Delta (DAL) reported poor second-quarter results Wednesday that revealed the major carrier’s continued battle with high jet fuel costs. Total operating revenue expanded 12% thanks to double-digit enhancement in yield (pricing), but operating income plummeted roughly 44% from the same period a year ago as it faced a fuel bill that was more than $1 billion higher. The company plans to cut its December quarter capacity (seats) by as much as 4%-5% on a year-over-year basis, an extra percentage point greater than it originally planned. We view this as necessary given the global economic environment and general weakness in load factor (capacity utilization) – which fell 1.3 percentage points during the period. We believe Delta is one of the better-positioned major carriers due to its cost structure and even greater weakness of its peers – one in particular – and we’re content with the carrier’s free cash flow generation in the quarter, which hit about $700 million. In all, we continue to believe that investors should steer clear of airline stocks and highlight our best candidates for a bet on declining airline equity values in our Best Ideas Newsletter portfolio, which continues to outperform the market benchmark. We plan to update subscribers of how the cost structure of the major airlines shook out in the second quarter with our next update.
Exclusive Analysis for the Discerning Investor