September 2018
Quarter Financial Highlights
Our pre-tax income for the
September 2018
quarter was
$1.7 billion
, representing a
$102 million
decrease
compared to the corresponding prior year quarter primarily resulting from higher fuel expense, offset in large part by increased passenger revenue. Pre-tax income, adjusted for special items (a non-GAAP financial measure) was
$1.6 billion
,
a decrease
of
$94 million
compared to the corresponding prior year period. Special items for the
September 2018
quarter were primarily related to
$50 million
of net unrealized gains on our equity investments.
Revenue.
Compared to the
September 2017
quarter, our operating revenue
increased
$892 million
, or
8.1%
, on
3.9%
higher
capacity, which was accompanied by strong demand and fare increases implemented in response to higher fuel prices. Total revenue per available seat mile ("TRASM")
increased
4.0%
and TRASM, adjusted (a non-GAAP financial measure)
increased
4.3%
compared to the
September 2017
quarter, led by (1) unit revenue growth in three of our four geographic regions, (2) broad-based strength in both leisure and business demand and (3) foreign currency favorability in the Atlantic and Pacific regions. TRASM growth was partially offset by nearly a half point of negative impact from Hurricane Florence in September 2018.
Operating Expense.
Total operating expense
increased
$1.1 billion
, or
11.6%
, and our consolidated operating cost per available seat mile ("CASM")
increased
7.4%
to
14.15 cents
compared to the
September 2017
quarter, primarily due to higher fuel expense. The increase in fuel expense primarily resulted from an approximately
36%
increase in the market price per gallon of fuel combined with a
2%
increase in consumption compared to the September 2017 quarter.
Non-fuel unit costs ("CASM-Ex" a non-GAAP financial measure) of
9.62 cents
was unchanged compared to the
September 2017
quarter.
Non-Operating Income/(Expense).
Total non-operating income was
$32 million
in the September 2018 quarter compared to expense of
$47 million
in the
September 2017
quarter, primarily due to
$50 million
of net unrealized gains on our equity investments and lower interest expense. In 2017, before we adopted the new financial instruments standard, we recorded unrealized gains/(losses) on our equity investments in AOCI.
The non-GAAP financial measures for pre-tax income, adjusted for special items, TRASM, adjusted, and CASM-Ex, used above, are defined and reconciled in "Supplemental Information" below.
Results of Operations -
Three Months Ended
September 30, 2018
and
2017
Operating Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
Increase (Decrease)
|
% Increase (Decrease)
|
(in millions)
|
2018
|
2017
|
Ticket - Main cabin
|
$
|
5,873
|
|
$
|
5,724
|
|
$
|
149
|
|
2.6
|
%
|
Ticket - Business cabin and premium products
|
3,680
|
|
3,088
|
|
592
|
|
19.2
|
%
|
Loyalty travel awards
|
678
|
|
622
|
|
56
|
|
9.0
|
%
|
Travel-related services
|
565
|
|
545
|
|
20
|
|
3.7
|
%
|
Total passenger revenue
|
$
|
10,796
|
|
$
|
9,979
|
|
$
|
817
|
|
8.2
|
%
|
Cargo
|
226
|
|
191
|
|
35
|
|
18.5
|
%
|
Other
|
931
|
|
891
|
|
40
|
|
4.4
|
%
|
Total operating revenue
|
$
|
11,953
|
|
$
|
11,061
|
|
$
|
892
|
|
8.1
|
%
|
|
|
|
|
|
TRASM (cents)
|
|
16.40
|
¢
|
|
15.77
|
¢
|
|
0.63
|
¢
|
4.0
|
%
|
Third-party refinery sales
(1)
|
(0.15
|
)
|
(0.18
|
)
|
0.03
|
|
NM
|
|
TRASM, adjusted (cents)
|
|
16.25
|
¢
|
|
15.58
|
¢
|
|
0.67
|
¢
|
4.3
|
%
|
|
|
(1)
|
For additional information on adjusting for third-party refinery sales, see "Supplemental Information" below.
|
Ticket and Loyalty Travel Awards Revenue
Ticket, including both main cabin and business cabin and premium products, and loyalty travel awards revenue increased
$741 million
and
$56 million
, respectively, compared to the
September 2017
quarter, consistent with the geographic region discussion below. Business cabin and premium products ticket revenue includes revenues from fare products other than main cabin, including Delta One, Delta Premium Select, First Class and Comfort+. The growth in this ticket revenue primarily results from the continued expansion of our Branded Fares product and strength in business demand.
Passenger Revenue by Geographic Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
vs. Three Months Ended September 30, 2017
|
(in millions)
|
Three Months Ended September 30, 2018
|
Passenger Revenue
|
RPMs
(Traffic)
|
ASMs
(Capacity)
|
Passenger Mile Yield
|
PRASM
|
Load Factor
|
Domestic
|
$
|
7,395
|
|
9.2
|
%
|
5.7
|
%
|
5.6
|
%
|
3.2
|
%
|
3.3
|
%
|
0.1
|
|
pts
|
Atlantic
|
1,996
|
|
10.7
|
%
|
3.5
|
%
|
2.7
|
%
|
7.0
|
%
|
7.8
|
%
|
0.7
|
|
pts
|
Latin America
|
675
|
|
(2.6
|
)%
|
(1.8
|
)%
|
0.3
|
%
|
(0.8
|
)%
|
(2.9
|
)%
|
(1.9
|
)
|
pts
|
Pacific
|
730
|
|
3.0
|
%
|
(3.1
|
)%
|
(1.7
|
)%
|
6.3
|
%
|
4.8
|
%
|
(1.3
|
)
|
pts
|
Total
|
$
|
10,796
|
|
8.2
|
%
|
3.8
|
%
|
3.9
|
%
|
4.2
|
%
|
4.2
|
%
|
—
|
|
pts
|
Passenger revenue
increased
$817 million
, or
8.2%
, compared to the
September 2017
quarter. Passenger revenue per available seat mile ("PRASM") and passenger mile yield both
increased
4.2%
on
3.9%
higher
capacity. Load factor was flat to the prior year quarter at
86.9%
.
Despite nearly half a point of negative impact from Hurricane Florence in September 2018, unit revenues of the domestic region increased
3.3%
, resulting from our commercial initiatives, including Branded Fares, strong demand and fare increases implemented throughout 2018 in response to higher fuel prices. Our domestic operations have generated six consecutive quarters of year-over-year unit revenue growth, including business yield growth throughout 2018. During the September 2018 quarter, we signed a definitive agreement with WestJet that, after regulatory approval, will create a transborder joint venture, providing enhanced offerings and more choice for customers.
Passenger revenues related to our international regions
increased
6.1%
year-over-year on capacity increases in the Atlantic and Latin America regions. During the quarter, we continued to expand our Branded Fares product and generated unit revenue increases in the Atlantic and Pacific regions.
In the Atlantic, unit revenues increased due to strengthening yields from business cabin traffic, efforts to recapture the cost of higher fuel and the benefit provided by foreign currency fluctuations. Yield growth was particularly strong as we continue to leverage our alliance partners' hub positions in Europe's leading business markets of London, Amsterdam and Paris.
