DELTA AIR LINES, INC.
10-Qs and 10-Ks
PROXIES
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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R
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the quarterly period ended
March 31, 2013
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Or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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Commission File Number 001-5424
DELTA AIR LINES, INC.
(Exact name of registrant as specified in its charter)
State of Incorporation: Delaware
I.R.S. Employer Identification No.: 58-0218548
Post Office Box 20706, Atlanta, Georgia 30320-6001
Telephone: (404) 715-2600
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.
Yes
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No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
Yes
R
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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o
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Non-accelerated filer
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o
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Smaller reporting company
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o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
o
No
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Number of shares outstanding by each class of common stock, as of
March 31, 2013
:
Common Stock, $
0.0001
par value -
856,421,033
shares outstanding
This document is also available through our website at http://www.delta.com/about_delta/investor_relations.
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Table of Contents
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Page
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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, 2012
(“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
DELTA AIR LINES, INC.
Consolidated Balance Sheets
(Unaudited)
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(in millions, except share data)
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March 31,
2013 |
December 31,
2012 |
|||||
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ASSETS
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|||||||
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Current Assets:
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|||||||
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Cash and cash equivalents
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$
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2,636
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$
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2,416
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Short-term investments
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958
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958
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Restricted cash, cash equivalents and short-term investments
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291
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375
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Accounts receivable, net of an allowance for uncollectible accounts of $22 and $36
at March 31, 2013 and December 31, 2012, respectively
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1,994
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1,693
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Fuel inventory
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624
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619
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Expendable parts and supplies inventories, net of an allowance for obsolescence of $133 and $127
at March 31, 2013 and December 31, 2012, respectively
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371
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404
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Deferred income taxes, net
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463
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463
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Prepaid expenses and other
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1,304
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1,344
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Total current assets
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8,641
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8,272
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Property and Equipment, Net:
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|||||||
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Property and equipment, net of accumulated depreciation and amortization of $6,938 and $6,656
at March 31, 2013 and December 31, 2012, respectively
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20,793
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20,713
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Other Assets:
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|||||||
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Goodwill
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9,794
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9,794
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Identifiable intangibles, net of accumulated amortization of $685 and $670
at March 31, 2013 and December 31, 2012, respectively
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4,709
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4,679
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Other noncurrent assets
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1,131
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1,092
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Total other assets
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15,634
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15,565
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Total assets
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$
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45,068
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$
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44,550
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LIABILITIES AND STOCKHOLDERS' DEFICIT
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|||||||
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Current Liabilities:
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|||||||
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Current maturities of long-term debt and capital leases
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$
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1,593
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$
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1,627
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Air traffic liability
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4,920
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3,696
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Accounts payable
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2,405
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2,293
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Frequent flyer deferred revenue
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1,715
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1,806
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Accrued salaries and related benefits
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1,223
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1,680
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Taxes payable
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735
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585
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Fuel card obligation
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604
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455
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Other accrued liabilities
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873
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1,128
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Total current liabilities
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14,068
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13,270
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Noncurrent Liabilities:
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Long-term debt and capital leases
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10,721
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11,082
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Pension, postretirement and related benefits
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15,865
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16,005
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Frequent flyer deferred revenue
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2,616
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2,628
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Deferred income taxes, net
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2,047
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2,047
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Other noncurrent liabilities
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1,694
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1,649
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Total noncurrent liabilities
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32,943
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33,411
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Commitments and Contingencies
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Stockholders' Deficit:
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Common stock at $0.0001 par value; 1,500,000,000 shares authorized, 874,326,995 and 867,866,505
shares issued at March 31, 2013 and December 31, 2012, respectively
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—
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—
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Additional paid-in capital
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14,120
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14,069
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Accumulated deficit
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(7,382
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)
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(7,389
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)
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Accumulated other comprehensive loss
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(8,426
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)
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(8,577
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)
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Treasury stock, at cost, 17,905,962 and 16,464,472 shares at March 31, 2013 and
December 31, 2012, respectively
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(255
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)
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(234
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)
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Total stockholders' deficit
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(1,943
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)
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(2,131
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)
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Total liabilities and stockholders' deficit
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$
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45,068
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$
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44,550
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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2
DELTA AIR LINES, INC.
Condensed Consolidated Statements of Operations and Comprehensive Income
(Unaudited)
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Three Months Ended March 31,
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(in millions, except per share data)
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2013
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2012
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Operating Revenue:
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Passenger:
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Mainline
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$
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5,876
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$
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5,662
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Regional carriers
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1,457
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1,564
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Total passenger revenue
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7,333
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7,226
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Cargo
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238
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244
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Other
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929
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943
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Total operating revenue
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8,500
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8,413
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Operating Expense:
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Aircraft fuel and related taxes
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2,289
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2,233
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Salaries and related costs
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1,911
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1,763
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Contract carrier arrangements
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1,399
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1,375
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Aircraft maintenance materials and outside repairs
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491
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561
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Depreciation and amortization
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405
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386
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Contracted services
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401
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378
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Passenger commissions and other selling expenses
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357
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380
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Landing fees and other rents
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323
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305
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Passenger service
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164
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171
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Aircraft rent
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60
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75
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Profit sharing
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20
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—
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Restructuring and other items
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102
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(12
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)
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Other
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356
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416
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Total operating expense
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8,278
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8,031
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Operating Income
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222
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382
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Other (Expense) Income:
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|||||
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Interest expense, net
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(178
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)
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(221
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)
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Amortization of debt discount, net
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(42
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)
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(51
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)
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Miscellaneous, net
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1
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17
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Total other expense, net
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(219
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)
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(255
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)
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Income Before Income Taxes
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3
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127
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Income Tax Benefit (Provision)
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4
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(3
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)
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Net Income
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$
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7
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$
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124
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Basic Earnings Per Share
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$
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0.01
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$
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0.15
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Diluted Earnings Per Share
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$
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0.01
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$
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0.15
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Comprehensive Income
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$
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158
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$
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372
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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3
DELTA AIR LINES, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
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Three Months Ended March 31,
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|||||||
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(in millions)
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2013
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2012
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|||||
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Net Cash Provided by Operating Activities
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$
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1,004
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$
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831
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Cash Flows From Investing Activities:
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Property and equipment additions:
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Flight equipment, including advance payments
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(527
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)
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(308
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)
|
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Ground property and equipment, including technology
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(120
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)
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(99
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)
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Purchase of investments
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(240
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)
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(240
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)
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|||
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Redemption of investments
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286
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266
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Other, net
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(29
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)
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32
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|
|||
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Net cash used in investing activities
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(630
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)
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(349
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)
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Cash Flows From Financing Activities:
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|||||||
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Payments on long-term debt and capital lease obligations
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(299
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)
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(367
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)
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Fuel card obligation
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149
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171
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Other, net
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(4
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)
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(32)
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Net cash used in financing activities
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(154
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)
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(228
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)
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Net Increase in Cash and Cash Equivalents
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220
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|
254
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|||
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Cash and cash equivalents at beginning of period
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2,416
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2,657
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Cash and cash equivalents at end of period
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$
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2,636
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$
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2,911
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Non-Cash Transactions:
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SkyMiles used pursuant to advance purchase under American Express Agreements
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$
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83
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$
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83
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Build-to-suit leased facilities
|
45
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|
75
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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4
DELTA AIR LINES, INC.
Notes to the Condensed Consolidated Financial Statements
March 31, 2013
(Unaudited)
NOTE 1
. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of Delta Air Lines, Inc. and our wholly-owned subsidiaries. These financial statements 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. We reclassified certain prior period amounts, none of which were material, to conform to the current period presentation.
Management believes the accompanying unaudited Condensed Consolidated Financial Statements reflect all adjustments, including normal recurring items and restructuring and other 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, changes in global economic conditions and other factors, operating results for the
three months ended
March 31, 2013
are not necessarily indicative of operating results for the entire year.
Recent Accounting Standards
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
Recently issued accounting guidance revises the reporting of items reclassified out of accumulated other comprehensive income and is effective for fiscal years beginning after December 15, 2012. We adopted this guidance in the March 2013 quarter and have presented amounts reclassified out of accumulated other comprehensive income in a note to the financial statements. For more information about accumulated other comprehensive income, see Note 10.
NOTE 2
. OIL REFINERY
Jet fuel costs have continued to increase in recent years, making fuel expense our single largest expense.
Because global demand for jet fuel and related products is increasing at the same time that jet fuel refining capacity is decreasing in the U.S. (particularly in the Northeast), the refining margin reflected in the prices we pay for jet fuel has increased.
In
June 2012
, we purchased an oil refinery as part of our strategy to mitigate the increasing cost of the refining margin we are paying.
Refinery Operations and Strategic Agreements
The refinery's production consists of jet fuel, as well as gasoline, diesel and other refined products ("non-jet fuel products"). Under a multi-year agreement, we are exchanging a significant portion of the non-jet fuel products with Phillips 66 for jet fuel to be used in our airline operations. In addition, we are selling most of the remaining production of non-jet fuel products to BP under a long-term buy/sell agreement, effectively exchanging those non-jet fuel products for jet fuel. Substantially all of the refinery's production of non-jet fuel products is included in these agreements.
Accounting for Buy/Sell Agreements
To the extent that we receive jet fuel for the non-jet fuel products exchanged under these agreements, we account for these transactions as non-monetary exchanges. We have recorded these non-monetary exchanges at the carrying amount of the non-jet fuel products transferred within aircraft fuel and related taxes on the Consolidated Statement of Operations. The gross fair value of the products exchanged under these agreements during the three months ended
March 31, 2013
was
$1.3 billion
.
