March 2019
Quarter Financial Highlights
Our pre-tax income for the
March 2019
quarter was
$946 million
, representing a
$214 million
increase
compared to the corresponding prior year quarter primarily resulting from improvements across our business, including a
7.8%
percent increase in premium product ticket revenue, and our amended agreements with American Express. These increases were partially offset by higher fuel expense. Pre-tax income, adjusted (a non-GAAP financial measure) was
$832 million
,
an increase
of
$149 million
compared to the corresponding prior year period. Adjustments for the
March 2019
quarter were primarily related to unrealized gains on our equity investments.
Revenue.
Compared to the
March 2018
quarter, our operating revenue
increased
$504 million
, or
5.1%
, primarily from growth in all components of passenger revenue with premium product ticket revenue driving nearly half of the improvement, and an increase in other revenue from our amended agreements with American Express. The improvement in operating revenue, partially offset by
5.0%
higher
capacity, generated a
0.1%
increase in total revenue per available seat mile ("TRASM") and a
2.4%
increase in TRASM, adjusted (a non-GAAP financial measure) compared to the
March 2018
quarter.
Operating Expense.
Total operating expense
increased
$328 million
, or
3.6%
. Our consolidated operating cost per available seat mile ("CASM")
decreased
1.4%
to
15.14 cents
compared to the
March 2018
quarter, primarily due to strong cost controls and higher capacity, which were partially offset by higher fuel expense. The increase in fuel expense primarily resulted from a
3%
increase in consumption and reduced profitability at our refinery. Non-fuel unit costs ("CASM-Ex" a non-GAAP financial measure)
decreased
0.2%
to
11.06 cents
compared to the
March 2018
quarter.
Non-Operating Results.
Total non-operating expense was
$74 million
in the
March 2019
quarter,
$38 million
lower than the
March 2018
quarter, primarily due to an increase in unrealized gains on our equity investments, partially offset by lower pension income.
The non-GAAP financial measures for pre-tax income, adjusted, TRASM, adjusted, and CASM-Ex, used above, are defined and reconciled in "Supplemental Information" below.
Results of Operations -
Three Months Ended
March 31, 2019
and
2018
Operating Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
Increase (Decrease)
|
% Increase (Decrease)
|
(in millions)
|
2019
|
2018
|
Ticket - Main cabin
|
$
|
4,721
|
|
$
|
4,622
|
|
$
|
99
|
|
2.1
|
%
|
Ticket - Business cabin and premium products
|
3,267
|
|
3,031
|
|
236
|
|
7.8
|
%
|
Loyalty travel awards
|
692
|
|
618
|
|
74
|
|
12.0
|
%
|
Travel-related services
|
574
|
|
494
|
|
80
|
|
16.2
|
%
|
Total passenger revenue
|
$
|
9,254
|
|
$
|
8,765
|
|
$
|
489
|
|
5.6
|
%
|
Cargo
|
192
|
|
202
|
|
(10
|
)
|
(4.9
|
)%
|
Other
|
1,026
|
|
1,001
|
|
25
|
|
2.5
|
%
|
Total operating revenue
|
$
|
10,472
|
|
$
|
9,968
|
|
$
|
504
|
|
5.1
|
%
|
|
|
|
|
|
TRASM (cents)
|
|
16.78
|
¢
|
|
16.77
|
¢
|
|
0.01
|
¢
|
0.1
|
%
|
Third-party refinery sales
(1)
|
(0.08
|
)
|
(0.36
|
)
|
0.28
|
|
NM
|
|
DGS sale adjustment
(1)
|
—
|
|
(0.10
|
)
|
0.10
|
|
NM
|
|
TRASM, adjusted (cents)
|
|
16.70
|
¢
|
|
16.31
|
¢
|
|
0.39
|
¢
|
2.4
|
%
|
|
|
(1)
|
For additional information on adjustments to TRASM, see "Supplemental Information" below.
|
Ticket and Loyalty Travel Awards Revenue
Ticket, including both main cabin and business cabin and premium products, and loyalty travel awards revenue increased
$335 million
and
$74 million
, respectively, compared to the
March 2018
quarter, consistent with the discussion of passenger revenue by geographic region below. Business cabin and premium products ticket revenue includes revenues from fare products other than main cabin, including Delta One, Delta Premium Select, First Class and Comfort+. The growth in ticket revenue primarily results from an increased number of premium seats resulting from new aircraft deliveries, the continued expansion of our Branded Fares products and strength in business demand.
