Delta posted adjusted earnings of $ 735 million in the second quarter, its biggest profit since the start of the pandemic. But analysts surveyed by Refinitiv had expected earnings of $ 1.1 billion for the airline.
Delta’s non-fuel costs were up 22% when adjusted for capacity, compared to what the airline paid in the same quarter of 2019, ahead of the pandemic.
Overtime and premium pay is now expected to cost the company more than $ 700 million throughout the year, Delta CFO Dan Janki said. He did not break out those costs for the quarter, but said most of those expenditures will come in the second and third quarter, which includes the summer travel season. That full-year figure is 50% more than Delta spent on those items in 2019.
“I want to thank our customers for their patience and understanding as we restore the reliability that you’ve come to expect from Delta,” said CEO Ed Bastian, during a call with investors. “The operational environment for the entire industry remains uniquely challenged. I’d like to sincerely apologize to those who have been impacted by cancellations, delays and long wait times over the last two months. … Restoring operational excellence is our top priority. “
Earlier Wednesday Bastian admitted that Delta had scheduled more flights than it should have in the quarter.
Too many flights on the schedule
“This was an industry, not just Delta, that was starved for revenue for the last two years,” he said in an interview on CNBC. “When the spring came and the huge surge came, we all stressed ourselves to do everything we could to take in and capture as much of that revenue. We pushed too hard.”
But things have been much better so far in July, Bastian said, with 99.2% completion rate in the first 11 days of the month, and only 25 canceled flights out of more than 30,000 scheduled during the last seven days.
Although the airline said it expects its profit margins and non-fuel costs to improve later this year, it won’t see those upsides during the rest of this summer travel season.
“In the near-term, as we prioritize restoring reliability, our full year non-fuel unit cost will remain higher than our previous plan,” said Janki.
Bastian said Delta has hired 18,000 employees since the start of 2021, and is now at 95% of its pre-pandemic employment level.
“The chief issue we’re working through is not hiring, but a training and experience bubble,” Bastian told investors. “Coupling this with the lingering effects of Covid and we’ve seen a reduction in crew availability and higher overtime.”
Fuel also a problem
Part of the problem for earnings was the spike in fuel costs, which represents the second largest expense for Delta and other airlines, behind only pay and benefits for staff.
Average fuel costs for Delta rose to $ 3.82 a gallon, up 37% from the first quarter and up 82% from the final quarter of 2021. Delta had previously told investors it expected to pay between $ 3.20 and $ 3.35 in the second quarter. It now expects to pay slightly less in the third quarter, with fuel costing between $ 3.45 and $ 3.60 a gallon.
The good news for the airline, but bad news for customers, is that unit passenger revenue – a measure of air fares – was up 17% compared to the second quarter of 2019. The company’s booking revenue in June reached a record level.
“Demand is really high, so that’s what’s driving fares,” Bastian told CNBC. In fact, he added, “in the past we were talking about fights on the airplane. Now there’s a fight trying to get into the airplane because people want to go.”
Asked about whether fares will stay this high, he conceded that ticket prices “are not sustainable for the long term.” But he suggested fares likely won’t begin to drop until the fall.
Still, the company was limited in the revenue it could take in for the quarter: Delta flew at 18% lower capacity than it did in the second quarter of 2019. So even with the higher fares, total passenger revenue was slightly lower than three years ago.
Total revenue of $ 13.8 billion was $ 250 million more than forecast, slightly higher than the same quarter of 2019, and was boosted by record revenue from the airline’s American Express co-branded credit card. Delta is also the only airline with its own oil refinery, and it benefited from higher fuel costs in that respect: the airline sold $ 1.5 billion in oil to third parties, compared to only $ 40 million in the second quarter of 2019.