Delta’s Fuel Bill Clips A Strong Quarter

Delta’s latest quarter ran straight into the most expensive fuel bill in its history. The airline reported second quarter adjusted operating revenue of $17.7 billion, up 14% from a year earlier, while adjusted earnings of $1.56 per share topped expectations despite falling 26%. Shares initially rose after the report but reversed course, trading as high as $89.20 during Friday’s regular session before closing down about 1.8% at $87.39, as investors weighed a strong quarter against an unusually heavy fuel load.

Delta’s top line showed that travelers were still willing to spend. Revenue grew 14% on only about 1% capacity growth, showing that higher fares and premium demand accounted for most of the increase. Premium revenue increased 17%, loyalty revenue rose 19%, and premium corporate sales jumped more than 25%. Even the main cabin posted double-digit unit-revenue growth, giving Delta a wider demand base than one built solely around premium passengers and its loyalty program.

Strong demand was encouraging, but the fuel shock remained the quarter’s defining problem. Adjusted fuel expense surged 77% to $4.4 billion, the highest quarterly total in Delta’s history, while its adjusted operating margin narrowed to 8.8% from 13.3% a year earlier. Delta said it recovered about 60% of the fuel-cost increase through stronger revenue, an impressive response to a sudden expense spike, but not enough to prevent adjusted profit from falling by more than one-quarter. Non-fuel unit costs also increased 6.8%, leaving Delta with higher expenses both in the tank and throughout the rest of the operation.

The guidance points to a better balance between revenue growth and costs in the third quarter. The company forecast third-quarter earnings of $2 to $2.50 per share, mid-teens revenue growth, and an operating margin of 11% to 13%, while reaffirming its full-year earnings outlook of $6.50 to $7.50 per share and free-cash-flow forecast of $3 billion to $4 billion. Delta also announced a 15% dividend increase beginning in the September quarter, giving shareholders something tangible while they wait for margins to recover. The quarter showed Delta can keep demand and fares high enough to fly through a record fuel bill, but keeping that pricing power airborne after the summer rush will be the next test.

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