Will Delta Air Lines’ Strong Operational Performance Last?

Delta Air Lines (DAL) saw average traffic of about 50 million passenger miles for the quarter, a 0.8% year-over-year improvement, aided by growth in capacity. Improving demand, especially during the fourth-quarter holiday season, helped. In 2016, Delta’s traffic grew 1.7% to 163.2 billion miles.

Airlines’ traffic is measured by revenue passenger miles or RPM. RPM is the number of revenue passengers multiplied by the total distance traveled.

DAL’s capacity during the fourth quarter rose 0.9% to 58.7 million miles, while traffic also increased in the same period. In 2016, capacity increased 2.1%, again higher than the 1.7% traffic growth seen in the same period. As a result, load factor fell by 0.1 percent points to 85.1%.

For the first quarter of 2017, Delta expects capacity to fall by ~0%–1% compared to the first quarter of 2016. DAL had already planned to reduce its 4Q16 capacity by 6% in the UK region, owing to the economic uncertainty brought on by Brexit and also the steep decline in the British pound.

The International Air Transport Association or IATA also suspects the industry might be at the end of the traffic boost phase provided by low oil prices. This suggests travel demand may slow in the short term, which could adversely impact airlines.

However, for the long term (next 20 years), IATA expects passenger demand to double. This assumes a 3.7% compound annual average growth rate, the main driver of which will be the Asia-Pacific region.

Delta Air Lines forms 1.9% holding of the PowerShares BuyBack Achievers Portfolio (PKW). It also has a 1.2% holding in American Airlines (AAL). However, it has no holdings in the other two big airlines, Southwest Airlines (LUV) and United Continental (UAL).

Next, we look at whether Delta can turn around its declining revenue trend in 2017.