Delta Air Lines in dramatic loss swing

As usual, those pesky special items conspired to move Delta’s year-end net profit of USD291 million into a net loss of USD1.1 billion, despite a USD6 billion decline in revenue year on year. The special items totaled USD169 million, with USD1.4 billion in fuel hedge losses. The company ended the year with USD5.4 billion in unrestricted liquidity, a USD400 million increase year-on-year.

It was only special items that kept Delta from USD291 million profit to a net loss of USD1.1 billion.

For the fourth quarter, Delta posted net losses of USD225 million or USD0.27 per share, a USD285 million improvement over the year-ago quarter, ex special items. With special items, the net loss for the quarter was USD25 million. The carrier's 4Q2009 operating loss was USD46 million.

Delta Air Lines operating profit (loss) margin (%): 1Q2007 to 4Q2009

Delta recorded special items totaling a net USD200 million credit in the Dec-2009 quarter, including USD121 million in merger-related expenses; and a USD321 million non-cash tax benefit related to the impact of fuel hedges in other comprehensive income. This compares with USD1 billion in special charges in the year-ago period.

The Delta Connection program contributed USD1.3 billion to the Q42009 bottom line, up USD103 million or 9%. For the full year, the group posted USD5.2 billion in revenues, up 19%.  

Echoing others about forward bookings

While echoing other airline executives on the difficulties of 2009 (and how glad he was that it was over), Chair and CEO Richard Anderson focused on the synergies expected this year from accomplishing a single operating certificate in its merger with Northwest. While conservative in its plans, Delta was clear it is expected far better results in 2010 just on the realisation of the single operating certificate which came on 31-Dec-2009. Delta achieved USD700 million incremental merger benefits in 2009.

Future bookings look strong. “In January, our corporate contract bookings are up roughly 10% as compared to the same period last year,” said President Ed Bastion. “While this partly reflects easier comparisons, business travelers are returning. Our consolidated passenger RASM has turned positive in January and will be up 2% over last January. We expect first quarter unit revenue performance to continue with the acceleration trend we have experienced over the last six months and to be in solid positive territory year-over-year.”

Domestic and Trans-Atlantic are showing the greatest improvements with yields expected to be up in the high single digits for domestic and double digits for Trans-Atlantic during the first quarter, he reported.

“Our domestic close-in bookings have sustained their trend in the fourth quarter and, on the leisure front, peak spring break periods also look improved versus 2009,” he said. “Our Trans-Atlantic business bookings continue to run above last year’s levels, coupled with recent industry fare increases and Delta's capacity restraint, we expect yield to improve throughout the quarter. We expect Latin and Pacific yields to be down in the mid single digits year-over-year in the first quarter. We are seeing strength in South America, but downward pressure driven by Caribbean and Central American capacity growth. Trans-Pacific is showing relative strength, while the Japanese resort markets and Inter-Asian markets are relatively weaker.”

During the March quarter, Delta expects system capacity to be down 3-5% year-on-year with consolidated domestic capacity down 1-3% and consolidated international capacity to be down 5-7%. Anderson reported that for 2010, system, domestic and international capacity will be flat for the full year.  

“So, while we have a lot of work ahead of us this year, we are well on our way to completing a successful integration and delivering USD2 billion in annual run rate synergy benefits that are unique to Delta,” concluded Bastion.

JAL would gain USD400 million benefit from switch to Delta

Analysts were keen to discuss the JAL situation, to which Anderson responded that, no matter what happens, there was no way for Delta to take a hit.

Anderson pointed to a long body of precedents governing anti-trust immunity from administration from both parties. “You really have to go into the data,” he said, adding this was a legal and factual analysis. “That analysis would show very clearly that the market shares in this instance are substantially below market shares that have been previously approved in ATI applications. Most notably, the ATI application SkyTeam had in for the Paris market, the German market. So, it’s really more a matter of just sort of coolly and objectively evaluating the law that has been fairly well settled by DOT over the last 20 years".

Interestingly, he discussed market share in terms of US-Asia, not US-Japan, which American forcefully said would not get ATI approval, because SkyTeam would end up with 65% of the market.

