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Delta Air Lines Cuts 3Q17 Unit Revenue Guidance

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Utilization rising

Delta Air Lines’ (DAL) traffic has outpaced its capacity growth for some time now. As a result, its utilization has improved over the past seven months. In August 2017, is utilization improved by 3.5% to 87.9%. As of August 2017, utilization had improved by 1.5% to 85.9% YTD (year-to-date).

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Outlook reduced

Delta Air Lines’ unit revenue improved by 2.5% YoY (year-over-year) in 2Q17 for the first time in two and half years. Based on this improved yield performance, Delta Air Lines targeted unit revenue growth of 2.5%–4.5%.

However, the company’s domestic yield has improved more slowly than expected. As a result, Delta Air Lines has reduced its unit revenue guidance to just 2%–3% growth.

Fuel costs are also expected to rise due to crude oil prices rising for the past two months. Fuel costs are now expected to be $1.68–$1.73, compared with the previously expected $1.55–$1.60. Due to lower unit revenue growth and higher fuel costs, operating margins are now expected to be 16.5%–17.5%, compared with the earlier expectation of 18%–20%. The negativity spread to other airlines and led to a decline in their stock prices.

Investors can gain exposure to Delta Air Lines by investing in the PowerShares Dynamic Leisure and Entertainment Portfolio ETF (PEJ), which invests ~5.0% of its holdings in the stock. It also holds 4.9% in United Continental (UAL) and 2.7% in JetBlue Airways (JBLU), but has no holdings in American Airlines (AAL).

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