In the years following the Great Recession, Delta Air Lines (NYSE: DAL) became known among investors for its steady financial performance. Considering the historical volatility of the airline sector, this was a great achievement.
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However, for the past two years or so, Delta has been plagued by unit revenue declines and guidance misses. This has undermined its reputation for consistency. On Wednesday morning, the company reported its results for yet another disappointing quarter. But once again, Delta Air Lines executives claim that a recovery is about to begin.
Delta hasn't met its financial targets consistently in the past two years. Image source: Delta Air Lines.
The hard numbers
At Delta's investor day last December, company president Glen Hauenstein stated that the company was on track to get passenger revenue per available seat mile (PRASM) back to the flat line in Q1 2017. A month later, as part of Delta's formal first quarter guidance, the company increased its Q1 PRASM forecast, calling for a 0%-2% increase.
Unfortunately, Delta's management spoke too soon. PRASM fell once again in Q1, although it was a subdued 0.5% decrease. This also led to a 1.1% decline in Delta's total revenue. Here are some other key statistics related to Delta's first quarter financial performance:
Data source: Delta Air Lines Q1 earnings release.
While unit revenue is finally leveling out, Delta's profitability was undermined by rising costs in Q1. First, fuel prices had bottomed out in the prior-year period, when Delta paid just $1.33/gallon for jet fuel. By contrast, it paid $1.71/gallon (including hedging losses) last quarter.
Second, Delta has handed out big raises to its pilots and smaller, but still significant, raises to its other employees in the past year. As a result, its adjusted non-fuel cost per available seat mile (CASM) surged 5.8% year over year in the first quarter.
The net effect was a collapse in Delta's profitability. Delta's adjusted pre-tax margin fell to 9.3% last quarter, from 16.9% a year earlier. Meanwhile, its adjusted pre-tax income and adjusted earnings per share both plunged by more than 40% year over year.
Delta gives a solid forecast
While Delta's first quarter performance left something to be desired, the company offered a strong forecast for Q2. It expects PRASM to return to growth at long last, rising 1%-3%. This will help to offset a projected 6%-8% rise in non-fuel unit costs.
Indeed, Delta's management expects the company to produce a 17%-19% operating margin this quarter, up from 16.8% in the second quarter of 2016. (That said, Delta paid an abnormally high $2.06/gallon for fuel in Q2 2016, due to the company's decision to terminate all of its fuel hedges for the rest of 2016 during that quarter.)
On a more promising note, Delta's management also projected that unit revenue growth and margin expansion will continue in the second half of 2017.
Can Delta deliver?
Based on this solid guidance, Delta Air Lines shares rose as much as 3% in pre-market trading. The stock probably could have risen even further, but for the fact that Delta has built up an unfortunate track record of missing its unit revenue and earnings guidance lately.
Delta's forecast certainly seems achievable. After all, the company did return to unit revenue growth last month, when PRASM rose approximately 0.5% year over year. Delta is moving in the right direction, albeit slowly.
To get its stock price back into record territory, Delta's task is simple. All it needs to do is to start hitting its financial targets consistently once again.
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