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Delta Adds To Excess Capacity Worries As Gulf Carriers Lower Overseas Prices

Delta Air Lines (DAL) led global airline stocks lower on Wednesday after reporting weaker-than-expected international yields in June due to industrywide capacity increases and fallout from the World Cup. The Atlanta-based airline said consolidated passenger unit revenue grew 4.5% in June vs. a year ago, led by corporate and domestic strength. That missed views for a 5% to 7% increase and is down from May's 7% gain.

Total June traffic rose 3%, but higher-margin international travel grew only 1.9%, slowing from May's 4.2% climb.

Delta shares fell 5%. United Continental (UAL) lost 7%, and American Airlines (AAL) dropped 4%.

Global Vs. Domestic Carriers Rapidly expanding Gulf carriers like Emirates are roiling the industry by lowering prices on lucrative routes. Germany's Lufthansa warned June11 its profit will be lower than expected this year due to Gulf rivals.

The news hit airline stocks. United has since dropped 17.8%, and Delta has fallen 8.8%. American, part of the Oneworld code-sharing alliance that also counts Qatar Airways as a member, has only dipped 3.9% over that span.

Meanwhile, more domestic-focused carriers have recovered from prior losses and resumed their uptrends. Southwest Airlines (LUV), which began flights to the Caribbean this week, has seen its shares edge up 0.7%. Shares of low-fare, high-fee Spirit Airlines (SAVE) are up 3.7%.

Gulf carriers are "an aggressive front" that can hurt European and North American carriers, said Morningstar analyst Neal Dihora, who added that they have an edge over rivals when fuel costs rise.

"They're essentially owned by oil producers," he told IBD.

Delta also has complained about the advantage some competitors enjoy via the taxpayer-backed U.S. Export-Import Bank, which helps foreign rivals like Dubai-based Emirates finance purchases of Boeing (BA) jets.

Other analysts say the lack of significant overlap in international routes and ports means that Gulf carriers are not a concern for U.S. carriers, for now.

"I think at this point in time the impact, at least on U.S. carriers, is fairly minimal," CRT Capital analyst Michael Derchin said in an interview.

Routes from Europe and Asia are "low-hanging fruit" for Gulf carriers, meaning airlines based there are seeing the most pressure, he added. But as the Gulf airlines add flights to more U.S. cities, "the impact will become more meaningful.

In addition to greater industrywide capacity, Delta blamed June weakness on softer business demand to Latin America because of the World Cup. Business travelers don't want to deal with Brazil's crowds, and much of soccer-mad Latin America is glued to the tournament.

Airlines should see increased passenger traffic over the Fourth of July weekend, since air travel is expected to increase to 3.1 million travelers from 3.07 million a year ago, according to auto club AAA. But fares are about 5% lower than last year.