Americans are traveling in record numbers this summer. Still, Delta Air Lines said Thursday that its second-quarter profit dropped 29% due to higher costs and discounting of base-level fares across the industry.
The airline also predicted a lower profit than Wall Street expected for the third quarter.
On a call, 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, and the shares of other carriers were also dragged down. JetBlue, American, United and Southwest fell between 3% and 6%.
Delta said it earned $1.31 billion from April through June, down from $1.83 billion a year earlier.
Revenue rose 7% to nearly $16.66 billion — a company record for the quarter. That is not surprising to anyone who has been in an airport recently. The Transportation Security Administration screened more than 3 million travelers Sunday, a single-day high.
“Demand has been strong,” Bastian said in an interview. “International, business (travel), our premium sector all outperformed.”
Delta’s results showed a continuing divide between passengers who sit in the front of the plane and those in economy class. Revenue from premium passengers jumped 10%—about $500 million—but sales in the main cabin were flat compared to a year earlier.
According to economists, wealthier Americans benefit from solid gains in stock prices and the value of their homes. At the same time, middle-class families are more likely to hold back on spending because high inflation over the last three years has eroded their paychecks.
Delta and United — with their focus on premium customers, a bigger share of business travel and extensive international routes — have emerged from the pandemic as the most profitable U.S. carriers. Others that cater to budget-conscious leisure travelers, including Southwest, JetBlue and Spirit, have posted losses and cut prices to fill seats.
“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 said.
Bastian, however, disputed any notion that middle-class travelers are pulling back on spending. He said it is simply supply and demand — the airline industry, including low-fare carriers, is adding flights even faster than demand is growing, leading to lower fares. “The discounting is in the lower-fare bucket,” he said.
Delta’s passenger-carrying capacity grew 8% in the second quarter, but it plans to throttle back to between 5% and 6% growth in the third quarter. Bastian said other, less profitable airlines should do the same.
“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.”
The signal to other airlines about capacity was remarkable. During the Obama administration, the Justice Department investigated whether U.S. carriers colluded by signaling each other during events such as conference calls to raise prices by reducing the number of seats for sale. That investigation ended without charges, although Southwest and American later paid to settle private lawsuits that made similar accusations.
Delta’s revenue increase was more than offset by higher costs. Expenses jumped 10%, with labor, jet fuel, airport fees, airplane maintenance and even the cost of running its oil refinery all rising sharply.
Spending on labor grew 9% over last year. The airline hired thousands of new workers when travel began recovering from the coronavirus pandemic, but hiring now is limited mainly to replacing workers who leave or retire. Delta laid off an undisclosed number of nonunion office employees last fall, indicating that management considered the company overstaffed.
Delta said its earnings, excluding one-time items, were $2.36 per share, a penny less than the average forecast among analysts in a FactSet survey.
The airline said its adjusted profit in the third quarter will be between $1.70 and $2 per share, below analysts’ forecast of $2.04 per share. Delta repeated its previous prediction that full-year profit would be $6 to $7 per share.