Passenger Revenue by Geographic Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
vs. Three Months Ended March 31, 2018
|
(in millions)
|
Three Months Ended March 31, 2019
|
Passenger Revenue
|
RPMs
(Traffic)
|
ASMs
(Capacity)
|
Passenger Mile Yield
|
PRASM
|
Load Factor
|
Domestic
|
$
|
6,713
|
|
6.9
|
%
|
5.9
|
%
|
5.9
|
%
|
0.9
|
%
|
0.9
|
%
|
0.1
|
|
pts
|
Atlantic
|
1,103
|
|
3.0
|
%
|
5.5
|
%
|
5.8
|
%
|
(2.3
|
)%
|
(2.6
|
)%
|
(0.2
|
)
|
pts
|
Latin America
|
855
|
|
3.0
|
%
|
0.1
|
%
|
0.5
|
%
|
2.9
|
%
|
2.4
|
%
|
(0.3
|
)
|
pts
|
Pacific
|
583
|
|
—
|
%
|
1.6
|
%
|
2.9
|
%
|
(1.5
|
)%
|
(2.8
|
)%
|
(1.1
|
)
|
pts
|
Total
|
$
|
9,254
|
|
5.6
|
%
|
4.8
|
%
|
5.0
|
%
|
0.8
|
%
|
0.6
|
%
|
(0.2
|
)
|
pts
|
Passenger revenue
increased
$489 million
, or
5.6%
, compared to the
March 2018
quarter. Passenger revenue per available seat mile ("PRASM")
increased
0.6%
, and passenger mile yield
increased
0.8%
on
5.0%
higher
capacity. Load factor
decreased
0.2 pts
from the prior year quarter to
82.7%
.
Unit revenue of the domestic region increased
0.9%
, resulting from our commercial initiatives, including our premium products, and strong business demand.
Passenger revenue related to our international regions
increased
2.3%
year-over-year on capacity increases in all regions, which were partially offset by the negative impact of foreign currency fluctuations.
In the Atlantic, unit revenue decreased due to foreign currency fluctuations between the U.S. dollar and the Euro and British pound and increased capacity in the region as we invested in new routes to our hubs in Amsterdam and Paris. Growth in premium product demand partially mitigated the unit revenue decrease.
Unit revenue increased in Latin America for the second consecutive quarter as a result of yield growth, mainly in Mexico and the Caribbean. Our joint cooperation agreement with Aeroméxico continues to generate revenue growth in both the beach and business markets of Mexico, while the Caribbean continues to rebound from the 2017 hurricanes.
Unit revenue decreased in the Pacific region primarily due to foreign currency fluctuations and challenging fare environments. Our joint venture with Korean Air continues to provide benefits as Korea was the strongest performing market in the region during the quarter.
Other Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
Increase (Decrease)
|
% Increase (Decrease)
|
(in millions)
|
2019
|
2018
|
Loyalty program
|
$
|
474
|
|
$
|
347
|
|
$
|
127
|
|
36.6
|
%
|
Ancillary businesses and refinery
|
369
|
|
521
|
|
(152
|
)
|
(29.2
|
)%
|
Miscellaneous
|
183
|
|
133
|
|
50
|
|
37.6
|
%
|
Total other revenue
|
$
|
1,026
|
|
$
|
1,001
|
|
$
|
25
|
|
2.5
|
%
|
Loyalty Program.
Loyalty program revenues relate to brand usage by third parties and other performance obligations embedded in mileage credits sold, including redemption of mileage credits for non-travel awards.
Effective January 1, 2019, we amended our co-brand agreement with American Express, and we also amended other agreements with American Express during the March quarter. The new agreements increase the value we receive and extend the terms to 2029. Under the agreements, we sell mileage credits to American Express and allow American Express to market its services or products using our brand and customer database. The products and services sold with the mileage credits (such as award travel, priority boarding, baggage fee waivers, lounge access and the use of our brand) are consistent with previous agreements. We continue to use the accounting method that allocates the consideration received based on the relative selling prices of those products and services.
With the amended agreements, the relative value of the brand component has increased, resulting in an additional $130 million primarily within other revenue during the March 2019 quarter. Including this amount, we expect the amended agreements to generate incremental revenues of approximately $500 million during 2019.
Ancillary Businesses and Refinery.
Ancillary businesses and refinery includes aircraft maintenance services we provide to third parties, our vacation wholesale operations, our private jet operations and refinery sales to third parties. Refinery sales to third parties, which are at or near cost, decreased
$164 million
compared to the
March 2018
quarter. March 2018 quarter results also included $60 million of revenue from DGS, which was sold in December 2018 and is no longer reflected in ancillary businesses and refinery. These decreases were partially offset by growth in our Maintenance, Repair and Overhaul ("MRO") revenues, which increased $64 million to $228 million during the March 2019 quarter.
Miscellaneous.
Miscellaneous revenue is primarily composed of lounge access and codeshare revenues.
