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Delta reports 2Q pre-tax income of $1.6 billion

Delta Air Lines today reported financial results for the second (June) quarter 2018. Highlights of those results, including both GAAP and adjusted metrics, are below and incorporated here.

Adjusted pre-tax income for the June quarter 2018 was $1.6 billion, a $183 million decrease from the June 2017 quarter, as record revenues partially offset the approximately $600 million impact of higher fuel prices.

“With an expected $2 billion higher fuel bill for 2018, we are now forecasting our full-year earnings to be $5.35 to $5.70 per share. We have seen early success in addressing the fuel cost increase and offset two-thirds of the impact in the June quarter,” said Ed Bastian, Delta’s Chief Executive Officer. “With strong revenue momentum, an improving cost trajectory, and a reduction of 50-100 bps of underperforming capacity from our fall schedule, we have positioned Delta to return to margin expansion by year end.”

Revenue Environment

Delta’s adjusted operating revenue of $11.6 billion for the June quarter improved 8 percent, or $880 million versus the prior year. This quarterly revenue result marks a record for the company, driven by improvements across Delta’s business, including double-digit increases in both cargo and loyalty revenue.

Total unit revenues excluding refinery sales (TRASM) increased 4.6 percent during the period driven by strong demand across all entities and improving yields. Foreign exchange drove a nearly one point benefit to the quarter.

“The great service of the Delta people, strong demand for our product, and momentum across our business allowed Delta to deliver the highest quarterly revenue in our history and increase our revenue premium to the industry,” said Glen Hauenstein, Delta’s President. “While we are pleased with our revenue performance in the quarter, accelerating the recapture of the recent fuel price increases is the number one focus for our commercial team. We expect total unit revenue growth of 3.5 to 5.5 percent for the September quarter as we benefit from our commercial initiatives and recapture higher fuel costs.”

September 2018 Quarter and Full Year Guidance

Delta expects solid top-line growth, an improving cost trajectory, and a return to margin expansion.

Cost Performance

Total adjusted operating expenses for the June quarter increased $1.1 billion versus the prior year quarter, with more than half of the increase driven by higher fuel prices.

Adjusted fuel expense increased $578 million, or 33 percent, relative to June quarter 2017. Delta’s adjusted fuel price per gallon for the June quarter was $2.17, which includes $45 million of benefit from the refinery.

CASM-Ex increased 2.9 percent for the June 2018 quarter compared to the prior year period, a one point improvement from the March quarter. Cost pressures were driven by higher revenue-related costs and increased aircraft rent and depreciation associated with Delta’s fleet initiatives.

“We expect the sequential improvement in cost trends to continue in the second half of the year as we see additional benefits from our fleet restructuring, our One Delta initiatives, and annualization of accelerated depreciation as well as prior investments in our product,” said Paul Jacobson, Delta’s Chief Financial Officer. “Our cost structure is an essential component of sustainable performance, and by keeping our cost growth below 2 percent for the year, we are positioning the company to expand margins by year end.”

Adjusted non-operating expense improved by $43 million versus the prior year, driven primarily by pension expense favorability. Adjusted tax expense declined $255 million for the June quarter primarily due to the reduction in Delta’s book tax rate from 34 percent to 23 percent.

Cash Flow and Shareholder Returns

Delta generated $2.8 billion of operating cash flow and $1.4 billion of free cash flow during the quarter, after the investment of $1.4 billion into the business primarily for aircraft purchases and improvements.

For the June quarter, Delta returned $813 million to shareholders, comprised of $600 million of share repurchases and $213 million in dividends.

The Board of Directors declared a quarterly dividend of $0.35 per share, an increase of 15 percent over previous levels. This change will bring the total annualized dividend commitment to approximately $950 million, consistent with the company’s target of returning 20 to 25 percent of free cash flow to owners over the long-term. The September quarter dividend will be payable to shareholders of record as of the close of business on July 26, 2018, to be paid on August 16, 2018.

Strategic Highlights

In the June quarter, Delta achieved a number of milestones across its five key strategic pillars.

