Delta Hits Turbulence on Sequester Cuts

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Delta Air Lines (NYSE: DAL  ) stock is languishing on a generally upbeat day for the markets, down more than 7% late in the trading session. Delta had expected March to show a big improvement in revenue per seat-mile flown -- a key metric for airlines -- but sequester cuts and technical problems left the result short of forecasts. Revenue per seat-mile did grow 2% in March from a year earlier, but less than a month ago company officials had said they expected 4.5% to 5.5% growth.

One of the issues cited in today's announcement was a decline in last-minute bookings by government employees, which Delta thinks owes to the sequester. Expensive airline tickets are an easy item to cut, and with across-the-board spending cuts taking effect March 1, Delta took a hit this month.

But that wasn't Delta's only problem in March. The company pointed to "temporary inefficiencies" in determining what to charge for flights, which had customers grabbing either cheaper tickets from competitors or inexpensive tickets from Delta. The company may be able to gain some of this revenue back in coming months, so this is the least concerning point.

Good for competitors?
The question is whether Delta's loss is competitors' gain. Today, investors don't think so, judging by the decline in airline stocks. One analyst downgraded United Continental (NYSE: UAL  ) just yesterday because he thought higher costs would hurt the airline. The stock is down 4.3% today.

The merger of US Airways (UNKNOWN: LCC.DL  ) and American Airlines was supposed to lead to less competition and higher prices, but the latest data point doesn't seem to be supporting that thesis. U.S. Airways is down 4.6% as of the time of writing.

Investors should keep an eye on trends in revenue per seat mile over the next few months. Sequester pressure will subside, but long-term challenges that have always faced the airline industry, such as fuel costs and fierce price competition, will remain.

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Related Tickers

9/28/2016 11:25 AM
DAL $39.56 Up +0.35 +0.88%
Delta Air Lines CAPS Rating: ***
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US Airways Group CAPS Rating: *
UAL $50.99 Up +0.58 +1.15%
United Continental… CAPS Rating: **