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2: EX-10.1 Material Contract HTML 204K
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39: R1 Cover Page HTML 72K
59: R2 Consolidated Balance Sheets (Unaudited) HTML 146K
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(Exact name of registrant as specified in its charter)
iDelaware
i58-0218548
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
iPost Office Box 20706
iAtlanta
,
iGeorgia
i30320-6001
(Address
of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (i404) i715-2600
Title
of each class
Name of each exchange on which registered
Trading Symbol
iCommon Stock, par value $0.0001 per share
iNew
York Stock Exchange
iDAL
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days.
iYes☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required
to submit such files).
iYes☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☑
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes i☐ No ☑
Number of shares outstanding by each class of common stock, as of September 30, 2019:
Common Stock, $0.0001 par value - i646,742,854
shares outstanding
Unless otherwise indicated, the terms "Delta,""we,""us" and "our" refer to Delta Air Lines, Inc. and its subsidiaries.
FORWARD-LOOKING STATEMENTS
Statements in this Form 10-Q (or otherwise made by us or on our behalf) that are not historical facts, including statements about our estimates, expectations, beliefs, intentions, projections or strategies for the future, may be "forward-looking
statements" as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or our present expectations. Known material risk factors applicable to Delta are described in "Item 1A. Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 ("Form 10-K"), other than risks that could apply to any issuer or offering. All forward-looking statements speak only as of the date made, and we undertake no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this report.
1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Delta Air Lines, Inc.
Results of Review of Interim Financial Statements
We have reviewed the accompanying consolidated balance sheet of Delta Air Lines, Inc. (the Company) as of September 30, 2019, the related condensed consolidated statements of operations and comprehensive income, and the consolidated statements of stockholders' equity for the three-month and nine-month periods
ended September 30, 2019 and 2018, the condensed consolidated statements of cash flows for the nine-month periods ended September 30, 2019 and 2018 and the related notes (collectively referred to as the "condensed consolidated interim financial statements"). Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated interim financial statements for them to be in conformity with U.S. generally accepted accounting principles.
We have
previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of Delta Air Lines, Inc. as of December 31, 2018, the related consolidated statements of operations, comprehensive income, cash flows, and stockholders' equity for the year then ended, and the related notes (not presented herein); and in our report dated February 15, 2019, we expressed an unqualified audit opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2018, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has
been derived.
Basis for Review Results
These financial statements are the responsibility of the Company's management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the SEC and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial statements consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially
less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
The
accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
3
DELTA AIR LINES, INC.
Condensed Consolidated Statements of Operations and Comprehensive Income
(Unaudited)
Three
Months Ended September 30,
Nine Months Ended September 30,
(in millions, except per share data)
2019
2018
2019
2018
Operating Revenue:
Passenger
$
i11,410
$
i10,796
$
i32,032
$
i30,107
Cargo
i189
i226
i567
i651
Other
i961
i931
i2,969
i2,938
Total
operating revenue
i12,560
i11,953
i35,568
i33,696
Operating
Expense:
Salaries and related costs
i2,884
i2,753
i8,275
i8,004
Aircraft
fuel and related taxes
i2,239
i2,498
i6,508
i6,693
Regional
carriers expense, excluding fuel
i900
i885
i2,698
i2,586
Contracted
services
i685
i562
i1,974
i1,646
Depreciation
and amortization
i631
i573
i1,960
i1,759
Passenger
commissions and other selling expenses
i539
i535
i1,505
i1,473
Aircraft
maintenance materials and outside repairs
i424
i371
i1,334
i1,233
Landing
fees and other rents
i460
i439
i1,321
i1,254
Profit
sharing
i517
i399
i1,256
i991
Ancillary
businesses and refinery
i279
i410
i945
i1,396
Passenger
service
i345
i329
i938
i892
Aircraft
rent
i110
i99
i318
i291
Other
i476
i455
i1,317
i1,305
Total
operating expense
i10,489
i10,308
i30,349
i29,523
Operating
Income
i2,071
i1,645
i5,219
i4,173
Non-Operating
(Expense)/Income:
Interest expense, net
(i70
)
(i73
)
(i228
)
(i244
)
Unrealized
gain/(loss) on investments, net
(i35
)
i50
(i17
)
(i171
)
Miscellaneous,
net
(i19
)
i66
(i174
)
i48
Total
non-operating (expense)/income, net
(i124
)
i43
(i419
)
(i367
)
Income
Before Income Taxes
i1,947
i1,688
i4,800
i3,806
Income
Tax Provision
(i452
)
(i366
)
(i1,131
)
(i890
)
Net
Income
$
i1,495
$
i1,322
$
i3,669
$
i2,916
Basic
Earnings Per Share
$
i2.32
$
i1.93
$
i5.61
$
i4.20
Diluted
Earnings Per Share
$
i2.31
$
i1.92
$
i5.59
$
i4.18
Cash
Dividends Declared Per Share
$
i0.40
$
i0.35
$
i1.10
$
i0.96
Comprehensive
Income
$
i1,545
$
i1,393
$
i3,849
$
i3,002
The
accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
4
DELTA AIR LINES, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
(in millions)
2019
2018
Net Cash Provided by Operating Activities
$
i7,468
$
i5,769
Cash
Flows from Investing Activities:
Property and equipment additions:
Flight equipment, including advance payments
(i2,774
)
(i2,833
)
Ground
property and equipment, including technology
(i1,090
)
(i972
)
Purchase
of short-term investments
i—
(i145
)
Redemption
of short-term investments
i206
i490
Purchase
of equity investments
(i170
)
i—
Other,
net
i32
i87
Net
cash used in investing activities
(i3,796
)
(i3,373
)
Cash
Flows from Financing Activities:
Payments on long-term debt and finance lease obligations
(i2,805
)
(i2,741
)
Repurchase
of common stock
(i1,802
)
(i1,250
)
Cash
dividends
(i721
)
(i670
)
Proceeds
from short-term obligations
i1,750
i—
Proceeds
from long-term obligations
i500
i3,124
Fuel
card obligation
(i636
)
(i1
)
Other,
net
(i8
)
(i63
)
Net
cash used in financing activities
(i3,722
)
(i1,601
)
Net
(Decrease) Increase in Cash, Cash Equivalents and Restricted Cash Equivalents
(i50
)
i795
Cash,
cash equivalents and restricted cash equivalents at beginning of period
i2,748
i1,853
Cash,
cash equivalents and restricted cash equivalents at end of period
$
i2,698
$
i2,648
Non-Cash
Transactions:
Right-of-use assets acquired under operating leases
$
i459
$
i908
Operating
leases converted to finance leases
i189
i—
Flight
and ground equipment acquired under finance leases
i619
i69
The
following table provides a reconciliation of cash, cash equivalents and restricted cash equivalents reported within the Consolidated Balance Sheets to the total of the same such amounts shown above:
September 30,
(in millions)
2019
2018
Current assets:
Cash
and cash equivalents
$
i1,899
$
i1,380
Restricted
cash included in prepaid expenses and other
i46
i54
Noncurrent
assets:
Cash restricted for airport construction
i753
i1,214
Total
cash, cash equivalents and restricted cash equivalents
$
i2,698
$
i2,648
The
accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
Shares
of common stock issued and compensation expense associated with equity awards (Treasury shares withheld for payment of taxes, $49.75(1) per share)
Shares
of common stock issued and compensation expense associated with equity awards (Treasury shares withheld for payment of taxes, $55.06(1) per share)
Shares
of common stock issued and compensation expense associated with equity awards (Treasury shares withheld for payment of taxes, $58.68(1) per share)
Shares
of common stock issued and compensation expense associated with equity awards (Treasury shares withheld for payment of taxes, $55.08(1) per share)
Shares
of common stock issued and compensation expense associated with equity awards (Treasury shares withheld for payment of taxes, $52.99(1) per share)
Shares
of common stock issued and compensation expense associated with equity awards (Treasury shares withheld for payment of taxes, $52.59(1) per share)
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
7
DELTA AIR LINES, INC.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1. iSUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
i
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of Delta Air Lines, Inc. and our wholly owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information. Consistent with these
requirements, this Form 10-Q does not include all the information required by GAAP for complete financial statements. As a result, this Form 10-Q should be read in conjunction with the Consolidated Financial Statements and accompanying Notes in our Form 10-K for the year ended December 31, 2018.
Management believes the accompanying unaudited Condensed Consolidated Financial Statements reflect all adjustments, including normal recurring items, considered necessary for a fair statement of results for the interim periods presented.
Due to seasonal variations in the demand for air travel, the volatility of aircraft fuel prices and other factors, operating results for the three
and nine months endedSeptember 30, 2019 are not necessarily indicative of operating results for the entire year.
We reclassified certain prior period amounts to conform to the current period presentation. Unless otherwise noted, all amounts disclosed are stated before consideration of income taxes.
i
Recent
Accounting Standards
Comprehensive Income. In February 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2018-02, "Income Statement—Reporting Comprehensive Income (Topic 220)." This standard provides an option to reclassify stranded tax effects within accumulated other comprehensive income/(loss) ("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 $i1.2
billion of stranded tax effects, primarily related to our pension plans, from AOCI to retained earnings.
NOTE 2. iREVENUE RECOGNITION
i
Passenger
Revenue
Passenger revenue is primarily composed of passenger ticket sales, loyalty travel awards and travel-related services performed in conjunction with a passenger’s flight.
Three Months Ended September 30,
Nine Months
Ended September 30,
(in millions)
2019
2018
2019
2018
Ticket
$
i10,029
$
i9,553
$
i27,986
$
i26,514
Loyalty
travel awards
i732
i678
i2,174
i1,976
Travel-related
services
i649
i565
i1,872
i1,617
Total
passenger revenue
$
i11,410
$
i10,796
$
i32,032
$
i30,107
/
We
recognized approximately $i3.7 billion in passenger revenue during the nine months endedSeptember 30, 2019 that was recorded in our air traffic liability balance at December 31, 2018. We expect the remaining balance
of the December 31, 2018 liability to be recognized by the end of 2019.
8
Other Revenue
Three
Months Ended September 30,
Nine Months Ended September 30,
(in millions)
2019
2018
2019
2018
Loyalty program
$
i485
$
i369
$
i1,443
$
i1,075
Ancillary
businesses and refinery
i291
i433
i990
i1,475
Miscellaneous
i185
i129
i536
i388
Total
other revenue
$
i961
$
i931
$
i2,969
$
i2,938
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, car rental agencies and ridesharing companies. 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.
During the nine months endedSeptember 30, 2019 and 2018, total cash sales from marketing agreements related to our loyalty program were $i3.1 billion and $i2.6
billion, respectively, which are allocated to travel and other performance obligations.
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 determine 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) equivalent ticket value ("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 current year. 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.
9
Current Activity of the Loyalty Program. Mileage credits are combined in one homogeneous pool and are not separately identifiable. As such, the revenue is comprised of miles that were part of the loyalty deferred revenue balance at the beginning of the period as well as miles that were issued during the period.
i
The
table below presents the activity of the current and noncurrent loyalty liability and includes miles earned through travel and miles sold to participating companies, which are primarily through marketing agreements.
(in millions)
2019
2018
Balance at January 1
$
i6,641
$
i6,321
Mileage
credits earned
i2,352
i2,322
Travel
mileage credits redeemed
(i2,175
)
(i1,976
)
Non-travel
mileage credits redeemed
(i122
)
(i125
)
Balance
at September 30
$
i6,696
$
i6,542
/
The
timing of mileage redemptions can vary widely; however, the majority of new miles are redeemed within itwo years.
Revenue by Geographic Region
Operating revenue for the airline segment is recognized in a specific geographic region based on the origin, flight path and destination of each flight segment. The majority of the revenues of the refinery, consisting of fuel
sales to the airline, have been eliminated in the Condensed Consolidated Financial Statements. The remaining operating revenue for the refinery segment is included in the domestic region. iOur passenger and operating revenue by geographic region is summarized in the following tables:
Passenger
Revenue
Three Months Ended September 30,
Nine Months Ended September 30,
(in millions)
2019
2018
2019
2018
Domestic
$
i7,971
$
i7,395
$
i22,755
$
i21,093
Atlantic
i2,060
i1,996
i5,042
i4,837
Latin
America
i683
i675
i2,298
i2,228
Pacific
i696
i730
i1,937
i1,949
Total
$
i11,410
$
i10,796
$
i32,032
$
i30,107
Operating
Revenue
Three Months Ended September 30,
Nine Months Ended September 30,
(in millions)
2019
2018
2019
2018
Domestic
$
i8,651
$
i8,125
$
i24,925
$
i23,480
Atlantic
i2,336
i2,244
i5,788
i5,494
Latin
America
i757
i741
i2,559
i2,449
Pacific
i816
i843
i2,296
i2,273
Total
$
i12,560
$
i11,953
$
i35,568
$
i33,696
10
NOTE 3. iFAIR VALUE MEASUREMENTS
i
Assets
(Liabilities) Measured at Fair Value on a Recurring Basis
Cash
Equivalents and Restricted Cash Equivalents. Cash equivalents generally consist of money market funds. Restricted cash equivalents generally consist of money market funds, time deposits, commercial paper and negotiable certificates of deposit, which primarily relate to proceeds from debt issued to finance a portion of the construction costs for our new terminal facilities at New York's LaGuardia Airport. The fair value of these cash equivalents is based on a market approach using prices generated by market transactions involving identical or comparable assets.
Short-Term Investments. The fair values of our short-term investments were based on a market approach using industry standard valuation techniques that incorporated observable inputs such as quoted market prices, interest rates, benchmark curves, credit ratings of the security
or other observable information and were recorded in prepaid expenses and other on the Consolidated Balance Sheet ("balance sheet").
Long-Term Investments. Our long-term investments that are measured at fair value primarily consist of equity investments, which are valued based on market prices or other observable transactions and are recorded in other noncurrent assets on our balance sheet. See Note 4, "Investments," for further information on our equity investments.
11
Hedge Derivatives. A portion of our derivative contracts
are negotiated over-the-counter with counterparties without going through a public exchange. Accordingly, our fair value assessments give consideration to the risk of counterparty default (as well as our own credit risk). Such contracts are classified as Level 2 within the fair value hierarchy. The remainder of our hedge contracts are comprised of futures contracts, which are traded on a public exchange. These contracts are classified within Level 1 of the fair value hierarchy.
•
Fuel
Contracts. Our fuel hedge portfolio consists of options, swaps and futures. Option and swap contracts are valued under income approaches using option pricing models and discounted cash flow models, respectively, based on data either readily observable in public markets, derived from public markets or provided by counterparties who regularly trade in public markets. Futures contracts and options on futures contracts are traded on a public exchange and valued based on quoted market prices.
•
Interest
Rate Contracts. Our interest rate derivatives are swap contracts, which are valued based on data readily observable in public markets.
•
Foreign Currency Exchange Contracts. Our foreign currency derivatives consist of forward contracts and are valued based on data readily observable in public markets.
NOTE
4. iINVESTMENTS
Long-Term Investments
We have developed strategic relationships with a number of airlines and airline services companies through equity investments and other forms of cooperation and support. Our equity investments reinforce our commitment to strategic relationships,
which improve our coordination with these companies and enable our customers to seamlessly connect to more destinations while enjoying a consistent, high-quality travel experience.
