Delta progresses on cost savings initiatives in Q3

Washington DC
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Delta Air Lines made progress on a number of cost savings initiatives in the third quarter, as part of a plan to trim $1 billion from its expenses by the end of 2013.

The Atlanta-based SkyTeam alliance carrier launched a competition between Bombardier and Embraer for a 70 aircraft order, began production at the Trainer oil refinery and launched a $1.95 billion refinancing of its Pacific routes debt during the quarter.

These initiatives are expected to show fruit in the second half of 2013, says Paul Jacobson, chief financial officer of Delta, during an earnings call today.

The fleet restructuring involves replacing about 218 50-seat regional jets with 88 Boeing 717-200s and 70 76-seat regional jets from the middle of 2013. The move will allow Delta to significantly reduce its fuel and future maintenance costs as the smaller aircraft exit its regional fleet.

"The domestic fleet restructuring will fundamentally change our cost dynamic," says Richard Anderson, chief executive of Delta, during the call.

The carrier anticipates that it will decide between Bombardier and Embraer by the end of the year, with deliveries beginning within 16 months.

Embraer is offering Delta a "Plus" version of its E-175 jet that improves fuel efficiency by 5% compared to the baseline aircraft, according to Cai Von Rumohr, aerospace analyst for Cowen and Co.

Production at the Trainer refinery began in September, with the first shipment of fuel scheduled to be delivered this month. Jacobson says that the airline expects the facility to contribute between breakeven to $25 million to its results during the fourth quarter.

Delta expects the refinery to be at full production by the end of the year.

The airline closed the Pacific routes refinancing with an all-in interest rate of 4.5% in October, says Jacobson. The repaid debt carried interest rates of 9.5% due in 2014 and 11.75% due in 2015.

Anderson says that other cost savings will be gained through operational efficiency improvements and lower maintenance costs.

Delta did not immediately benefit from these initiatives. It posted a 5.6% increase to 8.55 cents in cost per available seat mile excluding fuel compared to a year earlier, which was driven partially by an 8% increase in labour expenses during the period.

Overall operating expenses fell by 4% to $8.6 billion, led by a 23% decline in fuel costs year-on-year.

Delta paid an average of $3.14 per gallon for fuel without hedges in the third quarter, which was up 2% from 2011. It paid an average of $3.37 per gallon without hedges during the second quarter.

The airline reports both operating revenue and passenger unit revenue growth during the quarter. Revenue was up 1% to $9.9 billion and passenger revenue per available seat mile (PRASM) was up 3% to 13.96 cents over the third quarter of 2011.

The PRASM increase was within guidance, of a 3% to 4% increase.

Ed Bastian, president of Delta, says that its Pacific network performed the best during the third quarter with both strong loads and yields while unit revenue growth in its Latin America network was flat due to capacity increases at some of the region's foreign flag carriers, during the call.

Pacific passenger unit revenue increased by 6% during the quarter.