Delta Air Lines, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Figures are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. The interim statements were reviewed by Ernst & Young, not audited.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Operating revenue | $9,388 | $8,916 | +5% |
| Operating income | $1,398 | $620 | +$778 |
| Operating margin | 14.9% | 7.0% | +7.9 pts |
| Income before tax | $1,186 | $335 | +$851 |
| Net income | $746 | $213 | +$533 |
| Diluted EPS | $0.90 | $0.25 | +$0.65 |
| Operating cash flow | $1,636 | $951 | +$685 |
Passenger revenue rose 3% to $7,923, with traffic up 3.6% and capacity up 5.0%; passenger revenue per available seat mile fell 1.7%, and load factor declined 1.0 point to 81.7%. Other revenue grew 22% to $1,248, primarily from loyalty program revenue and refinery product sales. Cargo revenue was unchanged at $217.
Operating expenses decreased 4% to $7,990. Consolidated CASM fell 8.3% to 14.12 cents; non-GAAP CASM-Ex declined 1.4% to 9.64 cents. Fuel expense including regional carriers fell $600 to $2,099, reflecting a 25% lower average price per gallon, partly offset by increased consumption and hedge losses. Salaries rose 6%, and profit-sharing expense rose 37%.
Q1 pre-tax income adjusted for special items, a non-GAAP measure, was $594, up 34% from $444. The adjustment included $589 of fuel hedge mark-to-market adjustments and settlements, including $302 paid to early settle certain contracts. This adjusted measure was below reported pre-tax income of $1,186.
Cash, debt and liquidity
- Cash and cash equivalents were $2,122 at quarter-end; short-term investments were $1,447. Delta reported $5.5 billion of unrestricted liquidity, including $1.9 billion in undrawn revolving credit facilities.
- Operating cash flow was $1,636. Investing activities used $812, including $586 of capital expenditures; financing activities used $790, including $301 of debt and lease payments, $425 of share repurchases and $75 of dividends. Cash increased $34 during the quarter.
- Debt and capital leases were $9.6 billion at principal value, down from $9.9 billion at December 31, 2014. Net carrying amount was $9,183; fair value was $9,600. Delta reported compliance with financing covenants.
- Current assets were $12,266 and current liabilities were $17,319. Air traffic liability rose to $5,866 from $4,296, consistent with advance ticket sales and seasonal patterns.
- Stockholders’ equity was $9,046. Delta repurchased 9.3 million shares for $425 during the quarter; the remaining authorization under its $2 billion repurchase program was $725 at March 31.
Material changes and management commentary
- Management attributed the sharp improvement in reported earnings chiefly to higher passenger revenue and lower fuel prices. Total fuel expense fell 22%, although fuel hedge losses and adjustments materially affected reported and adjusted comparisons.
- Domestic passenger revenue was strong, while international revenue was pressured by foreign-currency weakness and lower surcharges. Pacific PRASM fell 9.2%; Atlantic PRASM fell 2.9%; Latin America PRASM fell 4.2% amid currency weakness and economic concerns in Venezuela.
- The refinery segment earned $86 versus a $41 loss a year earlier. It supplied or obtained through exchanges approximately 164,000 barrels of jet fuel per day for airline operations.
- Delta contributed $904 to qualified pension plans in Q1 and another $296 in April, stating that this satisfied 2015 required contributions on an accelerated basis, including nearly $600 above minimum funding requirements.
Outlook, commitments and risks
- Management expected to meet cash needs for the next 12 months from operating cash flow, available cash and investments, and financing arrangements, and expected positive operating cash flow for the remainder of 2015.
- Management forecast approximately $2.8 billion of 2015 capital investment, primarily for aircraft and modifications, expected to be funded from operating cash flow. Aircraft purchase commitments totaled approximately $13.6 billion; long-term financing commitments covered a substantial portion, except for 18 Boeing 787-8 aircraft.
- Delta projected a 2015 effective tax rate of approximately 38% and reported about $12 billion of U.S. federal pre-tax net operating loss carryforwards; management expected no federal income tax payments in the next few years.
- Fuel-price volatility and hedge margin requirements are key cash-flow risks. Delta had posted $383 of hedge margin at quarter-end. Its sensitivity analysis estimated substantial changes in fuel cost and margin flows under hypothetical 20% or 40% fuel-price movements through 2016.
- Delta had $93 of unrestricted cash in Venezuela awaiting repatriation authorization; funds remain exposed to further devaluation. It also disclosed $13.6 billion in aircraft purchase commitments and ongoing legal matters, while management did not expect legal proceedings to have a material adverse effect.
- Delta recorded a $10 restructuring charge in Q1 as it continued fleet restructuring. It reported no material changes to the risk factors in its 2014 Form 10-K. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of the earnings improvement is sustainable after distinguishing lower fuel costs from hedge mark-to-market effects, early settlements and other special items.
- Whether passenger revenue and unit-revenue trends improve, particularly in international markets, as capacity, foreign exchange and demand conditions change.
- Fuel-hedge cash settlements, margin requirements and the effects of the restructured positions on 2015–2016 cash flow.
- Funding and liquidity implications of aircraft commitments, planned capital spending, pension contributions, debt reduction and shareholder returns.
- The timing and recoverability of Venezuelan funds, and any material developments in legal, environmental, labor or other contingencies.