Delta Predicts More Cost Discipline in 2012, Focus on Business Travelers



Delta Air Lines (NYSE:DAL) says it is on track to improve passenger unit revenue by 12% in the fourth quarter, a reflection of continued declines in capacity, fuel hedging and an uptick in business travel.

The carrier sees system capacity down 4% to 5% during the period, with passenger unit revenue up 11% to 12%. That should bring fiscal net income to $800 million, up from $600 million last year.

Excluding special items, the company sees a 2011 profit of $1.1 billion, down from $1.4 billion a year ago, but ahead of average analyst estimates polled by Thomson Reuters of $1.01 billion.

The company continues to struggle under high fuel prices and a slump in the broader economy. Delta predicts fuel costs will remain stubborn in 2012, and it forecasts further deterioration in Europe that could lead to a recession.

This year, a 30% increase in fuel prices resulted in a $3 billion fuel expense, up $600 million year-over-year. A one-cent change in fuel prices equates to $40 million of annual fuel expense, the company said.

To help mitigate those costs, Delta is hopeful deliveries of the new, more fuel-efficient Boeing (NYSE:BA) 737-900ER in early 2012 will reduce overall fleet maintenance costs by $200 million to $250 million.

The company also plans to change the composition of its fleet by eliminating smaller-gauge aircraft, especially 50-seat regional jets, which it expects will save $150 million to $200 million.

Still, Delta expects margins to expand in 2011, with operating margins up between 6% and 8% in 2011 as a result of cost discipline. That will continue in 2012 with system reductions of 2% to 3%, the company said. 

Likewise, revenue is slated to be up 15% year-over-year with the help of growing demand from corporate travelers. Revenue from will also contribute, expected to surpass $8 billion this year.

Corporate travel continues to be a key area for Delta and is expected to grow 6% to 8% this year, which Delta is hopeful will improve passenger and ancillary unit revenues. Despite a 4% to 5% reduction in capacity in 2011, revenues from corporate bookings were up 14%, led by the financial service and healthcare industries.

Delta, which has the most first class seats of any other domestic carrier, says it will place even more of an effort to make Delta the airline of choice for corporate and business travelers, with plans to build up its terminals at key hubs for business travelers, renew sky clubs and install flat-bed seats on its entire international fleet by summer 2014.

The airline has built up its market share in New York, a key hub for business travelers, by 3.5% over the last three years. With more than 250 flights a day, Delta makes up 50% of daily departures at LaGuardia, and after willing new slots it plans to add another 100 flights and 29 destinations to the New York-based airport.

The company also plans to expand into emerging regions like Latin America and Asia through partnerships, which it predicts could experience GDP growth rates nearly double of those in Europe and the U.S. over the next two decades, led by Mexico, Brazil and Argentina.

The carrier now accounts for nearly 20% of U.S. carriers’ capacity in Latin America, helped by recent deals with Aeromexico, GOL and Aerolineas Argentinas.

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