Delta Air Lines, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. The interim statements are unaudited.
Business context and results
Delta operates an airline and an oil refinery. It became the sole owner of Pinnacle Airlines in May 2013 and acquired a 49% equity interest in Virgin Atlantic in June 2013.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Operating revenue | $9,707 | $9,732 | $18,207 | $18,145 |
| Operating income | $914 | $134 | $1,136 | $516 |
| Net income (loss) | $685 | $(168) | $692 | $(44) |
| Diluted EPS | $0.80 | $(0.20) | $0.81 | $(0.05) |
| Operating margin | 9.4% | 1.4% | 6.2% | 2.8% |
Q2 passenger revenue rose 1% to $8.494 billion; total revenue was essentially flat. Q2 operating expenses fell 8% to $8.793 billion, led by lower fuel costs. Fuel expense including regional carriers was $3.102 billion, down $724 million year over year. Delta reported a $78 million Q2 fuel hedge loss, versus $716 million a year earlier; the 2013 loss included $125 million of mark-to-market losses. The refinery segment lost $51 million in Q2.
Q2 GAAP CASM fell 9% to 14.69 cents, while CASM-Ex, a company-defined non-GAAP measure, increased 2.5% to 8.98 cents, primarily due to higher salary expense. Adjusted fuel cost was $3.03 per gallon versus $3.37. For the first half, passenger revenue increased 1%, operating expenses declined 3%, and CASM-Ex rose to 9.34 cents from 9.01 cents.
Cash, debt, and financial position
- Six-month operating cash flow was $2.212 billion, up from $1.463 billion. Cash and cash equivalents ended June at $2.965 billion, up $549 million from year-end.
- Unrestricted liquidity was $5.7 billion, comprising $3.9 billion in cash, cash equivalents and short-term investments and $1.8 billion of undrawn revolving credit facilities.
- Total debt and capital leases, including current maturities, were approximately $12.2 billion, down $488 million from December 31, 2012. Debt at par was $12.155 billion; net carrying amount was $11.688 billion. Delta reported covenant compliance.
- Total assets were $45.772 billion and stockholders’ deficit was $1.184 billion at June 30, 2013. Pension, postretirement and related benefit liabilities were $15.356 billion.
- Six-month capital expenditures were $985 million; Delta also paid $360 million for its Virgin Atlantic stake. It contributed $650 million to defined-benefit pension plans, satisfying its required 2013 contributions on an accelerated basis.
Material changes and notable items
- Q2 net income improved by $853 million year over year, primarily reflecting lower fuel expense and reduced restructuring charges. Mainline passenger revenue increased, while regional passenger revenue, cargo revenue and other revenue declined.
- Delta acquired Pinnacle for consideration of $30 million, primarily reflecting prior advances. The acquired assets included 16 CRJ-900 aircraft valued at $270 million and related debt of $240 million; the aircraft were already operating for Delta.
- The $360 million Virgin Atlantic investment is accounted for under the equity method. A proposed transatlantic joint venture is subject to U.S. antitrust immunity approval.
- Six-month restructuring charges were $136 million, mainly for retiring older aircraft, including accelerated depreciation, lease and return costs. Delta expects further potentially material fleet-related charges; timing and amount depend on fleet removals and lessor negotiations.
- Delta announced a shareholder-return plan exceeding $1 billion over three years: a quarterly dividend of $0.06 per share and a $500 million repurchase authorization through June 30, 2016.
Outlook, risks, and contingencies
- Management expected positive operating cash flow for the remainder of 2013 and anticipated meeting cash needs for the next 12 months from operations, available liquidity and financing. It expected 2013 investment above $2.5 billion, primarily for aircraft, modifications and the Virgin Atlantic investment.
- Delta said structural cost initiative benefits should increase through 2015; it expected the first-half increase in CASM-Ex to moderate in the second half of 2013. These are management expectations, not guaranteed outcomes.
- Aircraft purchase commitments totaled approximately $7.7 billion, including 100 B-737-900ERs, 18 B-787-8s and 40 CRJ-900s. Delta also agreed to lease 88 B-717-200s, with deliveries beginning in 2013.
- Renewable Identification Number (RIN) prices rose to more than $0.80 per RIN in the first half, compared with historical prices of about $0.02–$0.05. The refinery recognized approximately $50 million of Q2 expense related to renewable-fuel regulations. Delta warned that RIN availability and prices could materially affect full-year results and cash flows, and could constrain refinery production.
- Fuel-price movements can materially affect earnings and liquidity, including through hedge margin requirements. The filing’s sensitivity analysis estimates that a 10% fuel-price increase would produce a $300 million net fuel-cost impact for the six months ending December 31, 2013, before other business effects.
- Delta maintained a full $10.6 billion valuation allowance against deferred tax assets. It said substantially all of the allowance might be reversed as early as year-end 2013 if profitability continued and future projections supported it; no reversal was recorded in this filing.
- Management said it could not reasonably estimate certain legal and contractual indemnity exposures; it believed resolution of legal proceedings would not materially adversely affect the financial statements. Government-provided war-risk insurance was then extended through September 30, 2013, with further extension expected by management.
Important facts for investors to verify
- Whether lower fuel costs and hedge results persist, and how fuel prices, hedge mark-to-market movements and margin calls affect cash flow.
- RIN prices, market availability, regulatory relief and the refinery’s resulting operating costs and production.
- Progress on CASM-Ex, structural cost savings, fleet replacement, and the amount and timing of further restructuring charges.
- Cash generation and financing for aircraft commitments, planned capital spending, shareholder distributions and the Virgin Atlantic investment; also the approval status and economics of the proposed joint venture.
- Whether sustained profitability supports reversal of the deferred-tax valuation allowance, and whether debt reduction and liquidity targets are maintained.