Delta Cuts Back Growth Plans as Supply Glut Weighs on Fares

  • Airline paring expansion as revenue yardstick keeps falling
  • Carrier cutting flights to U.K. after voters choose Brexit

Delta Air Lines Inc. said it would seek to boost a key passenger revenue yardstick by reining in an expansion set for later this year.

Capacity will only increase 1 percent in the fourth quarter from a year earlier, half the previously planned advance, the carrier said in a statement Thursday. Delta also announced deeper reductions on routes to the U.K. due to the recent drop in the pound and economic uncertainty after the country voted to leave the European Union.

Delta is slowing the expansion of flights and seats as a step toward halting a sustained slide in passenger revenue for each seat flown a mile, a measure known as unit revenue. U.S. carriers have been plagued this year by an overabundance of capacity, which has put pressure on fares and contributed to a 15 percent decline in airline stocks through Wednesday.

“While admittedly we have done a poor job forecasting when unit revenues will turn positive, we’re working hard to achieve our goal hopefully by the end of the year,” Chief Executive Officer Ed Bastian said on a call with investors and analysts. “And even if ultimately it takes a little bit longer than year-end, we’re confident we’re on the right path.”

Delta climbed 2.9 percent to $40.70 at 1:33 p.m. in New York. The Bloomberg U.S. Airlines Index rose 2.4 percent, with United Continental Holdings Inc. advancing the most with a 3.8 percent gain.

‘Steep Hill’

Delta’s adjusted earnings were $1.47 a share in the second quarter, topping the $1.42 average of 13 analyst estimates compiled by Bloomberg. Revenue declined to $10.4 billion, the carrier said, compared with the average estimate of $10.5 billion.

Even after beating expectations for second-quarter profit, Atlanta-based Delta still faces a significant challenge in turning around unit revenue. The carrier issued a weaker-than-expected outlook for the current quarter, projecting that the measure would fall by 4 percent to 6 percent. That’s a steeper drop than analysts’ estimates, according to Stephens Inc. analyst Jack Atkins.

“It’s an awfully steep hill to climb,” Atkins said. “They’re still clinging to that, but I don’t think anyone believes it.”

Investors have shied away from airline stocks for months because of weak revenue and too much capacity in certain U.S. markets and abroad. Several carriers have cited a recent drop in revenue from pricey last-minute business trips.

‘Stubbornly Low’

Delta hadn’t anticipated that average fares for these late bookings would continue to drop and that the decline would accelerate, Delta President Glen Hauenstein said on the call. Fares are being dragged down by weak pricing in the industry and too much seating capacity, he said.

It can’t count on these “stubbornly low” close-in fares going away, so “that leaves us with really no other choice but to decrease the capacity levels moving forward,” Hauenstein said.

Delta’s U.S. capacity, a measure of available seats and the miles they’re flown, will probably rise about 3.5 percent in the U.S. in the third quarter, accompanied by a 1 percent decline internationally, Hauenstein estimated. In the fourth quarter, domestic growth should be as much as 2.5 percent with a decline abroad of a comparable in the same range, he said.

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