Delta Air Lines Inc on Thursday forecast stronger-than-expected profit in the fourth quarter as the carrier sees travel demand remaining robust despite growing risks of an economic recession, sending its shares higher.
The Atlanta-based carrier expects an adjusted profit of $1.00-$1.25 per share in the quarter through December on a possible 9% jump in revenue from the same period in 2019. That's higher than a profit of 79 cents a share expected by analysts in a Refinitiv survey.
U.S. carriers are enjoying the strongest consumer demand in three years. Reopening of borders after the COVID-19 pandemic as well as a strong U.S. dollar are encouraging more Americans to travel overseas while office reopenings are boosting corporate travel demand.
Delta Chief Executive Ed Bastian said that the airline industry is in a "countercyclical" recovery phase, helped by a shift in consumer spending from goods to services. With household budgets still "quite healthy," he expects consumer demand to stay "very strong" through the December quarter and into the new year.
"We don't think that just one busy summer of traveling is going to quench the desire and the needs of consumers," Bastian told Reuters. "This demand surge is going ... to continue for some time."
On an investor call, Delta said it expects to have a positive free cash flow this year despite incurring an extra $1 billion in costs.
The carrier anticipates a "meaningful" step-up in profitability and cash flow next year after the restoration of its pre-pandemic capacity, which it expects would improve asset utilization and further reduce non-fuel costs.
'FIRING ON ALL CYLINDERS'
Delta said corporate bookings - the industry's cash cow - have increased after last month's Labor Day holiday and demand for transatlantic travel remains strong. Overall, buoyant consumer demand translated into the highest quarterly revenue in the company's history in the third quarter, it said.
"In spite of ongoing economic uncertainty, Delta appears to be firing on all cylinders," Citi analyst Stephen Trent wrote in a note.
Growing risks of economic recession have sparked worries about travel spending, hammering airline shares and taking the focus away from what is shaping up to be the industry's best earnings performance in three years. The NYSE Arca Airline index (.XAL) is down 36% this year.
Carriers, which are facing higher fuel and wage bills, have been relying on robust demand to mitigate inflationary pressure with higher fares.
Airline fares were up about 43% year-on-year last month and have been one of the biggest contributors to a jump in U.S. consumer prices.
But with the Federal Reserve aggressively raising interest rates to tame inflation by lowering demand and slowing economic growth, the industry's pricing power is under threat.
Delta said it is focusing on keeping its cost down to deal with economic uncertainty and will remain "nimble" in ramping up capacity.
Bastian said the company has no plans to resume share repurchases as it intends to use extra cash to pay down its debt.
"We want to get our investment-grade rating back," he said.
Delta's adjusted profit for the third quarter came in at $1.51 a share, below analysts' expectations of $1.53 per share.