DAL Earnings Preview: Can Airlines Keep Passing Along Higher Costs?

SPEAKER_1 (0:00)

We welcome in David Nelson, Chief Strategist at Bellpoint to help us preview what we may hear from the airline.

David, I'm curious your thoughts. I mean, this has been such a space. I mean, I can't think of more things to throw at it to make it more and more confusing for them and difficult from COVID to no work travel to more work travel to now we got oil prices through the roof. Big picture, kind of where are we setting the stage as Delta kicks things off?

David Nelson (0:29)

Well, the headline for this quarter is going to be fewer passengers, pricier seats. And I think what Delta and the other airlines have to prove right now is with Jeff Fuels backing to the highs, like you said, and the question for Delta and the other airlines is how big is the hit? Unless there is a miracle, Q3 is going to be a miss, at least versus the last guidance. The street is already well below the previous guidance around 2 to 250, consensus is around 188, and I looked at that yesterday, and now it's all the way down to 182, so it gets cut almost every day.

The market is not grading this report, it's grading the next one.

SPEAKER_1 (1:09)

Okay, and so I think that's a really good point.

But as we look at this space, the factors that are going to be impacting Delta, they're also going to impact American, they're going to impact British Airways. Everybody is going to be dealing with this, it's going to come down to who can manage those costs the best and who can pass them on the best and maintain margins. When you think about where Delta is positioned, as I don't know if it's safe to say, but let's say it's the closest thing we have to sort of a mainstream luxury airline in the US, at least it kind of sees itself that way, a little bit higher end, higher quality, maybe than some of the others. Is it the airline of the big four in the US that's best positioned to maintain its margins in your estimate?

David Nelson (1:54)

Probably, and for one particular reason, refining. Refining is obviously a major concern right now, not just for airlines, but really the entire nation. Even with the Strait of Hormuz easing somewhat, refining is a big problem because we just can't get the product produced. So Delta, to the best of my knowledge, is the only major US airline that owns its own refinery. That could actually add 10 to 15 cents to the number. Now, look, it helps them get some of the spread back.

It's certainly a hedge, but it's not immunity.

SPEAKER_1 (2:27)

Yeah, that's a good point too, is they control a little bit more, but of course that can be a drag at times as well, but certainly something they welcome now.

You kick things off with sort of talking about fewer passengers price here seats. I imagine Delta maybe has a little bit more pricing power than some, but this is a very price sensitive industry and there's only so far you can stray from your peers on that. When it comes to the demand side of things, do you anticipate there being any real discrepancies amongst the different airliners or is this sort of one of those situations where across the board travel or the passenger counts expected lower?

David Nelson (3:08)

I think it's across the board. TSA screenings right now are well below where they were at peak in 2024 They've been coming down all summer. CPI airfares are up big year over year.

I just flew this weekend and I think a lot of viewers will, anybody that's flown in the last couple of months will understand what I'm talking about. When you log in, the base fare looks great, but that's if you're okay sitting in the last row next to the bathroom and you can't push your seat back. If you want to stow your bag overhead, unless you're willing to pay up in boarding group one or group two, you may not be able to do that. Want to move your legs, get out the credit card at this rate, the next upsell is going to be the lavatory. Pricing power is real, but there is a ceiling, there is a point where consumers will say no must.

SPEAKER_1 (3:56)

Well, there's something to this clearly because Southwest zigged when everybody else zagged and had a lot more of a all-inclusive, every man for themselves approach to it. But in order to, I guess, unlock value, they adopted the same model.

To my understanding, it's been relatively successful in that way of increasing a little bit by providing some of those additional all cart pricing upgrade options. But is it getting to the point now where it's almost, I don't want to say un-flyable without at least some things, but the base model or the baseline thing, it's almost like the concert industry. It's like once you add in all the fees and stuff, the price isn't even close to the same.