Delta Air Lines (NYSE: DAL) narrowed pretax losses in the second quarter thanks to a huge increase in cargo revenue, with management hinting that the business will be profitable on an operating basis in the second half of 2022 since passenger demand is recovering faster than planned.
The Atlanta-based carrier recorded a 35 percent gain in cargo revenue to $251 million in the first quarter of 2019 compared to the same period last year, while operating a significantly smaller network than before the COVID outbreak. Cargo sales increased by $16 million from the previous quarter. Cargo revenue increased by 23% in the first half of the year.
The results reflect the new cargo chief Robert Walpole’s emphasis on integrating cargo into the overall airline operation, which he outlined in a recent interview as a key element of the company strategy and more actively involved in route planning and aircraft purchase.
Delta’s earnings report beat analysts’ forecasts and met previous projections as the airline nears profitability and recovers business lost during the pandemic.
The corporation lost $881 million in pretax adjusted earnings, although that was a $2 billion improvement over the first quarter. On paper, the company earned $654 million in net income, which was only achievable thanks to $1.5 billion in federal handouts to cover payroll costs as part of the government’s effort to keep industrial jobs alive throughout the crisis.
Adjusted operating revenues were $6.3 billion, down 49% from the preceding quarter but up 76% from the year before.
In addition, the company is no longer losing money. In June, it earned adjusted free cash flow of $195 million.
Domestic leisure demand is practically back to 2019 levels, with better yields, and corporate and international business executives are optimistic. Many of the major airline routes are driven by business travel, and the more widebody routes they fly, the more belly capacity freight forwarders and other shippers may use.
On a conference call with analysts, Delta President Gary Hauenstein noted that corporate travel volumes increased in May and June, with over 95 percent of corporate accounts booking travel last month.
“In typically business-heavy cities like New York City and Boston, we’re starting to see a return of consultancy and sales-related travel, as well as larger volumes.” According to the results of our recent corporate study, over 90% of our corporate accounts expect travel volumes to increase in the September quarter, up from only 33% in the March quarter. In addition to these poll findings, our close interaction with clients has given us more confidence in the acceleration of business travel, particularly as we approach the post-Labor Day period, when schools and companies are still reopening.”
Business travel increased from the first quarter to 40% of pre-pandemic levels, according to the airline, and officials estimate domestic corporate volumes to recover to between 55 and 60% of 2019 levels by the end of the third quarter.
Analysts and airlines predict a slow recovery for business and international travel in 2023 and 2024, with major banks discussing travel reductions for environmental and financial reasons, and others limiting trips due to worker health concerns, the availability of technology substitutes, fewer city pairs offered by airlines, and tight budgets.
Internal business meetings are expected to be slashed by 50%, accounting for 21% of corporate travel expenses, according to the CAPA Center for Aviation in Australia. Only roughly 40% to 50% of business travel is spent on supplier and customer meetings.
International bookings are also on the rise, as are load factors. In comparison to two countries in the spring, more than 15 European countries are now open to vaccinated tourists. Officials expressed hope that the United States will soon relax its limitations on inbound travel.
Although the emergence of new COVID variations is a substantial risk to upward forecasts, Delta’s statement suggests that the resurgence in business and international travel could materialize faster than many expected.
Revenue could rebound to 65 percent to 70% of 2019 levels in the third quarter, with capacity reduced by around 30%, according to the company. However, even with unit expenses 11 percent to 14 percent higher than in 2019, authorities forecast positive pretax profitability as the company rebuilds its personnel and other competences.
“I believe the surge is on its way. We’re getting ready for it on the business side, just as we’ve seen it on the consumer side. “I think it’s going to be a really successful run over the next 12 to 24 months once you open businesses, offices, and international markets,” CEO Ed Bastian said.
With the purchase of 36 older planes, Delta is providing itself the flexibility to ramp up service if demand rises. It announced the purchase of 29 Boeing 737-900 jets on Tuesday, as well as the long-term leasing of seven huge Airbus A350 planes for foreign operations. If expansion does not occur as expected, the planes can be utilized to replace older, less fuel-efficient types.
Delta took on a lot of debt to ensure that it would be able to weather the downturn, but now that it has $15 billion in cash, it can start paying down the $18.3 billion debt. On Thursday, the company announced a $1 billion price for repurchasing some of its outstanding bonds.
Delta’s earnings provide a solid benchmark for the rest of the domestic airline industry.
American Airlines (NASDAQ: AAL) gave an upbeat preview of next week’s earnings on Tuesday, stating that revenue and expenses came in better than expected and that the company could break even for the quarter. When the government’s payroll support is deducted, the company will have a net loss of between $1.1 billion and $1.2 billion.
Eric Kulisch’s FreightWaves/American Shipper stories can be found here.
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