Delta and the Red-Ink Factory

High oil costs are making it tough for the carrier to turn the corner.
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Updated from 11:35 a.m. EDT

Delta Air Lines

(DAL) - Get Report

reported a narrower -- but still substantial -- loss as high oil costs continued to swamp the carrier's turnaround efforts.

The Atlanta-based airline, which is struggling to avoid bankruptcy, lost $382 million, or $2.64 a share, compared with a year-ago loss of $1.96 billion, or $15.79 a share.

Results included a $96 million charge related to its pension plans and an $18 million benefit from a reduction in the company's required income tax reserve. Excluding those items, Delta lost $304 million, or $2.11 a share, vs. an adjusted year-ago loss of $312 million, or $2.55 a share.

The adjusted loss was narrower than the $2.37-a-share average loss forecast from analysts surveyed by Thomson First Call.

Nevertheless, investors dumped Delta shares Thursday, and the stock closed down 36 cents, or 9.2%, at $3.55. Some investors may have been concerned about a reshuffling in the airline's executive suite announced Wednesday, which included the resignation of Michael Palumbo, its chief financial officer

They may also have been worried about a story in

The Wall Street Journal

saying executives are engaged in a debate about whether the company's turnaround plans are sufficient to keep it out of bankruptcy.

In a conference call, Gerald Grinstein, Delta's chief executive, said investors shouldn't interpret the departure of Palumbo as an indication the airline has changed its mind about bankruptcy.

"Our position is the same," Grinstein said. "We continue to believe that an out-of-court restructuring is the better course for all of our constituencies and stakeholders."

Still, Grinstein said that several factors were beyond Delta's control, including fuel costs, competition from low-cost carriers and the fate of federal pension reform. "We will take all of those into account, and other factors, as we go ahead," he said.

Delta's second-quarter revenue was $4.18 billion, up 5.7% from $3.96 billion a year before and ahead of the $4.14 billion analyst consensus.

"Delta's second-quarter results reflect both the solid progress we are making in implementation of our transformation plan, and the substantial challenges we are facing," Grinstein said. "As part of our companywide focus on reducing costs and increasing revenue, we have pursued a wide range of initiatives, including fuel conservation measures, debt-for-equity exchanges, implementation of a new revenue management system, surcharges on many of our trans-Atlantic flights and additional significant fare initiatives, among many others. Improvements in unit costs, passenger revenue and revenue per available seat mile are proof that these efforts are working."

Grinstein added that rising fuel prices outpaced the airline's transformation efforts.

"Our management team recognizes that further change is essential -- and it must be implemented with even greater speed -- if we are to achieve our goals in the increasingly competitive aviation marketplace," Grinstein added.

Like its rivals, Delta said booming passenger traffic helped it fill more seats on its planes. Traffic jumped 7.0% from last year, while Delta added only 4.8% in new capacity. That combination meant that on average the airline filled 78.2% of its seats, a 1.6-point improvement from a year before.

Unit revenue, measured in passenger revenue per available seat mile, increased just 1.2% year over year, well below the strong unit revenue gains seen at network rivals

Continental Airlines

(CAL) - Get Report

and

AMR's

(AMR)

American Airlines

.

Delta's unit revenue performance was affected by a 1.0% decline in yield, which measures average fares. In contrast, yields rose at Continental and AMR.

Delta spent 57.5% more on fuel in the latest quarter than it did a year before. This pushed up operating expenses by 2.7%, but the airline's efforts at improving efficiency and lowering costs resulted in a 2.0% decline in overall unit costs.

However, with the airline having already warned that it faces liquidity issues later this year and that it needs lawmakers to extend the timetable for airline pension funding, many on Wall Street worry Delta's cost-cutting progress may not be enough to save it.