Delta posts ‘best in history’ profit

Delta CEO Richard Anderson told analysts yesterday: "These results are a direct reflection of the success of our merger, cost discipline and debt reduction strategy [and employee effort] and give us momentum to deal with the rising fuel prices we face in 2011."

Revenue environment

Total operating revenue for the Dec-2010 quarter was USD7.8 billion, an increase of 14% compared with the same period last year. Passenger revenue increased USD889 million, 15% on 2009 on only a 7% increase in capacity.

For the full year, total operating revenue rose 13% to USD31.7 billion, while passenger revenue rose 14% to USD27.2 billion.

Passenger unit revenue (PRASM) was up 8% for the quarter and 13% for the year to USD 11.69 cents and USD 11.71 cents, respectively. This was driven by a 9% improvement in yield to USD 14.42 cents for the quarter and 12% jump to USD 14.11 cents for the year.

Other net revenue jumped 14% to USD885 million in the quarter, but finished the year up only 5% to USD3.6 billion on higher SkyMiles and ancillary products and service revenues.

Regional revenues from Delta Connection rose 9% to 1.4 billion in 4Q2010 as unit revenue rose 9%, yield increased 10% on flat capacity. For the full-year 2010, regional revenues jumped 11% - USD500 million - to USD5.8 billion. Regional expenses for the year rose 13% to USD4.3 billion, continuing Delta's tradition of maintaining a profitable regional programme.

During 4Q2010, regional expenses rose 25% to USD1.9 billion, an interesting event given Delta's efforts to lower regional airline costs. Interestingly, when asked if the small aircraft retirements was a shift from regional to mainline flying, Executive Vice President Network Revenue Management Glenn Hauenstein dodged the question, only pointing to rising fuel, saying smaller aircraft do not work at USD95/barrel.

It achieved its goal of finishing the year with USD15 billion in net debt, clearing USD2 billion in debt during the year. Over the next two years it expects to clear an additional USD5 billion in its goal to achieve investment-grade ratings. Unrestricted liquidity was USD5.2 billion. In addition to shaving debt, the company achieved its second goal of flat non-fuel unit costs in 2010, according to CFO Hank Halter. Non-operating expenses excluding special items decreased USD67 million on benefits from Delta's debt reduction initiatives. Including special items, non-operating expense was USD36 million lower than in the December 2009 quarter.

Comparisons of revenue-related statistics:

		Increase (Decrease)
		4Q10 versus 4Q09
		Change	Unit
Passenger Revenue	4Q10 ($M)	YOY	Revenue	Yield	Capacity
Domestic	2927	11%	5%	5%	6%
Atlantic	1226	21%	8%	10%	12%
Pacific	721	47%	24%	26%	18%
Latin America	364	13%	19%	18%	(5) %
Total mainline	5238	17%	8%	9%	8%
Regional	1430	9%	9%	10%	0%
Consolidated	6668	15%	8%	9%	7%

Cost performance

Higher fuel prices coupled with volume and revenue-related expenses conspired to increase operating costs USD644 million in the fourth quarter, or 9%, to USD7.4 billion which was partially offset by incremental merger cost synergies. For 2010, Delta succeeded in keeping cost hikes low at 4% to USD29.5 billion.

Consolidated unit cost (CASM), excluding fuel, profit sharing and special items, decreased 2% to USD 8.52 cents in the Dec-2010 quarter on a year-over-year basis, on 7% higher capacity. Consolidated CASM, including fuel, profit sharing and special items, increased 2% to USD 12.83 cents.

During the December quarter, Delta recorded USD139 million in special items including merger-related expenses, extinguishing debt and consolidation costs for Cincinnati operations. This was offset by a new USD200 million credit in the quarter on merger-related expenses and tax benefits of fuel hedges.

Delta's projections for March 2011 quarter:

	1Q 2011 Forecast
Operating margin	1 - 3%
Fuel price, including taxes and hedges	$2.60
Capital expenditures	$375 million
Total liquidity at end of period	$5.3 billion
	1Q 2011 Forecast (compared to 1Q 2010)
Consolidated unit costs - excluding fuel expense	Flat - up 2 %
System capacity	Up 5 - 7 %
Domestic	Flat - up 2 %
International	Up 12 - 14 %
Mainline capacity	Up 6 - 8 %
Domestic	Flat - up 2 %
International	Up 12 - 14 %

Short-takes from executives

The new consumer protection rules, once issued later this year, will not have an appreciable affect on earnings or costs.

Southwest's acquisition of AirTran is not expected to have a large impact on the company but it would be competitively aggressive.

Completing the merger integration added 10% in top-line growth on higher passengers sales, cargo increases, SkyMiles sales, Delta Global Services and Delta Private Jets.

Delta expects the global economy to grow 2-3% in 2011, leading to another year of profitability.

Severe weather in Europe and the US in December cost the airline USD45 million with 4000 flight cancellations while the January disruptions will cost the airline USD30 million on an equal number of cancellations.

Detroit, Atlanta and New York have the strongest year-over-year earnings as corporate revenue jumped 23%, at 2007/08 levels on the recovery of the automotive, banking and retail sectors.

Over the weekend, Delta led the fourth fare increase in the past month with rising fares and ancillary revenues expected to offset fuel increases. The industry is moving toward a fare solution to rising fuel costs.

Delta's take on the growing GDS controversy

While not as visible as American's moves, it has been moving aggressively, having dropped a dozen Online Travel Agencies (OTAs). Distribution costs for GDS' alone equal USD300 million (USD400 million if including OTAs). Delta made significant changes to LU and T fares, allowing OTAs to bundle the Delta product controlling the quality of distribution resulted in a 400-basis-point increase in Delta.com.

"This is not just about costs," said CEO Richard Anderson. "It is about controlling content and improving our customer services."

While Delta has no position on the Google/ITA acquisition now before the Department of Justice, Mr Anderson indicated its general philosophy is to let the market work and the government shouldn't interfere. Not surprisingly, the Delta executive had no more idea about how the Google/ITA acquisition will affect distribution than did analysts or anyone else.

Delta expects to get a trans-Pacific revenue boost from its Korean Air ATI now that the antitrust immunity has been clarified to extend beyond Northwest to Delta.

Mr Anderson is bullish on Pratt & Whitney's PurePower GTF engine. "We think the technology of the GTF makes it a viable engine building toward a 20% fuel reduction," he said. "We think the Airbus neo and the Bombardier CSeries are both really exciting opportunities when you think about where fuel prices are going. 20% at USD95 per barrel is an exciting development. Boeing is staying with its legacy equipment. They will be in the running but their numbers have to match up against the efficiency of other aircraft and the numbers speak for themselves."

Mr Anderson noted that the airline, which eliminated 101 shells in the past two years, was taking out an additional 100 aircraft, mostly DC-9s and 50-seat RJs. He confirmed that cap ex - expected to be between USD1 billion and USD1.2 billion for the foreseeable future - will come out of cash flow rather than new debt or equity offerings.

"Paying down debt is the most accretive thing we can do for our stakeholders because it reduces non-operating expense and gets us investment grade ratings," Mr Anderson said, also confirming that the fleet option could be "used" aircraft rather than new.