What happened

Delta Air Lines (DAL -0.71%) is the first airline out of the gate with earnings, and the company's disappointing results and tepid guidance are rippling through the entire sector. Shares of Delta fell as much as 8% on Wednesday morning, while shares of United Airlines Holdings (UAL 0.55%), American Airlines Group (AAL -0.72%), and JetBlue Airways (JBLU -1.99%) all fell as much as 5%.

So what

Airline investors are coming into earnings season not sure what to expect. Strong summer vacation demand is expected to prop up revenue, but those gains are likely to be at least somewhat offset by higher fuel and labor costs. Throw in a shortage of pilots and concerns about summer congestion, and it is hard to predict just how much airlines will be able to benefit from that strong demand.

On Tuesday, American gave the industry a boost when it said that it expects its results from the now-completed quarter to come in within expectations. But on Wednesday, Delta became the first airline to actually publish results, and investors are not pleased with what they are seeing.

Delta earned $1.44 per share in the quarter on revenue of $13.82 billion, missing analyst earnings expectations for a profit of $1.64 per share despite posting better-than-expected revenue. The issue, as expected, was costs, and Delta is not expecting those costs to ease anytime soon.

The airline said it intends to slow capacity growth in the second half of the year in order to improve the reliability of its operations, with capacity expected to be down 15% to 17% in the September quarter compared with the same three months of 2019, prior to the pandemic. Fewer flights by definition means operating costs on a per-flight basis will be higher, and indeed Delta said that nonfuel unit costs will be up more than 20% from 2019.

JetBlue shares are also likely trading down after a slight setback in its campaign to acquire Spirit Airlines (SAVE -0.46%). On Wednesday, Spirit said it remains committed to its deal with Frontier Group Holdings (ULCC -2.20%), pushing back its planned shareholder vote on the Frontier deal to July 27 in order to give the two airlines more time to solicit shareholder support for the deal.

Spirit appears to be facing a lot of pressure from shareholders to consider JetBlue's offer, which had led to some speculation that the company might back away from Frontier instead of reasserting its commitment to getting that deal done.

Now what

If there is any silver lining in the results, Delta did offer a decent rebuke of the idea that inflation fears and the potential for a recession would cause travel demand to fall off a cliff in the months to come. On its post-earnings call with investors, the company said that post-Labor Day leisure travel demand is experiencing its typical seasonal decline, but nothing more dramatic. And September international travel bookings are coming in near record levels.

Oil prices are coming down off their highs, and Delta and other airlines are scrambling to hire and train additional pilots and staff in hopes of rebuilding their schedule and adding capacity heading into the holiday season and 2023. The bull case from here is that if the issues are short term and the demand is sustained long term, the recovery is merely delayed, not canceled.

Delta's management has a reputation for being conservative when it comes to guidance and planning, a trait that has served long-term investors well but which can lead to some volatility during earnings season. The outlook is disappointing, but Delta's effort to trim its schedule and try to salvage its on-time statistics fits into the company's strategy to try to offer a premium product that can elicit customer loyalty over time.

For the broader airline sector, Delta's results and outlook are a reminder that there is no quick fix to what currently ails the industry, and a full recovery is likely still some time off. Investors tend not to like turbulence, and the sector sold off on Wednesday morning as a result.