5
Segment Reporting
Segment results are prepared based on our internal accounting methods described below, with reconciliations to consolidated amounts in accordance with GAAP. Our segments are not designed to measure operating income or loss directly related to the products and services included in each segment on a stand-alone basis.
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Three Months Ended March 31, 2013
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(in millions)
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Airline
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Refinery
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Intersegment Sales/ Other
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Consolidated
|
||||||||||
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Operating revenue:
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$
|
8,500
|
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$
|
1,731
|
|
$
|
8,500
|
|
|||||
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Sales to airline segment
|
$
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(292
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)
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(1)
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||||||||||
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Exchanged products
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(1,321
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)
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(2)
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|||||||||||
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Sales of by-products to third parties
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(118
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)
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(3)
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|||||||||||
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Operating income (loss)
(4)
|
244
|
|
(22
|
)
|
—
|
|
222
|
|
||||||
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Interest expense, net
|
178
|
|
—
|
|
—
|
|
178
|
|
||||||
|
Depreciation and amortization expense
|
401
|
|
4
|
|
—
|
|
405
|
|
||||||
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Total assets, end of period
|
43,789
|
|
1,279
|
|
—
|
|
45,068
|
|
||||||
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Capital expenditures
|
641
|
|
6
|
|
—
|
|
647
|
|
||||||
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(1)
|
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 for jet fuel from the refinery, which is New York harbor.
|
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(2)
|
Represents value of products exchanged under our buy/sell agreements, as discussed above, determined on a market price basis.
|
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(3)
|
Represents sales of refinery by-products to third parties. Such products are generally sold at or near cost; accordingly, margin on such sales is de minimis. By-products are produced as a result of the refining of crude oil into gasoline, diesel and jet fuel.
|
|
(4)
|
Includes allocation of refinery's inventory price risk to the airline segment.
|
NOTE 3
. FAIR VALUE MEASUREMENTS
Assets (Liabilities) Measured at Fair Value on a Recurring Basis
|
(in millions)
|
March 31,
2013 |
Level 1
|
Level 2
|
Level 3
|
||||||||
|
Cash equivalents
|
$
|
2,126
|
|
$
|
2,126
|
|
$
|
—
|
|
$
|
—
|
|
|
Short-term investments
|
958
|
|
958
|
|
—
|
|
—
|
|
||||
|
Restricted cash equivalents and investments
|
290
|
|
290
|
|
—
|
|
—
|
|
||||
|
Long-term investments
|
202
|
|
94
|
|
27
|
|
81
|
|
||||
|
Hedge derivatives, net
|
||||||||||||
|
Fuel contracts
|
257
|
|
61
|
|
196
|
|
—
|
|
||||
|
Interest rate contracts
|
(66
|
)
|
—
|
|
(66
|
)
|
—
|
|
||||
|
Foreign currency exchange contracts
|
210
|
|
—
|
|
210
|
|
—
|
|
||||
|
(in millions)
|
December 31, 2012
|
Level 1
|
Level 2
|
Level 3
|
||||||||
|
Cash equivalents
|
$
|
2,176
|
|
$
|
2,176
|
|
$
|
—
|
|
$
|
—
|
|
|
Short-term investments
|
958
|
|
958
|
|
—
|
|
—
|
|
||||
|
Restricted cash equivalents and investments
|
344
|
|
344
|
|
—
|
|
—
|
|
||||
|
Long-term investments
|
208
|
|
100
|
|
27
|
|
81
|
|
||||
|
Hedge derivatives, net
|
||||||||||||
|
Fuel contracts
|
249
|
|
27
|
|
222
|
|
—
|
|
||||
|
Interest rate contracts
|
(66
|
)
|
—
|
|
(66
|
)
|
—
|
|
||||
|
Foreign currency exchange contracts
|
123
|
|
—
|
|
123
|
|
—
|
|
||||
6
Cash Equivalents, Short-term Investments and Restricted Cash Equivalents and Investments.
Cash equivalents and short-term investments generally consist of money market funds and treasury bills. Restricted cash equivalents and investments are primarily held to meet certain projected self-insurance obligations and generally consist of money market funds and time deposits. These investments
are recorded at cost, which approximates fair value. Fair value is based on a market approach using prices and other relevant information generated by market transactions involving identical or comparable assets.
Long-term Investments
. Our long-term investments, primarily consisting of equity investments in Grupo Aeroméxico, S.A.B. de C.V., the parent company of Aeroméxico, and GOL Linhas Aéreas Inteligentes, S.A, the parent company of GOL, and auction rate securities, are classified in other noncurrent assets. Shares of Aeroméxico and GOL are traded on public exchanges and we have valued our investments based on quoted market prices. Because auction rate securities are not actively traded, fair values were estimated by discounting the cash flows expected to be received over the remaining maturities of the underlying securities. We based the valuations on our assessment of observable yields on instruments bearing comparable risks and considered the creditworthiness of the underlying debt issuer. Changes in market conditions could result in further adjustments to the fair value of these securities.
Hedge Derivatives.
Our derivative contracts are generally negotiated 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).
|
•
|
Fuel Derivatives.
Our fuel hedge portfolio consists of call options; put options; combinations of two or more call options and put options; swap contracts; and futures contracts.
The products underlying the hedge contracts include heating oil, crude oil, jet fuel and diesel fuel, as these commodities are highly correlated with the price of jet fuel that we consume.
Option contracts are valued under an income approach using option pricing models based on data either readily observable in public markets, derived from public markets or provided by counterparties who regularly trade in public markets.
Volatilities used in these valuations ranged from 9% to 25% depending on the maturity dates, underlying commodities and strike prices of the option contracts.
Swap contracts are valued under an income approach using a discounted cash flow model based on data either readily observable or derived from public markets. Discount rates used in these valuations vary with the maturity dates of the respective contracts and are based on LIBOR. Futures contracts and options on futures contracts are traded on a public exchange and valued based on quoted market prices.
|
|
•
|
Interest Rate Derivatives.
Our interest rate derivatives consist primarily of swap contracts and are valued primarily based on data readily observable in public markets.
|
|
•
|
Foreign Currency Derivatives.
Our foreign currency derivatives consist of Japanese yen and Canadian dollar forward contracts and are valued based on data readily observable in public markets.
|
NOTE 4
. DERIVATIVES
Changes in aircraft 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.
Aircraft Fuel Price Risk
Changes in aircraft fuel prices materially impact our results of operations.
We actively manage our fuel price risk through a hedging program intended to reduce the financial impact on us from changes in the price of jet fuel.
This fuel hedging program utilizes several different contract and commodity types.
The economic effectiveness of this hedge portfolio is frequently tested against our financial targets.
The hedge portfolio is rebalanced from time to time according to market conditions, which may result in locking in gains or losses on hedge contracts prior to their settlement dates.
We generally do not designate our fuel derivative contracts as accounting hedges.We record changes in the fair value of our fuel hedges in aircraft fuel and related taxes. These changes in fair value include settled gains and losses as well as mark to market adjustments ("MTM adjustments"). MTM adjustments are based on market prices as of the end of the reporting period for contracts settling in future periods. During the
three months ended
March 31, 2013
and
2012
, we recorded
$77 million
and
$196 million
in fuel hedge gains, respectively.
7
Hedge Position as of
March 31, 2013
|
(in millions)
|
Notional Balance
|
Final Maturity Date
|
Prepaid Expenses and Other
|
Other Noncurrent Assets
|
Other Accrued Liabilities
|
Other Noncurrent Liabilities
|
Hedge Derivatives, Net
|
|||||||||||||
|
Designated as hedges
|
||||||||||||||||||||
|
Interest rate contracts (cash flow hedges)
|
$
|
710
|
|
U.S. dollars
|
May 2019
|
$
|
—
|
|
$
|
—
|
|
$
|
(21
|
)
|
$
|
(44
|
)
|
$
|
(65
|
)
|
|
Interest rate contracts (fair value hedges)
|
$
|
455
|
|
U.S. dollars
|
August 2022
|
5
|
|
—
|
|
—
|
|
(6
|
)
|
(1
|
)
|
|||||
|
Foreign currency exchange contracts
|
112,004
|
|
Japanese yen
|
January 2016
|
113
|
|
97
|
|
—
|
|
—
|
|
210
|
|
||||||
|
394
|
|
Canadian dollars
|
||||||||||||||||||
|
Not designated as hedges
|
||||||||||||||||||||
|
Fuel contracts
|
1,957
|
|
gallons - heating oil, crude oil, jet fuel and diesel
|
June 2014
|
378
|
|
5
|
|
(124
|
)
|
(2
|
)
|
257
|
|
||||||
|
Total derivative contracts
|
$
|
496
|
|
$
|
102
|
|
$
|
(145
|
)
|
$
|
(52
|
)
|
$
|
401
|
|
|||||
Hedge Position as of
December 31, 2012
|
(in millions)
|
Notional Balance
|
Final Maturity Date
|
Prepaid Expenses and Other
|
Other Noncurrent Assets
|
Other Accrued Liabilities
|
Other Noncurrent Liabilities
|
Hedge Derivatives, Net
|
|||||||||||||
|
Designated as hedges
|
||||||||||||||||||||
|
Interest rate contracts (cash flow hedges)
|
$
|
740
|
|
U.S. dollars
|
May 2019
|
$
|
—
|
|
$
|
—
|
|
$
|
(22
|
)
|
$
|
(48
|
)
|
$
|
(70
|
)
|
|
Interest rate contracts (fair value hedges)
|
$
|
469
|
|
U.S. dollars
|
August 2022
|
—
|
|
6
|
|
(2
|
)
|
—
|
|
4
|
|
|||||
|
Foreign currency exchange contracts
|
119,277
|
|
Japanese yen
|
December 2015
|
62
|
|
63
|
|
(1
|
)
|
(1
|
)
|
123
|
|
||||||
|
430
|
|
Canadian dollars
|
||||||||||||||||||
|
Not designated as hedges
|
||||||||||||||||||||
|
Fuel contracts
|
1,792
|
|
gallons - heating oil, crude oil and jet fuel
|
December 2013
|
511
|
|
—
|
|
(262
|
)
|
—
|
|
249
|
|
||||||
|
Total derivative contracts
|
$
|
573
|
|
$
|
69
|
|
$
|
(287
|
)
|
$
|
(49
|
)
|
$
|
306
|
|
|||||
Offsetting Assets and Liabilities
We have master netting arrangements with all of our counterparties giving us the right of setoff. We have elected not to offset the fair value positions recorded on our Consolidated Balance Sheets. The following table shows the potential net fair value positions had we elected to offset.
