Business context and reporting period
Delta Air Lines, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2012. The filing covers the airline and its consolidated subsidiaries. Results are subject to seasonality, fuel-price volatility and broader economic conditions and may not indicate full-year performance.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Operating revenue | $9.732 billion | $9.153 billion | $18.145 billion | $16.900 billion |
| Operating income | $134 million | $481 million | $516 million | $389 million |
| Net income (loss) | $(168) million | $198 million | $(44) million | $(120) million |
| Diluted earnings (loss) per share | $(0.20) | $0.23 | $(0.05) | $(0.14) |
| Operating cash flow | Not separately presented | Not separately presented | $1.463 billion | $1.774 billion |
- Q2 passenger revenue rose 7% to $8.451 billion; traffic was flat, capacity fell 1%, passenger yield increased 7%, and PRASM rose 8% year over year.
- Q2 operating expenses increased 11% to $9.598 billion. Fuel expense, including contract-carrier fuel, was $3.826 billion, up $618 million; fuel consumption declined 2%. Reported average fuel cost was $3.95 per gallon, or $3.37 excluding fuel-hedge mark-to-market adjustments.
- CASM increased to 16.16 cents from 14.42 cents; CASM-Ex, a company-defined non-GAAP measure, increased to 8.77 cents from 8.46 cents. Q2 passenger load factor was 85.1%, up from 83.7%.
- At June 30, cash and cash equivalents were $2.539 billion, short-term investments $959 million, and unrestricted liquidity was $5.3 billion, including $1.8 billion of credit-facility availability. Six-month cash declined by $118 million to $2.539 billion.
- Total debt and capital leases were approximately $13.0 billion, down $791 million from year-end 2011; reported long-term debt and capital leases, including current maturities, totaled $13.0 billion. Stockholders’ deficit was $1.135 billion. Pension, postretirement and related benefit liabilities were $13.613 billion.
- Six-month investing cash outflow was $1.001 billion, including $180 million for the refinery acquisition; financing cash outflow was $580 million. Delta contributed $678 million to defined-benefit pension plans in the first half.
Material changes versus comparable periods
- Q2 revenue growth did not translate into higher operating income: operating income fell $347 million and Delta reported a net loss versus prior-year net income. The principal pressures were fuel costs and fuel-hedge losses, alongside a $171 million severance and retiree-healthcare charge.
- Six-month revenue increased 7% and operating income improved to $516 million from $389 million, but Delta still recorded a net loss of $44 million. Operating cash flow declined $311 million year over year.
- Fuel-hedge losses recognized in fuel expense were $716 million in Q2 and $520 million for the first half; the Q2 amount included $561 million of mark-to-market losses, primarily on contracts settling in future periods. Delta said the significant decline in fuel prices drove the valuation losses.
- Delta acquired a Philadelphia-area refinery through Monroe Energy on June 22 for $180 million and purchased $50 million of inventory. A $30 million public grant was expected to offset the acquisition price.
Outlook, commentary, risks and unusual items
- Delta said it expected to meet cash needs for the next 12 months using operating cash flow, cash, short-term investments and financing arrangements. It gave no specific earnings or revenue guidance in the supplied filing text.
- Monroe planned approximately $100 million of refinery modifications, with jet-fuel production expected to begin in fall 2012. Delta expected the refinery and supply agreements with BP and Phillips 66 to reduce fuel costs; these are expectations, not reported realized savings.
- Delta completed a $480 million aircraft-backed pass-through certificate offering in July 2012, after quarter-end, at a weighted-average interest rate of 5.31%. Proceeds were held in escrow and intended primarily to refinance aircraft debt.
- Aircraft purchase commitments were approximately $6.8 billion. A July 2012 agreement added 88 B-717 aircraft for delivery during 2013–2015. Delta said it had committed long-term financing for a substantial portion of aircraft purchases.
- Fuel remains a major risk: it represented 37% of first-half operating expenses including contract carriers. Fuel hedges require margin funding; Delta had posted $350 million at June 30. Its sensitivity analysis showed material potential fuel-cost and hedge-cash impacts under 10% or 20% price changes.
- Delta identified risks specific to operating the refinery, including production interruption, insurance gaps and environmental regulation. Other disclosed risks include fuel availability and pricing, the ability to pass costs to customers, and dependence on financing; significant assets are subject to liens.
- Delta had a $10.6 billion valuation allowance against deferred tax assets. It also expected a non-cash $321 million tax expense in Q4 2012 related to prior fuel-hedge accounting, unless qualifying additional hedges were designated before settlement.
- Approximately 2,000 employees enrolled in voluntary workforce-reduction programs; related severance and retiree-healthcare charges were $171 million. The pilot agreement was ratified in June and took effect July 1, 2012. Delta reported compliance with financing covenants and effective disclosure controls; the interim financial statements received an accountant’s review, not an audit.
Important facts for investors to verify
- Whether fuel-hedge losses translate into future cash settlements as projected, and the resulting margin requirements and realized fuel costs.
- Whether the refinery conversion, production start-up, grant funding and supply/exchange arrangements deliver the expected fuel savings, and whether operational, insurance or environmental costs arise.
- Whether liquidity and operating cash generation remain sufficient for debt service, pension funding and the substantial aircraft commitments; confirm the use of the July certificate proceeds and upcoming refinancing needs.
- Whether the cumulative profitability trend supports any future release of the deferred-tax valuation allowance, and whether the anticipated $321 million tax charge occurs.
- Whether labor, fleet and network changes—including pilot compensation changes and new aircraft deliveries—produce the expected productivity and unit-cost outcomes.