Delta Air Lines reported financial results for the September 2014 quarter. 

"With another record profit, solid margin expansion and nearly $1 billion of free cash flow, Delta's results are consistent with high-quality S&P 500 industrials," said Richard Anderson, Delta's chief executive officer.  "While we have more work ahead of us to achieve our long-term financial goals, we expect a record fourth quarter of 2014 with an operating margin of 10-12%.  For the full year, we expect a pre-tax profit in excess of $4 billion.  We have the right foundation in place for an even stronger 2015, proven strategies for Delta, and 80,000 Delta employees who are the very best in the industry."

Revenue Environment
Delta's operating revenue improved 7 percent, or $688 million, in the September 2014 quarter compared to the September 2013 quarter, driven by continued strength in corporate and domestic revenues. Traffic increased 3.7 percent on a 3.2 percent increase in capacity.

• Passenger revenue increased 6 percent, or $522 million, compared to the prior year period.  Passenger unit revenue (PRASM) increased 2.4 percent year-over-year with a 1.9 percent improvement in yield.   Seat-related products and other merchandising initiatives increased revenues by nearly $50 million versus the prior year period. 
• Cargo revenue increased 7 percent, or $15 million, on higher freight yields and volumes. 
• Other revenue increased 15 percent, or $151 million, driven by joint venture, SkyMiles revenues, and third-party refinery sales.

Comparisons of revenue-related statistics are as follows:

"For the December quarter, the overall revenue environment remains solid, with unit revenues expected to increase by 0-2%, and we are on track to produce another quarter of good top line growth, margin expansion and free cash flow," said Ed Bastian, Delta's president.  "Looking further ahead, our international network provides the largest opportunity for additional margin improvement, as we accelerate our Pacific network restructuring, recalibrate our transatlantic capacity levels, and reap the benefits of our investment in our Latin network."

Cost Performance
Consolidated unit cost excluding fuel expense, profit sharing and special items (CASM-Ex2), was up 0.3 percent in the September 2014 quarter on a year-over-year basis as the benefits of Delta's domestic refleeting and other cost initiatives offset the company's investments in its employees, products and operations.  

"The September quarter marks the fifth consecutive quarter with non-fuel unit cost growth below 2 percent, a testament that our cost initiatives are delivering benefits," said Paul Jacobson, Delta's chief financial officer.  "For the December quarter, we expect to again remain in line with our long-term goal of keeping unit cost growth below 2 percent."

Excluding special items, total operating expense in the quarter increased $320 million year-over-year driven by higher revenue- and volume-related expenses and $135 million higher profit sharing expense.  These cost increases were partially offset by lower fuel expense and savings from Delta's cost initiatives.  

Excluding mark-to-market adjustments,3 fuel expense declined $23 million driven by lower market prices and higher refinery profits.  Delta's average fuel price was $2.90 per gallon for the September quarter, which includes $63 million in settled hedge gains.  Operations at the refinery produced a $19 million profit for the September quarter, a $16 million improvement year-over-year.  

Non-operating expense declined by $63 million excluding special items as a result of lower interest expense and a $23 million increased contribution associated with Delta's 49 percent ownership stake in Virgin Atlantic.  

Tax expense, excluding special items, increased $629 million compared to the prior year quarter, as the company now recognizes tax expense for financial reporting purposes following the reversal of its tax valuation allowance at the end of 2013.  Delta's net operating loss carryforwards of more than $13 billion largely offset cash taxes due on future earnings.

On a GAAP basis, consolidated CASM increased 12 percent and total operating expense was up $1.4 billioncompared to the September 2013 quarter primarily due to special items associated with fleet restructuring and mark-to-market adjustments on fuel hedges settling in future periods.  GAAP fuel expense increased $609 millionon a year-over-year basis primarily driven by the hedge performance including mark-to-market adjustments.  GAAP fuel cost per gallon for the quarter was $3.23.  Non-operating expenses for the quarter increased by $56 million as a result of a $134 million special item for loss on extinguishment of debt resulting from Delta's debt reduction initiatives.  On a GAAP basis, tax expense was $222 million in the quarter.

Cash Flow
Adjusted cash from operations during the September 2014 quarter was $1.3 billion, driven by the company's September quarter profit, partially offset by the normal seasonal decline in advance ticket sales.  The company generated $910 million of free cash flow.  Adjusted capital expenditures during the September 2014 quarter were $411 million, including $322 million in fleet investments. During the quarter, Delta's net debt maturities and capital leases were $301 million. On a GAAP basis, cash from operations for the September 2014 quarter was $1.4 billion and capital expenditures were $457 million.  

With its strong cash generation in the September 2014 quarter, the company returned $325 million to shareholders through $75 million of cash dividends and $250 million of share repurchases.  For the first nine months of 2014, the company has returned a total of $776 million to shareholders, including $176 million in quarterly dividends and $600 million in share repurchases.

Delta ended the quarter with $6.4 billion of unrestricted liquidity and adjusted net debt of $7.4 billion.  The company has now achieved nearly $10 billion in net debt reduction since 2009.  

"Delta's strong operating cash flow, combined with our disciplined capital spending, has resulted in $2.8 billionin free cash flow so far this year.  We have used this cash flow to reduce our net debt levels by $2.0 billion, fund excess contributions of $250 million to our pension plans, and return more than $775 million to our owners through dividends and share repurchases already this year," Jacobson continued.  "With another solid quarter of free cash flow generation ahead of us, we are on track to produce nearly $3.5 billion in free cash flow for 2014."

December 2014 Quarter Guidance 
Following are Delta's projections for the December 2014 quarter: 

Special Items
Delta recorded a $657 million special items charge, net of taxes, in the September 2014 quarter, including: 

• a $397 million charge for fleet and other items, primarily associated with the decision to accelerate the retirement of Delta's 747 fleet as part of its Pacific network restructuring; 
• a $215 million charge for mark-to-market adjustments on fuel hedges settling in future periods; 
• an $87 million charge for debt extinguishment and other items, primarily associated with Delta's debt reduction initiative; and 
• a $42 million gain related to a litigation settlement.

Delta recorded a net $157 million special items gain in the September 2013 quarter, including: 

• a $285 million gain for mark-to-market adjustments on fuel hedges settling in future periods; and 
• a $128 million charge for facilities, fleet and other items, primarily associated with Delta's domestic fleet restructuring.