In an industry where huge losses are common, Delta Air Lines is now in a class all its own. The $5.2 billion loss the nation's third-largest...
ATLANTA — In an industry where huge losses are common, Delta Air Lines is now in a class all its own. The $5.2 billion loss the nation’s third-largest carrier posted for 2004 yesterday was the highest ever by a U.S. airline in one year and highlights the sheer magnitude of the problem facing the industry.
Persistently heavy fuel costs have hampered the ability of major carriers like Delta to become profitable again. And to remain competitive with low-fare carriers, the major airlines have had to reduce their ticket prices, making the revenue environment even more unpleasant.
“It’s a double-barreled shotgun,” said Ray Neidl, an airline analyst at Calyon Securities in New York.
Since January 2001, the six biggest U.S. legacy carriers have lost a combined $30 billion — and the red ink is still running.
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United Airlines , US Airways, America West and Alaska Air Group have yet to report fourth-quarter results, but all are expected to report losses.
Not all carriers are suffering. Southwest Airlines reported a $56 million profit in the fourth quarter, despite higher fuel prices. It predicted continued profitability in early 2005.
For the major airlines, however, things have not been rosy.
United and US Airways are restructuring under bankruptcy-court protection. Delta had said Chapter 11 was a possibility before winning $1 billion in wage cuts and other concessions from its pilots and some fresh financing from its creditors 2-1/2 months ago.
American Airlines teetered on the verge of bankruptcy before winning employee concessions of its own.
“Losses can’t be sustained forever,” said Bill Warlick, an airline analyst at Fitch Ratings in Chicago. “At some point, you run out of assets and you run out of flexibility.”
Clark Orsky, an analyst with KDP Investment Advisers, said the writing is on the wall. “Costs have got to come down in order to meet the drop in revenues that has occurred,” Orsky said.
Delta executives said yesterday the Atlanta-based airline’s effort to transform its business to reduce costs and attract more fliers is the right approach for the future, even with immediate losses mounting.
“If Delta is to survive, we must develop a fundamentally different way of doing business, which is what we’re doing,” Chief Executive Gerald Grinstein said in a conference with investors.
Also yesterday, Continental Airlines, the nation’s No. 5 carrier, reported a $206 million loss for the fourth quarter, citing some of the same difficulties as Delta.
Delta shares plunged 58 cents, or 9.8 percent, to $5.37, and Continental shares fell 8 cents to $9.37.
Delta’s loss for 2004 easily dwarfed the $3.5 billion loss American reported for 2002.
“The loss margins are staggering even after the pilot agreement,” Fitch analyst Warlick said of Delta, where pilot wage concessions took effect Dec. 1.
Grinstein, in his talk with analysts, agreed the airline’s results were are clearly disappointing. But, he said, he believes the carrier is making progress on its transformation plan.
That plan includes job cuts, lower pilot costs, restructured financing and a fare overhaul that has cut Delta’s most expensive fares up to 50 percent on routes nationwide.
Delta also is trying to improve the in-flight atmosphere by refurbishing planes to make interiors brighter, adding leather seats and revamping employee uniforms.
Analysts say it will take several more months to determine if Delta’s plan is working.
There have been some setbacks. On Christmas, Delta-feeder carrier Comair had to cancel all 1,100 of its flights because of a computer glitch. Chief Financial Officer Michael Palumbo estimated yesterday the incident cost the airline $20 million in lost revenue and added operating expenses.
Wild cards remain, such as fuel prices, the economy and the recent fare overhaul.
The same could be said for much of the industry, especially the major carriers.
Neidl, the Calyon Securities analyst, said all is not hopeless, even at Delta. He said the first quarter of 2005 will be rough for major carriers, but brighter skies may appear if fuel prices moderate.
“Those are phenomenal numbers,” Neidl said of Delta’s losses. But he added, “That’s history. We knew it was coming. That’s the past. They’re starting fresh now in January with a new cost structure.”