Equity Method Investments
We account for our investments in Aeroméxico, Virgin Atlantic and AirCo Aviation Services, LLC ("AirCo"),the parent company of DAL Global Services, LLC ("DGS"), under the equity method of accounting. Our portion of Aeroméxico's and Virgin Atlantic's financial results are recorded in miscellaneous, net in our Condensed Consolidated Statements of Operations and Comprehensive Income ("income statement") under non-operating expense, and our share of AirCo's financial results is recorded in contracted services in our
income statement as this entity is integral to the operations of our business. If an equity method investment experiences a loss in fair value that is determined to be other than temporary, we will reduce our basis in the investment to fair value and record the loss in unrealized gain/(loss) on investments.
•
Aeroméxico. Our non-controlling investment in Grupo Aeroméxico, the parent company of Aeroméxico, is accounted for under the equity method. Grupo Aeroméxico's corporate bylaws (as authorized by the Mexican Foreign Investment Commission) limit our voting interest to i49%.
However, due to Aeroméxico's share repurchase program, our equity stake in Grupo Aeroméxico has increased to i51%. The investment is recorded at $i843
million as of September 30, 2019.
•
Virgin Atlantic. We have a non-controlling i49%
equity stake in Virgin Atlantic Limited, the parent company of Virgin Atlantic Airways, and similar non-controlling interests in certain affiliated Virgin Atlantic companies. Our investment in these Virgin Atlantic companies is recorded at $i393 million as of September 30, 2019.
•
AirCo.
We have a non-controlling i49% equity stake in AirCo which is recorded at $i123
million as of September 30, 2019. AirCo is a subsidiary of Argenbright Holdings, LLC that provides aviation-related services, ground support equipment maintenance and security.
In the September 2019 quarter we announced our plan to enter into a strategic alliance with LATAM Airlines Group S.A. ("LATAM"). Subject to regulatory approval, specifically requirements under the Hart-Scott-Rodino Antitrust Improvement Act, we plan to commence a tender offer for the acquisition of up to i20%
of the common shares of LATAM at a price per share of $i16, to be funded with newly issued debt and available cash. In addition, to support the establishment of the strategic alliance, we will invest $i350
million, $i150 millionof which was disbursed in the September 2019 quarter.
12
Fair Value Investments
We account for the
following investments at fair value with adjustments to fair value recognized in unrealized gain/(loss) on investments within non-operating expense in our income statement. We recorded losses of $i35 million and $i17
million on our fair value investments during the three and nine months endedSeptember 30, 2019, respectively. These results were driven by changes in stock prices and foreign currency fluctuations.
•
Air France-KLM. We own i9%
of the outstanding shares of Air France-KLM, which are recorded at $i393 million as of September 30, 2019.
•
GOL.
We own i9% of the outstanding capital stock of GOL Linhas Aéreas Inteligentes, the parent company of VRG Linhas Aéreas (operating as GOL), through ownership of its preferred shares. Our ownership stake is recorded at $i256
million as of September 30, 2019.
Additionally, GOL has a $i300 millionfive-year term loan
facility with third parties maturing in 2020, which we have guaranteed. Our guaranty is secured by GOL's ownership interest in Smiles, GOL's publicly traded loyalty program. Because GOL remains in compliance with the terms of its loan facility, we have not recorded a liability on our balance sheet as of September 30, 2019.
We plan to sell our GOL ownership stake and wind down our commercial agreements with GOL to facilitate the formation of our strategic alliance with LATAM.
•
China Eastern. We
own a i3% equity interest in China Eastern, which is recorded at $i226
million as of September 30, 2019.
•
Korean.We have acquired i10%
of the outstanding shares of Hanjin-KAL, the largest shareholder of Korean Air, during 2019. This investment is recorded at $i134 million as of September 30, 2019.
•
Alclear
Holdings, LLC ("CLEAR"). We own a i7% equity interest in CLEAR.
•
Republic Airways. We own a i17%
equity interest in Republic Airways Holdings Inc.
NOTE 5. iDERIVATIVES AND RISK MANAGEMENT
Changes in fuel prices, interest rates and foreign currency
exchange rates impact our results of operations. In an effort to manage our exposure to these risks, we enter into derivative contracts and adjust our derivative portfolio as market conditions change. We recognize derivative contracts at fair value on our balance sheet.
Fuel Price Risk
Our derivative contracts to hedge the financial risk from changing fuel prices are primarily related to Monroe’s refining margins.
Interest
Rate Risk
Our exposure to market risk from adverse changes in interest rates is primarily associated with our long-term debt obligations. Market risk associated with our fixed and variable rate long-term debt relates to the potential reduction in fair value and negative impact to future earnings, respectively, from an increase in interest rates.
Foreign Currency Exchange Risk
We are subject to foreign currency exchange rate risk because we have revenue and expense denominated in foreign currencies. To manage exchange rate risk, we execute both our international revenue and expense transactions in the same foreign currency to the extent practicable. From time to time, we may also enter into
foreign currency option and forward contracts.
Current maturities of long-term debt and finance leases
$
(i20
)
$
(i11
)
$
i7
$
i7
Long-term
debt and finance leases
$
(i1,759
)
$
(i1,870
)
$
i75
$
(i8
)
/
Offsetting
Assets and Liabilities
We have master netting arrangements with our counterparties giving us the right to offset hedge assets and liabilities. However, we have elected not to offset the fair value positions recorded on our balance sheets. iiThe
following table shows the net fair value positions by counterparty had we elected to offset./
To manage credit risk associated with our fuel price, interest rate and foreign currency hedging programs, we evaluate counterparties based on several criteria including their credit ratings.
NYTDC
Special Facilities Revenue Bonds, Series 2018(2)
2022
to
2036
i4.00%
to
i5.00%
i1,383
i1,383
Other
financings(2)(3)
2021
to
2030
i3.02%
to
i8.75%
i196
i251
2018
Unsecured Revolving Credit Facility
2021
to
2023
undrawn
variable
i—
i—
Other
revolving credit facilities
2020
to
2021
undrawn
variable
i—
i—
Total
secured and unsecured debt
i8,874
i9,308
Unamortized
premium and debt issue cost, net and other
i151
i60
Total
debt
i9,025
i9,368
Less:
current maturities
(i1,953
)
(i1,409
)
Total
long-term debt
$
i7,072
$
i7,959
(1)
Certain
aircraft and other financings are comprised of variable rate debt. All variable rates are equal to LIBOR (generally subject to a floor) or another index rate, in each case plus a specified margin.
(2)
Due in installments.
/
(3)
Primarily includes unsecured bonds and debt secured by certain accounts receivable and real estate.
2019
Unsecured Term Loan
In February 2019, we entered into a $i1 billion term loan issued by itwo
lenders, which was subsequently repaid by the end of the June 2019 quarter. We used the net proceeds of the term loan to accelerate planned 2019 repurchases under our share repurchase program.
2019-1 EETC
We completed a $i500 million
offering of Pass Through Certificates, Series 2019-1 ("2019-1 EETC") utilizing a pass through trust during 2019. This amount is included in Certificates in the table above.i The details of the 2019-1 EETC, which is secured by i14
aircraft, are shown in the table below:
(in millions)
Total Principal
Fixed Interest Rate
Issuance Date
Final Maturity Date
2019-1 Class AA Certificates
$
i425
i3.204%
March
2019
April 2024
2019-1 Class A Certificates
i75
i3.404%
March
2019
April 2024
Total
$
i500
Availability
Under Revolving Credit Facilities
i
The table below shows availability under revolving credit facilities, all of which were undrawn, as of September 30, 2019:
(in millions)
2018
Unsecured Revolving Credit Facility
$
i2,650
Other revolving credit facilities
i456
Total
availability under revolving credit facilities
$
i3,106
/
16
Fair Value of Debt
Market risk associated with our fixed- and variable-rate long-term debt relates to the potential reduction in fair value and negative impact to future earnings, respectively, from an increase in interest rates. iThe fair value
of debt, shown below, is principally based on reported market values, recently completed market transactions and estimates based on interest rates, maturities, credit risk and underlying collateral. Long-term debt is primarily classified as Level 2 within the fair value hierarchy.
