Delta Air Lines, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Unaudited interim results; Delta cautions that seasonality, fuel-price volatility and other factors mean interim performance is not necessarily indicative of full-year results.
Financial performance and position
- Q2 revenue and earnings: Operating revenue was $9.153 billion, up 12% from $8.168 billion. Operating income was $481 million versus $852 million; net income was $198 million versus $467 million. Diluted EPS was $0.23 versus $0.55.
- First-half results: Revenue was $16.900 billion, up 13%. Operating income fell to $389 million from $920 million. Delta reported a net loss of $120 million, or $0.14 per diluted share, compared with net income of $211 million, or $0.25 per diluted share, in 2010.
- Costs and margins: Q2 operating expenses increased 19% to $8.672 billion, led by fuel and contract-carrier costs. Fuel expense rose 36% to $2.663 billion; average fuel price was $3.23 per gallon versus $2.32. Consolidated cost per available seat mile rose to 14.42 cents from 12.46 cents; excluding fuel and special items, it was 8.46 cents versus 8.08 cents. Q2 operating margin was approximately 5.3%, compared with 10.4% a year earlier.
- Revenue drivers: Q2 passenger revenue increased 13%; fare increases lifted passenger yield, while passenger load factor declined 1.3 percentage points to 83.7%. The Japan earthquake and tsunami reduced Q2 passenger revenue by about $125 million and first-half revenue by about $160 million.
- Cash flow: First-half operating cash flow was $1.774 billion, down from $2.000 billion. Investing activities used $874 million and financing activities used $937 million. Cash and cash equivalents ended at $2.855 billion, down $37 million from year-end 2010.
- Liquidity and debt: Delta reported $5.6 billion of unrestricted liquidity, including $1.8 billion of availability under credit facilities. Total debt and capital leases were $14.7 billion, down $591 million from December 31, 2010. The balance sheet showed $13.892 billion net carrying value of debt, $12.802 billion of current liabilities and $785 million of stockholders’ equity. Delta was in compliance with financing covenants at June 30.
Material changes versus the prior comparable period
- Q2 revenue growth did not offset sharply higher fuel costs and other operating expenses; Q2 net income declined by $269 million year over year. For the first half, Delta moved from net income to a net loss.
- Delta’s fuel-hedge portfolio shifted from primarily WTI exposure to a mix of heating oil, Brent, WTI and jet fuel. In June, it discontinued hedge accounting for existing fuel derivatives; subsequent fair-value changes on those contracts will be recorded in earnings. Previously deferred gains included $114 million scheduled for reclassification through June 2012.
- Delta adopted new multiple-deliverable revenue guidance prospectively on January 1, 2011; adoption had no material impact on revenue timing or allocation.
- Delta entered into new senior secured credit facilities of up to $2.6 billion, used to refinance and retire its prior senior secured exit financing facilities. The new facilities include minimum liquidity, fixed-charge coverage and collateral-coverage requirements.
Outlook, management commentary and risks
- Management’s stated objective was to reduce non-fuel unit costs to 2010 levels by year-end 2011. Planned measures included fare adjustments, 4–5% lower system capacity in Q4 2011 year over year, retirement of 140 less-efficient aircraft by the end of 2012, workforce reductions and facility consolidation. Approximately 2,000 employees elected voluntary workforce-reduction programs; associated Q2 charges were $80 million.
- Management expected to meet cash needs for the next 12 months from operating cash flow, cash and investments, and financing arrangements. It also noted that substantially all assets are subject to liens, which could constrain access to additional financing on acceptable terms.
- Fuel remains a significant exposure: it represented 35% of first-half operating expense, including contract carriers. At June 30, 57% of projected fuel consumption for the second half of 2011 and 7% for 2012 was hedged. Three-way collars limit protection above preset ceilings; market-price changes may also affect hedge margins and earnings.
- Other notable commitments and contingencies include $2.6 billion of aircraft purchase commitments, principally for 18 Boeing 787-8 and 14 previously owned MD-90 aircraft; potential aircraft purchase or lease obligations if certain contract-carrier agreements are terminated; and legal matters for which potential losses could not be reasonably estimated. Management said legal proceedings and risk factors had no material changes from the 2010 Form 10-K.
- Delta’s $1.2 billion JFK terminal redevelopment was expected to proceed in stages over five years. A proposed LaGuardia/Reagan National slot transaction remained subject to conditions, including regulatory approvals. The filing also identifies possible operating and insurance risks if U.S. government war-risk insurance support is not extended beyond September 30, 2011.
Important facts for investors to verify
- Whether fare increases and capacity reductions can offset fuel-price pressure without further weakening load factors or revenue.
- How fuel prices, hedge performance, hedge-accounting changes and any related margin calls affect subsequent earnings and cash flow.
- Compliance with the secured facilities’ liquidity, fixed-charge and collateral covenants, and the timing and terms of upcoming debt maturities and aircraft refinancings.
- Execution, cost and expected returns of fleet, workforce, facility and JFK investment plans, as well as approval and completion of the proposed slot transaction.
- Potential outcomes and financial exposure from legal proceedings, contract-carrier termination rights and other contingencies; the filing does not provide clear loss estimates for certain matters.