“The Star Alliance is actually the largest alliance between the United States and Asia,” he said. “And they'll continue to be the largest between the US and Asia. From a consumer perspective, the benefits of alliances have been very well established over the past 20 years. And those benefits come from seamless networks that provide many more travel choices much more efficient routings and an increase to significant increase in output by the carriers that are in these alliances. All of which drive significant consumer benefits. I think it’s really a matter of a cool and objective view of both the law and the facts in this case and I’m certain that the very professional staff at the DOT will do the good job that they've always done in handling these sorts of matters.”

Bastion added that while Delta has not quantified the benefit of having JAL in SkyTeam, the benefit to JAL is about USD400 million “full up,” he reiterated. Meanwhile, American quantified the JAL contribution to that airline at about USD100 million.

In response to a question about the importance of the Tokyo hub, he added, “Yes, in fact when you think about a number of those markets, the markets south and west of Tokyo, they are actually best served through a hub and with the right alliance relationships, they are in fact a valuable part of the network.”

Strategic priorities for 2010

Anderson spoke of the three strategic priorities for 2010, including progress on the Northwest merger, as well as obtaining all the assets “needed to succeed.” He pointed to the fact that the carriers now have single inventory scheduling and yield management systems. The technology integration will contribute to the USD600 million and incremental merger synergies for 2010.

“2010 must be the year of revenue synergies for our merger,” he said. About USD350 million of the synergies will come from increased revenue, with the balance coming from the cost side.

The company said it would take about two years to recover all the merger synergies. “We haven’t yet turned on the integrated code,” said Bastion. “Yet with the technology integration, we are expecting to complete that this quarter and once you have the code, once you have the technology complete together with the SOC, we will be able to start to free flow the fleet. Remember, there are fairly significant personnel implications as we need to get staffing complete and the crews in the right spot. We need to get people trained. It will take a while and there will be some trial and experience factors that we'll learn as we move the fleet across to Delta in Northwest traditional systems, but I’d say two years to get to the full level of that revenue synergy.”

Driving revenue premium through leveraging the network and investing in product is the second key goal for 2010, he added, emphasizing the company now has the freedom to schedule aircraft to strategically support its hubs.

Its Cincinnati hub remains a concern, however Anderson said the carrier is still working with the community to build back the hub. “48 of the 50 top markets out of Cincinnati will continue to be served", he said, "so we are adding two new markets to Austin and San Antonio, out of Cincinnati. In terms of the market coverage, that hasn’t really changed, so there is still service, non-stop service in all those markets and the Paris flight continues to perform well.”

This year, Memphis was roughly flat and Cincinnati is down 29%, according to the airline. However, for this year, Memphis will remain flat and Cincinnati will be plus/minus 5% in capacity.

Ancillary revenues

“We are also going to stay the course with respect to USD3.4 billion ancillary revenue stream that we are positioned to grow,” said Anderson. Ancillary revenues reached USD773 million in the December quarter, an increase of 3%. For the full year, such revenues jumped USD1 billion, or 43%.

President Ed Bastion reported baggage fees were up USD75 million, but said that was counterbalanced by softness in the MRO business and other non-passenger revenue components. The company is targeting growth of over $500 million in other net revenues this year primarily from bag fees, Sky Miles and the MRO business.

“We expect about USD100 million next year in revenue growth from Delta Global Services, our MRO business, the mainline travel business,” said Anderson. “So the ancillary businesses that are related to air travel, but will do better in an improving economy.”

See related report: Ancillary revenues: Airlines to earn USD58 billion in 2010; CAPA to review Asia Pacific prospects

Revenue Environment

Delta is restoring its traditional CASM/RASM relationship after a six-quarter period in which costs outpaced revenues starting in 1Q2008 and ending in 2Q2009 except for 2Q and 3Q2008. However, with the third quarter, it resumed its traditional relationship with CASM trailing RASM. In 4Q2009, consolidated passenger RASM was USD 10.84 cents, a decline of 5.4%. However, costs declined by 21.2% to USD 12.52 cents - still too high, but a move in the right direction.

Delta's operating revenue for the December quarter was down USD1 billion or 12% year-on-year, while consolidated passenger unit revenues decreased 5% year-on-year, with yield down 7 points and load factor up 1 point, Bastion reported.

