Business Context and Reporting Period
Company: Delta Air Lines, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Context: Delta operates as the world's largest airline following its merger with Northwest Airlines, completed on October 29, 2008. The financial results for the three and nine months ended September 30, 2009, include Northwest's operations, whereas the comparable 2008 periods under GAAP do not. The company is navigating a global economic recession, which has significantly reduced demand for air travel, alongside volatile fuel prices and ongoing merger integration costs.
Key Financial Metrics
| Metric (in millions) | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Total Operating Revenue | $7,574 | $21,258 |
| Operating Income (Loss) | $204 | $(278) |
| Net Loss | $(161) | $(1,212) |
| Operating Cash Flow | N/A | $1,452 |
| Cash and Cash Equivalents (Sep 30, 2009) | $5,396 | $5,396 |
| Total Debt (Carrying Amount) | $17,187 | $17,187 |
| Stockholders' Equity | $900 | $900 |
Key Operational Statistics (Three Months Ended Sep 30, 2009):
- Passenger Load Factor: 85.8%
- Passenger Mile Yield: $12.22
- PRASM (Revenue per Available Seat Mile): $10.48
- CASM (Cost per Available Seat Mile): $11.84
- Average Fuel Price (net of hedging): $2.13 per gallon
Material Changes vs. Prior Comparable Period
Revenue: Total operating revenue increased by $1.855 billion (32%) for the quarter and $5.274 billion (33%) for the nine months compared to 2008. This increase is primarily driven by the inclusion of Northwest Airlines' operations following the merger. Excluding Northwest, revenue declined due to reduced capacity and lower yields caused by the recession.
Expenses: Total operating expenses increased by $1.782 billion for the quarter and decreased by $1.665 billion for the nine months. The nine-month decrease is largely due to a $7.296 billion non-cash impairment of goodwill and intangible assets recorded in the first half of 2008, which did not recur in 2009. Fuel expenses decreased significantly year-over-year due to lower crude oil prices, partially offset by fuel hedge losses.
Profitability: The company reported an operating income of $204 million for the quarter, compared to $131 million in the prior year. However, the nine-month period resulted in an operating loss of $278 million, compared to a loss of $7.217 billion in 2008 (heavily impacted by the goodwill impairment). Net loss for the quarter was $161 million, compared to $50 million in 2008.
Debt and Liquidity: In September 2009, Delta borrowed $2.1 billion under new financing agreements (Senior Secured Credit Facilities, Senior Secured Notes, and Senior Second Lien Notes) to repay the Bank Credit Facility due in 2010 and for general corporate purposes. Cash and cash equivalents increased to $5.396 billion from $4.255 billion at year-end 2008.
Guidance, Outlook, and Risks
Outlook: Management expects system capacity in 2010 to be approximately 3% lower than in 2009. The company is focusing on disciplined spending, productivity initiatives, and accelerating merger synergies, targeting over $700 million in synergy benefits for 2009 and $2 billion annually by 2012.
Management Commentary:
- Merger Integration: The company is integrating operations, technologies, and workforces. Full realization of synergies depends on receiving a single operating certificate (expected end of 2009) and resolving labor representation issues.
- Fuel Hedging: Fuel expense for the quarter included $226 million in losses from the fuel hedge program. The company maintains a significant hedge position to manage price volatility.
- Cost Management: CASM excluding fuel and special items increased 2% compared to the combined 2008 quarter, primarily due to higher pension expenses resulting from declines in pension trust asset values.
Risks and Contingencies:
- Fuel Price Volatility: Results are materially impacted by fuel prices. While prices have fallen from 2008 peaks, they have risen 58% since December 2008.
- Debt Covenants: New financing agreements include strict financial covenants, including minimum fixed charge coverage ratios and collateral coverage ratios. Failure to maintain these could trigger defaults.
- Legal Proceedings: The company is defending against antitrust lawsuits regarding baggage fees and passenger surcharges. A settlement regarding Cincinnati Airport bonds is pending a Supreme Court petition.
- Pension Funding: Declines in investment markets have increased funding requirements for defined benefit pension plans, estimated at $200 million for 2009 and $650 million for 2010.
Investor Verification Checklist
- Merger Synergy Realization: Verify progress on the single operating certificate and labor union integration to ensure the $2 billion annual synergy target is achievable.
- Debt Covenant Compliance: Monitor the company's ability to maintain the required collateral coverage ratios and fixed charge coverage ratios under the new $2.1 billion financing agreements.
- Fuel Hedge Exposure: Assess the impact of future fuel price movements on the company's hedge portfolio, given the significant losses recorded in the current period.
- Pension Funding Obligations: Track the actual funding requirements for pension plans against the $200 million (2009) and $650 million (2010) estimates, as market performance could alter these figures materially.
- Legal Outcomes: Monitor the status of the Cincinnati Airport bond settlement appeal and the antitrust litigation regarding baggage fees for potential financial impact.