On the back of falling oil prices and a healthy industry growth, the airline behemoth Delta Air Lines (DAL, Financial), is definitely soaring high and conveniently exceeding the Street expectations. One of the largest passenger and cargo airlines in the U.S., Delta serves 165 million customers each year to 225 domestic and 97 international destinations.
Exhaustive view of the results
The revenue for the reported quarter marked a steady increase of 6% Y-o-Y to $9.65 billion. Airline traffic, measured in revenue passenger miles, went up 4% Y-o-Y to $48 billion. Capacity or available seat miles increased 4% to $58 billion whereas the load factor (percentage of seats filled with passengers) improved 20 basis points to 82.8%. Passenger revenue per available seat mile (PRASM) or unit revenue also rose 1%, led by a 1% increase in yield. Consequentially the company recorded an EPS of $0.78, i.e. an increment of 20% from $0.65 in Q4 2013. For full-year 2014 Delta posted earnings of $3.31 per share and revenues of $40.36 billion, a 7% surge from F.Y. 2013.
It is significant to note that though the given quarter’s top-line has increased relatively as compared to the same period in 2013, the company’s revenues have fallen a great deal on comparison to the immediately preceding quarter. The decline of almost 16% can be attributed to a loss of $712 million or 86 cents per diluted share, due to the fuel hedge settlements. To add to that, Delta saw a weak performance in the international markets. Besides reduced service to Venezuela, its international revenue saw a negative impact resulting from the strengthening dollar against the euro and the yen.
In terms of expenditures, Delta’s total operating expenses including special items, escalated by 25% to $10.4 billion. Due to the aforesaid, the net income took a hurt. The net income showed a negative growth and ebbed from $8.48 billion to a loss of $0.712 billion in the quarter. For full year 2014, Delta reflected a pretax net income of $1.07 billion- a straight decline from last year’s $2.53 billion due to increased SG&A expenses.
Robust numbers
Delta has consistently exceeded analyst estimates since past two years. Yet again, Delta’s Q4 2014 earnings exceeded consensus analyst earnings estimates. Wall Street had estimated an earnings of 77 cents a share on sales of $9.5 billion, whereas Delta soared ahead of this forecast conveniently. Additionally, on the date of the announcement of the result, Delta’s share price rose by 7.3%. Also the airline index rose by 3% as share prices of all major U.S. airlines increased. During the quarter, the company returned $575 million to its shareholders. The carrier paid $75 million in cash dividends and bought back 12.2 million shares for $500 million.
Debt reduction
Delta reduced its adjusted net debt by $2.1 billion during the year to $7.3 billion, which resulted in interest savings of $200 million in 2014. Delta plans to reduce its debt further to $6 billion in 2015 and $5 billion in 2016. This debt reduction should decrease Delta’s interest expense from $1.3 billion in 2009 to $475 million in 2015- a savings of close to $1 billion. Delta Air Lines’s leverage is lower than competitors American Airlines (AAL, Financial), United Continental Holdings (UAL, Financial), and JetBlue Airways Corporation (JBLU, Financial).
Wide domestic presence
In the domestic arena, Delta Air Lines competes with not only the legacy carriers but also with low cost carriers such as Southwest Airlines Co. (LUV, Financial) and JetBlue Airways Corp. These smaller domestic carriers operate under a direct flight model and typically offer cheaper fares than their larger peers.
Southwest Airlines has been the dominant player in the industry in terms of number of passengers carried on domestic flights. Delta Air Lines, however leads the industry in terms of domestic Passenger Revenue Per Available Seat Miles (PRASM) with 70% of its sales being generated from North America alone. Furthermore, Delta Air Lines plans to add capacity in its strong domestic markets, including New York, Seattle and Los Angeles. The company also plans to adjust gauge and frequency to better match demand.
Astute cost management
Delta’s profit will witness a rise in 2015 as gains from its sales growth will be enhanced by lower fuel costs, which constitute nearly a third of its total operating costs. Delta anticipates that it will spend about $2.40-2.50 per gallon on jet fuel in 2015, compared to around $3.08 per gallon that it spent in the nine months ended September 30, 2014. This significant decline in fuel prices driven by the fall in global crude oil prices will expand Delta’s operating margin and profit in 2015.
Delta’s non-fuel costs are also expected to grow modestly in 2015, remaining below 2%, on a year-over-year basis. Delta has been able to limit growth in its non-fuel costs by initiating several cost-cutting measures such as domestic re-fleeting and employee productivity enhancement. This has improved the carrier’s operating cost per aircraft seat, and as such re-fleeting remains underway, growth in Delta’s non-fuel costs will remain suppressed in 2015, boosting its margins and profit.
Final words
Delta Airlines has elevated its market capitalization by $30 million in the past two years and is now standing at $38.07 billion. On a lateral comparison with industry competitors such as American Airlines Group Inc. and United Continental Holdings Inc, Delta seems to have the highest P/E ratio of 59.15 times, which substantiates investors’ willingness to invest in the company and is also indicative of the company’s strong fundamentals.
Solid demand for air travel in the domestic market and in certain international markets including Latin America and the trans-Pacific market to Asia will enable Delta to grow its top line in 2015. The strong demand environment will allow Delta to expand capacity and raise fares, resulting in top line growth. The carrier has said that it will expand capacity by about 2% next year – by 3% in the domestic market and by less than 1% in the international market. (For the entire transcript click here.)
From an investment viewpoint, the future of Delta Air Lines seems to be very bright with a price target of $64.84. The carrier could outperform itself and is very likely to meet the future expectations. Hence a strong buy option is recommended for investors to earn great returns backed by the company’s primary outlook on continuously striving at creating shareholder value through dividends and buy backs.
