Delta Higher On Q2’17 Unit Revenues Guidance And Expected Improvement In Margins, Post Q1’17 Earnings Results

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Delta Air Lines

Delta Air Lines (NYSE:DAL) announced its first quarter 2017 results on 12th April 2017, beating the consensus for earnings, while falling short on revenues. In line with our expectations, the top line was slightly weighed down by the snow storms seen in the first quarter which caused the traffic to decline, and for unit revenues to remain restrained. However, the bottom line was buoyed by the company’s share repurchase program and the improvement seen in unit revenues.
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To breakdown the growth in top line, we discuss in detail the three determining factors: capacity, unit revenues, and load factor. Delta’s capacity declined by a small amount of -0.5% y-o-y in the March quarter, in line with the company goal to cap capacity growth to 1% in the year. The majority of cuts in the capacity happened in the Pacific and Atlantic regions, while Latin America and Americas saw positive capacity growth. This was done keeping in mind the growing expenses at the carrier, owing to the higher oil prices and new labor contracts, which also make a turnaround in unit revenues imperative. As a result of the restriction of capacity, the decline in unit revenues was only -0.5%, offset by the +4.4% growth in unit revenues in Latin America. Furthermore, the load factor improved 80 bps in the quarter, partially offsetting the impact of the decline in unit revenues on revenues.

In terms of costs excluding fuel, the company incurred additional costs of 5.8% y-o-y in the quarter. The increase in operating costs is attributable to the impact of the new pilot contract, which came in effect retroactively from 1st January 2016, and maintenance timing and higher depreciation expense. Consequently, Delta’s operating margins came down by over 5 percentage points. However, despite this the company earnings per share in the quarter went up, supported by the $200 million spent in share repurchase.

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130420171Apart from this, Delta generated $700 million in free cash flows (adjusted for capital expenditure and hedging activities), allowing the company to return approximately $349 million back to its equity owners, in terms of dividends and buybacks, and $288 million to debt holders. That is, 50% of the free cash flows were returned to the company’s shareholders, while it remains on track to pare down its debt to $4 billion by the end of 2020.


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Going forward, the company intends to continue restricting capacity to less than 1% in the year 2017, in order to see growth in its unit revenues and operating margins. The system-wide capacity is likely to stay flat in the second quarter of 2017, to facilitate growth in unit revenues. In terms of costs, they are expected to keep rising as the crude oil prices go up, and the effect of the new pilot contracts is felt on the bottom line. However, the company expects the pressure on margins due to higher fuel prices to have already occurred in the March quarter, in its entirety. Accordingly, the operating margin in the second quarter is expected in the 17% – 19% range.

In terms of unit revenues, March marked the first month of positive unit revenue growth for Delta since 2015. As such, it expects the unit revenues to start expanding significantly, going forward, although the April storm in the Atlantic may impact the company’s top line.

Furthermore, the airline has completed its tender offer that will result in a 49% ownership stake in Aeromexico and expects to formally launch its transborder Mexican joint venture later in April. This is expected to reinforce the company’s performance in the Latin American region. Similarly, Delta signed a Memorandum of Understanding for a Trans-Pacific joint venture with Korean Airline, to enhance its strategic division across Asia.

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