Operating Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
Increase (Decrease)
|
% Increase (Decrease)
|
(in millions)
|
2019
|
2018
|
Salaries and related costs
|
$
|
2,639
|
|
$
|
2,584
|
|
$
|
55
|
|
2.1
|
%
|
Aircraft fuel and related taxes
|
1,978
|
|
1,856
|
|
122
|
|
6.6
|
%
|
Regional carriers expense, excluding fuel
|
893
|
|
838
|
|
55
|
|
6.6
|
%
|
Contracted services
|
632
|
|
544
|
|
88
|
|
16.2
|
%
|
Depreciation and amortization
|
615
|
|
603
|
|
12
|
|
2.0
|
%
|
Aircraft maintenance materials and outside repairs
|
476
|
|
435
|
|
41
|
|
9.4
|
%
|
Passenger commissions and other selling expenses
|
427
|
|
427
|
|
—
|
|
—
|
%
|
Landing fees and other rents
|
419
|
|
389
|
|
30
|
|
7.7
|
%
|
Ancillary businesses and refinery
|
351
|
|
493
|
|
(142
|
)
|
(28.8
|
)%
|
Passenger service
|
271
|
|
263
|
|
8
|
|
3.0
|
%
|
Profit sharing
|
220
|
|
188
|
|
32
|
|
17.0
|
%
|
Aircraft rent
|
102
|
|
94
|
|
8
|
|
8.5
|
%
|
Other
|
429
|
|
410
|
|
19
|
|
4.6
|
%
|
Total operating expense
|
$
|
9,452
|
|
$
|
9,124
|
|
$
|
328
|
|
3.6
|
%
|
Aircraft Fuel and Related Taxes.
Fuel expense increased
$122 million
compared to the prior year quarter primarily due to a
3%
increase in consumption and reduced profitability at our refinery, which were partially offset by an approximately
2%
decrease
in the market price per gallon of fuel.
The table below shows the impact of hedging and the refinery on fuel expense and average price per gallon, adjusted (non-GAAP financial measures):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Price Per Gallon
|
|
Three Months Ended March 31,
|
Change
|
Three Months Ended March 31,
|
Change
|
(in millions, except per gallon data)
|
2019
|
2018
|
2019
|
2018
|
Fuel purchase cost
(1)
|
$
|
1,936
|
|
$
|
1,927
|
|
$
|
9
|
|
$
|
2.01
|
|
$
|
2.06
|
|
$
|
(0.05
|
)
|
Fuel hedge impact
|
8
|
|
(27
|
)
|
35
|
|
0.01
|
|
(0.03
|
)
|
0.04
|
|
Refinery segment impact
|
34
|
|
(44
|
)
|
78
|
|
0.04
|
|
(0.05
|
)
|
0.09
|
|
Total fuel expense
|
$
|
1,978
|
|
$
|
1,856
|
|
$
|
122
|
|
$
|
2.06
|
|
$
|
1.98
|
|
$
|
0.08
|
|
MTM adjustments and settlements
(2)
|
(8
|
)
|
27
|
|
(35
|
)
|
(0.01
|
)
|
0.03
|
|
(0.04
|
)
|
Total fuel expense, adjusted
|
$
|
1,970
|
|
$
|
1,883
|
|
$
|
87
|
|
$
|
2.05
|
|
$
|
2.01
|
|
$
|
0.04
|
|
|
|
(1)
|
Market price for jet fuel at airport locations, including related taxes and transportation costs.
|
|
|
(2)
|
Mark-to-market ("MTM") adjustments and settlements include the effects of the derivative transactions disclosed in
Note 5
of the Notes to the Condensed Consolidated Financial Statements. For the reason fuel expense is adjusted for MTM adjustments and settlements, see "Supplemental Information" below.
|
Contracted Services
. The increase in contracted services expense predominantly relates to services performed by DGS that were recorded in salaries and related costs prior to the sale of that business in December 2018.
Aircraft Maintenance Materials and Outside Repairs.
Aircraft maintenance materials and outside repairs consist of costs associated with the maintenance of aircraft used in our operations. The increase in aircraft maintenance materials and outside repairs expense primarily relates to an increase in maintenance activity in order to enhance service reliability of certain aircraft.
Ancillary Businesses and Refinery.
Ancillary businesses and refinery includes expenses associated with aircraft maintenance services we provide to third parties, our vacation wholesale operations, our private jet operations and refinery sales to third parties. Refinery sales to third parties, which are at or near cost, decreased
$164 million
compared to the
March 2018
quarter. In addition, costs related to services performed by DGS on behalf of third parties were recorded in ancillary businesses and refinery prior to the sale of that business in December 2018.
|
|
|
|
|
|
|
|
|
|
|
Non-Operating Results
|
Three Months Ended March 31,
|
|
(in millions)
|
2019
|
2018
|
Favorable (Unfavorable)
|
Interest expense, net
|
$
|
(83
|
)
|
$
|
(92
|
)
|
$
|
9
|
|
Unrealized gain on investments, net
|
100
|
|
18
|
|
82
|
|
Miscellaneous, net
|
(91
|
)
|
(38
|
)
|
(53
|
)
|
Total non-operating expense, net
|
$
|
(74
|
)
|
$
|
(112
|
)
|
$
|
38
|
|
Interest expense decreased compared to the prior year period as a result of lower interest rates on our debt, despite an increase in total debt.
Unrealized gain on investments reflects the unrealized gains on our equity investments in GOL, China Eastern and Air France-KLM.
