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Brace Yourself for Delta to Revise Guidance Lower Due to Outage

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Declining utilizations

The load factor is the most commonly used measure of an airline’s capacity utilization and is calculated by multiplying capacity and traffic. A higher load factor indicates better utilization of aircraft capacity.

As discussed in the previous articles, Delta Air Lines (DAL) witnessed a huge outage in August that resulted in its utilization declining by 2.9% in August 2016. However, year-to-date (or YTD), the scenario is different. Since capacity growth in the past eight months has matched traffic growth, utilization has remained almost flat. YTD in August 2016, utilization has fallen by 0.5%.

DAL’s legacy peers like American Airlines (AAL), United Continental (UAL), Alaska Air (ALK), and most regional players including Southwest Airlines (LUV) and JetBlue Airways (JBLU) have been plagued with declining utilization.

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Declining yields

Yield is the revenue earned per seat mile. Domestic yields especially remain weak. This has been adversely affected by increasing competition and seat oversupply in the industry, which has led to reduced airfares. In addition, DAL also had hedge losses on the Japanese yen during the month.

Unit revenues follow

As a result, DAL’s passenger unit revenue per available seat mile (or PRASM) fell by 9.5% in August 2016. DAL attributed two percentage points of this decline to the computer outage. An increase in PRASM validates the airline’s ability to generate higher revenue per seat. This is essential to increase margins.

Outlook

For 3Q16, DAL has forecasted a decline of 4%–6%. However, given the outage, we expect DAL to revise its guidance. Also, achieving this forecast would mean a steep comeback in the next two months, which most investors think is a difficult task.

However, analysts also feel that Delta may soon report improved unit revenues given that many airlines are reducing fall capacity to better match supply and demand. Also, airlines have increased airfares in 2016, which will help improve yields to some extent.

Delta forms ~1% of the Large Cap Growth AlphaDEX ETF (FTC).

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