Delta Air Lines, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports fourth-quarter results; figures are in U.S. dollars unless stated otherwise.
Business context
Delta operates a global passenger and cargo airline, a loyalty program, ancillary businesses and the Trainer refinery. Its network serves more than 300 destinations in over 50 countries. Delta cited premium products, its American Express co-brand relationship, global partnerships and fleet renewal as key parts of its strategy.
Financial and operating performance
| Metric | 2019 | 2018 |
|---|---|---|
| Operating revenue | $47.0 billion | $44.4 billion |
| Operating income | $6.6 billion | $5.3 billion |
| Operating margin | 14.1% | 11.8% |
| Income before taxes | $6.2 billion | $5.2 billion |
| Net income | $4.8 billion | $3.9 billion |
| Diluted EPS | $7.30 | $5.67 |
| Cash from operations | $8.4 billion | $7.0 billion |
| Capital expenditures | $4.9 billion | $5.2 billion |
| Free cash flow (non-GAAP) | $4.2 billion | $2.4 billion |
| Debt and finance leases at year-end | $11.2 billion | $9.8 billion |
Revenue rose 5.8% and operating income rose 25.7%. Net margin was approximately 10.1%, versus 8.9% in 2018. Passenger revenue increased 6.3%; premium-cabin ticket revenue increased 9.0% and loyalty-program revenue increased 34.5%. Cargo revenue declined 12.9%. Passenger load factor improved to 86.3% from 85.5%.
Fuel expense fell 5.6% to $8.5 billion despite 4.6% capacity growth, reflecting lower fuel prices and improved efficiency. Average fuel cost was $2.02 per gallon versus $2.20. Operating expense increased 3.1%, including higher wages, profit sharing, contracted services and depreciation. Non-fuel unit cost (CASM-Ex, non-GAAP) increased 2.0%.
At year-end, unrestricted liquidity was $6.0 billion, comprising $2.9 billion cash and $3.1 billion undrawn revolving credit. Total assets were $64.5 billion and stockholders’ equity was $15.4 billion. Delta returned $3.0 billion to shareholders through $2.0 billion of repurchases and $980 million of dividends. The declared dividend was $1.51 per share for 2019.
Fourth quarter: Revenue was $11.4 billion, operating income $1.4 billion, net income $1.1 billion and diluted EPS $1.71. In the fourth quarter of 2018, the corresponding figures were $10.7 billion, $1.1 billion, $1.0 billion and $1.49.
Material changes and strategic developments
- Delta amended its American Express co-brand agreements, extending the relationship through 2029. Cash sales from American Express were $4.0 billion in 2019; Delta expected them to approach $7 billion by 2023.
- Delta acquired a 10% stake in Hanjin-KAL and, in January 2020, completed a $1.9 billion purchase of 20% of LATAM. The planned LATAM alliance remains subject to regulatory approval; Delta also committed transition payments and aircraft-related arrangements.
- Delta combined Delta Private Jets with Wheels Up in January 2020, receiving a 27% equity stake; the private-jet business will no longer be consolidated.
- Fleet renewal continued, with 88 new aircraft delivered in 2019. Delta accelerated retirement of its MD-90 fleet to the end of 2022, recording $79 million of accelerated depreciation.
- Debt and finance leases increased from $9.8 billion to $11.2 billion. Delta issued $1.5 billion of unsecured notes and $500 million of aircraft-backed debt during 2019.
Outlook, risks and unusual items
- Management expected 2020 capital expenditures of approximately $4.5 billion, funded principally from operating cash flow; it planned a voluntary $500 million pension contribution and projected a 23%–24% effective tax rate. These are expectations stated in the filing, not guarantees.
- Delta suspended U.S.–China flights through April 30, 2020, following the novel coronavirus outbreak. China represented less than 2% of revenue historically, but the filing said the financial impact could not then be estimated and further schedule changes were possible.
- Major risks include fuel-price volatility, economic and travel-demand weakness, competition, severe weather and disruptions, cybersecurity or technology failures, labor disputes, pension assumptions, and regulatory or environmental costs. A 1-cent-per-gallon fuel-price increase was estimated to add about $40 million in annual fuel expense.
- Delta identified possible additional costs from U.S. tariffs on certain European aircraft and volatile renewable-fuel credit (RIN) prices; Monroe incurred $58 million of RIN compliance costs in 2019.
- Delta reported a pending capacity antitrust class action and other legal matters, while stating it did not expect current proceedings to materially affect its consolidated financial statements. The auditor issued an unqualified opinion; management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether 2020 demand, particularly after the China flight suspension, supports the company’s revenue and cash-flow expectations.
- How the $1.9 billion LATAM investment, planned alliance approvals and remaining transition payments affect liquidity, returns and debt.
- Whether planned aircraft and airport investments remain within budget, including LaGuardia’s estimated $3.3 billion net project cost and construction-overrun exposure.
- How fuel prices, labor negotiations, pension funding and RIN costs affect margins and cash generation.
- The assumptions behind the $6.7 billion loyalty-program deferred-revenue balance; the filing notes that changes in redemption and valuation estimates could materially affect revenue timing.