Delta Announces September Quarter Profit

ATLANTA, Oct. 24, 2012 /PRNewswire/ -- Delta Air Lines (NYSE:DAL) today reported financial results for the September 2012 quarter.  Key points include:

• Delta's net income, excluding special items¹, for the September 2012 quarter was $768 million, or $0.90 per diluted share. 
• Delta's September 2012 quarter GAAP net income was $1.0 billion, or $1.23 per diluted share, including mark-to-market gains on open fuel hedges and other special items.
• Delta's unit revenues were up 3 percent for the quarter and the company has produced a unit revenue premium to the industry for eighteen consecutive months.
• Results included $174 million in profit sharing expense, for a total of $309 million year to date, in recognition of Delta employees' efforts toward the company's financial targets.  In addition, Delta people have received $67 million in Shared Rewards in 2012 for hitting the company's operational and customer service targets.
• Delta ended the September 2012 quarter with $5.1 billion in unrestricted liquidity and adjusted net debt of $11.9 billion.

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"Delta's strong September quarter results combined with industry-leading operations and customer service reflect an improved industry structure and our consistent investment in the business;  we will continue on this path as we progress into 2013," said Richard Anderson, Delta's chief executive officer.  "With a more stable financial foundation, we have moved our focus beyond short-term profit gains to positioning ourselves for long-term margin expansion, sustained profitability and shareholder returns.  I want to thank Delta employees worldwide for their dedication and determination as we continue the hard work of building a better airline."

Revenue Environment

Delta's operating revenue grew $107 million, or 1 percent, on 1.5 percent lower capacity in the September 2012 quarter compared to the September 2011 quarter.  Load factor for the quarter increased 0.3 points year over year to 86.4 percent. 

• Passenger revenue increased 1 percent, or $124 million, compared to the prior year period.  Passenger unit revenue (PRASM) increased 3 percent, driven by a 3 percent improvement in yield. 
• Cargo revenue decreased 5 percent, or $14 million, with lower cargo yields partially offset by higher volumes.
• Other revenue decreased $3 million as lower third-party maintenance revenues were partially offset by higher codeshare revenue.

Comparisons of revenue-related statistics are as follows:

"Our solid revenue performance reflects the benefits of capacity discipline, strong operational performance and the investments we have made in our products and service," said Ed Bastian, Delta's president.  "We expect our revenue performance to benefit from our continued capacity discipline and further corporate travel gains and we are forecasting our October unit revenues to increase 4 – 5% year over year."

Fuel

Excluding mark-to-market adjustments, Delta's average fuel price² was $3.14 per gallon for the September quarter, which includes 3 cents per gallon in settled losses from its fuel hedging program.  On a GAAP basis, which includes $440 million of mark-to-market gains on out of period hedges, the company's average fuel price was $2.71 per gallon. 

During the September quarter, jet fuel production began at Delta's wholly-owned Trainer Refinery and the company expects the plant to be fully operational in the December quarter.  For the December quarter, Delta expects Trainer's production to generate a contribution of breakeven to $25 million.

Non-Fuel Cost Performance

Consolidated unit cost (CASM³), excluding fuel expense, profit sharing and special items, was 5.6 percent higher in the September 2012 quarter on a year-over-year basis, driven by the impact of capacity reductions, higher maintenance expense, wage increases and service investments.  GAAP consolidated CASM decreased 2 percent primarily due to mark-to-market gains on open fuel hedges.

"With consistent investment in the business, our non-fuel costs have grown in the past few quarters and we expect that trend to continue into the first half of next year," said Paul Jacobson, Delta's chief financial officer.  "However, we are in the process of implementing a $1 billion program of structural initiatives that we anticipate will generate significant savings in the second half of 2013, while maintaining the high quality product, network and operation we have built."

Cash Flow and Liquidity

As of September 30, 2012, Delta had $5.1 billion in unrestricted liquidity, including $3.2 billion in cash and short-term investments and $1.9 billion in undrawn revolving credit facilities. 

