We are reiterating our long-term Neutral recommendation on the second largest U.S. airline Delta Air Lines Inc. (DAL). The stock retains the Zacks #3 Rank (Hold) for the short term.
Despite soaring fuel prices and the recent Hurricane Irene in the Northeast, we believe Delta Air Lines will generate solid profits on a revival in air travel demand, increased fares, capacity cuts, new and improved ancillary revenues as well as hedging strategies.
So far, the company has been able to pass on the increased costs to customers in the form of fare hikes. Delta Air Lines is taking several initiatives to lower its overall cost, including fuel price inflation, and trimming down non-fuel cost to the past year level. The company is curtailing capacity in various markets, retiring less fuel-efficient planes,offering voluntary buyouts and reducing facility costs at both airport and cargo locations.
Further, Delta Air Lines continues its effort to expand domestic and international flights through various partnerships. The company is progressing on improving ancillary revenues by offering expanded products and services. All these measures are expected to fuel the company’s growth and profitability going forward.
However, Delta’s growth remains restricted due to unfavorable weather conditions, steeply rising fuel prices, unionized labor, a highly leveraged balance sheet and competitive threats from its larger peers such as United Continental Holdings Inc. (UAL), AMR Corporation (AMR) and Southwest Airlines Co. (LUV).
Further, the company’s second-quarter earnings missed the Zacks Consensus Estimate by a penny on soaring fuel prices. Aggressive fare hike actions as well as cost-cutting measures failed to counter the sharply rising fuel prices in the quarter.
Hence, we remain on the sidelines at present.
