Investing in Delta? Buckle Up for Turbulence

No-moat

Operating revenue in the quarter was basically flat versus 2015, falling $44 million. However, passenger unit revenue declined 1.9% during the quarter on the back of a 0.9% increase in capacity. Diluted earnings per share came in at $0.84 (adjusted $0.82), versus $1.25 (adjusted $1.18) in the fourth quarter of 2015, as expected. Delta faced labor cost headwinds from the labor agreement signed in December, which included a retroactive provision to Jan. 1, 2016. For full-year 2016, passenger revenue fell 2.9% and passenger revenue per available seat mile dropped nearly 5%. Adjusted 2016 net income came in at just above $4 billion, in line with our estimates, but EPS beat our forecast as a result of continued share buybacks.

Management stated in its release that it sees unit revenue turning positive and expects flat to 2% growth in this metric during the first quarter of 2017. Based on December traffic results, we think Delta will achieve positive unit revenue in the first quarter. Management also pledged to keep capacity on a leash and expects first-quarter available seat miles to decline 1% year over year. Despite this capacity constraint and improved outlook for unit revenue, we believe full-year 2017 operating margins will contract roughly 300 basis points in 2017 versus 2016, on the back of higher fuel and labor costs (cost per available seat mile, excluding fuel but including profit sharing, will be up by around 6% in the first quarter), combined with weak unit revenue growth during the first half of the year.

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