DL loses $2.2B for the Q

[General Lee]

#1 Windmilling,


I think the fare changes were aimed at Airtran and USAir. Song has already targeted Jetblue, and is providing a thorn in their rear. Airtran will be affected because we have lost many business walk up flyers to them who did not want to pay the large $1200 one way ticket prices, but rather could afford the mid $500 range. USAir will be affected because they NEED the $1200 one way fares to cities that aren't served by LCCs, like Charleston, SC. This attack will hopefully yeild results on both fronts, and it will increase the average fare upwards. Our planes now probably have 10% super high fare ($1200 and up), 15% middle value fare, and then the rest very low fare. That needs to change.


Bye Bye--General Lee

 

[FDJ2]

I am not sure I get it. These companies complain over capacity in the marketplace is placing undue pressure on revenue AND announce fare cuts, yet are poised to add more capacity! It looks to me like Delta's fare war is squarely aimed at driving weaker carriers to liquidate while positioning themselves to fill the void. General, thoughts?

#1 W

DAL will increase capacity 4% domestically and 17% internationally in 2005 with hopefully little increase in overall costs. The additional capacity will be the result of increased efficiencies and increased utilization of labor and assets currently at DAL. IOW, it won't cost much to do and at the end of the day overall mainline fuel nuetralized CASM is projected to drop 14%.

Simpli-fares has targetted caps that eliminate only 2% of DAL fares, which accounted for 8% of DAL revenue. Simpli-fares are not a fare sale, but rather a restructuring and simplification of DAL's fares. It's a more rational fare structure that consumers want. Prior experience in testing this concept in CVG were encouraging and according to todays webcast the system wide implementation has resulted in yields and book load factors that have been in-line with expectations.

$2.2B loss in the fourth quarter is not good, but remember $1.9B was writing off ASA/CMR as a loss. DAL still lost real $$$, but it wasn't $2.2B and the fourth quarter results don't reflect any of the $2.3B in annual savings from recent wage/benefit cuts, the restructuring of the route system (starts January 31st), or yield load factor increases associated with simpli-fares.

Will it all work, only time will tell.

 

[spinproof]

Spinproof,

Thank you for not finding any misspellings in my last post. I know you really love to point them out, and if you look again you probably will find some. Here is a brief look at what some of our losses today mean: (as posted on the Dalpa website)


Delta's announcement today is an "impairment charge" against Goodwill (amount paid in excess of fair value - when buying an asset). Delta today took a charge against goodwill of 1.9 billion against the ASA and Comair goodwill. This is more than the combined buying price of both entities. Thus saying they have negative value. In other words the purchase of ASA and Comair was a total waste of money and they have No value or Negative value today.

(1) A $1.9 billion goodwill impairment charge in accordance with SFAS 142 (4). This standard requires a company to assess, at least annually, whether the book value of an entity is at least equal to its fair value. If not, an impairment charge must be recorded. Increased fuel prices, the difficult revenue environment and the implementation of certain initiatives pursuant to our recently completed strategic review resulted in reductions to Atlantic Southeast Airlines, Inc. (ASA) and Comair, Inc. fair value estimates. This resulted in the requirement that we write off ASA and Comair goodwill.



Could this mean a probable sale in the near term? I don't know. But, I hope we see a bunch of ASA pilots on our property eventually regardless.




Bye Bye--General Lee

No. I would think not. The total write down of the asset means quite the opposite.

When an asset is purchased it has a value. When it is sold it also has a value. The difference is a capitol gain or loss. By the very nature of writting down an asset for tax purposes positions that asset at a new value of X. Since that value is somewhat less than the original value the capitol gain that would be incurred, if that asset were sold,would be extremely large.

So in fact to sell that asset after taking a write down of total value is completely without merit.The very nature of this suggest the asset(s) would be held for an extended lenth of time.



By the way please don't think of me as petty but it's paper not peper.

 

[100LL... Again!]

.....

 

[Hung Start]

Hmmm, planes are running fairly full,,,,, we can't make money. So,, let's lower prices!!!!