Unit revenues decreased in Latin America due to foreign currency fluctuations and macroeconomic challenges, particularly in Brazil and Argentina. These declines have been partially mitigated by recovery in Caribbean markets following hurricane damage during the September 2017 quarter and results generated by our joint cooperation agreement with Aeroméxico. Since this agreement's inception in May 2017, we have combined with Aeroméxico to launch nine new routes between the United States and Mexico, including Detroit to Querétaro in the September 2018 quarter. The joint agreement provides our customers with improved connectivity, more convenient schedules and increasingly seamless service between the two carriers.
Unit revenues increased in the Pacific region due to yield strength across all markets, particularly Japan and Korea, in addition to the benefit provided by foreign currency fluctuations. We launched a joint venture with Korean Air in May 2018 which provides more opportunities for our customers to reach destinations throughout Asia and enabled us to generate double-digit unit revenue growth in Korea during the September 2018 quarter.
Other Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
Increase (Decrease)
|
% Increase (Decrease)
|
(in millions)
|
2018
|
2017
|
Ancillary businesses and refinery
|
$
|
433
|
|
$
|
419
|
|
$
|
14
|
|
3.3
|
%
|
Loyalty program
|
369
|
|
317
|
|
52
|
|
16.4
|
%
|
Miscellaneous
|
129
|
|
155
|
|
(26
|
)
|
(16.8
|
)%
|
Total other revenue
|
$
|
931
|
|
$
|
891
|
|
$
|
40
|
|
4.4
|
%
|
Ancillary Businesses and Refinery.
Ancillary businesses and refinery includes aircraft maintenance and staffing services we provide to third parties, our vacation wholesale operations, our private jet operations and refinery sales to third parties.
Loyalty Program.
Loyalty program revenues relate to brand usage and other performance obligations embedded in mileage credits sold, including redemption of mileage credits for non-travel awards
.
Miscellaneous.
Miscellaneous revenue is primarily composed of lounge access and codeshare revenues.
Operating Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
Increase (Decrease)
|
% Increase (Decrease)
|
(in millions)
|
2018
|
2017
|
Salaries and related costs
|
$
|
2,753
|
|
$
|
2,619
|
|
$
|
134
|
|
5.1
|
%
|
Aircraft fuel and related taxes
|
2,498
|
|
1,785
|
|
713
|
|
39.9
|
%
|
Regional carriers expense, excluding fuel
|
903
|
|
887
|
|
16
|
|
1.8
|
%
|
Depreciation and amortization
|
580
|
|
571
|
|
9
|
|
1.6
|
%
|
Contracted services
|
562
|
|
543
|
|
19
|
|
3.5
|
%
|
Passenger commissions and other selling expenses
|
535
|
|
499
|
|
36
|
|
7.2
|
%
|
Ancillary businesses and refinery
|
410
|
|
387
|
|
23
|
|
5.9
|
%
|
Aircraft maintenance materials and outside repairs
|
371
|
|
390
|
|
(19
|
)
|
(4.9
|
)%
|
Landing fees and other rents
|
421
|
|
392
|
|
29
|
|
7.4
|
%
|
Profit sharing
|
395
|
|
314
|
|
81
|
|
25.8
|
%
|
Passenger service
|
329
|
|
331
|
|
(2
|
)
|
(0.6
|
)%
|
Aircraft rent
|
99
|
|
89
|
|
10
|
|
11.2
|
%
|
Other
|
455
|
|
431
|
|
24
|
|
5.6
|
%
|
Total operating expense
|
$
|
10,311
|
|
$
|
9,238
|
|
$
|
1,073
|
|
11.6
|
%
|
Aircraft Fuel and Related Taxes.
Fuel expense increased
$713 million
compared to the prior year quarter from an approximately
36%
increase in the market price per gallon of fuel and a
2%
increase in consumption.
The table below shows the impact of hedging and the refinery on fuel expense and average price per gallon, adjusted (non-GAAP financial measures):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Price Per Gallon
|
|
Three Months Ended September 30,
|
Change
|
Three Months Ended September 30,
|
Change
|
(in millions, except per gallon data)
|
2018
|
2017
|
2018
|
2017
|
Fuel purchase cost
(1)
|
$
|
2,526
|
|
$
|
1,822
|
|
$
|
704
|
|
$
|
2.23
|
|
$
|
1.64
|
|
$
|
0.59
|
|
Airline segment fuel hedge impact
|
(16
|
)
|
—
|
|
(16
|
)
|
(0.01
|
)
|
—
|
|
(0.01
|
)
|
Refinery segment impact
|
(12
|
)
|
(37
|
)
|
25
|
|
(0.01
|
)
|
(0.03
|
)
|
0.02
|
|
Total fuel expense
|
$
|
2,498
|
|
$
|
1,785
|
|
$
|
713
|
|
$
|
2.21
|
|
$
|
1.61
|
|
$
|
0.60
|
|
MTM adjustments and settlements
(2)
|
16
|
|
74
|
|
(58
|
)
|
0.01
|
|
0.07
|
|
(0.06
|
)
|
Total fuel expense, adjusted
|
$
|
2,514
|
|
$
|
1,859
|
|
$
|
655
|
|
$
|
2.22
|
|
$
|
1.68
|
|
$
|
0.54
|
|
|
|
(1)
|
Market price for jet fuel at airport locations, including related taxes and transportation costs.
|
|
|
(2)
|
Mark-to-market ("MTM") adjustments and settlements include the effects of the derivative transactions disclosed in
Note 5
of the Notes to the Condensed Consolidated Financial Statements. For additional information and the reason for adjusting fuel expense, see "Supplemental Information" below.
|
Profit Sharing.
The increase in profit sharing is related to the alignment of our profit sharing programs under a single formula, which was implemented October 1, 2017.
Under this formula, our profit sharing program pays 10% to all eligible employees for the first $2.5 billion of annual profit and 20% of annual profit above $2.5 billion. Prior to October 1, 2017, the profit sharing program for merit, ground and flight attendant employees paid 10% of annual profit (as defined by the terms of the program) and, if we exceeded our prior-year results, the program paid 20% of the year-over-year increase in profit to eligible employees.
Results of Operations -
Nine Months Ended
September 30, 2018
and
2017
Operating Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
Increase (Decrease)
|
% Increase (Decrease)
|
(in millions)
|
2018
|
2017
|
Ticket - Main cabin
|
$
|
16,158
|
|
$
|
15,914
|
|
$
|
244
|
|
1.5
|
%
|
Ticket - Business cabin and premium products
|
10,356
|
|
8,609
|
|
1,747
|
|
20.3
|
%
|
Loyalty travel awards
|
1,976
|
|
1,826
|
|
150
|
|
8.2
|
%
|
Travel-related services
|
1,617
|
|
1,576
|
|
41
|
|
2.6
|
%
|
Total passenger revenue
|
$
|
30,107
|
|
$
|
27,925
|
|
$
|
2,182
|
|
7.8
|
%
|
Cargo
|
651
|
|
542
|
|
109
|
|
20.0
|
%
|
Other
|
2,938
|
|
2,443
|
|
495
|
|
20.3
|
%
|
Total operating revenue
|
$
|
33,696
|
|
$
|
30,910
|
|
$
|
2,786
|
|
9.0
|
%
|
|
|
|
|
|
TRASM (cents)
|
|
16.78
|
¢
|
|
15.91
|
¢
|
|
0.87
|
¢
|
5.5
|
%
|
Third-party refinery sales
(1)
|
(0.27
|
)
|
(0.13
|
)
|
(0.14
|
)
|
NM
|
|
TRASM, adjusted (cents)
|
|
16.51
|
¢
|
|
15.78
|
¢
|
|
0.73
|
¢
|
4.6
|
%
|
|
|
(1)
|
For additional information on adjusting for third-party refinery sales, see "Supplemental Information" below.
|
Ticket and Loyalty Travel Awards Revenue
Ticket, including both main cabin and business cabin and premium products, and loyalty travel awards revenue increased
$2.0 billion
and
$150 million
, respectively, compared to the
nine months ended
September 30, 2017
, consistent with the geographic region discussion below. Business cabin and premium products ticket revenue includes revenues from fare products other than main cabin, including Delta One, Delta Premium Select, First Class and Comfort+. The growth in this ticket revenue primarily results from the continued expansion of our Branded Fares product and strength in business demand.