Miscellaneous is primarily composed of our proportionate share of earnings from our equity investments in Virgin Atlantic and Grupo Aeroméxico, pension-related benefits/costs, charitable contributions and foreign exchange gains/losses. Our equity investment earnings and foreign exchange gains/losses vary and impact the comparability of miscellaneous from period to period.
Income Taxes
We project that our annual effective tax rate for 2019 will be between 23% and 24%. In certain interim periods, we may have adjustments to our net deferred tax assets as a result of changes in prior year estimates and tax laws enacted during the period, which will impact the effective tax rate for that interim period.
Refinery Segment
The refinery primarily produces gasoline, diesel and jet fuel. Monroe exchanges the non-jet fuel products the refinery produces with third parties for jet fuel consumed in our airline operations. The jet fuel produced and procured through exchanging gasoline and diesel fuel produced by the refinery provides approximately
200,000
barrels per day for use in our airline operations. We believe that the jet fuel supply resulting from the refinery's operation contributes to reducing the market price of jet fuel and thus lowers our cost of jet fuel compared to what it otherwise would be.
The refinery recorded operating revenue of
$1.3 billion
in the
three months ended
March 31, 2019
, compared to
$1.5 billion
in the
three months ended
March 31, 2018
. Operating revenue in the
three months ended
March 31, 2019
was primarily composed of
$732 million
of non-jet fuel products exchanged with third parties to procure jet fuel,
$271 million
of sales of jet fuel to the airline segment and
$232 million
of non-jet fuel product sales. Refinery revenues decreased compared to the prior year period due to lower costs of crude oil leading to lower pricing for associated refined products and lower refinery run rates.
The refinery recorded an operating loss of
$34 million
in the
three months ended
March 31, 2019
compared to operating income of
$44 million
in
three months ended
March 31, 2018
.
A refinery is subject to annual U.S. Environmental Protection Agency requirements to blend renewable fuels into the gasoline and on-road diesel fuel it produces. Alternatively, a refinery may purchase renewable energy credits, called Renewable Identification Numbers ("RINs"), from third parties in the secondary market. The refinery purchases the majority of its RINs requirement in the secondary market.
For more information regarding the refinery's results, see
Note 10
of the Notes to the Condensed Consolidated Financial Statements.
Operating Statistics
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
% Increase
(Decrease)
|
Consolidated
(1)
|
2019
|
2018
|
Revenue passenger miles (in millions)
|
51,617
|
|
49,276
|
|
4.8
|
|
%
|
Available seat miles (in millions)
|
62,416
|
|
59,453
|
|
5.0
|
|
%
|
Passenger mile yield
|
|
17.93
|
¢
|
|
17.79
|
¢
|
0.8
|
|
%
|
PRASM
|
|
14.83
|
¢
|
|
14.74
|
¢
|
0.6
|
|
%
|
TRASM
|
|
16.78
|
¢
|
|
16.77
|
¢
|
0.1
|
|
%
|
TRASM, adjusted
(2)
|
|
16.70
|
¢
|
|
16.31
|
¢
|
2.4
|
|
%
|
CASM
|
|
15.14
|
¢
|
|
15.35
|
¢
|
(1.4
|
)
|
%
|
CASM-Ex
(2)
|
|
11.06
|
¢
|
|
11.08
|
¢
|
(0.2
|
)
|
%
|
Passenger load factor
|
82.7
|
%
|
82.9
|
%
|
(0.2
|
)
|
pts
|
Fuel gallons consumed (in millions)
|
962
|
|
936
|
|
2.8
|
|
%
|
Average price per fuel gallon
(3)
|
$
|
2.06
|
|
$
|
1.98
|
|
4.0
|
|
%
|
Average price per fuel gallon, adjusted
(3)(4)
|
$
|
2.05
|
|
$
|
2.01
|
|
1.8
|
|
%
|
|
|
(1)
|
Includes the operations of our regional carriers under capacity purchase agreements.
|
|
|
(2)
|
Non-GAAP financial measure defined and reconciled to TRASM and CASM, respectively, in "Supplemental Information" below.
|
|
|
(3)
|
Includes the impact of fuel hedge activity and refinery segment results.
|
|
|
(4)
|
Non-GAAP financial measure defined and reconciled to average fuel price per gallon in "Results of Operations" for the
three months ended
March 31, 2019
and
2018
.
