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Delta Air Lines posts 70% profit in December 2014 year-end financial results

Delta Air Lines have reported a 70% profit increase in its financial results for the December 2014 quarter.

“Our 2014 performance – an industry-leading operation, superior customer service, and a 70 percent increase in profits – shows that Delta is focused on delivering growing value for its employees, customers and investors,” said Richard Anderson, Delta’s chief executive officer.

“As we begin 2015, we have a significant opportunity from lower fuel prices, which will drive more than $2 billion in fuel savings over 2014.  Through our capacity discipline, pricing our product to demand, and the fuel savings, we expect to drive double-digit earnings growth, along with increased free cash flow and a higher return on invested capital in the upcoming year.”

Delta’s operating revenue improved 6 percent, or $571 million, in the December 2014 quarter compared to the December 2013 quarter.  Traffic increased 4.0 percent on a 3.7 percent increase in capacity.

Passenger revenue increased 4.6 percent, or $361 million, compared to the prior year period. Passenger unit revenue (PRASM) increased  0.8 percent year over year with a 0.6 percent improvement in yield.

Cargo revenue increased 2.1 percent, or $5 million, driven by increases in both freight volumes and yields. Other revenue increased 21.3 percent, or $205 million, driven by SkyMiles revenues, third-party refinery sales, and joint venture settlements.

“Delta delivered solid revenue performance in the December quarter, growing our top line by 6 percent against a backdrop of nearly 15 percent lower fuel prices,” said Ed Bastian, Delta’s president.

“While we face headwinds from the stronger dollar and lower fuel prices going forward, we have confidence we can continue to generate top-line growth as we realize additional benefits from our Virgin Atlantic joint venture, restructure our Pacific network, gain additional corporate share, and ramp up our merchandising efforts with branded fares and enhanced customer segmentation.”

FuelExcluding mark-to-market adjustments, fuel expense declined $342 million driven by lower market prices and higher refinery profits.  Delta’s average fuel price was $2.62 per gallon for the December quarter, which includes $180 million in settled hedge losses.  At December 31, Delta had $925 million in hedge margin posted with counterparties.  Operations at the refinery produced a $105 million profit for the December quarter, a $151 million improvement year-over-year.

“We expect a net year-over-year fuel price benefit of $500 million in the March quarter and will work throughout 2015 to maximize the benefit of fuel savings to our bottom line,” said Paul Jacobson, Delta’s chief financial officer.  “Our margin postings are manageable in light of our strong cash generation and balance sheet.”

Consolidated unit cost excluding fuel expense, profit sharing and special items (CASM-Ex4), was up 0.5 percent in te December 2014 quarter on a year-over-year basis, with the benefits of Delta’s domestic refleeting and other cost initiatives offsetting the company’s investments in its employees, products and operations.

“The December quarter marks the sixth consecutive quarter with non-fuel unit cost growth below two percent, a testament that our cost initiatives and domestic upgauging efforts are continuing to deliver benefits,” Jacobson continued.  “We still have many opportunities ahead of us and expect to again keep non-fuel unit cost growth below two percent for the March quarter, consistent with our long-term goal.”

Excluding special items, total operating expense in the quarter increased $135 million year-over-year driven by  $143 million higher profit sharing expense and higher volume-related expenses.  These cost increases were partially offset by lower fuel expense, excluding mark-to-market adjustments, and savings from Delta’s cost initiatives.

Non-operating expense, excluding special items, declined by $40 million as a result of lower interest expense, partially offset by a $13 million higher foreign exchange loss compared to the fourth quarter of 2013.

Tax expense, excluding special items, increased $383 million compared to the prior year quarter, as the company now recognizes tax expense for financial reporting purposes following the reversal of its tax valuation allowance at the end of 2013.  Delta’s net operating loss carryforwards of more than $12 billion will largely offset cash taxes due on future earnings during the next several years.

Cash from operations during the December 2014 quarter was $1.5 billion, driven by the company’s December quarter profit, and free cash flow was $834 million.  Cash flow from operations and free cash flow include fuel hedge margin posted, which is reflected as hedge margin receivable.  Capital expenditures during the December 2014 quarter were $620 million, including $444 million in fleet investments. During the quarter, Delta’s net debt maturities and capital leases were $354 million.

With its strong cash generation in the December 2014 quarter, the company returned $575 million to shareholders. The company paid $75 million in cash dividends and repurchased 12.2 million shares at an average price of $40.96 for $500 million.  In 2014, the company returned a total of $1.35 billion to shareholders by paying $251 million in quarterly dividends and spending $1.1 billion to repurchase 28.6 million shares.

Delta ended the quarter with adjusted net debt of $7.3 billion, including cash that is being held by counterparties as hedge margin.  The company has achieved nearly $10 billion in net debt reduction since 2009, resulting in a roughly 50% reduction in annual interest expense.

“Delta’s strong operating cash flow, combined with our disciplined capital investments, resulted in $3.7 billion in free cash flow in 2014.  We used this cash flow to reduce our net debt levels by $2.1 billion, fund excess contributions of $250 million to our pension plans, and return $1.35 billion to our owners through dividends and share repurchases,” Jacobson added.

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