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Delta’s summer outlook disappoints as industry’s flight glut drives down fares

Delta Air Lines on Thursday forecast record revenue for the third quarter thanks to booming summer travel demand, but its projection fell short of analysts’ estimates as carriers discounted fares after flooding the market with flights.

In the current quarter, Delta expects sales to rise no more than 4%, below the 5.8% growth analysts polled by LSEG estimated, and it forecast adjusted earnings per share of $1.70 to $2 a share, short of the $2.05 a share analysts estimated.

The Atlanta-based carrier on Thursday kicked off an airline earnings season marked by packed planes but profits under pressure as increased capacity weighs on fares and costs rise. The Transportation Security Administration said it screened more than 3 million people for the first time on Sunday at U.S. airports.

Delta is a standout in the U.S. airline industry as the most profitable carrier, and Thursday’s report is a sign that competitors, particularly those focused on the oversupplied U.S. air travel market, could struggle this summer.

Rival United Airlines, which is scheduled to report results next Wednesday is trying to catch up to Delta’s profitability, and both carriers have been racing to add more premium seats that fetch more revenue from consumers. Analysts have the most buy ratings on Delta and United compared with other U.S. airlines.

American Airlines and Southwest Airlines, which report on July 25, have each lowered their revenue forecasts for the second quarter. Money-losing airlines like JetBlue Airways, Frontier Airlines and Spirit Airlines are in a tougher position as they try to turn profits in an oversupplied U.S. market.

“The reality here though is that Delta’s financials remain among the best in the industry …, which speaks to just how bad the low end of the US domestic market is today,” said Melius Research airline analyst Conor Cunningham.

Shares of Delta fell 4% to $44.99 on Thursday, recovering somewhat from the lows of the day. Other major airlines also fell.

Here’s how Delta performed in the second quarter, compared with Wall Street expectations based on consensus estimates from LSEG:

  • Adjusted earnings per share: $2.36 vs. $2.36 expected
  • Adjusted revenue: $15.41 billion vs. $15.45 billion expected

For the three months ended June 30, Delta brought in adjusted revenue of $15.4 billion, up 5.4% from last year and shy of Wall Street estimates. Net income dropped almost 30% from a year ago to $1.31 billion, or $2.01 a share, with operating expenses up 10% from last year. Adjusting for one-time items, Delta reported earnings of $1.53 billion, or $2.36 a share, in line with analysts’ estimates.

“The second quarter was a really strong performance,” CEO Ed Bastian said in an interview. “What you see happening is the impact in the domestic marketplace to the lower fare discounting that’s been going on this quarter.”

Airfare in June was 5.1% lower than a year earlier and 5.7% lower than the month prior, according to Thursday’s latest read on consumer prices, which showed easing inflation.

Bastian said lower industry capacity in the U.S. toward the end of the summer will better match up with demand. Delta said that corporate travel continues to increase and that most customers expect to maintain or grow their corporate travel spending this quarter and after.

The carrier expects to grow its flying capacity 5% to 6% in the third quarter compared with last year, a slower clip than the 8% it expanded in the second quarter. Bastian told CNBC that he expects Delta’s unit revenues to turn positive over last year in September.

American Airlines in May said it would expand capacity by 3.5% in the second half of the year, less than half the clip it grew in the first half.

Revenue from international travel has been strong since the pandemic waned, though airlines have expanded schedules, meaning more competition for customers. Unit revenue for trans-Atlantic flights will take a 1-percentage point hit from the Summer Olympics in Paris, Delta said. The impact is equal to about $100 million from June through August, Bastian told CNBC. The airline has more capacity to the French capital than rivals through its partnership with Air France.

Delta reported growth in premium tickets, like those for first class, jumped 10% in the second quarter to $5.6 billion, while revenue from coach tickets rose 0.3% to about $6.7 billion. Its lucrative American Express credit card deal brought in $1.9 billion, up about 9% from last year.

Bastian said that Delta is “fairly well insulated” from industry overcapacity because it draws so much of its revenue from premium seats and other sources rather than standard coach tickets.

Delta reiterated its full-year earnings forecast of $6 to $7 a share and said it still expects to generate free cash flow of as much as $4 billion.

Disclosure: CNBC parent NBCUniversal owns NBC Sports and NBC Olympics. NBC Olympics is the U.S. broadcast rights holder to all Summer and Winter Games through 2032.