Delta, Southwest Stocks Hit Turbulence Over Capacity Concerns

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DAL: Delta Air Lines logo
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Delta Air Lines

The Global Transportation Conference 2012 organized by Bank of America Merrill Lynch unveiled surprising news from Delta Air Lines (NYSE:DAL) as it raised its capacity reduction plans to 3-4% from the earlier forecast of 2-3% for 2012. Southwest Airlines also deferred the procurement of 30 Boeing 737-800 jetliners that were scheduled for delivery over the next two years. The revised capacity caution plans are being pushed due to growing concerns on the Euro-zone crises which is weakening Euro and rising operational costs from fuel commitments. Capping the expansion plans fueled uncertainty over the performance of the airline sector and most of the airlines took a nosedive. Major players including Delta, US Airways (NYSE:LCC), JetBlue Airways (NYSE:JBLU), and United Continental (NYSE:UAL) tanked more than 7% on Thursday over grim profitability outlook in the near term.

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Delta’s initiative of early retirement program for employees registered 2000 employees which is expected to generate savings of $120 million (at $60,000 per employee). The rising foreign currency risk with weakening Euro has forced Delta to exercise a 5% capacity reduction across the Trans-Atlantic region this year. The leading carrier is also planning a 1-2% capacity cut in the Pacific markets as well. Overall, this capacity discipline exercise is expected to decrease the ASMs (Available Seat Miles) by 3-4%. The ongoing cost cutting exercise is affecting the airline’s growth prospects in the coming years. As Trefis market share estimates are calculated based on ASMs, this would dent the international market share of the carrier thereby affecting the top-line.

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Southwest Airlines also announced its plans to push back orders for 30 B737-800 aircraft by four years. The airline expects to trim its capital expenditures till 2014 by $1 billion through this deferment. The carrier is only accepting delivery of 29 aircraft to replace old fleet with fuel efficient ones, which doesn’t add much to the overall capacity. In a grim macroeconomic environment, these airlines are preserving cash outflows to be able to handle the ongoing financial crisis and improve their returns for the shareholders in the short-term. While the airlines don’t seem to have better alternatives, it does raise concerns over their long-term expansion plans.

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