Delta Air Lines Inc. (DAL), the second largest U.S. airline, is cutting more capacity to cope with persistently rising fuel prices and changing air travel demand conditions.
Delta plans to trim its capacity by 4% post Labor Day in markets where fare hikes are unable to deal with higher fuel prices. The company expects to cut 3% of domestic capacity, including a 25% reduction in departure at its Memphis hub and 140 aircraft reduction.
In Atlanta, the company plans to cut capacity by 12%, in Latin America by 4% and in the Pacific by 3%. Further, with its trans-Atlantic joint venture partners –– Air France KLM and Alitalia –– capacity between Europe, the U.S. and Canada will be reduced by 7–9%.
The company also plans to reduce maintenance and other non-fuel costs, as well as accelerate retirement of less fuel-efficient planes.
Delta Air Lines continues to invest in the existing domestic mainline fleet by installing winglets to increase fuel efficiency and by expanding the First Class cabin to more fleets. In the international transoceanic aircraft, the company is installing full flat-bed seats in BusinessElite and adding in-seat audio and video in all cabins. Delta is further investing to add First Class to 70 and 76 seat regional jets in its regional aircraft.
The steeply rising fuel prices are expected to increase Delta’s 2011 fuel expenses by $3 billion or 35% over the last year, thereby hurting its profitability. Although the aggressive fare hike actions and capacity cuts will help Delta to counter higher fuel costs, it might hurt revenue and profitability throughout 2011.
The Zacks Consensus Estimate for fiscal 2011 is $1.26. The estimate was static over the last 7 days but rose by 10 cents over the last 30 days. This represents a substantial decline of 26.61% annually.
However, for 2012, earnings will grow from the year-ago level aided by higher ancillary revenues such asexpanded seat-related offerings and the launch of the international premium economy product “Economy Comfort” in June as well as cost synergies from the integration of the Northwest merger. The ancillary revenues will yield revenue of $1 billion by 2013 and the merger will generate $2 billion in annual revenue and cost synergies by 2012.
The Zacks Consensus Estimate for 2012 is $2.11, up 8 cents over the last 7 days and 10 cents over the last 30 days. The estimate represents a whopping increase of 68.45% year over year.
We are currently maintaining our long-term Neutral recommendation on the stock. However, a highly unionized labor, debt loaded balance sheet, competitive threats from large peers such as United Continental HoldingsInc. (UAL), AMR Corporation (AMR) and Southwest Airlines Co. (LUV), and continued investment in technology make us cautious on the stock. Thus, for the short term (1–3 months), Delta Air Lines retains a Sell rating with the Zacks # 4 Rank.
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