Delta Pulls Airlines Higher on Strong Demand Outlook

Apr 24, 2014 11:56 am ET

(Corrects story published April 23 to specify range of comparisons in sixth paragraph.)

April 23 (Bloomberg) -- Delta Air Lines Inc. shares rallied to a record, pulling other carriers higher, after it forecast stronger demand and revenue than analysts had estimated headed into the busy summer travel season.

The third-largest U.S. carrier said its operating margin will be 14 percent to 16 percent this quarter, while unit revenue will expand about 5 percent to 7 percent. Delta gave its projection as it reported a first-quarter profit that more than tripled from a year earlier and exceeded analysts’ forecasts.

Delta’s outlook may have calmed investors’ concerns about how long strong U.S. revenue trends could be sustained, said Joseph Denardi, a Stifel Nicolaus & Co. analyst in Baltimore. It’s the first U.S. carrier to report results for last quarter, with American Airlines Group Inc., United Continental Holdings Inc. and others scheduled for tomorrow.

“Across the industry the focus is going to be more on the outlook for the summer,” Denardi said in an interview. “The outlook Delta provided does indicate the other airlines should benefit from a pretty healthy domestic revenue environment.”

Delta rose 4.8 percent to $36.61 at 1 p.m. in New York. It touched $37.41 earlier in the day, the biggest gain since September 2013. The Bloomberg U.S. Airlines Index of 11 carriers rose 2.3 percent.

Delta’s margin forecast was as much as three percentage points higher than that of Darryl Genovesi, a UBS AG analyst, and Savanthi Syth of Raymond James Financial Inc. and two points more than what was estimated by Jamie Baker, a JPMorgan Chase & Co. analyst.

Solid Demand

The implied earnings per share of about $1 also exceeded the 85-cent average forecast from 17 estimates compiled by Bloomberg.

“We are seeing a solid demand environment” and gains in revenue from corporate contracts and from passengers purchasing optional products such first-class upgrades, early boarding or choice seats in economy class, Delta President Ed Bastian said on a conference call. Revenue from those products rose 20 percent to $165 million in the first quarter, he said.

Delta today reported profit excluding some items of $281 million, or 33 cents a share, exceeding an average estimate of 29 cents from 17 analysts. Sales rose 4.9 percent to $8.92 billion, the Atlanta-based carrier said.

Delta’s passenger traffic increased 3.5 percent in the first three months of this year and capacity rose 1.7 percent. Passenger unit revenue, a key measure of performance for the industry, rose 3.2 percent.

Canceled Flights

The increase in fliers came even as the Easter holiday shifted to the current quarter and winter storms forced the airline to ground 17,000 flights in January and February. Those cancellations reduced revenue by $90 million and pretax income by $55 million.

Delta’s results probably will outperform peers, said Kevin Crissey, an analyst at Skyline Research LLC. He cited flat costs, excluding fuel, and strength in revenue from domestic markets as reasons Delta topped his 28-cent estimate.

“This is a better-than-average result,” he said.

A group of 11 airlines should have combined net income of $397 million in the first quarter, the first positive result for the industry in the period since 2007, according to Michael Linenberg, a Deutsche Bank AG analyst.