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Delta Traffic Report Panics Investors, Perhaps Unreasonably

ATLANTA ( TheStreet) -- If you woke up Monday thinking that plunging fuel prices would benefit airline shares, your day was no doubt disappointing.

Rather, investors chose to focus on Delta's (DAL - Get Report) disappointing May traffic report, which showed that revenue per available seat mile grew more slowly than expected. As a result, shares in Delta and US Airways (LCC) both fell 11.6%. United (UAL - Get Report) shares fell 7.6% and Southwest (LUV - Get Report) fell 3.8%.

It could well be, however, that panicky investors got it wrong, and that airline shares will rebound in the coming days. That would clearly reflect the conclusion reached by two analysts who issued reports late Monday.

In the May report, Delta said that PRASM grew 6%. A few weeks ago, Delta was guiding towards 7%. Delta explained the discrepancy by saying that "the variance to recent guidance is due primarily to the impact from competitor fare actions in the second half of the month." Furthermore, Delta said, "May's performance is strong when viewed in the context of an exceptional May performance in 2011." Moreover, the statement continued, "Delta expects strong peak season revenue performance."

This multi-faceted explanation failed to calm investors, who instead let the panic surrounding financial markets to seep into the airline sector despite declining fuel prices.

Analysts weren't buying it. In particular, JP Morgan analyst Jamie Baker questioned whether the Delta RASM shortfall had any relevance to the other carriers, who will report May traffic in the coming days.

"After digging through several weeks of individual fare filings, it appears that Southwest disproportionately targeted Atlanta with sharply lower, promotional walk-up fares" in a May 18 fare action, Baker wrote, in a report issued shortly before the close. Of 200-plus affected markets, he said, 46 involved Atlanta, which is Delta's largest hub. For instance, the one-way Atlanta-Baltimore sale fare was $79 compared with a walk-up fare of $304, while Atlanta-Los Angeles was $209 compared with a walk-up of $404. The sale fares applied to travel between May 18 and June 6.

"We view this largely as a Delta issue, not an industry issue," Baker wrote. In looking at other airline's hubs, he found 14 targeted Chicago markets, 11 Philadelphia markets, 10 Chicago markets, three Phoenix markets and two Dallas markets. As a result, Baker said, "We believe any extrapolation across other airline names is largely without merit, and would expect subsequent May (and June) traffic releases to assuage investor consternation."

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