Why revenue drivers influenced the operating margin

Market Realist

Overview: Delta Air Lines' second quarter earnings (Part 4 of 10)

(Continued from Part 3)

Delta’s revenue drivers

One of Delta’s primary revenue drivers was the higher load factor. New aircraft are added either to replace older non-fuel efficient aircraft or to expand routes and network coverage and add to the available seat miles to increase capacity. Increasing the capacity enables an airline to serve more passenger miles leading to revenue growth and can also bring in economies of scale. Delta’s revenue passenger miles (or RPM) increased by 5% due to increased capacity—Delta added 22 new aircraft on 2Q14. Delta also had a higher load factor of 86.3% in 2Q14—compared to 84.3% in 2Q13. Higher load factor improves margin because high fixed cost associated with airlines will be spread across more passengers.

Another revenue driver for Delta was higher yield. Yield is the measure of average fare paid per mile per passenger. Delta’s high quality services have attracted corporate customers who contribute to higher yields. Corporate revenue increased 8% year-over-year (or YoY) in 2Q14. Deltas’ management stated that, according to a survey, 85% of corporate travel managers expect to maintain or increase their future spending on Delta.

In 2013, Delta’s (DAL) yield was 16.9 cents while its peers United (UAL), American (AAL), and Southwest (LUV) average yield was 16.1 cents, 16.2 cents, and 16 cents, respectively. JetBlue’s (JBLU) average yield was 13.9 cents.

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