Up, up and away: Delta earnings jump, bolstered by cost reductions, fare hikes

Though consumers objected bitterly this year to rate hikes carried out by nearly every airline carrier, sales remained brisk. The increased fares helped to bolster earnings at Delta, which recently reported its latest quarterly results.

The second-biggest U.S. airline said this week net income for the September 2011 quarter was $765 million. The company's generally accept accounting principles (GAAP) net income came in at $549 million, and revenue grew 10 percent compared to the same period the year prior.

What's more, Delta's operating revenue grew $866 million in the September 2011 quarter, representing a 10 percent uptick from 2010. Still, the carrier battled volatile energy prices, doling out $1 billion to cover increased fuel prices, the company affirmed.

Nevertheless, Delta surprised investors with the generally upbeat earnings report. Unlike some of its competitors, it was able to effectively achieve business cost reductions, leading to an improved profit margin. Delta chief executive Richard H. Anderson said the company aggressively moved to raise fares to counter soaring oil prices. Though the measures were unpopular with consumers, they did not depress revenue.

"We are successfully adapting Delta to the challenging economic environment by producing a solidly profitable quarter in the face of $1 billion of fuel price pressure," Anderson said in a statement.

Delta's passenger revenue increased 10 percent in the quarter compared to last year, and cargo revenue similarly jumped, climbing 13 percent. Aviation analysts said Delta – along with nearly every other airline – had benefited from implementing fees and increasing fares, among other measures.

Airline carriers had struggled in the post-9/11 environment to attain profit growth as traffic declined. Delta cut capacity, increased fares and now charges for checked bags and other formerly free services, driving growth. The company said it would cut additional flights this year and continue the practice into 2012 as it works to strike a balance between supply and demand.

The Associated Press reports airlines were once hesitant to institute higher fares and other revenue-growing tactics. However, with nearly every airline raising fares, it appears as though they are more committed to profit growth than to potentially ostracizing consumers.

"Our September quarter passenger unit revenue increase of 11 percent from prior year, a revenue premium to the industry, demonstrates that our plan is working," Delta president Ed Bastian said. "Corporate travel demand remains strong. With continued capacity discipline, coupled with improvements we are making in our product and service, we are well positioned to deal with the impact of today's high fuel prices and an uncertain economy."

Business travel is more profitable for carriers than leisure travel, according to experts. Delta's traffic fell slightly in the quarter, but it cut flights by 1 percent in an effort to reduce overhead. Delta officials said the airline would likely reduce flight capacity by as much as 5 percent through the end of the year, and by as much as 3 percent in 2012.

The high cost of fuel continues to remain the biggest expenditure for airline carriers. Delta said it paid an average fuel price of $3.09 per gallon in the September quarter, which was up 35 percent, or 80 cents, from 2010. Delta's business cost reduction programs were instrumental in driving profitability, chief financial officer Hank Halter asserted.

"We are beginning to gain traction with our cost reduction initiatives," he said. "With the initiatives we have in place, we remain on track to bring our non-fuel unit costs modestly above 2010 levels in the fourth quarter despite a significant reduction in capacity."