Delta CEO sounds alarm about a growing problem

Setting off a month of airlines reporting their second-quarter earnings and predictions for the summer months, Delta Air Lines (DAL) released near-record revenue but still fell below analyst expectations with its profit expectation — a projected adjusted profit of between $1.70 and $2.00 per share instead of the $2.05 average given by analysts polled by LSEG and sales growth of no more than 4% rather than the initially expected 5.8%.

Adjusted net operating income was also at $1.528 billion instead of the $1.531 billion analysts had been expecting, even though revenue excluding sales rose 5.4% to a record $15.4 billion.

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While Delta CEO Ed Bastian called the second quarter a “really strong performance,” many factors affecting the aviation industry are putting pressure on earnings.

Particularly in the lowest seat price range, competition from low-cost carriers is resulting in discounted airline ticket prices, eating away at profits when rising fuel and other operational costs are hitting the bottom line.

Delta blames ‘Lower fare discounting’

Bastian told investors. “What you see happening is the impact in the domestic marketplace to the lower fare discounting that’s been going on this quarter.”

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Despite Bastian’s assurances that Delta was “fairly well insulated” from such impacts due to the higher number of business and other premium tickets it sells as the country’s primary luxury-minded airline, the markets immediately reacted to the news — Delta shares were down by more than 5% to $44 by closing on Thursday, July 12.

Both throughout and immediately after the COVID-19 pandemic, Delta has emerged as the country’s most financially sound airline. Delta’s new struggles with pricing could be a sign of trouble for other airlines that are less protected from the same influences of discounting pressure.

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Airline industry health threatens low-cost carriers

On May 29, American Airlines (AAL) announced it is cutting its growth capacity from 8% to 3.5%.

Southwest Airlines (LUV) did the same, reducing capacity from 6% to 4% last quarter when it reported a wider-than-expected loss of $231 million or 39 cents a share.

TD Cowen analysts immediately sent investors a note saying that Delta’s numbers would “likely raise concerns about industry health and lead to more pressure on low-cost carriers and ultra-low-cost carriers to cut capacity.”

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Given that low-cost carriers already rely on offering prices that are noticeably lower than their mainstream competitors, there is far less room for them to discount. Since they also lack the profitable business fares and high-end tickets that can help make up the difference, they could be particularly squeezed.

On Delta’s end, Bastian continued to express confidence that the airline would withstand the pressures as travel demand began to cool by the fall, allowing the airline to stop responding to overcapacity and charge regular ticket prices.

“We are encouraged by actions the industry is taking,” he said further in the earnings call. “Seat growth is decelerating, and there appears to be increased focus on improving financial performance.”

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