Delta revenue warning hurts US airline stock

Delta Air Lines sent US airline stocks sliding on Thursday, after warning that fourth-quarter revenues would be lower than forecast and reviving investors' concerns that the industry will struggle to keep raising ticket prices.

The carrier predicted that adjusted unit revenue for the fourth quarter would rise 3 per cent, compared with prior guidance of 3.5 per cent, and an initial guidance range of 3 per cent to 5 per cent.

Investors worried that revenues will weaken in 2019 in an industry that has been notorious for profit-sapping price competition. Shares in Delta were down 9 per cent by mid-morning in New York, American Airlines shares fell 8 per cent and United Continental dropped 5 per cent.

“The overall demand environment remains healthy with strength in both business and leisure segments throughout the quarter,” Delta said in an investor update, but it added a note of caution on the pace of ticket price rises at the end of last year.

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“While close-in yield momentum continues, the pace of improvement in late December was more modest than anticipated.”

Delta predicted fourth-quarter earnings per share would be $1.25 ($1.06)to $1.30, at the high end of its previous guidance range of $1.10 to $1.30. It also forecast fuel prices would drop by 10 cents a gallon for the fourth quarter, with a gallon of fuel expected to cost $2.38 to $2.43.

But investors focused on the expected decline in unit revenues.

Helane Becker, an airline analyst at Cowen, wrote in a note: “This is exactly why investors are apprehensive about getting involved in the group in a declining fuel environment. In the past, the airlines have competed away gains from lower fuel as they reward customers with lower fares. With oil trending lower in recent months, investors are worried this time will not be different.”

Delta said it expected its non-fuel unit costs to be down approximately 0.5 per cent year-on-year due to cost control and fleet changes.

Jim Corridore, airline analyst at CFRA research, said the share price decline was an overreaction.

“Investors must have been hoping for a large EPS beat for the fourth quarter,” instead of the slight increase that Delta gave in its investor update, he wrote in a note.

“We think these numbers show decent demand, and we see 2019 benefiting from higher fares, lower fuel costs and solid traffic numbers. We think shares are overreacting today.” – Copyright The Financial Times Limited 2019