Delta Q2 Earnings Preview: Delta Could Be Gearing Up For A Great Quarter

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Delta Air Lines (NYSE:DAL) is all set to report Q2 earnings on July 13. The company posted a mixed start to the financial year thus far. Adverse weather conditions throughout the first quarter led to lower-than-expected revenue figures in the first quarter, adding pressure on the already-strained unit revenues. However, the company managed to beat the consensus estimate in terms of earnings. That said, there are many positives, this time around, that could potentially pull Delta out of the rut.

In the second quarter, we can expect unit revenues to come in positively for the first time in months as the company continues restricting capacity growth to less than 1% in an effort to boost unit revenues and operating margins. Costs are expected to keep rising as the maintenance costs weigh on the company, 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.

Additionally, 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 over the remainder of the year.

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Key Highlights:

  • After struggling for more than 2 years, Delta finally managed to turn unit revenues positive in the month of March earlier this year. Since then, with each passing month, the company has managed to keep the key metric positive. Delta’s PRASM rose 3.5% in May and 2.5% in June, after increasing just 1% in April and declining 0.5% year over year during the first quarter. Given the trend, we can expect to see positive unit revenue growth for the first time in about 8 quarters. As mentioned previously, the feat was accomplished by severely restricting capacity growth.
  • Delta is expecting to see some relief when it comes to fuel costs. Delta’s economic fuel costs declined to approximately $1.68-$1.73/gallon last quarter, down from $1.97/gallon a year earlier. Given the low volatility in oil prices at the moment, we can expect the company to benefit from lower fuel costs in Q2 as well. Fuel costs are also set to remain low by historical standards for the foreseeable future, further propping up the figures.
  • Ex-fuel costs are expected to rise by about 5-6% this quarter on the back of higher-than-expected maintenance charges. That said, going forward, Delta plans to replace about a quarter of its mainline fleet by 2020. A large chunk of the airplanes getting replaced include the 149-seat MD-88s with larger 737-900ERs and A321s. Such a move can help contain unit-cost growth by boosting productivity.
  • In the previous quarter, Delta completed its tender offer that resulted in a 49% ownership stake in Aeromexico and formally launched its trans-border Mexican joint venture in April. The deal is expected to reinforce the company’s already stellar performance in the Latin America region. Similarly, Delta signed a Memorandum of Understanding for a Trans-Pacific joint venture with Korean Airlines, to enhance its strategic division across Asia. We can expect to learn more about these deals in the upcoming earnings call.

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