Delta Q4’16 Earnings Preview: Capacity Reduction To Show Improvement In Unit Revenues, But Weigh Down The Top Line

January 10th, 2017 by Trefis Team
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Delta Air Lines

The legacy carrier, Delta Air Lines (NYSE:DAL), is due to announce is fourth quarter and full year 2016 results on 12th January, 2017. Being the first to announce its full year results, Delta Air Lines will set the tone for the aviation sector’s earnings. Although the company disappointed in the third quarter, the fourth quarter is likely to redeem it on some level due to the capacity restriction and resultant improvement in unit revenues. However, the higher fuel prices and wages will continue to weigh down on earnings. In the following article we discuss some of the trends which are expected to be seen in the upcoming quarterly results.

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Key Trends:

  • Delta’s passenger revenue per available seat mile (PRASM) declined in the range of 4% – 5% in the first two quarters of 2016. The third quarter was even worse, when unit revenues were down as much as -6.8%, due to the technology outage episode in August that led to approximately 2,300 flight cancellations. However, as the year 2016 edged to a close, the headwinds related to yields began dissipating. As a result, the fall in unit revenues in November and December was also arrested. Consequently, the company expects fourth quarter unit revenues to fall less than the previous guidance of (3%)-(5%).
  • Delta’s operations in Mexico, Cuba, and the Caribbean have helped it slightly offset the headwinds being seen in Atlantic and Pacific. The trend is expected to persist as the year closes. Entering into 2017, the company wants to renew its focus on the improving economy of Brazil, while growing its capacity in Latin America by 1% y-o-y. On the other hand, Pacific and Atlantic routes will continue to weigh down Delta’s performance. Due to the overcapacity built up in the region, industry-wide, the company expects to continue to see negative PRASM in the Pacific region, even in 2017.
  • The company’s system-wide capacity should come in the range of its previous guidance of approximately 2%. The moderation in capacity was done in order to improve its unit revenue, by streamlining capacity over unprofitable routes. Although the reduction in capacity is expected to help unit revenues, it will play an offsetting role by restricting revenue growth. The situation will be further worsened by the 30 bps decline in occupancy rate in 2016.
  • We have recently seen some recovery in oil prices, owing to the OPEC countries’ decision to restrict their combined oil output to 1.2 million barrels of oil per day (Mbpd) over the coming months. In addition to this, the Non-OPEC members, such as Russia, also supported the OPEC’s move by offering to bring down their production by roughly 600,000 barrels of oil per day. In response to the news, crude oil prices have shot up by almost 20% over the last one month, reinforcing to investors that the commodity markets are on the path of recovery. The increase is likely to impact the airline’s fuel expenditure, but not as much as earlier, as the prices continue to be much lower than the historical $100 per barrel.
  • Excluding the costs associated with fuel, the company will see its unit costs rise significantly, at 10% y-o-y, in the December quarter. Of the total increase, 8 percentage points is attributable to Delta’s the recently concluded pilot wage agreement. Other costs included are third-party maintenance repair and overhaul expenses and refinery cost of sales to third parties.
  • Delta’s world class maintenance facility in Atlanta and optimization of its routes and fleet, has caused the carrier to achieve a 1.5% improvement in its fuel consumption and ensure that the its maintenance costs are the lowest in the industry. Consequently, the carrier has been able to save $100 million in fuel costs in 2016.
  • Delta’s dividend payment will continue to increase in 2016, even as it pursues an aggressive share buyback program to support earnings. This is likely in response to the increasing wages and fuel expenditure. The company is expected to complete its planned $5 billion share repurchase program by mid-2017.
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