The race to the bottom continues,,,,,,,

 

[General Lee]

hung,


You don't seem to understand what is going on. Our problem is that we have full planes, but too many low fares and not enough super high fares. So, we are trying to shake that up by getting more middle fares, and not as many super duper low fares. Airtran has been taking a lot of business away from us because a lot of those walk up fare people don't like $1200 one way fares. So, we will have more $499 and $599 fares, and that should bring a lot of people back and also fill our planes with higher paying passengers ON AVERAGE, compared with before that had 10% paying way too much, and 90% paying way too little. Get it yet? NW didn't like this because they have hardly any LCC competition and now they will have to compete. That is the way it goes.....


Bye Bye--General Lee

 

[Heavy Set]

People here tend to focus on the total number - but most peoplecan'tcomprehend that the majority is a paper loss... It's not great butnotas doom and gloom as some people think... All legacy carriersarehurting with the high fuel prices during the 2nd half of lastyearandthe destructive fare wars. Many of the huge costreductionsachievedby Delta in Q4 were not realized in time to make much of animpact. The non-writeoff $750 million dollar loss (actual loss) is inthe past andnow the expense savings will kick in and hopefully losseswill be reduced (maybe even a small profit) as fuel costs decrease,employee expenses are cut in general and the economy continuestoimprove... Itshould be interesting.

Anyone else notice that my words are sticking together despite making repeated corrections? Nice technology...

 

[skykid]

People here tend to focus on the total number - but mostcan'tcomprehend that the majority is a paper loss...

Yep, that's why I asked GL how much actual cash Delta went through. That's what you have to watch.

 

[General Lee]

Skykid,


That is correct. Here is an article from Motley Fool, which I usually don't endorse because of their dumb a$$ writer "Eric Guielin" who really doesn't understand this business:


Delta Means Change
By Bill Mann (TMF Otter)
January 20, 2005

So, when a company loses $2.2 billion in a quarter and $8.5 billion over the course of three years, does that spell "obviously great investment" to you?

Yeah, me neither. But that's just the situation that Delta Air Lines (NYSE: DAL) finds itself in, having reported a loss per share of $16.58 for the fourth quarter of 2004. Back out some big non-cash writedowns related to goodwill impairment from its Atlantic Southeast and Comair subsidiaries, as well as some one-time gains related to health-care subsidies for future retirees, and the loss drops to $5.88 a share, or $780 million. Phew! That's a relief. For a second, I thought that Delta had lost some real money.

These results badly trailed analyst estimates of $5.51 per share, ex items.

But you know what? So what. Though the number came out somewhat weak, you would have had to be a barking lunatic to think that the fourth quarter for Delta was going to be anything but a total disaster. The spike in fuel costs, rising 75%, or $385 million, over the same quarter last year, took an enormous bite out of the company. Additionally, the company spent much of the quarter quarreling with its pilot union, essentially on the steps of the bankruptcy court. Delta's stock is down big today as a result of the, uh, results from the fourth quarter. But that was before the company went through some massive changes, including a 32% salary concession from its pilots, a wage cut for non-union employees, a decision to abandon its Dallas-Fort Worth hub, and its new "SimpliFares" program.

Let's not pull punches: These are bet-the-company kind of changes that could fail miserably to resurrect the company's prospects, and the company's guidance for 2005 was certifiably grim, particularly if the price of jet fuel remains at nosebleed levels. Bankruptcy is still a viable option for Delta, even after the company wheedled its concessions from employees.

But the company's decision to eliminate most of its highest fare classes as well as certain nutty restrictions (stay a Saturday night in Wichita, anyone?) has already shown results in its Cincinnati hub, where the company ran its SimpliFares program for several months before taking it nationally. Cincinnati traffic leapt more than 30% in the five months since the test began, with many of the new passengers choosing to fly Delta where they had previously driven to other airports in the region to fly cheaper competitors, like Southwest Airlines (NYSE: LUV) out of Louisville, or AirTran (NYSE: AAI) out of Dayton. Delta reported a 60% uptick in online reservations in the first five days since the offer was released nationally.

