Delta Air Lines, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2011. The interim financial statements are unaudited.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Operating revenue | $9.816 billion | $8.950 billion | $26.716 billion | $23.966 billion |
| Operating income | $860 million | $1.003 billion | $1.249 billion | $1.923 billion |
| Net income | $549 million | $363 million | $429 million | $574 million |
| Diluted EPS | $0.65 | $0.43 | $0.51 | $0.68 |
| Operating cash flow | — | $1.676 billion | $2.514 billion |
Q3 operating margin was 9%, versus approximately 11% in the prior-year quarter (calculated from reported revenue and operating income). For the first nine months, operating income declined despite higher revenue. Q3 net income rose largely because the prior-year quarter included a $360 million loss on extinguishment of debt; operating income itself fell by $143 million.
- Q3 passenger revenue increased 10%; total operating revenue increased 10%. Passenger yield rose 11%, while capacity declined 1% and load factor increased 0.2 percentage point to 86.1%.
- Fuel and related taxes rose 42% in Q3 to $2.881 billion. Average fuel price was $3.29 per gallon, versus $2.29; the adjusted price excluding certain hedge mark-to-market effects was $3.09.
- Consolidated CASM increased to 14.16 cents from 12.48 cents. Non-GAAP CASM-Ex was 8.10 cents, up 3.3% from 7.84 cents.
- At September 30, cash and cash equivalents were $2.307 billion and short-term investments were $958 million. Unrestricted liquidity, including $1.8 billion of undrawn credit availability, was $5.1 billion.
- Total debt and capital leases, including current maturities, were approximately $14.5 billion, down $758 million from year-end 2010. Net carrying debt was $13.750 billion; fair value was $14.2 billion.
Material changes and financing
- For the first nine months, operating expenses increased 16%, including a 36% increase in fuel expense. Management attributed the fuel increase principally to higher prices; revenue increases reflected fare actions and stronger yields.
- Operating cash flow declined to $1.676 billion from $2.514 billion. Investing activities used $1.086 billion and financing activities used $1.175 billion; cash and cash equivalents fell by $585 million during the period.
- Delta refinanced prior secured exit facilities with new first-lien facilities of up to $2.6 billion: a $1.4 billion term loan was outstanding and the $1.2 billion revolver was undrawn at quarter-end. The term loan rate was 5.5%; the facilities have financial, liquidity and collateral covenants. Delta reported compliance with all financing covenants.
- Debt reduction included repayment of the 2001-1 aircraft trust certificates and new aircraft-backed financing. The Pacific Routes Term Loan Facility was amended, including a maturity extension to March 2016.
- Stockholders’ equity was $1.222 billion, compared with $897 million at December 31, 2010. The company issued shares during the period to settle remaining bankruptcy claims.
Outlook, commentary and risks
- Management planned to reduce December-quarter system capacity 4–5% year over year, including domestic capacity reductions of 3–5% and transatlantic reductions of 10–12%, while continuing fare actions and retiring less-efficient aircraft. These are operating plans, not earnings guidance; the filing provides no specific earnings forecast.
- Delta entered an agreement to buy 100 Boeing 737-900ER aircraft, with deliveries scheduled from 2013 through 2018. Total aircraft purchase commitments were $6.850 billion, and management said long-term financing was committed for a substantial portion of the new aircraft purchase price.
- Management cited fuel-price volatility, economic conditions and seasonal travel demand as significant uncertainties. Fuel hedges can require margin postings; after discontinuing hedge accounting for existing fuel derivatives in June, subsequent fair-value changes on those instruments are recognized in earnings. Q3 included $208 million of fuel-hedge mark-to-market losses recorded outside settlement periods.
- The filing describes legal matters for which potential losses cannot be reasonably estimated in some cases. It also discloses conditional aircraft-related obligations tied to possible termination of certain contract-carrier agreements.
- Management expected to meet cash needs for the next 12 months from operating cash flows, existing liquidity and financing arrangements, while noting that liens on substantially all assets could constrain additional financing. Results may not be indicative of full-year performance.
Important facts for investors to verify
- Whether fare increases and planned capacity cuts can offset fuel costs without materially weakening demand, yields or load factors.
- The trajectory of cash generation and liquidity, including the effect of debt service, aircraft spending and potential hedge-margin requirements.
- Compliance with secured-credit-facility liquidity, fixed-charge and collateral coverage tests, and the impact of pledged assets on future financing options.
- Execution, financing and returns from the 100-aircraft Boeing order and the broader $6.850 billion aircraft commitment program.
- Potential effects of fuel-hedge accounting changes, deferred SkyMiles revenue estimates, and legal or contract-carrier contingencies on future results.