Delta, Lufthansa Join Major Airlines, Revise Earnings Down – Live and Let’s Fly

Delta Air Lines and Lufthansa have both revised earnings down within the quarter citing capacity as the reason. Combined with the others, the true picture is pretty clear. 

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Delta Joins Air France In Blaming The Olympics, Others

Delta Air Lines announced it was revising earnings down in the coming quarter and following. The airline indicated that it expected earnings to be down from a forecast of 5-6% to 2-3%. Respectively, that slashes earnings by 40-66% with the trend continuing.

In part, the carrier bemoaned business travelers avoiding Paris, a market for which it shares 70% of trans-Atlantic traffic with joint venture partner, Air France. The French flag carrier advised that it would miss earnings considerably too with the same explanation.

Delta goes further.

In a deftly written article, Gary Leff points out that Delta’s second reason is problematic. Capacity. Where have we heard that before? If you’re a regular reader of Live And Let’s Fly you would have heard it each of the last few weeks with a carousel of carriers choosing “too many seats” as another way to avoid saying “not enough passengers.” As Leff points out, Delta who added as much capacity (if not more than everyone else) assures investors that it’s not their fault there’s too many seats on the market.

“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.” – View From The Wing

Another flaw in the explanation involving the Olympics is that Delta expects earnings to continue to drop after the games have concluded. In the past, Delta earnings reports have been the darling of Wall Street. Management has fashioned an excellent relationship with American Express and truly delivered industry-leading operational performance.

Lufthansa Also Revises Earnings Down

Lufthansa, the German flag carrier started off the year off with estimates that it would match the prior year.

“Lufthansa Group began the year hopeful of roughly matching the €2.68 billion adjusted EBIT it made in 2023, but scaled these expectations back to a profit of about €2.2 billion after strike disruption hit its German operations in particular, coupled with the impact of aircraft delivery delays.

Second-quarter profits at Lufthansa Airlines are around €300 million down on the €515 million profit the German unit made in the same period last year. The combination of two tough quarters means the German operation lost €427 million over the first half.” – Flight Global

For justification, we find a trio of reasons: a negative market trend (contraction), inefficient operations, and delays in aircraft deliveries. The first one is the same issue other carriers are saying by yet another manner. The second reason is taking blame on themselves and their ability to run a good operation – fair enough for them to own that. Lastly, the same trope others were using in the first quarter is a concern, but not a new one.

“Lufthansa Airlines is particularly affected by the challenges posed by the negative market trend and by inefficiencies in the flight operations of Lufthansa and Cityline, also due to delayed aircraft delivery,” the group says. ”It is becoming increasingly challenging for Lufthansa Airlines to break even for the full year.” – Flight Global

I respect Lufthansa’s candor, but the admission of a shrinking market is an important one.

A Rose By Any Other Name…

Saying there is too much capacity is not different than there are too few passengers. The question is why? Did the airlines grow past the market, hoping to continue to strike while the iron is hot as it has been? As an investor, I’d rather an airline tried to continue to grow when given the opportunity even if they turn out to mis-time the event.

Still, calling it too few passengers, or too much capacity still doesn’t say what this is – a market correction. It’s clear that discretionary funds are either drying up or being diverted by travelers who can choose not to travel. Businesses may be opting for more virtual meetings or there may have been a structural change in the market.

Regardless of the name you call it, it remains a market contraction. But what remains unclear to me is why, with near unanimity, market leaders refuse to call a spade a spade, or a rose a rose.

Here’s the running list of travel suppliers that have stated for one reason or another that it will miss earnings targets, some within the same quarter for which they provided guidance:

• Delta Air Lines
• Lufthansa (group)
• American Airlines
• Southwest Airlines
• JetBlue Airways
• Spirit Airlines
• Air France
• Air Canada
• Various cruise lines

And now the same list but with their reason which is not a slowing economy:

• Delta Air Lines – Olympics, capacity
• Lufthansa (group) – capacity, inefficiencies, delayed aircraft
• American Airlines – capacity
• Southwest Airlines – capacity, delayed aircraft
• JetBlue Airways – capacity, inefficiencies, unprofitable markets, litigation
• Spirit Airlines – failed merger, delayed aircraft
• Air France – Olympics, capacity
• Air Canada – **short sellers are shorting the stock based on the Canadian economy**
• Various cruise lines – market softening, lower growth but not contraction

Conclusion

We add another two airline giants to the pile of suppliers that indicate there is trouble ahead. They refuse to say it’s the economy and that the travel market is slowing so I will continue to bang that drum and publish more travel suppliers who come up with new reasons why they are failing to grow.

What do you think?