Delta Air Lines, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013. Dollar amounts are in millions unless stated otherwise. The interim financial statements were reviewed, not audited.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Operating revenue | $10,490 | $9,923 | $28,697 | $28,068 |
| Operating income | $1,563 | $1,308 | $2,699 | $1,824 |
| Net income | $1,369 | $1,047 | $2,061 | $1,003 |
| Diluted EPS | $1.59 | $1.23 | $2.40 | $1.18 |
| Operating margin | 14.9% | 13.2% | 9.4% | 6.5% |
Q3 revenue rose 6% year over year; passenger revenue increased 7%, reflecting 2% more traffic, 3% greater capacity, and 4% higher PRASM. Q3 operating expense rose 4%, led by salaries, profit sharing, and fuel. Reported fuel expense was $2,835 million, while adjusted fuel cost per gallon was $2.97 versus $3.14 a year earlier. Nine-month revenue rose 2%, while operating expense fell 1%, mainly as lower fuel costs offset higher labor and other costs.
Cash flow, balance sheet, and liquidity
- Nine-month operating cash flow was $3,373, up from $1,926 in 2012. Investing cash outflow was $1,808, including $1,616 of capital expenditures and the $360 Virgin Atlantic investment. Financing cash outflow was $963. Cash increased $602 to $3,018.
- At September 30, cash and short-term investments totaled about $4.0 billion; unrestricted liquidity, including $1.8 billion of undrawn revolving credit capacity, was $5.8 billion. Management expected to meet cash needs for the next 12 months from operating cash flow, available cash and investments, and financing arrangements.
- Debt and capital leases, including current maturities, were $11.9 billion, down $809 from December 31, 2012. Debt at par was $11.82 billion; net carrying amount was $11.39 billion. Delta reported compliance with financing covenants.
- Total assets were $46.0 billion and stockholders’ equity was $137 million, compared with a $2.13 billion stockholders’ deficit at year-end 2012. Pension and postretirement liabilities were $15.4 billion; current liabilities were $14.1 billion.
- Delta contributed $650 million to defined-benefit pension plans in the first nine months, satisfying its required 2013 contributions on an accelerated basis.
Material changes and management commentary
- Delta acquired Endeavor Air as its sole owner in May 2013 for consideration of $30 million, primarily prior loans and advances. Delta said the aircraft were already operating for it and capacity was unaffected.
- Delta bought a 49% interest in Virgin Atlantic for $360 million and received U.S. antitrust immunity for the transatlantic joint venture in September. Delta recorded $40 million of equity-method income from Virgin Atlantic in Q3.
- Delta and American Express modified their SkyMiles agreements, changing revenue allocation and reducing the amount deferred per mile sold. Delta expects an insignificant 2013 revenue effect and a 2014 revenue increase of less than $100 million; it reduced the related frequent-flyer liability by less than $10 million in Q3.
- Management said its $1 billion structural-cost initiative was producing benefits expected to increase through 2015. Fleet renewal targets removal of more than 200 50-seat regional aircraft and replacement of older aircraft with newer models.
- Delta announced a plan to return more than $1 billion to shareholders over three years. It paid a $0.06-per-share quarterly dividend totaling $51 million and repurchased about 5 million shares for approximately $100 million in Q3 under a $500 million authorization.
Outlook, risks, contingencies, and unusual items
- Management expected positive operating cash flow for the remainder of 2013 and approximately $2.8 billion of 2013 investment, primarily for aircraft, aircraft modifications, and the Virgin Atlantic stake. Aircraft purchase commitments totaled approximately $9.9 billion, with long-term financing arranged for a substantial portion, except for the 18 Boeing 787-8 aircraft.
- Delta retained a $10.1 billion full valuation allowance against net deferred tax assets. Management said that, if profitability continued and was projected to persist, it might reverse substantially all of the allowance as early as year-end 2013; this was not assured.
- The refinery’s renewable-fuel compliance obligation created exposure to volatile Renewable Identification Number (RIN) prices and availability. Delta recorded about $16 million of Q3 RIN expense and warned that elevated prices or limited availability could materially affect 2013 results and cash flows, or constrain refinery production. The refinery reported Q3 income of $3 million.
- Fuel-hedge gains were significant: $337 million in Q3, including $285 million of mark-to-market adjustments, and $336 million for the first nine months. Future fuel prices and hedge settlements may differ from period-end valuations; changes in prices can also affect margin requirements and cash flows.
- Domestic fleet restructuring generated $106 million of Q3 and $242 million of nine-month charges in 2013, primarily for older aircraft. Delta anticipated further potentially material lease-termination and other charges as aircraft are retired; timing and amounts depend on retirements and lessor negotiations.
- Delta identified refinery environmental regulation, including RIN requirements, as an updated risk. It also noted seasonality in advance ticket sales, fuel-price volatility, and the possibility that loss of U.S. government war-risk insurance after its then-current December 31, 2013 extension could increase costs or disrupt operations. Management said resolution of its disclosed legal matters was not expected to materially adversely affect the financial statements.
Important facts for investors to verify
- Whether passenger revenue growth, PRASM, and operating margins remain sustainable as capacity and operating costs change.
- Actual fuel expense, hedge settlements and margin calls, and the refinery’s RIN costs, availability, and operating results.
- Progress and financing of the $9.9 billion aircraft commitments, and the timing and amount of additional fleet-retirement charges.
- Whether profitability supports reversal of the $10.1 billion deferred-tax valuation allowance, and the resulting accounting impact.
- Realized performance and cash needs associated with the Virgin Atlantic investment, shareholder returns, and the SkyMiles agreement changes.