|
Fleet Information
As part of our fleet transformation, during the quarter we took delivery of 25 mainline aircraft and 3 CRJ-900 aircraft, and removed 11
aircraft from our active fleet. Our operating aircraft fleet and commitments at
March 31, 2019
are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Fleet
(1)
|
|
Commitments
|
Aircraft Type
|
Owned
|
Finance Lease
|
Operating Lease
|
Total
|
Average Age
|
Purchase
|
Options
|
B-717-200
|
3
|
|
16
|
|
72
|
|
91
|
|
17.5
|
—
|
|
—
|
|
B-737-700
|
10
|
|
—
|
|
—
|
|
10
|
|
10.2
|
—
|
|
—
|
|
B-737-800
|
73
|
|
4
|
|
—
|
|
77
|
|
17.5
|
—
|
|
—
|
|
B-737-900ER
|
80
|
|
—
|
|
41
|
|
121
|
|
2.8
|
9
|
|
—
|
|
B-757-200
|
91
|
|
7
|
|
2
|
|
100
|
|
21.6
|
—
|
|
—
|
|
B-757-300
|
16
|
|
—
|
|
—
|
|
16
|
|
16.1
|
—
|
|
—
|
|
B-767-300
|
2
|
|
—
|
|
—
|
|
2
|
|
25.7
|
—
|
|
—
|
|
B-767-300ER
|
55
|
|
1
|
|
—
|
|
56
|
|
22.8
|
—
|
|
—
|
|
B-767-400ER
|
21
|
|
—
|
|
—
|
|
21
|
|
18.2
|
—
|
|
—
|
|
B-777-200ER
|
8
|
|
—
|
|
—
|
|
8
|
|
19.3
|
—
|
|
—
|
|
B-777-200LR
|
10
|
|
—
|
|
—
|
|
10
|
|
10.0
|
—
|
|
—
|
|
A220-100
|
9
|
|
—
|
|
—
|
|
9
|
|
0.2
|
31
|
|
50
|
|
A220-300
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
50
|
|
—
|
|
A319-100
|
55
|
|
—
|
|
2
|
|
57
|
|
17.1
|
—
|
|
—
|
|
A320-200
|
55
|
|
3
|
|
4
|
|
62
|
|
23.6
|
—
|
|
—
|
|
A321-200
|
43
|
|
—
|
|
31
|
|
74
|
|
1.3
|
53
|
|
—
|
|
A321-200neo
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
100
|
|
100
|
|
A330-200
|
11
|
|
—
|
|
—
|
|
11
|
|
14.0
|
—
|
|
—
|
|
A330-300
|
28
|
|
—
|
|
3
|
|
31
|
|
10.2
|
—
|
|
—
|
|
A330-900neo
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
35
|
|
—
|
|
A350-900
|
13
|
|
—
|
|
—
|
|
13
|
|
1.1
|
12
|
|
—
|
|
MD-88
|
67
|
|
12
|
|
—
|
|
79
|
|
28.3
|
—
|
|
—
|
|
MD-90
|
37
|
|
—
|
|
—
|
|
37
|
|
22.0
|
—
|
|
—
|
|
Total
|
687
|
|
43
|
|
155
|
|
885
|
|
15.6
|
290
|
|
150
|
|
|
|
(1)
|
Excludes certain aircraft we own, lease or have committed to purchase (including
12
CRJ-900 aircraft) that are operated by regional carriers on our behalf shown in the table below.
|
The following table summarizes the aircraft fleet operated by regional carriers on our behalf at
March 31, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fleet Type
|
|
Carrier
|
CRJ-200
|
CRJ-700
|
CRJ-900
|
Embraer 170
|
Embraer 175
|
Total
|
Endeavor Air, Inc.
(1)
|
42
|
|
3
|
|
109
|
|
—
|
|
—
|
|
154
|
|
SkyWest Airlines, Inc.
|
77
|
|
18
|
|
44
|
|
—
|
|
49
|
|
188
|
|
Compass Airlines, Inc.
|
—
|
|
—
|
|
—
|
|
—
|
|
36
|
|
36
|
|
Republic Airways, Inc.
|
—
|
|
—
|
|
—
|
|
21
|
|
16
|
|
37
|
|
GoJet Airlines, LLC
|
—
|
|
22
|
|
7
|
|
—
|
|
—
|
|
29
|
|
Total
|
119
|
|
43
|
|
160
|
|
21
|
|
101
|
|
444
|
|
|
|
(1)
|
Endeavor Air, Inc. is a wholly owned subsidiary of Delta.
|
Financial Condition and Liquidity
We expect to meet our cash needs for the next 12 months with cash flows from operations, cash and cash equivalents, restricted cash equivalents and financing arrangements. As of
March 31, 2019
, we had
$4.9 billion
in unrestricted liquidity, consisting of
$1.9 billion
in cash and cash equivalents and
$3.0 billion
in available revolving credit facilities. During the
three months ended
March 31, 2019
, we used existing cash, cash received from financings and cash generated from operations to fund capital expenditures of
$1.4 billion
and return
$1.6 billion
to shareholders.
Sources of Liquidity
Operating Activities
We generated positive cash flows from operations of
$2.0 billion
and
$1.4 billion
in the
three months ended
March 31, 2019
and
2018
, respectively. We expect to continue generating positive cash flows from operations during the remainder of 2019.
Our operating cash flows are impacted by the following factors:
Seasonality of Advance Ticket Sales.
We sell tickets for air travel in advance of the customer's travel date. When we receive a cash payment at the time of sale, we record the cash received on advance sales as deferred revenue in air traffic liability. The air traffic liability increases during the winter and spring as advanced ticket sales grow prior to the summer peak travel season and decreases during the summer and fall months.
Fuel.
