Delta Air Lines (NYSE:DAL) today reported financial results for the December 2013 quarter. Key points include:
- Delta’s net income for the December 2013 quarter was $558 million, or $0.65 per diluted share, excluding special items1.
- Delta’s net income for 2013 was $2.7 billion, excluding special items, a $1.1 billion increase over 2012.
- Delta’s GAAP net income was $8.5 billion, or $9.89 per diluted share, for the December 2013 quarter and $10.5 billion for 2013. These results include an $8.0 billion non-cash gain associated with the reversal of the company’s tax valuation allowance.
- 2013 results include $506 million in profit sharing expense, including $119 million in the December quarter, recognizing Delta employees’ contributions toward meeting the company’s financial goals.
- Delta generated nearly $5 billion of operating cash flow and $2.1 billion of free cash flow in 2013, allowing the company to reduce its adjusted net debt at the end of 2013 to $9.4 billion, contribute an incremental $250 million above required funding to its defined benefit pension plans, and return $350 million to shareholders through a combination of $100 million of dividends and $250 million of share repurchases.
„Our December quarter profit caps off a successful year for Delta with strong profitability and margin expansion, industry-leading operations and significant improvements in customer satisfaction. Across the board this was an outstanding year and all credit for these achievements goes to the 78,000 Delta employees worldwide,” said Richard Anderson, Delta’s chief executive officer. „We have a solid set of initiatives in place to improve our financial results, operational performance and customer satisfaction levels beyond 2013’s record levels and remain focused on being the best airline for our employees, customers and shareholders.”
Revenue Environment
Delta’s operating revenue improved 6 percent, or $474 million, in the December 2013 quarter compared to the December 2012 quarter. Traffic increased 2.0 percent on a 2.9 percent increase in capacity.
- Passenger revenue increased 6.1 percent, or $451 million, compared to the prior year period. Passenger unit revenue (PRASM) increased 3.0 percent year over year with a 4.0 percent improvement in yield.
- Cargo revenue decreased 1.0 percent, or $3 million, as higher freight volumes partially offset declining freight yields.
- Other revenue increased 2.8 percent, or $26 million, driven by higher SkyMiles revenue.
Comparisons of revenue-related statistics are as follows:
| Increase (Decrease) | |||||||
| 4Q13 versus 4Q12 | |||||||
| Change | Unit | ||||||
| Passenger Revenue | 4Q13 ($M) | YOY | Revenue | Yield | Capacity | ||
| Domestic | 3,784 | 9.4 % | 6.6 % | 7.9 % | 2.6 % | ||
| Atlantic | 1,208 | 1.9 % | 0.1 % | 0.7 % | 1.8 % | ||
| Pacific | 803 | (1.6) % | (2.2) % | (1.5) % | 0.6 % | ||
| Latin America | 517 | 18.5 % | 1.9 % | 0.3 % | 16.3 % | ||
| Total mainline | 6,312 | 7.0 % | 3.7 % | 4.5 % | 3.3 % | ||
| Regional | 1,562 | 2.3 % | 1.4 % | 3.5 % | 0.8 % | ||
| Consolidated | 7,874 | 6.1 % | 3.0 % | 4.0 % | 2.9 % | ||
„With a solid demand environment, industry-wide capacity discipline and a number of Delta’s revenue initiatives already delivering benefits, we expect to produce significant margin expansion in the March quarter,” said Ed Bastian, Delta’s president. „As we move through the year, we expect to generate top-line revenue growth as we implement our Virgin Atlantic joint venture, continue to restructure and diversify our Pacific network, gain additional corporate share, and ramp up our merchandising efforts.”
Cost Performance
Total operating expense in the quarter increased 1.5 percent, or $125 million, year-over-year driven by higher volume and revenue-related expenses; the impact of operational, service and employee investments; and $56 million higher profit sharing expense. These cost increases were partially offset by lower fuel expense and the savings from Delta’s structural cost initiatives.
Non-operating expense declined by $116 million as a result of prior year special items for early debt extinguishment and lower interest expense from debt reduction. These items were partially offset by a $17 million negative impact from changes in foreign exchange rates.
Consolidated unit cost excluding fuel expense, profit sharing and special items (CASM-Ex2), was 1.4 percent higher in the December 2013 quarter on a year-over-year basis, driven by the impact of wage increases and operational and service investments. GAAP consolidated CASM decreased 1.4 percent.
