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Consumer confidence, Max grounding drive Delta's Q3 revenue boost

Delta Air Lines scored increases in passenger volume and revenue in summer 2019 and expects the same in the fourth quarter, thanks to strong demand from US consumers and the grounding of Boeing's 737 Max, which was never part of Delta's fleet.

Consumer confidence in the US economy forms the backdrop for Delta's earnings statement and is seen to absorb nearly any possible negative factor, including the recent 10% US tariff on Airbus aircraft, ongoing negotiations with the Delta pilots union and upticks in non-fuel costs.

"Domestic revenue is up 8% in third quarter, and we expect the holiday period to be equally strong," Delta chief executive Ed Bastian says on an earnings call today. "Our business is heavily directed toward the US consumer, and the US consumer is doing quite well."

Delta's net income in the third quarter increased 13% year-over-year, from $1.3 billion to $1.5 billion. Total operating expense in the quarter grew 2% year-over-year, offset by a 10% decline in fuel costs.

Cost per available seat mile excluding fuel (CASM ex-fuel) jumped 2.4% compared to the prior year period, driven by employee costs, passenger volumes and weather, Delta says. The airline characterises this increase as the downside of a sudden intensifying of consumer enthusiasm for the brand and the cancellation of its US rivals' 737 Max flights.

"We were a beneficiary of the Max not operating," Bastian says.

CASM EX-FUEL OUTLOOK

Delta expects a 4% to 5% rise in CASM ex-fuel in the fourth quarter compared to Q4 2018.

"We've given a long-term trajectory for non-fuel costs at around 2%," says Bastian, referring to 2020. "It's a good target for us." In the third quarter "we had costs related to the high volume we had," he says.

"We didn’t have the infrastructure to manage it well," adds Delta president Glen Hauenstein.

When asked during the earnings call if the 2020 target of 2% CASM ex-fuel growth is contingent on the success – from the airline's standpoint – of its negotiations with the pilots' union, Delta declined to comment.

"We anticipate management will mount a credible counteroffensive" against CASM ex-fuel, JP Morgan analyst Jamie Baker writes in a research note. "We estimate that roughly 1.5 points of 4Q cost pressure is related to accounting changes, and will not carry into 2020. On the other hand, roughly one point of recent labor headwinds are likely to carry through."

Delta's adjusted pre-tax income for the third quarter rose 22% compared to Q3 2018, an increase of $361 million. Total adjusted revenue excluding refinery sales grew 6.5% to $12.6 billion.

"Demand for our product has never been greater," Bastian says. "We've grown our revenue by 15% over the last two years."

IMPORTANCE OF AIRBUS'S MOBILE SITE

Bastian counts on this growing demand to soften the blow of potential cost increases resulting from the US tariff on Airbus aircraft. Of its 912 aircraft in service, 526 are from Boeing, but all of its 246 on-order aircraft will come from Airbus, according to Cirium fleets data. Delta has 70 A220s, 33 A321s, 100 A321neo's, 31 A330neo's and 12 A350s on order.

Bastian does not expect the tariff to be a material cost to Delta in the near term, although he admits that Airbus aircraft as they are being delivered are his immediate concern. He is expecting some deliveries of A321s from Airbus's assembly site in Mobile, Alabama, and points out that these will not carry a tariff.

"Mobile is going to be very important for us," Bastian says. "That's going to be the focus of our domestic strategy, to be getting our 220s and 321s via Mobile as Airbus continues to ramp up that production capability. Our goal is to minimize any tariff exposure."

DELTA'S FUTURE IN MIAMI

Delta's recent $1.9 billion investment inLATAM Airlines Group, representing a 20% stake in the Chile-based airline, has led to speculation that the airline might create a Florida hub and challenge American Airlines head-to-head in Miami.

Delta says that improving connectivity for LATAM in South Florida is something it has to do but it is not creating a hub in Miami.

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