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Delta Air Lines Inc. (DAL - Analyst Report) reported fourth-quarter 2013 adjusted earnings of 65 cents per share, surpassing the Zacks Consensus Estimate of 63 cents. The bottom line improved 132.1% from the year-ago adjusted profit of 28 cents buoyed by operational efficiency, reduced fuel cost and slow growth of non-fuel expenses.

For full-year 2013, Delta posted earnings of $3.15 per share (ahead of our projection of $3.13 and up 71.0% year over year) on revenues of $37.8 billion (ahead of our $37.7 billion expectation and up 3.0% from the prior year).

Revenues increased 6% year over year to $9.08 billion in the reported quarter and was ahead of the Zacks Consensus Estimate of $9.03 billion. On an annualized basis, Passenger revenues grew 6% and Other revenues improved 3% from the prior-year quarter. However, Cargo revenues dipped 1.3%.

Operating Statistics

Airlines traffic, measured in billions of revenue passenger miles, went up 2% year over year to 46.2 billion. Capacity or available seat miles increased 3% from a year ago to 55.9 billion, while load factor (percentage of seats filled with passengers) declined 70 basis points year over year to 82.6%. Passenger revenue per available seat mile (PRASM) or unit revenue rose 3% year over year, led by a 4% increase in yield.

Operating Expenses

Total operating expenses, including special items, increased 8% year over year to $8,375 million, primarily due to aircraft maintenance and aircraft restructuring. Consolidated unit cost or cost per available seat mile (CASM), excluding fuel cost, profit sharing and special items, crept up 1%.

Liquidity

At the end of 2013, the company had $3.8 billion in cash and short-term investments and net debt of $9.4 billion. The company has reduced its net debt by $7.5 billion since 2009.

The company generated operating cash flow of $1.2 billion in the fourth quarter while capital expenditures were $900 million.

Dividend and Share Repurchase

During the quarter, the company returned $201 million to its shareholders. It paid a dividend of 6 cents aggregating $51 million and repurchased 5.5 million shares totaling $150 million.

Guidance

For the first quarter of 2014, the company expects a strong demand environment, capacity addition and a number of strategic initiatives to lead to solid margin expansion.

Delta expects operating margin in the range of 6–8% and consolidated unit cost, excluding fuel and profit sharing, to increase 0.5–1.5% year over year in the first quarter.

The estimated fuel price, including taxes and hedges, is approximately $2.97 to $3.02 per gallon. System capacity is expected to increase 2–3%.

Upcoming Earning Releases

Of the other stocks in the sector, United Continental Holdings Inc. (UAL - Analyst Report) Southwest Airlines Co. (LUV - Analyst Report) will release their fourth quarter results on Jan 23, while JetBlue Airways Corp. (JBLU - Analyst Report) will release the same on Jan 27. LUV and JBLU currently carry a Zacks Rank #1 (Strong Buy), while UAL carries a Zacks Rank #2 (Buy).

Our Take

We believe that the company will benefit from various strategic measures such as route launches, introduction of ancillary products, strong customer service and fleet revamping. However, a weak cargo business, competitive pressure and slow economic recovery keeps us sidelined on the stock. Delta currently carries a Zacks Rank #3 (Hold).

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