Delta Air Lines’ cargo business benefited during the first quarter from supply chain disruptions that pushed shipments to the tight air market. The latest logistics gridlock in Shanghai, where authorities are enforcing a citywide COVID lockdown, could fuel even more growth, a top executive said.
Reduced industry capacity drove a significant increase in cargo yield, helping generate $289 million in cargo revenue during the period ended March 31 – up 51% from the 2019 benchmark, the company reported Wednesday. It generated record cargo revenue in March.
Delta (NYSE: DAL) will take a short-term hit from the pause in economic activity in the greater Shanghai region but could reap more revenue as businesses look to expedite backlogged shipments and leapfrog delays at Chinese ports, including Ningbo, President Glen Hauenstein told analysts on an earnings call.
Imports and exports in major Chinese trading hubs are piling up because Chinese authorities have sealed off Shanghai to stamp out the omicron variant and the infection wave is spreading. The measures are severely hampering activity at the world’s largest container port but also at Shanghai’s main cargo airport and other airports in the central coastal region.
Although Shanghai Pudong airport is officially open, few trucks can reach the cargo terminals to deliver or retrieve shipments because of street closures. There are also shortages of workers to load and unload cargo, and many warehouses where cargo originates are closed.
International passenger and cargo airlines have responded by canceling most flights in and out of Shanghai Pudong airport. Delta Air Lines last week imposed an embargo on freight shipments in Shanghai through at least April 18.
“China has been a very strong market for us in the cargo area. We’re literally not flying to China right now until Shanghai reopens, so that’s going to weigh a little bit on cargo revenues as we move forward,” Hauenstein said. Once the COVID crisis passes, however, the airline could more than make up for the deferred business as shippers rush to draw down backlogs.
“As that does reopen, then you can see that pent-up demand for goods that need to get shipped out of China and potentially even [give us] another leg up,” he said. “We could see even stronger demand coming out of that.”
Many businesses have converted cargo to air in the past year because of severe ocean shipping congestion, adding pressure to a system with 10% less capacity because of reductions in passenger flying and geopolitical events.
Delta Cargo’s results were also $74 million greater than last year when it still offered dedicated cargo service with several aircraft not needed for passenger service during the pandemic travel drought. The performance is also notable because it was only $15 million less than the $304 million in cargo sales during the fourth quarter — the busiest shipping season each year — of 2021.
Delta Cargo had $1 billion in revenue in 2021, its best year ever. Company officials have said they plan to invest more in technology, partnerships, sales and operations to take advantage of the strong market and substantially grow cargo business by mid-decade.
Cargo represented 11% of Delta Air Lines’ total operating revenue of $9.3 billion in the first quarter. Although cargo’s top-line share is down from the depths of the COVID travel abyss, it remains well above the low-single-digit average it represented prior to the pandemic.
Weathering omicron, turning to profit
Delta’s overall first-quarter performance was better than expected despite the surge in omicron cases during the winter. Delta reported a $940 million loss for the first quarter and an adjusted operating loss of $793 million, or $1.23 per share. The company beat the Wall Street consensus by 4 cents and by $360 million in revenue.
The omicron variant paused Delta Air Lines’ recovery from the COVID crisis after the company eked out a pretax profit for the second half of 2021, but with travel demand rapidly rising officials are predicting an operating profit for the second quarter.
The airline returned to profitability in March with an operating margin of 10% and issued guidance to operating profit in the second quarter. Executives said they expect profit margins in the 12% to 14% range, only 4 points less than in June 2019, despite seat capacity at 85% of pre-pandemic levels and fuel costs 50% higher than three years ago.
CEO Ed Bastian said strong travel demand is translating into pricing power as COVID fades and countries eliminate testing and quarantine requirements. The airline is successfully capturing higher fares, which are offsetting the rise in fuel costs to about $2.79 per gallon. Delta expects to pay $3.20 to $3.35 per gallon for jet fuel by June, 20 cents less than the industry average because it can source fuel from its own refinery near Philadelphia.
Domestic U.S. airfares have risen 40% since January, according to travel booking site Hopper.
Management pointed to very strong forward bookings and business travel recovering to 70% of normal in March as signs it will turn the corner this quarter and have a profitable full year.