Delta outage to cost $120 million

Juliette O'Neill
By Juliette O'Neill August 16, 2016 15:22

Delta outage to cost $120 million

Cowen & Co. analyst Helane Becker has estimated that Delta Air Lines will take a $120 million operating loss following last week’s computer outage, which caused the airline to cancel over 2,100 flights and experienced significant delays. As the Cowen & Co. report sets out, the network issues persisted over the course of four days and as a result the financial impact to the company’s 3Q16 financial results as a result of the cancellations,
delays and customer book away is estimated at $120 million.

“Delta has historically taken great pride in their operational performance, consistently referring to themselves as running “the industry’s best operation” and citing how many days they went without flight cancellations. We expect management to take a more humble approach to addressing their operations going forward. We anticipate Delta will quantify the impact from the network issues when they report August traffic (likely 9/2) and update 3Q16 guidance at our 9th Annual Global Transportation Conference (9/7),” said the report.

As a response to the cancellations and significant delays (+3 hours), Delta provided $200 vouchers to its customers. In an attempt to quantify the revenue impact, Cowen & Co has assumed during an average day in August, Delta flies ~540k passengers. If 100% of the passengers were delayed +3 hours or cancelled it would result in ~$108MM impact.
“We do not expect Delta to recognize the impact in just 3Q16 but rather over the course of the next four quarters. We also believe there could be some business travel implications, with customers changing flights / carriers in an attempt to circumvent Delta’s issues. As a result, we are lowering our 3Q16 revenue assumption by $50MM.”

Cowen & Co still believes Delta will maintain its 3Q16 PRASM range (all else equal) of down 4% – 6%, but “now believe there is potential revision to the low end of initial expectations, partially offset by less capacity being flown due to the cancellations.”

The true impact of the flight cancellations and delays will be felt on Delta’s costs, however, since it will face headwinds associated with less capacity and incremental costs from employee overtime and re-bookings. Cowen & Co is modelling “$70MM in cost headwinds in 3Q16, which will result in an incremental ~100 bps in non-fuel unit costs during the quarter. As a result, we believe management will raise their 3Q16 non-fuel unit cost guidance to up 1%, from flat previously. There will be some cost offsets associated with lower revenue and profit sharing, as well as jet fuel trending towards the lower end of management’s initial expectations of $1.52 to $1.57/gallon.”

Juliette O'Neill
By Juliette O'Neill August 16, 2016 15:22