Delta Air Lines May Miss Its Unit Revenue Guidance -- Again

By Markets Fool.com

So far, 2016 has been a year of revenue disappointments for most airlines. Based on Delta Air Lines CFO Paul Jacobson's comments at an investor conference on Wednesday, the long-awaited airline revenue recovery hasn't begun yet.

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Delta takes a step backward

A year ago, Delta executives set a goal of getting unit revenue back into positive territory by the end of 2015. Ultimately, the company fell short of that objective. However, passenger revenue per available seat mile (PRASM) declined just 1.6% year over year in the fourth quarter, suggesting that Delta was on the verge of returning to unit revenue growth.

Unfortunately, Delta's performance has gotten worse since the beginning of 2016. During Q1, PRASM slumped 4.6%, a little worse than the company's original guidance for a 2.5%-4.5% year-over-year decline.

Delta's unit revenue has declined more than expected in 2016. Image source: The Motley Fool.

For Q2, Delta management again forecast that PRASM would fall 2.5%-4.5%. Once again, the company is in danger of missing that target. PRASM declined about 4% year over year in April and about 5% year over year in May.

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Furthermore, CFO Jacobson told investors on Wednesday that PRASM is on track to end up near the bottom of the guidance range (i.e. down 4.5%) and could even fall slightly below it, as occurred in Q1. Delta's operating margin will also come in near the bottom of the 21%-23% guidance range. Jacobson blamed the unit revenue weakness on lower fares for last-minute bookings.

Is the revenue turnaround delayed again?

On the company's most recent earnings call, Delta President Glenn Hauenstein stated that while May unit revenue was looking "choppy," the early trends for June and July looked much better. Hauenstein noted that July is the peak month for airline travel. He also suggested that revenue headwinds from the strong dollar would be fading by the summer.

Based on the guidance update Jacobson provided on Wednesday, it seems that June isn't shaping up to be as good as expected. Through the first two months of Q2, Delta's PRASM has declined about 4.5%. For PRASM to decline 4.5% for the full quarter, the June result would have to be in the same down 4%-5% range as April and May.

This also casts doubt on whether peak season unit revenue in July and August will be as strong as Delta executives were predicting just two months ago.

Jacobson did reaffirm Delta's "commitment" to return to PRASM growth by the end of the year. Last month, Delta reduced its Q4 capacity growth plans by about 1 percentage point to bolster its revenue trajectory. Still, airline executives (including at Delta) have been caught off guard by revenue weakness frequently in the past year, so it's hard to be confident in pronouncements like this.

PRASM growth is becoming even more crucial

Delta is seeing some green shoots on the revenue front. It recently started selling extra-legroom seats as a straightforward fare option, rather than as an add-on to standard coach fares. This initiative is already driving stronger sales of these pricier seats. Furthermore, Jacobson reiterated in his comments on Wednesday that summer leisure travel demand looks very strong.

However, Delta may need to become even more aggressive in chasing PRASM growth. Up until now, Delta has posted strong earnings growth due to lower fuel costs, despite its weak revenue trends. With oil prices having recently popped back above $50/barrel, Delta isn't going to be getting much help from fuel prices going forward.

Bottom line: if Delta is to maintain its impressive margins and meet its earnings and cash flow targets, returning to PRASM growth by the end of 2016 is imperative.

The article Delta Air Lines May Miss Its Unit Revenue Guidance -- Again originally appeared on Fool.com.

Adam Levine-Weinberg is long January 2017 $40 calls on Delta Air Lines, Inc. 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.