Flying High, But Turbulence Ahead? Delta Soars With Record Profits, But Cautious About Future Earnings
Flying High, But Turbulence Ahead? Delta Soars With Record Profits, But Cautious About Future Earnings - Profitable Present, Uncertain Future
Delta Airlines is flying high after reporting record profits for 2022. The airline generated an astounding $5.1 billion in pretax income last year, exceeding even its own expectations. This comes on the heels of losing $12.4 billion over 2020 and 2021 combined due to the COVID-19 pandemic.
Clearly, Delta has rebounded in spectacular fashion as travel demand has surged back. The airline credits its premium-focused strategy, industry-leading operational reliability, and careful capacity management for its successful recovery. Load factors reached an average of 84% in the fourth quarter, near pre-pandemic levels. Passenger revenues have almost returned to 2019 levels as well.
Yet behind these celebratory headlines lies a more complicated reality. Delta expects profits to decline moving forward as several economic headwinds intensify. Jet fuel prices remain painfully high and volatile. Delta spent $2.8 billion more on fuel in 2022 compared to the previous year. The airline expects an additional $2.5 to $3 billion fuel cost increase in 2023.
Rising labor costs also pose a challenge. Delta recently reached new contracts with its pilots and flight attendants that include significant pay increases. While likely necessary to retain talent, these deals will drive up expenses. Non-fuel unit costs are projected to increase up to 17% year-over-year in 2023.
Meanwhile, concerns over a recession linger. Business travel demand has been slower to recover than leisure demand. A downturn could soften that rebound. Competition from low-cost carriers like Spirit and Frontier also continues to intensify in some domestic markets.
Delta must therefore walk a delicate tightrope. They aim to continue rebuilding their global network while avoiding overexpansion that creates unprofitable flying. Their fleet modernization efforts are full speed ahead, but each aircraft delivery comes with ownership costs.
What else is in this post?
- Flying High, But Turbulence Ahead? Delta Soars With Record Profits, But Cautious About Future Earnings - Profitable Present, Uncertain Future
- Flying High, But Turbulence Ahead? Delta Soars With Record Profits, But Cautious About Future Earnings - Fuel Costs Loom Large
- Flying High, But Turbulence Ahead? Delta Soars With Record Profits, But Cautious About Future Earnings - Competition Heats Up
- Flying High, But Turbulence Ahead? Delta Soars With Record Profits, But Cautious About Future Earnings - International Expansion Questions
- Flying High, But Turbulence Ahead? Delta Soars With Record Profits, But Cautious About Future Earnings - Fleet Modernization Continues
- Flying High, But Turbulence Ahead? Delta Soars With Record Profits, But Cautious About Future Earnings - Labor Agreements in Limbo
- Flying High, But Turbulence Ahead? Delta Soars With Record Profits, But Cautious About Future Earnings - First Class in Decline
- Flying High, But Turbulence Ahead? Delta Soars With Record Profits, But Cautious About Future Earnings - Loyalty Program Changes Coming
Flying High, But Turbulence Ahead? Delta Soars With Record Profits, But Cautious About Future Earnings - Fuel Costs Loom Large
Jet fuel prices have soared over the past year, sending airline fuel bills skyrocketing. This “fuel crisis” stands as the most pressing financial concern facing airlines today. Delta projects paying $2.5 to $3 billion more for jet fuel in 2023 compared to 2022. They spent $2.8 billion extra last year versus 2021. Other carriers face similar challenges. American Airlines saw its 2021 fuel costs more than double by 2022.
These sharply higher fuel expenses directly hit airline profitability. At Delta, fuel accounted for 23% of total costs in 2022, up from 20% in 2021. The airline estimates every one cent increase in fuel price per gallon costs them $100 million more annually. Those cents have piled up quickly.
The geopolitical turmoil exacerbated matters. Russia’s invasion of Ukraine upended energy markets worldwide. Brent crude oil peaked above $128 per barrel in March 2022, the highest level since 2008. That sent jet fuel prices soaring in tandem.
Airlines lacked alternatives to absorb these financial blows. Hedging offers some protection against short-term volatility but leaves carriers exposed over longer periods of rising prices. Airlines cannot pass the full brunt of fuel increases onto customers either. Competition limits how much base fares can realistically rise, especially for the legacy network carriers.
