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U.S. Markets

Delta, Southwest outlooks lift U.S. airline stocks

(Reuters) - U.S. airline stocks jumped on Wednesday after Delta Air Lines Inc DAL.N said sales trends were improving and Southwest Airlines Co LUV.N said it would slow its breakneck growth of flights in 2017, giving investors hope that the industry could recover from a revenue rut.

Passengers check in at a counter of Delta Air Lines in Mexico City, Mexico, August 8, 2016. REUTERS/Ginnette Riquelme/File Photo

Delta Chief Financial Officer Paul Jacobson said on a conference call with investors that the airline expected a $150 million drop in pretax income due to a power outage that shut down computer systems in August. The incident forced Delta to cancel 2,300 flights over three days and highlighted airlines’ fragile technology infrastructure.

Delta, the No. 2 U.S. airline by passenger traffic, now expects an operating profit margin of 18 percent to 19 percent in the third quarter, compared with a prior outlook of 19 percent to 21 percent. However, Jacobson said Delta’s underlying performance was on track.

“This has been a challenging quarter... but we do have a lot of momentum,” Jacobson said. “We see a lot of signs, reasons to be optimistic.”

The Atlanta-based airline has not canceled a single flight in the past 10 days, Jacobson said. Domestic unit revenue, a closely watched measure that compares sales to flight capacity, also showed “solid improvement” as fall schedules took effect, the company said in a regulatory filing.

The airline said capacity growth in the United States, its biggest market, would slow to 2.5 percent in the fourth quarter from 5.7 percent in the first half of the year. The fewer seats airlines offer, the more likely they are to avoid deep discounts to fill them.

For months, new flights as well as attacks from Paris to Istanbul have forced airlines to sell cheaper tickets, hurting their unit revenue.

Southwest, which has ramped up flights from Dallas and contributed to rivals’ woes, on Wednesday said it expected capacity to rise less than 4 percent in 2017, compared with anticipated growth of 5 percent to 6 percent this year.

“The data point should ease some concerns that elevated growth from Southwest next year could further pressure domestic pricing trends,” Stifel analyst Joseph DeNardi said in a research note.

Delta rose nearly 5 percent in early afternoon trading, while Southwest was up more than 4 percent.

Shares of American Airlines Group Inc AAL.O and United Continental Holdings Inc UAL.N, which compete head-to-head with Southwest on many routes, each rose more than 5 percent.

Reporting by Jeffrey Dastin in New York; Editing by Lisa Von Ahn and Joseph White

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