Unamortized
premium and debt issue cost, net and other
i151
i60
Net
carrying amount
$
i9,025
$
i9,368
Fair
value
$
i9,300
$
i9,400
Covenants
We
were in compliance with the covenants in our financings at September 30, 2019.
NOTE 7. iEMPLOYEE BENEFIT PLANS
i
The
following table shows the components of net periodic (benefit) cost:
Pension Benefits
Other Postretirement and Postemployment Benefits
(in millions)
2019
2018
2019
2018
Three
Months Ended September 30,
Service cost
$
i—
$
i—
$
i21
$
i21
Interest
cost
i208
i195
i34
i32
Expected
return on plan assets
(i297
)
(i329
)
(i12
)
(i17
)
Amortization
of prior service credit
i—
i—
(i2
)
(i7
)
Recognized
net actuarial loss
i73
i66
i9
i10
Settlements
i2
i—
i—
i—
Net
periodic (benefit) cost
$
(i14
)
$
(i68
)
$
i50
$
i39
Nine
Months Ended September 30,
Service cost
$
i—
$
i—
$
i63
$
i64
Interest
cost
i625
i586
i102
i95
Expected
return on plan assets
(i890
)
(i988
)
(i36
)
(i50
)
Amortization
of prior service credit
i—
i—
(i7
)
(i20
)
Recognized
net actuarial loss
i219
i199
i29
i27
Settlements
i3
i4
i—
i—
Net
periodic (benefit) cost
$
(i43
)
$
(i199
)
$
i151
$
i116
/
Service
cost is recorded in salaries and related costs in the income statement while all other components are recorded within miscellaneous under non-operating expense.
17
NOTE 8. iCOMMITMENTS
AND CONTINGENCIES
Aircraft Purchase Commitments
i
Our future aircraft purchase commitments, which enable our fleet transformation, totaled $i13.9
billion at September 30, 2019:
Our
future aircraft purchase commitments included the following aircraft at September 30, 2019:
Aircraft Type
Purchase Commitments
A220-100
i20
A220-300
i50
A321-200
i33
A321-200neo
i100
A330-900neo
i31
A350-900
i16
CRJ-900
i8
Total
i258
/
MD-90
Fleet Retirement
As part of our ongoing fleet transformation, during the June 2019 quarter we committed to accelerating the retirement of our MD-90 fleet. This fleet will now be retired by the end of 2022, which is approximately itwo years earlier than previously planned. The decision to permanently retire i35
aircraft resulted in accelerated depreciation of $i93 million during the nine months ended September 30, 2019, which is recorded in depreciation and amortization in our income statement.
LATAM A350 Commitments
We have
agreed to acquire ifour A350 aircraft from LATAM, which are included in the table above. In addition, we plan to assume iten
of LATAM's A350 purchase commitments from Airbus, with deliveries through 2025. See Note 4, "Investments," for further information on our planned strategic alliance with LATAM.
Legal Contingencies
We are involved in various legal proceedings related to employment practices, environmental issues, antitrust and other matters concerning our business. We record liabilities for losses from legal proceedings when we determine that it is probable that the outcome in a legal proceeding will be unfavorable and the amount of loss can be reasonably estimated. Although the outcome of the legal proceedings in which we are involved cannot be predicted with certainty, we believe that the resolution of current matters will
not have a material adverse effect on our Condensed Consolidated Financial Statements.
18
Other Contingencies
General Indemnifications
We are the lessee under many commercial real estate leases. It is common in these transactions for us, as the lessee, to agree to indemnify the lessor and the lessor's related parties for tort, environmental and other liabilities that arise out of or relate to our use or occupancy of the leased premises. This type of indemnity would typically make us responsible to indemnified parties for liabilities arising out of the conduct of, among others,
contractors, licensees and invitees at, or in connection with, the use or occupancy of the leased premises. This indemnity often extends to related liabilities arising from the negligence of the indemnified parties but usually excludes any liabilities caused by either their sole or gross negligence or their willful misconduct.
Our aircraft and other equipment lease and financing agreements typically contain provisions requiring us, as the lessee or obligor, to indemnify the other parties to those agreements, including certain of those parties' related persons, against virtually any liabilities that might arise from the use or operation of the aircraft or other equipment.
We believe that our insurance would cover most of our exposure to liabilities and related indemnities associated
with the commercial real estate leases and aircraft and other equipment lease and financing agreements described above. While our insurance does not typically cover environmental liabilities, we have insurance policies in place as required by applicable environmental laws.
Some of our aircraft and other financing transactions include provisions that require us to make payments to preserve an expected economic return to the lenders if that economic return is diminished due to specified changes in law or regulations. In some of these financing transactions, we also bear the risk of changes in tax laws that would subject payments to non-U.S. lenders to withholding taxes.
We cannot reasonably estimate our potential future payments under the indemnities and related provisions described above
because we cannot predict (1) when and under what circumstances these provisions may be triggered and (2) the amount that would be payable if the provisions were triggered because the amounts would be based on facts and circumstances existing at such time.
Other
We have certain contracts for goods and services that require us to pay a penalty, acquire inventory specific to us or purchase contract-specific equipment, as defined by each respective contract, if we terminate the contract
without cause prior to its expiration date. Because these obligations are contingent on our termination of the contract without cause prior to its expiration date, no obligation would exist unless such a termination occurs.
19
NOTE 9. iACCUMULATED
OTHER COMPREHENSIVE LOSS
i
The following tables show the components of accumulated other comprehensive loss:
Amounts
reclassified from AOCI for pension and other benefit liabilities and for derivative contracts designated as foreign currency cash flow hedges are recorded in miscellaneous, net in non-operating expense and in passenger revenue, respectively, in the income statement.
(2)
The reclassification into retained earnings relates to our investments in GOL, China Eastern and other previously designated available-for-sale investments, and the related conversion to accounting for changes in fair value of these investments from AOCI to the income statement.
/
(3)
Includes
$i688 million of deferred income tax expense primarily related to pension and other benefit obligations that will not be recognized in net income until these obligations are fully extinguished. We consider all income sources, including other comprehensive income, in determining the amount of tax benefit allocated to continuing operations.
20
NOTE 10. iSEGMENTS
Refinery Operations
Our refinery segment operates for the benefit of the airline segment by providing jet fuel to the airline segment from its own production
and through jet fuel obtained through agreements with third parties. The refinery's production consists of jet fuel, as well as non-jet fuel products. We use several counterparties to exchange the non-jet fuel products produced by the refinery for jet fuel consumed in our airline operations. The gross fair value of the products exchanged under these agreements during the three and nine months endedSeptember 30, 2019 was $i1.1
billion and $i3.0 billion, respectively, compared to $i1.1
billion and $i3.1 billion for the three and nine months endedSeptember 30, 2018, respectively.
Segment Reporting
i
Segment
results are prepared based on our internal accounting methods described below, with reconciliations to consolidated amounts in accordance with GAAP. Our segments are not designed to measure operating income or loss directly related to the products and services included in each segment on a stand-alone basis.
Represents
transfers, valued on a market price basis, from the refinery to the airline segment for use in airline operations. We determine market price by reference to the market index for the primary delivery location, which is New York Harbor, for jet fuel from the refinery.
(2)
Represents value of products delivered under our exchange agreements, as discussed above, determined on a market price basis.
(3)
These sales were at or near cost; accordingly, the margin on these sales
is de minimis.
Represents
transfers, valued on a market price basis, from the refinery to the airline segment for use in airline operations. We determine market price by reference to the market index for the primary delivery location, which is New York Harbor, for jet fuel from the refinery.
