Delta Air Lines Announces September Quarter Profit

ATLANTA, Oct. 14, 2015 /PRNewswire/ -- Delta Air Lines (NYSE:DAL) today reported financial results for the September 2015 quarter, including adjusted net income¹ of $1.4 billion or $1.74 per diluted share, up 45% from the September quarter of 2014.

"Despite currency volatility and global economic uncertainty which drove a modest decline in revenues, we expanded operating margins by over five points to 21%, grew earnings per share by 45%, and generated $1.4 billion of free cash flow in the September quarter as demand remains solid and fuel prices have dropped materially.  We expect that strong performance to continue in the December quarter with operating margins of 16 to 18% and over 40% earnings per share growth," said Richard Anderson, Delta's chief executive officer.  "It's an honor to recognize the hard work of 80,000 outstanding Delta employees with over $1 billion of profit sharing accrued so far this year.  Our team consistently delivers best-in-class operations and service to our customers, develops innovative solutions with our global partners, and produces strong returns for our shareholders."

Revenue Environment

Delta's operating revenue for the September quarter decreased 0.6%, or $71 million, including $235 million in foreign currency pressures.  Passenger unit revenues declined 4.9%, which includes approximately 2.5 points of impact from foreign currency.

Delta continues to successfully implement its Branded Fares initiative, increasing paid first class load factor by 8 points to 56% and expanding its Basic Economy product to over 450 markets.  In total, Branded Fares products produced more than $75 million in incremental revenue in the September quarter.

"Our commercial initiatives are delivering solid benefits as we've expanded our revenue premium to the industry, strengthened our hubs in New York, Seattle and Los Angeles, and deepened our partnerships around the globe.  However, low fuel prices and foreign currency have pressured our revenue performance," said Ed Bastian, Delta's president.  "By keeping our system capacity flat for the December quarter, we are taking action to drive improvement in our unit revenues which we forecast will decline 2.5-4.5% for the quarter including 2 points of impact from foreign currency.  Our conservative growth in this low fuel environment is evidence of our commitment to getting RASM back on a positive trajectory, which is a key component to achieving our long-term margin targets."

Bastian continued, "As we look ahead, fuel prices remain volatile and we are not recasting the business for low fuel prices.  Our plan is for 2016 capacity growth of 0-2%, which we believe is the appropriate level to balance supply and demand and to ensure the momentum in our business continues."

December 2015 Quarter Guidance
Following are Delta's projections for the December 2015 quarter:

Cost Performance
Adjusted fuel expense² declined over $1.1 billion compared to the same period in 2014, as 50% lower market fuel prices and an $87 million increase in profit at the refinery offset $250 million in settled hedge losses. 

CASM-Ex³ increased 0.9% for the September quarter on a year-over-year basis, with foreign exchange and the benefits of Delta's domestic refleeting and other cost initiatives offsetting the company's investments in its employees, products and operations.  The September quarter also included approximately 1 point of unit cost pressure from benefit accruals related to recently announced pay increases for Delta employees. 

Delta's debt reduction initiative continued to improve the company's interest expense, producing $33 million in interest savings for the quarter compared to the same period in 2014. 

"We continue to benefit from the decline in fuel prices, which provided a $1 billion-plus tailwind this quarter and, at current prices, will drive a $750 million benefit in the December quarter," said Paul Jacobson, Delta's chief financial officer.  "With volatile fuel prices and revenues under pressure, we are using the current environment to evaluate and prune costs across all parts of the business, including our overhead functions, making sure we're investing in the right parts of the airline and at levels we can sustain over time."

Cash Flow, Shareholder Returns, and Adjusted Net Debt⁴
Delta generated $2.4 billion of adjusted operating cash flow and $1.4 billion of free cash flow during the quarter.  The company used this strong cash generation to reinvest $1.0 billion back into the business, including $450 million for its 3.5% ownership position in China Eastern.  The company returned $532 million to its owners through $107 million of dividends and $425 million of share repurchases, while also strengthening its balance sheet by reducing its adjusted net debt to $6.4 billion. 

