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Delta blames rivals for profit drop amid market overcapacity

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Delta blames rivals for profit drop amid market overcapacity
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Gary Leff Chief Financial Officer | View from the Wing

Delta Air Lines is earning half the industry’s profit, with a 13.6% operating margin and $1.3 billion in earnings for the last quarter. Despite these figures, both are down year-over-year, and the airline has lowered its guidance for the third quarter. Following Thursday morning's announcement, Delta's stock initially lost 8% of its value but regained half by the end of the trading day.

The airline attributes its performance issues to excessive capacity in the market, suggesting that other airlines are responsible for this oversupply. Delta President Glen Hauenstein stated, "Domestic industry seat growth accelerated into the summer months beyond normal demand growth. This has impacted Main Cabin unit revenue trends through the summer." He added that with scheduled seat growth decelerating into fall, they expect unit revenue trends to improve significantly in August and beyond.

Aviation analytics company Cirium reports that domestic market seats are up 6% year-over-year, while Delta's seats increased by 5%. Across the Atlantic, Delta’s seat growth was also 5%, surpassing United Airlines and British Airways. Air France led this growth at 9%.

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Despite expectations that other airlines will reduce capacity, Delta plans to grow faster than its revenue projections suggest. For the September quarter, Delta anticipates capacity growth of 5% to 6% and revenue growth of 2% to 4%.

This situation raises questions about air travel commoditization. If capacity is indeed an issue as Delta claims, it implies that air travel is commoditized despite their long-standing message of offering a differentiated product.

Delta's second-quarter results indicate that much of its product remains a commodity. The airline industry operates with high fixed costs and is highly sensitive to fuel price changes. Most seats sold are economy class where price is a significant factor for consumers.

Before the pandemic, Delta attempted to de-commoditize economy class by offering enhanced services such as hot towels and amenity kits on long-haul flights; however, these efforts have since ceased.

Delta has built a brand around premium products but faces competition from other airlines offering superior business class experiences. The business class seats on their Boeing 767s lag behind those offered by American Airlines, United Airlines, JetBlue Airways, British Airways, Air France-KLM Group, and Air Canada.

Hauenstein highlighted their partnership with American Express during an earnings call: “American Express remuneration for the quarter was $1.9 billion, up 9% year over year.” However, SkyMiles loyalty program does not appear to be a strong differentiator compelling customers to choose Delta over competitors.

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