Delta Continues Strong Growth Despite Higher Fuel Costs

The global airline sector will spend the year grappling with rising fuel costs, yet players with strong fundamentals should be able to weather the storm.

Delta Air Lines on Thursday posted record operating revenue in the second quarter of 2018, although the company’s success has been hindered by increased costs that are challenging the global aviation sector.

Delta is the first major U.S. airline to report earnings in the quarter so investors and analysts pay extra-close attention to its results to parse trends for the entire industry.

Delta’s year-over-year income dropped by $104 million to $676 million, the result of higher fuel prices and winter weather disruptions. Despite recording record revenues of $10 billion, the narrative for the rest of the year will likely surround dealing with increased costs.

Delta expects fuel costs to increase by $2 billion over the course of the year but anticipates its margins to begin increasing again by the end of 2018 after it weathers high prices over the summer. This would be huge for the airline as it has struggled to improve its margins in recent years.

Total passenger revenue jumped 7.2 percent, and Delta’s cargo business revenue surged 23.4 percent. Delta saw increases in all of its business areas, with corporate travel leading the pack.

“Corporate revenues grew 10 percent and were our highest quarterly corporate revenues ever,” said Glen Hauenstein, Delta Air Lines President, on the company’s earnings call Thursday. “There were increases across all entities and across all industry sectors. Our corporate demand outlook remains strong. In our most recent survey, 84 percent of corporate travel managers expected to maintain or increase their travel spend in the third quarter. Improving corporate yields remain a significant opportunity and focus. While we are pleased with the June second quarter revenue results, as of June, we have only recovered 20 percent of the decline in domestic corporate fares since our peak in 2014.”

On the transatlantic front, Delta has observed strong bookings in the coming quarter. Its European business saw the most growth in the second quarter, a year-over-year increase of 14.7 percent, and that growth is expected to continue as low-cost carriers struggle with passing on fuel increases to flyers, making airlines like Delta more competitive.

“We hear a lot about Brexit, and we see all the rhetoric about Brexit, but business traffic to and from the UK on Delta and our partners is at record levels,” said Delta CEO Edward Bastian. “Similarly in Continental Europe, we’re seeing record revenues and in terms of yields and in terms of traffic into Continental Europe. So it is a relatively robust business environment and very, very strong leisure demand. And I think when you think of how fuel weighs on the ultra-low-cost carriers in that marketplace, is that it tends to have more of an impact on them and their raising fares translated into our ability to get higher fares for not only business but for leisure as well.”

The airline’s push into basic economy has been paying off, as well, without cannibalizing its more expensive fares. Its operation in the Pacific has seen a strong uptick in premium fares, as its increased segmentation seems to be resonating with customers.

“We’ve seen robust demand for our Delta One product,” said Bastian. “Especially in the Pacific as we’ve introduced Premium Select into over 50 percent of the markets now. We have seen no real degradation in terms of the demand for the premium products and services in most premium. And what we’ve seen is really consumer discretionary and corporations that have travel policies that only allow for a coach really using that extensively.

“And as we continue to roll out different ways to buy those products, we will see I think another exposure in demand as other customers will use their miles to sit in the cabin they want,” he added. “The ability of our frequent flyers to choose where they want to sit after they buy the ticket is really going to be something that’s going to generate a lot of great products and services for customers as well as revenue for the airline.”