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Delta Air lines (DAL) Poised for Growth on Low Fuel Costs
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We issued an updated research report on Delta Air Lines, Inc. (DAL - Free Report) on Jun 6, 2016.
Delta reported robust first-quarter 2016 earnings that surpassed the Zacks Consensus Estimate and almost doubled from the previous year on low fuel costs. However, the company’s top line marginally missed our expectation and also deteriorated year over year. Nevertheless, the company’s earnings history has been impressive with positive surprises in three of the last four quarters with an average beat of 1.84%.
Delta, like most other airlines, has been enjoying higher margins in the recent quarters with low fuel prices. For the second quarter, the carrier expects operating margin in the range of 21% to 23%. System capacity is likely to rise 2–3% year over year, whereas passenger unit revenues are projected to decline by 2.5–4.5%
The company is expected to generate savings of around $3 billion in 2016 due to low fuel costs. This is expected to help in boosting margins.
Higher Returns to Stakeholders
Delta has made consistent efforts to enhance returns to shareholders through dividends and share buybacks. The company returned $882 million to it shareholders in the first quarter. The company also remains on track to accelerate its share buyback program. This apart, Delta hiked dividends by over 50% in May this year to more than 20 cents per share. The new dividend is payable in the third quarter.
In addition to rewarding shareholders, the company has maintained an impressive record of sharing profits with employees. It paid $1.5 billion to employees in Feb this year as part of the 2015 profit sharing program. In fact, the company has paid $4.1 billion over the past five years to employees rewarding them for operational excellence.
Strong Balance Sheet
Delta has managed to reduce its debt significantly from the 2009 levels. Delta strives to maintain a strong balance sheet by effectively managing its capital expenses. To this end, the company deferred the delivery of four wide-bodied aircrafts from 2018 to 2019–20. The company intends to reduce capacity growth to below 2% in the second half of 2016. and expects to be the first carrier to return to “positive unit revenue growth later this year.”
Headwinds
Various macroeconomic and geopolitical factors such as slow economic growth, terrorist attacks and rise of war zones have limited revenue growth for the airline industry. Delta’s passenger revenue per available seat mile (PRASM) declined in May and the downtrend is expected to continue even in the months ahead. Additionally, issues such as feud with some Middle East airlines over market share and legal probe by the Department of Justice (DoJ) on unlawful coordination with American Airlines Group Inc. (AAL - Free Report) , United Continental Holdings, Inc. (UAL - Free Report) and Southwest Airlines Co. to limit seat availability remain concerns.
Growth and Estimates
However, Delta retains its strong brand name and continues to be one of the most profitable airlines in the industry. The company maintains a strong global network and keeps adding capacity in high traffic routes such as those to the United Kingdom.
The EPS estimates for this Zacks Rank #3 (Hold) stock has been pegged at $6.51 and $6.76 for 2016 and 2017, respectively. This translates to a growth of 41.18% this year and 3.94% in 2017.
A Stock to Consider
A better-ranked stock to be considered in the sector is Air France – KLM (AFLYY - Free Report) , which sports a Zacks Rank #1 (Strong Buy).
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Delta Air lines (DAL) Poised for Growth on Low Fuel Costs
We issued an updated research report on Delta Air Lines, Inc. (DAL - Free Report) on Jun 6, 2016.
Delta reported robust first-quarter 2016 earnings that surpassed the Zacks Consensus Estimate and almost doubled from the previous year on low fuel costs. However, the company’s top line marginally missed our expectation and also deteriorated year over year. Nevertheless, the company’s earnings history has been impressive with positive surprises in three of the last four quarters with an average beat of 1.84%.
Delta, like most other airlines, has been enjoying higher margins in the recent quarters with low fuel prices. For the second quarter, the carrier expects operating margin in the range of 21% to 23%. System capacity is likely to rise 2–3% year over year, whereas passenger unit revenues are projected to decline by 2.5–4.5%
The company is expected to generate savings of around $3 billion in 2016 due to low fuel costs. This is expected to help in boosting margins.
Higher Returns to Stakeholders
Delta has made consistent efforts to enhance returns to shareholders through dividends and share buybacks. The company returned $882 million to it shareholders in the first quarter. The company also remains on track to accelerate its share buyback program. This apart, Delta hiked dividends by over 50% in May this year to more than 20 cents per share. The new dividend is payable in the third quarter.
In addition to rewarding shareholders, the company has maintained an impressive record of sharing profits with employees. It paid $1.5 billion to employees in Feb this year as part of the 2015 profit sharing program. In fact, the company has paid $4.1 billion over the past five years to employees rewarding them for operational excellence.
Strong Balance Sheet
Delta has managed to reduce its debt significantly from the 2009 levels. Delta strives to maintain a strong balance sheet by effectively managing its capital expenses. To this end, the company deferred the delivery of four wide-bodied aircrafts from 2018 to 2019–20. The company intends to reduce capacity growth to below 2% in the second half of 2016. and expects to be the first carrier to return to “positive unit revenue growth later this year.”
Headwinds
Various macroeconomic and geopolitical factors such as slow economic growth, terrorist attacks and rise of war zones have limited revenue growth for the airline industry. Delta’s passenger revenue per available seat mile (PRASM) declined in May and the downtrend is expected to continue even in the months ahead. Additionally, issues such as feud with some Middle East airlines over market share and legal probe by the Department of Justice (DoJ) on unlawful coordination with American Airlines Group Inc. (AAL - Free Report) , United Continental Holdings, Inc. (UAL - Free Report) and Southwest Airlines Co. to limit seat availability remain concerns.
Growth and Estimates
However, Delta retains its strong brand name and continues to be one of the most profitable airlines in the industry. The company maintains a strong global network and keeps adding capacity in high traffic routes such as those to the United Kingdom.
The EPS estimates for this Zacks Rank #3 (Hold) stock has been pegged at $6.51 and $6.76 for 2016 and 2017, respectively. This translates to a growth of 41.18% this year and 3.94% in 2017.
A Stock to Consider
A better-ranked stock to be considered in the sector is Air France – KLM (AFLYY - Free Report) , which sports a Zacks Rank #1 (Strong Buy).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>