How Did Delta Air Lines Beat Estimates Despite Rising Fuel Costs?

by Trefis Team
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Delta Air Lines
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Delta Air Lines (NYSE: DAL) reported its third quarter operational performance last week, beating analysts estimates on the earnings front. The carrier’s EPS come in at $1.80 per share, representing a 16% year-on-year increase. Further, Delta’s 3Q’18 revenue grew at 8% y-o-y, driven by the favorable macro-economic environment. However, the rising crude prices added an extra $2 billion to Delta’s operating costs, which weighed on its bottom-line.

Our price estimate for Delta is $55 per share, which is higher than its market price. View our interactive dashboard for Outlook For Delta Air Lines Over The Coming Years and modify the key drivers to visualize the impact on the company’s price estimate.

 

There are several factors that contributed to Delta’s solid numbers for the quarter. First, the airline was able to run far more efficiently compared to the latest quarter. It operated for 100 days without cancellation versus their previous record of 90 days. In addition, Delta’s focus on acquiring equity in partner airlines has resulted in a positive revenue addition from partner airlines as well as increased operational efficiency.

Furthermore, the company’s focus on business and premium class passengers has paid off well. Revenue from these segments increased by 19% y-o-y, backed by higher operating efficiency and higher revenue. This revenue growth allowed the carrier to recoup a significant portion of the increased fuel expenses. Consequently, Delta did not see a notable dip in margins that many analysts had expected.

Moreover, Delta’s focus on non-core segments such as cargo, loyalty programs, and MRO (maintenance, repair, and operations), revenue has also delivered good results. Cargo revenue increased by 18% y-o-y, showing that the strategy to create a robust revenue stream is paying off.

On the profitability front, Delta’s operating income was down 10% and its income before taxes was down 6%. However, a steep fall in the company’s tax rate caused a jump in the net income for the quarter.

Overall, the airline continues to take steps to diversify its operations, reducing its reliance on its core business. Along with this, the steps taken to reduce the capital intensive nature of the business, and improvements in operating efficiency, have helped Delta weather turbulent times.

 

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