Delta Meets EPS, Gives Outlook

Airline behemoth Delta Air Lines (DAL - Analyst Report) reported fourth-quarter 2012 adjusted earnings of 28 cents, in line with the Zacks Consensus Estimate. The results, however, dropped 37.8% from year-ago adjusted profit of 45 cents, hurt by higher costs associated with aircraft rent, landing fees and other items.

Revenues edged up 2% year over year to $8.60 billion in the reported quarter but fell marginally short of the Zacks Consensus Estimate of $8.61 billion. On an annualized basis, Passenger revenues grew 3%, while Other revenues remained nearly on par with the last-year quarter. However, Cargo revenue dipped 6%.

For full-year 2012, Delta – the second largest airline company in U.S. after United Continental Holdings Inc. (UAL - Analyst Report) – posted earnings of $1.83 per share (in line with our projection and increased 29.8% year over year), on revenues of $36.7 billion (up 4.4% from the prior year).

Operating Statistics

Airlines traffic, measured in billions of revenue passenger miles, went up by 1% year over year to 45.3 billion. Capacity or available seat miles fell 1% to 54.3 billion, while load factor (percentage of seats filled with passengers) grew 160 basis points year over year to 83.3%. Passenger revenue per available seat mile (PRASM) or unit revenue rose 4% year over year, led by a 2% increase in yield.

Operating Expenses

Total operating expenses, including special items, increased 8% year over year to $577 million, primarily due to steeper aircraft fuel and salaries. Consolidated unit cost or cost per available seat mile (CASM), excluding fuel cost, profit sharing and special items, crept up 6%.

Liquidity

At the end of 2012, the company had $3.4 billion in cash and short-term investments and $1.8 billion in undrawn revolving credit facilities, netting $5.2 billion in unrestricted liquidity. By 2012 end, the company had net debt of $11.7 billion.

The company generated operating cash flow of $585 million in the fourth quarter while capital expenditures were $599 million.

Guidance

For the first quarter of 2013, Delta Air Lines expects operating margin in the range of 2.5–4.5% and consolidated unit cost, excluding fuel and profit sharing, to grow 6–8% year over year. Additionally, the company expects domestic flying to decrease 1–3% year over year and international flying to decrease 3–5% year over year.

The estimated fuel price, including taxes and hedges, is approximately in between $3.15 and $3.20 per gallon. Capital expenditures are estimated at $500–$600 million.

Other Airline Stock

Of the other stocks in the sector, Southwest Airlines Co. (LUV - Analyst Report) will release its fourth quarter results on Jan 24, while JetBlue Airways Corp. (JBLU - Analyst Report) will release the same on Jan 29.

Our Take

Delta currently holds a Zacks Rank #3, implying a short-term Hold rating. We believe that the company is progressing well on improving ancillary revenues by adding new services under its hood as well as introducing products, which are enhancing its value and profitability.