Skies Brighten for Delta

No-moat

Total operating revenue in the quarter was down versus 2016, falling $103 million to $9.2 billion. Passenger revenue was flat year over year at $7.7 billion on the back of a 0.5% reduction in capacity, which translated into a 0.5% year-over-year increase in passenger revenue per available seat mile, or PRASM. This was the first year-over-year increase in PRASM since Nov 2015 and represents the third consecutive quarter of sequential improvement. However, Delta faced higher depreciation (up 11% year over year), increasing labor costs (7%), and fuel headwinds (up 26% year over year). As a result, unadjusted operating margins came in at 11.5%, down from 16.6% during the first quarter of 2016. Diluted EPS stood at $0.82 (adjusted $0.77) versus $1.21 (adjusted $1.32) in the first quarter of 2016.

Delta provided near-term guidance that exceeded our expectations. Management projects operating margins of 17% to 19% for the second quarter and expects second-quarter PRASM to continue to increase, forecasting 1% to 3% year-over-year PRASM growth. Disruptions caused by recent storms will knock about $125 million off pretax profit in the second quarter.

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