Pressure On Delta’s Unit Revenue Will Be Partially Offset By Lower Fuel Costs

+8.23%
Upside
47.90
Market
51.84
Trefis
DAL: Delta Air Lines logo
DAL
Delta Air Lines

Delta Air Lines, which released its traffic results for June last week, has reported a 4.5% drop in its consolidated passenger unit revenue (revenue per passenger flown per mile) for the June quarter, higher than the company’s expectations of a 2-4% decline. The foreign currency fluctuations and lower surcharges in international markets, along with the stiff competition faced by the airline both domestically as well as internationally, caused this sharp decline in unit revenue. As the Atlanta-based airline is set to open the earning season next week, we expect the weak unit revenues to dampen the revenue growth, while the lower fuel costs will partially offset its effect on the bottom-line. In this article, we briefly discuss our expectations for Delta’s second quarter results, scheduled for release on the 15th of this month.

We currently have a price estimate of $48 per share for Delta, approximately 14% ahead of its current market price.

See our complete analysis for Delta Air Lines here

Relevant Articles
  1. Should You Pick Delta Stock Around $40 After Its Q4 Beat?
  2. After Over 20% Gains In 2023 Will Delta Air Stock Outperform Alaska Air?
  3. Should You Pick Delta Stock At $34 After Q3 Beat?
  4. What To Expect From Delta’s Q3?
  5. Which Is A Better Pick – Delta Stock Or United Airlines?
  6. Delta Air Lines Stock Poised For Strong Gains?

Competition To Pull Down Delta’s Yield

During the June quarter, Delta’s passenger traffic grew more than 3% on the back of a capacity growth of 3.5% [1], higher than its second quarter target of a 3% increase. This higher-than-expected capacity growth by the airline, coupled with the currency headwinds, and rising competition, has resulted in a 4.5% decline in its unit revenues during the latest quarter. Further, the airline’s load factor, a measure of the operational efficiency, also dropped 80 basis points to 83.8% during the three-month period. Consequently, we estimate that this will weigh heavily on the airline’s passenger yield due to which the airline will miss its top line growth target of a 2% increase. The market expects Delta’s revenue to remain flat at $10.62 billion for the quarter.

Higher-than-expected Fuel Costs To Create A Drag On The Margins

According to Delta’s investor update released last week, the airline’s unit costs are expected to remain flat versus the previous year driven by foreign currency fluctuations and continued benefits from Delta’s domestic re-fleeting and cost reduction initiatives. However, the airline revised its average fuel price guidance from $2.35-$2.40 per gallon, to $2.40-$2.45 per gallon [2] due to the faster-than-expected recovery in crude oil prices during the quarter. Besides, the airline’s hedging contracts on its fuel consumption are expected to restrict its ability to take complete advantage of the fuel cost savings, as was the case in the last quarter. As a result, the airline now expects its operating margin to be 15.5%-16.5%, lower than its previous guidance of 16%-18%. Given the airline’s track record, we forecast the airline to meet the consensus EPS estimate of $1.22 per share for the quarter.

Conclusion

In the current scheme of things, where the fear of an oversupply of seats and the DOJ probe on major US airlines for unlawful price collusion has caused investors to sell-off their airline stocks, Delta has managed to return $1 billion to its shareholders in the form of dividends and share repurchases. Thus, despite the downward revision of the margin guidance, we expect the lower fuel costs to drive Delta’s second quarter results, which will be positive news for the airline’s stock and the industry in general.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research

Notes:
  1. Delta Announces Traffic Results for June, 2nd July 2015, www.delta.com []
  2. Delta Investor Update, 2nd July 2015, www.delta.com []