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Airline behemoth Delta Air Lines (DAL - Analyst Report) reported second-quarter 2013 adjusted earnings of 98 cents, surpassing the Zacks Consensus Estimate of 95 cents. The results also improved considerably from the year-ago adjusted earnings of 69 cents. The company’s performance was buoyed by strong sales along with operational efficiency and growing demand.

Revenues remained flat year over year at $9.70 billion in the reported quarter but fell short of the Zacks Consensus Estimate of $9.83 billion. On an annualized basis, Passenger revenues also grew 1%, while Other revenues dropped 6% from the prior-year quarter. Cargo revenues also decreased 11%.

Operating Statistics

Airlines traffic, measured in billions of revenue passenger miles, increased 1% year over year to 50.8 billion. Capacity or available seat miles also increased 1% to 59.9 billion, while load factor (percentage of seats filled with passengers) dropped 30 basis points year over year to 84.8%. Passenger revenue per available seat mile (PRASM) or unit revenue was flat year over year, with 0.2% increase in yield.

Operating Expenses

Total operating expenses, including special items, decreased 8% year over year to $8.79 million, primarily due to cost-saving measures. Consolidated unit cost or cost per available seat mile (CASM), excluding fuel cost, profit sharing and special items, crept up 2.5%.

Average fuel price for Delta was $3.03 per gallon and total fuel expenses decreased $710 million year over year due to reducing fuel costs and less prior-year hedge loss.

Liquidity

At the end of the second quarter, the company had $3.9 billion in cash and short-term investments and $1.8 billion in undrawn revolving credit facilities, netting $5.7 billion in unrestricted liquidity. Net debt at quarter end was $10.2 billion. Delta generated operating cash flow of $1.3 billion in the quarter, while capital expenditures were $704 million. Free cash flow was $730 million.

Delta initiated a quarterly dividend payout policy of 6 cents per share payable on Sep 10, to shareholders of record as of Aug 9. Further, management announced a $500 million share repurchase program that will be completed by mid 2016.  

Guidance

For the third quarter of 2013, Delta Air Lines expects operating margin of 11–13% and consolidated unit cost, excluding fuel and profit sharing, to increase 0–2% year over year. Additionally, the company expects domestic flying to increase 1–3% year over year and international flying capacity to increase 2–4% year over year.

The estimated fuel price, including taxes and hedges, is approximately between $3.05 and $3.10 per gallon.

Other Airline Stocks

Of the other stocks in the sector, JetBlue Airways Corp. (JBLU - Analyst Report) will release its second-quarter financial results on Jul 30.

Our Take

Delta – the second largest airline company in U.S. after United Continental Holdings Inc. (UAL - Analyst Report) – currently holds a Zacks Rank #3, implying a Hold rating.

We appreciate Delta’s constant endeavors to expand its operational base through the introduction of services interlinking various domestic and international spots. Recently, the airline launched a daily nonstop service between Seattle and London. Delta will commence the service from Mar 29, 2014, through The Boeing Company’s (BA - Analyst Report) 210-seat 767-300ER jet.

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