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Delta's (DAL) Q2 TRASM View Bullish, Costs Guidance Bearish

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Delta Air Lines, Inc. (DAL - Free Report) issued a revised guidance for the second quarter of 2018 at the Deutsche Bank 2018 Global Industrials and Materials Summit held yesterday.

Strong demand for air travel is anticipated to aid the carrier’s second-quarter results. However, rising fuel prices are pushing up costs and are expected to affect bottom-line growth.

The company now expects total revenue per available seat mile (TRASM) to increase between 4% and 5% year over year in the second quarter. Past outlook had called for a rise of 3-5% in the metric. This upside has been driven by impressive revenues and solid demand across all entities in leisure and business segments.

With fuel prices trending upward lately (up 12% since the beginning of the second quarter), the company has raised its view pertaining to the same. It now expects the metric between $2.20 and $2.25 per gallon. Previously, the estimate came in between $2.07 and $2.12. Non-fuel unit costs are likely to rise approximately 3% year over year, up from the prior forecast of a climb in the 1-3% range. However, this view is less than the 3.9% ascent during the first quarter of 2018.

Pretax margin is now projected between 13% and 14%. Earlier prediction was in the band of 14-16%. Due to the cost headwind, the company slashed its earnings per share guidance for the concerned quarter. The metric is now likely to be in the range of $1.65-$1.75, much lower than the former estimate between $1.80 and $2. The Zacks Consensus Estimate for current-quarter earnings stands at $1.89.

The company stated that it takes approximately 6-12 months to recover from rising fuel prices through higher revenues. As a result of trimming its earnings per share guidance, shares of Delta fell significantly during the course of the trading session on Jun 6. However, the stock rebounded to a great extent, closing the trading session at $54.17, down 0.9% over Jun 5’s closing price.
 
The projection for system capacity in the second quarter remains unchanged at 3-4% expansion.

 

Delta continues to anticipate non-fuel unit costs, higher by 0-2% for the full year, way below the 5.9% increase in 2017. Additionally, the company hopes to return 70% of free cash flow to its shareholders this year. While in the longer-term, it aims to return 20-25% of free cash flow through dividends.

Escalating oil prices being a major headwind of the entire airline industry, other carriers might follow Delta and Southwest Airlines Co.’s (LUV - Free Report) footsteps in trimming their respective outlooks. We remind investors that a few days back, Southwest Airlines also lowered its capacity view due to the same reason. The low-cost carrier cited high oil prices among other factors behind its capacity outlook cut for 2018. It now expects capacity in the low 4% range compared with its prior forecast in the low 5% range.

Zacks Rank & Key Picks

Delta carries a Zacks Rank #3 (Hold). Two better-ranked stocks in the broader Transportation sector are GATX Corporation (GATX - Free Report) and Expeditors International of Washington, Inc. (EXPD - Free Report) . While GATX holds a Zacks Rank #2 (Buy), Expeditors sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Shares of GATX and Expeditors have rallied more than 18% and 40%, respectively, in a year.

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