DELTA AIR LINES, INC. annual report, FY2022

Delta Air Lines, Inc. — FY2022 Form 10-K

Business context and reporting period. This annual report covers the fiscal year ended December 31, 2022; it is not a standalone fourth-quarter report. Delta operates a global passenger and cargo airline and the Trainer refinery through its Monroe subsidiary. The year marked a continuing recovery in air travel demand: Delta served approximately 177 million customers, while system capacity remained 15% below 2019.

Financial performance and position

Metric	FY2022	FY2021	FY2019
Operating revenue	$50.6 billion	$29.9 billion	$47.0 billion
Operating income (GAAP)	$3.7 billion	$1.9 billion	$6.6 billion
Net income	$1.3 billion	$280 million	Not stated in the comparison table
Operating margin (calculated)	7.2%	6.3%	14.1%
Operating cash flow	$6.4 billion	$3.3 billion	Not stated in the comparison table
Capital expenditures	$6.4 billion	$3.2 billion	Not stated in the comparison table

• Revenue increased 69% year over year. Passenger revenue rose 79% to $40.2 billion; premium-ticket revenue rose 92% to $15.2 billion, and main-cabin ticket revenue rose 79% to $20.4 billion.
• Operating expenses were $46.9 billion, up 67%. Fuel expense increased 104% to $11.5 billion; the average fuel price was $3.36 per gallon versus $2.02 in 2021. Salaries and related costs increased 22% to $11.9 billion.
• GAAP diluted earnings per share were $2.06, compared with $0.44 in 2021. Net income was affected by $1.7 billion of net non-operating expense, including $783 million of net investment losses.
• Management-reported adjusted operating income was $3.6 billion; adjusted CASM-Ex was 12.87 cents, up 6% from 2021. These are non-GAAP measures and exclude specified items.
• Management-reported free cash flow was $244 million, a non-GAAP measure. Cash and cash equivalents were $3.3 billion, with $3.3 billion of short-term investments; reported liquidity, which also includes available revolving credit, was $9.4 billion.
• Debt and finance lease principal totaled approximately $23.2 billion at year-end. Delta repaid approximately $4.5 billion of debt and finance lease obligations during 2022. It reported $2.9 billion available under revolving facilities and compliance with debt covenants.
• Passenger load factor was 84%, versus 69% in 2021 and 86% in 2019. Total revenue per available seat mile was 21.69 cents; CASM was 20.12 cents.

Material changes versus comparable periods

• Compared with 2021, the recovery in travel demand drove higher revenue and operating income. The comparison is affected by $4.5 billion of payroll-support grants recognized as an expense reduction in 2021; Delta reported adjusted operating income of negative $2.5 billion for 2021 after its specified adjustments.
• Compared with 2019, revenue was 8% higher, but operating income was 45% lower. Delta attributed the shortfall principally to higher operating costs, including fuel cost up 35%, and capacity 15% below 2019.
• Refinery segment operating income was $777 million, versus a $2 million loss in 2021. The improvement reflected higher production and pricing, partly offset by increased renewable fuel compliance costs.
• Stockholders’ equity rose to $6.6 billion from $3.9 billion, and retained earnings returned to a positive balance. Cash and cash equivalents declined from $7.9 billion to $3.3 billion, primarily amid investment spending and debt repayments.

Outlook, commentary, risks and unusual items

• Management expected 2023 system capacity to recover to or exceed 2019 levels, with domestic recovery focused on core hubs. It expected non-fuel unit costs to decrease from 2022 as capacity recovered, while citing inflation and labor-cost pressures. These are expectations, not a guarantee; the filing does not provide clear full-year revenue or earnings guidance.
• Delta expected an effective tax rate of 23%–26% for 2023. Expected 2023 capital spending was approximately $5.5 billion, excluding the LaGuardia project.
• A January 2023 tentative pilot agreement remained subject to a pilot ratification vote scheduled to close March 1, 2023. It included an 18% pay-rate increase in 2023 and an approximately $700 million one-time payment upon ratification; Delta had not accrued that payment at year-end because ratification was uncertain.
• Fuel-price volatility is a major exposure: fuel represented approximately 24% of operating expense, and management expected elevated jet-fuel prices early in 2023. Demand, labor availability, severe weather, operational disruptions, competition and economic conditions are additional material risks.
• Delta’s environmental obligations and targets carry cost and execution uncertainty. Sustainable aviation fuel was not available at the scale or cost needed for broad adoption; proposed PFAS rules could create cleanup liability, and volatile renewable identification number (RIN) prices affect refinery costs. Monroe reported a $226 million net fair-value RIN obligation at year-end.
• Other notable items include a $100 million loss on extinguishment of debt and $116 million of carbon-offset costs. Dividends remained suspended; future payments depend on board decisions and financial conditions. A consolidated airline-capacity antitrust lawsuit remained pending, although Delta said it believed the claims were without merit. Management and the auditor reported effective internal controls, and the auditor gave an unqualified opinion on the financial statements.

Most important facts for investors to verify

• Whether capacity recovery, demand strength and the projected decline in non-fuel unit costs materialize in 2023, particularly given remaining cost inflation and labor commitments.
• How fuel prices and refinery results evolve, including RIN compliance costs and settlement of the 2021–2022 RIN obligations.
• Debt repayment progress, upcoming scheduled maturities, liquidity and covenant headroom; distinguish reported liquidity from cash available on the balance sheet.
• The final outcome and financial impact of the pilot agreement, including its one-time payment and ongoing wage costs.
• Whether management’s non-GAAP adjusted results and free-cash-flow measure reconcile to GAAP results as described, and how much cash is required for aircraft purchases and airport projects.
• Potential exposures from the antitrust litigation, environmental rules and obligations, airline-partner investments, and estimates underlying loyalty-program deferred revenue and ticket breakage.