Strong growth in cargo revenue during the third quarter helped Delta Air Lines turn its first profit since the start of the pandemic, but officials warned rising fuel costs could temporarily derail the momentum during the current period.
Delta (NYSE: DAL) reported cargo revenue jumped 39% over the 2019 level to $262 million even though the airline flew fewer than half its widebody fleet because COVID fears and restrictions have flattened international travel. Year-to-date cargo revenue is up 28% over the two-year benchmark to $728 million, putting the carrier on track to top $1 billion because of traditional fourth-quarter strength in shipping volumes tied to big holiday sales.
The results mark the fourth consecutive quarter of cargo growth for an airline that relied much less on cargo-only passenger flights at the height of the COVID crisis than many competitors. Instead, the focus this year has been on deploying passenger flights to destinations that also have strong cargo demand.
The carrier’s cargo gains are the result of much higher yields as shippers across the industry are forced to pay rates more than two times higher than normal because of ongoing shortages of aircraft amid strong business demand to replenish inventories.
The Atlanta-based airline achieved adjusted pretax profit of $216 million (30 cents per share) and a 2.6% profit margin on operating revenue of $8.3 billion, beating Wall Street estimates. Revenues have recovered to two-thirds of the pre-crisis level, while costs are 25% below two years ago.
The results excluded $1.3 billion in payroll support from the federal government.
“Generating a profit for the quarter even with a majority of our corporate and international customers still to return is a great achievement,” said Delta President Glen Hauenstein in a statement. “Our revenue recovery has shown strong progression through the course of the year as our customers return to the skies. With robust holiday demand and an expected improvement in corporate and international demand, we expect total December quarter revenue to recover to the low 70s percentage relative to 2019.”
Passenger traffic growth slowed in late August and September as the coronavirus delta variant discouraged travelers from flying and businesses delayed returning to the office, but company officials said business is improving again.
The domestic and Latin American operations are leading the way, with the trans-Atlantic showing the most improvement (35% restored). Domestic passenger revenue recovered to 72% of the third-quarter 2019 level, with international showing sequential improvement but still lagging at 42%. Pacific passenger revenue remains the slowest to return at 20% recovered, with traffic mostly limited to essential travel.
Delta said domestic corporate volumes are picking up in October as COVID case counts decline.
CEO Ed Bastian told analysts the airline expects a modest loss in the fourth quarter because fuel costs have increased 60% year-over-year and about 15% (40 cents) from the third quarter, partially offsetting an 11% decrease in capacity for the previous three months.
Every 5-cent increase in fuel price represents about $40 million in annual cost for airlines like Delta, a key reason the company is transitioning to newer aircraft.
Jet fuel prices are averaging about $2.25 per gallon versus $1.44 a year ago, with a barrel of Brent crude oil priced at $83.22 on Wednesday. It’s the first time in seven years that oil has crossed the $80 threshold. Some analysts are forecasting $100 oil or more in the near future. Airlines have been unable to hedge against fuel increases because of their weak financial condition during the pandemic and the uncertainty about future revenue streams.
Delta announced it has acquired two used Airbus A350 twin-aisle jets that are expected to be delivered this quarter, as part of its strategy to accelerate the renewal of the fleet that saw the retirement of 200 aircraft and two aircraft types in the past 16 months.
Earlier this year, Delta announced the lease of seven A350-900s. The A350s are well suited to carry large amounts of cargo below the passenger deck and replace Boeing 777s and 767s on the long-haul network.
Delta’s network is still 20% smaller than before the pandemic, but executives said they expect to restore the bulk of their capacity by next summer, aided by the U.S. reopening of travel to vaccinated people from 33 countries, mostly in Europe. The extra aircraft will provide additional space for cargo, too, and help alleviate the crowding and high rates shippers are currently experiencing.