UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
R | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2013
Or | |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 001-5424
DELTA AIR LINES, INC.
(Exact name of registrant as specified in its charter)
Delaware | 58-0218548 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
Post Office Box 20706 | |
Atlanta, Georgia | 30320-6001 |
(Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code: (404) 715-2600 | |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, par value $0.0001 per share | New York Stock Exchange | |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes R No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No R
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 R 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. R
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):
Large accelerated filer | R | Accelerated filer | o | Non-accelerated filer | o | Smaller reporting company | o | |
(Do not check if a smaller reporting company) | ||||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No R
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2013 was approximately $16.1 billion.
On January 31, 2014, there were outstanding 849,378,918 shares of the registrant's common stock.
This document is also available on our website at http://www.delta.com/about_delta/investor_relations.
Documents Incorporated By Reference
Part III of this Form 10-K incorporates by reference certain information from the registrant's definitive Proxy Statement for its Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission.
Table of Contents | |
Page | |
Forward-Looking Statements | |
PART I | |
PART II | |
Financial Highlights - 2013 Compared to 2012 | |
Company Initiatives | |
Results of Operations - 2013 Compared to 2012 | |
Results of Operations - 2012 Compared to 2011 | |
Income Taxes | |
Page | |
PART III | |
PART IV | |
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-K (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 “Risk Factors Relating to Delta” and “Risk Factors Relating to the Airline Industry” in “Item 1A. Risk Factors” of this 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.
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Part I
ITEM 1. BUSINESS
General
We provide scheduled air transportation for passengers and cargo throughout the United States and around the world. Our global route network gives us a presence in every major domestic and international market. Our route network is centered around a system of hub and international gateway airports that we operate in Amsterdam, Atlanta, Cincinnati, Detroit, Minneapolis-St. Paul, New York-LaGuardia, New York-JFK, Paris-Charles de Gaulle, Salt Lake City, Seattle and Tokyo-Narita. Each of these operations includes flights that gather and distribute traffic from markets in the geographic region surrounding the hub or gateway to domestic and international cities and to other hubs or gateways. Our network is supported by a fleet of aircraft that is varied in size and capabilities, giving us flexibility to adjust aircraft to the network.
Other key characteristics of our route network include:
• | our international joint ventures, particularly our transatlantic joint venture with Air France-KLM and Alitalia and our new transatlantic joint venture with Virgin Atlantic; |
• | our alliances with other foreign airlines, including Aeroméxico and GOL and our membership in SkyTeam, a global airline alliance; |
• | our domestic marketing alliance with Alaska Airlines, which supplements our west coast service; and |
• | agreements with multiple domestic regional carriers, which operate as Delta Connection®. |
We are incorporated under the laws of the State of Delaware. Our principal executive offices are located at Hartsfield-Jackson Atlanta International Airport in Atlanta, Georgia. Our telephone number is (404) 715-2600 and our Internet address is www.delta.com. Information contained on our website is not part of, and is not incorporated by reference in, this Form 10-K.
International Alliances
Our international alliance relationships range from our transatlantic and transpacific joint venture agreements to bilateral and multilateral marketing alliances. These relationships are an important part of our business as they improve our access to international markets and enable us to market expanded and globally integrated air transportation services. In general, these arrangements include reciprocal codesharing and frequent flyer program participation and airport lounge access arrangements, and may also include joint sales and marketing coordination, co-location of airport facilities and other commercial cooperation arrangements. These alliances also often present opportunities in other areas, such as airport ground handling arrangements and aircraft maintenance insourcing.
Joint Venture Agreements. We currently operate three joint ventures with foreign carriers. These arrangements, for which we have received anti-trust immunity, provide for the sharing of revenues and costs, as well as joint marketing and sales, coordinated pricing and revenue management, network planning and scheduling and other coordinated activities with respect to the parties' operations on joint venture routes. The three joint ventures are:
• | A transatlantic joint venture with Air France and KLM, both of which are subsidiaries of the same holding company, and Alitalia, which covers routes between North America and Europe. |
• | A transatlantic joint venture with Virgin Atlantic Airways with respect to operations on non-stop routes between the United Kingdom and North America. In 2013, we acquired a 49% equity stake in Virgin Atlantic Limited from Singapore Airlines. |
• | A transpacific joint venture with Virgin Australia Airlines with respect to operations on certain transpacific routes between North America and the South Pacific. |
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Enhanced commercial agreements with Latin American Carriers. We have separate strategic 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 an exclusive commercial relationship with each company's affiliated air carrier. We invested in GOL and Aeroméxico because they operate in Latin America's two largest markets, Brazil and Mexico, respectively. The agreements provide for expansion of reciprocal codesharing and frequent flyer program participation, airport lounge access arrangements, improved passenger connections and potential joint sales cooperation. In addition to our commercial cooperation arrangements for passenger service with Aeroméxico, we and Aeroméxico have established a joint venture relating to an airframe maintenance, repair and overhaul operation located in Queretaro, Mexico.
SkyTeam. In addition to our marketing alliance agreements with individual foreign airlines, we are a member of the SkyTeam global airline alliance. The other members of SkyTeam are Aeroflot, Aerolineas Argentinas, Aeroméxico, Air Europa, Air France, Alitalia, China Airlines, China Eastern, China Southern, CSA Czech Airlines, Kenya Airways, KLM, Korean Air, Middle East Airlines, Saudi Arabian Airlines, Tarom, Vietnam Airlines and Xiamen Airlines. Garuda Indonesia also has announced its formal intent to join SkyTeam. Through alliance arrangements with other SkyTeam carriers, Delta is able to link its network with the route networks of the other member airlines, providing opportunities for increased connecting traffic while offering enhanced customer service through reciprocal codesharing and frequent flyer arrangements and airport lounge access programs and coordinated cargo operations.
Codeshare Agreements. We also have international codeshare arrangements with the following international carriers, some of which are carriers with which we also have more extensive relationships: Aeroflot, Aeroméxico, Air Europa, Air France, Alitalia, China Airlines, China Eastern, China Southern, CSA Czech Airlines, KLM, Korean Air, Olympic Air, VRG Linhas Aéreas (operating as GOL), Vietnam Airlines, Virgin Australia and WestJet (and affiliated carriers operating in conjunction with some of these airlines).
Domestic Alliances
We have a marketing alliance with Alaska Airlines, which includes reciprocal codesharing and frequent flyer and airport lounge access arrangements. Our alliance agreement with Alaska Airlines allows us to expand our west coast presence. We also have reciprocal codesharing and frequent flyer and airport lounge access arrangements with Hawaiian Airlines.
Regional Carriers
We have air service agreements with domestic regional air carriers that feed traffic to our route system by serving passengers primarily in small-and medium-sized cities. These arrangements enable us to better match capacity with demand in these markets. Approximately 19% of our passenger revenue in 2013 was related to flying by these regional air carriers.
Through our regional carrier program, Delta Connection, we have contractual arrangements with regional carriers to operate regional jet and, in certain cases, turbo-prop aircraft using our “DL” designator code. We have contractual arrangements with:
• | ExpressJet Airlines, Inc. and SkyWest Airlines, Inc., both subsidiaries of SkyWest, Inc.; |
• | Chautauqua Airlines, Inc. and Shuttle America Corporation, both subsidiaries of Republic Airways Holdings, Inc.; |
• | Compass Airlines, Inc. (“Compass”) and GoJet Airlines, LLC, both subsidiaries of Trans States Holdings, Inc. (“Trans States”); and |
• | Endeavor Air, Inc., which we acquired in May 2013 as a part of its confirmed plan of reorganization. |
Our contractual agreements with regional carriers primarily are capacity purchase arrangements, under which we control the scheduling, pricing, reservations, ticketing and seat inventories for the regional carriers' flights operating under our “DL” designator code, and we are entitled to all ticket, cargo, mail and in-flight and ancillary revenues associated with these flights. We pay those airlines an amount, as defined in the applicable agreement, which is based on a determination of their cost of operating those flights and other factors intended to approximate market rates for those services. These capacity purchase agreements are long-term agreements, usually with initial terms of at least 10 years, which grant us the option to extend the initial term. Certain of these agreements provide us the right to terminate the entire agreement, or in some cases remove some of the aircraft from the scope of the agreement, for convenience at certain future dates.
SkyWest Airlines operates some flights for us under a revenue proration agreement. This proration agreement establishes a fixed dollar or percentage division of revenues for tickets sold to passengers traveling on connecting flight itineraries.
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Fuel
Our results of operations are significantly impacted by changes in the price and availability of aircraft fuel. The following table shows our aircraft fuel consumption and costs.
Year | Gallons Consumed(1) (Millions) | Cost(1)(2) (Millions) | Average Price Per Gallon(1)(2) | Percentage of Total Operating Expense(1)(2) | ||||||
2013 | 3,828 | $ | 11,464 | $ | 3.00 | 33 | % | |||
2012 | 3,769 | $ | 12,251 | $ | 3.25 | 36 | % | |||
2011 | 3,856 | $ | 11,783 | $ | 3.06 | 36 | % | |||
(1) | Includes the operations of our regional carriers under capacity purchase agreements. |
(2) | Includes fuel hedge gains (losses) under our fuel hedging program of $493 million, $(66) million and $420 million for 2013, 2012 and 2011, respectively. |
General
Jet fuel costs remained at high levels in 2013, with fuel expense our single largest expense. We have historically purchased most of our aircraft fuel under contracts that establish the price based on various market indices and therefore do not provide material protection against price increases or assure the availability of our fuel supplies. We also purchase aircraft fuel on the spot market, from off-shore sources and under contracts that permit the refiners to set the price.
Monroe Energy
Global jet fuel demand continues to increase. While the advent of domestic shale oil production in the U.S. has reduced the threat of U.S. refinery closures beyond those that have already closed, further capacity reduction is expected in Europe, thus impacting supply in the Atlantic Basin and ultimately increasing refinery margins in the U.S. Our wholly-owned subsidiaries, Monroe Energy, LLC and MIPC, LLC (collectively, “Monroe”), operate the Trainer refinery and related assets located near Philadelphia, Pennsylvania as part of our strategy to mitigate the increasing cost of the refining margin we are paying. The facilities include pipelines and terminal assets that allow the refinery to supply jet fuel to our airline operations throughout the Northeastern U.S., including our New York hubs at LaGuardia and John F. Kennedy International Airport ("JFK").
Refinery Operations. The facility is capable of refining 185,000 barrels of crude oil per day. In addition to jet fuel, the refinery's production consists of gasoline, diesel and other refined products (“non-jet fuel products”). BP is the primary supplier of crude oil used by the refinery under a three year agreement. We source domestic crude oil supply when economical and are attempting to increase our overall domestic supply, including from the Bakken oil field in North Dakota.
Strategic Agreements. 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. Substantially all of the remaining production of non-jet fuel products is being sold to BP under a buy/sell agreement effectively exchanging those non-jet fuel products for jet fuel. Our agreement with Phillips 66 requires us to deliver specified quantities of non-jet fuel products and they are required to deliver jet fuel to us. If we or Phillips 66 do not have the specified quantity and type of product available, the delivering party is required to procure any such shortage to fulfill its obligation under the agreement. Substantially all of the refinery's expected production of non-jet fuel products is included in these agreements.
Segments. Because the products and services of Monroe's refinery operations are discrete from our airline services, segment results are prepared for our airline segment and our refinery segment. Financial information on our segment reporting can be found in Note 2 of the Notes to the Consolidated Financial Statements.
Fuel Hedging Program
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.
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Fuel Supply Availability
We are currently able to obtain adequate supplies of aircraft fuel, including through our purchases from Monroe, and crude oil for Monroe's operations, but it is impossible to predict the future availability or price of aircraft fuel and crude oil. Weather-related events, natural disasters, political disruptions or wars involving oil-producing countries, changes in government policy concerning aircraft fuel production, transportation or marketing, changes in aircraft fuel production capacity, environmental concerns and other unpredictable events may result in fuel supply shortages and fuel price increases in the future.
Frequent Flyer Program
Our SkyMiles® frequent flyer program is designed to retain and increase traveler loyalty by offering incentives to customers to increase travel on Delta. The SkyMiles program allows program members to earn mileage for travel awards by flying on Delta, Delta's regional carriers and other participating airlines. Mileage credit may also be earned by using certain services offered by program participants, such as credit card companies, hotels and car rental agencies. In addition, individuals and companies may purchase mileage credits. Miles do not expire, but are subject to all program rules. We reserve the right to terminate the program with six months advance notice, and to change the program's terms and conditions at any time without notice.
SkyMiles program mileage credits can be redeemed for air travel on Delta and participating airlines, for membership in our Delta Sky Clubs® and for other program participant awards. Mileage credits are subject to certain transfer restrictions and travel awards are subject to capacity-controlled seating. In 2013, program members redeemed more than 271 billion miles in the SkyMiles program for 11 million award redemptions. During this period, 7.3% of revenue miles flown on Delta were from award travel.
Other Businesses
Cargo
Through our global network, our cargo operations are able to connect all of the world's major freight gateways. We generate cargo revenues in domestic and international markets through the use of cargo space on regularly scheduled passenger aircraft. We are a member of SkyTeam Cargo, a global airline cargo alliance, whose other members are Aeroflot, Aerolineas Argentinas, Aeromexico Cargo, Air France-KLM Cargo, Alitalia Cargo, China Airlines Cargo, China Cargo Airlines, China Southern Cargo, Czech Airlines Cargo and Korean Air Cargo. SkyTeam Cargo offers a global network spanning six continents.
Delta TechOps, Delta Global Services, MLT Vacations and Delta Private Jets
We have several other businesses arising from our airline operations, including aircraft maintenance, repair and overhaul (“MRO”), staffing services for third parties, vacation wholesale operations and our private jet operations. In 2013, the total revenue from these businesses was approximately $800 million.
• | In addition to providing maintenance and engineering support for our fleet of over 900 aircraft, our MRO operation, known as Delta TechOps, serves aviation and airline customers from around the world. |
• | Our staffing services business, Delta Global Services, provides staffing services, professional security, training services and aviation solutions. |
• | Our vacation wholesale business, MLT Vacations, provides vacation packages. |
• | Our private jet operations, Delta Private Jets, provides aircraft charters, aircraft management and programs allowing members to purchase flight time by the hour. |
Distribution and Expanded Product Offerings
Our tickets are sold through various distribution channels including telephone reservations, delta.com, and traditional "brick and mortar" and online travel agencies. An increasing number of our tickets are sold through delta.com, which reduces our distribution costs and gives us closer contact with our customers.
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We are transforming distribution from a commodity approach to a differentiated and merchandised approach. We expect that the merchandising initiatives we are implementing, primarily through delta.com, will generate additional revenue opportunities for us and will improve the experience of our customers. We provide our customers with opportunities to purchase what they value, such as first class upgrades, Economy ComfortTM seating, WiFi access and SkyClub passes. We expect to benefit from increased traffic on delta.com through a combination of advertising revenue and sales of third party merchandise and services such as car rentals, hotels and trip insurance.
Competition
The airline industry is highly competitive, marked by significant competition with respect to routes, fares, schedules (both timing and frequency), services, products, customer service and frequent flyer programs. The industry is going through a period of transformation through consolidation, both domestically and internationally, and changes in international alliances. Consolidation in the airline industry and changes in international alliances have altered and will continue to alter the competitive landscape in the industry by resulting in the formation of airlines and alliances with increased financial resources, more extensive global networks and altered cost structures. In addition, other network carriers have also significantly reduced their costs over the last several years including through restructuring and bankruptcy reorganization. Our ability to compete effectively depends, in part, on our ability to maintain a competitive cost structure.
Domestic
Our domestic operations are subject to competition from both traditional network and discount carriers, some of which may have lower costs than we do and provide service at low fares to destinations served by us. In particular, we face significant competition at our domestic hub and gateway airports in Atlanta, Cincinnati, Detroit, Minneapolis-St. Paul, New York-LaGuardia, New York-JFK, Salt Lake City and Seattle either directly at those airports or at the hubs of other airlines that are located in close proximity to our hubs and gateways. We also face competition in smaller to medium-sized markets from regional jet operations of other carriers.
International
Our international operations are subject to competition from both domestic and foreign carriers. Through alliance and other marketing and codesharing agreements with foreign carriers, U.S. carriers have increased their ability to sell international transportation, such as services to and beyond traditional European and Asian gateway cities. Similarly, foreign carriers have obtained increased access to interior U.S. passenger traffic beyond traditional U.S. gateway cities through these relationships. In particular, alliances formed by domestic and foreign carriers, including SkyTeam, the Star Alliance (among United Airlines, Lufthansa German Airlines, Air Canada, All Nippon Airways and others) and the oneworld alliance (among American Airlines, British Airways, Iberia, Qantas and others) have significantly increased competition in international markets.
