Delta’s Big Profits and Shopping Plans

Delta was first out of the gates with earnings numbers for Q3 ’15 and to say that they are impressive is an understatement: The company posted a profit in excess of $1.3 billion. But, as is always the case, there are more interesting stories when digging below the top line numbers and in to the rest of the details. Take, for example, the part where fuel costs were about $1.3bn below Q3 ’14. Certainly that was a major factor in the profit, especially as revenue and yield per seat mile decreased year over year. But Delta also says that yield strength is outpacing capacity growth in Seattle so even with the pressures on that front some optimism is due.

International capacity is being culled by Delta, with an expected drop around 4.5% looking forward short term. And while CEO Richard Anderson suggested that one of the nice things about running an airline is that the assets – aircraft – can be moved to follow demand the company also noted that some of this cut will come in the form of 757s being retired and other fleet adjustments. For transcon travelers the good news is more wide body aircraft on the JFK-SFO/LAX routes following United abandoning that market later this month.

And even with the international cuts coming it came out in the Q&A section of the call that Delta is strongly looking at the market for used 777s. The carrier has not been shy about picking up older aircraft which fit its fleet plan and the 777 is an able replacement for many of the routes operated by the 747s which are set to retire in the next few years. And Anderson sees a glut of inventory coming into the market, making expected acquisition costs spectacularly low:

Well we’re seeing a huge bubble in excess wide-body airplanes around the world and we’ve been approached by more than one party. I mean the market appears to be the 777-200s about 9 to 10 years old the price is about $10 million. …So we do think that the aircraft market is going to be right for Delta and over the course of the next 12 to 36 months and we think that that weakness in that aircraft bubble in wide-bodies is going to spread to narrow-bodies and that there will be some huge buying opportunities because low interest rates really have created a huge wide-body bubble in the world.…Prices are going to get lower; you wouldn’t strike a deal now.

The 777s obviously catch ones eye, particularly with the 747 replacement needed, but Anderson also mentions narrow body aircraft. And both the 737 and A320 markets are going to be similarly flooded with second-hand inventory in the near future. There are a ton of new deliveries scheduled and airlines are looking to upgrade sooner than has typically been the case. It seems a bit backwards compared to historical trends but the secondary market may soon be dominated by US carriers.

I did find the discussion of pay and profit sharing interesting. The company was keen to talk up the pay raises and mostly skipped over the change to the profit sharing structure, other than to mention that it would be willing to run two such programs, one for the pilots and one for everyone else, if needed. And they certainly didn’t mention the back office layoffs coming.

Finally, a few notes on ancillary revenues: Delta’s got a lot going on there. Comfort+ seat sales are up 42% YoY and paid first class load factor is at 56%, up 8 points YoY on a 5% increase in seats available to sell. An increasing number of travelers hates the economy class experience enough that they’re willing to buy their way out. And it doesn’t help that the airlines have adjusted pricing of those products to make them affordable in some cases.