Delta's CEO, Gerald Grinstein, claims to have gotten inspiration from Costco (Nasdaq: COST), which sets as its main goal giving customers the best products at the lowest price. Naturally, this being the brutally competitive airline industry, other big carriers like American Airlines (NYSE: AMR), Northwest (Nasdaq: NWAC), and Continental (NYSE: CAL) are following suit. Delta is hoping that it will replace some of the revenues from the now-eliminated top-end fares with additional volume from people who no longer feel the need to search among the discount airlines, and instead are willing to pay just a bit more for the added service on Delta.

We'll see. But the stock's reaction to the earnings report -- down 9% at midday -- seems absurd. None of the recent changes took effect early enough to have much impact on the fourth quarter, and as such, the initiatives that have taken place in the meantime are much more important than how things went way back when. Delta has plenty of unrestricted cash to survive a while -- it's no more at risk today of collapse than it was yesterday.

This is an ugly business, and the stock prices and bankruptcy filings of many of the competitors just highlights the fact that changes such as the ones Delta is making are simply overdue.




Heavy Set,

Yeah, that is a bit weird. Time to invest in a better computer.


Bye Bye--General Lee

 

[vc10]

That's not true. Here's why there was "goodwill".

Delta bought Comair. At the time, Comair had a certain book value (the value of its shareholder equity as reflected on the Comair balance sheet). But Delta bought Comair for a price that was in excess of the Comair book value. So when Delta bought Comair, Delta cash went down by the purchase price. Comair assets, liabilities and book equity were added to the Delta balance sheet. But there's a problem, because the Comair book equity was less than the amount of cash that was used to purchase it. So to make Delta's balance sheet balance after the cash was removed and the Comair stuff was added, a "virtual asset" (if you like) called "goodwill" is added which is the difference between what the Comair cash price was and the book value of the equity.

So the amount of goodwill was not arbitrary. Instead it was the difference between what Delta paid for Comair and what Comair's book equity was worth.

(to confuse things, it used to be that Delta had to amortize that goodwill over a period of time, so that goodwill would drop over time. Then the accounting rules changed and now you don't amortize goodwill. So the amount of goodwill that was written off was actually somewhat less than the original goodwill that was created).

Delta's statement has effectively reduced the "book value" of ASA and Comair to zero. That means if they are both "sold" tomorrow, whatever is generated would be a "gain" for Delta. If they were both closed tomorrow, it would cost Delta nothing. The "write off" accounts for 1/9 billion of the 2.2 billion dollar loss.

"Goodwill" is a hypothetical value that can be whatever the accountant says it is. The computer fiasco at CMR may well have cost 20 millions but it doesn't come close to the 1.9 billion that Delta has decided to "write off". The actual operating loss of about 750 millions is the focus. That's bad, but as the General says it does not account for any of the recent changes made at Delta, which will be seen in the first quarter of 2005.

Anybody want to buy CMR or ASA or both?

 

[WillowRunVortex]

hung,


You don't seem to understand what is going on. Our problem is that we have full planes, but too many low fares and not enough super high fares. So, we are trying to shake that up by getting more middle fares, and not as many super duper low fares. Airtran has been taking a lot of business away from us because a lot of those walk up fare people don't like $1200 one way fares. So, we will have more $499 and $599 fares, and that should bring a lot of people back and also fill our planes with higher paying passengers ON AVERAGE, compared with before that had 10% paying way too much, and 90% paying way too little. Get it yet? NW didn't like this because they have hardly any LCC competition and now they will have to compete. That is the way it goes.....


Bye Bye--General Lee

$499 to $599 fares? Get real. Nobody will pay that anymore. Way too many other options available these days. Delta has been dying a slow death since 1990,,,time to lay that tired ol' horse to rest. Transitioning all the 8 dollar an hour Comair people to mainline positions isnt gonna save the company.

 

[FDJ2]

Yep, that's why I asked GL how much actual cash Delta went through. That's what you have to watch.

