Delta Q3’16 Earnings Review: Continued Headwinds In Unit Revenues, Despite Reduction In Capacity
Delta Air Lines (NYSE:DAL) released its September 2016 financial results on 14th October 2016, beating the consensus for earnings, while slightly missing it for revenue. The company attributes the decline in revenues primarily to the strength in the U.S. dollar compared to other currencies, and the technology outage that occurred in early August. However, due to fiscal discipline and the continued slump in oil prices, the company was able to deliver operating margins almost comparable to Q3, 2015, at 18.8%.
In terms of providing value to the shareholders, the $1.1 billion free cash flow (adjusted for capital expenditure and hedging activities) allowed the company to return approximately $650 million back to its equity owners, in terms of dividends and buybacks. This, in turn, helped buoy earnings upwards, despite a decline in revenues.
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Although Delta’s unit revenues for Q3’16 came in line with its guidance range of -7%, the downtrend was seen to be persistent, despite minimal capacity growth in the quarter. The only region to show positive unit revenues was Latin America, mainly due to the launch of new flights to Mexico and Cuba. It seems unlikely that the airline will be able to turn around its PRASM numbers at the end of this year, as it earlier expected, due to the supply and demand imbalances in the Atlantic region and China, and the impact of foreign currency fluctuations. In line with this, the revised guidance for the fourth quarter unit revenues is in the (3%) – (5%) range. The company hopes to curtail the capacity growth in the remainder of the year and throughout the next year to 1%-2%, as it tries to return to positive PRASM in the face of rising oil prices and margin deterioration.
In terms of expenses, the company expects non-fuel costs to increase slightly in the quarter, due to lower capacity and expenses on maintenance. Consequently, Delta expects its operating margins to decline on an annual basis to 14%-16% in Q4’16. Further, in 2017, these costs may increase as the impact of the pilot agreement and higher fuel costs begins to be felt on operating expenses.
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