Passenger Revenue by Geographic Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
vs. Nine Months Ended September 30, 2017
|
(in millions)
|
Nine Months Ended September 30, 2018
|
Passenger Revenue
|
RPMs
(Traffic)
|
ASMs
(Capacity)
|
Passenger Mile Yield
|
PRASM
|
Load Factor
|
Domestic
|
$
|
21,093
|
|
8.1
|
%
|
4.9
|
%
|
5.2
|
%
|
3.0
|
%
|
2.7
|
%
|
(0.3
|
)
|
pts
|
Atlantic
|
4,837
|
|
12.5
|
%
|
3.6
|
%
|
2.6
|
%
|
8.7
|
%
|
9.6
|
%
|
0.8
|
|
pts
|
Latin America
|
2,228
|
|
0.1
|
%
|
(2.6
|
)%
|
(1.4
|
)%
|
2.8
|
%
|
1.5
|
%
|
(1.1
|
)
|
pts
|
Pacific
|
1,949
|
|
3.7
|
%
|
(2.0
|
)%
|
(2.3
|
)%
|
5.7
|
%
|
6.1
|
%
|
0.3
|
|
pts
|
Total
|
$
|
30,107
|
|
7.8
|
%
|
3.3
|
%
|
3.4
|
%
|
4.4
|
%
|
4.3
|
%
|
(0.1
|
)
|
pts
|
Passenger revenue
increased
$2.2 billion
, or
7.8%
, compared to the
nine months ended
September 30, 2017
. PRASM
increased
4.3%
and passenger mile yield
increased
4.4%
on
3.4%
higher
capacity. Load factor was slightly
lower
than the prior year period at
85.6%
.
Unit revenues of the domestic region increased
2.7%
, resulting from our commercial initiatives, including Branded Fares, strong demand and fare increases implemented in response to higher fuel prices. Our domestic operations have generated six consecutive quarters of year-over-year unit revenue growth, including business yield growth throughout 2018. During the September 2018 quarter, we signed a definitive agreement with WestJet that, after regulatory approval, will create a transborder joint venture, providing enhanced offerings and more choice for customers.
Passenger revenue related to our international regions
increased
7.3%
year-over-year including growth in all three regions, despite reduced capacity in the Pacific and Latin America. During the nine months ended September 30, 2018, we continued to expand our Branded Fares product and generated unit revenue increases in all three regions.
In the Atlantic, unit revenues increased due to strengthening yields from business cabin traffic and the benefit provided by foreign currency fluctuations. Yield growth was particularly strong as we continue to leverage our alliance partners' hub positions in Europe's leading business markets of London, Amsterdam and Paris. During 2018, we initiated service on our flagship A350-900 with Delta One suites and the Delta Premium Select cabin from Detroit to Amsterdam. We also launched several new routes, including Los Angeles to Paris and Amsterdam, Indianapolis to Paris and Atlanta to Lisbon.
Unit revenues increased in Latin America principally as a result of yield growth, particularly in Central America and the Caribbean. The increase was partially offset by challenges in the Mexico market from travel advisories and increased industry capacity impacting demand to beach destinations. These challenges have been mitigated through our joint cooperation agreement with Aeroméxico, which marked its first anniversary during 2018. Over that time, we have combined with Aeroméxico to launch nine new routes between the United States and Mexico, providing our customers with improved connectivity, more convenient schedules and increasingly seamless service between the two carriers.
Unit revenues increased in the Pacific region due to yield strength, particularly Japan and Korea. In May 2018, we launched a joint venture with Korean Air which provides more opportunities for our customers to reach destinations throughout Asia. During 2018, we have also introduced our flagship A350-900 on routes from Los Angeles to Shanghai, Detroit to Beijing and Shanghai and Atlanta to Seoul-Incheon, which has improved the customer experience and driven unit revenue increases.
Other Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
Increase (Decrease)
|
% Increase (Decrease)
|
(in millions)
|
2018
|
2017
|
Ancillary businesses and refinery
|
$
|
1,475
|
|
$
|
1,050
|
|
$
|
425
|
|
40.5
|
%
|
Loyalty program
|
1,075
|
|
939
|
|
136
|
|
14.5
|
%
|
Miscellaneous
|
388
|
|
454
|
|
(66
|
)
|
(14.5
|
)%
|
Total other revenue
|
$
|
2,938
|
|
$
|
2,443
|
|
$
|
495
|
|
20.3
|
%
|
Ancillary Businesses and Refinery.
Ancillary businesses and refinery includes aircraft maintenance and staffing services we provide to third parties, our vacation wholesale operations, our private jet operations and refinery sales to third parties. Refinery sales to third parties, which are at or near cost, increased
$280 million
compared to the
nine months ended
September 30, 2017
, primarily resulting from higher sales volume.
Loyalty Program.
Loyalty program revenues relate to brand usage and other performance obligations embedded in mileage credits sold, including redemption of mileage credits for non-travel awards
.
Miscellaneous.
Miscellaneous revenue is primarily composed of lounge access and codeshare revenues.
Operating Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
Increase (Decrease)
|
% Increase (Decrease)
|
(in millions)
|
2018
|
2017
|
Salaries and related costs
|
$
|
8,004
|
|
$
|
7,525
|
|
$
|
479
|
|
6.4
|
%
|
Aircraft fuel and related taxes
|
6,693
|
|
4,954
|
|
1,739
|
|
35.1
|
%
|
Regional carriers expense, excluding fuel
|
2,643
|
|
2,589
|
|
54
|
|
2.1
|
%
|
Depreciation and amortization
|
1,780
|
|
1,639
|
|
141
|
|
8.6
|
%
|
Contracted services
|
1,646
|
|
1,572
|
|
74
|
|
4.7
|
%
|
Passenger commissions and other selling expenses
|
1,473
|
|
1,371
|
|
102
|
|
7.4
|
%
|
Ancillary businesses and refinery
|
1,396
|
|
975
|
|
421
|
|
43.2
|
%
|
Aircraft maintenance materials and outside repairs
|
1,233
|
|
1,214
|
|
19
|
|
1.6
|
%
|
Landing fees and other rents
|
1,201
|
|
1,126
|
|
75
|
|
6.7
|
%
|
Profit sharing
|
978
|
|
803
|
|
175
|
|
21.8
|
%
|
Passenger service
|
892
|
|
849
|
|
43
|
|
5.1
|
%
|
Aircraft rent
|
291
|
|
258
|
|
33
|
|
12.8
|
%
|
Other
|
1,305
|
|
1,230
|
|
75
|
|
6.1
|
%
|
Total operating expense
|
$
|
29,535
|
|
$
|
26,105
|
|
$
|
3,430
|
|
13.1
|
%
|
Salaries and Related Costs
. The increase in salaries and related costs is primarily due to increases for eligible merit, ground and flight attendant employees implemented in the June 2017 quarter.
