Delta Air Lines is the most profitable airline in the world and the airline significantly sets the standard for financial performance in the industry. Delta just became the first U.S. airline to report its second-quarter 2024 financial results, and the company’s stock is falling after the update.
Delta disappointed investors with financial results
You can always tell how good an airline’s financial results are by looking at the first bullet point in the earnings press release. For Delta’s Q2 2023 results, it was as follows:
It delivered the highest quarterly revenue and profitability in Delta’s history
A year later, Delta’s Q2 2024 results are as follows:
Delivering operational excellence that supports a 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 fell nearly 30% from a year earlier to $1.31 billion. Weaker profitability was caused by a combination of increased costs (up to 10% compared to last year) and increased capacity, which pushed fares down.
Delta had a strong performance in premium revenue, up 10% year-over-year, while low-cost revenue was up just 0.3%. Meanwhile, revenue from Delta’s Amex partnership rose 9%.
Delta CEO Ed Bastian said he thinks the airline is “pretty well insulated” from industry overcapacity, given how much revenue Delta gets from its premium seats, rather than economy seats. Delta shares fell about 10% in premarket hours following the news.
The industry is not moving in a good direction
Delta has done as good a job as an airline can do in the current environment of delivering results. In no way am I trying to suggest that Delta is in trouble or anything. But I think these results are worth noting because they point to a bigger problem in the industry that many airline executives try to ignore.
Look, the airline industry is an absolutely impossible business. It is a highly cyclical industry that requires a lot of capital, has a unionized workforce without the ability to easily renegotiate contracts, and has endless factors beyond the company’s control. Worst of all, during the best of times, the industry is only marginally profitable overall. There are a lot of negatives, but not many positives.
Fortunately, there are some incredibly passionate people who dedicate their lives to this industry. After all, while the airline industry may not be a great business, it does enable travel, which is something that so many people enjoy.
The thing is, when you listen to airline CEOs, they’re basically trying to sell you a dream that the only way the industry is going is up. They like to talk about how airlines just don’t do a good job of telling their stories and how airline stocks are vastly undervalued, but that’s about to change.
We’ve heard airline CEOs make some pretty incredible claims. Perhaps most famously, former American CEO Doug Parker said the airline would never lose money again and that American stocks were so low at the time that it “defied logic.”
In terms of profitability, I personally think several airlines may have peaked in 2023. This is due to a combination of factors, including the fact that global capacity has not yet been restored. However, I can’t help feeling that it goes at least slightly downhill from here:
- Airlines are facing the reality of much higher costs than before the pandemic, especially with labor
- Over the past year, we’ve seen a tremendous amount of capacity restored, not just in the United States, but globally, and that’s putting downward pressure on fares.
- If the airlines think there is excess capacity now, one has to wonder how they would feel if Boeing didn’t have problems certifying and delivering new jets and if Airbus didn’t have problems with Pratt & Whitney engines.
Higher labor costs are not going anywhere and I personally feel strongly that we will continue to see downward pressure on prices. When you combine these factors, I really don’t buy into Delta and United’s vision that we’re just going to keep seeing better and better margins. And all of this assumes there is no major economic downturn that could have a much more catastrophic impact on the industry.
Bottom Line
Delta is the first US airline to report its financial results for Q2 2024. While the airline had record revenue, profitability fell significantly. This is not surprising when you consider that the industry is facing higher labor costs and lower returns due to increased capacity.
Higher labor costs and/or overcapacity are not in sight, so I think margins in this industry will continue to shrink over time. Airline executives often talk about the overcapacity problem while also expressing frustration that aircraft manufacturers are unable to reliably deliver planes on schedule. The capacity problem is only going to get worse in my opinion.
What do you think about Delta’s financial results? Am I the only one who thinks the financials will get worse rather than worse?