Superstorm Sandy Clips Delta’s Q4 But Full Year Is Solid
Delta (NYSE:DAL) posted profits of $7 million in the fourth quarter of 2012, down from $425 million in the year-ago period. Profits were impacted by a $100 million loss from Superstorm Sandy, which impacted not only the airline’s operations but also jet fuel production at the carrier’s Trainer crude oil refinery. [1] Profits were also impacted by higher fuel costs in the fourth quarter.
However, the negative impact from Sandy and higher fuel costs was partially offset by growth in top-line driven by higher passenger traffic and fares. Additionally, Delta continued to lower its debt and achieved nearly $5 billion of the $7 billion debt reduction target that it had set in 2009. [1]
For full year 2012 though, the carrier’s profits increased 18% y-o-y to $1 billion on strong performance in the first three quarters. [1]
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Superstorm Sandy
Superstorm Sandy struck the northeast United States in the last week of October and the first week of November. Delta, which receives a significant portion of its passenger traffic from this region, had to cancel several hundred flights due to the storm. As a result, it incurred $75 million in revenue losses. [1]
Apart from affecting flight services, the storm negatively impacted Trainer refinery’s start-up, slowing production and lowering jet fuel production at the plant. The refinery’s supply pipelines also suffered damage. In all, the refinery produced a loss of $63 million in the quarter. [1]
Delta had acquired the refinery along with its supply pipelines in June 2012. Despite the losses, the refinery is expected to save $300 million in annual fuel costs for the carrier 2013 onward. It will produce around 40,000 barrels of jet fuel per day by the end of 2013, providing for a significant portion of Delta’s fuel requirements. [2] Additionally, the refinery will improve Delta’s fuel management by providing leverage in fuel purchases and thereby generate further savings.
Higher jet fuel prices
Higher crude oil prices also impacted Delta’s fourth quarter profits. The average jet fuel price incurred by the carrier increased to $3.17 per gallon in Q4, up from $2.97 per gallon in the year-ago period. [1]
Higher passenger traffic and fares
The negative impact from Sandy and higher fuel prices were partially offset by growth in passenger revenue, which increased 3% y-o-y to $7.5 billion in Q4. Passenger revenue was driven by 1% y-o-y growth in passenger traffic and 2% y-o-y growth in yield (an indicator of passenger fares). [1] Passenger traffic for the carrier rose on account of strong growth on Pacific and Latin international routes partially offset by declines on Atlantic and domestic regional U.S. routes.
Declining debt
Additionally, Delta’s debt and capital lease obligations declined to $12.7 billion at the end of 2012, down from $17.2 billion at the end of 2009. [1] Lower debt bodes well for the carrier as it reduces risk. Delta aims to lower debt further to $10 billion by the end of 2013 and start returning cash to shareholders by 2014. [2]
We currently have a stock price estimate of $11.50 for Delta, approximately 15% below its current market price. We are in the process of incorporating the fourth quarter results and will update our analysis shortly.
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