April 14, 2016 / 11:32 AM / a year ago

Strong demand for Delta flights bodes well for U.S. rivals

Delta planes line up at their gates while on the tarmac of Salt Lake City International Airport in Utah in this September 28, 2013 file photo. REUTERS/Lucas Jackson

(Reuters) - Delta Air Lines Inc (DAL.N) on Thursday said demand for U.S. travel is steady and domestic fares are starting to rise for the first time in a year, allaying investor concerns and giving a boost to airline stocks Thursday.

Shares of Delta rose 1 percent, while rival United Continental Holdings Inc (UAL.N) gained 2 percent and American Airlines Group Inc (AAL.O) increased 3 percent.

Delta said a months-long decline in a closely-watched financial measure - revenue divided by all its plane seats and the miles it flies them - would stop falling this year, thanks to strong bookings and an easing of currency pressures for international flights. Where demand is weak, Delta said it would cut service if necessary.

Its incoming president, Glen Hauenstein, cautioned during a conference call Thursday that the turnaround in passenger unit revenue would come a few months later in 2016 than previously forecast. However, Wall Street had been braced for worse.

According to a recent survey by Wolfe Research analyst Hunter Keay, a third of airline investors polled believed Delta would simply fail to hit the unit revenue goal this year.

Delta forecast Thursday that passenger unit revenue would decline between 2.5 percent and 4.5 percent in the second quarter from a year ago. It dropped 4.6 percent in the first quarter.

“From here, we believe the first plausible case for (unit revenue) recovery can be made,” said JPMorgan analyst Jamie Baker in a note on Delta’s results.

Baker highlighted that U.S. airlines have made multi-city trips in the United States more expensive to book, and they are growing U.S. domestic capacity slower, therefore undercutting rivals less.

The top carriers have also raised U.S. domestic fares by $22 round-trip this year, according to FareCompare.com.

Delta executives also challenged forecasts that business travel was in a slump. Deutsche Bank analyst Michael Linenberg recently cut his rating of shares of Delta, United and American to a “hold” from “buy,” in part because a slowdown in U.S. corporate profits would hurt travel demand.

Hauenstein said business clients from healthcare to financial services had booked more travel on Delta during the first quarter, even though lower yields - a measure of average fares paid per mile per passenger - offset this.

“In our core European markets, the U.S. point of sale demand was strong and recovered quickly following the events in Brussels,” he added, referring to the March 22 attacks that closed the city’s main airport temporarily.

American and United, which report results next week, could face taller hurdles to improving unit revenue.

American and its code-share partners have the most flights to Brazil and Venezuela, where economic slowdowns and diving currencies have crushed travel demand. United is the biggest airline in Houston, where oil-industry companies have cut back spending on flights.

But Delta’s report suggests the rivals’ results may be better than investors expected, Sterne Agee CRT analyst Adam Hackel said. That Delta sees unit revenue improving in Brazil may have boosted American in particular, he said.

Delta said it nearly tripled profits in the just-ended first quarter to $1.03 billion, or $1.32 per diluted share, excluding changes to fuel hedges that have yet to settle. Analysts on average had expected $1.30 per share, according to Thomson Reuters I/B/E/S.

Reporting by Jeffrey Dastin in New York; Additional reporting by Joe White; Editing by Lisa Von Ahn, Bernard Orr

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