Delta Air Lines reports a third quarter net profit of $357 million

Delta Air Lines (Atlanta) today reported financial results for the September 2014 fourth quarter. Key points include:

Delta’s pre-tax income for the September 2014 quarter was $1.6 billion, excluding special items, an increase of $431 million over the September 2013 quarter on a similar basis. Delta’s net income for the September 2014 quarter was $1.0 billion, or $1.20 per diluted share, and its operating margin was 15.8 percent, excluding special items.

On a GAAP basis including special items, Delta’s pre-tax income was $579 million, operating margin was 7.5 percent and net income was $357 million, or $0.42 per diluted share.

Results include $384 million in profit sharing expense in recognition of Delta employees’ contributions toward achieving the company’s financial goals, which makes a year-to-date profit sharing accrual of $823 million.

Delta generated $910 million of free cash flow during the September 2014 quarter. The company used its strong cash generation in the quarter to reduce its adjusted net debt to $7.4 billion and return $325 million to shareholders through dividends and share repurchases.

Revenue Environment

Delta’s operating revenue improved 7 percent, or $688 million, in the September 2014 quarter compared to the September 2013 quarter, driven by continued strength in corporate and domestic revenues. Traffic increased 3.7 percent on a 3.2 percent increase in capacity.

Passenger revenue increased 6 percent, or $522 million, compared to the prior year period. Passenger unit revenue (PRASM) increased 2.4 percent year-over-year with a 1.9 percent improvement in yield. Seat-related products and other merchandising initiatives increased revenues by nearly $50 million versus the prior year period.

Cargo revenue increased 7 percent, or $15 million, on higher freight yields and volumes.

Other revenue increased 15 percent, or $151 million, driven by joint venture, SkyMiles revenues, and third-party refinery sales.
Comparisons of revenue-related statistics are as follows:

Cost Performance

Consolidated unit cost excluding fuel expense, profit sharing and special items (CASM-Ex2), was up 0.3 percent in the September 2014 quarter on a year-over-year basis as the benefits of Delta’s domestic refleeting and other cost initiatives offset the company’s investments in its employees, products and operations.

Excluding special items, total operating expense in the quarter increased $320 million year-over-year driven by higher revenue- and volume-related expenses and $135 million higher profit sharing expense. These cost increases were partially offset by lower fuel expense and savings from Delta’s cost initiatives.

Excluding mark-to-market adjustments,3 fuel expense declined $23 million driven by lower market prices and higher refinery profits. Delta’s average fuel price was $2.90 per gallon for the September quarter, which includes $63 million in settled hedge gains. Operations at the refinery produced a $19 million profit for the September quarter, a $16 million improvement year-over-year.

Non-operating expense declined by $63 million excluding special items as a result of lower interest expense and a $23 million increased contribution associated with Delta’s 49 percent ownership stake in Virgin Atlantic.

Tax expense, excluding special items, increased $629 million compared to the prior year quarter, as the company now recognizes tax expense for financial reporting purposes following the reversal of its tax valuation allowance at the end of 2013. Delta’s net operating loss carryforwards of more than $13 billion largely offset cash taxes due on future earnings.

On a GAAP basis, consolidated CASM increased 12 percent and total operating expense was up $1.4 billion compared to the September 2013 quarter primarily due to special items associated with fleet restructuring and mark-to-market adjustments on fuel hedges settling in future periods. GAAP fuel expense increased $609 million on a year-over-year basis primarily driven by the hedge performance including mark-to-market adjustments. GAAP fuel cost per gallon for the quarter was $3.23. Non-operating expenses for the quarter increased by $56 million as a result of a $134 million special item for loss on extinguishment of debt resulting from Delta’s debt reduction initiatives. On a GAAP basis, tax expense was $222 million in the quarter.

Cash Flow

Adjusted cash from operations during the September 2014 quarter was $1.3 billion, driven by the company’s September quarter profit, partially offset by the normal seasonal decline in advance ticket sales. The company generated $910 million of free cash flow. Adjusted capital expenditures during the September 2014 quarter were $411 million, including $322 million in fleet investments. During the quarter, Delta’s net debt maturities and capital leases were $301 million. On a GAAP basis, cash from operations for the September 2014 quarter was $1.4 billion and capital expenditures were $457 million.

With its strong cash generation in the September 2014 quarter, the company returned $325 million to shareholders through $75 million of cash dividends and $250 million of share repurchases. For the first nine months of 2014, the company has returned a total of $776 million to shareholders, including $176 million in quarterly dividends and $600 million in share repurchases.

Delta ended the quarter with $6.4 billion of unrestricted liquidity and adjusted net debt of $7.4 billion. The company has now achieved nearly $10 billion in net debt reduction since 2009.

December 2014 Fourth Quarter Guidance

Following are Delta’s projections for the December 2014 fourth quarter:

4Q14 Forecast

Operating margin

10% – 12%
Fuel price, including taxes, settled hedges and refinery impact

$2.69 – $2.74
Consolidated unit costs – excluding fuel expense and profit sharing
(compared to 4Q13)

Up 0 – 2%
Profit sharing expense

$200 – $250 million
Non-operating expense

$175 – $200 million
System capacity (compared to 4Q13)

Up ~3%
Special Items

Delta recorded a $657 million special items charge, net of taxes, in the September 2014 quarter, including:

a $397 million charge for fleet and other items, primarily associated with the decision to accelerate the retirement of Delta’s 747 fleet as part of its Pacific network restructuring;
a $215 million charge for mark-to-market adjustments on fuel hedges settling in future periods;
an $87 million charge for debt extinguishment and other items, primarily associated with Delta’s debt reduction initiative; and
a $42 million gain related to a litigation settlement.

Delta recorded a net $157 million special items gain in the September 2013 quarter, including:

a $285 million gain for mark-to-market adjustments on fuel hedges settling in future periods; and
a $128 million charge for facilities, fleet and other items, primarily associated with Delta’s domestic fleet restructuring.

Delta will hold a conference call at 1000 am EDT today.

Delta Air Lines (current livery):