How Did Delta Perform In Q2?

by Trefis Team
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DAL
Delta Air Lines
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Despite the Street’s pessimism, Delta Air Lines (NYSE:DAL) reported rather decent financials in Q2. The company managed to beat the consensus earnings estimate by 5 cents, posting a figure of about $1.77 (excluding a one-time charge of about 30 cents). In fact, the earnings figures managed to come in higher than the previously guided range of $1.65-$1.75, as well.

Further, revenues in the quarter rose more than expected, to a record $11.6 billion. The top line in the quarter benefited greatly on rising demand and good growth across all geographical areas. Additionally, sales saw a near $1 billion benefit as the company saw significant gains in cargo, loyalty, and branded fares. In this respect, unit revenues came in higher by about 4.1% year over year.

Despite the performance, we saw little movement in the stock price. At the moment, we believe that Delta’s stock price is undervalued by about 7%. We have created an interactive dashboard analysis to best relay our valuation methods and reasoning. Please click on the link to come up with your own estimate.

The only worrying thing for Delta at the moment is that, since the last earnings call, global fuel prices have risen sharply by almost 15%. For this reason, the company now estimates fuel to cost it about $2 billion in 2018. While this is a cause for concern in the near term, Delta has put into place a few strategies that are expected to contain its effects in the long term.

  • The first strategy involves increasing the top line in an effort to curb the negative effects of the higher fuel charges. Through its diverse revenue stream, the company has managed to report two consecutive record quarters in the year. In this respect, management has decided to up its full year revenue guidance by almost 8%, reflecting strong demand, pricing momentum, and record unit revenue premiums.
  • Secondly, the company is on track to change its cost trajectory. In Q2, it managed to keep unit cost growth rates down for the third quarter in a row. This trend is expected to continue through the remainder of the year as well nudging the airline back into its target range of less than 2% annual growth for 2018 and beyond.
  • Lastly, management is continuing to invest in the airline’s international franchise. Through organic expansion and joint ventures, the company is building a rather strong global network for its customers. In 2018, we expect to see a near $100 million in incremental value here.

Through these strategies, the airline hopes to deliver a fourth consecutive year of pretax earnings above $5 billion, representing a result largely in line with last year despite the significant fuel headwinds.

 

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