(2)
Represents value of products delivered under our exchange agreements, as discussed above, determined on a market price basis.
(3)
These sales were at or near cost; accordingly, the margin on these sales
is de minimis.
NOTE 11. iEARNINGS PER SHARE
We calculate basic earnings per share by dividing net income by the weighted average number of common shares outstanding, excluding restricted shares. We calculate diluted earnings
per share by dividing net income by the weighted average number of common shares outstanding plus the dilutive effect of outstanding share-based awards, including stock options and restricted stock awards. Antidilutive common stock equivalents excluded from the diluted earnings per share calculation are not material. iThe following table shows the computation of basic and diluted earnings per share:
Three
Months Ended September 30,
Nine Months Ended September 30,
(in millions, except per share data)
2019
2018
2019
2018
Net income
$
i1,495
$
i1,322
$
i3,669
$
i2,916
Basic
weighted average shares outstanding
i646
i686
i654
i695
Dilutive
effect of share-based awards
i2
i2
i2
i2
Diluted
weighted average shares outstanding
i648
i688
i656
i697
Basic
earnings per share
$
i2.32
$
i1.93
$
i5.61
$
i4.20
Diluted
earnings per share
$
i2.31
$
i1.92
$
i5.59
$
i4.18
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS
September 2019 Quarter Financial Highlights
Our pre-tax income for the September 2019 quarter was $1.9 billion, representing a $259 millionincrease
compared to the corresponding prior year quarter primarily resulting from a 5.1% increase in revenue. Pre-tax income, adjusted (a non-GAAP financial measure) was $2.0 billion, an increase of $361 million compared to the corresponding prior year period.
Revenue. Compared to the September 2018 quarter, our operating revenue increased$607 million, or 5.1%, primarily from growth in all components of passenger revenue, with premium product ticket revenue driving more than half of the improvement,
and strong growth in both loyalty and maintenance, repair and overhaul ("MRO") revenue. The improvement in operating revenue on 3.9%higher capacity generated a 1.1% increase in total revenue per available seat mile ("TRASM") and a 2.5% increase in TRASM, adjusted (a non-GAAP financial measure) compared to the September 2018 quarter.
Operating Expense. Total operating expense increased$181 million, or 1.8%, primarily resulting from higher employee costs. Our consolidated operating
cost per available seat mile ("CASM") decreased2.1% to 13.85 cents compared to the September 2018 quarter, primarily due to lower fuel costs and higher capacity. Non-fuel unit costs ("CASM-Ex" a non-GAAP financial measure) increased2.4% to 9.84 cents compared to the September 2018 quarter, due to employee wage increases, record passenger volumes and the effects of weather-related operational disruptions.
Non-Operating Results. Total non-operating expense was $124
million in the September 2019 quarter compared to income of $43 million in the September 2018 quarter, primarily due to unrealized losses on our equity investments.
Free Cash Flow. Strong earnings during the quarter resulted in $2.2 billion of operating cash flow, enabling $945 million of capital investments including $549 millionof aircraft purchases and cabin enhancements. These results generated $1.4 billion of free cash flow (a non-GAAP financial measure) compared to $655 million in the September 2018 quarter.
The
above non-GAAP financial measures for pre-tax income, adjusted, TRASM, adjusted, CASM-Ex and free cash flow, are defined and reconciled in "Supplemental Information" below.
The
reconciliation above may not calculate exactly due to rounding.
(2)
For additional information on adjustments to TRASM, see "Supplemental Information" below.
Ticket and Loyalty Travel Awards Revenue
Ticket, including both main and business cabin and premium products, and loyalty travel awards revenue increased $476 million and $54 million, respectively, compared to the September 2018
quarter. 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 was enabled by both business and leisure demand strength. We continue to take delivery of new aircraft that include more premium seats, while also generating higher load factor for premium products.
Passenger
revenue increased$614 million, or 5.7%, compared to the September 2018 quarter. Passenger revenue per available seat mile ("PRASM") increased1.7%, and passenger mile yield increased0.1% on 3.9%higher capacity. Load factor increased1.4 points from the prior year to 88.3%.
Domestic
unit revenue increased 3.2%, resulting from our commercial initiatives, including our premium products, as well as high load factors driven by a combination of strong demand and limited industry capacity growth.
Passenger revenue related to our international regions increased1.1% year-over-year on capacity increases in the Atlantic and Pacific regions and yield growth in Latin America. This growth in passenger revenue was achieved despite the negative impact of foreign currency fluctuations.
24
Atlantic unit revenue decreased due
to foreign currency fluctuations between the U.S. dollar and the Euro and British pound, the uncertain economic outlook in Europe and increased industry capacity. These conditions were partially offset by growth in premium product demand and strong U.S. point of sale.
Unit revenue increased in Latin America for the fourth consecutive quarter as a result of yield growth, mainly in Brazil on reduced industry capacity from the U.S. and in Mexico beach markets. Unit revenue and yield increases were achieved despite the negative impact of Hurricane Dorian in the Bahamas. In the September 2019 quarter we announced our plan to enter into a strategic alliance with LATAM, which is expected to provide greater customer convenience, a more seamless travel experience and to better connect customers from and throughout the Americas.
Unit
revenue decreased in the Pacific region primarily due to double-digit capacity growth to Japan and Korea from new routes introduced over the last year, trade related uncertainty and foreign currency fluctuations. We continued to reshape our Pacific network with the August announcement that beginning in March 2020 we will transfer our U.S.-Tokyo services from Narita to Haneda airport, Tokyo's preferred airport for corporate customers.
Other Revenue
Three
Months Ended September 30,
Increase (Decrease)
% Increase (Decrease)
(in millions)
2019
2018
Loyalty program
$
485
$
369
$
116
31.4
%
Ancillary
businesses and refinery
291
433
(142
)
(32.8
)%
Miscellaneous
185
129
56
43.4
%
Total
other revenue
$
961
$
931
$
30
3.2
%
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.
The relative value of the brand component has increased, resulting in an additional $130 million primarily within other revenue during the September 2019 quarter. 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 $102 million compared to the
September 2018 quarter. September 2018 quarter results also included $63 million of revenue from DGS, which was sold in December 2018 and is no longer reflected in ancillary businesses and refinery. These decreases were mitigated by growth in our MRO revenues, which increased $18 million to $209 million during the September 2019 quarter.
Miscellaneous. Miscellaneous revenue is primarily composed of lounge access and codeshare revenues.
25
Operating
Expense
Three Months Ended September 30,
Increase (Decrease)
% Increase (Decrease)
(in millions)
2019
2018
Salaries
and related costs
$
2,884
$
2,753
$
131
4.8
%
Aircraft fuel and related taxes
2,239
2,498
(259
)
(10.4
)%
Regional
carriers expense, excluding fuel
900
885
15
1.7
%
Contracted services
685
562
123
21.9
%
Depreciation
and amortization
631
573
58
10.1
%
Passenger commissions and other selling expenses
539
535
4
0.7
%
Aircraft
maintenance materials and outside repairs
424
371
53
14.3
%
Landing fees and other rents
460
439
21
4.8
%
Profit
sharing
517
399
118
29.6
%
Ancillary businesses and refinery
279
410
(131
)
(32.0
)%
Passenger
service
345
329
16
4.9
%
Aircraft rent
110
99
11
11.1
%
Other
476
455
21
4.6
%
Total
operating expense
$
10,489
$
10,308
$
181
1.8
%
Salaries and related
costs. The increase in salaries and related costs is primarily due to pay rate increases for eligible employees. This increase is partially offset by salaries for DGS employees, which are no longer included in salaries and related costs following the sale of that business in December 2018. DGS-related expenses are now recorded in contracted services.
