15 October 2018

Delta To Increase Fares As Fuel Prices Rise

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Delta Air Lines Inc. DAL +1.63% said it will boost fares and add fewer flights than planned as carriers contend with a surge in fuel prices amid a record stretch of profits.

Delta beat earnings forecasts on Thursday as record revenue helped offset a $578 million higher fuel bill than in the second quarter of last year.

But the No. 2 U.S. carrier by traffic said those rising fuel costs will weigh on profit for the rest of this year, leading it to lower its profit outlook. Delta said its fuel bill in 2018 would be $2 billion higher than last year.

“With higher fuel prices you’re going to expect to see ticket prices go up as well,” said Chief Executive Ed Bastian.

Analysts expect other U.S. carriers to outline plans to cut capacity growth as they report earnings over the next few weeks. Airline shares fell sharply on Wednesday after American Airlines Group Inc.warned that its revenue per available seat mile would fall short of its previous guidance. That day, American’s shares fell 8% to their lowest level in nearly two years.

Delta said it has raised fares 4% from last year, offsetting two-thirds of the higher fuel costs in the second quarter. “The domestic is where we really need to get those fares moving. They have moved internationally,” Delta President Glen Hauenstein said Thursday.

Delta plans to trim underperforming routes after the peak summer travel season ends, reducing capacity growth this fall by 0.5 to 1 percentage point. The airline said it will cut back in markets where it can’t pass along higher fuel costs, without naming specific routes or destinations.

Executives said they don’t expect higher fares to curb travel demand.

The Atlanta-based carrier said its closely watched unit-revenue metric rose 4.6% in the second quarter compared with that period last year. The company expects it to increase by 3.5% to 5.5% in the third quarter.

Investors monitor the revenue that airlines generate for each seat flown a mile as a sign of how well the industry is managing capacity. Investors have said lately that a glut of available seats could hamper airlines’ pricing power.

Delta shares rose 1% on Thursday.

Delta and other airlines have retreated from using derivatives to hedge against future fuel-price swings. The company said in June that it didn’t plan to start hedging again. Delta owns a jet fuel refinery that it says helps insulate its operations from rising prices.

“Fuel prices where they are today at roughly $75 Brent does not scare us,” Mr. Bastian said on Thursday.

Delta’s planned capacity cut is “a really important data point for the whole industry,” said Joseph DeNardi, an airline analyst at Stifel.

“Airlines have struggled to offset the effects of higher fuel costs with higher fares,” he said.

Some analysts said Delta’s capacity cuts don’t go far enough. Analysts have urged other carriers including American Airlines Group Inc. to trim capacity as well.

“American continues to see solid demand, but this strong demand appears to be coming as a result of lower fares,” said Helane Becker, an analyst at Cowen & Co.

Delta posted a profit of $1.03 billion in the second quarter, or $1.47 a share, compared with $1.19 billion, or $1.62 a share, a year earlier. On an adjusted basis, earnings rose to $1.77 a share from $1.59 in the prior year, topping the $1.72 analysts expected.

Revenue rose 9.6% to a record $11.8 billion. Delta also increased its quarterly dividend by 15% to 35 cents a share.

Click here for the original article from The Wall Street Journal.  

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