Aircraft Fuel and Related Taxes.
Fuel expense increased
$1.7 billion
compared to the prior year due to a
32%
increase in the market price per gallon of fuel and a
2%
increase in consumption.
The table below shows the impact of hedging and the refinery on fuel expense and average price per gallon, adjusted (non-GAAP financial measures):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Price Per Gallon
|
|
Nine Months Ended September 30,
|
Change
|
Nine Months Ended September 30,
|
Change
|
(in millions, except per gallon data)
|
2018
|
2017
|
2018
|
2017
|
Fuel purchase cost
(1)
|
$
|
6,814
|
|
$
|
5,029
|
|
$
|
1,785
|
|
$
|
2.17
|
|
$
|
1.64
|
|
$
|
0.53
|
|
Airline segment fuel hedge impact
|
(20
|
)
|
12
|
|
(32
|
)
|
(0.01
|
)
|
—
|
|
(0.01
|
)
|
Refinery segment impact
|
(101
|
)
|
(87
|
)
|
(14
|
)
|
(0.03
|
)
|
(0.03
|
)
|
—
|
|
Total fuel expense
|
$
|
6,693
|
|
$
|
4,954
|
|
$
|
1,739
|
|
$
|
2.13
|
|
$
|
1.61
|
|
$
|
0.52
|
|
MTM adjustments and settlements
(2)
|
20
|
|
210
|
|
(190
|
)
|
0.01
|
|
0.07
|
|
(0.06
|
)
|
Total fuel expense, adjusted
|
$
|
6,713
|
|
$
|
5,164
|
|
$
|
1,549
|
|
$
|
2.14
|
|
$
|
1.68
|
|
$
|
0.46
|
|
|
|
(1)
|
Market price for jet fuel at airport locations, including related taxes and transportation costs.
|
|
|
(2)
|
MTM adjustments and settlements include the effects of the derivative transactions disclosed in
Note 5
of the Notes to the Condensed Consolidated Financial Statements. For additional information and the reason for adjusting fuel expense, see "Supplemental Information" below.
|
Depreciation and Amortization.
The increase in depreciation and amortization primarily results from more new aircraft deliveries than the prior year, including B-737-900ER, A321-200 and A350-900 aircraft, and fleet modifications. In addition, as part of our fleet evolution, during 2017 and continuing through 2018, we began accelerating depreciation on MD-88 aircraft due to the planned retirement of the fleet. As we take delivery of the aircraft discussed above, we continue to evaluate our current fleet compared to network requirements.
Ancillary Businesses and Refinery.
Ancillary businesses and refinery includes expenses associated with aircraft maintenance and staffing services we provide to third parties, our vacation wholesale operations, our private jet operations and refinery sales to third parties. Expenses related to refinery sales to third parties, which are at or near cost, increased
$280 million
compared to the
nine months ended
September 30, 2017
, primarily resulting from higher sales volume.
Profit Sharing.
The increase in profit sharing is related to the alignment of our profit sharing programs under a single formula, which was implemented October 1, 2017.
Under this formula, our profit sharing program pays 10% to all eligible employees for the first $2.5 billion of annual profit and 20% of annual profit above $2.5 billion. Prior to October 1, 2017, the profit sharing program for merit, ground and flight attendant employees paid 10% of annual profit (as defined by the terms of the program) and, if we exceeded our prior-year results, the program paid 20% of the year-over-year increase in profit to eligible employees.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Operating Results
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
(in millions)
|
2018
|
2017
|
Favorable (Unfavorable)
|
|
2018
|
2017
|
Favorable (Unfavorable)
|
Interest expense, net
|
$
|
(84
|
)
|
$
|
(100
|
)
|
$
|
16
|
|
|
$
|
(274
|
)
|
$
|
(297
|
)
|
$
|
23
|
|
Unrealized gain/(loss) on investments, net
|
50
|
|
—
|
|
50
|
|
|
(171
|
)
|
—
|
|
(171
|
)
|
Miscellaneous, net
|
66
|
|
53
|
|
13
|
|
|
48
|
|
(51
|
)
|
99
|
|
Total non-operating income/(expense), net
|
$
|
32
|
|
$
|
(47
|
)
|
$
|
79
|
|
|
$
|
(397
|
)
|
$
|
(348
|
)
|
$
|
(49
|
)
|
Interest expense decreased compared to the prior year periods as a result of lower interest rates on our debt.
Unrealized gain/(loss) on investments reflects the unrealized gains and losses on our equity investments in GOL, China Eastern and Air France-KLM. In 2017, before we adopted the new financial instruments standard, we recorded unrealized gains and losses on available-for-sale investments in AOCI.
Miscellaneous is primarily composed of pension-related benefits/costs, charitable contributions, foreign exchange gains/losses and our proportionate share of earnings from our equity investments in Virgin Atlantic and Grupo Aeroméxico. Our equity investment earnings and foreign exchange gains/losses vary and impact the comparability of miscellaneous from period to period. The favorable variance compared to the prior year periods primarily results from the current year net pension benefit compared to net pension cost in the prior year.
Income Taxes
We project that our annual effective tax rate for 2018 will be approximately 23%. In certain interim periods, we may have adjustments to our net deferred tax assets as a result of changes in prior year estimates and tax laws enacted during the period, which will impact the effective tax rate for that interim period.
Refinery Segment
The refinery primarily produces gasoline, diesel and jet fuel. Monroe exchanges the non-jet fuel products the refinery produces with third parties for jet fuel consumed in our airline operations. The jet fuel produced and procured through exchanging gasoline and diesel fuel produced by the refinery provides approximately
200,000
barrels per day for use in our airline operations. We believe that the jet fuel supply resulting from the refinery's operation contributes to reducing the market price of jet fuel, and thus lowered our cost of jet fuel compared to what it otherwise would have been.
The refinery recorded operating revenues of
$1.6 billion
and
$4.8 billion
in the
three and nine months ended
September 30, 2018
, compared to
$1.4 billion
and
$3.6 billion
in the
three and nine months ended
September 30, 2017
. Operating revenues in the
three and nine months ended
September 30, 2018
were primarily composed of
$1.1 billion
and
$3.1 billion
of non-jet fuel products exchanged with third parties to procure jet fuel and
$328 million
and
$866 million
of sales of jet fuel to the airline segment, respectively. Refinery revenues increased compared to the prior year period due to higher costs of oil leading to higher pricing for associated refined products and higher refinery run rates.
The refinery recorded operating income of
$12 million
and
$101 million
in the
three and nine months ended
September 30, 2018
, respectively, compared to
$37 million
and
$87 million
in
three and nine months ended
September 30, 2017
.
