Delta Air Lines posted impressive profits of USD549 million despite declining revenue passenger and available seat miles during the third quarter. Passenger revenues rose 10%, or USD866 million, for the third quarter as load factor increased to 86.1% on a 1% decline in capacity. The USD765 million in non GAAP profits were short of analysts' expectations at USD786.8 million. Total operating revenues neared USD10 billion coming in slightly shy at USD9.86 billion, besting analysts estimates at USD9.73 billion.
The airline also hit its mark for third quarter passenger unit revenue growth at 10.5%, aided by new products and services including Economy Comfort which is being adopted across the fleet. Other revenue initiatives include premium up-sell and a specialised travel service for Delta’s best passengers. It has also rolled out ancillary products including hotels, Wi-Fi and lounge passes.
October passenger unit revenues are expected to be up 10%, with the month nearly done as the domestic market shows particular strength, according to president Ed Bastion. Looking further into November and December, he said, bookings remain stable while load factor is running two points ahead of last year.
Mr Bastion also reported that latest booking data shows forward corporate revenues were up 13% despite forward capacity declines of five points. The strength of the corporate results is coming from a combination of share shift and increased corporate spending. Mr Bastion reported while clients are cautious, they recognise travel needs to grow in 2012.
Delta echoed its counterparts that have reported to date, reporting corporate travel demand remaining strong.While all airlines are reporting strong forward bookings and see nothing that would change this into 2012, a new study indicates the uncertain economy is forcing corporate travel down. Nearly half (47%) of corporate travel managers say they are poised to pull cost-cutting measures in the next six months, according to AirPlus International. About 58% see stricter pre-trip approvals and 56% see a shift to web conferencing or telepresence.
The bottom line, however, is the fact that while they may be preparing to pull the trigger on cost-cutting solutions, such action awaits more certain signals from the economy. This, then, tallies with Delta’s experience having surveyed its corporate travel managers and finding they will increase spending in 2012.
During the Alaska earnings call, it was pointed out that over the last few years, the fourth quarter has been stronger with traffic dropping off in the new year to impact first quarter results. The prospect particularly concerns analysts who are asking how airlines are preparing. The answer, of course, for those reporting so far, is maintaining capacity discipline. Only yesterday, they raised fares once again, the second time in a month. These fare increases are building war chests to weather any storm that may be coming.
United, Delta and Continental added USD5 to each one-way ticket on most domestic flights. Airlines have been successful in raising fares in about half the 20 fare-hike attempts this year and this latest depends on whether low-cost carriers, especially Southwest, match. Southwest was quick to match last week’s hike.
This means executives are confident that demand is not only strong but will stay strong at least through the end of the year. The latest hikes are between USD2-5 depending on length of haul and type of ticket. Delta’s increase was USD5 one way for 1500+ mile trips.
Maintaining cautious approach
Despite the robust revenue picture, the company is maintaining a cautious approach with high fuel costs, rising fares and economic concerns cited by all airlines that have reported so far as reason enough to maintain such an approach.
For its part, Delta is keeping fourth quarter capacity down between 4-5% and following that with a 2-3% decline, year-on-year, in 2012. Operating margin for the fourth quarter is expected to be 5-7%, despite a USD500 million increase in fuel.
Trans-Atlantic capacity, suffering from the economic volatility in Europe, has been trimmed by 10-12%. Delta, Air France, KLM and Alitalia leverage their joint venture for joint capacity, pricing and revenue management, treating it as a single network, something CEO Richard Anderson, has evolved into a much more sophisticated operation. It has increased integration of the distribution systems as well as linking reservation and yield management systems. He also noted that regardless of how passengers get to the US, whether on JV partners or Delta, the Atlanta-based carrier gets the connecting traffic once they are in the US.
“Joint planning and the feed from Rome, Paris and Amsterdam to Delta are two important factors in improving trans-Atlantic unit revenues,” Mr Anderson told analysts. Mr Bastion pointed out that corporate volume is remaining strong. Bookings from the banking sector in the last four weeks are down 4%, but that has been offset by a 24% increase from consulting and business service sectors, the revenues from which are 2.5 times that of banking.
Strategy continues successfully
Delta’s strategy, as outlined by Mr Anderson, calls for revenue diversification, good employee relations, continuing capacity discipline, cost control, deleveraging the business and limiting capital expenditures to investment that return high internal rates of return (IRRs).
The US Air Transport Association reported industry passenger revenues up 11.3% in Sept-2011 to USD8.3 billion on a 2.4% increase in ancillaries to USD498.7 million. However, it also reported flat traffic on a 0.7% decline in capacity. Of special interest is the strong industry revenue performance, with domestic revenues up 11.5% to USD5.5 billion and international up 11% to USD6.8 billion. Ancillary growth, according to ATA, is slowing, up only 1.5% through September to USD4.7 billion.
