Delta Air Lines will be reporting its third-quarter earnings on Friday and there will be more that meets the eye than just whether the numbers will beat expectations. I would argue that the focus should be more centered on whether travellers are still willing to pay enough to help the airline absorb another period of elevated fuel costs.
To put things into context, that has already been the story for Delta for much of this year. The US-Iran conflict has led to surging energy prices and it is unsurprising that airlines are among those that are the most impacted.
Just in the second quarter, Delta saw its adjusted fuel expense surge by 77% from a year earlier to $4.4 billion with the average fuel price rising to $3.93 per gallon. And yet, demand held up surprisingly well. The airline’s adjusted revenue grew by 14%, premium revenue jumped by 17% and even main cabin revenue increased by 8%.
To put things more simply, Delta was able to generate enough revenue growth to soften what would otherwise have been a much nastier hit from rising energy prices.
But now, that resilience is about to be tested again.
For the third quarter, Delta had originally guided for adjusted EPS of $2.00 to $2.50 and for revenue growth in the mid-teens. However, Wall Street has tempered down those expectations in seeing a more challenging quarter for the airlines. The consensus estimates now sit around $1.88 per share, with revenue expected at around $17.6 billion.
The bigger question, though, is what comes next.
In the past two months, oil prices have pushed sharply higher again with Brent crude recently trading above $100 per barrel. Meanwhile, tightening supplies in refined products have also lifted pressure across diesel and jet-fuel markets.
As such, that will put a lot of eyes on Delta’s fourth-quarter guidance this week.
If travel demand remains strong enough for the airline to be able to maintain pricing and protect its margins despite higher fuel costs, that would offer another signal that consumers – particularly premium and business travellers – still have room to spend.
But if Delta starts pointing to weaker bookings citing more price-sensitive customers or renewed margin pressure, then that becomes a much broader consumer story instead.
With that in mind, I wouldn’t just be watching whether or not Delta beats EPS expectations on Friday. The more useful overview is whether higher fuel prices are finally reaching the point where either the airline or its customers have to be the one to give something up.
This article was written by Justin Low at investinglive.com.