Delta 3Q Earnings Preview: Set For Another Record Quarter, Thanks To Weak Fuel Prices

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DAL: Delta Air Lines logo
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Delta Air Lines

The sustained weakness in crude oil prices in the last three months will continue to drive the profits of the US airline in the third quarter. Delta Air Lines (NYSE:DAL), which is slated to release its third quarter results on 14th October 2015, is expected to report another strong quarter on the back of significant fuel cost savings. While the Atlanta-based airline anticipates a sharp decline in its unit revenue during the quarter, we expect the lower fuel costs to more than offset the impact of this decline, resulting in a meaningful increase in the airline’s operating margins.  Let’s briefly discuss our expectations for Delta’s third quarter performance to be released later this month.

We currently have a price estimate of $50 per share for Delta, approximately 6% ahead of its current market price.

DAL-Oct

Source: Google Finance

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Capacity Discipline And Fuel Costs Savings To More Than Offset Delta’s Lower Unit Revenue

Similar to the first half of the year, Delta has kept its system capacity growth in low single digits in the September quarter to contain the fears of an oversupply of seats in the market. This will enable the airline to grow its passenger traffic in tandem with its capacity growth, and maintain its load factor at close to 85% for the quarter. However, pressure from foreign currency fluctuations, lower surcharges in international markets, and weakness in domestic yields, are expected to pull down Delta’s third quarter unit revenue by around 5%.

However, based on the latest investor update [1], the airline’s fuel cost is estimated to average between $1.80 and $1.85 per gallon, almost 10 cents per gallon lower than its previous guidance. Further, Delta has significantly reduced its fuel-hedging exposure for the second half of 2015 and expects to realize the full impact of lower fuel prices in this quarter, unlike the previous quarter. As a result, we expect these fuel cost savings to more than offset the impact of weak unit revenue, and boost the airline’s bottom line growth. Our stance is validated by the upward revision of Delta’s operating margin (adjusted) guidance from 19-21% to 20-21% for the current quarter. This compares to the airline’s operating margin of 15.8% generated in the same quarter last year. Accordingly, we forecast the airline to meet the consensus EPS estimate of $1.65 per share for this quarter.

DAL-guidance

Source: Delta Investor Update, 2nd October 2015

In a nutshell, we expect Delta to open the earning season with record third quarter earnings driven by low fuel prices, and set the tune for the other airlines that are expected to release their results in the second half of the month.

See Our Complete Analysis For Delta Air Lines Here

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Notes:
  1. Delta Investor Update, 2nd October 2015 []