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Delta Air Lines (NYSE: DAL) today reported financial results for the December 2014 quarter.  Key points include:

  • Delta's pre-tax income for the December 2014 quarter was $1.0 billion, excluding special items1, an increase of $474 million over the December 2013 quarter on a similar basis.  Delta's net income for the December 2014 quarter was $649 million, or $0.78 per diluted share, and its operating margin was 12.6 percent, excluding special items.
  • For the full year 2014, Delta's pre-tax income, excluding special items, was $4.5 billion, a $1.9 billion increase over 2013.  Delta's net income for the year was $2.8 billion with an operating margin of 13.1 percent, excluding special items.
  • On a GAAP basis including special items, Delta's December quarter pre-tax loss was $1.1 billion, operating margin was -8.6 percent and net loss was $712 million, or $0.86 per share.  On a GAAP basis including special items, Delta's 2014 pre-tax income was $1.1 billion, operating margin was 5.5 percent and net income was $659 million.
  • 2014 results include $1.1 billion in profit sharing expense, including $262 million in the December quarter, recognizing Delta employees' contributions toward meeting the company's financial goals.
  • The company's strong cash generation allowed it to accelerate its capital deployment plans by reducing its adjusted net debt2 to $7.3 billion, contributing an incremental $250 million above required funding to its defined benefit pension plans, and returning $1.35 billion to shareholders through a combination of $251 million of dividends and $1.1 billion of share repurchases in 2014.

 

Another Record Year.

"Our 2014 performance – an industry-leading operation, superior customer service, and a 70 percent increase in profits – shows that Delta is focused on delivering growing value for its employees, customers and investors," said Richard Anderson, Delta's chief executive officer.  "As we begin 2015, we have a significant opportunity from lower fuel prices, which will drive more than $2 billion in fuel savings over 2014.  Through our capacity discipline, pricing our product to demand, and the fuel savings, we expect to drive double-digit earnings growth, along with increased free cash flow and a higher return on invested capital in the upcoming year."

Revenue Environment
Delta's operating revenue improved 6 percent, or $571 million, in the December 2014 quarter compared to the December 2013 quarter.  Traffic increased 4.0 percent on a 3.7 percent increase in capacity.

  • Passenger revenue increased 4.6 percent, or $361 million, compared to the prior year period. Passenger unit revenue (PRASM) increased 0.8 percent year over year with a 0.6 percent improvement in yield.
  • Cargo revenue increased 2.1 percent, or $5 million, driven by increases in both freight volumes and yields.
  • Other revenue increased 21.3 percent, or $205 million, driven by SkyMiles revenues, third-party refinery sales, and joint venture settlements.

 

Comparisons of revenue-related statistics are as follows:

 

       

Increase (Decrease)

       

4Q14 versus 4Q13

       

Change

Unit

   

Passenger Revenue

4Q14 ($M)

 

YOY

Revenue

Yield

Capacity

 

Domestic

4,190

 

10.7 %

5.2 %

2.8 %

5.2 %

 

Atlantic

1,229

 

1.7 %

(0.5) %

2.0 %

2.2 %

 

Pacific

759

 

(5.6) %

(5.2) %

(3.0) %

(0.5) %

 

Latin America

560

 

8.5 %

(4.2) %

(1.2) %

13.2 %

 

Total mainline

6,738

 

6.7 %

2.1 %

2.0 %

4.5 %

 

Regional

1,497

 

(4.1) %

(2.3) %

(2.8) %

(1.8) %

 

Consolidated

8,235

 

4.6 %

0.8 %

0.6 %

3.7 %

 

Delta People Have Your Back.

"Delta delivered solid revenue performance in the December quarter, growing our top line by 6 percent against a backdrop of nearly 15 percent lower fuel prices," said Ed Bastian, Delta's president.  "While we face headwinds from the stronger dollar and lower fuel prices going forward, we have confidence we can continue to generate top-line growth as we realize additional benefits from our Virgin Atlantic joint venture, restructure our Pacific network, gain additional corporate share, and ramp up our merchandising efforts with branded fares and enhanced customer segmentation."

Fuel
Excluding mark-to-market adjustments,3 fuel expense declined $342 million driven by lower market prices and higher refinery profits.  Delta's average fuel price was $2.62 per gallon for the December quarter, which includes $180 million in settled hedge losses.  At December 31, Delta had $925 million in hedge margin posted with counterparties.  Operations at the refinery produced a $105 million profit for the December quarter, a $151 million improvement year-over-year.

