Hamfighter
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Delta Looking Strong Over The Long Haul
Posted: May 03, 2011 09:52 AM by Ryan C. Fuhrmann
Airline operator Delta Air Lines (NYSE:DAL) reported a first quarter loss on Tuesday due to a jump in fuel costs. Sales were also hit by severe winter weather and the natural disasters in Japan, but still rose in the double digits. Investors remain rightfully worried about near-term fuel costs, but several factors suggest Delta is entering a period of consistent and sustainable profit generation. TUTORIAL: Mergers And Acquisitions 101
First Quarter Recap
Revenue rose 13% to $7.7 billion, as passenger and cargo sales increased in the double digits and accounted for the vast majority of the top line. Management stated that passenger trends would have been even stronger had it not been for severe winter weather and the natural disasters in Japan.
Operating expense growth outpaced the sales improvement, rising 16% to $7.8 billion. The primary culprit was fuel costs, which jumped 29% to $2.2 billion. Costs related to contracting flights to other airlines and maintenance costs also rose sharply. As a result, operating loss was over $90 million after $68 million in positive profits during last year's first quarter.
Interest expense fell 10% but was still hefty at $221 million. This pushed the net loss further into the red at $318 million, or 38 cents per diluted share.
Outlook
For the full year, analyst project sales will grow 8% and exceed $34 billion. Earnings are currently projected at $1.22 per share, or up approximately 66% from 2010 levels.
Bottom Line
Despite the income state loss, Delta said it generated $452 million in free cash flow, or 54 cents per diluted share. And for all of 2010, it generated just over $1.80 per diluted share in free cash flow. Rising fuel costs are the current concern, but management has stated it will be increasing fares, flight surcharges, and reining in capacity to better control costs.
With a share price hovering around $10 per share, Delta trades at single-digit earnings and free cash flow multiples. Debt levels are still lofty at $14.5 billion but management has ambitions to pay it down to closer to $10 billion within a few years with excess cash flow.
Investors remain skeptical about the going concern value of airlines and are pricing them as if they will never generate meaningful returns for shareholders. Yet Delta's merger with Northwest and United's merger with Continental to create United Continental (NYSE:UAL) have created two giant carriers that were cash-flow positive in 2010 and likely will remain so as the economy continues to improve. (For related reading, see The Merger - What To Do When Companies Converge.)
Southwest (NYSE:LUV) also merged with AirTran to further rationalize industry capacity and there could be further deals, such as a merger between American Airlines parent AMR (NYSE:AMR) and U.S. Airways (NYSE:LCC). This combined with an improving economy and new forms of revenue in the form of baggage, seat and boarding priority, and charges for food, should allow the larger players, such as Delta, to offset rising fuel costs and consistently generate profits. If this happens, investors should reward the industry with higher profit multiples.
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Long quote...sorry about that.
Nice to see some overall positive news.
So, two big problems: Cost of fuel and "contracting flights to other airlines." If only we had some control over one of those "culprits."
*Hint* It isn't cost of fuel.
