Delta Air Lines Sees Premium Profits

Delta Air Lines Sees Premium Profits
Delta is getting travelers to shell out more for seats
Delta Air Lines fuel bill surged in the last quarter and travelers were willing to pick some of the tab.

Higher airfares and brisk sales of seats in premium sections of the plane like business and first class helped the second-largest U.S. airline offset its fuel costs as it posted record revenue and profits that topped Wall Streets expectations for the three months ended in September. Delta shares were up more than 5 percent midday Thursday, more than the airlines competitors.

Well, Duane, I think weve been pretty articulate about why we put basic economy in the marketplace years ago as the industry was being commoditized at the low end and we didnt really have a product that competed on a like-for-like basis with Spirit or Frontier. I think that was a necessary thing we needed to put in the marketplace and as many people have written, ours was the most humane of all of those as we didnt try to charge for overhead baggage. But really for the commoditized sector, we had something that was well above what they were competing in the OTAs and in the low-end spectrum. And thats when we also started to think about well, what did people want to buy from us that we werent supplying and thats where we devised these superior products and services and brought them to market. And I think when — what we get really excited about is we still believe were in the early innings on this. They are still not as easy as they need to be to buy, theyre still not available in all channels with all forms of currency. And over the next years not only will we be expanding those products and services, but well make them be easier to buy for our customers and we think that will continue to fuel growth in those sectors.

Delta said it was able to cover about 85 percent of the increase in fuel costs, partly thanks to higher fares. Revenue from business class and higher-end coach seats with more legroom rose nearly 20 percent in the last quarter, compared with a 3 percent increase in revenue from coach, Delta said. Its revenue available per seat mile, a key industry metric of revenue for each seat an airline flies one mile, rose more than 4 percent from a year earlier.

No. I think at the end of the day what were trying to do is accelerate the usage of these products and services. And as we indicated previously, we are growing those cabins through the upgauge. And as we exit the MD-80s and as we bring on a 321 to substitute it, we generate 20% more premium seats. So the answer is that clearly it comes through different line items, but the revenue is real whether or not you pay with cash or whether or not you pay with mileage. And thats one of the things that were really excited about is being able to let you do that on your app on the way to the airport. And it doesnt matter to us how it comes through the P&L because its real revenue either way and what we need to do is continue to have your affinity grow there. And I think when you think about the ecosystem of the frequent flyer program, we want to give you more ways to burn your miles and control your experience and thats really the key of where we want to take this in the next couple of years is be able to buy what you want from us and be able to supply it to you. And as these things fill up, theres nothing keeping us from making more seats in those cabins because they are the higher margin pieces of our equation.

Delta Air Lines Inc (DAL) Q3 2018 Earnings Conference Call Transcript

It is welcome news. The sector has largely lagged the broader market as investors fretted about weak profit growth amid more expensive fuel, generally airlines second-biggest expense after employee salaries.

Well, good morning Savi. Thanks for the question. As weve talked about over the years with the Trainer strategy, weve talked often about finding a strategic partnership to take some of the products that we dont need, particularly the gasoline and the diesel, and get us to — keep us focused on jet fuel and allow us to harness all the benefits while still operating that plant. So with the turnaround coming up, it was a good opportunity to start that process. I wont comment on the process itself, but we continue to work through that. As it relates to IMO 2020, we spent a lot of time talking about it internally and I think the speculation is out there both that it could affect higher crude prices, but the preponderance seems to be that we would expect to see higher jet cracks. Thats bad for the airlines, but less bad for an airline that owns a refinery because we produce about 30% to 40% of the refinerys production in diesel and jet fuel that can help offset any increases in jet. So, we would expect that it would continue to help our relative advantage and look forward to continuing to see the benefits of Trainer in the years to come.

But Delta customers are also opting for more expensive seats in coach and the airline on Thursday said it plans to give travelers more options to buy up.

Airlines have been slicing the coach cabin into new classes of service in recent years, offering travelers more legroom and amenities at the high end, and restrictive so-called basic economy fares at the low end that dont allow changes and force travelers to board the plane last.

Well, good morning, Dan. I think as we talked about it, were not pursuing any hedging and think that were in a very good position. I think its important to note that as weve demonstrated this year, our ability to recover fuel costs in the businesses has accelerated over the past and thats the number one front line from that standpoint. And I think what weve proven here or what were in the midst of proving is the durability in the business model to be able to absorb that. Weve been successful in high oil price environments, weve been successful in low oil price environments. Where it gets a little bit tricky and what youve seen this year is in the volatility, when that moves quickly in one direction or the other. So, I think we continue to believe that were on the right trajectory without hedging. Certainly, the refinery helps us as does our integrated fuel strategy in which we continue to deliver results that are materially better than the industry average to the tune of $0.07 to $0.10 per gallon.

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We have increased our global reach to 52 countries with an innovative strategy that includes over $2 billion in equity ownership of our airline partners. Through our commercial efforts, we have taken Delta from mid-teens NPS and a revenue deficit to the industry to a carrier with leading customer satisfaction and a sustainable revenue premium. And through it all, weve shared that success with our people and at the same time, achieved an investment-grade rating and returned nearly $12 billion to our owners through dividends and share repurchases. Despite three significant upward moves in fuel this year driving more than $2 billion of higher fuel expense, we still expect to deliver our fourth consecutive year of pre-tax profits over $5 billion. This demonstrates the resiliency of our business model and the speed with which we are able to react to changing economic conditions. Even with oil now hovering above $80 per barrel, we are confident that we have the momentum to return to margin expansion in 2019.

New York (CNN Business)Hurricane Florence and higher fuel prices proved no big deal for Delta Air Lines. Profit grew after the company raised fares and sold more seats on its planes.