You might think investors would be most concerned with overall airline profits, which remain high. But they're not. Instead, they're fretting about unit revenues.
Delta Air Lines reported Friday it lost about $100 million in revenue in August from its multi-day computer system meltdown, but for investors, that one-time hit is not the biggest concern.
Instead, investors are closely watching Delta’s passenger revenue per available seat mile, or PRASM, an industry metric measuring how much money an airline makes for every mile it flies. Delta said Friday its consolidated passenger revenue in August decreased 9.5 percent, on a year-over-year basis.
Delta is generally considered the most fiscally healthy U.S. global airline, and its revenue decrease suggests United Airlines and American Airlines may report similar issues soon. While overall profits are important, many investors monitor unit revenues, believing they are a strong proxy for measuring the industry’s health. They prefer to see year-over-year increases.
Delta said about two percentage points of the PRASM drop were fallout from the system failure, which forced the airline to cancel 2,300 flights between August 8 and 10. But the rest of the decrease came from issues unrelated to the failure, including lower U.S. ticket prices, and a supply-and-demand “imbalance” on trans-Atlantic routes. Delta also said it lost money from its hedge positions in the Japanese Yen.
In July, Delta had told investors it expected its third quarter passenger revenue would fall between 4 and 6 percent year-over-year. In a research note Friday, analyst Jamie Baker of J.P. Morgan said he expects Delta will revise its third quarter guide next week. However, Baker predicted Delta will report stronger revenues in September, partly due to “more favorable domestic capacity trends.” Many airlines have cut capacity for the fall to try to balance supply-and-demand.
Daniel McKenzie of Buckingham Research Group also said in a note Friday that Delta may soon report better unit revenues. He noted airlines are not discounting tickets as widely as they did several months ago.
“PRASM trends are set to improve sequentially through year-end which should drive improved sentiment and better stock performance,” McKenzie said.
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Tags: delta air lines
Photo credit: Delta Air Lines lost about $100 million in revenue from an August computer outage. Delta Air Lines