Unrestricted cash position 3Q'04 $1.45B
Unrestricted cash position 4Q'04 $1.79B

The actual cash position has improved, but that was due mostly to cash received from GE and Amex.

year over year unrestricted cash went from $2.7B to $1.79B

Delta will get another cash installment for over $300M 1Q'05.

Excluding any unforeseen event, DAL is probably in no immediate threat of BK and if the company can successfully implement its route restructuring, which begins January 31 and if the yields and book loads come in as expected from simplifare, early results are in-line with expectations, and if oil drops down to ~$40/bl, DAL might pull in a small profit by the end of '05. Quite a few "ifs" in all of that, but time will tell. I hope that helps.

 

[Hung Start]

Thanks, General:
I do appreciate your thoughtful reply, and I guess I did come across way too sarcastic. I apologize.
But, I do seem to fly Delta a great deal these days, and I never have gotten a super "low" fare, so I'm not sure what the issue is. But,,, somebody with better smarts than me must know EXACTLY what it takes per hour to run every model of plane. And somebody must know EXACTLY what extraineous expenses are ( ramp, gates, etc. etc. etc.). So why don't they get together and figure out what a reasonable fare to go from point A to point B is?
Who cares if I buy 3 months from now or tomorrow? Give a reasonable fare and make money!
I think the worst thing that can be done is offer $99 bucks go from NY to LA, because that sets the expectation. If you can do that, then Bangor to Boston should be $12 !!!
And then,,, we pay ex CFO, CEO, C-who cares what the title is $16 mil to go away. The average guy just doesn't care about the plight anymore.
Good luck, I still think Delta is the best flag, and hope it makes it.

 

[jetblue320]

People here tend to focus on the total number - but most peoplecan'tcomprehend that the majority is a paper loss... It's not great butnotas doom and gloom as some people think... All legacy carriersarehurting with the high fuel prices during the 2nd half of lastyearandthe destructive fare wars. Many of the huge costreductionsachievedby Delta in Q4 were not realized in time to make much of animpact. The non-writeoff $750 million dollar loss (actual loss) is inthe past andnow the expense savings will kick in and hopefully losseswill be reduced (maybe even a small profit) as fuel costs decrease,employee expenses are cut in general and the economy continuestoimprove... Itshould be interesting.

Anyone else notice that my words are sticking together despite making repeated corrections? Nice technology...

Yo Heavy Set,

I thinkyouneed to blowthedirt outfrom underneath yourspacebar.



Cyaaaaaaa

 

[CRJDog]

It's fine and dandy that all this economics talk can paint a rosierpicture but IMHO Delta's low fare strategy was partly aimed to try tofinish off USAir.

Well guess what sucka WE ARE STILL HERE!!

Then the finger-pointing towards the regionals was also pretty obviousbut that does not even come close to the 2.2B DAL lost IN ONE Q and the8.5 BILLION lost in 04 making it the worst year in AIRLINE HISTORY. Whocalls the shots for the WO's at DAL but DAL management. RJ's make moneynot lose money with exception of the COMAIR glitch.

We will save you a spot in Bankruptcy court.

 

[FDJ2]

It's fine and dandy that all this economics talk can paint a rosierpicture but IMHO Delta's low fare strategy was partly aimed to try tofinish off USAir.

Well guess what sucka WE ARE STILL HERE!!

Simplifares started less than a month ago. Remember just because you're paranoid doesn't mean they're not out to get you.


Then the finger-pointing towards the regionals was also pretty obviousbut that does not even come close to the 2.2B DAL lost IN ONE Q

You're right, the $1.9B write off of ASA/CMR barely puts a dent in a $2.2B loss.
RJ's make moneynot lose money with exception of the COMAIR glitch.

Well in that case DAL should be rolling in the $$$ since we have the biggest RJ fleet in the entire industry. Makes you wonder what that $1.9B write off is all about.

 

[General Lee]

Is CRJDog drunk? Somebody get a medic. MEDIC!!! Thorozine, stat! He needs thorozine!



