01—Abstract
Summary
Summary of the 10-K filed February 5, 2016. Cited figures are marked; the original filing is the authoritative source.
Delta Air Lines, Inc. reported 2015 pre-tax income of $7.2 billiona and net income of $4.53 billion, versus pre-tax income of $1.07 billion and net income of $659 million in 2014.
Operating revenue rose to $40.70 billionb from $40.36 billion, while operating expense fell to $32.90 billion from $38.16 billion, driven mainly by lower fuel prices. Aircraft fuel and related taxes fell 43.9% to $6.54 billion, and the average fuel price per gallon was $1.90 versus $3.47 in 2014. Pre-tax income adjusted for special items (a non-GAAP measure) rose to $5.9 billion.
Fuel hedge mark-to-market adjustments and settlements contributed $1.3 billionc of special items in 2015. The company reported return on invested capital (non-GAAP) of 28.3% in 2015, up from 20.7% in 2014, and reduced adjusted net debt to $6.7 billion. It returned $2.6 billion to shareholders through dividends and share repurchases in 2015, and generated $7.9 billion in operating cash flow against $2.9 billion of capital expenditures.
Liquidity was $5.6 billiond at year-end, including $2.2 billion of undrawn revolving credit facilities. Credit ratings were upgraded by all three major agencies during 2015, to BB+ (S&P), Ba2 (Moody's) and BB+ (Fitch). The filing also flags continuing exposures.
Unit revenue (PRASM) fell 3.3% on 3.0% higher capacity, reflecting competitive pressure and a strong U.S. dollar. The Delta pilots' collective bargaining agreement became amendable on December 31, 2015, and negotiations were ongoing. The company faces two antitrust class actions, and it stated it expects to make annual operating cash flow of $7-8 billion and free cash flow of $4-5 billion part of its long-term plan.
02—Key points
Key Highlights
- Pre-tax income rose to $7.2 billion in 2015 from $1.07 billion in 2014, and net income rose to $4.53 billion from $659 million, largely due to lower fuel prices and non-fuel cost controls.
- Average fuel price per gallon fell to $1.90 from $3.47, and fuel costs were 23.0% of operating expense in 2015 versus 35.4% in 2014.
- Operating revenue increased $342 million to $40.70 billion, while operating expense decreased $5.25 billion to $32.90 billion.
- Return on invested capital (non-GAAP) increased to 28.3% from 20.7%, and adjusted net debt was reduced to $6.7 billion.
- Delta returned $2.6 billion to shareholders in 2015 through dividends and share repurchases, and $3.95 billion remained under the May 2015 repurchase program.
- Credit ratings were upgraded by S&P (BB+), Moody's (Ba2) and Fitch (BB+) during 2015, and the company remains below investment grade.
- The Delta pilots' collective bargaining agreement became amendable on December 31, 2015, and the company is in discussions to amend it; about 18% of employees are unionized.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2015filed February 5, 2016Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Revenue | $40.70B$40.36B | +0.8% |
| Operating Expenses | $32.90B$38.16B | −13.8% |
| Operating Income | $7.80B$2.21B | +253.7% |
| Interest Expense | $481.00M$650.00M | −26.0% |
| Net Income | $4.53B$659.00M | +586.8% |
| EPS (Basic) | $5.68$0.79 | +619.0% |
| EPS (Diluted) | $5.63$0.78 | +621.8% |
| Shares Outstanding (Basic) | 797.00M836.00M | −4.7% |
| Shares Outstanding (Diluted) | 804.00M845.00M | −4.9% |
05—Questions
Frequently Asked Questions
How did Delta's profitability change in 2015?
Net income rose to $4.53 billion ($5.63 diluted EPS) from $659 million ($0.78 diluted EPS) in 2014. The improvement was driven mainly by a $5.9 billion decrease in fuel expense, including the effect of lower fuel prices, partly offset by higher salaries and profit sharing. Special items in 2015 were primarily fuel hedge mark-to-market adjustments and settlements totaling $1.3 billion.
What is Delta's exposure to fuel prices and hedging?
Fuel is a major cost, at 23.0% of 2015 operating expense. Delta hedges fuel prices but reported $741 million of fuel hedge losses in 2015 from unfavorable mark-to-market adjustments. In January 2016 it neutralized most of its hedge portfolio through 2016, locking in cash payments of about $725 million. The Monroe refinery near Philadelphia supplies roughly 171,000 barrels per day of jet fuel.
How strong is Delta's balance sheet and liquidity?
At December 31, 2015, unrestricted liquidity was $5.6 billion, including $3.4 billion of cash and short-term investments and $2.2 billion of undrawn revolving credit facilities. Debt and capital lease obligations were $8.3 billion, down from $9.7 billion a year earlier. Stockholders' equity was $10.85 billion, up from $8.81 billion.
What are Delta's main risks identified in the filing?
The filing highlights terrorism and geopolitical events, volatile fuel prices, competition from low-cost and government-subsidized foreign carriers, labor relations (including the pilot contract amendment), dependence on regional carriers and hub airports, and cybersecurity. Delta is also a defendant in antitrust class actions over first-bag fees and alleged capacity restraint, which it says are without merit.
What capital allocation priorities did Delta outline?
Delta targets $7-8 billion in annual operating cash flow and $4-5 billion in annual free cash flow, using about 50% of operating cash flow for reinvestment. The rest is used to reduce debt, make pension contributions above minimums, and return capital to shareholders. Delta expects to invest about $3 billion in 2016 and plans to acquire additional shares of Grupo Aeroméxico for approximately $750 million.
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