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Delta Says Not to Fear International Unit Revenue Declines

Atlanta (TheStreet) -- Delta  (DAL - Get Report) spooked investors two weeks ago when it reported lower-than-expected international yields in June. On Wednesday, executives emphasized that the carrier's international operations remain strong.

A key is that Delta can control its own destiny on the trans-Atlantic, where "93% of capacity is in three joint ventures," CEO Richard Anderson said on the carrier's earnings call. Delta's joint venture includes Air France/KLM and Alitalia. Combined, "we manage over $13 billion of revenue and 30% of industry capacity," said President Ed Bastian.

American (AAL - Get Report) and United (UAL), Delta's key international competitors, will report earnings Thursday. American CEO Doug Parker has said that international demand remained strong in the second quarter. Both carriers' international results will be closely watched.

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On the Delta call, Anderson and Bastian said Delta produced strong trans-Atlantic returns in the second quarter and will do so again in the third. "Advance yields for the third quarter are ahead of where we were this summer," Bastian said. Anderson emphasized that the working relationships are well-defined. AirFrance/KLM employees "run yield management and pricing in Europe (and) we run all the metal out of the U.S.," he said.

"We think of it as running a single airline even though there are different colored airplanes in the joint venture," Anderson said. Delta and its joint venture partners will keep capacity growth between 1% and 3% this winter, he said.

Delta's trans-Atlantic performance also benefited from the carrier's 49% ownership of Virgin Atlantic, which provides access to London Heathrow. "Virgin America has been a big assist with respect to our being able to get a strong foothold in JFK/Heathrow," Bastian said. "We see very strong growth in New York."

Following the explanations, Rodman & Renshaw airline analyst Dan McKenzie told the executives: "You did a nice job of taking trans-Atlantic (worries) off the table here."

The rest of the world was not as kind to Delta as the trans-Atlantic, however.

During the quarter, consolidated passenger revenue per available seat mile rose 5.7%, led by domestic PRASM, which grew 10.2%. Trans-Atlantic PRASM grew 7.2%. But Pacific PRASM fell by 3.2% and Latin America PRASM fell by 0.7%. Overall capacity rose 3%.

In the Pacific, Bastian said, carriers suffered from the devaluation of the yen. Delta is "realigning its network in Tokyo to better match demand," he said. It has reduced intra-Asia traffic as well as traffic to beach destinations.

In Latin America, industrywide PRASM fell 5% in June because of the impact of the World Cup, which resulted in a drop-off in business travel. Additionally, Delta is sharply reducing capacity in troubled Venezuela. In the Pacific, carriers were faced with the impact of the devaluation of the yen.

Delta reported July 2 that June PRASM increased 4.5% "as continued corporate and domestic strength offset lower-than-expected international yields driven by industry-wide capacity increases and lower business demand to Latin America due to the World Cup." That triggered a selloff in airline shares.

For the second quarter, Delta reported net income of $889 million, or $1.04 per share. Analysts surveyed by Thomson Reuters had estimated $1.03. Revenue rose 9% to $10.6 billion, in line with estimates.

Including items, primarily a $69 million charge for debt extinguishment, net income was $801 million, or 94 cents a share, and operating margin was 14.9%.

"Delta's performance this quarter, with 9% top-line growth, more than 4 points of margin expansion and $1.5 billion of free cash flow, shows the financial strength and resilience of our company," said Anderson in a prepared statement. "We expect our September quarter performance will be even stronger, as we expand our operating margins to 15 to17% and further improve our profitability."

On the cost side, consolidated cost per available seat mile excluding fuel, profit share and special items was flat, as the benefit of Delta's domestic refleeting and other cost initiatives offset investments. Delta ended the quarter with $6 billion of unrestricted liquidity and adjusted net debt of $7.9 billion, the lowest in 20 years. The company has achieved more than $9 billion in net debt reduction since 2009.

Written by Ted Reed in Charlotte, N.C.

To contact this writer, click here.

Follow @tedreednc

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