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Extra
Delta launches fare war
Other carriers match drastic fare cuts, and an already shaky industry worries some carriers can't survive a battle for passengers.
By Reuters
Delta Air Lines on Wednesday cut its highest fares by up to 50% and lowered fares for last-minute travel in thousands of U.S. markets. The airline also eliminated Saturday-night stay requirements in most markets. The prospect of an airfare war sent airline stocks sharply lower.
By Thursday, American Airlines (AMR, news, msgs), Northwest Airlines (NWAC, news, msgs) and US Airways (UAIRQ, news, msgs) had matched all or most of Delta's (DAL, news, msgs) cuts.
Analysts said other carriers will have to match Delta's cuts, forecasting a gloomy year for the airline industry.
"We believe the whole airline industry will now have to move in this direction; this will likely hurt revenue in the short run but could be beneficial in the long run,'' Calyon Securities analyst Ray Neidl said.
Merrill Lynch analyst Michael Linenberg said industry-wide fare cuts could cost airlines as much as $3 billion a year.
Delta, the nation's No. 3 airline, is capping one-way domestic economy fares at $499 and one-way first-class fares at $599 in an effort to compete with low-cost carriers.
"We view (discount airlines) JetBlue, Southwest and AirTran Airways as our principal competitors,'' Delta's Chief Marketing Officer Paul Matsen said. He also said the fare cuts will lower earnings in the short term.
A looming fare battle knocked the wind out of most airline shares Wednesday, and the damage continued Thursday. Delta stock alone had fallen by more than 17% by Thursday morning.
A rough patch
Record-high fuel prices over the past year have hurt airlines, and weak fares stemming from stiff competition have further pared earnings. Larger airlines such as Delta have been restructuring to cut costs.
US Airways, United Airlines (UALAQ, news, msgs) and ATA Holdings (ATAHQ, news, msgs) are in bankruptcy, while several other legacy carriers have been negotiating concession packages with their labor groups to stay afloat.
Delta narrowly escaped bankruptcy in November when its pilots ratified a contract that saved the airline $1 billion annually. "Any fare restructuring in which the average fare paid does not increase can only send an airline to bankruptcy court,'' Terry Trippler, an air fare pricing analyst, said on Wednesday.
Analysts expect tougher times ahead as carriers will have to match Delta's cuts. "We doubt Continental Airlines can maintain $970 one-way fares between Houston and Newark while Delta offers first class via Atlanta for $549,'' JP Morgan analyst Jamie Baker wrote in a research note.
Merrill Lynch's Linenberg cut his ratings on Delta, AMR (parent of American Airlines), Northwest Airlines and AirTran Holdings (AAI, news, msgs) and said lower fares could lead to the demise of US Airways.
Delta's changes, which eliminate mandatory Saturday night stays, apply to all U.S. routes except Alaska and Hawaii and are available for walk-up purchases.
Northwest Airlines, the No. 4 U.S. carrier, on Tuesday said fare cuts "would immediately, adversely and significantly affect industry revenue.''
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