The good news: For the full year, Delta Air Lines (NYSE:DAL) grew net income 18% to $1 billion ($1.19 a share) on nearly $36.7 billion in revenue. The company successfully trimmed its seating capacity to gain pricing power. The bad news: DAL’s fourth-quarter earnings slipped to a scant $7 million — a penny a share on revenue of $8.6 billion — down from the $425 million (51 cents a share) it reported a year earlier.
Pricier fuel — and higher-than-expected non-fuel costs — contributed to the loss. Superstorm Sandy dealt a $100 million blow to DAL’s fourth-quarter profit. In addition to canceling thousands of East Coast flights, the late October storm slowed production at Delta’s Pennsylvania oil refinery. The refinery, which the airline bought last year to cut fuel costs, lost $63 million in the fourth quarter.
Add to that an 8% increase in operating expenses and a $122 million charge for fleet restructuring. DAL is leasing 88 Boeing (NYSE:BA) 717 jets from Southwest and has ordered 40 new CRJ9000 regional jets from Bombardier Aerospace to replace inefficient 50-seat jets at its Delta Connection subsidiary.
DAL shares have gained more than 60% since September, but still look great on a valuation basis, trading at 5 times 2014 earnings and a price/earnings-to-growth ratio of 0.21.
Delta’s purchase of a 49% share of Virgin Atlantic is a big positive, giving it better access to slots at London’s profitable Heathrow. But costs remain a big concern — DAL has set a target of $1 billion in structural cost cuts. Although Delta’s Trainer refinery is scheduled to begin processing cheaper Bakken crude into jet fuel in the first quarter, I’m still not sold on the near-term benefits. DAL’s increase in operating expenses is a concern that bears watching.