Delta Air Lines (NYSE: DAL) reported stellar earnings results for the second quarter last week. Revenue rose 8.7% to $12.5 billion, while adjusted earnings per share jumped 32% year over year, reaching $2.35, beating the average analyst estimate by $0.07.
Several top Delta executives spoke extensively about the airline's performance during the company's quarterly conference call following the earnings release. Here's why they are bullish about Delta's ability to continue posting strong results in the quarters and years ahead.
Operational excellence continues
To date [in 2019], we've achieved 82 days without a single cancellation across the Delta system, a 26% improvement over last year's record performance. ... This reliability, combined with the great service our people provide, is translating to more customers than ever choosing Delta. As a result, we ran the highest load factors in our history and flew a record 53.9 million passengers in the June quarter. And even with these record volumes, this was the first time in our history that Delta had zero involuntary denied boardings for an entire quarter.
-- Delta Air Lines CEO Ed Bastian
The foundation of Delta's strong results is its industry-leading operational performance. Over the past several years, the carrier has managed to steadily reduce the number of flight cancellations and improve its on-time performance. More recently, it has also introduced new processes and technology to minimize involuntary denied boardings.
Delta's ability to go an entire quarter without "bumping" a single passenger -- while also posting a record load factor -- is a testament to the quality of its operations. It should be no surprise that many air travelers prefer to fly Delta because of its superior reliability.
Delta continues to set new records for operational performance. Image source: Delta Air Lines.
Delta Air Lines is proving that it's a growth company
The 8.7% [revenue] growth in the June quarter is the seventh consecutive quarter of top-line growth of 7% or more, a level that is more than two times GDP.
-- Delta Air Lines President Glen Hauenstein
Last quarter, Delta achieved the trifecta of increasing its capacity, filling a higher proportion of its available seats with paying customers, and boosting its average fare. As a result, the company recorded a seventh consecutive quarter of high-single-digit revenue growth.
Delta executives noted that the company's revenue growth has consistently outpaced GDP growth by a wide margin over the past couple of years. This runs counter to the dominant narrative that the airline industry is a mature, no-growth business. In fact, rising interest in travel among generations ranging from millennials to baby boomers could allow Delta to continue growing faster than the U.S. economy for the foreseeable future.
Free cash flow surges
During the first half of the year, we generated $2.5 billion in free cash flow, more than what we produced in all of 2018, positioning us to achieve $4 billion in free cash flow in 2019.
Delta Air Lines' surging revenue and a recent dip in fuel prices allowed the company to deliver strong free cash flow of $2.5 billion in the first half of 2019. That's particularly remarkable because the company has ramped up capital expenditures as part of a multiyear plan to modernize its fleet and improve its onboard amenities.
With free cash flow coming in ahead of expectations, Delta has increased its capital return plans for the year by $500 million, to $3 billion. This includes a 15% increase to Delta's quarterly dividend that was announced in the earnings release.
Delta is posting strong free cash flow despite investing heavily in new planes. Image source: Delta Air Lines.
A one-time item pressured unit costs
For the June quarter, nonfuel unit costs were up 1.4%, in line with our guidance of 1% to 2%. This included approximately $60 million of pressure due to higher depreciation expense associated with our decision to accelerate the retirement of the MD-90 fleet by two years to the end of 2022.
-- Delta Air Lines CFO Paul Jacobson
Delta's nonfuel unit costs increased 1.4% year over year last quarter, after declining slightly in the first quarter. However, management noted that the company's underlying cost performance was better than the headline numbers suggest.
Most notably, Delta Air Lines decided during the quarter to accelerate the final retirement of its aging MD-90 fleet from 2024 to 2022. Over the long run, this will boost profits by reducing fuel consumption, boosting productivity, and simplifying Delta's operations. However, the airline recorded $60 million in accelerated depreciation last quarter because of this decision, accounting for about half of its nonfuel unit cost growth.
Most of that $60 million was a one-time expense, relating to 31 aircraft that have exited the fleet since the beginning of last year. Accelerated depreciation costs will tail off quickly over the next few quarters, as more MD-90s are retired.
Delta's refinery is doing its job
Our guidance includes an approximately $40 million contribution from the refinery this quarter, which is expected to benefit the September quarter fuel price per gallon by roughly $0.04.
Delta's Trainer, Pennsylvania, refinery lost $34 million in the first quarter of 2019, due to weak refining margins for gasoline. However, it returned to profitability last quarter, earning $37 million.
Looking ahead, profitability could continue to improve, due to the recent closure of the Trainer refinery's biggest competitor. Delta expects another profit of about $40 million this quarter. Management also hinted again that ownership of the refinery could help mitigate the impact of IMO 2020 -- new regulations for fuel used in the shipping industry that will go into effect next year -- on Delta's fuel costs. Thus, Delta's unorthodox decision to buy an oil refinery still looks like it is paying off for the company.
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