During the quarter, Delta refinanced its senior secured credit facility ahead of its scheduled maturity. The new borrowings include a $1.5 billion undrawn revolver, a $500 million term loan, and a $500 million EETC with a blended rate of 3.77%.  The improved strength of Delta's balance sheet allowed it to lower the overall rate on the borrowing and increase its revolver capacity by $275 million.  In addition, the company reduced the outstanding principal amount by $320 million as it continues toward its $4 billion debt target by 2017.

"The strong cash flows we are producing are allowing us to reinvest in our business and our employees, while working toward achieving an investment grade balance sheet and also returning increasing levels of cash to shareholders," Jacobson continued.  "Since initiating our capital return program, we have already retired 8% of Delta's outstanding share count while reducing our adjusted net debt by nearly $4 billion over that same time period."

GAAP Metrics Related to Fuel, Cost Performance and Cash Flow
Below are GAAP metrics corresponding to the non-GAAP figures cited above.

Special Items

Special items, net of taxes, in the September 2015 quarter totaled $69 million, including:

• A $69 million charge primarily for mark-to-market adjustments on fuel hedges settling in future periods.

Special items, net of taxes, in the September 2014 quarter totaled $657 million, including:

• a $397 million charge for fleet and other items;
• a $215 million charge for mark-to-market adjustments on fuel hedges settling in future periods;
• an $87 million charge for debt extinguishment and other items; and
• a $42 million gain related to a litigation settlement.

About Delta

Delta Air Lines serves more than 170 million customers each year. Delta was named to FORTUNE magazine's top 50 World's Most Admired Companies in addition to being named the most admired airline for the fourth time in five years. Additionally, Delta has ranked No.1 in the Business Travel News Annual Airline survey for four consecutive years, a first for any airline. With an industry-leading global network, Delta and the Delta Connection carriers offer service to 318 destinations in 58 countries on six continents. Headquartered in Atlanta, Delta employs nearly 80,000 employees worldwide and operates a mainline fleet of more than 800 aircraft. The airline is a founding member of the SkyTeam global alliance and participates in the industry's leading trans-Atlantic joint venture with Air France-KLM and Alitalia as well as a joint venture with Virgin Atlantic. Including its worldwide alliance partners, Delta offers customers more than 15,000 daily flights, with key hubs and markets including Amsterdam, Atlanta, Boston, Detroit, Los Angeles, Minneapolis/St. Paul, New York-JFK, New York-LaGuardia, Paris-Charles de Gaulle, Salt Lake City, Seattle and Tokyo-Narita. Delta has invested billions of dollars in airport facilities, global products and services, and technology to enhance the customer experience in the air and on the ground. Additional information is available on the Delta News Hub, as well as delta.com, Twitter @DeltaNewsHub, Google.com/+Delta, Facebook.com/delta and Delta's blog takingoff.delta.com.

End Notes

Forward Looking Statements

Statements in this press release that are not historical facts, including statements regarding 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. All forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from the estimates, expectations, beliefs, intentions, projections and strategies reflected in or suggested by the forward-looking statements.  These risks and uncertainties include, but are not limited to, the cost of aircraft fuel; the availability of aircraft fuel; the impact of rebalancing our hedge portfolio, recording mark-to-market adjustments or posting collateral in connection with our fuel hedge contracts; the possible effects of accidents involving our aircraft; the restrictions that financial covenants in our financing agreements will have on our financial and business operations; labor issues; interruptions or disruptions in service at one of our hub or gateway airports; disruptions or security breaches of our information technology infrastructure; our dependence on technology in our operations; the effects of weather, natural disasters and seasonality on our business; the effects of an extended disruption in services provided by third party regional carriers; failure or inability of insurance to cover a significant liability at Monroe's Trainer refinery; the impact of environmental regulation on the Trainer refinery, including costs related to renewable fuel standard regulations; our ability to retain management and key employees; competitive conditions in the airline industry; the effects of extensive government regulation on our business; the sensitivity of the airline industry to prolonged periods of stagnant or weak economic conditions; the effects of terrorist attacks or geopolitical conflict; and the effects of the rapid spread of contagious illnesses.  

Additional information concerning risks and uncertainties that could cause differences between actual results and forward-looking statements is contained in our Securities and Exchange Commission filings, including our Annual Report on Form 10-K for the fiscal year ended Dec. 31, 2014.  Caution should be taken not to place undue reliance on our forward-looking statements, which represent our views only as of Oct. 14, 2015, and which we have no current intention to update.

