Tags: Delta Outlook

Delta Says Fuel Prices Will Drive Fare Increases

Thursday, 03 Feb 2011 02:50 PM

Delta Air Lines will keep raising fares and trim its growth plans if jet fuel prices stay high, an executive said on Thursday.

Jet fuel was Delta's biggest expense last year. The run-up in fuel costs that began in the fall prompted the big airlines to begin raising fares in December. On Thursday, Delta President Ed Bastian said they weren't done.

"We're going to need to continue to raise ticket prices to cover that cost" if jet fuel remains around $2.75 per gallon, Bastian told analysts. That's 11 percent higher than the $2.47 per gallon Delta paid in the fourth quarter.

Delta also cut its growth plans. It had previously expected to increase first-quarter flying by 5 percent to 7 percent. On Thursday it said growth would be 3 percent to 5 percent. Bastian said the smaller increase was a combination of weather — storms last month caused thousands of cancellations — and a planned response to fuel prices.

And Bastian said 2011 flying would probably rise just 1 percent, versus an increase of 1 percent to 3 percent that Delta announced just over two weeks ago.

High fuel costs also prompted Delta to slice $300 million from its planned spending this year on big-ticket items such as used aircraft. The cut will allow Delta to keep generating as much cash as it had planned, Bastian said.

Delta has also been retiring 50-seat regional jets. The small jets cost more to fly per-passenger than larger planes because they don't spread the fuel costs over as many people. Bastian also said Delta will retire the last of its DC-9s in the next 12 to 18 months. The aging planes — they're 30 to 35 years old, according to data from Ascend Worldwide — were part of Northwest Airlines' fleet. Delta bought Northwest in 2008.

Delta has no deliveries of new jets until 2020, and has been buying used MD-90s for about $10 million each when it needs planes, Bastian said. The list price on a similar-size Boeing 737 would be about $80 million.

Wall Street has been eager to see airlines aggressively raise fares and cut capacity in response to rising fuel prices. The industry has a reputation for failing to pass along higher costs to customers, and for adding too many flights, driving down prices.

Shares of Delta Air Lines Inc. rose 38 cents, or 3.3 percent, to $11.73 in afternoon trading.

"We applaud management for being a first mover on capacity cuts," Stifel Nicolaus analyst Hunter Keay wrote in a note to clients.

He said he hoped other airlines — especially AMR Corp.'s American — would trim growth plans as well. American plans to increase flying capacity 4.3 percent this year, which "appears aggressive, in our opinion," he wrote.

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Delta Air Lines will keep raising fares and trim its growth plans if jet fuel prices stay high, an executive said on Thursday.Jet fuel was Delta's biggest expense last year. The run-up in fuel costs that began in the fall prompted the big airlines to begin raising fares in...
Delta Outlook
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2011-50-03
 

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