Delta posts a $844 million net profit in the Second Quarter

Delta Air Lines (Atlanta) today reported financial results for the June 2013 quarter.  Highlights from the quarter include:

  • Delta’s net profit for the June 2013 quarter was $844 million, or $0.98 per diluted share, excluding special items1.  This result is a record June quarter profit excluding special items and is a $258 million improvement year-over-year.
  • Including $159 million in special items, Delta’s GAAP net income was $685 million, or $0.80 per diluted share.
  • The company announced a balanced capital deployment plan, targeted at creating up to $5 billion of value for shareholders by 2017 through further debt reduction and the return of more than $1 billion to shareholders over the next three years by means of $200 million of annual dividends and a $500 million share repurchase program.
  • June quarter results include $118 million of profit sharing expense in recognition of Delta employees’ contributions to the company’s financial performance.
  • Delta generated $1.3 billion of operating cash flow and $730 million of free cash flow in the June 2013 quarter, and ended the period with adjusted net debt of $10.2 billion.

Revenue Environment

Delta’s operating revenue declined $25 million in the June 2013 quarter compared to the June 2012 quarter.  Traffic increased 0.5 percent on a 0.8 percent increase in capacity.

  • Passenger revenue increased 0.7 percent, or $63 million, compared to the prior year period.  Passenger unit revenue (PRASM) was flat year over year with a 0.2 percent improvement in yield.
  • Cargo revenue decreased 11.4 percent, or $30 million, on declining freight yields.
  • Other revenue decreased 5.6 percent, or $58 million, as a result of the decision to discontinue a number of low margin-producing third-party maintenance contracts.

Comparisons of revenue-related statistics are as follows:

Increase (Decrease)

2Q13 versus 2Q12

Passenger Revenue 2Q13 ($M) Change

YOY

Unit

Revenue

Yield Capacity
Domestic $ 3,885 3.7% 0.9% 2.5% 2.8%
Atlantic 1,578 2.5% 1.4% 0.9% 1.0%
Pacific 841 (2.1)% 0.5% (2.7)% (2.6)%
Latin America 492 3.6% 1.2% (2.3)% 2.4%
Total Mainline 6,796 2.7% 1.1% 1.1% 1.6%
Regional carriers 1,698 (6.2)% (2.3)% 0.9% (4.0)%
Consolidated $ 8,494 0.7% (0.1)% 0.2% 0.8%

Cash Flow

Cash from operations during the June 2013 quarter was $1.3 billion, driven by the company’s June quarter profit and the seasonal increase in advanced ticket sales, which was partially offset by $500 million of accelerated pension funding.  The company generated $730 million of free cash flow.

Capital expenditures during the June 2013 quarter were $704 million, including $360 million for the acquisition of 49% of Virgin Atlantic and $238 million in fleet investments, including aircraft parts and modifications. During the quarter, Delta’s debt maturities and capital leases were $405 million.

Delta ended the quarter with adjusted net debt of $10.2 billion and the company has now achieved nearly $7 billion in net debt reduction since 2009.  This debt reduction strategy produced a $43 million year-over-year reduction in interest expense in the June quarter. As of June 30, 2013, Delta had $5.7 billion in unrestricted liquidity, including $3.9 billion in cash and short-term investments and $1.8 billion in undrawn revolving credit facilities.

Cost Performance

Total operating expense in the quarter decreased year-over-year by $805 million driven by the savings from Delta’s structural cost initiatives and lower mark-to-market adjustments on fuel hedges, partially offset by the impact of operational, service and employee investments.

Consolidated unit cost excluding fuel expense, profit sharing and special items (CASM-Ex2), was 2.5 percent higher in the June 2013 quarter on a year-over-year basis, driven by the impact of wage increases and operational and service investments.  GAAP consolidated CASM decreased 9 percent, driven by lower fuel expense.

Fuel expense for the June quarter declined $710 million year-over-year, or $288 million excluding mark-to-market adjustments, as a result of lower fuel prices and prior year hedge losses. Delta’s average fuel price3 was $3.03 per gallon for the June quarter.  For the June quarter, operations at the Trainer refinery produced a $51 million loss ($0.05 cents per gallon impact) driven by the elevated price of the Renewable Identification Numbers (RINs) required under the Environmental Protection Agency’s Renewable Fuel Standard.

Balanced Approach to Capital Deployment

In May, Delta announced a five year financial plan and a balanced capital deployment program aimed at creating up to $5 billion of value for shareholders, including returning more than $1 billion to shareholders over the next three years.  The company’s financial plan focuses on free cash flow generation through a combination of expected earnings improvements and a disciplined approach to capital investment.  Over the next five years, Delta plans to reinvest $2.0 – $2.5 billion annually, or approximately 50 percent of its operating cash flow, into improving the company’s fleet, facilities, products and technology.

The resulting free cash flow will be used to return cash to shareholders, further reduce the company’s debt, and opportunistically address longer-term pension funding needs, driving up to $5 billion of value to Delta’s shareholders.  Specifically,

  • The company expects to achieve an adjusted net debt level of $7 billion by 2017, a $5 billion reduction over 2012.  By meeting the $7 billion target, Delta will have reduced its adjusted net debt by $10 billion since 2009, significantly decreasing the company’s balance sheet risk and accreting more than $750 million of interest expense savings for shareowners;
  • Delta’s Board of Directors initiated a quarterly dividend and declared a $0.06 per share dividend for shareholders of record as of August 9, 2013.  This dividend will be paid on September 10, 2013.  In addition, the Board authorized a $500 million share repurchase program, to be completed no later than June 30, 2016.  Together, these two programs are designed to return more than $1 billion of capital to shareholders over the next three years;
  • The company also plans to make up to $1 billion of incremental contributions to the company’s defined benefit pension plans over the next five years.  These contributions would be in addition to the $650 – $700 million annual contribution requirement.

Special Items

Delta recorded special items totaling a $159 million charge in the June 2013 quarter, including:

  • a $125 million charge for mark-to-market adjustments for fuel hedges settling in future periods; and
  • a $34 million charge for facilities, fleet and other items, primarily associated with Delta’s domestic fleet restructuring.

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

  • a $561 million charge for 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 facilities, fleet and other items.

End Notes

(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)  CASM – Ex: In addition to fuel expense, profit sharing and special items, Delta believes excluding ancillary business costs is helpful to investors because ancillary business costs are not related to the generation of a seat mile. These businesses include aircraft maintenance and staffing services Delta provides to third parties and Delta’s vacation wholesale operations. The amounts excluded were $165 million and $244 million for the June 2013 and 2012 quarters, respectively. The amounts excluded were $350 million and $484 million for the six months ended June 30, 2013 and 2012, respectively.  Management believes this methodology provides a more consistent and comparable reflection of Delta’s airline operations.

(3)  Average fuel price per gallon: Delta’s June 2013 quarter average fuel price of $3.03 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 2013 quarter. On a GAAP basis, fuel price includes $125 million in fuel hedge mark-to-market adjustments recorded in periods other than the settlement period. The net refinery loss for the quarter was $51 million, or 5 cents per gallon.  See Note A for a reconciliation of average fuel price per gallon to the comparable GAAP metric.

Copyright Photo: Michael B. Ing/AirlinersGallery.com. Boeing 777-232 LR N702DN (msn 29741) “The Spirit of Atlanta” prepares to land at Tokyo (Narita).

Delta Air Lines: AG Slide Show