Increased competition has also emerged from well-funded carriers in the Gulf region, including Emirates, Etihad and Qatar. These carriers have large numbers of international widebody aircraft on order and are increasing service to the United States from their hubs in the Middle East. Several of these carriers, along with carriers from China, India and Latin America, are government supported or funded, which has allowed them to grow quickly, reinvest in their product and expand their global presence at the expense of U.S. airlines. In addition, the adoption of liberalized Open Skies Aviation Agreements with an increasing number of countries around the world, including in particular the Open Skies Treaties that the U.S. has with the Member States of the European Union, Japan and the Gulf states, could significantly increase competition among carriers serving those markets.
Several joint ventures among U.S. and foreign carriers, including our transatlantic and transpacific joint ventures, have received grants of antitrust immunity allowing the participating carriers to coordinate schedules, pricing, sales and inventory. Other joint ventures that have received anti-trust immunity include a transatlantic alliance among United, Air Canada and Lufthansa, a transpacific joint venture among United and All Nippon Airways, a transatlantic joint venture among American, British Airways and Iberia and a transpacific joint venture between American and Japan Air Lines.
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Regulatory Matters
The Department of Transportation (“DOT”) and the Federal Aviation Administration (the “FAA”) exercise regulatory authority over air transportation in the U.S. The DOT has authority to issue certificates of public convenience and necessity required for airlines to provide domestic air transportation. An air carrier that the DOT finds fit to operate is given authority to operate domestic and international air transportation (including the carriage of passengers and cargo). Except for constraints imposed by regulations regarding “Essential Air Services,” which are applicable to certain small communities, airlines may terminate service to a city without restriction.
The DOT has jurisdiction over certain economic and consumer protection matters, such as unfair or deceptive practices and methods of competition, advertising, denied boarding compensation, baggage liability and disabled passenger transportation. The DOT also has authority to review certain joint venture agreements between major carriers and engages in regulation of economic matters such as slot transactions. The FAA has primary responsibility for matters relating to the safety of air carrier flight operations, including airline operating certificates, control of navigable air space, flight personnel, aircraft certification and maintenance and other matters affecting air safety.
Authority to operate international routes and international codesharing arrangements is regulated by the DOT and by the governments of the foreign countries involved. International certificate authorities are also subject to the approval of the U.S. President for conformance with national defense and foreign policy objectives.
The Transportation Security Administration and the U.S. Customs and Border Protection, each a division of the Department of Homeland Security, are responsible for certain civil aviation security matters, including passenger and baggage screening at U.S. airports and international passenger prescreening prior to entry into or departure from the U.S.
Airlines are also subject to various other federal, state, local and foreign laws and regulations. For example, the U.S. Department of Justice has jurisdiction over airline competition matters. The U.S. Postal Service has authority over certain aspects of the transportation of mail. Labor relations in the airline industry, as discussed below, are generally governed by the Railway Labor Act. Environmental matters are regulated by various federal, state, local and foreign governmental entities. Privacy of passenger and employee data is regulated by domestic and foreign laws and regulations.
Fares and Rates
Airlines set ticket prices in all domestic and most international city pairs with minimal governmental regulation, and the industry is characterized by significant price competition. Certain international fares and rates are subject to the jurisdiction of the DOT and the governments of the foreign countries involved. Many of our tickets are sold by travel agents, and fares are subject to commissions, overrides and discounts paid to travel agents, brokers and wholesalers.
Route Authority
Our flight operations are authorized by certificates of public convenience and necessity and also by exemptions and limited-entry frequency awards issued by the DOT. The requisite approvals of other governments for international operations are controlled by bilateral agreements (and a multilateral agreement in the case of the U.S. and the European Union) with, or permits or approvals issued by, foreign countries. Because international air transportation is governed by bilateral or other agreements between the U.S. and the foreign country or countries involved, changes in U.S. or foreign government aviation policies could result in the alteration or termination of such agreements, diminish the value of our international route authorities or otherwise affect our international operations. Bilateral agreements between the U.S. and various foreign countries served by us are subject to renegotiation from time to time. The U.S. government has negotiated “open skies” agreements with many countries, which allow unrestricted access between the U.S. and the foreign markets. These agreements include separate agreements with the European Union and Japan.
Certain of our international route authorities are subject to periodic renewal requirements. We request extension of these authorities when and as appropriate. While the DOT usually renews temporary authorities on routes where the authorized carrier is providing a reasonable level of service, there is no assurance this practice will continue in general or with respect to a specific renewal. Dormant route authorities may not be renewed in some cases, especially where another U.S. carrier indicates a willingness to provide service.
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Airport Access
Operations at four major domestic airports and certain foreign airports served by us are regulated by governmental entities through allocations of “slots” or similar regulatory mechanisms which limit the rights of carriers to conduct operations at those airports. Each slot represents the authorization to land at or take off from the particular airport during a specified time period.
In the U.S., the FAA currently regulates the allocation of slots, slot exemptions, operating authorizations, or similar capacity allocation mechanisms at Reagan National in Washington, D.C. and LaGuardia, John F. Kennedy International Airport and Newark in the New York City area. Our operations at these airports generally require the allocation of slots or analogous regulatory authorizations. Similarly, our operations at Tokyo's Narita and Haneda Airports, London's Heathrow airport and other international airports are regulated by local slot coordinators pursuant to the International Air Transport Association's Worldwide Scheduling Guidelines and applicable local law. We currently have sufficient slots or analogous authorizations to operate our existing flights, and we have generally been able to obtain the rights to expand our operations and to change our schedules. There is no assurance, however, that we will be able to do so in the future because, among other reasons, such allocations are subject to changes in governmental policies.
Environmental Matters
Emissions. The U.S. Environmental Protection Agency (the “EPA”) is authorized to regulate aircraft emissions and has historically implemented emissions control standards adopted by the International Civil Aviation Organization (“ICAO”). Our aircraft comply with existing EPA standards as applicable by engine design date. The ICAO has adopted two additional aircraft engine emissions standards, the first of which is applicable to engines certified after December 31, 2007, and the second of which is applicable to engines certified after December 31, 2013. In June 2012, the EPA published a final rulemaking for new emission standards for oxides of nitrogen (NOx), adopting ICAO's additional standards. Included in the rule are two new tiers of more stringent emission standards for NOx. These standards, referred to as the Tier 6 standards, become effective for newly-manufactured aircraft engines beginning in 2013.
Concern about aviation environmental issues, including climate change and greenhouse gases, has led to taxes on our operations in the United Kingdom and in Germany, both of which have levied taxes directly on our customers. We may face additional regulation of aircraft emissions in the United States and abroad and become subject to further taxes, charges or additional requirements to obtain permits or purchase allowances or emission credits for greenhouse gas emissions in various jurisdictions. This could result in taxation or permitting requirements from multiple jurisdictions for the same operations. Ongoing bilateral discussions between the United States and other nations may lead to international treaties or other actions focusing on reducing greenhouse gas emissions from aviation. In addition, at the 38th ICAO Assembly that concluded October 4, 2013 in Montreal, the Assembly adopted a climate change resolution committing ICAO to develop a global market-based measure to be finalized at the 2016 ICAO Assembly which would enable the airline industry to achieve carbon-neutral growth from 2020.
The European Union has required its member states to implement regulations including aviation in its Emissions Trading Scheme (“ETS”). Under these regulations, any airline with flights originating or landing in the European Union is subject to the ETS and, beginning in 2012, was required to purchase emissions allowances if the airline exceeds the number of free allowances allocated to it under the ETS. At the end of November 2012, the United States government enacted legislation exempting U.S. airlines from the ETS. In April 2013, the European Parliament deferred enforcement until April 2014 of the ETS with respect to flights operated to and from non-EU destinations; however, all intra-EU flights on any carrier (based in the EU or not) had to comply with the requirements of the ETS. The European Commission has proposed new legislation that would extend the ETS beyond intra-EU flights to include the portion of flights to and from the EU while in EU airspace for those countries whose international revenue ton kilometers exceeds a 1% de minimis threshold. This legislation faces opposition from the United States and some EU member countries.
Cap and trade restrictions have also been proposed in the United States. In addition, other legislative or regulatory action, including by the EPA, to regulate greenhouse gas emissions is possible. In particular, the EPA has found that greenhouse gases threaten the public health and welfare, which could result in regulation of greenhouse gas emissions from aircraft. In the event that legislation or regulation is enacted in the U.S. or in the event similar legislation or regulation is enacted in jurisdictions other than the European Union where we operate or where we may operate in the future, it could result in significant costs for us and the airline industry. In addition to direct costs, such regulation may have a greater effect on the airline industry through increases in fuel costs that could result from fuel suppliers passing on increased costs that they incur under such a system. We are monitoring and evaluating the potential impact of such legislative and regulatory developments.
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We seek to minimize the impact of greenhouse gas emissions from our operations through reductions in our fuel consumption and other efforts and have realized reductions in our greenhouse gas emission levels since 2005. We have reduced the fuel needs of our aircraft fleet through the retirement and replacement of certain elements of our fleet and with newer, more fuel efficient aircraft. In addition, we have implemented fuel saving procedures in our flight and ground support operations that further reduce carbon emissions. We are also supporting efforts to develop alternative fuels and efforts to modernize the air traffic control system in the U.S., as part of our efforts to reduce our emissions and minimize our impact on the environment.
Noise. The Airport Noise and Capacity Act of 1990 recognizes the rights of operators of airports with noise problems to implement local noise abatement programs so long as such programs do not interfere unreasonably with interstate or foreign commerce or the national air transportation system. This statute generally provides that local noise restrictions on Stage 3 aircraft first effective after October 1, 1990, require FAA approval. While we have had sufficient scheduling flexibility to accommodate local noise restrictions in the past, our operations could be adversely impacted if locally-imposed regulations become more restrictive or widespread.
Refinery Matters. Monroe's operation of the Trainer Refinery is subject to numerous environmental laws and extensive regulations, including those relating to the discharge of materials into the environment, waste management, pollution prevention measures and greenhouse gas emissions.
Under the Energy Independence and Security Act of 2007, the U.S. Environmental Protection Agency (“EPA”) has adopted Renewable Fuel Standards (“RFS”) that mandate the blending of renewable fuels into gasoline and on-road diesel ("Transportation Fuels"). Renewable Identification Numbers (“RINs”) are assigned to renewable fuels produced or imported into the U.S. that are blended into Transportation Fuels to demonstrate compliance with this obligation. A refinery may meet its obligation under RFS by blending the necessary volumes of renewable fuels with Transportation Fuels or by purchasing RINs in the open market or through a combination of blending and purchasing RINs. Because the refinery operated by Monroe does not blend renewable fuels, it must purchase its entire RINs requirement in the secondary market or obtain a waiver from the EPA.
Other Environmental Matters. We had been identified by the EPA as a potentially responsible party (a “PRP”) with respect to certain Superfund Sites, and entered into consent decrees or settlements regarding some of these sites. Our alleged disposal volume at each of these sites was small or was considered de minimis when compared to the total contributions of all PRPs at each site.
We are aware of soil and/or ground water contamination present on our current or former leaseholds at several domestic airports. To address this contamination, we have a program in place to investigate and, if appropriate, remediate these sites. Although the ultimate outcome of these matters cannot be predicted with certainty, we believe that the resolution of these matters will not have a material adverse effect on our consolidated financial statements.
We are also subject to various other federal, state and local laws governing environmental matters, including the management and disposal of chemicals, waste and hazardous materials, protection of surface and subsurface waters and regulation of air emissions and aircraft drinking water.
Civil Reserve Air Fleet Program
We participate in the Civil Reserve Air Fleet program (the “CRAF Program”), which permits the U.S. military to use the aircraft and crew resources of participating U.S. airlines during airlift emergencies, national emergencies or times of war. We have agreed to make available under the CRAF Program a portion of our international long-range aircraft during the contract period ending September 30, 2014. We have also committed aircraft to international short-range requirements. The CRAF Program has only been activated twice since it was created in 1951.
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Employee Matters
Railway Labor Act
Our relations with labor unions representing our airline employees in the U.S. are governed by the Railway Labor Act. Under the Railway Labor Act, a labor union seeking to represent an unrepresented craft or class of employees is required to file with the National Mediation Board (the “NMB”) an application alleging a representation dispute, along with authorization cards signed by at least 50% of the employees in that craft or class. The NMB then investigates the dispute and, if it finds the labor union has obtained a sufficient number of authorization cards, conducts an election to determine whether to certify the labor union as the collective bargaining representative of that craft or class. A labor union will be certified as the representative of the employees in a craft or class if more than 50% of votes cast are for that union. A certified labor union would commence negotiations toward a collective bargaining agreement with the employer.
Under the Railway Labor Act, a collective bargaining agreement between an airline and a labor union does not expire, but instead becomes amendable as of a stated date. Either party may request that the NMB appoint a federal mediator to participate in the negotiations for a new or amended agreement. If no agreement is reached in mediation, the NMB may determine, at any time, that an impasse exists and offer binding arbitration. If either party rejects binding arbitration, a 30-day “cooling off” period begins. At the end of this 30-day period, the parties may engage in “self help,” unless the U.S. President appoints a Presidential Emergency Board (“PEB”) to investigate and report on the dispute. The appointment of a PEB maintains the “status quo” for an additional 60 days. If the parties do not reach agreement during this period, the parties may then engage in “self help.” “Self help” includes, among other things, a strike by the union or the imposition of proposed changes to the collective bargaining agreement by the airline. Congress and the President have the authority to prevent “self help” by enacting legislation that, among other things, imposes a settlement on the parties.
Collective Bargaining
As of December 31, 2013, we had approximately 78,000 full-time equivalent employees, approximately 18% of whom were represented by unions. The following table shows our domestic airline employee groups that are represented by unions.
Employee Group | Approximate Number of Active Employees Represented | Union | Date on which Collective Bargaining Agreement Becomes Amendable | ||
Delta Pilots | 10,700 | ALPA | December 31, 2015 | ||
Delta Flight Superintendents (Dispatchers)(1) | 370 | PAFCA | December 31, 2013 | ||
Endeavor Air Pilots | 1,820 | ALPA | January 1, 2020 | ||
Endeavor Air Flight Attendants | 990 | AFA | December 31, 2018 | ||
Endeavor Air Dispatchers | 60 | DISTWU | December 31, 2018 | ||
(1) We are in discussions with representatives of the Flight Superintendents.
In addition, 210 refinery employees of Monroe are represented by the United Steel Workers under an agreement that expires on February 26, 2015. This agreement is governed by the National Labor Relations Act, which generally allows either party to engage in self-help upon the expiration of the agreement.
Labor unions periodically engage in organizing efforts to represent various groups of our employees, including at our operating subsidiaries, that are not represented for collective bargaining purposes.
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Executive Officers of the Registrant
Richard H. Anderson, Age 58: Chief Executive Officer of Delta since September 1, 2007; Executive Vice President of UnitedHealth Group and President of its Commercial Services Group (December 2006-August 2007); Executive Vice President of UnitedHealth Group (November 2004-December 2006); Chief Executive Officer of Northwest Airlines Corporation (“Northwest”) (2001-November 2004).
Edward H. Bastian, Age 56: President of Delta since September 1, 2007; President of Delta and Chief Executive Officer Northwest Airlines, Inc. (October 2008-December 2009); President and Chief Financial Officer of Delta (September 2007-October 2008); Executive Vice President and Chief Financial Officer of Delta (July 2005-September 2007); Chief Financial Officer, Acuity Brands (June 2005-July 2005); Senior Vice President-Finance and Controller of Delta (2000-April 2005); Vice President and Controller of Delta (1998-2000).
Michael H. Campbell, Age 65: Executive Vice President-HR & Labor Relations of Delta since October 2008; Executive Vice President-HR, Labor & Communications of Delta (December 2007-October 2008); Executive Vice President-Human Resources and Labor Relations of Delta (July 2006-December 2007); Of Counsel, Ford & Harrison (January 2005-July 2006); Senior Vice President-Human Resources and Labor Relations, Continental Airlines, Inc. (1997-2004); Partner, Ford & Harrison (1978-1996).
Stephen E. Gorman, Age 58: Executive Vice President and Chief Operating Officer of Delta since October 2008; Executive Vice President-Operations of Delta (December 2007-October 2008); President and Chief Executive Officer of Greyhound Lines, Inc. (June 2003-October 2007); President, North America and Executive Vice President Operations Support at Krispy Kreme Doughnuts, Inc. (August 2001-June 2003); Executive Vice President, Technical Operations and Flight Operations of Northwest (February 2001-August 2001), Senior Vice President, Technical Operations of Northwest (January 1999-February 2001) and Vice President, Engine Maintenance Operations of Northwest (April 1996-January 1999).
Glen W. Hauenstein, Age 53: Executive Vice President - Chief Revenue Office of Delta since August 2013; Executive Vice President-Network Planning and Revenue Management of Delta (April 2006 - July 2013); Executive Vice President and Chief of Network and Revenue Management of Delta (August 2005-April 2006); Vice General Director-Chief Commercial Officer and Chief Operating Officer of Alitalia (2003-2005); Senior Vice President-Network of Continental Airlines (2003); Senior Vice President-Scheduling of Continental Airlines (2001- 2003); Vice President Scheduling of Continental Airlines (1998-2001).