Aircraft Fuel and Related Taxes. Fuel expense decreased $259 million compared to the prior year quarter primarily due to an approximately 10%decrease in the market price per gallon of jet fuel, partially offset by a 2% increase in consumption.
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 September 30,
Change
Three Months Ended September 30,
Change
(in millions, except per gallon data) (1)
2019
2018
2019
2018
Fuel purchase cost(2)
$
2,313
$
2,526
$
(213
)
$
2.00
$
2.23
$
(0.23
)
Fuel
hedge impact
(25
)
(16
)
(9
)
(0.02
)
(0.01
)
(0.01
)
Refinery segment impact
(49
)
(12
)
(37
)
(0.04
)
(0.01
)
(0.03
)
Total
fuel expense
$
2,239
$
2,498
$
(259
)
$
1.94
$
2.21
$
(0.27
)
MTM
adjustments and settlements(3)
25
16
9
0.02
0.01
0.01
Total
fuel expense, adjusted
$
2,264
$
2,514
$
(249
)
$
1.96
$
2.22
$
(0.25
)
(1)
The
reconciliation above may not calculate exactly due to rounding.
(2)
Market price for jet fuel at airport locations, including related taxes and transportation costs.
(3)
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.
Depreciation and Amortization. The increase in depreciation and amortization primarily results from new aircraft deliveries, fleet modifications and technology enhancements.
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 primarily relates to a higher volume of scheduled engine overhauls on certain aircraft.
26
Profit Sharing. Our profit sharing program pays 10% to all eligible employees for the first $2.5 billion of annual profit and 20% of annual profit above $2.5 billion.
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 $102 million compared to the September 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. These decreases were partially offset by growth in our MRO business, as discussed above.
The
reconciliation above may not calculate exactly due to rounding.
(2)
For additional information on adjustments to TRASM, see "Supplemental Information" below.
Ticket and Loyalty Travel Awards Revenue
Ticket, including both main and business cabin and premium products, and loyalty travel awards revenue increased $1.5 billion and $198 million, respectively, compared to the nine months endedSeptember 30, 2018. 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 was enabled by both business and leisure demand strength. We continue to take delivery of new aircraft that include more premium seats, while also generating higher load factor for premium products.
Passenger
revenue increased$1.9 billion, or 6.4%, compared to the nine months endedSeptember 30, 2018. PRASM increased1.8% and passenger mile yield increased0.7% on 4.5%higher capacity. Load factor increased0.9 points from the prior year period to 86.5%.
Domestic
unit revenue increased 2.6%, resulting from our commercial initiatives, including our premium products, as well as high load factors driven by a combination of strong demand and limited industry capacity growth.
Passenger revenue related to our international regions increased2.9% year-over-year on capacity increases in the Atlantic and Pacific regions and yield growth in Latin America. This growth in passenger revenue was achieved despite the negative impact of foreign currency fluctuations.
28
Atlantic unit revenue decreased due
to foreign currency fluctuations between the U.S. dollar and the Euro and British pound, the uncertain economic outlook in Europe and increased industry capacity. These conditions were partially offset by growth in premium product demand and strong U.S. point of sale.
Unit revenue increased in Latin America as a result of yield growth, mainly in Brazil on reduced industry capacity from the U.S. and in Mexico beach markets.In the September 2019 quarter we announced our plan to enter into a strategic alliance with LATAM, which is expected to provide greater customer convenience, a more seamless travel experience and to better connect customers from and throughout the Americas.
Unit revenue decreased in the Pacific region primarily due to
higher capacity to China, Japan and Korea from new routes introduced over the last year, reduced business demand due to an extended Japanese holiday period, trade related uncertainty and foreign currency fluctuations. Despite these challenges, our joint venture with Korean has enabled solid traffic growth and we have continued to reshape our Pacific network with the August announcement that beginning in March 2020 we will transfer our U.S.-Tokyo services from Narita to Haneda airport, Tokyo's preferred airport for corporate customers.
Other Revenue
Nine
Months Ended September 30,
Increase (Decrease)
% Increase (Decrease)
(in millions)
2019
2018
Loyalty program
$
1,443
$
1,075
$
368
34.2
%
Ancillary
businesses and refinery
990
1,475
(485
)
(32.9
)%
Miscellaneous
536
388
148
38.1
%
Total
other revenue
$
2,969
$
2,938
$
31
1.1
%
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.
The relative value of the brand component has increased, resulting in an additional $400 million primarily within other revenue during the nine months endedSeptember 30, 2019. 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 $442 millioncompared to the nine months endedSeptember 30, 2018. The 2018 results also included $182 million of revenue from DGS, which was sold in December 2018 and is no longer reflected in ancillary businesses and refinery. These decreases were mitigated by growth in our MRO revenues, which increased $120 million to $646 million during the nine months endedSeptember 30, 2019.
Miscellaneous. Miscellaneous revenue is primarily
composed of lounge access and codeshare revenues.
29
Operating Expense
Nine
Months Ended September 30,
Increase (Decrease)
% Increase (Decrease)
(in millions)
2019
2018
Salaries and related costs
$
8,275
$
8,004
$
271
3.4
%
Aircraft
fuel and related taxes
6,508
6,693
(185
)
(2.8
)%
Regional carriers expense, excluding fuel
2,698
2,586
112
4.3
%
Contracted
services
1,974
1,646
328
19.9
%
Depreciation and amortization
1,960
1,759
201
11.4
%
Passenger
commissions and other selling expenses
1,505
1,473
32
2.2
%
Aircraft maintenance materials and outside repairs
1,334
1,233
101
8.2
%
Landing
fees and other rents
1,321
1,254
67
5.3
%
Profit sharing
1,256
991
265
26.7
%
Ancillary
businesses and refinery
945
1,396
(451
)
(32.3
)%
Passenger service
938
892
46
5.2
%
Aircraft
rent
318
291
27
9.3
%
Other
1,317
1,305
12
0.9
%
Total
operating expense
$
30,349
$
29,523
$
826
2.8
%
Salaries and related
costs. The increase in salaries and related costs is primarily due to pay rate increases for eligible employees. This increase is partially offset by salaries for DGS employees, which are no longer included in salaries and related costs following the sale of that business in December 2018. DGS-related expenses are now recorded in contracted services.
Aircraft Fuel and Related Taxes. Fuel expense decreased $185 million compared to the prior year due to an approximately 6% decrease in the market price per gallon of jet fuel, which was partially offset by a 2% increase in consumption and reduced profitability at our refinery.
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
Nine
Months Ended September 30,
Change
Nine Months Ended September 30,
Change
(in millions, except per gallon data) (1)
2019
2018
2019
2018
Fuel purchase cost(2)
$
6,568
$
6,814
$
(246
)
$
2.04
$
2.17
$
(0.13
)
Fuel
hedge impact
(8
)
(20
)
12
—
(0.01
)
0.01
Refinery segment impact
(52
)
(101
)
49
(0.01
)
(0.03
)
0.02
Total
fuel expense
$
6,508
$
6,693
$
(185
)
$
2.03
$
2.13
$
(0.10
)
MTM
adjustments and settlements(3)
8
20
(12
)
—
0.01
(0.01
)
Total
fuel expense, adjusted
$
6,516
$
6,713
$
(197
)
$
2.03
$
2.14
$
(0.11
)
(1)
The
reconciliation above may not calculate exactly due to rounding.
(2)
Market price for jet fuel at airport locations, including related taxes and transportation costs.
(3)
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 additional information and the reason for adjusting fuel expense,
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.
Depreciation and Amortization. The increase in depreciation and amortization primarily results from $93 million of accelerated depreciation in the nine months ended September 30, 2019 due to the decision to early retire our MD-90 fleet by the end of 2022, new aircraft deliveries, fleet modifications and technology enhancements. See Note 8
of the Notes to the Condensed Consolidated Financial Statements for additional information on the planned early retirement of our MD-90 fleet.
