Delta Air Lines, Inc. — Q2 2019 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods. Delta operates an airline business and a refinery segment. The interim financial statements were reviewed by Ernst & Young, not audited.
Financial performance
| Metric | Q2 2019 | Q2 2018 | H1 2019 | H1 2018 |
|---|---|---|---|---|
| Operating revenue | $12.536B | $11.775B | $23.008B | $21.743B |
| Operating income | $2.128B | $1.684B | $3.148B | $2.528B |
| Net income | $1.443B | $1.036B | $2.173B | $1.594B |
| Diluted EPS | $2.21 | $1.49 | $3.29 | $2.27 |
| Operating margin | 17.0% | 14.3% | 13.7% | 11.6% |
Q2 revenue rose 6.5% and net income rose 39.4% year over year. Passenger revenue increased 7.8%, supported by premium-cabin ticket revenue, loyalty travel awards and travel-related services. Q2 total revenue per available seat mile (TRASM) increased 1.6%; adjusted TRASM, a non-GAAP measure, increased 3.8%. Capacity increased 4.7%, while load factor reached 88.0%, up 1.3 percentage points.
Q2 operating expense increased 3.1% to $10.408B. Consolidated cost per available seat mile (CASM) decreased 1.5% to 14.51 cents, while non-fuel CASM-Ex, a non-GAAP measure, increased 1.4% to 10.15 cents. Fuel expense declined 2.1% in Q2, but increased 1.8% for H1. Q2 pre-tax income was $1.907B; adjusted pre-tax income was $1.997B versus $1.617B a year earlier.
Cash flow, balance sheet and capital allocation
- H1 operating cash flow was $5.223B, compared with $4.270B. H1 capital expenditures were $2.920B; net cash used in investing was $2.671B.
- Q2 free cash flow, a non-GAAP measure, was $1.771B, versus $1.392B. Q2 operating cash flow was $3.273B.
- At June 30, cash and cash equivalents were $2.009B; unrestricted liquidity was $5.1B, including $3.1B of undrawn revolving credit. Current assets were $7.134B and current liabilities were $21.164B.
- Debt and finance lease obligations on the balance sheet totaled $9.991B, including current maturities; reported total debt, excluding finance leases, was $9.296B. Delta reported covenant compliance.
- H1 share repurchases were $1.593B, and cash dividends were $461M. Delta repurchased and retired 31 million shares during H1. The quarterly dividend was raised to $0.4025 per share, approved July 10, 2019.
Material changes and notable items
- Delta amended its American Express co-brand and related agreements, extending terms to 2029. The change increased the allocated value of the brand component, adding $140M primarily to Q2 other revenue and $270M in H1. Management expected approximately $500M of incremental revenue in 2019 from the amended agreements.
- Q2 included $91M of accelerated depreciation after Delta advanced the planned retirement of 31 MD-90 aircraft to the end of 2022. Management expected related depreciation to moderate in future periods.
- Ancillary businesses and refinery revenue fell 36.8% in Q2, primarily reflecting lower third-party refinery sales and the prior-year contribution of DGS, sold in December 2018. MRO revenue grew.
- Fair-value investment losses were $82M in Q2, compared with $238M in Q2 2018; H1 recorded an $18M gain versus a $220M loss in H1 2018. These valuation movements affected non-operating results.
Outlook, commitments and risks
- Management projected a 2019 effective tax rate of 23%–24% and expected 2019 investments of $4.4B, primarily aircraft and fleet modifications. It said operating cash flow, cash and financing arrangements were expected to meet cash needs for the next 12 months. The filing does not provide a clear full-year earnings or revenue forecast.
- Aircraft purchase commitments totaled $14.1B for 275 aircraft. Delta also described significant airport projects: its net LaGuardia redevelopment cost estimate was approximately $3.3B, with construction cost-overrun risk; LAX construction was expected to finish by 2024 and LaGuardia by 2026.
- Key operating exposures include volatile jet fuel prices, foreign-exchange movements, international demand and capacity, and refinery performance. Delta reported no material changes to the risk factors or market-risk disclosures from its 2018 Form 10-K.
- Delta guaranteed a $300M third-party term loan for GOL, secured by GOL’s interest in Smiles; no liability was recorded because GOL remained compliant. Delta said current legal proceedings were not expected to have a material adverse effect, while noting their outcomes cannot be predicted with certainty.
Most important facts for investors to verify
- Whether passenger demand, unit revenue and load factor trends continue, particularly in the Pacific region, where unit revenue declined.
- Whether non-fuel unit-cost growth and profit-sharing expense remain manageable as capacity and labor costs change.
- How much of expected 2019 incremental American Express revenue is realized, and how the agreement affects deferred loyalty revenue and future obligations.
- Whether the $4.4B investment plan, aircraft commitments and airport projects can be funded within liquidity expectations and without material cost overruns.
- Changes in fuel, refinery and investment-related volatility, debt and lease obligations, and exposure under guarantees and other contingencies.