Delta Air Lines’ Profit Plunges on New Pilot Contract

Struck a new contract with its 13,000 pilots, granting them a 30% raise by 2019

D1Delta Air Lines Inc. (NYSE: DAL), the second-largest US carrier, announced its Q4 FY16 and full year FY16 financial results on January 12th, 2017.

Headquartered in Atlanta, Georgia, Delta Air Lines serves nearly 180 million customers each year and provides scheduled air passengers and cargo transportation globally. With an industry-leading global network, Delta and the Delta Connection carriers offer service to 337 destinations in 62 countries on six continents.

The airline operates a mainline fleet of more than 800 aircraft and is a founding member of the SkyTeam global alliance. It is part of the industry’s transatlantic joint venture with Air France-KLM and Alitalia as well as a joint venture with Virgin Atlantic. As part of these alliances and its partners, Delta Air Lines offers customers more than 15,000 daily flights covering the key hubs and global markets. Read more about Delta’s financial results below.

Q4 FY16 and FY16 financial highlights

D2Delta Air Lines’ Q4 FY16 total revenue was down 0.5% to $9.46 billion. Of the total revenue, domestic revenue amounted to $5.78 billion during the reporting quarter, of which $4.38 billion came from mainline passengers and $1.39 billion came from regional passengers. Under regional revenue, Atlantic accounted for $1.08 billion, Pacific for $559 million, and Latin America for $547 million. In all, total passenger revenue amounted to $7.97 billion during the reporting quarter. Cargo revenue amounted to $174 million, while other revenue amounted to $1.3 billion during the reporting quarter. Passenger unit revenues declined 2.7% to 13.58 cents on a 0.9% increase in capacity.

For full year FY16, revenue fell 3% to $28.1 billion from $28.9 billion in the previous year. Salaries and related costs shot up 14% to $10.03 billion from $8.77 billion in the prior year, as a result of which operating income fell 11% to $6.95 billion from $7.80 billion.

During the reporting quarter, adjusted fuel expense declined to $1.5 billion compared to $1.74 billion in the year-ago same period, as 12% higher market prices were offset by prior year hedge losses. As a result, Delta’s adjusted fuel price per gallon during the reporting quarter was $1.60 versus $1.85 in the year ago comparable period. Consolidated unit cost including profit sharing increased 10.6% for Q4 FY16 compared to the prior year’s corresponding period, primarily driven by the impact of the new pilot agreement ratified on December 01st, 2016. Results for Q4 FY16 include the full 2016 impact of the new contract totaling $475 million of expense, of which $380 million relates to the first three quarters of FY16.

Delta Air Lines’ Q4 FY16 non-operating expense declined $116 million due to a $75 million loss in prior year for the write-off of Venezuela currency and $10 million of lower interest expense from Delta’s debt reduction initiatives. Despite this, the carrier’s operating revenue fell to $9.46 billion from $9.50 billion, slightly above analysts’ average estimates of $9.40 billion.

Delta Air Lines’ Q4 FY16 GAAP adjusted pre-tax income was $923 million, a $524 million decrease from the prior year’s same period, primarily on account of the new pilot agreement. For the full year, adjusted pretax income grew 4% Y-o-Y to $6.1 billion.

d3In all, Delta Air Lines reported a whopping 37% decline in Q4 FY16 net profit to $622 million, or $0.84 per diluted share, from $980 million, or $1.25 per diluted share, a year earlier. Excluding special items, earnings of $0.82 per share met average estimates. Delta said the profit decline stemmed from the recent agreement it struck with its pilots, granting them a 30% raise by 2019. The four-year deal, ratified on December 01st, 2016 is retroactive to January 01st, 2016. For the full year FY16, net income fell by a modest 3% to $4.37 billion from $4.52 billion in the prior year.

Other highlights

New pilot contract: During FY16, labor costs were the main drag on Delta Air Lines’ earnings. Delta’s new pilot contract cost it $475 million in Q4 FY16, leading to a 10.6% jump in non-fuel unit costs. On the other hand, actual fuel costs fell by double digits despite the recent hike in crude oil prices because Delta incurred big hedging losses in Q4 2015. As part of the agreement ratified on December 01st, 2016, Delta Air Lines gave its 13,000 pilots 18% raises retroactive to the beginning of 2016. Delta has earlier estimated the retroactive component of the pilots’ pay increase at $380 million, which turned out to be much higher when implemented as said above. On a similar vein, on November 07th, 2016, pilots at Southwest Airlines Co. (NYSE: LUV) agreed to ratify a new contract that will increase their pay by 29.6% over the next four years.

Cash flow: Delta generated $1.2 billion of adjusted operating cash flow and $640 million of free cash flow during Q4 FY16. The Company used this strong cash generation to invest $600 million into the business for aircraft modifications, facilities upgrades, and technology improvements.

Share repurchase: During Q4 FY16, the Company returned $449 million to shareholders, comprised of $149 million of dividends and $300 million of share repurchases. For the full year FY16, Delta returned $3.1 billion to its shareholders through dividends and share repurchases.

Net debt: Adjusted net debt at the end of Q4 FY16 stood at $6.1 billion, a $500 million reduction compared to the end of 2015.

Guidance for FY17

For Q1 FY17, Delta expects unit revenue increase of flat to up 2%, stemming the declines that have been ongoing for the past two years. The Company plans to keep a check on capacity growth until a further firming of revenue trends in the near-term and longer-term, a return to a 17%-19% operating margin target. Delta is also expecting pressures on margins as the pace of change in unit revenue will not match the cost impact of higher fuel prices and employee wage increases. This margin pressure is likely to peak in Q1 FY17, and the Company expects margins to expand beginning in H2 FY17.d4

Stock Performance

d5Delta Air Lines’ stock stood at $50.33, falling 1.76%, at the close on Tuesday, January 17th, 2017, having vacillated between an intraday high of $51.22 and a low of $50.19 during the session. The stock’s trading volume was at 7,476,138 for the day. The Company’s market cap was at $37.44 billion as of Tuesday’s close.

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