Delta Air Lines Inc. (DAL), the second largest U.S. airline, reported a 0.5% year-over-year traffic increase in March. Airline traffic is measured in billions of revenue passenger miles, which implies one mile flown by one passenger.
On a year-over-year basis, capacity (or, available seat miles) grew 6.2% and load factor (percentage of seats filled with passengers) fell 450 basis point (bps).
Domestic traffic inched up 0.7% year over year on capacity increase of 3.2%, partially offset by a 210 bps decline in the load factor to 83.3%. International traffic also got a 0.2% year-over-year nudge from a 10.9% capacity increase while load factor decreased 800 bps to 74.3%.
Traffic growth was slow across the Pacific in March, with demand for air travel dropping due to the earthquake and tsunami in Japan. Delta’s Pacific traffic grew a meager 0.6% year over year in the month compared with a 13.6% increase in February.
Capacity cuts in Japan were largely responsible for the slump in demand. A few days back, Delta announced its intention to cut capacity by 15% to 20% and suspend services to Tokyo’s Haneda airport through May. The reduction in capacity will hurt Delta’s revenue by $250–$400 million in the first quarter.
However, Delta would resume flying to the Haneda airport in June. Seeing this as an opportunity, Delta’s biggest rival, United Continental Holdings Inc. (UAL), announced its intention to operate in Haneda airport. Delta will have to restart its flights within 90 days of suspension to maintain its grip in the country.
Delta Air Lines has the largest presence in Japan relative to other U.S. carriers such as United, AMR Corporation (AMR) and Southwest Airlines Co. (LUV). Notably, Delta generates almost $2 billion in revenue every year from planes flying the Tokyo hub.
In the first quarter of 2011, Delta’s traffic upped 1.3% year over year on a capacity increase of 5.5%. This was lower than the last quarter’s traffic increase of 6%. Load factor declined 310 bps to 76.4% from the year-ago quarter.
We are currently maintaining our long-term Neutral recommendation on Delta Air Lines. However, for the short term (1–3 months), the company retains the Zacks #4 Rank (Sell rating).
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