Issue No. 883
Delta Sees Strong Demand Through Seasonal Trough
Pushing Back: Inside the Issue
Third quarter earnings season is underway, with Delta as usual batting leadoff. For the second straight quarter, its earnings were strong, underscored by another double-digit operating margin. That’s thanks to record revenues, fueled by extraordinarily robust demand — for leisure travel, for premium products, for domestic and transatlantic travel, for cargo, for SkyMiles, and even, to some extent, for business travel. Now if only costs weren’t so high. Fuel costs are up, labor costs are up, maintenance costs are up, and, importantly, overall unit costs are up, swelled by suboptimal utilization of aircraft and other assets. Delta still flew 17 percent fewer seat miles last quarter than it did in the same quarter of 2019. These cost troubles explain why Delta’s 11 percent third quarter operating margin wasn’t as good as the 16 percent it earned three years earlier. It’s now telling investors to expect a margin of between 9-11 percent this quarter, compared to the 12 percent it managed in 2019.
More airlines will report this week, including Delta’s rivals American and United. But there’s more going on besides earnings. The red hot transatlantic market prompted United to add new routes, new cities, and even a new partner (Emirates) for its return to Dubai. An even closer United partner, Air Canada, is itself adding new flights to Europe. And still another United partner, Lufthansa, unveiled new premium seats. Or should we say “suites.”
The sweet taste of profits is back at airlines like EasyJet and Qantas, both of which treated investors with an upbeat assessment of current trading. Make no mistake, the global economy faces heightened risk from high inflation, rising interest rates, a strong U.S. dollar, energy scarcity, more frequent natural disasters, and geopolitical uncertainty. The silver lining? Employment remains high (for now). Travel demand, hit perhaps harder than anything else during the pandemic, is now holding up perhaps better than anything else as 2023 approaches. That’s definitely happy news for airlines.
A good time for a low-cost carrier to start new widebody flying? India’s IndiGo apparently thinks so, experimenting with a few Boeing 777s. Warning though: It’s a lot harder to make money with twin-aisle planes than it is with single-aisle planes. Just ask carriers like AirAsia, WestJet, Virgin Australia, and Gol.
Airline Weekly Lounge Podcast
Delta CEO Ed Bastian claimed this week, after his airline reported a robust third quarter profit and sees seemingly unsated demand, that travel is "countercyclical" to the economic winds. And he's not alone, International Airlines Group and United Airlines have separately said they see no signs of travel demand waning. Edward Russell and Jay Shabat discuss Bastian's prognosis, plus what's up in Amsterdam. Listen to this week’s episode to find out. A full archive of the 'Lounge is here.