by Josh Lew
Last updated: 2:15 PM ET, Thu July 7, 2016
Delta Air Lines announced that its revenue figures were not as positive as expected for the second quarter of the year. This has put its projections for growth and profits for 2016 in some doubt.
Revenue worse than expected
Delta, along with most major airlines in America, expected the important passenger revenue per seat mile (PRASM) figure to drop in the second quarter. (This is the number that investors and executives look at to see how much price control an airline has). However, its most optimistic projection was that the numbers would only drop by about 2.5 percent. The airline said that the worst case scenario would see the figures dropping by 4.5 percent.
However, yesterday Delta said that PRASM for the second quarter had dropped by a full five percent.
Recent changes were not enough
Analysts and airline executives, including Delta president Glen Hauenstein, have been saying that the worst is over and most markets are now starting to improve.
Judging by the Q2 revenue disappointment, these improvements have not yet started to take hold.
What will this mean? Delta and its peers will most likely continue to trim capacity so that it is more in line with demand. That could mean fewer flights on certain routes or it could mean that the airlines will drop some of their less lucrative routes altogether.
[READMORE] Read More: Delta Raises Fares While Southwest Lowers Them[/READMORE]
The slow and steady approach
Airlines will have to fix their revenue issues, but they seem to be doing so in a very methodical way despite the fact that investors are very worried about the short term. During the second quarter, the share prices for the stocks of all three legacy carriers dropped by more than 25 percent. Activist investors even launched an effort, that was partially successful, to take over the board of directors at United Airlines.
Airlines seem to be laying the groundwork for strategies that could help them gain control over pricing and revenue once again. For example, Delta and the other legacy carriers are segmenting their cabins so that fliers have more options as far as price on each flight. No frills "basic economy" fares might help to fill planes with frugal fliers while premium economy class (called Comfort Plus on Delta) and auctioned business class seats will help increase the overall revenue of a flight by attracting fliers who are willing to pay a little bit more than average.
Good news for fliers... but how long will low fares last?
The Q2 results are good news for fliers who are currently enjoying low fares on many routes. The traveler-friendly prices will continue for a while longer before airlines start inching prices up again by decreasing capacity.
However, as share prices continue to fall, airlines could start to feel the pressure from investors and begin to move more aggressively to raise fares and cut underperforming flights. Fliers will most likely be rooting for airlines to stick with their current strategy of incrementally lowering capacity so that it eventually becomes balanced with demand. The slow approach would mean that lower fares would stick around for a longer period of time.
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