Delta Abandons $4 Billion Jet Deal on Failed Pilot Contract

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Delta Air Lines Sees 3Q System Capacity Up 3%

Delta Air Lines Inc. abandoned plans to add at least $4 billion of Boeing Co. and Embraer SA jets after union pilots rejected the contract needed to trigger the deal.

“Those orders will be canceled,” Chief Executive Officer Richard Anderson said Wednesday on a conference call without elaborating. He spoke after Delta posted a second-quarter profit that beat analysts’ estimates and slowed growth in seating capacity.

Delta’s decision erases the purchase of 40 Boeing 737-900ERs and 20 Embraer E190s, which the airline linked to ratification of the proposed contract. The Air Line Pilots Association, whose members at Delta voted almost 2-to-1 against the accord, declined to comment on Anderson’s remarks.

Analysts had hailed the proposed contract as a sign of labor peace, six months ahead of the January start date for new terms at the least-unionized major U.S. airline. The rejection was a rare sign of friction between management and pilots at a carrier that otherwise has among the best labor relations in the industry.

Delta included the planes as a sweetener because the E190s would have been a new, smaller class of aircraft for the carrier’s main jet operations.

While the E190 might have created jobs, it came with a lower, “second-tier” pay scale, said Tim Caplinger, who leads a startup union seeking to replace ALPA. Some pilots also were concerned that the jet would replace some of Delta’s older mainline planes, rather than adding to the fleet, he said.

Profit Rises

“Delta is free to bring those airplanes if they’d like, and we’re not concerned about their choice to reject them at this time at those low B-scale pay rates,” said Caplinger, head of the Delta Pilots Association.

Scrapping the plane deal capped a busy day for Delta. Besides posting adjusted earnings of $1 billion for the quarter, the world’s third-largest airline slowed growth in seating capacity for the rest of 2015 and forecast that revenue for each seat flown a mile would fall more than some analysts had estimated.

Delta rose 0.8 percent to $43.99 at the close in New York, reversing an earlier decline. Jet fuel fell to $1.58 a gallon, the lowest price since Jan. 29, according to data compiled by Bloomberg.

A weak third-quarter forecast for so-called unit revenue -- down 4.5 percent to 6.5 percent -- “was the only negative thing I see” in the results, said Michael Derchin, an analyst with CRT Capital Group. Some investors may have expected that measure to improve after last quarter’s 4.6 percent slide, he said.

Positives Seen

“Otherwise, there’s a lot of positives in the report,” Derchin said.

The capacity pullback responds to analysts’ urgings for slower growth as airlines struggle to charge more. At the same time, the U.S. Justice Department is investigating whether the major carriers are colluding on those adjustments to their seat supply, boosting airfares.

Available seating will rise by 3 percent this quarter and be unchanged in the year’s final three months, Delta said. It’s restraining growth while discounters such as Spirit Airlines Inc. and Southwest Airlines Co. pile on capacity faster than the expansion of U.S. gross domestic product.

Average domestic fares have fallen 8 percent from a June 2014 high, as demand failed to keep pace with the jump in seat supply, according to data compiled by Bloomberg.

Excluding some items, Delta’s earnings of $1.27 per share exceeded the $1.21 average estimate among 16 analysts surveyed by Bloomberg. Sales were $10.7 billion, compared with a consensus analyst estimate of $10.6 billion.

A 39 percent drop in jet kerosene prices buoyed earnings in the three months ending in June and will continue to do so in the current period, Anderson said in a statement. Delta saved $463 million on fuel compared with the same period last year.

Delta expects its cuts on capacity to help “stem the erosion” in unit revenues, President Ed Bastian said in the statement. Available seating at Atlanta-based Delta had risen by at least 3.2 percent in every period since April 2014 and by as much as 5 percent in the first three months of this year.

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