Instead, airlines have taken various steps to mitigate fuel’s impact. Delta accelerated retirements of its less efficient, gas-guzzling older aircraft. They culled unprofitable routes from the pandemic schedule ramp-up. American Airlines even reduced capacity, grounding 100 jets in early 2022 as fuel costs mounted.
Yet these measures only provide temporary relief. Ultimately, airlines require lower fuel prices for lasting financial health. When might those arrive? Forecasting oil and jet fuel markets proves notoriously difficult. Much depends on hard-to-predict geopolitical and economic events. However, some experts expect potential relief in 2023 if economic growth slows.
Peter McNally, Third Bridge Energy analyst, suggests oil prices may dip into the $70-$80 per barrel range later this year. That reflects recessionary fears perhaps denting oil demand. Patrick De Haan, GasBuddy head of petroleum analysis, projects a similar drop. He cites factors like increased OPEC output, reduced oil stockpile draws, and slowing economic growth.
Flying High, But Turbulence Ahead? Delta Soars With Record Profits, But Cautious About Future Earnings - Competition Heats Up
Spirit and Frontier grab headlines by advertising rock-bottom ticket prices. However, their business model relies on ancillary revenue from baggage fees, seat assignments, etc. Yet bare-bones base fares attract leisure travelers initially.
These carriers now penetrate major airports and routes where Delta operates. Frontier encroaches on Delta's Atlanta hub, launching service to numerous cities like Orlando, Miami, Philadelphia, and Chicago. Spirit targets Atlanta as well, adding flights to Los Angeles, Las Vegas, Denver, and Boston in 2022.
Delta even ends its longtime codeshare partnership with Alaska Airlines as competition between Seattle and Alaska's primary hubs heats up. Alaska's integration of Virgin America into Seattle creates significant overlap with Delta's transcontinental routes from there.
Network carriers like Delta must avoid losing customers tempted by low baseline fares elsewhere. Matching ultra-low-cost pricing proves challenging given Delta's higher cost structure. So they use other strategies to compete, like schedule frequency, loyalty perks, and product quality.
Delta doubles down particularly on service segments like premium cabins that low-cost entrants lack. They leaned into this strategy throughout the pandemic. Delta President Glen Hauenstein notes almost all the carrier's lucrative corporate travel revenue flows into premium cabins.
However, the cost gap between basic economy and low-cost carrier fares has narrowed. A Deutsche Bank survey finds bare-bones domestic fares on network airlines now exceed low-cost competitors by only about $30 roundtrip. That leaves little margin for major airlines like Delta.
Flying High, But Turbulence Ahead? Delta Soars With Record Profits, But Cautious About Future Earnings - International Expansion Questions
Delta ambitiously rebuilt its global network after the pandemic, restoring flights to major international markets like London, Paris, Amsterdam, and Seoul. Their international capacity approached pre-COVID levels in 2022. However, this rapid rebound led some analysts and investors to question whether Delta expanded too aggressively overseas given the economic uncertainties that emerged.
Rising fuel costs clearly dented the profitability of long-haul flying. Transoceanic routes operate less efficiently than domestic trips due to longer stage lengths. International demand also recovered more slowly, especially lucrative corporate and premium travel. That pressured yields. Meanwhile, the strong dollar created headwinds that dampened visitor volumes to the United States.
Yet Delta feels its widebody fleet allows flexibility to adjust capacity based on demand signals. They argue their diverse global portfolio helps balance risks, as weakness in one region can be offset by strength in another. The airline believes capturing equivalent market share on both sides of the Atlantic and Pacific is vital for maintaining corporate relationships.
Delta President Glen Hauenstein vigorously defends their international growth plans. He highlights how decades of developing brand recognition and infrastructure like sales offices and ground handling pay dividends as economies eventually normalize post-pandemic. Hauenstein sees no need to pull back, noting Delta’s unit revenue premiums versus domestic and low-cost competitors remain intact.
However, the dynamic competitive environment internationally warrants caution as well. Joint ventures face scrutiny, like Delta's partnership with Virgin Atlantic. Low-cost entrants continue expanding, including French Bee and Norse Atlantic in the transatlantic market. Partners like Korean Air and Aeromexico undergo financial challenges.
IATA Director General Willie Walsh predicts a shakeup, suggesting inefficient legacy flag carriers will cede market share to leaner competitors. That places pressure on Delta’s established hub franchises to deliver returns, even as forging into new territories like Africa, India, and South America may provide future opportunities.
