Tags: Delta | Air | Revenue | Forecast

Delta Air Cuts Revenue Forecast; Shares Sink

Tuesday, 02 April 2013 05:59 PM

Delta Air Lines Inc. on Tuesday curbed a closely watched growth forecast, saying federal budget cuts hurt demand for government travel and potential flyers resisted the company's efforts to raise ticket prices.

The news sent Delta's shares down 8 percent and hurt other airline stocks. Some analysts said the sell-off appeared to be overdone because Delta's profit picture was largely unchanged.

Delta said that unit revenue, a measure of pricing power and the extent to which planes are filled, rose at a lower pace in March than in the previous two months. Delta's unit revenue last month rose 2 percent, compared with a rise of 5 percent in February and 5.5 percent in January.

The March performance was hurt by less last-minute travel from government customers, lower-than-expected demand as a result of Delta's attempts to increase prices and inefficiencies tied to the rollout of new revenue-management technology.

Delta reported revenue gains in trans-Atlantic and Latin American regions. But it said a weakening yen hurt results in Asia in March.

Automatic U.S. federal government budget cuts known as sequestration have already hit the number of trips taken by government employees. In coming months, the cuts could also disrupt travel as air traffic controllers and other aviation personnel face furloughs.

Delta is the first major U.S. carrier to cite effects of the sequester, and industry observers said they would watch to see if this would be a factor with other airlines' March results.

"Government contractors are a strong source of business travel revenue and to the extent that those contractors believe that the sequester will impact business, they probably will cut back on travel," said Robert Mann, an airline consultant in Port Washington, New York. "Whether it will be displaced to a future period" is uncertain.

Mann said he was more concerned that Delta indicated weaker than expected demand in March, which included the Easter holiday this year. He said technology changes don't always work as expected.

"Delta has either stubbed its toe with the revenue management technology or has become a little too aggressive on pricing," he said.

George Hamlin, president of Hamlin Transportation Consulting in Virginia, said Delta's attempt to raise fares might have met with consumer pushback, a potentially worrisome sign for the carrier and the industry.

"As much as the airlines would like to raise yields, the customers need to cooperate to make that happen," Hamlin said.

In an investor update filed on Tuesday, Delta said it now expects a rise of 4 to 4.5 percent in first-quarter unit revenue from the year earlier. That compared with a prior view of a rise of 4.5 to 5.5 percent for the quarter.

Last week, United Continental said it expected first-quarter unit revenue to rise between 5.4 percent and 6.4 percent.

Delta said it still expects a profitable first quarter, and kept its operating margin forecast intact at 2.5 to 3.5 percent. Despite the lighter forecast for quarterly unit revenue, which is also known as passenger revenue per available seat mile, Delta said non-fuel costs would rise less than its prior view.

A Delta spokesman declined to comment further on the carrier's outlook.

System traffic at Delta rose 0.1 percent in March as the number of passengers boarded fell 0.7 percent in the month.

Shares of Delta fell 8 percent at $14.94 on Tuesday on the New York Stock Exchange. Other U.S. airlines were also lower, with shares of United Continental Holdings falling 5.1 percent to $29.38, and US Airways Group off 5.6 percent at $15.74.

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Delta Air Lines Inc. on Tuesday curbed a closely watched growth forecast, saying federal budget cuts hurt demand for government travel and potential flyers resisted the company's efforts to raise ticket prices.
Tuesday, 02 April 2013 05:59 PM
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