Look Who Else Is Flying Delta Air Lines, Inc. (DAL) These Days

Based on United’s cost projections, unit cost growth may reverse in the second half of this year if fuel prices continue to retreat. However, the company would still need robust unit revenue growth to generate 500 basis points of margin expansion. Yet whereas United cut capacity by 4.9% in Q1 and is on pace to cut capacity by more than 2% in Q2, the company plans to increase capacity somewhat in the second half of the year. While this is helping reduce unit costs, it will also create a unit revenue headwind.  This will prevent anything beyond modest unit revenue growth.

Be careful out there!
Analysts are still projecting a fairly rosy profit scenario for United this year, despite its continuing weak performance. While Delta recently projected a Q2 adjusted operating margin of 10%-11% — a healthy improvement from last year’s 9.1% result — United appears poised to duplicate its 7.9% adjusted operating margin from Q2 2012.

Delta Air Lines, Inc. (NYSE:DAL)’s margin advantage of 200-300 basis points over United appears sustainable based on the company’s lower, projected-cost growth and its strategic initiatives to boost its corporate revenue share, particularly in New York. That margin advantage is equivalent to roughly $1 billion per year in additional profit for Delta!

United stock has been able to log big gains in the past six months, largely thanks to Delta Air Lines, Inc. (NYSE:DAL)’s success, but ultimately United will have to produce higher profitability to keep the stock afloat. However, the company has no clear path to replicating Delta’s superior margins. As a result, United’s stock looks very vulnerable over the next year or so.

The article Look Who Else Is Flying Delta These Days originally appeared on Fool.com and is written by Adam Levine-Weinberg.

Adam Levine-Weinberg is short shares of United Continental Holdings (NYSE:UAL) and is long Sep 2013 $33 Puts on United Continental Holdings. The Motley Fool has no position in any of the stocks mentioned.

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