Delta Air Lines, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Financial amounts below are in millions of dollars unless otherwise noted. The interim financial statements were reviewed, not audited.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Operating revenue | $9,923 | $9,816 | $28,068 | $26,716 |
| Operating income | $1,308 | $860 | $1,824 | $1,249 |
| Net income | $1,047 | $549 | $1,003 | $429 |
| Diluted EPS | $1.23 | $0.65 | $1.18 | $0.51 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $1,926 | $1,676 |
- Q3 operating margin was approximately 13.2%, versus 8.8% a year earlier; nine-month operating margin was approximately 6.5%, versus 4.7%. Q3 net margin was approximately 10.6%, versus 5.6%.
- Q3 passenger revenue rose 1% to $8,692; passenger yield improved 3% and PRASM rose 3%, while passenger traffic fell 1% and capacity fell 2%. For nine months, passenger revenue rose 6% and PRASM rose 8%.
- Q3 operating expenses fell 4% to $8,615, chiefly reflecting lower reported fuel expense. Q3 fuel expense including contract carriers fell $672, or 20%; fuel consumption declined 2%. Fuel expense adjusted for mark-to-market adjustments was $3.14 per gallon, versus $3.09.
- Nine-month operating expenses increased 3% to $26,244. Adjusted fuel cost was $3.26 per gallon, versus $3.07; fuel consumption declined 3%.
- At September 30, cash and cash equivalents were $2,274, short-term investments $959, and restricted cash and investments $401. Unrestricted liquidity was $5.1 billion, including $1.9 billion of revolving-credit availability.
- Total debt and capital leases, including current maturities, were $12.7 billion, down $1.1 billion from year-end 2011. Delta reported a $48 million stockholders’ deficit, improved from a $1,396 million deficit at year-end.
- Capital spending and other investing activity used $1,429 of cash in the first nine months; financing activities used $880. Cash declined $383 to $2,274.
Material changes and notable items
- Q3 included $414 of fuel-hedge gains from fair-value changes, most relating to contracts settling in future periods. Nine-month fuel hedges produced a net $106 loss. These non-cash and timing-sensitive mark-to-market amounts materially affect reported fuel expense and comparability.
- Restructuring and other charges were $149 in Q3 and $330 for nine months, versus $3 and $154, respectively, in 2011. They included Comair closure and fleet-related costs, severance, and recognition of a deferred $78 gain on the LaGuardia/Reagan National slot exchange.
- Delta closed the Trainer refinery acquisition in June for $180 and received a $30 Pennsylvania grant; approximately $100 of restart capital improvements were planned. Operations restarted in September and were not material in Q3. Delta expected full capacity in Q4 and estimated annual benefits of $300; these are expectations, not reported results.
- Delta announced closure of wholly owned regional carrier Comair effective September 29, 2012, and continued reducing 50-seat regional jets while adding mainline flying. Agreements provide for leasing 88 Boeing 717s, with deliveries from 2013 through 2015.
- Delta completed a $480 aircraft-backed pass-through certificate offering in July, primarily to refinance aircraft debt. In October, after quarter-end, it entered secured facilities with $1.5 billion of term loans and a $450 million undrawn revolver, and retired approximately $1.2 billion of debt principal.
- Delta contributed $678 to defined-benefit pension plans in the first nine months, satisfying 2012 minimum contributions on an accelerated basis. Pension and postretirement obligations totaled $13,688 at September 30.
- A full valuation allowance of $10.2 billion remained against net deferred tax assets despite Delta moving into a cumulative three-year income position during 2012; management said it would continue evaluating whether profitability supports a future reversal.
Outlook, risks, and contingencies
- Delta said it expected to meet cash needs for the next 12 months from operations, existing cash and investments, and financing arrangements. No specific consolidated earnings guidance was provided.
- Management identified fuel price and availability as major risks. Fuel was 36% of operating expense for the first nine months. Hedge agreements can require significant margin postings; sensitivity estimates through December 2013 show substantial potential fuel-cost and margin effects under 10% or 20% price changes.
- Refinery risks include operational interruptions, supply or delivery problems, environmental obligations, uninsured losses, and unfavorable economics under product-exchange agreements. A disruption could require Monroe to purchase products to meet delivery commitments.
- Aircraft purchase commitments totaled approximately $6.8 billion. Estimated lease payments, including the 717 agreements, were $1.6 billion in each of 2013 and 2014, $1.5 billion in 2015, $1.4 billion in 2016, and $8.8 billion thereafter.
- Delta reported compliance with financing covenants at September 30. The subsequent Pacific Facilities include minimum liquidity of $2.0 billion and fixed-charge and collateral coverage tests; a collateral coverage shortfall may require additional collateral or repayment.
- Management believed pending legal matters would not have a material adverse effect, but said potential losses in some proceedings could not be reasonably estimated. Government-provided war-risk insurance was extended through September 30, 2013; loss of that coverage could increase costs or affect operations.
- Management stated disclosure controls were effective as of September 30. It was evaluating policies, processes, technology, and controls for the newly acquired refinery.
Important facts for investors to verify
- How much of Q3 earnings and lower fuel expense reflected temporary fuel-hedge mark-to-market gains rather than realized fuel economics.
- Whether the refinery reaches planned capacity and achieves the estimated $300 million annual benefit, after restart spending and operating, contractual, and environmental risks.
- Whether passenger yield and revenue gains can offset rising non-fuel costs, including labor, maintenance, and fleet-related expenses.
- Debt-service, collateral, liquidity, and lease obligations, including the October 2012 refinancing and its covenant requirements.
- Progress toward sustained profitability and any resulting change to the $10.2 billion deferred-tax valuation allowance.