Delta Air Lines, Inc. — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. Delta provides scheduled passenger and cargo air transportation. The results include Northwest, acquired in 2008; Northwest Airlines, Inc. merged into Delta at the end of 2009.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Operating revenue | $8,950 | $7,574 | $23,966 | $21,258 |
| Operating income (loss) | $1,003 | $204 | $1,923 | $(278) |
| Operating margin | 11.2% | 2.7% | 8.0% | (1.3)% |
| Net income (loss) | $363 | $(161) | $574 | $(1,212) |
| Diluted earnings (loss) per share | $0.43 | $(0.19) | $0.68 | $(1.47) |
| Cash from operating activities | Quarterly figure: $514 | Not stated | $2,514 | $1,452 |
- Revenue and demand: Q3 revenue rose 18%; passenger revenue increased 19% on 2% higher capacity. Passenger yield and PRASM each rose 16%, while load factor was essentially flat at 85.9%. Management attributed the improvement primarily to stronger business travel and higher fares. Nine-month revenue increased 13%.
- Costs and margins: Q3 operating expenses rose 8%, slower than revenue growth. Fuel expense increased $50 million year over year; employee profit-sharing expense was $185 million, versus none in 2009. CASM excluding fuel, profit sharing, restructuring and merger-related items was 7.84 cents, roughly flat with 7.82 cents a year earlier (non-GAAP measure).
- Fuel: Q3 average fuel price, net of hedging, was $2.29 per gallon versus $2.13; unhedged price rose 17%. Net fuel hedge costs were $64 million in Q3 and $90 million for the nine-month period, compared with $226 million and $1.3 billion of losses, respectively, in the comparable 2009 periods.
- Cash flow and investment: Nine-month operating cash flow was $2.514 billion. Investing used $1.357 billion, including $921 million in property and equipment additions; financing used $2.328 billion, including $2.546 billion of debt and lease repayments. Cash and cash equivalents declined $1.171 billion to $3.436 billion.
- Debt and liquidity: Debt at par was $15.715 billion; net carrying amount was $14.714 billion, including $1.001 billion of unamortized discount. At September 30, unrestricted liquidity was $5.5 billion: $3.9 billion of cash and short-term investments plus $1.6 billion of undrawn revolving facilities. Delta reported compliance with financing covenants. Current liabilities of $11.820 billion exceeded current assets of $7.321 billion.
Material changes and significant transactions
- Q3 net income improved from a loss to profit, and nine-month operating results turned positive. The comparisons reflect a recovering airline revenue environment and significantly lower fuel-hedge losses than in 2009.
- Q3 included a $360 million loss on extinguishment of debt, primarily non-cash, including a $288 million write-off of purchase-accounting debt discounts. Debt-reduction actions included repurchases, redemptions, vendor-negotiated debt relief and restructuring of $783 million of existing debt; the company said these initiatives reduced scheduled maturities by $688 million.
- Delta sold Compass and Mesaba in July and entered into new or amended capacity-purchase agreements. These agreements increased aggregate minimum fixed obligations by $1.1 billion over ten years.
- Delta recorded a $146 million Q3 impairment charge, primarily for the planned retirement of older Comair CRJ-100/200 aircraft, and $53 million of merger-related costs. Q3 restructuring and merger-related expense totaled $206 million, including $7 million of severance.
- The American Express SkyMiles agreement was modified, extending the usage period and deferring certain debt maturities. Delta also issued $450 million of 2010-1 pass-through certificates at a fixed 6.2% rate.
Outlook, risks and contingencies
- Outlook: No specific earnings or revenue guidance is provided. Delta expected to meet cash needs for the next 12 months from operating cash flow, cash and investments, and financing arrangements. Management said the revenue environment was improving but remained weaker than before the recession, and fuel prices were rising.
- Delta hedged 64% of projected fuel requirements for Q4 2010 and 39% for 2011; exposure to fuel prices remains material. Results are also subject to seasonal demand, weather and economic conditions.
- Delta planned approximately $1.2 billion of JFK terminal redevelopment over three to five years, with most expected to be funded by Port Authority special project bonds. It also planned $1 billion of customer and fleet improvements through mid-2013.
- Aircraft purchase commitments totaled approximately $2.86 billion, largely associated with deferred Boeing 787 deliveries. Minimum fixed obligations under the revised regional carrier agreements increased by $1.1 billion over ten years. Certain regional-carrier aircraft put rights could create additional payments; estimated aircraft fair values were $180 million for Chautauqua and $350 million for Shuttle America, plus specified equity-related amounts and interest if exercised.
- Risks include the potential cost or availability of commercial war-risk insurance after government coverage was scheduled to expire December 31, 2010; labor representation elections; reliance on third-party regional carriers; and legal proceedings. In the first-bag-fee antitrust litigation, the court dismissed the Section 2 claim against Delta but allowed the Section 1 claim to proceed; class certification remained pending.
- Management said disclosure controls were effective as of September 30, 2010. The independent accountant’s interim review was not an audit and expressed no audit opinion.
Most important facts for investors to verify
- Whether revenue and yield improvements continue and exceed the effects of fuel-price increases and other cost growth.
- The composition and sustainability of operating cash flow, including seasonal ticket-sale and working-capital effects, and the trend in unrestricted liquidity.
- Debt maturities, the terms and realized benefits of debt restructuring, and the effect of the $360 million extinguishment loss on reported versus underlying results.
- Execution, funding and total obligations associated with regional carrier agreements, aircraft commitments, the Comair fleet reduction and JFK redevelopment.
- Fuel-hedge coverage, contract values and sensitivities, alongside the company’s exposure to unhedged fuel costs.