(DAL) Delta Reports Lower January Traffic

Delta Air Lines Inc. (DAL) reported a 1.5% year-over-year traffic decline in January. Airline traffic is measured in billions of revenue passenger miles, which means one mile flown by one passenger. Given the slowing space of the economy, international carriers like Delta continues to register limited passenger growth, impacting airline traffic numbers.

However, air fares remained strong due to the reduction in the availability of seats supporting Delta’s passenger unit revenue (PRASM), which increased 14.5% year over year.

Capacity (or available seat miles) continued to decline as evidenced by a 4.3% drop in the month of January but load factor (percentage of seats filled with passengers) increased 230 basis points (bps) year over year to 77.5%.

Although the load factor increased, we believe that the positive change is mostly attributable to the reduction in capacity rather than a notable increase in passengers. This can be validated from the fact that passengers boarded in the reported month registered a mere growth of 60 bps to 11,642,608.

Domestic traffic dropped 0.3% year over year on a capacity decrease of 3.4%. Load factor improved 240 bps to 77.3%. International traffic dipped 3.2% year over year, with capacity dropping 5.7% year over year. Load factor went up 200 bps to 77.8%.

As the carrier is persistently trying to cut down on operational costs and save fuel, we expect a continued decline in capacity. The trend is likely to continue in the near term as long as jet fuel prices continue to soar.

In 2011, air carriers struggled with rising fuel prices and a less than exciting economic outlook. However, fare hikes have aided airline companies, helping to offset the cost burden.

In addition, carriers benefited from the rise in holiday and leisure travel as evidenced by in load factor, evident from Delta’s gradual load factor recovery across its domestic and international businesses. But major carriers like Delta experienced declining year-over-year profits and a similar scenario can be expected this year due to the weak outlook for Europe.

According to the International Air Transport Association (IATA), airline companies are expected to generate overall profits of $3.5 billion in 2012, down from the estimated $6.9 billion in 2011 and $16 billion in 2010. This steep decline in the industry’s profitability is a function of the overall unfavorable macro backdrop, in which the industry has to operate this year.

Despite all these headwinds, Delta continues to make efforts to reduce its operating expenses, including fuel and non-fuel costs, through fare hikes, capacity cuts and fleet rightsizing. The company is also progressing well on several revenue initiatives such as upgrading seats, installing WiFi and expanding Economy Comfort to other aircraft. Additionally, Delta is expanding its footprint in both domestic and international markets.

Nevertheless, we remain on the sidelines due to steeply rising fuel prices, a highly leveraged balance sheet, competitive threats from major rivals like United Continental Holdings Inc. (UAL) and Southwest Airlines Co. (LUV), unionized workforce and heavy investments, which might weigh on the bottom line. We are currently maintaining our long-term Neutral recommendation on the stock. For the short term, the stock retains a Zacks #3 Rank (Hold).

DELTA AIR LINES (DAL): Free Stock Analysis Report

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