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Airline behemoth Delta Air Lines Inc. (DAL - Analyst Report) reported third quarter 2013 adjusted earnings of $1.41, surpassing the Zacks Consensus Estimate of $1.34. The results also improved from the year-ago adjusted earnings of $1.23. The company’s performance was buoyed by strong sales and reduced interest expenses.

Revenues grew 5.7% year over year to $10.49 billion in the reported quarter and was ahead of the Zacks Consensus Estimate of $10.47 billion. On an annualized basis, Passenger revenues also grew 6.7%, while Other revenues remained flat with the prior-year quarter. Cargo revenues also decreased 6.1%.

Operating Statistics

Airlines traffic, measured in billions of revenue passenger miles, increased 2.1% year over year to 54.9 billion. Capacity or available seat miles also increased 2.6% to 63.9 billion, while load factor (percentage of seats filled with passengers) dropped 40 basis points year over year to 86.0%. Passenger revenue per available seat mile (PRASM) or unit revenue grew 3.9% year over year, with 4.6% increase in yield.

Operating Expenses

Total operating expenses, including special items, increased 3.6% year over year to $8.92 million, primarily due to higher expenses related to volume and revenues. Consolidated unit cost or cost per available seat mile (CASM), excluding fuel cost, profit sharing and special items, crept up 1.1%.

Average fuel price for Delta was $2.97 per gallon while total fuel expenses increased $74 million.

Liquidity

At the end of the third quarter, the company had $4.0 billion in cash and short-term investments and $1.8 billion in undrawn revolving credit facilities, netting $5.8 billion in unrestricted liquidity. Net debt at quarter end was $9.9 billion. Delta generated operating cash flow of $1.2 billion in the quarter, while capital expenditures were $635 million. Free cash flow was $627 million.

Dividend and Share Repurchase

The company paid $51 million in dividends to its shareholders and repurchased 4.8 million shares worth $100 million during the quarter.

Guidance

For the fourth quarter of 2013, Delta Air Lines expects operating margin of 7–9% and consolidated unit cost, excluding fuel and profit sharing, to increase 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 $3.03 and $3.08 per gallon.

Other Airline Stocks

Of the other stocks in the sector, Southwest Airlines Co. (LUV - Analyst Report) and United Continental Holdings Inc. (UAL - Analyst Report) will release their third-quarter financial results on Oct 24, while JetBlue Airways Corp. (JBLU - Analyst Report) results are slated for Oct 29.

Our Take

Delta continues to expand its service on both domestic and international fronts, which we believe will not only expand its network but will also improve its traffic figures. Furthermore, Delta recently got the approval from Department of Transportation to go ahead with its proposed tie up with Virgin Atlantic, which will subsequently give it more control over the New York-London route and the second spot in this market with nine daily roundtrip flights.

Delta currently holds a Zacks Rank #2 (Buy).

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