Two months ago, most airline executives were extremely bullish about the rest of 2021. A strong rebound in leisure demand led to packed planes and high fares during the summer peak season. Meanwhile, airlines saw growing signs that business travel demand would begin to recover in earnest after Labor Day.
Alas, the summer surge in U.S. COVID-19 cases and hospitalizations undermined this demand recovery. Last week, U.S. airline giants Delta Air Lines (NYSE:DAL), American Airlines (NASDAQ:AAL), and United Airlines (NASDAQ:UAL) all slashed their Q3 forecasts. However, Delta is set to record an adjusted profit for the quarter anyway, continuing its long run of outperformance.
Delta trims guidance
Two months ago, Delta Air Lines projected that third-quarter revenue would decline 30% to 35% compared with 2019 on 28% to 30% less capacity. This performance implied a low- to mid-single-digit decline in unit revenue from pre-pandemic levels.
Delta did anticipate that adjusted nonfuel unit costs would jump 11% to 14% relative to Q3 2019, largely because of the impact of lower capacity and costs of rebuilding the airline. Nevertheless, this outlook implied that Delta would post a solid quarterly profit, excluding the benefit from the final round of federal payroll support for airlines. For comparison, it posted an adjusted pre-tax loss of $881 million in the second quarter.
On Thursday, Delta Air Lines reduced its quarterly forecast. It now expects revenue to wind up near the low end of its initial guidance range -- down 35% from 2019 -- as the latest wave of the pandemic led to a pause in the business travel recovery. Delta also said it now expects adjusted nonfuel unit costs to rise 15%, largely because of increased labor costs.
On the flip side, the carrier reduced its fuel price estimate by about 6%, more or less offsetting the increase to its nonfuel cost outlook. As a result, Delta remains on track to post an adjusted profit this quarter, albeit with a lower margin than it initially projected.
Deeper cuts at American and United
American Airlines and United Airlines had to make even sharper reductions to their forecasts. American had expected to lose money all along. It initially estimated that revenue would decline 20% from Q3 2019 on a 15% to 20% capacity reduction, while adjusted nonfuel unit costs would rise 8% to 12%. This outlook translated to an adjusted pre-tax margin guidance range of minus-3% to minus-7%.
Now, American expects total revenue to fall 24% to 28% from Q3 2019. That forced it to slash its pre-tax margin forecast by 7 percentage points, to a range of minus-10% to minus-14%.
United Airlines is doing a little better than American. Entering the quarter, it expected unit revenue to grow slightly relative to Q3 2019. That would have enabled it to post an adjusted profit despite a projected 17% jump in adjusted nonfuel unit costs.
Now, United estimates that revenue will fall about 33% on a capacity decrease of at least 28%, implying a unit revenue decline of up to 7%. While unit costs may come in slightly better than previously expected, the carrier now expects to post an adjusted pre-tax loss this quarter. United Airlines also walked back its previous projection that it would make money in the fourth quarter.
Delta's industry leadership continues
For several years before the pandemic, Delta Air Lines consistently generated the strongest margins among the three big network airlines. In recent years, United Airlines executives have sounded optimistic about closing that profitability gap. United's initial forecast for the third quarter suggested that it was making progress toward that goal.
Instead, Delta Air Lines' margin premium compared with United Airlines' will probably remain roughly similar to where it stood before the pandemic. Meanwhile, longtime underperformer American Airlines is falling even further behind its rivals.
Delta is well positioned to maintain its superior profitability as the industry recovers from the pandemic. Last year, the company implemented a plan to dramatically simplify its fleet by the end of 2025, while replacing many of its oldest planes with state-of-the-art models such as the Airbus A321neo. This plan should meaningfully reduce Delta's unit costs over the next five years, boosting its earnings to record levels.