Delta Air Lines (DAL), the second largest U.S. airline, reported first quarter adjusted net loss of 38 cents outpacing the Zacks Consensus Estimate of net loss of 50 cents on large fare hikes, despite higher fuel costs.
Delta raised its ticket prices for domestic as well as international flights several times in the reported quarter, which helped to cover at least 70% of the rising fuel costs. However, the adjusted net loss was wider than the year-ago loss of 23 cents. The deterioration could be due to the weak traffic in Japan resulting from the March 11 earthquake and tsunami.
Revenue
Revenue climbed 13% year over year to $7.7 billion and inched past the Zacks Consensus Estimate of $7.6 billion. Flight cancellations due to severe weather conditions as well as lower demand for air travel in Japan adversely affected revenues by $90 million and $35 million, respectively, in the first quarter.
Delta Air Lines was affected the most to the natural calamity in Japan as it has the largest presence in the country relative to other U.S. carriers such as United Continental Holdings Inc. (UAL), AMR Corporation (AMR) and Southwest Airlines Co. (LUV). Notably, Delta generates almost $2 billion in revenue every year from planes flying the Tokyo hub.
Passenger revenue per available seat mile (PRASM) rose 7% year over year, led by a 16% PRASM jump in Latin America and an 11% increase in the Pacific. Airlines traffic, measured in billions of revenue passenger miles, inched up 1% year over year. Capacity or available seat miles grew 5% and load factor (percentage of seats filled with passengers) fell 310 basis points year over year.
On an annualized basis, Passenger, Cargo and Other revenues increased 13%, 42% and 6%, respectively, in the reported quarter.
Operating Expenses
The company’s total operating expenses rose 16% year over year due to higher fuel expense, employee wage increases, maintenance volumes, and capacity and revenue related expenses.
Consolidated unit cost or cost per available seat mile (CASM), excluding fuel and special items, increased 3% and CASM, including fuel and special items, grew 10% year over year in the reported quarter.
Liquidity
Delta Air Lines continues to enjoy a solid balance sheet. At the end of the first quarter, the company had $5.5 billion in unrestricted liquidity including $2.9 billion in cash and $1.6 billion in undrawn revolving credit facilities. The company reduced its adjusted net debt to $14.5 billion from $15 billion at the end of fiscal 2010.
The company generated operating cash flow and free cash flow of $788 million and $452 million, respectively, in the reported quarter.
Guidance
Delta Air Lines expects double-digit unit revenue growth in the second quarter of 2011. The company expects operating margin in the range of 7–9% and consolidated unit cost, excluding fuel, to grow 2-4% from the year-ago level. Fuel price is estimated at approximately $3.26 per gallon and total liquidity at $5.8 billion in the upcoming quarter.
Further, for the second half of the year, Delta plans to cut its capacity in markets where fare hikes are unable to cope with higher fuel prices.
Our Analysis
For the short term (1–3 months), a Sell rating was retained for Delta with the Zacks # 4 Rank due to surging fuel prices and falling demand in Japan.Further, unionized labor, debt loaded balance sheet and competitive threats make us cautious on the stock.
However, we believe Delta Air Lines’ aggressive fare hike actions, cutting capacity as well as hedging strategies will help it to recover higher fuel costs. The company has hedged 49% of its fuel prices for the second quarter, up from 41% in the reported quarter. Based on these expectations, we are currently maintaining our long-term Neutral recommendation on the stock.
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