Will Delta Shares Stay Grounded In What Is Likely To Be A Transition Year?

Imperial Capital’s Michael Derchin believes fiscal year 2017 will be a transition year for Delta Air Lines, Inc. DAL, “in light of escalating costs and slower than expected PRASM (Passenger Revenue per Available Seat Mile) improvement.”

The analyst maintains an In-Line rating on the company, with a price target of $52, implying little upside from the current valuation levels for the stock over the next year.

Lower PRASM Expectations

Derchin lowered the first-quarter 2017 estimates for Delta Air Lines, following the updated guidance provided by management at the investor presentation on March 6.

The analyst now expects PRASM to be flat, as compared to the earlier expectation of a 1-percent increase, with domestic down 0.5 percent, as compared to the previous estimate of 2-percent growth, due to more conservative yield assumptions.

“Atlantic is estimated to be flat versus down 4 percent previously as a result of capacity reductions, a focus on its partner hubs, and strong outbound demand to Europe offsetting FX and elevated competition,” Derchin mentioned.

While Pacific is expected to decline 6 percent as Delta Air Lines structures its network and fleet, Latin America is expected to grow 9 percent, after having turned positive in the third quarter of 2016.

Transition Year

The analyst expects FY 2017 to be a transition year, given the company’s escalating costs, especially in the first half of 2017, along with slower-than-anticipated PRASM improvement.

Domestic PRASM is estimated to grow 1.5 percent now, as compared to the previous expectation of 2.8 percent, while in the Atlantic, PRASM is expected to decline 0.5 percent, as compared to the previous estimate of 2.5 percent, although meaningful geopolitical and economic risks persist.

“In the Pacific, we estimate PRASM to decline 3.5 percent, unchanged from our prior forecast, due to a choppy revenue and capacity environment,” Derchin stated.

In addition, PRASM is expected to increase 6 percent in Latin America, as compared to the previous estimate of 5 percent, with all regions having already achieved positive unit revenue growth, driven by industry capacity discipline.

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