Delta Air Lines, Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports fourth-quarter results. Delta provides domestic and international passenger and cargo air transportation through its network, airline alliances, regional carriers, and related businesses.
Financial performance and position
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Operating revenue | $35.115 billion | $31.755 billion |
| Operating income | $1.975 billion | $2.217 billion |
| Operating margin | 5.6% | 7.0% |
| Net income | $854 million | $593 million |
| Diluted EPS | $1.01 | $0.70 |
| Operating cash flow | $2.834 billion | $2.832 billion |
- Revenue rose 11%, principally from higher passenger fares and yields. Passenger revenue was $30.257 billion; cargo revenue was $1.027 billion and other revenue was $3.831 billion.
- Operating expenses increased 12% to $33.140 billion. Including contract-carrier fuel, fuel expense was $11.783 billion, up $2.882 billion, and represented 36% of operating expense. Average fuel cost rose 31% to $3.06 per gallon; hedging gains reduced expense by $420 million.
- Passenger mile yield increased 11%; passenger revenue per available seat mile (PRASM) increased 10%. Capacity rose 1%, while load factor declined 0.9 percentage point to 82.1%.
- Fourth quarter 2011 revenue was $8.399 billion, operating income $726 million, net income $425 million and diluted EPS $0.50. First-quarter 2011 was loss-making, with a $318 million net loss; results improved through the rest of the year.
- Year-end debt and capital leases, including current maturities, were $13.8 billion, down $1.5 billion year over year. Unrestricted liquidity was $5.4 billion: $3.6 billion in cash and short-term investments and $1.8 billion of revolving-credit availability.
- Total assets were $43.499 billion. Stockholders’ equity was negative $1.396 billion, versus positive $897 million a year earlier, driven principally by a $3.188 billion increase in accumulated other comprehensive loss.
- Cash used in investing activities was $1.498 billion and cash used in financing activities was $1.571 billion. Cash and cash equivalents ended the year at $2.657 billion.
Material changes versus the prior year
- Higher fares and yields lifted revenue, but operating income fell $242 million as the $2.882 billion increase in total fuel expense and other cost increases exceeded revenue growth.
- Net income increased $261 million, helped by lower total other expense, including a reduction in debt-extinguishment losses from $391 million to $68 million.
- Delta reduced total debt and capital leases by $1.5 billion and refinanced its senior secured exit facilities with new secured facilities. It also received $675 million from an American Express SkyMiles sale and expects similar annual purchases in 2012–2014.
- The pension benefit obligation increased to $19.293 billion from $17.506 billion, while pension plan assets declined to $7.789 billion from $8.249 billion. The recorded pension liability was $11.504 billion.
- Stockholders’ equity turned negative, and accumulated other comprehensive loss widened, primarily reflecting pension-related actuarial losses and related tax effects.
Outlook, commentary, risks and unusual items
- Management gave no specific earnings or revenue guidance. It expected to meet cash needs over the next 12 months through operating cash flow, available cash and investments, and financing arrangements.
- Delta estimated approximately $700 million in defined-benefit pension contributions for 2012. Its pension plans are closed to new entrants and frozen for future benefit accruals.
- Fleet plans include 100 Boeing 737-900ER deliveries beginning in 2013, alongside plans to introduce previously owned MD-90 aircraft and retire older, less-efficient aircraft. Delta also planned to expand Economy Comfort across its fleet by summer 2012 and complete its JFK terminal project in stages over five years, at an estimated cost of $1.2 billion.
- Fuel-price volatility is a central risk. Hedging can produce earnings volatility and may require substantial collateral when fuel prices fall; Delta reported $30 million of net hedge margin paid at year-end. The company also cited competition, economic and travel-demand weakness, hub disruptions, severe weather, labor disputes, technology failures, regulation and environmental costs as risks.
- Pension funding is sensitive to investment returns and discount rates. Delta disclosed an estimated $19.3 billion pension obligation against $7.8 billion of plan assets; a 0.50 percentage-point decrease in the discount rate would increase the recorded accrued pension liability by about $1.2 billion.
- Delta reported $16.8 billion of federal pretax NOL carryforwards, subject to ownership-change limitations, and a full $10.7 billion valuation allowance against net deferred tax assets. A $321 million noncash tax expense could be recognized in the June 2012 quarter as prior fuel-hedge tax amounts are released from accumulated other comprehensive loss, absent specified hedge-accounting activity.
- Restructuring and other items totaled $242 million in 2011, including a $50 million impairment charge for Moscow routes and slots, partly offset by a $43 million gain on divested airport slots. Delta also recorded $68 million of debt-extinguishment losses.
- Pending matters include U.S. first-bag-fee antitrust litigation, an EU passenger-compensation class action and Canadian passenger-surcharge antitrust litigation. Delta disputed the allegations and stated it believed resolution of its legal proceedings would not materially adversely affect its consolidated financial statements.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Whether fare and yield increases can continue to offset fuel-price and other cost pressures, and how 2012 fuel hedges affect cash requirements and earnings.
- The composition, availability and covenant conditions of the reported $5.4 billion unrestricted liquidity, as well as debt maturities, interest costs and collateral coverage.
- Actual pension contributions, plan asset performance and changes in discount-rate assumptions relative to the disclosed obligation and funding estimates.
- Progress, cost and financing of the JFK and LaGuardia projects, aircraft orders and fleet replacement plans.
- American Express SkyMiles purchases, deferred-revenue accounting and the timing of related cash receipts versus revenue recognition.
- Developments in pending litigation, labor negotiations at Comair and regulatory or environmental requirements, including the European emissions trading scheme.