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Stock Analyst Update

Skies Brighten for Delta

We've raised our fair value estimate on the no-moat airline.

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No-moat Delta Air Lines (DAL) reported first-quarter 2017 results and provided guidance for the second quarter. Given solid air traffic demand and Delta’s disciplined capacity expansion, we plan to slightly raise our operating margin projections for 2017 and 2018. The firm also raised $2 billion in unsecured debt during the quarter and used the proceeds to fund a $1.5 billion pension contribution. In anticipation of tax reform in the U.S., we plan to decrease our federal statutory tax rate to 25% from 35%. Higher margins, a lower pension liability, and lower taxes have led to a $10 increase in our fair value estimate.

Total operating revenue in the quarter was down versus 2016, falling $103 million to $9.2 billion. Passenger revenue was flat year over year at $7.7 billion on the back of a 0.5% reduction in capacity, which translated into a 0.5% year-over-year increase in passenger revenue per available seat mile, or PRASM. This was the first year-over-year increase in PRASM since Nov 2015 and represents the third consecutive quarter of sequential improvement. However, Delta faced higher depreciation (up 11% year over year), increasing labor costs (7%), and fuel headwinds (up 26% year over year). As a result, unadjusted operating margins came in at 11.5%, down from 16.6% during the first quarter of 2016. Diluted EPS stood at $0.82 (adjusted $0.77) versus $1.21 (adjusted $1.32) in the first quarter of 2016.

Delta provided near-term guidance that exceeded our expectations. Management projects operating margins of 17% to 19% for the second quarter and expects second-quarter PRASM to continue to increase, forecasting 1% to 3% year-over-year PRASM growth. Disruptions caused by recent storms will knock about $125 million off pretax profit in the second quarter.

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Chris Higgins does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.