Airline Stocks Fall as Delta Notes Weakness Outside U.S.

Jul 02, 2014 4:15 pm ET

(Updates share prices in first two paragraphs.)

July 2 (Bloomberg) -- U.S. carriers fell the most in three weeks after Delta Air Lines Inc. reported that excess capacity in some international markets forced fares down more than expected.

United Continental Holdings Inc. dropped 7.1 percent to $39.27 at the close in New York to lead the decline in the 11- member Bloomberg U.S. Airlines Index. Delta fell 5.1 percent to $38.24 and American Airlines Group Inc. slid 4.4 percent to $41.95.

Delta’s comments built on concerns raised last month when Germany’s Deutsche Lufthansa AG cut its earnings forecast for this year and next, in part because of excess capacity across the Atlantic. Too much capacity forces airlines to reduce ticket prices, reducing yield, or the average fare per mile.

“The commentary regarding international excess capacity is a bit of a concern,” Joseph Denardi, a Stifel Nicolaus & Co. analyst, said in an interview. “Delta also essentially reduced their profit-sharing guidance for the year, which indicates maybe a more cautious outlook on their part regarding profitability” in the third and fourth quarters.

The World Cup soccer competition in Brazil also reduced business demand to Latin America in June, Delta said

The Bloomberg U.S. Airlines Index declined 3.6 percent, the largest one-day drop since June 12, after gaining 31 percent this year. Among airlines without routes across the Pacific or Atlantic, Southwest Airlines Co. slipped 0.9 percent to $27.47 and JetBlue Airways Group Corp. declined 2.1 percent to $10.75.

Lower Than Expected

Delta’s unit revenue, or revenue from each seat flown a mile, rose 4.5 percent in June from a year ago on continued strong domestic travel that “offset lower-than-expected international yields driven by industry-wide capacity increases,” the airline said in a statement today.

“That’s a moderation from the 6 percent we saw in May,” Savanthi Syth, a Raymond James Financial Inc. analyst “Shares have been strong and I think people are taking profits on fear that unit revenue growth is moderating. It was weaker than what we were looking for and even what Delta might have been expecting in June.”

Second-quarter unit revenue rose 6 percent, which Atlanta- based Delta said was in line with its earlier guidance.

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