ANALYSIS: Delta posts strong 2012 results

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Delta Air Lines posted an impressive $1.01 billion net profit after special items in 2012, benefitting from a full year of capacity and revenue discipline while also making a number of notable investments.

The Atlanta-based carrier saw passenger revenue per available seat mile (PRASM) increase by 7% to 13.8 cents during the year compared to 2011, while traffic was flat and capacity fell 2%. Costs per available seat mile (CASM) excluding fuel and special items rose 5% to 8.92 cents.

"This is proof that revenue initiatives and prudent capacity deployment are driving results," says Ed Bastian, president of Delta, during an earnings call today.

Delta has been a leader in prudently deploying capacity where and when it is needed on a seasonal basis in order to maximise revenue for a few years. This strategy includes, for example, dramatic cuts during seasonally low demand during the winter over the Atlantic and ramping up capacity in the peak summer season.

Operating revenue and expenses at the airline both rose 4% to $36.7 billion and $34.5 billion, respectively. It paid an average of $3.26 per gallon for jet fuel during the year versus $3.05 per gallon in 2011.

Delta's strong profit came during a year of big-ticket investments. These include the $280 million acquisition of the Trainer refinery in Pennsylvania in June, as well as realising a $226.5 million slot swap with US Airways at New York's LaGuardia and Ronald Reagan Washington National airports, and a $65 million investment in Aeromexico.

Capital expenditure for the year was up more than 60% to about $2.03 billion, based on Flightglobal calculations, compared to $1.26 billion in 2011.

Trainer has yet to pay off. The refinery lost $63 million in the fourth quarter due to the impact of superstorm Sandy in October, says Paul Jacobson, chief financial officer of Delta, during the call. This is slightly more than guidance of a $50 million to $60 million loss that was provided in December.

The airline anticipates that the plant will report a modest profit this quarter, adds Jacobson.

Delta has said that Trainer will generate about $280 million in profits and reduce its fuel bill by about $300 million this year.

The slot swap is producing positive results. Bastian says that Delta continues to pick up market share in the New York area as a result of the hub it was able to create at LaGuardia following the deal. For example, he says that the carrier saw a 31% increase in business from banking sector clients during the fourth quarter, especially from the New York area.

Glen Hauenstein, executive vice-president of marketing, network, revenue management and alliances at Delta, said in December that the hub is on-track to be profitable in "perpetuity" from this March.

Delta also announced a $360 million investment in Virgin Atlantic Airways and an order for up to 70 Bombardier CRJ900s in December. Both will be reflected in 2013 capital expenditure.

During the fourth quarter, the carrier reported a $7 million net profit after $231 million in one-time special charges. These include $122 million related to Delta's fleet restructuring, $106 million from the Pacific route restructuring and a $3 million mark-to-market fuel hedge loss.

Operating revenue rose 2% to $8.6 billion and operating expenses by 8% to $8.25 billion versus the fourth quarter 2011. Operating income was $352 million.

Delta saw a 1% increase in traffic on a 1% decrease in capacity during the quarter. PRASM rose 4% to 13.69 cents while CASM ex-fuel and special items rose 6% to 9.17 cents.

Superstorm Sandy cost the carrier $100 million in revenue in the fourth quarter.

Cash and short-term investments were $3.4 billion at the end of December. Net capital expenditure during the quarter was $599 million.