Delta Air Lines continues to see a strong financial year in 2015, despite mounting headwinds in international markets.
“The strong dollar is a net positive for Delta,” says Richard Anderson, chairman and chief executive of the Atlanta-based carrier, during an earnings call today. The $2.2 billion revenue benefit from lower fuel prices will more than outweigh the $600 million negative impact of the strong US dollar this year, he says.
The comments come as Delta reports record first quarter performance. Its operating profit more than doubled to $1.4 billion on a 5% increase to $9.39 billion in operating revenues during the first quarter. Its operating margin increased one percentage point to 8.8%.
At the same time, the airline recorded $1.1 billion in settled fuel hedge losses and a $108 million negative impact from the strong dollar. These impacts shaved three percentage points off its operating margin and 1.5 points off its passenger unit revenue growth.
Delta felt the worst impacts of the strong dollar in Brazil, Japan and Africa, India, the Middle East and Russia, says its president Ed Bastian.
Passenger revenue per available seat mile (PRASM) declined in all international segments during the quarter. Pacific unit revenue decreased 9.2% on a 10.5% decrease in passenger revenues, Latin America unit revenue declined 4.2% despite an 8.5% increase in revenues and Atlantic unit revenue fell 2.9% on a 1.1% increase in revenue.
The lagging impact of Delta’s capacity cuts to Venezuela in August 2014 also negatively impacted unit revenues.
Delta will decrease international capacity by 3% in its winter schedule, which begins in late October, to mitigate the impact of this revenue weakness, says Bastian. Brazil, Japan and Africa, India, the Middle East and Russia will see capacity decrease by 15% to 20% largely through aircraft gauge and frequency reductions.
Domestic demand was strong in the first quarter. PRASM increased 2.1% on a 9.2% increase in passenger revenue.
Q2 IMPROVEMENTS
Delta expects the negative impact of its fuel hedge book and currency headwinds to abate in the second quarter. Another record profit on a roughly 2% increase in operating revenues are forecast for the period, says Bastian.
Fuel hedge losses are expected to nearly halve to about $650 million as the carrier’s all-in average cost for fuel drops to $2.35 to $2.40 per gallon. This would represent an at least $0.53 savings over the $2.93 per gallon it paid in the first quarter and an at least 18% improvement over the average $2.93 it paid in the second quarter of 2014.
The Trainer Refinery, which Delta bought in 2012 and turned its first quarterly profit in 2014, is expected to generate a roughly $80 million profit in the second quarter. This follows an $86 million profit in the first quarter.
PRASM is expected to decrease 2% to 4% in the second quarter. About three percentage points of this is attributable to currency volatility and decreases in international surcharges, says Bastian.
He adds that passenger unit revenues increased 6% in the second quarter of 2014, making year-on-year comparisons difficult.
JP Morgan analyst Jamie Baker describes the PRASM guidance as “better-than-feared” in a report today.
Analysts at Bank of America Merrill Lynch and Credit Suisse both say that Delta’s guidance is largely in-line with expectations.
Costs per available seat mile (CASM) excluding fuel and special items are expected to be flat to up 1% in the second quarter.
System capacity is expected to increase about 3% in the second quarter, says Bastian. Domestic capacity will be up 3% to 4%, he adds.
Capital expenditures of about $1 billion largely for new Airbus A330-300 - the first of the new higher weight variant - and Boeing 737-900ER deliveries are forecast for the second quarter.
ANNUAL BENEFIT
“Starting 1 July, we will have significant tailwind for fuel with fuel prices 25% lower than what we will pay in the first half of the year,” says Anderson, emphasising the financial benefits that Delta foresees in the second half.
The carrier anticipates an average price of fuel of $2 to $2.05 per gallon in the second half of the year, says Paul Jacobson, chief financial officer of Delta, during the call. This is “consistent with the industry average” and about $0.75 lower than what it paid in the second half of 2014.
Coupled with the 3% reduction in international capacity from roughly October, Delta anticipates maintaining its unit revenue premiums and continuing to generate margin improvements through the period – regardless of what occurs in currency markets.
“This reduction will be a key component to achieve the pricing improvements necessary to drive longer term sustainable margin expansion,” says Bastian on the capacity cuts.
The capacity cuts are seen as “favourable”, as Credit Suisse analyst Julie Yates says, with other Wall Street analysts anticipating additional seasonal changes from other US carriers.
Delta will continue to pay down debt and return capital to shareholders – as was outlined in January – with the financial benefits from lower fuel, says Anderson. This will make it a more “durable” business.
“With a clear path to long-term margin expansion and reduced risk, we get improved earnings predictability and better visibility to the long-term cash generation of this business,” he says.
Source: Cirium Dashboard
