Americans are traveling in record numbers this summer, but Delta Air Lines reported a 29% drop in second-quarter profit due to higher costs and discounting of base-level fares across the industry. The airline is also predicting a lower profit than Wall Street expects for the third quarter.
On a call with analysts and reporters, Delta CEO Ed Bastian sent a clear message to low-cost carriers: slow your growth to end the oversupply of seats on domestic routes. Delta shares tumbled 6% in midday trading Thursday, dragging down shares of other carriers like JetBlue, American, United, and Southwest by 3% to 6%.
Delta earned $1.31 billion from April through June, down from $1.83 billion the previous year. Despite this, revenue rose 7% to nearly $16.66 billion—marking a company record for the quarter, a fact unsurprising to anyone who has witnessed the crowded airports. The Transportation Security Administration screened more than 3 million travelers on Sunday, a single-day high.
“Demand has been really strong,” Bastian remarked in an interview, highlighting that international travel, business travel, and the premium sector all outperformed expectations. Delta’s results underscore a growing divide between passengers in the front of the plane and those in economy class. Revenue from premium passengers jumped 10%, netting about $500 million, while sales in the main cabin remained flat compared to last year.
Wealthier Americans are profiting from gains in stock prices and home values, economists say, whereas middle-class families are more likely to restrain spending due to high inflation over the past three years. Delta and United, favored by premium customers, business travelers, and extensive international routes, have emerged as the most profitable U.S. carriers post-pandemic. Conversely, airlines focusing on budget-conscious leisure travelers, including Southwest, JetBlue, and Spirit, have posted losses and cut prices to fill seats.
In response to the changing market, Southwest is contemplating adding premium seats for the first time in its 50-year history. “Our more affluent customers are contributing meaningfully to our growth, and that’s why we continue to bring more and more product to them,” Bastian noted.
However, Bastian contested the notion that middle-class travelers are pulling back on spending, attributing the issue to supply and demand. He pointed out that the industry, especially low-fare carriers, is adding flights faster than demand is growing, leading to lower fares. “The discounting is in the lower-fare bucket,” he explained.
Delta’s passenger-carrying capacity increased by 8% in the second quarter, but the airline plans to moderate growth to between 5% and 6% in the third quarter. Bastian urged other, less-profitable airlines to follow suit. “You cannot, if you are on the lower end of the industry’s food chain, continue to post losses, particularly given the health of the demand set we have all seen over these last couple of years,” he told analysts. “There is a lot of other work that others need to lift … there is only so much more we can do on our own.”
Delta’s suggestion to curtail capacity was notable. During the Obama administration, the Justice Department investigated whether U.S. carriers were colluding by signaling each other to raise prices by reducing the number of seats for sale. That investigation concluded without charges, although Southwest and American later paid to settle private lawsuits with similar allegations.
Delta doesn’t disclose average fares, but passengers paid 2% less per mile in the second quarter, and there were slightly more empty seats on average flights compared to a year earlier.
The increase in revenue was more than offset by higher costs. Expenses surged 10%, driven by labor, jet fuel, airport fees, airplane maintenance, and even the cost of operating its oil refinery. Labor expenses grew 9% over last year as the airline hired thousands of new workers during the travel recovery from the pandemic. However, current hiring is largely confined to replacing departing or retiring workers. Delta had laid off an undisclosed number of nonunion office employees last fall, indicating the company’s belief that it was overstaffed.
Atlanta-based Delta’s earnings, excluding one-time items, amounted to $2.36 per share, a penny less than the average forecast among analysts in a FactSet survey. The airline projected its adjusted third-quarter profit would be between $1.70 and $2 per share, short of analysts’ forecast of $2.04 per share. Delta reaffirmed its earlier prediction that full-year profit would be between $6 and $7 per share.
