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.