|
(in millions)
|
Prepaid Expenses and Other
|
Other Noncurrent Assets
|
Other Accrued Liabilities
|
Other Noncurrent Liabilities
|
Hedge Derivatives, Net
|
||||||||||
|
March 31, 2013
|
|||||||||||||||
|
Net derivative contracts
|
$
|
376
|
|
$
|
101
|
|
$
|
(25
|
)
|
$
|
(51
|
)
|
$
|
401
|
|
|
December 31, 2012
|
|||||||||||||||
|
Net derivative contracts
|
$
|
320
|
|
$
|
69
|
|
$
|
(34
|
)
|
$
|
(49
|
)
|
$
|
306
|
|
8
Hedge Gains (Losses)
For the three months ended March 31, 2013 and 2012, gains (losses) related to our designated hedge contracts are as follows:
|
Effective Portion Reclassified from AOCI to Earnings
|
Effective Portion Recognized in Other Comprehensive Income
|
||||||||||||
|
(in millions)
|
2013
|
2012
|
2013
|
2012
|
|||||||||
|
Foreign currency exchange contracts
|
$
|
21
|
|
$
|
(13
|
)
|
$
|
87
|
|
$
|
123
|
|
|
As of
March 31, 2013
, we have recorded
$113 million
of net gains on cash flow hedge contracts in accumulated other comprehensive loss, which are scheduled to settle and be reclassified in to earnings within the next 12 months.
Credit Risk
To manage credit risk associated with our aircraft fuel price, interest rate and foreign currency hedging programs, we select counterparties based on their credit ratings and limit our exposure to any one counterparty.
Our hedge contracts contain margin funding requirements.
The margin funding requirements may cause us to post margin to counterparties or may cause counterparties to post margin to us as market prices in the underlying hedged items change.
Due to the fair value position of our hedge contracts, we received net margin of
$69 million
and
$62 million
as of
March 31, 2013
and
December 31, 2012
, respectively. Margin received is recorded in accounts payable and margin posted is recorded in prepaid expenses and other.
NOTE 5
. LONG-TERM DEBT
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. In the table below, the aggregate fair value of debt is based primarily on reported market values, recently completed market transactions and estimates based on interest rates, maturities, credit risk and underlying collateral and is classified primarily as Level 2 within the fair value hierarchy.
|
(in millions)
|
March 31,
2013 |
December 31,
2012 |
||||
|
Total debt at par value
|
$
|
12,267
|
|
$
|
12,633
|
|
|
Unamortized discount, net
|
(490
|
)
|
(527
|
)
|
||
|
Net carrying amount
|
$
|
11,777
|
|
$
|
12,106
|
|
|
Fair value
|
$
|
12,600
|
|
$
|
13,000
|
|
Covenants
We were in compliance with all covenants in our financing agreements at March 31, 2013.
NOTE 6
. COMMITMENTS AND CONTINGENCIES
Aircraft Purchase and Lease Commitments
Future aircraft purchase commitments at
March 31, 2013
total approximately
$8.0 billion
and include
100
B-737-900ER aircraft,
18
B-787-8 aircraft,
56
CRJ-900 aircraft and
two
previously owned MD-90 aircraft. Our purchase commitment for
18
B-787-8 aircraft provides for certain aircraft substitution rights. We have obtained long-term financing commitments for a substantial portion of the purchase price of
40
CRJ-900 and
100
B-737-900ER aircraft.
9
|
(in millions)
|
Total
|
||
|
Nine months ending December 31, 2013
|
$
|
865
|
|
|
2014
|
1,525
|
|
|
|
2015
|
815
|
|
|
|
2016
|
810
|
|
|
|
2017
|
760
|
|
|
|
Thereafter
|
3,240
|
|
|
|
Total
|
$
|
8,015
|
|
Our aircraft purchase commitments do not include orders for
five
A319-100 aircraft and
two
A320-200 aircraft because we have the right to cancel these orders. We also have agreements with Southwest Airlines and The Boeing Company to lease
88
B-717-200 aircraft. Deliveries will begin later this year and continue through 2015.
Proposed Transatlantic Joint Venture With Virgin Atlantic
Pending regulatory approval, we have agreed to buy
49%
of Virgin Atlantic, currently held by Singapore Airlines, for
$360 million
. We also entered into a joint venture agreement with Virgin Atlantic with respect to operations on non-stop routes between the United Kingdom and North America. We and Virgin Atlantic have filed an application with the U.S. Department of Transportation for U.S. antitrust immunity with respect to the joint venture.
Legal Contingencies
We are involved in various legal proceedings related to employment practices, environmental issues, antitrust matters 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. We cannot reasonably estimate the potential loss for certain legal proceedings because, for example, the litigation is in its early stages or the plaintiff does not specify the damages being sought. Although the outcome of the legal proceedings in which we are involved cannot be predicted with certainty, management believes that the resolution of these matters will not have a material adverse effect on our Condensed Consolidated Financial Statements.
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 such 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 certain insurance policies in place as required by applicable environmental laws.
Certain 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 certain changes in law or regulations. In certain of these financing transactions, we also bear the risk of certain changes in tax laws that would subject payments to non-U.S. lenders to withholding taxes.
10
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.
Employees Under Collective Bargaining Agreements
At
March 31, 2013
, we had approximately
73,400
full-time equivalent employees. Approximately
15%
of these employees were represented by unions.
War-Risk Insurance Contingency
As a result of the terrorist attacks on September 11, 2001, aviation insurers significantly (1) reduced the maximum amount of insurance coverage available to commercial air carriers for liability to persons (other than employees or passengers) for claims from acts of terrorism, war or similar events and (2) increased the premiums for such coverage and for aviation insurance in general. Since September 24, 2001, the U.S. government has been providing U.S. airlines with war-risk insurance to cover losses, including those resulting from terrorism, to passengers, third parties (ground damage) and the aircraft hull. The U.S. Secretary of Transportation has extended coverage through September 30, 2013, and we expect the coverage to be further extended. The withdrawal of government support of airline war-risk insurance would require us to obtain war-risk insurance coverage commercially, if available. Such commercial insurance could have substantially less desirable coverage than currently provided by the U.S. government, may not be adequate to protect our risk of loss from future acts of terrorism, may result in a material increase to our operating expense or may not be obtainable at all, resulting in an interruption to our operations.
Other
We have certain contracts for goods and services that require us to pay a penalty, acquire inventory specific to us or purchase equipment specific to a contract, if we terminate this type of contract without cause prior to its expiration date. Because these obligations are contingent on our termination of a contract without cause prior to its expiration date, no obligation would exist unless such a termination occurs.
NOTE 7
. RESTRUCTURING AND OTHER ITEMS
The following table shows amounts recorded in restructuring and other items on the Condensed Consolidated Statements of Operations and Comprehensive Income:
|
Three Months Ended March 31,
|
||||||
|
(in millions)
|
2013
|
2012
|
||||
|
Facilities, fleet and other
|
$
|
102
|
|
$
|
27
|
|
|
Gain on slot exchange
|
—
|
|
(39
|
)
|
||
|
Total restructuring and other items
|
$
|
102
|
|
$
|
(12
|
)
|
Facilities, Fleet and Other.
We recorded charges of
$102 million
in the
March 2013
quarter, primarily related to our domestic fleet restructuring initiative. Under the domestic fleet restructuring initiative, we are focused on removing older, less efficient aircraft from our fleet and replacing them with B-737-900ER, B-717-200 and CRJ-900 aircraft that we have committed to acquire. These fleet restructuring charges are related to older, retiring aircraft, including remaining lease payments for grounded aircraft, the acceleration of aircraft depreciation and lease return costs during the period.
As we restructure our fleet and assess our fleet plans, we will continue to evaluate older, retiring aircraft and related equipment for changes in depreciable life, impairment and lease termination costs. The associated retirement of aircraft will result in material lease termination and other charges over this period. The timing and amount of these charges will depend on a number of factors, including our final negotiations with lessors, the timing of removing aircraft from service and ultimate disposition of aircraft included in the fleet restructuring program. We expect to benefit from reduced future maintenance cost and improved operational and fuel efficiency that we will experience over the life of the new aircraft.
11
Gain on Slot Exchange.
During December 2011, we closed transactions with US Airways where we received takeoff and landing rights (each a "slot pair") at LaGuardia in exchange for slot pairs at Reagan National. In approving these transactions, the Department of Transportation restricted our use of the exchanged slots. We recorded a
$78 million
deferred gain in December 2011. We recognized
$39 million
of this deferred gain in the March 2012 quarter as half of the restrictions lapsed and recognized the remainder of the deferred gain in the September 2012 quarter as the remaining restrictions lapsed.
