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Low Fuel Cost to Aid Delta 2Q

Zacks Equity Research

One of the major U.S. airlines, Delta Air Lines Inc. (DAL) has projected a favorable second quarter owing to the prevailing low fuel prices. The company expects profit improvement with significant margin expansion along with stability in revenue growth. We expect the news to drive the company’s market value despite the economic overhang that the airline industry is currently facing.

Earlier in May, the company also stated that it aims to restart its quarterly dividend and authorized a share repurchase program, over a period of three years. The move is an attempt by Delta to win back investors’ confidence, which suffered due to the slump in the airline industry.

The airline giant has authorized a share repurchase program of $500 million and will pay a quarterly dividend of 6 cents per share on Sep 10 to shareholders of record on Aug 9. Delta last paid a dividend in 2003. Together, the dividend and stock buyback program will return $1 billion to shareholders of Delta.

After Southwest Corporation (LUV), which pays a quarterly dividend of a penny, Delta will be the second among the big airline companies in the U.S. to pay a dividend. Apart from these two companies, other major airlines like United Continental Holdings Inc. (UAL) and JetBlue Airways Corporation. (JBLU) pay dividends.

We expect Delta to remain profitable as it continues to reap benefits from the investments made to improve operating efficiencies and customer experience. In 2012, the company experienced higher revenues than the prior year based on better service offerings, capacity discipline and customer-focused initiatives.

These trends are expected to continue in the coming months, resulting in 4% to 6% year-over-year improvement in unit revenues, with margin expansion of 2.5% to 4.5% for the March quarter. On the operational front, Delta witnessed an on-time arrival rate of 86.5%, luggage missing dropped by 25% and customer complaints were about 40% less.

Further, the company is taking several initiatives to lower costs and targets $1 billion of cost savings over the next few years. Delta is leading the industry in managing fuel cost through fare hikes and capacity cuts.

The company is planning cautiously to cut consolidated capacity by 2–4% year over year in the first quarter, with 1–3% reduction in domestic flying and 3–5% drop in international flying. Delta Air Lines is involved in fuel hedging strategies, which provide a cushion to the rising fuel prices.

Currently, Delta carries a Zacks Rank #3 (Hold).

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