Delta Air Lines Announces First Quarter Results

ATLANTA, April 26, 2011 /PRNewswire/ — Delta Air Lines (NYSE: DAL) today reported financial results for the March 2011 quarter. Key points include:

Delta’s net loss for the March 2011 quarter was $318 million, or $0.38 per diluted share, which includes $2 million of special items.

Driven by the $610 million impact of 30% higher fuel prices, Delta’s net loss was $128 million worse than the March 2010 quarter, excluding special items(1).

Delta generated $452 million in free cash flow for the quarter and its adjusted net debt at quarter end was $14.5 billion.

Delta ended the March 2011 quarter with $5.5 billion in unrestricted liquidity, which includes $1.6 billion in undrawn revolving credit lines.

Response to Rising Fuel Prices

During the March quarter, Delta detailed its plan to adjust its business in response to rising fuel prices. As part of that plan, the Company:

Actively implemented domestic fare increases and international fare surcharges as a means of passing through fuel costs to its customers;
Reduced its capacity plans for the second half of 2011, which resulted in a four point reduction in planned capacity. The company is targeting reductions in markets where revenue improvements have not kept pace with rising fuel costs. Delta now expects system capacity for the post-Labor Day period to be down approximately 3% compared to the prior year period;
Announced the retirement of 130 of Delta’s least efficient aircraft over the next 18 months, including the DC9-50 and Saab turbo-prop fleets, and 60 50-seat regional jets;
Repositioned its fuel hedge portfolio in response to the dislocation in price of West Texas Intermediate crude oil (“WTI”) to jet fuel and changed the majority of Delta’s WTI positions to Brent crude oil or heating oil; and
Reduced planned capital expenditures by $300 million to $1.2 billion for 2011.

“Fuel is the biggest challenge facing this industry and Delta is actively reducing capacity, implementing fare actions, hedging our fuel needs and attacking our cost structure in order to offset fuel’s impact on our earnings,” said Richard Anderson, Delta’s chief executive officer. “These actions would not be possible without the dedication and determination of Delta people worldwide, who are working every day to build the best airline in the world for our shareholders, our employees and our customers.”

Revenue Environment

Total operating revenue for the March 2011 quarter was $7.7 billion, an increase of $899 million, or 13%, compared to the same period last year. Passenger revenues were negatively impacted by $90 million and $35 million by severe winter weather and events in Japan, respectively.

Passenger revenue increased 13%, or $769 million, compared to the prior year period driven by a 12% increase in yield on 1% higher traffic. Passenger unit revenue (PRASM) increased 7% on 5% higher capacity.

Cargo revenue increased 42%, or $74 million, due to higher volume and yield.

Other, net revenue increased 6%, or $56 million, primarily due to higher SkyMiles revenue and revenues from ancillary products and services.

“Based on the strength we are seeing in the revenue environment, we currently expect double-digit unit revenue growth for the June quarter,” said Ed Bastian, Delta’s president. “We believe our aggressive fare actions, combined with a four point capacity reduction for the back half of the year, will allow us to recover the higher costs of fuel in our ticket prices.”

Cost Performance

In the March 2011 quarter, operating expense increased $1.1 billion year over year due to higher fuel expense, maintenance volumes, employee wage increases, and capacity- and revenue-related expenses. Consolidated unit cost (CASM) excluding fuel and special items(2), increased 2.8% in the March 2011 quarter on a year-over-year basis, with 1.4 points of that increase attributable to the impact of severe winter weather and events in Japan during the quarter.

Non-operating expense excluding special items decreased $27 million due to benefits from Delta’s debt reduction initiatives. Income tax benefit for the March 2011 quarter includes $71 million of alternative minimum tax (AMT) credits.

On a GAAP basis, which includes special items, consolidated CASM increased 10% and non-operating expense decreased $17 million for the March 2011 quarter versus the prior year period.

Fuel Price and Related Hedges

Delta hedged 41% of its fuel consumption for the March 2011 quarter for an average fuel price(3) of $2.89 per gallon.

