Delta expects 'significant' Q1 loss

Delta Air Lines Inc. expects to record a “significant loss” for the first three months of 2009, the carrier said Monday in a Securities and Exchange Commission filing.

Atlanta-based Delta (NYSE: DAL) said the typically weak demand of the first quarter of the year and the sour economy will couple with upside-down fuel hedges and drops in global demand to send it to a “significant loss in the March 2009 quarter.”

“We believe a combination of lower fuel prices, capacity reductions, and merger synergies better positions us to effectively manage our business through the current economic crisis,” Delta said in its year-end filing with the SEC. “Nevertheless, we expect to report a significant loss in the March 2009 quarter primarily due to fuel hedge losses coupled with the impact of the global recession, which has weakened demand for air travel, and the first quarter traditionally being our weakest quarter due to seasonality.”

The carrier, however, does expect to save $500 million in costs because of “synergies” obtained through its merger with Northwest Airlines Corp.

Delta stock closed down Monday 44 cents to $4.59. It is down from $14.33, its 52-week high, recorded March 5, 2008.

Demand for air travel has waned as wary consumers and businesses put off or cancel trips in the uncertain economy. Delta has said it would cut its capacity this year by 6 percent to 8 percent. Delta said Monday if conditions worsen the carrier could make additional reductions to capacity.

Delta said it would use approximately 4 billion gallons of fuel in 2009 and that a $1 change in the average annual per barrel price of crude oil is a $100 million hit or savings to the carrier.

Delta and many other carriers bought their fuel in the fourth quarter at above market prices, not anticipating the precipitous decline in the price of oil, which peaked in July at $147 per barrel and now trades below $42 per barrel.

Delta said it would “recognize losses on hedge contracts that we entered into in 2008 when fuel prices were much higher,” with much of the losses occurring in the first half of 2009, when the majority of that fuel is bought and burned.

“In January 2009, we have added new hedges that reflect current market prices, approximating 16 [percent] of our estimated 2009 consumption,” Delta said. “Should fuel prices remain at their current levels, we will realize significant savings in fuel costs compared to 2008.”

Delta acquired Eagan, Minn.-based Northwest in a $2.8 billion stock swap last October. The deal promised significant cost synergies and created the world’s largest carrier.

“We believe that we will recognize $500 million in synergy benefits in 2009, primarily in the second half of the year,” Delta said. “Our ability to realize the synergies will depend, among other things, on our successfully aligning technologies of the two airlines, receiving a single operating certificate and resolving labor representation differences while maintaining productive employee relations.”

Several of its work groups, including pilots and mechanics, have been integrated. It expects the single operating certificate from the Federal Aviation Administration by the end of the year.

The recession and stock market collapse has bitten Delta’s retirement plans. The carrier said it also expects be hit with higher pension costs for 2009 because of the declining value of benefit plan assets.

The carrier will also suffer rising costs because of “timing delays between the reduction in capacity and our ability to remove certain capacity-related costs,” and a $260 million charge from increased amortization of debt caused by the “lower fair value of Northwest debt” since closure of the airlines’ merger.

The carrier announced earlier this year it would shrink its workforce as it cuts capacity.

Delta announced Feb. 18 that 2,100 employees elected to participate in a buyout program . The carrier said Monday it would suffer “between $40 million and $50 million in restructuring charges” because of the buyouts.

The latest report comes after Delta announced in January it had suffered a $8.9 billion net loss for 2008, and a $1.4 billion net loss for the fourth quarter of 2008. Those losses largely hinged on a previously reported $7.3 billion non-cash impairment charge, the employee equity program and late season fuel hedging.

The carrier said much of its losses were from one-time equity awards given its 75,000 employees and a $91 million hit from out of period fuel hedges. The carrier said it actually would have posted a $340 million loss without the charges.