Delta expects robust travel demand to boost fourth quarter profit

By Rajesh Kumar Singh

CHICAGO (Reuters) -Delta Air Lines Inc on Thursday forecast stronger-than-expected profit in the fourth quarter as the carrier expects travel demand to remain robust despite growing risks of an economic recession, sending its shares higher in premarket trading.

The Atlanta-based carrier expects an adjusted profit of $1-$1.25 per share in the quarter through December, on a possible 9% jump in revenue from the same period in 2019. That’s higher than a profit of 79 cents a share expected by analysts in a Refinitiv survey.

In an interview, Chief Executive Ed Bastian said a shift in consumer spending from goods to services is driving travel recovery. With consumers’ finances still “quite healthy,” he doesn’t expect a letup in travel demand.

“We’re seeing in the bookings some very strong demand signals,” Bastian told Reuters.

Delta’s shares were up 4% at $30.4 in premarket trading.

Adjusted profit for the quarter through September was $1.51 a share, below analysts’ expectations of $1.53 per share.

Delta said its third-quarter earnings were impacted by Hurricane Ian, which led to mass flight cancellation last month. Strong travel demand, however, generated the highest quarterly revenue in the company’s history, it said.

U.S. carriers are enjoying the strongest consumer demand in three years. Reopening of borders after the COVID-19 pandemic as well as a strong U.S. dollar are encouraging more Americans to travel overseas, while office reopenings are boosting corporate travel demand.

‘FIRING ON ALL CYLINDERS’

Delta said corporate bookings – the industry’s cash cow – have increased after last month’s Labor Day holiday, reaching 80% of the pre-pandemic level by the end of September.

Its international passenger revenue has also recovered to 97% of 2019 levels, driven by demand for transatlantic flights.

“In spite of ongoing economic uncertainty, Delta appears to be firing on all cylinders,” Citi analyst Stephen Trent wrote in a note.

Growing risks of economic recession, however, have sparked worries about travel spending, hammering airline shares and taking the focus away from what is shaping up to be the industry’s best earnings performance in three years. The NYSE Arca Airline index is down 36% this year.

Carriers, which are facing higher fuel and wage bills, have been relying on robust demand to mitigate inflationary pressure with higher fares.

Higher ticket prices, for example, led to a 23% jump in Delta’s total revenue per available seat mile in the latest quarter even though its capacity remained well below the pre-pandemic level.

But with the Federal Reserve aggressively raising interest rates to tame inflation by lowering demand and slowing economic growth, the industry’s pricing power is under threat.

If the economy does slip into a recession, Bastian said Delta would focus on further reducing its non-fuel costs, which are projected to ease in the December quarter from a quarter ago. But he expects the urge to travel to remain strong.

“We don’t think that just one busy summer of traveling is going to quench the desire and the needs of consumers,” Bastian said. “This demand surge is going … to continue for some time.”

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