NEW YORK (TheStreet) -- Fresh from hounding JetBlue (JBLU - Get Report) CEO Dave Barger out of a job because the carrier provides too many luxuries to its coach-fare passengers, some Wall Street analysts have turned their sights on Delta (DAL - Get Report) .
Delta's transgression, they say, is adding too much capacity at a time when "capacity discipline," strongly encouraged by Wall Street, has been a key factor in the airline industry's transformation into a more profitable, less cyclical, investment-worthy business.
Ironically, Delta has been a leader in this effort. But Delta's third quarter earnings call on Thursday became a battleground, leading an apparently irritated CEO Richard Anderson to declare: "We will not discuss pricing and we will not discuss capacity among competitors on these calls today or in the future, because it is not appropriate.
"And it is not appropriate for the analyst community to be engaging in what forward capacity and pricing decisions are at Delta," Anderson added, according to this transcript.
The discussion of Delta capacity expansion began with questions by JPMorgan analyst Jamie Baker. Delta has grown in Seattle, where it is building a trans-Pacific hub and where it reported 6% third-quarter growth in passenger revenue per available seat mile on a 25% capacity increase, and in Los Angeles, where it will begin Delta Connection service to Dallas and Austin next month and to San Antonio next spring.
"I am curious about how you model for new routes and whether that has evolved at all over time, and in particular whether you consider earnings multiple destruction," Baker said.
"When you add capacity, particularly into (other airline) hubs, it diminishes shareholder confidence, it suggests a lack of discipline, and in my opinion, it jeopardizes the likelihood of earning a multiple closer to that of high-quality industrial transport," he said. "So I know it may be difficult to quantify, but do you ever stop before you announce a route and just ask, or maybe run it past others: What if this destroys tens of millions of dollars of shareholder value by robbing me of a better earnings multiple?"
In response, Anderson declared, "I think you are in an area that is in some respects not appropriate for an earnings call. But I will just say this: Look at our results. I don't think there is a more disciplined approach to the deployment of capital in this industry anywhere in the world. And we will continue to make the right unilateral decisions. And we appreciate that you have a different opinion."
Morgan Stanley analyst John Godyn picked up the line of questioning, asking how Delta is funding growth in the trans-Atlantic, Seattle and Los Angeles.
"What we were doing was trying to find the worst assets across the whole network, wherever they were, and redeploy them into better revenue potential opportunities," said Glen Hauenstein, Delta's chief revenue officer and executive vice president. "That was really a key contributor to the improvement in the profitability of the airline."
Next, Goldman Sachs analyst Thomas Kim asked whether, at the low end, Delta's guidance on passenger revenue per available seat mile reflected concerns regarding Asia or South America. In response, Anderson offered his comments regarding Delta's disinclination to discuss pricing or capacity decisions.
Following the call, Wolfe Research Hunter Keay, who downgraded Delta to peer perform from outperform on Sept. 26, called Delta's 2% capacity guidance "unnerving," saying it implies 4% domestic growth since international growth is likely to be flat. He also called Baker's question "one of the most on-point questions we've heard (yet) it was dismissed by management as being inappropriate."
Some other analysts applauded Delta's results. Imperial Capital's Bob McAdoo said Delta "will continue to operate at the top end of the peer group and is likely to report record 4Q14 and even stronger 2015 results." He said 2% capacity growth results largely from using bigger aircraft on regional routes. He maintains an outperform on Delta and a $55 price target.
CRT Capital analyst Mike Derchin raised his target price to $51 and his fourth-quarter estimate to $1.20 and said Delta shares are at "a compelling entry point." Gimme Credit bond analyst Vicki Bryan said, "We found plenty to like in Delta Air Lines' third-quarter results, adding "Delta has been sprinting ahead of most competitors for the past three years -- revenue and profit growth are outpacing industry trends."
On Friday, Delta closed at $34.39, up $1.07 for the day, when Delta's 3.2% gain led the airline industry. Four days earlier, on Monday Oct. 13, Delta closed at $30.90. Over the next four days, shares climbed 11%.
Written by Ted Reed in Charlotte, N.C.
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