Delta forecasts weak first-quarter profit on higher costs

© Reuters. Delta Airlines passenger jets are pictured outside the newly completed 1.3 million-square foot $4 billion Delta Airlines Terminal C at LaGuardia Airport in the Queens borough of New York City, New York, U.S., June 1, 2022. REUTERS/Mike Segar

By Rajesh Kumar Singh

CHICAGO (Reuters) - Delta Air Lines Inc (NYSE:DAL) on Friday forecast first-quarter profit below Wall Street's estimates due to higher non-fuel operating costs, but said "healthy" consumer demand would result in "significant" earnings and free cash flow growth this year.

The company's shares were down 3.8% at $38.10 in morning trade.

Delta said it expects non-fuel operating costs to increase by as much as 4% in the quarter through March from a year ago as the airline rebuilds its network for the summer travel season.

Labor costs are also set to rise after the company offered a 34% pay hike to its pilots in a new contract.

The Atlanta-based carrier expects earnings of 15 cents to 40 cents per share in the first quarter, below estimates of 55 cents, according to Refinitiv IBES data.

First-quarter revenue is estimated to be 14%-17% higher than 2019 on capacity that is expected to be 1% lower.

The airline reiterated the full-year profit forecast issued last month as it expects the industry to see tens of billions of dollars of incremental demand in the next few years.

"I've never seen a more constructive backdrop for the industry," Chief Executive Ed Bastian said on an earnings call.

"Demand remains strong as passengers return to the skies and industry returns to the long-term trend to GDP, all while supply constraints continue."

U.S. carriers are enjoying the strongest travel demand since the start of the pandemic, boosted by reopening of closed borders, a strong U.S. dollar and rising corporate travel.

While a worsening economic outlook has sparked concerns about consumer spending, airlines say travel demand remains strong and exceeds the pace of flight capacity growth, keeping ticket prices high.

Delta said corporate bookings in the past 10 days were the highest in the post-pandemic period. Demand for flights to Europe is also robust and is expected to generate record spring and summer revenues, it said.

A sharp rebound in demand from the pandemic lows, however, has also exposed the fragility of the aviation system.

The Federal Aviation Administration had to halt flights nationwide this week due to a systems outage, just weeks after an operational meltdown at Southwest Airlines (NYSE:LUV) left thousands of passengers stranded.

Bastian attributed the fragility to consumer demand exceeding the industry's ability to supply. To ensure a reliable service, he said Delta would not try to overstretch its resources.

"We all in the industry owe it to our customers to make sure we don't fly in excess of our capabilities," he said.

For the fourth quarter, adjusted profit came in at $1.48 a share, above analysts' estimates of $1.33. The company reported $12.3 billion in adjusted revenue.