Fuel expense, excluding mark-to-market adjustments, declined $91 million as a result of lower market fuel prices and better settled hedge performance. Delta’s average fuel price3 was $3.05 per gallon for the December quarter, which includes $0.06 in settled hedge gains. On a GAAP basis, fuel expense for the December quarter decreased $186 million year-over-year, driven by lower market fuel prices and mark-to-market gains on hedges in the current quarter.
Operations at the Trainer refinery produced a $46 million loss for the December quarter and a $116 million loss for the full year. While lower crack spreads pressured results at the refinery, they also reduced market jet fuel prices and helped lower Delta’s overall fuel expense.
„Delta’s non-fuel unit cost growth of just over 2 percent for all of 2013 was three points better than our projections at the start of the year due to the success of our cost initiatives,” said Paul Jacobson, Delta’s chief financial officer. „These initiatives have built the foundation for managing our cost growth over the longer term and our performance in the back half of 2013 puts us on pace to keep our annual unit cost growth below 2 percent going forward.”
Cash Flow
Cash from operations during the December 2013 quarter was $1.2 billion, driven by the company’s December quarter profit and working capital initiatives, which were partially offset by the normal seasonal decline in advance ticket sales. Cash from operations is net of a $250 million incremental contribution made by Delta to its defined benefit pension plans during the quarter. The company generated $260 million of free cash flow.
Capital expenditures during the December 2013 quarter were $900 million, including $835 million in fleet investments and $16 million for the purchase of 4 aircraft off lease. During the quarter, Delta’s net debt maturities and capital leases were $335 million.
In the December quarter, the company returned $200 million to shareholders. On Nov. 26, the company paid $51 million to shareholders, which represents a $0.06 per share quarterly dividend. In addition, the company repurchased 5.5 million shares at an average price of $27.39 for a total of $150 million. The company has completed $250 million of the $500 million share repurchase plan authorized by Delta’s Board of Directors in May 2013.
Delta ended the quarter with adjusted net debt of $9.4 billion and the company has now achieved over $7.5 billion in net debt reduction since 2009. This debt reduction strategy produced a $28 million year-over-year reduction in interest expense in the December quarter and a $153 million reduction for 2013.
Jacobson continued, „We also expect to continue strong cash generation from the business. We will deploy the $5 billion of operating cash flow projected for the upcoming year to reinvest in the business, reduce our debt levels by more than $1 billion, continue to address our pension obligation, and deliver meaningful capital returns for shareholders.”
Reversal of Tax Valuation Allowance
Delta’s expectations for sustainable future profitability combined with its consistent and strong profitability over the past four years resulted in the reversal of the company’s tax valuation allowance in the December quarter. The reversal of the tax valuation allowance resulted in a non-cash net gain of $8.0 billion in the December quarter. Beginning in the March 2014 quarter, net income will be reduced to reflect a 39% tax rate; however, there will be no cash impact as Delta’s net operating loss carryforwards will offset cash taxes on more than $15 billion of future taxable income.
Special Items
Delta recorded a $7.9 billion special items gain in the December 2013 quarter, including:
- an $8.0 billion non-cash gain associated with the reversal of the Delta’s tax valuation allowance, as detailed above;
- a $92 million mark-to-market gain on fuel hedges; and
- a $160 million charge for facilities, fleet and other, including charges associated with Delta’s domestic fleet restructuring.
Delta recorded a $231 million special items charge in the December 2012 quarter, including:
- a $122 million charge for facilities, fleet and other, including charges associated with the company’s domestic fleet restructuring;
- a $106 million loss on early extinguishment of debt primarily due to the company’s Pacific route credit facility refinancing; and
- a $3 million mark-to-market loss on fuel hedges.
March 2014 Quarter Guidance
Following are Delta’s projections for the March 2014 quarter:
| 1Q 2014 Forecast | |
| Operating margin | 6 – 8% |
| Fuel price, including taxes, settled hedges and refinery impact | $2.97 – $3.02 |
| Non-operating expense | $235 – $250 million |
| 1Q 2014 Forecast
(compared to 1Q 2013) |
|
| Consolidated unit costs – excluding fuel expense and profit sharing | Up 0.5 – 1.5% |
| System capacity | Up 2 – 3% |
Other Matters
Included with this press release are Delta’s unaudited Consolidated Statements of Operations for the three and twelve months ended Dec. 31, 2013 and 2012; a statistical summary for those periods; selected balance sheet data as of Dec. 31, 2013 and 2012; and a reconciliation of non-GAAP financial measures.
Source / Author: Delta Air Lines