Delta Air Lines, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2014. The interim financial statements are unaudited; the independent accountant performed a review, not an audit.
Business context and financial performance
Delta operates an airline and an oil refinery. Management attributed stronger results to solid travel demand, higher passenger revenue, and lower fuel expense, partly offset by higher employee-related and capacity-driven costs.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Operating revenue | $10.621 billion | $9.707 billion | $19.537 billion | $18.207 billion |
| Operating income | $1.579 billion | $914 million | $2.199 billion | $1.136 billion |
| Income before taxes | $1.298 billion | $686 million | $1.633 billion | $689 million |
| Net income | $801 million | $685 million | $1.014 billion | $692 million |
| Diluted EPS | $0.94 | $0.80 | $1.19 | $0.81 |
| Operating cash flow | Not separately provided | Not separately provided | $3.007 billion | $2.212 billion |
Q2 revenue rose 9%, including passenger revenue growth of 9%; passenger revenue per available seat mile (PRASM) increased 6%. Management reported Q2 pre-tax margin expansion of five percentage points. Consolidated operating cost per available seat mile (CASM) declined 0.4% to 14.63 cents; CASM-Ex, a non-GAAP measure, was unchanged at 8.98 cents.
Cash, debt, and liquidity
- At June 30, cash and cash equivalents were $3.362 billion and short-term investments were $719 million. Management reported $6.0 billion of unrestricted liquidity, including $1.9 billion of undrawn revolving credit facilities.
- Total debt and capital leases, including current maturities, were about $10.3 billion, down $1.0 billion from December 31, 2013. Six-month debt and lease payments were $1.477 billion; early debt retirements generated a $129 million loss.
- Six-month investing cash outflow was $842 million, including $1.132 billion of capital expenditures. Financing cash outflow was $1.647 billion, including $350 million of share repurchases and $101 million of dividends. Cash and cash equivalents increased $518 million to $3.362 billion.
- Delta contributed $905 million to qualified defined-benefit pension plans in the first four months of 2014, satisfying 2014 required contributions early and including $250 million above minimum funding requirements.
Material changes and outlook
- Q2 fuel expense, including regional carriers, fell $168 million year over year to $2.934 billion; average fuel cost was $2.93 per gallon versus $3.16. Fuel expense represented about 32% of operating expense. Fuel hedges generated a $97 million Q2 gain; refinery operations recorded a $13 million profit.
- Profit-sharing expense increased to $340 million in Q2 from $118 million, reflecting higher projected annual pre-tax profit. Salaries and related costs rose 6% in Q2, while total operating expense rose 3%.
- Management expected positive operating cash flow for the remainder of 2014 and approximately $2.3 billion of 2014 investment, primarily aircraft and modifications, funded through operating cash and new financing. It projected a 2014 annual effective tax rate of about 38% and said it expected no federal cash income taxes for several years, citing more than $14 billion of federal NOL carryforwards.
- Aircraft purchase commitments totaled approximately $8.9 billion, with long-term financing commitments secured for a substantial portion, except for 18 Boeing 787-8 aircraft. Delta added 15 Airbus A321-200 aircraft to its orders; deliveries are scheduled to begin in 2018.
- Delta completed its prior $500 million repurchase authorization and launched a new $2 billion program through 2016. It planned to raise the quarterly dividend 50%, to $0.09 per share beginning in the September 2014 quarter; the company expected the new program and increased dividends together to return an additional $2.75 billion through 2016.
- Fleet restructuring charges were $30 million in Q2. Management estimated another $120–$220 million of future charges, in addition to the Q2 charge. A voluntary employee retirement program was announced; the related charge was expected when severance commitments were finalized in the September quarter.
Risks, contingencies, and unusual items
- Venezuela: $194 million of ticket-sale cash was awaiting repatriation authorization and remained exposed to further devaluation. Delta recorded a $23 million devaluation charge and announced a significant service reduction beginning August 1, 2014, with refunds for affected tickets paid in local currency.
- Refinery/RIN exposure: The refinery recorded $20 million of Q2 expense for renewable fuel credits (RINs). Delta warned that elevated prices or limited secondary-market availability could materially affect results and cash flows. A major product-exchange agreement with BP ended early effective July 1, 2014, and was replaced by another counterparty.
- Fuel and hedging: Fuel prices are volatile, and derivative margin requirements can require cash postings. Delta’s sensitivity analysis estimated that a 20% fuel-price increase through December 2015 would raise unhedged fuel cost by $3.4 billion, partly offset by $140 million of hedge gains.
- Debt and commitments: Delta was in covenant compliance at quarter-end, but noted that liens on a significant portion of assets could constrain additional financing. Aircraft commitments and leases require substantial future funding.
- Delta said there were no material changes to previously disclosed legal proceedings or risk factors. It could not reasonably estimate potential losses for certain legal matters; management did not expect resolution of the proceedings to materially adversely affect the financial statements.
- The filing states that seasonal travel demand, fuel-price volatility, and other factors mean interim results are not necessarily indicative of full-year results. Forward-looking statements are subject to risks and are not commitments to update.
Important facts for investors to verify
- Whether passenger revenue and unit-revenue momentum persist, especially in the Pacific and Latin America regions.
- Fuel prices, hedge settlements and margin needs, and RIN availability and cost at the refinery.
- Progress in repatriating the $194 million of Venezuelan cash and the effect of reduced Venezuela service and ticket refunds.
- Funding and delivery plans for aircraft commitments, expected 2014 capital spending, and the pace of debt reduction.
- Actual restructuring and retirement-program charges, pension funding, and the sustainability of planned shareholder returns.