Delta Air Lines, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparative period is Q1 2013. Amounts are in U.S. dollars. The interim financial statements are unaudited; the independent accountant performed a review, not an audit.
Financial performance
- Revenue: $8.916 billion, up 5% from $8.500 billion. Passenger revenue rose 5% to $7.677 billion; cargo revenue fell 9% to $217 million, while other revenue increased 8% to $1.022 billion.
- Profit: Operating income was $620 million, versus $222 million. Net income was $213 million, or $0.25 per diluted share, versus $7 million, or $0.01 per diluted share. Pre-tax income was $335 million versus $3 million.
- Margins: Operating margin was approximately 7.0%, versus 2.6% in Q1 2013; pre-tax margin was approximately 3.8%, versus near zero. Management reported four percentage points of pre-tax margin expansion.
- Costs and operating metrics: Operating expense was $8.296 billion, up less than 1%. CASM decreased 1% to 15.39 cents; CASM-Ex, a non-GAAP measure, was nearly flat at 9.77 cents. Passenger revenue per available seat mile increased 3%, and load factor rose to 82.7% from 81.2%.
- Fuel: Consolidated fuel expense, including regional carriers, was $2.699 billion, down $109 million. Average fuel price was $3.06 per gallon versus $3.21; adjusted fuel price was $3.03 versus $3.24. Delta recorded $78 million in fuel hedge gains, including $34 million of mark-to-market adjustments. The refinery reported a $41 million loss.
- Cash flow: Operating cash flow was $951 million, down from $1.004 billion. Investing cash use was $563 million and financing cash use was $533 million. Capital expenditures were $614 million. Cash and cash equivalents ended at $2.699 billion, down $145 million from year-end.
- Liquidity: Unrestricted liquidity was $5.6 billion, comprising $3.7 billion of cash, cash equivalents and short-term investments, plus $1.9 billion of undrawn revolving credit capacity.
- Debt and balance sheet: Debt and capital lease obligations were approximately $11.0 billion, down $298 million from December 31, 2013. Total assets were $52.167 billion; current liabilities were $15.010 billion. Delta reported compliance with all financing covenants.
Material changes and notable items
- Operating income improved by $398 million year over year, while net income increased by $206 million. Management attributed improved results principally to higher revenue and lower fuel costs.
- Severe winter weather caused more than 17,000 flight cancellations in the first two months of 2014. Management estimated a $55 million pre-tax impact and a $90 million revenue impact.
- Operating costs included $99 million of profit sharing, up from $20 million, and $49 million of restructuring and other charges, down from $102 million. Delta recorded an $18 million loss on debt extinguishment and a $23 million Venezuela-related devaluation charge.
- Delta contributed $605 million to qualified defined benefit pension plans during the quarter and another $300 million in April, accelerating its required 2014 contributions and funding $250 million above minimum requirements.
- Delta repurchased four million shares for $125 million and paid $51 million in dividends. Cumulative repurchases under the $500 million authorization reached $375 million; management expected to complete the authorization in the June quarter.
Outlook, management commentary and risks
- Delta expected positive operating cash flow for the remainder of 2014 and approximately $2.2 billion of 2014 investment, primarily in aircraft and modifications. Management targeted non-fuel unit-cost growth below 2% annually.
- Fleet renewal and retirement of older leased aircraft are expected to improve efficiency, but Delta estimated an additional $150 million to $250 million of future fleet restructuring charges beyond the $49 million recorded this quarter.
- Future aircraft purchase commitments totaled approximately $8.7 billion. Long-term financing commitments covered a substantial portion, but not the purchase price of 18 B-787-8 aircraft.
- The refinery’s RIN compliance costs are a material uncertainty: Delta recorded $34 million of RIN expense in the quarter and warned that high prices or limited availability could materially affect results and cash flows.
- Venezuela exposure included $122 million of 2013-related receivables awaiting repatriation authorization, valued at the official exchange rate, and $59 million of Q1-related amounts awaiting authorization, valued at the SICAD rate. Delta warned of potential further devaluation.
- Fuel-price movements can materially affect expenses and cash flows; hedge contracts may require significant margin postings. Delta also cited seasonality, pension obligations, liens on assets and financing availability as liquidity considerations.
- Effective January 1, 2015, SkyMiles was to shift from distance-based to ticket-price-based mileage earning, with changes to award redemption options. Delta said the changes were intended to improve customer rewards and award availability.
- Delta stated that its Q1 operating results are not necessarily indicative of full-year results because of seasonality, fuel-price volatility and other factors. It gave no specific full-year earnings guidance in the supplied filing text.
Important facts for investors to verify
- Whether revenue growth and improved margins persist after the effects of severe winter weather and lower fuel prices.
- The sensitivity of earnings and liquidity to jet-fuel prices, hedge settlements, margin requirements and refinery performance, including RIN costs.
- Collection and exchange-rate treatment of the Venezuelan receivables and any further currency restrictions or devaluations.
- Funding and cash-flow implications of aircraft commitments, pension contributions and planned capital expenditures.
- The timing and ultimate cost of fleet retirements and restructuring, and progress on the share-repurchase authorization.