DALLAS – Delta Air Lines Inc.’s second-quarter profit beat expectations despite lower revenue, and the company plans to limit its growth in a bid to push fares higher.
Notably, Delta will reduce flights this winter between the U.S. and U.K. partly because of uncertainty over the economic fallout from the U.K.’s decision to leave the European Union.
Lower fuel prices have helped airlines earn big profits. That continued at Delta, which said Thursday that net income for the April-to-June quarter was $1.55 billion, up 4 per cent from a year ago.
But airline stocks have fallen this year — Delta’s shares began Thursday down 22 per cent in 2016 — because investors are skittish about a long slump in revenue per mile.
So-called unit revenue has been sliding for more than a year because cheaper fuel encouraged airlines to add flights and seats faster than demand could absorb, leading to lower average ticket prices. Delta’s unit revenue tumbled nearly 5 per cent in the second quarter.
Atlanta-based Delta predicted that revenue per mile will fall again in the third quarter — by between 4 per cent and 6 per cent. The airline is sticking with its prediction of achieving break-even revenue per mile by year end, which analysts including Darryl Genovesi of UBS and Joseph DeNardi of Stifel consider unlikely.
Much of the weaker pricing is coming in last-minute, so-called walk-up fares that usually carry higher prices. Those tickets are frequently bought by corporate travellers.
Delta President Glen Hauenstein said the number of business travellers remained “solid” but didn’t grow fast enough to keep up with the increase in seats, leading to “stubbornly low business fares.” He said that revenue per mile from leisure travellers rose.
Airlines are feeling pressure to boost fares and revenue because their long dividend from cheaper fuel is fading. Oil prices have increased since hitting a decade-long low in February. While jet fuel is still much cheaper than it was two years ago, Delta CEO Ed Bastian said the year-to-year savings are now mostly over, making revenue growth more important.
One step in that direction: Delta will grow its passenger-carrying capacity just 1 per cent in the fourth quarter, half the increase it had been planning.
Delta will cut planned flying between the U.S. and the U.K. by a surprisingly large 6 per cent. That is an important business-travel route, and Delta said it was scaling back in reaction to soft fares, the drop in the British pound, and uncertainty about the U.K. leaving the European Union.
The economic fate of Britain is doubly important to Delta because it owns 49 per cent of British carrier Virgin Atlantic.
On a call with analysts and reporters, Delta executives said they might reduce U.S.-U.K. flights on non-peak days and use smaller planes. Manchester, England, favoured more by British tourists leaving the country than Americans going in, could see fewer flights, they said. U.S. destinations popular with British travellers, they added, include New York, Florida and Las Vegas.
For the second quarter, Delta said that excluding one-time items, its adjusted profit was $1.47 per share. Thirteen analysts surveyed by FactSet predicted $1.42.
Revenue fell 2 per cent to $10.45 billion, below the analysts’ forecast of $10.48 billion.
In midday trading, Delta shares rose $1.03, or 2.6 per cent, to $40.60. The shares of American Airlines Group Inc. and United Continental Holdings Inc. also rose — American and United both fly to the U.K. and could benefit if the moves Delta announced lead to higher fares across the Atlantic.
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