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Delta Aug Traffic Lacks Bite, Stock Dips on Lowered View

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A rise in August traffic figures could not save Delta Air Lines Inc. (DAL) from tumbling as the third largest U.S. carrier in terms of passenger count reduced its September quarter forecast partially. The news impacted Delta’s stock, which closed the day 5.16% lower.

Delta stated overcapacity in transatlantic routes, the impact of the Ebola outbreak and geo-political crisis in Russia and the Middle East as factors weighing on its unit revenues. The Atlanta-based carrier now expects its September quarter unit revenue growth to be around 2–3%, down from the earlier forecast of 2–4%.

Consequently, the reduced unit revenue expectation is likely to have an impact on Delta’s margins. The carrier now expects an operating margin of 15–16%, down from its previous guidance of 15–17%.

Further, despite a fall in Brent crude, jet fuel prices have not seen any meaningful decline. This led the premier carrier to raise its expected fuel price projection for the forthcoming quarter by 2 cents to $2.90–$2.95. Notably, jet fuel comprises 30–35% of the airline’s operating costs.

Similar concerns have also dragged down some of Delta’s traditional peers. American Airlines Group Inc. (AAL), United Continental Holdings Inc. (UAL) and Southwest Airlines Co. (LUV) were some of the biggest losers.

However, these negatives were partially mitigated by moderate August traffic numbers. Revenue passenger miles or RPMs – which imply revenue generated per mile per passenger – moved up 3.1% year over year to 20.03 billion. Consolidated capacity (available seat miles or ASMs) for the month increased 2.7% from Aug 2013 to 22.87 billion. Passenger revenue per available seat mile (:PRASM) improved 2.0% year over year. Continued domestic strength attributed to the improved performance.

The load factor or percentage of seats filled by passengers improved 30 basis points (bps) from Aug 2013 to 87.6% while the completion factor was 99.6%, with nearly 84.3% of flights on schedule.

In the first eight months of 2014, Delta has generated RPMs of 137.94 billion (up 3.9% from the corresponding period last year) and ASMs of 161.40 billion (up 2.5% year over year). The load factor improved 120 bps year over year to 85.5%.

Delta is expected to generate higher revenues than last year on strong domestic market, capacity discipline, route expansion, cost control measures and customer-focused initiatives. Apart from domestic strength, Delta is leveraging from its joint venture with Virgin Atlantic and strong demand within the New-York London route. The carrier also held that it will earn a pre-tax income of $4 billion in 2014.

Delta currently has a Zacks Rank #3 (Hold).

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