Delta reported record earnings for its second quarter, beating estimates on the top and bottom line and raising its guidance. TD Cowen Senior Research Analyst Helane Becker joins Yahoo Finance Live to discuss the company’s results and what they tell us about both business and leisure travel.
Video Transcript
- Pent up demand for travel driving Delta earnings to a record high, the airline also boosting its full year guidance. Joining us now is TD Cowen senior research analyst Helane Becker. Now, Helane, you had predicted that they would post record numbers previously. You predicted that for this quarter and even the coming quarter. What's your first takeaway from today's numbers?
HELANE BECKER: Thanks for the question. The numbers are very good. Demand is very strong and you see that at airports around not only the United States, but around the world. People really want to make up for lost time and are getting out and traveling. And the fact that they have the ability to do so, not only from a financial perspective but from the time perspective, the fact that they can travel, make almost any weekend a long weekend because of work from anywhere opportunities.
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- Helane, is this a case across the board, not just Delta? And also, more specifically, the comments that we heard from Ed Bastian when it comes to corporate travel, he is very optimistic that that is going to continue to move to the upside here. What does that growth look like? Are we ever going to get back to those 2019 levels?
HELANE BECKER: Yeah, no, I think that's a really fair question, because he mentioned-- and he mentioned on the call this morning, and we've said this before, the US economy is, what, 15 20% bigger now than it was four years ago? So just in terms of the size of the economy, it should drive higher business traffic. It's just there's this hybrid work environment, and when you plan a business trip to go see your clients, it's increasingly difficult because some companies are in the office Monday, Tuesday, Thursday, others are in Tuesday to Thursday. It seems like Friday is a work from anywhere day.
So I think it makes travel from a business perspective more difficult. We certainly have seen growth in attendance at conferences. We're pretty much back to 2019 and prior year levels from that perspective. And our view has really been evolving that into this more, yes, we're going to see more business travel. It's just where you're going to see it I think is changing.
Small and medium sized companies have never really stopped traveling. It's just the large corporates. Tech, financial services as an example, that have curtailed travel. And I think as your competitors travel, because your travel salespeople travel, as your competitors travel and they win business, I think you'll see people start to get back on the road.
- Helane, I want to ask you about just the pricing power. We know fares are much higher. Inflation in general has been sticky, although it's started to cool. Let's talk about the level of fares, where they are, what the risk is. Does Delta still have pricing power heading through the balance of the year? Even, yes, their guidance is strong, but what is the headwind that you see?
- Yeah, I think that, again, you guys are really on top of it today with your questions. So I think from a pricing perspective, jet fuel prices have come down off their peaks. They're significantly below where they were a year ago, and that gives the airline some opportunity to cut fares to continue to see strong demand.
We're seeing domestic fares come down a little bit on a year on year basis, and although May was up sequentially from April, that kind of makes sense because the summer months start. I guess May through July, especially if you're in the South, schools go back in early to mid August. In the North, schools don't go back until after Labor Day, so you have this elongated season where you can have strong demand that would drive higher prices.
Plus, capacity in the New York area. As you guys are probably aware, the Department of Transportation asked the four big airlines serving the market, United, American, Delta, and JetBlue, to cut capacity by 10%, and capacity is already down by 10%. We are not back to 2019 capacity levels, but as I mentioned, the economy has grown and demand is fully back to 2019 levels, or in some days it's above.
And so when you think about that and when you think about the ability of airlines to price, intuitively they should be buying more aircraft, but they can't do that because of OEM delivery delays, supply chain issues, and then all the other limitations on growth. There's no place to put planes at the busiest airports.
So we've been for the past four or five years talking about more seats per departure and fewer departures per day as the only way you're going to be able to get growth, and now the airlines are starting to talk about that as well. But it generally-- it definitely drives higher revenue in an environment that, if you see a slower economy, you would normally see slower revenue growth or declining revenue.
- And Helane, to that point, because Delta did say on the call that they believe that they've reached an inflection point when it comes to costs, but you brought up some of the issues, some of the headwinds that are facing Delta and many of its competitors today. To what degree should investors be worried about those lingering cost issues, given the fact that we are seeing pretty significant delays for some of those aircrafts?
HELANE BECKER: Yeah. I think that from that perspective, we're concerned, but not as concerned as we would be if the revenue environment was slightly different. Some of the costs that you see pressure, labor costs obviously have been-- we've been talking about that for a long time, as have you, and we're seeing that percent change should start to abate in 2024. Maintenance, as airlines get new aircraft, you should see a maintenance holiday just because the newer aircraft need less maintenance than older aircraft.
So that type of thing should start to-- should start to abate, but the other issues that are out there just in terms of supply chain, labor, it's not so much attracting, it's retaining. Air traffic control has been an issue. We should. There seems to be bipartisan support for an FAA reauthorization bill, which needs to be done before the end of the government's fiscal year. So I think I think there's a lot of good happening that should make '24 a better year, but at least we're hopeful. Maybe hope isn't a strategy, but we're hoping that things improve on the cost side.
- All right, Helane Becker, we have to leave it there. TD Cowen, thanks so much for joining us.