The legacy airlines -- Delta Air Lines , American Airlines , and United Continental -- have faced significant revenue headwinds this year. The strong dollar, falling international fuel surcharges, and rapid capacity growth in some domestic markets combined to drive down unit revenue at all three carriers.
U.S. legacy carriers have faced steep unit revenue declines in 2015. Photo: American Airlines.
Delta Air Lines has been the most proactive about cutting capacity to reverse the weak revenue trend. Last month's terrorist attacks in Paris threatened to derail Delta's momentum, though, by stifling demand.
That outcome doesn't seem to have been the case. In fact, Delta is on pace to reach the top end of its original revenue guidance range this quarter. This performance indicates that the Paris attacks have had little to no impact on travel demand.
Unit revenue declines moderatingIn the second and third quarters, Delta Air Lines' passenger unit revenue declined 4.6% and 4.9% year over year, respectively. To stabilize unit revenue, Delta implemented steep cuts to its international capacity for its fall schedule.
In October, Delta projected that its Q4 passenger unit revenue would decline 2.5% to 4.5%, which would mark a solid sequential improvement. Within a few weeks, that forecast seemed quite conservative; in early November, Delta reported that its October passenger unit revenue had decreased just 1% year over year. This strong performance made it seem likely that Delta would meet or exceed the high end of its revenue guidance.
However, the terrorist attacks that struck Paris on Nov. 13 made many investors nervous. It seemed plausible that people would dramatically cut back on travel because of fear about potential follow-on attacks.
The Paris terrorist attacks threatened Delta's revenue recovery. Photo: The Motley Fool.
A demand interruption like this would primarily affect Delta, American, and United rather than smaller airlines, which tend to be U.S.-focused. Delta was in a particularly vulnerable position because it has a small hub in Paris and it participates in a trans-Atlantic joint venture with Air France.
No immediate impact from ParisSo far, it appears these worries were blown out of proportion. Last week, Delta reported that its passenger unit revenue increased 1.5% year over year in November, lifted by a shift in the timing of Thanksgiving relative to the end of the month. It also confirmed that unit revenue for the fourth quarter would be near the high end of its original guidance (i.e., down about 2.5%).
This guidance implies that Delta will post a mid- to high-single-digit passenger unit revenue decline in December. That's not a cause for concern, though; it merely reflects the impact of two calendar effects.
First, the shift in the timing of Thanksgiving that benefited Delta's November results will have a corresponding negative impact on December. Additionally, the Christmas travel season will be more compressed this year. With Christmas falling on a Friday rather than a Thursday, travelers are less likely to take that whole week off.
Good news for American and United, tooDelta's improving unit revenue trajectory is also good news for American Airlines and United Continental investors. They have less capacity deployed in Paris than Delta does, so if the terrorist attacks didn't appreciably affect Delta's unit revenue, American and United aren't likely to see a noticeable impact, either.
More broadly, Delta's rapidly improving unit revenue trajectory is a sign that American Airlines and United Continental should also be able to stabilize unit revenue in the next few quarters. However, to do so, they may need to adopt Delta's more aggressive approach to capacity management.
The article Delta Air Lines, Inc. Soars: What Terrorist Attacks? originally appeared on Fool.com.
Adam Levine-Weinberg owns shares of United Continental Holdings, and is long January 2017 $40 calls on Delta Air Lines, and long January 2017 $30 calls on American Airlines Group. The Motley Fool is long January 2017 $35 calls on American Airlines Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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