Delta Air Lines Announces June Quarter Profit

Delta Air Lines reported financial results for the June 2011 quarter.  Key points include:

  • Delta’s net income for the June 2011 quarter was $366 million, or $0.43 per diluted share, excluding special items(1).  
  • Delta’s net income was $198 million, or $0.23 per diluted share, for the June 2011 quarter.
  • Strong top line revenue growth of 12% year over year helped offset more than $1 billion higher fuel expense.
  • Delta generated a revenue premium, with unit revenues up 10% for the quarter.
  • Delta generated $1 billion of operating cash flow and $700 million in free cash flow in the quarter.  The company ended the June 2011 quarter with $5.6 billion in unrestricted liquidity.

"High fuel prices are putting significant pressure on the industry, but the benefits of Delta’s strategic actions and the dedication of Delta employees are evident in the solid profit we produced despite more than $1 billion in higher fuel expense," said Richard Anderson, Delta’s chief executive officer.  "Our revenue momentum, coupled with the capacity reductions we are making in September and actions to get our non-fuel costs to 2010 levels, will generate the margins we need to hit our return targets."  

Adapting the Business for Higher Fuel Prices

Delta is recalibrating its business to succeed in a permanent, high fuel price environment.  The company’s actions include:

  • Using fare increases, fuel surcharges and revenue initiatives to recover fuel cost increases through ticket prices;
  • Reducing its December quarter capacity by 4 – 5% year over year, an incremental 1 point reduction from previous guidance, focused in markets where revenues do not cover higher fuel costs.  Domestic capacity will be down 1 – 3% and international capacity will be down 4 – 6%.  In the transatlantic, Delta and its partners, Air France – KLM and Alitalia, established capacity levels as a single entity, leading to a combined reduction in transatlantic capacity of 7 – 9% for the December quarter;
  • Retiring 140 of Delta’s least efficient aircraft by the end of 2012, including the entire DC9 and Saab turbo-prop fleets, and 60 50-seat regional jets.  Half of these aircraft will exit the fleet in 2011, which will contribute to the expected $250 million in maintenance savings for the second half of 2011 compared to the first half of the year; and
  • Implementing initiatives to reduce the company’s non-fuel unit costs to 2010 levels by the end of 2011, including voluntary exit programs accepted by more than 2,000 employees; consolidating more than 1.2 million square feet of facilities in Atlanta and Minneapolis; and lowering selling and distribution costs by shifting to more efficient distribution channels.

Revenue Environment
Delta’s operating revenue grew $1 billion, or 12%, in the June 2011 quarter compared to the 2010 quarter.  Traffic rose 1% on a 2.5% increase in capacity.  

  • Passenger revenue increased 13%, or $882 million, compared to the prior year period.  Passenger unit revenue (PRASM) increased 10%, driven by a 12% improvement in yield partially offset by a 1.3 point decline in load factor.  Passenger revenues were negatively impacted by $125 million as a result of the March events in Japan.
  • Cargo revenue increased 25%, or $53 million, on higher cargo volume and yield.
  • Other revenue increased 5%, or $50 million, from higher third-party maintenance revenue.

As part of its plan to generate $1 billion in incremental revenue by 2013, Delta launched its new international premium economy product, Economy Comfort, on June 1.  Revenue from Economy Comfort and other new seat-related products and merchandising initiatives are expected to generate $150 – 200 million in revenue in 2011.
Comparisons of revenue-related statistics are as follows:

Increase (Decrease)

2Q11 versus 2Q10

Change

Unit

Passenger Revenue

2Q11 ($M)

YOY

Revenue

Yield

Capacity

Domestic

$     3,475

12%

12%

12%

(0.2%)

Atlantic

1,570

16%

7%

10%

7.6%

Pacific

722

14%

6%

11%

7.8%

Latin America

440

18%

14%

16%

3.7%

Total mainline

6,207

13%

10%

12%

3.1%

Regional

1,684

10%

12%

12%

(1.7%)

Consolidated

$     7,891

13%

10%

12%

2.5%

"A strong demand environment, combined with our corporate revenue share gains and great work by our entire team, resulted in top line growth of 12% and produced a unit revenue premium to the industry," said Ed Bastian, Delta’s president.  "Right-sizing our capacity, coupled with pricing initiatives and revenues from new products and services, position us well to continue to generate solid unit revenue improvements for the September quarter."

Cost Performance

In the June 2011 quarter, Delta’s operating expense increased $1.4 billion year over year.  More than $1 billion of this increase was attributable to the 39% increase in fuel prices, with the remainder of the cost increase primarily driven by maintenance volumes and higher revenue-related expenses.

Consolidated unit cost (CASM(2)), excluding fuel expense, profit sharing and special items, was 4.8% higher in the June 2011 quarter on a year-over-year basis.  Consolidated CASM increased 16% due to higher fuel prices.
"We have seen unit cost growth from not only high fuel prices, but also maintenance volumes and revenue-related expenses," said Hank Halter, Delta’s chief financial officer.  "We are moving aggressively to stem this cost growth with a target of bringing our non-fuel unit costs to 2010 levels by the end of the year."

Fuel Price and Related Hedges

Delta’s average fuel price(3) of $3.22 per gallon for the June quarter was a $0.90, or 39%, increase over the prior year.  The June quarter 2011 price included $118 million in gains, net of option premiums, from its fuel hedging program.  At July 22, 2011, Delta’s fuel hedge portfolio for the remainder of 2011 was worth $225 million, net of option premiums, and the table below represents fuel hedges Delta had in place on that date:

3Q11

4Q11

WTI – Crude

0%

1%

Heating Oil

33%

34%

Brent – Crude

11%

14%

Jet Fuel

1%

6%

Total

45%

55%

Projected fuel price

$  3.20

$  3.31

Liquidity Position

As of June 30, 2011, Delta had $5.6 billion in unrestricted liquidity, including $3.8 billion in cash and short-term investments and $1.8 billion in undrawn revolving credit facilities.  

