Although Delta Air Lines expects to sustain strong pre-tax profits in 2017, cost inflation and continued unit revenue pressure are creating margin compression for the airline. Delta anticipates its operating margin for the year will fall below the 17% to 19% targets it has set for itself over the long term.
Delta acknowledges that in the past its ability to predict a return to positive unit revenue accurately has been dismal; but the company believes it will post a flat unit revenue performance in 1Q2017. The airline also concedes that when it set long-term margin targets earlier in 2016 it believed unit revenues would rebound faster than has ultimately materialised.
The company is characterising 2017 as a transition year in which it is crucial to restore unit revenues in line with cost escalation, concluding that it could be the first year in many that could test the durability of its business model. But Delta is encouraged by positive momentum in many of its markets, and the slowing of yield degradation in the key corporate sector.
The four largest US airlines are moving closer to returning to positive unit revenue in 2017 after each of those companies has issued an improved unit revenue forecast for 4Q2016, driven by stronger yields and continued improvement in close in bookings. The yield improvement indicates that the US domestic environment is gaining some pricing traction after two years of weak fares, and the results on close in bookings continue a trend that emerged in the US market during late 3Q2016 and continued through the rest of the year.
Delta and Southwest have both publicly cited a bump in demand since the US presidential election in Nov-2016. Delta has expressed cautious optimism that the US revenue environment has turned a corner, and the positive momentum is driving the company’s confidence of climbing out of a negative unit revenue performance in 1Q2017.
Key to sustaining unit revenue momentum is keeping capacity in check over the course of 2017. American, Delta, United and Southwest have all declared their intentions to lower capacity growth in 2017, and show no intentions of revising those targets upwards. Rising fuel cost and non fuel cost inflation are the major headwinds for US airlines in 2017, which has resulted in Delta declaring margin compression for the year.