Richard B. Hirst, Age 69: Executive Vice President - Chief Legal Officer of Delta since April 2013; Senior Vice President and General Counsel of Delta (October 2008 - April 2013); Senior Vice President-Corporate Affairs and General Counsel of Northwest (March 2008- October 2008); Executive Vice President and Chief Legal Officer of KB Home (March 2004-November 2006); Executive Vice President and General Counsel of Burger King Corporation (March 2001-June 2003); General Counsel of the Minnesota Twins (1999-2000); Senior Vice President-Corporate Affairs of Northwest (1994-1999); Senior Vice President-General Counsel of Northwest (1990-1994); Vice President-General Counsel and Secretary of Continental Airlines (1986-1990).
Paul A. Jacobson, Age 42. Executive Vice President - Chief Financial Officer of Delta since August 2013; Senior Vice President and Chief Financial Officer of Delta (March 2012 - July 2013); Senior Vice President and Treasurer for Delta (December 2007 - March 2012); Vice President and Treasurer (August 2005 - December 2007).
Additional Information
We make available free of charge on our website our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and amendments to those reports as soon as reasonably practicable after these reports are filed with or furnished to the Securities and Exchange Commission. Information on our website is not incorporated into this Form 10-K or our other securities filings and is not a part of those filings.
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ITEM 1A. RISK FACTORS
Risk Factors Relating to Delta
Our business and results of operations are dependent on the price of aircraft fuel. High fuel costs or cost increases, including in the cost of crude oil, could have a materially adverse effect on our operating results.
Our operating results are significantly impacted by changes in the price of aircraft fuel. Fuel prices have increased substantially since the middle part of the last decade and have been extremely volatile during the last several years. In 2013, our average fuel price per gallon was $3.00, an 8% decrease from our average fuel price in 2012. In 2012, our average fuel price per gallon was $3.25, a 6% increase from our average fuel price in 2011. In 2011, our average fuel price per gallon was $3.06, a 31% increase from our average fuel price in 2010, which in turn was significantly higher than fuel prices just a few years earlier. Fuel costs represented 33%, 36% and 36% of our operating expense in 2013, 2012 and 2011, respectively. Volatility in fuel costs has had a significant negative effect on our results of operations and financial condition.
Our ability to pass along the higher fuel costs to our customers may be affected by the competitive nature of the airline industry. Until recently, we often have not been able to increase our fares to offset fully the effect of increases in fuel costs in the past and we may not be able to do so in the future. This is particularly the case when fuel prices increase rapidly. Because passengers often purchase tickets well in advance of their travel, a significant increase in fuel price may result in the fare charged not covering that increase.
We acquire a significant amount of jet fuel from our wholly-owned subsidiary, Monroe, and through strategic agreements that Monroe has with BP and Phillips 66. The cost of the fuel we purchase under these arrangements remains subject to volatility in the cost of crude oil and jet fuel. In addition, we continue to purchase a significant amount of aircraft fuel in addition to what we obtain from Monroe. Our aircraft fuel purchase contracts do not provide material protection against price increases as these contracts typically establish the price based on industry standard market price indices.
Our business and results of operations are also dependent on the availability of aircraft fuel. Significant disruptions in the supply of aircraft fuel, including from our wholly-owned subsidiary, would materially adversely affect our operations and operating results.
We are currently able to obtain adequate supplies of aircraft fuel, but it is impossible to predict the future availability of aircraft fuel. Weather-related events, natural disasters, political disruptions or wars involving oil-producing countries, changes in governmental policy concerning aircraft fuel production, transportation, taxes or marketing, environmental concerns and other unpredictable events may result in crude oil and fuel supply shortages in the future. Shortages in fuel supplies could have negative effects on our results of operations and financial condition.
Because we acquire a large amount of our jet fuel from Monroe, the disruption or interruption of production at the refinery could have an impact on our ability to acquire jet fuel needed for our operations. Disruptions or interruptions of production at the refinery could result from various sources including a major accident or mechanical failure, interruption of supply or delivery of crude oil, work stoppages relating to organized labor issues, or damage from severe weather or other natural or man-made disasters, including acts of terrorism. If the refinery were to experience an interruption in operations, disruptions in fuel supplies could have negative effects on our results of operations and financial condition. In addition, the financial benefits we expect to achieve from buying fuel from Monroe could be materially adversely affected (to the extent not recoverable through insurance) because of lost production and repair costs.
Under a strategic agreement that Monroe has with Phillips 66, Monroe is exchanging non-jet fuel products for jet fuel for use in our airline operations. Monroe is required to deliver specified quantities of non-jet fuel products to Phillips 66 and Phillips 66 is required to deliver specified quantities of jet fuel to us. If either party does not have the specified quantity or type of product available, that party is required to procure any such shortage to fulfill its obligation under the exchange agreements. If the refinery experiences a significant interruption in operations, Monroe may be required to expend substantial amounts to purchase the products it is required to deliver, which could have a material adverse effect on our consolidated financial results of operations.
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In addition, the strategic agreements utilize market prices for the products being exchanged. If Monroe's cost of producing the non-jet fuel products that it is required to deliver under these agreements exceeds the value it receives for those products, the financial benefits we expect to achieve through the ownership of the refinery and our consolidated results of operations could be materially adversely affected.
Our fuel hedging activities are intended to reduce the financial impact from changes in the price of jet fuel. Our obligation to post collateral in connection with our hedge contracts may have a substantial impact on our short-term liquidity.
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 and may have a negative impact on our financial results.
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 decrease 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, which could have a material adverse impact on the level of our unrestricted cash and cash equivalents and short-term investments.
Our funding obligation with respect to defined benefit pension plans we sponsor is significant and can vary materially because of changes in investment asset returns and values.
As of December 31, 2013, our defined benefit pension plans had an estimated benefit obligation of approximately $19.1 billion and were funded through assets with a value of approximately $8.9 billion. The benefit obligation is significantly affected by investment asset returns and changes in interest rates, neither of which is in our control. We estimate that our funding requirement for our defined benefit pension plans, which are governed by ERISA and have been frozen for future accruals, is approximately $675 million in 2014. Estimates of pension plan funding requirements can vary materially from actual funding requirements because the estimates are based on various assumptions concerning factors outside our control, including, among other things, the market performance of assets; statutory requirements; and demographic data for participants, including the number of participants and the rate of participant attrition. Results that vary significantly from our assumptions could have a material impact on our future funding obligations.
Agreements governing our debt, including credit agreements, include financial and other covenants that impose restrictions on our financial and business operations.
Our credit facilities have various financial and other covenants that require us to maintain, depending on the particular agreement, minimum fixed charge coverage ratios, minimum liquidity and/or minimum collateral coverage ratios. The value of the collateral that has been pledged in each facility may change over time, which may be reflected in appraisals of collateral required by our credit agreements and indentures. These changes could result from factors that are not under our control. A decline in the value of collateral could result in a situation where we may not be able to maintain the collateral coverage ratio. In addition, the credit facilities contain other negative covenants customary for such financings. If we fail to comply with these covenants and are unable to obtain a waiver or amendment, an event of default would result. These covenants are subject to important exceptions and qualifications.
The credit facilities also contain other events of default customary for such financings. If an event of default were to occur, the lenders could, among other things, declare outstanding amounts due and payable, and our cash may become restricted. We cannot provide assurance that we would have sufficient liquidity to repay or refinance the borrowings or notes under any of the credit facilities if such amounts were accelerated upon an event of default. In addition, an event of default or declaration of acceleration under any of the credit facilities could also result in an event of default under other of our financing agreements.
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Employee strikes and other labor-related disruptions may adversely affect our operations.
Our business is labor intensive, utilizing large numbers of pilots, flight attendants, aircraft maintenance technicians, ground support personnel and other personnel. As of December 31, 2013, approximately 18% of our workforce was unionized. Relations between air carriers and labor unions in the United States are governed by the Railway Labor Act, which provides that a collective bargaining agreement between an airline and a labor union does not expire, but instead becomes amendable as of a stated date. The Railway Labor Act generally prohibits strikes or other types of self-help actions both before and after a collective bargaining agreement becomes amendable, unless and until the collective bargaining processes required by the Railway Labor Act have been exhausted. Monroe's relations with unions representing its employees are governed by the National Labor Relations Act ("NLRA"), which generally allows self-help after a collective bargaining agreement expires.
If we or our subsidiaries are unable to reach agreement with any of our unionized work groups on future negotiations regarding the terms of their collective bargaining agreements or if additional segments of our workforce become unionized, we may be subject to work interruptions or stoppages, subject to the requirements of the Railway Labor Act or the NLRA, as the case may be. Strikes or labor disputes with our unionized employees may adversely affect our ability to conduct business. Likewise, if third party regional carriers with whom we have contract carrier agreements are unable to reach agreement with their unionized work groups in current or future negotiations regarding the terms of their collective bargaining agreements, those carriers may be subject to work interruptions or stoppages, subject to the requirements of the Railway Labor Act, which could have a negative impact on our operations.
Extended interruptions or disruptions in service at one of our hub or gateway airports could have a material adverse impact on our operations.
Our business is heavily dependent on our operations at the Atlanta airport and at our other hub or gateway airports in Amsterdam, Cincinnati, Detroit, Minneapolis-St. Paul, New York-LaGuardia, New York-JFK, Paris-Charles de Gaulle, Salt Lake City, Seattle and Tokyo-Narita. Each of these operations includes flights that gather and distribute traffic from markets in the geographic region surrounding the hub or gateway to other major cities and to other Delta hubs and gateways. A significant interruption or disruption in service at one of our hubs or gateways could have a serious impact on our business, financial condition and results of operations.
We are dependent on technology in our operations, and if our technology fails or we are unable to continue to invest in new technology, our business may be adversely affected.
We have become increasingly dependent on technology initiatives to reduce costs and to enhance customer service in order to compete in the current business environment. For example, we have made and continue to make significant investments in delta.com, check-in kiosks, mobile device applications and related initiatives. The performance and reliability of the technology are critical to our ability to attract and retain customers and our ability to compete effectively. Because of the rapid pace of new developments, these initiatives will continue to require significant capital investments in our technology infrastructure. If we are unable to make these investments, our business and operations could be negatively affected.
Disruptions or security breaches of our information technology infrastructure could interfere with our operations, compromise customer information and expose us to liability, possibly causing our business and reputation to suffer.
Any internal technology error or failure impacting systems hosted internally at our data centers or externally at third party locations, or large scale external interruption in technology infrastructure we depend on, such as power, telecommunications or the internet, may disrupt our technology network. Any individual, sustained or repeated failure of technology could impact our customer service and result in increased costs. Our technology systems and related data may also be vulnerable to a variety of sources of interruption due to events beyond our control, including natural disasters, terrorist attacks, telecommunications failures, computer viruses, hackers and other security issues. While we have in place, and continue to invest in, technology security initiatives and disaster recovery plans, these measures may not be adequate or implemented properly to prevent a business disruption and its adverse financial and reputational consequences to our business.
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In addition, as a part of our ordinary business operations, we collect and store sensitive data, including personal information of our customers and employees. The secure operation of the networks and systems on which this type of information is stored, processed and maintained is critical to our business operations and strategy. Any compromise of our technology systems resulting from attacks by hackers or breaches due to employee error or malfeasance could result in the loss, disclosure, misappropriation of or access to customers', employees' or business partners' information. Any such loss, disclosure, misappropriation or access could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information, disrupt operations and damage our reputation, any or all of which could adversely affect our business.
Our primary credit card processors have the ability to take significant holdbacks in certain circumstances. The initiation of such holdbacks likely would have a material adverse effect on our liquidity.
Most of the tickets we sell are paid for by customers who use credit cards. Our primary credit card processing agreements provide that no holdback of receivables or reserve is required except in certain circumstances, including if we do not maintain a required level of unrestricted cash. If circumstances were to occur that would allow American Express or our VISA/MasterCard processor to initiate a holdback, the negative impact on our liquidity likely would be material.
We are at risk of losses and adverse publicity stemming from any accident involving our aircraft.
An aircraft crash or other accident could expose us to significant liability. In the event that the insurance that we carry to cover damages arising from future accidents is not adequate, we may be forced to bear substantial losses from an accident. In addition, any accident involving an aircraft that we operate or an aircraft that is operated by an airline that is one of our regional carriers or codeshare partners could create a public perception that our aircraft are not safe or reliable, which could harm our reputation, result in air travelers being reluctant to fly on our aircraft and harm our business.
Our business is subject to the effects of weather and natural disasters and seasonality, which can cause our results to fluctuate.
Our results of operations will reflect fluctuations from weather, natural disasters and seasonality. Severe weather conditions and natural disasters can significantly disrupt service and create air traffic control problems. These events decrease revenue and can also increase costs. In addition, increases in frequency, severity or duration of thunderstorms, hurricanes, typhoons or other severe weather events, including from changes in the global climate, could result in increases in delays and cancellations, turbulence-related injuries, and fuel consumption to avoid such weather, any of which would increase the potential for greater loss of revenue and higher costs. In addition, demand for air travel is typically higher in the June and September quarters, particularly in international markets, because there is more vacation travel during these periods than during the remainder of the year. The seasonal shifting of demand causes our financial results to vary on a seasonal basis. Because of fluctuations in our results from weather, natural disasters and seasonality, operating results for a historical period are not necessarily indicative of operating results for a future period and operating results for an interim period are not necessarily indicative of operating results for an entire year.
An extended disruption in services provided by our third party regional carriers could have a material adverse effect on our results of operations.
We utilize the services of third party providers in a number of areas in support of our operations that are integral to our business, including third party carriers in the Delta Connection program. While we have agreements with these providers that define expected service performance, we do not have direct control over the operations of these carriers. To the extent that a significant disruption in our regional operations occurs because any of these providers are unable to perform their obligations over an extended period of time, our revenue may be reduced or our expenses may be increased resulting in a material adverse effect on our results of operations.
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The failure or inability of insurance to cover a significant liability related to hazards associated with the operation of a refinery by Monroe would have a material adverse effect on our consolidated financial results.
Monroe's refining operations are subject to various hazards unique to refinery operations, including explosions, fires, toxic emissions and natural catastrophes. Monroe's insurance coverage does not cover all potential losses, costs or liabilities and Monroe could suffer losses for uninsurable or uninsured risks or in amounts greater than its insurance coverage. In addition, Monroe's ability to obtain and maintain adequate insurance may be affected by conditions in the insurance market over which it has no control. If Monroe were to incur a significant liability for which it is not fully insured or for which insurance companies do not or are unable to provide coverage, this could have a material adverse effect on our consolidated financial results of operations.
The operation of a refinery by Monroe is subject to significant environmental regulation. Failure to comply with environmental regulations or the enactment of additional regulation could have a negative impact on our consolidated financial results.
Monroe's operations are subject to numerous environmental laws and extensive regulations, including those relating to the discharge of materials into the environment, waste management, pollution prevention measures and greenhouse gas emissions. If Monroe violates or fails to comply with these laws and regulations, Monroe could be fined or otherwise sanctioned, which if significant could have a material adverse effect on our financial results. In addition, the enactment of new environmental laws and regulations, including any laws or regulations relating to greenhouse gas emissions, could significantly increase the level of expenditures required for environmental matters for Monroe.
Under the Energy Independence and Security Act of 2007, the U.S. Environmental Protection Agency (“EPA”) has adopted Renewable Fuel Standards (“RFS”) that mandate the blending of renewable fuels into gasoline and on-road diesel ("Transportation Fuels"). Renewable Identification Numbers (“RINs”) are assigned to renewable fuels produced or imported into the U.S. that are blended into Transportation Fuels to demonstrate compliance with this obligation. A refinery may meet its obligation under RFS by blending the necessary volumes of renewable fuels with Transportation Fuels or by purchasing RINs in the open market or through a combination of blending and purchasing RINs.
Because the refinery operated by Monroe does not blend renewable fuels, it must purchase its entire RINs requirement in the secondary market or obtain a waiver from the EPA. Monroe is exposed to the market price of RINs. Market prices for RINs have recently become volatile and increased significantly during 2013 before returning to more moderate levels. We cannot predict the future prices of RINs. Purchasing RINs at elevated prices could have a material impact on our results of operations and cash flows.
Existing laws or regulations could change and the minimum volumes of renewable fuels that must be blended with refined petroleum products may increase. Increases in the volume of renewable fuels that must be blended into Monroe's products could limit the refinery's production if sufficient numbers of RINs are not available for purchase or relief from this requirement is not obtained, which could have an adverse effect on our consolidated financial results.
If we experience losses of senior management personnel and other key employees, our operating results could be adversely affected.
We are dependent on the experience and industry knowledge of our officers and other key employees to execute our business plans. If we experience a substantial turnover in our leadership and other key employees, and these persons are not replaced by individuals with equal or greater skills, our performance could be materially adversely impacted. Furthermore, we may be unable to attract and retain additional qualified executives as needed in the future.
