Like many American consumers, Delta Air Lines is paying down its debt




The widespread job losses and plummeting home values that characterized the Great Recession scared many Americans into being more careful with their money.

Some consumers have shied away from buying goods they don't really need. Middle-income Americans have started shopping at thrift stores out of financial necessity or to pursue great deals. And people have been reducing their credit card balances.

Delta Air Lines, the world's second-largest airline, is the commercial equivalent of a disciplined consumer who only spends money on goods that are important to him or her.

Delta, which operates a majority of the flights out of the Minneapolis-St. Paul International Airport, on Wednesday reported a second-quarter net loss of $168 million. Its quarterly operating profit was $586 million, but special charges that included fuel hedge losses pushed Delta into the loss column.

One of the more intriguing aspects of Delta's conference call with analysts and reporters was the discussion of Delta's debt-reduction strategy.


The Atlanta-based carrier paid down $374 million in debt during the second quarter. Its debt has fallen from about $17 billion to $12.1 billion in recent years, and Delta management is pushing to get debt to a $10 billion level.

Delta is a huge enterprise, which had $18.1 billion in operating revenue for the first half of 2012.

JP Morgan Chase analyst Jamie Baker asked Delta CEO Richard Anderson on Wednesday's call whether the carrier would be "tempted to fall off the wagon" and go on a "growth bender" once Delta's debt drops to $10 billion.

"We're not going on any benders around here, period," replied Anderson. He emphasized that Delta is focused on efforts to "de-risk and de-lever the business," which is precisely what many consumers have been doing with their personal balance sheets.

"We're going to continue to grind down that net debt number," Anderson said.

Just as consumers derive financial benefits from strong credit ratings, Delta's financial discipline caught the attention of Fitch Ratings in mid-June. Fitch upgraded a Delta credit rating, stating it "considers Delta to be currently the strongest player in the much improved airline industry in the U.S."

Outperforming the industry average
It noted that Delta's unit revenues have "outperformed the industry average" for more than a year and that it has carefully matched capacity, airline seats on the market, with consumer demand.

Delta operates more than 13,000 daily flights and during the months of April, May and June, 85.1 percent of the seats on its planes were filled.

Fitch emphasized that Delta's financial prowess also is linked to its "enhanced network and synergies from the Northwest merger, product improvements and significant share gains in premium corporate customers."

Delta acquired Eagan-based Northwest in October 2008, on the eve of the last presidential election.

The airline is investing $3 billion in product and service upgrades and it recently started flying out of Atlanta's new international terminal. It also has established a new hub at LaGuardia in New York.

But there might be some copies of "The New Frugality" by Chris Farrell floating around corporate headquarters. Instead of leasing new airplanes, Delta recently consummated a deal with Southwest Airlines and Boeing to lease Boeing 717s. Those airplanes are being operated by AirTrain Airways, which Southwest acquired in a merger deal.

Delta will be able to get rid of many inefficient 50-seat regional jets and replace them with the Boeing 717s, which seat 117 passengers and have first-class cabins.

While Delta's Anderson prefers to be a leader, not a follower, in the airline industry, he recently surprised the business world when he decided that Delta should buy an oil refinery. The Texas native didn't want his business model to be so vulnerable to the volatility in oil prices.

A Delta subsidiary is gearing up a Pennsylvania refinery to begin production in the next few months. Delta management projects this enterprise will save the airline $300 million a year on fuel expenses.

All of these moves are designed to create ongoing profitability for Delta, which has taken a trip through bankruptcy along with other big U.S. carriers. To maintain profitability, Delta intends to keep its fares high enough to cover its costs and a profit margin.

Delta is hearing complaints from some consumers who think its fares are too expensive, but it is also receiving kudos within the airline industry for being agile in shifting its capacity up or down to match market demand.

Delta has built a reputation for seizing and creating business opportunities. Or, as Anderson said on Wednesday, "At Delta, we will continue to always control our destiny."



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