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

  • Delta's pre-tax income for the March 2014 quarter was $444 million, excluding special items1, an increase of $363 million over the March 2013 quarter on a similar basis.  
  • Delta's net income for the March 2014 quarter was $281 million, or $0.33 per diluted share, excluding special items1.  This is $196 million higher year over year despite $163 million of non-cash tax expense now recognized after the reversal of the company's valuation allowance.
  • On a GAAP basis including special items, Delta's pre-tax income was $335 million and net income was $213 million, or $0.25 per diluted share.
  • Delta cancelled more than 17,000 flights due to severe weather in January and February, double the number of flights cancelled for weather in 2013.  These cancellations resulted in $90 million of lost revenue and $55 million lower pre-tax income.
  • Results include $99 million in profit sharing expense in recognition of Delta employees' contributions toward achieving the company's financial goals.
  • Delta generated $951 million of operating cash flow and $390 million of free cash flow in the March 2014 quarter.  This strong cash generation allowed the company to reduce its adjusted net debt to $9.1 billion, contribute more than $600 million of funding to its defined benefit pension plans, and return $176 million to shareholders through dividends and share repurchases.
 

"The March quarter's record results in the face of unprecedented weather show the strength and resilience of Delta.  By delivering the industry's best customer service, operational reliability and financial performance, Delta people continue to show that they are the very best in the business," said Richard Anderson, Delta's chief executive officer.  "Our work is not finished, and there is great opportunity ahead as we expect the June quarter to produce 14% - 16% operating margins.  We are transforming Delta into a high-quality S&P 500 company that consistently delivers strong earnings growth and shareholder returns." 

Revenue Environment
Delta's operating revenue improved 5 percent, or $416 million, in the March 2014 quarter compared to the March 2013 quarter, despite $90 million of lost revenue due to weather-related cancellations.  Traffic increased 3.5 percent on a 1.7 percent increase in capacity.

  • Passenger revenue increased 5 percent, or $357 million, compared to the prior year period. Passenger unit revenue (PRASM) increased 3.2 percent year over year with a 1.3 percent improvement in yield.
  • Cargo revenue decreased 9 percent, or $21 million, driven by lower freight volumes and lower yields.
  • Other revenue increased 8 percent, or $80 million, driven by higher joint venture and SkyMiles revenues.

Comparisons of revenue-related statistics are as follows:

       

Increase (Decrease)

       

1Q14 versus 1Q13

       

Change

Unit

   

Passenger Revenue

1Q14 ($M)

 

YOY

Revenue

Yield

Capacity

 

Domestic

3,734

 

9.4 %

7.4 %

5.3 %

1.8 %

 

Atlantic

1,008

 

(1.0) %

0.5 %

(0.3) %

(1.5) %

 

Pacific

827

 

(5.3) %

(5.0) %

(5.4) %

(0.3) %

 

Latin America

655

 

18.1 %

(0.1) %

(1.6) %

18.3 %

 

     Total mainline

6,224

 

6.2 %

3.6 %

2.1 %

2.5 %

 

Regional

1,453

 

(0.5) %

3.8 %

0.1 %

(4.1) %

 

     Consolidated

7,677

 

4.9 %

3.2 %

1.3 %

1.7 %

 

"March quarter's top line growth of 5 percent shows the strength of Delta's revenue momentum even through the revenue loss from weather and a shift of the Easter holiday traffic into April," said Ed Bastian, Delta's president. "We see continued revenue strength as we move through the year from corporate revenue gains, the benefits of the Virgin Atlantic joint venture and improved ancillary revenues.  These initiatives, coupled with a solid demand environment, should lead to unit revenue growth in the mid-single digits for the June quarter."

Cost Performance
Total operating expense in the quarter increased $18 million year-over-year driven by the impact of employee investments including $79 million higher profit sharing expense.  These cost increases were almost fully offset by lower fuel expense, savings from Delta's structural cost initiatives, and receipt of a $25 million insurance claim related to Superstorm Sandy. 

Consolidated unit cost excluding fuel expense, profit sharing and special items (CASM-Ex2), was 0.3 percent higher in the March 2014 quarter on a year-over-year basis, driven by the impact of employee investments and 1 point of pressure from weather-related cancellations.  GAAP consolidated CASM decreased 1.4 percent.

Fuel expense, excluding mark-to-market adjustments, declined $167 million as a result of lower market fuel prices and better settled hedge performance. Delta's average fuel price3 was $3.03 per gallon for the March quarter, which includes $107 million in settled hedge gains.  On a GAAP basis, consolidated fuel expense for the March quarter decreased $109 million year-over-year, driven by lower market fuel prices and mark-to-market adjustments on fuel hedges. 

Operations at the Trainer refinery produced a $41 million loss for the March quarter as a result of the same lower market fuel prices that lowered Delta's overall fuel spend.  During the quarter, one of the major crude units at the refinery was taken offline for scheduled modifications which lowered throughput levels.  These modifications will yield a higher level of jet and diesel distillates going forward and improve the profitability of Trainer.  In addition, refinery profitability was negatively impacted by an increase in Renewable Identification Numbers (RINs) expense.    

Non-operating expense for the quarter increased by $66 million, driven by a $31 million seasonal loss associated with Delta's 49% ownership stake in Virgin Atlantic, an $18 million loss on extinguishment of debt driven by Delta's debt reduction initiatives, and $39 million higher foreign exchange impact, including a $23 million loss associated with the devaluation of the Venezuelan currency.  These losses were offset by $34 million lower interest expense.

"The March quarter marks another quarter with non-fuel unit cost growth below 2 percent, and the growing momentum of our domestic refleeting and other cost initiatives provide the platform to maintain this performance," said Paul Jacobson, Delta's chief financial officer.  "We are addressing all parts of our cost base through executing our structural cost initiatives, lowering our fuel expense with the refinery and hedging, and reducing our interest burden with additional debt reduction."

Cash Flow
Cash from operations during the March 2014 quarter was $951 million, driven by the company's March quarter profit and the normal seasonal increase in advance ticket sales.  Cash from operations is net of $605 million of contributions made by Delta to its defined benefit pension plans during the quarter.  The company generated $390 million of free cash flow.

Capital expenditures during the March 2014 quarter were $570 million, including $514 million in fleet investments. During the quarter, Delta's net debt maturities and capital leases were $353 million.

In the March quarter, the company returned $176 million to shareholders.  On March 14, the company paid $51 million to shareholders, which represents a $0.06 per share quarterly dividend.  In addition, the company repurchased four million shares at an average price of $30.94 for a total of $125 million.  The company has completed $375 million of the $500 million share repurchase plan authorized by Delta's Board of Directors in May 2013.

Delta ended the quarter with $5.6 billion of unrestricted liquidity and adjusted net debt of $9.1 billion.  The company has now achieved nearly $8 billion in net debt reduction since 2009. 

June 2014 Quarter Guidance
Following are Delta's projections for the June 2014 quarter:

 

2Q 2014 Forecast

   

Operating margin

14% – 16%

Fuel price, including taxes, settled hedges and refinery impact

$2.97 - $3.02

   
 

2Q 2014 Forecast

(compared to 2Q 2013)

   

Consolidated unit costs – excluding fuel expense and profit sharing

Up 0% – 2%

System capacity

Up 2% – 3%

 

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

  • Recognizing the achievements of Delta employees toward meeting the company's financial and operational goals with $114 million of incentives so far this year, including $99 million in employee profit sharing and $15 million in Shared Rewards;
  • Ranking in Fortune's Top 50 of the World's Most Admired Companies for the first time in the company's history, and named as World's Most Admired Airline for the third time in four years;
  • Unveiling of new SkyMiles program that will take effect in 2015 that will better reward our most valuable customers for what they spend instead of distance flown.  Delta is the first of the legacy carriers to make this transition to a revenue-based model;
  • Launching of immunized joint venture with Virgin Atlantic allowing coordination on pricing and scheduling, and also co-locating London Heathrow departures to Boston, New York JFK, and Seattle to Terminal 3 at Heathrow to enhance the customer experience.
  • Supporting the communities served through the Habitat for Humanity International partnership and building 10 homes in four days on a Global Build in the Philippines.  This marks the ninth year that Delta has partnered with Habitat for Humanity on a Global Build.

Special Items
Delta recorded a net $68 million special items charge in the March 2014 quarter, including:

  • a $31 million charge associated with Delta's domestic fleet restructuring;
  • a $21 million mark-to-market adjustment on fuel hedges; and
  • a $16 million charge for debt extinguishment and other.

Delta recorded a net $78 million special items charge in the March 2013 quarter, including:

  • a $102 million charge for facilities, fleet and other, primarily associated with Delta's domestic fleet restructuring; and
  • a $24 million mark-to-market adjustment on fuel hedges.

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

About Delta
Delta Air Lines serves nearly 165 million customers each year. This year, 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 319 destinations in 57 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 hubs in Amsterdam, Atlanta, Cincinnati, Detroit, Minneapolis-St. Paul, New York-JFK, New York-LaGuardia, Paris-Charles de Gaulle, Salt Lake City 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, visit ir.delta.com

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