"We expect a net year-over-year fuel price benefit of $500 million in the March quarter and will work throughout 2015 to maximize the benefit of fuel savings to our bottom line," said Paul Jacobson, Delta's chief financial officer.  "Our margin postings are manageable in light of our strong cash generation and balance sheet."

Cost Performance
Consolidated unit cost excluding fuel expense, profit sharing and special items (CASM-Ex4), was up 0.5 percent in the December 2014 quarter on a year-over-year basis, with the benefits of Delta's domestic refleeting and other cost initiatives offsetting the company's investments in its employees, products and operations. 

"The December quarter marks the sixth consecutive quarter with non-fuel unit cost growth below two percent, a testament that our cost initiatives and domestic upgauging efforts are continuing to deliver benefits," Jacobson continued.  "We still have many opportunities ahead of us and expect to again keep non-fuel unit cost growth below two percent for the March quarter, consistent with our long-term goal."

Excluding special items, total operating expense in the quarter increased $135 million year-over-year driven by  $143 million higher profit sharing expense and higher volume-related expenses.  These cost increases were partially offset by lower fuel expense, excluding mark-to-market adjustments, and savings from Delta's cost initiatives. 

Non-operating expense, excluding special items, declined by $40 million as a result of lower interest expense, partially offset by a $13 million higher foreign exchange loss compared to the fourth quarter of 2013. 

Tax expense, excluding special items, increased $383 million compared to the prior year quarter, as the company now recognizes tax expense for financial reporting purposes following the reversal of its tax valuation allowance at the end of 2013.  Delta's net operating loss carryforwards of more than $12 billion will largely offset cash taxes due on future earnings during the next several years.

Cash Flow
Cash from operations during the December 2014 quarter was $1.5 billion, driven by the company's December quarter profit, and free cash flow was $834 million.  Cash flow from operations and free cash flow include fuel hedge margin posted, which is reflected as hedge margin receivable.  Capital expenditures during the December 2014 quarter were $620 million, including $444 million in fleet investments. During the quarter, Delta's net debt maturities and capital leases were $354 million.

With its strong cash generation in the December 2014 quarter, the company returned $575 million to shareholders. The company paid $75 million in cash dividends and repurchased 12.2 million shares at an average price of $40.96 for $500 million.  In 2014, the company returned a total of $1.35 billion to shareholders by paying $251 million in quarterly dividends and spending $1.1 billion to repurchase 28.6 million shares.

Delta ended the quarter with adjusted net debt of $7.3 billion, including cash that is being held by counterparties as hedge margin.  The company has achieved nearly $10 billion in net debt reduction since 2009, resulting in a roughly 50% reduction in annual interest expense.

"Delta's strong operating cash flow, combined with our disciplined capital investments, resulted in $3.7 billion in free cash flow in 2014.  We used this cash flow to reduce our net debt levels by $2.1 billion, fund excess contributions of $250 million to our pension plans, and return $1.35 billion to our owners through dividends and share repurchases," Jacobson continued. 

GAAP Metrics Related to Cost Performance and Cash Flow
On a GAAP basis compared to the December 2013 quarter, consolidated CASM increased 21 percent, total operating expense was up $2.1 billion, and fuel expense increased $1.7 billion primarily due to mark-to-market adjustments on fuel hedges settling in future periods of $2.0 billion.  GAAP fuel cost per gallon for the quarter was $4.70.  Non-operating expenses for the quarter increased by $86 million as a result of a $119 million mark-to-market adjustment on hedges owned by Virgin Atlantic.  GAAP tax benefit was $428 million in the quarter, down $7.6 billion from the December 2013 quarter due to the release of the company's tax valuation allowance at the end of 2013.  Cash from operations for the December 2014 quarter was $582 million and the company ended 2014 with debt and capital lease obligations of $9.8 billion on a GAAP basis. 

