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Delta Raises 2019 Profit Forecast as Summer Travel Surges

Delta Raises 2019 Profit Forecast as Summer Travel Surges

(Bloomberg) -- Delta Air Lines Inc. boosted its profit forecast for 2019 as blistering travel demand, lower fuel costs and a grounded Boeing 737 Max gave it the muscle to command higher fares.

The world’s third-largest airline expects to earn as much as $7.25 per share this year, above its prior $6 to $7 per share estimate, Delta said Thursday as it reported second-quarter earnings. The raised expectations came a day after rival American Airlines Group Inc. boosted its own outlook, citing the same market trends.

The gains reported by two major airlines show that Americans’ fervor to fly remains unchecked amid strong U.S. economic data, while Boeing’s troubles with its workhorse jet have carried a silver lining for the industry by tightening seat supply.

“The outlook is strong in terms of continued top-line growth,” Delta Chief Executive Officer Ed Bastian said in an interview. Five of Delta’s top 10 record revenue-generation days have occurred in the past 30 days, he said.

The Max grounding offered Delta “a marginal benefit” on domestic summer capacity, which is 1% to 2% lower industrywide than was planned before regulators banned the plane from flying, Bastian said. “We are always looking to take share wherever we can,” he said of travelers who might have moved to Delta. “There’s no question we benefited somewhat from that.”

Shares rose 1.4% to $60.30 at 12:10 p.m. in New York. As of Wednesday, Delta’s total gain for the year was 19% compared with an 11% rise in a Standard & Poor’s index of the five largest U.S. carriers.

Delta Raises 2019 Profit Forecast as Summer Travel Surges

In a research note published earlier this week, Morgan Stanley analyst Rajeev Lalwani said growth in the availability of seats for airlines’ domestic flights will remain below 3%, “the lowest level of capacity observed in the last several years.”

Delta sales rose to a quarterly record of $12.5 billion in the three months ending June 30, up 6.5% from a year earlier, as the carrier reaps more money from the sale of premium seats, its customer loyalty program and maintenance work for other airlines, according to a statement before the start of trading.

Atlanta-based Delta led the industry in reporting its financial performance for the first full quarter since regulators grounded the Boeing Co. 737 Max in mid-March after two crashes involving the jet killed 346 people. The grounding has constrained U.S. seat growth this summer and helped carriers’ pricing power.

No Max

While Delta doesn’t fly the plane, its three largest rivals do, and they’ve been forced to scrub thousands of flights during their busiest period of the year. Southwest Airlines Co., the largest 737 Max operator, has removed the plane from its schedule through Oct. 1.

And even though Delta is known as an opportunistic aircraft buyer -- rescuing Bombardier Inc.’s troubled C Series program in 2016 with a major order, for example -- the carrier won’t be mulling any hefty discounts Boeing might offer on the Max. In 2017, Delta ordered 100 Airbus SE A321neo aircraft, with options for 100 more. The first of those arrive next year.

“The Max is a good product. It was a close call, I’ll admit,” Bastian said Thursday of the company’s review of the Boeing and Airbus offers. “We spent quite a few months analyzing and going back and forth, but the 321neo in aggregate carried the day for us.”

In a conference call to discuss second-quarter results, the CEO declined to address a “hypothetical” scenario from a JPMorgan Chase analyst asking Delta’s view of “the most intelligent and profitable way” an airline could return a grounded aircraft back into commercial service.

American, which has taken the Max off its schedule through Sept. 3, said Wednesday its second-quarter unit revenue would be 3% to 4% higher than a year ago, above its prior guidance of as much as 3%.

“Given the continuation of strong revenue trends, more favorable cost trends in 2H19, and our expectation that MAX issues are likely to keep supply tight through the rest of the year, we remain quite comfortable with airline fundamentals,” Macquarie Group analyst Susan Donofrio wrote in a July 9 client note.

Delta is moving closer to its goal of capping growth in nonfuel expenses at 1% this year. Costs for each seat flown a mile, a gauge of efficiency, increased 1.4% in the second quarter from a year earlier, driven partly by Delta’s decision to retire its aged MD-90 fleet by 2023, two years earlier than planned. The decision, which will see 40 of the planes grounded by year’s end, added $60 million in depreciation costs.

The carrier benefited from lower jet fuel prices. Average spot prices in New York Harbor dropped more than 8% in the quarter from a year earlier.

To contact the reporters on this story: Justin Bachman in Dallas at jbachman2@bloomberg.net;Mary Schlangenstein in Dallas at maryc.s@bloomberg.net

To contact the editors responsible for this story: Brendan Case at bcase4@bloomberg.net, Susan Warren, Thomas Black

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