Morgan Stanley Says Delta's PRASM Was A Relief

In a report published Thursday, Morgan Stanley analysts maintained an Outperform rating on Delta Air Lines, Inc. (NYSE: DAL). Delta Air Lines announced its 1Q15 adj.EPS at $0.45, marginally ahead of the consensus of $0.44 and in-line with Morgan Stanley's estimate. The company's total revenue, at $9.39B, was in-line with expectations. "We expected an increased focus on 2Q15 PRASM, which DAL guided to (2%)-(4%), marginally below our (2.5%) estimate, and above seemingly low market expectations," the analysts said. Although the company guided to operating margin of 16 percent - 18 percent, short of the consensus estimate of about 18.5 percent, the company's stock reacted favorably. This reinforces the fact that "investors continue to value PRASM updates first and foremost."The report added, "…we found DAL's capacity cuts across several weak international markets encouraging and supportive of accelerating PRASM trends and the cycle overall."Delta Air Lines indicated that demand trends were robust in the domestic market, while international markets continued to face revenue weakness, largely driven by weak FX and declining fuel surcharges. "As such, mgmt announced a 6 pt. reduction in capacity across international after Labor Day in order to actively address DAL's exposure to regions most affected by the aforementioned headwinds. This will result in a 3% YoY decline in international capacity in 4Q15 and the reduction will continue through the Spring of 2016," the analysts wrote.The analysts expect margin growth to accelerate in 2H15. The company's ability to "generate strong cash flow regardless of the fuel environment reinforces its deleveraging goals and provides ample room for more capital returns from here, both of which are supportive of earnings growth," the analysts added.