Operating cash flow during the September 2012 quarter was $545 million, driven by the company's profitability, which was offset by the normal seasonal decline in advance ticket sales.  Free cash flow for the September 2012 quarter was $120 million.

Capital expenditures during the quarter were $425 million, including $275 million for fleet, including advance payments for 737-900ERs, induction costs for MD-90s and interior modifications to Delta's international fleet.

During the September quarter, Delta paid $270 million in net debt maturities and capital lease obligations.  At September 30, the company's adjusted net debt was $11.9 billion, a reduction of $5 billion since the end of 2009.

Subsequent to the end of the quarter, Delta refinanced $1.7 billion in debt and undrawn revolving credit facilities secured by the company's Pacific routes and slots.  As a result of this transaction, the company has maintained its revolving credit capacity and lowered the interest rate.  Delta expects the transaction will generate more than $30 million in annual interest expense savings.

December 2012 Quarter Guidance

Delta's projections for the December 2012 quarter are below.

Special Items

Delta recorded special items totaling a $279 million gain in the September 2012 quarter, including:

• a $440 million gain on mark-to-market adjustments on fuel hedges settling in future periods;
• a $39 million gain associated with the exchange of slots at New York-LaGuardia and Washington-Reagan National;
• a $12 million loss on extinguishment of debt;
• a $66 million charge for severance and related costs; and
• a $122 million charge for facilities, fleet and other, including charges resulting from the closure of Comair.

Delta recorded special items totaling a $216 million charge in the September 2011 quarter, primarily related to mark to market adjustments for open fuel hedges.

Other Matters

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

About Delta

Delta Air Lines serves more than 160 million customers each year. During the past year, Delta was named domestic "Airline of the Year" by the readers of Travel Weekly magazine, was named the "Top Tech-Friendly U.S. Airline" by PCWorld magazine for its innovation in technology and won the Business Travel News Annual Airline Survey. With an industry-leading global network, Delta and the Delta Connection carriers offer service to nearly 350 destinations in 65 countries on six continents. Headquartered in Atlanta, Delta employs 80,000 employees worldwide and operates a mainline fleet of more than 700 aircraft. A founding member of the SkyTeam global alliance, Delta participates in the industry's leading trans-Atlantic joint venture with Air France-KLM and Alitalia. Including its worldwide alliance partners, Delta offers customers more than 13,000 daily flights, with hubs in Amsterdam, Atlanta, Cincinnati, Detroit, Memphis, Minneapolis-St. Paul, New York-LaGuardia, New York-JFK, Paris-Charles de Gaulle, Salt Lake City and Tokyo-Narita. The airline's service includes the SkyMiles frequent flier program, a world-class airline loyalty program; the award-winning BusinessElite service; and more than 50 Delta Sky Clubs in airports worldwide. Delta is investing more than $3 billion through 2013 in airport facilities and global products, services and technology to enhance the customer experience in the air and on the ground. Customers can check in for flights, print boarding passes, check bags and review flight status at delta.com.

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) Average fuel price per gallon: Delta's September 2012 quarter average fuel price of $3.14 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 September 2012 quarter.  Settled hedge losses for the quarter were $26 million, or 3 cents per gallon.  On a GAAP basis, fuel price includes $440 million in fuel hedge mark-to-market adjustments recorded in periods other than the settlement period.

(3) CASM - Ex: Delta excludes from consolidated unit cost 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 were $214 million and $232 million for the September 2012 quarter and September 2011 quarter, respectively.  

