Delta Air Lines, Inc. - Q2 2009 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2009. Delta Air Lines, Inc. (Delta) completed its merger with Northwest Airlines on October 29, 2008. Consequently, the financial results for the three and six months ended June 30, 2009, include the operations of Northwest, whereas the comparable 2008 periods do not. The airline is navigating a global economic recession, the impact of the H1N1 virus, and volatile fuel prices.
Key Financial Metrics
| Metric (in millions) | Three Months Ended June 30, 2009 | Six Months Ended June 30, 2009 |
|---|---|---|
| Total Operating Revenue | $7,000 | $13,684 |
| Operating Income (Loss) | $1 | $(482) |
| Net Loss | $(257) | $(1,051) |
| Loss Per Share (Basic & Diluted) | $(0.31) | $(1.27) |
| Operating Cash Flow | N/A | $1,477 |
| Cash and Cash Equivalents (End of Period) | $4,851 | $4,851 |
| Total Debt (Current + Noncurrent) | $16,598 | $16,598 |
Note: Total Debt calculated as Current maturities ($1,824) + Long-term debt ($14,774).
Material Changes vs. Prior Period
- Revenue: Total operating revenue increased by $1.5 billion (27%) for the quarter and $3.4 billion (33%) for the six months compared to 2008. This increase is primarily due to the inclusion of Northwest Airlines' operations. On a combined basis (excluding Northwest), revenue declined significantly due to reduced demand and lower yields.
- Profitability: Delta reported a net loss of $257 million for the quarter, a significant improvement from the $1.044 billion loss in the same period in 2008. The 2008 loss included a $1.2 billion non-cash impairment charge for goodwill and intangible assets, which was absent in 2009.
- Expenses: Operating expenses increased by $413 million for the quarter, largely driven by the addition of Northwest. Excluding Northwest, fuel expenses decreased by $465 million due to lower average fuel prices, partially offset by $379 million in fuel hedge losses.
- Yields: Passenger revenue per available seat mile (PRASM) declined 20% year-over-year on a combined basis, reflecting a 19% decrease in passenger mile yield due to reduced business demand and competitive pricing.
Guidance, Outlook, and Risks
- Outlook: Management does not expect a meaningful recovery in the revenue environment for the remainder of 2009. The company now expects to record a net loss for the full year 2009, as revenue declines are expected to exceed benefits from lower fuel prices and capacity reductions.
- Capacity Reductions: Delta plans to reduce international capacity by 15% starting in September 2009. The company also intends to remove 30-40 mainline passenger aircraft and retire its entire B-747-200F freighter fleet by the end of 2009.
- Fuel Hedging: Fuel expense included $390 million in losses for the quarter and $973 million for the six months from fuel hedging programs. Management expects to recognize additional losses of $256 million in the third quarter and $87 million in the fourth quarter related to terminated contracts and unamortized premiums.
- Liquidity: As of June 30, 2009, Delta held $4.9 billion in cash, cash equivalents, and short-term investments, plus an undrawn $500 million revolving credit facility. The company faces refinancing needs for Northwest credit facilities maturing in late 2009 and 2010.
- Risks: Key risks include the global economic recession, the spread of the H1N1 virus, volatile fuel prices, and the potential inability to refinance debt in tight credit markets. Legal proceedings include antitrust litigation regarding baggage fees and a pending Supreme Court petition regarding the Cincinnati Airport settlement.
Investor Verification Checklist
- Merger Integration Costs: Verify the timeline and total cost ($500 million estimated) for integrating Northwest operations, including the receipt of a single operating certificate.
- Fuel Hedge Exposure: Confirm the projected $343 million in future fuel hedge losses for the remainder of 2009 and the impact on cash flow.
- Debt Refinancing: Assess the company's ability to refinance the $904 million Northwest Bank Credit Facility and the $500 million revolving facility maturing in late 2009/2010.
- Capacity vs. Demand: Monitor the effectiveness of the planned 7-9% capacity reduction in 2009 against the backdrop of continued weak demand and H1N1 impacts.
- Legal Contingencies: Track the status of the antitrust lawsuits regarding baggage fees and the Supreme Court petition on the Cincinnati Airport settlement.