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North America

Delta Sees ‘Gangbusters’ Recovery, Downplays Industry Concerns

Edward Russell
June 27th, 2023 at 12:25 PM EDT

Delta planes at new LaGuardia terminal

Business looks good to the folks at Delta Air Lines. The carrier has raised its financial outlook for the year, and CEO Ed Bastian sees “years” of favorable travel demand ahead.

“Travel is going gangbusters, and it’s going to continue to go gangbusters because we still have a tremendous amount of demand coming,” Bastian told Wall Street analysts and investors at an event Tuesday.

Atlanta-based Delta raised its outlook for 2023 to a roughly 12% operating margin, and around $6 in earnings per share. It previously guided a 10-12% margin, and $5-6 in earnings per share for the year. In terms of margins, that would represent a roughly 5-point improvement from last year, and nearly 2 points shy of its 13.9% operating margin in 2019.

But the outlook must be seen through the prism of the presentation. Delta executives were making the case on why the company is an attractive investment to Wall Street. And Wall Street wants to hear of growth — particularly earnings growth — as the airline industry achieves a new, post-pandemic normal. Delta executives served that up on a platter for those assembled in a call that featured few surprises or notable new announcements.

Bastian and other executives spoke of how a plateau in the corporate travel recovery only creates revenue “upside” in the future. Similarly, the potential removal of limits on China flying also creates a potential opportunity next year. And weather- and air traffic control-related disruptions in the northeastern U.S.? Only more reason to focus on an airline’s own operations, and making sure it’s top class.

That is a marked difference from the more divisive tones of other U.S. airline leaders. On Monday, United Airlines CEO Scott Kirby told staff in an email that the Federal Aviation Administration “frankly failed us this weekend,” in reference to the spike in flight delays and cancellations over the period. And earlier in June, Alaska Airlines CEO Ben Minicucci spoke of getting “distracted” from critical points over things like slots at Washington’s Reagan National Airport — something pushed by Delta — in the underway FAA reauthorization process.

Yet, Delta’s outlook is widely shared. Executives at Alaska and United have outlined broadly the same outlook this month. And global airline leaders at the IATA Annual General Meeting earlier in June emphasized that travel demand was good as far out as their data showed, which was to about the end of the year.

The widely touted statistic among U.S. airline executives is how industry revenues remain below their historic percentage of national economic activity. While that percentage differs slightly depending on what airline you ask, the premise is the same: There remains a significant delta between the historic average and where industry revenues are today. And that gives them confidence — even amid uncertainty in other areas of the U.S. and global economy — in financial strength for years to come.

And the airlines might be onto something. The non-profit Conference Board’s U.S. consumer confidence index rose in June to its highest level since January 2022. Consumer spending is holding steady and expectations of a recession are declining.

“Our consumer is in really good shape,” Bastian said. Delta’s main consumers are Americans with annual incomes of at least $100,000 that make up 75% of the industry’s revenues. These consumers have more disposable income than they ever had before and, increasingly, want to spend that on experiences rather than durable goods. In other words, they want a luxury or unique trip over a kitchen renovation or new deck.

And Delta has done a good job capturing the premium end of the U.S. market. It has repeatedly been a step ahead in terms of offering a better inflight experience, whether that is food in economy cabins, in-seat entertainment screens, or free inflight wi-fi (at least for SkyMiles loyalty members). Delta anticipates high-margin “premium” revenue — first class or premium economy seats, upgrades, etc. — to make up 35% of total revenue, or $19 billion, this year. That represents a 27 percent increase in premium revenue compared to 2019.

Premium travel demand shows “no sign of abating,” Delta President Glen Hauenstein said Tuesday.

Delta does face challenges. Weather can derail even the best airline operations, as the industry saw in the northeast Sunday and Monday. More than 30% of all Delta flights were delayed or canceled those two days, according to data from FlightAware. And roughly half of all flights operated by Delta regional affiliate Endeavor Air were delayed or canceled. A national air traffic controller shortage only exacerbates disruptions during severe weather.

The supply chain shortages that are limiting airline capacity around the world are affecting Delta, though to a lesser extent than others, Bastian said. He described the airline as near the “top of the food chain” for aircraft and parts given its size and clout. The long-sought recovery of Delta’s high-margin generating core hubs — Atlanta, Detroit, Minneapolis-St. Paul, and Salt Lake City — keeps shifting right with capacity, measured in available seat miles (ASMs), expected to come back this year but seats not until next summer. And Delta’s regional operation remains constrained by the U.S. pilot shortage to the equivalent of 15 mainline narrowbody aircraft worth of flying; regional is not expected to recover to pre-pandemic levels until around 2025.

But of course, capacity constraints from the supply chain to pilot shortages also mean higher yields for airlines, including Delta. And, as long as the airline can keep costs in check — it expects year-over-year unit cost declines in the second half — higher yields directly benefit the bottom line.

“Our goal here is to make it: why would anyone fly another airline but Delta ever again?” Bastian said jokingly.

Edward Russell
June 27th, 2023 at 12:25 PM EDT

Tags: North America

Photo credit: Delta aircraft seen from inside the airline's new terminal at New York's LaGuardia airport. Delta Air Lines

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