Updated from 10:56 a.m. EST

Delta Air Lines ( DAL) shares plunged nearly 12%, after the carrier warned first-quarter losses will be deeper than expected partly because of the high price of oil, a troubling sign that the airline recovery may have stalled out during the seasonally slow winter months.

In a filing with the Securities and Exchange Commission, the nation's third-largest carrier said it expects a net loss of about $400 million, up from its previous forecast of $300 million to $350 million, implying a loss of around $3.25 a share. Analysts expect Delta to lose about $307.5 million, or $2.51 a share, in the first quarter, according to Thomson One Analytics.

Delta's Friday filing prompted a negative reaction from Wall Street, with a flurry of brokerages dropping their earnings estimates and investors dumping shares. By midday, Delta shares were off $1.05, or 11.9%, to $7.79, on 5.1 million shares traded, well above its average daily volume. The downdraft pressured other airlines as well, most of which are coming off solid but unspectacular results for January and February. The Amex Airline index was off 5.4%.

Delta, which is struggling to cut costs, including wage concessions from its pilot union, attributed the move to higher fuel prices and "continued pressure on passenger revenue," and said the situation further illustrates "Delta's critical need to reduce costs to a competitive level for the long term."

Indeed, Delta's comments highlight the pressing concerns the company needs to address in a restructuring plan it hopes to complete by July, which includes a 30% pay cut for unionized pilots. But because the pilots' contract does not expire until May 2005, unlike its rivals, Delta may have to wait a year to cut labor costs.

"Disappointment is nothing new for a carrier with labor concerns. All eyes are on the pilots at Delta and Friday's warning actually strengthens management's argument that Delta's current cost structure is unacceptable," said Jamie Baker, airline analyst at J.P. Morgan. "The situation will likely worsen before showing any signs of progress."


Oil and the Airlines
Fuel costs are the second-largest expense that airlines have, which creates tremendous volatility for airline earnings, especially at legacy carriers who have not hedged the price of oil.
Carrier Morgan Stanley EPS Estimate at Price of Oil Per Barrel
$28/bbl $30/bbl $32/bbl $34/bbl* $36/bbl $38/bbl
American $2.36 $1.34 $0.31 -$0.70 -$1.74 -$2.77
Continental 0.35 -0.41 -1.18 -1.94 -2.70 -3.46
Delta -4.71 -5.23 -5.74 -6.30 -6.77 -7.28
Northwest -0.86 -2.02 -3.17 -4.40 -5.49 -6.64
AirTran 0.67 0.62 0.57 0.52 0.46 0.41
Frontier 0.86 0.74 0.63 0.53 0.40 0.28
JetBlue 0.89 0.84 0.80 0.76 0.72 0.68
Southwest 0.51 0.50 0.49 0.48 0.47 0.46
* -- Current Morgan Stanley EPS estimates assume $34/bbl. Source: Morgan Stanley Research.

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