Waning consumer confidence and soaring fuel costs caused Delta Air Lines Inc to warn of a possible operating loss on Tuesday, while Southwest Airlines Co said it would restrict capacity growth to brace for tougher times ahead.
The cautious statements from the two airlines are the latest signs that the U.S. airline industry is struggling to hold on to its fledgling recovery, said Henri Courpron, president of the aerospace division of investment bank and advisory firm Seabury Group.
What we see today is there's not much room for upside. Airplanes are full. Fares have been hiked several times over the last few months, Courpron said at the Reuters Aerospace and Defense Summit.
Southwest's capacity forecast marks yet another move by the leading U.S. low-cost carrier to rein in growth. The change is not necessary bad news for Southwest, said Courpron, who noted that Southwest is still growing unlike many other airlines.
Delta is coming as probably more of a surprise because they've come out of bankruptcy, so you would have expected that they have taken the steps that would make them profitable for at least another few quarters after coming out of bankruptcy, he said.
The warnings hit most airline shares. The Amex airline index .XAL was down 1 percent, led by a 4 percent fall in Delta shares. Southwest rose 0.8 percent on optimism that the company was taking the appropriate action to improve earnings.
DELTA SEES POTENTIAL LOSS
Citing higher-than-expected fuel costs, Delta lowered its operating profit margin target to a range of 0 percent to negative 2 percent. That compares with an October forecast of an operating profit margin of 3 percent to 5 percent, the No. 3 U.S. carrier said in a filing with the U.S. Securities and Exchange Commission.
The company also raised its forecast for fourth-quarter jet fuel to $2.60 from $2.36 per gallon. Delta said it was responding to higher fuel prices by reducing capacity.
The carrier, which exited bankruptcy last spring, said it took 13 domestic aircraft out of its fleet during the fourth quarter. Delta also plans to cancel the equivalent of 10 domestic mainline aircraft and 35 regional jets by grounding aircraft and reducing utilization, beginning in January.
Delta said it expected 2008 domestic capacity to decline 4 percent to 5 percent.
Some of those planes will be transferred to more lucrative international routes. Delta forecast international capacity to rise 15 percent next year.
The company also plans to cut costs by about $400 million in 2008, in part by installing lighter seats and winglets on certain aircraft and halting hiring for back-office jobs.
SOUTHWEST CUTS CAPACITY GROWTH ... AGAIN
Southwest said it plans to slow its capacity growth to five to 10 aircraft, or about 4 percent to 5 percent, in 2008 -- about half its earlier plans.
We are concerned about growing evidence of slowing economic growth that would inevitably affect passenger demand, coupled with a surge in energy prices, Southwest Chief Executive Gary Kelly said in a statement.
The airline industry has been battered by overcapacity, which has made it hard for carriers to boost fares enough to cover the soaring cost of jet fuel.
Top airlines, however, have been cutting domestic capacity and raising fares this year to boost revenue, a strategy that has proved profitable so far.
Southwest had earlier planned to reduce capacity growth to 6 percent from 8 percent in the fourth quarter and 2008 because of softening travel demand.
The airline had also previously agreed with Boeing Co (BA.N: Quote, Profile, Research) to defer delivery of 21 aircraft to the period 2013 to 2014, from 2009 to 2011. The delay will cut planned capacity growth to between 5 percent and 6 percent, from a previous range of 7 percent to 8 percent.
Southwest, one of the few U.S. airlines to consistently post profits, is adjusting its strategy in the face of tougher competition and higher fuel and labor costs.
Besides the slowed expansion, Southwest has said it hopes new business initiatives, such as its Business Select fares, will add more than $1 billion to annual revenue by 2010.
Southwest expects these initiatives to put its earnings, which the company says will likely miss its 15 percent growth target in 2007, back on track.