Delta Off To A Tumultuous Start In The First Quarter Of 2017

January 12th, 2017 by Trefis Team
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The beginning of the year has been tumultuous for Delta Air Lines (NYSE:DAL). Two isolated incidents caused Delta’s operations in different parts of the U.S. to be disrupted.

The first of these incidents was a sporadic shooting in the baggage claim area in Terminal 2 of Fort Lauderdale (FLL). The deadly shooting left five dead and eight injured. The occurrence caused FAA to bring all operations to and from FLL to a nation-wide ground halt for the day. Furthermore, Delta had to cancel as many as 14 flights, while diverting six FLL bound flights to other airports. At its peak, Delta operates 33 flights from Fort Lauderdale to 9 destinations. The cancellations are likely to cause losses in revenue by way of waivers given to the passengers flying on the said routes. Consequently, the incident is expected to affect the company’s Q1 2017 performance adversely.

Regions Affected By The Winter Storm

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The second incident is the winter storm Helena, expected to affect much of  South-East America. In expectation of this, Delta has preemptively canceled about 35o flights, primarily to and from its Atlanta hub, where an inch of ice accumulated at the airport. To prevent customers from getting inconvenienced, the carrier has issued refunds to those whose flights got delayed for long duration or cancelled, and waivers to those who want to change their plans due to the storm. As a result of these waivers and refunds, the company will lose precious revenue. This is not to mention the extreme pressure on passenger yields in the Atlantic region, resulting in a sustained decline in unit revenues.

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The losses from the two incidents can equal the losses that occurred from the technical glitch in August 2016. Furthermore, there are additional headwinds that can end up hurting the margins significantly.

Jet fuel prices are forecast to increase nearly 30% in the coming year, resulting in additional costs of approximately $1.2 billion for Delta. The headwinds relating to jet fuel prices are expected to be the greatest in the first quarter of the year. A further drag on fuel costs would be the fact that the company has no open hedge positions it can utilize to offset price increases.

Other non-fuel costs are expected to increase in the range of 2% to 3% in 2017. Most of the weight of these costs will be seen in the first half of 2017 due to the labor contracts signed in late 2016. Consequently, Delta will undergo an additional $800 million burden.

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Given the company has already cancelled the order of 18 787 Dreamliners in order to meet its capacity guidance of 1% y-o-y in 2017, Delta will have to work exceptionally hard to turnaround its unit revenues, if it is to maintain its margins. So far the company expects unit revenues to remain flat in the first half of the year supported by the positive demand from Latin America, slightly offset by the continued pressure in Atlantic and Pacific regions.

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According to our analysis, unit revenues need to grow by 5% y-o-y, if margins of 17% are to be achieved.

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