Delta reports jump in fuel costs despite strong flight demand

Delta Air Lines reported better-than-expected financial results for the second quarter, supported by strong travel demand, but the company's shares fell due to sharply rising fuel costs and signals that high ticket prices will persist.

The airline reported a 25% drop in adjusted profit to $1.56 per share, still beating analyst forecasts of $1.49 per share. Adjusted revenue grew 14% to $17.7 billion, also above the expected $17.55 billion.

Delta's management emphasized that demand remains strong with capacity growth of only 1% during the quarter. Travel for the FIFA World Cup was stronger than projected, and corporate clients from the banking, automotive, aviation, and defense sectors also increased business travel.

The company reports double-digit growth in main cabin revenue per seat, while premium class revenue increased by 17% as a result of investments in more luxurious seating. Proceeds from loyalty programs and related services grew by 19%, and the cargo business jumped 39% due to higher volumes.

Despite solid demand, results were weighed down by more expensive fuel associated with the war with Iran. Adjusted fuel expenses rose 77% to $4.4 billion, and the average adjusted price jumped 75% to $3.93 per gallon.

Nevertheless, Delta expects to offset cost pressures and achieve 20% profit growth for the year. CEO Ed Bastian indicated in an interview with CNBC that one reason is that "higher airfare prices are expected to last longer."

Earlier this week, the airline introduced new "Basic" fare options that provide access to some of its premium products at a lower price. However, capacity is expected to remain constrained in the near future as carriers focus on premium seats and improving the onboard experience rather than mass seat expansion.

Delta reaffirmed its full-year guidance for adjusted earnings between $6.50 and $7.50 per share. The company expects free cash flow to be in the range of $3–4 billion, which is better than average market expectations of about $6 in earnings per share and $2.4 billion in free cash flow.

For the third quarter, Delta forecasts earnings between $2 and $2.50 per share, compared to FactSet expectations of $2.03 per share.

In premarket trading on Friday, Delta (DAL) shares limited their decline to about 1% and fell to near $88, returning to the 21-day exponential moving average and the area around the $87.39 buy point in a "rising base." The shares broke through this area on June 24 and climbed above it, but over the last week have retreated under pressure from the renewed conflict in the Middle East.

United Airlines (UAL) shares also retreated by less than 1% on Friday but remain extended above the buy zone after consolidation. American Airlines (AAL) shares, which are also trading above their latest buy zone following a "cup with handle" formation, recorded a slight decline in early trading.