The following table shows the balances and activity for restructuring charges:
|
(in millions)
|
Severance and Related Costs
|
Lease Restructuring
|
||||
|
Balance as of December 31, 2012
|
$
|
49
|
|
$
|
77
|
|
|
Additional costs and expenses
|
—
|
|
6
|
|
||
|
Payments
|
(36
|
)
|
(3
|
)
|
||
|
Other
|
—
|
|
(5
|
)
|
||
|
Balance as of March 31, 2013
|
$
|
13
|
|
$
|
75
|
|
NOTE 8
. EMPLOYEE BENEFIT PLANS
The following table shows the components of net periodic cost:
|
Pension Benefits
|
Other Postretirement and
Postemployment Benefits
|
|||||||||||
|
(in millions)
|
2013
|
2012
|
2013
|
2012
|
||||||||
|
Three Months Ended March 31
|
||||||||||||
|
Service cost
|
$
|
—
|
|
$
|
—
|
|
$
|
12
|
|
$
|
15
|
|
|
Interest cost
|
215
|
|
232
|
|
36
|
|
41
|
|
||||
|
Expected return on plan assets
|
(184
|
)
|
(176
|
)
|
(21
|
)
|
(19
|
)
|
||||
|
Amortization of prior service benefit
|
—
|
|
—
|
|
(7
|
)
|
(3
|
)
|
||||
|
Recognized net actuarial loss
|
56
|
|
36
|
|
6
|
|
6
|
|
||||
|
Settlements
|
6
|
|
—
|
|
—
|
|
—
|
|
||||
|
Net periodic cost
|
$
|
93
|
|
$
|
92
|
|
$
|
26
|
|
$
|
40
|
|
NOTE 9. INCOME TAXES
Valuation Allowance
We periodically assess whether it is more likely than not that we will generate sufficient taxable income to realize our deferred income tax assets. We establish valuation allowances if it is not likely we will realize our deferred income tax assets. In making this determination, we consider all available positive and negative evidence and make certain assumptions. We consider, among other things, our deferred tax liabilities, the overall business environment, our historical financial results, our industry's historically cyclical financial results and potential current and future tax planning strategies.
We recorded a full valuation allowance in 2004 due to our cumulative three year loss position at that time, compounded by the negative industry-wide business trends and outlook. At
March 31, 2013
, we had an
$11.0 billion
valuation allowance established against our deferred income tax assets, which represents a full valuation allowance against our net deferred income tax asset.
During 2012, we moved from a cumulative loss position over the previous three years to a cumulative income position for the first time since we established the full valuation allowance. We have concluded as of March 31, 2013 that the valuation allowance was still needed on our net deferred tax assets based upon the weight of the factors described above. We continue to evaluate our cumulative income position and income trend as well as our future projections of sustained profitability. We evaluate whether this profitability trend constitutes sufficient positive evidence to support a reversal of our valuation allowance (in full or in part).
12
NOTE 10
. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following tables show the components of accumulated other comprehensive loss:
|
(in millions)
|
Pension and Other Benefits Liabilities
|
Derivative Contracts
(1)
|
Deferred Tax Impact
|
Total
|
||||||||
|
Balance at December 31, 2012
|
$
|
(5,147
|
)
|
$
|
(286
|
)
|
$
|
(3,144
|
)
|
$
|
(8,577
|
)
|
|
Changes in value
|
—
|
|
114
|
|
—
|
|
114
|
|
||||
|
Reclassifications into earnings:
|
||||||||||||
|
Actuarial losses
(2)
|
58
|
|
—
|
|
—
|
|
58
|
|
||||
|
Foreign currency exchange contracts
(3)
|
—
|
|
(21
|
)
|
—
|
|
(21
|
)
|
||||
|
Total reclassification into earnings
|
58
|
|
(21
|
)
|
—
|
|
37
|
|
||||
|
Tax effect
|
(22
|
)
|
(35
|
)
|
57
|
|
—
|
|
||||
|
Balance at March 31, 2013
|
$
|
(5,111
|
)
|
$
|
(228
|
)
|
$
|
(3,087
|
)
|
$
|
(8,426
|
)
|
|
(in millions)
|
Pension and Other Benefits Liabilities
|
Derivative Contracts
(1)
|
Deferred Tax Impact
|
Total
|
||||||||
|
Balance at December 31, 2011
|
$
|
(3,899
|
)
|
$
|
(413
|
)
|
$
|
(2,454
|
)
|
$
|
(6,766
|
)
|
|
Changes in value
|
91
|
|
116
|
|
—
|
|
207
|
|
||||
|
Reclassifications into earnings:
|
||||||||||||
|
Actuarial losses
(2)
|
41
|
|
—
|
|
—
|
|
41
|
|
||||
|
Total reclassification into earnings
|
41
|
|
—
|
|
—
|
|
41
|
|
||||
|
Tax effect
|
(47
|
)
|
(47
|
)
|
94
|
|
—
|
|
||||
|
Balance at March 31, 2012
|
$
|
(3,814
|
)
|
$
|
(344
|
)
|
$
|
(2,360
|
)
|
$
|
(6,518
|
)
|
|
(1)
|
Includes
$321 million
of deferred income tax expense that will remain in AOCI until all amounts in AOCI that relate to fuel derivatives which are designated as accounting hedges are recognized in the Consolidated Statement of Operations.
|
|
(2)
|
Reclassified to salaries and related costs
|
|
(3)
|
Reclassified to passenger revenue
|
NOTE 11
. EARNINGS PER SHARE
We calculate basic earnings per share by dividing net income by the weighted average number of common shares outstanding. The following table shows the computation of basic and diluted earnings per share:
|
Three Months Ended March 31,
|
||||||
|
(in millions, except per share data)
|
2013
|
2012
|
||||
|
Net income
|
$
|
7
|
|
$
|
124
|
|
|
Basic weighted average shares outstanding
|
848
|
|
843
|
|
||
|
Dilutive effect of share based awards
|
7
|
|
4
|
|
||
|
Diluted weighted average shares outstanding
|
855
|
|
847
|
|
||
|
Basic earnings per share
|
$
|
0.01
|
|
$
|
0.15
|
|
|
Diluted earnings per share
|
$
|
0.01
|
|
$
|
0.15
|
|
|
Antidilutive common stock equivalents excluded from diluted earnings per share
|
16
|
|
21
|
|
||
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
March 2013
Quarter Financial Highlights
Our net income for the
March 2013
quarter was
$7 million
, or
$0.01
per diluted share. Total operating revenue increased
$87 million
, or
1%
, over the
March 2012
quarter, primarily due to higher passenger revenue due to yield improvement. Fuel expense increased
2%
due to a
3%
increase in our average price per gallon and lower fuel hedge gains, despite a
1%
decrease in consumption.
Passenger revenue increased
$107 million
due to a
2%
year over year improvement in passenger mile yield on
1%
lower traffic, while capacity declined
3%
. Passenger revenue per available seat mile ("PRASM") increased
4%
over the
March 2012
quarter, reflecting higher revenue under corporate travel contracts and improvements in our products and services.
Total operating expense increased
$247 million
over the
March 2012
quarter, driven primarily by higher salaries and fuel expense. Our fuel expense increased
$49 million
(including our contract carriers under capacity purchase agreements) compared to the
March 2012
quarter due to a
3%
increase in our average price per gallon and lower fuel hedge gains, despite a
1%
decrease in consumption. During the
March 2013
quarter, we recorded gains of
$77 million
due to changes in the fair value of our fuel hedge portfolio. Some of these gains relate to mark-to-market adjustments for fuel hedges settling in future periods. Excluding mark-to-market adjustments recorded in periods other than the settlement period ("MTM adjustments"), our average fuel price for the quarter was
$3.24
per gallon, compared to
$3.28
per gallon for the
March 2012
quarter.
Our consolidated operating cost per available seat mile ("CASM") for the
March 2013
quarter increased
5.8%
to
15.61 cent
s from
14.76 cent
s in the
March 2012
quarter, primarily reflecting increased salaries and fuel expense. For the
March 2013
quarter, CASM-Ex (a non-GAAP financial measure) was
9.75 cent
s, or
5.0%
higher than the
March 2012
quarter. The non-GAAP financial measures used in this section are defined and reconciled in "Supplemental Information" below.
Company Initiatives
Strengthening the Balance Sheet
We continue to focus on cash flow generation toward our goal of further strengthening our balance sheet. We finished the
March 2013
quarter with
$5.4 billion
in unrestricted liquidity (consisting of cash, cash equivalents, short-term investments and undrawn revolving credit facility capacity). During the first three months of 2013, we generated
$1.0 billion
in cash from operating activities, reduced debt by
$395 million
and funded capital expenditures while maintaining a solid liquidity position.
Structural Cost Initiatives
We initiated a $1 billion structural cost initiatives program in 2012. These initiatives are designed to improve our cost efficiency while maintaining our operational performance and revenue generation and include:
•
Domestic fleet restructuring to retire older, less efficient aircraft from our fleet;
•
Maintenance redesign focusing on improving our processes and resource management;
•
Distribution platforms to increase the use of cost effective and value-added distribution channels such as delta.com;
•
Staffing efficiency to generate higher productivity levels through technology and improved staffing models; and
•
Other costs to improve network efficiency and to reduce transportation expense.
We anticipate realizing the benefits of the structural cost initiatives in 2013, with CASM-Ex growth expected to moderate in the second half of 2013, and the benefits of the initiatives increasing through 2015.
