Delta Made Big Money This Spring. Other Airlines May Not.

America's most consistently profitable airline had a surprisingly strong second quarter. But I'm not sure that means much for the rest of the industry.

Dear readers,

Despite lower-than-expected demand — especially in economy class and during off-peak periods — Delta reported a remarkably strong second quarter on Thursday. It produced an operating margin of 12.6 percent — only 1 point less than a year earlier.

I know it's tempting to believe (or hope) that this result will be a bellwether for the industry and that other airlines also will outperform expectations. But I'll make a prediction based on my informal conversations with insiders over the past month: Delta will be one of a small number of outliers, as some competitors will report a clunker of a quarter.

I’m usually reluctant to applaud Delta, if only because management already is confident enough, but I think we have to give executives the credit they deserve. Delta is durable and differentiated — just as executives underscored in November at their last investor day — so much so the airline earned a hefty profit during a period of major economic uncertainty.

Many U.S. airlines do not share Delta’s strengths. Other than United — which has unabashedly copied Delta, albeit with more focus on international flights — and Alaska, with its surprisingly resilient premium regional approach, I don't think we'll see similar results from Southwest, American, Frontier, Spirit, or JetBlue. While all of those airlines have made customer experience improvements in the past year, they've been slower to adapt to a world where an airline seat is not a commodity.

And that seat-as-a-commodity business is pretty crummy, even at Delta. Its main cabin revenues decreased 5 percent in the second quarter year-over-year, while revenues from premium products grew 5 percent. "Main cabin margins remained soft across both domestic and international markets," president Glen Hauenstein told analysts.

So why did Delta do so well in the last quarter?

Fuel is one reason: Delta was helped (as its competitors will be too) by fuel prices that decreased 16 percent year-over-year to $2.21 per gallon. But the rest of it is Delta-specific, as customers chose Delta for all the reasons Hauenstein has cited over the years. First, Delta offers a better product at almost every price point. Second, Delta has invested significant money in the premium products today’s most economically resilient customers want. And third, Delta created a loyalty program that may not be overly generous but keeps passengers coming back and spending on credit cards. (The airline reported $2 billion in credit card-related revenues for the second quarter, up 10 percent year-over-year).¹

Here are some items I found interesting on Delta's earnings call about how demand is shaping up for the rest of the year.