ANALYSIS: Delta anticipates Q3 capacity growth with fleet upgauge

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Delta Air Lines is predicting capacity growth of between 1% and 3% during the third quarter, as it begins the long-discussed upgauging of its regional jet fleet.

The Atlanta-based SkyTeam alliance member anticipates domestic available seat miles (ASMs) to increase 1% to 3% and international to rise by 2% to 4% in the quarter compared to a year earlier.

"This growth is being driven by our upgauging strategy, which will allow us to produce these capacity levels with 16 fewer aircraft or about a 1.5% reduction in our fleet size," says Ed Bastian, president of Delta, during an earnings call today.

The airline will begin accepting Boeing 717-200s, Boeing 737-900ERs and Bombardier CRJ900s as part of its fleet renewal and upgauging strategy. The first 717s are due in August, 737s in July and CRJ900s in September, Flightglobal's Ascend Online database shows.

Paul Jacobson, chief financial officer of Delta, says that the airline will begin taking delivery of eight to ten aircraft per month during the third quarter. This will "enable" it to remove 14 mainline aircraft and more than 40 50-seat regional jets from its fleet by the end of the year, he adds.

Delta plans to reduce its 50-seat regional jet fleet to about 125 aircraft by 2015 from 305 at the end of March, while adding 70 76-seat CRJ900s at its regional partners and 88 110-seat 717s to its mainline operation.

The larger regional aircraft will replace outgoing 50-seaters while the 717s will replace 76-seaters elsewhere in Delta's system. The fist 717 market will be Atlanta-Newark from 19 September.

"Think of it as kind of a reverse cascade in terms of gauge," says Glen Hauenstein, executive vice-president of marketing, network planning and revenue management, during the call.

Capacity at Delta increased 0.8% in the second quarter and fell 1% during the first half.

RATIONALISING ASIA

Capacity to Japan is a soft point for Delta, despite the strength elsewhere. Bastian cites a 25% deterioration in the value of the Japanese yen for a $60 million negative impact to profit during the second quarter.

Delta will continue to "rationalise" capacity to Japan during the second half and into 2014, says Bastian. This comes after the airline cut Pacific ASMs 2.6% in the second quarter, mostly by reducing flights to beach destinations.

Passenger revenue per available seat mile (PRASM) for the Pacific was the region's only positive metric, increasing 0.5% during the period.

The yen's continued weakness has raised questions regarding the future of Delta's hub at Tokyo Narita airport. Hauenstein calls the hub a "really great asset for Delta" in response to analyst inquiries but adds that the airline is likely to focus growth on routes directly into Asia, bypassing Tokyo, in the future.

"Right now, we're flying about 50% of our trans-Pacific not touching Narita," he says. "That would be the opportunity for us to continue to grow in Asia, not to shrink Narita necessarily, but to grow in the rest of Asia."

PRASM and capacity rose in all of Delta's other mainline operations during the second quarter, with the largest passenger unit revenue growth in Europe at 1.4% and the most capacity growth in its domestic operations with a 2.8% increase.