Delta Air Lines (NYSE: DAL) achieved its best unit revenue growth in years during the fourth quarter of 2017, as revenue per available seat mile (RASM) rose 4.4%. On Thursday, the carrier confirmed that its unit revenue growth accelerated in the first few months of 2018 — and is on track to stay strong in the second quarter.
Delta’s revenue momentum comes at a critical time for the company. Profitability has been under pressure for more than a year due to rising fuel and labor costs. A recent uptick in oil prices suggests that cost headwinds could continue for the foreseeable future. Fortunately, Delta Air Lines appears to be well positioned to cope with rising costs.
Delta Air Lines posted strong unit revenue growth last quarter. Image source: Delta Air Lines.
Delta earnings by the numbers
Last quarter, Delta Air Lines nearly achieved double-digit revenue growth, thanks to a 5% RASM increase, along with 2.7% capacity growth. (Rising oil prices also contributed to Delta’s revenue increase, as the carrier owns an oil refinery; excluding refinery sales, revenue rose about 7.9% year over year.)
Despite the carrier’s stellar unit revenue growth, its pre-tax margin fell last quarter, leading to a double-digit pre-tax profit decline. Delta paid $2.01 per gallon for jet fuel, up 18% year over year. Meanwhile, non-fuel unit costs rose 3.9%, due to wage increases implemented in April 2017, accelerated depreciation for aircraft that Delta plans to retire soon, and an uptick in costs related to winter storms.
Nevertheless, Delta Air Lines was able to hold earnings per share roughly flat at $0.74 — near the high end of its recent guidance range — thanks to the recent reduction of the federal corporate tax rate. The following table provides further details on Delta’s first-quarter financial performance.
International markets take the lead
In the second half of 2017, Delta began to report stronger unit revenue growth on international routes than in the domestic market. This represented a big change following several years of domestic outperformance.
Last quarter, the gap between Delta’s domestic unit revenue growth and international unit revenue growth widened further. Passenger revenue per available seat mile rose 3.9% in the trans-Pacific market, 5.7% on routes to Latin America, and a stunning 11.5% for transatlantic routes, compared to a modest 2.6% increase in the domestic market.
A rise in the value of the euro and the British pound relative to the dollar helped drive Delta’s particularly strong transatlantic unit revenue performance. Those tailwinds will continue in the second quarter before potentially moderating later this year.
The second-quarter outlook looks good
Delta Air Lines’ initial second-quarter guidance looks solid as well. RASM is expected to rise 3%-5%, which would be an impressive result, given that Delta will face a tougher year-over-year revenue comparison this quarter.
On the flip side, fuel costs are set to exert even more pressure on profitability in the second quarter. And while non-fuel cost creep is finally moderating, Delta Air Lines still projects that adjusted non-fuel unit costs will rise 1%-3% year over year. As a result, management estimates that the company’s adjusted pre-tax margin will fall to 14%-16% from 17.2% a year ago.
The good news is that the benefit from a lower tax rate will be highest in the seasonally strong second and third quarters. As a result, Delta is on pace to post double-digit EPS growth next quarter, in line with its full-year goal. If recent revenue and cost trends stay intact, double-digit earnings growth should continue into the second half of 2018.