Delta cuts 2Q operating margin estimates

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Delta Air Lines expects to have a "solidly profitable" second quarter, though the carrier now expects its operating margin to be lower than previously forecast.

The Atlanta-based airline in its latest investor update said it expects an operating margin between 6.5-7% for the quarter. Delta projected in its 26 April first quarter earnings release and a 19 May investor presentation filed with the US regulators that it expected an operating margin between 7-9%.

Delta also said that it expects passenger revenue per available seat mile (PRASM) to increase 10% year-over-year.

In addition, the carrier noted that its second quarter Pacific revenues "have been negatively impacted by approximately $125 million" due to the earthquake and tsunami in Japan.

Delta's revised guidance also includes unit cost increases higher than anticipated. The airline now expects its consolidated cost per available seat mile (CASM) excluding fuel and profit sharing to rise 4.5-5.5% year-over-year. The estimate also excludes special items.

The airline said in April unit costs were projected to rise 2-4%, followed by estimates published in May of a CASM increase of 3-5%.

Delta said costs are now higher than expected "due to higher maintenance costs combined with lower capacity than planned".

Delta originally forecasted in April that system capacity for the quarter would be up 2-4% year-over-year. According to the latest projections, system capacity is now expected to rise 2-3%.

The airline is expecting to "reduce its post-Labour Day system capacity by 4% year over year". Domestic capacity is expected to be down 1-3%, and international capacity to decrease 4-6%.

For the fourth quarter, Delta and its SkyTeam joint venture partners Air France-KLM and Alitalia are reducing transatlantic capacity 7-9%. As part of this previously-announced plan, Delta's transatlantic capacity for the quarter is expected to decrease by 10-12%.

Despite higher unit costs in the second quarter, Delta expects to realise "significant maintenance savings" later in the year as it retires some of its least-efficient aircraft. The carrier said maintenance expense for the second half of 2011 is slated to be $250 million lower than the first six months of the year.

Delta also reported today that it expects to end the quarter "with $5.6 billion in unrestricted liquidity, including $1.8 billion of undrawn revolving credit facilities", and that it will generate $600 to $700 million in free cash flow for the quarter.