Delta warning sends shares down

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By admin July 3, 2014 16:30

Delta warning sends shares down

Even though the US airline revenue figures to the end of May are strong according to the US Bureau of Transportation Statistics (BTS), going forward matters for the US majors are not so clear cut. Domestic traffic growth is expected to fall back to 4.5% year on year for June 2014. Even so US economic output figures are strengthening and thus one would hope the domestic airline market will be able to absorb additional capacity at speed. The international market however looks set to continue is weakening trend on the back of overcapacity.

At the beginning of July 2014 some US carriers saw shares fall in value the most in three weeks after Delta Air Lines reported that excess capacity in some international markets forced fares down more than had been expected. Delta essentially reduced its profit-sharing guidance for the year, which indicates a more cautious outlook for the third and fourth quarters of 2014. This news follows that of Lufthansa, which in May 2014 warned that there was significant excess capacity on Atlantic routes at this time. If this is the case across all airlines on the Atlantic routes then we should see this coming out through Virgin Atlantic and British Airways figures, not to mention American Airlines.

On the news from Delta traders with short options were quick to cash-in as shares fell, United Continental Holdings Inc. shed 7.1% to $39.27, Delta fell 5.1% to $38.24 and American Airlines Group dropped by 4.4% to $41.95. The reason for the Delta share price fall was because the investor update implies Q2 EPS in the $0.96-1.11 range with midpoint at -$1.03, while passenger revenue missed most forecasts by about -50 bps and PRASM looks set to come through at the low end of the 6-7% guidance range. Although all of this is more than offset by higher cargo/other revenue ($0.01), lower fuel ($0.01) and lower non-operating expenses ($0.01). This could be reflecting better equity earnings contribution from Virgin Atlantic, which would dispel the theory that all airlines are suffering on Atlantic routes at this time.

Information released by Delta indicated a second-quarter operating margin of 14-16%, said Jamie Baker, a JPMorgan & Chase analyst in a note, in which he also reduced his second-quarter profit estimate to $1.01 a share from $1.04, with a 14.9% operating margin.

American is now starting to catch-up with Delta. Operating margins in 1Q 2014 were above those of both Southwest and United at 7.3%, while operating margins at Delta were 7.7% for the same period. Most analysts expect American’s 2014 full year operating margin to be 11.7%, while Delta is expected to return a 12.6% operating margin for the full year, well within its 11-14% range set by management.

The US international airline market is seeing huge upticks in capacity during 2014 as the Middle East majors, European low costs and APAC airlines all increase services to US cities exponentially – it is this that is starting to drive down fares for the US majors. As such the US majors have a very stark choice with regard to international services. They can either cut capacity and risk losing more business to foreign competitors or they can cut their ticket prices. The logical answer seems to be to unbundle fares on some international routes and see what the reaction will be.

Either way, 2014 presents a significant test for the US majors and they will need to find answers to these difficult problems.

admin
By admin July 3, 2014 16:30
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