Airline behemoth Delta Air Lines Inc. (DAL - Analyst Report) reported third-quarter 2014 adjusted earnings of $1.20 per share, edging past the Zacks Consensus Estimate of $1.18. Earnings, however, came in lower than the year-ago adjusted number of $1.41 per share due to higher operating expenses.

Operating revenues increased 7% year over year to $11.2 billion in the reported quarter, in line with the Zacks Consensus Estimate. On a year-over-year basis, Passenger revenues grew 6%, Cargo revenues were up 7% and Other revenues improved 15%.

Operating Statistics

Airline traffic, measured in revenue passenger miles, went up 4% year over year. Capacity or available seat miles increased 3.2% year over year, while load factor (percentage of seats filled with passengers) moved up 40 basis points year over year to 86.4%. Passenger revenue per available seat mile (PRASM) or unit revenue rose 2% year over year, along with a 2% increase in yield.

Operating Expenses

Total operating expenses crept up 16% year over year to $10.3 billion, primarily due to rise in profit sharing expenses and higher volume and revenue related expenses. Consolidated unit cost or cost per available seat mile (CASM), excluding fuel cost, profit sharing and special items, was 0.3% up in the third quarter owing to profit sharing expenses and cost of restructuring and other items.

Liquidity

As of Sep 30, 2014, the company had $4.4 billion in cash and short-term investments and net debt of $7.4 billion. The company generated adjusted operating cash flow of $1.3 billion in the third quarter while capital expenditures were $411.0 million. Free cash flow at the end of the September quarter stood at $910 million.

Dividend and Share Repurchase

For the third quarter, the carrier has returned $325 million to shareholders including $75 million in cash dividends and $250 million in share repurchases.

Guidance for the Fourth Quarter 2014

The company expects non-operating expenses to be incurred in the range $175–$200 million while profit sharing expenses are forecasted around $200–$250 million.  

Delta expects operating margin in the range of 10–12% and consolidated unit cost, excluding fuel and profit sharing, could vary between nil to 2% up year over year in the fourth quarter.

The estimated fuel price, including taxes and hedges, is approximately $2.69 to $2.74 per gallon. System capacity is expected around 3%.  

Our Take

We believe Delta is expected to generate higher revenues than last year on a strong domestic market, capacity discipline, route expansion, cost control measures and customer-focused initiatives. Further, Delta is reaping the benefits of its tie up with Virgin Atlantic as it is picking up on the lucrative New York-London travel route.

Delta currently carries a Zacks Rank #3 (Hold).

Other Stocks

Republic Airways Holdings Inc. (RJET - Snapshot Report), United Continental Holdings, Inc. (UAL - Analyst Report) and Alaska Air Group, Inc. (ALK - Snapshot Report) are other stocks, which can be considered in this sector. While Republic Airways Holdings and United Continental Holdings has a Zacks Rank #1 (Strong Buy), Alaska Air Group has a Zacks Rank #2 (Buy).

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