Bloomberg News

Airlines Rally as Delta Joins US Airways in Beating Views

July 25, 2012

Delta Joins US Airways Beating Profit Estimates on Higher Fares

Delta Air Lines Inc. rose 4 percent to $9.70 at 8:58 a.m. in New York before regular trading. Photographer: David Paul Morris/Bloomberg

US Airways Group Inc. and Delta Air Lines Inc. (DAL:US) led an index of U.S. carriers toward its first gain in more than a week as higher fares helped the companies beat analysts’ second-quarter profit estimates.

Delta rose 3 percent to $9.61 at 12:58 p.m. in New York, while US Airways was up 0.6 percent to $11.66, after climbing as much as 7.8 percent. Those moves fueled a 0.4 percent gain in the 10-member Bloomberg U.S. Airlines Index, which has fallen for the past six trading days.

Charging more for tickets buoyed the airlines’ results in a quarter when U.S. job growth slowed amid concern that the recovery was losing steam. Delta, the world’s second-biggest carrier, posted a 0.3 percent gain in traffic even as it shrank seating capacity to help maintain pricing power.

“We have to give credit to constant cost control by the carriers,” Ray Neidl, an analyst with New York-based Maxim Group LLC, said in an interview. “That’s very important. Longer term, especially if we are headed into a recession, cost control is the key and they’ve been doing a good job on that.”

Delta’s earnings excluding some costs were $586 million, or 69 cents a share, while US Airways said its adjusted profit was $321 million, or $1.61 a share. JetBlue Airways Corp. (JBLU:US) had net income of $52 million, or 16 cents a share, matching analysts’ estimates.

Southwest Airlines Co. (LUV:US) reported record profit and revenue on July 19 and AMR Corp. (AAMRQ:US)’s American Airlines had a profit excluding costs linked to its bankruptcy restructuring. US Airways is trying to engineer a merger with larger competitor American.

‘Very Strong’

“For this quarter and looking ahead to the third quarter, it looks like revenue trends are very strong,” said Neidl, who recommends buying Delta and US Airways and holding JetBlue. Analysts will be looking for airlines’ comments about demand beyond the U.S. Labor Day holiday in September, the end of the historically busy summer travel season, he said.

Bookings this quarter indicate continued strong travel demand, Delta and JetBlue executives said on conference calls today with analysts and investors.

Delta’s 8.5 percent gain in passenger revenue from each seat flown a mile helped blunt a 24 percent jump in spending for fuel, its largest expense. A slide in fuel prices left the Atlanta-based carrier paying more than spot-market rates because of hedging contracts that locked in costs in advance.

Including the effect of those fuel contracts, Delta reported a net loss of $168 million, or 20 cents a share. That compared with net income a year earlier of $198 million, or 23 cents. Sales climbed 6 percent to $9.73 billion.

Delta’s Hedging

“We remain committed to our hedging strategy and we view our hedge portfolio as protection from volatility in the fuel markets,” Chief Financial Officer Paul Jacobson said on a conference call. “We don’t expect our hedge book to be a profit center, but as a means to better manage our business by reducing the volatility of our largest expense.”

Delta’s adjusted profit topped the 68-cent average of 17 analysts’ estimates (DAL:US) on that basis compiled by Bloomberg. Profit on that basis a year earlier was $366 million, or 43 cents a share. For the third quarter, Delta said it would have an operating margin in a range of 10 percent to 12 percent.

“To achieve that level of profitability in the current uncertain economic backdrop implies that Delta is doing a superb job of maintaining equilibrium between its capacity and market demand,” Michael Linenberg, a Deutsche Bank analyst in New York, said in a note. He recommends buying the shares.

US Airways

Chief Executive Officer Doug Parker has been lobbying American’s creditors and bondholders to build support for a merger, after the fifth-largest airline signed tentative labor agreements with American’s unions in April.

US Airways’ profit excluding some special items exceeded the average $1.55 estimate on that basis among 15 analysts surveyed by Bloomberg. Higher fares helped boost sales 7.2 percent to $3.75 billion. Revenue for each seat flown a mile rose 6.1 percent from a year earlier.

A policy of not using hedging contracts allowed Tempe, Arizona-based US Airways to benefit from a 5.7 percent drop in spot jet-fuel prices from a year earlier. Total spending for fuel, its largest cost, fell 4.4 percent. Higher fares helped boost sales 7.2 percent to $3.75 billion.

The quarter included $15 million in one-time charges related to auction-rate securities arbitration, early debt payments and new labor contracts at a wholly owned regional carrier and a gain from a vendor settlement.

Net income was $306 million, or $1.54 a share, more than tripling the year-earlier total of $92 million, or 49 cents.

JetBlue Airways

JetBlue’s profit doubled from $25 million, or 8 cents, a year ago. Revenue climbed 11 percent to $1.28 billion, a second- quarter record, as the airline focused growth in Boston and the Caribbean, helping attract both leisure and higher-fare business travelers, CEO Dave Barger said in a statement.

Passenger traffic jumped 11 percent as yields, or average fare per mile, increased 1.3 percent from a year earlier, JetBlue said. The New York-based airline posted a 6.1 percent increase in revenue from each passenger.

JetBlue also reported hedging-related costs, with a $4 million mark-to-market accounting charge and a $1 million loss on fuel hedges that settled during the quarter. The airline paid $3.22 a gallon, 3 percent less than a year earlier. Total fuel expense increased 2.4 percent to $450 million.

Excluding fuel, third quarter unit costs will rise in a range of 4.5 percent to 6.5 percent over a year ago, primarily on higher maintenance and profit-sharing expense, the airline said.

United Continental Holdings Inc. (UAL:US), the world’s biggest airline, is set to announce earnings tomorrow.

To contact the reporter on this story: Mary Schlangenstein in Dallas at maryc.s@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net


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Companies Mentioned

  • DAL
    (Delta Air Lines Inc)
    • $40.93 USD
    • 1.35
    • 3.3%
  • JBLU
    (JetBlue Airways Corp)
    • $12.64 USD
    • 0.41
    • 3.24%
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