OREANDA-NEWS. Delta Air Lines (NYSE:DAL) today reported financial results for the June 2013 quarter.  Highlights from the quarter include:
Delta's net profit for the June 2013 quarter was USD 844 million, or USD 0.98 per diluted share, excluding special items1.  This result is a record June quarter profit excluding special items and is a USD 258 million improvement year-over-year.
Including USD 159 million in special items, Delta's GAAP net income was USD 685 million, or USD 0.80 per diluted share.
The company announced a balanced capital deployment plan, targeted at creating up to USD 5 billion of value for shareholders by 2017 through further debt reduction and the return of more than USD 1 billion to shareholders over the next three years by means of USD 200 million of annual dividends and a USD 500 million share repurchase program.
June quarter results include USD 118 million of profit sharing expense in recognition of Delta employees' contributions to the company's financial performance.
Delta generated USD 1.3 billion of operating cash flow and USD 730 million of free cash flow in the June 2013 quarter, and ended the period with adjusted net debt of USD 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 USD 138 million accrued for our profit sharing program this year in addition to USD 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 USD 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 USD 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 USD 30 million, on declining freight yields.          
Other revenue decreased 5.6 percent, or USD 58 million, as a result of the decision to discontinue a number of low margin-producing third-party maintenance contracts.
"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 USD 1.3 billion, driven by the company's June quarter profit and the seasonal increase in advanced ticket sales, which was partially offset by USD 500 million of accelerated pension funding.  The company generated USD 730 million of free cash flow.

Capital expenditures during the June 2013 quarter were USD 704 million, including USD 360 million for the acquisition of 49% of Virgin Atlantic and USD 238 million in fleet investments, including aircraft parts and modifications. During the quarter, Delta's debt maturities and capital leases were USD 405 million.

Delta ended the quarter with adjusted net debt of USD 10.2 billion and the company has now achieved nearly USD 7 billion in net debt reduction since 2009.  This debt reduction strategy produced a USD 43 million year-over-year reduction in interest expense in the June quarter. As of June 30, 2013, Delta had USD 5.7 billion in unrestricted liquidity, including USD 3.9 billion in cash and short-term investments and USD 1.8 billion in undrawn revolving credit facilities. 

"Having generated over USD 1 billion of free cash flow so far in 2013, we have nearly achieved our USD 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 USD 50 million to shareholders with our September quarter dividend."

Cost Performance
Total operating expense in the quarter decreased year-over-year by USD 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 USD 710 million year-over-year, or USD 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 USD 3.03 per gallon for the June quarter.  For the June quarter, operations at the Trainer refinery produced a USD 51 million loss (USD 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 USD 5 billion of value for shareholders, including returning more than USD 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 USD 2.0 - USD 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 USD 5 billion of value to Delta's shareholders.  Specifically,
The company expects to achieve an adjusted net debt level of USD 7 billion by 2017, a USD 5 billion reduction over 2012.  By meeting the USD 7 billion target, Delta will have reduced its adjusted net debt by USD 10 billion since 2009, significantly decreasing the company's balance sheet risk and accreting more than USD 750 million of interest expense savings for shareowners;
Delta's Board of Directors initiated a quarterly dividend and declared a USD 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 USD 500 million share repurchase program, to be completed no later than June 30, 2016.  Together, these two programs are designed to return more than USD 1 billion of capital to shareholders over the next three years;
The company also plans to make up to USD 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 USD 650 - USD 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 USD 183 million of incentives so far this year, including USD 138 million in employee profit sharing and USD 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 USD 1.4 billion at JFK International Airport and opening the new Terminal 4, committing USD 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 USD 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 USD 159 million charge in the June 2013 quarter, including:
a USD 125 million charge for mark-to-market adjustments for fuel hedges settling in future periods; and
a USD 34 million charge for facilities, fleet and other items, primarily associated with Delta's domestic fleet restructuring.

Delta recorded special items totaling a USD 754 million charge in the June 2012 quarter, including:
a USD 561 million charge for mark-to-market adjustments on fuel hedges settling in future periods;
USD 171 million in severance and related costs associated with voluntary early out programs; and a USD 22 million charge for facilities, fleet and other items.
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.

About Delta
Delta Air Lines serves more than 160 million customers each year. During the past year, Delta won 33 airline industry awards sweeping the major corporate travel surveys including Business Travel News, Travel Weekly, TravelAge West, Recommend Magazine and The Beat. Delta was also a recipient of the Secretary of Defense Freedom Award for exceptional support of National Guard and Reserve employees. With an industry-leading global network, Delta and the Delta Connection carriers offer service to nearly 318 destinations in 59 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 USD 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)  CASM - Ex: In addition to fuel expense, profit sharing and special items, Delta believes excluding ancillary business costs is helpful to investors because ancillary business costs are not related to the generation of a seat mile. These businesses include aircraft maintenance and staffing services Delta provides to third parties and Delta's vacation wholesale operations. The amounts excluded were USD 165 million and USD 244 million for the June 2013 and 2012 quarters, respectively. The amounts excluded were USD 350 million and USD 484 million for the six months ended June 30, 2013 and 2012, respectively.  Management believes this methodology provides a more consistent and comparable reflection of Delta's airline operations.

(3)  Average fuel price per gallon: Delta's June 2013 quarter average fuel price of USD 3.03 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 June 2013 quarter. On a GAAP basis, fuel price includes USD 125 million in fuel hedge mark-to-market adjustments recorded in periods other than the settlement period. The net refinery loss for the quarter was USD 51 million, or 5 cents per gallon.  See Note A for a reconciliation of average fuel price per gallon to the comparable GAAP metric.

Forward-looking Statements

Statements in this investor update 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 availability 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; 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 dependence on technology in our operations; disruptions or security breaches of our information technology infrastructure; 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; failure or inability of insurance to cover a significant liability at the Trainer refinery; the impact of environmental regulation on the Trainer refinery; our ability to retain management and key employees; our ability to use net operating losses to offset future taxable income; competitive conditions in the airline industry; the effects of extensive government regulation on our business; the effects of terrorist attacks; the effects of the rapid spread of contagious illnesses; and the costs associated with insurance.