What happened
Shares of Delta Air Lines (DAL 3.05%) traded down more than 5% on Wednesday morning after the U.S. airline giant tempered expectations for the recently completed third quarter due to higher-than-forecast costs. It's a rare bit of bad news for what has been one of the top-performing U.S. airlines in recent years.
So what
In a news release, Delta said traffic was up 6.8% year over year, with 8.3% domestic growth leading the way. Among international destinations, trans-Atlantic traffic stood out, with Pacific travel showing little growth.
Image source: Delta Airlines.
The airline's load factor, a measure of how many seats were filled, climbed to 85.3% in September from 83.6% for the same month in 2018.
But investors were more focused on updated guidance contained in a separate regulatory filing. Delta said it expects to earn between $2.20 and $2.30 per share in the recently completed quarter, revealing some potential downside to the $2.27 analyst consensus. The culprits are costs, with Delta warning that non-fuel expenses would be up 2.5% year over year -- an increase from initial guidance for a 1% to 2% gain -- due to higher employee costs, weather, and record passenger volumes.
Delta said it now expects full-year non-fuel costs to be up 2%, versus previous forecasts for a rise of about 1%.
Now what
Investors are understandably nervous seeing costs rise at a time of jittery economic signals that could mean a slowdown in travel demand. But it is worth noting that some of those higher costs are due to higher-than-expected passenger volumes, and Delta is getting that traffic without eating into profits.
The company expects a pre-tax margin of about 15.5% in the quarter, which would represent a 175-basis-point improvement to profitability year over year.
International headwinds and volatile fuel prices could weigh on the entire airline sector in the quarters to come, but Delta remains one of the best buys in the industry and should be able to fly through this latest turbulence over time.
