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Delta Plan Shakes Up Industry

The airline's fare-restructuring plan triggers doom-and-gloom reaction.
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Delta Air Lines


wants to keep it simple, but its air fare-restructuring plan is weighing on airline stocks and eliciting predictions of even more revenue woes for the industry.

With a nationwide expansion of its SimpliFares program, formally announced Wednesday, the nation's third-largest airline will slash ticket prices as much as 50% as well as simplify its pricing structure.

The move could help Delta attract more customers -- the airline's chief executive said last month that its SimpliFares experiment in Cincinnati caused traffic there to increase by about one-third. But it most likely will intensify pricing pressure among U.S. airlines, which are having difficulty raising fares in the face of stiff competition, overcapacity and high fuel prices. The latest symptom of the problem was



announcement late Monday that December unit revenue slumped from a year ago.

Wall Street analysts said network airline revenue could decline significantly as a result of Delta's action, which smacks of a failed 1992 attempt by American Airlines' parent



to restructure fares. Michael Linenberg, a Merrill Lynch analyst, went so far as to cut his investment ratings on AMR and



to neutral from buy and on Delta to sell from neutral.

Linenberg also cut his rating on low-cost carrier

AirTran Holdings


to sell from neutral, citing increased competition in Atlanta, where both Delta and AirTran have major airport hubs. (Merrill Lynch does and seeks to do business with companies covered in its research reports.)

Airline shares slumped. The Amex Airline Index fell 4.1%. AMR was down 34 cents, or 3.4%, to $9.67; Delta dropped 31 cents, or 4.2%, to $7.00; and Northwest fell 98 cents, or 10.2%, to $8.66. AirTran was off 24 cents, or 2.4%, to $9.68.

In a news release, Delta said that it will cap one-way fares, including last-minute walk-up purchases, at $499 in economy class and $599 in first class. The airline is also eliminating the Saturday-night stay requirement, which has long annoyed travelers. There are restrictions, though. Customers must purchase the tickets on the airline's Web site,, or from a travel agent, and some tickets require a round-trip purchase.

The airline is in the midst of a dramatic restructuring program that includes significant layoffs and $1 billion in annual labor concessions from its pilots.

Delta CEO Gerald Grinstein last month raved about the Cincinnati experiment begun in August, citing it as an example of what network carriers could do to win back the trust of passengers who had flocked to low-cost carriers like

Southwest Airlines



JetBlue Airways


, which have appealed to travelers with simplified, low fares. Grinstein said Delta passengers were frustrated by paying more than $1,000 for a ticket only to find their in-flight neighbors paid a couple of hundred dollars for the same tickets, noting Delta's old fare structure had prompted many passengers to drive to other airports near Cincinnati where low-cost carriers operate, he added.

Rivals have already begun to voice criticism of the nationwide expansion, however. In a statement issued in response to news reports about the expansion, Northwest said a fare simplification would decrease industry revenue. "Northwest expects that such an initiative, if it becomes general, would immediately, adversely and significantly affect industry revenues."

In a research note, J.P. Morgan airline analyst Jamie Baker said: "The scope of Delta's changes is system-wide, with no apparent carve-outs for competing carriers. As such, we expect a significantly hostile industry response, coupled with material reductions to our 2005 estimates." (J.P. Morgan does and seeks to do business with the companies covered in its research reports.)

Delta is issuing a shot across the bow at other carriers' current fares, the analyst noted. "We doubt Continental can maintain $970 one-way fares between Houston and Newark while Delta offers first-class via Atlanta for $549," he wrote.

Revenue estimate revisions for U.S. airlines could be "steep," added Baker, at least for the first half of this year. "Long-term revenue prospects are likely improved, but 2006 is a long ways away," he wrote. "We can easily envision a 3% reduction in aggregate 2005 revenue production."

Delta's move could pummel

US Airways


, which is struggling to emerge from Chapter 11 bankruptcy protection. "One possible outcome of Delta's more aggressive fare structure could be the demise of US Airways, which overlaps with approximately 60% of Delta's domestic revenue," wrote Merrill Lynch's Linenberg. "If that were to occur, it would be a positive for the industry."