Delta's Work Has Just Begun

The bankrupt carrier loses $1.2 billion in the fourth quarter.
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Updated from 11:55 a.m. EST

Delta Air Lines

(DALRQ)

said it reduced salaries and personnel costs by 27% in the fourth quarter, but financial results released Tuesday show that the nation's third-largest carrier has a long way to go before it emerges from bankruptcy court protection.

The airline, which filed for Chapter 11 in September, reported a fourth-quarter net loss of $1.2 billion. The operating loss was $675 million. In the same quarter a year earlier, Delta reported a net loss of $2.2 billion and an operating loss of $2.3 billion.

For all of last year, Delta lost $3.8 billion. Excluding reorganization and special items, the full year loss was $2.2 billion. While Delta improved in several areas, Chief Financial Officer Edward Bastian said losses "of the magnitude that Delta recorded in 2005 are not sustainable."

"These losses emphasize the need for the urgency with which we have to pursue route network and revenue improvements and the use of the bankruptcy process to reduce the cost and complexity of our business," he said. The airline, which is staking its future on international expansion, added or announced 50 new international routes in the past year, and now calls itself "one of the world's fastest-growing international carriers."

Delta said its revenue per available seat mile is 9.33 cents, and that's below the industry average of 9.43 cents, according to airline analyst Helane Becker of Benchmark Securities. Meanwhile, Delta's cost per available seat mile, excluding fuel and other one-time expenses, is a relatively high 7.71 cents.

United Air Lines

(UAUA)

, which spent three years in bankruptcy, recently reported CASM of 7.45 cents.

"Their revenue is lower than the industry average, and their costs are higher," said Becker, whose firm has no financial relationship with Delta. "It shows that Delta is still at the beginning of the bankruptcy process. But I'm not sure it's fair to compare them with United quite yet."

Becker noted that more international flying will likely produce improved revenue numbers for Delta.

Standard & Poor's said Wednesday that Delta's loss was expected and wouldn't affect the airline's 'D' bond rating, which is applied to companies in bankruptcy. S&P said Delta's revenue per available seat mile improvement of 8.4%, aided by improved domestic pricing, was "healthy."

The airline's labor-cost savings were partially offset by higher fuel costs. In the fourth quarter, Delta reduced personnel outlays by $415 million, but paid $410 million more for fuel. Delta said 2005 mainline costs, driven by fuel and special items, increased by 15.7%. Taking out fuel and items, mainline unit costs decreased by 7.1%.

For the quarter, revenue rose 6.2% to $3.9 billion, from $3.7 billion a year earlier. The net loss excluding reorganization and special items was $782 million, little changed from $780 million for the same quarter a year earlier. As of Dec. 31, Delta had $2.9 billion in cash and cash equivalents, of which $2 billion was unrestricted.

Since seeking bankruptcy protection, the airline has restructured its route system with more international flying, shrank its Cincinnati hub, scaled back its fleet and reduced employee costs.

Bastian said 2006 will be a year for Delta to stabilize its financial situation. "While masked by the high cost of fuel, our restructuring initiatives have begun to produce tangible results this quarter in the form of increased unit revenue and lower mainline nonfuel costs," he said.

In December, Delta recorded a $372 million operating loss and $753 million net loss for the month. Excluding reorganization costs and special items, the company recorded a $196 million operating loss and a $358 million net loss for the month.