Update: Delta Air Lines' August '14 Traffic Report

Sep. 4.14 | About: Delta Air (DAL)

Summary

Delta released disappointing August traffic numbers.

Stock remains a strong buy.

The original investment thesis anticipated hiccups from Russia and Ebola.

Delta Air Lines (NYSE:DAL) plunged on Wednesday following the release of traffic and operational numbers for August. While the numbers were at the low-end of previous guidance, the market should've already adjusted for an expected impact from the ongoing hostilities in Ukraine and the Ebola outbreak in Africa. With the expected headwinds and a stock trading sideways during the strong summer travel season, the sell-off suggests the market over reacted.

The airline released that August PRASM came in at 2.0% causing the airline to slightly downgrade the Q314 forecast. The company previously forecast a PRASM of 2.0% to 4.0% for the quarter and it dropped the high-end to only 3.0%. The main causes are the events in Russia, the Middle East, and Africa. The international load factor was hit by 1.8 points dropping to 88.2%. Both Atlantic and Latin America routes were impacted during August. The domestic market saw a strong increase in the load factor by 1.9 points to reach 87.2%. Another small problem is the increase in the projected fuel cost by a couple cents per gallon. The fuel cost per gallon mid-point for the quarter is now $2.925, up from $2.905.

The original investment thesis in the article "Incredible Takeaways From Delta Air Lines Earnings" had already suggested that investors own the stock prior to the recent run to the current price around $39. Considering the headline fears are unrelated to long-term travel trends and the ability of the airline to continue to generate PRASM growth in the face of a difficult travel environment justifies buying the 5% sell-off. The stock only trades at 10x estimated 2015 earnings and the events of today likely having limited impact next year, the stock and the industry should be owned on similar dips.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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