Airline behemoth Delta Air Lines Inc. (DAL) reported second-quarter 2014 adjusted earnings of $1.04 per share, edging past the Zacks Consensus Estimate of $1.03 cents. The bottom line improved 5.1% from the year-ago adjusted profit of 98 cents buoyed by operational efficiency as well as customer satisfaction.
Revenues increased 9.4% year over year to $10.62 billion in the reported quarter, and topped the Zacks Consensus Estimate of $10.59 billion. On a year-over-year basis, Passenger revenues grew 9.1% and Other revenues improved 14.7%. However, Cargo revenues dipped 0.9%.The impressive revenue growth was owing to strength in corporate and domestic revenues, merchandising efforts and investments in New York and Seattle that offset the weakness in Pacific yields. The results have already pushed the stock up in the pre-market trade on NYSE.
Operating Statistics
Airline traffic, measured in revenue passenger miles, went up 5.0% year over year to 53.34 billion. Capacity or available seat miles increased 3.2% year over year to 61.82 billion, while load factor (percentage of seats filled with passengers) moved up 150 basis points year over year to 86.3%. Passenger revenue per available seat mile (PRASM) or unit revenue rose 5.6% year over year, along with a 3.8% increase in yield.
Operating Expenses
Total operating expenses crept up 2.8% year over year to $9,042.0 million, primarily due to rise in profit sharing expenses and higher volume and revenue related expenses. Consolidated unit cost or cost per available seat mile (CASM), excluding fuel cost, profit sharing and special items, was flat in the second quarter owing to investments in products, employees and operations, which mitigated the domestic refleeting benefit.
Liquidity
As of Jun 30, 2014, the company had $4.08 billion in cash and short-term investments and net debt of $7.9 billion. The company has reduced its net debt by $9.1 billion since 2009.
The company generated operating cash flow of $2.06 billion in the second quarter while capital expenditures were $520.0 million, which includes $343 million in fleet investments. Free cash flow at the end of the June quarter stood at $1.54 billion.
Dividend and Share Repurchase
Till mid-July, the carrier has returned $550 million to shareholders. It paid a dividend of 6 cents per share aggregating $101 million and repurchased 12.4 million shares totaling $450 million.
Guidance
The company expects a strong demand environment, corporate revenue gains and synergies from revenue initiatives to lead to 2%–4% revenue growth for the third quarter of 2014.
Non-operating expenses are expected in the range of $100–$150 million while profit sharing expenses are forecasted around $350–$400 million.
Delta expects operating margin in the range of 15–17% and consolidated unit cost, excluding fuel and profit sharing, to increase nil–2.0% year over year in the third quarter.
The estimated fuel price, including taxes and hedges, is approximately $2.88 to $2.93 per gallon. System capacity is expected to increase 2–3%.
Upcoming Earning Releases
Of the other stocks in the sector, United Continental Holdings Inc. (UAL), Southwest Airlines Co. (LUV) and JetBlue Airways Corp. (JBLU) are scheduled to release their second quarter results on Jul 24, 2014.
Our Take
We believe Delta is expected to generate higher revenues than last year on a strong domestic market, capacity discipline, route expansion, cost control measures and customer-focused initiatives. Further, Delta is reaping the benefits of its tie up with Virgin Atlantic as it is picking up in the lucrative New York-London travel route.
Delta currently carries a Zacks Rank #1 (Strong Buy).
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