Travelers wait in line at the Delta Air Lines ticket counter inside LaGuardia Airport (LGA) in New York, U.S., on Thursday, June 29, 2017.
Travelers wait in line at the Delta Air Lines ticket counter inside LaGuardia Airport (LGA) in New York, U.S., on Thursday, June 29, 2017. David Williams—Bloomberg via Getty Images

Delta’s Profits Tumbled Last Quarter. Here’s Why

Jul 13, 2017

Delta Air Lines on Thursday reported a 21% drop in second-quarter profit because of sharply higher labor and fuel costs, despite higher passenger unit revenue, sending its shares down 2 percent.

The stock drop reversed positive gains earlier in the week driven by investor optimism about improving passenger unit revenue in the sector. The closely-watched metric measures sales relative to flight capacity.

Breaking a losing streak that has plagued much of the industry for the last two years, Delta posted a 2.5% increase in passenger unit revenue, but that performance was overshadowed by the carrier's poorer-than-expected bottom line.

While positive unit growth is a bright spot for investors, stocks were slightly down sector-wide on Delta 's results. The cost of fuel and mounting labor expenses, prompted in large part by renegotiated contracts with carriers' pilots, flight attendants and mechanics unions, added a sobering drag on an otherwise uplifting industry outlook on passenger unit revenue.

In the second quarter of 2017, net income fell to $1.22 billion, or $1.68 per share, in the quarter ended June 30, from $1.55 billion, or $2.03 per share, a year earlier.

On an adjusted basis, the No. 2 U.S. airline by passenger traffic earned $1.64 per share, compared to the analyst consensus forecast of $1.67, according to Thomson Reuters I/B/E/S.

Shares of the company were down 2% at $54.35.

Delta 's unit revenue is expected to continue trending positive into the third quarter, with the carrier forecasting growth between 2.5% and 4.5% That progress is expected to boost the company's operating margins between 18% and 20% from the prior year.

Delta said operating expenses climbed during the second quarter on higher salaries and fuel costs, its two biggest cost components. The airline paid an additional $338 million towards 2017 profit sharing with employees.

"The June quarter represented the peak for non-fuel cost pressures this year and we expect our CASM (cost per available seat mile) trajectory to moderate to approximately 2% for the September quarter," Delta Chief Financial Officer Paul Jacobson said in a statement.

Aircraft fuel related expenses rose 18% to $1.45 billion during the quarter, while salary costs were up 9% to $2.62 billion.

Delta 's operating margin in the June quarter, excluding special items, rose slightly to 18.4%, compared to 17.4% last year.

Total operating revenue rose 3.3% to $10.79 billion.

All products and services featured are based solely on editorial selection. FORTUNE may receive compensation for some links to products and services on this website.

Quotes delayed at least 15 minutes. Market data provided by Interactive Data. ETF and Mutual Fund data provided by Morningstar, Inc. Dow Jones Terms & Conditions: S&P Index data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Terms & Conditions. Powered and implemented by Interactive Data Managed Solutions