Delta Is Making Big Bucks Today, but What About Tomorrow?
Delta Air Lines will announce third-quarter earnings next Tuesday. I expect the company to report a record profit, as passenger revenue continued to grow throughout the quarter while jet fuel prices remained moderate.
Furthermore, Delta has exhibited strong cost control for non-fuel items recently, and beat its cost guidance last quarter by two percentage points. Delta's management has projected that non-fuel unit cost growth will remain below 2% annually going forward, which bodes well for profitability.
However, it is unclear how much the recent budget and debt ceiling stalemate has affected travel demand. If gridlock in D.C. erodes consumer and business confidence, Delta's corporate clients may cut back on discretionary travel. As the first airline to report earnings this month, Delta's outlook could reveal a lot about how much the shutdown is damaging the economy.
Strong unit revenue
Airline earnings announcements usually do not entail much drama these days, as most of the major carriers report unit revenue and traffic results on a monthly basis. Thus, we already know that Delta's unit revenue increased throughout the third quarter, growing 3% in July, 4% in August, and 5.5% in September.
Taken together, these results imply a unit revenue increase of approximately 4% for the full quarter. That's better than any of the other network carriers except for US Airways. Delta's strong performance was particularly impressive because it has the heaviest exposure to Japan's weakening currency of any legacy carrier. This rapid devaluation of the yen has been a drag on Delta's unit revenue throughout 2013.
Great cost performance
In its second-quarter earnings release, Delta provided some cost projections for the third quarter. Unit costs, excluding fuel and profit-sharing, were expected to increase by 0%-2%, while Delta projected its fuel costs at $3.05-$3.10 per gallon. The low cost inflation is the result of Delta's ongoing structural cost reduction program, which is helping the airline to reduce its head count and cut maintenance expenses.
Furthermore, Delta reported earlier this month that its adjusted fuel price will average just $2.98-$3.03 per gallon for the quarter -- below the earlier outlook. Saving a few pennies on every gallon of fuel will have a big impact on Delta's bottom line, since the company consumes about 1 billion gallons per quarter.
As a result of Delta's strong revenue performance and lower than anticipated fuel prices, I expect Delta to meet or exceed the top of its guidance for an 11%-13% adjusted operating margin in the third quarter. Analysts expect this strong margin performance to drive a 50% year-over-year increase in adjusted earnings per share.
What's not to like?
Investors probably won't find much to complain about in Delta's third-quarter earnings results. Moreover, the airline industry as a whole faces relatively easy comparisons in the fourth quarter due to the impact of Superstorm Sandy last year.
However, the uncertainty caused by the partial government shutdown and debt ceiling brinksmanship muddies the picture. Corporate travelers are the most likely to book tickets at the last minute, and pay significantly higher airfares as a result. Airlines were hit with a sudden drop in last-minute bookings earlier this year after the federal sequester went into effect, leading to lower unit revenue performance in March and April. It would not be surprising to see this skittishness resurface this fall.
Still, among the U.S. legacy carriers, Delta is best positioned for long-term success. Even if results for the fall miss expectations, I would be surprised if Delta experiences any long-term damage. For the foreseeable future, Delta has secured its leadership position within the airline industry.
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The article Delta Is Making Big Bucks Today, but What About Tomorrow? originally appeared on Fool.com.Fool contributor Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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