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Clearer Skies for Airlines

Bellwether Delta's results are encouraging, and we think airline stocks could be poised for a strong second half in 2018 due to falling fuel prices.

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Delta Air Lines Inc


Operating revenue in the quarter stood at $10.2 billion, increasing 8% compared with 2016 on the back of strong mainline passenger revenue growth of 8% and other revenue growth, which includes ancillary sales, of 18%. Delta, which was guiding to operating margins of 11%-13% this quarter, landed at 11.6%. Diluted EPS came in at $0.80, which includes a revaluation charge on deferred tax assets and liabilities. Operating cash flow grew nearly $800 million to $1.9 billion due to better working capital management. For full-year 2017, operating revenue grew 4% thanks to 4% passenger revenue growth and 10% other revenue growth. Operating margins contracted 270 basis points in 2017 to 14.8% primarily due to higher fuel and labor cost pressures coupled with modest unit revenue growth. Full-year EPS came in at $4.95 (adjusted $4.93) down 14.5% versus 2016.

Management gave a midpoint pretax margin forecast of 7% for the first quarter, which represents a 300-basis-point contraction compared with 2017. Total unit revenue growth was pegged at a midpoint of 3.5% for the first quarter. The March quarter should be peak unit cost growth for Delta (forecast at 3% year over year) and over the rest of 2018, management aims to keep unit costs excluding fuel growing at 0%-2%. We also expect accelerating capacity growth across the industry to materialize, as evidenced by Delta's plans to grow capacity 3% during the first quarter.

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About the Author

Chris Higgins

Senior Equity Analyst
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Chris Higgins, CFA, is a senior equity analyst for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers aerospace and defense companies, airports, and airlines.

Before joining Morningstar in 2015, Higgins spent eight years working for Airbus Group in both the United States and Europe. While at Airbus Group, he held a variety of positions, ranging from corporate development to investor relations.

Higgins began career in strategy consulting, where he consulted leading U.S. and European aerospace and defense prime contractors. During his time in consulting, he led teams that solved business challenges ranging from merger and acquisition decisions to new product launches.

Higgins holds a bachelor’s degree in economics from Rhodes College, where he graduated as a member of Phi Beta Kappa, and a master’s degree in finance from The Henley Business School in the United Kingdom. He also holds the Chartered Financial Analyst® designation.

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