Airlines Seen Paring U.S. Capacity as Delta Trims Forecast

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Gary Kelly
Southwest Airlines CEO Gary Kelly. Photographer: Scott Eells/Bloomberg

The largest U.S. carriers may trim their plans to expand domestic seating capacity after Delta Air Lines Inc. said its benchmark revenue gauge probably will decline more than forecast.

Executives from Delta and United Continental Holdings Inc. probably “will make it clear” at a conference this week that they’re focused on matching the supply of seats to travel demand, according to a report Tuesday from Darryl Genovesi, a UBS AG analyst. No specifics are likely until July, he wrote.

The Bloomberg U.S. Airlines Index has tumbled 11 percent this year amid investor concern that having too many seats for sale in the U.S. would erode pricing power. That market has been a bright spot for U.S. carriers as a strong dollar, foreign competition and economic weakness roiled international travel and cut into revenue.

“We believe all of the larger U.S. airlines would do better to acknowledge weaker demand and then take some domestic capacity out rather than allow investors to go on assuming that capacity discipline has broken down,” Genovesi said.

Delta’s passenger revenue from each seat flown a mile, an industry benchmark gauge, will drop in a range of 4 percent to 5 percent this quarter, the Atlanta-based airline said Tuesday, outstripping an earlier projection for a decrease of 2 percent to 4 percent.

Delta fell 2.6 percent to close at $43.21 in New York. American Airlines Group Inc. and United each dropped less than 1 percent while the airlines index slipped 1.1 percent.

American, Delta and United announced plans in April to slow international growth and may wait to disclose domestic plans when they report second-quarter financial results next month, Genovesi said.

Delta’s changes would probably take effect after the summer season, said Helane Becker, a Cowen & Co. analyst.

“We believe it is more likely than not that Delta makes an adjustment to their schedule post-Labor Day given the weakening GDP forecast in the U.S. domestic market,” she wrote in a note Tuesday.

Southwest Airlines Co., which carries the most domestic passengers, backed off plans to increase capacity as much as 8 percent this year. The Dallas-based carrier instead will “stick to 7 percent,” Chief Executive Officer Gary Kelly said in an interview on Monday.

Southwest may trim its 2016 growth plan of 6 percent “if demand doesn’t quickly re-accelerate,” Genovesi said.

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