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Delta Lowered Its Fourth-Quarter Revenue Outlook

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Jan. 4 2019, Published 8:03 a.m. ET

Delta lowered its revenue guidance

Delta Air Lines (DAL) shares fell ~9% on January 3 after the company updated its fourth-quarter outlook. Although the company’s earnings guidance was impressive, investors seemed to be disappointed with the downbeat revenue outlook for the quarter.

Delta expects its fourth-quarter revenues to increase nearly 7% YoY (year-over-year), which is lower than the company’s earlier guidance of a 7.5% increase. The company lowered the unit revenue growth expectation to 3% from an earlier projection of 3.5% YoY.

Delta lowered its revenue outlook despite the fact that it witnessed healthy demand for leisure and business travels throughout the fourth quarter. The company noted that although the close-in yield continued to improve throughout the quarter, the growth pace was more modest in December.

For the second time in a month, Delta lowered its fourth-quarter growth outlook for revenues and unit revenue. On December 4, Delta reduced its revenue growth projection to 7.5% from 8% and cut the unit revenue growth expectation to 3.5% from the previous range of 3%–5%.

Delta’s pessimistic outlook put pressure on airline stocks (JETS) on January 3. Investors seemed concerned about airlines’ growth prospects. On January 3, American Airlines (AAL), Spirit Airlines (SAVE), and United Continental (UAL) fell 7.5%, 6.7%, and 5%, respectively.

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Bottom-line guidance

Delta is optimistic about its bottom-line performance. Delta expects its cost control measures and a decline in fuel prices to lead to an expansion in its fourth-quarter pre-tax margin and EPS. The airline has raised the lower-end guidance of its pre-tax margin and EPS.

The company expects the fourth-quarter pre-tax margin to be 10%–11%—higher than the previous guidance range of 9%–11% and the level of 9.8% in the same quarter the previous year. The EPS is expected to be $1.25–1.30, which is higher than the updated guidance range of $1.10–$1.30 in December. The updated EPS guidance range depicts YoY growth of 30%–35%.

The fuel cost is expected to be $2.38–$2.43 per gallon—nearly $0.10 lower than the initial guidance range. The company noted that the wrong timing of fuel inventory purchases and maintenance at a refinery partially offset the benefit of lower fuel prices. Without these issues, the cost per gallon would have declined more.

Delta’s cost control measures, fleet transformation, and One Delta initiatives are expected to lower the fourth-quarter non-fuel unit costs by 0.5% on a YoY basis. Earlier, Delta expected the non-fuel unit costs to be either flat or down 1% on a YoY basis.

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