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Delta's shares fall as cost concerns overshadow quarterly performance

10/13/2021 | 12:28pm EDT
FILE PHOTO: A Delta Air Lines plane takes off from Sydney Airport in Sydney

(Reuters) -Delta Air Lines Inc on Wednesday warned of a pre-tax loss for the fourth quarter due to a sharp rise in fuel prices, after posting its first quarterly profit without federal aid since the coronavirus pandemic, sending its shares lower.

Oil prices have surged to multi-year highs, threatening the pace of a recovery in the airline industry. Fuel costs alone accounted for nearly 20% of Delta's adjusted operating expenses in the third quarter. The carrier said every 5 cent increase in fuel prices drives up its expense by about $40 million.

In response, Chief Executive Ed Bastian suggested the airline might have to pass along the increased costs to consumers.

"There's nothing we can do to keep fuel prices down," he said in an interview. "What we need to work on is our ability to include that in our pricing."

Historically, the airline industry has been able to increase fares to offset higher fuel costs. But with air travel demand still way below pre-pandemic levels, such moves carry risk.

Delta's shares were down 5.2% at $41.28 in mid-day trade.

The Atlanta-based carrier said its revenue has recovered to two-thirds of 2019 levels on the back of a continued improvement in travel demand.

Bastian said company revenue is estimated to reach 75% of the pre-pandemic levels in November and December, thanks to strong holiday demand and an improvement in international and corporate travel. He expects company revenue to recover to 2019 levels in 2023.

U.S. airlines are buoyed by the Biden administration's decision to reopen transatlantic routes in November, which accounted for up to 17% of 2019 passenger revenues for the big three carriers.

Since the White House announced the decision, Delta said, bookings for the transatlantic flights in November and December have seen more than a six-fold increase.

The carrier also reported a pick-up in business travel over the last month, saying volumes are now at the highest level since the recovery in air travel began.

"As the restrictions are lifted, we're going to see considerable demand," he said. "There's high interest and high demand, not just for consumers, but also for business coming into the U.S."

As a result, Bastian expects 2022 to be a good year for the recovery after the coronavirus pandemic plunged air travel into its worst ever downturn.

The airline has hired more than 8,000 employees since the beginning of 2021 and plans to hire more pilots, flight attendants and mechanics next year to deal with increased demand for air travel.

Delta, the first major U.S. airline to report third-quarter financial results, forecast adjusted fuel prices per gallon of between $2.25 and $2.40 in the current quarter, up from $1.94 in the quarter through September.

Citi analyst Stephen Trent, however, reckons that the pace of demand recovery, especially on the transatlantic corridor, should ease Wall Street's concerns about the fuel cost pressure.

"Moving into 2022, continued revenue recovery seems more relevant than fretting about oil prices," he said.

Adjusted profit for the quarter came in at 30 cents a share, beating analysts' average estimate of 17 cents per share, according to IBES data from Refinitiv.

(Reporting by Sanjana Shivdas in Bengaluru and Rajesh Kumar Singh in Chicago; Editing by Anil D'Silva, Jane Merriman and Steve Orlofsky)

By Rajesh Kumar Singh and Sanjana Shivdas

© Reuters 2021
Stocks mentioned in the article
ChangeLast1st jan.
DELTA AIR LINES, INC. -0.37% 40.3 Delayed Quote.0.22%
DJ INDUSTRIAL 0.43% 35609.34 Delayed Quote.15.20%
S&P 500 0.37% 4536.19 Delayed Quote.19.45%
S&P GSCI PETROLEUM INDEX -0.16% 299.158 Delayed Quote.68.19%
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