Will Rising Costs Hamper Delta Air Lines' (DAL) Q4 Earnings?

Delta Air Lines, Inc. (NYSE:DAL) is scheduled to report fourth-quarter 2017 results on Jan 11, before the market opens.

The carrier’s earnings as well as revenues surpassed expectations in the third quarter despite the natural calamities. However, the bottom line declined 7.6% on a year-over-year basis due to higher costs. While the top line increased 5.5% from the year-ago figure.

Let’s see how things are shaping up for this earnings.

Factors Likely at Play

Like the previous quarter, high costs are anticipated to hurt Delta’s bottom line in the fourth quarter too. Additionally, the recent power outage at the Atlanta airport has led to approximately 1,400 flight cancellations and is estimated to have affected the carrier’s pre-tax income to the tune of $25-50 million in the to-be-reported quarter. Moreover, the company has increased guidance for fourth-quarter costs due to the power crisis as well as some other factors.

The Atlanta, GA-based company now anticipates fourth-quarter non-fuel unit costs including profit sharing to be up approximately 5.5% (previous view was in the range of 5-5.5%). The carrier expects fuel price per gallon for the concluding quarter of 2017 between $1.92 and $1.97 including taxes and refinery impact. The Zacks Consensus Estimate for fourth-quarter Average fuel price per gallon, net of hedging (mainline) stands at $1.89, substantially higher than the year-ago reported value of $1.60. Moreover, due to high fuel costs, the company expects operating margin for the fourth quarter to be approximately 11%, the lowest point in its initially guided range of 11-13%. Additionally, system capacity for the period is projected to expand 2.3%.

However, the airline has been seeing rising revenue trends in the final quarter. The carrier forecasts the metric to rise approximately 4% in the final quarter of 2017, higher than the 1.9% growth witnessed in the third quarter. In fact, the Zacks Consensus Estimate for fourth-quarter passenger revenue per available seat mile (PRASM) stands at 14.04 cents, higher than the year-ago reported value of 13.58 cents.

The carrier is anticipated to take a one-time charge of $150-$200 million in the to-be-reported quarter on account of the newly initiated tax law.

Earnings Whispers

Our proven model does not show conclusively that Delta is likely to beat estimates in fourth-quarter 2017. This is because a stock needs to have both a positive Earnings ESP and a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. However, that is not the case here as highlighted below.

Zacks ESP: Delta has an Earnings ESP of -0.71% as the Most Accurate estimate is pegged at 89 cents per share, marginally lower than the Zacks Consensus Estimate of 90 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Delta carries a Zacks Rank #3, which increases the predictive power of ESP. However, we need to have a positive ESP to be confident about a possible earnings surprise. Hence, a negative ESP leaves our surprise prediction inconclusive.

We caution against Sell-rated stocks (#4 or 5) going into an earnings announcement, especially when the stock is witnessing negative estimate revisions.

Delta Air Lines, Inc. Price and EPS Surprise

Delta Air Lines, Inc. Price and EPS Surprise | Delta Air Lines, Inc. Quote

Stocks to Consider

Investors interested in the broader Transportation sector may consider American Airlines Group, Inc. (NASDAQ:AAL) , CSX Corporation (NASDAQ:CSX) and JetBlue Airways Corporation (NASDAQ:JBLU) stocks with the right combination of elements to deliver an earnings beat in their next releases.

American Airlines has an Earnings ESP of +4.54% and a Zacks Rank #3. The company is expected to report fourth-quarter earnings on Jan 26.

CSX has an Earnings ESP of +1.13% and a Zacks Rank of 3. The company is scheduled to report fourth-quarter results on Jan 16. You can see the complete list of today’s Zacks #1 Rank stocks here.

JetBlue has an Earnings ESP of +6.06% and the stock is a Zacks #3 Ranked player. The company is expected to report fourth-quarter earnings on Jan 25.

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