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Delta: Ready for takeoff?
Stock Spotlight: Reviving a debt-laden airline won't be easy, fare cuts may be just the beginning.
January 17, 2005: 11:10 AM EST
By Joseph Lee, CNN/Money staff writer

NEW YORK (CNN/Money) - Delta Air Lines shocked the already turbulent airline industry a few weeks ago by slashing prices.

The nation's third-largest airline cut unrestricted domestic fares by up to 50 percent and eliminated Saturday night stay requirements. It also lowered its fee for changing a flight to $50, from $100.

Competitors, including AMR Corp. (Research)'s American Airlines, Continental (Research) and Northwest Airlines (Research), followed Delta's footsteps and unveiled similar moves the next day. United, which is owned by bankrupt UAL Corp. (Research), also said it will match the fare cuts in regions where it competes "head-to-head" against with Delta.

Some analysts said the fare moves could help Delta (Research). After all, the airline did report record sales on its Web site the day after the fare cuts were announced.

Still, most analysts said the lower fares could hurt revenue in the next few quarters. And Delta needs all the money it can get. The company, like other major U.S. carriers, has had trouble making money in recent years.

Plus, it has the added burden of more than $20 billion in debt. Delta continues to struggle with mounting pension obligations, a challenging labor environment and stiff competition from low-cost carriers, such as JetBlue (Research) and AirTran (Research).

Delta avoided filing for bankruptcy last fall after it gained $1 billion in pilot concessions and secured $1.1 billion new financing. But analysts believe that the company needs to do more to lower costs.

So far, Wall Street isn't happy with the latest airline price war. Shares of Delta have fallen more than 15 percent since announcing the fare cuts. But could this desperate move eventually cause Delta's stock to gain altitude?

Not a pretty Song

It's no secret that low-cost airlines such as Southwest (Research) and JetBlue are growing fast and reporting healthy profits. And that's coming at the expense of carriers like Delta.

In Delta's main hub of Atlanta, discount carrier AirTran has been taking market share from Delta by providing attractive options for business travelers who are willing to make connecting flights in order to save money.

That may be why Delta's latest price cuts focused mostly on business travel, analysts said.

But Delta has already tried to fight back against the low-cost carriers with its own discount airline, Song.

Management initially thought the new airline would help Delta by expanding its presence domestically, but analysts say that Song has not lived up to expectations.

Fuel for thought

It's always something with the airlines.

Delta finally saw traffic return to pre-Sept 11 levels by the end of last year. But at the same time, the company faced a new problem: hefty fuel costs as oil prices surged to record highs in 2004.

Some low-cost carriers, such as Southwest, were able to limit the harm through long-term contracts that lock in lower prices. But cash-strapped Delta was unable to do so.

That's not good news since every penny increase in the fuel price per gallon adds millions in dollars of costs for Delta.

To that end, the company is expected to report a whopping fourth quarter loss of $5.33 a share on Thursday, compared to a loss of $1.71 a share a year ago, even though analysts are predicting a revenue increase of 8 percent from the same period last year.

Some analysts believe that oil prices should fall in 2005. But the price of crude has spiked again recently, proving that fluctuating fuel costs will always be a wild card.

Skidding on the runway?

Despite the drastic moves made by Delta in the past six months, industry watchers still have mixed feelings about the stock. According to Thomson/First Call, three analysts think Delta is a "Buy" and two have it at a "Hold." Two analysts even have it at that rarest of Wall Street ratings: a "Sell."

The company is also not expected to make money any time soon, with analysts forecasting a loss of $5.35 a share per year in 2005. That would be the company's fifth consecutive year of losses.

Do you agree with our take on Delta's stock?

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Sure, Delta's price cuts have boosted customer traffic during the first week with the new prices. And one analyst pointed out that if the resulting industry price war forces one of the airlines out of business, it may actually help Delta survive. Most analysts agree that one of the biggest problems facing the industry is excess capacity.

Still, price wars typically do more harm than good. And even though Delta's stock has taken a tumble lately, it is still up more than 120 percent from its October low-point when it was still facing an imminent bankruptcy threat. That suggests that there's a lot more downside possible for Delta's stock.

So our advice would be to take advantage of Delta's fare cuts if you can and take a trip somewhere. But don't hop on board the stock. Shares are likely to face a lot of turbulence for a while.  Top of page

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