Operating cash flow during the June 2011 quarter was $1 billion, driven by the company’s profitability and advance ticket sales.  Free cash flow was $700 million.  

Capital expenditures during the quarter were $300 million, including $205 million in aircraft, parts and modifications.  To date, Delta has modified 40 aircraft with full flat-bed seats.  The airline’s entire widebody international fleet will have full flat-bed seats in BusinessElite by 2013.  These expenditures are part of Delta’s three-year, $2 billion investment in improved products, services and facilities.

For the full year 2011, the company expects its capital expenditures will be $1.2 billion.  The company remains committed to keeping its annual capital expenditures at $1.2 – $1.4 billion.  

During the June quarter, Delta refinanced $2.6 billion of corporate credit facilities.  The transaction, with an effective annual rate of 3.67%, increased the company’s revolving credit availability by $200 million and reduced its term loan borrowing by $200 million. This reduction in term loan borrowing, combined with normal amortization payments, resulted in net debt payments of $510 million for the quarter.  

At June 30, Delta’s adjusted net debt was $13.8 billion, a $700 million reduction from March 31, 2011.  The company has now completed $3.2 billion of its $7 billion debt reduction target.

"With strong cash generation despite fuel price pressures, we are making solid progress on our debt reduction goals," Halter added.  "In 18 months, we have reduced our net debt by over $3 billion, while still making significant investments in our product, fleet and facilities."

Company Highlights

Delta has a strong commitment to its employees, customers and the communities it serves.  Key accomplishments in the June quarter include:

  • Delivering significant improvements in operational performance, including an on-time arrival rate of 80.7% that was among the best in the industry.  Delta employees received $9 million in Shared Rewards payments to recognize their work in achieving these operational improvements;
  • Receiving the Million Work Hours Award from the U.S. National Safety Council, recognizing employees in Reservation Sales and Information Technology for their safety excellence in achieving more than 1 million injury-free work hours in 2010;
  • Improving products and facilities for Delta’s customers, including launching the company’s new premium international economy seating, Economy Comfort; beginning construction on the company’s new  international facility at New York-JFK’s Terminal 4, which is set to open in the spring of 2013; and updating apps for iPhone, Blackberry and Android that allow travelers to download mobile boarding passes, check flight status, and search flight schedules;
  • Positioning the company as the airline of choice in New York with preliminary DOT approval to exchange slots and airport facilities at New York’s LaGuardia and Washington’s Reagan National airports with US Airways.  Under the agreement, Delta will acquire 132 slot pairs at LaGuardia, which will allow Delta to double its available destinations, offering customers more frequent and convenient service at New York’s preferred airport for business travel;
  • Expanding Delta’s global reach to give passengers more options through new service to key international business destinations such as London-Heathrow, Beijing, Shanghai, and Tokyo-Haneda; improving SkyTeam’s leading alliance position in China with the inclusion of the alliance’s newest partner, China Eastern; and obtaining anti-trust approval of the industry’s first US-Australia joint venture between Delta and Virgin Australia;
  • Being chosen by the readers of Executive Travel magazine as the leading U.S. carrier in six categories for the publication’s 2011 Leading Edge awards, including Best First-Class Service; Best Business-Class Service; Best Airport Lounge; Best Flight Experience to Mexico; Best Flight Experience to Central/South America; and Best Private Jet Service (for Delta Private Jets);
  • Awarding more than $350,000 in scholarships to 330 Delta employees and their families through the Delta Scholarship Fund; and
  • Teaming with Habitat for Humanity and SkyTeam partners China Southern and China Eastern to help build five houses in Pinghu, China.  This year’s effort was Delta’s seventh international build with Habitat for Humanity.

Special Items
Delta recorded special items totaling $168 million in the June 2011 quarter, including:

  • $80 million in severance and related costs associated with the voluntary exit programs the company offered as part of its initiatives to adapt the airline to higher fuel prices;
  • A $64 million charge for facilities consolidation and fleet initiatives;
  • A $13 million charge for debt extinguishment associated with the company’s debt reduction initiatives; and
  • $11 million in mark-to-market adjustments for fuel hedges.

Delta recorded $82 million in special items in the June 2010 quarter, including $46 million in merger-related expenses and $36 million in asset impairment charges.
September 2011 Quarter Guidance
Delta’s projections for the September 2011 quarter are below.

3Q 2011 Forecast

Fuel price, including taxes and hedges

$ 3.20

Operating margin

7 – 9%

Capital expenditures

$250 million

Total liquidity at end of period

$ 5.1 billion

3Q 2011 Forecast
(compared to 3Q 2010)

Consolidated unit costs – excluding fuel expense and profit sharing

Up 2 – 4%

System capacity

Flat

    Domestic

Down 1 – 3%

    International

Up 2 – 4%

Mainline capacity

Flat

    Domestic

Down 1 – 3%

    International

Up 2 – 4%

Other Matters
Included with this press release are Delta’s unaudited Consolidated Statements of Operations for the three and six months ended June 30, 2011 and 2010; a statistical summary for those periods; selected balance sheet data as of June 30, 2011 and Dec. 31, 2010; and a reconciliation of certain non-GAAP financial measures.

Source = Delta Air Lines
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