Aerospace & Defense

Delta Air Lines Earnings Cannot Overcome Soft Outlook

Delta Air Lines Inc. (NYSE: DAL) reported first-quarter 2013 results before markets opened this morning. The airline reported adjusted diluted quarterly earnings per share (EPS) of $0.10 on revenues of $8.5 billion. In the same period a year ago, Delta reported an EPS loss of $0.05 on revenues of $8.4 billion. First-quarter results also compare to the consensus estimates for EPS of $0.06 on revenues of $8.51 billion.

On a GAAP basis, the company reported quarterly EPS of $0.01, compared with $0.15 in the first quarter of 2012. Special items totaled $78 million, including a $24 million mark-to-market gain on fuel hedges and a $102 million charge for other items. In the first quarter of 2012, the company reported one-time items totaling $163 million.

Delta’s unique fuel supply scheme, in which it owns and operates its own refinery, cost the company $22 million in the first quarter, caused by disruption to the refinery’s operation due to Hurricane Sandy and a short-term problem with the gasoline production unit.

The company’s CEO said:

We are taking actions to mitigate the decline in close-in demand we saw in the last part of March, and we expect the impact of the sequester, combined with a softening of leisure demand, to result in a 2 – 3 percent decline in April’s unit revenues. However, a key benefit from a consolidated industry is that we now see a much stronger correlation between revenue and fuel; so while we are seeing some revenue softness, we are also benefitting from lower fuel costs, allowing us to continue our path of margin expansion even in a sluggish economic environment.

At the end of last year’s fourth quarter, Delta forecast fuel costs for the first quarter in the range of $3.15 to $3.20 per gallon. Actual fuel cost came in at $3.24 per gallon, and if the company is going to benefit from its refinery, it is going to have to get its refining operations straightened out.

Capital spending of $650 million in the first quarter was also higher than the previous estimate of $500 million to $600 million. The airline’s seat capacity dropped 2.5% in the quarter, in line with the estimate for a 2% to 4% decline.

For the second quarter of 2013, Delta expects to post an operating margin of 9% to 11% on fuel prices of $2.95 to $3.00 per gallon. Seat capacity is expected to be flat to up 1%, compared with the second quarter of 2012.

Shares are down 2.3% at $14.80 in premarket trading this morning in a 52-week range of $8.42 to $17.25. Prior to today’s release Thomson/Reuters had a consensus price target of around $18.80 on the company’s shares.

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