Domestic Fleet Restructuring
Domestic fleet restructuring is a key part of our structural cost initiatives, and is focused on lowering unit costs while investing in our fleet to enhance the customer experience. We are restructuring our domestic fleet by reducing our 50-seat regional flying and replacing other older, less cost effective aircraft with newer, more efficient aircraft. Recent agreements with SkyWest Airlines, Inc., Pinnacle Airlines, Inc. and Bombardier Aerospace have produced a path for us to eliminate more than 200 50-seat aircraft. We are replacing these aircraft and older B-757-200 aircraft with more efficient and customer preferred CRJ-900, B-717-200 and B-737-900ER aircraft.
14
In 2012, we entered into an agreement with Bombardier Aerospace to purchase 40 CRJ-900 aircraft with 12 deliveries this year and 28 in 2014. Also in 2012, we finalized agreements with Southwest Airlines and The Boeing Company ("Boeing") to lease 88 B-717-200 aircraft. Delivery of the aircraft will begin later this year, with 16 aircraft scheduled to enter our fleet. We will receive 36 aircraft deliveries in each of 2014 and 2015. These B-717-200 aircraft are 110-seat aircraft and will feature new, fully upgraded interiors, with 12 First Class seats, 15 Economy Comfort seats and in-flight WiFi throughout the cabin.
In 2011, we entered into an agreement with Boeing to purchase 100 new fuel efficient B-737-900ER aircraft. We will add these aircraft to our fleet between this year and 2018, primarily replacing older B-757-200 aircraft. We expect the B-737-900ER to offer an industry leading customer experience, including expanded carry-on baggage space and a spacious cabin. Additionally, we continue to increase our MD-90 fleet with previously owned aircraft that offer a lower total cost of ownership.
As we restructure our fleet and assess our fleet plans, we will continue to evaluate older, retiring aircraft and related equipment for changes in depreciable life, impairment and lease termination costs. The associated retirement of aircraft will result in material lease termination and other charges over this period. The timing and amount of these charges will depend on a number of factors, including our final negotiations with lessors, the timing of removing aircraft from service and ultimate disposition of aircraft included in the fleet restructuring program. We expect to benefit from reduced future maintenance cost and improved operational and fuel efficiency that we will experience over the life of the new aircraft.
Oil Refinery
Jet fuel costs have continued to increase in recent years, making fuel expense our single largest expense.
Because global demand for jet fuel and related products is increasing at the same time that jet fuel refining capacity is decreasing in the U.S. (particularly in the Northeast), the refining margin reflected in the prices we pay for jet fuel has increased.
We purchased an oil refinery in June 2012 as part of our strategy to mitigate the increasing cost of the refining margin we are paying. Production at the refinery commenced in September 2012.
Refinery Operations and Strategic Agreements
The refinery's production consists of jet fuel, as well as gasoline, diesel and other refined products ("non-jet fuel products"). Under a multi-year agreement, we are exchanging a significant portion of the non-jet fuel products with Phillips 66 for jet fuel to be used in our airline operations. In addition, we are selling most of the remaining production of non-jet fuel products to BP under a long-term buy/sell agreement, effectively exchanging those non-jet fuel products for jet fuel. Substantially all of the refinery's production of non-jet fuel products is included in these agreements.
New York Strategy
Strengthening our position in New York City continues to be an important part of our network strategy. As discussed below, key components of this strategy are operating a domestic hub at LaGuardia and creating a state-of-the-art facility at JFK. In May 2012, we announced new and expanded service to 10 popular leisure destinations (in addition to the service expansion discussed below) in the Caribbean, Bermuda and Florida from LaGuardia and JFK. These flights began operating in the December quarter of 2012.
LaGuardia.
During December 2011, we closed transactions with US Airways where we received takeoff and landing rights (each a "slot pair") at LaGuardia in exchange for slot pairs at Reagan National. This exchange allows us to operate a new domestic hub at LaGuardia. We have increased capacity at LaGuardia by 41% since March 2012, adding 110 new flights and a total of 27 new destinations. We currently operate about 270 daily flights between LaGuardia and 63 cities, more than any other airline.
We are also investing more than $160 million in a renovation and expansion project at LaGuardia to enhance the customer experience. In December 2012, we opened the connector linking Terminals C and D and in September 2012 we opened a new SkyClub in Terminal C. Ongoing investments include expanded security lanes and a baggage handling system in both terminals as well as an expanded SkyClub in Terminal D.
JFK.
While our expanded LaGuardia schedule is focused on providing industry-leading domestic service, we are optimizing our international and trans-continental flight schedule at JFK to facilitate convenient connections for our passengers and improve coordination with our SkyTeam alliance partners.
15
At JFK, we currently operate domestic flights primarily at Terminal 2 and international flights at Terminal 3 and, to a lesser extent, Terminal 4. Our five-year $1.2 billion renovation project at JFK, which began in 2010, is on schedule. The expansion and enhancement of Terminal 4, which includes the construction of nine new international gates, is expected to be open in the spring of 2013. Upon completion of the Terminal 4 expansion, we will relocate our operations from Terminal 3 to Terminal 4, proceed with the demolition of Terminal 3 and thereafter conduct coordinated flight operations from Terminals 2 and 4. Once our project is complete, we expect that passengers will benefit from an enhanced customer experience and improved operational performance, including reduced taxi times and better on-time performance.
Alliances and Equity Investments
We have made long-term investments in other airlines that give us the ability to increase our network scale and produce revenue improvements. We invested in GOL and Aeromexico because they operate in Latin America's two largest markets, Brazil and Mexico, respectively. Pending regulatory approval, we also agreed to buy 49% of Virgin Atlantic, currently held by Singapore Airlines, for $360 million. We also entered into a joint venture agreement with Virgin Atlantic with respect to operations on non-stop routes between the United Kingdom and North America. We and Virgin Atlantic have filed an application with the U.S. Department of Transportation for U.S. antitrust immunity with respect to the joint venture.
16
Results of Operations -
Three Months Ended
March 31, 2013
and
2012
Operating Revenue
|
Three Months Ended March 31,
|
|||||||||||
|
(in millions)
|
2013
|
2012
|
Increase (Decrease)
|
% Increase
(Decrease)
|
|||||||
|
Passenger:
|
|||||||||||
|
Mainline
|
$
|
5,876
|
|
$
|
5,662
|
|
$
|
214
|
|
4
|
%
|
|
Regional carriers
|
1,457
|
|
1,564
|
|
(107
|
)
|
(7
|
)%
|
|||
|
Total passenger revenue
|
7,333
|
|
7,226
|
|
107
|
|
1
|
%
|
|||
|
Cargo
|
238
|
|
244
|
|
(6
|
)
|
(2
|
)%
|
|||
|
Other
|
929
|
|
943
|
|
(14
|
)
|
(1
|
)%
|
|||
|
Total operating revenue
|
$
|
8,500
|
|
$
|
8,413
|
|
$
|
87
|
|
1
|
%
|
|
Increase (Decrease)
vs. Three Months Ended March 31, 2012
|
|||||||||||||||
|
(in millions)
|
Three Months Ended March 31, 2013
|
Passenger
Revenue
|
RPMs
(1)
(Traffic)
|
ASMs
(2)
(Capacity)
|
Passenger Mile
Yield
|
PRASM
(3)
|
Load
Factor
|
||||||||
|
Domestic
|
$
|
3,402
|
|
6
|
%
|
2
|
%
|
1
|
%
|
5
|
%
|
5
|
%
|
0.3
|
pts
|
|
Atlantic
|
1,052
|
|
(3
|
)%
|
(7
|
)%
|
(11
|
)%
|
4
|
%
|
8
|
%
|
3.0
|
pts
|
|
|
Pacific
|
871
|
|
3
|
%
|
3
|
%
|
(1
|
)%
|
—
|
%
|
4
|
%
|
3.3
|
pts
|
|
|
Latin America
|
551
|
|
6
|
%
|
8
|
%
|
2
|
%
|
(2
|
)%
|
3
|
%
|
4.7
|
pts
|
|
|
Total Mainline
|
5,876
|
|
4
|
%
|
1
|
%
|
(2
|
)%
|
3
|
%
|
5
|
%
|
1.9
|
pts
|
|
|
Regional carriers
|
1,457
|
|
(7
|
)%
|
(10
|
)%
|
(9
|
)%
|
3
|
%
|
2
|
%
|
(1.2
|
) pts
|
|
|
Total passenger revenue
|
$
|
7,333
|
|
1
|
%
|
(1
|
)%
|
(3
|
)%
|
2
|
%
|
4
|
%
|
1.5
|
pts
|
|
(1)
|
Revenue passenger miles (“RPMs”)
|
|
(2)
|
Available seat miles (“ASMs”)
|
|
(3)
|
Passenger revenue per ASM (“PRASM”)
|
Passenger Revenue.
Passenger revenue increased
$107 million
, or
1%
, due to an improvement in the passenger mile yield due to higher revenue under corporate travel contracts and improvements in our products and services. Capacity decreased 1% in the domestic region and decreased 5% in international regions.
International mainline passenger revenue remained flat over March quarter 2012. Atlantic PRASM was up
8%
, driven by a
4%
increase in yield on a
11%
reduction in capacity. Latin America passenger revenue increased
6%
, driven by an
8%
increase in traffic offset by a
2%
decline in yield.
