Delta Air Lines Is Bullish Despite So-So February

Delta Air Lines’ financial results in February “were a little choppier than we expected,” leading the airline to reduce its estimated first quarter operating margin, but the company expects business to improve, its CFO told investment analysts on Monday.

Delta’s Paul Jacobson said the airline expects its operating margin to be between 10 percent and 11 percent, rather than the 11 to 13 percent it forecasted earlier. The airline blamed higher than expected costs, including from fuel prices, and said unit revenues did not increase by as much as expected.

“The good news is that we do expect this to be the trough for the full year in terms of year-over-year margin performance,” Jacobson said at the Raymond James 38th Annual Institutional Investors Conference in Orlando, Fla.

Delta also revised its guide for first quarter revenue per available seat mile, or RASM, a closely watched metric that gauges how much money an airline makes for each seat it flies one mile. Most U.S. airlines have been reporting lower RASM for several consecutive quarters, as average ticket prices have fallen amid new capacity and fierce competition. But earlier this year, Delta said it expected to reverse that trend this year, predicting a first quarter RASM increase between 0 and 2 percent.

On Monday, Jacobson said Delta’s guidance is still accurate, but warned analysts that it probably will be closer to the low end of the range.

“We still believe that we are on that trajectory,” he said. “The pace of change hasn’t deteriorated. It just hasn’t improved as much as we thought or expected that it might.”

In a research note published March 2, after Delta indicated February was softer than expected, Hunter Keay of Wolfe Research predicted the airline would change its guidance. He called it a non-issue.

“In the grand scheme of things, fine,” Keay said. “Obviously not super news and we certainly share some disappointment but, really… who cares? Has anything really changed? Eh. We’re over it.”

Domestic ‘capacity discipline’ returns

Overall U.S. airline revenue per available seat mile fell in 2016, as carriers added a significant capacity in the domestic market. But this year, Jacobson said, more airlines are practicing “capacity discipline,” which should lead to better pricing.

Delta said Monday that industrywide domestic industry capacity will increase 3 percent this year, a number that should closely track GDP. Last year, Delta said, U.S. airlines increased capacity 4.5 percent, year-over-year, on domestic routes.

Already, Jacobson said, revenues are improving. Last summer, he said, only about 20 percent of Delta’s domestic markets showed year-over-year unit revenue gains. Now, about half of its domestic markets are showing year-over-year increases.

“Domestically we see capacity growth across the industry moderating off of last year’s growth,” Jacobson said. “Strong business demand continues, which, with that capacity discipline, we believe is going to translate into continued improvement year-over-year on yields.”

Some International markets improving

Delta is also seeing improvement in Latin America, a region many carriers have found challenging the past three years, because of economic problems in many countries, including Brazil and Argentina.

Jacobson called the region “the shining star” in the airline’s network.

“We are achieving positive RASM in all segments of the region, led in particular by the Brazilian recovery,” he said. “We expect those trends to continue through 2017.”