Culture and People

Accrued an additional $400 million in profit sharing and paid out $23 million in Shared Rewards as a testament to the outstanding performance made possible by Delta’s more than 80,000 employees around the world.
Ranked No. 1 corporate blood donor by the American Red Cross for the most recent year at 11,085 units of blood from 214 Delta sponsored blood drives.
Became a National Signature Partner of Junior Achievement’s 3DE program with a $2 million contribution over the next five years.

Operational Reliability

Delivered 58 days of zero system cancellations on a year-to-date basis, up 23 days from 2017.
Achieved mainline on-time performance (A0) of 71.7 percent year-to-date, up 1.4 percent from the prior year.

Network and Partnerships

Launched a joint venture with Korean Air on May 1, expanded reciprocal codeshare flying to more than 50 Korean Air-operated markets and 400 Delta-operated markets, and announced new service from Seattle to Osaka and Minneapolis/St. Paul to Seoul in partnership with Korean Air to begin in 2019.
Continued Delta’s global expansion with the launch of new service including Los Angeles to Paris and Amsterdam; Indianapolis to Paris; and Atlanta to Lisbon. Delta also announced plans to begin nonstop flights between the United States and Mumbai, India, in 2019.

Customer Experience and Loyalty

Debuted the first refreshed 777-200ER aircraft featuring the award-winning Delta One suite, the popular Delta Premium Select cabin and 9-abreast seating in the Main Cabin in addition to all new interior features and in-flight entertainment.
Launched new uniforms for 64,000 Delta employees worldwide, created by acclaimed designer Zac Posen and built with Lands’ End quality. The designs embrace innovative fit, form and function, and carry Delta into the future in style.
Opened the newly renovated Delta Sky Club at Ronald Reagan Washington National Airport (DCA) with an additional 1,800 square feet of space for guests to enjoy.

Investment Grade Balance Sheet

Completed a $1.6 billion unsecured debt offering through a mix of three-, five-, and 10-year notes at a blended yield of 3.85 percent. The proceeds from this offering were used to refinance secured debt and will lower Delta’s overall interest expense by $20 million annually on a run-rate basis.
Increased revolver capacity by $635 million, to a total of $3.1 billion in undrawn revolving credit facilities.

June Quarter Results

Special items for the quarter consist primarily of mark-to-market adjustments on refinery fuel hedges and unrealized gains/losses on investments.

Top Copyright Photo (all others by Delta): Delta Air Lines Boeing 777-232 LR N702DN (msn 29741) “The Spirit of Atlanta” AMS (Ton Jochems). Image: 941962.

Delta aircraft slide show (Boeing):

Delta plans to start Los Angeles – Shanghai flights on July 9

Delta Air Lines (Atlanta) plans to begin daily nonstop service between Los Angeles International Airport and Shanghai-Pudong Airport on July 9, 2015, pending U.S. Department of Transportation and foreign government approval.

The Los Angeles market makes up 25 percent of all U.S.-Asia demand, and the start of Shanghai service marks Delta’s fourth daily nonstop flight to the Asia-Pacific region in addition to Tokyo-Narita, Tokyo-Haneda and Sydney.

The route will operate using a 291-seat Boeing 777-200 LR aircraft with 37 full flat-bed seats in BusinessElite, 36 seats in Economy Comfort and 218 seats in Economy class.

Combined with its hubs in Detroit, Seattle/Tacoma and Tokyo-Narita, Delta will operate 42 weekly departures to China’s global financial center. Additionally, Delta offers daily service to China’s capital, Beijing, from both Seattle/Tacoma and Detroit.

Travelers passing through Los Angeles continue to enjoy the benefits of the $229 million expansion and enhancement of Terminal 5 at LAX. The current project will double the size of the ticketing lobby and screening checkpoints and open an exclusive Sky Priority lobby with dedicated access to screening checkpoints for Delta’s high-value customers. It also will include renovations to the Delta Sky Club and new baggage carousels. All renovations are expected to be complete prior to the start of Shanghai service in July.

Copyright Photo: Michael B. Ing/AirlinersGallery.com. Delta Air Lines’ Boeing 777-232 LR N702DN (msn 29741) named “The Spirit of Atlanta” arrives at Los Angeles International Airport.

Delta Air Lines aircraft slide show (current livery):

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: