Delta outlook upbeat, but caution remains

Delta Air Lines Inc. said Monday it will beat forecasts and have a positive operating margin of up to 4 percent for the third quarter, even as its available cash on hand continues to fall by year's end because of challenges posed by the economic downturn.

Although demand for air travel is uneven at best, the revenue decline for each seat flown a mile for the three months ending Sept. 30 will be a "slight improvement" from the previous quarter and keep improving through the fourth quarter, Delta said in a regulatory filing. Revenue on that basis slid 17 percent for the quarter ended June 30.

Delta's higher expectation reflects leisure travelers taking advantage of lower fares that airlines offered for U.S. summer vacations

to keep planes full. Delta said its planes will be about 82 percent full this month and in October, in line or better than the year-earlier period, suggesting that business travel demand could be holding up after the end of the peak summer season.

"Business traffic is starting to return to the market," Helane Becker, an analyst at Jesup & Lamont Securities Corp. in New York, wrote Monday in a note to clients, which would be good news for an industry that is shrinking to a size not seen since the months after the 2001 terror attacks.

The airlines have been trimming flights for the past two years, matching the falling demand for air travel, mainly by higher-paying business travelers. If business travel doesn't rebound, there probably will be further cuts.

Less capacity means consumers will be left with fewer flights to choose from, and planes will be crowded. Fewer seats normally means higher fares but that might not happen this time unless the economy begins a true recovery and passenger traffic picks up.

Delta will suspend its new nonstop route from its hub at Salt Lake City International Airport to Tokyo between October and mid-May. Flights to Paris haven't been affected by Delta's capacity cuts, and the airline has been launching domestic routes or restarting ones that had been trimmed.

Becker raised her third-quarter estimate for Delta to a profit of 5 cents a share from a previous projection of a 30 cent loss. She recommends buying the stock, which on Monday closed at $8.60, up 54 cents, or 6.7 percent.

The airline also said in its regulatory filing that a 2010 funding requirement for its defined benefit pension plans, which have been frozen for future accruals, is estimated to increase by $450 million as compared with 2009. The increase in required funding is primarily because of the decline in the investment markets in 2008.

Delta, the world's biggest airline operator, said it expects to have $5 billion in unrestricted liquidity at the end of September, with $4.6 billion at year end. Capacity on its main jet operations will fall as much as 6 percent in this quarter, and as much as 9 percent for 2009.

Delta, which acquired Northwest Airlines last year and employs about 3,600 people in Utah, said it remains on track with its integration and expects to receive a single operating certificate from the FAA by the end of 2009.

The carrier also expects to achieve more than $400 million in merger synergies for the first nine months of 2009. The airline said its acquisition of Northwest has improved revenue from increased market share, Delta's affinity card agreement and alignment of frequent flyer programs. In addition, the airline said, costs have been reduced through streamlined overhead, facilities and technology, elimination of dedicated freighter flying and supply chain savings.

The projections come amid word that Delta is considering making a cash infusion of a couple hundred million dollars to aid struggling Japan Airlines Corp.

In exchange, Delta could get a stake in Japan Airlines, an expanded presence in Japan and coveted access to the closest airport to the Tokyo business center.

Some analysts have said the move would make sense for Delta and help expand its position in a key market like Japan. But others question why Delta would want to use its cash to make an investment in Japan Airlines.