Delta Airlines, Inc. published its earnings report for the second quarter of 2017 on Thursday, according to Reuters’ Alana Wise and Arunima Banerjee. For investors, the report was a mixed bag. Profit fell 21% as compared to quarter 2 of 2016: net income dropped to $1.22 billion from 1.55 billion a year ago. However, passenger unit revenue (PUR), which Reuters says “measures sales according to flight capacity,” rose 2.5%.
Stocks across the industry, which had been trending upward recently as a result of sector-wide increases in PUR, dipped following Delta’s report. Delta’s own shares fell 2% Thursday, closing at $54.35.
Operating costs are soaring as fuel prices rise and “renegotiated contracts with…pilots, flight attendants, and mechanics unions” demand higher payouts from airlines. Delta reports that its salary costs are up 9% as compared to last year, and that fuel costs have risen 18%. Employees also received an additional $338 million in profit shares.
However, there are plenty of reasons to be hopeful about the future of Delta, and of the airline industry as a whole. Delta Chief Financial Officer Paul Jacobson says “the June quarter represented the peak for non-fuel cost pressures this year,” and expects costs to moderate in quarter three.
Moreover, passenger unit revenue is expected to continue to rise; Delta projects that the figure will grow between 2.5% and 4.5% in quarter three. An 18-20% increase in operating revenue is anticipated as PUR continues to climb. In quarter two, operating margin rose by one percent. Total operating revenue was up 3.3% to 10.79 billion.
Matthew Heller of CFO.com quotes Delta President Glen Hauenstein as saying the quarter two increase in PUR “marked Delta’s return to unit revenue growth after two and a half years.” Delta expected a 2% increase in PUR in the first quarter of the year, but reported a 0.5% decrease instead.
Unit revenue has declined throughout the sector over the past few years, partly because consumers are pressuring airlines to lower fares. Passenger Revenue per Available Seat Mile (PRSM), a key indicator of unit revenue, fell over 7% across the industry from 2013 to 2016, according to MIT’s Airline Data Project.
Recently, though, unit revenue has been on the upswing. Hauenstein attributes the rise in Delta’s unit revenue numbers to “a strengthening demand environment and our commercial initiatives to provide customers more choice, an innovative experience, and a broader global network.”
The air travel industry is a key element of the United States’ economy, accounting for 7.3% of the country’s jobs and 5.1% of its GDP (data collected by Airlines for America). The success of airlines can boost the overall health of the economy considerably, and when airlines struggle, the economy is liable to dip.
The inverse is also true: when the economy struggles, consumers opt for more affordable modes of travel, and the airline industry suffers. But, as Hauenstein says, the increase in Delta’s unit revenue suggests that demand is strong. An efficient business should be able to turn a greater profit when a greater demand exists.
Still, given Delta’s earnings reports over the last year or so, and considering Jacobson’s assertion that quarter two marked the apex of Delta’s yearly costs, it seems the June quarter was an aberration. With unit revenue increasing for the first time in years, Delta looks poised to close 2017 well.
As of 2:48 Eastern Time on Friday, Delta stock had risen 1.32% since the market closed Thursday. Since April 17, the stock is up nearly 25%, as investors respond to increases in unit revenue throughout the airline industry. Yes, a 21% decrease in profit is alarming at first blush, but Delta should be fine in the long run.