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Risk Factors Relating to the Airline Industry
The airline industry is highly competitive and, if we cannot successfully compete in the marketplace, our business, financial condition and operating results will be materially adversely affected.
The airline industry is highly competitive, marked by significant competition with respect to routes, fares, schedules (both timing and frequency), services, products, customer service and frequent flyer programs. Our domestic operations are subject to competition from both traditional network and discount carriers, some of which may have lower costs than we do and provide service at low fares to destinations served by us. In particular, we face significant competition at our domestic hub and gateway airports in Atlanta, Cincinnati, Detroit, Minneapolis-St. Paul, New York-LaGuardia, New York-JFK, Salt Lake City and Seattle either directly at those airports or at the hubs of other airlines that are located in close proximity to our hubs and gateways. We also face competition in smaller to medium-sized markets from regional jet operations of other carriers.
Discount carriers, including Southwest, JetBlue, Spirit and Allegiant have placed significant competitive pressure on us in the United States and on other network carriers in the domestic market. In addition, network carriers have also significantly reduced their costs over the last several years through restructuring and bankruptcy reorganization. Our ability to compete effectively depends, in part, on our ability to maintain a competitive cost structure. If we cannot maintain our costs at a competitive level, then our business, financial condition and operating results could be materially adversely affected.
Our international operations are subject to competition from both domestic and foreign carriers. Through alliance and other marketing and codesharing agreements with foreign carriers, U.S. carriers have increased their ability to sell international transportation, such as services to and beyond traditional European and Asian gateway cities. Similarly, foreign carriers have obtained increased access to interior U.S. passenger traffic beyond traditional U.S. gateway cities through these relationships. In particular, alliances formed by domestic and foreign carriers, including SkyTeam, the Star Alliance (among United, Lufthansa German Airlines, Air Canada and others) and the oneworld alliance (among American Airlines, British Airways, Qantas and others) have significantly increased competition in international markets.
Increased competition has also emerged from well-funded carriers in the Gulf region, including Emirates, Etihad and Qatar. These carriers have large numbers of international widebody aircraft on order and are increasing service to the United States from their hubs in the Middle East. Several of these carriers, along with carriers from China, India and Latin America, are government supported or funded, which has allowed them to grow quickly, reinvest in their product and expand their global presence at the expense of U.S. airlines. In addition, the adoption of liberalized Open Skies Aviation Agreements with an increasing number of countries around the world, including in particular the Open Skies Treaties that the U.S. has with the Member States of the European Union and Japan, could significantly increase competition among carriers serving those markets.
Several joint ventures among U.S. and foreign carriers, including our transatlantic and transpacific joint ventures, have received grants of antitrust immunity allowing the participating carriers to coordinate schedules, pricing, sales and inventory. Other joint ventures that have received anti-trust immunity include a transatlantic alliance among United, Air Canada and Lufthansa, a transpacific joint venture among United and All Nippon Airways, a transatlantic joint venture among American Airlines, British Airways and Iberia and a transpacific joint venture between American Airlines and Japan Air Lines.
Consolidation in the domestic airline industry, changes in international alliances and the rise of well-funded government sponsored international carriers have altered and will continue to alter the competitive landscape in the industry by resulting in the formation of airlines and alliances with increased financial resources, more extensive global networks and altered cost structures.
The airline industry is subject to extensive government regulation, and new regulations may increase our operating costs.
Airlines are subject to extensive regulatory and legal compliance requirements that result in significant costs. For instance, the FAA from time to time issues directives and other regulations relating to the maintenance and operation of aircraft that necessitate significant expenditures. We expect to continue incurring expenses to comply with the FAA's regulations.
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Other laws, regulations, taxes and airport rates and charges have also been imposed from time to time that significantly increase the cost of airline operations or reduce revenues. The industry is heavily taxed. For example, the Aviation and Transportation Security Act mandates the federalization of certain airport security procedures and imposes security requirements on airports and airlines, most of which are funded by a per ticket tax on passengers and a tax on airlines. The federal government has adopted a significant increase in the per ticket tax effective in July 2014 and has recently proposed additional fees. The ticket tax increase and additional taxes and fees, if implemented, could negatively impact our results of operations.
Proposals to address congestion issues at certain airports or in certain airspace, particularly in the Northeast United States, have included concepts such as “congestion-based” landing fees, “slot auctions” or other alternatives that could impose a significant cost on the airlines operating in those airports or airspace and impact the ability of those airlines to respond to competitive actions by other airlines. In addition, the failure of the federal government to upgrade the U.S. air traffic control system has resulted in delays and disruptions of air traffic during peak travel periods in certain congested markets. The failure to improve the air traffic control system could lead to increased delays and inefficiencies in flight operations as demand for U.S. air travel increases, having a material adverse effect on our operations. Failure to update the air traffic control system in a timely manner, and the substantial funding requirements of an updated system that may be imposed on air carriers, may have an adverse impact on our financial condition and results of operations.
Events related to extreme weather delays caused the Department of Transportation to promulgate regulations imposing potentially severe financial penalties upon airlines that have flights experiencing extended tarmac delays. These regulations could have a negative impact on our operations in certain circumstances.
Future regulatory action concerning climate change, aircraft emissions and noise emissions could have a significant effect on the airline industry. For example, the European Commission adopted an emissions trading scheme applicable to all flights operating in the European Union, including flights to and from the United States. While enforcement of the scheme has been deferred until April 2014, if fully implemented, we expect that this system would impose additional costs on our operations in the European Union. Other laws or regulations such as this emissions trading scheme or other U.S. or foreign governmental actions may adversely affect our operations and financial results, either through direct costs in our operations or through increases in costs for jet fuel that could result from jet fuel suppliers passing on increased costs that they incur under such a system.
We and other U.S. carriers are subject to domestic and foreign laws regarding privacy of passenger and employee data that are not consistent in all countries in which we operate. In addition to the heightened level of concern regarding privacy of passenger data in the United States, certain European government agencies are initiating inquiries into airline privacy practices. Compliance with these regulatory regimes is expected to result in additional operating costs and could impact our operations and any future expansion. In addition, a security breach in which passenger or employee data is exposed could result in disruption to our operations, damage to our reputation and significant costs.
Terrorist attacks or international hostilities may adversely affect our business, financial condition and operating results.
The terrorist attacks of September 11, 2001 caused fundamental and permanent changes in the airline industry, including substantial revenue declines and cost increases, which resulted in industry-wide liquidity issues. Potential terrorist attacks or security breaches or fear of such events, even if not made directly on the airline industry, could negatively affect us and the airline industry. The potential negative effects include increased security (including as a result of our global operations), insurance and other costs and lost revenue from increased ticket refunds and decreased ticket sales. Our financial resources might not be sufficient to absorb the adverse effects of any further terrorist attacks or other international hostilities involving the United States.
The rapid spread of contagious illnesses can have a material adverse effect on our business and results of operations.
The rapid spread of a contagious illness can have a material adverse effect on the demand for worldwide air travel and therefore have a material adverse effect on our business and results of operations. Moreover, our operations could be negatively affected if employees are quarantined as the result of exposure to a contagious illness. Similarly, travel restrictions or operational problems resulting from the rapid spread of contagious illnesses in any part of the world in which we operate may have a materially adverse impact on our business and results of operations.
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Reductions in coverage or lack of access to war risk insurance coverage could have a material adverse impact on our business and operating results.
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. 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, 2014, 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. 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 or, may result in a material increase to our operating expense.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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ITEM 2. PROPERTIES
Flight Equipment
Our operating aircraft fleet, commitments and options at December 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) | Lease | Options |
B-717-200 | — | 4 | 9 | 13 | 12.1 | — | 75 | — |
B-737-700 | 10 | — | — | 10 | 4.9 | — | — | — |
B-737-800 | 73 | — | — | 73 | 12.9 | — | — | — |
B-737-900ER | 12 | — | — | 12 | 0.1 | 88 | — | 30 |
B-747-400 | 4 | 9 | 3 | 16 | 20.1 | — | — | — |
B-757-200 | 100 | 20 | 18 | 138 | 19.7 | — | — | — |
B-757-300 | 16 | — | — | 16 | 10.8 | — | — | — |
B-767-300 | 10 | 2 | 4 | 16 | 22.9 | — | — | — |
B-767-300ER | 51 | 5 | 2 | 58 | 17.8 | — | — | 2 |
B-767-400ER | 21 | — | — | 21 | 12.8 | — | — | 4 |
B-777-200ER | 8 | — | — | 8 | 13.9 | — | — | — |
B-777-200LR | 10 | — | — | 10 | 4.8 | — | — | 6 |
B-787-8 | — | — | — | — | — | 18 | — | — |
A319-100 | 55 | — | 2 | 57 | 11.9 | — | — | — |
A320-200 | 50 | — | 19 | 69 | 18.8 | — | — | — |
A321-200 | — | — | — | — | — | 30 | — | — |
A330-200 | 11 | — | — | 11 | 8.8 | — | — | — |
A330-300 | 21 | — | — | 21 | 8.4 | 10 | — | — |
MD-88 | 71 | 46 | — | 117 | 23.5 | — | — | — |
MD-90 | 57 | 8 | — | 65 | 16.7 | — | — | — |
DC9-50 | 12 | — | — | 12 | 34.9 | — | — | — |
Total | 592 | 94 | 57 | 743 | 17.1 | 146 | 75 | 42 |
(1) | Excludes certain aircraft we own or lease which are operated by regional carriers on our behalf shown in the table below. |
(2) | Our purchase commitment for 18 B-787-8 aircraft provides for certain aircraft substitution rights. |
(3) | In addition, we have purchase commitments for 28 CRJ-900 aircraft and options for 24 CRJ-900 aircraft and 27 Embraer 175 aircraft that will be operated by our regional carriers. |
The following table summarizes the aircraft fleet operated by our regional carriers on our behalf at December 31, 2013:
Fleet Type | |||||||
Carrier | CRJ-200 | CRJ-700 | CRJ-900 | ERJ-145 | Embraer 170 | Embraer 175 | Total |
Endeavor Airlines, Inc.(1) | 116 | — | 53 | — | — | — | 169 |
ExpressJet Airlines, Inc. | 62 | 41 | 28 | — | — | — | 131 |
SkyWest Airlines, Inc. | 46 | 19 | 32 | — | — | — | 97 |
Compass Airlines, Inc. | — | — | — | — | 6 | 36 | 42 |
Chautauqua Airlines, Inc. | — | — | — | 41 | — | — | 41 |
Shuttle America Corporation | — | — | — | — | 14 | 16 | 30 |
GoJet Airlines, LLC | — | 22 | — | — | — | — | 22 |
Total | 224 | 82 | 113 | 41 | 20 | 52 | 532 |
(1) | Endeavor Airlines, Inc. is one of our wholly-owned subsidiaries. |
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Aircraft Purchase Commitments
Our purchase commitments for additional aircraft at December 31, 2013 are detailed in the following table:
Delivery in Calendar Years Ending | |||||
Aircraft Purchase Commitments | 2014 | 2015 | 2016 | After 2016 | Total |
B-737-900ER | 19 | 19 | 19 | 31 | 88 |
A321-200 | — | — | 15 | 15 | 30 |
B-787-8 | — | — | — | 18 | 18 |
CRJ-900 | 28 | — | — | — | 28 |
A330-300 | — | 4 | 4 | 2 | 10 |
Total | 47 | 23 | 38 | 66 | 174 |
Aircraft Options
Our options to purchase additional aircraft at December 31, 2013 are detailed in the following table:
Delivery in Calendar Years Ending | |||||
Aircraft Options | 2014 | 2015 | 2016 | After 2016 | Total |
B-737-900ER | — | 5 | 6 | 19 | 30 |
B-767-300ER | — | — | 1 | 1 | 2 |
B-767-400ER | — | 1 | 2 | 1 | 4 |
B-777-200LR | — | 2 | 4 | — | 6 |
CRJ-900 | — | 18 | 6 | — | 24 |
Embraer 175 | — | 9 | 18 | — | 27 |
Total | — | 35 | 37 | 21 | 93 |
Ground Facilities
Airline Operations
We lease most of the land and buildings that we occupy. Our largest aircraft maintenance base, various computer, cargo, flight kitchen and training facilities and most of our principal offices are located at or near the Atlanta airport, on land leased from the City of Atlanta. We own our Atlanta reservations center, other real property in Atlanta, former headquarters and flight training buildings, which are located near the Minneapolis-St. Paul International Airport, and reservations centers in Minot, North Dakota and Chisholm, Minnesota. We also own property in Tokyo, including a 1.3-acre site in downtown Tokyo and a 33-acre land parcel, 512-room hotel and flight kitchen located near Tokyo's Narita International Airport.
We lease ticket counter and other terminal space, operating areas and air cargo facilities in most of the airports that we serve. At most airports, we have entered into use agreements which provide for the non-exclusive use of runways, taxiways and other improvements and facilities; landing fees under these agreements normally are based on the number of landings and weight of aircraft. These leases and use agreements generally run for periods of less than one year to 30 years or more, and often contain provisions for periodic adjustments of lease rates, landing fees and other charges applicable under that type of agreement. We also lease aircraft maintenance facilities and air cargo facilities at several domestic airports. Our aircraft maintenance facility leases generally require us to pay the cost of providing, operating and maintaining such facilities, including, in some cases, amounts necessary to pay debt service on special facility bonds issued to finance their construction. We also lease marketing, ticketing and reservations offices in certain locations for varying terms.
Refinery Operations
Our wholly-owned subsidiaries, Monroe and MIPC, own and operate the Trainer refinery and related assets in Pennsylvania. The facility includes pipelines and terminal assets that allow the refinery to supply jet fuel to our airline operations throughout the Northeastern U.S., including our New York hubs at LaGuardia and JFK.
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ITEM 3. LEGAL PROCEEDINGS
First Bag Fee Antitrust Litigation
In May, June and July, 2009, a number of purported class action antitrust lawsuits were filed in the U.S. District Courts for the Northern District of Georgia, the Middle District of Florida and the District of Nevada against Delta and AirTran Airways (“AirTran”). In these cases, the plaintiffs originally alleged that Delta and AirTran engaged in collusive behavior in violation of Section 1 of the Sherman Act in November 2008 based upon certain public statements made in October 2008 by AirTran's CEO at an analyst conference concerning fees for the first checked bag, Delta's imposition of a fee for the first checked bag on November 4, 2008 and AirTran's imposition of a similar fee on November 12, 2008. The plaintiffs sought to assert claims on behalf of an alleged class consisting of passengers who paid the first bag fee after December 5, 2008 and seek injunctive relief and unspecified treble damages. All of these cases have been consolidated for pre-trial proceedings in the Northern District of Georgia by the Multi-District Litigation (“MDL”) Panel.
In February 2010, the plaintiffs in the MDL proceeding filed a consolidated amended class action complaint which substantially expanded the scope of the original complaint. In the consolidated amended complaint, the plaintiffs added new allegations concerning alleged signaling by both Delta and AirTran based upon statements made to the investment community by both carriers relating to industry capacity levels during 2008-2009. The plaintiffs also added a new cause of action against Delta alleging attempted monopolization in violation of Section 2 of the Sherman Act, paralleling a claim previously asserted against AirTran but not Delta.
In August 2010, the District Court issued an order granting Delta's motion to dismiss the Section 2 claim, but denying its motion to dismiss the Section 1 claim. Plaintiffs have filed a motion to certify the Section 1 class, which remains pending. Delta believes the claims in these cases are without merit and is vigorously defending these lawsuits.
EU Regulation 261 Class Action Litigation
In February 2011, a putative class action was filed in the U.S. District Court for the Northern District of Illinois seeking to represent all US residents who were passengers on flights during the period from February 2009 to the present who are allegedly entitled to compensation under EU Regulation 261 because their flight was cancelled or delayed by more than 3 hours. Plaintiffs allege that Delta has incorporated a duty to pay this compensation into its contract of carriage, and assert a claim for breach of contract as the basis for their cause of action. The complaint seeks recovery of the EU Regulation 261 compensation of €600 for each US resident on a flight qualifying for such compensation. In October 2013, the District Court granted Delta’s motion to dismiss all claims with prejudice. The plaintiffs have filed an appeal to the U.S. Court of Appeals for the Seventh Circuit, which remains pending. Delta disputes the allegations in the Complaint and intends to vigorously defend the matter.
***
For a discussion of certain environmental matters, see “Business-Regulatory Matters-Environmental Matters” in Item 1.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is listed on the New York Stock Exchange. The following table sets forth for the periods indicated the highest and lowest sales price for our common stock as reported on the NYSE and dividends declared during these periods.
