Fuel costs hit Delta profit; shares at new year low

The Delta airline logo is seen on a strap at JFK Airport in New York, July 30, 2008.

ATLANTA (Reuters) - Delta Air Lines Inc (DAL.N) fell short of Wall Street profit estimates as fuel costs grew at a higher rate than revenue, and its shares fell to a new year low.

Travel has picked up after the 2008/2009 downturn, but airlines are pressured by higher fuel costs and an uncertain global economy that could depress demand later this year.

Concerns about a fall slowdown and challenging outlook have hit airline stocks in the past week. On Wednesday, the Arca Airline index .XAL was off 2.3 percent as carriers such as American parent AMR Corp AMR.N and US Airways Group (LCC.N) also hit year lows amid a broad market sell-off.

"The market, especially with cyclicals like airlines, is just very nervous, and then pile on top of that the uncertainty with fuel prices," said Ray Neidl, senior aerospace sector analyst with Maxim Group.

Delta, the industry No. 2 behind United Continental Holdings (UAL.N), has invested in new airplane seats and better food and wine offerings to boost revenue and is also cutting non-fuel-related costs.

REDUCED FLYING

The airline is reducing flying in areas where revenue is not keeping up with fuel cost rises. It said on Wednesday that it would cut fourth-quarter capacity by 4 percent to 5 percent. Earlier this month it said it would end unprofitable service to some smaller U.S. cities such as Butte, Montana.

More than 2,000 Delta workers will be leaving under a voluntary exit program for which 55,000 employees were eligible, the airline said. The carrier is also consolidating U.S. facilities and retiring its least-fuel-efficient planes.

Delta said it expects a profit for the current quarter but still has a lot more work to do to lower costs.

"The challenge to the airlines right now is absorbing higher fuel costs," said Matthew Jacob, senior airlines analyst at ITG Investment Research.

"It's hard to overlook the silver lining that higher oil prices have on the industry at large in that it really forces the airlines to be more disciplined with costs and with capacity plans," he added.

Net income at Delta was $198 million, or 23 cents a share, for the second quarter, compared with $467 million, or 55 cents a share, a year earlier.

Excluding special items, Delta earned 43 cents a share, a penny short of analysts' average forecast, according to Thomson Reuters I/B/E/S.

Quarterly revenue rose 12 percent to $9.15 billion. Operating expenses rose 19 percent, with aircraft fuel and related costs up 36 percent.

Delta said its average fuel price for the second quarter was $3.22 a gallon, up 90 cents from a year earlier. It expects an average fuel cost of $3.20 a gallon for the current quarter.

Shares of Delta were down 5.6 percent at $7.57 in afternoon trading, below their year low of $7.78, after trading as low as $7.29 earlier in the session.

Other airlines were also weaker, with United Continental down 2.8 percent at $18.24 and discounter Southwest Airlines (LUV.N) off 1.2 percent at $10.00.

(Reporting by Karen Jacobs, editing by Maureen Bavdek, Dave Zimmerman)