Delta Air’s Pullback Abroad Seen Spurring Rivals to FollowMichael Sasso and Mary Schlangenstein
Delta Air Lines’ move to cut seats on international routes later this year may herald similar moves by American Airlines and United, helping the U.S. carriers pare costs and maintain pricing power.
The reduction announced Wednesday amounts to 3 percent of overseas capacity for Delta’s winter schedule. Delta is paring service from Japan and to Brazil, Africa, India and the Middle East. It’s also suspending flights to Moscow, meaning no U.S. passenger carrier will fly there during that period.
Delta’s pullback, disclosed along with first-quarter earnings, focuses on markets that are facing a strong dollar and regions most affected by the decline in oil prices. Lucrative, long-haul foreign flights have been a focus for American, United and Delta in recent years, and shrinking the number of available seats lets them match demand with supply, supporting higher fares.
“The cuts are deeper than we had anticipated and the announcement a little earlier,” said Savanthi Syth, a Raymond James Financial Inc. analyst. “This is what we would expect to see with capacity discipline. We would expect adjustments to international capacity by the other legacy carriers” in the fall and winter months.
United Continental Holdings Inc. hasn’t announced any changes to its winter international capacity, spokeswoman Megan McCarthy said Wednesday. American Airlines Group Inc. disclosed in a regulatory filing last week that it trimmed international growth plans to 1 percent this year from a prior estimate of 1.5 percent. Total capacity will be up 2 percent this year compared with previous plans to grow as much as 3 percent.
American declined to provide additional information on capacity plans ahead of its earnings results on April 24, said Casey Norton, a spokesman.
Delta’s capacity shift “is likely to be greeted enthusiastically (including by us) and will likely be joined by similar efforts at competing carriers as earnings season moves on,” said Jamie Baker, an analyst at JPMorgan Chase & Co. in a note. United and American will report results next week.
Delta gets about 30 percent of its revenue from international sales and is feeling the pinch from the strength of the U.S. currency, which neared a 12-year high against the euro earlier this week.
Delta’s seating capacity cuts follow expansion in Brazil in recent years, largely to provide connecting passengers to partner Gol Linhas Aereas Inteligentes SA. In Asia, Delta operates a hub at Tokyo’s Narita International Airport, where it has been cutting back while serving more Asian destinations from Seattle and other U.S. airports.
Airlines can reduce the number of available seats by flying routes less frequently, dropping service or using smaller aircraft. To reduce capacity on Japan routes, Delta said it’s mostly switching out of Boeing Co. 747 jumbo jets.
In its first-quarter earnings release Delta said that the international reductions, combined with 2 percent domestic growth, will result in unchanged system-wide capacity in the fourth quarter.
“This is music to the ears of many investors who believe Delta should not over-grow capacity,” Helane Becker, a Cowen & Co. analyst, said in a note. “The international markets have been a drag on results recently.”
Delta rose 2.6 percent to $44.20 in New York, paring its loss for the year to 10 percent. American and United also rose.
News about Delta’s cuts came as the carrier announced that its first-quarter profit excluding one-time items rose to $372 million, or 45 cents a share. That’s a record for the first quarter since Delta’s 2008 merger with Northwest Airlines and beat the average analyst estimate of 44 cents. Net income almost tripled to $746 million.
The first of the major U.S. carriers to report earnings, Delta also gave its initial forecast for second-quarter operating profit margin, at 16 percent to 18 percent. That was in line with some analysts’ estimates.