Delta Air Lines, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2018. Unless otherwise stated, amounts are in U.S. dollars. The interim financial statements were reviewed by Ernst & Young, not audited. 2017 comparisons were recast principally for new revenue-recognition and retirement-benefit accounting.
Business context and financial performance
Delta operates an airline business and a refinery segment. Results reflect seasonal travel demand and substantial exposure to fuel prices. In the second quarter, revenue growth was outpaced by operating-cost growth, primarily because of higher fuel costs.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Operating revenue | $11.775 billion | $10.747 billion | $21.743 billion | $19.848 billion |
| Operating income | $1.680 billion | $1.982 billion | $2.520 billion | $2.981 billion |
| Income before taxes | $1.372 billion | $1.831 billion | $2.090 billion | $2.680 billion |
| Net income | $1.025 billion | $1.186 billion | $1.572 billion | $1.747 billion |
| Diluted EPS | $1.47 | $1.62 | $2.24 | $2.39 |
| Operating margin | 14.3% | 18.4% | 11.6% | 15.0% |
Q2 revenue increased 9.6%, with passenger revenue up 8.0%, cargo up 19.1% and other revenue up 27.1%. Capacity rose 3.5%; passenger unit revenue (PRASM) grew 4.4%, while load factor was 86.7%, down 0.2 percentage points. Adjusted pre-tax income, a non-GAAP measure, was $1.612 billion versus $1.795 billion. For the first half, revenue increased 9.5% and adjusted TRASM rose 4.8%.
Costs, cash flow, debt and liquidity
- Q2 operating expenses rose 15.2% to $10.095 billion. Fuel expense increased 38.8% to $2.341 billion, reflecting an approximately 38% rise in market fuel price per gallon and 2% higher consumption. Q2 consolidated CASM rose 11.3%; CASM-Ex, a non-GAAP measure, rose 2.9%.
- Six-month cash from operations was $4.150 billion, compared with $1.539 billion. Investing activities used $2.472 billion; property and equipment additions were $2.846 billion. Financing activities used $271 million. Cash, cash equivalents and restricted cash totaled $3.260 billion at period-end, including $1.326 billion restricted for airport construction.
- Management reported $5.5 billion of unrestricted liquidity: $2.4 billion in cash and short-term investments and $3.1 billion in undrawn revolving credit facilities. It expects operating cash flows, existing liquidity and financing arrangements to meet cash needs over the next 12 months.
- Debt carrying value was $9.514 billion, including current maturities; principal debt and capital leases were $9.9 billion. Delta issued $1.6 billion of unsecured notes and obtained $1.4 billion of LaGuardia-related revenue bonds during the quarter. It was in compliance with financing covenants at June 30.
- Stockholder returns in the first half included $925 million of share repurchases and $430 million of dividends. Delta repurchased 17 million shares during the period. The quarterly dividend was $0.305 per share.
Material changes, outlook and risks
- Higher fuel costs were the principal operating headwind. The airline does not currently hedge fuel-price risk; refinery derivatives hedge refinery-margin exposure. Q2 fuel hedge losses were $94 million, compared with gains of $40 million in Q2 2017.
- Q2 non-operating expense included $238 million of unrealized losses on equity investments in GOL, China Eastern and Air France-KLM; first-half unrealized losses were $220 million. Delta adopted fair-value accounting for these investments in 2018, so the year-over-year comparison is affected by an accounting change.
- Management expects an approximately 23% annual effective tax rate for 2018, positive operating cash flow in the remainder of 2018, and full-year investment of approximately $4.5 billion. No full-year earnings guidance is provided in the supplied filing text.
- Aircraft purchase commitments totaled approximately $16.4 billion. Expected 2018 spending includes approximately $550 million for the LaGuardia redevelopment; Delta bears construction-cost risk and currently estimates its project costs at about $3.3 billion. It also expects to spend approximately $230 million on the LAX project in 2018.
- SkyMiles deferred revenue was $6.5 billion. Management estimates a hypothetical 10% change in miles expected to be redeemed could affect annual revenue by approximately $200 million; a 10% increase in estimated mileage-credit equivalent ticket value could reduce annual passenger revenue by approximately $100 million.
- Delta expects adoption of the lease accounting standard in 2019 to significantly affect its balance sheet, but not materially affect lease-expense presentation or cash flows. Results are also subject to fuel-price volatility, seasonality, foreign-exchange movements, and changes in travel demand. Management said there were no material changes to previously disclosed risk factors.
- Legal proceedings include the first-bag-fee antitrust case: an appellate court affirmed judgment for the defendants and denied rehearing, although the period to seek U.S. Supreme Court review had not expired. Delta stated it did not expect resolution of its legal matters to materially adversely affect its financial statements.
Key investor verification points
- Track whether fare and unit-revenue growth can offset fuel inflation and broader cost increases.
- Assess cash generation against the $16.4 billion aircraft commitment and major airport construction obligations, including project cost and financing risks.
- Monitor reported investment gains and losses, separating fair-value volatility from airline operating performance.
- Review SkyMiles liability valuation and redemption assumptions, given their disclosed potential effect on revenue.
- Confirm the timing and balance-sheet impact of lease-standard adoption, and follow the status of the antitrust case and GOL loan guarantee. Delta reported no liability for its $300 million GOL guarantee because GOL remained in compliance with the facility terms.