Common Stock | Cash Dividends Declared (per share) | ||||||||
High | Low | ||||||||
Fiscal 2013 | |||||||||
Fourth Quarter | $ | 29.44 | $ | 23.63 | $0.06 | ||||
Third Quarter | $ | 24.10 | $ | 18.30 | $0.06 | ||||
Second Quarter | $ | 19.43 | $ | 13.94 | -- | ||||
First Quarter | $ | 17.25 | $ | 11.97 | -- | ||||
Fiscal 2012 | |||||||||
Fourth Quarter | $ | 12.05 | $ | 9.11 | -- | ||||
Third Quarter | $ | 11.25 | $ | 8.42 | -- | ||||
Second Quarter | $ | 12.25 | $ | 9.78 | -- | ||||
First Quarter | $ | 11.58 | $ | 7.83 | -- | ||||
Holders
As of January 31, 2014, there were approximately 3,390 holders of record of our common stock.
Dividends
In 2013, our Board of Directors initiated a quarterly dividend program and declared a $0.06 per share dividend for shareholders of record as of August 9, 2013 and November 6, 2013, which were paid in September and November 2013 respectively. The Board did not declare any other dividends in the last two fiscal years. Our ability to pay future dividends is subject to compliance with covenants in several of our credit facilities. In addition, any future determination to pay cash dividends will be at the discretion of the Board of Directors, subject to applicable limitations under Delaware law, and will be dependent upon our results of operations, financial condition, cash requirements, future prospects and other factors deemed relevant by the Board of Directors.
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Stock Performance Graph
The following graph compares the cumulative total returns during the period from January 1, 2009 to December 31, 2013 of our common stock to the Standard & Poor's 500 Stock Index and the Amex Airline Index. The comparison assumes $100 was invested on January 1, 2009 in each of our common stock and the indices and assumes that all dividends were reinvested.
Issuer Purchases of Equity Securities
The following table presents information with respect to purchases of common stock we made during the December 2013 quarter. The total number of shares purchased includes shares repurchased pursuant to our $500 million share repurchase program, which was publicly announced on May 8, 2013 (the "2013 Repurchase Program"). The 2013 Repurchase Program will terminate no later than June 2016.
In addition, the table includes shares 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. The shares of common stock withheld to satisfy tax withholding obligations 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 | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value (in millions) of Shares That May Yet Be Purchased Under the Plan or Programs | ||
October 2013 | 1,138,700 | $25.54 | 1,138,700 | $378 | ||
November 2013 | 4,627,552 | $27.56 | 4,627,552 | $252 | ||
December 2013 | 95,000 | $29.01 | 95,000 | $250 | ||
Total | 5,861,252 | 5,861,252 | ||||
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ITEM 6. SELECTED FINANCIAL DATA
The following tables are derived from our audited consolidated financial statements, and present selected financial and operating data for the years ended December 31, 2013, 2012, 2011, 2010 and 2009.
Consolidated Summary of Operations
Year Ended December 31, | |||||||||||||||
(in millions, except share data) | 2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||
Operating revenue | $ | 37,773 | $ | 36,670 | $ | 35,115 | $ | 31,755 | $ | 28,063 | |||||
Operating expense | 34,373 | 34,495 | 33,140 | 29,538 | 28,387 | ||||||||||
Operating income (loss) | 3,400 | 2,175 | 1,975 | 2,217 | (324 | ) | |||||||||
Other expense, net | (873 | ) | (1,150 | ) | (1,206 | ) | (1,609 | ) | (1,257 | ) | |||||
Income (loss) before income taxes | 2,527 | 1,025 | 769 | 608 | (1,581 | ) | |||||||||
Income tax benefit (provision) | 8,013 | (16 | ) | 85 | (15 | ) | 344 | ||||||||
Net income (loss) | $ | 10,540 | $ | 1,009 | $ | 854 | $ | 593 | $ | (1,237 | ) | ||||
Basic earnings (loss) per share | $ | 12.41 | $ | 1.20 | $ | 1.02 | $ | 0.71 | $ | (1.50 | ) | ||||
Diluted earnings (loss) per share | $ | 12.29 | $ | 1.19 | $ | 1.01 | $ | 0.70 | $ | (1.50 | ) | ||||
The following are included in the results above:
Year Ended December 31, | |||||||||||||||
(in millions) | 2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||
Release of tax valuation allowance and intraperiod income tax allocation | $ | (7,989 | ) | $ | — | $ | — | $ | — | $ | (321 | ) | |||
MTM adjustments | (276 | ) | (27 | ) | 26 | — | — | ||||||||
Severance, impairment charges and other | 424 | 452 | 242 | 227 | 132 | ||||||||||
Loss on extinguishment of debt | — | 118 | 68 | 391 | 83 | ||||||||||
Merger-related items | — | — | — | 233 | 275 | ||||||||||
Total | $ | (7,841 | ) | $ | 543 | $ | 336 | $ | 851 | $ | 169 | ||||
Other Financial and Statistical Data (Unaudited)
Year Ended December 31, | |||||||||||||||
Consolidated(1) | 2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||
Revenue passenger miles (millions) | 194,988 | 192,974 | 192,767 | 193,169 | 188,943 | ||||||||||
Available seat miles (millions) | 232,740 | 230,415 | 234,656 | 232,684 | 230,331 | ||||||||||
Passenger mile yield | 16.89 | ¢ | 16.46 | ¢ | 15.70 | ¢ | 14.11 | ¢ | 12.60 | ¢ | |||||
Passenger revenue per available seat mile | 14.15 | ¢ | 13.78 | ¢ | 12.89 | ¢ | 11.71 | ¢ | 10.34 | ¢ | |||||
Operating cost per available seat mile | 14.77 | ¢ | 14.97 | ¢ | 14.12 | ¢ | 12.69 | ¢ | 12.32 | ¢ | |||||
Passenger load factor | 83.8 | % | 83.8 | % | 82.1 | % | 83.0 | % | 82.0 | % | |||||
Fuel gallons consumed (millions) | 3,828 | 3,769 | 3,856 | 3,823 | 3,853 | ||||||||||
Average price per fuel gallon(2) | $ | 3.00 | $ | 3.25 | $ | 3.06 | $ | 2.33 | $ | 2.15 | |||||
Average price per fuel gallon, adjusted(3) | $ | 3.07 | $ | 3.26 | $ | 3.05 | $ | 2.33 | $ | 2.15 | |||||
Full-time equivalent employees, end of period | 77,755 | 73,561 | 78,392 | 79,684 | 81,106 | ||||||||||
(1) | Includes the operations of our regional carriers under capacity purchase agreements. Full-time equivalent employees exclude employees of regional carriers that we do not own. |
(2) | Includes the impact of fuel hedge activity. |
(3) | Non-GAAP financial measure defined and reconciled in "Operating Expense" sections of Results of Operations - 2013 compared to 2012 and 2012 compared to 2011. |
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December 31, | |||||||||||||||
(in millions) | 2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||
Total assets | $ | 52,252 | $ | 44,550 | $ | 43,499 | $ | 43,188 | $ | 43,789 | |||||
Long-term debt and capital leases (including current maturities) | $ | 11,342 | $ | 12,709 | $ | 13,791 | $ | 15,252 | $ | 17,198 | |||||
Stockholders' equity (deficit) | $ | 11,643 | $ | (2,131 | ) | $ | (1,396 | ) | $ | 897 | $ | 245 | |||
Common stock outstanding | 851 | 851 | 845 | 835 | 784 | ||||||||||
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Highlights - 2013 Compared to 2012
Our net income for 2013 was $10.5 billion, which reflects $8.0 billion of income tax benefits primarily due to the release of the tax valuation allowance. Income before income taxes was $2.5 billion, representing a $1.5 billion improvement over prior year. Our pre-tax operating margin rose by 4 percentage points to 7% on both higher revenues and lower costs.
2013 was a successful year for Delta based on several measures. Our pre-tax profits were 147% higher than the prior year. Our operating performance led the industry, driving customer satisfaction and doubling our domestic net promoter scores, a metric measuring customer satisfaction. Our completion factor was 99.7% with over 70 days where none of our flights were canceled. We ranked number two in the industry for bag performance as measured by the U.S. Department of Transportation. During the year, we returned over $350 million to our shareholders through dividends and a share purchase program. We also rejoined the Standard & Poor's 500 index of large companies.
Revenue. Our passenger revenue increased $1.2 billion, despite a lower market price of fuel. We experienced positive market reaction to our first class upsell and Economy Comfort products. Our customers value these products, which together contributed more than $600 million in revenues. Our geographic regions performed well compared to the prior year, with the domestic region leading year-over-year unit revenue improvement. Unit revenues of the domestic region rose by over 5% with notable improvements in the New York market. New York unit revenues increased as we continue to see improvements due to our investments in JFK and LaGuardia, as well as many in-flight product enhancements. Revenues related to our international regions were generally flat year-over-year, with slight unit revenue improvements in both Atlantic and Latin America regions. Our Pacific region experienced a slight decline in unit revenues primarily due to the Yen devaluation.
Operating Expense. Total operating expense decreased $122 million from 2012. As a result, our consolidated operating cost per available seat mile ("CASM") for 2013 decreased 1% to 14.77 cents from 14.97 cents in 2012, on a 1% increase in capacity. CASM-Ex (a non-GAAP financial measure) was 9.14 cents in 2013, or 2% higher than 2012.
Changes in our total operating expenses reflect decreased fuel expense offset by higher salaries and related costs and profit sharing. Fuel expense for 2013 was $11.5 billion, including regional carriers; our average price per gallon was $3.00, which was $0.25 lower than 2012. Our average price per gallon, adjusted was $3.07 (a non-GAAP financial measure), which was $0.19 lower than 2012. Our fuel cost includes net airline segment fuel hedge gains for the year of $444 million, and a loss on refinery operations of $116 million, or $0.03 per gallon. The higher salaries expense represents wage increases and shows the continued investment we are making in our employees. Delta relies on its employees for its operational and financial success. As a result of our success in 2013, we will pay our employees record profit sharing of $506 million, which represents over 8% of an employee's annual pay, and is a 36% year-over-year increase.
Income Tax. We have released the tax valuation allowance that placed a reserve against certain tax assets. We now believe that, given the company's financial performance, we will be able to use these tax assets to offset future cash income tax liabilities. We recognized an $8.0 billion tax benefit primarily as a result of releasing the valuation, which was recorded in income tax benefit (provision) in our Consolidated Statement of Operations. Beginning in 2014, we expect to record income tax expense with an effective rate of approximately 38%. As of December 31, 2013, we have more than $15 billion of net operating loss carryforwards ("NOLs") that will be used to offset cash income taxes due on future earnings.
The non-GAAP financial measure CASM-Ex used in this section is defined and reconciled in "Supplemental Information" below. Average fuel price per gallon, adjusted is defined and reconciled in "Results of Operations - Year Ended 2013 and 2012 - Operating Expense" below.
Company Initiatives
Increasing Shareholder Value
We continue to focus on cash flow generation with the goal of further strengthening our balance sheet. We finished 2013 with $5.7 billion in unrestricted liquidity (consisting of cash, cash equivalents, short-term investments and undrawn revolving credit facility capacity). During 2013, we generated $4.5 billion in cash from operating activities, reduced debt by $1.4 billion and funded capital expenditures of $2.6 billion and returned $350 million to shareholders, while maintaining a solid liquidity position.
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In May 2013, we announced a plan to return more than $1 billion to shareholders over the next three years. As part of this plan, our Board of Directors initiated a quarterly dividend program and declared a $0.06 per share dividend for shareholders of record as of August 9, 2013 and November 6, 2013. These dividends were paid in September 2013 and November 2013 and each totaled $51 million. In addition, the Board of Directors authorized a $500 million share repurchase program, to be completed no later than June 30, 2016. During 2013, we repurchased and retired approximately 10 million shares at a cost of approximately $250 million. On February 7, 2014, our Board of Directors declared a $0.06 dividend for shareholders of record on February 21, 2014 and payable on March 14, 2014.
Network Strategy
We are implementing several strategies that are designed to strengthen and expand our global network and presence. These include our investment in and joint venture with Virgin Atlantic, improvements at our hubs at LaGuardia and JFK in New York and the creation of an international gateway in Seattle.
Virgin Atlantic Investment. In 2013, we purchased a 49% interest in Virgin Atlantic from Singapore Airlines for $360 million. We also entered into an agreement with Virgin Atlantic with respect to operations on non-stop routes between the United Kingdom and North America. In September 2013, the U.S. Department of Transportation granted antitrust immunity on these routes.The antitrust immunized relationship allows for joint marketing and sales, coordinated pricing and revenue management, network planning and scheduling with respect to operations on routes between North America and the United Kingdom. Virgin Atlantic has a significant presence at London's Heathrow airport, the airport of choice for business travelers traveling to and from London. Along with our state of the art facility at JFK, we believe our relationship with Virgin Atlantic will provide our customers with superior service and connectivity between New York and London. Beginning January 1, 2014, we began working under the immunized relationship and published our first coordinated schedule that becomes effective April 2014.
LaGuardia. During December 2011, we closed transactions with US Airways in which we received takeoff and landing rights (each a "slot pair") at LaGuardia in exchange for slot pairs at Reagan National. This exchange allowed us to create a new domestic hub at LaGuardia. We have increased capacity at LaGuardia by approximately 50% since March 2012, adding 123 new flights and a total of 31 new destinations. We currently operate about 277 daily flights between LaGuardia and 65 cities, more than any other airline.
We are investing approximately $200 million in a renovation and expansion project at LaGuardia to enhance the customer experience. In 2012, we opened the connector linking Terminals C and D and a new SkyClub in Terminal C. We are also expanding security lanes and a baggage handling system in both terminals as well as an enhanced 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 and undertaking a redevelopment project at JFK to facilitate convenient connections for our passengers and improve coordination with our SkyTeam alliance partners. Prior to beginning the redevelopment project, we primarily operated domestic flights out of Terminal 2 and international flights out of Terminal 3. Our initial five-year project to expand and enhance Terminal 4, which began in 2010, is on schedule. We have constructed nine new international gates in Terminal 4, which opened in 2013. We have relocated our operations from Terminal 3 to our newly constructed facilities at Terminal 4 and have begun the demolition of Terminal 3. During 2013, we announced plans for an additional $180 million expansion project that will add 11 more gates at Terminal 4. With the additional expansion, we will relocate our regional jet operations from Terminal 2 to Terminal 4. We expect that passengers will benefit from an enhanced customer experience and improved operational performance, including reduced taxi times and better on-time performance.
Seattle International Gateway Expansion. Seattle is one of Delta’s fastest-growing international gateways. We have recently expanded service in Seattle, with additional frequencies and destinations, both domestically and internationally. We have invested in our facilities, including a renovated lobby, a new Delta SkyClub and many other customer enhancements. By expanding in Seattle, we will have improved service for our local customers and increased connection into Asia.
Maintaining Cost Performance
Beginning in 2012, we implemented a cost initiatives program, which is expected to stem the rate of cost growth to less than 2% cost inflation annually. These initiatives are designed to improve our cost efficiency while maintaining our operational performance and revenue generation. An important component is the fleet restructuring initiative to retire older, less efficient aircraft from our fleet.
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Fleet Restructuring
Fleet restructuring is an important component of our 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. Agreements with SkyWest Airlines, Inc. and Bombardier Aerospace, as well as our acquisition of Endeavor, 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.
• | 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 began in September 2013, with a total of 13 aircraft delivered in 2013, 39 aircraft deliveries expected in 2014 and 36 aircraft deliveries expected in 2015. These B-717-200 aircraft are 110-seat aircraft and 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 took delivery of the first B-737-900ER aircraft in September 2013 and will continue adding these aircraft to our fleet through 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. |
In addition, we entered into an agreement in September 2013 with Airbus to purchase 10 international capable widebody A330-300 and 30 large narrowbody A321-200 aircraft expected to serve domestic markets. Delivery of the first A330-300 aircraft is expected to occur in spring 2015, with three additional A330-300 aircraft expected to be delivered in 2015, four aircraft in 2016 and two in 2017. Delivery of three A321-200 aircraft are scheduled for the first quarter of 2016, with 12 additional aircraft expected to be delivered later in 2016 and 15 in 2017.
As mentioned above, an important component of the fleet restructuring initiative is to reduce 50-seat CRJ aircraft, which are our least fuel efficient aircraft and have the lowest customer satisfaction ratings. We are targeting a fleet size of 100 to 125 aircraft within the next two years. Our current fleet includes aircraft we lease and aircraft that are operated for us by regional carriers that own or lease aircraft through third parties. As part of the reduction, we will retire a significant portion of the fleet that is leased by us. We expect to continue to recognize material restructuring charges, representing the remaining obligations under the leases, as we retire the leased aircraft. Although many factors could change over the next two years, we currently estimate that future charges will be between $200 million to $300 million, in addition to the $107 million recorded in 2013. 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 the ultimate disposition of aircraft included in the fleet restructuring program. Also, to accelerate the restructuring of the fleet, we may park a portion of the fleet on a temporary basis until contracts for aircraft flying under contract carrier agreements expire. The temporarily parked aircraft will be returned to service as aircraft flying under these expiring agreements exit the fleet. We will continue to incur operating lease expense for these temporarily parked aircraft. As a result of restructuring the fleet, we expect to benefit from improved operational and fuel efficiency, customer service and reduced future maintenance cost that we will experience over the life of the new aircraft.