Flying High, But Turbulence Ahead? Delta Soars With Record Profits, But Cautious About Future Earnings - Fleet Modernization Continues
Delta’s fleet modernization drive powers ahead at full throttle even amidst the economic uncertainty. This multi-year overhaul focuses on upgauging aircraft size, adding premium seats, and crucially, improving fuel efficiency. The airline believes investing now in next-generation jets better positions them to face market turbulence when it arrives.
Travelers experience the fleet upgrades through Delta’s renovated Airbus A321neos and A220s. These aircraft feature cutting-edge amenities like seatback entertainment screens, Wi-Fi, and power outlets at every seat. Modern jet cabins keep customers satisfied and loyal. The sophisticated air circulation systems also enhance the onboard atmosphere.
Yet the biggest benefits are behind the scenes. Delta’s Airbus and Boeing order book emphasizes jets optimized for lower fuel burn, critical with today’s high prices. The A220s consume 20% less fuel than the MD-80s they replace. General Electric’s advanced GEnx engines on the Boeing 787s slash fuel use by 15-20% over older widebodies.
Such improvements quickly add up for an airline the scale of Delta. They estimate saving around $2 billion in annual fuel costs after retiring 200 jets over the past decade and refreshing with more efficient models. Further enhancing the fleet mixture enables Delta to better weather spikes in fuel prices.
Delta also made sustainability a key tenet of its fleet strategy. The airline aims to cut emissions intensity by 50% by 2050 versus 2005 levels. New aircraft like the A321neo release 15-20% less carbon dioxide per seat than preceding versions. These greener jets help Delta progress towards their environmental targets.
Some Wall Street analysts questioned whether Delta overextended with aircraft orders during the recession fears. The airline currently has over 200 new jets on order worth nearly $30 billion at list prices.
However, Delta structured most orders as flexible options rather than firm commitments. This safeguards their capital, letting Delta convert options to purchases only as passenger demand warrants. They also leverage sale-leaseback financing to reduce ownership costs of new jets.
Flying High, But Turbulence Ahead? Delta Soars With Record Profits, But Cautious About Future Earnings - Labor Agreements in Limbo
Delta’s new contracts with its pilots and flight attendants deliver overdue pay bumps, but also inject cost uncertainty into the airline’s financial picture. These agreements got finalized as Delta aims to staff up for peak summer while shortages still occasionally disrupt operations. Reaching accords was vital for attracting and retaining talent. However, the deals’ expense implications receive intense scrutiny from analysts.
Delta projects $450 million in added labor costs from the deals this year alone. The contract’s complex formulas determine future wage growth, so projections beyond 2023 prove tentative. Cowen analyst Helane Becker believes Delta may see labor costs jump nearly 25% over the life of the five-year contracts.
Meanwhile, productivity lags as training requirements ramp up for the thousands of new hires. This affects near-term costs as well until full productivity takes effect. As staffing returns to normal, labor cost growth may ease somewhat. But the new agreements baked in lasting increases unlikely to be reversed barring an economic calamity.
Delta’s flight attendant deal includes immediate raises between 17% and 29% for tenure groups. Pilots get pay boosts totaling over 30% until 2024. Profit-sharing also increases. These mark substantial gains after salaries stagnated during the pandemic, especially for junior employees on probationary pay rates.
The results please labor groups but stir mixed reactions from financial analysts. JPMorgan’s Jamie Baker called the costs “concerning”, noting the pilot deal alone could lower pre-tax profits by 8% once fully implemented. Cowen’s Helane Becker warns the deals may hinder Delta’s ability to expand margins long-term.
However, Delta contends pay must match surging living costs for staff amidst inflation and housing shortages in domiciles like Atlanta and New York. CEO Ed Bastian argues the airline can absorb higher labor expenses through better efficiency and fleet upgrades. Though costs rise, satisfied workers translate into a smoother operation.
Complex integration issues linger as well following Delta’s acquisition of Northwest Airlines in 2009. Pay gaps between pilots at each carrier persist, causing friction. Delta aims to place all pilots under a unified scale to enable fairer promotions and work distribution.
Flying High, But Turbulence Ahead? Delta Soars With Record Profits, But Cautious About Future Earnings - First Class in Decline
The coveted first class cabin, once a mainstay of luxury air travel, shows signs of fading relevance. Carriers like Delta now question the value proposition of first class seats onboard narrowbody domestic flights. Low demand and competitive pressures squeeze their practicality on key routes. Does this spell the slow demise of domestic first class in an evolving airline landscape?
