Delta Air Lines, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Financial statements are unaudited and were reviewed by Ernst & Young. Dollar amounts are in millions unless stated otherwise. Comparisons are with Q1 2017, recast for accounting-standard adoption and presentation changes where applicable.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Operating revenue | $9,968 | $9,101 | +9.5% |
| Operating income | $840 | $999 | −$159 |
| Operating margin | 8.4% | 11.0% | −2.6 percentage points |
| Income before taxes | $718 | $849 | −$131 |
| Net income | $547 | $561 | −2.5% |
| Diluted EPS | $0.77 | $0.77 | Flat |
| Operating cash flow | $1,343 | $(830) | Improved by $2,173 |
| Capital expenditures | $1,265 | $802 | Increased |
Passenger revenue rose 7.2% to $8,765; cargo revenue increased 23.4% to $202 and other revenue increased 31.7% to $1,001. Passenger revenue per available seat mile (PRASM) increased 4.3%; total revenue per available seat mile (TRASM) rose 6.6%, or 5.0% excluding third-party refinery sales. Capacity increased 2.7%, and load factor was 82.9%, unchanged year over year.
Operating expenses rose 12.7% to $9,128, faster than revenue. Fuel expense increased 25.2% to $1,856, reflecting an approximately 23% increase in market price per gallon and higher consumption. Salaries and related costs increased 8.3% to $2,584. CASM increased 9.6% to 15.35 cents; CASM-Ex increased 3.9% to 11.10 cents. Operating and net margins above are calculated from reported figures.
At March 31, cash and cash equivalents were $1,447 and short-term investments were $523. Management reported $4.4 billion of unrestricted liquidity, including $2.0 billion of cash and short-term investments and $2.4 billion in undrawn revolving credit facilities. Debt and capital leases had a principal amount of $8.7 billion ($8,234 net carrying amount); Delta reported compliance with financing covenants. Total assets were $54,078 and stockholders’ equity was $12,557. The company repurchased $325 million of shares and paid $217 million in dividends; total shareholder returns were reported at $542 million.
Material changes and accounting
- Pre-tax income fell $131 million, mainly due to higher salary and fuel costs, partly offset by higher passenger revenue. Adjusted pre-tax income, a non-GAAP measure, was $676 versus $781.
- Revenue from all regions grew, with particularly strong Atlantic unit revenue. Management cited broad-based leisure and business demand, foreign-exchange improvements, and Branded Fares expansion.
- Delta adopted the revenue recognition standard retrospectively. Approximately $2 billion of annual revenue was reclassified from other to passenger revenue; the adoption increased the December 2017 frequent-flyer liability by $2.2 billion and reduced air traffic liability by $524 million. The company said the standard did not significantly affect earnings overall, but prior-period comparisons were recast.
- Delta adopted a financial-instruments standard that moved fair-value changes on certain equity investments into earnings; Q1 included an $18 million net unrealized investment gain. It also adopted a retirement-benefits standard and reclassified $12 million of Q1 2017 expense from operating to non-operating expense.
Outlook, risks and contingencies
- Management expected positive operating cash flow for the remainder of 2018 and said available liquidity and expected cash generation would meet cash needs for the next 12 months. The projected 2018 effective tax rate was approximately 23%.
- Expected 2018 investments were approximately $4.5 billion. Aircraft purchase commitments totaled approximately $17.2 billion, and the company expected to spend about $550 million on the LaGuardia redevelopment and $200 million on the LAX project during 2018. Delta bears construction-cost risk on the approximately $3.3 billion LaGuardia project.
- Delta voluntarily contributed $500 million to qualified pension plans in Q1; it reported no minimum pension funding requirement for 2018. It paid $1.1 billion of profit sharing in February for 2017 results.
- Fuel-price volatility is a significant operating and cash-flow risk. Delta reported $1,856 million of Q1 fuel expense and stated fuel represented approximately 20% of operating expenses. Its refinery generated $44 million of operating income, unchanged from Q1 2017.
- A third-party chat-services vendor notified Delta of a cyber incident involving its desktop website tool in September–October 2017. Delta said malware potentially exposed payment-card and personal data for several hundred thousand customers. It planned customer notifications and free credit monitoring; remediation and other costs were expected but not quantified.
- Delta reported various legal proceedings and believed their resolution would not materially adversely affect its financial statements. In the first-bag-fee antitrust case, the Eleventh Circuit affirmed judgment for defendants, but the further-appeal period had not expired.
- Delta said adoption of the new lease standard in 2019 would significantly affect its balance sheet, but was not expected to significantly affect lease expense or cash-flow presentation. The filing also identifies estimation sensitivity in SkyMiles accounting: a hypothetical 10% change in estimated miles expected to be redeemed could affect annual recognized revenue by approximately $200 million.
Most important facts for investors to verify
- Whether revenue momentum and unit-revenue gains continue to offset higher fuel, labor and other operating costs.
- Fuel-price exposure, hedge effects, and the sustainability of refinery performance and reported fuel-cost benefits.
- Cash generation, liquidity availability, debt obligations, pension funding, and the scale and timing of aircraft and airport capital spending.
- SkyMiles liability valuation and redemption assumptions, including the effects of accounting estimates on reported revenue and earnings.
- The extent, costs and potential liability arising from the vendor cyber incident, and the status of the antitrust case and other contingencies.