Delta Airlines: What We Learned Today

Delta Airlines released earnings today and gave us a little color on what is going on in the industry. It was a quiet quarter, but there are a few tidbits worth noting.

Your Ticket Costs Are Going Up…

Delta Airlines

It’s going to cost you a bit more to fly.

Delta noted that ticket price growth accelerated through the quarter and estimated that the second quarter would see RASM* increases of 3-5%. They also announced that they would grow their capacity (the total number of seats for sale) by 3-4%. That’s a big number, and the combination of those two items means that air travel demand is particularly strong.

But So Are Theirs

Here’s where it gets interesting. The airline business is more about having the lowest costs, rather than generating the most revenue. Sales are cyclical. When things are good, you’ll get a lot of them. When things aren’t, you’ll get fewer. But salaries are fixed, whether times are good or bad. The lower your costs, the better the chance you have of surviving the lean years.

When an airline measures costs, it usually does so independent of fuel, since oil prices are out of their control. The problem that airlines run is that when things are good and the airline is making billions of dollars, employees want higher salaries, knowing that there is a chance that wages will be cut during the downturn. Thus, airlines often end up giving large increases just as the market is at its peak.**

Delta’s management noted on their earnings conference call that costs independent of fuel were growing¬† “at an unacceptably high rate.” What does the airline consider to be unacceptably high? In this case, it’s 1-3% cost growth. Ouch. That doesn’t seem like much, but even a percent can mean a difference of millions of dollars.

Here’s the issue: After record contract increases, management and labor have been at relative peace. A happy employee base means that a well-run airline, and a well-run airline usually means happy customers. Delta has been running an outstanding operation over the past few years, and I don’t see that changing. But if management decides that it has a cost problem, it could mean the return of the animosity between the two groups. I don’t see any looming problems right now, but it’s worth keeping an eye on.

As is always the case with these pieces, nothing in this blog post should be taken as advice to buy or sell any stock. 

 


*Beginners Hint: Airlines use the term “RASM” as their main bogey. It stands for “revenue per available seat mile,” and measures how much revenue they generate to fly one seat one mile, whether it has a butt in it or not. CASM is a similar term: How much does it cost to fly that seat.

**The history of labor relations in the airline industry is long and fascinating one. Who the good guys and who the bad guys are depends on your point of view.

 

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