Fuel Expense, including refinery results
Fuel Expense. Fuel expense is our largest expense, representing 33% of total operating expenses. For 2013, our total fuel expense decreased $787 million (including our regional carriers under capacity purchase agreements) compared to 2012. This decrease is primarily due to reduced market jet fuel prices and an increase in gains from our hedging activities. Excluding mark-to-market adjustments on hedges recorded in periods other than the settlement period ("MTM adjustments"), our fuel price per gallon, adjusted (a non-GAAP financial measure) for 2013 was $3.07 per gallon, compared to $3.26 per gallon in 2012.
The market volatility of jet fuel prices greatly impacts our fuel costs. We manage our fuel cost through three primary methods: purchase agreements, fuel hedging and the operation of a refinery.
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Fuel Purchase Cost. The market price per gallon of jet fuel decreased 4%, compared to 2012, which lowered our purchase cost of fuel. This decrease was partially offset by a 2% increase in consumption on higher capacity.
Fuel Hedging Program Impact. 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. During 2013, our consolidated fuel hedge gain was $493 million. This hedge gain included $276 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.
Refinery Segment Impact. Global jet fuel demand continues to increase. While the advent of shale oil production in the U.S. has reduced the threat of U.S. refinery closures beyond those that have already closed, further capacity reduction is expected in Europe, thus impacting supply in the Atlantic Basin and ultimately increasing refinery margins in the U.S. Our wholly-owned subsidiaries, Monroe Energy, LLC and MIPC, LLC (collectively, “Monroe”), operate the Trainer refinery and related assets located near Philadelphia, Pennsylvania as part of our strategy to mitigate the increasing cost of the refining margin we are paying. The facilities include pipelines and terminal assets that allow the refinery to supply jet fuel to our airline operations throughout the Northeastern U.S., including our New York hubs at LaGuardia and JFK.
The refinery produces primarily gasoline, diesel and jet fuel. Under multi-year agreements, we are effectively exchanging the non-jet fuel products with Phillips 66 and BP for jet fuel to be used in our airline operations. The refinery produced approximately 162,000 barrels per day in 2013. The jet fuel produced and procured through exchanging gasoline and diesel fuel produced by the refinery provided approximately 150,000 barrels per day for use in airline operations during 2013.
A refinery is subject to U.S. Environmental Protection Agency ("EPA") requirements that are established each year to blend renewable fuels into the gasoline and on-road diesel fuel it produces. Alternatively, a refinery may purchase renewable energy credits, called RINs, from third parties in the secondary market.
Because the refinery operated by Monroe does not blend renewable fuels, it must purchase its entire RINs requirement in the secondary market or obtain a waiver from the EPA. The refinery is exposed to the market price of RINs. For example, the average historical price of ethanol RINs ranged from $0.02 to $0.05 per RIN in prior years, but the market price increased to over $1.40 per RIN during 2013; the price at December 31, 2013 was $0.34 per RIN. Compliance with the RINs requirement by purchasing RINs, if available in the secondary market, at elevated prices could have a material impact on our results of operations and cash flows for 2014. We recognized $64 million of expense related to the RINs requirement in 2013, which is included in the refinery's results. We believe that holders of RINs have been withholding them from the secondary market. This reduction of available RINs significantly impairs the secondary market as a means of compliance with the RINs requirement. Therefore, the Company is pursuing legal, regulatory and legislative solutions to this problem.
The refinery recorded a loss of $116 million in 2013. The refinery's results were impacted by the cost of RINs that far exceeded their historical averages, as discussed above. In addition, we believe that the increase in jet fuel supply due to the refinery's operation has decreased the overall market price of jet fuel, and lowered our cost of jet fuel.
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Results of Operations - 2013 Compared to 2012
Operating Revenue
Year Ended December 31, | Increase (Decrease) | % Increase (Decrease) | |||||||||
(in millions) | 2013 | 2012 | |||||||||
Passenger: | |||||||||||
Mainline | $ | 26,534 | $ | 25,173 | $ | 1,361 | 5 | % | |||
Regional carriers | 6,408 | 6,581 | (173 | ) | (3 | )% | |||||
Total passenger revenue | 32,942 | 31,754 | 1,188 | 4 | % | ||||||
Cargo | 937 | 990 | (53 | ) | (5 | )% | |||||
Other | 3,894 | 3,926 | (32 | ) | (1 | )% | |||||
Total operating revenue | $ | 37,773 | $ | 36,670 | $ | 1,103 | 3 | % | |||
Increase (Decrease) vs. Year Ended December 31, 2012 | ||||||||||||||||
(in millions) | Year Ended December 31, 2013 | Passenger Revenue | RPMs (Traffic) | ASMs (Capacity) | Passenger Mile Yield | PRASM | Load Factor | |||||||||
Domestic | $ | 15,204 | 8 | % | 1 | % | 2 | % | 6 | % | 5 | % | (0.8 | ) | pts | |
Atlantic | 5,657 | 3 | % | 1 | % | (1 | )% | 2 | % | 3 | % | 1.2 | pts | |||
Pacific | 3,561 | (2 | )% | 1 | % | (1 | )% | (2 | )% | (1 | )% | 1.3 | pts | |||
Latin America | 2,112 | 11 | % | 11 | % | 8 | % | (1 | )% | 2 | % | 2.3 | pts | |||
Total mainline | 26,534 | 5 | % | 2 | % | 2 | % | 3 | % | 4 | % | 0.3 | pts | |||
Regional carriers | 6,408 | (3 | )% | (6 | )% | (3 | )% | 3 | % | 1 | % | (1.8 | ) | pts | ||
Total passenger revenue | $ | 32,942 | 4 | % | 1 | % | 1 | % | 3 | % | 3 | % | — | pts | ||
Passenger Revenue. Passenger revenue increased $1.2 billion, or 4%, on a 3% PRASM increase and a 3% increase in passenger mile yield. Revenue remained strong despite lower fuel prices. In addition, the increase in passenger revenue reflects the investments for in-flight product enhancements such as the Economy Comfort product and higher corporate sales.
Our geographic regions performed well compared to the prior year, with the domestic region leading year-over-year unit revenue improvement as a result of higher passenger mile yield. Unit revenues of the domestic region rose by over 5% with notable improvements in the New York market. New York unit revenues increased as we continue to see improvements due to our investments in JFK and LaGuardia, as well as many in-flight product enhancements. Revenues related to our international regions were generally flat year-over-year, with slight unit revenue improvements in both Atlantic and Latin America regions. Our Pacific region experienced a slight decline in unit revenues primarily due to the Yen devaluation.
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Operating Expense
Year Ended December 31, | Increase (Decrease) | % Increase (Decrease) | |||||||||
(in millions) | 2013 | 2012 | |||||||||
Aircraft fuel and related taxes | $ | 9,397 | $ | 10,150 | $ | (753 | ) | (7 | )% | ||
Salaries and related costs | 7,720 | 7,266 | 454 | 6 | % | ||||||
Regional carrier expense | 5,669 | 5,647 | 22 | — | % | ||||||
Aircraft maintenance materials and outside repairs | 1,852 | 1,955 | (103 | ) | (5 | )% | |||||
Contracted services | 1,665 | 1,566 | 99 | 6 | % | ||||||
Depreciation and amortization | 1,658 | 1,565 | 93 | 6 | % | ||||||
Passenger commissions and other selling expenses | 1,603 | 1,590 | 13 | 1 | % | ||||||
Landing fees and other rents | 1,410 | 1,336 | 74 | 6 | % | ||||||
Passenger service | 762 | 732 | 30 | 4 | % | ||||||
Profit sharing | 506 | 372 | 134 | 36 | % | ||||||
Aircraft rent | 209 | 272 | (63 | ) | (23 | )% | |||||
Restructuring and other items | 402 | 452 | (50 | ) | NM(1) | ||||||
Other | 1,520 | 1,592 | (72 | ) | (5 | )% | |||||
Total operating expense | $ | 34,373 | $ | 34,495 | $ | (122 | ) | — | % | ||
(1) NM - not meaningful. For a discussion of charges recorded in restructuring and other items, see Note 16 of the Notes to the Consolidated Financial Statements.
Fuel Expense. Including regional carriers under capacity purchase agreements, fuel expense decreased $787 million because of a 4% decrease in fuel market price per gallon and fuel hedge gains, partially offset by a 2% increase in consumption. The table below presents fuel expense, gallons consumed and our average price per gallon, including the impact of fuel hedging and the refinery:
Year Ended December 31, | Increase (Decrease) | % Increase (Decrease) | |||||||||
(in millions, except per gallon data) | 2013 | 2012 | |||||||||
Aircraft fuel and related taxes(1) | $ | 9,397 | $ | 10,150 | $ | (753 | ) | ||||
Aircraft fuel and related taxes included within regional carrier expense | 2,067 | 2,101 | (34 | ) | |||||||
Total fuel expense | $ | 11,464 | $ | 12,251 | $ | (787 | ) | (6 | )% | ||
Total fuel consumption (gallons) | 3,828 | 3,769 | 59 | 2 | % | ||||||
Average price per gallon | $ | 3.00 | $ | 3.25 | $ | (0.25 | ) | (8 | )% | ||
(1) | Includes the impact of fuel hedging and refinery results 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, adjusted:
Average Price Per Gallon | |||||||||||||||||||
Year Ended December 31, | Increase (Decrease) | Year Ended December 31, | Increase (Decrease) | ||||||||||||||||
(in millions, except per gallon data) | 2013 | 2012 | 2013 | 2012 | |||||||||||||||
Fuel purchase cost | $ | 11,792 | $ | 12,122 | $ | (330 | ) | $ | 3.09 | $ | 3.23 | $ | (0.14 | ) | |||||
Airline segment fuel hedge (gains) losses | (444 | ) | 66 | (510 | ) | (0.12 | ) | 0.01 | (0.13 | ) | |||||||||
Refinery segment impact | 116 | 63 | 53 | 0.03 | 0.01 | 0.02 | |||||||||||||
Total fuel expense | $ | 11,464 | $ | 12,251 | $ | (787 | ) | $ | 3.00 | $ | 3.25 | $ | (0.25 | ) | |||||
MTM adjustments gains | 276 | 27 | 249 | 0.07 | 0.01 | 0.06 | |||||||||||||
Total fuel expense, adjusted | $ | 11,740 | $ | 12,278 | $ | (538 | ) | $ | 3.07 | $ | 3.26 | $ | (0.19 | ) | |||||
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Fuel Purchase Cost. Fuel purchase cost is based on the market price for jet fuel at airport locations.
Refinery Impact. The refinery results include the impact on fuel expense of self-supply from the production of the refinery and from refined products exchanged with Phillips 66 and BP. As described in Note 2 of the Notes to the Consolidated Financial Statements, to the extent that we account for exchanges of refined products as non-monetary transactions, we include the results of those transactions within fuel expense.
Fuel Hedge (Gains) Losses and MTM Adjustments. During the year ended December 31, 2013, our airline segment fuel hedge gains of $444 million included $276 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 gains for 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) was $3.07 for the year ended December 31, 2013.
Salaries and Related Costs. The increase in salaries and related costs is primarily due to employee pay increases.
During the June 2012 quarter, we reached an agreement with ALPA that increases pay and benefits for our pilots. Our pilots and substantially all other employees received base pay increases on July 1, 2012 and received additional increases on January 1, 2013. These increases are designed both to recognize changes to the profit sharing program described below and to accelerate the planned 2013 pay increase for non-pilot employees.
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 volume of sales to third parties of our MRO services and the cyclical timing of maintenance events on our fleet.
Contracted Services. Contracted services expense increased year-over-year due primarily to the impact of severe winter storms on our operations and costs associated with the 1% increase in capacity.
Depreciation and amortization. Depreciation and amortization expense increased year-over-year primarily due to our investment in the purchase of aircraft and aircraft modifications that upgraded aircraft interiors and enhanced our product offering.
Landing fees and other rents. Landing fees and other rents increased year-over-year primarily due to our investment in airport facilities.
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 terms of the program specify the exclusion of special items, such as MTM adjustments and restructuring and other items, from pre-tax profit. During the June 2012 quarter, our profit sharing program was modified so that we will pay 10% of profits on the first $2.5 billion of annual profits effective with the plan year beginning January 1, 2013 compared to paying 15% of annual profits for the 2012 plan year. Under the program, we will continue to pay 20% of annual profits above $2.5 billion.
Aircraft Rent. Aircraft rent decreased year-over-year due primarily due to purchasing aircraft off-lease.
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Results of Operations - 2012 Compared to 2011
Operating Revenue
Year Ended December 31, | Increase | % Increase | |||||||||
(in millions) | 2012 | 2011 | |||||||||
Passenger: | |||||||||||
Mainline | $ | 25,173 | $ | 23,843 | $ | 1,330 | 6 | % | |||
Regional carriers | 6,581 | 6,414 | 167 | 3 | % | ||||||
Total passenger revenue | 31,754 | 30,257 | 1,497 | 5 | % | ||||||
Cargo | 990 | 1,027 | (37 | ) | (4 | )% | |||||
Other | 3,926 | 3,831 | 95 | 2 | % | ||||||
Total operating revenue | $ | 36,670 | $ | 35,115 | $ | 1,555 | 4 | % | |||
Increase (Decrease) vs. Year Ended December 31, 2011 | ||||||||||||||||
(in millions) | Year Ended December 31, 2012 | Passenger Revenue | RPMs (Traffic) | ASMs (Capacity) | Passenger Mile Yield | PRASM | Load Factor | |||||||||
Domestic | $ | 14,134 | 7 | % | 1 | % | — | % | 6 | % | 7 | % | 0.8 | pts | ||
Atlantic | 5,514 | (1 | )% | (4 | )% | (7 | )% | 3 | % | 6 | % | 2.8 | pts | |||
Pacific | 3,619 | 11 | % | 6 | % | 3 | % | 5 | % | 8 | % | 2.6 | pts | |||
Latin America | 1,906 | 8 | % | 6 | % | 3 | % | 2 | % | 5 | % | 2.7 | pts | |||
Total mainline | 25,173 | 6 | % | 1 | % | (1 | )% | 5 | % | 7 | % | 1.7 | pts | |||
Regional carriers | 6,581 | 3 | % | (4 | )% | (5 | )% | 7 | % | 8 | % | 0.7 | pts | |||
Total passenger revenue | $ | 31,754 | 5 | % | — | % | (2 | )% | 5 | % | 7 | % | 1.7 | pts | ||
Passenger Revenue. Passenger revenue increased $1.5 billion, or 5%, due to an improvement in the passenger mile yield of 5%, on a 2% decline in capacity. Passenger mile yield and unit revenue increased due to fare increases, higher revenue under corporate travel contracts and improvements in our products and services.
International mainline passenger revenue increased $520 million. In early 2011, we faced industry overcapacity in the transatlantic market and in connection with our joint venture partners, AirFrance-KLM and Alitalia, we reduced capacity in underperforming markets during the second half of 2011 and in 2012. As a result, Atlantic PRASM was up 6%, driven by a 3% increase in yield on a 7% decrease in capacity. Pacific passenger revenue increased 11% on a 3% and 6% increase in capacity and traffic, respectively. These results reflect Pacific market improvement, as demand returned to levels seen prior to the March 2011 earthquake and tsunami in Japan. Latin America passenger revenue increased 8% on a 3% and 6% increase in capacity and traffic, respectively.
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Operating Expense
Year Ended December 31, | Increase (Decrease) | % Increase (Decrease) | |||||||||
(in millions) | 2012 | 2011 | |||||||||
Aircraft fuel and related taxes | $ | 10,150 | $ | 9,730 | $ | 420 | 4 | % | |||
Salaries and related costs | 7,266 | 6,894 | 372 | 5 | % | ||||||
Regional carrier expense | 5,647 | 5,470 | 177 | 3 | % | ||||||
Aircraft maintenance materials and outside repairs | 1,955 | 1,765 | 190 | 11 | % | ||||||
Passenger commissions and other selling expenses | 1,590 | 1,682 | (92 | ) | (5 | )% | |||||
Contracted services | 1,566 | 1,642 | (76 | ) | (5 | )% | |||||
Depreciation and amortization | 1,565 | 1,523 | 42 | 3 | % | ||||||
Landing fees and other rents | 1,336 | 1,281 | 55 | 4 | % | ||||||
Passenger service | 732 | 721 | 11 | 2 | % | ||||||
Profit sharing | 372 | 264 | 108 | 41 | % | ||||||
Aircraft rent | 272 | 298 | (26 | ) | (9 | )% | |||||
Restructuring and other items | 452 | 242 | 210 | NM(1) | |||||||
Other | 1,592 | 1,628 | (36 | ) | (2 | )% | |||||
Total operating expense | $ | 34,495 | $ | 33,140 | $ | 1,355 | 4 | % | |||
(1) For a discussion of charges recorded in restructuring and other items, see Note 16 of the Notes to the Consolidated Financial Statements.
