Delta has plenty of customers willing to fly. The less cheerful part of its latest earnings report is how much it costs to get them there. Record September-quarter revenue arrived alongside a lower full-year earnings outlook, and the fuel bill deserves more attention than the celebratory headline.
In its October 9 results, Delta Air Lines (NYSE: DAL) reported adjusted revenue of $17.6 billion, up 16% from a year earlier. Adjusted earnings were $1.72 per share, compared with $1.70. On a GAAP basis, revenue was $20.2 billion and earnings were $1.15 per share, down from $2.17.
Those are very different profit comparisons. Before deciding whether this was a resilient quarter or a disappointing one, I’d keep both in view. There’s evidence for resilience here. There is also a smaller earnings forecast.
The outlook moved down from July
Delta now expects full-year adjusted earnings of $5.10 to $5.60 per share and approximately $2.5 billion in free cash flow. In its July 10 release, those forecasts were $6.50 to $7.50 and $3 billion to $4 billion, respectively.
The adjusted EPS midpoint has moved from $7.00 to $5.35, a decrease of about 24%. That comparison tells us how much management’s expectations have changed since July. It isn’t a prediction of what the stock should do.
July’s September-quarter forecast also called for adjusted EPS of $2.00 to $2.50 and an adjusted operating margin of 11% to 13%. Actual results came in at $1.72 and 9.4%. The sales growth was real, but it didn’t produce the profit conversion Delta had anticipated.
Fuel took a bigger share of the fare
Adjusted fuel expense reached $4.14 billion, up 62% from a year earlier. Delta’s adjusted fuel price was $3.61 per gallon, versus the roughly $3.15 assumption in July’s outlook. Chief financial officer Erik Snell said fuel costs were more than $500 million higher than the company had assumed in early July.
Fuel wasn’t the only pressure. Delta’s non-fuel cost per available seat mile rose 7.3%, with management pointing primarily to crew and revenue-related costs and capacity growth below its original plan. This adjusted measure excludes fuel, third-party refinery sales, maintenance-services expense and profit sharing.
Meanwhile, adjusted operating margin fell to 9.4% from 11.1% a year earlier. In everyday terms, Delta retained about $9.40 of adjusted operating profit per $100 of adjusted revenue, versus $11.10. A fuller sales total doesn’t automatically leave more money at the bottom. Airlines do have a talent for making that lesson expensive.
There’s genuine demand strength underneath
This wasn’t simply a case of passengers disappearing. Premium revenue grew 18%, supported by a 6% increase in premium seats as well as higher yields and load factors. Domestic unit revenue increased 16%, and American Express remuneration grew 15%.
That helps explain how Delta kept adjusted EPS roughly level despite the fuel increase. But I’d resist reading the strength in premium products as protection against every cost shock. The margin decline shows the limits of that protection in this quarter.
The earnings-report checklist is useful here: compare sales, margins, cash flow and guidance together. Focusing only on revenue would miss the reduced outlook; focusing only on the outlook would miss the demand supporting the business.
The accounting needs its own quick check
Delta removes $2.6 billion of third-party refinery sales from adjusted revenue because those sales aren’t part of its airline segment. Its earnings adjustments also remove investment valuation changes and certain refinery hedge effects, among other items. That is why the GAAP and adjusted results should stay clearly labeled.
Free cash flow was $463 million, down from $833 million a year earlier. Delta uses its own non-GAAP definition, combining operating and investing cash flows with adjustments for items including certain airport projects and strategic investments. It isn’t simply the rounded operating-cash-flow headline minus the rounded capital-spending headline.
December’s forecast comes with a fuel assumption
For the December quarter, Delta expects adjusted revenue growth of approximately 20%, an adjusted operating margin of 7% to 9%, and adjusted EPS of $1.15 to $1.65.
That outlook assumes roughly $4.25 per gallon for fuel, using the October 2 forward curve and already including an expected refinery benefit of about 40 cents per gallon. Don’t subtract that benefit a second time. Management also expects the year-over-year growth rate in non-fuel unit costs to improve by one to two percentage points from the September quarter, rather than forecasting that costs themselves will fall.
My next checkpoint would be whether strong fares and loyalty revenue can cover those costs while rebuilding margins. Delta has shown it can bring in more revenue. Shareholders still need to see how much of the next dollar makes it through.