Delta’s Sept-2011 passenger revenue was up 13% while cargo was up 13% on 10% higher yields. However, owing to the impact of the expiration of Northwest ticket stock, passenger revenues were actually up 15.5%. Other revenues rose USD43 million on increased maintenance, repair and overhaul (MRO) revenues, according to Mr Bastion.
Ancillaries to deliver USD1 billion in revenues by 2013
Passenger revenue per available seat mile (PRASM) increased 10.9% to USD 13.54 cents driven by an 10.5% improvement in yield to USD 15.72 cents. Cargo revenue was up 13% or USD30 million on higher yields, despite the fact Delta no longer has a freighter fleet. Domestic unit revenues were up 12% on a two-point decline in capacity. Strong business demand contributed to a 10% increase in yield while load factor rose one point to 86%.
Mr Anderson reported that other and cargo revenues were providing good revenue diversification at USD2 billion annually and the airline is on track to delivering USD1 billion in ancillaries by 2013. New merchandising revenue streams are expected to produce USD200 million for the full year.
Regional revenues rose 9% to USD1.711 billion on a 12% increase in unit revenue and 10% increase in yield. Regional capacity was down 3%.
Consolidated revenue was up 10% to USD8.568 billion as unit revenue and yield both rose 11% on a 1% capacity decline.
Trans-Atlantic passenger revenue jumped 6% to USD1.79 billion as unit revenue and yield both rose 10% on a 4% decline in capacity. The Pacific outperformed other regions with a 22% increase in revenues to USD1.073 billion as unit revenues rose 7% and yield increased 12% on a 14% capacity increase. Japanese point of sale has nearly recovered while US point of sales still lags 10-15% behind in revenues. However, Latin America, with USD452 million in revenue, up 14%, had higher revenue and yield results increasing at 13% and 12%, respectively on a 1% increase in capacity.
Pacific capacity will be flat as the only growth will come in Latin capacity, which will be up 4-6% in response to market demand from Central and South America.
Operating expense rose USD1 billion, or 13%, after USD1 billion in gross fuel price pressure was offset by benefits from hedge portfolio and lower consumption. Operating expenses were USD8.9 billion. Fuel cost per gallon was USD3.09 per gallon, up 35% year-on-year.
Consolidated cost per available seat mile (CASM) ex special items rose from USD 7.84 cents in 3Q2010 to USD 8.10 cents while mainline rose USD 30 cents to USD 7.35 cents. Non-fuel unit costs were up 3% in the third quarter year-on-year on a 1% decline in capacity. Compounding this is a USD65 million in increased revenue-related expenses and USD31 million in foreign exchange losses on the strengthening dollar. Without counting those items, the core non-fuel unit cost of was up only 1%.
Non-fuel unit costs for the December quarter will be flat to up 2% on a 4-5% capacity reduction, including a 3-5% drop in domestic and 4-6% decline in international capacity, with one point of pressure coming from increases in revenue-related expenses and foreign exchange.
The airline continues to invest in its website to move share from global distribution systems and is now at 40% of tickets being sold through delta.com. Interestingly, Delta reported no uptick in the quarter resulting from the Sabre bias imposed against American because of its direct-connect strategy fight.
Also, as with its peers, it recorded a fuel hedge special item. Delta’s was USD216 million related to mark-to-market adjustments for open fuel hedge positions which are expected to continue. Other special charges were USD566 million, including USD360 million for loss on debt extinguishment and USD153 million on Comair’s fleet reduction. It also recorded USD53 million in merger-related expenses.
Continuing to lower costs
Cost-cutting measures include consolidating facilities at hubs at Memphis, Minneapolis and Cincinnati and working to sell vacant facilities in addition to the retirement of 70 older regional and mainline aircraft, which is expected to result in a double-digit decline in maintenance costs.
The airline is predicting it will lower costs to 2010 levels in the next 12-18 months but hopes to best it at USD 8.25-8.35 cents on a sustainable level. In 2010, consolidated unit cost (CASM), excluding fuel, profit sharing and special items, decreased 2% to USD 8.52 cents in the Dec-2010 quarter year-on-year. Consolidated CASM increased 2% to USD 12.83 cents.
Delta expected increasing revenues to offset about 80% of cost increases in the third quarter but bested that, covering 85% of USD1 billion in fuel increases. It was also expected an operating margin of between 9-11%, coming in at 11%. Its return of invested capital was at 8% for the quarter despite a USD3 billion jump in fuel. The airline's fuel hedging strategy saved it USD100 million in the third quarter and USD400 million year to date with fourth quarter cost per gallon expected to be lower than those having already reported at USD2.98.
Delta ended the quarter with USD5.1 billion in unrestricted liquidity, including USD3.3 billion in cash and shot-term investments and a USD1.8 billion in undrawn revolved credit facility. It reported cash used in operations during the quarter was USD100 million and the company cited normal seasonal decline in advance ticket sales as well as the offset from profitability.
At the end of the quarter, its adjusted net debt was USD14 billion, which is expected to be paid down to USD10 billion in 2013.