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Could Delta Air Lines’ Margins Keep Improving?

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Jul. 6 2017, Updated 8:07 a.m. ET

Analyst estimates

Delta Air Lines’ (DAL) 2Q17 EBITDA margin is expected to improve slightly to 22.8% as compared to 21.8% in 2Q16. For the third quarter, margins are expected to fall to 22.9% as compared to 23.5% in 3Q16. EBITDA margins for 4Q17 are then expected to improve to 18.9% as compared to 16.5% in 4Q16.

For the full year 2017, margins are expected to fall from 21.9% in 2016 to 20.6% in 2017. Increasing labor costs are a primary reason for this decline. However, declining crude will provide some respite.

Delta expects fuel cost per gallon to be in the range of $1.68 to $1.73, a 12.2%–14.7% decline as compared to the 2Q16 fuel price of $1.97 per gallon. Investors should also keep in mind that margins could improve if crude oil prices fall further, thereby reducing Delta Air Lines’ fuel cost.

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Cost to rise

Costs are expected to increase in the second quarter. According to Delta, the cost per available seat mile excluding fuel (or CASM-Ex) and including profit sharing is expected to rise 6%–8% in the second quarter. Normalized CASM-Ex including profit is expected to rise 4%–6%.

As a result, Delta Air Lines expects operating margins for 2Q17 to fall 17%–19% from the 23.2% operating margin it achieved in 2Q16.

You can gain exposure to Delta Air Lines by investing in the PowerShares Dynamic Leisure & Entertainment ETF (PEJ), which invests 5.4% of its holdings in the airline. It also invests ~5.3% of its portfolio in American Airlines (AAL), ~4.6% in United Continental Holdings (UAL), and 2.8% in JetBlue Airways (JBLU).

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