Delta to Grow on High Travel Demand - Analyst Blog

Delta Air Lines Inc. (DAL), the world's largest airline, expects third quarter unit revenue to rise on recovering travel demand. The demand for air travel has been growing more than expected so far in September.
 
The economic downturn in 2009 and the oil price hike in 2008 had affected the airline industry during the past two years. Now, with an economic resurgence, demand for air travel is increasing from last year's depressed levels.
 
For the third quarter of 2010, Delta's passenger revenue per available seat mile is expected to increase 15% compared with a decline of 18% in the year-ago quarter. Load factor (the percentage of seats filled) is expected to remain consistent with the year-earlier quarter at 86%. The company currently expects Cargo and other revenue to be in the range of $1.1–$1.2 billion.
 
Delta expects its third quarter operating margin to be 12%–13%, which is higher than its previous expectation of 10%–12%. However, the consolidated cost per available seat mile (capacity) growth outlook remains unchanged from the company's previously announced expectation.
 
On the other hand, Delta expects to end the third quarter with $5.6 billion of unrestricted liquidity, which is lower than its previous guidance. This cutback can be credited to the successful execution of $750 million in debt reduction initiatives.
 
The current third quarter Zacks Consensus Estimate for Delta is 89 cents per share compared with 6 cents in the year-ago quarter. The company expects to announce its third quarter earnings on October 18.
 
We believe the successful integration of the Northwest merger, investments in new products and network, competitive cost structure and an effort to strengthen the balance sheet will help Delta Air Lines to take advantage of the economic recovery. However, unionized labor, rising fuel price, debt loaded balance sheet and the company's continued investment in technology make us cautious on the stock. Moreover, the company does not pay any dividend on its stock.
 
We are currently maintaining our Neutral recommendation with the short-term Zacks #4 (Sell) Rank.