Most people likely don't want to invest an hour of their time listening to the earnings call of a company, unless you happen to own a large amount of equity in said company, or you're an analyst who follows that industry/company. However, there were a few key points in Delta Airlines' (DAL) earning call on October 20th that travelers (especially those who personally pay for their travel, either for work or personal) will likely want to pay attention to.
First, there was a lot of mention of the word "discipline." Now, for all our sakes, let's hope no airline tries to go down the path of corporal punishment for those travelers (and you know who you are) who refuse to quickly leave the aisle when boarding... The discipline being tossed around is around capacity. Over the past couple of years, domestic airline capacity has dropped, and it's not rebounding quickly. Delta is anticipating only a 1-3% increase in capacity to occur in 2011 over 2010 levels. 2010 levels are still at least 10% below 2007 levels, before demand and the economy went to hell.
What does "discipline" mean to air travelers? It means less airlines will be taking a marketshare grabbing position. Sure, there will be markets of focus, and fare sales will still happen, but the feeling portrayed by Delta on the call (and reflected by the analyst questions, thus confirming this is a common theme in the industry) is that the idea now is not to grow at the cost of profits, but maintain the relative status quo, compete where you need to, and allow some profit to build up. In Delta's case, their stated objective is to pay down debt (looking for a 33% reduction in adjusted net debt (from $15B to $10B) by the end of 2012). The discipline reference is not a good sign for airfares. If there is no staunch competition going on (through fare reductions to grab share) then prices are either stable, or, more likely, will experience inflation over time.
Secondly, and important for those who normally (or are planning this year to) travel by air to visit family for the Holidays, was a reference to "holding inventory." Basically, Delta admitted that they are going to be holding back more seats this year on flights around the Holiday travel season, for "high value customers." In this case high value customers aren't frequent flyers (though those of us who are DO delivery high value for an airline over time). These are schmucks willing to pay higher airfares for seats on the plane during peak times. Delta is going to hold more seats (maybe than ever before?) and release them later, and charge more for them.
For holiday travelers this means think twice before betting on a drop in fare price as the travel date nears. If you see a seat on a flight you want, and the price is liveable, you might want to consider taking the plunge. The indication is that there may be more seats available tomorrow, but they'll all be at least as expensive as the ones available today, if not more.
The airlines are finally turning a profit again. And, for the most part, it's better than them needing a government bail out. But, we should be a little wary... As you know, investors always want more (and not just more good PR for saving consumers $$$), so if demand doesn't dramatically increase, and allow for safe re-expansion of capacity (and thus increase in overall revenue and margin) we'll likely see upward pressure on airfares in the next few years to come in order for airlines to continue to deliver expected profits.
No comments:
Post a Comment