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

• Delta’s net income for the December 2012 quarter was $238 million, or $0.28 per diluted share, excluding special items¹.   Results include the $100 million negative impact of Superstorm Sandy on airline and refinery operations.
• Delta’s net income for 2012 was $1.6 billion, excluding special items, a $362 million increase over 2011.
• Delta’s GAAP net income was $7 million, or $0.01 per diluted share, for the December 2012 quarter and $1.0 billion for 2012.
• Delta’s unit revenues were up 4.3 percent for the quarter and the company’s unit revenue gains have outperformed the industry for 21 consecutive months.
• 2012 results include $372 million in profit sharing expense, including $63 million in the December quarter, recognizing Delta employees’ contributions toward meeting the company’s financial goals.
• Delta’s adjusted net debt at the end of 2012 was $11.7 billion, a $5.3 billion reduction from 2009.

“Our December quarter profit caps off a successful 2012 for Delta with strong financial results, industry-leading operational performance, and across the board improvements in customer satisfaction.  I want to thank our employees and I look forward to recognizing them next month with $372 million of profit sharing for 2012,” said Richard Anderson, Delta’s chief executive officer.  “We enter 2013 as a stronger airline, with initiatives in place to build on our 2012 success.  In the year ahead, we will advance our position around the world and continue to build a better airline for our shareholders, customers and employees.”

Revenue Environment

Delta’s operating revenue grew $203 million, or 2 percent, in the December 2012 quarter compared to the December 2011 quarter, despite a $75 million revenue decline associated with Superstorm Sandy.  Load factor increased to 83.3 percent, with traffic up 0.7 percent on a 1.3 percent decrease in capacity.

• Passenger revenue increased 3.0 percent, or $215 million, compared to the prior year period.  Passenger unit revenue (PRASM) increased 4.3 percent, driven by a 2.3 percent improvement in yield.
• Cargo revenue decreased 5.9 percent, or $15 million, on declining freight yields.
• Other revenue increased 0.3 percent, or $3 million, as higher codeshare revenue was offset by lower third-party maintenance revenue.

Comparisons of revenue-related statistics are as follows:

“Our investments in Delta’s network, products and operations, combined with our capacity discipline, have produced unit revenue growth that has outpaced the industry for 21 consecutive months,” said Ed Bastian, Delta’s president.  “We have built strong revenue momentum going into the year with our customer-focused initiatives, corporate share gains, and capacity actions.  As a result, we project a 4 – 6 percent year over year increase in March quarter unit revenues.”

Cash Flow

Cash from operations during the December 2012 quarter was $585 million, as the company’s profitability and working capital initiatives were partially offset by the normal seasonal decline in advance ticket sales.  Capital expenditures during the December 2012 quarter were $600 million, including $310 million in fleet investments and $70 million of capital investments for the Trainer Refinery.

During the quarter, Delta’s net debt and capital lease payments were $17 million.  In October, Delta refinanced $1.7 billion in debt and undrawn revolving credit facilities secured by the company’s Pacific routes and slots, which resulted in a lower interest rate.  Delta expects the transaction will generate more than $30 million in annual interest expense savings.

As of Dec. 31, 2012, Delta had $5.2 billion in unrestricted liquidity, including $3.4 billion in cash and short-term investments and $1.8 billion in undrawn revolving credit facilities.  The company ended 2012 with adjusted net debt of $11.7 billion and Delta has now achieved more than $5 billion of its $7 billion debt reduction target since 2009.

“Delta’s results this quarter are remarkable in light of the $100 million negative impact Superstorm Sandy had on our airline and refinery operations,” said Paul Jacobson, Delta’s chief financial officer.  “We have generated $4 billion in free cash flow over the past three years, and we expect to build on that momentum in 2013 with the additional benefits of further debt reduction and $1 billion of structural cost initiatives.”

Cost Performance

Total operating expense increased by $577 million as a result of higher fuel costs and wages.  Interest expense declined $30 million as a result of Delta’s debt reduction strategy.

Consolidated unit cost (CASM³), excluding fuel expense, profit sharing and special items, was 5.7 percent higher in the December 2012 quarter on a year-over-year basis, driven by the impact of capacity reductions, wage increases, and operational and service investments.  GAAP consolidated CASM increased 9 percent.

Fuel

Delta’s average fuel price² was $3.24 per gallon for the December quarter, which includes 5 cents per gallon in settled hedge gains and a 7 cent per gallon loss from the Trainer refinery.

During the quarter, jet fuel production ramped up at the Trainer Refinery.  However, Superstorm Sandy negatively impacted the refinery start up, slowing production and lowering efficiency levels at the plant.  As a result of the reduced production, the refinery produced a $63 million net loss for the quarter.  At current market prices, Delta expects Trainer to produce a modest profit in the March quarter.

Delta recorded special items totaling a $231 million charge in the December 2012 quarter, including:

• a $122 million charge for facilities, fleet and other, including charges associated with Delta’s domestic fleet restructuring;
• a $106 million loss on early extinguishment of debt primarily due to the company’s Pacific route refinancing; and
• a $3 million mark to market loss on fuel hedges.

Delta recorded special items totaling a $46 million gain in the December 2011 quarter, including:

• a $164 million mark to market gain primarily for open fuel hedges settling in future periods;
• a $43 million gain associated with the divestiture of slots at New York-LaGuardia and Washington-Reagan National;
• an $81 million charge for impairment of intangible assets and grounded aircraft associated with Delta’s capacity reductions; and
• an $80 million charge for severance and other items, including loss on early extinguishment of debt.

(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 December 2012 quarter average fuel price of $3.24 per gallon reflects the consolidated cost per gallon for mainline and regional operations; the impact of fuel hedge contracts with original maturity dates in the December 2012 quarter; and net refinery results including the impact of self-supply from the production of the Trainer refinery, the impact of refined products exchanged with Phillips 66 and BP.  Settled hedge gains for the quarter were $43 million, or 5 cents per gallon.  On a GAAP basis, fuel price includes $3 million in fuel hedge mark-to-market adjustments recorded in periods other than the settlement period.  The net refinery loss for the quarter was $63 million, or 7 cents per gallon.  See Note A for a reconciliation of average economic fuel price per gallon to the comparable GAAP metric.

(3) CASM – Ex: In addition to fuel expense, profit sharing and special items, Delta excludes 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 for 2012 were $185 million and $883 million for the December quarter and full year, respectively.  The amounts excluded for 2011 were $216 million and $847 million for the December quarter and full year, respectively.  Management believes this methodology provides a more consistent and comparable reflection of Delta’s airline operations.

Copyright Photo: Nick Dean. Boeing 767-432 ER N840MH (msn 29718) climbs away from the runway at Everett (Paine Field).

Delta Air Lines: