DALLAS (AP) — Delta Air Lines set records for passengers and revenue over the summer and benefitted from cheaper jet fuel, boosting its third-quarter profit 13% to $1.5 billion.
However, Delta offered a cautious fourth-quarter forecast that fell short of Wall Street expectations, and the airline's shares dropped in trading before Thursday's opening bell.
CEO Ed Bastian said travel demand remains strong.
"It was a good summer at Delta, the busiest summer in our history," he said in an interview. "The consumer outlook is strong. Looking into the holiday period, the bookings look good."
Atlanta-based Delta has been the most profitable U.S. airline in recent years, and it regularly beats its closest rivals for fewer flight delays and cancellations. This year it has benefitted from the grounding of the Boeing 737 Max — Delta doesn't own any, but American, United and Southwest do, and they have been forced to cut thousands of flights from their schedules.
Delta might also be gaining at the expense of American Airlines in particular, which suffered through a difficult summer marked by delays and cancellations, many of which American blamed on labor strife with its mechanics.
American entered the year as the world's biggest airline, but Delta surpassed it by revenue in the second quarter, and analysts expect Delta will repeat that feat in the third quarter.
Bastian said Delta's success is due more to its own brand and operations, "not the weakness of any of our competitors."
For the quarter ended Sept. 30, Delta earned about $173 million more than in the same period last year. Excluding what it considers non-repeating gains and losses, Delta said it earned $2.32 per share, 5 cents better than the average forecast of analysts surveyed by Zacks Investment Research.
Revenue rose 5% to $12.56 billion, slightly less than analysts expected.
Spending on wages and benefits rose 5%, or $131 million, but that was more than offset by a drop in fuel spending of 10%, or $259 million, compared with a year earlier.
Delta did best at home. U.S. revenue rose 7.8% as the carrier added flights and appeared to charge higher prices — about 3% more for every seat on a per mile basis. The carrier showed rising revenue on flights to Europe and South America, but its Asia business declined.
Although its third-quarter report was solid, Delta faces questions heading into the end of the year.
— Investors have expressed concern over rising costs; Delta shares dipped this month when the company forecast a sharper rise in fourth-quarter spending than the market expected. On Wednesday, Bastian said part of the increase was due to rapid growth.
The airline is adding employees, Bastian said, to keep market-share gains it achieved over the summer, when it had to spend heavily on overtime. Also, this month it gave 4% raises to ground workers and flight attendants. Those employees are not represented by unions, and Delta has fought hard to keep unions out. Although its pilots are unionized, Delta has a far lower percentage of union employees than the other largest U.S. airlines.
— Delta agreed last month to pay $1.9 billion — a premium of nearly 80% — for a 20% stake in Latam Airlines Group in South America, where Delta is weak. Bastian said it was a "pretty reasonable price to pay for a great long-term stake in a growing geography." American pursued the same deal for years but was left empty-handed.
Delta will finance the deal with a combination of cash and borrowing. Bastian said Delta can handle the additional debt without losing its investment-grade credit rating or cutting the dividend. He added that Delta might grow in Miami, an American Airlines stronghold, to better link up with Latam's network.
— Analysts believe that when the Boeing Max does return, probably early next year, it will flood the market with new planes and cause airlines to slash prices to fill seats. That could hurt pricing power across the board, even among carriers that don't operate the Max.
Bastian, however, believes such predictions are overblown. He said that when airlines finally get their Max planes back, they will get rid of older planes that were scheduled for retirement but kept flying to fill the gap left by the Boeing plane.
About an hour before the opening bell, shares of Delta Air Lines Inc. were down $1.85, or 3.4%, to $52.09. They closed Wednesday up 8% in 2019, which is about half the gain in the Standard & Poor's 500 index but better than most U.S. airlines.