Is This Airline Climbing Into the Black?

You won't find many investors in our 120,000-strong Motley Fool CAPS community who like airlines -- especially Delta (NYSE: DAL  ) :


Delta Air Lines

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Data current as of Dec. 5, 2008.

"Slowdown in travel will not offset the drop in oil prices," wrote CAPS investor darksabre last month in a bearish pan of Delta. "Airlines will cut fares and will cut extra costs in order to compete for business ... Some airlines will have to go under -- airline industry needs more consolidation."

There's truth to that. JetBlue (Nasdaq: JBLU  ) , Southwest (NYSE: LUV  ) , and Virgin America have held fare sales recently, the San Francisco Chronicle reports. So have UAL's (Nasdaq: UAUA  ) United, AMR's (NYSE: AMR  ) American, Continental (NYSE: CAL  ) , and US Airways (NYSE: LCC  ) , in markets where they compete with Southwest, reports the St. Louis-Dispatch.

Delta has also cut fares. But, looking at the November traffic numbers, I'm wondering whether dirty, rotten, beautiful Southwest is doing what it must, while Delta is playing a profitable brand of hardball.

Delta and AirTran were the only two airlines to record load factor gains last month, meaning their planes were fuller this year than last November. Southwest, by contrast, suffered the largest year-over-year percentage decline: 6.1 percentage points.

Has Delta merely cut fares to the bone, attracting customers who want nothing more than cheap flights? Or is this the rare carrier that's climbing toward the black? I'm not holding my breath. This, after all, is the airline that just merged with still-recovering Northwest.

Yet yesterday, I had zero interest in Delta's Q4 earnings report, due out Jan. 21. Today? Color me more than a little intrigued.

Taxi towards related Foolishness:

Fool contributor Tim Beyers didn't own shares in any of the companies mentioned in this article at the time of publication. He also writes for Motley Fool Rule Breakers. See his portfolio and his Foolish writings. Or, if you're socially inclined, follow Tim on Twitter, where he's @milehighfool. The Motley Fool's disclosure policy, like a thick steak, is juicy and delicious.

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  • Report this Comment On December 06, 2008, at 10:09 AM, jetfan100 wrote:

    Will someone do the math here? Southwest has been adding seats while Delta has been removing seats. You can fly fewer passengers with fewer available seats and still get a higher load factor (ASM-RSM=LF). Conversely, you can fly more passengers with more available seats and still have a falling load factor. The real number to watch is Revenue per Available Seat Mile versus Cost per Available Seat Mile. If the revenue is the larger one, you made money as an operation. If not, you lose money. It's that simple.

  • Report this Comment On December 06, 2008, at 11:03 AM, TMFMileHigh wrote:

    Yes, but the math doesn't favor Southwest. Capacity increased only slightly but revenue seat miles declined more than 8%. So, in that formula, Southwest either had to (a) increase prices at least 8% or (b) cut costs at least 8%. Either is possible but with LUV starting the latest fare war, I see it as extremely unlikely.

    Delta, by contrast, saw revenue miles dip less than capacity. Fare reductions could easily eliminate any benefit from this otherwise good equation -- hence my conclusion -- but I'm nonetheless intrigued. We haven't seen a legacy carrier perform this well in a while.

    FWIW, Tim (TMFMileHigh)

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