5 Things Delta Air Lines, Inc. Management Wants You to Know

By Markets Fool.com

Delta Air Lines reported another quarter of strong profit growth this past week (excluding one-time fuel hedging losses). This brought its 2014 full-year profit to a record $4.5 billion.

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Delta executives are looking forward to an even better profit performance in 2015thanks to strong demand in the U.S. and the recent drop in oil prices. Here are five other key points Delta management emphasized on the company's recent earnings call.

Exceeding performance targets

We are exceeding our long-term shareholder commitments. Our long-term op margin goal is 11% to 14%. We achieved 13.1%. EPS growth long-term goal is 10% to 15 %. We achieved 70% growth on a pre-tax basis. Our ROIC goal is 15% to 18%, we hit 20.7 %. Our free cash flow goal is $3 billion, we hit $3.7 billion.
-- CEO Richard Anderson

One fact that Delta CEO Richard Anderson highlighted was that even in a high-fuel-price environment, Delta has been overachieving. In late 2013, Delta laid out long-term performance targets, including 10%-12% operating margins, 10%-15% annual EPS growth, a 15% return on invested capital, and annual free cash flow of at least $2.5 billion.

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Delta exceeded most of its long-term performance targets in 2014.

As Delta's performance quickly improved to beat some of those targets, Delta revised its long-term goals upward last year. However, it still managed to exceed most of its long-term goals in 2014, led by its 70% pre-tax EPS growth. This should give investors confidence that even if oil prices rebound, Delta should still be able to produce strong earnings and free cash flow.

Keeping capacity in check despite cheap oil

Fuel will remain volatile in 2015. We are not making any changes to our 2015 capacity plan in light of the lower fuel prices. In fact, we continue to trim capacity on the margin to maintain yields and our RASM premium.
-- Anderson

One of the ways Delta has achieved staggering profit growth over the past five years has been its rigid capacity discipline. Even with jet fuel prices having fallen by more than 50% since last June, Delta is maintaining its methodical growth pace.

Recently, Delta has been trimming capacity from its domestic schedule for the spring. While domestic demand has been quite strong, the revenue management team believes the best way to keep fares high is to cut some of the lower-performing flights. Domestic capacity will still grow 2%-3% this year, but the growth may be slightly less than originally planned.

Maintaining cost control

There is tremendous commitment across the entire organization to continue to achieve our goal of cost growth consistently below 2%, and we expect that momentum to continue through this year and into 2016.
-- CFO Paul Jacobson

In 2014, Delta was able to keep its non-fuel costs roughly flat before the impact of higher profit-sharing payments. This stood in sharp contrast to the rather high cost inflation Delta was experiencing just two years earlier.

One key driver of this strong cost performance was Delta's "upgauging" strategy. The company has been drastically reducing the number of 50-seat regional jets in its fleet, replacing them with larger 76-seat regional jets and 110-seat mainline planes. Delta has also added seats to hundreds of its mainline planes to reduce unit costs.

Delta is retiring most of its 50-seat jets in favor of 76-seat regional jets like this one.

These programs -- as well as some broader productivity initiatives -- will continue this year and into the beginning of 2016. As a result, Delta expects to keep its non-fuel unit cost growth very low. Including fuel, unit costs should fall thanks to the lower price of jet fuel.

Downsizing in Japan

And in the Pacific, we continue to restructure our network in light of continued pressure from the weakened yen. This will take a couple of years as we retire the 747s and backfill a portion of that flying with new smaller-gauged aircraft.
-- President Ed Bastian

One of Delta's weakest markets recently has been Japan. The yen has plummeted since late 2012, reducing the dollar value of tickets sold in Japan and making travel to the U.S. more expensive for Japanese citizens. The weak yen has also reduced non-fuel costs for Japanese carriers that compete with Delta.

Delta is attacking this problem head-on by cutting capacity in Japan. It will reduce capacity in Japan by 15% this year. Its top targets have been beach-market flights from Japan to places like Hawaii and Guam and flights from Japan to other points in Asia.

Delta has also implemented an early retirement schedule for its massive Boeing 747s. Starting this year, Delta is taking delivery of 10 new A330-300s, which are more than 20% smaller than the 747s they are replacing and more fuel-efficient. Beginning in 2017, Delta will add the even more fuel-efficient A350-900 to its transpacific fleet, further improving profitability there.

A big profit at the refinery

Our results this quarter included $180 million in settled hedge losses, which were offset by $105 million profit at the refinery.
-- Jacobson

In 2012, Delta made a much-maligned decision to buy an oil refinery in order to better manage its crack spreads (the difference between the price of oil and the price of jet fuel). Critics of the move argued that an airline should not be in the business of running an oil refinery.

The critics got more ammunition when start-up costs came in above projections due in part to the impact of Hurricane Sandy. Falling margins across the refinery industry have also weighed on profitability. An article criticizing the refinery play is running in the Feb. 9 issue of Forbes.

This is ironic, because the refinery churned out a $105 million profit last quarter, offsetting a large portion of Delta's hedging losses. Falling oil prices tend to improve refinery margins, so the Trainer refinery could make a substantial profit in Q1, as well. This validates Delta's argument that owning a refinery is a key part of its broader hedging strategy.

The overall tone of Delta's Q4 earnings call was very positive. There are a few headwinds on the horizon, but they are very manageable. Meanwhile, lower fuel prices will catalyze substantial profit growth in 2015, allowing Delta to keep reducing its debt while rewarding shareholders.

The article 5 Things Delta Air Lines, Inc. Management Wants You to Know originally appeared on Fool.com.

Adam Levine-Weinberg owns shares of Boeing. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.