17
Operating Expense
|
Three Months Ended March 31,
|
Increase
(Decrease)
|
% Increase
(Decrease)
|
|||||||||
|
(in millions)
|
2013
|
2012
|
|||||||||
|
Aircraft fuel and related taxes
|
$
|
2,289
|
|
$
|
2,233
|
|
$
|
56
|
|
3
|
%
|
|
Salaries and related costs
|
1,911
|
|
1,763
|
|
148
|
|
8
|
%
|
|||
|
Contract carrier arrangements
|
1,399
|
|
1,375
|
|
24
|
|
2
|
%
|
|||
|
Aircraft maintenance materials and outside repairs
|
491
|
|
561
|
|
(70
|
)
|
(12
|
)%
|
|||
|
Depreciation and amortization
|
405
|
|
386
|
|
19
|
|
5
|
%
|
|||
|
Contracted services
|
401
|
|
378
|
|
23
|
|
6
|
%
|
|||
|
Passenger commissions and other selling expenses
|
357
|
|
380
|
|
(23
|
)
|
(6
|
)%
|
|||
|
Landing fees and other rents
|
323
|
|
305
|
|
18
|
|
6
|
%
|
|||
|
Passenger service
|
164
|
|
171
|
|
(7
|
)
|
(4
|
)%
|
|||
|
Aircraft rent
|
60
|
|
75
|
|
(15
|
)
|
(20
|
)%
|
|||
|
Profit sharing
|
20
|
|
—
|
|
20
|
|
NM
|
|
|||
|
Restructuring and other items
|
102
|
|
(12
|
)
|
114
|
|
NM
|
|
|||
|
Other
|
356
|
|
416
|
|
(60
|
)
|
(14
|
)%
|
|||
|
Total operating expense
|
$
|
8,278
|
|
$
|
8,031
|
|
$
|
247
|
|
3
|
%
|
Fuel Expense.
Including contract carriers under capacity purchase agreements, fuel expense increased
$49 million
because of a
3%
increase in our average price per gallon and lower fuel hedge gains, despite a
1%
decrease in consumption. The table below presents fuel expense, gallons consumed and our average price per gallon, including the impact of fuel hedge gains of
$77 million
in the
March 2013
quarter:
|
Three Months Ended March 31,
|
Increase
(Decrease)
|
% Increase
(Decrease)
|
|||||||||
|
(in millions, except per gallon data)
|
2013
|
2012
|
|||||||||
|
Aircraft fuel and related taxes
(1)
|
$
|
2,289
|
|
$
|
2,233
|
|
$
|
56
|
|
||
|
Aircraft fuel and related taxes included within contract carrier arrangements
|
519
|
|
526
|
|
(7
|
)
|
|
|
|||
|
Total fuel expense
|
$
|
2,808
|
|
$
|
2,759
|
|
$
|
49
|
|
2
|
%
|
|
Total fuel consumption (gallons)
|
875
|
|
886
|
|
(11
|
)
|
(1
|
)%
|
|||
|
Average price per gallon
|
$
|
3.21
|
|
$
|
3.11
|
|
$
|
0.10
|
|
3
|
%
|
|
(1)
|
Includes the impact of fuel hedge activity described further in the table below.
|
The table below shows the impact of hedging and the refinery on fuel expense and average price per gallon:
|
Average Price Per Gallon
|
||||||||||||||||||
|
Three Months Ended March 31,
|
Change
|
Three Months Ended March 31,
|
Change
|
|||||||||||||||
|
(in millions, except per gallon data)
|
2013
|
2012
|
2013
|
2012
|
||||||||||||||
|
Fuel purchase cost
|
$
|
2,863
|
|
$
|
2,955
|
|
$
|
(92
|
)
|
$
|
3.28
|
|
$
|
3.33
|
|
$
|
(0.05
|
)
|
|
Refinery segment impact
|
22
|
|
—
|
|
22
|
|
0.02
|
|
—
|
|
0.02
|
|
||||||
|
Fuel hedge (gains) losses
|
(77
|
)
|
(196
|
)
|
119
|
|
(0.09
|
)
|
(0.22
|
)
|
0.13
|
|
||||||
|
Total fuel expense
|
$
|
2,808
|
|
$
|
2,759
|
|
$
|
49
|
|
$
|
3.21
|
|
$
|
3.11
|
|
$
|
0.10
|
|
|
MTM adjustments
|
24
|
|
151
|
|
(127
|
)
|
0.03
|
|
0.17
|
|
(0.14
|
)
|
||||||
|
Total fuel expense, adjusted
|
$
|
2,832
|
|
$
|
2,910
|
|
$
|
(78
|
)
|
$
|
3.24
|
|
$
|
3.28
|
|
$
|
(0.04
|
)
|
18
During the
three months ended
March 31, 2013
, our consolidated fuel hedge gains of
$77 million
included
$24 million
of MTM adjustments. These MTM adjustments are based on market prices as of the end of the reporting period for contracts settling in future periods. Such market prices are not necessarily indicative of the actual future value of the underlying hedge in the contract settlement period. The MTM adjustments are reflected in the table above to calculate an effective fuel cost for the period. We adjust fuel expense for these items to arrive at a more meaningful measure of fuel cost. Our average price per gallon, adjusted (a non-GAAP financial measure as defined in "Supplemental Information" below), was
$3.24
for the
March 2013
quarter.
Salaries and Related Costs
. The increase in salaries and related costs is primarily due to employee pay increases.
Aircraft Maintenance Materials and Outside Repairs.
Aircraft maintenance materials and outside repairs consists of costs associated with maintenance of aircraft used in our operations and maintenance sales to third parties by our MRO services business. The decrease in maintenance costs is primarily due to lower costs on lower maintenance sales to third parties by our MRO services business and the cyclical timing of maintenance events on our fleet.
Restructuring and Other Items.
Due to the nature of amounts recorded within restructuring and other items, a year over year comparison is not meaningful. For a discussion of charges recorded in restructuring and other items, see
Note 7
of the Notes to the Condensed Consolidated Financial Statements.
Non-Operating Results
The following table shows the components of other expense, net:
|
Three Months Ended March 31,
|
Favorable (Unfavorable)
|
||||||||
|
(in millions)
|
2013
|
2012
|
|||||||
|
Interest expense, net
|
$
|
(178
|
)
|
$
|
(221
|
)
|
$
|
43
|
|
|
Amortization of debt discount, net
|
(42
|
)
|
(51
|
)
|
9
|
|
|||
|
Miscellaneous, net
|
1
|
|
17
|
|
(16
|
)
|
|||
|
Total other expense, net
|
$
|
(219
|
)
|
$
|
(255
|
)
|
$
|
36
|
|
Income Taxes
The following table shows the components of our income tax benefit (provision):
|
Three Months Ended March 31,
|
||||||
|
(in millions)
|
2013
|
2012
|
||||
|
International and state income tax provision
|
$
|
(2
|
)
|
$
|
(3
|
)
|
|
Alternative minimum tax refunds
|
6
|
|
—
|
|
||
|
Income tax benefit (provision)
|
$
|
4
|
|
$
|
(3
|
)
|
We consider all income sources, including other comprehensive income, in determining the amount of tax benefit allocated to continuing operations. During the
three months ended
March 31, 2013
and 2012, we did not record an income tax provision for U.S. federal income tax purposes since our deferred tax assets are fully reserved by a valuation allowance.
19
Operating Statistics
The following table sets forth our operating statistics:
|
Three Months Ended March 31,
|
||||||
|
Consolidated
(1)
|
2013
|
2012
|
||||
|
Revenue passenger miles (millions)
|
43,078
|
|
43,351
|
|
||
|
Available seat miles (millions)
|
53,022
|
|
54,408
|
|
||
|
Passenger mile yield
|
|
17.02
|
¢
|
|
16.67
|
¢
|
|
Passenger revenue per available seat mile
|
|
13.83
|
¢
|
|
13.28
|
¢
|
|
Operating cost per available seat mile (CASM)
|
|
15.61
|
¢
|
|
14.76
|
¢
|
|
CASM-Ex
(2)
|
|
9.75
|
¢
|
|
9.28
|
¢
|
|
Passenger load factor
|
81.2
|
%
|
79.7
|
%
|
||
|
Fuel gallons consumed (millions)
|
875
|
|
886
|
|
||
|
Average price per gallon
(3)
|
$
|
3.21
|
|
$
|
3.11
|
|
|
Average price per gallon, adjusted
(2)
|
$
|
3.24
|
|
$
|
3.28
|
|
|
Full-time equivalent employees, end of period
|
73,430
|
|
78,761
|
|
||
|
(1)
|
Includes the operations of our contract carriers under capacity purchase agreements. Full-time equivalent employees exclude employees of contract carriers that we do not own.
|
|
(2)
|
Non-GAAP financial measure as defined in "Supplemental Information" below.
|
|
(3)
|
Includes the impact of fuel hedge activity.
