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Delta Air Lines, Inc. Follows Rivals and Raises Its Unit Revenue Guidance

By Adam Levine-Weinberg – Dec 15, 2017 at 6:05AM

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Delta Air Lines expects passenger revenue per available seat mile to increase by 4% this quarter, reaching the high end of its original guidance range.

A bizarre peak-season price war led to somewhat disappointing earnings results for the four largest U.S. airlines last quarter. However, the fourth quarter is shaping up to be much better.

Earlier this month, Southwest Airlines (LUV -1.28%) and United Continental (UAL -2.27%) boosted their Q4 unit revenue forecasts. Last week -- in conjunction with its investor day -- Delta Air Lines (DAL -0.80%) followed suit. This bodes well for airline investors heading into 2018.

A Delta Air Lines plane on the tarmac

Delta Air Lines recently increased its Q4 unit revenue guidance. Image source: Delta Air Lines.

Guidance rising across the industry

In the past two weeks, several airlines' November traffic updates have been accompanied by upward revisions to their unit revenue forecasts. Southwest Airlines now expects revenue per available seat mile (RASM) to rise 1%-2% this quarter, whereas its original guidance called for RASM to be "up slightly," to 1.5%. Meanwhile, United Continental increased its guidance range for passenger revenue per available seat mile (PRASM) by 1 percentage point, although it still expects PRASM to decline 0%-2% this quarter.

Delta Air Lines didn't update its unit revenue guidance when it reported its November traffic results. However, it was just waiting for its annual investor day. On Thursday, Delta revealed that it expects PRASM to rise by about 4% in the fourth quarter.

This would be at the high end of the 2%-4% guidance range that management provided in mid-October. RASM growth, which includes contributions from cargo and "other" revenue, will probably be at least 4.5%, as revenue from those sources is rising at a double-digit rate.

A rendering of an American Airlines plane

American Airlines is the only airline matching Delta's unit revenue growth. Image source: American Airlines.

Following the Delta guidance revision, American Airlines (AAL -0.23%) is the only one of the top four carriers that hasn't altered its Q4 unit revenue outlook. That's not surprising, though. American Airlines has stopped publishing monthly traffic reports and guidance updates entirely, as management wants investors to focus on long-term trends.

Delta is leading the way

Delta's current unit revenue trend is significantly better than those of Southwest and United. Among the top four U.S. airlines, only American is in the same league. American Airlines' guidance, issued in late October, called for Q4 RASM growth of 2.5%-4.5%. Given that the industry unit revenue environment seems to have improved significantly since then, it will probably reach the high end of that range.

Delta Air Lines President Glen Hauenstein noted during the investor day presentation that Delta is seeing strong unit revenue trends throughout its route network. In fact, this quarter, unit revenue is set to increase in every geographical region -- domestic, Atlantic, Pacific, and Latin America -- for the first time in five years.

Hauenstein expects that momentum to continue in 2018, with PRASM up year over year in each quarter. For the full year, Delta's guidance implies PRASM growth of 2%-3%.

It's about time

Investors should be very pleased about the rising unit revenue forecasts at Delta, Southwest, and United -- not to mention several of their smaller competitors. This unit revenue momentum suggests that airlines are reacting to the recent uptick in fuel costs by reining in discounting.

Higher fuel costs could be a 2-3 percentage point margin headwind for many airlines in 2018. To offset that cost increase -- as well as other inflationary pressures -- it's absolutely critical for airlines to generate steadier unit revenue gains in 2018 than what they've produced this year.

There's still plenty of cause for worry among United Continental shareholders. Even after its guidance update, the carrier still expects RASM to decline this quarter. By contrast, the outlook for Delta Air Lines is quite favorable. Its growing unit revenue momentum across the globe puts the company in good position to return to a double-digit earnings-per-share growth rate in 2018.

Adam Levine-Weinberg owns shares of Delta Air Lines. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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