Rising capacity in the airline industry has been a major concern for investors over the past couple of years. Delta Air Lines (DAL, Financial) Q2 earnings miss and downside Q3 guidance highlight that an oversupply of seats is squeezing the industry's margins and profits. As the first major airline to report Q2 earnings, DAL's disappointing results and outlook suggest more turbulence ahead, especially since DAL's financial performance has generally outpaced its rivals.
- After three consecutive earnings beats, DAL fell short of Q2 EPS estimates due to lower ticket prices and higher operating costs. Despite strong travel demand, DAL's revenue reached a June quarter record.
- Available Seat Miles (ASMs) grew by 8% year-over-year, led by a 19% increase in DAL's Latin America market, driving revenue up by over 5% to $15.41 billion.
- Consumers, particularly in the U.S., are cutting back on travel plans, opting for less expensive trips, while industry-wide capacity remains high. CEO Ed Bastian noted increased price sensitivity in lower fare categories.
- Passenger Revenue per Available Seat Mile (PRASM) decreased by 3% in Q2.
- The rise in industry capacity is pressuring DAL's PRASM. CFO Dan Janki mentioned that "growth continues to normalize," and DAL's Q3 revenue guidance of $14.84-$15.13 billion missed expectations.
- Demand remains strong in certain areas, including DAL's premium, corporate, and international businesses. Premium revenue grew by 10% year-over-year, corporate travel demand increased double-digits, and international passenger revenue rose by 4%, despite challenging year-over-year comparisons.
Additionally, DAL continues to pay down its debt, thanks to strong free cash flow generation of $1.3 billion in Q2. By the end of Q2, the company's adjusted debt to EBITDAR decreased to 2.8x from 3.0x at the end of 2023. However, DAL and its peers are facing headwinds due to an unfavorable supply and demand dynamic as consumers tighten their travel budgets.