A refinery is subject to annual U.S. Environmental Protection Agency requirements to blend renewable fuels into the gasoline and on-road diesel fuel it produces. Alternatively, a refinery may purchase renewable energy credits, called Renewable Identification Numbers ("RINs"), from third parties in the secondary market. The refinery purchases the majority of its RINs requirement in the secondary market. We recognized
$9 million
and
$54 million
of expense related to the RINs requirement in the September 2018 and 2017 quarters, respectively. In the
nine months ended
September 30, 2018
we recognized a
$32 million
gain, resulting from an approximately 70% decline in observable RINs prices. In the
nine months ended
September 30, 2017
we recognized
$116 million
of expense related to the RINs requirement.
At the end of September 2018, the refinery began a planned turnaround, which is expected to be completed within 50 to 60 days. This turnaround is in accordance with the long term maintenance plan for the facility to allow for the safe completion of major repairs and upgrades. During this time, the refinery will not produce any refined products.
For more information regarding the refinery's results, see
Note 10
of the Notes to the Condensed Consolidated Financial Statements.
Operating Statistics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
% Increase
(Decrease)
|
Nine Months Ended September 30,
|
% Increase
(Decrease)
|
Consolidated
(1)
|
2018
|
2017
|
2018
|
2017
|
Revenue passenger miles (in millions)
|
63,320
|
|
61,006
|
|
3.8
|
%
|
172,002
|
|
166,533
|
|
3.3
|
%
|
Available seat miles (in millions)
|
72,875
|
|
70,167
|
|
3.9
|
%
|
200,842
|
|
194,265
|
|
3.4
|
%
|
Passenger mile yield
|
|
17.05
|
¢
|
|
16.36
|
¢
|
4.2
|
%
|
|
17.50
|
¢
|
|
16.77
|
¢
|
4.4
|
%
|
PRASM
|
|
14.81
|
¢
|
|
14.22
|
¢
|
4.2
|
%
|
|
14.99
|
¢
|
|
14.37
|
¢
|
4.3
|
%
|
TRASM
|
|
16.40
|
¢
|
|
15.77
|
¢
|
4.0
|
%
|
|
16.78
|
¢
|
|
15.91
|
¢
|
5.5
|
%
|
TRASM, adjusted
(2)
|
|
16.25
|
¢
|
|
15.58
|
¢
|
4.3
|
%
|
|
16.51
|
¢
|
|
15.78
|
¢
|
4.6
|
%
|
CASM
|
|
14.15
|
¢
|
|
13.17
|
¢
|
7.4
|
%
|
|
14.71
|
¢
|
|
13.44
|
¢
|
9.4
|
%
|
CASM-Ex
(2)
|
|
9.62
|
¢
|
|
9.62
|
¢
|
—
|
%
|
|
10.19
|
¢
|
|
9.97
|
¢
|
2.2
|
%
|
Passenger load factor
|
86.9
|
%
|
86.9
|
%
|
—
|
|
85.6
|
%
|
85.7
|
%
|
(0.1
|
) pts
|
Fuel gallons consumed (in millions)
|
1,135
|
|
1,108
|
|
2.4
|
%
|
3,137
|
|
3,073
|
|
2.1
|
%
|
Average price per fuel gallon
(3)
|
$
|
2.21
|
|
$
|
1.61
|
|
37.3
|
%
|
$
|
2.13
|
|
$
|
1.61
|
|
32.3
|
%
|
Average price per fuel gallon, adjusted
(3)(4)
|
$
|
2.22
|
|
$
|
1.68
|
|
32.1
|
%
|
$
|
2.14
|
|
$
|
1.68
|
|
27.3
|
%
|
|
|
(1)
|
Includes the operations of our regional carriers under capacity purchase agreements.
|
|
|
(2)
|
Non-GAAP financial measure defined and reconciled to TRASM and CASM, respectively, in "Supplemental Information" below.
|
|
|
(3)
|
Includes the impact of fuel hedge activity and refinery segment results.
|
|
|
(4)
|
Non-GAAP financial measure defined and reconciled to average fuel price per gallon in "Results of Operations" for the
three and nine months ended
September 30, 2018
and
2017
.
|
Fleet Information
Our operating aircraft fleet and commitments at
September 30, 2018
are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Fleet
(1)
|
|
Commitments
(1)
|
Aircraft Type
|
Owned
|
Capital Lease
|
Operating Lease
|
Total
|
Average Age
|
Purchase
|
Options
|
B-717-200
|
3
|
|
15
|
|
73
|
|
91
|
|
17.1
|
—
|
|
—
|
|
B-737-700
|
10
|
|
—
|
|
—
|
|
10
|
|
9.7
|
—
|
|
—
|
|
B-737-800
|
73
|
|
4
|
|
—
|
|
77
|
|
17.0
|
—
|
|
—
|
|
B-737-900ER
|
65
|
|
—
|
|
39
|
|
104
|
|
2.7
|
26
|
|
—
|
|
B-757-200
|
89
|
|
9
|
|
2
|
|
100
|
|
21.1
|
—
|
|
—
|
|
B-757-300
|
16
|
|
—
|
|
—
|
|
16
|
|
15.6
|
—
|
|
—
|
|
B-767-300
|
2
|
|
—
|
|
—
|
|
2
|
|
25.3
|
—
|
|
—
|
|
B-767-300ER
|
55
|
|
1
|
|
—
|
|
56
|
|
22.3
|
—
|
|
—
|
|
B-767-400ER
|
21
|
|
—
|
|
—
|
|
21
|
|
17.8
|
—
|
|
—
|
|
B-777-200ER
|
8
|
|
—
|
|
—
|
|
8
|
|
18.8
|
—
|
|
—
|
|
B-777-200LR
|
10
|
|
—
|
|
—
|
|
10
|
|
9.5
|
—
|
|
—
|
|
A220-100 (formerly called CS100)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
75
|
|
50
|
|
A319-100
|
55
|
|
—
|
|
2
|
|
57
|
|
16.6
|
—
|
|
—
|
|
A320-200
|
55
|
|
3
|
|
4
|
|
62
|
|
23.1
|
—
|
|
—
|
|
A321-200
|
35
|
|
—
|
|
28
|
|
63
|
|
1.0
|
64
|
|
—
|
|
A321-200neo
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
100
|
|
100
|
|
A330-200
|
11
|
|
—
|
|
—
|
|
11
|
|
13.5
|
—
|
|
—
|
|
A330-300
|
28
|
|
—
|
|
3
|
|
31
|
|
9.7
|
—
|
|
—
|
|
A330-900neo
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
25
|
|
—
|
|
A350-900
|
11
|
|
—
|
|
—
|
|
11
|
|
0.7
|
14
|
|
—
|
|
MD-88
|
80
|
|
13
|
|
—
|
|
93
|
|
28.0
|
—
|
|
—
|
|
MD-90
|
49
|
|
—
|
|
—
|
|
49
|
|
21.6
|
—
|
|
—
|
|
Total
|
676
|
|
45
|
|
151
|
|
872
|
|
16.2
|
304
|
|
150
|
|
|
|
(1)
|
Excludes certain aircraft we own, lease or have committed to purchase that are operated by regional carriers on our behalf shown in the table below.
|
The following table summarizes the aircraft fleet operated by regional carriers on our behalf at
September 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fleet Type
|
|
Carrier
|
CRJ-200
|
CRJ-700
|
CRJ-900
(3)
|
Embraer 170
|
Embraer 175
|
Total
|
Endeavor Air, Inc.
