Delta Still Planning for Profit

The airline's CFO says the goal is to make money all year in 2007.
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A disappointing September loss of $134 million made

Delta Air Lines

(DALRQ)

the only legacy carrier to lose money from its operations in the third quarter, but the airline insists it remains on track to restore profitability in 2007.

"We need to walk before we can run," Chief Financial Officer Ed Bastian said in an interview. "We're now to the point where we make decent money in the summer and lose money in the fall and winter, but next year our focus is to be solidly profitable year-round."

In the third quarter, excluding special items, Delta lost $46 million, compared with a $438 million loss a year earlier. Delta will also lose money in the fourth quarter, Bastian said, but again the loss will be far smaller than a year earlier. The full-year 2005 loss, excluding special items, totaled $2.2 billion, more than the rest of the industry combined. "We had further to climb," Bastian said.

After filing for bankruptcy court protection in September last year, Delta has taken the opportunity to reinvent itself as an international carrier. International revenue has grown from 20% to 35% of its total, as many planes have been shifted from domestic to international flying.

The strategy had been widely questioned, although positive early results have caused much of the skepticism to diminish. However, on a recent conference call, Gerard Arpey, CEO of

American Airlines

(AMR)

, noted that the inherent risk in international expansion is the post-summer drop-off.

"The airline business would be a great business if you just operated in June, July and August," Arpey said.

Bastian said Delta didn't experience any significant decline due to international expansion. "I guarantee that if we were flying

the same airplanes domestically in September, we would have done a whole lot worse," he added.

A confluence of events led to the September loss, Bastian said, the biggest being a failed fuel hedging effort.

"We were hedging to protect against hurricane risk," he said. "Not only did the risk not show up, but the market dropped considerably, so the hedge we were sitting on fell out of the money." Delta reported that it took a $31 million loss for the decline in value of the hedges, but Bastian said another undisclosed "big slug" was included in Delta's cost of fuel.

The loss also reflected a falloff in travel due to new security regulations imposed on Aug. 10, as well as a traditional reduction in Delta's September traffic. While school classes in the Southeast generally resume in August, schools elsewhere don't reopen until after Labor Day.

"The seasonal shift, exacerbated by the

U.K. terrorism incident, drove September," said Bastian. Normally, September ranks second to January as Delta's worst month.

The five other legacy carriers all produced triple-digit profits for the quarter after excluding special items.

Northwest Airlines

(NWACQ)

, still in bankruptcy, led the pack with net income of $252 million, while

United Airlines

(UAUA)

was second with net income of $190 million. Bastian noted that both carriers benefited from peak-season Asian travel.

"Our calendar seasonality is a little different," he said.