Airline behemoth Delta Air Lines Inc. (DAL) exited 2014 on an impressive note reporting higher-than-expected revenues and earnings in the final quarter. The carrier reported fourth-quarter 2014 adjusted earnings of 78 cents per share, surpassing the Zacks Consensus Estimate of 75 cents. Earnings were 20% above the year-ago figure. The earnings beat saw the stock gaining in early trading.
Including special items, the carrier lost $712 million or 86 cents per share mainly due to fuel hedge settlements.
Revenues increased 6% year over year to $9.65 billion in the reported quarter and was ahead of the Zacks Consensus Estimate of $9.59 billion. During the quarter, passenger revenues grew 5% and other revenues improved 21% from the prior-year period. Cargo revenues climbed 2%.
For full-year 2014, Delta posted earnings of $3.31 per share (just short of our projection of $3.33) on revenues of $40.36 billion (ahead of our expectation of $40.29 billion and up 7% from the prior year).
Operating Statistics
Airline traffic, measured in revenue passenger miles, went up 4% year over year to 48 billion. Capacity or available seat miles increased 4% to 58 billion, while load factor (percentage of seats filled with passengers) improved 20 basis points year over year to 82.8%. Passenger revenue per available seat mile (PRASM) or unit revenue rose 1% year over year, led by a 1% increase in yield.
Operating Expenses
Total operating expenses, including special items, increased 25% year over year to $10,475 million. Consolidated unit cost or cost per available seat mile (CASM), excluding fuel cost, profit sharing and special items, crept up 1%.
Liquidity
At the end of 2014, the company had $3.3 billion in cash and short-term investments and net debt of $7.3 billion. The company has reduced its adjusted net debt by approximately $10 billion since 2009.
The company generated operating cash flow of $1.5 billion in the fourth quarter while capital expenditures totaled $620 million.
Dividend and Share Repurchase
During the quarter, the company returned $575 million to its shareholders. The carrier paid $75 million in cash dividends and bought back 12.2 million shares for $500 million. We are impressed by the company’s efforts to reward shareholders through dividends and share buybacks.
Guidance
For the first quarter of 2015, the carrier expects operating margin in the range of 11% to 13% and projects consolidated unit cost, excluding fuel and profit sharing, to increase 0–2% year over year in the first quarter.
The estimated fuel price, including taxes and hedges, is approximately $2.45 to $2.50 per gallon. System capacity is expected to increase approximately 3% (excluding the impact of winter storms).
Our Take and the Way Ahead
We are impressed by Delta’s outperformance in the final quarter of 2014. Delta is benefiting considerably from persistent weak oil prices. With oil prices expected to remain weak for quite some time ahead, Delta should continue to witness an upside. This is because fuel costs account for a major chunk of an airline's operating expenses. Consequently, cheaper oil price should continue to boost Delta’s bottom-line going forward.
Furthermore, we believe that the company will benefit from various strategic measures such as route launches, introduction of ancillary products, strong customer service and fleet revamping.
Upcoming Earning Releases
Of the other stocks in the sector, United Continental Holdings Inc. (UAL) and Southwest Airlines Co. (LUV) will release their fourth quarter results on Jan 22, while American Airlines Group (AAL) will release the same on Jan 27. All the three stocks, akin to Delta, sport a Zacks Rank #1 (Strong Buy).
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