Delta Air Lines Inc. (DAL:US) will pare costs by $1 billion, in part by retiring older jets, and trim fourth- quarter capacity as much as 3 percent after expenses increased at the world’s second-largest carrier.
The capacity cut will be in a range of 1 percent to 3 percent, with the deepest pullback on international routes, Atlanta-based Delta said today in a statement. Third-quarter profit excluding some items was 90 cents a share, trailing the 91-cent average of 17 analysts’ estimates (DAL:US) compiled by Bloomberg.
“We will generate significant savings starting in the second half of 2013,” Chief Financial Officer Paul Jacobson said today on a conference call with analysts and investors. The changes are “not easy and will take some time and upfront costs to implement.”
The biggest piece of the savings plan comes from getting rid of aging aircraft on U.S. routes and replacing 50-seat jets with larger models, Jacobson said. Trading out the small planes for used Boeing Co. (BA:US) 717s being bought from Southwest Airlines Co. (LUV:US) and new Boeing 737-900ERs will reduce operating costs and put higher-fare business-class seats on more of Delta’s fleet.
Delta is also in discussions with Bombardier Inc. (BBD/B) and Embraer SA (EMBR3) to buy about 70 76-set regional jets, Chief Executive Officer Richard Anderson said on the call. Delta plans to make a decision on an order by year’s end, he said.
The other major parts of the cost reduction plan call for paring maintenance expenses and making technology improvements that will lower payments to vendors and drive more customers to Delta’s reservations website to book flights because that’s the cheapest way to distribute tickets, Jacobson said.
Delta slid 1.1 percent to $10.04 at the close in New York. That pared the shares’ year-to-date advance to 24 percent, which was still good enough to rank third in the 10-carrier Bloomberg U.S. Airlines Index.
“There’s no growth, and you need growth to offset cost inflation,” said Savanthi Syth, a Raymond James & Associates Inc. analyst in St. Petersburg, Florida. She rates Delta stock (DAL:US) as outperform. “The cost-cutting initiative is less related to demand. There’s an expectation here that you’re not going to see rapid growth anywhere.”
The airline’s fleet consisted of 775 planes, with an average age of 15.6 years, at the end of 2011, according to a regulatory filing. That compared with an average of 11 years among 12 North American carriers, according to data compiled by Bloomberg. Jets at United Continental Holdings Inc. (UAL:US), the world’s largest airline, averaged 12.4 years of age, the data show.
Delta would add the new regional jets under a new pilot contract that allows for more of those smaller models, Anderson said.
Delta joins Southwest in efforts to reduce expenses after the Dallas-based carrier said last week it plans spending cuts of at least $100 million to blunt costs that are outpacing sales gains.
Excluding fuel, Delta’s cost to fly each seat a mile rose 5.6 percent last quarter for its consolidated operations, which consist of its main jet flights and its regional business. Salary and wage expenses, Delta’s second-largest after fuel, climbed 7.7 percent, and maintenance jumped 15 percent.
Third-quarter net income jumped to $1.05 billion, or $1.23 a share, from $549 million, or 65 cents, a year earlier. Delta said the one-time items in the quarter included a $440 million gain on fuel hedge accounting and charges for trimming jobs, trading airport slots and shutting the Comair regional unit.
Delta charged more for tickets to mute the impact from a 1.2 percent decrease in miles flown by paying passengers across its network. Revenue rose 1.1 percent to $9.92 billion, lagging behind the $9.97 billion average projected by analysts.
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