- The Washington Times - Thursday, April 24, 2008

ATLANTA (AP) — Delta and Northwest, seeking to combine to create the world’s largest airline, posted losses yesterday totaling $10.5 billion for the first three months of the year because of exorbitant fuel prices and write-downs of their companies’ value.

Southwest’s chief executive, meanwhile, indicated that the carrier wasn’t interested in a merger and said the very thought of it was daunting.

The red ink from Delta and Northwest put into focus the enormity of the challenge the airline industry faces to become profitable again amid $120-a-barrel oil — even with the benefits that consolidation can bring.

“All airlines are in the same boat,” said Calyon Securities analyst Ray Neidl. “The industry cannot make money at the current ticket fare levels. Seats have to come out of the market. To cover higher fuel costs, airfares have to go up.”

Atlanta-based Delta Air Lines Inc., the nation’s third-largest carrier, said its loss widened in the first quarter to $6.39 billion. A few hours later, Eagan, Minn.-based Northwest Airlines Corp. reported a $4.1 billion loss for the period.

Delta’s results badly missed Wall Street expectations, despite a 12 percent increase in sales.

Excluding special items — primarily a $6.1 billion non-cash charge relating to the drop in Delta’s market value because of sustained record fuel prices — the airline lost $274 million in the first quarter.

Northwest took a $3.9 billion charge of its own related to its market value decline, despite a 9 percent increase in sales. Northwest, too, missed analysts’ earnings expectations.

Excluding the accounting charge and losses from some fuel hedges, Northwest said, it would have lost $191 million in the quarter.

In a memo to Delta employees yesterday, Ed Bastian, Delta’s president and chief financial officer, said the airline expects some of its peers to record similar accounting adjustments. A spokeswoman said Delta would have recorded the charge regardless of the tie-up with Northwest.

Both airlines have been hampered by the steep rise in fuel prices. Delta recorded a $585 million year-over-year increase in the cost of fuel in the first quarter, while Northwest’s fuel costs increased $445 million from a year earlier.

When it emerged from Chapter 11 protection a year ago, Delta projected its stock would be worth $9.4 billion to $12 billion in all, but that was assuming crude oil would cost $70 per barrel. Delta’s market value is roughly $2.6 billion.

The company announced last week that it would acquire Northwest in a stock-swap deal, which regulators and shareholders still must approve.

During an appearance in Boston yesterday, Southwest Airlines Co. Chief Executive Gary Kelly cited industry pressures as he suggested that a merger isn’t appealing right now to the Dallas-based carrier.

“My own view is that with the current fuel outlook that we have and the near-term economic outlook, the thought of acquiring another airline is just daunting because of the complexity involved and the investment that’s going to have to take place upfront,” Mr. Kelly said.

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