Delta posts strong income gains despite slump in cargo revenue

Updated: 3:41 p.m. Correction: Cargo revenue dropped 17%. Representing $37 million less, not 37% drop.

Delta Air Lines’ cargo revenue dropped 17% to $189 million in the third quarter and year-to-date is off 13% to $567 million compared to the same period last year due to lower volumes and yield, the company reported Thursday.

Delta [NYSE: DAL] is a victim of a weakening air cargo market that has seen a steady drop in volumes since the end of 2018. Yesterday, American Airlines said it expected cargo revenue to fall 16% in the third quarter when it reports later this month.

Overall, however, Delta’s Oct. 10 earnings were positive, depicting a company that continues to spin off profit and returns to shareholders. Net income for the quarter grew 13% to $1.5 billion, with adjusted pre-tax income up 22% and adjusted earnings per share up 29% to $2.32, pushing profit margin up 2.5 points to 16.5%.

The Atlanta, Georgia-based airline said operating revenue, excluding sales from its refinery, improved 6.5%, or $771 million, to a quarterly record of $12.6 billion for the quarter ended Sept. 30 on the strength of premium passenger tickets, loyalty programs and third-party maintenance service. Premium products and non-ticket sources, such as its amended credit card arrangement with American Express and aircraft maintenance for other carriers, now compromise 52% of Delta’s total revenue.

The Pacific was the only region that experienced a sales decline in the quarter, which officials attributed to a pullback in corporate travel, especially in the automotive and manufacturing sectors impacted driven by retaliatory U.S. and China tariffs, as well as leisure travel to China.

The airline said it expects to have another year of revenue growth in excess of GDP in 2020 because of strong demand for its passenger product, other commercial initiatives and the relaunch of service to India. It has had nine consecutive quarters of revenue growth of at least twice GDP.

Consolidated operating costs decreased 2.1%, primarily due to lower fuel costs and higher capacity. Excluding fuel, operating costs on a per-seat basis increased 2.4%, or $345 million, compared to the prior year, because of higher profit sharing expenses, overtime costs to accommodate record passenger volumes and weather-related delays, including Hurricane Dorian. Some of that demand was from people switching from other airlines that canceled flights scheduled on Boeing 737 MAX jets, which were grounded by authorities for safety reasons in March, but most of it was from Delta customers. The company also spent $150 million toward to help LATAM Airlines gain regulatory approval for their new strategic partnership, announced in September. 

CEO Ed Bastian said later on an earnings call with analysts that the extremely high load factors – over 90% between April and August – plus the volatile weather gave Delta very little margin for error to recover from flight delays. Delta plans to reinvest even more “to make certain that next year we’re better prepared to handle the volumes,” he said.

Delta increased pay for eligible ground and flight attendant employees during the quarter and plans to hire more people to make sure it can maintain service levels. About 6,000 people will be hired in 2020, in line with the rate of new employees in recent years. About half to two-thirds of them will replace workers who retire or leave for other reasons, and the rest will be associated with growth, Bastian said.

Costs are projected to increase 1% next year because of the added labor and related expenses, but extra productivity from fleet, technology and facility investments will mitigate cost inflation over the long term, Bastian said.

Adjusted fuel expense declined 10%, or $249 million. Delta paid $1.96 per gallon, benefiting in part from its own jet fuel refinery operation in New Jersey and average fuel prices below prior-year levels.

Delta generated $2.2 billion of operating cash flow and $1.4 billion of free cash flow during the quarter after the investment of $814 million primarily for aircraft purchases and improvements. Year to date, the company has generated $7.5 billion of operating cash flow and $4.0 billion of free cash flow.

Delta continues to be a leader in operational execution, with 202 days of zero mainline cancellations and 115 days of zero system cancellations through the first nine months of the year, an improvement of 12% and 19% respectively compared to 2018. 

It carried 55.2 million passengers in the quarter, 6% more than the year-ago period.

Bastian said Delta will selectively add flights from Dallas, Denver and Chicago flying through Miami to South America to bolster its new joint venture with LATAM and replace traffic LATAM previously shared with American Airlines under a more limited partnership. Once the deal gets anti-trust approval from U.S. and other regulators, the airline plans to create more South American routes through Atlanta and other gateways, rather than create a new hub in Miami.

The Air Line Pilots Association, which represents Delta pilots, said it hopes members are rewarded for their role in Delta’s profitability during current contract negotiations, adding that an estimated 900 additional pilots are needed to meet next summer’s projected passenger volumes.