Delta Reports June Traffic Performance; Lowers Q2 Guidance

Delta Air Lines Inc. (NYSE:DAL) recently released the operating figures for June. The company recorded a 5% decline in passenger revenue per available seat mile (PRASM: a measure of unit revenue). The decrease can be attributed to lower domestic yield and adverse foreign exchange fluctuations.

Revenue passenger miles (RPMs) – a measure of air traffic – improved 3.1% to 20.3 billion, while capacity (available seat miles/ASMs) expanded 3.5% to 23.1 billion. In addition to PRASM, another important metric, load factor (percentage of seats filled by passengers) declined by 40 basis points (bps) to 87.7% as traffic growth was outpaced by capacity expansion. The company registered a completion factor of 100%, with 83.4% of its flights on schedule.

At the end of the first six months of 2016, Delta recorded RPMs of 104.1 billion (up 3.1% year over year) and ASMs of 124.1 billion (up 3% year over year). Load factor was 83.9% as against 83.8% in last June.

Guidance Lowered

Delta revised its guidance for the June quarter after accounting for a fuel hedge, which increased fuel expenses by $450 million. However, the company does not expect any additional hedge losses this year. As a result of the aforesaid expense, the company’s operating margins for the June quarter are expected to decline by 4 margin points and be approximately 17% instead of the lower end of its earlier projection of 21–23% for the second quarter. The company expects non-unit fuel costs as well as profit sharing to remain flat, year over year. Profit sharing expenses and non-operating expenses for the June quarter are projected at $315–-$325 million and $140–$150 million, respectively. Cargo and other revenues are projected at $1.5 billion. The company expects an average fuel price from between $1.95 to $2.00 per gallon.

Notably, Delta has returned over $1.1 billion to investors via share buybacks and dividends. The company is estimating an outstanding share count of 764 million diluted and 758 million weighted average shares for the quarter.

Nonetheless, it remains to be seen if the company will be able to overcome a plethora of challenges like Brexit, fluctuating fuel prices, and currency issues in the remaining half of 2016.

Zacks Rank and Stocks to Consider

Delta currently carries a Zacks Rank #4 (Sell). Investors interested in the airline sector can consider better-ranked stocks like Cathay Pacific Airways Limited (OTC:CPCAY) with a Zack Rank #1 (Strong Buy) and GOL Linhas Aereas Inteligentes SA (NYSE:GOL) and ANA Holdings Inc. (OTC:ALNPY) with a Zacks Ranks #2 (Buy).