Delta Air Lines, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Financial statements are unaudited interim statements; the independent accountant performed a review, not an audit.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | First nine months 2014 | First nine months 2013 |
|---|---|---|---|---|
| Operating revenue | $11.178 billion | $10.490 billion | $30.715 billion | $28.697 billion |
| Operating income | $835 million | $1.563 billion | $3.034 billion | $2.699 billion |
| Income before taxes | $579 million | $1.363 billion | $2.212 billion | $2.052 billion |
| Net income | $357 million | $1.369 billion | $1.371 billion | $2.061 billion |
| Diluted EPS | $0.42 | $1.59 | $1.61 | $2.40 |
- Q3 passenger revenue rose 6% to $9.776 billion; traffic increased 4%, capacity 3%, PRASM 2%, and load factor was 86.4%, up 0.4 percentage points.
- Q3 operating margin was approximately 7.5%, versus 14.9% a year earlier. Management reported adjusted pretax income of $1.637 billion, up from $1.206 billion, excluding specified special items; this is a non-GAAP measure.
- Operating cash flow was $4.365 billion for the first nine months, versus $3.373 billion. Investing used $2.425 billion and financing used $2.274 billion; cash and cash equivalents ended at $2.510 billion.
- At September 30, cash, cash equivalents and short-term investments totaled $4.362 billion. Unrestricted liquidity was $6.4 billion including $2.0 billion of undrawn revolving credit facilities.
- Total debt and capital leases, including current maturities, were approximately $10.1 billion, down about $1.2 billion from December 31, 2013. The company reported compliance with financing covenants.
- Q3 consolidated CASM was 15.69 cents, up from 13.97 cents; non-GAAP CASM-Ex was 8.66 cents, compared with 8.64 cents. For the nine-month period CASM-Ex was 9.10 cents, versus 9.09 cents.
Material changes and notable items
- Revenue increased 7% in both the quarter and nine-month period. Q3 net income fell substantially year over year, chiefly reflecting about $1.1 billion of specified items excluded from management’s adjusted pretax measure.
- Q3 operating expenses included $570 million of restructuring and other items, mainly charges related to accelerated B-747-400 retirements and other fleet changes; $347 million of unfavorable fuel-hedge mark-to-market adjustments; and a $134 million loss on early debt extinguishment. The adjusted pretax reconciliation also includes $141 million for debt extinguishment and other items.
- Fuel expense, including regional carriers, rose 21% in Q3 to $3.444 billion, despite a 5% decline in market jet fuel price per gallon; management cited hedge mark-to-market effects and higher consumption. Adjusted fuel cost was $2.90 per gallon versus $2.97.
- Delta decided to retire its 16-aircraft B-747-400 fleet over four years and continued reducing 50-seat regional aircraft. It estimated an additional $50 million to $150 million of future charges from the leased 50-seat fleet restructuring.
- Debt reduction and refinancing lowered interest expense, but early repayment produced $263 million of debt-extinguishment losses for the nine months. Delta paid $905 million into qualified defined-benefit pension plans in early 2014, including $250 million above minimum requirements.
Outlook, management commentary and risks
- Management expected positive operating cash flow for the remainder of 2014 and said it expected to meet the next 12 months’ cash needs from operations, available cash and investments, and financing arrangements.
- Delta expected approximately $2.3 billion of 2014 investment, primarily in aircraft and modifications, funded through operating cash flow and new financing. Aircraft purchase commitments totaled approximately $8.5 billion at quarter-end.
- Management’s stated cost objective was to keep annual CASM-Ex growth below 2%. It projected an approximately 38% 2014 effective tax rate and said federal net operating loss carryforwards meant it expected no cash federal income taxes for several years.
- The company expected to return $2.75 billion to shareholders through 2016 under its increased dividend and new $2 billion repurchase authorization. It repurchased $600 million of shares and paid $176 million of dividends during the first nine months of 2014.
- Fuel-price volatility and hedge margin requirements could affect costs and liquidity. Delta reported $108 million of Venezuelan ticket-sale cash awaiting repatriation authorization and warned of further devaluation risk; service to Venezuela was reduced from daily to weekly.
- The refinery faced elevated renewable-fuel credit (RIN) prices and had accrued $79 million for unsettled 2013 and 2014 obligations; Delta said it was pursuing legal, regulatory and legislative remedies. Other cited pressures included currency weakness, geopolitical disruption to international routes, pension assumptions, and aircraft commitments.
- Delta said there were no material changes to the risk factors or legal proceedings described in its 2013 Form 10-K. It was evaluating the impact of the new revenue-recognition standard.
Important facts for investors to verify
- Reconcile GAAP earnings with management’s adjusted pretax results and assess how much of the Q3 charges are nonrecurring versus likely to recur.
- Track fuel prices, hedge settlements and mark-to-market volatility, including potential collateral or margin calls.
- Monitor progress and future costs of fleet retirements, aircraft purchases, and the refinery’s RIN obligations.
- Confirm recovery or further impairment risk for Venezuelan funds and assess the effects of currency and geopolitical exposure on international revenue.
- Evaluate debt reduction, pension funding, capital spending, and planned shareholder returns against ongoing liquidity and operating cash flow.