(DAL) Delta Air Lines Faces Hurricane Irene Ire

Delta Air Lines Inc. (DAL) reported a 0.3% year-over-year traffic decline in August. Airline traffic is measured in billions of revenue passenger miles, which means one mile flown by one passenger.

On a year-over-year basis, capacity (or, available seat miles) grew 0.8% and load factor (percentage of seats filled with passengers) increased 40 basis point (bps).

Domestic traffic dropped 1.8% year over year due to capacity decrease of 2.6% and load factor improved 70 bps to 86.5%. International traffic grew 1.9% year over year driven by a 1.8% capacity increase while load factor upped 10 bps to 87.5%.

The recent hurricane Irene caused a major setback to the carrier’s operations in August. Consequently, the carrier grounded approximately 2,200 flights that restricted the month’s profit by approximately $15 million.

August traffic growth remained sluggish across the U.S. while international traffic grew on higher demand for the pacific routes, particularly as carriers resumed flights to Japan after the massive natural disaster. Accordingly, Delta’s Pacific traffic increased 14.8% year over year in August.

For the past several months, air carriers are struggling with rising fuel prices. However, increased fare hike have aided airline companies to lessen the cost burden. In addition carriers continue to benefit from the rise in holiday and leisure travel as evidenced by the gradual recovery in load factor of Delta in domestic as well as international flights. Further, we expect the trend to continue in the balance of this year due to travel demand in fall winter season and the expected growth in business travel demand.

The third quarter fuel cost is expected to be $3.20 per gallon, up from the prior expectation of $3.03 per gallon. Further, Delta’s non-fuel expenses also remain high due to steeper maintenance costs.

Despite soaring fuel prices, Delta projects a strong third quarter with higher revenues owing to increasing fares, reducing capacity as well as hedging strategies. However, we believe stiff competition from the likes of AMR Corporation (AMR) and Southwest Airlines Co. (LUV) and United Continental Holdings Inc. (UAL), fuel price volatilities and an uncertain economic outlook could limit the company’s earnings in the near term.

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

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