Delta's Profits Will Glide Higher On Capacity Expansion And Cost Controls

Jan.17.14 | About: Delta Air (DAL)

Delta Air Lines (NYSE:DAL) will announce its fourth quarter earnings Tuesday, January 21. The carrier will likely post good growth in its revenues on higher passenger traffic driven by capacity expansion and higher passenger fares, supported by stable demand for flights. The carrier’s fourth quarter profits will likely also post strong growth on expanded margins driven by cost cuts.

We currently have a stock price estimate of $29.20 for Delta, around 5% below its current market price.

Revenues Will Rise On Higher Passenger Traffic Enabled By Steady Demand Environment

In the fourth quarter, backed by a stable demand environment, Delta expanded its flying capacity by around 3% annually. This higher capacity in turn enabled the airline to raise its passenger traffic. Additionally, in its December traffic results released in early January, Delta forecast its fourth quarter unit revenues – amount collected from passengers per seat for a mile of flight – to rise by around 3% annually driven by passenger fare hikes on some routes. Higher passenger traffic and higher unit revenues effectively mean that the carrier will post strong growth in its passenger revenues in the fourth quarter.

Cost Cutbacks Will Lift Operating Margins & Profits

On the margin front, Delta’s fourth quarter results will benefit from the structural cost controlling measures it launched in 2012. These measures which include fleet restructuring and employee productivity improvements have controlled growth in the carrier’s non-fuel costs. Delta is replacing less fuel efficient airplanes in its fleet with new more efficient ones and raising its employee productivity through the use of technology. Through these methods among others, it is controlling its non-fuel costs to expand its margins. As a result, in the fourth quarter, the carrier anticipates its operating margins to rise to around 8-9%, from 5.5% in the same period last year. Needless to say that higher margins combined with higher revenues will grow Delta’s profits strongly in the fourth quarter.

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