Delta Air Lines Inc. ( DAL - Analyst Report ) , the second largest U.S. airline, reported a 2% year-over-year traffic increase in March due to a surge in travel demand from business travelers. Airline traffic is customarily measured in billions of revenue passenger miles.

On a year-over-year basis, consolidated capacity (or available seat miles) fell 3.4% while the load factor (percentage of seats filled by passengers) improved 400 basis points (bps) to 84.1%.

Domestic traffic inched up 0.3% year over year on a 300-bp expansion in load factor, which partly offset capacity reduction of 3.2%. International traffic rose 4.7% year over year driven by a 650-bp growth in load factor that partially offset a 3.8% decline in capacity. Pacific and Latin America remains the strong driver with traffic climbing 12.6% and 5.1%, respectively.

Passenger revenue per available seat mile (PRASM) rose 13% year over year in March, which is within management’s previous guidance of 11–15%. Fuel prices were $3.37 in March.

Last month, Delta had projected that fuel costs will grow $250 million in the first quarter. Operating margin is expected in the range of 1–3%, down from the previous expectation of 2–4%.

The Zacks Consensus estimates loss of 7 cents for the first quarter, representing a massive growth of 82.11% from the year-ago quarter.

Notwithstanding higher fuel prices and the threat of recession looming large over Europe, 2012 will likely mark the third consecutive year of profitability for the company. Delta continues to make efforts to reduce its operating expenses including fuel and non-fuel costs, through fare hikes, capacity cuts and fleet rightsizing as well as de-leveraging of its balance sheet. The company is also progressing well on several revenue initiatives such as upgrading seats, installing WiFi and expanding Economy Comfort to other aircraft. Additionally, Delta is expanding its footprint in both domestic and international markets.

Despite these positive attributes, we remain on the sidelines due to new pricing rules, competitive threats from United Continental Holdings Inc. ( UAL - Analyst Report ) , Southwest Airlines Co. ( LUV - Analyst Report ) and JetBlue Airways Corp. ( JBLU - Analyst Report ) , its unionized workforce and heavy investments, which might weigh on the bottom line.

Consequently, we are maintaining our long-term Neutral recommendation on the stock. For the short term (1–3 months), Delta Air Lines retains a Zacks #4 (Sell) Rank.