Shares of Delta Air Lines (DAL) are falling as the company reports earnings that miss Wall Street estimates. Speaking to Yahoo Finance, Delta CEO Ed Bastian said that while the market for the lower fare category has softened, travel demand remains robust overall.
Morningstar Industrials Analyst Nicolas Owens joins Morning Brief to provide insight into Delta's results.
Owens explains why Delta is in a tough position: “Delta is kind of the leader of the pack, the first to report, and they really have the most, let's say successful, customer segmentation that allows them to drive premium revenues and really great margins. I mean, a 15% operating margin is pretty enviable for an airline, and so when they say it's going to be a little soft in the next quarter, the assumption is that other airlines are going to be even softer.”
For the entire airline industry, Owens noted of the lack of newer aircraft: “This is kind of impacting the entire industry, I mean, Southwest (LUV) has a unique exposure to Boeing (BA) aircraft, but in general, new aircraft have been delayed. Even from Airbus (AIR.PA). And so you're going to see them just hold on to some of their older aircraft a little bit longer. Those aircraft are a little more expensive to operate, a little less fuel efficient… they require maintenance, so that's a little harder to come by with higher maintenance costs and parts shortages in some places. But that's just a little bit of friction, let's say, that the entire industry is going to experience.”
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This post was written by Nicholas Jacobino
Video transcript
In one of the biggest early earnings reports of the season, Delta and Delta Airlines shares fell this morning.
The company reported record revenue in the second quarter, but said lower airfares were putting pressure on profits, which fell short of analysts' expectations.
I had the opportunity to discuss the company's report with Ed Bastian, the CEO of Delta Dis.
And here's what he had to say about the company's guidelines.
Let's listen.
Well, relatively speaking, we predict a slightly lower reach.
That's exactly what I just said about the weakness of the domestic market in the lower fare category, the discounts given particularly by the lower cost airlines.
The good news is that capacity is expected to be back in balance in September.
And we are seeing the taste of the industry with the offerings that are coming into the market and that is expected to enable us to achieve positive unit sales in the domestic market in the month of September, which will allow us to dig deeper into Delta's bottom line.
We are joined by Nicholas Owens, equity analyst at Morningstar Industrials.
It's great to have you here on the show. Okay.
Are expectations of Delta on the street simply too high or is this a symptom of what we should expect now, given the direction in which consumers are moving?
I think it might be a little too lofty.
Yes.
Um, over the last few years we've had record demand and record prices.
And basically I see that as a stabilization and my fair value for Delta is $39.
Uh, so uh, it was closer to where I thought the quarter would be, it didn't really surprise me.
And that's really the most important story: a little bit of a price reduction.
As you heard from CEO Nicholas, it seems that the public opinion, at least from a population perspective, is that there may be some concern about healthcare across the sector. Is that the right interpretation and why or why not?
Well, Delta is kind of the leader of the pack, although they were the first to report their findings. They really have the most successful customer segmentation, which is why they have record or premium revenues and really great margins.
I mean, a 15% operating margin is pretty enviable for an airline.
Um, if they say it's going to be a little bit less in the next quarter, then the assumption is that other airlines will be even less strict.
It seems that there is still demand among consumers. According to CEO Ed Bastian, this is an affluent consumer who likes to spend money on international travel, for example.
I think it's just kind of where those international travel itineraries are compared to what we saw last year, when there was still a lot of revenge travel in the pipeline.
And it appears some of that has shifted to the Latin America division, which saw revenue increase about 4% in the most recent quarter.
Yeah, and again, there's still a lot of demand for travel, you know, the planes are full.
Uh, I see it as a bit of a barbell in the sense that you still have all the premium seats and stuff, but the price war, if you want to call it that, is in the back half of the plane, you know, where Southwest is cutting prices and they're also under pressure from the even lower-cost carriers. Nicholas, when it comes to, uh, I think some of the comments from management about the capacity growth here will taper off a bit going forward.
How big of a boost do you think these adjustments will be to their business?
At least in the second half of the year, or how quickly can we expect this to trickle through?
Well, you know, they're targeting 3 to 5% capacity growth in the second quarter and only 2 to 4% revenue growth.
So, uh, 2 to 5% or something, that's 3 to 5% capacity growth. That's pretty slow compared to the last few years. You're basically matching 2019 capacity levels.
Uh, and actually, we're coming off this record high revenue. You know, Nicholas, while we're on the subject, one of the big things that struck me in my conversation with Delta was the headwinds that they're seeing, or at least the headwinds that they're seeing, I should say, within manufacturing.
And I believe he told me that maintenance is lagging behind on a number of points.
You see some aircraft maturing or getting closer, it's going to be a multi-year process to fix the overhang for the entire industry.
Delta agrees that it is important to note that this has implications for virtually the entire sector.
Uh, I mean, Southwest has a unique exposure to Boeing aircraft, but generally new aircraft have been delayed, even from Airbus, and so you'll see them hold on to some of their older aircraft for a little bit longer.
These planes are slightly more expensive to operate and consume less fuel.
Uh, and then they also need maintenance.
Well, that's a lot harder to find, with higher maintenance costs and a shortage of parts in some places.
Well, that's a little bit of friction.
Let's say the entire industry will experience this.
Okay, Nicholas Owens, Morningstar Industrials Equity Analyst.
Thank you very much for joining us this morning.
Thank you for letting me be here.
