Delta Pledges to Slow Growth Next Year in Bid to Boost Faresby
Capacity expansion will slow to 1% in 2017, airline says
Additional cuts to seats and flights will be made if needed
Delta Air Lines Inc. will keep a lid on growth next year as it seeks to shore up persistently weak fares.
The Atlanta-based carrier plans to expand seats and flights only 1 percent in 2017, less than half this year’s pace through September. As demand catches up with slower supply growth, fares should rebound and passenger revenue for each seat flown a mile could halt its slide by early next year, Delta said. The airline pledged to pare capacity more if it doesn’t see an improvement in the benchmark gauge, which is known as unit revenue.
Delta is trying to reverse a glut of flights and seats that has weakened airlines’ pricing power and put their stocks on track for the biggest annual decline in five years. The carrier’s commitment to reining in capacity growth to end 18 months of declines in unit revenue helped Delta shares recover from an early drop and fueled the biggest gain in two weeks for a Bloomberg index of U.S. airlines.
“People want to believe that we’re close to an inflection,” Jack Atkins, an analyst at Stephens Inc., said by telephone.
Delta’s shares rose 1.6 percent to $39.91 at 2:10 p.m. in New York. The Bloomberg U.S. Airline Index rose 3.1 percent.
Modest growth in the last three months of this year will help slow the decline in unit revenue after a 6.8 percent drop in the third quarter, the airline said in a statement Thursday. In the current quarter, the measure will fall 3 percent to 5 percent, the airline said.
Unit revenue has already turned positive in Latin America, executives said on the call, while the U.S. figure could rise as early as December. Europe will take longer because of the effects of terrorist attacks, Britain’s decision to withdrawal from the European Union and other challenges.
Delta reported third-quarter adjusted earnings of $1.70 a share, exceeding the $1.65 average of analyst estimates compiled by Bloomberg. Sales fell to less than $10.5 billion, slightly trailing predictions.
A computer-network interruption that grounded thousands of flights in early August cut pretax income by an estimated $150 million, Delta said.
Fares have improved recently for tickets booked shortly before travel, President Glen Hauenstein said on a conference call with investors and analysts. That has given the airline confidence that it is close to increasing unit revenue, he said.
“We expect that with a lot of hard work, we can continue to drive improvement and get to positive unit revenues by early next year,” Hauenstein said. “If we do not see the performance we expect as we move through the quarter, we will move quickly to make the changes we need to get the right outcome.”
“We view the results and guidance this morning as encouraging for the company and the industry as a whole,” Helane Becker, an analyst at Cowen & Co., said in a research note. While the carrier has fallen short of earlier promises to reverse unit-revenue declines, “management has been proactive with their capacity adjustments.”
Delta is the first major airline to report third-quarter earnings. U.S. carriers are expected to report pretax profit of $6.5 billion for the period, which would be the first year-over-year decline for a quarter since the end of 2012, Deutsche Bank analyst Michael Linenberg said in a recent note.
Weak fares and higher employee wages have dragged down earnings, he said. Several airlines have raised pay for pilots and other employees recently as workers demanded a greater share of industry profits.