Delta Discovers It’s Just Another Airline, Blames Rivals for Profit Drop – View from the Wing

Delta Discovers It’s Just Another Airline, Blames Rivals for Profit Drop

by Gary Leff on July 12, 2024

Delta Air Lines is earning half the industry’s profit. They had a 13.6% operating margin and made $1.3 billion in the last quarter. That’s great – except that both figures are down year-over-year and the airline lowered its guidance for the third quarter as well. Their stock lost 8% of its value at the open on Thursday’s morning’s announcement, though it gained half of that back by the end of the trading day.

The airline’s spin is that there’s too much capacity, and the problem is other airlines, but the industry is correcting itself. In other words, the problem isn’t Delta, and going forward Delta won’t have a problem. I don’t think this actually makes sense.

• Delta says the problem is other airlines adding too much capacity. According to Delta President Glen Hauenstein,
  

  [D]omestic industry seat growth accelerated into the summer months beyond normal demand growth. This has impacted Main Cabin unit revenue trends through the summer. With scheduled seat growth decelerating into the fall, June and July will be the low point with unit revenue trends expected to significantly improve in August and beyond.

  But the number of seats in the domestic market are up 6% year-over-year, according to aviation analytics company Cirium. Delta is up 5%. Delta domestic seats grew roughly on par with the industry.

  Across the Atlantic, Delta seat growth was 5% and exceeded United and British Airways. Seat growth was led by Air France, which is part-owned by and a joint venture partner of Delta vassal Virgin Atlantic grew 9%.

  While they say they expect other airlines to trim capacity, Delta isn’t doing its part, and their capacity is expected to grow faster than revenue.

  For the September quarter, we expect capacity growth of 5% to 6% and revenue growth of 2% to 4%.

• And if the problem is too much capacity, then Delta is actually saying air travel is commoditized. Their message for years has been that people choose Delta, that Delta offers a differentiated product. If that were true it shouldn’t matter if Spirit and Frontier are adding capacity. (And while Spirit and Frontier are growing seats, they aren’t growing more seats than Delta is.)

What we learn from the second quarter results is that most of the Delta Air Lines product remains a commodity, and the market knows this.

Ultimately Delta Air Lines stock trades at 6 to 7 times earnings because airlines are high fixed cost and cyclical businesses. They have high fixed costs and are highly vulnerable to changes in the cost of fuel. And at the end of the day most of the seats they sell are economy seats where price continues to prevail as the primary driver of consumer choice.

Before the pandemic they actually were trying to de-commoditize economy, where most of their customers fly. They were offering hot towels, welcome drinks and amenity kits in long haul coach as well as coursed-meals. They aren’t trying to do this anymore.

Delta Air Lines Economy Amenity Kits, 2019

The airline has been able to build a brand around premium product, but that only goes so far when the premium product isn’t better than what’s offered by competitors. They have more Boeing 767s than any other widebody type, and the business class seats on their 767s are inferior to what’s offered by American Airlines, United and JetBlue – and inferior to British Airways, Air France, KLM and Air Canada. They’re also behind American and United in differentiating their ground experience, and behind United in on board business class amenities.

And while Hauenstein talked about the success of their American Express relationship in the earnings call, noting that “American Express remuneration for the quarter was 1.9 billion, up 9% year over year,” SkyMiles isn’t a competitive differentiator that is a reason to choose Delta over other airlines helping to de-commoditize the product.

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