Delta’s Profit Tops Estimates as Domestic Demand Increases

Jul 23, 2014 4:16 pm ET

(Updates with analyst’s comments in 11th paragraph.)

July 23 (Bloomberg) -- Delta Air Lines Inc. posted second- quarter profit that beat analysts’ estimates, buoyed by strong U.S. demand, and said its domestic business would help boost margins in the current three-month period.

Earnings excluding some items were $1.04 a share in the second quarter, the Atlanta-based company said in a statement today. The average of 17 estimates compiled by Bloomberg was $1.03. Growth in the average fare per mile on U.S. trips led gains across Delta’s regions, showing the carrier’s pricing power in its home market.

The shares rallied as Delta’s results, the first for the U.S. industry, reassured investors about the traditionally strong second quarter. Delta also was optimistic about the current period, saying performance will be “even stronger” and projected operating margins to expand to as much as 17 percent.

“The margin guidance they gave for the third quarter was the focal point for us,” said Joseph Denardi, a Baltimore-based analyst with Stifel Financial. “It was better than what we were expecting. It’s just another indication that even with some pricing pressure internationally, particularly in the Pacific, these guys can put up some pretty good operating margins.”

Denardi, who recommends buying the shares, had forecast operating margins of 15.5 percent.

Domestic Gains

The shares rose 3.9 percent to $39.15 at the close in New York. They advanced 43 percent this year.

Revenue at Delta rose 9.4 percent to $10.6 billion in the quarter. Passenger revenue for each seat flown a mile, a benchmark measure of performance for the industry, increased 5.7 percent, driven by a 10 percent gain in the U.S. Domestic flights showed bigger increases in yield, or the average fare per mile, than flights across the Atlantic, and trans-Pacific routes declined.

Delta’s results “are a good indication that domestic pricing is pretty good, Denardi said.

The airline is benefiting from strong demand from businesses in the U.S., higher revenues from its contracts with corporations and lower fuel and fleet costs. During a conference call with analysts, executives said the strategy of replacing small regional jets with larger, more fuel-efficient planes is helping lowering costs.

Strong Performance

Over time, Delta’s strong financial performance in recent quarters means it will have to work harder to beat the prior year’s results, or comparables, President Ed Bastian said.

‘‘Yeah, the comps get tough,” said Jim Corridore, an analyst at Standard & Poor’s Capital IQ in New York,. “But, this is a company that is generating cash, generating profits, using the money to buy back stock, pay dividends, doing everything that airlines have never done before.”

Bastian and Chief Executive Officer Richard Anderson fielded questions from analysts today about a glut of seats in markets including Europe and Asia. Deutsche Lufthansa AG of Germany and Air France-KLM Group each recently lowered their full-year profit forecasts on overcapacity concerns.

World Cup

Meantime, Bastian noted that the World Cup hurt its revenues in Latin America in the second quarter, as business travelers cut their flights there. Delta’s recent decision to limit its service to Venezuela will lower its unit revenue in Latin America in the current quarter, but Bastian said he sees improvements overall in the region.

Delta has taken steps to cope with the abundance of seats overseas, including boosting capacity in trans-Atlantic routes by no more than 3 percent this winter. The company cited its partnership with Virgin Atlantic Airways Ltd. with helping it build its market share in the coveted New York-to-London route.

“The recent industry concerns on the transatlantic appear to be overblown, especially given the company’s June quarter reported 5.5 percent increase in transatlantic passenger revenue,” said Helane Becker, an analyst with Cowen & Co. in New York.

Israel Flights

Delta and other U.S.-based carriers stopped serving Israel on July 22 after the Federal Aviation Administration ordered domestic airlines to suspend flights to Tel Aviv for 24 hours. The agency extended that suspension for another 24 hours today. Anderson told analysts the airline may not return to Israel immediately, even if the FAA lifts its ban. Delta will make a decision on when to return based on its own safety evaluation, he said.

Delta’s net income in the quarter rose 17 percent to $801 million, or 94 cents a share, from $685 million, or 80 cents, a year earlier. In a memo to employees this morning, Chief Financial Officer Paul Jacobson said Delta’s second-quarter pretax profit of $1.4 billion was the largest “ever reported in the airline industry.”

American Airlines Group Inc., United Continental Holdings Inc., Southwest Airlines Co., JetBlue Airways Corp. and Alaska Air Group Inc. are scheduled to report results tomorrow.