Delta Air Lines, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparison is with the three months ended March 31, 2010. Unaudited interim results; Delta cautions that seasonal demand, fuel-price volatility and other factors mean the quarter may not indicate full-year results.
Financial performance and position
| Metric | Q1 2011 | Q1 2010 / prior date |
|---|---|---|
| Operating revenue | $7.747 billion | $6.848 billion; up 13% |
| Operating income (loss) | $(92) million | $68 million |
| Net income (loss) | $(318) million | $(256) million |
| Basic and diluted loss per share | $(0.38) | $(0.31) |
| Operating margin | Approximately (1.2)% | Approximately 1.0% |
| Net cash from operating activities | $788 million | $966 million |
| Net cash used in investing activities | $576 million | $293 million |
| Net cash used in financing activities | $223 million | $367 million |
| Cash and cash equivalents | $2.881 billion at March 31 | $2.892 billion at December 31, 2010 |
| Unrestricted liquidity | $5.5 billion, including $1.6 billion of credit-facility availability | — |
| Total debt and capital leases | $15.2 billion at March 31 | $15.3 billion at December 31, 2010; down $83 million |
Passenger revenue rose 13% to $6.575 billion; cargo revenue increased 42% to $250 million. Fuel expense was $2.166 billion, up 29%. Consolidated CASM was 13.94 cents, versus 12.72 cents; CASM excluding fuel and special items, a non-GAAP measure, was 8.96 cents, up 2.8%. The passenger load factor declined to 76.4% from 79.5%. Stockholders’ equity was $758 million, down from $897 million at December 31, 2010.
Material changes and drivers
- Net loss widened by $62 million despite revenue growth. Management attributed results principally to approximately $600 million of higher fuel expense, partly offset by fare increases. Average fuel price, net of hedging, rose to $2.86 per gallon from $2.23.
- Severe winter storms and the Japan earthquake and tsunami reduced passenger revenue by approximately $90 million and $35 million, respectively. The Atlantic market also faced overcapacity that constrained fare increases against higher fuel costs.
- Passenger revenue benefited from demand and fare increases; total passenger revenue grew 13%. Mainline capacity rose 7%, while total passenger revenue per available seat mile increased 7%.
- Operating costs increased 16%, including higher fuel, contract-carrier expense and maintenance. Contract-carrier expense also reflects the post-sale accounting presentation for Compass and Mesaba, sold in July 2010.
- Q1 2011 included a $71 million income-tax benefit, primarily from alternative minimum tax refunds for 2008 and 2009; a $20 million loss on extinguishment of debt; and $7 million of restructuring and other charges. Q1 2010 had $54 million of restructuring and other charges.
Liquidity, debt and significant financing
Operating cash flow was $788 million, compared with $966 million, and included an $854 million increase in advance ticket sales for summer travel. Investing outflows included $274 million for flight equipment, $66 million for ground property and equipment, and $240 million of short-term investment purchases. Financing included $460 million of debt and capital-lease repayments, partly offset by $245 million of proceeds from long-term obligations.
During the quarter Delta amended its $250 million Pacific Routes term loan, reducing its rate and extending maturity to March 2016; the rate was 4.25% at quarter-end. It also issued aircraft-backed certificates. In April 2011, after quarter-end, Delta entered into up to $2.6 billion of senior secured credit facilities, retired its prior $2.5 billion exit financing facilities, and completed a $293 million aircraft-certificate offering. The new facilities impose financial, liquidity and collateral covenants, including a $1.0 billion minimum of unrestricted cash, cash equivalents and permitted investments and a 1.20:1 minimum fixed-charge coverage ratio. Delta reported compliance with financing covenants at March 31, 2011.
Outlook, management commentary and risks
- No specific full-year earnings or revenue guidance is provided in the filing. Management said higher fuel prices had caused it to revise plans for the remainder of 2011.
- Planned responses include fare increases, second-half capacity reductions—particularly in the Atlantic market and at Memphis—retirement of older aircraft, and a $300 million reduction in planned 2011 capital spending to $1.2 billion.
- Delta repositioned fuel hedges from primarily WTI exposure toward Brent and heating oil, using three-way collars. At March 31, 37% of projected fuel consumption for the remaining nine months of 2011 was hedged, including 29% through three-way collars. These collars cap protection against rising prices and expose Delta to market prices above preset ceilings; they do not qualify for hedge accounting, so fair-value changes affect earnings.
- Delta announced Japan capacity reductions and temporarily suspended Haneda service, with flights expected to resume in June 2011. The filing describes near-term uncertainty from Japan-related disruption and the potential use of larger aircraft on some Asia routes.
- Other exposures include fuel-price and hedge-margin volatility, pension and postretirement obligations, legal proceedings whose potential losses cannot always be estimated, and aircraft purchase commitments of $2.610 billion. Certain contract-carrier termination provisions could require aircraft purchases or leases if Delta terminates agreements without cause.
- The company had $11.487 billion of pension, postretirement and related benefit liabilities at quarter-end. Government-provided war-risk insurance was extended through September 30, 2011; loss of that coverage could raise costs or affect operations.
Most 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.
- Whether the revised hedge portfolio provides effective protection; review collar ceilings and floors, hedge-margin requirements and the disclosed fuel-price sensitivity scenarios.
- Whether $5.5 billion of stated unrestricted liquidity remains adequate after distinguishing cash and investments from facility availability, and whether the new credit covenants remain satisfied.
- How Japan disruption, Atlantic overcapacity and winter-related operational impacts develop, including the timing of Haneda service resumption.
- The refinancing and repayment requirements for aircraft debt maturing in September 2011, and the terms and collateral constraints of the April 2011 facilities.
- Whether aircraft commitments, pension obligations, and legal or contract-carrier contingencies change materially.