Tags: Delta | fuel | economy | DAL

Delta Limited by Fuel, Slow Economy

By    |   Monday, 24 Oct 2011 11:55 AM

Delta Air Lines (DAL), the world’s second-largest air carrier, has established itself as one of the strongest airlines in the world. But it faces circumstances beyond its control, namely fuel prices and sluggish economic growth, which likely will limit profits for the short term.

Delta’s fuel costs soared by about $1 billion, or 39 percent, in the second quarter from a year earlier. Delta has been forced to raise ticket prices sharply — by 12 percent in the second quarter alone — to make up for the fuel expense.

Given the intense competition in the airline industry, Delta can’t go too much further in increasing its prices. The stagnant economy may start eating into Delta’s passenger traffic. Economists doubt that GDP growth will register much more than 2 percent in coming quarters.

Delta’s profit dropped 58 percent in the second quarter to $198 million from $467 million a year earlier. But the latest quarter included $168 million in one-time costs for items such as severance packages and aircraft retirement. Revenue climbed 12 percent to $9.15 billion.

Revenue increase

Standard & Poor’s analyst Jim Corridore assigns Delta shares a four-star buy rating. He expects the company’s revenue to climb 11 percent for all of 2011, helped by increases in capacity and yields. Fees for checked bags and other services also should boost sales.

“We think industry-wide capacity cuts taken over the past two years will help drive airfare increases and yield improvement,” Corridore writes.

The aftermath of Delta’s 2008 purchase of Northwest Airlines also will aid earnings, he says. “The merger with Northwest will give the combined company increased network scale and provide revenue and cost synergies,” Corridore writes. But Delta also must deal with different fleet types and commitments to maintain hubs that could limit cost-cutting.

The company next reports around Oct. 25.

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Delta Air Lines (DAL), the world s second-largest air carrier, has established itself as one of the strongest airlines in the world. But it faces circumstances beyond its control, namely fuel prices and sluggish economic growth, which likely will limit profits for the short...
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Monday, 24 Oct 2011 11:55 AM
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