(1)
|
42
|
|
3
|
|
109
|
|
—
|
|
—
|
|
154
|
|
ExpressJet Airlines, Inc.
(2)
|
—
|
|
12
|
|
—
|
|
—
|
|
—
|
|
12
|
|
SkyWest Airlines, Inc.
|
86
|
|
25
|
|
37
|
|
—
|
|
37
|
|
185
|
|
Compass Airlines, Inc.
|
—
|
|
—
|
|
—
|
|
—
|
|
36
|
|
36
|
|
Republic Airline, Inc.
|
—
|
|
—
|
|
—
|
|
22
|
|
16
|
|
38
|
|
GoJet Airlines, LLC
|
—
|
|
22
|
|
7
|
|
—
|
|
—
|
|
29
|
|
Total
|
128
|
|
62
|
|
153
|
|
22
|
|
89
|
|
454
|
|
|
|
(1)
|
Endeavor Air, Inc. is a wholly owned subsidiary of Delta.
|
|
|
(2)
|
Our relationship with ExpressJet Airlines, Inc. will conclude by the end of November 2018.
|
|
|
(3)
|
In June 2018, we signed an agreement with Bombardier Commercial Aircraft to purchase 20 CRJ-900 aircraft, which are not included in the table above other than the first aircraft, which was delivered in September 2018. These aircraft will be operated by SkyWest Airlines, Inc., and will replace older dual-class aircraft that they own or lease. The new aircraft will be delivered through 2020.
|
Financial Condition and Liquidity
We expect to meet our cash needs for the next 12 months with cash flows from operations, cash and cash equivalents, short-term investments and financing arrangements. As of
September 30, 2018
, we had nearly
$5.1 billion
in unrestricted liquidity, consisting of
$1.9 billion
in cash and cash equivalents and short-term investments and
$3.2 billion
in undrawn revolving credit facilities. During the
nine months ended
September 30, 2018
, we used existing cash and cash generated from operating activities to fund capital expenditures of
$3.8 billion
and return
$1.9 billion
to shareholders.
Sources of Liquidity
Operating Activities
Cash flows from operating activities continue to provide our primary source of liquidity. We generated positive cash flows from operations of
$5.7 billion
and
$3.1 billion
in the
nine months ended
September 30, 2018
and 2017, respectively. We had lower operating cash flows during 2017 primarily due to incremental pension plan contributions, as discussed below. We expect to continue generating positive cash flows from operations during the remainder of 2018.
Our operating cash flows are impacted by the following factors:
Seasonality of Advance Ticket Sales.
We sell tickets for air travel in advance of the customer's travel date. When we receive a cash payment at the time of sale, we record the cash received on advance sales as deferred revenue in air traffic liability. The air traffic liability increases during the winter and spring as advanced ticket sales grow prior to the summer peak travel season and decreases during the summer and fall months.
Fuel.
Fuel expense represented approximately
23%
of our total operating expenses for the
nine months ended
September 30, 2018
. The market price for jet fuel is volatile, which can impact the comparability of our periodic cash flows from operations.
Pension Contributions.
We have no minimum funding requirements in 2018. However, we voluntarily contributed
$500 million
to our qualified defined benefit pension plans during the first three months of 2018. Using the net proceeds from an unsecured debt offering in 2017 and existing cash, we contributed $3.2 billion to our qualified defined benefit pension plans during the first half of 2017. We also contributed shares of our common stock from treasury with a value of $350 million during the March 2017 quarter.
Profit Sharing.
Our broad-based employee profit sharing program provides that for each year in which we have an annual pre-tax profit, as defined by the terms of the program, we will pay a specified portion of that profit to employees.
In determining the amount of profit sharing, the program defines profit as pre-tax profit adjusted for profit sharing and certain other items.
Effective October 1, 2017, we aligned our profit sharing plans under a single formula.
Under this formula, our profit sharing program pays 10% to all eligible employees for the first $2.5 billion of annual profit and 20% of annual profit above $2.5 billion. Prior to October 1, 2017, the profit sharing program for merit, ground and flight attendant employees paid 10% of annual profit (as defined by the terms of the program) and, if we exceeded our prior-year results, the program paid 20% of the year-over-year increase in profit to eligible employees.
During the
nine months ended
September 30, 2018
, we accrued
$978 million
in profit sharing expense based on the year-to-date performance and current expectations for 2018 profit.
We paid $1.1 billion in profit sharing in February 2018 related to our 2017 pre-tax profit in recognition of our employees' contributions toward meeting our financial goals.
Investing Activities
Capital Expenditures.
Our capital expenditures were
$3.8 billion
and
$2.7 billion
for the
nine months ended
September 30, 2018
and
2017
, respectively. Our capital expenditures during the
nine months ended
September 30, 2018
were primarily related to the purchases of B-737-900ER, A321-200, A350-900 and CRJ-900 aircraft, advanced deposit payments on future aircraft order commitments and seat density projects for our domestic fleet.
We have committed to future aircraft purchases that will require significant capital investment and have obtained, but are under no obligation to use, long-term financing commitments for a substantial portion of the purchase price of a significant number of these aircraft. Our expected 2018 investments of
$4.9 billion will be primarily for (1) aircraft, including deliveries of B-737-900ERs, A321-200s, A350-900s, A220-100s and CRJ-900s, along with advance deposit payments for these and A321-200neos and A330-900neos, as well as (2) aircraft modifications, the majority of which relate to increasing the seat density and enhancing the cabins on our domestic fleet.
Los Angeles International Airport ("LAX") Construction.
During 2016, we executed a modified lease agreement with Los Angeles World Airports ("LAWA"), which owns and operates LAX, and announced plans to modernize, upgrade and connect Terminals 2 and 3 at LAX over the next seven years. Based on the lease agreement, we are designing and managing the construction of the initial investment of $350 million to renovate gate areas, support space and other amenities for passengers, upgrade the baggage handling systems in the terminals and facilitate the relocation of those airlines located in Terminals 2 and 3 to Terminals 5 and 6 and Tom Bradley International Terminal ("TBIT"). The relocation was completed during the June 2017 quarter. We will also design and manage the construction of an expansion of the project, which is expected to cost an additional $1.5 billion, of which $1.3 billion has been approved by LAWA. The expanded project will include (1) redevelopment of Terminal 3 and enhancement of Terminal 2, (2) rebuild of the ticketing and arrival halls and security checkpoint, (3) construction of infrastructure for the planned airport people mover, (4) ramp improvements and (5) construction of a secure connector to the north side of TBIT.
A substantial majority of the project costs will be funded through the Regional Airports Improvement Corporation ("RAIC"), a California public benefit corporation, using an $800 million revolving credit facility provided by a group of lenders. The credit facility was executed during 2017. Loans made under the credit facility will be repaid with the proceeds from LAWA’s purchase of completed project assets. We have guaranteed the obligations of the RAIC under the credit facility. Using funding provided by the credit agreement and/or cash flows from operations, we expect to spend approximately $230 million on this project during 2018, of which $177 million was incurred in the
nine months ended
September 30, 2018
.
