Delta Stays Upbeat Despite Continued Headwinds

The airline beat on earnings, missed on revenue and warned of Brexit-related challenges, but still hopes to improve a key revenue metric before year's end.
By Lou Whiteman ,

Delta Air Lines (DAL) - Get Report in recent quarters usually has offered one of the more optimistic outlooks among domestic airlines. The company stayed true to form Thursday, while admitting there remains a good bit of turbulence on the horizon.

Atlanta-based Delta reported second-quarter earnings of $1.47 a share, besting estimates for $1.42, but revenue came in at $10.489 billion, shy of expectations thanks in part to forex pressures. Passenger unit revenue declined by 4.9% in the quarter, in part because capacity grew by 3.2%.

Delta executives, on a call with analysts and investors, said results were hampered by uncertainty in foreign markets and a stubborn sluggishness in higher-margin business travel, declaring the era of lower fuel costs "largely behind us" with ramifications of higher fuel still to be priced in.

Still, management said it remains hopeful that passenger revenue per available seat mile could turn positive by year's end, even if only for a single month and not the whole quarter, a forecast that remains more optimistic than most of its competitors.

The company said it expects to generate an operating margin of between 19% and 21% in the third quarter, and expects passenger unit revenue to be down between 4% and 6% during that period. Both projections are slightly softer than what the markets had hoped for earlier in the year.

Still, shares of Delta traded up more than 2% following the results and the conference call.

Delta President Glen Hauenstein said on the call that the company was overly optimistic when adding summer capacity based on expectations that both tourist traffic and business traffic would be strong. The tourists have come as expected, but close-in yields -- tickets bought at the last minute generally sold to business customers -- have remained weaker than expected.

"We're left with no other choice but to decrease capacity levels going forward," Hauenstein said. "We can't count on stubbornly weak close-in yields to go away."

The company said it could take down domestic capacity by 3% by the fourth quarter compared to current flying, mostly from discontinuing the extra, more marginal flying introduced when oil prices were at lows. Hauenstein said he expects some revenue upside from higher fuel prices, as competitors who had priced their product based on $25 a barrel oil raise their fares, but said that process normally takes about nine months to flow through to revenue.

Internationally, Delta said that Brexit has already eaten into results by exasperating foreign currency swings, with the airline expecting further impact this winter. The airline believes uncertainty about the domestic British economy, coupled with weakness in the British pound that makes international travel more expensive for British tourists, will depress transatlantic demand to U.S. destinations like Florida and Las Vegas.

As a result, the airline said it expects to reduce U.S./U.K. capacity by about 6% in the quarters to come, after growing the market considerably in recent years as part of its joint venture with Virgin Atlantic.

Mexico remains an international bright spot, however, with Delta expecting continued benefits as the company hopes to receive final clearance to operate a joint venture with partner Aeromexico before year's end.

Loading ...