Delta earnings better than expected, despite rising costs

Key Points
  • Delta, the nation's second-largest airline, posts record revenues as it faced strong demand, particularly for trans-Atlantic routes.
  • But fuel and labor costs are on the rise.
Delta CEO: Higher oil prices 'forces discipline'

Delta Air Lines' captured more revenue from passengers in the first quarter, but the airlines' costs are also on the rise.

The second-largest U.S. airline on Thursday reported first-quarter net income of $547 million, or 77 cents a share, down from $561 million, or 77 cents a share, in the year-earlier period.

On an adjusted basis, the company earned 74 cents a share, a penny above expectations of analysts polled by Thomson Reuters.

The airline posted record revenues in the quarter. Its adjusted operating revenue in the first three months of 2018 was $9.76 billion, slightly below Wall Street's estimate of $9.85 billion. That figure strips out third-party sales from its refinery.

Delta's shares were up 2 percent in early trading Thursday.

The airline said it also faced higher labor costs and a slew of powerful winter storms that cost is $44 million.

Higher costs may make airlines think twice about growing aggressively since doing so becomes more expensive. Delta said its first-quarter fuel prices were 20 percent higher than during the year-earlier period.

"It forces discipline," CEO Ed Bastian told CNBC. "When you think about fuel at $70 a barrel you've got think about the long-term implications of the supply you're putting into the market."

Bastian said there is about a six-to-nine month lag between an increase in the price of fuel and when the airline can price for it. It's a challenge because raising fares from higher costs could also crimp demand, and failing to expand could also be a boon to bolder airlines.

Delta and other airlines are hoping strong demand will help them weather those costs.

Its trans-Atlantic routes performed particularly well, with revenue from those routes up 15 percent from a year earlier, more than any other region.

Delta, its European partners, and their rivals are adding no-frills fares that charge passengers to check luggage, an effort to compete with low-cost competitors such as Norwegian Air Shuttle.

Executives have said that the success of the so-called basic economy fares, which several U.S. airlines already offer in the U.S., is based on how many passengers pay up to avoid the class of service. Delta said up-sell revenue in the quarter totaled $421 million, a 23 percent increase from the year before.

Earlier Thursday, British Airways' parent said it had bought a nearly 5 percent stake in Norwegian Air Shuttle and said it would start talks with the carrier, discussions that could include an offer for the airline.

Looking ahead to the second quarter, Delta said it expects per-share earnings of $1.80 to $2, and unit revenue growth of 3 percent to 5 percent, excluding refinery sales. For the full year, Delta said it expects revenue growth of 4 to 6 percent.