Delta Air Lines Inc. (DAL) cut its third-quarter unit revenue and margin guidance, moves that analysts have been expecting for weeks.
Nevertheless, Delta's guidance cuts led airline shares down on Tuesday, Sept. 5, as share prices fell for every major carrier. Delta shares dropped about 1.3%. The stock has declined 4.8% year to date.
Delta, which posted its traffic report for August on Tuesday, said it "now expects passenger unit revenue growth to be 2-3 percent, as the recovery in domestic close-in yields has been slower than anticipated." Delta's third quarter ends Sept. 30.
On its July earnings call, Delta forecast a third-quarter gain between 2.5% and 4.5% in passenger revenue per available seat mile.
Also, Delta guided toward a third-quarter operating margin between 16.5% and 17.5%, down from previous guidance of 18% to 20%. The carrier said "higher fuel prices and close-in yield softness combined resulted in close to 2 points of margin pressure for the quarter."
In a report released Tuesday morning, UBS analyst Darryl Genovesi anticipated the reduction, cutting his third-quarter earnings estimate for U.S. airlines by an average of 10%.
Genovesi attributed pending guidance reductions primarily to higher fuel costs. Another factor is "strategic discounting at legacy carriers to discourage ultra-low-cost carrier growth," he said.
In Delta's case, Genovesi cut his earnings forecast to $1.73 a share from $1.85. Consensus is $1.79.
"Airline stocks have sold off 20% over the past six weeks on worsening Q3 unit revenue (PRASM) outlook and pickup in competitive pricing rhetoric," he wrote.
He forecast that other airlines will reduce third-quarter unit revenue guidance. He said guidance has furthest to fall at United Continental Holdings Inc. (UAL)
"We think potential weakness around guidance cuts could make for an interesting buying opportunity, and we continue to prefer legacy airlines, particularly United and Delta," Genovesi wrote.
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