"Delta Air Lines (NYSE: DAL ) , this is the tower, you are cleared for takeoff."
The nation's second-largest domestic carrier in capacity reported estimate-topping results for the third-quarter before the opening bell today. For the quarter, Delta Air Lines delivered a 6% increase in aggregate revenue to $10.49 billion as GAAP diluted EPS improved 29% to $1.59 from the year-ago period. The company also generated $627 million in free cash flow, which helped it achieve its 2013 target of less than $10 billion in net debt -- it ended the quarter with net debt of $9.9 billion.
There were three primary factors that led Delta's revenue and profitability higher in the third quarter: domestic growth, lower fuel costs, and tight cost controls.
Without question, Delta's domestic operations were its biggest quarterly boost, with a 7.7% increase in passenger revenue per available seat mile (PRASM) and an 8.9% jump in yield on just a 2.7% jump in seat capacity. This would signal that Delta's pricing power and load factors were solid for the quarter. Delta's cross-Atlantic market did well also, with PRASM up 5.6%. The lone weak spot was Delta's Pacific operations, which saw PRASM fall 4.2%.
Fuel also played a big role in Delta's strong growth with adjusted fuel costs -- including a $3 million profit from its Trainer refinery and favorable fuel hedges – pushing below $3/gallon to $2.97.
Finally, Delta's fuel and profit-sharing-excluded costs grew by just 1.1% during the quarter, signaling minimal wage and maintenance price increases.
Looking ahead, Delta is forecasting fourth-quarter operating margins of 7%-9%, and a slight rise in fuel costs to $3.03-$3.08 per gallon with domestic costs rising by 1%-3%. Keep in mind that the third quarter is often the airline industry's best because it includes the lucrative vacation months while the fourth quarter this year will include results during the government shutdown.
Lastly, Delta also announced that it has been given approval by the U.S. Department of Transportation to move forward with its cross-Atlantic joint venture with Virgin Atlantic Airways, thus deepening an existing relationship between the two companies and potentially giving consumers more options.