Delta fare warning sends airline stocks lower

Major US airline stocks fell sharply Thursday after Delta Air Lines warned about weaker than expected sales ...

Posted: Jan 3, 2019 4:16 PM
Updated: Jan 3, 2019 4:16 PM

Major US airline stocks fell sharply Thursday after Delta Air Lines warned about weaker than expected sales and fares at the end of 2018.

Delta (DAL) shares tumbled 8% on the revenue guidance.

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The airline said it had been anticipating higher fares from business travelers making last-minute reservations in December, but those reservations didn't happen.

It was the second time in the last two months that Delta has lowered its revenue guidance. Delta said it expects earnings to come in at $1.25 - $1.30 a share, which remains at the high end of its previous outlook.

Still the revenue guidance spooked investors across the sector.

Shares of American (AAL), the largest airline, also plunged 8%, and United Continental (UAL) shares fell 5%. Southwest (LUV) shares were down 3%.

"Given when Christmas fell this year there was some hope business travel would stay strong through December 21, and that appears not to have happened for Delta," said Helane Becker, an airline analyst with Cowen, in a note to clients Thursday.

Becker said airline stocks fell because Delta's guidance offered another sign that the sector could be about to be hit by broader, global economic weakness.

"If you look at all the geopolitical issues affecting the world this year, the slowdown in China, Brexit in Europe, and what all of that means for the US economy, there's a lot of uncertainty. And the airlines have to deal with all of that," she told CNN Business.

Some good news for airline earnings, at least in the short-term, comes from the recent decline in oil prices. Delta said fuel costs in the fourth quarter were about 10 cents per gallon cheaper than it had previously expected. Fuel is a major expense for airlines.

But Becker said even that can cause some problems for the sector, since lower oil can prompt airlines to add more flights, which in turn leads to more competition and lower fares.

"Most of the airlines are hesitant to bring back much capacity in first half of 2019 because they don't know how long oil will stay this low," she said. "But if it stays here through the summer, you might see more capacity in the second half of the year."

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