Margins are expected to be volatile in 2017. For the first quarter of the year, Delta Air Lines’ (DAL) margin is expected to fall 16.7% as compared to 23.6% in 1Q16. However, this fall was expected given the fact that Delta had indicated fuel costs could be at their peak and revised pilot contracts would come into full effect in 1Q17.
For the second and third quarters, margins are expected to be maintained at 22.2% as compared to 21.8% in 2Q16 and 23.5% in 3Q16. EBITDA margins for 4Q17 are then expected to improve to 18.4% as compared to 16.5% in 4Q16.
For the full year 2017, margins are expected to fall to 20.1% as compared to 21.9% in 2016. In fact, there is little room for margin expansion in 2017. Declining fuel costs, falling hedging losses, and improving capacity utilizations are the key factors that have led to margin expansion. Any further gains from these factors will likely be limited.
Cost to rise
Costs are expected to increase in the first quarter due to the increased cost of labor. Thus, unit costs including profit sharing but excluding fuel are expected to rise 5%–6% in 1Q17.
For the first quarter of 2017, Delta Air Lines’ management expects to achieve an operating margin of 10%–11%, similar to its earlier guidance. The PowerShares Dynamic Leisure & Entertainment ETF (PEJ) invests ~5.0% of its portfolio in Southwest Airlines (LUV), ~5.0% in United Continental Holdings (UAL), 4.6% in Delta Air Lines (DAL) and American Airlines (AAL), and 2.8% in JetBlue Airways (JBLU).