Delta profit misses estimates as fuel costs weigh

ATLANTA (Reuters) - Delta Air Lines Inc (DAL.N) reported a lower-than-expected quarterly profit on Tuesday as fuel prices rose, and its shares fell more than 6 percent amid fresh concerns that rising oil could hamper the industry recovery.

The carrier said it expected 2011 to be profitable overall as fare increases and baggage fees aid revenue. But some analysts said Delta's operating margin forecast of 1 percent to 3 percent suggested a higher-than-expected loss for the first quarter.

"Demand right now is strong enough where the costs can be passed through at least to a certain degree," said Ray Neidl, senior aerospace specialist with Maxim Group. "Beyond that it does create some problems but the airlines are prepared to take actions."

Analysts currently expect a loss of 16 cents a share for Delta for the first period, according to Thomson Reuters I/B/E/S. The first quarter is typically the weakest period for airlines.

Shares of other airlines weakened, with industry leader United Continental Holdings Inc (UAL.N) down 2.6 percent, US Airways (LCC.N) off 4.4 percent and American parent AMR Corp AMR.N down 3.1 percent. The Arca Airline index fell .XAL was off 2.4 percent.

U.S. oil prices slipped on Tuesday but are nonetheless approaching $100 a barrel. In London, ICE Brent crude for March rose 36 cents to $97.79 a barrel.

"There's concern that oil prices are only going to go up from here," said ITG Investment Research analyst Matthew Jacob.

Industry revenues 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 to report fourth-quarter profits this week and next.

REVENUE, CAPACITY CONCERN

Yet fuel prices are not the only challenge for airlines. ITG analyst Jacob said revenue growth was starting to slow year-over-year as carriers face tougher 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 percent 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 said during its earnings conference call that it was prepared to change its capacity plans in the face of higher fuel. The carrier said fuel was the biggest issue it faced, with the potential to add an extra $1 billion to company costs over last year. Delta's total operating expense rose 4 percent, or $1.15 billion, in 2010.

"In the short term ..., we expect to be able to keep our March quarter margins flat year over year despite $350 million in higher fuel costs," Chief Executive Richard Anderson said.

Net income at Delta, the second-largest carrier behind United Continental, came to $19 million, or 2 cents a diluted share, in the fourth quarter. That compared with a year-earlier loss of $25 million, or 3 cents a share.

Excluding items such as merger costs, profit was 19 cents a share. Analysts on average expected 24 cents.

Winter storms hurt profit by $45 million as Delta halted flights. The carrier said storm effects would also hit first quarter results, adding that winter weather last week led it to cancel 4,000 flights in Atlanta, its biggest hub.

Operating revenue rose 14 percent to $7.79 billion, compared with $7.74 billion that analysts expected.

Quarterly 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 as aircraft were returned to service. Costs tied to contracts with feeder airlines rose 25 percent, Delta 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 nearly 6.4 percent, or 81 cents, at $11.94 in afternoon trading.

(Reporting by Karen Jacobs; Editing by Lisa Von Ahn and Dave Zimmerman)