Fuel Expense. Including regional carriers under capacity purchase agreements, fuel expense increased $468 million because of a 6% increase in our average price per gallon, despite a 2% decrease in consumption. The table below presents fuel expense, gallons consumed and our average price per gallon, including the impact of fuel hedge losses of $66 million during the year ended December 31, 2012:
Year Ended December 31, | Increase (Decrease) | % Increase (Decrease) | |||||||||
(in millions, except per gallon data) | 2012 | 2011 | |||||||||
Aircraft fuel and related taxes | $ | 10,150 | $ | 9,730 | $ | 420 | |||||
Aircraft fuel and related taxes included within regional carrier expense | 2,101 | 2,053 | 48 | ||||||||
Total fuel expense | $ | 12,251 | $ | 11,783 | $ | 468 | 4 | % | |||
Total fuel consumption (gallons) | 3,769 | 3,856 | (87 | ) | (2 | )% | |||||
Average price per gallon | $ | 3.25 | $ | 3.06 | $ | 0.19 | 6 | % | |||
The table below shows the impact of hedging and the refinery on fuel expense and average price per gallon:
Average Price Per Gallon | |||||||||||||||||||
Year Ended December 31, | Increase (Decrease) | Year Ended December 31, | Increase (Decrease) | ||||||||||||||||
(in millions, except per gallon data) | 2012 | 2011 | 2012 | 2011 | |||||||||||||||
Fuel purchase cost | $ | 12,122 | $ | 12,203 | $ | (81 | ) | $ | 3.23 | $ | 3.17 | $ | 0.06 | ||||||
Fuel hedge losses (gains) | 66 | (420 | ) | 486 | 0.01 | (0.11 | ) | 0.12 | |||||||||||
Refinery segment impact | 63 | — | 63 | 0.01 | — | 0.01 | |||||||||||||
Total fuel expense | $ | 12,251 | $ | 11,783 | $ | 468 | $ | 3.25 | $ | 3.06 | $ | 0.19 | |||||||
MTM adjustments gains (losses) | 27 | (26 | ) | 53 | 0.01 | (0.01 | ) | 0.02 | |||||||||||
Total fuel expense, adjusted | $ | 12,278 | $ | 11,757 | $ | 521 | $ | 3.26 | $ | 3.05 | $ | 0.21 | |||||||
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Salaries and Related Costs. The increase in salaries and related costs is primarily due to employee pay increases, increases in pension expense and other benefits.
During the June 2012 quarter, we reached an agreement with ALPA that increases pay and benefits for our pilots. Our pilots and substantially all other employees received base pay increases on July 1, 2012 and received additional increases on January 1, 2013. These increases are designed both to recognize changes to the profit sharing program described below and to accelerate the planned 2013 pay increase for non-pilot employees.
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 increase in maintenance costs is primarily due to the cyclical timing of maintenance events on our fleet. Additionally, maintenance cost increased as we accelerated certain maintenance events into 2012, resulting in a lower total cost for those activities, and completed maintenance initiatives to improve our operational reliability.
Passenger Commissions and Other Selling Expenses. The decrease in passenger commissions and other selling expenses is primarily due to lower booking fees and international commission rates, partially offset by increases in sales.
Contracted Services. Contracted services expense decreased year-over-year due primarily to the impact of severe winter storms on our operations in the March 2011 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 terms of the program specify the exclusion of special items, such as MTM adjustments and restructuring and other items, from pre-tax profit. During the June 2012 quarter, our profit sharing program was modified so that we will pay 10% of profits on the first $2.5 billion of annual profits effective with the plan year beginning January 1, 2013 compared to paying 15% of annual profits for the 2012 plan year. Under the program, we will continue to pay 20% of annual profits above $2.5 billion.
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Non-Operating Results
Year Ended December 31, | Favorable (Unfavorable) | |||||||||||||||
(in millions) | 2013 | 2012 | 2011 | 2013 vs. 2012 | 2012 vs. 2011 | |||||||||||
Interest expense, net | $ | (698 | ) | $ | (812 | ) | $ | (901 | ) | $ | 114 | $ | 89 | |||
Amortization of debt discount, net | (154 | ) | (193 | ) | (193 | ) | 39 | — | ||||||||
Loss on extinguishment of debt | — | (118 | ) | (68 | ) | 118 | (50 | ) | ||||||||
Miscellaneous, net | (21 | ) | (27 | ) | (44 | ) | 6 | 17 | ||||||||
Total other expense, net | $ | (873 | ) | $ | (1,150 | ) | $ | (1,206 | ) | $ | 277 | $ | 56 | |||
The decline in interest expense, net is driven by reduced levels of debt and lower interest rates. Our principal amount of debt has declined from $15.4 billion at the beginning of 2011 to $11.2 billion at December 31, 2013. During 2012 and 2011, we recorded $118 million and $68 million in losses from the early extinguishment of debt, which primarily related to the write-off of debt discounts. These debt discounts are primarily a result of fair value adjustments recorded in 2008 to reduce the carrying value of Northwest long-term debt due to purchase accounting. As a result of these write-offs and scheduled amortization, our unamortized debt discount has decreased from $935 million at the beginning of 2011 to $383 million at December 31, 2013.
Income Taxes
We consider all income sources, including other comprehensive income, in determining the amount of tax benefit allocated to continuing operations. The following table shows the components of our income tax benefit (provision):
Year Ended December 31, | |||||||||
(in millions) | 2013 | 2012 | 2011 | ||||||
Current tax benefit (provision): | |||||||||
Federal | $ | 24 | $ | — | $ | 91 | |||
State and local | (3 | ) | 15 | (6 | ) | ||||
International | 1 | (14 | ) | (2 | ) | ||||
Deferred tax provision: | |||||||||
Federal | 7,197 | (4 | ) | 2 | |||||
State and local | 794 | (13 | ) | — | |||||
Income tax benefit (provision) | $ | 8,013 | $ | (16 | ) | $ | 85 | ||
During the December 2013 quarter, after considering all relevant factors, we concluded that our deferred income tax assets are more likely than not to be realized. Accordingly, at December 31, 2013, we released almost all of our valuation allowance against our net deferred income tax assets. The release of the allowance primarily resulted in a net tax benefit of $8.0 billion that was recorded in income tax benefit (provision) in our Consolidated Statement of Operations. Beginning in 2014, we expect to record income tax expense with an effective rate of approximately 38%. At December 31, 2013, we had $15.3 billion of U.S. federal pre-tax net operating loss carryforwards. Accordingly, we believe we will not pay any cash federal income taxes during the next several years. Our U.S. federal pre-tax net operating loss carryforwards do not begin to expire until 2023. See Note 12 of the Notes to the Consolidated Financial Statements for more information.
During 2012 and 2011, we did not record an income tax provision for U.S. federal income tax purposes since our deferred tax assets were fully reserved by a valuation allowance. During 2011, we recorded an income tax benefit of $85 million, primarily related to the recognition of alternative minimum tax refunds.
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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 December 31, 2013, we had $5.7 billion in unrestricted liquidity, consisting of $3.8 billion in cash and cash equivalents and short-term investments and $1.9 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 $4.5 billion in 2013, $2.5 billion in 2012 and $2.8 billion in 2011. We also expect to generate positive cash flows from operations in 2014.
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 33% of our total operating expenses for 2013. 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, we acquired the Trainer oil refinery in 2012, which, as part of refinery operations, has refined oil product inventories. Jet fuel and refined oil product inventories are recorded as Fuel Inventory. Fuel Inventory increased during 2012 as a result of the start up of refinery operations in the September quarter and the transition of our fuel supply program. The increase in Fuel Inventory to achieve normal operating levels at our refinery was offset by a similar increase in accounts payable, and therefore, did not have a significant impact on operating cash flows during 2012. The remaining $180 million increase in Fuel Inventory was a result of the transition in Delta's fuel supply program.
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 each of 2013, 2012 and 2011. In 2011, this operating cash flow was largely offset by working capital changes. We anticipate American Express will make an additional purchase of $675 million of unrestricted SkyMiles in 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 agreement, as modified, 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 utilized SkyMiles valued at $333 million annually over three years beginning 2012 instead of paying cash to Delta for SkyMiles used. This draw down of $333 million in SkyMiles reduced cash flows from operations in 2012 compared to 2011. In December 2013, we and American Express amended this agreement to allow American Express to use these SkyMiles immediately and without restriction.
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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 $914 million in 2013, including $250 million above the minimum funding levels, $697 million in 2012 and $598 million in 2011 to our defined benefit pension plans. We estimate the funding under these plans will total approximately $925 million in 2014, including $250 million above the minimum funding requirements.
Undrawn Lines of Credit
We have available $1.9 billion in undrawn lines of credit. As described in Note 8 of the Notes to the Consolidated Financial Statements, we have an undrawn $1.2 billion first-lien revolving credit facility, as part of our 2011 Credit Facilities. The revolving credit facility carries a variable interest rate and expires in April 2016.
We also have an undrawn $450 million revolving credit facility included in the 2012 Pacific Facilities, as described in Note 8 of the Notes to the Consolidated Financial Statements. The 2012 Pacific Facilities are secured by our Pacific routes and slots. This revolving credit facility carries a variable interest rate and expires in October 2017. In addition, we have undrawn bank revolving credit facilities of $250 million.
The credit facilities mentioned above 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 and may not be able to draw on the revolving credit facilities.
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
Investing Activities
We incurred capital expenditures of $2.6 billion in 2013, $2.0 billion in 2012 and $1.3 billion in 2011. Our capital expenditures were primarily for the purchase of aircraft and aircraft modifications that upgraded aircraft interiors and enhanced our product offering. Also during 2013, we purchased a 49% equity investment in Virgin Atlantic for $360 million.
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 approximately $2.3 billion in 2014 primarily for aircraft and aircraft modifications. We expect that the 2014 investments will be funded through cash from operations and new financings.
Financings
At December 31, 2013, total debt and capital leases, including current maturities, was $11.3 billion, a $1.4 billion reduction from December 31, 2012 and a $5.9 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.
In May 2013, we announced a plan to return more than $1 billion to shareholders over the next three years. As part of this plan, our Board of Directors initiated a quarterly dividend program and declared a $0.06 per share dividend in both August 2013 and November 2013. These dividends were paid in September 2013 and November 2013 and each totaled $51 million. In addition, the Board of Directors authorized a $500 million share repurchase program, to be completed no later than June 30, 2016. During 2013, we repurchased and retired approximately 10 million shares at a cost of approximately $250 million.
In 2013, we received $268 million in financing proceeds from long-term debt, which is secured by aircraft delivered in 2013. In 2012, we received $480 million in financing proceeds from long-term debt secured by aircraft previously financed by debt. In 2012, we also refinanced $1.7 billion in debt and undrawn revolving credit facilities secured by our Pacific routes and slots, which resulted in a lower interest rate.
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Contractual Obligations
The following table summarizes our contractual obligations at December 31, 2013 that we expect will be paid in cash. The table does not include amounts that are contingent on events or other factors that are uncertain or unknown at this time, including legal contingencies, uncertain tax positions and amounts payable under collective bargaining arrangements, among others. In addition, the table does not include expected significant cash payments which are generally ordinary course of business obligations that do not include contractual commitments.
The amounts presented are based on various estimates, including estimates regarding the timing of payments, prevailing interest rates, volumes purchased, the occurrence of certain events and other factors. Accordingly, the actual results may vary materially from the amounts presented in the table.
Contractual Obligations by Year(1) | |||||||||||||||||||||
(in millions) | 2014 | 2015 | 2016 | 2017 | 2018 | Thereafter | Total | ||||||||||||||
Long-term debt (see Note 8) | |||||||||||||||||||||
Principal amount | $ | 1,491 | $ | 1,089 | $ | 1,472 | $ | 2,190 | $ | 2,159 | $ | 2,827 | $ | 11,228 | |||||||
Interest payments | 510 | 440 | 370 | 290 | 230 | 460 | 2,300 | ||||||||||||||
Capital lease obligations (see Note 9) | 165 | 158 | 143 | 100 | 54 | 74 | 694 | ||||||||||||||
Operating lease payments (see Note 9) | 1,429 | 1,356 | 1,186 | 1,026 | 831 | 5,666 | 11,494 | ||||||||||||||
Aircraft purchase commitments (see Note 10) | 1,585 | 1,215 | 1,700 | 1,495 | 450 | 2,700 | 9,145 | ||||||||||||||
Contract carrier obligations (see Note 10) | 2,110 | 2,040 | 1,780 | 1,560 | 1,320 | 1,930 | 10,740 | ||||||||||||||
Employee benefit obligations (see Note 11) | 810 | 760 | 690 | 670 | 650 | 8,260 | 11,840 | ||||||||||||||
Other obligations | 790 | 580 | 530 | 390 | 430 | 1,420 | 4,140 | ||||||||||||||
Total | $ | 8,890 | $ | 7,638 | $ | 7,871 | $ | 7,721 | $ | 6,124 | $ | 23,337 | $ | 61,581 | |||||||
(1) | For additional information, see the Notes to the Consolidated Financial Statements referenced in the table above. |
Long-Term Debt, Principal Amount. Represents scheduled principal payments on long-term debt.
Long-Term Debt, Interest Payments. Represents estimated interest payments under our long-term debt based on the interest rates specified in the applicable debt agreements. Interest payments on variable interest rate debt were calculated using LIBOR at December 31, 2013.
Aircraft Purchase Commitments. Represents our commitments to purchase 88 B-737-900ER, 30 A321-200, 28 CRJ-900, 18 B-787-8 aircraft and 10 A330-300 aircraft. Our purchase commitment for 18 B-787-8 aircraft provides for certain aircraft substitution rights.
Contract Carrier Obligations. Represents our estimated minimum fixed obligations under capacity purchase agreements with regional carriers. The reported amounts are based on (1) the required minimum levels of flying by our contract carriers under the applicable agreements and (2) assumptions regarding the costs associated with such minimum levels of flying.
Employee Benefit Obligations. Represents primarily (1) our estimated minimum required funding for our qualified defined benefit pension plans based on actuarially determined estimates and (2) projected future benefit payments from our unfunded postretirement and postemployment plans. For additional information about our employee benefit obligations, see “Critical Accounting Policies and Estimates.”
Other Obligations. Represents estimated purchase obligations under which we are required to make minimum payments for goods and services, including but not limited to insurance, marketing, maintenance, technology, sponsorships and other third party services and products. Additionally, other obligations includes estimates of lease payments on the remaining 75 B-717-200 aircraft still to be delivered in 2014 and 2015 from the agreements entered into in 2012 with Southwest Airlines and Boeing to lease 88 B-717-200 aircraft .
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Critical Accounting Policies and Estimates
Our critical accounting policies and estimates are those that require significant judgments and estimates. Accordingly, the actual results may differ materially from these estimates. For a discussion of these and other accounting policies, see Note 1 of the Notes to the Consolidated Financial Statements.
Frequent Flyer Program
Our frequent flyer program (the “SkyMiles Program”) offers incentives to travel on Delta. This program allows customers to earn mileage credits by flying on Delta, regional air carriers with which we have contract carrier agreements and airlines that participate in the SkyMiles Program, as well as through participating companies such as credit card companies, hotels and car rental agencies. We sell mileage credits to non-airline businesses, customers and other airlines.
The SkyMiles Program includes two types of transactions that are considered revenue arrangements with multiple deliverables. As discussed below, these are (1) passenger ticket sales earning mileage credits and (2) the sale of mileage credits to participating companies with which we have marketing agreements. Mileage credits are a separate unit of accounting as they can be redeemed by customers in future periods for air travel on Delta and participating airlines, membership in our Sky Club and other program awards.
Passenger Ticket Sales Earning Mileage Credits. Passenger ticket sales earning mileage credits under our SkyMiles Program provide customers with two deliverables: (1) mileage credits earned and (2) air transportation. We value each deliverable on a standalone basis. Our estimate of the standalone selling price of a mileage credit is based on an analysis of our sales of mileage credits to other airlines and customers and is re-evaluated at least annually. We use established ticket prices to determine the standalone selling price of air transportation. We allocate the total amount collected from passenger ticket sales between the deliverables based on their relative selling prices.
We defer revenue for the mileage credits related to passenger ticket sales and recognize it as passenger revenue when miles are redeemed and services are provided. We record the air transportation portion of the passenger ticket sales in air traffic liability and recognize these amounts in passenger revenue when we provide transportation or when the ticket expires unused. A hypothetical 10% increase in our estimate of the standalone selling price of a mileage credit would decrease passenger revenue by approximately $50 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 through 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 deliverables, as defined below.
Our most significant contract to sell mileage credits relates to our co-brand credit card relationship with American Express. In September 2013, we and American Express modified our SkyMiles agreements. This modification required that we use a different accounting standard for recording SkyMiles sold. Prior to the modifications, we allocated consideration received from selling miles to American Express among two primary deliverables: credit redeemable for future travel and marketing deliverables. We deferred revenue related to the portion of mileage credits redeemable for future travel based on the rate at which we sell mileage credits to other airlines. We calculated the value of the marketing component based on the residual method and recognize it as other revenue as related marketing services are provided.
