The second largest U.S. airline Delta Air Lines (DAL) reported fourth quarter 2011 adjusted earnings of 45 cents per share surpassing the Zacks Consensus Estimate by 8 cents. The outstanding performance in the quarter was credited to fare hikes, cost-cutting measures and fuel hedging programs that fully offset surging fuel prices.
On a GAAP basis, earnings per share jumped to 50 cents in the quarter from 2 cents in the year-ago quarter. Earnings in fiscal 2011 shot up 44.3% year over year to $1.01.
Revenue
Revenue increased 8% year over year to $8.4 billion in the reported quarter and was above the Zacks Consensus Estimate of $8.3 billion. Airlines traffic, measured in billions of revenue passenger miles, dipped 3% year over year. Capacity or available seat miles fell 3% while load factor (percentage of seats filled with passengers) grew 60 basis points year over year to 81.7%.
On an annualized basis, Passenger, Cargo and Other revenues increased 8%, 8% and 4%, respectively, in the reported quarter. Passenger revenue per available seat mile (PRASM) rose 12.2% year over year, led by a 13.7% spike in PRASM in Pacific and a 13.2% domestic hike.
For fiscal 2011, revenue increased 11% to 35.1 billion from the prior year. Traffic remained stable year over year while capacity rose 1% and load factor contracted 90 bps.
Operating Expenses
Total operating expenses increased 2% and 12% year over year in the fourth quarter and fiscal 2011, respectively, primarily due to higher fuel expenses.
Consolidated unit cost or cost per available seat mile (CASM), excluding fuel and special items, crept up 2% and CASM, including fuel and special items, grew 6% year over year in the reported quarter.
Liquidity
Delta Air Lines’ balance sheet continues to be strong. At the end of fiscal 2011, the company had $5.4 billion in unrestricted liquidity including $3.6 billion in cash and short-term investments, and $1.8 billion in undrawn revolving credit facilities.
The company reduced its adjusted net debt to $12.9 billion from $14.5 billion at the end of 2010 and $17 billion at the end of 2009. Delta is on track to reduce it to $10 billion by the next year.
The company generated operating cash flow of $1.2 billion in 2011 while capital expenditures were $400 million.
Guidance
For the first quarter of 2012, Delta Air Lines expects operating margin in the range of 2–4% and consolidated unit cost, excluding fuel, to grow 3-5% year over year. The estimated fuel price, including taxes and hedges, is approximately $3.16 per gallon and total liquidity is projected at $5.5 billion.
Our Take
Notwithstanding higher fuel prices and the threat of recession looming large over Europe, 2012 will likely mark the third consecutive year of profitability for the company. Delta continues to make efforts to reduce its operating expenses including fuel and non-fuel costs, through fare hikes, capacity cuts and fleet rightsizing. The company is also progressing well on several revenue initiatives such as upgrading seats, installing WiFi and expanding Economy Comfort to other aircrafts. Additionally, Delta is expanding its footprint in both domestic and international markets.
Nevertheless, we remain on the sidelines due to steeply rising fuel prices,highly leveraged balance sheet, competitive threats from major rivals like United Continental Holdings Inc. (UAL) and Southwest Airlines Co. (LUV), unionized workforce and heavy investments, which might weigh on the bottom line.
We are currently maintaining our long-term Neutral recommendation on the stock. For the short term, the stock retains a Zacks #3 (Hold) Rank.
DELTA AIR LINES (DAL): Free Stock Analysis Report
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UNITED CONT HLD (UAL): Free Stock Analysis Report
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