Delta Air Lines, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Financial statements are unaudited and were reviewed by Ernst & Young; the review is not an audit. Amounts below are in U.S. dollars unless indicated.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Operating revenue | $9.148 billion | $9.251 billion | Down 1.1% |
| Operating income | $1.053 billion | $1.540 billion | Down $487 million |
| Operating margin | 11.5% | 16.6% | Down 5.1 percentage points |
| Income before taxes | $915 million | $1.434 billion | Down $519 million |
| Net income | $603 million | $946 million | Down 36.3% |
| Diluted EPS | $0.82 | $1.21 | Down $0.39 |
| Net cash from operating activities | $(801) million | $1.011 billion | Down $1.812 billion |
Operating expenses rose 5.0% to $8.095 billion, while operating revenue declined. Operating margin was 11.5%, compared with 16.6% a year earlier; net margin was 6.6%, compared with 10.2%. The filing attributes lower pretax income primarily to weaker passenger and other revenue and higher salaries, regional carrier costs and maintenance, partly offset by lower profit-sharing expense.
Passenger revenue fell 1.0% to $7.688 billion; total operating revenue declined by $103 million. Passenger revenue per available seat mile (PRASM) fell 0.5%, with capacity down 0.5%; load factor increased 0.8 percentage points to 82.9%. Domestic close-in yields remained weak, while international revenue was pressured by supply-demand imbalances and currency effects. Latin American unit revenue improved.
Consolidated cost per available seat mile (CASM) rose 5.5% to 13.99 cents. Non-fuel CASM, including profit sharing, a non-GAAP measure, rose 5.8% to 10.92 cents. Fuel expense including regional carriers was $1.482 billion, up 6.3%; adjusted average fuel price was $1.71 per gallon versus $1.33.
Financial position, cash flow and capital allocation
- At March 31, 2017, cash and cash equivalents were $1.907 billion and short-term investments were $743 million. Management reported $5.1 billion of unrestricted liquidity, including $2.4 billion of undrawn revolving credit facilities.
- Operating cash flow was negative $801 million, primarily reflecting pension contributions. Delta said operating activities generated $699 million excluding $1.5 billion of pension contributions funded from debt proceeds, and expected positive operating cash flow for the rest of 2017.
- Investing cash outflow was $1.734 billion, including $802 million of capital expenditures and the $622 million Aeroméxico share purchase. Financing cash inflow was $1.680 billion. Cash and equivalents declined $855 million during the quarter.
- Principal debt and capital leases were $9.3 billion at quarter-end; net carrying amount was $8.770 billion. Delta issued $2.0 billion of unsecured notes, due 2020 and 2022, at 2.875% and 3.625%, respectively. The proceeds and existing cash funded pension contributions. Delta reported compliance with financing covenants.
- Delta contributed $2.6 billion in cash to qualified defined-benefit pension plans during the quarter, plus $350 million of treasury shares, and contributed another $610 million in April. The filing says these actions satisfied 2017 required contributions on an accelerated basis and exceeded minimum funding requirements by more than $3.0 billion.
- Share repurchases were $200 million and cash dividends were $149 million. The quarterly dividend was reported as $0.2025 per share in MD&A; the income statement reports $0.20 declared per share.
- Stockholders’ equity was $12.945 billion, up from $12.287 billion at December 31, 2016. Total assets were $51.459 billion.
Material changes, outlook and risks
- Fuel hedge gains were $57 million in Q1 2017 versus losses of $274 million in Q1 2016. Delta said it had neutralized its airline segment hedge positions for the remainder of 2017, locking in net settlements.
- The refinery reported $44 million of operating profit, compared with a $28 million loss a year earlier, citing stronger crack spreads, lower crude costs and lower renewable identification number (RIN) costs.
- Delta completed a $622 million Aeroméxico tender offer, increasing its ownership to 36% and adopting equity-method accounting. It expected to execute derivative contracts for an additional 13% interest in Q2 2017 for approximately $175 million. Delta also guaranteed a $300 million GOL loan; it reported no guarantee liability because GOL remained in compliance.
- Management projected a 2017 effective tax rate of 34%–35%, expected positive operating cash flow for the remainder of 2017 and planned more than $3 billion of 2017 investment. It stated that seasonal travel demand, fuel-price volatility and other factors mean first-quarter results are not necessarily indicative of full-year results.
- Aircraft purchase commitments totaled approximately $12.35 billion. A seven-year LAX terminal modernization had an initial planned investment of $350 million; an optional expansion could add $1.5 billion, subject to approvals, with a substantial majority of project costs expected to be funded by a quasi-governmental entity.
- Risks include fuel-price and currency volatility, pension obligations, debt and liquidity covenant requirements, significant aircraft and infrastructure commitments, and legal proceedings. In the first-bag-fee antitrust litigation, the district court granted defendants’ summary-judgment motions on March 29, 2017; the appeal period had not expired. Delta said it believed resolution of its legal matters would not materially adversely affect its financial statements.
- Delta said there were no material changes to the risk factors in its 2016 Form 10-K. It was evaluating new revenue-recognition and lease accounting standards; it expected the lease standard to significantly affect the balance sheet, but not materially affect lease expense recognition or cash-flow presentation.
Important facts for investors to verify
- Whether revenue and unit-revenue trends improve, particularly domestic yields and Atlantic/Pacific performance, and whether rising non-fuel unit costs moderate.
- How pension funding, debt issuance and subsequent cash flows affect liquidity, leverage and future funding requirements.
- Actual performance against management’s 2017 cash-flow, tax-rate and capital-investment expectations.
- Completion and cost of the additional Aeroméxico investment, and the exposure associated with the GOL guarantee and other airline investments.
- Developments in the antitrust case, fuel-price exposure, aircraft commitments and LAX project approvals and funding.