Delta Air Lines Inc. (DAL), the second largest U.S. airline, reported first quarter 2011 results on April 26. Adjusted loss of 38 cents outpaced the Zacks Consensus Estimate of a loss of 50 cents on large fare hikes partially offset by higher fuel costs. However, adjusted net loss was wider than the year-ago loss of 23 cents.
First Quarter Review
The deterioration from the year-ago level could be due to weak traffic in Japan resulting from the March 11 earthquake and tsunami. Delta Air Lines was affected the most as it has the largest presence in the country relative to other U.S. carriers such as United Continental Holdings Inc. (UAL), AMR Corporation (AMR) and Southwest Airlines Co. (LUV).
During the reported quarter, Delta raised its ticket prices for domestic as well as international flights several times, which helped to cover at least 70% of the rising fuel costs.
The company reported improved revenue owing to high traffic and increased capacity, and surpassed the Zacks Consensus Estimate. Operating expense grew due to higher fuel expense, employee wage increases, maintenance volumes, and capacity and revenue-related expenses.
(Read our full coverage on this earnings report: Delta Beats on Fare Hike)
Agreement of Analysts
Following the first quarter earnings, the analysts have mixed views on the company’s earnings going forward.
For the upcoming quarter, out of 11 analysts, 4 revised their estimates upward over the last 30 days while 4 analysts moved in the opposite direction. For fiscal 2011, 3 analysts out of 10 made upward revisions while 6 analysts made downward revisions over the last 30 days. Similarly, for 2012, out of 10 analysts, 2 analysts revised their estimates upward while 3 analysts moved in the opposite direction over the last 30 days.
Only one analyst made upward revisions over the last 7 days with none of them moving down for the upcoming quarter and the two upcoming years.
The analysts making positive revisions believe Delta Air Lines will generate solid profits going forward on increasing fares, improved ancillary revenues as well as hedging strategies. Delta Air Lines is currently 49% hedged at prices equaling $3.26 per gallon for the second quarter.
Delta Air Lines is making progress on improving ancillary revenues by offering expanded products and services both on board and on the ground that are expected to yield additional revenue of $1 billion by 2013.Further, ancillary revenues, such as expanded seat-related offerings and the launch of international premium economy product “Economy Comfort” in June,will generate $150–$200 million in additional revenue in 2011. Moreover, Delta Air Lines continues to improve its balance sheet by reducing its debt and targets to reduce net debt to $10 billion by 2013.
The analysts with negative earnings estimate revisions expect the disaster in Japan to hurt near-term results. Delta Air Lines is cutting capacity by 15% to 20% through May to reflect falling short-term demand, temporarily suspending service to Tokyo's Haneda airport with flights expected to resume in June, and pulling back on capacity between Tokyo's Narita airport and leisure markets.
In addition to the cut in Japan flights, Delta Air Lines is lessening departures at its Memphis hub by 25%. Thus, the company expects the impact from Japan flight cuts to reduce total revenue by $150 million in the second quarter. Further, soaring fuel prices are expected to raise Delta’s 2011 fuel expenses by $3 billion or 35% over the last year, thereby hurting its profitability. Additionally, the company is investing more than $2 billion in improved products, services and airport facilities through 2013 in the air and on the ground.
Although the aggressive fare hike actions and capacity cuts will help Delta to recover higher fuel costs, it might hurt revenue and profitability throughout 2011.
Magnitude –– Consensus Estimate Trend
The Zacks Consensus Estimate for the second quarter rose by a penny over the last 7 days to 55 cents but was down from 61 cents in the last 30 days. The estimate represents a 14.69% decline year over year.
The Zacks Consensus Estimate for fiscal 2011 is $1.26. The estimate rose by a nickel over the last 7 days but was down 24 cents over the last 30 days and represents a substantial decline of 26.61% annually.
For fiscal 2012, the Zacks Consensus Estimate is $2.03, up 4 cents over the last 7 days and down 10 cents in the last 30 days. The estimate represents a whopping increase of 62.07% year over year.
The analysts believe surging fuel costs as well as trimmed capacity will limit the earnings growth in the current year. However, for the next year, earnings will grow from the year-ago level aided by higher ancillary revenues as well as cost synergies from the integration of the Northwest merger.
Earning Surprises
With respect to earnings surprises, the company’s fairly good track record is expected to continue in the coming quarters. Delta produced a positive average earnings surprise of 4.34% over the last four quarters, which suggests that it outpaced the Zacks Consensus Estimate by that amount over the last year.
Neutral Recommendation
For the short term (1–3 months), a Sell rating was retained for Delta with the Zacks # 4 Rank due to surging fuel prices and falling demand in Japan. Further, unionized labor, debt loaded balance sheet and competitive threats keep us cautious on the stock.
However, 2011 appears promising, as the company will increase its fares to pass the higher costs to customers, cut capacity as well as generate revenue through higher ancillary services. Hence, we are maintaining our long-term Neutral recommendation on Delta Air Lines.
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at: http://www.zacks.com/education/
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