|
20
Fleet Information
Our operating aircraft fleet, commitments and options at
March 31, 2013
are summarized in the following table:
|
Current Fleet
(1)
|
Commitments
|
||||||||||||||||
|
Aircraft Type
|
Owned
|
Capital
Lease
|
Operating
Lease
|
Total
|
Average
Age
|
Purchase
(2)(3)(4)
|
Lease
|
Options
|
|||||||||
|
B-717-200
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
88
|
|
—
|
|
|
|
B-737-700
|
10
|
|
—
|
|
—
|
|
10
|
|
4.2
|
|
—
|
|
—
|
|
—
|
|
|
|
B-737-800
|
73
|
|
—
|
|
—
|
|
73
|
|
12.2
|
|
—
|
|
—
|
|
—
|
|
|
|
B-737-900ER
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
100
|
|
—
|
|
30
|
|
|
|
B-747-400
|
4
|
|
9
|
|
3
|
|
16
|
|
19.4
|
|
—
|
|
—
|
|
—
|
|
|
|
B-757-200
|
92
|
|
27
|
|
30
|
|
149
|
|
19.6
|
|
—
|
|
—
|
|
—
|
|
|
|
B-757-300
|
16
|
|
—
|
|
—
|
|
16
|
|
10.1
|
|
—
|
|
—
|
|
—
|
|
|
|
B-767-300
|
10
|
|
2
|
|
2
|
|
14
|
|
21.7
|
|
—
|
|
—
|
|
—
|
|
|
|
B-767-300ER
|
51
|
|
5
|
|
2
|
|
58
|
|
17.0
|
|
—
|
|
—
|
|
3
|
|
|
|
B-767-400ER
|
21
|
|
—
|
|
—
|
|
21
|
|
12.1
|
|
—
|
|
—
|
|
5
|
|
|
|
B-777-200ER
|
8
|
|
—
|
|
—
|
|
8
|
|
13.2
|
|
—
|
|
—
|
|
—
|
|
|
|
B-777-200LR
|
10
|
|
—
|
|
—
|
|
10
|
|
4.0
|
|
—
|
|
—
|
|
10
|
|
|
|
B-787-8
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
18
|
|
—
|
|
—
|
|
|
|
A319-100
|
54
|
|
—
|
|
2
|
|
56
|
|
11.1
|
|
—
|
|
—
|
|
—
|
|
|
|
A320-200
|
49
|
|
—
|
|
19
|
|
68
|
|
18.0
|
|
—
|
|
—
|
|
—
|
|
|
|
A330-200
|
11
|
|
—
|
|
—
|
|
11
|
|
8.0
|
|
—
|
|
—
|
|
—
|
|
|
|
A330-300
|
21
|
|
—
|
|
—
|
|
21
|
|
7.6
|
|
—
|
|
—
|
|
—
|
|
|
|
MD-88
|
71
|
|
46
|
|
—
|
|
117
|
|
22.7
|
|
—
|
|
—
|
|
—
|
|
|
|
MD-90
|
46
|
|
8
|
|
—
|
|
54
|
|
16.0
|
|
2
|
|
—
|
|
—
|
|
|
|
DC9-50
|
17
|
|
—
|
|
—
|
|
17
|
|
34.6
|
|
—
|
|
—
|
|
—
|
|
|
|
CRJ-900
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
56
|
|
—
|
|
30
|
|
|
|
Embraer 175
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
36
|
|
|
|
Total
|
564
|
|
97
|
|
58
|
|
719
|
|
17.0
|
|
176
|
|
88
|
|
114
|
|
|
|
(1)
|
Excludes certain aircraft we own or lease which are operated by third party contract carriers on our behalf shown in the table below.
|
|
(2)
|
Excludes our orders for five A319-100 aircraft and two A320-200 aircraft because we have the right to cancel these orders.
|
|
(3)
|
Includes 16 CRJ-900 aircraft which are currently being operated by third party contract carriers on our behalf that are included in the table below.
|
|
(4)
|
Our purchase commitment for 18 B-787-8 aircraft provides for certain aircraft substitution rights.
|
The following table summarizes the aircraft fleet operated by third party contract carriers on our behalf at
March 31, 2013
:
|
Fleet Type
|
||||||||||||||
|
Carrier
|
CRJ-200
|
CRJ-700
|
CRJ-900
|
ERJ-145
|
Embraer 170
|
Embraer 175
|
Total
|
|||||||
|
Pinnacle Airlines, Inc.
|
140
|
|
—
|
|
49
|
|
—
|
|
—
|
|
—
|
|
189
|
|
|
ExpressJet Airlines, Inc.
|
81
|
|
41
|
|
23
|
|
—
|
|
—
|
|
—
|
|
145
|
|
|
SkyWest Airlines, Inc.
|
51
|
|
19
|
|
29
|
|
—
|
|
—
|
|
—
|
|
99
|
|
|
Compass Airlines, Inc.
|
—
|
|
—
|
|
—
|
|
—
|
|
6
|
|
36
|
|
42
|
|
|
Chautauqua Airlines, Inc.
|
—
|
|
—
|
|
—
|
|
33
|
|
—
|
|
—
|
|
33
|
|
|
Shuttle America Corporation
|
—
|
|
—
|
|
—
|
|
—
|
|
14
|
|
16
|
|
30
|
|
|
GoJet Airlines, LLC
|
—
|
|
22
|
|
—
|
|
—
|
|
—
|
|
—
|
|
22
|
|
|
Total
|
272
|
|
82
|
|
101
|
|
33
|
|
20
|
|
52
|
|
560
|
|
21
Financial Condition and Liquidity
We expect to meet our cash needs for the next 12 months from cash flows from operations, cash and cash equivalents, short-term investments and financing arrangements. As of
March 31, 2013
, we had
$5.4 billion
in unrestricted liquidity, consisting of
$3.6 billion
in cash and cash equivalents and short-term investments and $1.8 billion in undrawn revolving credit facilities.
Sources of Liquidity
Operating Cash Flow
Cash flows from operating activities continue to provide our primary source of liquidity. We generated positive cash flows from operations of
$1.0 billion
and
$831 million
in the three months ended
March 31, 2013
and
2012
, respectively. We also expect to generate positive cash flows from operations for the remainder of 2013.
Our operating cash flows can be impacted by the following factors:
Seasonality of Advance Ticket Sales
. We sell tickets for air travel in advance of the customer's travel date, and receive cash payment at the time of sale. As a result, we record the cash received on advance sales as deferred revenue in Air Traffic Liability. The Air Traffic Liability increases during the spring as we have increased sales in advance of the summer peak travel season. Our cash balances are typically higher at the beginning of the summer and at a low point during the winter.
Fuel and Fuel Hedge Margins
. The cost of jet fuel is our most significant expense, representing approximately
34%
of our total operating expenses. The market price for jet fuel is highly volatile and can vary significantly from period to period. This price volatility affects our cash flows from operations, impacting comparability from period to period.
We have jet fuel inventories at various airport locations, which are used in our airline operations. Also, our Trainer oil refinery, which we acquired in 2012, produces refined oil products. Jet fuel and refined oil product inventories are recorded as Fuel Inventory.
As part of our fuel hedging program, we may be required to pay hedge margin to counterparties when our portfolio is in a loss position. Conversely, if our portfolio with counterparties is in a gain position, we may receive hedge margin. Our future cash flows are impacted depending upon the nature of our derivative contracts and the market price of the commodities underlying our derivative contracts.
Timing of SkyMiles Sales.
In December 2011, we amended our American Express agreements and agreed to sell
$675 million
of unrestricted SkyMiles to American Express in each December from 2011 through 2014. Under the December 2011 amendment, American Express purchased
$675 million
of unrestricted SkyMiles in both 2012 and 2011. We anticipate American Express will make additional purchases of
$675 million
of unrestricted SkyMiles in both 2013 and 2014.
In 2008, we entered into a multi-year extension of our American Express agreements and received $1.0 billion from American Express for an advance purchase of restricted SkyMiles. The 2008 agreement provided that our obligations with respect to the advance purchase would be satisfied as American Express uses the purchased miles over a specified future period (“SkyMiles Usage Period”). During the SkyMiles Usage Period, which commenced in December 2011, American Express draws down SkyMiles valued at
$333 million
annually over three years beginning 2012 instead of paying cash to Delta for SkyMiles used.
Pension Contributions.
We sponsor defined benefit pension plans for eligible employees and retirees. These plans are closed to new entrants and are frozen for future benefit accruals. Our funding obligations for these plans are governed by the Employee Retirement Income Security Act, as modified by the The Pension Protection Act of 2006. We contributed $150 million to our defined benefit pension plans during the March 2013 quarter and contributed an additional $500 million in April 2013. As a result of these contributions, we satisfied, on an accelerated basis, our required contributions for our defined benefit plans for 2013.
Undrawn Lines of Credit
We have available
$1.8 billion
in undrawn lines of credit. We have credit facilities that have covenants, such as collateral coverage ratios. If we are not in compliance with these covenants, we may be required to repay amounts borrowed under the credit facilities or post additional collateral or may not be able to draw on the revolving credit facilities.
22
Other
Our ability to obtain additional financing, if needed, on acceptable terms could be adversely affected by the fact that a significant portion of our assets are subject to liens.
Investing and Financing
Capital Expenditures
We incurred capital expenditures of $647 million and $407 million in the three months ended
March 31, 2013
and 2012, respectively. Our capital expenditures were primarily for the purchase of aircraft and aircraft modifications that upgraded aircraft interiors and enhance our product offering.
We have committed to future aircraft purchases that will require significant capital investment, and have obtained long-term financing commitments for a substantial portion of the purchase price of these aircraft. We expect that we will invest more than $2 billion in 2013 primarily for aircraft, aircraft modifications and the purchase of a $360 million equity investment in Virgin Atlantic. We expect that the 2013 investments will be funded through cash from operations.
Financings
At
March 31, 2013
, total debt and capital leases, including current maturities, was
$12.3 billion
, a
$395 million
reduction from
December 31, 2012
and a $4.9 billion reduction from December 31, 2009. We have focused on reducing our total debt over the past few years as part of our strategy to strengthen our balance sheet. In addition, we have refinanced previous financing transactions, which we expect to reduce our total future interest expense.
Critical Accounting Policies and Estimates
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.
Recent Accounting Standards
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
Recently issued accounting guidance revises the reporting of items reclassified out of accumulated other comprehensive income and is effective for fiscal years beginning after December 15, 2012. We adopted this guidance in the March 2013 quarter and have presented amounts reclassified out of accumulated other comprehensive income in a note to the financial statements. For more information about accumulated other comprehensive income, see Note 10.
