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Delta, Northwest profit hammered by fuel and charges

CHICAGO (Reuters) - Delta Air Lines Inc DAL.N and Northwest Airlines NWA.N, set to merge to become the world's largest carrier, on Wednesday said record-high fuel costs slashed their overall valuation, leading to $10.5 billion in losses during the first quarter.

Delta Air Lines jets sit at terminal at Reagan National Airport outside Washington in this August 19, 2004 file photo. REUTERS/Larry Downing

The losses posted by the two airlines’ underscored the pressures facing the entire industry, which is battling fuel prices and competitive pressures that make it hard to pass those costs on to customers.

Delta, the No. 3 U.S. airline, posted a loss of $6.4 billion, or $16.15 per share. Northwest, the No. 5 U.S. carrier, posted a loss of $4.1 billion, or $15.78 per share.

Each carrier said its loss would have been significantly less had it not been for multibillion-dollar non-cash charges related to their bankruptcy exits in 2007 when the companies estimated their values.

Those values were based on oil price forecasts that were shattered in the last year as crude shot past $100 a barrel.

“We think the write-downs are significant, in that they reflect reduction in the values of these companies,” said Jim Corridore, equity analyst at Standard & Poor’s.

Shares of Delta tumbled initially, but later rose about 2 percent to $6.97 on the New York Stock Exchange. Northwest shares were up about 1.3 percent at $7.57 on NYSE.

The Amex airline index .XAL, which hit its lowest level on record on Wednesday was slightly lower.

As fare hikes have failed to keep pace with rising fuel costs, airlines are under increasing pressure to find new revenue sources by charging fees for items and services previously included in ticket prices.

For example, several major carriers have begun to charge passengers a fee to check a second bag.

HEFTY LOSSES

Delta, which emerged from bankruptcy about a year ago, said that excluding the $6.1 billion goodwill impairment charge and other items, it lost $274 million, or 69 cents per share, driven by a $585 million rise in the cost of fuel.

Its revenue jumped 12 percent to $4.77 billion. It has announced plans to cut capacity -- the number of seats for sale -- a move that will pull 15 to 20 aircraft from its operations by the end of 2008. In March, Delta said it would cut about 2,000 employees.

Delta is also reducing capital spending and speeding revenue and productivity initiatives. The airline hopes these measures will produce revenue and cost benefits of $150 million in 2008.

“While it’s disheartening to record a quarterly loss on the heels of our first annual profit in six years, we are still seeing positive momentum from our network restructuring and cost discipline initiatives,” Delta’s Chief Financial Officer said in a message to employees.

For Northwest’s part, its quarterly loss included a $3.9 billion goodwill impairment charge. Excluding that charge -- as well as losses associated with fuel hedges -- Northwest posted a loss of $191 million in the quarter.

Northwest’s operating revenue rose 8.8 percent to $3.1 billion.

Fuel was by far the biggest expense for Northwest during the quarter. The carrier’s fuel costs rose 58.2 percent, to $1.11 billion.

“The sustained high fuel prices represent an extraordinary challenge to Northwest and the entire airline industry,” Northwest Chief Executive Doug Steenland said in a statement.

Northwest also has announced capacity reductions and plans to remove from service 15 to 20 aircraft from its main fleet.

“At some point, all these cuts in capacity are going to be meaningful, but it’s not going to happen right away,” S&P’s Corridore said.

BIGGER BETS

Delta said last week it would buy Northwest for about $3 billion to create the world’s largest airline. The deal is expected to generate $1 billion in savings and revenue.

Other airlines reportedly are also considering mergers as a way to compete in the troubled industry. After racking up $35 billion in losses and finally emerging from a five-year slump in 2006, U.S. airlines are hoping such deals mergers could lead to higher fares as combined carriers reduce flights and use their increased market power to raise prices.

It has been rumored that UAL Corp UAUA.O, parent of United Airlines, and Continental Airlines CAL.N, soon will announce a merger to form an even larger airline than Delta.

Reporting by Kyle Peterson and Christopher Kaufman; Editing by Derek Caney

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