Delta Air Lines, Inc. — FY 2012 Form 10-K
Business context and reporting period. Delta provides domestic and international passenger and cargo air transportation, supported by regional carriers, alliances, SkyMiles, and ancillary businesses. This filing covers the fiscal year ended December 31, 2012; fourth-quarter figures are included below as supplemental quarterly data. Delta also restarted the Trainer refinery in September 2012.
Key financial metrics
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Operating revenue | $36.670 billion | $35.115 billion |
| Operating income | $2.175 billion | $1.975 billion |
| Net income | $1.009 billion | $854 million |
| Diluted earnings per share | $1.19 | $1.01 |
| Cash from operating activities | $2.476 billion | $2.834 billion |
| Capital expenditures | $1.968 billion | $1.254 billion |
| Debt and capital leases, including current maturities | $12.709 billion | $13.791 billion |
| Unrestricted liquidity | $5.2 billion | Not stated here |
Revenue rose 4%; operating income increased 10% and net income increased 18%. Passenger revenue increased 5%, reflecting a 5% improvement in passenger mile yield, while capacity declined 2%. Passenger load factor increased to 83.8% from 82.1%. Operating cost per available seat mile rose 6% to 14.97 cents; CASM-Ex, a company-defined non-GAAP measure, increased 5% to 8.92 cents.
Fuel expense, including contract carriers, was $12.251 billion, up $468 million; fuel represented 36% of operating expense. Average fuel price rose 6% to $3.25 per gallon as consumption declined 2%. Interest expense, net, was $812 million. Stockholders’ deficit widened to $2.131 billion from $1.396 billion, primarily reflecting other comprehensive losses, including pension-related changes.
At December 31, Delta had $3.374 billion in cash, cash equivalents and short-term investments and $1.825 billion of undrawn revolving credit facilities. Cash and cash equivalents alone were $2.416 billion. The company reported a $13.293 billion funded-status deficit in its defined benefit pension plans; plan obligations were $21.489 billion against $8.196 billion of assets.
Material changes and fourth-quarter results
- Fourth-quarter revenue was $8.602 billion versus $8.399 billion in Q4 2011. Operating income fell to $352 million from $726 million, and net income was $7 million versus $425 million.
- For the full year, higher yields and stronger passenger revenue were partly offset by higher fuel, labor, maintenance and restructuring costs. Restructuring and other items totaled $452 million, compared with $242 million in 2011, largely associated with fleet changes, workforce programs and the Comair shutdown.
- Delta reduced debt and capital leases by approximately $1.1 billion year over year. It refinanced Pacific-route debt in 2012, retiring $1.152 billion of principal and entering new facilities; management expected annual interest savings above $30 million.
- Fuel hedges produced a $66 million loss in 2012, versus a $420 million gain in 2011. Fuel hedge fair-value movements contributed to significant quarterly earnings volatility.
Outlook, management commentary, risks and contingencies
- Management expected positive operating cash flow in 2013 and planned more than $2 billion of 2013 investment, primarily for aircraft and modifications, plus a proposed $360 million Virgin Atlantic investment. The company expected to fund investment with operating cash flow and new financing.
- Delta said its $1 billion structural-cost program should moderate CASM-Ex growth in the second half of 2013, with benefits increasing through 2015. The program includes fleet restructuring, maintenance, distribution and staffing initiatives.
- The refinery recorded a $63 million net loss in Q4 2012; Superstorm Sandy disrupted startup and reduced production efficiency. Refining was intended to mitigate refining-margin exposure, but fuel costs remained volatile and refinery operations carry supply, operating and environmental risks.
- Fuel price and availability, high debt and secured collateral, pension funding, labor actions, hub disruptions, competition, technology/security incidents, severe weather, and regulation are significant disclosed risks. Delta estimated 2013 pension contributions of approximately $675 million.
- Delta agreed, subject to regulatory approvals, to acquire 49% of Virgin Atlantic for $360 million and pursue a transatlantic joint venture. The transaction had not closed at filing. Delta also disclosed a pending first-bag-fee antitrust class action and an EU passenger-compensation class action; management said it believed legal matters would not materially adversely affect consolidated financial statements, while noting some losses could not be reasonably estimated.
- No specific earnings guidance was provided. Delta had $16.3 billion of federal pretax net operating loss carryforwards but maintained a full valuation allowance against net deferred tax assets. The company paid no dividends in the prior two fiscal years.
Important facts for investors to verify
- Whether passenger yield and revenue gains can continue to offset fuel, labor and other operating-cost inflation.
- Actual refinery economics and production reliability after startup disruptions, including the effect of product-exchange agreements and fuel-price movements.
- Liquidity and covenant headroom as aircraft commitments, capital spending and pension contributions proceed; debt and capital leases were $12.7 billion at year-end.
- The assumptions behind the $21.5 billion pension obligation, 9% expected long-term asset return, and projected contribution requirements.
- Regulatory approval and completion of the Virgin Atlantic investment and joint venture, and developments in the disclosed litigation.
- Quarterly earnings volatility: Q4 net income was only $7 million despite full-year net income of $1.009 billion. The filing attributes volatility in part to fuel hedge mark-to-market movements and restructuring items.
Ernst & Young issued an unqualified opinion on the financial statements and internal control over financial reporting as of December 31, 2012.