Delta Vows to Cut Seating Capacity If Needed to Boost Fares

  • Airline puts focus on reversing unit-revenue declines
  • Profit beats estimates as inexpensive fuel offsets weak demand

Delta Air Lines Inc. will cut seating capacity if it can’t make speedy progress in turning around flagging fares.

Reductions may be needed in the fall as Delta seeks to reverse five straight quarters of falling unit revenue, a crucial yardstick for airlines, the Atlanta-based airline said. While it said the measure would drop again in the second quarter, the pace of the decline is expected to slow.

Cutting capacity could help nudge fares higher and improve passenger revenue for each seat flown a mile. Turning that metric around would further entice investors as Delta’s first-quarter profit exceeded analysts’ estimates, said Sterne Agee CRT analyst Michael Derchin.

“Business is really going great and they’re doing a great job as a company, but as far as the stock, everybody’s focused on them getting into positive territory” with unit revenue, he said.

Delta rose 1.6 percent to $48.83 at 1:12 p.m. in New York. Its earnings report Thursday, the first of the quarter for U.S. carriers, gave a boost to the rest of the industry. American Airlines Group Inc. advanced 3.4 percent, the biggest gain on the Standard & Poor’s 500 Index, while United Continental Holdings Inc. climbed 2.7 percent, putting the stock at No. 5.

Unit revenue will drop between 2.5 percent and 4.5 percent this quarter, Delta predicted. That would follow a 4.6 percent decline in the first three months of the year. Executives said on a conference call that they expect the measurement will start rising later this year.

Fuel Prices

“We are very aware that fuel prices remain volatile and have increased nearly 60 percent from the lows earlier this year,” President Ed Bastian, who becomes chief executive officer next month, said on the call. “For this reason, we are determined to get our business back on the path to positive unit revenues because this is how we ensure that the margins and cash flows that we are producing are sustainable through good times and bad.”

The airline also plans this quarter to expand its Basic Economy fare, which appeals to customers who want the lowest price and comes with fewer privileges than other fare types. Delta currently offers Basic Economy in 400 or 500 U.S. markets out of more than 20,000, and it will roll it out to many more in coming months, said Glen Hauenstein, who will replace Bastian as president.

Beating Estimates

Earnings excluding some items rose to $1.32 a share in the first quarter, exceeding the $1.30 average of 14 analysts’ estimates compiled by Bloomberg. Sales were $9.25 billion, slightly below the $9.27 billion estimate of analysts.

Inexpensive fuel helped Delta overcome soft revenue, especially in overseas markets, and costs that rose in part because of high employee profit-sharing payments. Weak foreign currencies are making air travel costlier for overseas travelers. Delta paid an average of $1.33 a gallon for fuel in the first quarter, compared with $2.93 a gallon a year earlier.

The least-expensive fuel in more than a decade has helped carriers post record profits while letting them put more money into sprucing up jet interiors and airport luxury lounges. Operating income for the U.S. airline industry rose $959 million in the first quarter because of the lower fuel bill, Deutsche Bank analyst Michael Linenberg estimated in an April 7 note.

Delta’s stock was down 5.2 percent this year through Wednesday, compared with a 1.2 percent drop for the Bloomberg U.S. Airlines Index. Several analysts this week predicted that unit revenue would improve this quarter through the end of the year as the effects of weak foreign currencies and last year’s aggressive fare discounting in the U.S. taper off.

Fleet Upgrade

Delta may announce news about purchases for its narrow-body jet fleet, which it uses for short-distance flights, next month, Bastian told analysts. The company is looking to replace its McDonnell Douglas MD-88 jets, which numbered 116 as of Dec. 31 and are 25 years old on average, and cut the use of inefficient 50-seat planes now used by its regional airline affiliates.

Airbus Group SE, Boeing Co., Bombardier Inc. and Embraer SA are competing to sell jets to Delta, people familiar with the negotiations told Bloomberg earlier this month.

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