Delta Flies into Profitability

Delta Air Lines has returned from bankruptcy by way of profitability. This week, it reported its financial results for the second quarter of 2007 with a largely healthy set of numbers. Total revenues are up as is the passenger unit revenue [PRASM, in the airline biz] and it turned a profit. A lot of the good news came from one-time events related to the emergence from bankruptcy, but there is clearly underlying strength. Now, if Delta can just keep from screwing it up.

Operating revenue for the quarter hit $5 billion, up around 5.5% from the second quarter 2006. The PRASM was 11.78 cents in the quarter, up from 5.6 a year ago. Net income was $1.8 billion, or around $4.49 per fully diluted share – there were roughly 394 million shares. Moreover, the company has $3.7 billion in cash or its equivalents and short-term investments. Delta is liquid.

That said, the Company noted in its earnings press release and its 10-Q filing, “Upon emergence from bankruptcy on April 30, 2007, the company adopted fresh start reporting. Under fresh start reporting, Delta revalued its assets and liabilities to preliminarily estimated current market values and changed the accounting for its SkyMiles frequent flyer program. These non-cash adjustments significantly impacted Delta’s balance sheet, statement of operations and statement of cash flows. As a result, Delta’s financial statements on and after May 1, 2007 are not comparable to its previously issued financial statements.”

When the one-time charges and benefits are stripped out, one gets a less spectacular view of Delta. For example, pre-tax income was $373 million with them removed, but it was $1.9 billion when they were counted. Either number is better than the $2.2 billion loss in the previous year’s second quarter, but investors will need to review the results for the next year or two very carefully. After all, net income per fully diluted share of $4.49 is great, but with one time benefits and charges removed, it was merely $0.70 a share, a much different kind of investment.

Nevertheless, Delta has learned one thing; hedging fuel costs is a good idea. In August 2005, it reported in its 10-Q, “We have no hedges or contractual arrangements to reduce our aircraft fuel costs below market levels, and the forward curve for crude oil currently implies that aircraft fuel prices will remain at historically high levels beyond the near term.” This week’s 10-Q read in part, “As of July 18, 2007, Delta has hedged 21% of its projected fuel consumption for the September 2007 quarter utilizing heating oil collars with an average cap of $1.80.” Southwest has hedged for years, and has been profitable longer than any other American airline. Some people still have to learn the hard way.

© Copyright 2007 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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