Note except for full-time equivalent employees and number of aircraft in fleet, consolidated data presented includes operations under Delta's contract carrier arrangements.

Note A: The following tables show reconciliations of non-GAAP financial measures. The reasons Delta uses these measures are described below.

Delta sometimes uses information ("non-GAAP financial measures") that is derived from the Consolidated Financial Statements, but that is not presented in accordance with accounting principles generally accepted in the U.S. ("GAAP"). Under the U.S. Securities and Exchange Commission rules, non-GAAP financial measures may be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for or superior to GAAP results. The tables below show reconciliations of non-GAAP financial measures used in this release to the most directly comparable GAAP financial measures.

Forward Looking Projections. Delta is unable to reconcile certain forward-looking projections to GAAP as the nature or amount of special items cannot be estimated at this time.

Pre-Tax Income and Net Income, adjusted for special items.  We adjust for the following items to determine pre-tax income and net income, adjusted for special items, for the reasons described below:

MTM adjustments and settlements. MTM adjustments are defined as fair value changes recorded in periods other than the settlement period. Such fair value changes are not necessarily indicative of the actual settlement value of the underlying hedge in the contract settlement period. Settlements represent cash received or paid on hedge contracts settled during the period. These items adjust fuel expense to show the economic impact of hedging, including cash received or paid on hedge contracts during the period.  Adjusting for these items allows investors to better understand and analyze our core operational performance in the periods shown.

Restructuring and other. Because of the variability in restructuring and other, the adjustment for this item is helpful to investors to analyze the company's recurring core performance in the period shown.

Virgin Atlantic MTM adjustments. We record our proportionate share of earnings from our equity investment in Virgin Atlantic in other expense. We adjust for Virgin Atlantic's MTM adjustments to allow investors to better understand and analyze the company's core financial performance in the period shown.

Loss on extinguishment of debt. We adjusted for loss on extinguishment of debt in 2014 to assist investors with their analysis of the company's core financial performance.

Income tax. Pre-tax income is adjusted for the income tax effect of special items. We believe this adjustment allows investors to better understand and analyze the company's core financial performance in the periods shown.

Operating Margin, adjusted.  We adjust for the following items to determine operating margin, adjusted for the reasons described below:

MTM adjustments and settlements. MTM adjustments are defined as fair value changes recorded in periods other than the settlement period. Such fair value changes are not necessarily indicative of the actual settlement value of the underlying hedge in the contract settlement period. Settlements represent cash received or paid on hedge contracts settled during the period. These items adjust fuel expense to show the economic impact of hedging, including cash received or paid on hedge contracts during the period.  Adjusting for these items allows investors to better understand and analyze our core operational performance in the periods shown.

Restructuring and other. Because of the variability in restructuring and other, the adjustment for this item is helpful to investors to analyze the company's recurring core performance in the periods shown.

Refinery Sales. Delta's refinery segment provides jet fuel to the airline segment from its own production and from jet fuel obtained through agreements with third parties. Activities of the refinery segment are primarily for the benefit of the airline. However, from time to time, the refinery sells fuel by-products to third parties. These sales are recorded gross within other revenue and other operating expense. We believe adjusting for refinery sales allows investors to better understand and analyze the impact of fuel cost on our results in the periods shown.

Free Cash Flow.  We present free cash flow because management believes this metric is helpful to investors to evaluate the company's ability to generate cash that is available for use for debt service or general corporate initiatives. Adjustments include:

Hedge deferrals. During the March 2015 quarter, we effectively deferred settlement of a portion of our hedge portfolio until 2016 by entering into fuel derivative transactions that, excluding market movements from the date of the transactions, would provide approximately $150 million in cash receipts during the September 2015 quarter and $150 million in cash receipts for the December 2015 quarter. Additionally, these transactions will require approximately $300 million in cash payments in 2016 (excluding market movements from the date of the transactions). By effectively deferring settlement of a portion of the original derivative transactions, the restructured hedge portfolio provides additional time for the fuel market to stabilize while adding some hedge protection in 2016.  Free cash flow is adjusted to include these deferral transactions in order to allow investors to better understand the net impact of hedging activities in the period shown.

