Delta Foresees Robust 2Q

The second largest U.S. airline Delta Air Lines Inc. (DAL - Analyst Report) expects second quarter unit revenue (or revenue per available seat miles) to grow 8% year over year thanks to the growing business travel demand and flight expansion in the New York market. The addition of novel features to its services as well as introduction of new products is also expected to boost revenue.

Due to the drop in fuel prices, the company foresees $155 million loss from fuel hedging strategies in the second quarter. Delta Air Lines was 70% hedged for the second quarter at a jet fuel price of $3.05–$3.40 per gallon using collars and call spreads. As a result, the company expects to record operating loss in the quarter with negative 1% margin after accounting for the hedges and other special charges.

However, on a non-GAAP basis, the company still expects operating margin in the range of 8–10% and consolidated unit cost, excluding fuel, to grow 3-4% year over year. Additionally, the company expects both domestic and international flying to decline 1–2% year over year.

Now, the company estimates fuel price of $3.37 per gallon for the ongoing quarter, up from the previous forecast of $3.28 per gallon attributable to hedge losses that were settled in May and June.

For the second quarter, the Zacks Consensus Estimate for Delta remains unchanged at 80 cents over the last 7 days but fell by a penny in the last 30 days. The estimate represents a massive growth of 84.88% from the year-ago quarter.

Further, Delta Air Lines, which competes strongly with United Continental Holdings Inc. (UAL - Analyst Report) and Southwest Airlines Co. (LUV - Analyst Report), continues to have a healthy balance sheet. The company expects to exit the quarter with $5.3 billion in unrestricted liquidity including $3.5 billion in cash and short-term investments, and $1.8 billion in undrawn revolving credit facilities.

We are currently maintaining our long-term Neutral recommendation on Delta Air Lines. For the short term, the stock retains a Zacks #3 (Hold) Rank.