Delta Posits Lower Profits Due to Airfare Competition and Rising Expenses

delta-airline-hikeSummertime is peak travel season in the United States so airlines, of course, typically plan to make a major percentage of their annual revenue during that fiscal quarter. For Delta, though, the third quarter of the year has not been as good as those of the past.

This year, Delta posted profits $1.26 lower—about 4 percent down—than the same period last year. This is not a huge surprise as the industry knew that low fuel prices were not going to stick around forever. However, Delta warned, recently, that year-over-year fuel prices will be higher next quarter, a warning they have not made for many years.

For Delta, the average airfare for each 1,000 miles passengers flew during this summer season was down $153.80. This is more than 5 percent below the $162.40 (per 1,000 miles) the company collected during the same period from last year. Furthermore, Delta had 1.5 percent more available seats and miles flown than the previous year, with the number of paying customers falling 0.2 percent. To look at it another way, last summer, Delta flew at an average capacity of 86.8 percent (paying passengers) with a peak in July, August, and September (of course). This year, the capacity fell to 85.4 percent.

But while Delta has reported lower liquidity, it is also spending more money on workers. Full-time equivalent employment increased by 1.3 percent last year (to 84,084) with salaries jumping up 8 percent (to a total of $2.5 billion). Combine that with a 14 percent increase on aircraft payments to replace its aging fleet and it is easy to see how the company might have hit a bit of a financial snag.

As such, Delta has now said it has plans to slow growth down to only 1 percent in the coming quarter as well as into the beginning of 2017. This will, first of all, help to offset losses so they can begin to raise airfares. The company is banking on its industry-leading on-time performance rating to convince travelers to choose Delta over its competitors; hopefully paying a little for the rating, too.

But the industry as a whole is taking a hit. Pressured by rising fuel prices combined with lower airfare, too many available seats, and higher salaries and maintenance costs, it seems everyone is feeling the squeeze.

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