By Karen Jacobs
ATLANTA (Reuters) - Delta Air Lines Inc
Rising fuel prices could add $1 billion to costs over last year, the company told staff in a memo.
"There's concern that oil prices are only going to go up from here, and there's not really much that the airlines can do to offset that," said ITG Investment Research analyst Matthew Jacob.
Oil prices slipped on Tuesday but are nonetheless approaching $100 a barrel. Last week, the front-month Brent contract touched $99.20, the highest price since October 2008.
"Industrywide fare increases, combined with growth in Delta's ancillary products and services, will provide a more long-term, revenue-based solution to addressing the high fuel environment," Delta President Ed Bastain said in a statement.
U.S. airlines' revenue and profit have improved in the past year, recovering from the recession that sapped corporate and consumer demand for air travel.
Analysts expect other carriers, such as United Continental, US Airways
Delta, the second-largest carrier behind United Continental Holdings Inc
Excluding items such as merger-related costs, profit was 19 cents a share. Analysts on average expected 24 cents, according to Thomson Reuters I/B/E/S.
Delta had warned earlier this month that flight cancellations due to snow would hurt profit.
Operating revenue rose 14 percent to $7.79 billion, compared with $7.74 billion that analysts expected.
Operating expenses increased 9 percent, or $644 million. Fuel costs rose 13 percent to $1.93 billion, and plane maintenance expenses were up 39 percent at $395 million. Costs tied to contracts with feeder airlines rose 25 percent, Delta said.
REVENUE, CAPACITY CONCERN
But as fuel prices rose, ITG analyst Jacob said, revenue growth rates were starting to slow as airlines bump up against tougher year-earlier comparisons.
He also expressed concern about plans by airlines to increase capacity this year. Capacity cuts a couple of years ago helped airlines bounce back from the downturn, Jacob added.
For example, Delta said its system capacity would rise 5 to 7 percent in the current first quarter from a year earlier, mainly because of planned international increases.
"Investors are starting to get a little bit nervous about the industry's overall ability to manage the capacity properly and not grow too quickly and put more pressure on recovery," Jacob said.
Delta has cut debt, added passenger amenities such as fully reclining seats, and expanded service to higher-growth markets since it bought Northwest Airlines in 2008.
Shares of Delta were down 2.4 percent at $12.45 in morning trading as other airline stocks weakened. The Arca Airline index <.XAL> was off 1.3 percent.
(Reporting by Karen Jacobs; Editing by Lisa Von Ahn and Dave Zimmerman)
