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UPDATE 3-Delta Air predicts rise in key revenue measure
January 12, 2017 / 1:39 PM / a year ago

UPDATE 3-Delta Air predicts rise in key revenue measure

(Recasts on revenue outlook, adds analyst comment, updates shares)

By Alana Wise

Jan 12 (Reuters) - Delta Air Lines Inc expects a closely watched revenue measure to rise for the first time in two years, although higher labor costs will weigh on its profits in 2017, the company said on Thursday.

Delta, in a news release, predicted a flat to 2 percent increase in the first quarter of 2017 in its passenger unit revenue, which measures sales relative to flight capacity, which would break a streak that has affected most of the U.S. industry.

While improved unit revenue is a positive sign for investors, the news was tempered by the airline’s forecast of a decline in its operating margin to 11 percent to 13 percent in the first quarter of 2017, compared with 18.5 percent in the same period of 2016.

“Delta provided a Q1 guide predicated on positive (unit revenue), a feat that would have been viewed as remarkable by last July’s standards, but current buy-side expectations were expecting as much,” JPMorgan analyst Jamie Baker said in a note.

Shares were down sector-wide in afternoon trading. Cheaper fares and increased competition have battered the U.S. industry for months.

Shares of Delta, the No. 2 carrier by passenger traffic, closed down 1 percent at $50.89.

The Atlanta-based company reported a 37 percent slip in fourth-quarter net income to $622 million and a 2.7 percent decline in fourth-quarter passenger unit revenue as the carrier added more seats available for purchase on its routes.

Contributing to that was a 30 percent pay raise for pilots by 2019 that Delta agreed to last year, the airline said.

Excluding special items, fourth-quarter earnings of 82 cents a share met analysts’ average estimates, according to Thomson Reuters I/B/E/S. They were down from $1.18 a share in the year-earlier period.

“We will remain conservative and keep our capacity growth in check until we see a further firming of these revenue trends in the near-term and longer-term, a return to our 17-19 percent operating margin target,” Delta Chief Executive Ed Bastian said in the statement.

Fourth-quarter operating revenue fell to $9.46 billion from $9.50 billion, slightly above analysts’ average estimate of $9.40 billion.

Delta’s results and reports from other major U.S. airlines suggest an improving unit revenue environment, according to CFRA Research analyst Jim Corridore.

“Capacity discipline is helping, coupled with improving demand. We note domestic remains stronger than international, and see international capacity cuts likely,” Corridore wrote in a research note. “We think valuations across the group are likely to expand in ‘17, on better unit revenue performance.” (Reporting by Alana Wise in New York; Additional reporting by Ankit Ajmera in Bengaluru and Jeffrey Dastin in New York; Editing by Bernadette Baum and Peter Cooney)

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