Delta Airlines Manage Solid But Not Exceptional Performance Despite Fuel Hedge Losses

Despite the results, the airline continues to face 'headwinds' offsetting low oil prices. 
 
Delta Airlines Inc. (NYSE:DAL) has reported Q1 profits that have slightly edged past analysts’ expectations. The airline’s revenue increased 5% to clock in at $9.4 billion, against the $8.9 billion reported last year. Operating margin increased to 8.8%, but the one setback is the hedge fuel losses that are calculated at 17.8%. Margins would have been a lot higher if it had not been for the fuel hedge losses.

Another sign of a red flag in its financials is that the company is reporting currency ‘headwinds’, which has served as a thorn for its revenues whilst keeping costs at bay. Delta Airlines operates in Europe, the Middle East, Japan, India, and Brazil, and all their currencies have weakened against the dollar, making travel expensive there. To this end, Delta plans on capacity cuts to increase margins during the winter months.

For the year ahead, the Delta airline forecasts a free cash flow of around $5 billion, a billion dollars more than the last year. It also forecasts continuous reduction in its interest expense. Delta saw its interest expense dropped down from $7.5 billion to less than $5 billion this year, giving it more leeway to increase its debt to investment grade till the end of the year.

A combination of fuel expenses and debt payments will continue to improve the fundamentals of Delta Airlines, with the continued risk of currency headwinds, which is a situational factor beyond control for the company. With fuel prices now starting to show a moderate upward trend (Brent crude and WTI prices are now trading in the range of 60’s), this is another upside risk that could feed into the company’s financials for the next quarter, if not for the whole year.

On the external, if not political fronted ongoing feud with Gulf Airlines over subsidies has reached a critical stage in which the Obama administration has solicited comments from the public in general till next month, investors need to keep an eye out for this development. However, many pundits do not expect any radical change in the Open Skies Agreement, except for some little tweaks here and there, to adjust to the current operating environment.

Delta stock price ended the day yesterday at $46.66, a gain of 0.50%. For now, investors are cheering on the company’s stellar performance, and rightly so, but as mentioned above, the performance is dubbed by analysts as only solid, not exceptional. Therefore, it will be a good idea for investors to temper that celebration, a little bit, just so they can introspect and understand the bigger picture, especially with the risk mentioned above.