Delta Air Lines and Lufthansa both revised their profits down in the quarter, citing capacity as the reason. Add in the others, and the real picture is pretty clear.
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Delta joins Air France in blaming Olympics and others
Delta Air Lines announced that it is revising its earnings for the next quarter and beyond downward. The airline said it expects its earnings to decline from a forecast of 5-6% to 2-3%, which represents a 40-66% decline in earnings, with the trend continuing.
The carrier has notably lamented that business travellers are avoiding Paris, a market for which it shares 70% of transatlantic traffic with its joint venture partner, Air France. The French flag carrier has indicated that it would also suffer a significant loss of profits with the same explanation.
Delta goes further.
In a cleverly 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’ve probably heard it every single week, with a carousel of carriers choosing “too many seats” as another way to avoid saying “not enough passengers.” As Leff points out, Delta, which has added as much (if not more) capacity than anyone else, is assuring investors that it’s not its fault that there are too many seats in the market.
“But domestic seats increased 6 percent year over year, according to aviation analytics firm Cirium. Delta increased 5 percent. Delta’s domestic seats grew at about the same pace as the rest of the industry.
Across the Atlantic, Delta’s seat growth was 5%, outpacing United and British Airways. Seat growth was led by Air France, which is partly owned by Delta’s Virgin Atlantic subsidiary, and grew 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 their revenue.” – View From The Wing
Another mistake in the Olympics explanation is that Delta expects its profits to continue to decline after the Games are over. Delta’s earnings reports have historically been Wall Street darlings. Management has built a great relationship with American Express and has truly delivered industry-leading operating performance.
Lufthansa also revises its profits downwards
Lufthansa, Germany’s national airline, began the year with estimates that it would match the previous year.
“Lufthansa Group started the year with hopes of roughly matching the adjusted EBIT of €2.68 billion it had achieved in 2023, but cut those expectations to a profit of around €2.2 billion after strike disruptions hit its German operations in particular, coupled with the impact of aircraft delivery delays.
Lufthansa Airlines’ second-quarter profits were down around €300 million from the €515 million the German subsidiary made in the same period last year. The combination of two tough quarters meant the German subsidiary lost €427 million in the first half of the year. – Flight Global
To justify this situation, we put forward three reasons: a negative market trend (contraction), inefficient operations and delays in aircraft deliveries. The first reason is the same as that given by other carriers, but in a different way. The second reason is that they blame themselves and are not able to carry out their operations – which is quite normal for them to be aware of. Finally, the same argument used by others in the first quarter is worrying, but it is not new.
“Lufthansa Airlines is particularly affected by the challenges posed by the negative market trend and by the inefficiencies in Lufthansa and Cityline flight operations, also due to aircraft delivery delays,” the group said. “It is becoming increasingly difficult for Lufthansa Airlines to achieve break-even over the full year.” – Flight Global
I respect Lufthansa’s frankness, but the admission of a declining market is important.
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. Have airlines overshot the market, hoping to continue to strike while the iron is hot, as has been the case for a long time? As an investor, I prefer an airline to try to continue to grow when it has the opportunity, even if it fails to seize the opportunity.
However, talking about too few passengers or too much capacity does not mean that this is a market correction. It is clear that discretionary funds are drying up or being diverted by travelers who may choose not to travel. Companies may be opting for more virtual meetings or there may be a structural change in the market.
Whatever you call it, it is still a market contraction. But what is still unclear to me is why market leaders almost unanimously refuse to call a spade a spade or a rose a rose.
Here’s a list of travel suppliers that have said, for one reason or another, that they will miss their profit targets, some in the same quarter for which they provided guidance:
- Delta Airlines
- 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 an economic slowdown:
- Delta Air Lines – Olympics, Capacity
- Lufthansa (group) – capacity, inefficiencies, delayed planes
- American Airlines – capacity
- Southwest Airlines – capacity, delayed planes
- JetBlue Airways – capacity, inefficiencies, unprofitable markets, litigation
- Spirit Airlines – failed merger, delayed planes
- Air France – Olympic Games, capacity
- Air Canada – **Short Sellers Short Stock Based on Canadian Economy**
- Various cruise lines – market slowdown, weaker growth but no contraction
Conclusion
We are adding two more airline giants to the list of suppliers who are telling us that trouble is coming. They refuse to say it is the economy and that the travel market is slowing down. So I will continue to press this point and publish more travel suppliers who are coming up with new reasons why they are failing to grow.
What do you think?
