Delta Announces June Quarter Financial Results

ATLANTA, July 25, 2012 /PRNewswire/ — Delta Air Lines (NYSE: DAL) today reported financial results for the June 2012 quarter. Key points include:

Delta’s net income, excluding special items1, for the June 2012 quarter was $586 million, or $0.69 per diluted share.
Delta’s June 2012 quarter GAAP net loss was $168 million, or $0.20 per diluted share, including mark-to-market adjustments on open fuel hedges and other special items.
Delta’s unit revenues were up 8.5% for the quarter and the company has produced a unit revenue premium to the industry for fifteen consecutive months.
Delta ended the June 2012 quarter with $5.3 billion in unrestricted liquidity and adjusted net debt of $12.1 billion.

“Delta’s solid profit this quarter (excluding special items) is evidence that our business and industry are evolving and delivering meaningful improvements. I am grateful for the hard work of the entire Delta team that produced these results and I congratulate them on earning $135 million in profit sharing so far this year,” said Richard Anderson, Delta’s chief executive officer. “Moving forward, we expect to have strong profitability in the September quarter with a 10 – 12% operating margin as we continue to reap the benefits of investments we’ve made in our operation and customer experience. We have also taken important steps towards structural change on the cost side with initiatives like the domestic fleet restructuring and the refinery.”

Revenue Environment

Delta’s operating revenue grew $579 million, or 6%, on 1.3% lower capacity in the June 2012 quarter compared to the June 2011 quarter. Despite lower capacity, traffic increased 0.3% as load factor increased 1.4 points to 85.1%.

Passenger revenue increased 7%, or $560 million, compared to the prior year period. Passenger unit revenue (PRASM) increased 8.5%, driven by a 6.8% improvement in yield.
Cargo revenue decreased 1%, or $2 million, with lower cargo yields partially offset by higher volumes.
Other revenue increased 2%, or $21 million, from higher ancillary business revenue.

“Delta’s revenue performance in the June quarter was among the best in the industry as we experienced benefits from our customer-focused initiatives, corporate sales growth, and capacity discipline,” said Ed Bastian, Delta’s president. “By actively managing the business through capacity reductions and pricing actions, we expect to maintain our solid revenue performance despite the continuing uncertain economic backdrop.”

Fuel

Excluding mark-to-market adjustments, Delta’s average fuel price2 was $3.37 per gallon for the June quarter, which includes 16 cents per gallon in settled losses from its fuel hedging program. On a GAAP basis, which includes mark-to-market adjustment on out of period hedges, the company’s average fuel price was $3.95 per gallon. At June 30, Delta had $350 million of hedge margin posted with counterparties.

Delta expects to participate meaningfully in the fuel price decline for the second half of 2012. As of the July 23rd forward curve, the company expects to realize average fuel prices of $3.09 and $3.05 for the September and December 2012 quarters, respectively, excluding any impact from the Trainer refinery.

During the June quarter, Delta’s subsidiary, Monroe Energy, closed its acquisition of the Trainer refinery. Work is currently underway to complete the turnaround and modify the plant to maximize its jet fuel production. The company expects the plant to be operating at full capacity in the fourth quarter. With Trainer at full capacity, Delta expects to save more than $300 million annually on its fuel expense.

Non-Fuel Cost Performance

In the June 2012 quarter, Delta’s operating expense, excluding fuel, increased $308 million year over year. Primary drivers for the increase included higher profit sharing expense, increases in wages and benefits, and the impact of special items.

Consolidated unit cost (CASM3), excluding fuel expense, profit sharing and special items, was 3.6% higher in the June 2012 quarter on a year-over-year basis, driven by the impact of capacity reductions and investments in employees, products, services and facilities. GAAP consolidated CASM increased 12% primarily due to mark-to-market adjustments on open fuel hedges in future periods.

“While we are experiencing cost pressures in the near-term, we are implementing the structural initiatives, including the 717 transaction and Trainer refinery acquisition, needed to achieve better cost outcomes,” said Paul Jacobson, Delta’s chief financial officer. “We expect to begin realizing some of these benefits in the December quarter and into 2013.”

Cash Flow and Liquidity

As of June 30, 2012, Delta had $5.3 billion in unrestricted liquidity, including $3.5 billion in cash and short-term investments and $1.8 billion in undrawn revolving credit facilities.

Operating cash flow during the June 2012 quarter was $683 million, driven by the company’s profitability and advance ticket sales, which was partially offset by pension funding and fuel hedge margin postings. During the quarter, Delta made $354 million in contributions to its defined benefit pension plan, completing its funding requirements for the year.

Capital expenditures during the quarter were $652 million, including $300 million for aircraft (including parts and modifications), $180 million for the Trainer acquisition, and $65 million for Delta’s investment in Aeromexico.

During the June quarter, Delta paid $374 million in debt maturities and capital lease obligations. Subsequent to the end of the quarter, Delta completed its $480 million 2012-1 enhanced equipment trust certificates (EETC) offering. The certificates are secured by 31 aircraft that are being refinanced from other debt financings.

At June 30, Delta’s adjusted net debt was $12.1 billion.

“Delta’s strong cash generation has allowed us to achieve $5 billion of our $7 billion debt reduction target,” said Paul Jacobson. “By tactically accessing the capital markets, we are also improving rates on our remaining debt portfolio through low-interest rate transactions such as our 2012-1 EETC.”

September 2012 Quarter Guidance

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

Delivering some of the industry’s best operational performance, including an 8 point improvement in on-time arrivals, 30% fewer lost bags and a 20% reduction in customer complaints year over year. Delta employees received $23 million in Shared Rewards payments in the quarter to recognize their work in achieving these operational improvements;
Reaching agreement with the Air Line Pilots Association for a new contract which becomes amendable in December 2015. The agreement provides Delta with productivity gains and the flexibility to accelerate its domestic fleet restructuring, while offering career growth opportunities and wage improvements to pilots;
Reaching agreement with Southwest Airlines and Boeing to lease 88 Boeing 717s, currently in service at AirTran Airways. The aircraft, which will begin arriving at Delta in mid-2013, will allow Delta to reduce the number of fifty seat regional jets which will improve Delta’s cost efficiency while also providing an improved customer experience;
Implementing the largest route expansion at New York’s LaGuardia airport in more than 40 years, increasing Delta’s service at LaGuardia by 60 percent, with 100 new flights and 26 new destinations;
Continuing Delta’s ongoing $3 billion investment in improving the customer experience on the ground and in the air. Improvements in the June quarter included the launch of domestic Economy Comfort, the opening of Atlanta’s new international terminal and the announcement that Delta will expand onboard wi-fi to its international fleet in 2013; and
Raising $1.25 million for The Breast Cancer Research Foundation, which was presented to the foundation at its annual Hot Pink Party in New York City. Delta people have raised nearly $5 million for BCRF since 2009.
Special Items

Delta recorded special items totaling $754 million in the June 2012 quarter, including:

a $561 million charge on 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 fleet, facilities and other items.
Delta recorded special items totaling $168 million in the June 2011 quarter, including:

$80 million in severance and related costs;
a $64 million charge for fleet, facilities and other items;
a $13 million charge for debt extinguishment; and
$11 million in mark-to-market adjustments for fuel hedges.
Other Matters

Included with this press release are Delta’s unaudited Consolidated Statements of Operations for the three and six months ended June 30, 2012 and 2011; a statistical summary for those periods; selected balance sheet data as of June 30, 2012 and Dec. 31, 2011; and a reconciliation of certain non-GAAP financial measures.