Delta Air Lines ( DAL ) had in the previous quarter reported strong earnings growth, and projected this momentum to continue well into the second half of the year. However, it looks as though things didn’t go exactly as planned. The adjusted earnings per share fell by a sizeable margin of 7.6% in Q3. A lethal combination of increased pricing pressures and flight cancellations due to the hurricanes led to the company falling short of its previously expected target. That said, management was quick to react to the problem, steering the company back on track to return to strong earnings growth in early 2018.
- The company managed to increase net revenues by a significant 5.5%, marking the highest reported growth in several years. However, despite the stellar top-line performance, costs came in higher than expected to hurt the bottom line significantly. A sudden uptick in oil prices caused a $0.10 per gallon rise in fuel costs, while Hurricane Irma forced the airline to cancel thousands of flights, which hurt the operating income by about $120 million.
- In the previous earnings call, management had forecast a near 18-20% operating margin in Q3, however, the figure ultimately landed at around 16%. That said, in the future, non-fuel cost pressures are expected to recede as the company begins to benefit from its latest round of fleet renewal. Additionally, if the airline’s growth initiatives keep RASM rising at a steady pace, we could see the company return to earnings growth next year.
- It is expected that the airline’s fourth-quarter will see a 2-4% year-over-year increase in passenger unit revenue. For the full year, CASM is expected to jump 2-3% above the current guidance for the year on the back of adverse weather conditions, and the accelerated depreciation from incremental fleet decisions, including moving up narrow body retirements. Combined, these items created over a point of incremental pressure for 2017.
- Next year, the company is on track to double the pace at which it replaces older aircraft with more efficient fleet types. The newer technology is expected to improve fuel efficiencies and provide notable cost benefits, thereby benefiting the bottom line significantly.
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