Delta Air Lines and Lufthansa both revised earnings down in the quarter citing capacity as the reason. Combined with the others, the true picture is quite clear.
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Delta joins Air France in blaming Olympics, others
Delta Air Lines announced that it was revising earnings down in the next quarter and beyond. The airline said it expected revenue to fall from a forecast of 5-6% to 2-3%. Accordingly, this reduces profits by 40-66% with the following trend.
In part, the carrier complained about business travelers avoiding Paris, a market for which it shares 70% of transatlantic traffic with joint venture partner Air France. The French flag carrier advised that it will miss a lot of profits as well with the same explanation.
Delta goes further.
In a deftly written article, Gary Leff points out that Delta’s second reason is problematic. Capacity. Where have we heard this before? If you’re a regular reader of Live And Let’s Fly, you’ll have heard each of the last few weeks with a carousel of carriers opting for “too many seats” as another way to avoid saying “not enough passengers.” As Leff points out, Delta adding as much capacity (if not more than everyone else) reassures investors that it’s not their fault that there are too many seats in the market.
“But the number of seats in the domestic market has increased by 6% year-on-year, according to aviation analytics company Cirium. Delta has increased by 5%. Delta domestics grew at about the same rate as the industry.
Across the Atlantic, Delta seat growth was 5% and outpaced United and British Airways. Seat growth was led by Air France, which is part of the property and a joint partner of Delta vassal Virgin Atlantic, which was up 9%.
While they say they expect other airlines to cut capacity, Delta is not doing its part and their capacity is expected to grow faster than revenue.” – Side view
Another flaw in the explanation involving the Olympics is that Delta expects revenue to continue to decline after the games are over. In the past, Delta’s earnings reports have been the darlings of Wall Street. Management has built an excellent relationship with American Express and has truly delivered industry-leading operating performance.
Lufthansa also revises earnings down
Lufthansa, the German flag carrier, started the year with estimates that it would match last year.
“The Lufthansa Group started the year hoping to roughly match the adjusted EBIT of €2.68 billion it made in 2023, but cut those expectations to a profit of around €2.2 billion after strike disruption hit especially its German operations, coupled with the impact of aircraft delivery delays.
Second-quarter profits at Lufthansa Airlines are about 300 million euros less than the 515 million euros the German unit made in the same period last year. The combination of two difficult quarters means the German operation lost €427 million during the first half.” – Global Flight
For justification, we find a trio of reasons: a negative trend in the market (shrinkage), inefficient operations and delays in aircraft deliveries. The first is the same issue that other operators say in a different way. The second reason is taking the blame on themselves and their ability to run a good operation – enough to own it. Lastly, the same trope that others used in Q1 is a concern, but not a new one.
“Lufthansa Airlines is particularly affected by the challenges posed by the negative market trend and by inefficiencies in the flight operations of Lufthansa and Cityline, also due to delayed aircraft deliveries,” the group says. “It is becoming more and more challenging for Lufthansa Airlines to break even for the entire year.” – Global Flight
I respect Lufthansa’s sincerity, but accepting a shrinking market is an important thing.
A rose by any other name…
Saying there is too much capacity is no different than saying there are too few passengers. The question is why? Did the airlines get ahead of the market, hoping to keep striking while the iron is as hot as it has been? As an investor, I’d rather see an airline try to keep growing when given the chance, even if they turn out to be underwhelming.
However, calling it too few passengers, or too much capacity still doesn’t say what it is – a market correction. It is clear that discretionary funds are either drying up or being diverted by travelers who may choose not to travel. Businesses may choose more virtual meetings or there may have been a structural change in the market.
No matter what you call it, it remains a shrinking market. But what remains unclear to me is why, almost unanimously, market leaders refuse to call a match a match, or a rose a rose.
Here’s the current list of travel suppliers that have said for one reason or another they’ll miss their earnings targets, some within the same quarter they gave guidance for:
- Delta Air Lines
- Lufthansa (group)
- American Airlines
- Southwest Airlines
- JetBlue Airways
- Spirit Airlines
- Air France
- Air Canada
- Different cruise lines
And now the same list, but with their reason not being a slowing economy:
- Delta Air Lines – Olympics, capacity
- Lufthansa (group) – capacity, inefficiencies, delayed aircraft
- American Airlines – capacity
- Southwest Airlines – capacity, delayed aircraft
- JetBlue Airways – capacity, inefficiencies, unprofitable markets, litigation
- Spirit Airlines – failed connection, delayed plane
- Air France – Olympics, capacity
- Air Canada – **short sellers are shorting stock based on Canadian economy**
- Different cruise lines – market softening, lower growth but no contraction
CONCLUSION
We add two more airline giants to the pile of suppliers indicating trouble ahead. They refuse to say it’s the economy and that the travel market is slowing, so I’ll keep banging that drum and publishing more travel suppliers coming up with new reasons why they’re not growing.
What do you think?