Monthly passenger RASM improved sequentially throughout the quarter with October down 11% year-on-year, November down 4% and December down 1%. Domestic passenger unit revenue was down 7% on a 4% capacity reduction, driven by yield pressures, he said.

“International passenger revenue for the quarter was down 5% year-on-year, with yields down 10 points and load factors up 4 points on a 14% capacity reduction,” he told analysts. “We've seen significant improvement in our unit revenue performance since the June month, when we experienced a 23% year-over-year decline in our consolidated passenger RASM. While the comparisons have certainly become easier as we closed out the year, we have seen tangible evidence of sequential demand improvement which indicates the recovery has begun".

Delta's operating revenue on a GAAP basis grew 1% to USD6.8 billion in the December 2009 quarter compared to the prior year period as a result of its merger with Northwest. On a combined basis, total operating revenue declined nearly USD1 billion, or 12%, and total unit revenue (RASM) declined 5% in the December 2009 quarter compared to the 2008 quarter.

Passenger revenue decreased 13%, or USD878 million, compared to the prior year period on an 8% capacity reduction. Passenger unit revenue (PRASM) declined 5%, driven by a 7% decline in yield and a 1 point improvement in load factor.

Reflecting the on-going cessation of freighter operations when concluded during the quarter, cargo revenue declined 11%, or USD32 million, reflecting lower yields. Freighter capacity was 19% lower year over year due to Delta's decision to end all dedicated freighter flying by the end of 2009.

Increased baggage fees partially offset a 6%, USD53million decline in other net revenue. The airline cited declines in administrative service charges.

Delta comparisons of revenue-related statistics: 4Q2009 vs 4Q2008


Increase (Decrease)


4Q09 (GAAP) versus 4Q08 (Combined)


4Q09 ($M)





Passenger Revenue








$      2,670













   Latin America














   Total mainline















$      5,779






Flat costs this year

Looking at a year in which most feel any recovery will be very slow and very long, the airline is putting emphasis on cost reductions targeting consolidated non-fuel unit costs to be flat or up just 2%. In 1Q2009 ex-fuel unit costs reached USD8.63, according to CFO Hank Halter, who made a point to say that full-year 2009 also had flat consolidated non-fuel cost per available seat mile (CASM), excluding three points of market-driven pension expense.

He reported that operating expenses decreased USD1.2 billion year-on-year, reflecting USD900 million and lower fuel price in addition to reduced capacity-related costs, higher synergy benefits and productivity.

Consolidated non-fuel unit costs were up 7% over the year-ago period, higher than the guidance it provided in mid-Dec-2010, owing to higher shares on exceeding operational goals. Also involved was asset write downs as a result of impairment testing and higher revenue related expenses.

“In the March quarter, we will have some cost pressure from customer and product investments as well as from maintenance volumes, but we expect to largely offset those with incremental cost synergies and productivity,” he told analysts. “We are expecting a breakeven operating margin for the March quarter. Our year-end liquidity balance was down from $5.8 billion at the end of the September quarter. Operating cash flow was negative 75 million in December quarter, reflecting our pre-tax loss and seasonal declines in the air traffic liability".

Delta has few aircraft deliveries in 2010 with only four, including two B777-200LRs and two B737-800s, all of which have financing in place. Halter also noted that the company is purchasing nine MD-90s to bring its total MD-90 fleet to 28, adding they are very cost effective aircraft for fleet replacement.

It was hedged 40% in the Dec-2009 quarter on fuel consumption with consolidated oil and fuel at USD2.17 per gallon. For the Mar-2010 quarter, it is hedged 47% of anticipated consumption with about half of that in [coal] options.

In the Dec-2009 quarter, Delta's operating expense on a GAAP basis decreased approximately $1 billion year on year, said the airline, citing restructuring and merger-related items. Bastion reported remaining merger-related, one-time cost of $150 million to $175 million to be recorded over the balance of 2010.

Capacity cuts exceeded cost reduction and merger synergy efforts. Consolidated unit cost (CASM), excluding fuel expense and special items, increased 7% year on year in the December 2009 quarter. Non-operating expense ex special items decreased USD55 million, or 15%, in the December 2009 quarter on foreign exchange losses.

