Delta Air Lines Inc. (DAL), the second largest U.S. airline, reported a 1.9% year-over-year traffic decline in November due to falling international travel demand. Airline traffic is customarily measured in billions of revenue passenger miles.
On a year-over-year basis, consolidated capacity (or available seat miles) fell 4.1% while the load factor (percentage of seats filled by passengers) improved 190 basis points (bps) to 81.4%.
Domestic traffic inched up 1.4% year over year on 320 bps expansion in load factor, which partly offset capacity reduction of 2.6%. International traffic dropped 7.3% year over year on a 6.5% decrease in capacity and 60 bps decline in load factor.
Delta Air Lines is cutting capacity to cope with persistently rising fuel prices following the fare hikes. The company plans to trim its consolidated capacity by 4–5% in the fourth quarter in markets where fare hikes are unable to deal with higher fuel prices. Delta Air Lines intends to reduce domestic capacity by 3–5% as well as reduce less fuel-efficient aircraft. For the next year, the company is planning cautiously on capacity cuts, which is expected to be down 2–3% year over year.
Airline industry needs to figure out ways to curb rising fuel expenses, which is estimated at $176 billion for this year. Fuel will account for 30% of the industry costs compared with 13% a decade ago. Further, industry fuel cost is expected to rise another 2% next year, taking fuel expenses up to $201 billion.
Beside taking stringent steps, the company is progressing well on improving ancillary revenues by offering expanded products and services. Delta Air Lines continues to invest in the existing domestic mainline fleet by installing winglets to increase fuel efficiency and deploying the First Class cabin in more fleets. In the international transoceanic aircraft, the company is installing full flat-bed seats in BusinessElite, and in-seat audio and video in all cabins. Additionally, the company will extend its Economy Comfort product to 800 domestic aircraft by next summer. Delta is further investing to add First Class and WiFi to 70 and 76 seat regional jets in its regional aircraft.
Despite the rising fuel environment, we expect earnings to grow next year from the year-ago level aided by higher ancillary revenues as well as cost synergies from the integration of the Northwest merger. Ancillary revenues are estimated to reach $1 billion by 2013 while the merger will generate $2 billion in annual revenue and cost synergies by 2012. Further, the company, facing stiff competition from United Continental Holdings Inc. (UAL) and AMR Corporation (AMR), is trying to lower non-fuel costs through job cuts and controlled expenses.
We are currently maintaining our long-term Outperform recommendation on the stock. For the short term (1–3 months), Delta Air Lines retains a Buy rating with a Zacks #2 Rank.
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