Delta Air Lines reported results for the quarter ended March 31, 2005, and other significant news.
The key points are, Delta:
— Reports a first quarter net loss of $1.1 billion, or $7.64 loss per share.
— Excluding the special items described below, reports a first quarter net loss of $684 million, or $4.89 loss per share.
— Is achieving the targets set forth in its transformation plan, as demonstrated by a 12.7 percent year over year reduction in mainline unit costs, excluding fuel expense and the special items described below. 1 Including fuel expense and special items, mainline unit costs increased 11.9 percent compared to the March 2004 quarter.
— Maintains cash balance, ending quarter with $1.8 billion in unrestricted cash and cash equivalents and short-term investments.
Delta Air Lines reported a net loss of $1.1 billion and a loss per share of $7.64 for the March 2005 quarter. In the March 2004 quarter, Delta reported a net loss of $383 million and a loss per share of $3.12.
Excluding the special items described below, the March 2005 quarter net loss and loss per share were $684 million and $4.89, respectively, compared to a net loss of $598 million and a loss per share of $4.86 in the March 2004 quarter.
“Today’s financial results clearly are disappointing,” said Gerald Grinstein, Delta’s chief executive officer. “Record-breaking fuel prices are masking the many crucial, large-scale, core initiatives our airline implemented during the quarter. The issue is simple: including fuel, Delta is not on plan, but excluding fuel, we are better than plan. Also, as competitive and cost pressures — including fuel — continue to grow, we are aggressively pursuing opportunities to further reduce our cost structure and also maintain liquidity levels.”
First quarter operating revenues increased 3.3 percent, while passenger unit revenues decreased 2.9 percent, compared to the March 2004 quarter. These results are in line with the company’s expectations. The load factor for the March 2005 quarter was 74.4 percent, a 3.9 point increase as compared to the March 2004 quarter. System capacity rose 6.0 percent and mainline capacity increased 6.5 percent from the prior-year quarter. Detailed traffic, capacity, load factor, yield and passenger unit revenue information is provided in Note 2 attached below.
Due to sharply higher fuel costs and the special items described below, operating expenses for the March 2005 quarter increased 17.5 percent from the March 2004 quarter and unit costs increased 10.9 percent. Excluding the special items described below, operating expenses for the March 2005 quarter increased 4.0 percent from the corresponding period in the prior-year.
Excluding the special items described below, consolidated system unit costs decreased 1.9 percent and mainline unit costs decreased 3.9 percent as compared to the prior year period. Excluding fuel expense and the special items described below, unit costs for the consolidated system decreased 9.9 percent and mainline unit costs decreased 12.7 percent. Fuel expense increased 54.0 percent, or $310 million, with approximately 94 percent of the increase resulting from higher fuel prices. Average fuel price per gallon for the March 2005 quarter was $1.42, a 49 percent increase over the prior year period.
“To date, we have implemented changes in our business to a degree, and at a rate, that has never been done before. By the end of the March 2005 quarter, we had implemented initiatives intended to achieve over 80 percent of our transformation plan targets and expect to implement actions by the end of September 2005 to realize materially all of our targeted benefits,” said Michael J. Palumbo, Delta’s executive vice president and chief financial officer. “However, historically high fuel prices are a significant challenge, defining the need for even more change.”
Guidance on capacity, unit costs and other items is provided below.
Liquidity and Financial Transactions
At March 31, 2005, Delta had $2.2 billion in cash and cash equivalents and short-term investments, of which $1.8 billion was unrestricted. Cash flow from operations was positive $165 million in the March 2005 quarter, including the sale of short term investments. Capital expenditures for the quarter were approximately $160 million, including $85 million for aircraft delivered under seller financing. Delta expects its funding obligation in 2005 for its defined benefit pension and defined contribution plans will be approximately $450 million, of which $220 million of required contributions were made during the March 2005 quarter. Cash debt maturities for 2005 are expected to be approximately $630 million, of which $130 million was paid during the March 2005 quarter.
During the March 2005 quarter, Delta exchanged $176 million principal amount of enhanced equipment trust certificates (EETCs) due in November 2005 for a like aggregate principal amount of EETCs due in September 2006 and January 2008. Additionally, Delta borrowed the final $250 million installment under its financing agreement with American Express.
Transformation Plan
On Sept. 8, 2004, Delta outlined key elements of its transformation plan, which is intended to deliver approximately $5 billion in annual benefits by the end of 2006 (as compared to 2002), while also improving the service Delta provides to its customers. By the end of 2004, Delta had achieved $2.3 billion of its targeted transformation plan objectives. Delta believes that it remains on track to achieve the remaining $2.7 billion in targeted benefits.
As previously announced, during the March 2005 quarter, Delta implemented several key initiatives as part of its transformation plan:
SimpliFares
On Jan. 5, 2005, Delta announced the expansion of its SimpliFares initiative within the 48 contiguous United States. To date, traffic stimulation has been less than expected, but yield declines have also been less than anticipated. The net result is that this initiative is on track with Delta’s revenue expectations.
Hub Redesign
On Jan. 31, 2005, Delta implemented Operation Clockwork, the redesign of its primary hub in Atlanta to a continuous, “un-banked” hub and dehubbed its Dallas/Ft. Worth operations. Together, these actions restructured over 51 percent of Delta’s network. As a result of Operation Clockwork, Delta was able to redeploy the equivalent of 19 aircraft gained through operational efficiencies.
Outsourcing
During the March 2005 quarter, Delta announced plans to outsource certain of its human resources and payroll functions, resulting in expected cost savings of approximately $40 million over seven years as well as allowing Delta to forego significant capital expenditures and heavy maintenance visits (HMVs) on its MD-88, MD-90, B757 and B767 aircraft. The outsourcing of HMVs, combined with additional efficiencies gained from consolidating certain other maintenance work from Tampa to Atlanta, is expected to yield savings of approximately $240 million over five years.
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