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Delta Air Lines Announces June Quarter Profit

July 26, 2013 Financial No Comments Email Email

Delta Air Lines 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.

“Our June quarter operational and financial performance is among the best in Delta’s history. These results reflect the momentum we are building at Delta and I want to thank Delta employees worldwide for their great work, which has led to $138 million accrued for our profit sharing program this year in addition to $45 million of Shared Rewards,” said Richard Anderson, Delta’s chief executive officer. “We have significant opportunities ahead of us to expand margins, cash flows and profitability. With initiatives like our new Terminal 4 at JFK, the Virgin Atlantic joint venture, and our quarterly dividend and share repurchase program, we are relentless in our efforts to build a better airline for our employees, customers, and shareholders.”

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%

“The combination of strong operational performance and the success of our revenue and sales initiatives once again allowed Delta to outperform the industry in the second quarter,” said Ed Bastian, Delta’s president. “Looking forward, we expect demand trends to remain solid which will lead to continued margin expansion against a backdrop of lower year-over-year fuel prices.”

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 billionin unrestricted liquidity, including $3.9 billion in cash and short-term investments and $1.8 billion in undrawn revolving credit facilities.

“Having generated over $1 billion of free cash flow so far in 2013, we have nearly achieved our $10 billion adjusted net debt goal,” said Paul Jacobson, Delta’s chief financial officer. “Our strong free cash flow generation, along with the substantial improvements we have made to our balance sheet, allows us to implement our new capital deployment plan, which will return an initial $50 million to shareholders with our September quarter dividend.”

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.

“Our June quarter non-fuel unit cost increase of 2.5 percent was a full two points lower than our guidance at the start of the quarter and we expect that positive trend to continue in the September quarter,” Jacobson added. “The success we have had with our structural cost initiatives should result in non-fuel CASM growth for the remainder of the year at less than 2 percent, setting a solid foundation for upholding our long-term goal of keeping our cost growth below 2 percent annually beyond 2013.”

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 billiontarget, 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.

Company Highlights
Delta has a strong commitment to its employees, customers and the communities it serves. Key accomplishments in the June 2013 quarter include:

  • Recognizing the achievements of Delta employees toward meeting the company’s financial and operational goals with $183 million of incentives so far this year, including $138 million in employee profit sharing and $45 million in Shared Rewards;
  • Acquiring 49% of Virgin Atlantic and reaching a significant milestone in the creation of a joint venture with Virgin Atlantic by filing an antitrust immunity application, expanding competition in critical business markets;
  • Significantly improving its operational performance, resulting in an on-time arrival rate of 82.9 percent and the lowest number of customer complaints for the month of May in Delta’s history;
  • Continuing the company’s ongoing investment in high-quality facilities by investing $1.4 billion at JFK International Airport and opening the new Terminal 4, committing $229 million to overhaul Terminal 5 at Los Angeles International Airport, and opening the Sky Deck at the Delta Sky Club in Atlanta; and
  • Continuing to support the communities we serve through the Delta Force for Global Good, including committing to raise $1 million to aid the American Cancer Society in its fight to end cancer through Relay for Life events at 74 airports and a company-wide Jet Drag and being one of the top American Red Cross corporate blood donors nationally and the top donor in the Southeast.

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.

September 2013 Quarter Guidance
Following are Delta’s projections for the September 2013 quarter.

3Q 2013 Forecast
Operating margin 11 – 13%
Fuel price, including taxes, settled hedges, and refinery impact $3.05 – $3.10

 

3Q 2013 Forecast

(compared to 3Q 2012)

Consolidated unit costs – excluding fuel expense and profit sharing Up 0 – 2%
System capacity Up 1 – 3%
Domestic Up 1 – 3%
International Up 2 – 4%

Other Matters
Included with this press release are Delta’s unaudited Consolidated Statements of Operations for the three and six months ended June 30, 2013 and 2012; a statistical summary for those periods; selected balance sheet data as of June 30, 2013 and Dec. 31, 2012; and a reconciliation of non-GAAP financial measures.

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