Airline Stocks Soar on Revenue Outlook

U.S. airline stocks rose sharply Wednesday as executives flagged an improving revenue outlook for the domestic market, combined with rising fuel costs, as providing more scope to boost ticket prices.

Shares in American Airlines Group Inc., Delta Air Lines Inc. and United Continental Holdings Inc. all gained more than 5% in morning trade on expectations that carriers would keep capacity growth in check and boost average fares and profits.

Investor sentiment has been battered over the past 18 months as a series of fare wars weighed on average ticket prices and overshadowed the cost-cutting and sale of ancillary perks and products that have helped airlines generate record profits.

Delta Chief Financial Officer Paul Jacobson led a parade of bullish comments about capacity and revenue trends from executives at an industry conference on Wednesday.

He said Delta would be the first of the three network carriers to report a positive year-over-year increase in unit revenue, a closely watched metric of how much an airline takes in for each passenger flown a mile. Negative unit revenue trends have been central to investor sentiment.

Mr. Jacobson pointed to an improving domestic fares environment that is been replicated in its Pacific and Latin American markets, though capacity additions on trans-Atlantic routes remained a challenge.

He said the tailwind to profits from lower fuel prices was over, and predicted that the fourth quarter of 2016 would be the first time in two years that airlines experienced a year-over-year rise in market fuel prices, excluding hedges.

Investors have remained wary of carriers diluting the benefits of cheaper fuel with pricier labor deals and expanded flying, but Mr. Jacobson said higher fuel "traditionally" allowed carriers to boost ticket prices and average revenue.

Delta shares were recently up 5.4% at $38.80, recouping most of the losses over the past month since the airline suffered a huge computer-system outage that grounded hundreds of flights. The shares are still down more than 20% year to date.

Atlanta-based Delta also said Wednesday that the outage would trim $150 million from its pretax profits in the third quarter and leave its unit revenue down around 7% from the same period a year earlier, instead of 4% to 6% decline previously forecast. Mr. Jacobson didn't say when Delta expected the metric to turn positive, but the No. 3 U.S. airline by traffic in July said it hoped that could occur by the end of this year.

Shares in American led the gains among the big network carriers, recently up 6% at $39.17. Robert Isom, the carrier's new president, laid out plans to boost revenue with more segmentation of its aircraft to attract fliers willing to pay different ticket prices.

Shares in United and Southwest Airlines Co. also gained, outpacing rises among the discount carriers such as Spirit Airlines Co. that have driven much of the capacity growth across the industry in recent months.

Southwest said this week that it expected to expand capacity by less than 4% next year compared with 2016, less than most analysts expected and a move that could give carriers more flexibility to boost fares as fuel prices increase.

Write to Doug Cameron at [e-mail]

Corrections & Amplifications: Delta Chief Financial Officer Paul Jacobson predicted that the fourth quarter of 2016 would be the first time in two years that airlines experienced a year-over-year rise in market fuel prices, excluding hedges. An earlier version of this article incorrectly stated the prediction was for the fourth quarter of 2017. (Sept. 7, 2016)

(END) Dow Jones Newswires

September 07, 2016 14:27 ET (18:27 GMT)

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