Delta Air Lines recently announced a forecast of record revenue for the third quarter of the year due to the surge in summer travel demand. Nevertheless, the forecast missed analysts’ estimates, as airlines resorted to discounting fares after expanding their flights. The growth in sales for the current quarter is expected to be up to 4%, below the 5.8% growth that analysts estimated. Moreover, the adjusted earnings per share are projected to be between $1.70 and $2, falling short of the $2.05 per share that was expected by analysts.
Following the announcement, shares of Delta fell by approximately 9% in premarket trading. This movement also impacted other U.S. airlines, which were also trading lower. The airline earnings season opened by Delta has highlighted the pressure on profits due to rising costs and increased capacity affecting fares in the industry. With the Transportation Security Administration revealing its screening of over 3 million people at U.S. airports for the first time, Delta’s report serves as a warning sign for competitors, particularly those focusing on the oversupplied U.S. air travel market.
Competitive Landscape
Delta remains a significant player in the U.S. airline industry, being the most profitable carrier. This has put competitors, especially those reliant on the domestic air travel market, in a challenging position for the upcoming summer. United Airlines, expected to report its results next week, is striving to match Delta’s profitability. Both carriers are racing to expand the number of premium seats to increase revenue. Diverging results from analysts, with more buy ratings on Delta and United compared to other U.S. airlines, showcase the strength of these leading carriers in the industry.
Second Quarter Performance
Looking back at the second quarter, Delta’s performance was compared with Wall Street expectations. The adjusted earnings per share were in line with the forecast at $2.36. However, adjusted revenue fell slightly short of the expected $15.45 billion, standing at $15.41 billion. Despite a 5.4% increase in adjusted revenue, net income decreased by almost 30%. Operating expenses saw a rise of 10% from the previous year. Adjusted for one-time items, Delta reported earnings of $1.53 billion, or $2.36 per share, matching analysts’ estimates.
CEO Ed Bastian highlighted the strong performance in the second quarter, attributing it to a decrease in fare discounting in the domestic marketplace. Lower airfare prices compared to the previous year signal the impact on the industry due to reduced capacity this quarter. Delta emphasized the growth in corporate travel and the expectation for customers to maintain or increase their spending on corporate travel in the coming months. As the airline plans to increase its flying capacity by 5% to 6% in the third quarter, it aims to align it more closely with demand, ensuring a better balance in revenue and costs.
Despite challenges, Delta remains optimistic about achieving positive unit revenues in the upcoming months. International travel revenue has seen growth post-pandemic, although increased schedules have intensified competition for customers. Delta expects a dip in unit revenue for trans-Atlantic flights due to the Summer Olympics in Paris. The airline has witnessed growth in premium ticket sales, indicating a shift towards higher revenue streams. The lucrative American Express credit card deal has contributed significantly to its revenue, signaling diversity in income sources. Delta’s emphasis on premium seats shields it from the impact of industry overcapacity, providing a sturdier foundation for sustained profitability.
Future Outlook
Delta reiterated its full-year earnings forecast of $6 to $7 per share, maintaining optimism about its financial performance. Additionally, the airline anticipates generating free cash flow of up to $4 billion, demonstrating confidence in its ability to navigate through challenges and capitalize on opportunities in the ever-evolving airline industry landscape.