Last Friday we posted our outlook for airline stocks and noted that airlines that “manage to disappoint on earnings” could look forward to losing some of the gains they’ve made in the recent past. We hate/love to say it, but Delta Air Lines Inc. (NYSE: DAL) has verified our prediction.
Delta reported EPS this morning of $0.55 on revenues of $8.17 billion. Excluding restructuring and merger-related items, Delta posted EPS of $0.65. Analysts had been expecting EPS of $0.63 on revenues of $8.27 billion. The shares are getting pounded in early trading, down about 8% in the first half-hour.
Other airlines include Continental Airlines Inc. (NYSE: CAL), UAL Corp. (NASDAQ: UAUA), AirTran Holdings Inc. (NYSE: AAI), AMR Corp. (NYSE: AMR), US Airways Group, Inc. (NYSE: LCC), Alaska Air Group Inc. (NYSE: ALK) and JetBlue Airways Corp. (NASDAQ: JBLU) are on deck later this week. Southwest Airlines (NYSE: LUV) reports next week.
Delta’s miss on revenue is probably costing it more than its earnings beat is paying off. Deutsche Bank recently bumped several airlines to ‘Buy’ ratings on the strength of improving passenger counts. International passenger traffic is now above pre-recession levels, and freight traffic is doing even better.
On top of increased traffic, the fees that airlines now impose are generating significant revenues. As Delta’s CFO noted, “Delta exhibited strong cost performance this quarter as merger synergies and productivity offset cost pressures in the business. Synergies have exceeded our expectations and will be a key factor as we strive to keep our non-fuel unit costs flat for the full year.”
Productivity-enhancing synergies are airline-speak for fees. Costs rose $317 million year-over-year, due to higher fuel costs and employee profit sharing. Fee revenues only partially offset that rise. Operating costs per available seat mile rose 2.4% over the same period last year
For the third quarter the company forecasts fuel price, including taxes and hedging, at $2.33/gallon, a penny more than the second quarter’s $2.32/gallon. Operating margins are predicted to be 10%-12%, compared with 10.4% in the second quarter. Costs, excluding fuel, are forecast to be flat and capacity is expected to be up.
All in all, next quarter doesn’t look like it’ll be a whole lot better than this quarter. That’s weighing on the share price even more. In the half hour it took to write this, shares lost another 1.3%.
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