Nevertheless, some investors remain concerned about a recent uptick in fuel prices and ongoing increases in Delta's non-fuel unit costs. Management used the company's first-quarter earnings conference call on Thursday morning to dispel some of those worries. Here are five noteworthy details from the earnings call.
Revenue growth is accelerating
Our March-quarter revenue was the highest in our history, with 8% top-line growth driven by strong demand across all entities and improving business and leisure yields. -- Delta Air Lines President Glen Hauenstein
Last December, Delta Air Lines projected that its revenue would increase 4% to 6% in 2018. It did significantly better than that in the first quarter, as revenue rose 8%, excluding the impact of higher sales from Delta's wholly owned oil refinery.
The company's second-quarter guidance implies a similar level of top-line growth, as Delta is benefiting from strong demand in nearly every part of the world.
Delta does expect to face tougher year-over-year revenue comparisons in the second half of 2018, which will likely lead to a sequential slowdown in unit revenue growth. Nevertheless, the carrier seems to be on track to meet (or even exceed) the high end of its full-year revenue growth forecast, thanks to its fast start.
A new joint venture will add to Delta's momentum
This quarter, we received final approval for our newest joint venture with Korean Air, which is expected to launch May 1, and we'll offer customers world-class travel benefits across one of the most comprehensive route networks in the transpacific market. -- Delta Air Lines CEO Ed Bastian
Delta Air Lines' recently approved joint venture with Korean Air will contribute to its efforts to keep growing unit revenue. The transpacific market has been a weak point for Delta for several years, particularly because of changes in the Japanese market and a rapid increase in the number of nonstop flights between the U.S. and East Asia.
The new joint venture will allow Delta to funnel traffic through Korean's hub in Seoul to connect customers from the U.S. to destinations throughout Asia. This will help it capture business from travelers it couldn't serve efficiently on its own. The joint venture model is a proven tactic: Delta has used it with great success in the transatlantic market, and it should be equally lucrative in Asia.
Fleet transformation provides new revenue opportunities
[O]ne of the backbones, if you will, of our commercial strategy, is to continue to increase the number of premium seats we have in the marketplace using the upgauging strategy as the main vehicle for that. So we will have double-digit increases throughout the year in terms of premium seats in the marketplace. -- Glen Hauenstein
In recent years, Delta Air Lines has increasingly looked to segmentation to drive unit revenue growth. The idea is to maximize average fares by offering customers a wide variety of options in terms of seat size, service, and other features.
As part of this segmentation push, Delta is boosting its inventory of premium seats (including both first-class and extra-legroom economy seats). It is also working to sell more of these premium seats rather than giving them away as free upgrades for frequent fliers.
Delta's management expects premium seat inventory to continue growing at a double-digit rate in 2018. This is a key benefit of the carrier's move to replace nearly a quarter of its fleet over the next three years with new, larger aircraft, mainly from Airbus (NASDAQOTH:EADSY).
Halting cost creep remains a priority
As we move through the year, we'll continue to see increasing relief on cost as we annualize prior-year investments and gain benefits from our upgauging and One Delta initiatives. -- Delta Air Lines CFO Paul Jacobson
Another benefit of fleet renewal is that it will improve Delta's cost trajectory. This is one of management's top priorities. Last quarter, non-fuel unit costs rose 3.9% year over year.
By contrast, Delta expects non-fuel unit costs to rise no more than 2% for the full year. Lower labor cost inflation will help, but the biggest benefit will come from replacing aging MD-88s with brand new Airbus A321s (and to a lesser extent, Boeing 737-900ERs). Delta's A321s have 29% more seats than its MD-88s but similar operating costs, so the savings will be substantial.
Rising fuel prices could dent profit growth
[T]he wild card is, obviously, fuel. It's currently probably $5 or $6 a barrel ahead of plan at this point, but it's been bouncing all around over the course of the year to date. -- Ed Bastian
Rising fuel prices are another challenge for Delta Air Lines. Oil prices have increased by about $10 per barrel since early December. That would translate to nearly $1 billion of additional costs over the course of a full year. Management is sticking with its full-year earnings-per-share forecast of $6.35 to $6.70 for now, but it did acknowledge it could miss this target if fuel prices continue moving higher.
Fortunately, Delta's fleet renewal project will also help to mitigate fuel cost headwinds over time. For example, the Airbus A321 is 28% more fuel efficient than the MD-88s Delta is retiring. Delta will also add 100 A321neos to its fleet starting in 2020. Those planes will offer a stunning 40% improvement in fuel efficiency over the carrier's MD-88s.
In short, Delta appears to be nearing a turning point after which its cost performance will start to improve. Barring any setbacks, this could pave the way for continued profit growth in the next few years.