The FINANCIAL — The strength of Delta’s long-term business model was on full display on July 14 as the airline reported GAAP pre-tax income of $2.4 billion and adjusted pre-tax income of $1.7 billion amid a dip in unit revenues – the amount of money collected for every mile each seat is flown – and the start of climbing fuel prices.
Delta’s solid profit was achieved despite the airline reporting a 4.9 percent year-over-year dip in unit revenues for the quarter. The airline is now setting its sights on returning to positive unit revenue growth by the end of 2016, as fuel prices rise.
“As we look to the remainder of the year, the large year-on-year savings driven by lower fuel are largely behind us,” said CEO Ed Bastian. “It is important to achieving our long-term financial targets that we get unit revenues back to a positive trajectory.”
With foreign currency under heightened pressure from the steep drop in the British Pound and the economic uncertainty from the United Kingdom’s decision to exit the European Union, Delta has decided to reduce 6 points of U.S.-U.K. capacity from its winter schedule. These actions will reduce system capacity by about one point in the December 2016 quarter and Delta now expects to grow its system capacity by 1 percent year over year during this time, according to Delta.
“While the revenue environment remains challenging, with persistent headwinds from close-in domestic yields and geopolitical uncertainty, we remain focused on achieving our goal of positive unit revenues by year end,” said Glen Hauenstein, Delta’s president. “We’ll continue to move quickly and aggressively with all our commercial levers, including an incremental 1 point reduction in our December quarter capacity levels, to make sure we create the momentum we need to achieve this goal.”
Despite significant investments in Delta people, products and services, Delta’s non-fuel cost growth remains on track to be below 2 percent for the year, and was flat in the second quarter.
Delta’s GAAP fuel expense declined $305 million and adjusted fuel expense declined $408 million year over year due to lower market fuel prices. And while Delta’s hedge losses for the quarter totaled $614 million – $455 million of which was early settlements – it does not expect additional hedge losses in 2016.
Delta generated $3.2 billion in GAAP operating cash flow, $2.6 billion in adjusted operating cash flow and $1.6 billion of free cash flow during the quarter that allowed for the following investments:
$1 billion into the business, including $880 million in fleet investments
$135 million in pension plan contributions, completing its planned $1.3 billion in pension contributions for the year.
Returned $1.1 billion to shareholders, comprised of $103 million of dividends and $1 billion in share repurchases
During the quarter, FitchRatings upgraded Delta’s corporate credit rating to BBB-, an investment-grade rating, in recognition of the airline’s improved financial strength.
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