New York-LaGuardia Redevelopment.
As part of the terminal redevelopment project at LaGuardia Airport, we are partnering with the Port Authority of New York and New Jersey (the “Port Authority”) to replace Terminals C and D with a new state-of-the-art terminal facility consisting of 37 gates across four concourses connected to a central headhouse. The terminal will feature a new, larger Delta Sky Club, wider concourses, more gate seating and 30 percent more concessions space than the existing terminals. The facility will also offer direct access between the parking garage and terminal and improved roadways and drop-off/pick-up areas. The design of the new terminal will integrate sustainable technologies and improvements in energy efficiency. Construction will be phased to limit passenger inconvenience and is expected to be completed by 2026.
In connection with the redevelopment, during 2017, we entered into an amended and restated terminal lease with the Port Authority with a term through 2050. Pursuant to the lease agreement we will (1) fund (through debt issuance and existing cash) and undertake the design, management and construction of the terminal and certain off-premises supporting facilities, (2) receive a Port Authority contribution of $600 million to facilitate construction of the terminal and other supporting infrastructure, (3) be responsible for all operations and maintenance during the term of the lease and (4) have preferential rights to all gates in the terminal subject to Port Authority requirements with respect to accommodation of designated carriers. We currently expect our costs for the project to be approximately $3.3 billion and we bear the risks of project construction, including if the project’s actual costs exceed the projected costs. Using funding provided by cash flows from operations and/or financing arrangements, we expect to spend approximately $330 million on this project during 2018, of which $207 million was incurred in the
nine months ended
September 30, 2018
.
Financing Activities
Debt and Capital Leases.
During the June 2018 quarter, we issued $1.6 billion in aggregate principal amount of unsecured notes, consisting of $600 million of 3.4% Notes due 2021, $500 million of 3.8% Notes due 2023 and $500 million of 4.375% Notes due 2028. We used the net proceeds from the offering of the Notes to repay borrowings outstanding under our secured Pacific term loan B-1 facility and 2015 term loan facility and for general corporate purposes.
Concurrent with the unsecured debt offering, we entered into a
$2.65 billion
unsecured revolving credit facility, up to
$500 million
of which may be used for the issuance of letters of credit (the “Revolving Credit Facility”). The Revolving Credit Facility was undrawn at the time we entered into it and remains undrawn. The Revolving Credit Facility replaced the undrawn secured Pacific revolving credit facility and the 2015 revolving credit facility, both of which were terminated in conjunction with the repayment of the term loans described above.
The Revolving Credit Facility is split evenly into a
$1.325 billion
three-year facility and a
$1.325 billion
five-year facility. Borrowings on both facilities bear interest at a variable rate equal to LIBOR, or another index rate, in each case plus a specified margin.
Also during the June 2018 quarter, the New York Transportation Development Corporation ("NYTDC") issued Special Facilities Revenue Bonds, Series 2018 (the "2018 Bonds") in the aggregate principal amount of $1.4 billion. We entered into loan agreements with the NYTDC to use the proceeds from the 2018 Bonds to finance a portion of the construction costs for the new terminal facilities at the LaGuardia Airport. The proceeds from the 2018 Bonds are recorded in cash restricted for airport construction on the Consolidated Balance Sheet.
Despite the recent debt issuances, since December 31, 2009, we have reduced our principal amount of debt and capital leases by
$8.8 billion
. The principal amount of debt and capital leases was
$9.3 billion
at
September 30, 2018
.
Capital Return to Shareholders.
During the
nine months ended
September 30, 2018
, we repurchased and retired 23 million shares of our common stock at a cost of
$1.3 billion
.
In the September 2018 quarter, the Board of Directors approved and we paid a quarterly dividend of
$0.35
per share, for total cash dividends of $241 million.
Undrawn Lines of Credit
We have
$3.2 billion
available in undrawn revolving lines of credit. These credit facilities include covenants customary for financing of this type. If we are not in compliance with these covenants, we may be required to repay amounts borrowed under the credit facilities or we may not be able to draw on them. We currently have a substantial amount of unencumbered assets available to pledge as collateral.
Covenants
We were in compliance with the covenants in our financings at September 30, 2018
.
Critical Accounting Policies and Estimates
Except as set forth below, for information regarding our Critical Accounting Policies and Estimates, see the "Critical Accounting Policies and Estimates" section of "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Form 10-K.
Frequent Flyer Program
Our frequent flyer program (the "SkyMiles program") generates customer loyalty by rewarding customers with incentives to travel on Delta. This program allows customers to earn mileage credits by flying on Delta, Delta Connection and other airlines that participate in the SkyMiles program. When traveling, customers earn redeemable mileage credits based on the passenger's loyalty program status and travel fare paid. Customers can also earn mileage credits through participating companies such as credit card companies, hotels and car rental agencies. To facilitate transactions with participating companies, we sell mileage credits to non-airline businesses, customers and other airlines. Mileage credits are redeemable by customers in future periods for air travel on Delta and other participating airlines, membership in our Sky Club and other program awards.
To reflect the mileage credits earned, the SkyMiles program includes two types of transactions that are considered revenue arrangements with multiple performance obligations: (1) mileage credit earned with travel and (2) mileage credit sold to participating companies.
Passenger Ticket Sales Earning Mileage Credits.
Passenger ticket sales earning mileage credits under our SkyMiles program provide customers with (1) mileage credits earned and (2) air transportation. We value each performance obligation on a standalone basis. To value the mileage credits earned, we consider the quantitative value a passenger receives by redeeming miles for a ticket rather than paying cash which is referred to as equivalent ticket value ("ETV"). Our estimate of ETV is adjusted for mileage credits that are not likely to be redeemed ("breakage"). Management uses statistical models to estimate breakage based on historical redemption patterns. A change in assumptions as to the actual redemption activity for mileage credits or the estimated fair value of mileage credits expected to be redeemed could have a material impact on our revenue in the year in which the change occurs and in future years. We recognize breakage proportionally during the period in which the remaining mileage credits are actually redeemed.
At
September 30, 2018
, the aggregate deferred revenue balance associated with the SkyMiles program was
$6.5 billion
. A hypothetical 10% change in the number of outstanding miles estimated to be redeemed would result in an approximately $200 million impact on annual revenue recognized.
We defer revenue for the mileage credits when earned and recognize loyalty travel awards in passenger revenue as the miles are redeemed and services are provided. We record the air transportation portion of the passenger ticket sales in air traffic liability and recognize passenger revenue when we provide transportation or if the ticket goes unused.
A hypothetical 10% increase in our estimate of the ETV of a mileage credit would decrease annual passenger revenue by approximately $100 million, as a result of an increase in the amount of revenue deferred from the mileage component of passenger ticket sales.
Sale of Mileage Credits.
Customers may earn mileage credits based on their spending with participating companies such as credit card companies, hotels and car rental agencies with which we have marketing agreements to sell mileage credits. Our contracts to sell mileage credits under these marketing agreements have multiple performance obligations. Payments are typically due monthly based on the volume of miles sold during the period, and the terms of our marketing contracts are generally from one to eight years.
