OPTIMISTIC DELTA DEFIES HEADWINDS AS TRAVEL BOOMS

What’s a billion bucks here or there? Delta Air Lines – the biggest US airline by some metrics – says it lost nearly that (US $940 million) in the first quarter alone, hurt by a rise in fuel prices and the lingering effects of the pandemic. However, the airline also says it registered its highest bookings ever in the past five weeks, suggesting that “people are through with the virus.”

(Ed note: But is the virus through with people?)

Wall Street had expected the loss in a quarter marred by the omicron variant of COVID-19, however, investors focused last week on Delta’s upbeat outlook for the rest of the year. Shares of the Atlanta-based airline jumped more than 6%, and American, United, and Southwest all gained between 5% and 11%.

Delta still faces stiff headwinds, including the rise in fuel and labour costs. And it is not clear whether spiking inflation will cause consumers to pull back on travel spending.

Last week, the US reported that in the past year inflation rose at its fastest pace since 1981, led by soaring energy prices. Jet fuel is Delta’s second-largest cost after labour.

Delta’s jet fuel costs rose 33% from just the last quarter. Total adjusted operating expense reached $9 billion in the first three months of the year, up 11% sequentially due to fuel prices and the cost of ramping up operations from the pandemic.

So far, though, neither inflation, the ongoing pandemic nor Russia’s war against Ukraine seem to be having any impact on ticket sales. Delta officials say that bookings started to rise in late February and have kept going.

“The last five weeks have been the highest bookings in our history,” CEO Ed Bastian said in an interview. “I think that’s an indication that people are through with the virus. They feel they have all the tools and the technology to manage it.”

Bastian said he expects travel demand to remain strong for two to three months – about as far into the future as airlines care to venture.

“Then, when we get to the fall, that will be the next inflection point as to consumer health, what impact inflation has had on them, higher fuel prices, what impact there is from the virus,” he said.

Delta forecast second-quarter revenue of about 95% of pre-pandemic levels, up from 89% in the first quarter. The trend will be driven by more spending on premium seats and more charging with Delta-branded credit cards.

At the same time, Delta is bracing for much higher costs. It forecast that spending on labour and everything else other than fuel will rise about 17% on a per-seat basis, compared with the same quarter in 2019.

And jet fuel, which cost Delta an average of $2.79 a gallon in the first quarter, is expected to jump to between $3.20 and $3.35. If Delta had paid the higher price in the first quarter, it would have spent an extra $364 million fueling up.

Bastian said travel demand is strong enough to let Delta cover higher fuel costs.

From under 90,000 on some days in April 2020, now more than 2 million people a day on average board planes in the United States. So far in April, airport crowds are down only 9% from April 2019, according to government figures.

Business travel, and in particular international corporate travel, have not recovered yet, however.

Airlines are lobbying the Biden administration to drop a requirement that flyers test negative for COVID-19 before boarding a flight to the US, which they think is holding back people – particularly business travellers – who are afraid of being stranded far from home if they contract the virus.

“We are getting a strong indication that the predeparture testing will be phased out in the near future, which of course is quite encouraging,” said Peter Carter, Delta’s chief legal officer. He based that view on discussions between airline representatives and officials “throughout the administration,” whom he did not name.

A requirement to wear face masks on planes, in airports and on public transportation that was due to expire April 18, but has been extended by two weeks through May 3, the Centers for Disease Control and Prevention announced last week.

Bastian favours eliminating the mask mandate immediately. He said some people might start flying if they don’t have to wear a mask, and others might stop flying if other passengers are unmasked. He called both groups “fringe.”

If masks are no longer required, “I think you’ll see a surprising number of people continue to wear masks, and certainly some of our employees will wear masks,” he said. “I may choose to wear a mask once in a while.”

Delta was the first US carrier to post first-quarter numbers, and Baker said its report “bodes exceptionally well” for other airlines this earnings season. United and American are scheduled to release results this week and Southwest is set for April 28.

Peter McNally, an analyst for business researcher Third Bridge, said “Delta is delivering a confident message ahead of the busy summer travel season, which is expected to be the busiest in three years, and the company should return to full profitability.”

Like other airlines, Delta has added debt during the pandemic by borrowing from the federal government and private sources. At the end of March, Delta had total debt and finance lease obligations of $25.6 billion. It aims to trim about $6 billion in debt by the end of 2024.