"Delta's strong financial foundation and unmatched merger benefits allowed us to keep our full-year unit costs contained and grow our unrestricted liquidity to $5.4 billion," said CFO Hank Halter.  "We are well positioned for 2010 with more than 50% of our debt maturities already addressed and plans to keep our non-fuel unit costs flat to 2009."

Liquidity Position

As of 31-Dec-2009, Delta had USD5.4 billion in unrestricted liquidity, including USD4.7 billion in cash and short-term investments and USD685 million in undrawn revolving credit facilities.  Operating cash flow during the December 2009 quarter was negative USD75 million, reflecting the pre-tax loss and the seasonal declines in air traffic liability.

During the quarter, the company completed a total of USD1.1 billion in financing transactions, including USD689 million from the 2009-1 EETC offering to refinance 27 aircraft (of which USD347 million remains in escrow), USD150 million from the issuance of unsecured municipal bonds and USD250 million in new revolving credit facilities. The company noted that Northwest's USD300 million revolving credit facility terminated without be drawn.  Debt and capital lease payments for the December 2009 quarter totaled USD628 million, which included repaying the original financing for five aircraft in the 2009-1 EETC.

Capital expenditures during the quarter were approximately USD175 million, which included USD136 million for investments in aircraft, parts and modifications. The Cap Ex expenditure is part of the earlier announcement this week, the carrier would USD1 billion – about USD300 million annually through mid-2013 – to improve both air and ground customer experience. The effort is meant to avoid new aircraft investment.

Anderson called it the most significant investment in customers in more than a decade. "Our premium travelers tell us that the comfort of a flat bed seat with direct aisle access, a first class experience on regional jets and in-flight entertainment are important factors in their choice of carrier," said Delta CEO Richard Anderson.

He was echoing comments made during Continental’s 4Q2009 conference last week, when the company said it was losing market share because it did not have full-flat bed seats on all aircraft and it was working on upgrading its fleet just as Delta is doing.

Focused mostly on the elite flyer, the effort includes installing full flat-bed seats in BusinessElite on 90 trans-oceanic aircraft, including 14 B767-400ERs, 52 B767-300ERs, 16 B747-400s and eight B777-200ERs.

It is also adding in-seat audio- and video-on-demand throughout economy on 16 Boeing 747-400 and 52 Boeing 767-300ER aircraft. With these  additions, Delta will offer personal, in-seat entertainment for both BusinessElite and economy class customers on all wide-body aircraft. It is also following other airlines in adding first class cabins to its regional aircraft including the 66 CRJ-700s operating by Atlantic Southeast Airlines, Comair an SkyWest. The change brings to 219 the number of regional aircraft with the dual-class configuration.

The investment includes the completion of 269 former Northwest aircraft to conform to Delta interiors, updated lighting and enhanced cabin amenities such as increased overhead bin space on 757-200s. In addition winglets will be installed on more than 170 Boeing 767-300ER, 757-200 and 737-800 aircraft to extend aircraft range and improve fuel efficiency by as much as 5%. Finally, it is renovating and expanding Delta’s Los Angeles Sky Club lounge and introducing new Sky Club locations in Seattle, Philadelphia and Indianapolis.

Delta also continues to rapidly expand in-flight Wi-Fi service, which is available on more than 340 aircraft and more than 1,200 flights each day. Delta, which leads the market in the number of Wi-Fi equipped aircraft, plans to have more than 530 aircraft equipped with Wi-Fi by mid-2010.

Delta's projections for 1Q2010 quarter


1Q 2010 Forecast

Fuel price, including taxes and hedges

$ 2.22

Operating margin


Capital expenditures

$ 400 million

Total liquidity as of Mar. 31, 2010

$ 5.6 billion


1Q 2010 Forecast (compared to 1Q 2009)

Consolidated unit costs - excluding fuel expense

Flat to up 2%

Mainline unit costs - excluding fuel expense

Flat to up 2%

System capacity

Down 3 – 5 %


Down 1 – 3 %


Down 5 – 7 %

Mainline capacity

Down 3 – 5 %


Down 2 – 4 %


Down 5 – 7 %

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