Delta Air Lines Earnings Preview: Lower Profit, Surging Share Price

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Before markets open Wednesday morning, Delta Air Lines Inc. (NYSE: DAL) is scheduled to report earnings. Last Tuesday the company said that Hurricane Irma will cost it about one point of margin and that Delta now expects an operating margin of 15.5% to 16.5% for the quarter. The company’s prior forecast called for an operating margin of 16.5% to 17.5%.

In the June quarter, Delta’s operating margin was 18.8% and its mainline average fuel cost was $1.61 a gallon. Including a mark-to-market adjustment and the impact of Delta’s refinery operations, the adjusted cost per gallon totaled $1.66.

Last week Delta raised its average fuel cost estimate from a prior range of $1.55 to $1.60 a gallon to a new range of $1.68 to $1.73 a gallon.

Delta consumed 893 million gallons of fuel on its mainline jets in the second quarter. That works out to about $1.48 billion. At the high end of its guidance, an equal amount of fuel would cost about $1.54 billion in the September quarter.

But Delta had to cancel 2,200 flights due to Hurricane Irma, so the airline did not have to consume that fuel and, of course, it realized no revenue for the cancelled flights. The airline said last week that the cancellations cost it about $120 million in pretax income.

So why did the stock price jump about 6% following last week’s update to guidance? For one thing, analysts were expecting much worse fallout from the effects of the storms that caused flight disruptions for several weeks.

Even given that, however, the best Delta would have done would have been to meet its prior forecast. Delta did manage to boost its mainline revenue miles by 1.3% year over year in September while boosting its available seat miles by 3.6%. The airline’s load factor decreased 1.9% year over year.

All that adds up to “better-than-expected-given-the-circumstances” performance and accounts for the lift to Delta’s stock price. Analysts polled by Reuters expect Delta to post earnings per share (EPS) of $1.64 on Wednesday, while The Wall Street Journal reports an EPS expectation of $1.54.

One more thing to watch for: what, if anything, the airline says about its order for 75 new CS-100 aircraft from Canada’s Bombardier following the U.S. Department of Commerce’s recommendation for a tariff of 80% on each plane imported into the United States.

The stock traded down about 0.1% in the noon hour Monday, at $51.93 in a 52-week range of $37.91 to $55.75.