Delta Air Lines expects solid second-quarter profit despite European ash cloud disruptions

By Harry R. Weber, AP
Tuesday, April 20, 2010

Ash cloud likely to be just a blip for US airlines

ATLANTA — The volcanic ash cloud hovering over Europe shouldn’t give Delta Air Lines Inc. anything worse than a migraine, as long as flight disruptions don’t re-ignite. That’s welcome news for a U.S. airline industry hoping for a big boost from summer travelers.

Delta said Tuesday that it lost $256 million in the first three months of the year, before the eruption of an Icelandic volcano shut down a large portion of air travel in Europe. The carrier expects to be solidly profitable in the current period, the second quarter. Analysts forecast a profit of about $559 million.

Delta executives said the airline has lost $5 million a day from the disruption, or $20 million so far. As long as that doesn’t persist, it would mark just a blip on Delta’s radar screen. The airline’s total revenue this year is expected to be roughly $31 billion.

Delta, a major trans-Atlantic carrier thanks in part to a joint venture with Air France-KLM, had canceled 400 flights through Monday because of the ash cloud hovering over Europe. But it expected to have all of its eastbound flights to Europe operating by Tuesday night. It was unclear when its westbound flights from Europe would be back to full schedule.

Europe is important to Delta’s bottom line. Roughly 22 percent of its 2009 systemwide traffic came from trans-Atlantic service.

Taking into account all U.S. airlines, the impact isn’t expected to be severe. Only a handful of major U.S. carriers fly their own planes to Europe.

Other airlines set to report first-quarter results this week include American Airlines parent AMR Corp., Continental Airlines Inc., Southwest Airlines Co. and AirTran Airways parent AirTran Holdings Inc. US Airways Group Inc. and United Airlines parent UAL Corp. are scheduled to report next week.

Delta, based in Atlanta, blamed heavy winter storms and one-time expenses for propelling it to its loss for the January-March period. Delta lost $65 million in revenue because of repeated storms in February, which forced it to cancel roughly 7,000 flights.

The red ink in the first quarter was still far less than a year earlier, thanks to rising demand for air travel and a steady revenue stream from add-on fees for things like baggage, pillows and food. Delta pocketed $215 million in revenue from baggage fees, alone, in the first quarter.

Those fees could become even more important if fuel prices continue to rise and as Delta seeks to further reduce its huge debt burden. It had $16.4 billion in adjusted net debt as of March 31, some three years after the carrier emerged from bankruptcy and 18 months after it acquired Northwest Airlines.

Delta has reduced its debt maturities in 2010 and 2011 by amending its co-branded credit-card agreement with American Express.

Delta shares fell 2 cents to close at $13.16 in Tuesday trading.

Across the industry, fares are higher and demand is up. There’s also the possibility of further consolidation, with talks between United and US Airways, and separately between United and Continental.

Now, as airlines head into their busy summer travel season, many hope to start turning profits again. If Delta posts a profit for the April-June period, it will be its first quarterly profit since the third quarter of 2007, before it combined with Northwest.

Delta is seeing solid advance bookings across all regions. It expects consolidated passenger revenue per available seat mile, a key industry metric, to be up 17 percent for April and to continue to be strong in May and June, President Ed Bastian said during a conference call with investors and reporters.

Business travelers, too, are taking to the skies again as the economy rebounds. Corporate contract revenue as of last week was up 50 percent year-over-uear, Bastian said.

As for consolidation, Delta CEO Richard Anderson said the current regulatory environment is not the same as when Delta acquired Northwest. While not prejudging what would happen if United sought to combine with US Airways or Continental, Anderson noted that Delta’s deal with US Airways to swap takeoff and landing slots at airports in New York and Washington has already been pending final government approval longer than it took for Delta’s acquisition of Northwest to be approved.

Fuel prices also are substantially higher than a year ago, although Delta’s fuel hedging program helped it mitigate their impact in the first quarter. Its expenses for aircraft fuel and related taxes actually fell 11 percent to $1.68 billion in the quarter.

Delta’s first-quarter loss was equivalent to 31 cents a share, compared to a loss of $794 million, or 96 cents a share, a year earlier.

Excluding special items, Delta lost 23 cents a share.

Revenue rose 2 percent to $6.85 billion from $6.68 billion.

Analysts, who generally exclude one-time items, expected a loss of 23 cents a share on revenue of $7.01 billion.

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