Liquidity Position

As of March 31, 2011, Delta had $5.5 billion in unrestricted liquidity, including $1.6 billion in undrawn revolving credit facilities. During the March 2011 quarter, operating cash flow was $788 million, driven by strong advance ticket sales, and free cash flow was $452 million.

Capital expenditures during the quarter were $340 million, which included $274 million for investments in aircraft, parts and modifications, as the company continued the previously announced investment in its fleet, including winglets, flat-bed seats and enhanced in-seat entertainment.

Debt payments in the March 2011 quarter were $460 million. To date in 2011, Delta completed enhanced equipment trust certificate (EETC) offerings totaling over $500 million, including:

In February, Delta completed the $100 million 2010-1B EETC and the $135 million 2010-2B EETC. As part of these transactions, Delta received $192 million in net proceeds during the quarter. The remaining $43 million will be held in escrow until additional aircraft are refinanced later in 2011.
In April 2011, Delta completed the $293 million 2011-1A EETC. These proceeds will be held in escrow until the maturity of Delta’s 2001-1 EETC later in 2011.

In April 2011, Delta refinanced its $2.5 billion corporate credit facility entered into by Delta in 2007. As part of the new facility, Delta obtained a new $1.225 billion revolving credit facility, which increased the company’s total revolving credit facilities by $200 million. The refinancing also included a $1.375 billion term loan. As a result of this transaction, Delta’s 2012 debt maturities have been reduced to $1.9 billion.

At March 31, 2011, Delta’s adjusted net debt was $14.5 billion, a $500 million reduction from Dec. 31, 2010.

“Delta’s cost performance this quarter reflects not only the effects from higher maintenance volumes and employee wage increases, but also the impact of severe weather. We are redoubling our efforts across the company to improve our cost performance with productivity from capital investments, accelerated aircraft retirements and fixed cost reductions from the business,” said Hank Halter, Delta’s chief financial officer. “Despite the significant pressures from fuel prices, we continue to make progress on our debt reduction goals and have now achieved $2.5 billion of our $7 billion planned reduction.”

Company Highlights

Delta has a strong commitment to employees, customers and the communities it serves. Key accomplishments in 2011 to date include:

Being named by FORTUNE magazine as the most admired airline worldwide;
Pledging, in partnership with employees and customers, $1 million in cash and in-kind support to disaster relief efforts in Japan through the Japanese Red Cross Society and SkyWish Asia;
Kicking off the 70th anniversary as Atlanta’s Hometown Airline, including the christening of a Delta Boeing 777 as the “Spirit of Atlanta”;
Announcing a new international premium economy product offering – “Economy Comfort” – which will provide an improved customer experience while unlocking new revenue streams;
Eliminating the SkyMiles mileage expiration, creating a new industry-leading benefit for SkyMiles program members and making Delta the only major U.S. carrier without mileage expiration;
Extending Delta’s reach through alliance and codeshare partnerships, including the beginning of codeshare service with GOL, one of Brazil’s largest airlines, and welcoming the decision by Middle East Airlines – Air Liban (MEA) and Saudi Arabian Airlines to join the SkyTeam global airline alliance in 2012; and
Becoming the official airline of Los Angeles’ STAPLES Center, L.A. Kings, the GRAMMY® Awards and the GRAMMY® Museum.

Special Items

Delta recorded special items totaling a $2 million gain in the March 2011 quarter, including:

$29 million in mark-to-market gains for fuel hedges settling in future periods;
A $7 million charge associated with the announced retirement of Delta’s DC9-50 fleet; and
A $20 million loss on extinguishment of debt.

Delta recorded special items totaling a $64 million charge in the March 2010 quarter, including:

$46 million in merger-related expenses;
A $10 million charge related to the Venezuela currency devaluation; and
$8 million in severance charges.

Other Matters

Included with this press release are Delta’s unaudited Consolidated Statements of Operations for the three months ended March 31, 2011 and 2010; a statistical summary for those periods; selected balance sheet data as of March 31, 2011 and Dec. 31, 2010; and a reconciliation of certain non-GAAP financial measures.