Delta’s Costs Add Turbulence to Otherwise Smooth Flight

By: | at 10:23 AM | Air Cargo  

Shares of Delta Air Lines Inc. may have reached their cruising altitude for now.

The Atlanta-based carrier got investors excited last week when it said revenue from each seat flown a mile jumped 2.5 percent, another big boost following May’s 3.5 percent increase. The stock had soared 22 percent since the beginning of May.

But Thursday’s second-quarter results show that investors were too optimistic. It’s a positive development that airlines such as Delta have been able to keep raising flight fares, even amid a flood of negative headlines about travelers being treated poorly. However, the added revenue wasn’t enough to offset rising costs that again ate into Delta’s profit margin. Adjusted earnings of $1.64 a share missed the average analyst estimate by about 2 cents. Its shares dropped more than 2 percent to $54.17 apiece Thursday morning.

Analysts have been quite bullish, with price targets calling for Delta to surpass $60 a share, and before Thursday it looked as if the stock was well on its way there. But should other carriers’ results show a similar pattern—expenses offsetting any rebound in revenue—Delta and other airline shares may drift for a while.

There’s at least one big shareholder who probably won’t be scared off by the results, though, and that’s Warren Buffett’s Berkshire Hathaway Inc. Anticipating the return of the industry’s pricing power, he got back into airline stocks last year, just in time to ride their ascent. Berkshire is the biggest owner of Delta and its rival United Continental Holdings Inc., as well as a top shareholder in Southwest Airlines Co. and American Airlines Group Inc.

Even so, one has to wonder when or if Buffett or his investing lieutenants might call a top, or whether these are truly long-term holdings for Berkshire. Buffett’s letter to Berkshire shareholders this year notably said that while the company has some investments it has no intention of selling for the foreseeable future, it’s made no commitment to holding any of them forever.

Delta and its peers may hit some bumps, but should they be able to hold onto their pricing power—something industry consolidation has certainly aided—and get a handle on costs, then the small pullback will be just that.


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