Delta Air Lines' weak second quarter unit revenue guidance provides new fuel to concerns that growth in the domestic US market is heating up too quickly.
At least three Wall Street analysts said in reports on 2 June that they believe or anticipate capacity growth reductions from the Atlanta-based carrier – potentially announced as soon as 4 June at the Deutsche Bank Global Global Industrials and Basic Materials conference – as a result of the lower guidance and see the potential for industrywide capacity growth reductions.
“We believe domestic capacity reductions are likely,” writes Darryl Genovesi, an analyst at UBS, on the Delta guidance. “Domestic demand looks pretty flat for the industry as far out as we can see [through July].”
Delta anticipates a 4% to 5% drop in passenger revenue per available seat mile (PRASM) in the second quarter following a 5.5% drop in May and a 3.5% drop in April. It previously guided a 3% to 4% decrease.
The airline forecasts a 3% to 4% increase in domestic capacity during the quarter.
This is not the first time that concerns have been raised about US capacity growth. While executives at the mainline carriers have repeatedly cited a need to keep capacity increases at or below economic growth, not everyone is walking the talk.
Southwest Airlines is growing the most of any US carrier in absolute terms, with capacity expected to be up about 8% at the largest domestic airline by passenger numbers this year. Much of this is driven by the addition of dozens of new nonstops from Dallas Love Field since restrictions on the airport were lifted in October 2014.
“[Delta] cited softer close-in domestic business yields for the cut today, which we believe is pervasive throughout the network but tied closely to extremely aggressive competitive behavior in Dallas, which is spreading like a cancer through the US system,” says Hunter Keay, an analyst with Wolfe Research, referring to Southwest in all but name in a report today.
Dallas-based Southwest chief executive Gary Kelly said on Bloomberg on 1 June that due to weaker than expected demand they are more likely going to grow about 7% in 2015.
“We don't want to grow 8%, we're not going to grow 8% and we can easily trim the schedule to stick to 7%,” he said.
Concerns about capacity growth are not limited to Wall Street.
“In 2015, domestically, capacity is going to be up 5%, 6% this year,” said Scott Kirby, president of American Airlines, on 8 May. “GDP [gross domestic product] is going to grow much less than that [and] industry RASM [revenue per available seat mile] is going to be down, even domestically… I think most people define ‘capacity discipline’ as supply aligned with demand – it’s not aligned in 2015.”
He attributed the growth to low oil prices.
Brent crude stood at $64.89 per barrel on the morning of 3 June, Bloomberg Markets shows. This is down 40.4% from $108.87 per barrel on 3 June 2014.
Kirby’s comments came a few weeks after Fort Worth, Texas-based American reduced its 2015 full year system capacity guidance by 0.5 points to a roughly 2% increase.
However, the cuts were not enough to stave off a downgrade to neutral by Bank of America Merrill Lynch analyst Andrew Didora. He says that American is the “most exposed to the capacity concerns that have arisen” in the domestic market and cites Southwest’s rapid expansion out of Dallas Love, the impact of which he does not expect to abate until the first quarter of 2016.
Delta anticipates a domestic capacity increase of about 3% in 2015 and United Airlines a system capacity increase of 1% to 2%.
Chicago-based United is also presenting at the Deutsche Bank conference and could update its capacity guidance there as well.
Smaller US carriers continue to plan significant growth. Alaska Airlines plans to increase capacity by roughly 10%, Allegiant Air by 15% to 18%, JetBlue Airways by 7% to 9% and Spirit Airlines by roughly 30.7% this year.
Source: Cirium Dashboard
