Delta CEO: Traveling is ‘not a category’ where consumers are pulling back

Yahoo Finance's Brad Smith joins the Live show to break down his interview with Delta Airlines CEO Ed Bastian, covering the airline's Q2 earnings report and the impact of rising fuel costs.

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DAVE BRIGGS: Airfares up 34% from a year ago, but actually fell 1.8% month over month in June, one of the few silver linings this morning in the CPI report. Delta Airlines reporting earnings as well, posting profit, but shares falling about 5% right now, as results fell short of expectations. Brad Smith here with us. And Brad had a chance to speak with the CEO of Delta Airlines, Ed Bastian, about the company's expectations, and the economy's expectations as well. What did he tell you?

BRAD SMITH: Yeah, it was great to get a check-in with Ed Bastian, especially coming off of this most recent quarter. Now, we know for-- if we're breaking it up in kind of two frames of the conversation here, it's going to be about the costs that the airline is seeing. What of those costs are also being passed on to consumers?

So, a little iteration-- alliteration-- excuse me, can't even pronounce it-- for the folks out there. But when we think about the costs, those input costs, fuel costs continuing to be passed in, not all of them out to the consumer. But that is something that airlines, even American Airlines, just a day ago, had to get ahead of their own forecasts to say that we're actually going to see higher input costs on the fuel prices side than anticipated and forecasted prior.

For Delta Airlines, we had the same opportunity to ask Ed Bastian about that. And what he's particularly noticing here is that even though they have their own refinery practices, they are still going to see an extended period of time where those costs are going to need to be passed on to consumers. And consumers, the demand is strong right now. And that's not really going to help in any alleviation of those fair prices right now that people are paying for tickets.

SEANA SMITH: Yeah, and Brad, it's interesting here. When we talk about the fact that people are paying for tickets, I think there's the question of when are we going to start to see some of that demand destruction? Airfares are so high right now. Was at least maybe that one silver lining in today's CPI report, but still, they're extremely high when you compare it to what we were paying just a year ago, or even in 2019, before the pandemic.

BRAD SMITH: It's spot on. And for what we're seeing show up in the Delta numbers, at least right now, that demand destruction isn't necessarily taking place. Sure, you might be frustrated if your flight gets canceled or delayed. And those are things that Delta factors in, as all of the airline industry does. But in this period of time, they're still only operating at 82% capacity in comparison to 2019 pre-pandemic levels.

So with that in mind, they're still seeing even in this most recent June month, one of the record months for the company, and 104% operation on the revenue side versus June of 2019 as well. And so, when you consider that they're still going to be looking for more pilots to be coming out of the pipeline and add them into the operations, that's going to be a significant boon to the business in the future, as they look to really add on more capacity as well and service customers. I believe we also have a short clip--

RACHELLE AKUFFO: And Brad, a of people still--

BRAD SMITH: Yeah. Sorry, Rachelle.

RACHELLE AKUFFO: Oh, I was just going to say that a lot of people still haven't taken their first trips yet, a lot of that pent-up COVID demand. I was wondering in terms of what his expectations were after this sort of built-up summer travel goes down, how he expects that to build back up. But go ahead. I know you got some sound from him there.

BRAD SMITH: We do, and it kind of fuses together with what you're asking. So just to tee it up here, what we've also watched is this revenge travel period, right, where people are coming out of the pandemic. And they're looking to book any type of travel that they can, whether it be begrudgingly for a wedding that got pushed back or whether that is wholeheartedly for a vacation that you've just been waiting to take.

The larger question, though, as well, is, in the environment that we find ourselves in, if consumers start to pull back on their levels of spending, because they're sensing a potential recession, what does that mean for a company in Delta? This was actually brought up on the earnings call. And I had the opportunity to ask Ed Bastian about this as well.

ED BASTIAN: It's not our base case, Brad. We obviously watch consumer behaviors very carefully. We're in the consumer business. And we're a fairly high ticket purchase item for consumers. Recall, consumers have not had access to our product in large numbers in over two years. And that's behind the huge run in demand that we've seen over the course of the spring and the summer, and we're continuing to see strong demand as we look into the fall as well.

Consumers are pulling back on goods. They are pulling back certain categories. This is not a category they're pulling back on. But if we do see some evidence later in the year or next year that there's some weakness in demand, we'll take action. And we've been most conservative about the capacity we've put out there. So that would be always the first step yoou take because you make sure your supply is not in excess of the demand that's out there.

BRAD SMITH: And so just to put a bow on that very briefly here, since that conversation, we've had the earnings call as well take place earlier today. And he added some color on that, saying that the last time an economic recession hit our business was in 2009, absent fuel hedge losses at the time, which they no longer utilize, Delta was profitable that year. Comparing then to now, Delta's business has structurally involved in significant ways over the last decade as well.

SEANA SMITH: Yeah, and Brad, it's going to be-- he mentioned quickly there the staffing shortages. I think that's a huge issue, obviously, for the industry. And he was mentioning the fact that they do have at least a number of pilots that are on board right now. But the big question now is experience, because so many people just don't have the training that they need in order for Delta to, I guess, meet the demand that we're seeing at these levels.

BRAD SMITH: Experience and negotiations as well that are taking place both on the pilot front, but also on the types of aircrafts that they're going to be flying in the future.

SEANA SMITH: All right, Brad. Great interview. Thanks so much for bringing that to us.