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Delta's earnings outlook is optimistic due to the demand for premium fares and higher prices.

Delta Air Lines announced on Thursday that a robust demand for luxury travel, coupled with a sharp decline in seat capacity expansion across the industry, has positioned them well to grow revenue and margins over the next year.

The Atlanta-based airline also expects record earnings in the current quarter, after posting stronger-than-expected third-quarter profit on improved consumer demand and pricing power.

In midday trading, its shares rose by about 5%.

Delta, by far the largest airline in the United States, has reported that its sales across all regions have increased over the last six weeks. It reported an increase in corporate bookings from all sectors.

Tickets prices increase due to fewer seats

The sharp decrease in seat capacity on the domestic market is driving up ticket prices. Delta's unit revenue - a key indicator of pricing power - increased in the third quarter after a decline the first quarter. Delta expects that its unit revenue will remain positive during the December quarter, despite Spirit Airlines' bankruptcy and other carriers' plans to reduce capacity in order to avoid discounting pressure.

Delta CEO Ed Bastian said on an earnings call that "structural change" had taken place across the industry. He was referring to a reduction in the unprofitable flights by U.S. airlines.

The airline anticipates a profit adjusted between $1.60 and $1.90 per share for the fourth quarter, which ends in December. Bastian stated that the company will perform at or above their all-time earnings for the fourth quarter.

LSEG data shows that the midpoint of the forecast is $1.75 compared to analysts' average estimates of $1.66. Delta's revenue for the quarter is expected to increase by 2%-4% compared to last year.

Delta reported an adjusted profit per share of $1.71 in the third quarter of 2018, compared to analysts' estimates of $1.53. The company's optimistic tone contrasts with the rocky first half year, when economic uncertainty clouded the forecast for travel spending and prompted Delta and other U.S. airlines to withdraw their financial projections.

High-End Travel Demand

Since the pandemic began, travelers are willing to pay more for better seats and a more luxurious experience. Delta and United rivals have benefited the most.

Delta's premium revenues were up 9% from the previous year in its third quarter and accounted about 43% for passenger revenue. The airline is encouraged by the high returns and plans to expand the premium seat offering while reducing the main cabin capacity.

Delta President Glen Hauenstein said, "Exposure of higher household income cohorts has improved our relative position against carriers who cater to a more stressful lower-to-mid-income environment." The outlook does not take into account any negative effects of the U.S. Government shutdown. This week, more than 13,000 flights were delayed due to staffing shortages in air traffic control facilities. The staffing shortage could worsen as federal employees work without pay. Travelers have begun canceling their trips and avoiding the airports until U.S. legislators reopen government. A prolonged shutdown could also have a negative impact on the economy and consumer spending.

Delta was hit with a financial loss of $25 million in 2019 during the 35-day shutdown.

Hauenstein said, however, that the airline had not felt any material impact as a result of the shutdown. (Reporting and editing by Sherry Jacobi-Phillips, Rod Nickel and Rajesh Kumar Singh)

(source: Reuters)