Delta Air Lines, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. Amounts are in U.S. dollars; financial statements are unaudited and were reviewed, not audited, by Ernst & Young.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Operating revenue | $11.060 billion | $10.483 billion | $30.999 billion | $30.181 billion |
| Operating income | $1.839 billion | $1.969 billion | $4.920 billion | $5.932 billion |
| Net income | $1.178 billion | $1.259 billion | $3.005 billion | $3.751 billion |
| Diluted EPS | $1.64 | $1.69 | $4.13 | $4.92 |
| Operating margin | 16.6% | 18.8% | 15.9% | 19.7% |
Q3 passenger revenue rose 3.6% to $9.399 billion; total revenue increased 5.5%. Passenger revenue per available seat mile (PRASM) increased 1.9%, capacity rose 1.6%, and load factor was 86.9%, up 1.5 percentage points. Management cited commercial initiatives, strong leisure demand and improving business revenue. Hurricane Irma reduced Q3 PRASM by about one percentage point.
Q3 operating expenses increased 8.3% to $9.221 billion, outpacing revenue growth. Consolidated cost per available seat mile (CASM) rose 6.6% to 13.14 cents; non-fuel CASM including profit sharing rose 4.8% to 10.05 cents. Higher salaries, fuel and depreciation were key drivers. Fuel purchase cost per gallon increased about 14%; refinery profits partly offset the increase. Nine-month revenue increased 2.7%, while operating expense rose 7.5%.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $3.230 billion, down from $6.080 billion. Management attributed the decline primarily to higher pension contributions, including $3.2 billion in cash contributions to qualified defined-benefit plans in the first half of 2017; Delta also contributed $350 million of treasury shares.
- Investing cash outflow was $4.034 billion, including $2.731 billion of capital expenditures and $795 million for equity investments. Financing cash outflow was $480 million. Cash and cash equivalents declined by $1.284 billion to $1.478 billion.
- At September 30, unrestricted liquidity was $4.9 billion: $2.4 billion in cash, cash equivalents and short-term investments, plus $2.5 billion in undrawn revolving facilities. Management expected operating cash flow, available cash and investments, and financing arrangements to meet cash needs for the next 12 months.
- Debt and capital lease principal was $8.9 billion, compared with $7.4 billion at year-end 2016. Delta issued $2.0 billion of unsecured notes in March, with maturities in 2020 and 2022, and used proceeds and existing cash toward pension funding. Delta reported investment-grade ratings from all three major agencies and compliance with financing covenants.
- Delta repurchased $1.35 billion of stock and paid $516 million in dividends during the nine months. It completed its prior $5 billion repurchase authorization and had a new $5 billion authorization, expiring no later than December 2020.
Material changes and outlook
- For Q3, pre-tax income decreased $95 million year over year to $1.8 billion. Higher salaries, fuel and depreciation outweighed revenue growth. The refinery generated Q3 profit of $37 million, compared with a $45 million loss a year earlier.
- Management expected 2017 capital investments of $3.5–$4.0 billion and an annual effective tax rate of 34%–35%. It noted that results are subject to travel seasonality and fuel-price volatility, and that 2017 results are not necessarily indicative of full-year results.
- Delta expected to adopt the new revenue recognition standard on January 1, 2018 using full retrospective transition. It anticipated reclassifying approximately $2 billion of annual revenue, including baggage and certain travel-related fees, from other revenue to passenger revenue. It also expected a significant increase in the frequent-flyer liability from a change in mileage valuation, but did not expect a significant change in program revenue under stable volume.
- Delta expected the lease accounting standard, effective for it in 2019, to significantly increase balance-sheet assets and liabilities, without a significant impact on lease expense recognition or cash-flow presentation.
- Aircraft purchase commitments totaled approximately $13.1 billion. Delta estimated its LaGuardia redevelopment costs at approximately $3.3 billion and bears construction-cost risk; a $600 million Port Authority contribution is provided for in the project arrangement. The LAX redevelopment credit facility has $800 million of lender commitments and is guaranteed by Delta.
Risks, contingencies and unusual items
- Fuel prices, labor and operating costs, foreign currency, and competitive capacity—particularly in the Pacific—are material business sensitivities. Caribbean hurricane damage was expected to require temporary service adjustments.
- Delta guaranteed a $300 million GOL term-loan facility, secured by GOL’s interest in its loyalty program, and guaranteed obligations of the LAX redevelopment financing entity. Delta said neither guarantee had resulted in a recorded liability because the borrowers remained in compliance.
- A Boeing trade petition concerning Bombardier CS100 aircraft remained under U.S. government review, with final decisions expected in 2018. Delta said it was not a party to the petition and believed it was without merit.
- The first-bag-fee antitrust litigation remained on appeal after the district court granted Delta’s and AirTran’s summary-judgment motions. Delta stated that it did not expect resolution of its legal proceedings to have a material adverse effect, while noting outcomes cannot be predicted with certainty.
- Management reported effective disclosure controls as of September 30. A new U.S. employee payroll system materially changed a component of internal financial reporting controls; operating effectiveness was to be evaluated in the year-end assessment.
Important facts for investors to verify
- Whether revenue growth and unit-revenue trends can continue to outpace rising labor, fuel and aircraft-related costs.
- Cash generation and liquidity after substantial pension funding, capital spending, shareholder returns and planned investments.
- The final cost, financing and construction risks of the LaGuardia and LAX projects, as well as aircraft purchase commitments.
- The effects of the 2018 revenue standard on frequent-flyer liabilities and revenue classification, and the 2019 lease standard on reported leverage.
- Developments in the Bombardier trade matter, antitrust appeal, and Delta’s guarantee exposures.