Delta Air Lines, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; compared with Q1 2011 unless otherwise noted. Financial statements are unaudited. Delta cautions that seasonal travel demand, fuel-price volatility and other factors mean quarterly results may not indicate full-year performance.
Financial results and position
- Revenue: $8.413 billion, up 9% from $7.747 billion. Passenger revenue rose 10% to $7.226 billion; cargo revenue fell 2% to $244 million.
- Profitability: Operating income was $382 million, versus an operating loss of $92 million. Net income was $124 million ($0.15 per diluted share), versus a net loss of $318 million ($0.38 per diluted share). Operating margin was approximately 4.5%, compared with negative 1.2%.
- Costs and operating metrics: Operating expenses increased 2% to $8.031 billion. Fuel expense, including contract carriers, rose 5% to $2.759 billion; average fuel cost was $3.11 per gallon versus $2.86. Capacity fell 3%, traffic rose 1%, passenger yield increased 9%, and passenger load factor improved to 79.7% from 76.4%. CASM rose 6% to 14.76 cents; CASM-Ex, a non-GAAP measure, rose 3.6% to 9.28 cents.
- Cash flow: Operating cash flow was $831 million, up from $788 million. Investing activities used $349 million, versus $576 million; financing activities used $228 million, versus $223 million. Cash and cash equivalents ended the quarter at $2.911 billion, up $254 million during the quarter.
- Liquidity and debt: Unrestricted liquidity was $5.7 billion, including $1.8 billion available under credit facilities. Debt and capital leases totaled $13.4 billion, down $415 million from year-end 2011. Delta said it was in compliance with financing covenants.
- Balance sheet: Total assets were $44.189 billion. Stockholders’ deficit was $1.011 billion. Pension, postretirement and related benefit liabilities were $13.905 billion.
Material changes and management commentary
- Revenue growth was driven by higher passenger yield and stronger passenger demand, despite reduced capacity. Management cited fare increases, fuel surcharges, corporate travel contracts and improved Pacific demand; Atlantic capacity was reduced in underperforming markets.
- Higher fuel prices and maintenance and employee costs contributed to expense growth. Lower fuel consumption and reduced weather-related costs partly offset the increases.
- Delta reduced total debt and capital leases by $415 million. It contributed $324 million to defined benefit pension plans in Q1 and another $354 million in April, saying this satisfied its 2012 minimum required contributions on an accelerated basis.
- Delta continued expanding its New York strategy: it began service to 12 new markets from LaGuardia in March and expected a 60% increase in LaGuardia service by summer 2012. It was also progressing with a five-year, $1.2 billion JFK renovation, with Terminal 4 expansion expected to finish in summer 2013.
- Management expected to meet cash needs for the next 12 months through operating cash flow, cash and investments, and financing arrangements. The filing gives no specific earnings or full-year financial guidance.
Outlook, risks and unusual items
- Fuel and hedging: Fuel represented 34% of Q1 operating expense, including $196 million of net hedge gains. Delta no longer applies hedge accounting to new fuel derivative contracts; fair-value changes are recorded in earnings. Fuel prices and hedge-margin requirements could materially affect results and liquidity. At March 31, Delta had paid $100 million in margin and received $34 million from counterparties.
- Tax valuation allowance: Delta maintained a full valuation allowance of $10.5 billion against net deferred tax assets despite moving to a cumulative three-year income position. It said sustained profitability could lead it to reassess the allowance. It also anticipated a $321 million noncash tax expense in Q4 2012 as specified deferred tax amounts are recognized, unless circumstances change.
- Restructuring and other items: Q1 included a $39 million gain recognized from a LaGuardia/Reagan National slot exchange, partly offset by $27 million of facilities, fleet and other costs, for a net $12 million benefit. Delta expected to record severance and retiree-healthcare charges in Q2 after a voluntary workforce-reduction enrollment period ends.
- Commitments and contingencies: Aircraft purchase commitments totaled approximately $6.8 billion, with committed long-term financing for a substantial portion. Delta reported legal proceedings but said their resolution was not expected to have a material adverse effect; some potential losses could not be estimated. Government-provided war-risk insurance was extended through September 30, 2013; loss of that coverage could increase costs or disrupt operations.
- Contract-carrier exposure: Pinnacle Airlines and related entities filed for bankruptcy in April 2012. Delta did not expect a material effect on operations or financial statements.
- Other balance-sheet consideration: A significant portion of Delta’s assets were subject to liens, which could adversely affect its ability to obtain additional financing on acceptable terms.
Most important facts for investors to verify
- Whether passenger revenue and yield gains persist as capacity and demand change, and whether Delta can absorb fuel-price increases.
- Whether Q1 cash generation and the stated $5.7 billion of unrestricted liquidity remain adequate after pension funding, capital spending and debt maturities.
- Whether fuel-hedge fair-value movements, margin calls and the planned recognition of fuel-hedge balances materially affect later-period earnings or cash flows.
- Whether sustained profitability supports a deferred-tax valuation-allowance release, and whether the anticipated Q4 2012 tax expense occurs.
- The eventual cost of workforce-reduction programs, aircraft commitments and other contingencies, and the operational impact, if any, of Pinnacle’s bankruptcy.