Delta (DAL): The Noose Tightens Around The Airline Industry

All of the fuel-hedging, layoffs, capacity and route-cutting the airline industry did last year in an attempt to offset the rising price of fuel has gone for nothing. Delta (DAL) announced today that it would need to make more significant reductions in available seats and the process would cost many more people their jobs.

According to the AP, most of the $6 billion benefit that Delta got from its NWA merger and resulting capacity reductions will be washed away by falling revenue due to the global recession. Delta will chop its number of international seats by 15%.

The news is bad for Delta, but almost certainly worse for many of its competitors that did not pick up the economies of scale that Delta did by its takeover of Northwest.

Rising oil prices and falling passenger loads have started to hit the airline stocks over the last month. Delta’s shares are flat, but its peers, many of them with weaker balance sheets, have not been so fortunate. Shares in US Air (LCC) and Continental (CAL) are down more than 20%. United’s (UAUA) stock is off 17% and American’s (AMR) 12%.

The recession is likely to persist long enough that, coupled with the potential that oil could stay at or above $70 for the rest of the year, airlines might be back in the merger business. The success of the marriages is often debated. Mergers bring down labor costs but often at the expense of employee unrest and strikes. Merging reservation systems can take over a year and the process usually undermines customers service and sometimes serves as a catalyst for fliers to move to other carriers.

Otherwise, everything in the airline industry is fine.

Douglas A. McIntyre