Delta Talks About Tough Choices
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By Andrew Compart
Delta reported a $257 million loss in the second quarter and retreated from its prediction earlier this year that it will make a full-year profit, with CEO Richard Anderson declaring July 22 that “we do not see any meaningful recovery in 2009.”
“We do not expect to be profitable this year,” Anderson said in an earnings call with stock analysts and media. That should come as no surprise in the current climate, but when the airline reported its first-quarter results in April, it was still projecting a full-year profit (DAILY, April 22).
Anderson cited the “unprecedented” decline in revenue for the industry as the key factor. Delta’s revenue for the second quarter fell 23% year-over-year, or by $2.1 billion, when compared to the combined pre-merger results of Delta and Northwest in 2008. Unit revenue dropped 19.9% on a 19.1% decline in yield.
In a July 22 memo to Delta employees, Senior VP and CFO Hank Halter said the financial results and outlook mean the airline must “take a hard look at our entire business — our network, fleet and cost structure — to determine other changes that must be made.” In the airline’s earnings call with stock analysts and media, Anderson said the airline “may have to make some tough choices.”
Neither Anderson nor Halter, however, provided much detail on what those tough choices will be. The airline already is slashing capacity, starting in late August — it will end up 10% lower for the fourth quarter — and did not announce any change in that plan. It also is not saying yet what it will do with 2010 capacity; Delta executives said the airline will decide that closer to the end of the year, when it can better assess future demand and revenue.
Nor did they spell out how many more jobs Delta might have to cut, although they clearly suggested more cuts are in the offing. Anderson said the airline would try to use voluntary retirement and early-out offers to avoid furloughs, adding, “We hope that the economy cooperates.”
Delta did see some bright spots amid the general gloom.
Anderson said the carrier would have reported a $191 million profit for the second quarter if it excluded $390 million in fuel hedge losses and $58 million in merger-related costs. That “shows the underlying strength of the core enterprise,” he maintained.
Delta also ended the quarter with $4.9 billion in cash, cash equivalents and short-term investments, along with $500 million available under an undrawn line of credit, and said it generated $834 million in cash from operations and $509 million in free cash flow for the quarter.
Anderson also said the airline has seen some stabilization in business traveler demand, and even “a bit of an uptick.” But he declared that it is “a little early to be calling that fact a trend.”
“We are assuming no recovery,” Anderson said, “because that’s the conservative approach to take.”
Photo: Airliners Gallery
