Delta Air Lines, Inc. — FY 2018 Form 10-K
Business context and reporting period. Delta is a global passenger and cargo airline with a wholly owned refinery segment and airline-related businesses. This is the annual report for the year ended December 31, 2018; it also reports fourth-quarter results. Unless stated otherwise, financial amounts are in U.S. dollars.
Key financial results
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Operating revenue | $44.438 billion | $41.138 billion | +8.0% |
| Operating income | $5.264 billion | $5.966 billion | -11.8% |
| Operating margin | 11.8% | 14.5% | -2.7 percentage points |
| Net income | $3.935 billion | $3.205 billion | +22.8% |
| Diluted EPS | $5.67 | $4.43 | +$1.24 |
| Cash from operations | $7.014 billion | $5.023 billion | +$1.991 billion |
| Capital expenditures | $5.168 billion | $3.891 billion | +$1.277 billion |
Net margin was approximately 8.9%, versus 7.8% in 2017. Higher net income despite lower operating income reflected lower non-operating expense and a lower effective tax rate. The effective tax rate was 23.6%, compared with 41.8% in 2017, which included the impact of U.S. tax reform.
Fourth-quarter 2018 revenue was $10.742 billion, operating income $1.090 billion, net income $1.019 billion, and diluted EPS $1.49.
Operating performance and material changes
- Passenger revenue rose 7.6% to $39.755 billion. Premium-cabin ticket revenue increased 13.8%; main-cabin ticket revenue rose 4.0%. Total revenue per available seat mile increased 4.3% to 16.87 cents.
- Operating expense increased 11.4% to $39.174 billion, faster than revenue. Fuel expense increased $2.264 billion, or 33.5%, to $9.020 billion; average fuel cost rose 31% to $2.20 per gallon. Fuel was 23.0% of operating expense, versus 19.2% in 2017.
- Salaries and related costs increased 6.8% to $10.743 billion, and profit-sharing expense increased 22.2% to $1.301 billion. CASM rose 7.5% to 14.87 cents; adjusted non-fuel CASM increased 1.4% to 10.31 cents.
- Passenger load factor was 85.5%, compared with 85.6%; capacity increased 3.6%. Revenue grew in all geographic regions, with Atlantic passenger revenue up 11.4% and domestic up 8.0%.
- Delta generated $7.014 billion of operating cash flow and spent $5.168 billion on capital expenditures, principally aircraft and equipment. Management reported $2.5 billion returned to shareholders during 2018, including $1.575 billion of share repurchases and $909 million of dividends.
Financial position, liquidity and debt
- At December 31, 2018, unrestricted liquidity was $4.8 billion: $1.8 billion in cash and short-term investments and $3.0 billion in available revolving credit facilities. Cash and cash equivalents were $1.565 billion; short-term investments were $203 million.
- Long-term debt and finance leases, including current maturities, totaled $9.771 billion on the selected-data basis. The debt table reports $9.308 billion of principal debt; operating lease liabilities were $6.756 billion after adoption of the new lease standard.
- Total assets were $60.266 billion and stockholders’ equity was $13.687 billion. Delta reported compliance with financing covenants at year-end and investment-grade ratings from Fitch, Moody’s and S&P.
- Delta expected to fund 2019 cash needs through operations, cash and financing. It forecast approximately $4.7 billion of 2019 capital investment and planned a voluntary $500 million pension contribution. It expected a 2019 effective tax rate of 23%–24% and positive operating cash flow.
Management commentary, outlook and material risks
- Management characterized 2018 as a solid year and said revenue initiatives offset most, but not all, of the approximately $2.3 billion increase in fuel costs. Priorities included revenue growth, cost performance, global network expansion and investment.
- Delta launched its Korean Air transpacific joint venture. Proposed WestJet and combined transatlantic joint ventures remained subject to regulatory approval.
- Delta had $16.160 billion in aircraft purchase commitments and significant airport redevelopment commitments. The LaGuardia project had an estimated net cost of approximately $3.3 billion, with Delta bearing construction and potential cost-overrun risks. LAX expansion work was also continuing.
- Fuel price and availability are major exposures: a one-cent-per-gallon increase was estimated to add approximately $40 million in annual fuel expense. Hedging may not provide effective protection and could require margin postings.
- Other disclosed risks include airline competition and economic or currency volatility; severe weather, geopolitical events and disease outbreaks; labor disputes; technology or cybersecurity disruptions; regional-carrier service interruptions; refinery operating and environmental risks, including volatile renewable-fuel credit costs; and changing regulation, including emissions requirements.
- A consolidated antitrust class action alleging airline capacity coordination was proceeding through discovery; Delta said it considered the claims without merit and was defending them. Management did not expect resolution of current legal matters to materially adversely affect the consolidated financial statements.
Unusual items and comparability
- Delta sold DAL Global Services in December 2018 for $40 million cash and a 49% interest in the new company, recognizing a $91 million gain. The business generated $244 million of third-party revenue in 2018 and will no longer be consolidated in 2019.
- The Trainer refinery completed a planned approximately 60-day maintenance turnaround in the December quarter. Refinery income fell to $58 million from $110 million in 2017.
- Delta adopted lease accounting in 2018, recognizing operating lease right-of-use assets of $5.994 billion and operating lease liabilities of $6.756 billion. Prior-year balance-sheet amounts were not recast, limiting direct balance-sheet comparability.
- Revenue-standard adoption was applied retrospectively and shifted certain fees from other revenue to passenger revenue; it also increased the reported loyalty-program liability. Delta reported $6.641 billion of SkyMiles deferred revenue at year-end. A hypothetical 10% change in estimated miles expected to be redeemed would affect annual revenue by approximately $200 million.
Most important facts for investors to verify
- Whether fare and premium-product growth can continue to offset fuel, wage and other cost inflation, and whether margins recover.
- Current fuel-price exposure, refinery performance, hedging and RIN costs, including the effect of future price changes on cash and earnings.
- Execution, funding and potential overruns for aircraft purchases and the LaGuardia and LAX projects, alongside debt maturities and liquidity.
- Key assumptions underlying SkyMiles deferred revenue and breakage estimates, and the effects of lease-accounting adoption on comparisons.
- Progress on regulatory approvals for proposed joint ventures, labor negotiations, and developments in the antitrust litigation and other contingencies.