30
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 primarily relates to a higher volume of scheduled engine overhauls on certain aircraft during the September 2019 quarter.
Profit Sharing. Our profit sharing program pays 10% to all eligible employees for the first $2.5 billion of annual profit and 20% of annual profit above $2.5
billion.
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$442 million compared to the nine months endedSeptember 30, 2018. 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. These decreases were partially offset by growth in our MRO
business, as discussed above.
31
Non-Operating Results
Three
Months Ended September 30,
Nine Months Ended September 30,
(in millions)
2019
2018
Favorable (Unfavorable)
2019
2018
Favorable (Unfavorable)
Interest expense, net
$
(70
)
$
(73
)
$
3
$
(228
)
$
(244
)
$
16
Unrealized
gain/(loss) on investments, net
(35
)
50
(85
)
(17
)
(171
)
154
Miscellaneous,
net
(19
)
66
(85
)
(174
)
48
(222
)
Total non-operating (expense)/income,
net
$
(124
)
$
43
$
(167
)
$
(419
)
$
(367
)
$
(52
)
Interest
expense decreased compared to the prior year periods as a result of lower interest rates on our debt.
Unrealized gain/(loss) on investments reflects the unrealized gains and losses on our equity investments in GOL, China Eastern, Air France-KLM and Korean. See Note 4 of the Notes to the Condensed Consolidated Financial Statements for additional information on our equity investments.
Miscellaneous, net is primarily composed of our proportionate share of earnings/losses 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,
net 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 liabilities 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 ("Monroe") 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, or approximately 75% of our consumption, 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 $1.5 billion
and $4.3 billion in the three and nine months endedSeptember 30, 2019, compared to $1.6 billion and $4.8 billion in the three and nine months endedSeptember 30, 2018. Operating revenue in the three and nine months endedSeptember 30, 2019 was primarily composed of $1.1 billion and $3.0 billion of non-jet fuel products exchanged
with third parties to procure jet fuel, $304 million and $882 million of sales of jet fuel to the airline segment and $52 million and $360 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, partially offset by higher refinery run rates during the quarter.
The refinery recorded operating income of $49 million and $52 million in the three and nine months endedSeptember 30,
2019, compared to operating income of $12 million and $101 million in three and nine months endedSeptember 30, 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.
32
Operating Statistics
Three
Months Ended September 30,
% Increase
(Decrease)
Nine Months Ended September 30,
% Increase
(Decrease)
Consolidated(1)
2019
2018
2019
2018
Revenue passenger miles
(in millions)
66,862
63,320
5.6
%
181,652
172,002
5.6
%
Available
seat miles (in millions)
75,742
72,875
3.9
%
209,911
200,842
4.5
%
Passenger
mile yield
17.07
¢
17.05
¢
0.1
%
17.63
¢
17.50
¢
0.7
%
PRASM
15.06
¢
14.81
¢
1.7
%
15.26
¢
14.99
¢
1.8
%
TRASM
16.58
¢
16.40
¢
1.1
%
16.94
¢
16.78
¢
1.0
%
TRASM,
adjusted(2)
16.57
¢
16.17
¢
2.5
%
16.90
¢
16.42
¢
2.9
%
CASM
13.85
¢
14.14
¢
(2.1
)
%
14.46
¢
14.70
¢
(1.6
)
%
CASM-Ex(2)
9.84
¢
9.61
¢
2.4
%
10.31
¢
10.18
¢
1.3
%
Passenger
load factor
88.3
%
86.9
%
1.4
pts
86.5
%
85.6
%
0.9
pts
Fuel
gallons consumed (in millions)
1,154
1,135
1.8
%
3,215
3,137
2.5
%
Average
price per fuel gallon(3)
$
1.94
$
2.21
(12.2
)
%
$
2.03
$
2.13
(4.7
)
%
Average
price per fuel gallon, adjusted(3)(4)
$
1.96
$
2.22
(11.5
)
%
$
2.03
$
2.14
(5.3
)
%
(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 and nine months endedSeptember 30, 2019 and 2018.
33
Fleet Information
As part of our fleet transformation, during the
quarter we took delivery of 20 mainline aircraft and one CRJ-900 aircraft, and removed 14 aircraft from our active fleet. Our operating aircraft fleet and commitments at September 30, 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
21
67
91
18.1
—
—
B-737-700
10
—
—
10
10.7
—
—
B-737-800
73
4
—
77
18.0
—
—
B-737-900ER
88
—
42
130
3.1
—
—
B-757-200
91
7
2
100
22.1
—
—
B-757-300
16
—
—
16
16.6
—
—
B-767-300ER
56
—
—
56
23.3
—
—
B-767-400ER
21
—
—
21
18.8
—
—
B-777-200ER
8
—
—
8
19.8
—
—
B-777-200LR
10
—
—
10
10.5
—
—
A220-100
24
1
—
25
0.4
20
—
A220-300
—
—
—
—
—
50
50
A319-100
55
—
2
57
17.6
—
—
A320-200
58
—
4
62
24.1
—
—
A321-200
51
12
31
94
1.5
33
—
A321-200neo
—
—
—
—
—
100
100
A330-200
11
—
—
11
14.5
—
—
A330-300
28
—
3
31
10.7
—
—
A330-900neo
3
1
—
4
0.2
31
—
A350-900
13
—
—
13
1.6
16
—
MD-88
54
10
—
64
28.7
—
—
MD-90
30
—
—
30
22.4
—
—
Total
703
56
151
910
15.0
250
150
(1)
Excludes
certain aircraft we own, lease or have committed to purchase (including 8 CRJ-900 aircraft) that are operated by regional carriers on our behalf shown in the table below.
We have agreed to acquire four A350 aircraft from LATAM, which are included in the table above. In addition, we plan to assume ten of LATAM's A350 purchase commitments from Airbus, with deliveries through 2025. For more information regarding our planned strategic alliance with LATAM, see Note 4, "Investments", of the Notes to the Condensed Consolidated Financial Statements.
34
The
following table summarizes the aircraft fleet operated by regional carriers on our behalf at September 30, 2019:
Fleet Type
Carrier
CRJ-200
CRJ-700
CRJ-900
Embraer
170
Embraer 175
Total
Endeavor Air, Inc.(1)
42
5
109
—
—
156
SkyWest
Airlines, Inc.
75
14
43
—
54
186
Compass Airlines, Inc. (2)
—
—
—
—
36
36
Republic
Airways, Inc.
—
—
—
22
16
38
GoJet Airlines, LLC (3)
—
20
7
—
—
27
Total
117
39
159
22
106
443
(1)
Endeavor
Air, Inc. is a wholly owned subsidiary of Delta.
(2)
In the September 2019 quarter we and Compass Airlines, Inc., agreed not to renew our contract and to end our relationship by the end of 2020.
(3)
In the September 2019 quarter we and GoJet Airlines, LLC, agreed not to renew our CRJ-700 contract
and to end those operations by the end of 2020. The seven CRJ-900 are under contract through 2022 and subject to further negotiation.
35
Financial Condition and Liquidity
We expect to meet our cash needs for the next twelve months with cash flows from operations, cash and cash equivalents, restricted cash equivalents and financing arrangements. As of September 30, 2019, we had $5.0
billion in unrestricted liquidity, consisting of $1.9 billion in cash and cash equivalents and $3.1 billion in available revolving credit facilities. During the nine months endedSeptember 30, 2019, we used existing cash, cash received from financings and cash generated from operations to fund capital expenditures of $3.9 billion and return $2.5 billion to shareholders.
Sources of Liquidity
Operating Activities
We
generated cash flows from operations of $7.5 billion and $5.8 billion in the nine months endedSeptember 30, 2019 and 2018, respectively. We expect to continue generating cash flows from operations during the remainder of 2019.
