Delta Air Lines Inc (DAL.N) on Thursday said it will add fewer seats for purchase than usual in early 2017 to prop up fares, reacting to a deluge of flights from rivals that is squeezing its profit margins.
Delta, No. 2 globally in passenger traffic after American Airlines [AAMRQA.UL], said income fell about 4 percent to $1.3 billion in the third quarter. That nonetheless topped what analysts expected per share on an adjusted basis, according to Thomson Reuters I/B/E/S.
While plummeting fuel costs led to a blockbuster rise in U.S. airline profits since 2014, oil prices have to a degree plateaued and no longer are a force to improve the sector’s results. At issue now is lower revenue. Budget carriers like Norwegian Air Shuttle ASA (NWC.OL) are fighting larger airlines over a fixed number of travelers and charging less per ticket.
Delta said it expects its operating profit margin, excluding items, to shrink to between 14 percent and 16 percent in the fourth quarter from 17.1 percent a year earlier. If pilots approve a union-negotiated contract, analysts said the margin will be lower still.
In addition, the third quarter was “the weakest revenue environment in recent memory,” Chief Executive Officer Ed Bastian said on an analyst conference call.
Trans-Atlantic flights earned less than expected because attacks in Europe discouraged would-be vacationers, Delta’s President Glen Hauenstein said. Norwegian also began flights from New York to Paris, a hub city for Delta’s partner Air France KLM SA (AIRF.PA), increasing competition for price-sensitive customers.
Hoping to counteract an uptick in rivals’ flights, Delta will cut capacity across the Atlantic by 3 percent to 4 percent starting in November, said Hauenstein. Capacity refers to how many seats an airline flies and how far it flies them.
Delta also plans to grow capacity just 1 percent in early 2017, versus growth of 2.7 percent in the first quarter of this year.
Shares were up 1.5 percent in early afternoon trading. Delta hopes next year’s moves will be enough to stop a months-long decline in passenger unit revenue.
That measure, which compares sales to capacity, dropped 6.8 percent in the third quarter and is expected to fall another 3 percent to 5 percent in the fourth quarter from a year earlier, Delta said.
There are bright spots in Latin America and the Pacific. Ending 16 quarters of revenue decline in Brazil, the Olympics brought more visitors to Rio, and Brazilians booked more travel as the real strengthened, Hauenstein said.
Shares of American, the largest U.S. airline in Latin America, rose 5 percent after Delta’s commentary. Shares of United (UAL.N), a major player in Asia, rose 2 percent.