Delta Profit Seen Rising as Travel Surge Offsets Higher Costs

Delta Air Lines (DAL), the second-largest U.S. carrier, heads into its fourth-quarter earnings report before markets open on Jan. 13 on an upswing as it rides a rebound in travel after a pandemic-era plunge.

Net income probably rose to $818.3 million, or $1.29 per adjusted share, from 22 cents a year earlier, according to estimates from Visible Alpha. Revenue likely rose 39% year-over-year. Its load factor, reflecting the percentage of available seats sold, has climbed to its pre-COVID range in the mid-80s and is expected to have stayed there in the latest period.

Delta took much of the suspense from its results by raising its earnings forecast in mid-December to a range of $1.35 to $1.40 per share from between $1 and $1.25. But the airline, like its industry, has yet to prove it can cope with big cost increases over the long haul.

Pilots Contract Adds to Cost Squeeze

In addition to recently elevated fuel expenses, Delta faces a higher wage bill this year after agreeing to a preliminary labor contract with its pilots that would increase their wages by 34% over the next four years, including 18% at signing. The proposed deal also includes significant improvements in benefits and a provision that would further increase pilot pay if rival airlines offer their pilots a better deal. JPMorgan analysts estimate the deal's first-year cost at $900 million excluding retroactive hikes and increased profit-sharing expenses, or more than 20% of the airline's estimated pre-tax earnings in 2023.

Investors have been focusing more on the recovery in travel volumes, with Delta projecting in September it would operate at 91% to 92% of its 2019 capacity in the December quarter, en route to "full network restoration" by the summer.

In December, Delta estimated adjusted earnings of $5 to $6 per share in fiscal 2023, along with $2 billion in free cash flow. The company also said it expects revenue growth of 15% to 20% this year after third-quarter sales set a record. “We’ve seen our recession,” CEO Ed Bastian told CNBC last month. “Consumers are prioritizing their spend, where they’re making choices, and they’re prioritizing investing in themselves and experience.”

While third-quarter revenue surpassed its pre-COVID peak, operating income fell almost 30% from three years earlier with the cost of jet fuel nearly doubled.

Delta's stock is down just 7% in the past year, compared with a 16% drop for the S&P 500. The entirety of the outperformance has happened in 2023, with Delta shares up 16% over the year's first six trading sessions.

Delta Key Stats

Source: Visible Alpha

The Key Metric

The load factor is a measure of how fully an airline is using its available seating capacity, calculated by dividing revenue passenger miles by available seat miles. Revenue passenger miles is the number of passengers multiplied by the number of miles they traveled. Available seat miles are the total number of seats available for transporting passengers multiplied by the total number of miles flown during the period.

The higher the load factor the better the airline's profitability, since wages and fixed costs aren't likely to vary proportionately.