ATLANTA Airline travellers should expect higher fares and fewer seats in the coming months after Delta Air Lines (DAL.N) and US Airways Group LCC.N said they would take steps to deal with higher fuel costs.
The two U.S. airlines reported smaller-than-expected losses on Tuesday and their share prices rose, with Delta up 11 percent, even as some analysts questioned how much longer consumers, paying more for gasoline and food, would tolerate higher air fares.
"We must fully recapture our costs on every flight every day to maintain and improve our earnings performance," Delta Chief Executive Richard Anderson told analysts on a conference call, adding that high fuel was "the new norm."
"Where we cannot get the necessary revenue increases to offset the increased cost of operating the flights, we will remove capacity, particularly in our post Labour Day schedule," he said.
Soaring fuel costs are plaguing the airline industry as the price of crude oil remains above $100 a barrel. U.S. crude was off 23 cents at $112.05 a barrel on Tuesday.
(For fuel cost graphic, r.reuters.com/mat29r)
"As you see fuel rise ... over the course of the next few months, you can expect ticket prices to increase," Delta President Edward Bastian said on a conference call.
US Airways President Scott Kirby told analysts that the pricing environment was strong, pointing to improving corporate demand "consistent with underlying demand ... evidenced by another system-wide successful fare increase last week."
US Airways said it would cut capacity in the third and fourth quarters by 1 percent as it tries to make sure its planes fly full.
Glenn Tilton, chairman of United Continental Holdings (UAL.N), said he thought Delta's strategy was "a good way of looking at the challenge," and added it was an effective way of communicating to the company the need to reduce a top cost.
But Morningstar equity analyst Basili Alukos questioned the practicality of Delta's goal to recover the full cost of fuel on each flight.
"(It's) very aggressive, if you ask me," he said. "The only way for that to occur is if the legacy carriers abandon the leisure passenger and focus exclusively on the premium passengers."
Ray Neidl, a senior aerospace specialist with Maxim Group, also was eyeing consumers.
"You're not seeing (airlines) in a state of panic like they were, say, in 2008 because so far demand has been so strong they've been able to pass through most of these additional costs," he said. "But at some point, you'll get consumer push-back for ticket price increases."
Atlanta-based Delta reported a first-quarter net loss of $318 million, or 38 cents a share, beating the analysts' average forecast for a loss of 50 cents a share, according to Thomson Reuters I/B/E/S. Revenue rose 13 percent to $7.75 billion.
Delta, which had lower demand for travel to Japan after the March earthquake and tsunami, said it expected a second-quarter profit and forecast double-digit growth in unit revenue for the period.
US Airways posted a loss, excluding special items, of $110 million, or 68 cents per share. The loss was wider than a year ago but less than the loss of 72 cents a share analysts' on average had expected.
Revenue was $3 billion, up 11.7 percent. Operating expenses were also $3 billion, up 12.8 percent, due primarily to a $272 million jump in fuel costs.
Shares of Delta rose 11 percent at $9.99, while US Airways gained 6.3 percent to $8.80.
The Arca Airline index .XAL gained 2.6 percent. (Additional reporting by John Crawley and Kyle Peterson; Editing by John Wallace and Steve Orlofsky)
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