Analysts went into earnings season expecting only four US airlines to make money in the third quarter: Delta, United, Southwest and Alaska. Fuel is the reason. Three airlines have now reported, and none of them came in cleanly ahead of the estimates.
The estimates
The numbers below are analyst estimates of third-quarter net income, in millions of US dollars, from a proprietary research report. Similar consensus figures are available from Seeking Alpha, MarketWatch, Morningstar and brokerage research. Figures in parentheses are losses.
| Airline | Q3 estimate ($M) | Reports |
|---|---|---|
| Delta | 1,325 | Oct. 9 (reported) |
| United | 935 | Oct. 20 (reported) |
| Southwest | 289 | Oct. 22 |
| Alaska | 42 | Oct. 20 (reported) |
| Frontier | (7) | Oct. 28 |
| Allegiant | (15) | Nov. 4 |
| JetBlue | (189) | Oct. 27 |
| American | (225) | Oct. 22 |
Delta and United were expected to earn $2.26 billion between them. The other six were expected to lose a combined $105 million.
Fuel: a cheap start, an expensive finish
The quarter started with fuel prices relatively low, after a drop from the second-quarter highs. By the end of September, prices were more than 40% higher.
The US Energy Information Administration charted the swing. Brent crude futures opened the quarter at $72 a barrel on July 1. They passed $100 on July 23, peaked at $109 on September 15 and averaged about $104 in the last two weeks of September.
Refining made jet fuel costlier still. The EIA says crack spreads for distillate and jet fuel were almost triple their year-earlier levels. The research behind the estimates puts the jet crack spread around $50 a barrel, and says refiners are steering capacity to other distillates.
| Airline | Fuel cost per gallon |
|---|---|
| Frontier | $4.17 in Q2; guided $3.70 for Q3 |
| Delta | $3.61 in Q3; about $4.25 guided for Q4 |
| United | $3.90 in Q3, up 60.3% in a year |
| Alaska | $4.65 to $4.85 guided for Q4 |
Delta and Alaska both expect to pay more per gallon in the fourth quarter than in the third.
Results so far
| Airline | Estimate ($M) | GAAP net ($M) | Adjusted net ($M) |
|---|---|---|---|
| Delta | 1,325 | 756 | about 1,130 |
| United | 935 | 1,029 | 833 |
| Alaska | 42 | (147) | 49 |
Each airline name links to its earnings release. Delta does not publish adjusted net income. We worked it out from its adjusted EPS of $1.72 and the share count implied by its GAAP results, so treat it as approximate. Alaska's adjusted figure excludes certain tax items; without that step, it lost $35 million. The research does not say whether its estimates are GAAP or adjusted.
Delta
Delta's revenue rose 21.1% to a record $20.2 billion. Fuel expense rose 69.3% to $4.35 billion, and Delta says fuel cost more than $500 million above its July plan. Adjusted pre-tax income was $1.5 billion, the same as a year earlier.
Delta cut its full-year EPS outlook to $5.10 to $5.60, from $6.50 to $7.50 in July. Premium ticket revenue rose 17.6% to $6.82 billion and now edges out main cabin. We covered the lounge angle in our Delta results story.
United
United beat the estimate on GAAP profit by about $94 million and missed it on adjusted profit by about $102 million. Revenue rose 17.4% to $17.9 billion. Fuel expense rose 61.6% to $4.84 billion. Premium and loyalty revenue each grew 17%, and United expects fourth-quarter revenue to rise more than 20%.
Alaska
Alaska Air Group, which includes Hawaiian, beat the estimate by $7 million on its preferred adjusted measure. On a GAAP basis it lost $147 million. Revenue rose 14% to $4.3 billion. Alaska now expects a full-year adjusted loss of $5.00 to $5.50 a share, including $1.8 billion more fuel cost than it planned. CEO Ben Minicucci said the company is "not satisfied with this quarter's result."
Still to report
American is expected to post the largest loss, $225 million, when it reports on October 22 alongside Southwest. JetBlue follows on October 27, Frontier on October 28 and Allegiant on November 4.
Frontier is the one to watch on fuel. In July it guided to $3.70 a gallon and adjusted EPS between a 10-cent loss and a 10-cent profit. That was before prices jumped in September.
What it means for travelers
The airlines holding up best sell the most premium seats. Delta and United both grew premium and loyalty revenue by 17% to 19%. That income gives them a reason to keep investing in lounges and business class while fuel stays high.
Airlines under fuel pressure tend to respond with tighter schedules, more fees and firmer fares, and the money-losing carriers have the least room to wait. Watch whether American or Southwest trims its winter schedule or slows lounge and cabin plans when they report on October 22.