Hedge margin. Free cash flow is adjusted for hedge margin as we believe this adjustment removes the impact of current market volatility on our unsettled hedges and allows investors to better understand and analyze the company's core operational performance in the period shown.

Fuel expense, adjusted and Average fuel price per gallon, adjusted.  The tables below show the components of fuel expense, including the impact of the refinery segment and hedging on fuel expense and average price per gallon.  We then adjust for MTM adjustments and settlements for the reason described below:

MTM adjustments and settlements. MTM adjustments are defined as fair value changes recorded in periods other than the settlement period. Such fair value changes are not necessarily indicative of the actual settlement value of the underlying hedge in the contract settlement period. Settlements represent cash received or paid on hedge contracts settled during the period. These items adjust fuel expense to show the economic impact of hedging, including cash received or paid on hedge contracts during the period.  Adjusting for these items allows investors to better understand and analyze our core operational performance in the periods shown.

Non-Fuel Unit Cost or Cost per Available Seat Mile ("CASM-Ex").  We adjust CASM for the following items to determine CASM-Ex for the reasons described below:

Aircraft fuel and related taxes. The volatility in fuel prices impacts the comparability of year-over-year non-fuel financial performance. The adjustment for aircraft fuel and related taxes (including our regional carriers) allows investors to better understand and analyze our non-fuel costs and our year-over-year financial performance.

Profit sharing. We adjust for profit sharing because this adjustment allows investors to better understand and analyze our recurring cost performance and provides a more meaningful comparison of our core operating costs to the airline industry.

Restructuring and other. Because of the variability in restructuring and other, the adjustment for this item is helpful to investors to analyze the company's recurring core performance in the periods shown.

Other expenses. Other expenses include aircraft maintenance and staffing services we provide to third parties, our vacation wholesale operations, and refinery cost of sales to third parties. Because these businesses are not related to the generation of a seat mile, we adjust for the costs related to these sales to provide a more meaningful comparison of the costs of our airline operations to the rest of the airline industry.

Operating Cash Flow, adjusted.  We present adjusted operating cash flow because management believes adjusting for these amounts provides a more meaningful measure for investors. Adjustments include:

Hedge deferrals. During the March 2015 quarter, we effectively deferred settlement of a portion of our hedge portfolio until 2016 by entering into fuel derivative transactions that, excluding market movements from the date of the transactions, would provide approximately $150 million in cash receipts during the September 2015 quarter and $150 million in cash receipts for the December 2015 quarter. Additionally, these transactions will require approximately $300 million in cash payments in 2016 (excluding market movements from the date of the transactions). By effectively deferring settlement of a portion of the original derivative transactions, the restructured hedge portfolio provides additional time for the fuel market to stabilize while adding some hedge protection in 2016.  Operating cash flow is adjusted to include these deferral transactions in order to allow investors to better understand the net impact of hedging activities in the period shown.

Hedge margin. Operating cash flow is adjusted for hedge margin as we believe this adjustment removes the impact of current market volatility on our unsettled hedges and allows investors to better understand and analyze the company's core operational performance in the period shown.

Capital Expenditures, net.  Delta presents net capital expenditures, which includes strategic investments, because management believes adjusting for these amounts provides a more meaningful financial measure for investors. This metric is adjusted for reimbursements related to build-to-suit leased facilities and other because management believes investors should be informed that these reimbursements for build-to-suit leased facilities effectively reduce net cash provided by operating activities and related capital expenditures.

Adjusted Net Debt.  Delta uses adjusted total debt, including aircraft rent, in addition to long-term adjusted debt and capital leases, to present estimated financial obligations. Delta reduces adjusted debt by cash, cash equivalents and short-term investments, and hedge margin receivable, resulting in adjusted net debt, to present the amount of assets needed to satisfy the debt. Management believes this metric is helpful to investors in assessing the company's overall debt profile. Management has reduced adjusted debt by the amount of hedge margin receivable, which reflects cash posted to counterparties, as we believe this removes the impact of current market volatility on our unsettled hedges and is a better representation of the continued progress we have made on our debt initiatives.      

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SOURCE Delta Air Lines