Delta Air Lines’ (DAL) cost reduction initiatives have helped reduce costs, its debt reduction initiatives are on track, and it is generating strong cash flows and buying back shares aggressively. The company has seen decent growth in its available seat miles and revenues per mile.
In 2Q15, Delta Air Lines saw a 3.4% year-over-year (or YoY) growth in its capacity, driven by capacity growth of more than 5% in the Atlantic and Latin America regions. However, the company experienced lower passenger revenue unit price (or PRASM).
In order to improve its PRASM, Delta Air Lines announced that it would not have any further capacity expansions during 3Q15. The company took this step in order to match demand with supply, which would help drive much better unit revenue performance in 4Q15 and beyond.
Delta noted that its PRASM is expected to decline by 4.5%–6.5% YoY for the third quarter. However, its fuel hedges are lower in 2H15, and its savings on fuel should help it grow its earnings per share by more than 30%. Its fuel cost per gallon for 2H15 is expected to be around $1.90–$2.00, compared with $2.65 in 1H15. The operating margins are expected to be between 19%–21%. Fuel prices should stay between $1.90–$1.95 per gallon.
4Q15 looks brighter
Delta Air Lines said that it plans to implement deep capacity cuts in underperforming markets such as India, Africa, the Middle East, Brazil, Russia, and Japan during its off-season. This would result in a flat capacity for 2015. The demand-supply match will also help DAL improve its PRASM in 4Q15 as well as fiscal 2016.
New investments to add to revenues
Delta Air Lines has been increasing its flight operations in order to boost its unit revenues by keeping capacity steady. The company also plans to invest in Japan’s bankrupt Skymark Airlines by buying a 20% stake in it. This would help the company expand its flight operations in Japan and the international market since its competitors such as American Airlines Group (AAL) and United Continental Holdings (UAL) are already offering their services under similar strategic alliances.
Other major airlines will soon report their 2Q15 results. We’ll be covering all of them:
- United Airlines (UAL): July 22
- Alaska Airlines (ALK): July 23
- Southwest Airlines (LUV): July 23
- American Airlines (AAL): July 24
- JetBlue Airways (JBLU): July 28
These airlines are part of many ETFs, including the iShares Transportation Average ETF (IYT) and the PowerShares DWA Consumer Cyclicals Momentum Portfolio ETF (PEZ). Mark these dates on your calendar and check back here for analyses of the results.