Fuel expense represented approximately
21%
of our total operating expenses for the
three months ended
March 31, 2019
. The market price for jet fuel is volatile, which can impact the comparability of our periodic cash flows from operations.
Pension Contributions.
We have no minimum funding requirements in
2019
. However, we voluntarily contributed
$250 million
to our qualified defined benefit pension plans during April
2019
, and we plan to voluntarily contribute an additional $250 million in July 2019. During the three months ended March 31, 2018, we contributed $500 million to our qualified defined benefit pension plans.
Profit Sharing.
Our broad-based employee profit sharing program provides that for each year in which we have an annual pre-tax profit, as defined by the terms of the program, we will pay a specified portion of that profit to employees. In determining the amount of profit sharing, the program defines profit as pre-tax profit adjusted for profit sharing and certain other items. During the
three months ended
March 31, 2019
, we accrued
$220 million
in profit sharing expense based on the year-to-date performance and current expectations for
2019
profit.
We paid $1.3 billion in profit sharing in February
2019
related to our
2018
pre-tax profit in recognition of our employees' contributions toward meeting our financial goals.
Investing Activities
Capital Expenditures.
Our capital expenditures were
$1.4 billion
and
$1.3 billion
for the
three months ended
March 31, 2019
and
2018
, respectively. Our capital expenditures during the
three months ended
March 31, 2019
were primarily related to the purchases of A350-900, A321-200, B-737-900ER, A220-100 and CRJ-900 aircraft, advanced deposit payments on future aircraft order commitments and enhancing the cabins on our domestic fleet.
We have committed to future aircraft purchases and have obtained, but are under no obligation to use, long-term financing commitments for a substantial portion of the purchase price of certain aircraft. Our expected
2019
investments of
$4.7 billion will be primarily for (1) aircraft, including deliveries of A321-200s, A220-100s, B-737-900ERs, A330-900neos, A350-900s and CRJ-900s, along with advance deposit payments for these and A321-200neos and A220-300s as well as (2) aircraft modifications, the majority of which relate to enhancing the cabins on our domestic fleet.
Los Angeles International Airport ("LAX") Construction.
During 2016, we executed a modified lease agreement with the City of Los Angeles ("the City"), which owns and operates LAX, and announced plans to modernize, upgrade and connect Terminals 2 and 3 at LAX by 2023. Under the lease agreement, we have relocated certain airlines and other tenants located in Terminals 2 and 3 to Terminals 5 and 6 and undertaken various initial projects to enable operations from Terminals 2 and 3 during the project. We are now designing and constructing the redevelopment of Terminal 3 and enhancement of Terminal 2, which also includes rebuild of the ticketing and arrival halls and security checkpoint, construction of core infrastructure to support the City's planned airport people mover, ramp improvements and construction of a secure connector to the north side of the Tom Bradley International Terminal.
Under the lease agreement and subsequent project component approvals by the City's Board of Airport Commissioners, the City has appropriated to date approximately $1.6 billion to purchase completed project assets. The lease allows for a maximum reimbursement by the City of $1.8 billion. Costs we incur in excess of such a maximum will not be reimbursed by the City.
A substantial majority of the project costs will be funded through the Regional Airports Improvement Corporation ("RAIC"), a California public benefit corporation, using an $800 million revolving credit facility provided by a group of lenders. The credit facility was executed during 2017, and we have guaranteed the obligations of the RAIC under the credit facility. Loans made under the credit facility will be repaid with the proceeds from the City’s purchase of completed project assets. Using funding provided by cash flows from operations and/or the credit facility, we expect to spend approximately $230 million on this project during
2019
, of which $49 million was incurred in the
three months ended
March 31, 2019
.
New York-LaGuardia Redevelopment.
As part of the terminal redevelopment project at LaGuardia Airport, we are partnering with the Port Authority of New York and New Jersey (the “Port Authority”) to replace Terminals C and D with a new state-of-the-art terminal facility consisting of 37 gates across four concourses connected to a central headhouse. The terminal will feature a new, larger Delta Sky Club, wider concourses, more gate seating and 30 percent more concessions space than the existing terminals. The facility will also offer direct access between the parking garage and terminal and improved roadways and drop-off/pick-up areas. The design of the new terminal will integrate sustainable technologies and improvements in energy efficiency. Construction will be phased to limit passenger inconvenience and is expected to be completed by 2026.
In connection with the redevelopment, during 2017, we entered into an amended and restated terminal lease with the Port Authority with a term through 2050. Pursuant to the lease agreement we will (1) fund (through debt issuance and existing cash) and undertake the design, management and construction of the terminal and certain off-premises supporting facilities, (2) receive a Port Authority contribution of $600 million to facilitate construction of the terminal and other supporting infrastructure, (3) be responsible for all operations and maintenance during the term of the lease and (4) have preferential rights to all gates in the terminal subject to Port Authority requirements with respect to accommodation of designated carriers. We currently expect our net project cost to be approximately $3.3 billion and we bear the risks of project construction, including any potential cost over-runs. Using funding provided by cash flows from operations and/or financing arrangements, we expect to spend approximately $530 million on this project during
2019
, of which $134 million was incurred in the
three months ended
March 31, 2019
.
