Delta, Northwest lose billions

April 23, 2008 5:53:41 PM PDT
Delta and Northwest, seeking to combine to create the world's largest airline, posted losses Wednesday totaling $10.5 billion for the first three months of the year due to 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 figures from Delta and Northwest follow large losses at other carriers, such as United Airlines parent UAL Corp., which earlier this week reported a $537 million first-quarter loss on higher fuel costs, and likely rank among the industry's largest quarterly losses ever.

That red ink puts into focus the enormity of the challenge the 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, air fares 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 a whopping $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 due to sustained record fuel prices - the airline lost $274 million in the first quarter. A spokeswoman said Delta would have recorded the charge regardless of the tie-up with Northwest.

Northwest took a $3.9 billion charge of its own related to its market value decline. Its loss came despite a 9 percent increase in sales, and 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 Wednesday, Ed Bastian, Delta's president and chief financial officer, said the airline expects some of its peers to record similar accounting adjustments.

John Heimlich, chief economist for the Air Transport Association, said the industry is now likely to report a "multibillion loss" this year.

"When all the results are in, this will be one of the worst quarters for the industry in its history," he said.

The airline industry's biggest annual loss came in 2002, in the wake of the Sept. 11 attacks, when carriers reported a combined loss of $11 billion, according to the ATA.

More recently, 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 current market value is roughly $2.6 billion.

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

During an appearance in Boston on Wednesday, 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 up front," Kelly said.

Against that backdrop, as well as labor integration issues and the length of time it will take to get the full cost savings expected, Kelly questioned the merits of the Delta-Northwest combination.

"The implication of the combinations are pretty dire as to whether or not they'll actually be successful," Kelly said.

Delta and Northwest have been trying to sell their deal to the public, employees, federal regulators and Wall Street. Delta executives said Wednesday they believe the deal will help create long-term value for shareholders. So far, investors appear unconvinced.

The stock declines since the deal was announced have shaved roughly $1.4 billion off the value of the deal to Northwest shareholders. The initial value was $3.6 billion.

The carriers have not committed to cut a specific number of U.S. flights beyond what they have disclosed separately. Analysts say that limits the cost savings or higher fares the airlines could reap from the deal.

Delta and Northwest haven't ruled out further capacity cuts in the future. Delta is already cutting jobs, and both airlines are grounding some planes.

Northwest has been successful in charging passengers more for international flights. But many of the domestic fare increases attempted by Northwest and other airlines have been rolled back in recent months after one airline or another decided not to match it.

Meanwhile, pilots at Delta and Northwest are looking to resume talks on merging their work forces. The Air Line Pilots Association said negotiators will aim to work out a joint union contract before the two airlines combine. Once that is done, the chairmen of the two unions say they want to negotiate a seniority agreement.

The lack of a seniority agreement is what kept them from making a deal before Delta and Northwest announced plans to join.

Northwest pilots had vowed to kill the tie-up because they were left out of contract talks at the end. They say they still oppose the combination, but that a joint contract with Delta pilots would be a step in the right direction.

Northwest suggested Wednesday that it may lose money for the full year. Bastian said Delta expects to be slightly profitable in the second quarter.

Delta shares fell 24 cents, or 3.5 percent, to close at $6.56 on Wednesday, while Northwest fell 37 cents, or 5 percent, to $7.10. Southwest rose 39 cents, or 3.3 percent, to $12.17.

Associated Press Writers Joshua Freed in Minneapolis, Adam Schreck in New York and Jay Lindsay in Boston contributed to this report.