Hung,

I was a little harsh, too. You are right, super low fares may be great for awhile, but when high fuel prices are around, you can't do it for long unless you have a lot of cash built up. Everyone seems to be looking at the lower end of the spectrum, but I think there will be a certain amount of very low fares (probably on Song, which has 757s with 199 seats---more than our average mainline 757), and the rest of the fares will be spread out evenly---low, middle, and the walkup $499 for coach and $599 for first. Our best customers were telling us( according to marketing) that they didn't like paying $1200 one way for coach for a walk up---when the guy next to him was paying $199 for 3 week in advance ticket. A lot of corporations in ATL were tired of those high prices---and they were making their people fly Airtran because their walkups were around $500. Well, now we should be able to attract a lot of those people back, and our FF program is 20 times better and has more rewards. Even the extra $100 for a first class upgrade was a great idea---because a lot of people were not buying until they got to the airport---and then it was just a $50 or $75 upgrade at the gate. People will see value and will buy again, partially because they will not feel as mad as they were buying those $1200 one way tickets. We will make up the difference in VOLUME. And, those FF will like it that we have added some new flights for them from ATL---like twice daily 764 nonstop service to Honolulu, and we are starting SLC--Maui soon. You have to keep your best customers happy, and offer something Airtran and Jetblue don't have. (Our FF program can get them on any Skyteam partner too)


Willowrunvortex,

What? Maybe you have spent too much time at Willow Run airport in Detroit and not at normal passenger airports. Have you ever flown our Delta Shuttle in LGA? We fill planes with walk ups and even have to have some on standby for extra passengers. And, those fares, for the 30 minute flight, are near $300 each way. We have plenty of walk up people that would easily pay $499 or $599 for a ticket---which is better than the previous fares. When business calls, people fly---and they like it better when they don't feel as ripped off--and that will make them fly more. Have a great one.


Bye Bye--General Lee

 

[lowecur]

It's fine and dandy that all this economics talk can paint a rosierpicture but IMHO Delta's low fare strategy was partly aimed to try tofinish off USAir.

I doubt it. UAIR fate will not be determined by this new fare structure. Hell, RASM has been choked by FLYi, SWA, JBLU, and AAI well before DL. UAIR still has pricing power in many small markets not served by these carriers, and will continue to charge higher fares in these small communities to help keep the RASM high. UAIR is here to stay as long as IAMS doesn't do something foolish.

DL's fare structure is intended to draw business away from the LCC customers that have been driving to other airports to secure lower fares. While it worked well in CVG due to the lack of LCC competition, it remains to be seen whether it will work in the ATL spider web where there is plenty of LCC competition. With AMR, CAL, UAL, NWA matching this fare structure, it would be a futile attempt to steal any of their existing customers. Time will tell, but I believe this fare structure will not generate the revenue increase that they did in CVG. Existing payroll and other changes will help DL keep it's head above water in the next 6 months, and I believe DL will begin a gradual sell-off of CRJ's at WO as the 170's come on-line to help the cash flow.

If the fare structure does nothing more than reduce revenue across the board amongst the legacys, then DL will head into 11 first with CAL, AMR, and NWA close behind. DL has much of the hard fight behind them, so in this game of musical chairs, they may just find a seat for the long run.

 

[General Lee]

You don't think it will play well against Airtran in the ATL market? I do. Airtran has been taking a lot of our local passengers, and that will be changing soon. Our best corporate accounts in ATL told our people that they would come back if the fares were more fair. And, you may be correct about the E class airplanes.


Bye Bye---General Lee

 

[lowecur]

You don't think it will play well against Airtran in the ATL market? I do. Airtran has been taking a lot of our local passengers, and that will be changing soon. Our best corporate accounts in ATL told our people that they would come back if the fares were more fair. And, you may be correct about the E class airplanes.


Bye Bye---General Lee

Time will tell General, but I believe this whole fare structure may be a way of bringing all the other legacy's into Chapt 11 at the same time. It's a way of leveling the playing field in a hurry. DL would have a great advantage at that point, as the difficult negotiations are behind them, and they would find it much easier to get exit financing ahead of the others (who still will face difficult negotiations securing more payroll givebacks).