Delta Air Lines (DAL), the second largest U.S. airline, declared its third quarter adjusted earnings of $1.10 which easily surpassed the Zacks Consensus Estimate of 95 cents on strong international and travel demand.
Including special items, net income increased to $363 million or 43 cents per share compared with a net loss of $161 million or 19 cents in the year-ago quarter.
Revenue
Revenue climbed 18% year over year to $9 billion on strong revenue from international markets especially in Asia. High business travel demand and ticket prices also fueled the rise in revenue in the reported quarter. Passenger revenue per available seat mile (PRASM) rose 16% year over year, led by a 54% PRASM jump in the Pacific and a 25% increase in the Atlantic.
Airlines traffic, measured in billions of revenue passenger miles, upped 2% year over year. Capacity or available seat miles rose 2% and load factor (percentage of seats filled with passengers) inched up 10 basis points year over year.
On an annualized basis, Passenger, Cargo and Other revenues increased a respective 19%, 28% and 9%.
Operating Expenses
The company’s total operating expenses climbed 8% year over year due to higher fuel price, profit sharing expense and maintenance expense, which were partially offset by incremental merger cost synergies from the acquisition of Northwest in 2008.
Consolidated unit cost or cost per available seat mile (CASM), excluding fuel and special items, was almost flat year over year. CASM, including fuel, inched up 2% from the year-ago quarter.
Liquidity
Delta Air Lines continues to enjoy a solid balance sheet. At the end of the second quarter, the company had $5.5 billion in unrestricted liquidity including $3.9 billion in cash and $1.6 billion in undrawn revolving credit facilities. The company reduced its adjusted net debt to $15.2 billion from $15.6 billion at the end of the second quarter.
The company generated operating cash flow and free cash flow of $515 million and $150 million, respectively, in the third quarter. Capital expenditure was $360 million.
Guidance
Going forward in the fourth quarter, the company sees strength through the holiday period and expects solid year over year unit revenue growth. Delta Air Lines expects operating margin to be in the range of 6%–8 % for the fourth quarter and consolidated unit cost to decline 3%-5% from the year-ago level.
Our Analysis
We are encouraged by improving revenue trends and a global recovery. With the successful integration of the Northwest acquisition, Delta Air Lines’ investments in new products and network as well as continued efforts to strengthen its balance sheet, we believe the company is favorably positioned to take advantage of the economic recovery.
However, we remain cautious on the company due to its leveraged balance sheet and rising fuel prices. In addition, a unionized workforce and competitive threats keep us on the sidelines. Hence, we are currently maintaining our long-term Hold rating, supported by the Zacks #3 Rank (Hold).
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