Delta Air Lines (Atlanta) today reported financial results for the June 2012 quarter.  Key points include:

• Delta’s net income, excluding special items¹, for the June 2012 quarter was $586 million, or $0.69 per diluted share.
• Delta’s June 2012 quarter GAAP net loss was $168 million, or $0.20 per diluted share, including mark-to-market adjustments on open fuel hedges and other special items.
• Delta’s unit revenues were up 8.5% for the quarter and the company has produced a unit revenue premium to the industry for fifteen consecutive months.
• Delta ended the June 2012 quarter with $5.3 billion in unrestricted liquidity and adjusted net debt of $12.1 billion.

Delta’s operating revenue grew $579 million, or 6%, on 1.3% lower capacity in the June 2012 quarter compared to the June 2011 quarter.  Despite lower capacity, traffic increased 0.3% as load factor increased 1.4 points to 85.1%.

• Passenger revenue increased 7%, or $560 million, compared to the prior year period.  Passenger unit revenue (PRASM) increased 8.5%, driven by a 6.8% improvement in yield.
• Cargo revenue decreased 1%, or $2 million, with lower cargo yields partially offset by higher volumes.
• Other revenue increased 2%, or $21 million, from higher ancillary business revenue.

Comparisons of revenue-related statistics are as follows:

Fuel

Excluding mark-to-market adjustments, Delta’s average fuel price² was $3.37 per gallon for the June quarter, which includes 16 cents per gallon in settled losses from its fuel hedging program.  On a GAAP basis, which includes mark-to-market adjustment on out of period hedges, the company’s average fuel price was $3.95 per gallon.  At June 30, Delta had $350 million of hedge margin posted with counterparties.

Delta expects to participate meaningfully in the fuel price decline for the second half of 2012.  As of the July 23^rd forward curve, the company expects to realize average fuel prices of $3.09 and $3.05 for the September and December 2012 quarters, respectively, excluding any impact from the Trainer refinery.

During the June quarter, Delta’s subsidiary, Monroe Energy, closed its acquisition of the Trainer refinery.  Work is currently underway to complete the turnaround and modify the plant to maximize its jet fuel production. The company expects the plant to be operating at full capacity in the fourth quarter.  With Trainer at full capacity, Delta expects to save more than $300 million annually on its fuel expense.

Non-Fuel Cost Performance

In the June 2012 quarter, Delta’s operating expense, excluding fuel, increased $308 million year over year.  Primary drivers for the increase included higher profit sharing expense, increases in wages and benefits, and the impact of special items.

Consolidated unit cost (CASM³), excluding fuel expense, profit sharing and special items, was 3.6% higher in the June 2012 quarter on a year-over-year basis, driven by the impact of capacity reductions and investments in employees, products, services and facilities.  GAAP consolidated CASM increased 12% primarily due to mark-to-market adjustments on open fuel hedges in future periods.

Cash Flow and Liquidity

As of June 30, 2012, Delta had $5.3 billion in unrestricted liquidity, including $3.5 billion in cash and short-term investments and $1.8 billion in undrawn revolving credit facilities.

Operating cash flow during the June 2012 quarter was $683 million, driven by the company’s profitability and advance ticket sales, which was partially offset by pension funding and fuel hedge margin postings.  During the quarter, Delta made $354 million in contributions to its defined benefit pension plan, completing its funding requirements for the year.

Capital expenditures during the quarter were $652 million, including $300 million for aircraft (including parts and modifications), $180 million for the Trainer acquisition, and $65 million for Delta’s investment in Aeromexico.

During the June quarter, Delta paid $374 million in debt maturities and capital lease obligations.  Subsequent to the end of the quarter, Delta completed its $480 million 2012-1 enhanced equipment trust certificates (EETC) offering.  The certificates are secured by 31 aircraft that are being refinanced from other debt financings.

At June 30, Delta’s adjusted net debt was $12.1 billion.

Delta recorded special items totaling $754 million in the June 2012 quarter, including:

• a $561 million charge on mark-to-market adjustments on fuel hedges settling in future periods;
• $171 million in severance and related costs associated with voluntary early out programs; and
• a $22 million charge for fleet, facilities and other items.

Delta recorded special items totaling $168 million in the June 2011 quarter, including:

• $80 million in severance and related costs;
• a $64 million charge for fleet, facilities and other items;
• a $13 million charge for debt extinguishment; and
• $11 million in mark-to-market adjustments for fuel hedges.

(1) Note A to the attached Consolidated Statements of Operations provides a reconciliation of non-GAAP financial measures used in this release and provides the reasons management uses those measures.

(2) Average fuel price per gallon: Delta’s June 2012 quarter average fuel price of $3.37 per gallon reflects the consolidated cost per gallon for mainline and regional operations, including contract carrier operations, and includes the impact of fuel hedge contracts with original maturity dates in the June 2012 quarter.  Settled hedge losses for the quarter were $155 million, or 16 cents per gallon.  On a GAAP basis, fuel price includes $561 million in mark-to-market losses recorded on fuel hedge contracts settling in future periods.

(3) CASM – Ex: Delta excludes from consolidated unit cost ancillary businesses which are not related to the generation of a seat mile, including aircraft maintenance and staffing services which Delta provides to third parties and Delta’s vacation wholesale operations (MLT).  The amounts excluded were $244 million and $230 million for the June 2012 quarter and June 2011 quarter, respectively.

Copyright Photo: Tony Storck. Boeing 737-832 N3742C arrives at Baltimore/Washington.

Delta Air Lines: