Delta Air Lines, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparative period is Q1 2012. Amounts are in U.S. dollars. Delta’s results are seasonal and are not necessarily indicative of full-year performance.
Financial results and position
| Metric | Q1 2013 | Q1 2012 / prior balance date |
|---|---|---|
| Operating revenue | $8.500 billion | $8.413 billion; up 1% |
| Operating income | $222 million; 2.6% operating margin | $382 million; 4.5% margin |
| Net income | $7 million; diluted EPS $0.01 | $124 million; diluted EPS $0.15 |
| Operating cash flow | $1.004 billion | $831 million |
| Capital expenditures | $647 million | $407 million |
| Cash and cash equivalents | $2.636 billion | $2.416 billion at Dec. 31, 2012 |
| Unrestricted liquidity | $5.4 billion, including $1.8 billion of undrawn credit facilities | Not stated as a comparable figure |
| Debt and capital leases | $12.3 billion | Down $395 million from Dec. 31, 2012 |
Revenue included $7.333 billion of passenger revenue, up 1%; mainline passenger revenue rose 4%, while regional-carrier passenger revenue declined 7%. Passenger yield increased 2%, traffic fell 1%, capacity fell 3%, and load factor improved to 81.2% from 79.7%. PRASM rose 4% to 13.83 cents. Operating expenses increased 3% to $8.278 billion, principally because of higher salaries and fuel. CASM rose 5.8% to 15.61 cents; non-GAAP CASM-Ex rose 5.0% to 9.75 cents.
Fuel expense, including contract carriers, was $2.808 billion, up 2%; consumption declined 1%, while average price per gallon increased 3%. Delta recorded $77 million of fuel-hedge gains, compared with $196 million a year earlier. Adjusted average fuel cost, excluding mark-to-market adjustments, was $3.24 per gallon versus $3.28.
Cash increased by $220 million during the quarter. Investing activities used $630 million and financing activities used $154 million, including $299 million of debt and capital-lease payments. At March 31, total assets were $45.068 billion and stockholders’ deficit was $1.943 billion. The company reported $15.865 billion of pension, postretirement and related benefit liabilities. Debt covenants were in compliance.
Material changes and operating developments
- Operating income fell $160 million year over year and net income fell $117 million, despite modest revenue growth. The filing attributes cost pressure chiefly to salaries and fuel; salary costs rose 8%, or $148 million.
- Restructuring and other items were a $102 million expense in Q1 2013, primarily for domestic fleet restructuring, versus a $12 million net credit in Q1 2012. Delta cautioned that fleet retirements may cause further material lease-termination and related charges.
- Delta’s refinery segment reported a $22 million operating loss; the airline segment reported $244 million of operating income. Delta said the refinery is intended to mitigate refining-margin costs, and substantially all non-jet products are covered by exchange or buy/sell agreements.
- Delta contributed $150 million to defined-benefit pension plans during the quarter and another $500 million in April, satisfying 2013 required contributions on an accelerated basis.
Outlook, commitments, and risks
- Management expected positive operating cash flow for the remainder of 2013 and said cash, investments, operating cash flow, and financing arrangements should meet needs for the next 12 months.
- Delta expected CASM-Ex growth to moderate in the second half of 2013 as its $1 billion structural-cost initiative delivers benefits, with benefits expected to increase through 2015.
- The company expected to invest more than $2 billion in 2013, primarily in aircraft and modifications and a proposed $360 million investment for 49% of Virgin Atlantic. The Virgin Atlantic purchase and related joint venture remained subject to regulatory approval and antitrust immunity.
- Aircraft purchase commitments totaled approximately $8.015 billion, including commitments for 100 B-737-900ERs, 18 B-787-8s, and 56 CRJ-900s. Delta also agreed to lease 88 B-717-200s, with deliveries beginning in 2013.
- Fuel is a major exposure: fuel and related taxes represented approximately 34% of operating expenses. Hedge contracts may require margin payments; Delta’s sensitivity analysis showed that significant fuel-price movements could materially affect fuel costs and hedge margins.
- Delta maintained an $11.0 billion valuation allowance against deferred tax assets, concluding it remained necessary despite moving to a cumulative income position in 2012. Other disclosed uncertainties include legal matters, indemnification obligations, and government war-risk insurance coverage scheduled through September 30, 2013.
- Management reported no material changes to the risk factors or legal proceedings previously described in the 2012 Form 10-K. Forward-looking statements are subject to risks and are not guarantees of future results.
Investor verification priorities
- Track whether passenger yields and PRASM continue to offset lower traffic/capacity and rising unit costs.
- Check fuel prices, hedge results and margin requirements, and whether refinery operations deliver the intended cost mitigation.
- Assess the timing and total cost of fleet restructuring charges against expected efficiency gains and the large aircraft commitments.
- Monitor operating cash generation, debt reduction, pension funding, liquidity and the planned 2013 investment program.
- Verify regulatory approval and financing for the proposed Virgin Atlantic investment and joint venture, and monitor the deferred-tax valuation allowance.