Delta Air Lines, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. The interim financial statements were reviewed by Ernst & Young, not audited.
Business context and financial results
Delta operates an airline business and a refinery segment that supplies jet fuel to its airline operations. Q3 results benefited from passenger revenue growth and lower fuel costs. Management cautions that seasonal travel demand and fuel-price volatility mean interim results are not necessarily indicative of full-year results.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Operating revenue | $12,560 | $11,953 | $35,568 | $33,696 |
| Operating income | $2,071 | $1,645 | $5,219 | $4,173 |
| Income before tax | $1,947 | $1,688 | $4,800 | $3,806 |
| Net income | $1,495 | $1,322 | $3,669 | $2,916 |
| Diluted EPS | $2.31 | $1.92 | $5.59 | $4.18 |
| Operating cash flow | $2,245 | $1,500 | $7,468 | $5,769 |
Q3 operating margin was approximately 16.5% (13.8% in Q3 2018); nine-month operating margin was approximately 14.7% (12.4% in 2018). These percentages are calculated from reported revenue and operating income. Q3 declared dividends were $0.40 per share; nine-month dividends were $1.10 per share.
Liquidity, debt and investment
- At September 30, Delta reported $1.9 billion of cash and cash equivalents and $3.1 billion of undrawn revolving credit availability, or $5.0 billion of unrestricted liquidity. It expected cash flows, cash and financing facilities to meet cash needs for the next 12 months.
- Cash, cash equivalents and restricted cash totaled $2.7 billion at period end. Nine-month capital expenditures were $3.9 billion; the company returned $2.5 billion to shareholders through repurchases and dividends.
- The debt table reports $9.0 billion of total debt at carrying value; management separately reported $10.0 billion of principal debt and finance leases. Delta was in compliance with financing covenants.
- Aircraft purchase commitments totaled $13.9 billion. Expected 2019 investments were $4.5 billion. Q3 capital investments were $945 million; management’s non-GAAP free cash flow measure was $1.43 billion, versus $655 million in Q3 2018.
Material changes versus prior periods
- Q3 operating revenue rose 5.1%, led by passenger revenue, up 5.7%; premium-cabin and product ticket revenue increased 8.9%. Capacity rose 3.9%, adjusted TRASM increased 2.5%, and passenger load factor was 88.3%, up 1.4 percentage points.
- Operating expenses rose 1.8%. Fuel expense fell 10.4%, primarily as market fuel prices declined; salaries, contracted services, depreciation, maintenance and profit sharing increased. CASM fell 2.1%, while non-GAAP CASM-Ex rose 2.4%.
- Nine-month operating cash flow increased to $7.5 billion from $5.8 billion. Nine-month repurchases were $1.8 billion; Delta repurchased and retired 34 million shares during the period.
- American Express co-brand agreement amendments extended through 2029 and increased the value received. Delta attributed $130 million of Q3 revenue and $400 million of nine-month revenue primarily to the increased relative value of the brand component; it expected about $500 million of incremental revenue in 2019.
Outlook, risks and unusual items
- Management projected a 2019 annual effective tax rate of 23%–24% and expected 2019 investment of $4.5 billion. These are expectations, not guarantees.
- Delta announced a planned LATAM alliance and a tender offer for up to 20% of LATAM at $16 per share, subject to regulatory approval. It planned a separate $350 million investment to support the alliance, of which $150 million had been disbursed by quarter-end, and intended to sell its GOL stake and wind down GOL commercial agreements.
- Delta accelerated retirement of its MD-90 fleet to the end of 2022, recording $93 million of accelerated depreciation during the first nine months. A 10% U.S. tariff announced on new aircraft imported from Europe was under evaluation.
- Management cited foreign-exchange effects, economic uncertainty and added capacity as pressures on Atlantic and Pacific unit revenue. It also described fuel-price volatility, weather-related operating disruptions and the impact of Hurricane Dorian. No material changes to previously disclosed risk factors or legal proceedings were reported.
- Major infrastructure commitments include an estimated $3.3 billion net cost for the LaGuardia redevelopment, with Delta bearing construction and potential cost-overrun risk, and LAX redevelopment costs above the City’s $1.8 billion reimbursement cap being unreimbursed. Delta also guaranteed an $800 million credit facility for the LAX project entity.
Important facts for investors to verify
- Progress and required approvals for the LATAM alliance, tender offer, related funding and planned exit from GOL.
- Whether expected AmEx-related incremental revenue, 2019 investment spending and the projected tax rate are achieved.
- Aircraft delivery commitments, tariff effects, fleet-retirement costs and airport-project budgets, reimbursement and cost-overrun exposure.
- Trends in fuel costs, foreign exchange, international unit revenue, employee costs and non-GAAP measures; assess non-GAAP results alongside GAAP figures.
- Liquidity and debt obligations, including aircraft purchase commitments, lease liabilities and the distinction between reported debt carrying value and principal debt plus finance leases.