Delta Air Lines, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Delta operates an airline business and an oil refinery. Interim financial statements were reviewed by Ernst & Young, not audited; results are seasonal and are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Operating revenue | $10.707B | $10.621B | $20.095B | $19.537B |
| Operating income | $2.474B | $1.579B | $3.872B | $2.199B |
| Income before taxes | $2.366B | $1.298B | $3.552B | $1.633B |
| Net income | $1.485B | $801M | $2.231B | $1.014B |
| Diluted EPS | $1.83 | $0.94 | $2.72 | $1.19 |
| Operating margin | 23.1% | 14.9% | 19.3% | 11.3% |
Operating margins are calculated from reported operating income and revenue. Q2 passenger revenue declined 1%, while other revenue rose 21%, principally on refinery product sales and loyalty program revenue. Q2 passenger revenue per available seat mile fell 4.6%; load factor was 85.6%, down 0.7 percentage points.
Costs and fuel: Q2 operating expense declined 9% to $8.233B, primarily as fuel expense fell. Consolidated CASM was 12.88 cents, down 12.0%; non-GAAP CASM-Ex was 8.91 cents, down 0.8%. Q2 fuel expense including regional carriers was $1.752B, down 40%; adjusted average fuel cost was $2.40 per gallon. For the first half, reported fuel expense was $3.851B, down 32%, while adjusted average fuel cost was $2.65 per gallon.
Cash flow and capital allocation: First-half operating cash flow was $4.381B, versus $3.007B. Capital expenditures were $1.505B. Financing cash outflow was $2.409B, including $1.350B of share repurchases, $634M of debt and lease payments, and $147M of dividends. Cash and cash equivalents ended at $2.293B, compared with $2.088B at year-end 2014.
Liquidity and debt: Delta reported $5.7B of unrestricted liquidity, including $3.8B of cash and short-term investments and $2.0B of undrawn revolving credit facilities. Principal debt and capital leases were $9.3B at June 30, down from $9.9B at December 31, 2014; the company said it reduced these obligations by $593M during the first half. The balance sheet reports $9.257B in current and noncurrent debt and capital leases. Delta was in compliance with financing covenants.
Balance sheet highlights: Total assets were $52.781B, compared with $54.121B at year-end; total stockholders’ equity was $9.563B, versus $8.813B. Pension, postretirement and related benefit liabilities were $13.869B, down from $15.138B.
Material changes and management commentary
- Management attributed the sharp improvement in operating income mainly to lower fuel prices and cost execution. Q2 pre-tax income was $2.366B; pre-tax income adjusted for special items, a non-GAAP measure, was $1.640B versus $1.438B in Q2 2014. The filing’s reconciliation includes a $720M fuel hedge mark-to-market and settlement adjustment.
- International revenue remained under pressure from the stronger U.S. dollar and lower fuel surcharges. Management planned targeted international capacity reductions in the second half of 2015, including winter capacity reductions in the Pacific. Latin America capacity growth was expected to move closer to the system average.
- Delta removed 30 50-seat regional aircraft in the first half as part of fleet restructuring. It cited pay increases and higher crew block hours as contributors to increased salary costs, partly offsetting fuel savings.
- The refinery reported Q2 profit of $90M and first-half profit of $176M, versus $13M and a $28M loss, respectively, in the comparable 2014 periods. Management cited improved crack spreads, lower-priced domestic crude, operational reliability and throughput.
Outlook, commitments and risks
- Delta expected to meet cash needs for the next 12 months from operating cash flows, cash and investments, and financing arrangements; it also expected positive operating cash flow for the remainder of 2015. Management forecast approximately $2.8B of 2015 investment, primarily aircraft and fleet modifications, funded through operating cash flows.
- Management projected a 2015 effective tax rate of approximately 38% and said roughly $11B of U.S. federal pre-tax net operating loss carryforwards meant it did not expect to pay federal income taxes during the next few years.
- The board approved a 50% increase in the quarterly dividend to $0.135 per share beginning in the September 2015 quarter and a new $5B repurchase authorization, to be completed no later than December 31, 2017.
- Aircraft purchase commitments totaled approximately $13.0B, with long-term financing commitments covering a substantial portion, but not all, of the purchase price. Management noted further fleet restructuring could result in additional lease termination and other charges.
- Fuel price exposure remains significant. Delta recorded $313M of fuel hedge losses in the first half and had posted $134M of hedge margin at June 30. Its sensitivity analysis estimated that, from July 2015 through December 2016, a 20% rise in fuel prices would increase net fuel costs by $1.740B after projected hedge effects; a 20% decline would reduce net costs by $2.040B. These are hypothetical estimates, not forecasts.
- $85M of unrestricted cash related primarily to Venezuelan ticket sales remained in the country pending repatriation authorization and was exposed to potential further devaluation. Delta also planned, subject to definitive agreements and regulatory approvals, to invest up to $56M in GOL preferred shares and guarantee up to $300M of GOL borrowings.
- Delta reported no material changes to the legal proceedings or risk factors described in its 2014 Form 10-K. It stated that certain legal losses cannot be reasonably estimated and that existing proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether fuel-price movements, hedge settlements and mark-to-market adjustments continue to materially affect reported earnings and cash requirements.
- Whether passenger yields and international unit revenues stabilize after planned capacity adjustments, and whether lower fuel costs persist.
- Execution, financing and cash-flow implications of the aircraft commitments, planned 2015 capital spending and fleet restructuring.
- Progress on the $5B repurchase program, the higher dividend, and the proposed GOL investment and guarantee.
- Repatriation of the $85M Venezuelan cash balance and any material developments in legal, pension, or other contingent obligations.