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Why Investors Were Disappointed with Delta's 2Q17 Results

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Part 2
Why Investors Were Disappointed with Delta's 2Q17 Results PART 2 OF 7

Will Delta’s Strong Operational Performance Continue?

Traffic growth

Delta (DAL) saw average traffic of about 57.6 million passenger miles for the quarter, a 2.1% year-over-year (or YoY) improvement, aided largely by growth in travel demand and a small increase in capacity. For 1H17, Delta’s traffic has risen 1.3% to 105.5 billion miles, completely driven by increasing travel demand.

Will Delta&#8217;s Strong Operational Performance Continue?

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Airline traffic is measured by revenue passenger miles (or RPM). RPM is the number of revenue passengers multiplied by the total distance traveled.

Capacity

DAL’s capacity during the second quarter rose 0.4% to 66.2 million miles at a much slower pace than traffic in the same period. In 1H17, capacity has remained flat at 124.1 billion miles, again slower than the traffic growth seen in the same period.

As a result, load factor rose 1.4 percent points to 86.9% in the second quarter and by 1.1 percent points to 85.0% for 1H17.

Outlook

After reducing capacity in 1Q17 and almost flat capacity in 2Q17, Delta expects capacity to rise ~2% in 3Q17 as compared to 3Q16. This might be the only quarter of growth, as for the full year 2017, Delta Air Lines is aiming for capacity growth of 0%–1%.

The International Air Transport Association (or IATA) expects passenger demand to double over the long term. The key driver of this growth will be emerging markets, especially India and China. If Delta Air Lines can capitalize on this growth without a significant increase in capacity or margin deterioration, it could beat industry peers on this front.

You can gain exposure to Delta Air Lines by investing in the PowerShares Dynamic Leisure & Entertainment ETF (PEJ), which invests 5.1% of its holdings in the airline. It also invests ~5.0% of its portfolio in Southwest Airlines (LUV), ~5.0% in United Continental Holdings (UAL), 4.6% in American Airlines (AAL), and 2.8% in JetBlue Airways (JBLU).

Next, we’ll look at how Delta Air Lines turned around its declining revenue trend in 2Q17.

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