Financing Activities
Debt and Finance Leases.
In February 2019, we entered into a
$1 billion
term loan issued by two lenders and subsequently repaid
$300 million
in March 2019. This loan, which is unsecured, bears interest at a variable rate equal to LIBOR plus a specified margin and is due in February 2020. We used the net proceeds of the term loan to accelerate planned 2019 repurchases under our share repurchase program.
In March 2019, we completed a $500 million offering of Pass Through Certificates, Series 2019-1 ("2019-1 EETC") through a pass through trust. The net proceeds of the offering are being used for general corporate purposes, including to refinance debt maturing during 2019.
The principal amount of debt and finance leases was
$10.7 billion
at
March 31, 2019
.
Capital Return to Shareholders.
During the
three months ended
March 31, 2019
, we repurchased and retired 26 million shares of our common stock at a cost of
$1.3 billion
.
In the
March 2019
quarter, the Board of Directors approved and we paid a quarterly dividend of
$0.35
per share, for total cash dividends of $233 million.
Undrawn Lines of Credit
We have
$3.0 billion
available in undrawn revolving lines of credit. These credit facilities include covenants customary for financing of this type. If we are not in compliance with these covenants, we may be required to repay amounts borrowed under the credit facilities or we may not be able to draw on them.
Covenants
We were in compliance with the covenants in our financings at March 31, 2019
.
Critical Accounting Policies and Estimates
Except as set forth below, for information regarding our Critical Accounting Policies and Estimates, see the "Critical Accounting Policies and Estimates" section of "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Form 10-K.
Loyalty Program
Our SkyMiles loyalty program generates customer loyalty by rewarding customers with incentives to travel on Delta. This program allows customers to earn mileage credits by flying on Delta, Delta Connection and other airlines that participate in the loyalty program. When traveling, customers earn redeemable mileage credits based on the passenger's loyalty program status and ticket price. Customers can also earn mileage credits through participating companies such as credit card companies, hotels and car rental agencies. To facilitate transactions with participating companies, we sell mileage credits to non-airline businesses, customers and other airlines. Mileage credits are redeemable by customers in future periods for air travel on Delta and other participating airlines, membership in our Sky Club and other program awards.
Our most significant contract to sell mileage credits relates to our co-brand credit card relationship with American Express. Our agreements with American Express provide for joint marketing, grant certain benefits to Delta-American Express co-branded credit card holders ("cardholders") and American Express Membership Rewards program participants, and allow American Express to market its services or products using our customer database. Cardholders earn mileage credits for making purchases using co-branded cards, and certain cardholders may also check their first bag for free, are granted discounted access to Delta Sky Club lounges and receive priority boarding and other benefits while traveling on Delta. Additionally, participants in the American Express Membership Rewards program may exchange their points for mileage credits under the loyalty program. We sell mileage credits at agreed-upon rates to American Express which are then provided to their customers under the co-brand credit card program and the Membership Rewards program.
We account for marketing agreements, including those with American Express, consistent with the accounting method that allocates the consideration received to the individual products and services delivered. We allocate the value based on the relative selling prices of those products and services, which generally consist of award travel, priority boarding, baggage fee waivers, lounge access and the use of our brand. We determined our best estimate of the selling prices by considering a discounted cash flow analysis using multiple inputs and assumptions, including: (1) the expected number of miles awarded and number of miles redeemed, (2)
ETV
for the award travel obligation, (3) published rates on our website for baggage fees, discounted access to Delta Sky Club lounges and other benefits while traveling on Delta and (4) brand value.
Effective January 1, 2019, we amended our co-brand agreement with American Express, and we also amended other agreements with American Express during the March quarter. The new agreements increase the value we receive and extend the terms to 2029. The products and services delivered are consistent with previous agreements, and we continue to use the accounting method that allocates the consideration received based on the relative selling prices of those products and services.
We defer the amount for award travel obligation as part of loyalty program deferred revenue and recognize loyalty travel awards in passenger revenue as the mileage credits are used for travel. Revenue allocated to services performed in conjunction with a passenger’s flight, such as baggage fee waivers, is recognized as travel-related services in passenger revenue when the related service is performed. Revenue allocated to access Delta Sky Club lounges is recognized as miscellaneous in other revenue as access is provided. Revenue allocated to the remaining performance obligations, primarily brand value, is recorded as loyalty program in other revenue over time as miles are delivered.
Recent Accounting Standards
Comprehensive Income
. In February 2018, the FASB issued ASU No. 2018-02, "Income Statement—Reporting Comprehensive Income (Topic 220)." This standard provides an option to reclassify stranded tax effects within AOCI
to retained earnings due to the U.S. federal corporate income tax rate change in the Tax Cuts and Jobs Act of 2017. This standard is effective for interim and annual reporting periods beginning after December 15, 2018. We adopted this standard effective January 1, 2019 with the election not to reclassify
$1.2 billion
of stranded tax effects related to our pension plans from AOCI to retained earnings.
