By Victor Stefanescu and Alison Sider
Delta Air Lines reported a sharply lower profit in the second quarter as it faced a new challenge during the busy summer travel season: airlines are flying too much.
As the Covid-19 pandemic receded, airlines worked to catch up with travel demand that seemed insatiable by buying planes, hiring staff and increasing flight plans. Consumer air travel has been setting U.S. records, but supply has still outpaced demand as carriers added flights on bigger planes with more seats.
Now, there is a glut of airline seats, especially at the lower end of the market, and carriers are discounting domestic fares to fill them, said Delta Chief Executive Ed Bastian in an interview. Bastian said he expects the domestic market profitability to improve in the coming months as airlines dial back their fall flight plans.
"We see the industry already taking pretty significant corrective action by pulling capacity down," Bastian said. "And we expect by the end of August, we'll have that back in balance."
Delta is the first airline to report second-quarter earnings and it comes days after the daily traveler count through U.S. airport-security checkpoints topped three million for the first time. Still, airlines are contending with difficult business conditions during what is typically their best season.
In the latest quarter, Delta's profit was $1.31 billion, down 29% from the prior year. Adjusted earnings were $2.36 a share, slightly lower than the expectations of analysts polled by FactSet.
Revenue excluding sales from Delta's refinery increased 5.4% to a record $15.4 billion.
Delta's shares tumbled about 6% Thursday as the airline's third-quarter profit outlook also fell short of Wall Street's expectations. Other U.S. airlines were down in morning trading.
Analysts expect Delta to fare better than rivals given its focus on lucrative international routes and premium seating. American Airlines and Southwest Airlines have cut their forecasts for the June quarter. Airlines that focus on cheaper flights have been struggling and modifying their business models to attract passengers.
Lower airline fares were reflected in inflation data released Thursday. The airline component of the consumer-price index was down 5.1% in June from a year earlier, according to the latest figures.
Delta's strategy of focusing on high-end offerings has been paying off as customers have been more willing to shell out for perks such as lounge access and posh plane seating.
Over half of Delta's revenue now comes from sources such as its loyalty program and premium ticket sales. Sales of premium tickets also grew more quickly than those in the airline's main cabin.
Southwest is contemplating whether to add seats with extra legroom as airlines have expanded premium options.
"There's a lot of room for others to follow our lead," Bastian said.
Still, Delta wasn't immune to the airline industry's race to the bottom on domestic ticket prices, as competitors have had to match falling fares to lure passengers. While total domestic revenue is up, Delta is earning less money per seat flown a mile, reflecting diminished pricing power. Its planes were slightly less full than they were a year earlier, too.
While Delta said trans-Atlantic travel demand remains strong, Bastian said he expects the Summer Olympics in Paris to dent revenue between June and August by $100 million. The effect from the Games, he said, would be temporary.
"Unless you're going to the Olympics, there's no business going, there's not a lot of others going," Bastian said.