Delta Air Lines (DAL) is indicated higher premarket after the company reported better than expected earnings and guided for improved second quarter results.
Delta preannounced first quarter passenger revenue per available seat mile (PRASM, or unit revenue) down 0.5% with an operating margin of 10-11% when the company reported March traffic last week. One month ago, the company cut PRASM guidance to flat from +0-2% growth. While February was disappointing, March PRASM grew 0.5%, the first positive unit revenue month for the company since November 2015.
First quarter adjusted earnings fell 42% year-over-year to $0.77/share as fuel costs were up 26%.
Much of the first quarter results were already known so the second quarter guidance was the most important aspect of this morning's report. Delta guided for second quarter PRASM up 1-3% with an operating margin of 17-19%. Investors are encouraged by the sequential improvement in unit revenue and operating margin trends.
Last week, severe weather in Atlanta caused significant disruptions to Delta's operations. The company cancelled ~4,000 flights as a result of the weather and the subsequent operational recovery. The company returned to normal operations on Sunday afternoon and had a 100% mainline completion factor yesterday. Delta currently estimates the storm will reduce its June quarter pre-tax income by $125 million.
Negative press around rival United (UAL) this week also points to the inherent difficult nature of the airline business.
Still, the overall fundamental picture for Delta and the sector remains largely positive despite higher labor and fuel costs. Unit revenue trends are positive amid capacity discipline. The sector has pricing power after a bout of consolidation in the sector following the financial crisis.
Meanwhile, DAL trades at just under ~5x EV/EBITDA, a slight discount to the group and much cheaper than other transportation or industrial stocks.