(DAL) Delta Air Lines to Fly Less in 2012

The second largest U.S. airline Delta Air Lines Inc. (DAL) plans to trim its capacity by 2–3% next year followed by this year’s capacity reductions. The cuts will be in markets where fare hikes are unable to deal with higher fuel prices.

The company’s flight reduction strategy is well in force even this year. Management reaffirmed 4–5% capacity cut by the fourth quarter of this year. Domestic capacity will be slashed by 1–3% and international capacity by 4–6%. In the trans-Atlantic route, Delta Air Lines with its partners, Air France KLM and Alitalia, will reduce capacity by 7–9% by the end of the year.

Delta Air Lines is lowering its capacity to counter overall cost, including fuel price inflation. Further, Delta is trying to reduce its non-fuel expense by the end of the year and expects it to bring to the past year level. The company is offering voluntary buyouts to 55,000 of its workers. Moreover, Delta reduced its facility costs at 170 airport locations and 10 cargo locations with the aim of saving more than $80 million annually.

The company will retire 140 less fuel-efficient planes from its fleet by the end of next year. Half of the expected fleet would be removed by this year, contributing $250 million in maintenance savings in the second half. Besides, Delta will not replace new planes until 2013.

Last month, the company agreed to buy 100 planes from Boeing Co (BA). The new planes will be delivered in 2013 and offers 15–20% extra fuel efficiency, keeping maintenance costs low.

Despite several initiatives taken to reduce fuel and maintenance cost, we believe Delta’s growth remains restricted due to high unionization, leveraged balance sheet and competitive threats from its larger peers such as United Continental Holdings Inc. (UAL), AMR Corporation (AMR) and Southwest Airlines Co. (LUV).

We are reiterating our long-term Neutral recommendation on Delta Air Lines. The stock retains the Zacks #3 (Hold) Rank for the short term.

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