Forward-looking Statements

Statements in this press release that are not historical facts, including statements regarding our estimates, expectations, beliefs, intentions, projections or strategies for the future, may be "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995.  All forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from the estimates, expectations, beliefs, intentions, projections and strategies reflected in or suggested by the forward-looking statements.  These risks and uncertainties include, but are not limited to, the cost of aircraft fuel; the impact of posting collateral in connection with our fuel hedge contracts; the impact of significant funding obligations with respect to defined benefit pension plans; risks related to operation of an oil refinery;  the impact that our indebtedness may have on our financial and operating activities and our ability to incur additional debt; the restrictions that financial covenants in our financing agreements will have on our financial and business operations; labor issues; interruptions or disruptions in service at one of our hub airports; our increasing dependence on technology in our operations; the ability of our credit card processors to take significant holdbacks in certain circumstances; the possible effects of accidents involving our aircraft; the effects of weather, natural disasters and seasonality on our business; the effects of an extended disruption in services provided by third party regional carriers; our ability to retain management and key employees; competitive conditions in the airline industry; the effects of the rapid spread of contagious illnesses; and the effects of terrorist attacks.  

Additional information concerning risks and uncertainties that could cause differences between actual results and forward-looking statements is contained in our Securities and Exchange Commission filings, including our Annual Report on Form 10-K for the fiscal year ended Dec. 31, 2011 and our Form 10-Q for the quarter ended June 30, 2012.  Caution should be taken not to place undue reliance on our forward-looking statements, which represent our views only as of Oct. 24, 2012, and which we have no current intention to update.

Note A: The following tables show reconciliations of non-GAAP financial measures. The reasons Delta uses these measures are described below.

Delta sometimes uses information ("non-GAAP financial measures") that is derived from the Consolidated Financial Statements, but that is not presented in accordance with accounting principles generally accepted in the U.S. ("GAAP"). Under the U.S. Securities and Exchange Commission rules, non-GAAP financial measures may be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for or superior to GAAP results. The tables below show reconciliations of non-GAAP financial measures to the most directly comparable GAAP financial measures.

Forward Looking Projections. Delta is unable to reconcile certain forward-looking projections to GAAP as the nature or amount of special items cannot be estimated at this time.

Special Items. Delta excludes special items because management believes the exclusion of these items is helpful to investors to evaluate the company's recurring core operational performance in the period shown. Therefore, we adjust for these amounts to arrive at more meaningful financial measures. Special items excluded in the table below are:

(a)  Mark-to-market adjustments for fuel hedges recorded in periods other than the settlement period ("MTM adjustments"). We exclude MTM adjustments, which are based on market prices at the end of the reporting period and certain assumptions, as they are not necessarily indicative of the actual future value of the underlying hedge in the contract settlement period.

(b)  Restructuring and other items.

(c)   Loss on extinguishment of debt.

Cost Per Available Seat Mile or Non-Fuel Unit Cost ("CASM"): In addition to the special items described above, we exclude the following items from consolidated and mainline CASM to determine CASM-Ex:

• Aircraft fuel and related taxes. The volatility in fuel prices impacts the comparability of year-over-year financial performance. Management believes the exclusion of aircraft fuel and related taxes (including contract carriers under capacity purchase arrangements) allows investors to better understand and analyze our non-fuel costs and our year-over-year financial performance.
• Ancillary businesses. Ancillary businesses are not related to the generation of a seat mile. These businesses include aircraft maintenance and staffing services we provide to third parties and our vacation wholesale operations.
• Profit sharing. Management believes the exclusion of this item provides a more meaningful comparison of our results to the airline industry and our prior year results.

Adjusted Net Debt: Delta uses adjusted total debt, including aircraft rent, in addition to long-term adjusted debt and capital leases, to present estimated financial obligations. Delta reduces adjusted total debt by cash, cash equivalents, and short-term investments, resulting in adjusted net debt to present the amount of additional assets needed to satisfy the debt.

Net Cash Provided by Operations, adjusted or "Operating Cash Flow": Delta presents net cash provided by operating activities because management believes adjusting for certain items is helpful to investors to evaluate the company's operating activities.

Free Cash Flow: Delta presents free cash flow because management believes this metric is helpful to investors to evaluate the company's ability to generate cash.

Net Debt Maturities: Delta presents net debt payments because management believes this metric is helpful to investors to evaluate the company's debt-related activities.

SOURCE Delta Air Lines