Option Trade 
Delta Air Lines, Inc. (NYSE:DAL) Calls 
Monday, 11th April, 2016

**OPTION TRADE: Buy the DAL Jun 17 2016 48.000 call at approximately $2.30. Place a pre-determined sell at $4.60.

Note: No protective stop losses added -- but if you wish to do so make it $0.90.

by Ian Harvey

April 11, 2016

Delta Air Lines, Inc. (NYSE: DAL), one of the oldest operating airlines, will report its results early Thursday. Wall Street analysts forecast, for the most recent quarter, an EPS of $1.30. That would be up from $0.45 per share in the same period of last year, and it is in line with the consensus expectations.

Revenue for the three months that ended in March will total $9.26 billion, which would be less than 2 percent lower year over year, if the Wall Street analysts are correct. That also would be the lowest quarter revenue results in the past year and a half.

Delta Air Lines posted impressive air traffic data in the month of April. Traffic – measured in revenue passenger miles (RPMs) – stood at 17.76 billion, up 1.2% from 17.55 billion recorded a year ago.

On a year-over-year basis, consolidated capacity (or available seat miles/ASMs) inched up 1.5% to 20.94 billion. Meanwhile, the load factor or percentage of seats filled by passengers decreased by 20 basis points to 84.8%.

At the end of the first four months of 2016, Delta generated RPMs of 47.72 billion (up 3.2% year over year) and ASMs of 58.14 billion (up 2.7% year over year). Load factor stood at 84.8% versus 85% recorded last April. Likewise, passenger count in the month grew 2.1% while that for the first four months of this year rose 4.8%.

The company’s significant route expansion plans, introduction of ancillary products, fleet revamping and customer service enhancement bode well. Further, the company has been reaping considerable benefits from its joint ventures and code share agreements.

Delta Air Lines has a market capitalization of $35.93 billion and a P/E ratio of 8.22. The firm has a 50 day moving average of $48.14 and a 200 day moving average of $47.92. Delta Air Lines, Inc. has a 12-month low of $34.61 and a 12-month high of $52.77.

Why Delta?

Delta is on pace to post strong profit growth for the first quarter (and the full year). Furthermore, its unit revenue trend should improve significantly in the next couple of quarters.

Back in October, Delta projected that PRASM would decline 2.5%-4.5% for the fourth quarter of 2015, dragged down by the strong dollar, falling fuel surcharges, and growing pricing pressure in the U.S. However, the company raised its Q4 revenue guidance three times in the ensuing three months. Ultimately, PRASM declined just 1.6% for the quarter.

While Delta Air Lines had a small unit revenue setback last quarter, it should benefit from some tailwinds as the year progresses:-

1. First, it will have much easier unit revenue comparisons. In Q1 2015, Delta's PRASM declined about 1.7% year over year, whereas PRASM fell 4.6% in Q2 and 4.9% in Q3. This should make it a lot easier for Delta to post smaller PRASM declines (or perhaps even gains) going forward.

2. Second, the foreign currency pressure that has dragged down Delta's unit revenue for more than a year should begin to subside. The dollar has started to weaken in recent months, as the Federal Reserve has signaled that it won't raise interest rates as fast as initially planned. Most importantly for Delta, the Japanese yen is regaining ground against the dollar. (Japan is one of Delta's largest foreign markets.)

Delta still faced a 2 percentage point impact from the strong dollar in Q1. This foreign currency headwind should be much smaller for the rest of the year, based on today's exchange rates.

3. Third, with each passing quarter, Delta has more time to adapt to changing demand patterns. For example, it announced last week that it would suspend its Atlanta-Brussels route until March 2017 due to reduced demand following the Brussels terrorist attacks. Delta and other airlines also recently closed a loophole that was allowing some customers to pay lower fares by booking multi-city tickets instead of regular connecting itineraries.

Delta has stated that forward bookings are above last year's levels and demand remains strong, despite some weakness in ticket prices. This suggests that Delta's unit revenue results could improve soon.

Analysts expect Delta's earnings per share to nearly triple during the first quarter, despite its relatively weak PRASM performance. Delta won't benefit from the same level of fuel cost savings after Q1, but if its unit revenue trend starts to improve as expected, that won't be a problem.

The average full-year analyst EPS estimate is $6.72, which would represent 46% year-over-year growth. Delta Air Lines stock currently trades for just seven times that earnings estimate. This gives Delta shareholders a big margin of safety in case of an unexpected jump in fuel prices or another demand slump.

Delta Air Lines, Inc. has earned a consensus rating of “Buy” from the nineteen brokerages that are currently covering the stock. One investment analyst has rated the stock with a sell rating, one has assigned a hold rating, fifteen have assigned a buy rating and one has assigned a strong buy rating to the company. The average 12-month price objective among brokerages that have updated their coverage on the stock in the last year is $63.50.

Harvey’s Options Volatility Indicator

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

**OPTION TRADE: Buy the DAL Jun 17 2016 48.000 call at approximately $2.30. Place a pre-determined sell at $4.60.

Note: No protective stop losses added -- but if you wish to do so make it $0.90.

”Success is simple. Do what's right, the right way, at the right time.”

Option Tip for your Success!
Options traders are not successful because they win.
Options traders win because they are successful.

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