Delta sees ‘meaningful’ profit as travel demand hits ‘historic’ levels

By Rajesh Kumar Singh

CHICAGO (Reuters) -Delta Air Lines Inc on Wednesday forecast returning to profit in the current quarter, after posting a smaller-than-expected quarterly loss, on the back of a booming travel demand, sending its shares higher.

The company said robust consumer demand not only translated into a “solid” profit in March, but is also allowing it to offset soaring fuel costs with higher fares.

As a result, Delta said it expects to post a “meaningful” profit this year. In the quarter through June, it estimates to generate an adjusted operating margin in the range of 12% to 14% and “strong” free cash flow. Company revenue in the quarter is forecast to increase by about 14-18 points from a quarter ago.

“The demand environment that we have today is at a historic high,” Chief Executive Officer Ed Bastian told Reuters in an interview. “The last five weeks have been the strongest period of bookings that Delta has ever seen in our history.”

After a speed bump caused by the Omicron coronavirus variant, travel demand has roared back. U.S. passenger traffic has been averaging about 89% of the pre-pandemic levels since mid-February, according to Transportation Security Administration (TSA) data.

The Atlanta-based carrier said its domestic consumer revenues are above 2019 levels and the recovery in business travel has accelerated with the reopening of offices.

Delta’s shares were up 4.6% at $40.39 in mid-day trade.

SOARING COSTS, HIGHER FARES

A run-up in fuel costs and rising wages, however, are also driving up industry’s operating expenses. Jet fuel prices in North America have gone up by more than 30% in the past month, since Western countries slapped sanctions on Russian exports.

Delta’s fuel bill in the March quarter was 33% higher than a quarter ago and is projected to increase by at least 15% quarter-on-quarter in the three months to end-June.

Fuel is the airline industry’s second-biggest expense after labor, but major U.S. carriers do not hedge against volatile oil prices like most European airlines. Instead, they typically look to offset fuel costs with higher fares.

Airline fares were up about 24% year-on-year in March, among the biggest contributors to a jump in U.S. consumer prices. Delta’s average fares are up about 33% from a year ago, according to data from Cowen.

Some analysts are concerned that rising fares and higher inflation could dent travel spending. But Delta said higher fares have not impacted consumer demand, thus far. It expects the demand to stay strong even in the fall.

“Right now, I’m optimistic that our consumers will be in a very good place to continue to travel,” Bastian said.

Yet, the company is mindful of rising macroeconomic uncertainty and plans to be disciplined in ramping up capacity.

Its capacity in the June quarter is estimated to inch up to about 84% of the 2019 level. Bastian said the carrier is not expected to be at full capacity this year.

Adjusted loss for the first quarter came in at $1.23 per share, smaller than $1.27 per share estimated by analysts in a Refinitiv survey.

(Additional reporting by Abhijith Ganapavaram in Bengaluru; Editing by Bernard Orr and Nick Zieminski)