Delta cargo revenue down 36% YoY

Delta Air Lines reported $14.6 billion in third-quarter revenue on Thursday, marking a 13% increase year over year, but Q3 cargo revenue was down 36% YoY, at $154 million. [caption id="attachment_57137186" align="alignright" width="300"] A Delta A350 from below (Photo/Delta)[/caption] “Total unit revenues were down 2.5%, including a point of pressure from cargo and MRO [maintenance, repair and operations],” Delta President Glen Hauenstein said during the company’s earnings call last week. WHY IT MATTERS: Delta, often the first of the major carriers to report, serves as a bellwether for the remainder of the earnings season. With Delta reporting a 14% YoY increase in passenger revenue but a 36% YoY decrease in cargo revenue, it is likely that other major carriers will also report increased passenger revenue and decreased cargo revenue. Delta’s Q3 earnings are in line with its earnings from Q1 and Q2 , showing continued challenges in the airfreight industry attributed to increased capacity and decreased demand. BY THE NUMBERS: In addition to record Q3 revenue, Delta also reported: Earnings per share of $2.03, up 35% YoY; Operating income of $2 billion with an operating margin of 13.5%; and Net income of $1.3 billion, up 32% YoY. WHAT THEY’RE SAYING: Despite some hiccups in early Q3, Delta executives said the remainder of the quarter went smoothly and they expect to see improved performance in Q4. “Following a high number of irregular operations days early in the quarter driven by weather and ATC [air traffic control] constraints, we have seen consistent improvement in our operating metrics,” Delta Chief Executive Ed Bastian said in the earnings call. ATC staffing shortages led to delays for carriers across the United States in Q3. “In October, we are running a near-perfect completion factor across the mainline system, and we remain No. 1 in on-time arrivals year to date,” Bastian said. STATE OF PLAY: Q3 earnings and cash flow were lowered by higher fuel and maintenance costs, Bastian said. “We are seeing the structural step-up in operating costs amid increasing fuel prices, creating some near-term pressure on industry margins,” he said. “However, I fully expect that the market will adjust to higher costs, as it has historically, and reestablish equilibrium.” The Q3 adjusted fuel expense of $3 billion was down 10% YoY and the adjusted fuel price of $2.78 per gallon declined 21% YoY, the earnings report stated. “Fuel prices have moved higher since July, adding roughly $400 million of expense to our outlook for the second half of the year,” Delta Chief Financial Officer Dan Janki said in the earnings call. “We expect December fuel prices to be $2.90 to $3.20 per gallon, with the refinery expected to be roughly break-even for the quarter.” FLASHBACK: S&P Global Ratings upgraded Delta’s credit rating to a “BB+” rating, one step below an investment-grade rating, in August. “The company, along with its mainline peers, has benefited from continuing strong passenger airline demand and industrywide capacity constraints that have led to full planes and high fares,” S&P said in an Aug. 24 report. “Delta is on pace to generate sharply higher earnings and cash flow in 2023, led by capacity growth and steady operating margin expansion.” NOTEWORTHY: Though the war in Israel did not affect Q3 earnings, Delta’s executives did address the conflict in the earnings call. “I want to acknowledge the unfolding war in Israel and the tragic loss of life that has ensued,” Bastian said. “Delta is donating $1 million to the American Red Cross for the International Committee of the Red Cross to help fund humanitarian efforts in the conflict. This includes emergency assistance such as health services, emergency care, ambulance services and other critical needs.” Delta’s flights to and from Tel Aviv’s Ben Gurion International Airport (TLV) have been suspended through Oct. 31. “We’re closely monitoring the situation in Israel [and] we will evaluate restarting flights as this situation stabilizes,” airline president Hauenstein said. “The reason we’re not saying how much exposure there is, we don’t know how this will evolve yet.” At this time, there are no plans to resume flights to Israel as “it’s considered unsafe for a U.S. carrier to operate in that airspace,” Bastian said. MARKET REACTION: Shares of Delta Air Lines Inc. [NYSE: DAL] were up 0.94% from market open Monday to $34.42 as of market close today. Delta has a market capitalization of $22.15 billion. FUTURE LOOK: Delta executives expect a robust Q4 due to strong demand for travel and a sturdy domestic demand environment. “We expect our December quarter revenues to be 10% higher than 2022 with a 10% operating margin and earnings of over $1 per share,” Bastian said. “This brings our expectation for full-year earnings to over $6 per share on a double-digit operating margin and free cash flow of $2 billion. Since raising full-year guidance over the summer, revenue outlook has improved.”

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