Mega airline carrier, Delta Air Lines Inc. (DAL) has announced that it expects a massive surge in its profits this year. The company estimates its pre-tax profits, excluding special items, to shore up 70% year over year to $2.6 billion in 2013. Further, it also foresees a decline in its debt position to $9.6 billion in 2013 from $11.7 billion in 2012.
The carrier expects revenues of $40 billion in 2014. We believe the current optimism surrounding the airline industry is also reflecting on the individual performance of airline companies, supporting their financials. Recovery in operational performance and improved leverage ratio would not only expand margins for Delta but also enable it to expand in new markets despite a subdued macro economy.
On a broader level, airline industry profits would be around $11.7 billion for 2013, with 3.12 billion passengers in total as per The International Air Transport Association (IATA). Net profit margin is expected at 1.65%, down from 1.8% estimated previously. Profitability is expected to increase to $16.4 billion in 2014 backed by a passenger count of 3.30 billion. Net profit margin is expected to grow 2.2% in 2014.
Despite a soft air travel demand for the rest of the year owing to weakness in certain emerging economies, Delta can to look forward to consistent economic recovery and improved business and consumer confidence, which are likely to support its year-end results.
Further, rating firm, Moody’s Investors Service recently upgraded Delta’s outlook from stable to positive on margin growth and improvement of leverage position in 2013. Delta lowered its net debt to $9.9 billion at the end of the third quarter, achieving the $10 billion debt reduction target. Further, the rating agency expects Delta’s bottom line to improve modestly in 2014 despite slower demand due to macroeconomic softness and a weak Japanese Yen.These lead to our positive sentiment on the company.
We expect Delta to remain profitable as it continues to reap benefits from the investments made to improve operating efficiencies and customer experience. This year, the company is expected to generate higher revenues than last year based on better service offering, capacity discipline, cost control measures and customer-focused initiatives. These trends are expected to result in 4% to 6% year-over-year improvement in unit revenues, with margin expansion of 7% to 9% in the fourth quarter.
Delta Air Lines, which operates with other carriers like United Continental Holdings, Inc. (UAL), JetBlue Airways Corporation (JBLU) and Southwest Airlines Co. (LUV) has a Zacks Rank #2 (Buy).
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