Airlines get wings clipped after Delta guidance cut

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Airline stocks were cruising at a lower altitude on Monday after Delta Air Lines unexpectedly cut its guidance on a number of key metrics amid rising fuel prices and labour costs.

The US’s largest carrier by market value said it expect passenger revenue per available seat mile (PRASM) – a closely followed industry measure of pricing power – will be flat for the current quarter, which ends in March.

This compares to the 0-2 per cent growth range it had forecast just two months ago and prompted Delta shares to slide 3.2 per cent in early trading.

Operating margins are also expected to come in weaker for the March quarter as fare hikes fail to keep up with the pace of fuel price and wage increases. They are now seen to be in the 10 to 11 per cent range – down from the 11 to 13 per cent forecast it issued in January and below the 18.5 per cent recorded during the first quarter of last year.

Delta said in a presentation to investors on Monday:

For the March quarter, Delta is expecting pressures on margins as the pace of change in unit revenue will not match the cost impact of higher fuel prices and employee wage increases. This margin pressure is likely to peak in the March quarter, and the company expects margins to expand beginning in the second half of the year.

The guidance cuts weighed on the wider airline sector, with the benchmark NYSE Arca Airline index losing 2.5 per cent – the most since late January.

Within this, shares in Southwest Airline and United Continental were down 2.2 per cent and 4.2 per cent respectively while American Airlines dropped 4.2 per cent.

After reaping the benefits of lower fuel prices for the past few years, airlines are bracing for a tougher 2017 as market fuel prices continue to rise in tandem with the rebound in oil prices and companies struck a number of new labour agreements with their employees.

Employees and fuel are airlines’ two largest cost bases.

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