Cost Initiatives And Lower Fuel Prices Will Lift Delta’s Earnings

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    Quick Take
  • Delta will likely post strong growth in its second quarter operating profits on gains from structural cost initiatives, which include fleet restructuring, maintenance redesign, staffing efficiency and distribution channel changes.
  • The carrier’s profits will also rise on the recent decline in jet fuel prices. We also anticipate Delta’s net profit to benefit from lower interest payments driven by a decline in the carrier’s debt.

Delta (NYSE:DAL) will announce its second quarter earnings Wednesday, July 24. The carrier will likely post flat top-line growth from the year ago period on a steady performance in both passenger and cargo segments. However, Delta’s profits will likely rise on higher operating margins driven by savings from structural cost initiatives and lower jet fuel prices. The carrier guides its second quarter operating margins between 10% and 11%, up from 9.1% in the prior year period. [1]

We further anticipate growth in Delta’s second quarter profits to also be aided by lower interest payments resulting from lower debt on the carrier. We currently have a stock price estimate of $16.30 for Delta, around 15% below its current market price.

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See our complete analysis of Delta here

Structural Cost Initiatives

Delta has continued to replace its older 50-seat regional jets with more cost efficient larger regional jets. In addition, the carrier has improved its maintenance processes, resource management and employee productivity through the use of technology to derive significant cost savings. Other initiatives around partner commissions and increasing the share of delta.com in gross bookings have continually reduced Delta’s structural costs. We expect gains from these cost initiatives to drive growth in the carrier’s profits in the second quarter.

For full year 2013, Delta estimates these structural cost initiatives to lower its operating costs by $600 million from 2012. [2]

Lower Jet Fuel Prices And Interest Payments

The sharp decline in jet fuel prices over the last few months will also aid growth in Delta’s second quarter profits. According to U.S. Energy Information Administration, jet fuel spot prices declined from $3.22 per gallon in February to $2.77 per gallon in June, driven in part by the weak outlook for global economic growth. [3] Accordingly, Delta anticipates its second quarter jet fuel prices to decline to $3-$3.05 per gallon from $3.37 incurred in the second quarter of 2012. [1] [4] This decline in jet fuel prices will lower the carrier’s operating expenses significantly as fuel costs constitute around a third of its total operating expenses.

In addition, we anticipate Delta to make lower interest payments in the second quarter driven by a decline in its debt and capital lease obligations – from $13.4 billion at the end of Q1 2012 to $12.3 billion at the end of Q1 2013. [5] [6]

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Notes:
  1. Delta’s June 2013 operational and financial results Form 8-K, July 2 2013, www.delta.com [] []
  2. Delta’s annual investor day presentation, December 17 2012, www.delta.com []
  3. U.S. Gulf-coast kerosene-type jet fuel spot price, July 19 2013, www.eia.gov []
  4. Delta’s Q2 2012 10-Q filing, July 25 2013, www.delta.com []
  5. Delta’s Q1 2012 10-Q, April 25 2012, www.delta.com []
  6. Delta’s Q1 2013 10-Q, April 24 2012, www.delta.com []