Delta Reports Strong Profits, More Ahead

Edward Russell

January 17th, 2023

After two years of airline industry hell, Delta Air Lines was happy to report that “2022 was a strong year.” It didn’t start that way, with nearly $800 million in first quarter losses — operating margin in the period was negative 10 percent. But then came a swift and robust revival. Delta earned a positive 12 percent operating margin in both the second and third quarters. And on Friday, it unveiled — guess what? — another 12 percent operating margin for the fourth quarter. So much for seasonality.

Bring it all together, and Delta’s full-year operating margin for 2022 was 8 percent, down from 14 percent in 2019. The question now is how will earnings unfold in 2023? So far, so good, given what Delta describes as ongoing booking strength. Transatlantic markets appear to be firing on all cylinders (even March is morphing into a peak month). Latin America is performing “very well,” especially markets within narrowbody reach of Delta’s hubs. Asia-Pacific is well along its recovery path with Australia and Korea producing record profits, and Japan set for a strong summer; China is the only wild card left, and the reopening of its borders is encouraging. Premium demand continues to outperform. Same for SkyMiles, its loyalty program. Its lucrative partnership with American Express grows more lucrative by the year. Corporate travel, Delta thinks, is poised for revival as bankers, consultants, lawyers, accountants, and the like can once again meet clients as offices welcome back workers; corporate bookings for January indeed look promising, albeit somewhat hard to compare with 2019 given holiday calendar shifts. “I have never seen a more constructive backdrop for the industry,” said CEO Ed Bastian during Delta’s fourth-quarter earnings call.

What’s not to like? Well, Delta’s costs are rising rather sharply, with a tentative new pilot contract delivering additional expenses if ratified. After a “very difficult” 2022 operationally, the risk of growing beyond what system infrastructure can handle remains. Nevertheless, Delta expects a fruitful 2023, eyeing a first quarter operating margin of 4-6 percent. Full-year 2023 operating margin should register 10-12 percent. Declining fuel prices, assuming they don’t reverse course, would help.

Delta is in the meantime repaying debt, reinstating employee profit sharing, developing international joint ventures, and planning to offer free high-speed Wi-Fi for all customers. A key means of easing unit cost pressures will be restoring capacity removed during the pandemic, thus boosting asset and employee productivity.

Jay Shabat

Former Kingfisher Exec to Launch New Indian Regional Carrier, Fly91

Fly91, a new Indian airline named after the country’s telephone code, aims to take advantage of India’s rising middle class by focusing its services on second and third-tier cities. The carrier hopes to start operations by the fourth quarter. 

Heralded by Manoj Chacko, the former executive vice-president of the defunct Kingfisher Airlines and the man who set up the India business for risk management group Fairfax group, Fly91 will be the first airline to be based in India’s southwestern coastal city of Goa. India-based investment firm Convergent Finance anchors Fly91’s initial $25 million investment with Harsha Raghavan, managing partner at Convergent, as its chairman with Chacko as CEO.

Speaking to Airline Weekly, Chacko said Fly91 will serve India’s regional airports, from where about 30 percent of India’s domestic passengers originate and which has so far been underserved by existing airlines.

“In spite of having the spending power, when people from smaller towns and cities need to get to a bigger city, they’d either have to drive for around 10 hours or take an overnight train. That’s the space that that we are focusing on,” he said.

Close to 58 airports still fall under the Indian government’s Regional Connectivity Scheme — which are airports which are unserved or underserved. “We see that as a huge opportunity,” Chacko said. And of the 131 operational airports in India, around 20 percent do not have flights serving them.

Flying in India is concentrated on some popular routes as almost 68 percent of the domestic traffic touch one of the country’s 10 busiest airports, there’s a need for second and third tier cities to get onto the air connectivity map, according to Chacko. Only about five percent of domestic seat capacity is deployed on regional routes, Chacko said, compared to roughly double that in mature markets like the U.S. and Europe.

Fly91 will operate ATR 72-600 aircraft on flights of 45-90 minutes in duration connecting the smaller cities in the southern state of Karnataka and Maharashtra in western India. “We will be on an operating lease model and we will be starting with two aircraft and will almost immediately induct a third aircraft,” Chacko said.

