Delta Expects Lower 4Q Profit - Analyst Blog

Delta Air Lines Inc. (DAL), the second largest U.S. airline, expects fourth quarter profit will be $45 million less than its previous expectation as several of its flights were cancelled due to severe snowfall in December across the U.S. and Western Europe.

In December, Delta Air Lines' traffic rose 2.6% to 15.04 billion revenue passenger miles from 14.68 billion in the year-ago month. Capacity or available seat miles grew 3.9% and load factor (percentage of seats filled with passengers) fell 110 bps year over year to 80.1%.

Domestic traffic inched up 0.5% year over year on capacity increase of 1.2% offset by a decline of 60 bps in the load factor to 79.6%. International traffic also increased 5.3% year over year primarily driven by an 8.1% capacity increase while load factor decreased 210 bps to 80.7%.

The current fourth quarter Zacks Consensus Estimate for Delta is 27 cents, representing 200% growth from the year-ago level. The company is slated to announce its fourth quarter earnings on January 24, 2011.

We believe the company's competitive cost structure, new investments and expansion of services make the investment compelling for the long term. Delta Air Lines is expected to benefit from the Northwest merger as synergies from it will be fully realized and strong revenue momentum will continue as the economy strengthens.

Delta Air Lines continues to improve its balance sheet, which would lay a strong foundation going forward. Debt reduction is the first priority for the company. Delta Air Lines expects to reduce its net debt to $10 billion by 2012 from $17 billion at the end of 2009. During the first nine months of 2010, the company reduced its net debt by approximately $2 billion to $15 billion. We believe these efforts will position the company strongly relative to its peers.

However, we remain cautious on the company due to its current debt-heavy balance sheet and rising fuel prices. In addition, a unionized workforce and competitive threats keep us on the sidelines. Delta Air Lines competes with United Continental Holdings (UAL), Southwest Airlines Co. (LUV), and American Airlines, a wholly owned subsidiary of AMR Corporation (AMR).

We are currently maintaining our Neutral recommendation on the stock with the short-term Zacks #3 (Hold) Rank.

 
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