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Why Did Delta Air Lines’ Revenue Decline in 3Q15?

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Top line performance in 3Q15

Delta Air Lines’ (DAL) revenue declined by 0.6%, or $71 million, year-over-year. Its passenger revenue fell 1.9%, or $181 million, in 3Q14. Domestic regional carriers and international operations saw revenue declines of 5.9% and 7.9%, respectively, for the quarter ended September 2015.

However, domestic mainline revenues grew 3.8% due to strong performance in some of its key markets, including New York, Seattle and Los Angeles.

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Why did revenues decline?

Delta’s top line fell in spite of solid growth in total capacity and traffic. Lower unit passenger revenue drove its overall revenue down. Domestic revenue grew 1.3%, driven by a 4.4% increase in capacity offset by a 3.0% decline in unit revenue. Unit revenue is a measure of passenger revenue earned by the airline per available seat mile.

Revenue from international operations declined 5.4%, driven by lower unit revenues. The unit revenue from Delta’s international operations from the Atlantic and Pacific regions declined 9.5% and 9.3%, respectively, due to the stronger US dollar and reduced international fuel surcharges.

Other revenue, including proceeds from loyalty programs and non-jet fuel products sold to third parties from its oil refineries, rose 13.6%, or $158 million, to reach $1,316 million.

How is Delta responding to the fall in its top line?

Delta plans to accelerate its restructuring plan, which includes replacing its 50-seat regional fleet with the customer-preferred CRJ-900 and B-717-200. Delta plans to use this new equipment to grow its unit revenues in domestic operations.

Revenue from its Latin American operations is largely affected by the strong dollar in Brazil. Delta plans to reduce its capacity to Brazil by 20% in 4Q15.

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Top line grows in first 9 months of fiscal 2015

For the first nine months of 2015, Delta’s revenue grew 1.6%. The largest contribution came from revenue from the Other Operations segment, which grew 18.8%, or $620 million. Passenger revenue for domestic operations grew 2.5% and for international operations by 1.6%.

Growth in passenger revenue was driven largely by the airline’s growth in capacity and traffic, which grew 3.8% and 3.3%, respectively.

Investors can gain exposure to airlines like Delta Air Lines (DAL), American Airlines (AAL), United Continental Holdings (UAL), and Southwest Airlines (LUV) through the iShares Transportation Average ETF (IYT). IYT holds ~38% in airline stocks and ~3% in Delta Air Lines. You can also invest in the SPDR S&P Transportation ETF (XTN).

In the next article, we’ll see how Delta’s profit margins performed in 3Q15.

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