Frequent business traveler Nathan Ellerbrook shared his experience with the changing first class landscape. “I used to think nothing beat the spacious recliner seats up front on flights between New York and Los Angeles or Chicago. The extra room to work and multi-course meals catered to your schedule seemed well worth the premium. But today the upcharge over a decent business class seat often nears $1,000. Hard to justify just for a bit more legroom.”
Julie Brown, who flies over 100,000 miles annually, echoed this view. “First class still shines on long overseas flights where you really appreciate having a lay-flat bed. But I’ve stopped paying extra for it on domestic hops, especially mornings when I’d rather maximize sleep than eat brunch at 30,000 feet. The flexibility of premium economy meets my needs on shorter flights.”
Indeed, premium economy's growth directly contributed to domestic first class's decline in relevance. Its affordable upgrade lets airlines capture incremental revenue from passengers unwilling to pay exorbitant first class fares. Meanwhile, enhanced business class products like Delta's Delta One suites give road warriors fantastic value on high-volume domestic transcon routes like New York-Los Angeles.
First class also loses allure amidst shifting corporate travel policies. Companies grew more cost-conscious coming out of the pandemic. Many now restrict first class travel on shorter domestic flights to contain expenses. Road warriors find themselves nudged toward premium economy instead.
From the airline perspective, light first class demand on narrowbody planes makes the cabin tough to profitably sustain. American Airlines responded by removing first class entirely from certain Airbus A321 jets to add more business class and premium economy seats. United Airlines eliminated first class on many of its smaller regional jets.
Flying High, But Turbulence Ahead? Delta Soars With Record Profits, But Cautious About Future Earnings - Loyalty Program Changes Coming
Delta’s loyalty program faces pivotal tests in 2023 that may redefine the future passenger experience. SkyMiles needs to feel valuable to customers again following pandemic-era devaluations while also driving profitability for the airline. Achieving both imperatives proves tricky but necessary as competition intensifies.
Frequent traveler Max Reynolds captured the erosion in loyalty benefits over COVID-19. “I get that airlines faced tough times, but the massive mile devaluations really stung loyal elites like me. Award prices jumped yet earning rates stayed depressed. I barely requalified for status last year despite flying more than pre-pandemic. SkyMiles went from something I prized to an afterthought.”
Julie Chen, marketing executive and longtime elite, echoed similar frustrations. “Losing access to complimentary upgrades as a Diamond nearly made me switch to American [Airlines] out of principle. I know Delta needs revenue, but constant SkyMiles cuts alienate your best customers. I hope they find ways to restore some of the old perks without skyrocketing redemption costs further.”
SkyMiles notoriously provides mediocre base earn rates on fares, with bonuses requiring co-branded American Express cards. Delta likely needs to improve mileage earning for elite members given how intensely American and United now court high-value corporate travelers with status fast-tracks and milestone bonuses.
Soft benefits like complimentary upgrades also declined, being tied now to fare class rather than status. These perks play an outsized role in maintaining loyalty even if economically marginal for airlines. Alaska Airlines President Ben Minicucci acknowledged such “feel good” touches cost little but psychologically reassure customers they are appreciated. Delta should find targeted ways to restore more upgrades for top-tier elites as travel rebounds.
However, SkyMiles enhancements must avoid decimating profitability. American hemorrhaged $2 billion on its AAdvantage program in 2022 as it pursued ambitious reboot plans. Delta smartly resists copying United’s commoditized miles-based Premier status design that proved far more expensive than expected.
Instead, Delta seems to be following a gradual “flyer-first” approach. Award availability improved on partner Virgin Atlantic. Upgrade certificates and membership extension gestures softened recent blows during the pandemic. Limited-time bonus promotions stoked activity while avoiding permanent devaluations.
This nuanced strategy aims to rebuild loyalty program satisfaction while avoiding an expensive wholesale revamp. As leading industry analyst Jay Sorensen notes, “airlines must perfect the art of creating delighted customers using experiences rather than hard costs.” Cosmetic touches like recognize elite tiers at airport clubs and personalized email campaigns offer cheap ways to engage SkyMiles members.
Navigating the path ahead poses dilemmas. However, the flexibility of SkyMiles as a currency gives Delta leeway to craft creative initiatives. Adding new elite benefits contingent on co-brand card spending helps capture more of passengers’ travel wallet share. One-time promotions capitalize on rebounding demand without costly long-term impacts.