Delta Air Lines, Inc. (NYSE:DAL) spooked the market by reporting a steep drop in unit revenue for last month, and the drop in DAL stock underscores the uncertainty surrounding the industry.
Delta Air Lines and the rest of the industry are facing number of headwinds, as cheaper fuel prices have some counterintuitive consequences.
Low fuel prices prompt airlines to boost capacity, which pressures air fares. Additionally, lower fuel costs lead to smaller fuel surcharges on international flights. That puts pressure on unit revenue, or Passenger Revenue per Available Seat Mile, a key industry measure.
Put that against the backdrop of a waning demand thanks to a sluggish global economy, Zika, terrorism, Brexit — you name it — and stocks like DAL are getting punished.
The latest beating came after Delta Air Lines said unit revenue fell 7% in July. Unit revenue measures the sales generated by a single seat per mile flown. It can be used and it’s been in steady decline across the industry.
Unfortunately, the declines at DAL appear to be accelerating based on the latest report. In the most recent quarter, PRASM fell 4.9%.
DAL Stock Is Still Grounded
The culprits for the shortfall remained pretty much the same: domestic yield weakness, the ongoing supply-demand imbalance in the Transatlantic, and headwinds from the company’s yen hedge positions.
The challenge for DAL, as well as peers, is that it’s tough to raise air fares when demand is less than robust. Although it has pledged to halt declines in unit revenue in the second half of the year. It appears the latest results have investors worried that this won’t happen until 2017.
DAL is down is now down nearly 30% for the year-to-date. Naturally, it’s going to get attention as a potential rebound play, but any hopes on that front are premature. Negative unit revenue is doing more to hurt airline stocks than any other metric.
It takes a good amount of time for the industry to rebuild unit revenue. If the inflection point is set for early 2017, that’s fine. But it means DAL stock is probably not a buy until Q4.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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