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Do Margin Estimates for Delta Suggest Limited Expansion Scope?

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Analyst estimates

After an improvement in Delta Air Lines’ margins (DAL) in 1Q16, analysts are expecting EBITDA margins to improve in 2Q16 as well to 26% as compared to 21% in 2Q15. For the full year 2016, analysts are expecting EBITDA margin expansion to 24% as compared to 21% in 2015. This is lower than the earlier estimates of a 25% margin in 2016.

In fact, there is little room for margin expansion beyond 2016. Declining fuel cost, reducing hedging losses, and improving capacity utilizations are the key factors that have led to margin expansion. Any further gains from these measures will be limited.

Fuel prices have already touched historical lows and in fact have recovered slightly. Airlines stand to lose if fuel prices rise. Capacity utilizations have also been declining, which may in fact contract margins.

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Management outlook

For 2Q16, Delta expects fuel cost to fall to $1.48–$1.53 as compared to $2.4 per gallon in 2Q15. Operating margins are expected to stay flat at 21%–23% in 2Q16 as compared to 23% in 2Q15.

For the full year 2016, Delta Air Lines expects to see a 36% drop in its fuel cost to ~$1.45 as compared to 2015. Operating margins are expected to remain in the range of 16%–17%.

The PowerShares Dynamic Leisure and Entertainment Portfolio ETF (PEJ) holds 4.5% of its holdings in DAL. It also invests 5% in Southwest Airlines (LUV), 4% in United Continental (UAL), and 4% in American Airlines (AAL).

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