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) -- Airline shares were falling Tuesday after



, the first carrier to report earnings, missed estimates.

Rising fuel prices cost Delta about $350 million and underscored the question of whether the airline industry, expected to produce a $4 billion to $5 billion profit in 2010, can stay ahead of a historically destructive equation in which it cannot raise ticket prices rapidly enough to match fuel cost increases. Delta earned 19 cents a share, compared with

a consensus estimate of 24 cents.


Shortly after midday, Delta shares were trading down 73 cents to $12.02, down nearly 6%. Other loss leaders were

US Airways


, down 49 cents to $10.30 and



, down 27 cents to $6.53 following its

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December traffic report.

During 2010, Delta shares gained 12%, while the

Amex Airline Index


gained 43%.

Despite fuel, Delta executives forecast a 2011 profit and said a key goal is to gain an investment grade rating. To a degree, that reflects that goal that




Chris Liddell articulated

at the Detroit Auto Show last week. But investors seem more willing to reward GM for balance sheet progress than to reward Delta.

"Our goal is to get to investment grade," said CEO Richard Anderson during the earnings conference call, adding that "a reduction of debt to investment grade and stable employee relations should engender a higher multiple." At year-end net debt stood at $15 billion, down $2 billion from a year earlier. CFO Ed Bastian said the goal is net debt of $10 billion by the end of 2012.

Currently, Standard & Poor's rates Delta a B with a stable outlook. In a November report, analyst Betsy Snyder said "we do not expect to revise the ratings in the next year." She said an upgrade could follow continued strong earnings and debt reduction as well as a favorable ratio of cash flow to debt; a downgrade could follow adverse industry conditions or a decline in unrestricted liquidity to below $3.5 billion on a sustained basis.

Looking ahead, Bastian said that January unit revenues are about 6% ahead of last year's level, while corporate revenue is up 23%. In general, he said, industry fare increases appear to be holding, noting "the benefit of these actions should be seen in revenues for the coming months." However, January flight cancellations due to weather reduced income by $30 million, as a $40 million revenue decrease was partially offset by $10 million in cost savings. Delta currently plans a 1% to 3% system capacity increase in 2011, but Bastian said that number may well be scaled back.

Nevertheless, JP Morgan analyst Jamie Baker, in a report written before the earnings call, said that not only did Delta miss first quarter estimates, but also that its first quarter guidance was "unremarkable." He projected a first quarter loss of 10 cents. Analysts surveyed by Thomson Reuters estimate a loss of 16 cents. Baker said the latest round of airline fare increases may not stick and that "headlines related to such could potentially weigh on equities." Baker rates Delta at overweight with a price target of $18.

Meanwhile, following the earnings call, S&P airline equities analyst Jim Corridore reiterated a buy rating and a price target of $16. "We currently expect DAL to offset higher jet fuel costs with revenue growth, but we see DAL's capacity growth plans as very aggressive, which is a risk," Corridore wrote. "We were impressed with DAL's debt reduction efforts which should drive significant reductions in interest expense in '11."

-- Written by Ted Reed in Charlotte, N.C.

>To contact the writer of this article, click here:

Ted Reed

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