$6.2B Loss by Delta Really a Gain in Recovery

The bankrupt airline said the huge losses were largely a result of one-time restructuring charges rather than daily operations.


Only in the upside-down world of bankruptcy court could a $6.2 billion annual net loss mean things are going well.

Delta Air Lines on Wednesday posted that eye-popping figure for 2006, along with a $2 billion deficit for the fourth quarter alone.

But as it has done throughout its flight through Chapter 11, the airline said the huge losses were largely a result of one-time restructuring charges rather than daily operations.

The bulk of those charges reflect the value of monetary claims Delta settled as part of its bankruptcy case, and thus serve as a measure of progress. Meanwhile, financial results that come from operating the airline now continue to improve, the airline said.

It touted a $58 million "operating profit" --- a measure that excludes all restructuring charges, as well as certain other expenses --- for last year, marking the first such profit since 2000.

"They've made a substantial improvement, and they're on track with their turnaround plan," said Standard & Poor's analyst Philip Baggaley, supporting the carrier's explanation.

He said Delta appears to be largely finished renegotiating terms with its largest aircraft lessors, lenders and other suppliers and should be about ready to emerge from Chapter 11 this spring, as executives predict.

After it leaves bankruptcy, the airline is likely to report similarly huge gains as it discharges many of the debts and other obligations.

"That's just the way the accounting works," said Baggaley, noting that United Airlines reported a $20 billion gain after emerging from Chapter 11 last year.

Delta's chief financial officer, Ed Bastian, agreed that Delta could see big gains after bankruptcy. But he said the huge restructuring charges and gains are largely irrelevant to Delta's financial performance. "It's just accounting conventions. It doesn't have any meaning," Bastian said.

What's important, he added, is that Delta will emerge with about $10 billion less debt than when it entered Chapter 11 in the fall of 2005, and with lower costs and higher revenues.

"I think you're seeing the homestretch here," said Bastian.

Delta projects that it will report net profit of more than $800 million this year and almost $1.5 billion in 2008. Delta expects the improvement to come mostly from shifting additional planes to more profitable overseas routes.

In its latest report, the airline said it lost $406 million for the full year and $179 million for the fourth quarter if the restructuring charges alone are factored out --- both sharp improvements over comparable 2005 results. To arrive at the operating profit, other expenses such as interest and taxes must also be excluded.

Delta also said it hit various other financial targets, including a $3 billion annual cost-cutting goal, ahead of schedule.

Most big airlines reported improved results in 2006, and Baggaley noted that some big network rivals such as Continental Airlines reported stronger operating profits than Delta's.

He said Delta's revenues are still weaker, partly because its international route expansion --- a major plank of its retooling strategy --- is "still unfolding."

For the fourth quarter, Delta said revenue rose 5.9 percent despite a 3.6 percent cut in capacity. Revenue per seat-mile flown rose 9.3 percent compared to a year earlier.

In a report, Calyon Securities analyst Ray Neidl noted that Delta's loss before one-time charges was smaller than he projected.

But Delta's unit costs, down 6.8 percent compared to a year earlier, remain higher than he expected, Neidl said.

The airline also said its available cash reserves were $2.6 billion as of Dec. 31, 2006, holding steady or slightly lower than prior levels.

The fourth-quarter results included $1.8 billion in restructuring charges.

Among them were a $2.2 billion claim related to a settlement with the Pension Benefit Guaranty Corp., which took over the pilots' pension plan, and an $801 million pension-related claim from a settlement with retired pilots.

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