Delta Air Lines, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also provides unaudited quarterly results, including the December 2015 quarter. Delta operates passenger and cargo air transportation globally, with airline and refinery reporting segments.
Financial performance and position
- FY2015 revenue: $40.704 billion, up 0.8% from $40.362 billion in 2014. Passenger revenue declined 0.5%; other revenue rose 14.2%, supported by loyalty-related revenue, American Express arrangements, refinery product sales and third-party maintenance.
- Profit: Operating income was $7.802 billion, versus $2.206 billion; pretax income was $7.157 billion, versus $1.072 billion; and net income was $4.526 billion, versus $659 million. Diluted EPS was $5.63 versus $0.78. Adjusted pretax income, a non-GAAP measure, increased 29.3% to $5.865 billion.
- Cash flow and investment: Operating cash flow was $7.927 billion, compared with $4.947 billion. Capital expenditures were $2.945 billion. Delta returned $2.6 billion to shareholders and reduced debt and capital lease principal by $1.5 billion.
- Costs and operating metrics: Operating expense fell 13.8% to $32.902 billion, primarily reflecting lower fuel costs. Fuel expense was $7.579 billion, down 43.9%; average fuel price was $1.90 per gallon versus $3.47. Capacity rose 3.0%, load factor was 84.9% versus 84.7%, PRASM declined 3.3%, and CASM fell 16.3% to 13.33 cents. Non-fuel CASM-Ex, a non-GAAP measure, was nearly flat at 9.17 cents.
- Debt and liquidity: Debt and capital leases on the balance sheet totaled $8.329 billion, including current maturities. Adjusted net debt, a non-GAAP measure, was $6.675 billion. Unrestricted liquidity was $5.6 billion, including $3.4 billion of cash and short-term investments and $2.2 billion of undrawn revolving facilities. Delta reported compliance with financing covenants at year-end.
- Other obligations: Pension benefit obligations were underfunded by $11.237 billion. Contractual obligations totaled $62.630 billion, including $13.560 billion of aircraft purchase commitments, $12.761 billion of operating lease payments and $12.320 billion of contract-carrier obligations.
Prior-period and fourth-quarter comparisons
- Annual operating income improved substantially as lower fuel costs more than offset higher salaries, profit sharing and other costs. Fuel was 23.0% of operating expense in 2015, compared with 35.4% in 2014.
- Passenger unit revenue weakened: PRASM fell 3.3%, reflecting competitive pressure in a low-fuel-price environment and the strong U.S. dollar’s effect on international markets. International revenue declined 6.0% year over year.
- For Q4 2015, revenue was $9.502 billion versus $9.647 billion in Q4 2014; operating income was $1.717 billion versus an operating loss of $828 million; net income was $980 million versus a net loss of $712 million. Diluted EPS was $1.25 versus a loss of $0.86.
- Comparisons are affected by unusual items. FY2015 included $1.301 billion of fuel mark-to-market adjustments and settlements and $35 million of restructuring and other items. FY2014 included a $2.346 billion fuel mark-to-market benefit, $716 million of restructuring and other items, and $268 million of debt-extinguishment losses. FY2013 net income of $10.540 billion included an approximately $8.0 billion tax benefit from releasing substantially all of the deferred-tax valuation allowance.
Outlook, management commentary and risks
- Management targeted annual operating cash flow of $7–8 billion and free cash flow of $4–5 billion, with approximately half of operating cash flow reinvested in the business. It expected approximately $3 billion of capital investment in 2016 and at least $1 billion of pension contributions.
- Management expected a 2016 effective tax rate of 35%–36% and said it did not expect to pay federal cash income taxes before 2018, citing $9.5 billion of federal net operating loss carryforwards. The company expected 2016 non-fuel unit-cost growth below 2% annually.
- Delta neutralized substantially all fuel hedge positions through 2016 in early 2016, locking in approximately $725 million of 2016 cash payments. Its 2016 fuel-cost sensitivity estimated that a 20% fuel-price increase would raise costs by about $820 million, while a 20% decrease would lower them by about the same amount, based on stated assumptions.
- Strategic initiatives included fleet renewal and restructuring, capacity adjustments in challenged international markets, a $450 million investment for a 3.5% China Eastern stake, and a proposed Aeroméxico tender offer expected to cost approximately $750 million and potentially raise Delta’s ownership to 49%, subject to approvals.
- Principal risks include fuel-price and supply volatility, fuel-hedge margin requirements, refinery interruption and environmental/RIN costs, intense fare competition, foreign-exchange and economic exposure, labor negotiations, operational disruptions, cybersecurity, safety events, regulatory changes, and reliance on alliance and regional-carrier partners.
- Two antitrust matters remained pending: first-bag-fee litigation and class actions alleging airline capacity coordination. Delta said it believed the claims were without merit and was defending them. Management stated that resolution of current legal matters was not expected to materially adversely affect the consolidated financial statements.
- The Delta pilots’ agreement became amendable December 31, 2015, and negotiations were underway. CEO Richard Anderson was scheduled to retire May 2, 2016, with Edward Bastian expected to become CEO.
Most important facts for investors to verify
- Whether low fuel prices and lower unit costs persist, and how fare competition, yields and international currency pressure affect margins.
- The cash and earnings effects of fuel hedging, including the approximately $725 million of 2016 hedge-related payments and potential margin calls.
- Execution and funding of aircraft commitments, planned capital spending, debt reduction and substantial pension contributions.
- Progress and final terms of the Aeroméxico proposal, regulatory approvals, and returns from Delta’s airline investments and alliances.
- Developments in pilot labor negotiations, antitrust proceedings, refinery environmental obligations and the company’s large pension deficit.
Audit and controls: Ernst & Young issued an unqualified opinion on the financial statements and internal control over financial reporting.