- Delta Air Lines (DAL) reported an EPS of $2.32 in Q3, beating the expectation of $2.26.
- Revenues in America grew handsomely while the US-China trade war hit Pacific revenues.
- The stock opened 3.7% lower on weak Q4 guidance and was trading 3.1% down at 11:51 AM ET.
- Delta could be experiencing diseconomies of scale.
- Tariffs on Airbus planes could add to Delta’s worries.
Delta Air Lines reports Q3 earnings
Today, Delta Air Lines reported its third-quarter earnings as well as the outlook for the last quarter of 2019. On the positive note, Delta Air Lines beat Wall Street analysts’ EPS estimates by $0.6. Also, Delta saw strong revenue growth in the US at 7.8%. However, the company’s revenues from the Pacific segment fell by 4.6%. This is likely due to subdued demand on account of the US-China trade war.
However, the market wasn’t impressed. The stock opened 3.1% lower today on subdued outlook. Delta Air Lines expects the Q4 EPS to be between $1.2 and $1.5. This is below the market expectation of $1.51 even at the top end.
Delta Air Lines and diseconomies of scale
Delta Air Lines had a great year, especially since the grounding of the Boeing (BA) 737 Max 8s. Not having any of those planes in its fleet helped Delta avoid massive cancellations. Also, it helped win over customers from other airlines. On CNBC’s Squawk Box, Delta CEO Ed Bastian admitted that the Max crisis helped the airline. But, he added that it was not the main driver.
While the Boeing 737 Max crisis helped Delta Air Lines’s revenue growth, the airline seems to now face scaling problems. Excluding airline fuel costs, Delta’s operating costs are expected to increase by 5% in Q4 over the same quarter in 2018. Wages may take up a majority of the cost escalation as they have the highest share in Delta’s cost structure in Q3. On October 1, Delta raised salaries for flight attendants and ground staff by 4%.
Delta’s Airbus trouble
Another headwind that Delta is facing is related to Trump’s trade war against Europe. On October 2, the WTO (World Trade Organization) gave the green light for the Trump Administration to impose tariffs on EU goods. The Trump administration was quick to target Airbus (EASDY) by putting a 10% tariff on Airbus planes manufactured in Europe.
Delta is awaiting deliveries of 300 Airbus planes across product lines. Delta Air Lines could be hit badly if those tariffs stick.
797, Where are you?
Additionally, Delta Air Lines plans to retire its 200 fleet of older 757 and 767s over the next decade. Delta is waiting for Boeing to decide on its NMA (New Midrange Aircraft), which is dubbed the Boeing 797.
Boeing is focused on getting 737 Max 8s back in the skies. The company will decide the fate of 797 after that. New tariffs on Airbus plans could cost Delta a lot. Airbus’s answer to the midrange demand is getting the A321XLR. Thus, the 737 Max 8 crisis, which helped Delta gain business, may actually turn into a curse.