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Delta CFO Says Merger Not Required

SEATTLE -- Merger talk is "a distraction" and $100 oil is a burden, but Delta Air Lines (DAL - Get Report) remains elated by its international prospects and is confident it will show a profit this year.

"Our plan is to make money this year, [with] fuel at $90 to $100, and we're still on plan," President and CFO Ed Bastian told reporters after the carrier took delivery Friday of a Boeing (BA) 777-200LR, its first new airplane in six years. "We made over $600 million [pretax] in 2007, and while oil wasn't at $100, it wasn't far from that."

Bastian reiterated that Delta is not wedded to the concept of a deal with another carrier. A transaction with Northwest Airlines (NWA) is widely considered to be the most likely possibility, but Delta hasn't confirmed that the two have held discussions.

A merger "has to be right for employees," he said. "That includes protecting seniority [and] protecting jobs. If we can do that, we'll consider a merger. If we can't, we won't."

Sources with knowledge of the situation say merger talks have stalled over the issue of Northwest pilots' efforts to protect their seniority. Bastian said only that "if we're going to do a deal, we'll do it with all the parties on board. Our standalone plan is in pretty good shape. Look at the momentum we have."

Meanwhile, the new airplane Delta received has the longest range of any commercial jet in the world. Next month, it will begin flying Delta's lengthiest route, 7,800 miles between New York and Mumbai. Because it will replace an aircraft that flies with cargo weight restrictions, it will add $10 million a year in revenue.

The airplane is emblematic of Delta's increasing international presence, which will rise from 20% of capacity in 2005 to 40% this summer. More growth is planned. Like other legacy carriers, Delta is benefitting from the move of capacity from domestic service to international. But Delta gains more than some of its rivals, because it has more domestic 757s and 767s to move.

"We're not smarter than the other guys, but we have the aircraft," Bastian says.

Because fuel prices are so high, airlines have to be able to pass the cost of fuel on to customers. "In international, you have a better ability to do that," Bastian said. So far, Delta has not seen weakening demand, and at the moment, several trends all seem to be breaking its way.

For instance, Delta gets 36% of its trans-Atlantic revenue in euros, said Glen Hauenstein, executive vice president. That equates to about 7% of total revenue. The euro has risen against the dollar, luring international travelers to the U.S. "It helps to offset fuel costs," he said.

At New York's Kennedy Airport, Delta has been replacing 50-seat regional jets with 76-seaters, a move that also has multiple benefits. First, it makes better use of Delta's slots. Second, despite the capacity increase, the carrier's strongest year-over-year gains in revenue per available seat mile are at Kennedy. And third, high fuel costs make flying 50-seaters unprofitable. "We have too many 50-seat [jets]," Bastian said.

Another bright spot is London. Delta will begin Heathrow service this month, and bookings are "off the charts," Hauenstein said. But he notes that with 14% more capacity than last year, the U.S. to London market is bound to disappoint established carriers. AMR's (AMR) American has already identified a decline in yield.

To be sure, being an international carrier has its drawbacks. Delta has pushed back the start of Nairobi service due to civil unrest in Kenya. Once planned for June, it will now launch in December. Additionally, advance bookings for the Atlanta to Shanghai route, are a bit weaker than the airline wants to see.

Moreover, there are looming signs that international traffic may be slowing, according to the International Air Transport Association, which said traffic growth slowed to 4.3% in January, down from 7.4% in 2007.

"January traffic results show that we could be at a turning point," said Giovanni Bisignani, the IATA's chief executive, in a prepared statement. "A month's data is not enough to define a trend; however, the sharp shift in demand growth patterns makes it clear that the U.S. credit crunch is negatively impacting air travel."

Nevertheless, Hauenstein says the carrier is talking to Boeing about increasing the range of the 777, enabling it to fly routes like Atlanta to Sydney, which is 8,100 miles. Other routes he envisions include Atlanta and Kennedy to Hong Kong, which are 8,100 miles and 8,400 miles, respectively.

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