Delta Air Lines' Slower Recovery From Summer Struggles Worries Investors

Key Points:

1. Delta Air Lines issued fourth-quarter earnings guidance below analysts' expectations, leading to a 2% drop in its stock.
2. A summer supply glut put pressure on fares, but Delta saw an inflection in September as airlines scaled back growth plans, helping to stabilize pricing.
3. Despite strong corporate sales and premium customer focus, Delta’s quarterly profit fell 26%, impacted by a fare war and a major IT outage.

Delta Air Lines (NYSE:DAL) recently issued guidance for the fourth quarter of 2024, signaling a slower-than-expected recovery from the challenges faced during the peak summer travel season, which has led to investor concerns. The Atlanta-based airline forecasted earnings between $1.60 and $1.85 per share, with operating margins ranging from 11% to 13%. While the guidance indicates some growth, it fell short of analysts' expectations, particularly with the midpoint of the earnings range falling just below the $1.76 per share anticipated by analysts polled by FactSet. As a result, Delta’s stock saw a slight dip, trading about 2% lower in Thursday morning trading.

Like many airlines, Delta faced significant hurdles this past summer, including a supply glut that put downward pressure on fares during what is traditionally a lucrative period for the industry. Airlines, including Delta, overexpanded in anticipation of strong travel demand, leading to excessive seat capacity, which forced carriers to lower fares to fill those seats. This fare war negatively impacted the airline's pricing power and profitability, contributing to its disappointing third-quarter performance.

However, Delta believes that the worst of the fare pressure is behind them. In September, the airline began to see an inflection point as carriers adjusted their growth plans, scaling back the supply of available flights. This reduction in capacity has started to bolster fares again, and Delta expects earnings to grow on a year-over-year basis during the fourth quarter. While this is an encouraging sign, CEO Ed Bastian noted that consumers have become more cautious about discretionary spending in the lead-up to the 2024 U.S. presidential election. Nevertheless, the airline has reported strong bookings for the upcoming holiday travel season, indicating that demand for air travel remains resilient in certain segments.

Delta’s business strategy, which focuses on attracting more affluent customers, has helped the airline weather some of the storms faced by budget airlines. The carrier's emphasis on premium services has allowed it to sidestep the full impact of the summer fare wars, which disproportionately hurt low-cost carriers reliant on price-sensitive travelers. Additionally, Delta reported that corporate sales increased by 7% compared to the same period last year, with substantial growth from key sectors such as technology, media, and banking. This suggests that business travel, a high-margin sector for airlines, remains strong for Delta.

Despite these positives, Delta's financial results for the third quarter were still weaker than anticipated. The airline’s quarterly adjusted profit fell by 26%, coming in just shy of analysts' estimates. Total passenger revenue remained flat at $13.1 billion, as the airline earned less per seat flown a mile than it did in the previous year. This decline in unit revenue highlights Delta’s diminished pricing power during the summer, a key factor that hurt its profitability.

Compounding the summer challenges, Delta was also impacted by a significant IT outage in July caused by a system failure at cybersecurity firm CrowdStrike. The outage resulted in widespread disruptions across Delta’s operations and was responsible for a $0.45 per share reduction in the airline’s adjusted profits for the quarter.