Delta Air Lines, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Amounts are in U.S. dollars; financial statements are unaudited and were reviewed, not audited, by Ernst & Young LLP.
Financial results and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Operating revenue | $10.791B | $10.447B | $19.939B | $19.698B |
| Operating income | $2.028B | $2.423B | $3.081B | $3.963B |
| Operating margin | 18.8% | 23.2% | 15.5% | 20.1% |
| Net income | $1.224B | $1.546B | $1.827B | $2.492B |
| Diluted EPS | $1.68 | $2.03 | $2.50 | $3.23 |
| Operating cash flow | Not provided by quarter | $1.585B | $4.226B |
- Q2 revenue rose 3.3%, while operating expenses increased 9.2%. Net income fell 20.8% year over year. Management attributed the pre-tax income decline to higher salaries and fuel expense, partly offset by increased revenue.
- Q2 passenger revenue increased 2.9%; PRASM rose 2.5% and load factor reached 86.9%, up 1.4 percentage points. Capacity increased 0.4%.
- Q2 consolidated CASM increased 8.8% to 13.23 cents; non-fuel CASM-Ex, including profit sharing, increased 7.3% to 10.24 cents. Management cited compensation increases and higher fuel purchase costs.
- At June 30, cash and cash equivalents were $2.241B and short-term investments were $747M. Total unrestricted liquidity was $5.5B, including $2.5B in undrawn revolving credit facilities.
- Debt and capital leases were $9.1B at principal value, versus $7.4B at December 31, 2016. The company issued $2.0B of unsecured notes in Q1; financing cash flow included $2.004B of proceeds from long-term obligations. Delta reported covenant compliance.
- Six-month investing cash outflow was $2.712B, including $1.790B of capital expenditures and the $622M Aeroméxico share purchase. Financing cash inflow was $606M; cash declined $521M over the period.
- Stockholders’ equity was $13.479B, compared with $12.287B at year-end. Pension, postretirement and related benefit liabilities were $9.623B, down from $13.378B, following $3.2B in cash pension contributions and a $350M contribution of treasury shares.
Changes versus prior period
- Six-month revenue grew 1.2%, but operating income declined 22.3% and net income declined 26.7%. Operating expenses rose 7.1%, driven by compensation, fuel, depreciation, contracted services and passenger service costs.
- Six-month operating cash flow fell to $1.585B from $4.226B. Delta said the reduction was primarily due to larger pension contributions; it contributed $3.2B to qualified defined benefit plans in 2017 versus $1.3B in the first half of 2016.
- Six-month reported fuel expense increased $328M, while adjusted fuel expense was nearly unchanged at $3.305B versus $3.303B. The adjusted measure excludes mark-to-market adjustments and settlements.
- Delta’s 36% Aeroméxico investment moved to equity-method accounting after a $622M tender offer. The company expected to execute contracts representing a further 13% ownership during Q3 for approximately $175M, which would bring its total interest to 49%.
Outlook, commentary and risks
- Delta said it expected to meet cash needs for the next 12 months through operating cash flow, cash and short-term investments, and financing arrangements. It expected 2017 investments of $3.5B–$4.0B, primarily for aircraft and fleet modifications.
- Management projected a 2017 annual effective tax rate of 34%–35%. The filing gives no specific earnings or revenue guidance.
- The board approved a 50% increase in the quarterly dividend, effective Q3 2017. Delta repurchased $800M of shares in the first half and paid $297M in dividends.
- Management cited stronger domestic unit revenue and improving business yields, while international passenger revenue was pressured by capacity growth and foreign exchange. Pacific capacity was reduced 10.9% in Q2; Delta also announced a trans-Pacific joint venture with Korean Air.
- Aircraft purchase commitments totaled approximately $13.7B. Delta expanded its A321 order by 40 aircraft and deferred 10 A350 deliveries by two to three years. Boeing’s trade petition concerning Bombardier CS100 imports was pending; Delta said it was not a party and believed the petition lacked merit, with a government decision expected in 2018.
- Delta identified fuel-price volatility, seasonal advance ticket sales, pension funding, and financing covenant requirements as liquidity considerations. The company reported no material changes to the risk factors in its 2016 Form 10-K.
- Delta expected to adopt the revenue recognition standard in 2018 using full retrospective transition. It anticipated reclassifying approximately $2B annually of certain travel-related fees from other revenue to passenger revenue and was evaluating the impact on frequent flyer liabilities. The new lease standard, expected to be adopted in 2019, was expected to significantly affect the balance sheet.
- The first-bag-fee antitrust case remained on appeal after the district court granted defendants’ summary judgment motions; appeals related to class certification also remained pending. Delta said resolution of its legal proceedings was not expected to materially adversely affect its financial statements.
Important facts for investors to verify
- Whether revenue growth and improved unit revenue can offset persistent compensation, fuel and other operating-cost inflation.
- The sustainability of cash generation after the large pension prefunding, and the implications of higher debt and substantial aircraft commitments.
- The expected cost, funding structure and execution risks of aircraft orders and airport redevelopment projects, including LAX and LaGuardia.
- The results and financial exposure associated with Delta’s Aeroméxico, GOL and Virgin Atlantic relationships, including the planned Aeroméxico transaction.
- The eventual effects of revenue recognition and lease accounting changes, and developments in the Bombardier trade petition and antitrust litigation.