Delta Air Lines, Inc. Joins Its Peers, Raises Unit Revenue Guidance

After years of steady, industry-leading performance, Delta Air Lines (NYSE: DAL) took some lumps in 2016. The company repeatedly fell short of its goal of returning to unit revenue growth. Moreover, while rivals American Airlines (NASDAQ: AAL) and United Continental (NYSE: UAL) started to see stronger unit revenue trends late in the year, Delta's revenue trajectory remained subpar.

Delta posted steep unit revenue declines for much of 2016. Image source: Delta Air Lines.

However, in the last two months, Delta's revenue initiatives have finally gained traction. That bodes well for the company's efforts to maintain its margin advantage over American and United in the coming years.

American Airlines and United Continental threaten to take the lead

Throughout the airline industry's recent unit revenue slump, Delta executives told investors that Delta would return to unit revenue growth before either of its legacy carrier rivals. A year ago, that looked like a safe bet. Delta Air Lines' passenger revenue per available seat mile (PRASM) declined just 1.6% year over year in Q4 2015. PRASM declined 6% year over year at both American Airlines and United Continental in the same quarter.

However, Delta's unit revenue took a turn for the worse in 2016. In Q1, PRASM slumped 4.6%. As recently as the month of October, PRASM was down about 6.5% year over year, putting unit revenue on pace to reach the bottom of Delta's Q4 guidance range of down 3% to 5%.

Meanwhile, American Airlines' unit revenue trajectory had already improved dramatically by Q3, with revenue per available seat mile down just 2.2% year over year. Furthermore, following guidance increases in early November and early December, American Airlines currently expects unit revenue to be roughly flat in Q4 (plus or minus 1%).

American Airlines will post better Q4 unit revenue results than its peers. Image source: American Airlines.

United's unit revenue trajectory is also on the upswing. Whereas the carrier initially expected PRASM to fall 4% to 6% year over year in the fourth quarter, it boosted its guidance range last month and now projects that PRASM will decline just 3% to 4%.

Is Delta finally turning the corner?

Both American Airlines and United Continental have noted that business travel demand has started to rebound since November. Delta Air Lines seems to be experiencing the same positive trends. PRASM declined just 1% year over year in November, leading Delta to project last month that its Q4 unit revenue would hit the high end of its guidance range.

Demand for last-minute tickets is finally starting to rebound. Image source: Delta Air Lines.

On Wednesday, Delta revealed that travel demand improved once again in December. As a result, passenger revenue per available seat mile may have declined by as little as 2.5% during the fourth quarter.

Obviously, two months of solid results aren't enough to be confident that Delta Air Lines is out of the woods. That said, the fact that Delta has finally stabilized its unit revenue despite facing relatively tough comparisons from Q4 2015 -- as well as unfavorable holiday timing -- is encouraging.

Unit revenue should recover in 2017

Year-over-year revenue comparisons will be much easier for most of 2017. At the company's investor day last month, Delta president Glen Hauenstein projected that PRASM would be flat in Q1. Based on Delta's improving revenue trajectory, that guidance now seems conservative.

Rising fuel prices and various non-fuel cost headwinds will almost certainly cause Delta's operating margin to decline on a year-over-year basis in 2017. However, a return to unit revenue growth would allow Delta to mitigate the impact of rising costs on its profit margin.

If Delta can maintain a high profit margin even in an environment of rising fuel and labor costs, it would go a long way toward demonstrating the durability of its business model. This in turn could convince investors to award Delta Air Lines stock a higher valuation going forward.

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Adam Levine-Weinberg is long January 2017 $40 calls on Delta Air Lines. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.