Americans are traveling in record numbers this summer, but Delta Air Lines experienced a 29% decline in second-quarter profit due to rising costs and industry-wide discounting of base-level fares.
The airline has also projected a lower-than-expected profit for the third quarter, falling short of Wall Street expectations.
Delta’s shares fell 8% before the market opened on Thursday, affecting the shares of other carriers as well.
On Thursday, Delta reported a profit of $1.31 billion from April through June, down from $1.83 billion during the same period last year. Despite this, revenue increased by 7% to nearly $16.66 billion, marking a company record for the quarter. This surge in revenue is reflected in the recent high travel volumes, with the Transportation Security Administration screening over 3 million travelers in a single day on Sunday.
“Demand has been really strong,” CEO Ed Bastian said. “International, business travel, and our premium sector all outperformed.”
Delta’s results highlight a growing divide between premium and economy passengers. Revenue from premium passengers rose by 10%, approximately $500 million, while sales in the main cabin remained flat compared to last year.
Economists note that wealthier Americans are benefiting from strong gains in stock prices and home values, while middle-class families are more cautious with spending due to high inflation over the past three years, which has eroded their paychecks.
Delta, along with United and other airlines, has increased efforts to attract premium passengers by offering better seats, food, airport lounges, and other amenities.
“Our more affluent customers are contributing meaningfully to our growth, and that’s why we continue to bring more and more products to them,” Bastian stated.
However, Bastian refuted claims that middle-class travelers are cutting back on spending. He attributed the trend to supply and demand dynamics, with the airline industry, including low-fare carriers, adding flights faster than demand is growing, leading to lower fares. “The discounting is in the lower-fare bucket,” he explained.
Delta plans to slow the rate of flight additions for the remainder of the year. Bastian expressed confidence that other airlines would do the same, potentially allowing carriers to regain pricing power. Although Delta doesn’t disclose average fares, passengers paid 2% less per mile in the second quarter, and there were slightly more empty seats on average compared to a year earlier.
The increase in revenue was offset by a 10% rise in expenses, with higher costs for labor, jet fuel, airport fees, airplane maintenance, and operating its oil refinery.
Labor costs grew by 9% over the previous year. Delta hired thousands of new workers as travel recovered from the coronavirus pandemic, but current hiring is primarily to replace departing or retiring employees. Last fall, Delta laid off an undisclosed number of nonunion office employees, indicating management considered the company overstaffed.
Atlanta-based Delta reported adjusted earnings of $2.36 per share, a penny below the average forecast in a FactSet survey.
For the third quarter, Delta anticipates an adjusted profit between $1.70 and $2 per share, below analysts’ forecast of $2.04 per share. The airline reiterated its previous full-year profit forecast of $6 to $7 per share.