Our operating cash flow is 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 nine months endedSeptember 30, 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 $500 millionto our qualified defined benefit pension plans during the June 2019 quarter. During the March 2018 quarter we also voluntarily 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 nine months endedSeptember 30,
2019, we accrued $1.3 billion 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. The 2019 profit sharing payment will be made in February 2020.
36
Investing Activities
Capital
Expenditures. Our capital expenditures were $3.9 billion and $3.8 billion for the nine months endedSeptember 30, 2019 and 2018, respectively. Our capital expenditures during the nine months endedSeptember 30, 2019 were primarily related to the purchases of aircraft, fleet modifications and technology enhancements.
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$4.5 billion will be primarily for aircraft, including deliveries and advance deposit payments, as well as aircraft modifications, the majority of which relate to cabin enhancements throughout our fleet.
In October 2019, the Office of the U.S. Trade Representative announced a 10% tariff on new aircraft imported from Europe. We are evaluating the impact of this announcement on our future Airbus deliveries.
Equity Investments.We have acquired 10%
of the outstanding shares of Hanjin-KAL, the largest shareholder of Korean Air, during 2019, for $170 million.
In the September 2019 quarter we announced our plan to enter into a strategic alliance with LATAM Airlines Group S.A. Subject to regulatory approval, specifically requirements under the Hart-Scott-Rodino Antitrust Improvement Act, we plan to commence a tender offer for the acquisition of up to 20% of the common shares of LATAM at a price per share of $16, to be funded with newly issued debt and available cash. In addition, to support the establishment of the strategic alliance, we will invest $350 million, $150 millionof
which was disbursed in the September 2019 quarter. As part of our planned strategic alliance with LATAM, we have also agreed to acquire four A350 aircraft from LATAM and plan to assume ten of LATAM's A350 purchase commitments from Airbus, with deliveries through 2025.
This alliance is expected to generate new growth opportunities, building upon Delta's and LATAM's global footprint and joint ventures, including Delta's existing partnership with Aeroméxico. We plan to sell our GOL ownership stake and wind down our commercial agreements with GOL to facilitate the formation of our strategic alliance with LATAM.
Los Angeles International Airport ("LAX") Construction. We executed a modified
lease agreement during 2016 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. 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 rebuilding 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. Construction is expected to be completed by 2024.
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 $200 million on this project during 2019, of which $134 million was incurred in the nine months endedSeptember 30, 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.
37
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 $560 million on this project during 2019, of which $430 million was incurred in the nine months endedSeptember 30, 2019.
Financing
Activities
Debt and Finance Leases. In February 2019, we entered into a $1 billion term loan issued by two lenders, which was subsequently repaid by the end of the June 2019 quarter. We used the net proceeds of the term loan to accelerate planned 2019 repurchases under our share repurchase program.
In the March 2019 quarter, 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 $10.0 billion at September 30, 2019.
Capital Return to Shareholders. During the nine months endedSeptember 30, 2019, we repurchased and retired 34 million shares of our common stock at a cost of $1.8 billion.
In the September 2019 quarter, the Board of Directors approved and we paid a quarterly dividend of $0.4025
per share, for total cash dividends of $260 million. In addition, on October 9, 2019, the Board of Directors approved and we will pay a quarterly dividend of $0.4025 per share to shareholders of record as of November 13, 2019.
Undrawn Lines of Credit
We have $3.1 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 September 30, 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, car rental agencies and ridesharing companies. 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.
38
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 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 determine 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 current year. 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, primarily related to our pension plans, from AOCI to retained earnings.
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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. The reconciliations presented below of the non-GAAP measures used in this 10-Q 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 the following items to determine pre-tax income, adjusted for the reasons described below.
•
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 in GOL, China Eastern, Air France-KLM and Korean, which are 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 2018 results for comparability.
Three
Months Ended September 30,
(in millions)
2019
2018
Pre-tax income
$
1,947
$
1,688
Adjusted for:
MTM
adjustments and settlements
(25
)
(16
)
Equity investment MTM adjustments
10
(7
)
Unrealized gain/loss on investments
35
(50
)
DGS
sale adjustment
—
(9
)
Pre-tax income, adjusted
$
1,967
$
1,606
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TRASM,
adjusted
The following table shows a reconciliation of TRASM (a GAAP measure) to TRASM, adjusted (a non-GAAP financial measure). We adjust TRASM for the following items to determine TRASM, adjusted for the reasons described below.
•
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.
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. We adjust for expenses related to aircraft maintenance we provide to third parties, our vacation wholesale operations, our private jet operations, as well as refinery cost of sales to third parties. Results from 2018 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.
We present free cash flow because management believes this metric is helpful to investors to evaluate the company's ability to generate cash that is available for use for debt service or general corporate initiatives. Adjustments include:
•
Net redemptions of short-term investments. Net redemptions of short-term investments represent the net purchase and sale activity of investments and marketable securities in
the period, including gains and losses. We adjust for this activity to provide investors a better understanding of the company's free cash flow generated by our operations.
•
Strategic investments. Cash flows related to our investment in Hanjin-KAL, the largest shareholder of Korean Air, are included in our GAAP investing activities. We adjust free cash flow for this activity because it provides a more meaningful comparison to the airline industry.
•
Net
cash flows related to certain airport construction projects and other. Cash flows related to certain airport construction projects are included in our GAAP operating activities and capital expenditures. We have adjusted for these items, which were primarily funded by cash restricted for airport construction, to provide investors a better understanding of the company's free cash flow and capital expenditures that are core to our operational performance in the periods shown.
Three
Months Ended September 30,
(in millions)
2019
2018
Net cash provided by operating activities
$
2,245
$
1,500
Net cash used in investing activities
(1,125
)
(903
)
Adjustments:
Net
redemptions of short-term investments
—
(42
)
Strategic investments
81
—
Net cash flows related to certain airport construction projects and other
229
100
Total
free cash flow
$
1,430
$
655
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes
in market risk from the information provided in "Item 7A. Quantitative and Qualitative Disclosures About Market Risk" in our Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
Our management, including our Chief Executive Officer and Chief Financial Officer, performed an evaluation of our disclosure controls and procedures, which have been designed to permit us to effectively identify and timely disclose important information. Our management, including our Chief Executive Officer and Chief Financial Officer, concluded that the controls and procedures were effective as of September 30,
2019 to ensure that material information was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
During the three months ended September 30, 2019, we did not make any changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
"Item 3. Legal Proceedings" of our Form 10-K includes a discussion of our legal proceedings. There have been no material changes from the legal proceedings described in our Form 10-K.
ITEM 1A. RISK FACTORS
“Item 1A. Risk Factors” of our Form 10-K includes a discussion of our risk factors. There have been no material changes from the risk factors described in our Form 10-K.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table presents information with respect to purchases of common stock we made during the September 2019 quarter. The total number of shares purchased includes shares repurchased pursuant to our $5 billion share repurchase program, which was publicly announced on May 11, 2017 and will terminate no later than December 31, 2020. Some purchases made in the September 2019 quarter were made pursuant to a trading
plan meeting the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934.
In addition, the table includes shares withheld from employees to satisfy certain tax obligations due in connection with grants of stock under the Delta Air Lines, Inc. Performance Compensation Plan (the "Plan"). The Plan provides for the withholding of shares to satisfy tax obligations. It does not specify a maximum number of shares that can be withheld for this purpose. The shares of common stock withheld to satisfy tax withholding obligations may be deemed to be "issuer purchases" of shares that are required to be disclosed pursuant to this Item.
Period
Total
Number of Shares Purchased
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Approximate Dollar Value (in millions) of Shares That May
XBRL
Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.
The cover page from this Quarterly Report on Form 10-Q for the quarter ended September 30,
2019, formatted in Inline XBRL
____________
* Portions of this exhibit have been omitted as confidential information.
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SIGNATURE
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.