Delta Air Lines, Inc. — Q1 2019 Form 10-Q
Business context and period: Delta reported unaudited consolidated results for the three months ended March 31, 2019, compared with Q1 2018. Results are seasonal and are not necessarily indicative of full-year performance. The independent accountant performed an interim review, not an audit.
Key financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Operating revenue | $10.472 billion | $9.968 billion | +5.1% |
| Operating income | $1.020 billion | $844 million | +$176 million |
| Operating margin | 9.7% | 8.5% | +1.2 percentage points |
| Income before tax | $946 million | $732 million | +$214 million |
| Adjusted pre-tax income (non-GAAP) | $832 million | $683 million | +$149 million |
| Net income | $730 million | $557 million | +31% |
| Diluted EPS | $1.09 | $0.79 | +$0.30 |
| Operating cash flow | $1.951 billion | $1.372 billion | +$579 million |
Passenger revenue rose 5.6% to $9.254 billion; premium-cabin and business-product ticket revenue increased 7.8%. Total operating expenses rose 3.6% to $9.452 billion. CASM declined 1.4% to 15.14 cents, while non-fuel CASM-Ex (non-GAAP) declined 0.2% to 11.06 cents. Fuel expense increased 6.6% to $1.978 billion; adjusted fuel cost per gallon was $2.05 versus $2.01.
Cash and cash equivalents were $1.910 billion at March 31, 2019. Management reported $4.9 billion of unrestricted liquidity, including $3.0 billion of undrawn revolving credit. Total debt was $10.389 billion carrying value; debt and finance-lease principal was reported as $10.7 billion. Debt increased during the quarter, including a $700 million unsecured term loan balance and a $500 million aircraft-secured certificate offering. Stockholders’ equity was $12.911 billion.
Capital returns included $1.325 billion of share repurchases and $233 million of dividends. Capital expenditures were $1.4 billion. The company reported $15.1 billion of future aircraft purchase commitments.
Material changes and drivers
- Revenue growth reflected higher premium-product ticket sales, passenger growth, loyalty travel awards, and amended American Express agreements. Capacity increased 5.0%; passenger load factor edged down 0.2 points to 82.7%.
- The amended American Express agreements extend through 2029. A higher allocated brand component contributed approximately $130 million of additional revenue in Q1; Delta expected approximately $500 million of incremental revenue during 2019 from the amended agreements.
- Higher fuel consumption and lower refinery profitability contributed to increased fuel expense, partly offset by lower market fuel prices. Refinery operating results shifted to a $34 million loss from $44 million income a year earlier.
- A $100 million unrealized gain on strategic equity investments boosted reported non-operating results. Adjusted pre-tax income excludes this and other specified items.
- Q1 operating cash flow increased year over year. Financing cash flows included $1.325 billion of repurchases, $1.285 billion of debt and finance-lease payments, and proceeds from new borrowings.
Outlook, risks and contingencies
- Management expected positive operating cash flow for the remainder of 2019, and expected to meet cash needs for the next 12 months from operations, cash and financing arrangements. It projected a 2019 effective tax rate of 23%–24% and approximately $4.7 billion of 2019 investments.
- Delta voluntarily contributed $250 million to pension plans in April 2019 and planned another $250 million contribution in July; it had no minimum funding requirement for 2019.
- Key exposures include fuel-price volatility, foreign-exchange movements, interest rates, seasonal advance-ticket sales and operational costs. International unit revenue was pressured by currency fluctuations and challenging fare conditions in the Atlantic and Pacific regions.
- Major airport construction commitments include an expected net LaGuardia project cost of approximately $3.3 billion, with Delta bearing construction and potential cost-overrun risks. For the LAX project, the City’s reimbursement is capped at $1.8 billion.
- Aircraft purchase commitments totaled $15.1 billion. Delta also disclosed a $300 million guarantee of a GOL loan facility, secured by GOL’s interest in its loyalty program; no liability was recorded because GOL remained compliant. Management said current legal proceedings were not expected to have a material adverse effect, while noting outcomes cannot be predicted with certainty.
- No material changes to the previously disclosed risk factors or market-risk disclosures were reported. Management stated disclosure controls were effective as of March 31, 2019.
Important facts for investors to verify
- How much of the reported earnings improvement is repeatable, given the $100 million investment gain and the amended American Express agreement’s revenue and accounting allocation effects.
- Whether passenger yields, capacity growth and unit revenue trends remain sustainable, particularly in international markets.
- Fuel prices, refinery profitability and the effect of fuel hedges on future costs and cash flows.
- Execution, funding and cost-overrun exposure for the LaGuardia and LAX projects, alongside aircraft commitments and planned capital spending.
- Debt maturities, variable-rate exposure, liquidity availability and the cash impact of repurchases, dividends and pension contributions.