DAL

Delta Air Lines, Inc. - Q2 2010 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2010. Delta Air Lines, Inc. (Delta) operates scheduled air transportation for passengers and cargo globally. The reporting period follows the full integration of Northwest Airlines, which merged into Delta on December 31, 2009. The company is a large accelerated filer incorporated in Delaware.

Key Financial Metrics

Note: Operating cash flow for the quarter is estimated based on the six-month total of $2.0 billion and the quarterly net income trend, as the specific quarterly cash flow figure is not explicitly isolated in the text, though the six-month figure is provided.

Material Changes vs. Prior Period

• Profitability Turnaround: Delta reported a net income of $467 million for the quarter, a significant improvement from a net loss of $257 million in the same period in 2009. This $724 million swing was driven by improved industry revenue conditions and merger synergies.
• Revenue Growth: Total operating revenue increased 17% ($1.2 billion) in the quarter and 10% ($1.3 billion) for the six months compared to 2009. Passenger revenue per available seat mile (PRASM) improved 19% in the quarter.
• Fuel Costs and Hedging: While unhedged fuel prices increased 39% to $2.31 per gallon, the effective fuel price (including hedges) was $2.32 per gallon. Net fuel hedge costs were $14 million for the quarter, a massive improvement over the $390 million in fuel hedge losses recorded in Q2 2009.
• Cost Management: Consolidated operating cost per available seat mile (CASM) excluding fuel, profit sharing, and special items was 8.08 cents, flat compared to the prior year quarter despite lower capacity.

Guidance, Outlook, and Risks

• Merger Synergies: Management anticipates achieving $1.5 billion in annual merger synergies by the end of 2010 and $2.0 billion by 2011. $200 million in incremental synergies were realized in Q2 2010.
• Capital Investment: Delta plans to invest $1 billion through mid-2013 to improve the customer experience and fleet efficiency, including flat-bed seats on trans-oceanic aircraft and winglets.
• Legal Contingencies:
  • Northwest Cargo Antitrust: On July 30, 2010, a subsidiary entered a plea agreement regarding antitrust violations related to cargo rates (2004-2006) and agreed to pay a $38 million fine. Delta asserts no civil liability remains due to prior bankruptcy proceedings.
  • First Bag Fee Litigation: Delta is vigorously defending class action antitrust lawsuits regarding first checked bag fees filed in 2009.
• Operational Risks:
  • Fuel Volatility: Fuel prices remain a significant risk. As of June 30, 2010, Delta hedged approximately 50% of projected fuel requirements for the remainder of 2010.
  • Boeing 787 Delays: Boeing informed Delta it cannot meet the delivery schedule for 18 ordered B-787-8 aircraft; discussions are ongoing.
  • War-Risk Insurance: Government-provided war-risk insurance coverage was extended through August 31, 2010. Commercial alternatives may be costly or unavailable if government support ends.

Investor Verification Checklist

• Debt Maturities: Verify the schedule of debt maturities, noting $766 million due in the six months ending December 31, 2010, and $2.1 billion in 2011.
• Pension Funding: Confirm the $665 million contributed to defined benefit pension plans in the first half of 2010 satisfied minimum required contributions for the full year.
• Restructuring Charges: Review the $82 million in restructuring and merger-related charges for the quarter, including a $36 million impairment of retired B-747-200 aircraft.
• Contract Carrier Agreements: Assess the "Put Right" exposure with Chautauqua and Shuttle America, estimated at $180 million and $350 million respectively, if agreements are terminated without cause.
• Boeing 787 Dispute: Monitor the status of negotiations regarding the delayed delivery of 18 B-787-8 aircraft.