Delta Air Lines, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018, compared with the same 2017 periods. Financial statements are unaudited; the independent accountant performed an interim review, not an audit.
Business context and results
Delta operates an airline and refinery segment. Quarterly revenue growth reflected higher capacity, strong demand and fare increases, while substantially higher fuel costs pressured operating income. Results are subject to seasonality and fuel-price volatility.
| Metric (USD millions, except per-share data and margins) | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Operating revenue | 11,953 | 11,061 | 33,696 | 30,910 |
| Operating income | 1,642 | 1,823 | 4,161 | 4,805 |
| Operating margin | 13.7% | 16.5% | 12.4% | 15.5% |
| Net income | 1,312 | 1,159 | 2,884 | 2,907 |
| Net margin | 11.0% | 10.5% | 8.6% | 9.4% |
| Diluted EPS | $1.91 | $1.61 | $4.14 | $4.00 |
| Operating cash flow | — | — | 5,650 | 3,132 |
| Capital expenditures | — | — | 3,813 | 2,731 |
Q3 passenger revenue rose 8.2%; passenger revenue per available seat mile increased 4.2%, while load factor was flat at 86.9%. For the nine-month period, passenger revenue increased 7.8% and load factor edged down 0.1 percentage point to 85.6%. The filing reports non-GAAP CASM-Ex of 9.62 cents for Q3, unchanged year over year, and 10.19 cents for the nine months, up 2.2%.
Financial position, liquidity and capital allocation
- At September 30, cash and cash equivalents were $1.38 billion and short-term investments were $478 million. The company reported nearly $5.1 billion of unrestricted liquidity, including $3.2 billion in undrawn revolving facilities. An additional $1.214 billion was restricted for airport construction.
- Total debt was $8.881 billion carrying value, including $1.080 billion of current maturities; long-term debt was $7.801 billion. Debt and capital lease principal was $9.3 billion. Delta reported compliance with financing covenants.
- Current assets of $6.726 billion were below current liabilities of $18.158 billion. Frequent flyer deferred revenue was $6.542 billion in total.
- Nine-month financing included $1.6 billion of unsecured notes and $1.4 billion of LaGuardia-related revenue bonds. The latter proceeds are restricted to airport construction.
- Delta spent $1.25 billion repurchasing shares and paid $670 million in dividends during the first nine months. It repurchased 23 million shares during that period and paid a Q3 dividend of $0.35 per share.
Material changes and unusual items
- Q3 operating expenses rose 11.6%, faster than revenue growth of 8.1%; operating income declined $181 million. Fuel expense increased $713 million, or 39.9%, as market fuel price per gallon rose about 36% and consumption increased 2%. For the nine months, fuel expense rose $1.739 billion, or 35.1%.
- Q3 net income increased despite lower operating income, alongside lower tax expense and $50 million of net unrealized gains on equity investments. Nine-month net income was $23 million lower year over year; investment remeasurement produced a $171 million net unrealized loss.
- Operating cash flow increased to $5.65 billion from $3.13 billion, which Delta attributed in part to lower pension contributions in 2018; it voluntarily contributed $500 million to pension plans in 2018 versus $3.2 billion in the first half of 2017, plus $350 million of treasury shares in 2017.
- Revenue-recognition adoption increased the December 2017 frequent flyer liability by $2.2 billion and reduced air traffic liability by $524 million, with no significant effect on earnings. The company cautions that mileage redemption and valuation assumptions can materially affect revenue.
Outlook, risks and contingencies
- Management expected positive operating cash flow for the remainder of 2018 and said cash flow, cash and investments, and financing arrangements should cover cash needs over the following 12 months. Expected 2018 investment was approximately $4.9 billion. The filing does not provide clear full-year revenue or earnings guidance; it projected an approximately 23% annual effective tax rate.
- Fuel-price exposure is significant; Delta reported fuel at about 23% of operating expenses for the first nine months. Fuel hedges were primarily related to refinery margins, and Delta recorded net fuel-hedge losses of $85 million for the nine months.
- Aircraft purchase commitments totaled approximately $15.5 billion. Delta estimated its LaGuardia terminal project costs at $3.3 billion, bears construction-cost risk, and expected completion by 2026. LAX terminal redevelopment also entails substantial multiyear investment.
- The refinery began a planned turnaround at September’s end, expected to last 50–60 days, during which it would not produce refined products. Hurricane Florence reduced Q3 unit revenue growth by nearly half a percentage point; Latin American performance faced currency and macroeconomic challenges.
- Delta said its legal proceedings were not expected to have a material adverse effect. In the first-bag-fee antitrust case, appellate judgment favored Delta, but the period to seek U.S. Supreme Court review had not expired. The company reported no material changes to previously disclosed risk factors.
- Adoption of the new lease accounting standard was expected to materially affect the balance sheet, but not materially affect lease expense or cash-flow presentation. Delta had not completed its transition assessment.
Important facts for investors to verify
- Whether fare increases and revenue growth can offset continued fuel inflation and other cost pressures.
- Cash-flow conversion and liquidity available after restricted construction cash, capital spending, debt service, pension contributions and shareholder returns.
- Progress, financing and potential cost overruns for LaGuardia and LAX projects, alongside the $15.5 billion aircraft commitment schedule.
- Frequent-flyer liability assumptions: Delta estimated a hypothetical 10% change in miles expected to be redeemed could affect annual revenue by about $200 million; a 10% increase in estimated equivalent ticket value could reduce annual revenue by about $100 million.
- Refinery turnaround performance, fuel-hedge outcomes, investment-value volatility and the outcome of any further appeal in the antitrust matter.