Delta Air Lines (NYSE:DAL) posted a disappointing Q2 earnings report last week. Delta did beat the average analyst EPS estimate, but only after having previously cut its unit revenue guidance. Furthermore, the company projected that mid-single-digit unit revenue declines will continue throughout the peak summer season.
Nevertheless, Delta Air Lines stock actually rose after the earnings report came out on Thursday. Here are five key points management made during Delta's earnings call that caused investors to look past the current weak revenue trends.
Expecting a trend change in September
We expect July and August monthly RASM [revenue per available seat mile] results to be weak. However, we're anticipating a marked improvement in our September monthly numbers.
-- Delta CEO Ed Bastian
Three months ago, Delta Air Lines executives expected the company's unit revenue declines to start moderating during the summer peak season. Instead, Delta exited the second quarter with unit revenue declining at a faster rate than it did during Q1.
Overall, Delta expects its Q3 unit revenue trajectory to be in line with its performance in the first half of the year. However, there will likely be a pronounced change in the middle of the quarter. In July and August, revenue per available seat mile (RASM) could fall at an even faster rate than the 4% to 5% declines seen recently. But capacity cuts that will go into effect in late August and early September should lead to much better unit revenue results in September.
Comfort+ revenue rising
Comfort+ paid load factor increased by 15 points to 46% as we began selling this product in the purchase path in mid-May. We now expect Comfort+ to generate nearly $300 million of upsell revenues in the second half of 2016, with further upside in 2017 as we begin the international rollout scheduled to be complete by the end of 2017.
-- Delta President Glenn Hauenstein
Delta's move to start selling extra-legroom Comfort+ seats as a separate fare (rather than as an upgrade to regular economy tickets) has been one of its most important revenue growth initiatives recently. The company expects this to generate $300 million of revenue in the second half of 2016, helping to offset the weak fare environment.
Delta started by making Comfort+ available as a fare for domestic routes, and it is gradually expanding it to international markets. This should drive significant growth in Comfort+ revenue over the next two years or so.
Reacting swiftly to Brexit
[W]e've decided to take an additional 6 points of capacity out of the U.K. for the winter... We've also been working closely with our partner, Virgin Atlantic, who will be making their own capacity changes. Combined, our overall U.K. capacity this winter will be down 2% to 4% compared to the prior year.
Several years ago, Delta acquired a 49% stake in British airline Virgin Atlantic and the two airlines formed a joint venture for flights between the U.S. and the U.K. This move dramatically increased Delta's exposure to the U.K. market, making it vulnerable to Brexit.
As a result, Delta Air Lines stock fell sharply following the British referendum decision to leave the EU. However, investors were happy to see that Delta is being proactive about the resulting economic dislocation, cutting its U.K. capacity by 6 percentage points for the winter season. This should help cushion Delta against the unit revenue pressure that Brexit is likely to cause.
Hedges are hurting in Japan -- for now
We expect to recognize a $5 million [yen] hedge loss in the back half of this year compared to a $90 million gain last year. $70 million of that headwind will occur in the September quarter alone.
In the Trans-Pacific market, Delta's sharp capacity reductions have already positively impacted its unit revenue trajectory. However, the company still faces currency-related headwinds there. In previous years, the problem has been the weakening yen. The yen has now started to strengthen against the dollar again, but Delta is missing out on currency hedging gains that it enjoyed in 2015.
As of last week, Delta expected to face a $95 million hedging-related headwind in Japan during the back half of the year. That said, the year-over-year impact will fall from $70 million in Q3 to $25 million in Q4. This will help Delta get closer to stabilizing its RASM in Q4.
Strong cost performance mitigates revenue weakness
We expect our non-fuel unit cost, including profit sharing, to be roughly flat again in the September quarter, and increase less than 2% for the full year.
-- Delta CFO Paul Jacobson
After a blip in Q1 -- when non-fuel unit costs increased 4.5% year over year -- Delta returned to its track record of excellent cost performance last quarter. Non-fuel unit costs decreased 0.1% year over year in Q2 and the company expects to achieve a similar performance this quarter.
By constantly focusing on efficiency and increasing the number of seats it fits on each plane, Delta has been able to offset its rising labor costs in recent years. This isn't a substitute for returning to unit revenue growth -- but at least it has made the recent string of revenue declines less painful.