Delta’s Q1 Performance Expected To Be Weak On Lower Traffic And Higher Fuel Costs

Delta Air Lines (NYSE:DAL) is due to report its earnings for Q1 on 12 April. Since the company reports its earnings well ahead of its competitors, the call is expected to give investors a glimpse into what can be expected from the airline industry in the coming quarters. The Atlanta-based company performed better than consensus expectations in the last quarter, despite missing on the unit revenue forecast. The first quarter is typically the slowest for airline carriers in terms of traffic. Hence, we can expect a dip in revenues relative to the previous quarter. Furthermore, rising fuel and labor costs are bound to hurt earnings, yet again.

Additionally, as Delta prepares to report its first quarter, the second quarter is already off to a bad start.  Delta has had to cancel over 3,000 flights over the last week as severe thunderstorms swept across Atlanta (the company’s biggest hub airport), while bad weather in the northeast grounded several other flights. Delta’s stock is down 9.3% this year so far.

Key Highlights:

• Revenues are expected to come in around $9.2 billion this quarter. This figure is relatively flat in comparison to the same period last year. As mentioned previously, the first quarter is generally the slowest in the year, and revenue rises strongly in the second and third quarters. Furthermore, Easter falls in April this year, as opposed to March in 2016, resulting in lower leisure-travel demand for Q1 2017.

• Earnings will continue to be hurt this time around on the back of higher fuel costs and persistent labor expense pressures. In the first quarter, oil prices have ranged between $50-55 per barrel, in comparison to about $33 per barrel in the same quarter last year, reflecting a 60% rise in prices. Consequently, analysts estimate earnings to come in around $579 million in the quarter as opposed to $946 million a year ago.

• As mentioned previously, the company missed on its unit revenue forecast in the last quarter. That said, Delta management last week announced that its March unit revenue increased by about 0.5% year-over-year, marking the first positive monthly result for the company since November 2015. Despite this, however, the company expects its first quarter unit revenue to fall by close to 0.5% year-over-year, after indicating in mid-January that it would be flat to up 2%.

• Delta’s operations in Mexico, Cuba, and the Caribbean have helped it slightly offset the headwinds being seen in Atlantic and Pacific. The trend is expected to persist in the coming year, as well. Entering into 2017, the company wants to renew its focus on the improving economy of Brazil, while growing its capacity in Latin America by 1% y-o-y. On the other hand, Pacific and Atlantic routes will continue to weigh down Delta’s performance. Due to the overcapacity built up in the region, industry-wide, the company expects to continue to see negative PRASM (passenger revenue per available seat mile) in the Pacific region.

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