Delta Q3’16 Earnings Preview: Technology Outage Episode, Headwinds In Trans-Atlantic Region To Be A Drag

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Delta Air Lines

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Key Trends:

  • Delta’s passenger revenue per available seat mile (PRASM) declined in the range of 4% – 5% in the last two quarters. However, July and August saw a sharp fall in this metric, at -7% and -9.5%, respectively. The primary cause of this decline is attributable to the technology outage in August that led to approximately 2,300 flight cancellations. In a turn of events, the drop in September unit revenues was curtailed to -3%, attributable to lower capacity levels. Notwithstanding September metrics, Delta expects third quarter unit revenues to fall more than the previous guidance of (4%)-(6%).
  • The company’s system-wide capacity should come in the range of its previous guidance of less than 2%. The moderation in capacity is being done in order to improve its unit revenue and manage the rising fuel costs.
  • We have recently seen some recovery in oil prices, owing to the OPEC countries’ decision to restrict their combined oil output between 32.5 and 33 million barrels per day, a potential reduction of 200 to 700 MBPD (thousand barrels per day) compared to the output in August. However, the increase is unlikely to have an immediate impact on the fuel expenditure of the airline, as the prices continue to be much lower than the historical $100 per barrel.
  •  The technology outage, causing a loss of approximately $150 million in August, coupled with ongoing supply-demand imbalance in the transatlantic region, and headwinds from its yen hedge positions, are likely to negatively impact Delta’s operating margins by roughly 3 percentage points.
  • Delta’s aggressive share buyback program is likely to support earnings, even as the power outage episode of August pressures the top-line.

Have more questions about Delta Air Lines (NYSE:DAL)? See the links below:

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Delta Air Lines Limited

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