Delta sees improvement in pricing power after discounting pressure hits Q3 outlook
Rewrites first paragraph, updates share prices, adds comments from earnings call throughout
By Rajesh Kumar Singh and Shivansh Tiwary
July 11 (Reuters) -Delta Air Lines DAL.N on Thursday said its pricing power will "significantly" improve August onwards as U.S. carriers slow down seat capacity growth in the domestic market to ease discounting pressure.
The comments came after the Atlanta-based airline forecast a lower-than-expected profit for the third quarter as excess industry capacity has dampened airfares in the low end of the market.
"We are encouraged by actions the industry is taking," CEO Ed Bastian told analysts on an earnings call. "Seat growth is decelerating, and there appears to be increased focus on improving financial performance."
Those remarks helped Delta's stock pare losses. It shares were down 5.4% at $44.30, after falling as much as 10% in morning trade.
Rivals United Airlines UAL.O and American Airlines AAL.O were down nearly 5% each.
Domestic peer Southwest Airlines LUV.N was also down 3%, while European rivals Lufthansa LHAG.DE and British Airways owner IAG ICAG.L fell between 1% and 2%.
Delta forecast an adjusted profit between $1.70 and $2.00 per share in the third quarter through September compared with analysts' expectations of $2.05, according to LSEG data.
Airlines are enjoying a summer travel boom, with more than 3 million people passing through U.S. airport security checkpoints in a single day on July 7.
However, a rush among carriers to capitalize on summer travel demand has caused overcapacity, undermining their pricing power.
Major airlines have scheduled about 6% more seats in the domestic market this month than a year earlier, data from consultancy Cirium shows.
Average round-trip ticket price for a U.S. domestic flight was $543 in May, down 1% month-on-month and 3% lower from a year earlier, according to data from Airlines Reporting Corporation (ARC).
American Airlines and Southwest have cut their revenue forecasts in the second quarter, citing discounting pressure. The impact is more telling on ticket prices for main cabins.
Delta's revenue from main cabins, which generate about 49% of its passenger revenue, was flat in the June quarter. In contrast, revenue from premium cabins was up 10% year-on-year.
"This (Delta's earnings) print will likely raise concerns about industry health and lead to more pressure on low-cost carriers and ultra-low-cost carriers to cut capacity," TD Cowen analysts said.
Delta's executives, however, played down worries about the industry's health, saying airlines have been quick in responding to the oversupply situation.
The company sees its domestic unit revenue, a proxy for pricing power, inflecting positively in September as industry capacity growth moderates from high-single to low-single digits. It expects its annual seat capacity growth to be 5%-6% in the third quarter, compared with an 8% growth in the second quarter.
Delta also warned of a $100 million hit between June and Augustas travelers are avoiding Paris due to the Olympic Games this summer.
The airline reported an adjusted profit of $2.36 a share for the second quarter, in line with analysts' estimates. The company reaffirmed its forecast for a profit of $6 to $7 per share in 2024 with a free cash flow of $3 billion-$4 billion.
Air France KLM flags hit to summer sales due to the Olympics nL8N3IT097
High costs, safety worries hurt Paris Games bookings nL8N3IT116
Southwest Airlines' pricing woes dampen forecast despite solid travel demand nL4N3IO0T7
American Airlines cuts second-quarter profit forecast nL4N3HV3RT
Reporting by Rajesh Kumar Singh in Chicago and Shivansh Tiwary in Bengaluru; Editing by David Gregorio, Shounak Dasgupta and Nick Zieminski
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