Delta Air Lines is the world’s most profitable airline, and the airline very much sets the standard when it comes to financial performance in the industry. Delta has just become the first US airline to report its financial results for the second quarter of 2024, and the company’s stock is tumbling following this update.
Delta disappoints investors with financial results
You can always tell how good an airline’s financial results are based on the first bullet point in the press release about the earnings results. For Delta’s Q2 2023 results, that was the following:
Delivered highest quarterly revenue and profitability in Delta’s history
A year later, for Delta’s Q2 2024 results, that’s the following:
Delivered industry-leading operational performance, underpinning trusted brand and customer loyalty
On the plus side, Delta had record revenue of $15.4 billion for the quarter, up 5.4% from last year. However, net income dropped nearly 30% from a year ago, to $1.31 billion. The weaker profitability was due to a combination of increased expenses (up to 10% from last year), plus increased capacity, putting downward pressure on fares.
Delta had strong performance when it came to revenue from premium ticket sales, up 10% from a year ago, while revenue from economy ticket sales rose just 0.3%. Meanwhile revenue from Delta’s Amex partnership was up 9%.
Delta CEO Ed Bastian stated that he thinks the airline is “fairly well insulated” from industry overcapacity, given how much revenue Delta gets from its premium seats, rather than economy seats. Delta’s stock is down around 10% in pre-market hours, following this news.
The industry isn’t headed in a good direction
Delta did as good of a job as an airline can do in the current environment with achieving results. I’m not in any way attempting to suggest that Delta is in trouble, or anything. But I think these results are worth taking note of, because they point to a bigger issue in the industry, which many airline executives try to ignore.
Look, the airline industry is an absolutely impossible business. It’s a highly cyclical industry that requires a ton of capital, has a unionized workforce without the ability to easily renegotiate contracts, and it has endless factors outside of a company’s control. Worst of all, during the best of times, the industry overall is only marginally profitable. There’s a ton of downside, but not a lot of upside.
Fortunately there are some incredibly passionate people who dedicate their lives to the industry. After all, while the airline industry might not be a great business, it is one that enables travel, which is something that so many people enjoy.
The thing is, when you listen to airline CEOs, they basically try to sell you on the dream that the only way the industry is headed is up. They love to talk about how airlines just don’t do a good job telling their stories, and how airline stocks are vastly undervalued, but that’s going to change soon.
I mean, we’ve heard airline CEOs make some pretty unbelievable claims. Perhaps most famous for that is former American CEO Doug Parker, who said that the airline would never lose money again, and that American’s stock at the time was so low that “it defies logic.”
When it comes to profitability, personally I think that several airlines may have peaked in 2023. That’s thanks to a combination of factors, including that global capacity hadn’t yet been restored. However, I can’t help but feel like it’s at least slightly downhill from here:
- Airlines are dealing with the reality of much higher costs than pre-pandemic, particularly with labor
- We’ve seen a huge amount of capacity restored within the past year, not just in the United States, but globally, and that puts downward pressure on fares
- If airlines think there’s overcapacity now, one has to wonder how they’d feel if Boeing weren’t having issues with certifying and delivering new jets, and if Airbus weren’t having issues with its Pratt & Whitney engines
The higher labor costs aren’t going anywhere, and personally I feel strongly that we’re going to continue to see downward pressure on fares. When you combine those factors, I don’t really buy into the Delta and United vision that we’re just going to keep seeing better and better margins. And all of this assumes that there isn’t any major economic downturn, which could have a much more catastrophic impact on the industry.
Bottom line
Delta is the first US airline to report its Q2 2024 financial results. While the airline had record revenue, profitability was down considerably. That’s not surprising, when you consider that the industry is dealing with higher labor costs and lower yields, due to increased capacity.
There’s no end in sight to higher labor costs and/or overcapacity, so I think the margins in the industry will continue to decrease over time. Airline executives often talk about overcapacity being a problem, while also expressing frustration with aircraft manufacturers not being able to reliably deliver planes on schedule. The capacity problem is only going to keep getting worse, in my opinion.
What do you make of Delta’s financial results? Am I the only one who thinks financial results will keep getting worse, rather than batter?