Premium demand, higher fares fuel Delta’s optimistic earnings outlook

Delta Air Lines planes are seen parked at Seattle-Tacoma International Airport on June 19, 2024, in Seattle, Wash. (Kent Nishimura / Getty Images)

CHICAGO — Delta Air Lines said on Thursday robust demand for high-end travel and a sharp slowdown in the industry’s seat capacity expansion have positioned it well to increase revenue and expand margins next year.

The Atlanta-based airline also expects record earnings in the current quarter, after posting stronger-than-expected third-quarter profit on improved consumer demand and pricing power.

Its shares were up about five per cent in midday trading.

Delta, the biggest U.S. airline by market cap, said its sales have accelerated over the past six weeks across all geographies. It reported a rebound in corporate bookings across all sectors.

Fewer seats boost ticket prices

A sharp reduction in airline seat capacity in the domestic market has driven up ticket prices. This contributed to Delta’s higher unit revenue, a key indicator for pricing power, in the September quarter, following a decline in the previous quarter.

With bankrupt Spirit Airlines shrinking its operations and most carriers moderating plans to expand capacity to prevent discounting pressure, Delta expects its unit revenue to remain positive in the December quarter.

“Structural change has taken hold across the industry,” Delta CEO Ed Bastian told analysts on an earnings call, referring to the pullback in unprofitable flying by U.S. carriers.

The airline expects an adjusted profit of US$1.60 to $1.90 a share for the quarter through December. Bastian said the company’s performance will be at par or above its all-time fourth-quarter earnings.

The forecast’s midpoint is $1.75, compared with analysts’ average estimate of $1.66, according to data compiled by LSEG. Delta’s quarterly revenue is projected to rise about two to four per cent from year-ago levels.

Delta reported an adjusted profit of $1.71 a share in the September quarter, compared with analysts’ average estimate of $1.53 per share.

The company’s bullish tone contrasts with a rocky first half of the year when economic jitters clouded the outlook for travel spending, prompting Delta and other U.S. carriers to pull their financial forecasts.

High-end travel demand

Demand for high-end travel has boomed since the pandemic, with travelers willing to pay higher fares for more comfortable and swankier seats. Delta and rival United have been among the biggest beneficiaries.

Delta’s premium revenue was up nine per cent in the third quarter from a year ago and accounted for about 43 per cent of its passenger revenue. Encouraged by the strong returns, the airline plans to significantly expand its premium seat offerings while scaling back main cabin capacity.

“Exposure to higher household income cohort has enhanced our relative position versus carriers that are catering to a more stressed lower to middle-income environment,” said Delta President Glen Hauenstein.

Its outlook, however, does not factor in any fallout from the U.S. government shutdown. More than 13,000 flights have been delayed this week amid staffing shortages at air-traffic control facilities. With the federal employees working without pay, the staffing situation could worsen.

Some travelers have started canceling trips and avoiding airports until U.S. lawmakers reopen the government. A prolonged shutdown also runs the risk of taking a toll on broader economic activity and hitting consumer spending.

In 2019, during a 35-day government shutdown, Delta suffered a $25 million financial hit.

Hauenstein, however, said the airline has not seen a material impact from the shutdown.

(Reporting by Rajesh Kumar Singh and Nathan Gomes; Editing by Sherry Jacob-Phillips and Rod Nickel)