Delta Air Lines, Inc. — 2014 Form 10-K
Business context and reporting period. Delta provides passenger and cargo air transportation globally, supported by airline-related businesses and its Monroe refinery. This is the annual report for the fiscal year ended December 31, 2014; it also reports the fourth quarter. The financial statements received an unqualified audit opinion.
Financial performance
| Metric | 2014 | 2013 |
|---|---|---|
| Operating revenue | $40.362 billion | $37.773 billion |
| Operating income | $2.206 billion | $3.400 billion |
| Income before taxes | $1.072 billion | $2.527 billion |
| Net income | $659 million | $10.540 billion |
| Diluted earnings per share | $0.78 | $12.29 |
| Cash from operating activities | $4.947 billion | $4.504 billion |
| Capital expenditures | $2.249 billion | $2.568 billion |
| Long-term debt and capital leases, including current maturities | $9.777 billion | $11.342 billion |
- Passenger revenue rose 6% to $34.954 billion, with passenger traffic up 4%, capacity up 3%, passenger revenue per available seat mile up 3%, and load factor at 84.7%, 0.9 percentage points higher.
- Operating expense increased 11% to $38.156 billion. Reported operating cost per available seat mile rose 8% to 15.92 cents; adjusted non-fuel CASM-Ex was nearly flat at 9.16 cents versus 9.14 cents.
- Fuel expense was $13.512 billion, or 35% of operating expense. Reported average fuel cost was $3.47 per gallon, up from $3.00; adjusted for mark-to-market items, cost was $2.87 versus $3.07.
- Year-end unrestricted liquidity was $5.2 billion: $3.3 billion in cash and short-term investments and $1.9 billion in undrawn revolving facilities. Cash and cash equivalents alone were $2.088 billion.
- Shareholders’ equity was $8.813 billion, down from $11.643 billion. Pension, postretirement and related benefit liabilities were $15.138 billion; the pension plans’ reported unfunded benefit obligation was $12.501 billion.
Material changes and unusual items
- Adjusted pre-tax income increased 70% to $4.536 billion, while GAAP pre-tax income fell to $1.072 billion. The company excluded $3.464 billion of special items from adjusted pre-tax income, principally $2.346 billion of unfavorable fuel-hedge mark-to-market adjustments, $716 million of restructuring and other items, $268 million of debt-extinguishment losses, and $134 million of Virgin Atlantic mark-to-market adjustments.
- Net income comparisons are especially affected by 2013’s $8.013 billion income-tax benefit, primarily from releasing substantially all of Delta’s deferred-tax valuation allowance. Delta reported a $413 million income-tax provision in 2014.
- Fourth-quarter 2014 operating loss was $828 million and net loss was $712 million, compared with fourth-quarter 2013 net income of $8.479 billion, which included the tax valuation-allowance release. Fourth-quarter 2014 included $2.157 billion of listed special-item losses.
- Operating cash flow improved to $4.947 billion. Delta used cash to reduce debt and capital-lease principal by $1.9 billion, invest $2.2 billion in capital expenditures, and return $1.4 billion to shareholders. It repurchased $1.1 billion of shares and paid $251 million in dividends during 2014.
- Monroe’s refinery recorded $96 million profit in 2014, compared with losses of $116 million in 2013 and $63 million in 2012. Delta recorded $111 million of 2014 expense related to renewable-fuel credits (RINs).
Outlook, management commentary and risks
- Management expected positive operating cash flow in 2015, approximately $2.8 billion of 2015 capital investment, and at least $950 million in 2015 pension contributions. It said cash flows from operations would primarily fund planned investment.
- Delta targeted annual CASM-Ex growth below 2%. Management expected continued fleet restructuring to improve fuel and operating efficiency, customer service, and maintenance costs; it estimated an additional $50 million to $150 million of charges from retiring leased 50-seat regional aircraft.
- Delta ordered 25 Airbus A330-900neo and 25 A350-900 aircraft for delivery beginning in 2017. It also planned to increase Seattle peak daily departures to 120 in 2015 and expected its Virgin Atlantic joint venture to increase U.S.–U.K. capacity by about 10% to 39 peak daily round trips.
- Major risks include volatile fuel prices and fuel-hedge margin calls, refinery interruptions and RIN costs, intense fare and network competition, economic weakness, weather and disruptions at hubs, labor disputes, third-party regional carrier capacity, cybersecurity and technology failures, regulation and environmental requirements, and significant pension obligations.
- At year-end, Delta had posted $925 million of fuel-hedge margin. It also had $102 million of Venezuelan cash whose repatriation had not been authorized and which remained exposed to devaluation. Management said it was in compliance with financing covenants.
- Contractual obligations totaled $63.733 billion, including $13.950 billion of aircraft purchase commitments, $12.741 billion of noncancelable operating-lease payments, $11.220 billion of contract-carrier obligations, and $11.840 billion of employee-benefit obligations. Estimates and timing are subject to uncertainty.
Important facts for investors to verify
- How much of the 2014 fuel-hedge loss was settled cash loss versus noncash mark-to-market adjustment, and the subsequent cash, earnings, and margin effects as contracts settled.
- Whether lower fuel prices translated into sustained operating-margin improvement, given reported fuel expense, hedging exposure, and the timing of fare changes.
- Progress against the 2015 cash-flow, capital-expenditure, CASM-Ex, fleet-transition, and network plans, including restructuring charges and aircraft financing.
- Future pension funding and liability sensitivity to discount rates, longevity assumptions, and investment returns.
- RIN market prices and refinery operating performance; labor negotiations with Monroe refinery employees; and developments in the Venezuelan cash restrictions and pending litigation.
- Dividend and share-repurchase capacity under credit-facility covenants, liquidity needs, and substantial aircraft and lease commitments.