Skip to Content

Delta And SouthWest Just Caused Airline Stocks to Take Off

September 7, 2016

DENVER, CO. - February 19, 2015: A Southwest Airlines flight gear up and on it's way at Denver International Airport. February 19, 2015 Denver, CO (Photo By Joe Amon/The Denver Post via Getty Images)Photograph by Joe Amon — Denver Post via Getty Images

U.S. airline stocks jumped on Wednesday after Delta Air Lines (DAL) said sales trends were improving and Southwest Airlines (LUV) said it would slow its breakneck growth of flights in 2017, giving investors hope that the industry could recover from a revenue rut.

Delta Chief Financial Officer Paul Jacobson said on a conference call with investors that the airline expected a $150 million drop in pretax income due to a power outage that shut down computer systems in August. The incident forced Delta to cancel 2,300 flights over three days and highlighted airlines’ fragile technology infrastructure.

Delta, the No. 2 U.S. airline by passenger traffic, now expects an operating profit margin of 18% to 19% in the third quarter, compared with a prior outlook of 19% to 21%. However, Jacobson said Delta’s underlying performance was on track.

“This has been a challenging quarter. . .but we do have a lot of momentum,” Jacobson said. “We see a lot of signs, reasons to be optimistic.”

The Atlanta-based airline has not canceled a single flight in the past 10 days, Jacobson said. Domestic unit revenue, a closely watched measure that compares sales to flight capacity, also showed “solid improvement” as fall schedules took effect, the company said in a regulatory filing.

The airline said capacity growth in the United States, its biggest market, would slow to 2.5% in the fourth quarter from 5.7% in the first half of the year. The fewer seats airlines offer, the more likely they are to avoid deep discounts to fill them.

For months, new flights as well as attacks from Paris to Istanbul have forced airlines to sell cheaper tickets, hurting their unit revenue.

Southwest, which has ramped up flights from Dallas and contributed to rivals’ woes, on Wednesday said it expected capacity to rise less than 4% in 2017, compared with anticipated growth of 5 percent to 6 percent this year.

“The data point should ease some concerns that elevated growth from Southwest next year could further pressure domestic pricing trends,” Stifel analyst Joseph DeNardi said in a research note.

Delta’s shares rose nearly 5% in early afternoon trading, while Southwest was up more than 4 percent.

Shares of American Airlines Group (AAL) and United Continental Holdings (UAL), which compete head-to-head with Southwest on many routes, each rose more than 5%.