Delta Air Lines, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. The interim statements received an independent accountant’s review, not an audit.
Business context and results
Delta operates an airline and refinery segment. Management attributed the quarter’s revenue growth mainly to strong travel demand and 17% capacity growth. International demand was particularly strong, and premium-product revenue grew faster than main-cabin revenue.
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Operating revenue | $15.578B | $13.824B | $28.337B | $23.173B |
| Operating income | $2.491B | $1.519B | $2.215B | $0.735B |
| Net income (loss) | $1.827B | $0.735B | $1.464B | $(0.205)B |
| Diluted EPS | $2.84 | $1.15 | $2.28 | $(0.32) |
| Operating margin | 16.0% | 11.0% | 7.8% | 3.2% |
| Net margin | 11.7% | 5.3% | 5.2% | (0.9)% |
Passenger revenue rose 21% in Q2 and 32% in the first half. Q2 premium ticket revenue increased 25%; main-cabin ticket revenue rose 18%. Cargo revenue fell 37% in Q2. Total revenue includes third-party refinery sales, which declined with lower pricing.
Cash flow, debt and liquidity
- First-half operating cash flow was $4.843B, versus $4.306B a year earlier. First-half investing cash use was $2.482B and financing cash use was $3.010B.
- Q2 operating cash flow was $2.609B. Management-reported free cash flow, a non-GAAP measure, was $1.094B for the quarter.
- At June 30, cash and cash equivalents were $2.668B and short-term investments were $3.368B. Management reported liquidity of $8.8B, including $2.8B available under revolving credit facilities.
- Debt carrying value was $18.636B; principal debt and finance lease obligations were reported as $20.3B. Delta paid $3.0B on debt and finance lease obligations in the first half, including early repayments and repurchases. Debt agreements were in compliance with covenants.
- Capital expenditures were $2.5B in the first half. Aircraft purchase commitments totaled approximately $18.5B at quarter-end.
Changes versus prior comparable periods
- Q2 operating revenue increased 13%, while operating income rose $972M. Operating expense increased 6%; capacity growth, employee costs and profit sharing were partly offset by lower fuel expense.
- Q2 fuel expense fell $707M, principally reflecting a 38% decrease in market jet-fuel prices, partly offset by higher consumption. Total operating cost per available seat mile fell 9%; non-fuel CASM-Ex, a non-GAAP measure, rose 2.4%.
- First-half revenue increased 22% and operating expense increased 16%. First-half fuel expense was down 2%; non-fuel CASM-Ex rose 4%.
- Investment results improved: Q2 recorded a $128M gain versus a $221M loss in 2022; first-half gains were $251M versus losses of $368M. These valuation-sensitive gains contributed to reported earnings.
Outlook, commentary and risks
- Delta expects positive operating cash flow for the remainder of 2023 and says it expects to meet liquidity needs for the next 12 months using cash, short-term investments and operating cash flow. It expects full-year system capacity to increase versus 2022.
- Management projected a 2023 effective tax rate of 22%–25%. It cautioned that jet-fuel prices are expected to remain volatile.
- A planned refinery turnaround was scheduled to begin in mid-September 2023, last about two months and halt refinery production during that period.
- The new four-year pilot agreement, effective January 1, 2023, included an initial 18% pay-rate increase, a $735M one-time ratification payment and approximately $130M of benefit-related adjustments. These were recorded in Q1; first-half pilot-agreement expense was $864M. First-half profit-sharing expense was $667M.
- Delta expected approximately $5.5B of 2023 capital spending, excluding the LaGuardia project. It estimated LaGuardia project costs at $4.3B and bears construction and potential cost-overrun risk. Delta also guarantees obligations tied to the LAX terminal redevelopment financing.
- Legal proceedings and risk factors were reported as not materially changed from the 2022 Form 10-K. Management said current legal matters were not expected to have a material adverse effect, while noting outcomes cannot be predicted with certainty.
- Management reported disclosure controls were effective at June 30, 2023, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sustained passenger demand, capacity growth and premium-fare trends support revenue and margin performance beyond this seasonal quarter.
- How fuel-price volatility and the refinery turnaround affect costs, refinery earnings and airline fuel supply.
- Cash generation, liquidity and debt reduction relative to aircraft commitments, planned capital spending and airport-project obligations.
- The ongoing cost effects of pilot-agreement pay increases and profit sharing, distinct from the one-time Q1 ratification expense.
- The sustainability of earnings, including the impact of investment valuation gains, and progress against management’s stated tax and cash-flow outlook.