Delta Air Lines Inc. (DAL), the second largest U.S. airline, expects its first quarter 2011 revenue to be adversely affected by the drop in air traffic resulting from the March 11 catastrophe in Japan.
Delta Air Lines has the largest presence in Japan relative to other U.S. carriers, generating almost $2 billion in revenue every year from planes flying the Tokyo hub. The massive earthquake and radiation leaks from a nuclear power plant, which took a toll on Japan’s economy, also affected demand of air travel in that country.
The company is cutting capacity by 15% to 20% through May to reflect falling short-term demand, suspending service to Haneda and pulling back on capacity between Narita and the beaches. In addition to the cut in Japan flights, Delta Air Lines is lessening departures at its Memphis hub by 25%.
The reduction in capacity will hurt Delta’s revenue in the range of $250 million to $400 million in the current quarter. The Zacks Consensus Estimate projects revenue of $7.63 billion in the first quarter.
Delta’s move is similar to its rivals United Continental Holdings (UAL) and American Airlines, a wholly owned subsidiary of AMR Corporation (AMR). United expects to reduce its capacity by approximately 1% in May and approximately 4% by September. American Airlines cited a modest decline in revenue from Japan.
Further, soaring fuel prices in the airline industry are expected to lift Delta’s 2011 fuel expenses by $3 billion or 35% over the last year. This will lead to reduced earnings and margins in the first quarter. Delta expects operating margin of negative 2–3% for the current quarter, down from the previous expectation of positive 1–3%.
The Zacks Consensus Estimate projects a net loss of 20 cents per share in the first quarter compared with a loss of 23 cents in the year-ago quarter. However, the magnitude of the loss was increased in the last 7 days and 30 days from 18 cents and 13 cents, respectively.
We believe the U.S. carriers are combating rising fuel prices with increasing fares. Unitedraised its fares by $10 per round trip on most U.S. flights while Delta responded with fare hikes of $6 to $14 per round trip.
We are currently maintaining our long-term Neutral recommendation on the Delta Air Lines. However, for the short term (1–3 months), the company retains the Zacks #4 Rank (Sell rating).
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