(DAL) Delta Soars in Third Quarter

Delta Air Lines (DAL), the second largest U.S. airline, has reported third quarter adjusted earnings per share (EPS) of 91 cents that matched the Zacks Consensus Estimate. On a GAAP basis, earnings shot up 51% to 65 cents from 43 cents in the year-ago quarter.

Despite the surging fuel prices, the year-over year upswing was driven by aggressive fare hike actions, cost-cutting measures and unbundled offerings such as upgraded seats.

Revenue

Revenue climbed 10% year over year to $9.82 billion and was above the Zacks Consensus Estimate of $9.75 billion. Airlines traffic, measured in billions of revenue passenger miles, was flat year over year. Capacity or available seat miles inched down 1% and load factor (percentage of seats filled with passengers) grew 20 basis points year over year to 86.1%.

On an annualized basis, Passenger, Cargo and Other revenues increased 10%, 13% and 5%, respectively, in the reported quarter. Passenger revenue per available seat mile (PRASM) rose 11% year over year, led by a 13% jump in PRASM in Latin America and a 12% domestic hike.

Operating Expenses

Total operating expenses increased 13% year over year in the third quarter. Most of the increase was due to fuel expenses, which were up 42% from the year-ago quarter. Increased capacity and revenue-related expenses as well as currency translation were responsible for the rise.

Consolidated unit cost or cost per available seat mile (CASM), excluding fuel and special items, increased 3.3% and CASM, including fuel and special items, grew 13.5% year over year in the reported quarter.

Liquidity

Delta Air Lines continues to enjoy a solid balance sheet. At the end of the third quarter, the company had $5.1 billion in unrestricted liquidity including $3.3 billion in cash and $1.8 billion in undrawn revolving credit facilities.

The company reduced its adjusted net debt to $14 billion from $14.5 billion at the end of fiscal 2010. Delta Air Lines is on track to reduce its net debt to $10 billion by 2013.

The company generated operating cash flow of $100 million in the reported quarter. Capital expenditures were $220 million.

Guidance

For the fourth quarter, Delta Air Lines expects operating margin in the range of 5–7% and consolidated unit cost, excluding fuel, to grow 2% year over year. The estimated fuel price, including taxes and hedges, is approximately $2.98 per gallon and total liquidity is projected at $5 billion.

Our Analysis

We expect Delta Air Lines to be profitable on increasing fares, reducing capacity, ancillary revenues, expansion into new and untapped markets as well as hedging strategies. In addition, the company is trying to lower costs through job cuts and reduction in non-fuel expenses as well as by retiring 140 aircraft, which will generate $250 million in savings.

However, we are concerned about steeply rising fuel prices, unionized labor, the current debt loaded balance sheet and competitive threats from its large peers such as United Continental Holdings Inc. (UAL), AMR Corp. (AMR) and Southwest Airlines (LUV) that are restraining the upside potential of the stock.

We are currently maintaining our long-term Neutral rating on the stock. For the short term (1–3 months), the stock retains a Zacks #2 (Buy) Rank.

AMR CORP (AMR): Free Stock Analysis Report

DELTA AIR LINES (DAL): Free Stock Analysis Report

SOUTHWEST AIR (LUV): Free Stock Analysis Report

UNITED CONT HLD (UAL): Free Stock Analysis Report

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