Will Delta’s Margin Expansion Continue?
Delta Air Lines’ (DAL) cost per available seat mile excluding fuel and including profit sharing (or CASM-ex) rose 7.3% year-over-year (or YoY). The primary factor driving this cost growth was the huge increase in pilot compensation, thanks to the pilot contract ratification at the end of 2016. Another reason was the Atlanta storms in April that caused Delta to cancel more than 1,000 flights. A 2% YoY increase in inflation also led to unit cost growth for the quarter.
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Fuel costs save the day
New oversupply concerns have caused crude oil prices to fall again after a brief rise in the first quarter. As a result, Delta’s fuel expense fell 15.7% to $1.7 billion in the second quarter. Adjusted fuel cost per gallon fell from $1.97 to $1.66 in the second quarter.
Thanks to the low fuel costs, Delta’s margin ended a contracting streak that had lasted for several quarters. For 2Q17, adjusted operating margins improved to 18.4% as compared to 17.4% in 2Q16.
Delta Air Lines expects CASM-ex growth to slow down to about 2%, significantly lower than the 7.3% rise this quarter. Fuel costs could fall further to $1.55–$1.60 per gallon. Both these expected falls could lead to margin expansion of 18% to 20% for 3Q17.
Investors can gain exposure to Delta stock by investing in the First Trust Industrials/Producer Durables AlphaDEX Fund (FXR), which invests 1.9% of its portfolio in DAL. It also invests 1.9% in American Airlines (AAL), JetBlue (JBLU), United Continental (UAL), Southwest Airlines (LUV), and Spirit Airlines (SAVE).
Continue to our next article to learn more about Delta’s increasing debt.