|Delta Shares Fall on Profit Concerns -- 2nd Update|
|Dow Jones Newswires January 03, 2019 05:33:00 PM ET |
Delta Air Lines Inc. said fare revenue didn't climb as much as expected during the holiday travel season, fanning concerns that major carriers will struggle to maintain profits as lower fuel prices lead customers to expect cheaper flights.
Shares in the second-biggest U.S. airline by traffic were on track for their worst day in more than six years on Thursday after the airline said it raised fares at a slower pace in December. Delta shares were off 8.9% at $45.62 late Thursday, their biggest percentage drop since June 4, 2012, when they fell 12%.
The selloff also hit other airlines, which investors worry might add unprofitable flights or cut fares if fuel prices, down nearly 40% since October, fall further. Shares of American Airlines Group Inc. were off 7.5%. Shares of United Continental Holdings Group Inc. were down 5%.
"It's bad news in a very jittery market," said Raymond James analyst Savanthi Syth.
Delta's warning about more modest sales of pricey, last-minute fares in December added to broader concerns that the U.S. economy is cooling. The S&P 500 was off 2.5% late Thursday, after Apple Inc. the night before cut its quarterly sales forecast for the first time in more than 15 years.
Delta said it expects profit of $1.25 to $1.30 a share, the top of the range it previously set, but the airline now expects that unit revenue in the fourth quarter grew by 3% from the previous year, down from expectations for 3.5% unit- revenue growth the airline had set a month earlier. Unit revenue is a measure of how much airlines make for each seat flown a mile.
This is the second consecutive month in which Delta has triggered a sector-wide selloff with warnings of lower- than-expected unit revenue. Shares of all but two U.S. carriers ended last year in negative territory.
Airlines responded to a run-up in fuel prices during the first half of 2018 by raising fares and fees and trimming unprofitable flights from their schedules. Global crude prices have since dropped to $55 a barrel from a high last year of over $86 a barrel, and investors are worried that airlines will backslide and abandon their newfound discipline.
"In the past, the airlines have competed away gains from lower fuel as they reward customers with lower fares," Cowen & Co. analyst Helane Becker wrote in a client note. "With oil trending lower in recent months, investors are worried this time will not be different."
Analysts and investors are watching whether airlines' efforts to divide their customers into smaller niches will insulate them from falling ticket prices, allowing carriers to confine decreases to their most price-sensitive customers in basic economy while keeping fares higher in premium cabins.
Some airlines were also hoping that the unusually long gap between the Thanksgiving and Christmas holidays this year would add a few more days for business travel, boosting demand from customers who often book at the last minute and pay higher fares.
"That appears not to have happened for Delta," Ms. Becker wrote.
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