March 2015 Quarter Guidance
Following are Delta's projections for the March 2015 quarter:

   

1Q15 Forecast

     

Operating margin

 

11% - 13%

Fuel price, including taxes, settled hedges and refinery impact

 

$2.45 - $2.50

Consolidated unit costs – excluding fuel expense and profit sharing (compared to 1Q14)

 

Up 0 – 2%

System capacity (compared to 1Q14)

 

Up ~5%

System capacity – excluding impact of 2014 winter storms (compared to 1Q14)

 

Up ~3%

 

 

Company Highlights
Delta has a strong commitment to its employees, customers and the communities it serves.  Key accomplishments in the December 2014 quarter include:

  • Recognizing the achievements of Delta employees toward meeting the company's financial and operational goals with $286 million of incentives in the quarter, including accruing $262 million in employee profit sharing and paying $24 million in Shared Rewards;
  • Investing in its domestic network with new service connecting Seattle with eight additional western U.S./Canada destinations as well as linking Los Angeles with the key business market of London Heathrow;
  • Announcing an order for 50 new widebody aircraft for delivery beginning in 2017: 25 A350-900 aircraft to primarily serve the Pacific region and 25 A330-900neo aircraft, which will mainly be deployed across the Atlantic. These aircraft offer a 20 percent improvement in operating cost per seat and continue Delta's focus on making prudent, cost-effective investments in its fleet;
  • Redefining its cabin options to offer a best-in-class product to each segment of customers with the introduction of Delta One (formerly Business Elite), Delta Comfort+ (formerly Economy Comfort), Main Cabin, and a Basic Economy option for the most price-sensitive consumers;
  • Enhancing the airport experience with the opening of an exclusive Delta Arrivals Lounge in London Heathrow, a key high-value business destination; and
  • Celebrating ten years of partnership with the Breast Cancer Research Foundation (BCRF), during which time Delta's support has contributed more than $8 million to BCRF in the pursuit of eradicating breast cancer and has raised awareness through "Breast Cancer One", a specially painted 767-400.

Special Items
Delta recorded a $1.4 billion special items charge, net of taxes, in the December 2014 quarter, including:

  • a $1.2 billion charge for mark-to-market adjustments on fuel hedges settling in future periods;
  • a $75 million charge for mark-to-market adjustments on hedges owned by Virgin Atlantic;
  • a $74 million charge for fleet, facilities, and other items, associated with Delta's domestic fleet restructuring initiative as well as the write-down of certain facilities in Concourse C of Detroit Airport; and
  • a $29 million gain related to an insurance settlement.

Delta recorded a net $7.9 billion special items gain in the December 2013 quarter, including:

  • an $8.0 billion non-cash gain associated with the reversal of Delta's tax valuation allowance;
  • a $92 million mark-to-market gain on fuel hedges; and
  • a $160 million charge for facilities, fleet and other, including charges associated with Delta's domestic fleet restructuring.

Other Matters
Included with this press release are Delta's unaudited Consolidated Statements of Operations for the three and twelve months ended December 31, 2014 and 2013; a statistical summary for those periods; selected balance sheet data as of December 31, 2014 and December 31, 2013; and a reconciliation of non-GAAP financial measures.

About Delta
Delta Air Lines serves more than 170 million customers each year. Delta has ranked No.1 in the Business Travel News Annual Airline survey for four consecutive years, a first for any airline. Additionally, Delta was named the 2014 Airline of the Year by Air Transport World magazine and was named to FORTUNE magazine's top 50 Most Admired Companies in addition to being named the most admired airline for the third time in four years. With an industry-leading global network, Delta and the Delta Connection carriers offer service to 327 destinations in 59 countries on six continents. Headquartered in Atlanta, Delta employs nearly 80,000 employees worldwide and operates a mainline fleet of more than 700 aircraft. The airline is a founding member of the SkyTeam global alliance and participates in the industry's leading trans-Atlantic joint venture with Air France-KLM and Alitalia as well as a newly formed joint venture with Virgin Atlantic. Including its worldwide alliance partners, Delta offers customers more than 15,000 daily flights, with key hubs and markets including Amsterdam, Atlanta, Boston, Detroit, Los Angeles, Minneapolis/St. Paul, New York-JFK, New York-LaGuardia, Paris-Charles de Gaulle, Salt Lake City, Seattle and Tokyo-Narita. Delta has invested billions of dollars in airport facilities, global products, services and technology to enhance the customer experience in the air and on the ground. Additional information is available on delta.com, Twitter @Delta, Google.com/+Delta, Facebook.com/delta and Delta's blog takingoff.delta.com.

For more information, please visit ir.delta.com. 

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