Delta Air Lines is confident in its plans to continue its growth into 2019, as it closes in on margin growth and offsetting the dramatic run up in fuel prices.
The Atlanta-based carrier expects capacity to grow in excess of its 3% target for 2018 and continue at about the same rate next year, while also covering the more than $2 billion in additional fuel expenses this year, executives said during its third quarter earnings call on 11 October.
"Our speed and recovery to these costs have never been better," said Ed Bastian, chairman and chief executive of Delta, during the call. The airline recovered about 85% of fuel expenses, which were up 40% year-over-year to $2.5 billion in the third quarter, through higher fares and its various revenue and cost initiatives.
The airline recovered about two-thirds of higher fuel expenses during the second quarter.
Bastian expects Delta to fully recover the rise in oil prices by the end of the year and into 2019, hopefully putting to rest some investor fears that the higher costs could materially cut into margins.
"We will be monitoring fuel and our ability to recapture these higher price points to ensure 2019 is a year of margin growth," he says.
Brent crude stood at over $80 per barrel on the afternoon of 11 October, Bloomberg data shows. This is up 20% since the beginning of the year, and 43% since 11 October 2017, according to US Energy Information Administration data.
Delta expects its average fuel bill to increase at least 28% to $2.47-2.52 per gallon in the fourth quarter, a significant jump but lower than the 32% increase it saw during the September quarter.
Allaying investor concerns is critical for Delta. American Airlines stock dropped 7.6% on 9 October after it released updated guidance forecasting higher than expected fuel prices in the third quarter, and in spite of the anticipation that revenue would come in at the higher end of its expectations.
Delta expects total unit revenues (TRASM), a rough guide for demand and fares, to increase 3-5% year-over-year in the fourth quarter. This could be better than the 4% increase in the third quarter and fits its forecast of an improving yield environment.
"This is as solid of a guide as one could reasonably expect at current fuel," say JP Morgan analysts on Delta's forecast in a report on 11 October. They add that the pre-tax margin guidance of 9-11% "leaves open the door" for expansion in the fourth quarter, and possibly into next year.
Capacity growth, which Delta was targeting at roughly 3% following a downward revision in July, will grow faster than expected in 2018.
"Completion factor and stage length, are expected to result in our full year ASMs slightly ahead of our 3% ASM [growth] guidance," said Glen Hauenstein, president of Delta, during the call.
While slight changes due to such operational improvements are not uncommon, it's notable how Wall Street analysts largely left this alone on the call after raking Delta over the coals for what they saw as too small of a reduction in July.
Analysts, instead, focused on revenue growth and recapturing fuel expenses, timely topics in the current environment and pertinent considering Delta's demonstrated ability to raise revenues to cover the cost of fuel.
The airline has been prudent about capacity growth since it revised growth forecasts down in July. Since then, it has exited at least 10 routes, including Detroit-Akron, Detroit-Peoria and Minneapolis-Flint, half of which were operated with 50-seat regional jets, an aircraft class that is both unpopular with passengers and has poor economics in high fuel cost environments.
Hauenstein describes these moves as "streamlining" Delta's network in order to make it "more efficient".
"We're trying to make our schedules more relevant to people in Detroit and where people want to go," he says when asked about the cuts in Detroit and Minneapolis/St Paul. He adds that the carrier plans to bring "a lot more service into Detroit" in 2019 beyond the already announced new service to Honolulu and San Jose, California.
Delta plans to grow capacity by roughly 3% again in 2019, says Bastian. The majority of that will be driven by new international flying, a change from the last few years when capacity additions have focused on the domestic market, include new service between Minneapolis/St Paul and Seoul from April, and to Mumbai from either Atlanta or New York JFK.
The SkyTeam Alliance member plans to leverage connectivity over its joint venture partner Korean Air's Seoul Incheon hub to grow to Asia next year, adds Hauenstein.
Delta expects capacity to increase roughly 4% year-over-year in the fourth quarter.
For all the hemming and hawing over fuel prices, capacity growth and other concerns, Delta expects revenues to increase 8% and profits to exceed $5 billion this year.
At the same time, it is holding non-fuel expenses in check with unit costs (CASM) excluding fuel and special items forecast to be flat to down 1% in the fourth quarter as the airline continues to become more productive and reduce expenses.
"Delta is managing the business to improve margins," writes Helane Becker, an analyst at Cowen, in a report on 11 October. "Investors consistently push back on the company's capacity growth, but given their revenue outlook, growing makes sense."
Source: Cirium Dashboard