Business Context and Reporting Period
Company: Delta Air Lines, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2010
Business Overview: Delta provides scheduled air transportation for passengers and cargo globally, operating a hub-and-spoke network centered in Atlanta, Amsterdam, Cincinnati, Detroit, Memphis, Minneapolis-St. Paul, New York-JFK, Paris-Charles de Gaulle, Salt Lake City, and Tokyo-Narita. The company is a member of the SkyTeam alliance and operates a transatlantic joint venture with Air France-KLM and Alitalia. Approximately 21% of passenger revenue in 2010 was generated by regional carriers operating under capacity purchase agreements.
Key Financial Metrics
| Metric | 2010 | 2009 | 2008 |
|---|---|---|---|
| Operating Revenue | $31,755 million | $28,063 million | $22,697 million |
| Operating Income | $2,217 million | ($324 million) | ($8,314 million) |
| Net Income (Loss) | $593 million | ($1,237 million) | ($8,922 million) |
| Diluted EPS | $0.70 | ($1.50) | ($19.08) |
| Operating Cash Flow | $2,832 million | $1,379 million | ($1,707 million) |
| Total Debt (incl. capital leases) | $15,252 million | $17,198 million | $16,571 million |
| Unrestricted Liquidity | $5.2 billion | N/A | N/A |
| Fuel Cost (Total) | $8,901 million | $8,291 million | $8,686 million |
| Avg. Fuel Price (Net of Hedges) | $2.33/gallon | $2.15/gallon | $3.16/gallon |
Note: 2008 figures include significant non-cash impairment charges ($7.3 billion goodwill impairment and $1.1 billion merger-related charges).
Material Changes vs. Prior Period
- Profitability Turnaround: Delta returned to profitability in 2010 with $593 million in net income, a $1.8 billion improvement over the 2009 net loss. Operating margin excluding special items rose to 8.4% in 2010 from 0.3% in 2009.
- Revenue Growth: Total operating revenue increased 13% to $31.8 billion, driven by a 14% increase in passenger revenue. Mainline passenger revenue grew 16% due to increased business demand and higher fares.
- Fuel Costs: While the average fuel price increased 8% to $2.33 per gallon, total fuel costs rose only 3% due to reduced fuel hedge losses ($89 million in 2010 vs. $1.4 billion in 2009).
- Debt Reduction: Total debt decreased by $1.9 billion to $15.3 billion through repayments, tender offers, and refinancing activities.
- Special Items: 2010 included $851 million in special expenses, primarily $450 million in restructuring/merger-related charges and $401 million in loss on extinguishment of debt.
Guidance, Outlook, and Risks
Management Commentary & Outlook: Management highlighted a strengthening airline industry revenue environment. The company is focusing on fleet investment, including adding winglets for fuel efficiency and expanding First Class cabins. A major $1.2 billion redevelopment project at JFK Airport began in late 2010, expected to complete in stages over five years. The company expects to meet cash needs for the next 12 months from operating cash flows and existing liquidity.
Key Risks and Contingencies:
- Fuel Price Volatility: Results remain significantly impacted by fuel prices. Delta hedges a portion of requirements but remains exposed to market fluctuations.
- Labor Relations: Approximately 17% of the workforce is unionized. Integration of Northwest Airlines workgroups remains ongoing, with representation issues for flight attendants and ground employees still being resolved following 2010 elections where unions were rejected.
- Pension Obligations: Defined benefit plans had an estimated benefit obligation of $17.5 billion against $8.2 billion in assets. Funding requirements are estimated at $600 million for 2011.
- Regulatory/Environmental: Potential costs from the European Union Emissions Trading Scheme (ETS) and other climate change regulations could impact operations.
- Legal Proceedings: Ongoing antitrust litigation regarding first bag fees and Canadian passenger surcharges.
Investor Verification Checklist
- Debt Covenants: Verify compliance with fixed charge coverage ratios and collateral coverage ratios required by Senior Secured Exit Financing Facilities and other credit agreements.
- Pension Funding: Monitor the $600 million estimated funding requirement for 2011 and the impact of discount rate changes on the $9.3 billion unfunded liability.
- Labor Integration: Track the resolution of National Mediation Board (NMB) interference claims filed by unions following the 2010 representation elections.
- Fuel Hedging: Assess the effectiveness of the current hedge portfolio (covering 38% of 2011 requirements) against rising crude oil prices.
- JFK Redevelopment: Monitor cost overruns and construction progress on the $1.2 billion JFK terminal project.
- Net Operating Losses (NOLs): Confirm the utilization of the $17.5 billion NOL carryforward, noting limitations due to ownership changes under Section 382 of the Internal Revenue Code.