Delta falls short on higher costs, weaker traffic
MINNEAPOLIS—Delta will cut back on flights next year and probably be 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 $1 billion in the third quarter compared to a year ago.
Delta's earnings rose by 50 percent, despite the higher cost of fuel, in large part because the airline charged more for its tickets.
All the big airlines except Southwest raised fares by up to $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 1 percent in the most recent quarter, plans to cut as much as 5 percent through the rest of the year and as much as 3 percent next year. Its third-quarter yield -- one way of measuring fares -- rose 11 percent 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 $549 million, or 65 cents per share, up from $366 million, or 43 cents, a year earlier. Revenue rose 10 percent to $9.8 billion. If not for losses from fuel hedging and other items, Delta would have earned 91 cents per share. That was 3 cents less than expected by analysts surveyed by FactSet.
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 percent 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 travelers 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 $208 million because of such volatility. Last week Southwest Airlines Co. 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 46 cents, or 5.2 percent, to close at $8.44 Tuesday. For the year, they have dropped 33 percent.