Delta sees packed flights and summer travel back in force

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Summer travel is back in force: Flights are packed, lines are long, and bargain-basement fares to vacation hot spots are vanishing fast.

A business update from Delta Air Lines confirms those trends. The airline said its June domestic flight capacity will be back to 100% of pre-pandemic levels, up from 60% in March. Travelers are also trading up to premium economy and “upsell rates are improving,” the airline said in a filing on Thursday.

Delta sees the momentum continuing in the second half of the year, fueled by gains in leisure travel and a gradual rebound in corporate and trans-Atlantic travel.

The trends should help Delta pivot to pretax profitability in June. The airline narrowed its expected loss for the second quarter to a range of $1.0 to $1.2 billion, down from a prior forecast of $1.0 to $1.5 billion.

Yet Delta left its flight capacity and revenue forecasts intact for the quarter. It is seeing pressure on the cost side from rising fuel costs, which it expects to average $2.10 to $2.15 a gallon, up from a range of $1.85 to $1.95 a gallon. That could push up operating costs by 9%, at the upper end of Delta’s prior guidance.

None of this is much of a surprise, however, which could explain why Delta’s stock wasn’t reacting positively Thursday. Indeed, the shares were down around 3% in morning trading to $46.34, trailing the S&P 500, which was down 0.8%.

The stock’s weakness may reflect a few factors. Investors may have already anticipated a surge in travel as vaccination rates increase. The NYSE Arca Airline Index is up 29% for the year, and it has pushed up airline multiples to pre-pandemic levels, based on 2022 and 2023 estimates in many cases.

Rising jet fuel costs could also pressuring profitability, as Delta’s update indicated. And the airline’s ownership of a fuel refinery could prove problematic.

The refinery, Monroe Energy, supplies about 75% of Delta’s fuel and sells non-jet fuel products. But revenue plummeted last year, causing an operating loss of $216 million, partly because Delta was also required to purchase biofuel credits, which increased in price.

Those credits may now be a source of friction between Delta and the U.S. government. Delta recently suspended its purchases of the credits, aiming to receive a waiver from the Biden administration, according to a report by Reuters. That has left the airline with a $346 million liability in the first quarter.

Delta is now trying to convince the White House to suspend its biofuel obligations under the U.S. Renewable Fuel Standard, according to Reuters.

Delta addressed the issue of rising fuel costs and renewable credits at a Bernstein conference this week. “Fuel, as everyone can appreciate, is starting to move and that’s moved up over the course of the quarter,” CEO Ed Bastian said, adding “we’ve seen some pressure on fuel as well as RINs for our refinery,” referring to the biofuel credits.

The airline didn’t immediately respond to a request for comment.

By Daren Fonda www.barrons.com

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