Lower Fuel Costs Plump Delta Air Lines’ Earnings

Adjusted fuel expenses declined by $408 million due to a 28% lower market fuel prices

Source: Company's Website
Source: Company’s Website

Delta Air Lines Inc. (NYSE: DAL), one of the largest U.S. carriers, announced its Q2 FY16 financial results on July 14th, 2016. Headquartered in Atlanta, Georgia, Delta Air Lines serves nearly 180 million customers each year and provides scheduled air passengers and cargo transportation globally. With an industry-leading global network, Delta and the Delta Connection carriers offer service to 337 destinations in 62 countries on six continents. The airline operates a mainline fleet of more than 800 aircraft and is a founding member of the SkyTeam global alliance. It is part of the industry’s transatlantic joint venture with Air France-KLM and Alitalia as well as a joint venture with Virgin Atlantic. As part of these alliances and its partners, Delta Air Lines offers customers more than 15,000 daily flights covering the key hubs and global markets. Read more about Delta’s financial results below.

Q2 FY16 financial highlights

D2Delta Air Lines’ Q2 FY16 revenues declined 2.4% to $10.45 billion, marginally short of the estimates of $10.49 billion, mainly due to currency woes. The Company’s operating revenue fell 2%, or $260 million, of which $65 million was due to foreign currency pressures. However, the bright spot in the Q2 FY16 earnings release was lower fuel expenses. Delta Air Lines’ adjusted fuel expense declined by $408 million in Q2 FY16, despite a 3.2% Y-o-Y increase in seating capacity, due to a 28% lower market fuel prices. The Company’s adjusted non-fuel unit costs fell by 0.1% during the quarter under review.

A main cause for concern for the Company is that Q2 FY16 passenger revenue per available seat mile (PRASM) was weak across all four of its geographical regions and fell by 4.9%, including 1 point of impact from foreign currency. Domestic PRASM declined 5.6% Y-o-Y owing to fare weakness for the last-minute bookings made by business travelers. Delta Air Lines’ international PRASM fell 4.4% in the Trans-Atlantic market, 5.1% in the Trans-Pacific market, and 4.9% in Latin America, partly due to the strengthening of the U.S. dollar against foreign currencies.

On a brighter note, Delta Air Lines settled all of its fuel hedges for the remainder of FY16 during the quarter under review. As a result, the Company’s hedge losses for the quarter totaled $614 million, including $455 million of early settlements.

Delta Air Lines’ Q2 FY16 GAAP pre-tax income came in at $2.4 billion, while adjusted pre-tax income came in lower at $1.7 billion owing to special items including mark-to-market adjustments and settlements on fuel hedges. Delta reported GAAP EPS of $2.03 and adjusted earnings of $1.47 per diluted share, up from $1.27 in the year-ago period, aided by lower fuel costs and non-fuel cost control.

Other highlights

During Q2 FY16, Delta Air Lines generated $2.6 billion of adjusted operating cash flow and $1.6 billion of free cash flow, of which the Company invested $1 billion back into the business, including roughly $880 million in fleet improvements. Delta Air Lines also made a $135 million contribution to its pension plan during Q2 FY16, completing its planned $1.3 billion in pension contributions for FY16.

Share repurchase

During Q2 FY16, the Company gave back $1.1 billion to shareholders, comprised of $103 million of dividends and $1 billion of share repurchases. In addition, the Company plans to complete its existing $5 billion share repurchase authorization by May 2017.

Guidance for Q3 FY16

In the wake of the Brexit uncertainty, Delta Air Lines has decided to trim six points of U.S.-U.K. capacity from its winter schedule. This comes on top of other capacity actions that the airliner had announced in May 2016. For Q3 FY16, Y-o-Y impact of fuel savings is expected to decline; hence, Delta Air Lines forecasts operating margin in the range of 19% to 21%, nearly flat from the year-ago period. The estimated fuel price, including taxes and hedges, is expected in the range of $1.52 to $1.57 per gallon for Q3 FY16. Delta Air Lines’ system capacity is expected to grow by 1% to 2% on a Y-o-Y basis, while passenger unit revenue is projected to decline by 4% to 6% in Q3 FY16.

Stock Performance

D3Delta Air Lines’ stock stood at $39.98, falling 2.44%, at the close on Friday, July 15th, 2016, having vacillated between an intraday high of $40.54 and a low of $39.71 during the session. The stock’s trading volume was at 15,167,194 for the day. The Company’s market cap was at $31.62 billion as of Friday’s close.

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