By Susan Carey And Angela Chen
Delta Air Lines Inc., bowing to pressure from the strong dollar
and lower travel demand from oil-dependent economies, on Wednesday
said it would cut its overseas capacity by 3% this winter--or a 6%
reduction from prior plans.
The biggest year-over-year cuts will come on routes to Japan,
Brazil, Africa, India and the Middle East, it said, along with the
seasonal suspension of service to Moscow. The company said those
moves, which will result in flat capacity overall in the fourth
quarter, should help return its unit-revenue performance to growth
after several quarters of declines.
Unit revenue, a key metric, is the amount of revenue taken in
for each seat flown a mile. Investors, who had been fretting about
Delta's bullish growth forecasts and sagging unit revenue, rewarded
the company by bidding up its stock 2.6% Wednesday to $44.18.
The Atlanta-based airline announced the trims along with its
first-quarter results, which beat analysts' expectations by a penny
a share, excluding items. Delta's profit more than tripled to $746
million, or 90 cents a share, from $213 million, or 25 cents a
share, a year ago, marking the best first quarter in its history.
Revenue rose 5% to $9.4 billion.
But the company also racked up $1.1 billion in fuel hedge
losses, including $300 million in early payments on contracts that
were supposed to settle later this year. Special items trimmed
Delta's adjusted profit to $372 million in the quarter, up from
$281 million a year ago.
After an expected $650 million hedge loss in the second quarter,
Delta said it believes its hedge losses will be largely behind it
by July 1, and its cost of fuel will be 25% lower in the second
half of 2015 than it was in the first six months. Delta expects
lower fuel costs to save it $2.2 billion this year. American
Airlines Group Inc., Delta's largest rival, doesn't hedge its fuel
consumption and thus hasn't had to contend with this headache.
The strong dollar shaved off about $105 million in Delta sales
during the first quarter, which also was hurt by winter storms.
Capacity increased 5% and unit revenue declined 1.7%, mostly on
foreign-currency effects. Delta's operating margin was an
uncharacteristically modest 8.8%, dinged by three points from the
early hedging settlement.
Richard Anderson, Delta's chief executive, said the carrier's
domestic business "is performing very well and demand is
solid."
Looking ahead, the nation's No. 3 airline by traffic said its
second-quarter capacity will rise 3%, and it expects its unit
revenue to decline 2% to 4% from a year ago. But it forecasts an
operating margin of 16% to 18%, including the additional hedge
losses. Delta President Ed Bastian said second-quarter revenue will
increase by 2%.
"Our summer revenue performance combined with significantly
lower fuel prices and continued strong cost controls should result
in another record quarter," he said.
Mr. Anderson said Delta is two notches away from an
investment-grade credit rating and hopes a strong performance in
2015 will lift its ratings by year-end. The company is close to
completing its five-year plan that will lay out its long-term debt
target and level of shareholder returns. Details are expected in
mid-May.
Write to Angela Chen at angela.chen@dowjones.com