(DAL) Delta Air Lines’ June Traffic Dips

Delta Air Lines Inc. (DAL) reported a 1.5% year-over-year traffic decline in June. Airline traffic is measured in billions of revenue passenger miles, which means one mile flown by one passenger.

Capacity (or, available seat miles) grew 0.2% year over year and load factor (percentage of seats filled with passengers) dipped 140 basis points (bps) year over year.

Domestic traffic dropped 2.7% year over year due to a capacity decrease of 1.5%. Load factor also declined 110 bps to 86.5%. International traffic inched up 0.3% year over year driven by a 2.5% capacity increase while load factor decreased 190 bps to 86.0%.

June traffic growth remained sluggish across the U.S. while international traffic grew on higher demand for the pacific routes, particularly as the carrier resumed flights to Japan after the massive natural disaster in March. However, Delta’s Pacific traffic clawed back up just about 3.9% year over year in June compared with a 26.0% increase in June 2010 traffic.

Rising fuel cost and a weaker consumer market were responsible for the drop in growth. For the past several months, air carriers are struggling with rising fuel prices.

In order to alleviate the pressure, carriers are passing the increased cost to customers in the form of fare hikes. As a result, carriers are registering continued falls in load factor, as is evident  from the declining load factor of Delta in domestic as well as international flights.

The second quarter fuel cost is expected to be $3.23 per gallon, down from the prior expectation of $3.26 per gallon. The projected fuel cost for the third quarter is $3.03 per gallon. Further, Delta’s non-fuel expenses also remain steep due to higher maintenance costs and lower-than-expected capacity.

However, Delta projects a strong second quarter owing to higher revenues, which would largely offset the fuel price inflation.

Despite the lingering uncertainty in U.S. recovery as well as debt concerns in Europe, the demand for air travel has rebounded to some extent after the March 11 catastrophe. Delta now expects the Japan disaster to hurt total revenue by $125 million in the second quarter compared with the previous expectation of $150 million.

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), generating almost $2 billion in revenue every year from  Tokyo traffic. Further, to keep costs down, Delta plans to trim its capacity by 4% post Labor Day along with removing less fuel-efficient planes and 140 aircraft by the end of next year.

We believe Delta Air Lines is better placed than its largest rivals United Continental Holdings Inc. (UAL) and American Airlines, a wholly-owned subsidiary of AMR Corporation to report solid second quarter results.

United Continental expects to report lower-than-expected unit revenue growth of 8.3–9.3%. American Airlines’ revenue is expected to be hurt to the tune of $60 million by a spring hailstorm at American’s Dallas-Fort Worth hub that could hurt revenue. The company expects its unit revenue to increase 4.5–5.5% in the current quarter.

We are currently maintaining our long-term Neutral recommendation on Delta Air Lines. For the short term (1–3 months), the company retains a Zacks #3 Rank(Hold).

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