Supplemental Information
We sometimes use information ("non-GAAP financial measures") that is derived from the Condensed Consolidated Financial Statements, but that is not presented in accordance with GAAP. Under the U.S. Securities and Exchange Commission rules, non-GAAP financial measures may be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for or superior to GAAP results. Reconciliations below may not calculate exactly due to rounding.
Pre-tax income, adjusted
The following table shows a reconciliation of pre-tax income (a GAAP measure) to pre-tax income, adjusted (a non-GAAP financial measure). We adjust pre-tax income for mark-to-market ("MTM") adjustments and settlements on fuel hedge contracts, the MTM adjustments recorded by our equity method investees, Virgin Atlantic and Aeroméxico, and unrealized gains/losses on our investments in GOL, China Eastern and Air France-KLM, to determine pre-tax income, adjusted.
|
|
•
|
MTM adjustments and settlements.
MTM adjustments are defined as fair value changes recorded in periods other than the settlement period. Such fair value changes are not necessarily indicative of the actual settlement value of the underlying hedge in the contract settlement period. Settlements represent cash received or paid on hedge contracts settled during the period.
|
|
|
•
|
Equity investment MTM adjustments.
We record our proportionate share of earnings/loss from our equity investments in Virgin Atlantic and Aeroméxico in non-operating expense. We adjust for our equity method investees' hedge portfolio MTM adjustments to allow investors to better understand and analyze our core operational performance in the periods shown.
|
|
|
•
|
Unrealized gain/loss on investments.
We record the unrealized gains/losses on our equity investments accounted for at fair value in non-operating expense. Adjusting for these gains/losses allows investors to better understand and analyze our core operational performance in the periods shown.
|
|
|
•
|
DGS sale adjustment.
Because we sold DGS in December 2018, we have excluded the impact of DGS from historical results for better comparability.
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in millions)
|
2019
|
2018
|
Pre-tax income
|
$
|
946
|
|
$
|
732
|
|
Adjusted for:
|
|
|
MTM adjustments and settlements
|
8
|
|
(27
|
)
|
Equity investment MTM adjustments
|
(21
|
)
|
3
|
|
Unrealized gain/loss on investments
|
(100
|
)
|
(18
|
)
|
DGS sale adjustment
|
—
|
|
(7
|
)
|
Pre-tax income, adjusted
|
$
|
832
|
|
$
|
683
|
|
TRASM, adjusted
The following table shows a reconciliation of TRASM (a GAAP measure) to TRASM, adjusted (a non-GAAP financial measure).
|
|
•
|
Third-party refinery sales.
We adjust TRASM for refinery sales to third parties to determine TRASM, adjusted because these revenues are not related to our airline segment. TRASM, adjusted therefore provides a more meaningful comparison of revenue from our airline operations to the rest of the airline industry.
|
|
|
•
|
DGS sale adjustment.
We adjust for the DGS sale for the same reason described above under the heading pre-tax income, adjusted.
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
2018
|
TRASM
|
|
16.78
|
¢
|
|
16.77
|
¢
|
Adjusted for:
|
|
|
Third-party refinery sales
|
(0.08
|
)
|
(0.36
|
)
|
DGS sale adjustment
|
—
|
|
(0.10
|
)
|
TRASM, adjusted
|
|
16.70
|
¢
|
|
16.31
|
¢
|
CASM-Ex
The following table shows a reconciliation of CASM (a GAAP measure) to CASM-Ex (a non-GAAP financial measure). We adjust CASM for the following items to determine CASM-Ex, for the reasons described below:
|
|
•
|
Aircraft fuel and related taxes.
The volatility in fuel prices impacts the comparability of year-over-year financial performance. The adjustment for aircraft fuel and related taxes allows investors to better understand and analyze our non-fuel costs and year-over-year financial performance.
|
|
|
•
|
Ancillary businesses and refinery.
These expenses include aircraft maintenance we provide to third parties, our vacation wholesale operations and refinery cost of sales to third parties. 2018 results also include staffing services performed by DGS. Because these businesses are not related to the generation of a seat mile, we adjust for the costs related to these areas to provide a more meaningful comparison of the costs of our airline operations to the rest of the airline industry.
|
|
|
•
|
Profit sharing.
We adjust for profit sharing because this adjustment allows investors to better understand and analyze our recurring cost performance and provides a more meaningful comparison of our core operating costs to the airline industry.
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
2018
|
CASM
|
|
15.14
|
¢
|
|
15.35
|
¢
|
Adjusted for:
|
|
|
Aircraft fuel and related taxes
|
(3.17
|
)
|
(3.12
|
)
|
Ancillary businesses and refinery
|
(0.56
|
)
|
(0.83
|
)
|
Profit sharing
|
(0.35
|
)
|
(0.32
|
)
|
CASM-Ex
|
|
11.06
|
¢
|
|
11.08
|
¢
|