Delta Air Lines said Wednesday that its second-quarter profits were the largest ever in the airline industry as robust demand from U.S. businesses and lower fuel and fleet costs boosted results.
The Twin Cities' dominant carrier also said it's optimistic about the current quarter, saying performance will be "even stronger" and projected operating margins to expand to as much as 17 percent. Shares rallied as Delta's results reassured investors about the traditionally strong second quarter.
"The margin guidance they gave for the third quarter was the focal point for us," said Joseph Denardi, a Baltimore-based analyst with Stifel Financial. "It was better than what we were expecting. It's just another indication that even with some pricing pressure internationally, particularly in the Pacific, these guys can put up some pretty good operating margins."
Denardi had forecast operating margins of 15.5 percent.
Along with strong demand from business travelers, the Atlanta-based airline is benefiting from higher revenues from its contracts with corporations, as well as reduced expenses. During a conference call with analysts, executives said Delta's strategy of replacing small regional jets with larger, more fuel-efficient planes is helping to lower costs.
Delta's results "are a good indication that domestic pricing is pretty good," Denardi said.
Delta's shares are up 43 percent this year
Delta shares gained 3.9 percent on the news to close at $39.15. The stock has advanced 43 percent this year. Delta's net income in the quarter rose 17 percent to $801 million, or 94 cents a share, from $685 million, or 80 cents, a year earlier. In a memo to employees, Chief Financial Officer Paul Jacobson said Delta's second-quarter pretax profit of $1.4 billion was the largest "ever reported in the airline industry."
Revenue at Delta rose 9.4 percent to $10.6 billion in the quarter. Passenger revenue for each seat flown a mile, a benchmark measure of performance for the airline industry, increased 5.7 percent, driven by a 10 percent gain in U.S. domestic flights.
Earnings excluding some items were $1.04 a share in the second quarter, the company said Wednesday. The average of 17 estimates compiled by Bloomberg was $1.03. Growth in the average fare per mile on U.S. trips led gains across Delta's regions, showing the carrier's pricing power in its home market.
Also Wednesday, Delta said it expects 800 to 900 employees to take early retirement offers.
Mike Campbell, Delta's executive vice president of human resources, said employees have another week to consider the offer, which could affect the company's third-quarter forecast.
According to Delta spokeswoman Keyra Lynn Johnson, the program is voluntary and hiring will continue as needed. Delta said a key reason it is offering the early retirement program is the availability of the health insurance exchanges.
U.S. employees who meet age and years-of-service requirements are eligible, except for pilots or salaried employees above a certain level. Those eligible can get severance, retiree travel and COBRA health insurance reimbursement to allow for a smooth transition into the health insurance exchanges.
Over time, Delta's strong financial performance in recent quarters means it will have to work harder to beat the prior year's results, or comparables, President Ed Bastian said.
It's never happened before
"Yeah, the comps get tough," said Jim Corridore, an analyst at Standard & Poor's Capital IQ in New York. "But, this is a company that is generating cash, generating profits, using the money to buy back stock, pay dividends, doing everything that airlines have never done before."
Bastian and CEO Richard Anderson fielded questions from analysts about a glut of seats in markets including Europe and Asia. By limiting seats or capacity, airlines can keep fares high. Anderson said Delta will continue its "disciplined approach" to adding new flights.
"This discipline continues to be a key driver of our success, as we will post record results for 2014," Anderson said. "We see a good demand environment, combined with modest capacity increases that will result in solid [revenue] growth."
American and United are to report second-quarter figures on Thursday; analysts expect the biggest U.S. carriers to post large profits.
The Associated Press contributed to this report