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Morningstar | Operational Reliability and Strained Peer Capacity Drive Strong Second-Quarter Results for Delta

Delta registered solid second-quarter results on higher-than-expected passenger demand, excellent operational performance, and strained domestic capacity from peers. Delta matched fervent passenger demand with impeccable operational performance, reaching a completion factor of 99.9% and a 30% first-half improvement in cancelations. Delta’s operational reliability during the second quarter was rewarded with record load factors, ab ove 88%, and solid unit revenue growth. On capacity growth of almost 5%, Delta’s top  line improved 6.5% (before refinery sales adjustments). This translated to adjusted pretax margins at the top end of management’s 16% guided range. Delta highlighted a shift in holiday seasons, business travel remaining resilient, and MAX related capacity constraints at rival airlines. While third-quarter results won’t benefit from a holiday season boost, business travel demand should hold steady and peer capacity growth will remain challenged. Accordingly, Delta should register solid third-quarter results, but we won't raise our $67 fair value estimate or change our long-term outlook.

Compared with the June quarter last year, adjusted unit revenue finished materially higher, up about 4%, versus the same quarter last year, even though capacity growth accelerated. Delta will likely meet its top-line growth forecast for 2019, while realizing full-year capacity growth ahead of initial expectations (~3%).

Total unit costs were manageable during the second quarter. Aircraft fuel costs declined 2% with Brent oil prices trending lower than the prior year. Non-fuel unit costs remained within management’s 1%-2% growth range at 1.4%. The airline is on pace to keep 2019 non-fuel unit cost inflation around 1%. For the third quarter, Delta plans to log unit cost (excluding fuel costs) growth between 1%-2%, with adjusted pretax margins near the second quarter’s 16%. We model full-year adjusted pretax margins around 12.5%, which marks a 1 point improvement over 2018.

Healthy capacity growth, up around 5% systemwide, contributed to Delta’s 8% passenger revenue increase and passenger yields improved considerably compared with the second quarter last year. Delta captured passenger yield growth of 1.5% against the same period last year, besting last quarter’s year over year growth below 1%. Delta’s cargo business remains challenged, with top-line growth down almost 17%. Still, adjusted total revenue per available seat mile finished the June quarter improved by 1.5% year over year. On the heels of robust demand in Delta’s network, premium product and loyalty program revenue remained lofted. Delta logged double-digit premium product and business cabin growth, above 10%, while loyalty program revenue rose 35% on a new American Express agreement.

Domestic and Latin markets should maintain strong performance heading into the next quarter. Assuming MAX aircraft remain out of service through the end of the quarter, Delta will accrue benefits in domestic, transborder, and Latin American markets. Management pegged strength in Brazilian and Mexican markets as growth drivers for Latin outperformance in the coming quarter. Also, limited partner capacity on transborder routes from suspended MAX capacity will deliver yield benefits as Delta relieves strained joint venture partners in tight transborder markets.

Free cash flow almost reached $2 billion in the quarter, and Delta raised its dividend for the sixth consecutive year, though less than the 18% growth we had pegged for 2019. The dividend was raised to $0.40 in the second quarter from $0.35. Delta is still on pace to reach our share buyback pace of $2.3 billion after buying back $268 million worth of shares during the quarter.