- Associated Press - Monday, July 19, 2010

Delta Air Lines Inc. reported its largest quarterly profit in a decade Monday but investors dumped its shares as sales didn’t meet expectations and the carrier gave a cautious outlook amid economic uncertainty.

The world’s largest airline said its second-quarter net income was $467 million, or 55 cents per share. That reversed a year-ago loss of $257 million, or 31 cents a share, when the airline industry was still reeling from the recession.

Delta’s revenue rose 17 percent to $8.17 billion from $7 billion a year earlier. But that figure was below analysts’ revenue estimate of $8.25 billion and Chief Executive Richard Anderson described the revenue environment as “good, but not yet great.”

Investors hoping for better sold the shares. Delta shares fell 86 cents, or 7.3 percent, to $10.80 in midday trading.

Excluding one-time items, Delta’s earnings came to 65 cents a share, above analysts’ expectations of 63 cents per share.

Delta said it expects to be solidly profitable for the year. But it’s reducing the size of its fleet by 20 aircraft next year on top of the 91 fewer it expects to have by the end of this year. And it doesn’t expect to increase capacity much this year or in 2011, signs of a cautious approach with the strength of the U.S. economic recovery in question.

Another sign: Delta is hoarding its cash. Delta had $6 billion in unrestricted liquidity, including $4.4 billion in cash, as of June 30. The total figure is expected to grow to $6.3 billion by the end of September. Delta is using some of the extra cash to pay down debt and improve its balance sheet, while continuing to rein in costs.

“Our focus is very much on driving efficiency,” Mr. Anderson said.

The company isn’t bulking up its employee rolls. The total number of full-time Delta employees fell 1.3 percent year-over-year to 81,916 at the end of June. Delta said it is in the process of hiring more airport customer service and reservations agents.

And there are other headwinds: Delta’s expense for aircraft fuel and related taxes rose 8 percent in the second quarter to $1.96 billion.

Still, the airline, based in Atlanta, is in much better shape than it was just a year ago.

“The business is performing well and we still have significant opportunity for improvement ahead,” Mr. Anderson said during a conference call with analysts and reporters.

Delta expects to report double-digit year-over-year unit revenue gains for the September quarter.

Several major carriers are expected to post profits in the days ahead, but investors are wary about whether the industry can keep the momentum going. Continued fare sales are good for consumers, but not for investors who want airlines to charge more for tickets while remaining lean.

Analysts say that while airlines have raised ticket prices since the recession ended, they still have room to grow.

The parent of United Airlines will report its results on Tuesday, followed by US Airways Group Inc. and the parents of American Airlines and AirTran Airways on Wednesday and Continental Airlines Inc., Alaska Air Group Inc. and JetBlue Airways Corp. on Thursday. Southwest Airlines Co. reports its second-quarter results on July 29.

In the latest quarter, Delta’s passenger unit revenue increased 19.4 percent, driven by higher yields and occupancy. Cargo revenue increased 22 percent. Passenger unit revenue is calculated by dividing passenger revenue by available seat miles, which are the available seats an airline offers times the miles flown. Passenger yield is the measure of the average fare paid per mile, per passenger, which is calculated by dividing passenger revenue by revenue passenger miles.

Delta said its latest results included $90 million in profit sharing expense.

The last time Delta reported a quarterly profit close to what it reported in the latest quarter was in the second quarter of 2000, when it posted net income of $376 million. Today, however, Delta is a much larger airline, having gobbled up Northwest Airlines in 2008.

For the first half of the year, Delta earned $211 million, or 25 cents a share, compared to a loss of $1.05 billion, or $1.27 a share, a year earlier. Six-month revenue rose to $15.02 billion from $13.68 billion.

The airline industry has been benefiting of late from increased demand for seats, especially among business travelers. The fees they have been charging for checked bags and other services also have been helping their bottom line.

The total number of international passengers rose 6 percent in the first five months of the year, according to the International Air Transport Association. Traffic at the front of the plane — the most expensive seats in business and first class — improved at an even faster clip.

But premium traffic fell further and faster in the recession than demand for economy class. The IATA said recently that premium traffic is still 10 percent below a pre-recession peak, while traffic in coach has jumped 5 percent above its best point before the recession.