Delta Air Lines Inc. on Wednesday reported first-quarter profit that topped analysts' expectations and pleased investors with plans to reduce international capacity in the fourth quarter where a strong U.S. dollar has weakened demand.
The Atlanta-based airline earned $746 million in the three-month period, more than triple its net income a year earlier. It earned $372 million on an adjusted basis, or $0.45 per diluted share, compared to analysts' average estimate of $0.44 per diluted share, according to Thomson Reuters I/B/E/S.
While investors in U.S. airlines are concerned about the strong U.S. dollar, Delta's unit revenue and capacity outlook painted a better picture than Wall Street had anticipated, and it could mean similar forecasts from peers American Airlines Group Inc. and United Continental Holdings Inc
Delta's stock closed up 2.6 percent, while American's rose 0.7 percent and United's 1.2 percent.
Delta said it expects international unit revenue this quarter to fall in the high-single digits but only 2 to 4 percent system-wide, while some had expected a decline of up to 5 percent.
Facing markets where travelers' spending power has been hurt by the strong dollar or lower oil prices, Delta said it will reduce service from the Middle East, Africa, India, Japan and Brazil by at least 15 percent in the fourth quarter, while transatlantic capacity will fall between zero and 2 percent. This will total a 3 percent reduction of international capacity year-over-year at that time.
"This is music to the ears of many investors," Cowen and Co analyst Helane Becker said in a research note. "This reduction in capacity should benefit (passenger-unit revenue) and reduce the negative foreign currency effect."
CRT Capital Group analyst Michael Derchin added, "I think that you will see (similar) capacity discipline announcements coming out of United and American on the international side, primarily."
For the second quarter, Delta said it expects an operating margin of 16 to 18 percent. It forecast paying on average $2.35 to $2.40 per gallon of fuel including about $650 million in fuel hedge losses, compared to $2.93 per gallon last quarter.
"We restructured our hedge book... which will put the bulk of our hedge losses behind us after this quarter," Chief Executive Officer Richard Anderson said during the company's earnings call.