Delta’s Profits Soared in Q3, But Slashed Outlook on Rising Fuel Costs

Delta Q3 2023 Results

The airline industry went through e very good summer period due to strong travel demand, continuing the post-pandemic recovery. Global traffic increased 28.4% y/y in August, now at 95.7%of pre-Covid levels, according to the latest report by the International Air Transport Association (IATA). ^[1]

Riding this wave, Delta Air Lines announced on Thursday revenues of $15.5 billion (GAAP) for the third quarter of the year, driven by international travel. This marked a record for the period and an approximately 10% y/y increase. The positive effect of the travel boom was evident to its bottom line as well. Net income soared nearly 60% y/y to $1.108 billion and earnings/share came in at $1.72, strengthening from a year ago. Even though the financials were impressive, these figures were worse than the second quarter. ^[2]

As I recently noted in the Top 10 Stocks for Q4 guide, "rising fuel costs pose another source of concern". Oil prices have surged over the past few months, due to the massive supply cuts by Saudi Arabia, Russia and other OPEC+ members. Delta Air Lines had already slashed its guidance ahead of today's results because of that and the attack of Hamas on Israel over the weekend, threatens to intensify those headwinds.

Delta's fuel expense eased in Q3 compared to a year ago, but rose significantly from Q2, to $2.936 billion. Higher fuel spend ate into its profitability, with operating margins narrowing to 12.8% versus 16% in the second quarter. Furthermore, the US carrier lowered its full year outlook, now expecting Earnings/share in the range of $6.00 to $6.25, compared to $6 - $7 previously.

Airlines have generally managed to cope better with the surge in demand, compared to last year, but there are still challenges. Similarly to what some its competitors have done, Delta unveiled changes to its loyalty program that would limit benefits and restrict access to its Sky Club lounges, but simplified its program after consumer backlash ^[3]. Furthermore, there are still stress points in the industry's infrastructure, underscored by the recent traffic control failure in the UK, which caused 1500 flight cancellations. ^[4]

DAL.us has entered its fourth straight losing month and erases most of this year's gains, weighed by higher oil prices, negative media from its loyalty program changes, high inflation and tight monetary environment. It dropped on Monday due to the situation in the Middle East and is losing ground today after the Q3 results, despite opening higher.