Explaining the choice of Goa as a hub for the airline, Chacko shared some interesting data points about the city, which he said was the eighth-busiest air destination in India. Besides the fact that Goa is a year-round tourist destination, he highlighted other important elements that the airline considered while looking at the city as a base.

Goa’s the only place in India that has two fully-functional international airports within an hour’s driving distance — the recently-launched Mopa airport, and Dabolim airport. The city is a popular destination for meetings, conventions, exhibitions and weddings. And few airlines cater to the remote workers living in Goa that have offices in Mumbai, Bengaluru and Pune.

Chacko also mentioned that Fly91 is looking to use its network to pick up the charter traffic that comes in to Goa, which is the largest international charter destination for India.

“We want to be the last mile connectivity airline for people who may fly in on any airline — domestic or international,” he said.

Peden Doma Bhutia

In Other News

  • American Airlines won’t report fourth quarter results until later this month. But based on a preview delivered last week, it needs to start planning a party. The Texas-based carrier blew its earlier forecasts out of the water, such that it now expects to report a quarterly operating margin of between 10 and 11 percent — it previously guided to between six and eight percent. Revenue was way higher than expected, and it’s no mystery why. American overlaps a lot with Southwest, whose epic holiday meltdown surely spilled hordes of weary travelers onto American’s aircraft.
  • Regarding American, Chilean authorities have signed off on its investment in and commercial partnership with low-cost carrier JetSmart. Chile’s Fiscalia Nacional Economica (FNE) approved the tie up with no conditions after finding that it would not substantially reduce competition. American will take an undisclosed minority stake in JetSmart, and the two plan codeshare and loyalty program tie ups. The deal is one in a wave of consolidation among airlines in Latin America, which also includes Avianca and Gol‘s formation of Abra.
  • A corrupted file in the U.S. Federal Aviation Administration’s Notice to Air Missions (NOTAM) system is being blamed for temporarily shutting down the safety communications system last week. The FAA ordered an unusual nationwide ground stop that lasted for nearly two hours on January 11 and disrupted an estimated 11,000-plus flights over the course of the day. Transportation Secretary Pete Buttigieg said his priority was to fix the issue and added that the outage provided an “important data point, at a really important moment, to understand what we’re going to need moving forward” in reference to the upcoming FAA funding reauthorization in Congress.
  • Air France-KLM priced a €1 billion ($1.1 billion) bond linked to its carbon-emission reduction targets. The debt is split between a €500 million 3.3-year tranche with a 7.25 percent coupon, and a €500 million 5.3-year tranche with an 8.125 percent coupon. Both coupons are linked to Air France-KLM’s commitment to reduce its scope 1 and 3 emissions per revenue passenger kilometer (RPK) 10 percent by 2025 from 2019 levels; if it does not meet that target, the coupons increase by at least 37.5 basis points. Proceeds will be used to partially repay the aid Air France received from the French government in 2020.
  • Cyprus Airways said it carried just shy of 282,000 passengers in 2022, after moving just 78,000 a year earlier. In 2019, however, its passenger count was about 400,000. The airline is small, operating just two Airbus A320s currently. Prior to 2016, a separate government-owned entity with the same name served as the island’s flag carrier. A new private-sector investor called Charlie Airlines purchased the rights to use the Cyprus Airways brand in 2016, relaunching the airline. In 2021, it was purchased by a Malta-based company. Currently, Cyprus Airways calls itself a “hybrid airline,” soon flying to 18 destinations. Bookings are “healthy” for the remainder of this winter and “strongly picking up” for the upcoming summer tourist season, the airline said. Tourism is central to its home island’s economy but complicated by geopolitics. Cyprus has long been divided politically (one side backed by Greece and the EU and the other by Turkey). In addition, Russian travelers, a major source of Cypriot tourism in the past, are no longer coming due to EU sanctions.
  • Australia’s Civil Aviation Safety Authority issued an air operators certificate to startup airline Bonza last week. Based in Queensland, the discounter plans to operate low-frequency, point-to-point routes that target Australian leisure travelers. Bonza is backed by U.S. private equity firm 777 Partners. No word yet on when the airline will begin revenue passenger flights, which were planned to start last fall pending receipt of its certificate.

Edward Russell & Jay Shabat

Edward Russell

January 17th, 2023