Delta CEO Plays Down Fare Hikes
Although
Delta Air Lines
(DAL) - Get Report
jumped back on the industry's fare-increase bandwagon, its top executive says such hikes are no cure-all in the face of skyrocketing oil prices.
"No matter how aggressive" the industry is with surcharges, it will not be able to cover rising fuel costs, said Gerald Grinstein, the airline's CEO, speaking at a Goldman Sachs investor conference. Frequent fare increases will likely only recover a "fraction" -- perhaps 25% -- of increased fuel expenses.
Delta reinstated a $5 one-way fare increase Tuesday just one day after rescinding it, keeping alive hopes the industry's latest attempt to offset fuel costs with higher prices will succeed. If it does, most U.S. airlines will have raised fares three times in about a month, in contrast to last year's failed attempts.
Although crude oil futures fell Wednesday to around $55 a barrel from last week's record highs, they remain lofty enough to punish the airline industry. Earlier this month, Delta's acknowledgement that its liquidity needs will be substantially higher if oil prices do not decline "significantly" caused its stock to tumble.
Grinstein said the airline expects to constantly be "bumping up" against liquidity issues in 2005 and 2006 and acknowledged that a key variable is fuel expenses. The airline is looking at other liquidity opportunities to provide a cushion that will get it through the next two years. Delta expects to turn cash flow-positive in 2007, he added.
Fuel isn't the only major challenge the airline faces, Grinstein noted. Pension obligations are also proving burdensome. The airline has been at the forefront of lobbying efforts to have Congress give the industry more time to make pension payments, and Grinstein said the response has been "very good." He expects lawmakers will introduce legislation stretching payments over 25 or 30 years in the next two weeks.
Even though Delta's liquidity is tight, Grinstein said the airline will likely meet required pension payments totaling $450 million this year and sees 2005 and 2006 payments as "manageable." He suggested, however, that "very significant" payments in 2007 and 2008 could prove troublesome.
Northwest
(NWAC)
and American Airlines' parent
AMR
(AMR)
also have pressed lawmakers to give them more time to meet pension obligations, arguing it would reduce the possibility they would have to pass obligations on to a federal pension insurer.
One recent move that has paid off for Delta is the airline's scheduling overhaul at its Atlanta hub, which spreads flights out over a longer time to reduce congestion. It also allows the airline to maximize its plane use and should deliver a $50 million benefit to the company this year and $150 million annually after that, according to Grinstein.
Delta shares were up 10 cents, or 2.3%, at $4.37, as most airline stocks gained on Wednesday.