So, when a company loses $2.2 billion in a quarter and $8.5 billion over the course of three years, does that spell "obviously great investment" to you?
Yeah, me neither. But that's just the situation that Delta Air Lines (NYSE:DAL) finds itself in, having reported a loss per share of $16.58 for the fourth quarter of 2004. Back out some big non-cash writedowns related to goodwill impairment from its Atlantic Southeast and Comair subsidiaries, as well as some one-time gains related to health-care subsidies for future retirees, and the loss drops to $5.88 a share, or $780 million. Phew! That's a relief. For a second, I thought that Delta had lost some real money.
These results badly trailed analyst estimates of $5.51 per share, ex items.
But you know what? So what. Though the number came out somewhat weak, you would have had to be a barking lunatic to think that the fourth quarter for Delta was going to be anything but a total disaster. The spike in fuel costs, rising 75%, or $385 million, over the same quarter last year, took an enormous bite out of the company. Additionally, the company spent much of the quarter quarreling with its pilot union, essentially on the steps of the bankruptcy court. Delta's stock is down big today as a result of the, uh, results from the fourth quarter. But that was before the company went through some massive changes, including a 32% salary concession from its pilots, a wage cut for non-union employees, a decision to abandon its Dallas-Fort Worth hub, and its new "SimpliFares" program.
Let's not pull punches: These are bet-the-company kind of changes that could fail miserably to resurrect the company's prospects, and the company's guidance for 2005 was certifiably grim, particularly if the price of jet fuel remains at nosebleed levels. Bankruptcy is still a viable option for Delta, even after the company wheedled its concessions from employees.
But the company's decision to eliminate most of its highest fare classes as well as certain nutty restrictions (stay a Saturday night in Wichita, anyone?) has already shown results in its Cincinnati hub, where the company ran its SimpliFares program for several months before taking it nationally. Cincinnati traffic leapt more than 30% in the five months since the test began, with many of the new passengers choosing to fly Delta where they had previously driven to other airports in the region to fly cheaper competitors, like Southwest Airlines (NYSE:LUV) out of Louisville, or AirTran (NYSE:AAI) out of Dayton. Delta reported a 60% uptick in online reservations in the first five days since the offer was released nationally.
Delta's CEO, Gerald Grinstein, claims to have gotten inspiration from Costco (NASDAQ:COST), which sets as its main goal giving customers the best products at the lowest price. Naturally, this being the brutally competitive airline industry, other big carriers like American Airlines (NYSE:AMR), Northwest (NASDAQ:NWAC), and Continental (NYSE:CAL) are following suit. Delta is hoping that it will replace some of the revenues from the now-eliminated top-end fares with additional volume from people who no longer feel the need to search among the discount airlines, and instead are willing to pay just a bit more for the added service on Delta.
We'll see. But the stock's reaction to the earnings report -- down 9% at midday -- seems absurd. None of the recent changes took effect early enough to have much impact on the fourth quarter, and as such, the initiatives that have taken place in the meantime are much more important than how things went way back when. Delta has plenty of unrestricted cash to survive a while -- it's no more at risk today of collapse than it was yesterday.
This is an ugly business, and the stock prices and bankruptcy filings of many of the competitors just highlights the fact that changes such as the ones Delta is making are simply overdue.
See also:
- Rich Smith's "Delta Doomed, Yet Investors Board"
- Bill Mann's "Delta's Aborted Crash Landing"
Bill Mann holds shares in Costco, and has a position in Delta Air Lines debt. Could some of the airline stocks turn out to be a value? AMR sure was two years ago, when things seemed most grim. To see what values The Motley Fool is uncovering, consider a free trial subscription to Philip Durell's Inside Value newsletter.
