Delta to cut back on flying as offset to fuel costs

Published: Wednesday | October 26, 2011 Comments 0
A Delta plane on the tarmac at Sangster International Airport. - File
A Delta plane on the tarmac at Sangster International Airport. - File

Delta will be a smaller airline next year, and probably more expensive for passengers, too.

The nation's second-biggest airline said on Tuesday that it will reduce flying through the rest of this year and into next year. CEO Richard Anderson said Delta is determined to price fares high enough to cover fuel costs, which rose by US$1 billion in the third quarter compared to a year ago.

All the big airlines except Southwest raised fares by up to US$5 each way on Monday, for the second time in a week.

With Southwest sitting out the increase, it may not stick. But the attempt shows how aggressively airlines are jumping at any opportunity to raise fares.

Delta executives said they expect high fuel prices and an uncertain economy to continue into next year.

In the past, airlines struggled to make money in a weak economy or when fuel prices rose. Now, they appear committed to raising prices or cutting back on flying to stay profitable.

Delta cut flying by one per cent in the most recent quarter, plans to cut as much as five per cent through the rest of the year and as much as three per cent next year.

Its third-quarter yield - one way of measuring fares - rose 11 per cent compared with a year earlier.

Traffic fell slightly, although Delta said business travel, which generates more profit, remained strong.

The result was net income of US$549 million, or 65 cents per share, up by 50 per cent from US$366 million, or 43 cents, a year earlier. Revenue rose 10 per cent to US$9.8 billion. If not for losses from fuel hedging and other items, Delta would have earned 91 cents per share. That was three cents less than expected by analysts surveyed by FactSet.

Expecting profitable 4q

Delta said it expects to be profitable in the fourth quarter, too.

"We've had good success in passing on high fuel costs through ticket prices at Delta," Anderson said on a conference call. Higher revenue - mostly from fares - covered 85 per cent of its higher fuel bill.

"Delta must cover its fuel costs with ticket prices" like other industries such as railroads and trucking companies do with their prices, he said.

Delta said revenue from corporate travel is holding up well despite the financial crisis in Europe. Corporate travellers tend to fly more and pay more, making them especially important for airlines.

Volatile fuel prices have confounded all the big airlines. Rising jet fuel prices hurt airline profits. So most of them make financial bets on the direction of oil as insurance against that volatility. But if oil prices fall, those hedges lose value - hurting airline profits. Delta's profit was cut by US$208 million because of such volatility. Last week Southwest Airlines Company reported a quarterly loss for the same reason.

American Airlines parent AMR Corp reported a loss last week, too, although its problems have more to do with costs that are higher than its competitors.

United Continental Holdings Inc, the only airline company that is bigger than Delta, is due to report quarterly results on Thursday.

Delta shares fell 5.1 percent to US$8.46 in afternoon trading. For the year, they have dropped 32 per cent.

- AP


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