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

Delta’s pre-tax income for the June 2014 quarter was $1.4 billion, excluding special items1, an increase of $593 million over the June 2013 quarter on a similar basis. Delta’s net income for the June 2014 quarter was $889 million, or $1.04 per diluted share, and its operating margin was 15.1 percent, excluding special items.

On a GAAP basis which includes special items, Delta’s pre-tax income was $1.3 billion, operating margin was 14.9 percent and net income was $801 million, or $0.94 per diluted share.

Results include $340 million in profit sharing expense in recognition of Delta employees’ contributions toward achieving the company’s financial goals.

Delta generated over $2 billion of operating cash flow and $1.5 billion of free cash flow during the June 2014 quarter. As of mid-July, the company has used its strong cash generation in 2014 to reduce its adjusted net debt below $8 billion, contribute more than $900 million of funding to its defined benefit pension plans, and return $550 million to shareholders through dividends and share repurchases.

“Delta’s performance this quarter, with 9 percent top line growth, more than 4 points of margin expansion and $1.5 billion of free cash flow, shows the financial strength and resilience of our company. We expect our September quarter performance will be even stronger, as we expand our operating margins to 15-17% and further improve our profitability,” said Delta chief executive officer Richard Anderson. “All credit goes to Delta people worldwide who not only produced this record financial performance, but also continue to lead the industry in operational reliability and customer satisfaction.”

Revenue Environment

Delta’s operating revenue improved 9 percent, or $914 million, in the June 2014 quarter compared to the June 2013 quarter, driven by continued strength in corporate and domestic revenues. Traffic increased 5.0 percent on a 3.2 percent increase in capacity.

Passenger revenue increased 9 percent, or $772 million, compared to the prior year period. Passenger unit revenue (PRASM) increased 5.7 percent year-over-year with a 3.8 percent improvement in yield. Seat-related products and other merchandising initiatives increased revenues by $45 million versus the prior year period.

Cargo revenue decreased 1 percent, or $2 million, as lower freight yields were partially offset by higher volumes.

Other revenue increased 15 percent, or $144 million, driven by higher joint venture and SkyMiles revenues.

Cost Performance

Consolidated unit cost excluding fuel expense, profit sharing and special items (CASM-Ex2), was flat in the June 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. GAAP consolidated CASM decreased 0.4 percent.

Total operating expense in the quarter increased $249 million year-over-year driven by higher revenue- and volume-related expenses and $222 million higher profit sharing expense. These cost increases were partially offset by lower fuel expense and savings from Delta’s cost initiatives.

Fuel expense declined $168 million driven by hedge benefits, refinery profits and prior year mark to market adjustments that offset higher market fuel prices and higher consumption. Delta’s average fuel price was $2.93 per gallon for the June quarter, which includes $99 million in settled hedge gains. Operations at the refinery produced a $13 million profit for the June quarter, a $64 million improvement year-over-year.

Excluding special items, non-operating expense declined by $58 million as a result of lower interest expense, lower foreign exchange impact, and a $7 million gain associated with Delta’s 49 percent ownership stake in Virgin Atlantic. Including a $111 million special item for loss on extinguishment of debt resulting from Delta’s debt reduction initiatives, non-operating expense for the quarter increased by $53 million.

Tax expense increased $496 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.

“With our domestic refleeting continuing and our cost initiatives taking hold, we have been able to keep our non-fuel unit cost growth below 2 percent for each of the last four quarters,” said Paul Jacobson,

Delta’s chief financial officer. “Not only are these initiatives driving our current performance, but they are also building a foundation for sustaining this performance into the future.”

Cash Flow

Cash from operations during the June 2014 quarter was $2.1 billion, driven by the company’s June quarter profit and the normal seasonal increase in advance ticket sales, which were partially offset by $300 million in contributions to the defined benefit pension plan. The company generated $1.5 billion of free cash flow.

Capital expenditures during the June 2014 quarter were $520 million, including $343 million in fleet investments. During the quarter, Delta’s net debt maturities and capital leases were $851 million.

With its strong cash generation year to date, the company has returned $550 million to shareholders as of mid-July. Through its $0.06 per share quarterly dividend, the company paid $101 million to shareholders. In addition, the company repurchased 12.4 million shares at an average price of $36.33 for a total of $450 million. These repurchases represent $200 million under the May 2014 $2 billion authorization, in addition to completing the May 2013 $500 million authorization.

Delta ended the quarter with $6.0 billion of unrestricted liquidity and adjusted net debt of $7.9 billion. The company has now achieved more than $9 billion in net debt reduction since 2009.

Jacobson continued, “By taking a balanced approach to capital deployment, Delta has been able to invest more than $1 billion in our fleet and other products, while also reducing our debt to its lowest level in twenty years, contributing over $900 million to our pension plans, and returning $550 million to shareholders so far this year.”

Company Highlights

Delta has a strong commitment to its employees, customers and the communities it serves. Key accomplishments in the June 2014 quarter include:

Recognizing the achievements of Delta employees toward meeting the company’s financial and operational goals with $476 million of incentives so far this year, including accruing $439 million in employee profit sharing and paying $37 million in Shared Rewards;

Improving its global network with new service connecting Delta’s hubs in New York and Seattle/Tacoma with the key business destinations of London-Heathrow, Zurich, Rome, Hong Kong and Seoul;

Announcing an order for 15 Airbus A321 aircraft, adding to the 30 aircraft of this type already on order. These economically efficient, proven-technology aircraft will provide an improved customer experience as they replace similar, less-efficient domestic aircraft that are being retired as part of the Delta’s domestic fleet restructuring;

Completing modifications on its international widebody fleet, making Delta the only U.S. carrier to offer full flat-bed seats with direct aisle access in BusinessElite and personal, on-demand entertainment at every seat on all long-haul international flights; and

Celebrating the grand opening of the new Delta Flight Museum, which coincided with the 85th anniversary of Delta’s first passenger service. The museum is housed in the airline’s two original maintenance hangars with exhibits that chronicle more than eight decades of Delta history and the growth and development of commercial aviation.

Special Items

Delta recorded a net $88 million special items charge in the June 2014 quarter, including:

a $69 million charge for debt extinguishment associated with Delta’s debt reduction initiative; and
a $20 million charge associated with Delta’s domestic fleet restructuring.

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

a $125 million mark-to-market adjustment on 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.

Copyright Photo: Jay Selman/AirlinersGallery.com. Boeing 757-2Q8 N709TW (msn 28168) arrives in New York (JFK) with a special tribute to retired New York Yankees pitcher Mariano Rivera “42”.

Delta Air Lines (current):