The second largest U.S. airline Delta Air Lines Inc. (DAL) expects second quarter 2011 to be profitable owing to higher revenues, which would largely offset the fuel price inflation.
Despite the lingering uncertainty in U.S. recovery as well as debt concerns in Europe, the demand for air travel has rebounded to some extent after the March 11 catastrophe. Delta now expects the disaster in Japan to hurt total revenue by $125 million in the second quarter compared with the previous expectation of $150 million.
The company also expects the current quarter’s passenger revenue per seat mile (PRASM or unit revenue) to grow 10% year over year. In the recently concluded first quarter, the company’s PRASM rose 7% year over year.
For the past several months, air carriers are struggling with the rising fuel prices. In order to alleviate the pressure, the carriers are passing the increased cost to customers in the form of fare hikes. The second quarter fuel cost is expected to be $3.23 per gallon, down from the prior expectation of $3.26 per gallon. The third quarter projection for fuel cost is $3.03 per gallon. Further, Delta’s non-fuel expenses also remain steep due to higher maintenance costs and lower-than-expected capacity.
To keep costs down, Delta Air Lines plans to trim its capacity by 4% post Labor Day, retire less fuel-efficient planes and remove 140 aircraft by the end of the next year. In addition, Delta offers voluntary buyouts to 55,000 of its workers.
Delta expects operating margin in the range of 6.5–7% for the ongoing quarter. We believe Delta Air Lines is in a superior position than its largest rivals United Continental Holdings Inc. (UAL) and American Airlines, a wholly owned subsidiary of AMR Corporation (AMR) to report solid second quarter results.
United Continental expects to report lower-than-expected unit revenue growth of 8.3–9.3%. American Airlines revenue is expected to hit by a spring hailstorm at American’s Dallas-Fort Worth hub that could hurt revenue by $60 million. The company expects its unit revenue to increase 4.5–5.5% in the current quarter.
The Zacks Consensus Estimate of Delta Air Lines for the second quarter is 55 cents. The estimate was static over the last 7 days but fell by a cent over the last 30 days. This represents a substantial year-over-year decline of 15.56%.
We are currently maintaining our long-term Neutral rating on Delta Air Lines. The company also retains a Zacks # 3 (Hold) Rank for the short term.
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