Delta Air Lines Inc. is reining in the supply of available seats as a surge in industrywide capacity damps carriers’ ability to raise prices.
Even as falling fuel costs helped drive a second-quarter profit that beat analysts’ estimates, Delta’s results showed how competition is weighing on fares. Delta projected a drop in a benchmark revenue gauge for the three months ending in September that was larger than some analysts predicted, and the shares fell.
“That’s the only thing negative I see,” said Michael Derchin, an analyst with CRT Capital Group. “Otherwise, there’s a lot of positives in the report.”
Delta’s capacity restraint 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, boosting airfares. Delta said available seating will rise by 3 percent this quarter and be unchanged in the year’s final three months.
Flush with record profits in 2014, airlines had begun adding more seats, hoping to lure additional flyers. Budget carriers like Spirit Airlines Inc. and Southwest Airlines Co. are the most aggressive: Spirit plans to increase capacity by 30 percent this year, Southwest by 7 percent.
As demand failed to keep pace, average domestic fares have fallen 8 percent from a June 2014 high, according to data compiled by Bloomberg, and airlines started to feel the heat, especially in highly contested markets such as Dallas and Chicago. This week, Spirit cut its forecast for operating margins for the rest of 2015, citing pricing pressure from other carriers.
Airline stocks fell following Delta’s report. Delta slid 1.9 percent to $42.84 at 9:44 a.m. in New York as all 11 carriers in the Bloomberg U.S. Airlines Index declined.
Delta’s weak third-quarter forecast for revenue from each seat flown a mile -- down 4.5 percent to 6.5 percent -- may be weighing on the shares, CRT Capital’s Derchin said. Some investors may have expected that measure to improve after last quarter’s 4.6 percent slide, he said. Yield, or the average fare per mile, fell 3.9 percent.
Excluding some items, 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, Chief Executive Officer Richard 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.