Delta Reports Biggest Profit in Decade
By JAD MOUAWAD
Published: July 19, 2010

Delta Air Lines reported its biggest quarterly profit in a decade on Monday, but investors were concerned that Delta and the rest of the airline industry would repeat the mistakes that have jeopardized many past recoveries.

Delta Air Lines said profit growth was helped by higher ticket prices for business travelers and growth in international routes.

Delta’s revenue per passenger flown one mile — a crucial industry metric — rose more than 19 percent as a result of higher ticket prices for business travelers and growth in international routes. That helped the airline report a net income of $467 million in the second quarter, or 55 cents a share, compared with a loss of $257 million, or 31 cents a share, in the same period last year.

Despite that strong performance, stock prices fell across the industry on Monday as Wall Street questioned whether airlines were moving too quickly to restore some of the deep cuts in capacity they had made in the last couple of years to stem losses.

“The real engine behind the recovery in the second quarter has been capacity cuts,” said Hunter Keay, an airline analyst at Stifel, Nicolaus & Company. “Investors don’t want to see more supplies added to an industry whose Achilles’ heel has been an imbalance of supply and demand.”

Delta’s shares closed at $11.38, down 2.9 percent, after declining as much as 11 percent in morning trading. The carrier’s rivals, including American Airlines, Continental Airlines and United Airlines, report earnings in coming days.

The airline business is a typically cyclical one: when the economy picks up, airlines usually order more planes and add more seats, which pushes down prices. At the Farnborough International Airshow, the aerospace industry’s largest trade show, which kicked off on Monday, Airbus and Boeing announced more than 200 combined new orders on the first day alone.

Like other airlines, Delta has been cutting the number of planes in its fleet to adapt to the drop in passenger demand, which was especially marked last year. The company’s capacity — or the number of seats it offers — fell 0.6 percent in the last quarter. It has 958 planes, 59 fewer than in the same period last year.

But Delta’s chief executive, Richard H. Anderson, indicated on a conference call with analysts on Monday that Delta’s capacity would grow 5 to 7 percent in the fourth quarter to make up for last year’s sharp pullback. He also forecast capacity growth of 1 to 3 percent in 2011.

Delta is not planning to increase the number of planes it has; rather, it wants to fly them more often.

Delta executives asserted that they remained careful not to add too much new capacity. Edward H. Bastian, the company’s president, described the plan as merely correcting last year’s tightening. “We recognize the importance of capacity restraint in improving the financial performance of the business,” he said on the conference call.

The industry is struggling to recover from the recession, which cut deeply into passenger traffic last year, especially among the most lucrative business travelers. Some analysts pointed out that with a weak economic recovery, passengers were still tentative about resuming air travel.

The number of international passengers rose 6 percent in the first five months of the year, according to the International Air Transport Association, with premium traffic rising more rapidly. Still, business travelers remain below pre-recession numbers.

Airlines responded by grounding planes to lower their costs. They have also sought to increase revenue through luggage fees and higher ticket prices. Air fares have risen for five of the last six months, according to data from the Bureau of Transportation Statistics.
Because many passengers buy their tickets in advance, there is typically a lag between the state of the economy and the financial performance of airlines.

There are also concerns about the health of the economy, which could put a damper on the airlines’ fortunes.

“It’s been a tepid recovery for the airlines,” said Basili Alukos, an airline analyst at Morningstar.
Still, Wall Street analysts were encouraged by Delta’s performance in the last quarter. The company is the world’s largest airline since it acquired Northwest Airlines. If the planned merger of United Airlines and Continental Airlines wins approval, that airline will become the new No. 1.
Delta’s overall revenue, which includes ticket sales, bag and other fees, and cargo, rose 17 percent, to $8.2 billion, in the quarter.

Delta provided an upbeat forecast for the rest of the year, anticipating double-digit gains in revenue in the third quarter.

“We are seeing strong improvements in these early stages of the economic recovery and believe there’s room for more revenue growth as the economy continues to stabilize,” Mr. Bastian said.
Vicki Bryan, an analyst at Gimme Credit, an independent research service on corporate bonds, said Delta had done a good job of bolstering its balance sheet and refinancing some of its heavy debt load inherited from Northwest. She noted that the company generated more than twice the margins on its earnings before interest, taxes, depreciation and amortization as its competitors.
It also has “dramatically stronger free cash flow versus its high-yield peers, and the merger benefits will help to accelerate profitability and competitive strength,” she wrote in a research note. “We expect revenue growth and profitability to be restored in 2010, despite a potentially more tepid economic recovery.”