Delta outlook underwhelms as cost pressures loom large

Bloomberg

Delta Air Lines Inc stuck to its upbeat financial forecasts despite posting a bigger-than-expected loss in the first three months of the year and jarring Wall Street with its outlook for cost pressures tied to the travel rebound.
The carrier still expects to stop burning cash this quarter and to return to profitability in the third “if recovery trends hold,” Chief Executive Officer Ed Bastian said as Delta reported results for the first three months of the year. But the airline warned of added costs as it readies idled aircraft for service and trains pilots returning from voluntary leave.
The steady outlook underscored Delta’s bet that travel demand will roar back in the coming months as rising US vaccination rates ease worries about the coronavirus pandemic and prompt more consumers to fly again. But rising expenses add financial risk at a time when airlines remain vulnerable to any sign of weakness in the recovery, such as this week’s decision by the US to pause use of Johnson & Johnson’s Covid-19 vaccine.
Delta’s second-quarter “guidance calls for lower-than-expected revenue on less capacity and higher non-fuel unit costs,” Helane Becker, an analyst at Cowen & Co, said.
The Atlanta-based carrier is the first of those companies to report first-quarter results.
Delta expects costs to fly each seat a mile excluding fuel, an industry benchmark, will climb 6% to 9% this quarter from 2019 levels, compared with the 2% gain that Raymond James Financial Inc analyst Savanthi Syth had been expecting.
Three to four percentage points of the increase will come from pilot training and maintenance work on reactivated aircraft. Another drag comes from the dearth of long-haul international flights, which spread expenses over vast distances.
“It’s a meaningful amount that we’re investing to get the business back,” Bastian said on a conference call with analysts and investors, less than two weeks after staffing shortages forced Delta to cancel flights on Easter.

While the carrier still has limits on how much demand it can serve in the very near term, Delta’s decision to resume selling middle seats May 1 should ease any capacity squeeze as the company’s planes fill to an expected level of about 85% in June, Bastian said. A recent U.S. government study found that blocking middle seats reduced the risk of exposure to Covid-19 on airline flights, but Delta said the report was based on outdated information.
“That study was based on 2017 data so it doesn’t take into account any of the safety protocols that we’ve implemented, including masking,” Bastian said in an interview with CNBC.
The company recalled all of its 1,713 idled pilots on April 1, but only about 400 will be trained in time to start flying again this summer. Delta has shrunk its fleet by 15% since the end of 2019 and retired some aircraft to cut costs amid the collapse of demand, meaning a number of pilots must be trained on different planes.
Delta “very well could be in the market” to hire pilots and flight attendants before the end of 2021 if travel demand continues to recover, Bastian said.
“There’s a constant tension between trying to be as efficient as possible with costs while waiting to see when demand picks up,” Bastian said in an interview. “That’s something we’ve never done before as an industry. It’s not easy.”
The company posted an adjusted loss of $3.55 a share in the first quarter, worse than the $3.17 average deficit of analyst estimates compiled by Bloomberg. Revenue tumbled 65% to $3.6 billion, excluding sales from a Delta-owned refinery.
The beginnings of a rebound were enough to enable the airline to generate positive cash flow in March to the tune of $4 million a day, a sign of improvement after a challenging start to the year. Delta isn’t alone in seeing signs of a recovery, with American Airlines Group Inc and United Airlines Holdings Inc reporting that their planes are flying with an average 80% of seats filled.
“When I look at the first quarter, what’s been clear is our business has made a turn,” Bastian told CNBC. “That turn is active and rebounding” with the increasing vaccination rate.
While domestic leisure trips are leading the rebound, with bookings at 85% of 2019 levels, even long-depressed domestic business travel has picked up to about 20% of previous levels, Bastian said.
A vital US-UK travel corridor “hopefully” will open by early summer and lead other international markets to lift restrictions, he said. Demand in Asia may take a year or more to rebound.
In the US, large corporate customers are linking vaccination rates to a decision to fly again.
The trend will likely start this summer and build to a “meaningful improvement” by fall, Bastian said. “Travelers are gaining confidence and beginning to reclaim their lives.”