Delta Leads Airlines’ Gains as Earnings Beat Estimates

Jan 21, 2014 10:03 pm ET

(Updates with year-to-date index gain in sixth paragraph.)

Jan. 21 (Bloomberg) -- Delta Air Lines Inc. led shares of U.S. carriers higher after posting fourth-quarter profit that topped analysts’ estimates and forecasting an operating margin of as much as 8 percent in this year’s initial three months.

Delta, adjusted for its 2008 merger with Northwest Airlines Corp., last had a first-quarter operating margin at that level in 1998, according to Jamie Baker, a JPMorgan Chase & Co. analyst in New York. The quarter historically has been the industry’s slowest time of year.

Airlines are benefiting from lower fuel prices, constraints on capacity growth, controls on operating costs and demand that’s keeping planes full, said Ray Neidl of Nexa Capital Partners LLC, a Washington-based aerospace and transportation consulting firm. Delta was the first major U.S. carrier to report fourth-quarter results.

“Delta is on the leading edge,” Neidl said in an interview. “They’re riding a wave now and the rest of the industry will benefit. Delta is probably one of the best run airlines in an industry that has a lot of well-run airlines.”

Other airlines have achieved operating margins since the 2001 terrorist attacks like what Delta forecasts for the current period, though none occurred in the first quarter, Baker said. He rates Delta shares overweight.

Delta, the third-largest U.S. carrier, rose 3.3 percent to $32.08 at the close in New York. The Atlanta-based company led advances by eight of nine carriers in the Bloomberg U.S. Airlines Index, which climbed 1.9 percent. The index has climbed 16 percent this year, compared with the Standard & Poor’s 500, which is little changed.

Industry Earnings

The six biggest airlines should report combined fourth- quarter net income of $1.2 billion, according to Michael Linenberg, a Deutsche Bank AG analyst in New York. He estimated that revenue climbed 6 percent to $35.1 billion.

United Continental Holdings Inc., Southwest Airlines Co. and Alaska Air Group Inc. are set to issue results Jan. 23, with American Airlines Group Inc. on Jan. 28 and JetBlue Airways Corp. on Jan. 29.

Delta’s full forecast was a “margin expansion” this quarter in a range of 6 percent to 8 percent, President Ed Bastian told analysts and investors on a conference call. “We are also expecting to see a strong second and third quarters, which you should see expansion there as well.”

The airline expects revenue from each seat flown a mile this quarter to climb 3 percent to 4 percent from a year earlier, he said.

Credit Rating

Delta’s profit and positive outlook are a result of its improved operations, said Betsy Snyder, a Standard & Poor’s analyst. The agency last month raised its rating on Delta to BB- from B+ and removed it from CreditWatch. The new rating is three levels below investment grade.

The carrier had 72 days last year without a cancellation and 85 percent of its flights were on time, Chief Executive Officer Richard Anderson said on the call.

An expanding economy should lead to growing demand that will let carriers keep raising fares, said David Swierenga, president of aviation consultant Aeroecon in Round Rock, Texas.

“The economy I expect did very well in the fourth quarter and it looks like it’s going to continue that way,” he said in an interview. “I’m pretty optimistic for 2014. Prices will be up, not a whole lot but enough to justify forecasts of margins in that 5 percent to 6 percent range.”

Profit Surge

Delta’s fourth-quarter profit excluding some items more than doubled to $558 million, or 65 cents a share, on increased holiday travel, higher fares and lower fuel prices, according to a company statement today. That beat the 63-cent average of 16 analyst estimates compiled by Bloomberg.

Sales rose 5.5 percent to $9.08 billion, beating the average estimate of $9.04 billion. Net income was $8.48 billion, including an $8 billion non-cash gain from the reversal of a tax valuation allowance.

Passenger traffic at Delta and its regional partners rose 6.9 percent in December, which included Christmas and return Thanksgiving travel, the airline said on Jan. 3. Average fare per mile on Delta’s main jet fleet rose 4.5 percent in the quarter, while total fuel spending on that basis fell 7 percent.

Delta forecast a first-quarter average jet-fuel price of $2.97 to $3.02 a gallon. The airline’s Trainer oil refinery had a $46 million loss in the fourth quarter.

Buyback, Dividend

Delta last year began a share buyback program and reinstated a dividend after a decade-long break. The changes, along with a $10 billion debt-reduction plan, helped Delta regain a spot on the Standard & Poor’s 500 Index after being dropped in August 2005 ahead of its bankruptcy filing.

In 2013, Delta paid $100 million in dividends and spent $250 million repurchasing stock.

The airline is pulling costly 50-seat commuter jets from regional operations and replacing them with larger aircraft with two-class seating. It’s also eliminating some premium seats from long-haul jets that often sit empty on international routes and expanding the cheaper coach cabin.

“On several fronts they have identified cost initiatives and they are executing on those,” Savanthi Syth, a Raymond James Financial Inc. analyst, said in an interview before the earnings. Syth, who is based in St. Petersburg, Florida, rates Delta shares outperform.

--With assistance from J. Kyle O’Donnell in New York. Editors: John Lear, Ben Livesey