Delta Reconsiders Flying Solo After Earnings Drop

Delta Air Lines Inc. on Thursday reported a sharp drop in earnings, short of Wall Street estimates, and said it is considering merging with other carriers to stay competitive.

Meanwhile, UAL Corp., parent of No. 1 United Airlines, reported a fourth-quarter loss, reversing a year-earlier profit, citing higher fuel and labor costs. The performance was better than expected, however.

Northwest Airlines Corp., the world’s fourth-largest carrier, said fourth-quarter profit grew 7% to $31 million, or 34 cents a share, weakened by high fuel costs, winter weather and a slowdown by its mechanics. Analysts had forecast 31 cents a share. Revenue rose 7% to $2.74 billion.

Delta Chairman Leo Mullin said the company was mulling whether to merge or remain independent in the wake of recent airline industry consolidation, which he described as the beginning of a tumultuous period.

“Industry consolidation had a sense of inevitability about it,” Mullin told analysts during a conference call after the release of Delta’s financial results. Mullin added that maintaining shareholder value would be a priority in any future merger decision.

UAL has proposed to take over No. 6 airline US Airways Group Inc. AMR Corp., the nation’s second-largest airline, has announced plans to acquire No. 8 Trans World Airlines Inc.

Delta, the nation’s third-largest airline, said operating profit plunged 54% to $79 million, or 60 cents a share, in the fourth quarter, as revenue rose 9% to $4.02 billion. Delta was expected to earn 62 cents, according to analysts polled by First Call/Thomson Financial.

Analysts said the results came as little surprise since Delta had warned last month that it would miss estimates due to cancellations from bad weather and the impact of an ongoing labor dispute with some of its 9,000 pilots.

Some analysts expressed doubts about whether Delta could stay competitive if it remained independent.

“Clearly, the status quo is not good enough for Delta Air Lines,” said Kevin Murphy, analyst with Morgan Stanley Dean Witter in New York. Delta has “to proceed with some sort of strategic acquisition of assets,” Murphy added.

Delta, which said its fuel hedging program had helped shelter it from rising fuel prices in the quarter, also must contend with an increasingly bitter labor dispute with its unionized pilots.

The carrier scored a victory on Thursday when a federal appeals court in Atlanta ordered a lower court to grant Delta’s request for an injunction forcing its more than 9,000 unionized pilots to end a “no-overtime campaign.”

In its ruling, the 11th Circuit U.S. Court of Appeals said the Air Line Pilots Assn., which represents the lion’s share of Delta pilots, had not done enough to fulfill its labor agreement and avoid an “interruption to commerce.”

Delta had accused some of its unionized pilots of engaging in a campaign to refuse overtime flying requests, which the carrier said had led to widespread flight cancellations and contributed to its lower earnings in the most recent quarter.

The union, which has denied orchestrating such a campaign, said it would appeal to the entire 12-judge panel of the appellate court.

Mullin said that Delta and the pilots union remained “far apart” on pay increases and other pilot demands in contract talks.

“The big unknown, near term, is how long the negotiations with the pilots will drag on,” said analyst Robert Milmore of Arnhold & S. Bleichroeder, who added that Delta risked losing customers to other airlines if it did not resolve the dispute soon.

Meanwhile, UAL said higher fuel and labor costs resulted in a loss of $124 million, or $2.41 a share, in the latest quarter, contrasted with profit of $100 million, or 59 cents, in the 1999 fourth quarter. Analysts had anticipated a $3.84-a-share loss.

Revenue rose 7% to $4.79 billion. Operational disruptions stemming from a slowdown by unionized mechanics, frustrated by the pace of contract talks, trimmed revenue by about $200 million, UAL said.

UAL said first-quarter bookings look good, but higher fuel and labor costs probably will cause it to lose money again in the period. The company said it expects a “modest profit” for the full year 2001.

Amid a strong showing of airline stocks, Delta rose $1.63 to close at $48, while UAL gained $2.13 to close at $40, and Northwest closed off $1.50 at $27.44, all on the New York Stock Exchange.