The September 2013 modifications introduced new deliverables and modified existing deliverables. Because these modifications were material to the SkyMiles agreements, we are required to use a different accounting standard that allocates the consideration received from selling miles to all deliverables based on their relative standalone sales price. Accordingly, we determined our best estimate of selling prices by considering discounted cash flows analysis using multiple inputs and assumptions, including: (1) the expected number of miles awarded and number of miles redeemed, (2) the rate at which we sell mileage credits to other airlines, (3) published rates on our website for baggage fees, access to Delta SkyClub lounges and other benefits while traveling on Delta and (4) brand value. The effect of this change in accounting standard lowered the deferral rate we use to record miles sold under the agreements, which increases revenue we will record in future periods. The revenue impact of the SkyMiles agreement modifications was insignificant for 2013 and is expected to increase 2014 revenue by approximately $100 million. Additionally, upon application of this accounting standard, we were required to adjust the recorded value of miles currently deferred in our Frequent Flyer Liability that originated through the American Express programs. Accordingly, we adjusted the liability in the September 2013 quarter by less than $10 million.
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Breakage. For mileage credits that we estimate are not likely to be redeemed (“breakage”), we recognize the associated value proportionally during the period in which the remaining mileage credits are expected to be redeemed. Management uses statistical models to estimate breakage based on historical redemption patterns. A change in assumptions as to the period over which mileage credits are expected to be redeemed, 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. At December 31, 2013, the aggregate deferred revenue balance associated with the SkyMiles Program was $4.4 billion. A hypothetical 1% change in the number of outstanding miles estimated to be redeemed would result in a $28 million impact on our deferred revenue liability at December 31, 2013.
Goodwill and Indefinite-Lived Intangible Assets
We assess our goodwill and indefinite-lived intangible assets under a qualitative or quantitative approach. Under a qualitative approach, we consider many market factors, including those listed under Key Assumptions below. We analyze these market factors to determine if events and circumstances have affected the fair value of goodwill and indefinite-lived intangible assets. If we determine that it is more likely than not that the asset value may be impaired, we use the quantitative approach to assess the asset's fair value and the amount of the impairment. Under a quantitative approach, we calculate the fair value of the asset using the Key Assumptions listed below. If the asset's carrying value exceeds its fair value calculated using the quantitative approach, we will record an impairment charge for the difference in fair value and carrying value.
When we evaluate goodwill for impairment using a quantitative approach, we estimate the fair value of the reporting unit by considering market capitalization and other factors. When we perform a quantitative impairment assessment of our indefinite-lived intangible assets, fair value is estimated based on (1) recent market transactions, where available, (2) a combination of limited market transactions and the lease savings method for certain airport slots (which reflects potential lease savings from owning the slots rather than leasing them from another airline at market rates), (3) the royalty method for the Delta tradename (which assumes hypothetical royalties generated from using our tradename) or (4) projected discounted future cash flows (an income approach).
Key Assumptions. The key assumptions in our impairment tests include (1) our projected revenues, expenses and cash flows, (2) an estimated weighted average cost of capital, (3) assumed discount rates depending on the asset and (4) a tax rate. These assumptions are consistent with those hypothetical market participants would use. Since we are required to make estimates and assumptions when evaluating goodwill and indefinite-lived intangible assets for impairment, the actual amounts may differ materially from these estimates. In addition, we consider the amount the intangible assets' fair value exceeded their carrying value in the most recent fair value measurement using a quantitative approach.
Changes in certain events and circumstances could result in impairment. Factors which could cause impairment include, but are not limited to, (1) negative trends in our market capitalization, (2) an increase in fuel prices, (3) declining passenger mile yields, (4) lower passenger demand as a result of a weakened U.S. and global economy, (5) interruption to our operations due to a prolonged employee strike, terrorist attack, or other reasons and (6) changes to the regulatory environment.
We assessed each of the above assumptions in our most recent impairment analyses. The combination of our most recently completed annual results and our projected revenues, expenses and cash flows more than offset the impact of fuel prices and other airline input costs. The stabilizing operating environment for U.S. airlines has resulted in annual yields increasing along with load factors, leading to improved financial results.
Goodwill. Our goodwill balance was $9.8 billion at December 31, 2013. We determined that there was no indication that Goodwill was impaired based upon our qualitative assessment of all relevant factors, including applicable factors noted in "Key Assumptions" above.
Identifiable Intangible Assets. Our identifiable intangible assets had a net carrying amount of $4.7 billion at December 31, 2013. Indefinite-lived assets are not amortized and consist primarily of routes, slots, the Delta tradename and assets related to SkyTeam and collaborative arrangements.
In 2013, we determined that there was no indication that our indefinite-lived intangible assets were impaired based upon our assessments. These assessments included analyses and weighting of all relevant factors, including the significant inputs and key assumptions which impact the fair value of our indefinite-lived intangible assets.
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Long-Lived Assets
Our flight equipment and other long-lived assets have a recorded value of $21.9 billion at December 31, 2013. This value is based on various factors, including the assets' estimated useful lives and salvage values. We record impairment losses on flight equipment and other long-lived assets used in operations when events and circumstances indicate the assets may be impaired and the estimated future cash flows generated by those assets are less than their carrying amounts. Factors which could cause impairment include, but are not limited to, (1) a decision to permanently remove flight equipment or other long-lived assets from operations, (2) significant changes in the estimated useful life, (3) significant changes in projected cash flows, (4) permanent and significant declines in fleet fair values and (5) changes to the regulatory environment. For long-lived assets held for sale, we discontinue depreciation and record impairment losses when the carrying amount of these assets is greater than the fair value less the cost to sell.
To determine whether impairments exist for aircraft used in operations, we group assets at the fleet-type level (the lowest level for which there are identifiable cash flows) and then estimate future cash flows based on projections of capacity, passenger mile yield, fuel costs, labor costs and other relevant factors. If an impairment occurs, the impairment loss recognized is the amount by which the aircraft's carrying amount exceeds its estimated fair value. We estimate aircraft fair values using published sources, appraisals and bids received from third parties, as available.
Income Tax 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 future projections of sustained profitability, deferred income 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 loss position at that time, compounded by the negative industry-wide business trends and outlook. At December 31, 2012, we had an $11.0 billion valuation allowance established against our deferred income tax assets, which represented a full valuation allowance against our net deferred income tax assets.
For 2012, we recorded a pre-tax profit of $1.0 billion, and during 2012 we moved from a three-year cumulative loss position to a cumulative income position for the first time since we established the full valuation allowance. However given the industry's recent history of significant losses, we concluded as of December 31, 2012 that another year of significant profitability was needed to support a release of valuation allowance.
During 2013, we continued our trend of sustained profitability, recording a pre-tax profit of $2.5 billion for the year. During the December 2013 quarter, after considering all relevant factors, we concluded that our deferred income tax assets are more likely than not to be realized. In evaluating the likelihood of utilizing our net deferred net assets, the significant relevant factors that we considered are: (1) our recent history of profitability; (2) growth in the U.S. and global economies; (3) forecast of airline revenue trends; (4) estimate of future fuel prices; and (5) future impact of taxable temporary differences. Accordingly, at December 31, 2013, we released almost all of our valuation allowance against our net deferred income tax assets, primarily resulting in the $8.0 billion benefit in our provision for income taxes.
Defined Benefit Pension Plans
We sponsor defined benefit pension plans for eligible employees and retirees. These plans are closed to new entrants and frozen for future benefit accruals. As of December 31, 2013, the unfunded benefit obligation for these plans recorded on our Consolidated Balance Sheet was $10.1 billion. During 2013, we contributed $914 million to these plans and recorded $354 million of expense in salaries and related costs on our Consolidated Statement of Operations. In 2014, we estimate we will contribute approximately $925 million to these plans, including $250 million of contributions above the minimum funding requirements, and that our expense will be approximately $230 million. The most critical assumptions impacting our defined benefit pension plan obligations and expenses are the discount rate and the expected long-term rate of return on the plan assets.
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Weighted Average Discount Rate. We determine our weighted average discount rate on our measurement date primarily by reference to annualized rates earned on high quality fixed income investments and yield-to-maturity analysis specific to our estimated future benefit payments. We used a weighted average discount rate to value the obligations of 5.01% and 4.11% at December 31, 2013 and 2012, respectively. Our weighted average discount rate for net periodic pension benefit cost in each of the past three years has varied from the rate selected on our measurement date, ranging from 4.10% to 5.70% between 2013 and 2011.
Expected Long-Term Rate of Return. Our expected long-term rate of return on plan assets is based primarily on plan-specific investment studies using historical market return and volatility data. Modest excess return expectations versus some public market indices are incorporated into the return projections based on the actively managed structure of the investment programs and their records of achieving such returns historically. We also expect to receive a premium for investing in less liquid private markets. We review our rate of return on plan asset assumptions annually. Our annual investment performance for one particular year does not, by itself, significantly influence our evaluation. Our actual historical annualized three and five year rate of return on plan assets for our defined benefit pension plans was approximately 9% and 12%, respectively, as of December 31, 2013. The investment strategy for our defined benefit pension plan assets is to use a diversified mix of global public and private equity portfolios, public and private fixed income portfolios and private real estate and natural resource investments to earn a long-term investment return that meets or exceeds our annualized return target. Our expected long-term rate of return on assets for net periodic pension benefit cost for the year ended December 31, 2013 was 9%.
The impact of a 0.50% change in these assumptions is shown in the table below:
Change in Assumption | Effect on 2014 Pension Expense | Effect on Accrued Pension Liability at December 31, 2013 |
0.50% decrease in weighted average discount rate | — | +$1.1 billion |
0.50% increase in weighted average discount rate | -$5 million | -$1.1 billion |
0.50% decrease in expected long-term rate of return on assets | +$50 million | — |
0.50% increase in expected long-term rate of return on assets | -$50 million | — |
Funding. Our funding obligations for qualified defined benefit plans are governed by the Employee Retirement Income Security Act. The Pension Protection Act of 2006 allows commercial airlines to elect alternative funding rules (“Alternative Funding Rules”) for defined benefit plans that are frozen. Delta elected the Alternative Funding Rules under which the unfunded liability for a frozen defined benefit plan may be amortized over a fixed 17-year period and is calculated using an 8.85% discount rate.
While the Pension Protection Act makes our funding obligations for these plans more predictable, factors outside our control continue to have an impact on the funding requirements. Estimates of future funding requirements are based on various assumptions and can vary materially from actual funding requirements. Assumptions include, among other things, the actual and projected market performance of assets; statutory requirements; and demographic data for participants. For additional information, see Note 11 of the Notes to the Consolidated Financial Statements.
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 (loss), see Note 14.
Presentation of Comprehensive Income
In June 2011, the Financial Accounting Standards Board issued "Presentation of Comprehensive Income." The standard revises the presentation and prominence of the items reported in other comprehensive income and is effective retrospectively for fiscal years beginning after December 15, 2011. We adopted this standard in 2012 and have presented comprehensive income in our Consolidated Statements of Comprehensive Income (Loss).
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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 table shows a reconciliation of CASM (a GAAP measure) to CASM-Ex (a non-GAAP financial measure). We exclude the following items from CASM to determine CASM-Ex for the reasons described:
• | Aircraft fuel and related taxes. The volatility in fuel prices impacts the comparability of year-over-year financial performance. The exclusion of aircraft fuel and related taxes from this measure (including our regional 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. Our ancillary businesses include aircraft maintenance and staffing services we provide to third parties and our vacation wholesale operations. Because these businesses are not related to the generation of a seat mile, we exclude the costs related to these businesses from this measure to provide a more meaningful comparison of the costs of our airline operations to the rest of the airline industry. |
• | Profit sharing. We exclude profit sharing because this exclusion 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 items. Because of the variability in restructuring and other items, the exclusion of this item from this measure is helpful to investors to analyze our core operational performance in the periods 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, excluding these adjustments allows investors to better understand and analyze our costs for the periods reported. |
Year Ended December 31, | ||||||
2013 | 2012 | |||||
CASM | 14.77 | ¢ | 14.97 | ¢ | ||
Items excluded: | ||||||
Aircraft fuel and related taxes | (5.04 | ) | (5.32 | ) | ||
Ancillary businesses | (0.32 | ) | (0.38 | ) | ||
Profit sharing | (0.22 | ) | (0.16 | ) | ||
Restructuring and other items | (0.17 | ) | (0.20 | ) | ||
MTM adjustments | 0.12 | 0.01 | ||||
CASM-Ex | 9.14 | ¢ | 8.92 | ¢ | ||
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Glossary of Defined Terms
ASM - Available Seat Mile. A measure of capacity. ASMs equal the total number of seats available for transporting passengers during a reporting period multiplied by the total number of miles flown during that period.
CASM - (Operating) Cost per Available Seat Mile. The amount of operating cost incurred per ASM during a reporting period.
CASM-Ex - The amount of operating cost incurred per ASM during a reporting period, excluding aircraft fuel and related taxes, ancillary businesses, profit sharing, restructuring and other items and MTM adjustments for fuel hedges recorded in periods other than the settlement period.
Passenger Load Factor - A measure of utilized available seating capacity calculated by dividing RPMs by ASMs for a reporting period.
Passenger Mile Yield or Yield - The amount of passenger revenue earned per RPM during a reporting period.
PRASM - Passenger Revenue per ASM. The amount of passenger revenue earned per ASM during a reporting period. PRASM is also referred to as “unit revenue.”
RPM - Revenue Passenger Mile. One revenue-paying passenger transported one mile. RPMs equal the number of revenue passengers during a reporting period multiplied by the number of miles flown by those passengers during that period. RPMs are also referred to as “traffic.”
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have market risk exposure related to aircraft fuel prices, interest rates and foreign currency exchange rates. Market risk
is the potential negative impact of adverse changes in these prices or rates on our Consolidated Financial Statements. In an
effort to manage our exposure to these risks, we enter into derivative contracts and may adjust our derivative portfolio as
market conditions change. We expect adjustments to the fair value of financial instruments to result in ongoing volatility in
earnings and stockholders' equity.
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. We utilize several different contract and commodity types in this program and frequently test its economic effectiveness against our financial targets. We rebalance the hedge portfolio 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 crude oil, diesel fuel and jet 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 year ended December 31, 2013, aircraft fuel and related taxes, including our regional carriers under capacity purchase agreements, accounted for $11.5 billion, or 33%, of our total operating expense. We recognized $493 million of net fuel hedge gains during the year ended December 31, 2013, including $276 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 December 31, 2013 based on their contract settlement dates, assuming the same 10% and 20% changes.
Year Ending December 31, 2014 | Fuel Hedge Margin (Posted to) Received from Counterparties | |||||||||||
(in millions) | (Increase) Decrease to Unhedged Fuel Cost(1) | Hedge Gain (Loss)(2) | Net Impact | |||||||||
+ 20% | $ | (2,290 | ) | $ | 170 | $ | (2,120 | ) | $ | 220 | ||
+ 10% | (1,140 | ) | 150 | (990 | ) | 80 | ||||||
- 10% | 1,140 | 50 | 1,190 | 30 | ||||||||
- 20% | 2,290 | 10 | 2,300 | (30 | ) | |||||||
(1) | Projections based upon the (increase) decrease to unhedged fuel cost as compared to the jet fuel price per gallon of $3.00, excluding transportation costs and taxes, at December 31, 2013 and estimated fuel consumption of 3.9 billion gallons for the year ending December 31, 2014. |
(2) | Projections based on average futures prices by contract settlement month compared to futures prices at December 31, 2013. |
Interest Rate Risk
Our exposure to market risk from adverse changes in interest rates is primarily associated with our long-term debt obligations. 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.
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At December 31, 2013, we had $4.9 billion of fixed-rate long-term debt and $6.3 billion of variable-rate long-term debt. An increase of 100 basis points in average annual interest rates would have decreased the estimated fair value of our fixed-rate long-term debt by $210 million at December 31, 2013 and would have increased the annual interest expense on our variable-rate long-term debt by $44 million, exclusive of the impact of our interest rate hedge contracts.
Foreign Currency Exchange Risk
We are subject to foreign currency exchange rate risk because we have revenue and expense denominated in foreign currencies with our primary exposures being the Japanese yen and Canadian dollar. To manage exchange rate risk, we execute both our international revenue and expense transactions in the same foreign currency to the extent practicable. From time to time, we may also enter into foreign currency option and forward contracts. At December 31, 2013, we had open foreign currency forward contracts totaling a $257 million asset position. We estimate that a 10% depreciation or appreciation in the price of the Japanese yen and Canadian dollar in relation to the U.S. dollar would change the projected cash settlement value of our open hedge contracts by a $80 million gain or $100 million loss, respectively, for the year ending December 31, 2014.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Delta Air Lines, Inc.
We have audited the accompanying consolidated balance sheets of Delta Air Lines, Inc. (the Company) as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 2013. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Delta Air Lines, Inc. at December 31, 2013 and