(Reuters) - Delta Air Lines (DAL.N) reported a lower fourth-quarter profit on Tuesday but said it expected better results this year as it makes targeted investments in operations and products to drive revenue.
The No. 2 airline behind United Continental Holdings (UAL.N) said an important revenue measure was trending up solidly, and its shares gained 3.5 percent to $14.09 in afternoon trading.
“Delta has developed as the leader of the industry in showing that you can improve your profitability while taking out (seating) capacity,” said Barclays airline analyst David Fintzen. “That’s become something of a model for others to emulate.”
Trimming seating to match demand has helped U.S. airlines garner higher airfares and post profits. Delta said it would cut system capacity by 2 to 4 percent in the current first quarter.
Unit revenue, a measure of pricing power and how full planes are, would likely rise 4 to 6 percent in the current period, Delta said. It added that for January, that revenue gauge was expected to jump 5 to 6 percent.
“Going forward, if they can maintain that unit revenue momentum, that will be very positive,” said Fred Lowrance, an analyst with Avondale Partners.
Special items took a toll in the fourth quarter, as fuel and compensation costs rose and Superstorm Sandy hurt airline and oil refinery operations. Delta had a charge of $122 million tied to the company’s restructuring of its aircraft fleet and a loss of $106 million on debt extinguishment.
Delta cited nearly $100 million in impact from Sandy, which barreled through the U.S. Northeast in late October and led to thousands of flight cancellations as New York-area airports shut down. The carrier said the storm also slowed output at its Pennsylvania oil refinery, which had a $63 million net loss in the quarter.
Net earnings fell to $7 million, or 1 cent a share, from $425 million, or 50 cents a share, a year earlier.
Excluding one-time items, profit was 28 cents a share, in line with analysts’ average forecast, according to Thomson Reuters I/B/E/S.
Operating revenue rose 2 percent to $8.6 billion. Operating expenses climbed 8 percent, with costs for fuel and related taxes up 18 percent. Expenses tied to salaries increased 7 percent.
Delta has been upgrading plane seats and expanding in-flight food and entertainment options to entice travelers to spend more. It has also launched partnerships with non-U.S. airlines to position itself to win new customers.
Last month, it announced the purchase of a 49 percent stake in British carrier Virgin Atlantic and plans for a joint venture that will give it expanded access at London’s Heathrow Airport, an important business travel market.
Passenger revenue rose 3 percent in the fourth quarter, while unit revenue rose 4.3 percent.
“The investments we have made in our product, technology, facilities and employees have generated the momentum we’ve built in our earnings, but those investments have not come without cost,” Chief Financial Officer Paul Jacobson said in a memo to staff.
He added that the carrier must stay “disciplined with our spending” and focused on eliminating costs that don’t add value to the business.
Lowrance, the Avondale Partners analyst, said cost pressure in the first half will come from a labor contract reached with pilots last year. He said cost controls were crucial if Delta is to generate higher margins.
“What we want to see ... is a slowdown in the year-over-year growth in non-fuel costs,” Lowrance said.
Other airline stocks rose on Tuesday. United Continental was up 1.3 percent to $25.12 and US Airways Group LCC.N gained 2 percent to $14.73. Southwest Airlines (LUV.N) was up 2.4 percent to $11.53.
Reporting by Karen Jacobs; Editing by John Wallace, Gary Hill