Delta Faces Economic Turbulence

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Delta Air Lines (NYS: DAL) , the world's second-largest carrier, saw shares plummet after posting a quarterly profit that fell below analysts' expectations. This was primarily due to high jet fuel costs that wiped out the benefits of fare hikes. Let's take a closer, Foolish look at the numbers to see what happened.

The numbers
While sales increased by 9.7% to $9.8 billion, the cost to fly each available seat mile climbed 13%.

The airline saw its fuel expenses surge 42% to $2.9 billion in the third quarter. Earnings apart from a few items slid 18% to $765 million, or $0.91 a share.

Delta is not alone in its misery. The industry as a whole is being dragged down by crude oil prices that have soared to 12-week highs.

Turbulent times for an industry
The parent company of American Airlines, AMR (NYS: AMR) , just recently came out with a $162 million net loss, worse than analyst expectations.

Alaska Air (NYS: ALK) saw an increase in third-quarter revenue, but its profits were down 37% largely due to noncash fuel-related hedging losses. Southwest Airlines  (NYS: LUV) also experienced hedging-related losses due to large noncash mark-downs against its fuel hedge contracts that would mature in the future. Nevertheless, Southwest managed to post a profit of $122 million that beat expectations.

In addition to raising ticket prices, Delta has tackled higher fuel prices in a number of other ways. It cut staff, decreased flights to less-profitable destinations, and consolidated facilities to cut costs.

In the eye of the storm
The bleak economic outlook has shown its negative effects on airline companies worldwide. Businesses and consumers alike have begun to slash travel-related expenses because of a sluggish economy and fears of another recession.

Overall, softening demand for tickets in August and September potentially hints at lower bookings for airlines mainly because consumer confidence has taken a beating.

To top that, cargo shipments through aircrafts are sliding, signaling weakening worldwide trade and worsening economic conditions.

Cloudy with a chance of recession
On the back of ever more depressing forecasts for the economy, it seems that investors are losing faith in the airline sector as a whole.

Shares of airline companies have been severely beaten down in recent months, especially AMR. The Fort Worth, Texas-based company may still be forced to file for Chapter 11 bankruptcy.

Apart from all these depressing statistics, one potential silver lining for airline companies is that many believe that sagging demand for oil will translate into lower jet fuel prices. However, the International Air Transport Association has expressed skepticism. According to it, even though a weak economic environment is sinking demand for oil, supply-related issues and speculative demand for such commodities is thwarting a significant decline in prices. So it seems that airline companies have landed between a rock and a hard place.

The Foolish bottom line
I feel that the airline industry is likely to see cloudy skies in the coming months as consumers cut travel and big businesses also tighten their belts. Unless there is some sort of improvement in economic conditions, I'm going to stay away from this sector. Until then, feel free to add Delta or the rest of the industry to a free stock watchlist so you can stay up to speed:

  • To add Delta Airlines to your watchlist, click here.
  • To add AMR Corporation to your watchlist, click here.
  • To add Alaska Air to your watchlist, click here.
  • To add Southwest Airlines to your watchlist, click here.

At the time this article was published Keki Fatakia does not hold shares in any of the companies mentioned in this article.Motley Fool newsletter serviceshave recommended buying shares of Southwest Airlines. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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