Delta Air Lines, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Dollar figures are in millions unless stated otherwise. The interim financial statements were reviewed by Ernst & Young, not audited.
Business context and financial performance
Delta operates an airline and an oil refinery that supplies jet fuel to its airline operations. Third-quarter results benefited primarily from lower fuel prices and improved refinery performance, while passenger revenue was pressured by a stronger U.S. dollar and weaker yields in certain markets.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Operating revenue | $11,107 | $11,178 | $31,202 | $30,715 |
| Operating income | $2,213 | $835 | $6,085 | $3,034 |
| Operating margin | 19.9% | 7.5% | 19.5% | 9.9% |
| Net income | $1,315 | $357 | $3,546 | $1,371 |
| Diluted EPS | $1.65 | $0.42 | $4.37 | $1.61 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $6,448 | $4,365 |
Q3 passenger revenue fell 1.9% to $9,595; total revenue declined 0.6%. Nine-month total revenue rose 1.6%, while passenger revenue was nearly flat. Q3 total operating expense fell 14% to $8,894, chiefly as fuel expense decreased. Fuel expense including regional carriers was $2,076 in Q3 and $5,927 for the nine-month period, down 40% and 35%, respectively, year over year. Q3 CASM declined 16.7% to 13.07 cents per available seat mile, but non-fuel CASM-Ex rose 0.9% to 8.74 cents. Q3 load factor was 86.8%, up 0.4 percentage points.
Financial position, cash flow and capital allocation
At September 30, 2015, cash and cash equivalents were $2,369 and short-term investments were $1,442. Management reported $6.0 billion of unrestricted liquidity, including $2.2 billion of undrawn revolving credit facilities. Total assets were $53,646; stockholders’ equity was $10,345. Debt and capital leases totaled approximately $8.9 billion in principal amount, down from $9.9 billion at December 31, 2014. The company reported compliance with financing covenants.
For the first nine months, operating cash flow of $6,448 funded $2,067 of capital expenditures, $500 of strategic equity investments, $2,151 of debt and lease payments, $1,775 of share repurchases and $254 of dividends. Cash and cash equivalents increased $281 to $2,369. The August refinancing included a $500 term loan and $500 of aircraft-backed certificates; the $1.5 billion revolving facility was undrawn at quarter-end.
Changes, outlook and management commentary
- Q3 pre-tax income was $2,072 versus $579 a year earlier. Adjusted pre-tax income, a non-GAAP measure, was $2,184 versus $1,637, reflecting lower fuel costs and non-fuel cost management.
- Passenger revenue trends were weak in international markets, particularly the Pacific, and in Brazil. Delta cited foreign-exchange pressure, reduced international fuel surcharges and weaker yields. Planned December-quarter actions included international capacity reductions, more than 20% lower capacity in Brazil, winter Pacific capacity reductions and B-747-400 retirements.
- Management expected to meet cash needs for the next 12 months using operating cash flow, available cash and investments, and financing arrangements, and expected positive operating cash flow for the remainder of 2015. It projected approximately $2.8 billion of 2015 investment spending and an approximately 37% annual effective tax rate.
- Delta announced 14.5% base-pay increases for eligible merit, ground and flight-attendant employees effective December 1, 2015, and a higher 401(k) match effective January 1, 2016. It also announced changes to the broad-based profit-sharing formula beginning with 2016 profits; pilot profit sharing remains unchanged.
- The board increased the quarterly dividend to $0.135 per share and authorized a $5 billion repurchase program through December 31, 2017. Delta repurchased $1.8 billion of shares in the first nine months, including completion of its prior authorization.
Risks, contingencies and unusual items
- Fuel-price exposure remains material. Delta recorded $563 of fuel-hedge losses for the first nine months and posted $381 of hedge margin at quarter-end. Management’s sensitivity analysis estimated a net fuel-cost impact from October 2015 through December 2016 ranging from a $2,640 increase under a 40% fuel-price rise to a $2,350 decrease under a 40% decline; actual outcomes may differ.
- Delta restructured its fuel hedges in early 2015, paying $302 to settle certain contracts and deferring some settlements. The filing reports $128 of cash receipts related to deferral transactions during the nine-month period and approximately $300 of expected cash payments in 2016, excluding market movements.
- Delta had $79 of unrestricted cash in Venezuela awaiting government authorization for repatriation; those funds are exposed to possible further devaluation. It also guaranteed GOL’s $300 five-year loan, secured by GOL’s interest in its loyalty program; no liability was recorded while GOL remained compliant.
- Future aircraft purchase commitments were approximately $13.0 billion, with long-term financing arranged for a substantial portion. Delta accrued $1,110 of profit-sharing expense for the first nine months and contributed $1.2 billion to qualified pension plans during the first half of 2015.
- Legal proceedings were not expected by management to have a material adverse effect; the filing reported no material changes to previously disclosed legal proceedings or risk factors. Controls and procedures were judged effective at September 30, 2015.
Important facts for investors to verify
- Whether fuel-price movements, hedge settlements and margin requirements materially affect cash flow and earnings after quarter-end.
- Passenger yields, international demand, foreign-exchange exposure and the results of planned capacity reductions, especially in Brazil and the Pacific.
- Execution and financing of the approximately $13.0 billion aircraft commitment pipeline and the projected 2015 capital spending.
- Progress on repurchases and dividends alongside debt reduction, liquidity and secured-credit covenant requirements.
- Potential exposure under the GOL loan guarantee, repatriation of Venezuelan funds, and any future lease-restructuring or employee-program charges.