23
Supplemental Information
We sometimes use information that is derived from the Consolidated Financial Statements, but that is not presented in accordance with GAAP. Certain of this information is considered to be “non-GAAP financial measures” under the U.S. Securities and Exchange Commission rules. The non-GAAP financial measures should 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 following tables show reconciliations of non-GAAP financial measures to the most directly comparable GAAP financial measures.
We exclude the following items from CASM to determine CASM-Ex:
|
•
|
Aircraft fuel and related taxes.
The volatility in fuel prices impacts the comparability of year-over-year financial performance. Management believes the exclusion of aircraft fuel and related taxes (including our contract carriers under capacity purchase arrangements) allows investors to better understand and analyze our non-fuel costs and our year-over-year financial performance.
|
|
•
|
Ancillary businesses
. Ancillary businesses are not related to the generation of a seat mile. These businesses include aircraft maintenance and staffing services we provide to third parties and our vacation wholesale operations.
|
|
•
|
Profit sharing.
Management believes the exclusion of this item provides a more meaningful comparison of our results to the airline industry and prior years' results.
|
|
•
|
Restructuring and other items.
Management believes the exclusion of this item is helpful to investors to evaluate our recurring core operational performance in the period shown.
|
|
•
|
MTM adjustments.
MTM adjustments are based on market prices as of the end of the reporting period for contracts settling in future periods
.
Such market prices are not necessarily indicative of the actual future value of the underlying hedge in the contract settlement period. Therefore, we adjust fuel expense for these items to arrive at a more meaningful measure of fuel cost.
|
|
Three Months Ended March 31,
|
||||||
|
2013
|
2012
|
|||||
|
CASM
|
|
15.61
|
¢
|
|
14.76
|
¢
|
|
Items excluded:
|
||||||
|
Aircraft fuel and related taxes
|
(5.33
|
)
|
(5.34
|
)
|
||
|
Ancillary businesses
|
(0.35
|
)
|
(0.44
|
)
|
||
|
Profit sharing
|
(0.04
|
)
|
—
|
|
||
|
Restructuring and other items
|
(0.19
|
)
|
0.02
|
|
||
|
MTM adjustments
|
0.05
|
|
0.28
|
|
||
|
CASM-Ex
|
|
9.75
|
¢
|
|
9.28
|
¢
|
24
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, other than those discussed below.
The following sensitivity analysis does not consider the effects of a change in demand for air travel, the economy as a whole or actions we may take to seek to mitigate our exposure to a particular risk. For these and other reasons, the actual results of changes in these prices or rates may differ materially from the following hypothetical results.
Aircraft Fuel Price Risk
Changes in aircraft fuel prices materially impact our results of operations.
We actively manage our fuel price risk through a hedging program intended to reduce the financial impact on us from changes in the price of jet fuel.
This fuel hedging program utilizes several different contract and commodity types.
The economic effectiveness of this hedge portfolio is frequently tested against our financial targets.
The hedge portfolio is rebalanced from time to time according to market conditions, which may result in locking in gains or losses on hedge contracts prior to their settlement dates.
Our fuel hedge portfolio consists of call options; put options; combinations of two or more call options and put options; swap contracts; and futures contracts.
The products underlying the hedge contracts include heating oil, crude oil, jet fuel and diesel fuel, as these commodities are highly correlated with the price of jet fuel that we consume.
Our fuel hedge contracts contain margin funding requirements.
The margin funding requirements may cause us to post margin to counterparties or may cause counterparties to post margin to us as market prices in the underlying hedged items change.
If fuel prices change significantly from the levels existing at the time we enter into fuel hedge contracts, we may be required to post a significant amount of margin. We may adjust our hedge portfolio from time to time in response to margin posting requirements.
For the
three months ended
March 31, 2013
, aircraft fuel and related taxes, including our contract carriers under capacity purchase agreements, accounted for
$2.8 billion
, or
34%
, of our total operating expense. We recognized
$77 million
of net fuel hedge gains during the
three months ended
March 31, 2013
, including
$24 million
of mark-to-market gains primarily relating to hedge contracts settling in future periods.
The following table shows the projected cash impact to fuel cost assuming 10% and 20% increases or decreases in fuel prices. The hedge gain (loss) reflects the change in the projected cash settlement value of our open fuel hedge contracts at
March 31, 2013
based on their contract settlement dates, assuming the same 10% and 20% changes.
|
Nine Months ending December 31, 2013
|
Fuel Hedge Margin Received from (Posted to) Counterparties
|
||||||||||||
|
(in millions)
|
(Increase) Decrease to Unhedged Fuel Cost
(1)
|
Hedge Gain (Loss)
(2)
|
Net Impact
|
||||||||||
|
+ 20%
|
$
|
(1,740
|
)
|
$
|
240
|
|
$
|
(1,500
|
)
|
$
|
290
|
|
|
|
+ 10%
|
(870
|
)
|
200
|
|
(670
|
)
|
240
|
|
|||||
|
- 10%
|
870
|
|
(60
|
)
|
810
|
|
70
|
|
|||||
|
- 20%
|
1,740
|
|
(200
|
)
|
1,540
|
|
(70
|
)
|
|||||
|
(1)
|
Projections based upon the (increase) decrease to unhedged fuel cost as compared to the jet fuel price per gallon of $2.96, excluding transportation costs and taxes, at
March 31, 2013
and estimated fuel consumption of 2.9 billion gallons for the nine months ended December 31, 2013.
|
|
(2)
|
Projections based on average futures prices by contract settlement month compared to futures prices at
March 31, 2013
.
|
25
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
March 31, 2013
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
March 31, 2013
, 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.
26
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Delta Air Lines, Inc.
We have reviewed the consolidated balance sheet of Delta Air Lines, Inc. (the Company) as of
March 31, 2013
, and the related condensed consolidated statements of operations and comprehensive income and the condensed consolidated statements of cash flows for the three-month periods ended
March 31, 2013
and
2012
. These financial statements are the responsibility of the Company's management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information 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 standards of the Public Company Accounting Oversight Board (United States), 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.
Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements referred to above 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), the consolidated balance sheet of Delta Air Lines, Inc. as of
December 31, 2012
and the related consolidated statements of operations, comprehensive income (loss), cash flows and stockholders' (deficit) equity for the year ended
December 31, 2012
and in our report dated February 12, 2013, we expressed an unqualified opinion on those consolidated financial statements.
|
Atlanta, Georgia
|
/s/ Ernst & Young LLP
|
|
April 24, 2013
|
|
27
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
“Item 3. Legal Proceedings” of our Form 10-K includes a discussion of other 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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
We withheld the following shares of common stock to satisfy tax withholding obligations during the
March 2013
quarter from the distributions described below. These shares 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
(1)
|
Average Price Paid Per Share
|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
(1)
|
Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Plan or Programs
|
||||
|
January 2013
|
4,821
|
|
$
|
11.95
|
|
4,821
|
|
(1)
|
|
February 2013
|
1,411,127
|
|
$
|
14.17
|
|
1,411,127
|
|
(1)
|
|
March 2013
|
25,542
|
|
$
|
16.19
|
|
25,542
|
|
(1)
|
|
Total
|
1,441,490
|
|
1,441,490
|
|
||||
|
(1)
|
Shares were withheld from employees to satisfy certain tax obligations due in connection with grants of stock under the Delta Air Lines, Inc. 2007 Performance Compensation Plan (the "2007 Plan"). The 2007 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.
|
ITEM 6. EXHIBITS
(a) Exhibits
|
10.1
|
Model Award Agreement for the Delta Air Lines, Inc. 2013 Long Term Incentive Program
|
|
10.2
|
Model Award Agreement for the Delta Air Lines, Inc. Transition Award Program
|
|
15
|
Letter from Ernst & Young LLP regarding unaudited interim financial information
|
|
31.1
|
Certification by Delta's Chief Executive Officer with respect to Delta's Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 2013
|
|
31.2
|
Certification by Delta's Senior Vice President and Chief Financial Officer with respect to Delta's Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 2013
|
|
32
|
Certification pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code by Delta's Chief Executive Officer and Senior Vice President and Chief Financial Officer with respect to Delta's Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 2013
|
|
101.INS
|
XBRL Instance Document
|
|
101.SCH
|
XBRL Taxonomy Extension Schema Document
|
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
101.LAB
|
XBRL Taxonomy Extension Labels Linkbase Document
|
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
28
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.
|
Delta Air Lines, Inc.
|
|
|
(Registrant)
|
|
|
/s/ Craig M. Meynard
|
|
|
Craig M. Meynard
|
|
|
Vice President and Chief Accounting Officer
|
|
|
(Principal Accounting Officer)
|
|
|
April 24, 2013
|
|
29
TABLE OF CONTENTS
Note 1 . Summary Of Significant Accounting PoliciesprintNote 2 . Oil RefineryprintNote 3 . Fair Value MeasurementsprintNote 4 . DerivativesprintNote 5 . Long-term DebtprintNote 6 . Commitments and ContingenciesprintNote 7 . Restructuring and Other ItemsprintNote 8 . Employee Benefit PlansprintNote 9. Income TaxesprintNote 10 . Accumulated Other Comprehensive LossprintNote 11 . Earnings Per ShareprintItem 2. Management's Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 2. Management's Discussion and Analysis Of Financial Condition and ResultsprintItem 3. Quantitative and Qualitative Disclosures About Market RiskprintItem 4. Controls and ProceduresprintPart II. Other InformationprintItem 1. Legal ProceedingsprintItem 1A. Risk FactorsprintItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsprintItem 6. Exhibitsprint