Delta Up On Bullish Q4 Unit Revenue View At Investor Day

Shares of Delta Air Lines (NYSE:DAL) have lately been on an uptrend. The stock has registered gains of 14.5%, comfortably outpacing the Zacks Airline industry’s 9.5% growth over the last three months.

Continuing the trend, this Atlanta, GA-based airline behemoth presented a rosy picture at its Investor Day, particularly with respect to passenger unit revenues. The stock gained 2.9% on Dec 14, to close the trading session at $5516, after the update.

The carrier issued an encouraging outlook for passenger revenue per available seat miles (PRASM: a key measure of unit revenue) for the current quarter and expects the metric to improve by approximately 4% (the earlier outlook on the metric had called for an improvement in the band of 2% to 4%). Delta expects to perform well on this front in 2018 as well, with PRASM growth estimated in each quarter. We note that Delta is not the only carrier to unveil a bullish unit revenue view for the fourth quarter. Fellow airline players like United Continental Holdings (NYSE:UAL) , Southwest Airlines (NYSE:LUV) and JetBlue Airways (NASDAQ:JBLU) have done the same recently.

Delta, however, said at the event that due to high fuel costs, the company expects operating margin for the fourth quarter to be approximately 11%, the lowest point of its previously guided range of 11% to 13%. Fuel price per gallon, inclusive of taxes and refinery impact, are now projected between $1.92 and $1.97 (the previous view had projected the metric in the band of $1.82 and $1.87).

The carrier expects normalized non-fuel unit costs, including profit sharing expenses, in the band of 5% to 5.5% in the current quarter mainly due to “continued investment in our people and product combined with accelerated depreciation of aircraft retirements.” The metric was earlier projected to grow in the range of 4% to 5%. Capacity is expected to grow in the band of 2.5% to 3% in the final quarter of 2017.

This Zacks Rank #3 (Hold) carrier also sounded confident about performing well in 2018. It expects to end 2018 with earnings per share in the band of $5.35 to 5.70. The projection is higher than the Zacks Consensus Estimate of $5.41 per share. The tax reforms, on materialization, are likely to boost Delta’s 2018 bottom line in the range of $1-1.25. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The carrier expects to bring down the non-fuel unit cost growth to the range of 0% and 2% (excluding profit sharing) in 2018, thereby aiding its bottom line. Through its prudent cost management, the carrier intends to reduce the growth of the metric below 2% over the long term.

Delta also stated that it remains focused on rewarding its shareholders with dividends and buybacks. The carrier expects to return approximately $2.4 billion to its shareholders this year. Moreover, it intends to return at least 70% of free cash flow to its investors in 2018. Over the long term, the carrier aims to return 20% to 25% of free cash flow to its investors through dividends.

Moreover, the carrier is constantly looking to modernize its fleet. To this end, it announced the decision to buy 100 Airbus A321neo narrow-body planes. Delta has the option to buy 100 more similar jets under the deal. Delivery of the new entrants to Delta’s fleet is expected to start in the first quarter of 2020, continuing till 2023. In fact, Delta expects capital spending levels of approximately $ 4 billion in 2018, up from the estimated $3.7 billion in 2017, with the lion’s share being spent on aircraft.

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