01—Abstract
Summary
Summary of the 10-K filed February 13, 2017. Cited figures are marked; the original filing is the authoritative source.
Delta Air Lines, Inc. reported 2016 operating revenue of $39.64 billiona, down from $40.70 billion in 2015, and net income of $4.37 billion, or $5.79 per diluted share, versus $4.53 billion in 2015.
Pre-tax income was $6.6 billionb, a $521 million decrease from the prior year, though pre-tax income adjusted for special items (a non-GAAP measure) rose 3.5% to $6.1 billion. Passenger revenue per available seat mile fell 4.9% on 2.1% higher capacity, reflecting competitive pressure in a low fuel price environment and U.S. dollar strength. Total fuel expense fell to $5.99 billion, with an average price of $1.49 per gallon versus $1.90 in 2015, while salaries and related costs rose to $10.03 billion, driven by an 18% pilot pay increase.
Management highlighted balance sheet progress: debt and capital lease obligations were reduced to $7.3 billionc, and the company received investment-grade ratings from Moody's and Fitch. Delta returned $3.1 billion to shareholders in 2016 through dividends and share repurchases, and the quarterly dividend was raised to $0.2025 per share. Cash flow from operations was $7.2 billion, against $3.4 billion of capital expenditures.
The company also reported a 26.1%d return on invested capital and plans to expand its Aeroméxico relationship through a joint venture and a tender offer for additional Grupo Aeroméxico shares expected in the first half of 2017. Key risks disclosed include fuel price volatility and hedging losses, labor cost pressure from new union contracts, competition from government-subsidized Gulf carriers, and pending antitrust litigation over first bag fees and capacity coordination. The company stated it believes these claims lack merit and is defending them vigorously.
02—Key points
Key Highlights
- Operating revenue of $39.64 billion in 2016, down 2.6% from $40.70 billion in 2015, with operating income of $6.95 billion versus $7.80 billion.
- Net income of $4.37 billion and diluted EPS of $5.79 in 2016, compared with $4.53 billion and $5.63 in 2015.
- Average fuel price fell to $1.49 per gallon from $1.90; fuel represented 18.3% of operating expense versus 23.0% in 2015.
- Debt and capital lease obligations reduced to $7.3 billion; Moody's (Baa3) and Fitch (BBB-) ratings are investment grade.
- Shareholder returns totaled $3.1 billion in 2016 ($2.6 billion in repurchases and $509 million in dividends); quarterly dividend raised to $0.2025 per share.
- Operating cash flow of $7.2 billion in 2016 against capital expenditures of $3.4 billion; approximately $5.7 billion in unrestricted liquidity at year end.
- Pilot contract ratified in the December 2016 quarter includes an 18% pay rate increase retroactive to January 1, 2016, which increased salaries and related costs to $10.03 billion.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2016filed February 13, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $39.64B$40.70B | −2.6% |
| Operating Expenses | $32.45B$32.90B | −1.4% |
| Operating Income | $7.00B$7.80B | −10.3% |
| Interest Expense | $388.00M$481.00M | −19.3% |
| Net Income | $4.20B$4.53B | −7.3% |
| EPS (Basic) | $5.59$5.68 | −1.6% |
| EPS (Diluted) | $5.55$5.63 | −1.4% |
| Shares Outstanding (Basic) | 751.00M797.00M | −5.8% |
| Shares Outstanding (Diluted) | 755.00M804.00M | −6.1% |
05—Questions
Frequently Asked Questions
Why did pre-tax income decline in 2016 despite lower fuel costs?
Pre-tax income was $6.6 billion, a $521 million decrease from 2015. Management attributed the decline to lower passenger revenue and higher salaries and related costs, which offset the benefit of lower fuel prices. Passenger revenue per available seat mile fell 4.9%, driven by competitive pressure and U.S. dollar strength affecting international fares.
How is the company reducing its debt and returning capital to shareholders?
Debt and capital lease obligations were reduced to $7.3 billion at December 31, 2016, and the company stated it has reduced adjusted net debt by nearly $11 billion since 2009. In 2016 it returned $3.1 billion to shareholders through dividends and share repurchases, and the Board's 2015 repurchase program had $1.35 billion remaining at year end.
What are the main risks from fuel and hedging activity?
Fuel prices are volatile, and the company's fuel purchase contracts do not provide material price protection. Its hedging program records mark-to-market adjustments and requires margin postings when hedge contracts are in a loss position; hedge contracts were in a net loss position of $38 million in margin postings at December 31, 2016. The Monroe refinery also supplies a significant share of jet fuel and carries exposure to renewable fuel (RINs) costs, which the filing notes were $171 million of expense in 2016.
What is the status of the Aeroméxico investment and joint venture?
The company owns 4.2% of Grupo Aeroméxico and derivative contracts representing 12.8% of its shares. Antitrust immunity for the joint venture was approved by Mexican and U.S. regulators in 2016 subject to conditions, and the company expects the joint venture and a tender offer, which would take its stake up to 49%, to be completed in the first half of 2017 for up to $765 million.
06—Continue