Delta Air Lines Inc. (DAL), the second largest U.S. airline, is slated to release its second quarter 2011 earnings on July 18. The current Zacks Consensus Estimate for the second quarter is 49 cents, representing a 25.17% decline from the year-ago level.
Delta had positive surprises averaging 4.34% over the last four quarters. The second quarter is expected to be profitable owing to higher revenues, which would largely offset the surge in fuel prices.
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.
Second quarter unit revenue is projected to grow 10% year over year. Fuel cost is estimated at $3.23 per gallon, down from the prior expectation of $3.26 per gallon. Further, Delta expects operating margin in the range of 6.5–7%, down from previous outlook of 7–9%.
First Quarter Flashback
Delta Air Lines reported first quarter adjusted loss of 38 cents that 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. The deterioration from the year-ago level could be due to weak traffic in Japan resulting from the March 11 earthquake and tsunami.
The company reported improved revenue owing to high traffic and increased capacity, and surpassed the Zacks Consensus Estimate. Airlines traffic, measured in billions of revenue passenger miles, inched up 1% year over year. Capacity or available seat miles grew 5% and load factor (percentage of seats filled with passengers) fell 310 basis points year over year.
Operating expense rose due to higher fuel expense, employee wage increases, maintenance volumes, and capacity and revenue-related expenses.
Agreement of Analysts
Estimates for the second quarter have been trending downward over the last 7 and 30 days. In the last 30 days, 6 analysts out of 11 have made downward revisions while two analysts moved in the opposite direction. Over the last 7 days, 2 analysts reduced their estimates while none made a positive revision.
For fiscal 2011, out of 9 analysts, 4 revised their estimates downward over the last 30 days and 2 made similar revisions over the last 7 days. Three analysts made positive revisions to the estimates over the last 30 days while one revised the estimate upward over the last 7 days.
For the past several months, air carriers are struggling with rising fuel prices. Soaring fuel prices in the airline industry are expected to lift Delta’s 2011 fuel expenses by $3 billion or 35% over 2010.
In order to alleviate the cost pressure, the carriers are passing the increased cost to customers in the form of fare hikes and are cutting capacity. 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 next year. In addition, Delta offers voluntary buyouts to 55,000 employees.
The analysts with negative earnings estimate revisions believe the company’s capacity reduction plan might hurt its profitability. The company is investing substantially to enhance customer service that might adversely affect its free cash flow levels. Moreover, the company’s current debt level is high in comparison to its peers and historical levels.
On the other side, 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 progressing 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 net debt to $10 billion by 2013.
Magnitude — Consensus Estimate Trend
The Zacks Consensus Estimate for the second quarter fell by a penny over the last 7 days and 6 cents over the last 30 days to 49 cents.
The Zacks Consensus Estimate for fiscal 2011 is $1.24. The estimate was down by 4 cents and 9 cents over the last 7 days and 30 days, respectively, and represents a substantial 27.29% decline annually.
Our Analysis
We believe Delta Air Lines is in a superior position relative to its largest rivals United Continental Holdings Inc. (UAL) and 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 could be hurt by $60 million due to a spring hailstorm at American’s Dallas-Fort Worth hub. The company expects its unit revenue to increase 4.5–5.5% in the second quarter.
We are currently maintaining our long-term Neutral recommendation on the stock. For the short term, the stock retains a Zacks #3 (Hold) Rank.
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DELTA AIR LINES (DAL): Free Stock Analysis Report
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