Delta Air Lines, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports unaudited fourth-quarter results. Delta operates a global passenger and cargo airline, with a refinery segment, regional-carrier arrangements, loyalty program, and airline partnerships and joint ventures.
Key financial results
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Operating revenue | $39.639 billion | $40.704 billion |
| Operating income | $6.952 billion | $7.802 billion |
| Net income | $4.373 billion | $4.526 billion |
| Diluted EPS | $5.79 | $5.63 |
| Operating cash flow | $7.205 billion | $7.927 billion |
| Capital expenditures | $3.391 billion | $2.945 billion |
| Debt and capital leases, including current maturities | $7.332 billion | $8.329 billion |
| Cash and short-term investments | $3.249 billion | $3.437 billion |
Operating margin was approximately 17.5%, versus 19.2% in 2015; net margin was approximately 11.0%, versus 11.1%. Delta reported $5.7 billion of unrestricted liquidity, including $2.5 billion of undrawn revolving credit facilities. Adjusted net debt, a non-GAAP measure, was $6.144 billion. The company returned $3.1 billion to shareholders during 2016 through dividends and share repurchases.
Fourth quarter: Revenue was $9.458 billion, operating income $1.020 billion, net income $622 million, and diluted EPS $0.84. In fourth-quarter 2015, the corresponding figures were $9.502 billion, $1.717 billion, $980 million, and $1.25.
Material changes versus 2015
- Annual revenue fell 2.6%; passenger revenue declined 2.9%. Passenger revenue per available seat mile (PRASM) decreased 4.9%, while capacity rose 2.1% and load factor slipped 0.3 percentage points to 84.6%.
- Operating income declined $850 million, and GAAP net income declined $153 million. Pre-tax income adjusted for special items, a non-GAAP measure, increased 3.5% to $6.071 billion.
- Lower fuel costs partly offset weaker unit revenue and higher labor costs. Total fuel expense fell 21.0% to $5.985 billion; average fuel price was $1.49 per gallon, versus $1.90.
- Salaries and related costs rose 14.3%, including an 18% pilot pay increase retroactive to January 1, 2016. Non-fuel unit cost, excluding specified items and including profit sharing, increased 3.7% to 10.13 cents per available seat mile.
- Operating cash flow decreased $722 million. Debt and capital lease obligations fell, while the company spent $2.601 billion repurchasing shares and paid $509 million in cash dividends.
Outlook, commentary, and risks
- Management expects positive operating cash flow in 2017; its longer-term targets are $8–9 billion of annual operating cash flow and $4–5 billion of annual free cash flow. Planned 2017 capital investment is approximately $3.5 billion, primarily for aircraft and fleet modifications.
- Management expects a 2017 effective tax rate of 34%–35% and at least $1.2 billion of pension contributions, including approximately $700 million above minimum funding requirements. It targets at least 80% pension-plan funding by 2020.
- Delta aims to keep long-term non-fuel unit-cost growth below 2% annually. This is a target, not a guarantee; the comparable non-fuel unit-cost measure rose 3.7% in 2016.
- The Trainer refinery recorded a $125 million loss in 2016, compared with $290 million profit in 2015, primarily due to higher renewable-fuel credit (RIN) costs and lower distillate crack spreads. RIN expense was $171 million.
- Risks include volatile fuel prices and hedge-related cash requirements; intense fare and capacity competition; international currency and economic exposure, including uncertainty following the U.K. vote to leave the EU; labor costs or disruptions; operational dependence on hubs and regional carriers; cybersecurity and technology interruptions; environmental regulation and refinery exposure; and pension funding obligations.
- Delta is defending pending antitrust class actions concerning first-bag fees and alleged airline capacity coordination. The filing states the company believes the claims are without merit; outcomes cannot be assured. Management said current legal matters were not expected to have a material adverse effect, but no clear loss estimate for these cases is provided.
- Aircraft purchase commitments totaled $12.460 billion, and disclosed operating lease commitments totaled $13.095 billion at year-end. The company also expects up to $765 million of spending related to its planned Aeroméxico tender offer and associated shares.
- The financial statements received an unqualified audit opinion, and the auditor also gave an unqualified opinion on internal control over financial reporting.
Important facts for investors to verify
- Whether passenger yields and PRASM stabilize amid continued capacity and fare competition, particularly in international markets.
- How fuel prices, hedge settlements and margin requirements affect future earnings and unrestricted liquidity.
- Progress and economics of the Aeroméxico tender offer and joint venture, and performance of other strategic airline investments.
- Actual pension contributions, funded status, and sensitivity to discount-rate, asset-return, and longevity assumptions.
- Refinery profitability and RIN costs, alongside the execution and funding of aircraft, lease, and airport investment commitments.
- Developments in the pending antitrust litigation and any material changes to the company’s stated assessment of legal contingencies.