Delta Shares Fall Following Poor Guidance

Delta reported its best second quarter in a decade, but margin guidance disappointed.
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) -- Although


(DAL) - Get Report

reported a strong second quarter, its shares were falling Monday as the carrier's third quarter outlook disappointed investors.

In midday trading Monday, Delta stock was down about 6% after falling about 9% earlier. For the full year, Delta shares are down about 1%, while the

Amex Airline Index


is up about 9%.

Delta shares were down even though the carrier reported its best quarter in 10 years, with earnings excluding items of $549 million or 65 cents a share, two cents ahead of the estimate compiled by Thomson Reuters.

The principal weakness in Delta's report was its third quarter EBIT margin guidance of 10% to 12%, below what analysts had expected. UBS analyst Kevin Crissey wrote that given cost estimates, the margin guidance implies revenue per available seat mile growth of about 13% in the third quarter. "This is 3% lower than our forecast," he said.

JP Morgan analyst Jamie Baker said the margin guidance was also below his expectation and suggested third quarter earnings of 80 cents a share. Analysts surveyed by Thomson Reuters were estimating 94 cents and Baker said he had been estimating $1.25.

"A 10-12% outcome is robust in the absolute," Baker wrote. "The predecessor company hasn't achieved 3Q margins of this magnitude since 2000 and has only done so six times in the last 15 years.

But we fear it will not satisfy the market's appetite/insistence for ever-rising estimates."

On the carrier's earnings conference call, President Ed Bastian noted that "advance bookings remain strong across the system" and that July passenger revenue per available seat mile will likely increase by 17% to 19%. Looking towards September, Bastian said September PRASM is normally 85% to 87% of June's level, adding: "I wouldn't say we are seeing deceleration for September." However, he said comparisons become more difficult starting in August, because that is when the carrier began to emerge from the recession.

Delta's principal point during the call, however, was that it will not be sucked into substantially boosting capacity in the current year or in 2011. Bastian said that Delta's winter schedule capacity will be 2 points below 2009 levels and six points below 2007 levels, while full-year capacity will be up about 1%. In 2011, he said, system capacity will increase by 1% to 3%.

Increases are likely in the Pacific, where 2009 travel was restrained by fears of the H1N1 virus and where PRASM grew 36% in the second quarter.

-- Written by Ted Reed in Charlotte, N.C