Delta warns of rising costs after missing earnings estimates

By Rajesh Kumar Singh

CHICAGO (Reuters) -Delta Air Lines Inc on Wednesday posted a lower-than-expected second-quarter profit and warned that cost pressures would remain elevated through the year as it battles operational challenges, sending its shares lower.

U.S. carriers are enjoying the strongest summer travel season in three years as more people resume regular activities including vacations. International traffic and corporate travel demand are also on a rebound, making for a profitable second-quarter for most of the major carriers.

However, the industry’s decision to let go thousands of workers at the height of the coronavirus pandemic in 2020 has left it ill-equipped to deal with a surge in consumer demand. Carriers are struggling to ramp up capacity and get operations back on a smoother track, resulting in higher operational costs.

Delta had to cancel 3.5% of its scheduled flights last month. The flight disruptions along with higher fuel costs resulted in a profit below Wall Street estimates.

The company’s headcount has reached 95% of pre-pandemic levels, but training backlogs have left it short-staffed.

Chief Executive Ed Bastian said the company now expects to reach pre-pandemic capacity by the summer of 2023. He added that Delta will maintain its capacity in line with its resources in order to restore operational reliability.

Delta expects to spend over $700 million this year in overtime and premium pay, 50% higher than in 2019. As a result, its full-year non-fuel costs are now estimated to be eight percentage points above the company’s initial forecast.

Peter McNally, an analyst for Third Bridge, said elevated operational costs would pressure Delta’s earnings in coming quarters as well.

“Inflation is a major headache for all industries and the airline business is not immune to rising costs,” he said.

Delta shares, which had been down more than 8%, trimmed those losses and were off about 6% at $29.24.

Airline shares have been battered in recent weeks on concerns that higher air fares, a worsening economic outlook, persistently high inflation and rising interest rates could dent travel spending in the second half of the year.

Delta, however, said it has not seen any meaningful pullback in consumer demand and fall travel bookings have been strong.

The Atlanta-based carrier said resilient travel demand will result in solid third-quarter earnings and a “meaningful” profit for the full-year despite inflationary pressure.

“Looking forward, we’re in pretty good shape,” Bastian said in an interview. “The demand is going to continue to hold fairly well through the fall and into the winter.”

The company’s third-quarter operating margin is estimated to be in the range of 11%-13%. It expects revenue for the September quarter to be up as much as 5% from 2019, even as its capacity is projected to be down 15%-17%.

Delta posted an adjusted second-quarter profit of $1.44 per share, 29 cents below Wall Street estimates, according to Refinitiv. The company reported $13.8 billion in revenue for the quarter.

(Reporting by Rajesh Kumar SinghEditing by Bill Berkrot)