Delta tightens belt after demand slackens

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Delta Air Lines is tightening its belt both in terms of capacity and costs, following a slump in demand beginning in March.

The Atlanta-based carrier plans to more closely watch capacity going into the peak US summer season, maintain its focus on cost cutting and reduce its bias on yield in its revenue management systems, say executives during an earnings call today.

The airline saw demand fall in March and into April due to a combination of factors including the US federal payroll tax, the across-the-board US federal government budget cuts known as the sequester and economic sluggishness in some of its markets, says Ed Bastian, president of Delta, during the call.

Delta saw passenger revenue per available seat mile (PRASM) increase by only 2% in March following year-on-year increases of 5% in February and 5.5% in January. It attributed the lower March number to the sequester.

PRASM was up 4% for the quarter compared to 2012.

Declines in fuel prices partially offset the fall in demand. Delta paid $3.24 per gallon for jet fuel including hedges and the impact of the Trainer refinery during the quarter, which was down 1% from a year earlier. This was at the lower end of its guidance of $3.23 to $3.28 per gallon earlier this month.

"Even with the lower-than-expected revenue, we posted the most profitable March month in Delta's history, generating a net profit of $300 million, a great result by any measure and an indication of the core strength of our business," says Bastian.

Look forward, Richard Anderson, chief executive of Delta, says: "Lower fuel costs and capacity management will more than offset any [slack] in demand."

Delta still anticipates a 9% to 11% operating margin in the second quarter, he adds.

Capacity could rise during the second quarter but Delta is maintaining its long-term discipline. The carrier anticipates that available seat miles (ASMs) will be flat to up 1% year-on-year in the period, split between a 1% to 2% rise on the domestic side and either flat to down 1% on the international side.

Anderson says that Delta will focus on trimming off-peak capacity if demand remains weak. He says that the airline could adjust levels on a day-to-day basis during its US summer schedule.

In Asia-Pacific, Bastian warns of possible reductions in capacity during off-peak travel periods and to beach markets in the region due to the continued weakness in the Japanese yen.

Delta's Asia-Pacific beach markets include flights between Japan and Guam, Hawaii, Palau and Saipan.

The airline is in the midst of a cost cutting programme that it anticipates could generate up to $1.2 billion in savings by 2015. Paul Jacobson, chief financial officer of the airline, says that it has a run rate of a little over $200 million currently from the programme. The airline anticipates about $600 million in realised savings by the end of the year largely due to its domestic re-fleeting, he adds.

Delta is on-track to retire 40 mainline aircraft, including Boeing 757s and McDonnell Douglas DC-9s, and more than 40 50-seat regional jets by the end of the year, he says. Deliveries of Boeing 717-200s and Bombardier CRJ900s, which will replace many of the 50-seaters, begin in September.

"We continue to rally the organisation around better cost control, and we are starting to see the results," says Jacobson.

Cost per available seat mile (CASM) excluding fuel and profit sharing is anticipated to increase by 4.5% to 5.5% in the second quarter versus 2012.

Bastian says that Delta's revenue management system's bias towards yield "exacerbated" the decline in yield growth during March. He adds that this is being adjusted and should be eliminated by May.

Unit revenues are expected to be flat to down 1% in the second quarter partially as a result of this bias, says Anderson. PRASM was up 8.5% year-on-year during the same period in 2012.

Delta reported an $85 million net profit excluding special items - $7 million after $78 million in one-time charges - during the first quarter, despite the headwinds. Operating revenue increased 1% to $8.5 billion and operating expenses rose 3% to $8.28 billion.

It was Delta's first net profit in the first quarter since 2000.