Delta Air Lines' (NYSE:DAL) fiscal third-quarter earnings report, issued Thursday, revealed that the airline continues to capitalize on brisk passenger demand as it heads into the year-end travel season. Shares of the legacy carrier were down roughly 3% at midday, however, as shareholders panned unit cost escalation both in the current quarter and in projections for the fiscal fourth quarter of 2019. Note that all comparative numbers in the discussion that follows refer to those of the prior-year quarter.
Delta's headline numbers
|Metric||Q3 2019||Q3 2018||Change|
|Revenue||$12.56 billion||$11.95 billion||5.1%|
|Net income||$1.50 billion||$1.32 billion||13.6%|
|Diluted earnings per share||$2.31||$1.92||20.3%|
Here are the salient details from the last three months:
- Total revenue per available seat mile, or TRASM, increased by 2.5% to 16.57 cents.
- Business and premium product seating paced overall revenue results, as this category expanded by 9% to $4 billion. Main cabin revenue inched up by 3% to $6 billion. Loyalty program revenue and travel services increased by 8% and 15%, respectively, and together comprised $1.4 billion in revenue.
- Operating cost per available seat mile (CASM) dipped by 2.1% to 13.85 cents; however, this was due primarily to lower fuel prices. CASM ex-fuel increased by 2.4% to 9.84 cents.
- The carrier saw passenger revenue growth in its U.S., Atlantic, and Latin geographical regions. Domestic revenue was particularly strong, rising nearly 8% due to a 3.2% advance in passenger unit revenue and a 4.5% increase in capacity.
- Passenger revenue declined by 4.6% in the airline's fourth geographical region of the Pacific on a 7.6% drop in passenger unit revenue and a 3.3% rise in capacity.
- Operating margin jumped by roughly 270 basis points, to 16.5%. The company benefited from the higher sales level and a 10% decrease in fuel costs. Delta notched an average adjusted fuel cost per gallon of $1.96 during the quarter. These factors were somewhat offset by a 5% increase in labor costs.
- The carrier generated $1.4 billion of free cash flow during the quarter. It also repurchased $208 million worth of its own shares over the last three months while declaring its 26th consecutive quarterly dividend. Delta shares now yield approximately 2.8% on an annualized basis.
In Delta's earnings press release, CFO Paul Jacobson commented on both year-to-date costs and the benefits of the carrier's cash-generation prowess:
We are making important investments in our people and facilities to drive sustainable growth in our business. Unit cost performance in 2019 of approximately two percent is consistent with our long-term target. ... With $7.5 billion in operating cash flow year-to-date, our strong cash generation sets Delta apart in the industry, and allows us to maintain consistent reinvestment in our business, an investment grade balance sheet and substantial cash returns to shareholders.
The simple inference from Jacobson's commentary is that investors should focus on longer-term cash returns rather than on often-volatile quarterly fluctuations in unit costs.
Delta's fourth-quarter outlook
For the final quarter of the fiscal year, Delta is expecting earnings per share of between $1.20 and $1.50. The company anticipates average fuel price per gallon, inclusive of taxes and its refinery operations, of $2.00 to $2.20. Management believes adjusted TRASM will advance by 0% to 2%, while CASM ex-fuel is slated to rise by 4% to 5%. Delta plans an increase in system capacity of roughly 4.5% in the fourth quarter.
While shareholders were disappointed with the projected year-end rise in unit costs, CEO Ed Bastian noted in an interview with Reuters Thursday morning that the airline is currently hiring pilots, staff, and flight attendants to meet strong demand partially due to rival carriers' grounding of Boeing's 737 MAX aircraft. Thus, climbing unit costs shouldn't necessarily be viewed as a failure of execution; rather, the escalation is in service of additional incremental revenue, which will deliver higher operating income, though at a lower margin, in the fourth quarter.
Today's slight sell-off pushes Delta stock further into value territory. As investors keep airlines at arms' length due to the possibility of a global economic slowdown, trading multiples appear cheaper by the day. Despite Delta's relatively solid balance sheet, rich cash generation, and a rising operating margin trend, its shares trade at just 7.5 times forward earnings. Value-oriented investors should keep the venerable carrier on their watch screens in the event of a market retracement in the coming quarters.