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Delta's Costs Spike But Yields Improving; Southwest, Hawaiian Flirt With Buys

Delta said it "continued to see stabilization" of close-in domestic yields, or its ability to make more money on tickets booked closer to a flight's departure time. (iStockphoto)

Delta Air Lines (DAL) on Friday cut its fourth-quarter operating margin forecast and hiked its expected unit costs due to a newly ratified contract with its pilots, but the carrier reported encouraging November results.

Meanwhile, Alaska Air Group (ALK) reported traffic that outpaced carrying capacity growth.

The news pushed Delta shares up 1.1% to 48.31 on the stock market today, closer to a 50.60 buy point. Southwest (LUV) climbed 1.8% to 47.91, just below a 48.10 buy point after topping that level intraday. American Airlines (AAL) added 0.8%, and United Airlines (UAL) rose 1.2%. Hawaiian Airlines parent Hawaiian Holdings (HA) rose 1.6% to 51.20, but is back below a 51.63 entry point after rising as high as 51.95 earlier.

Delta now expects its nonfuel unit costs, including profit sharing, to spike around 10%, well up from the 1%-2% increase forecast when the company reported third-quarter results in October. The carrier expects operating margin of 9.5%-10.5%, down from a forecast of 14%-16% given in October.

The earlier outlook, Delta noted then, did not factor in costs from any deal struck with pilots. On Friday, Delta said its new pilot contract included a retroactive adjustment that would be accrued in Q4 for a total cost of $475 million. Excluding the labor deal, operating margin would be at the higher end of the forecast the carrier gave in October, Delta said.

Still, the carrier held to its forecast for a 3%-5% drop in passenger unit revenue, a measure of how much money airlines make on passengers compared to available seats and distance traveled. The company said it still expects Q4 capacity to be up around 1%.

In November, unit revenue, or sales as they relate to an airline's overall carrying capacity, fell 1%. Capacity dipped 0.7%. Load factor, a measure of seats filled, rose 0.9 percentage points to 85%.

The carrier said it "continued to see stabilization" of close-in domestic yields, or its ability to make more money on tickets booked closer to a flight's departure time. Positive unit revenue in Latin America also helped, Delta said.

Alaska Air Group shares rose 2.4% to 84.83 climbing further above buy range, after the carrier said passenger traffic rose 7% in November, while capacity rose 2.8%.


IBD'S TAKE: As low-cost carriers outside the U.S. offer cheaper trans-Atlantic flights, the big U.S. network carriers have tried to find ways to compete. Airlines like Delta, American and United have leaned more toward cheaper fare classes, as opposed to dedicated low-cost airlines of their own.


After punishing airlines through much of the year on concerns of overexpansion, Wall Street has taken a more sympathetic approach to the industry. With oil prices rising, investors have been more hopeful that airlines will pare back growth and, in turn, shore up unit revenue. Warren Buffett's recent investments in the big carriers has also helped.

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