During the
nine months ended
September 30, 2018
and
2017
, total cash sales from marketing agreements were
$2.6 billion
and
$2.3 billion
, respectively, which are allocated to travel and other performance obligations, as discussed below.
Our most significant contract to sell mileage credits relates to our co-brand credit card relationship with American Express. Our agreements with American Express provide for joint marketing, grant certain benefits to Delta-American Express co-branded credit card holders ("cardholders") and American Express Membership Rewards program participants, and allow American Express to market using our customer database. Cardholders earn mileage credits for making purchases using co-branded cards, may check their first bag for free, are granted discounted access to Delta Sky Club lounges and receive other benefits while traveling on Delta. Additionally, participants in the American Express Membership Rewards program may exchange their points for mileage credits under the SkyMiles program. We sell mileage credits at agreed-upon rates to American Express which are then provided to their customers under the co-brand credit card program and the Membership Rewards program.
We account for marketing agreements, including American Express, consistent with the accounting method that allocates the consideration received to the individual products and services delivered. We allocate the value based on the relative selling prices of those products and services, which generally consist of award travel, baggage fee waivers, lounge access and the use of our brand. We determined our best estimate of the selling prices by considering discounted cash flow analysis using multiple inputs and assumptions, including: (1) the expected number of miles awarded and number of miles redeemed, (2) ETV for the award travel obligation, (3) published rates on our website for baggage fees, discounted access to Delta Sky Club lounges and other benefits while traveling on Delta and (4) brand value.
We defer the amount for award travel obligation as part of frequent flyer deferred revenue and recognize loyalty travel awards in passenger revenue as the mileage credits are used for travel. Revenue allocated to services performed in conjunction with a passenger’s flight, such as baggage fee waivers, is recognized as travel-related services in passenger revenue when the related service is performed. Revenue allocated to access Delta Sky Club lounges is recognized as miscellaneous in other revenue as access is provided. Revenue allocated to the remaining performance obligations, primarily brand value, is recorded as loyalty program in other revenue over time as miles are delivered.
Recent Accounting Standards
Comprehensive Income
. In February 2018, the FASB issued ASU No. 2018-02, "Income Statement—Reporting Comprehensive Income (Topic 220)." This standard provides an option to reclassify stranded tax effects within
AOCI
to retained earnings due to the U.S. federal corporate income tax rate change in the Tax Cuts and Jobs Act of 2017. This standard is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. We have not completed our assessment, but the adoption of the standard may impact tax amounts stranded in AOCI related to our pension plans. We will adopt this standard effective January 1, 2019.
Supplemental Information
We sometimes use information ("non-GAAP financial measures") that is derived from the Condensed Consolidated Financial Statements, but that is not presented in accordance with GAAP. Under the U.S. Securities and Exchange Commission rules, non-GAAP financial measures may be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for or superior to GAAP results. Reconciliations below may not calculate exactly due to rounding.
The following table shows a reconciliation of pre-tax income (a GAAP measure) to pre-tax income, adjusted for special items (a non-GAAP financial measure). We adjust pre-tax income for mark-to-market ("MTM") adjustments and settlements on fuel hedge contracts, the MTM adjustments recorded by our equity method investees, Virgin Atlantic and Aeroméxico, and unrealized gains/losses on our investments in GOL, China Eastern and Air France-KLM, to determine pre-tax income, adjusted for special items.
MTM adjustments and settlements.
MTM adjustments are defined as fair value changes recorded in periods other than the settlement period. Such fair value changes are not necessarily indicative of the actual settlement value of the underlying hedge in the contract settlement period. Settlements represent cash received or paid on hedge contracts settled during the period.
Equity investment MTM adjustments.
We record our proportionate share of earnings/loss from our equity investments in Virgin Atlantic and Aeroméxico in non-operating income/(expense). We adjust for our equity method investees' hedge portfolio MTM adjustments to allow investors to better understand and analyze our core operational performance in the periods shown.
Unrealized gain/loss on investments.
We record the unrealized gains/losses on our investments in GOL, China Eastern and Air France-KLM in non-operating income/(expense). Adjusting for these gains/losses allows investors to better understand and analyze our core operational performance in the periods shown.
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
(in millions)
|
2018
|
2017
|
Pre-tax income
|
$
|
1,674
|
|
$
|
1,776
|
|
Adjusted for:
|
|
|
MTM adjustments and settlements
|
(16
|
)
|
(74
|
)
|
Equity investment MTM adjustments
|
(7
|
)
|
(7
|
)
|
Unrealized gain/loss on investments
|
(50
|
)
|
—
|
|
Pre-tax income, adjusted for special items
|
$
|
1,601
|
|
$
|
1,696
|
|
The following table shows a reconciliation of TRASM (a GAAP measure) to TRASM, adjusted (a non-GAAP financial measure).
|
|
•
|
Third-party refinery sales.
We adjust TRASM for refinery sales to third parties to determine TRASM, adjusted because these revenues are not related to our airline segment. TRASM, adjusted therefore provides a more meaningful comparison of revenue from our airline operations to the rest of the airline industry.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
2017
|
|
2018
|
2017
|
TRASM
|
|
16.40
|
¢
|
|
15.77
|
¢
|
|
|
16.78
|
¢
|
|
15.91
|
¢
|
Adjusted for:
|
|
|
|
|
|
Third-party refinery sales
|
(0.15
|
)
|
(0.18
|
)
|
|
(0.27
|
)
|
(0.13
|
)
|
TRASM, adjusted
|
|
16.25
|
¢
|
|
15.58
|
¢
|
|
|
16.51
|
¢
|
|
15.78
|
¢
|
The following table shows a reconciliation of CASM (a GAAP measure) to CASM-Ex (a non-GAAP financial measure). We adjust CASM for the following items to determine CASM-Ex, for the reasons described below:
|
|
•
|
Aircraft fuel and related taxes.
The volatility in fuel prices impacts the comparability of year-over-year financial performance. The adjustment for aircraft fuel and related taxes allows investors to better understand and analyze our non-fuel costs and year-over-year financial performance.
|
|
|
•
|
Ancillary businesses and refinery.
These expenses include aircraft maintenance 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.
|
|
|
•
|
Profit sharing.
We adjust for profit sharing because this adjustment allows investors to better understand and analyze our recurring cost performance and provides a more meaningful comparison of our core operating costs to the airline industry.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
2017
|
|
2018
|
2017
|
CASM
|
|
14.15
|
¢
|
|
13.17
|
¢
|
|
|
14.71
|
¢
|
|
13.44
|
¢
|
Adjusted for:
|
|
|
|
|
|
Aircraft fuel and related taxes
|
(3.43
|
)
|
(2.54
|
)
|
|
(3.33
|
)
|
(2.55
|
)
|
Ancillary businesses and refinery
|
(0.56
|
)
|
(0.56
|
)
|
|
(0.70
|
)
|
(0.50
|
)
|
Profit sharing
|
(0.54
|
)
|
(0.45
|
)
|
|
(0.49
|
)
|
(0.41
|
)
|
CASM-Ex
|
|
9.62
|
¢
|
|
9.62
|
¢
|
|
|
10.19
|
¢
|
|
9.97
|
¢
|