Delta shares dip 2.9% on fuel expense, yet demand outlook stays positive

Delta's third-quarter earnings fell short of analyst expectations and its own forecast by a considerable amount, leading the carrier to lower its full-year projection. Much of that had been anticipated by investors, and management struck a positive tone on demand, issuing a fourth-quarter outlook that tops the average estimate.

Turning to the figures, the negative point is that Delta recorded its first earnings shortfall in two years, though the surge in fuel costs provided a ready explanation. All the results are affected by that factor, yet none comes as a shock considering the level of fuel prices. On the positive side, the fourth-quarter and full-year guidance modestly surpass expectations, although that is contingent on developments in Iran.

The carrier's adjusted fuel price came in at $3.61 per gallon, a 60% increase year-over-year, while adjusted fuel spending climbed 62% to $4.1 billion. Delta took on over $500 million in fuel expenses above the level it had anticipated in its early-July forecast.

For the fourth quarter, the company projects an all-in price of roughly $4.25, inclusive of a refinery benefit of about $0.40 per gallon, representing an 18% rise from the third quarter. The chief financial officer attributed the full-year reduction solely to jet fuel, noting that it averaged $4.50 as of Thursday evening. The outlook is based on present prices, not on any expectation of easing, leaving no buffer should fuel prices increase again. That compares with the current spot price range of $4.40 to $4.43, after accounting for the refinery credit.

For both the broader economy and Delta, the encouraging sign is that consumers seem ready to accept the elevated ticket prices. The airline transferred nearly all of its cost inflation onto passengers, while operating income remained nearly unchanged at $1.66 billion versus $1.69 billion. The fourth-quarter margin projection of 7% to 9% is lower than the third quarter's, indicating that fares have not fully caught up with fuel costs, though investors are likely to factor in a rebound down the line (and see a reversal of pressure if the conflict concludes).

Delta's ability to raise prices is evident. Revenue per passenger mile increased 14% as the load factor stayed steady at 86% with no change in capacity. Travelers are spending significantly more for each mile flown, yet aircraft remain fully booked. The main factors are premium and business travel demand, reflecting the diverging fortunes in the economy. The airline stated earlier this week that households with incomes of $100,000 or greater account for 90% of its revenue.

The fourth quarter is already about 60% booked, with revenue advancing roughly 20% and seat capacity increasing less than 2%. The key issue for the final period is the spending behavior of lower-income passengers, who tend to travel more during the holiday season.

At the start of trading, shares declined roughly 2.9%, with an earnings call scheduled for 10 a.m. Eastern Time that is expected to provide further detail on fourth-quarter demand.