Delta Air Lines today reported financial results for the June quarter 2017. Highlights of those results, including both GAAP and adjusted metrics, are below and incorporated here.
Adjusted pre-tax income for the June 2017 quarter was $1.85 billion, a $172 million increase from the June 2016 quarter, primarily driven by higher revenue. Delta recorded a June quarter 2017 adjusted operating margin of 18.4 percent. Delta delivered these results despite a $125 million negative impact from the operational disruption following severe storms in Atlanta in early April.
“The June quarter ranks among the best in Delta’s history as our people delivered top financial, operational, and customer satisfaction results — and it is an honor to recognize that performance with an additional $338 million toward our 2017 profit sharing,” said Ed Bastian, Delta’s Chief Executive Officer. “While 2017 is a transition period for Delta, we are encouraged by the improvement in unit revenues, leading to increasing conviction in our ability to expand margins as we move through the back half of the year.”
Delta’s record operating revenue of $10.8 billion for the June quarter was up $344 million versus prior year, despite a $115 million headwind from April‘s operational disruption.
Passenger revenue increased $261 million, including $100 million from Delta’s Branded Fares initiatives. Passenger unit revenues increased 2.5 percent on 0.4 percent higher capacity.
Cargo revenue increased 11 percent, driven by higher volumes in freight and mail. Other revenue increased 5 percent primarily due to higher SkyMiles revenue and third-party refinery sales.
“The June quarter marked Delta’s return to unit revenue growth after two and a half years. This improvement resulted from a strengthening demand environment and our commercial initiatives to provide customers more choice, an innovative experience, and a broader global network,” said Glen Hauenstein, Delta’s President. “We expect this momentum to continue in the September quarter, with passenger unit revenue growth of 2.5 to 4.5 percent as we focus on driving a sustainable revenue premium to the industry.”
September 2017 Quarter Guidance
For the September quarter, Delta is expecting its margins to expand relative to prior year, as unit revenue improvement continues and fuel prices and non-fuel cost pressures moderate.
Adjusted fuel expense4 decreased $325 million compared to the same period in 2016 as prior year hedge settlements offset higher market fuel prices. Delta’s adjusted fuel price per gallon for the June quarter was $1.66, which includes $0.01 of benefit from the refinery.
CASM-Ex, including profit sharing increased 7.3 percent for the June 2017 quarter compared to the prior year period. Normalized CASM-Ex, including profit sharing increased 5.5 percent versus the prior year period, driven by employee wage increases, product investments, and 1 point of pressure from April’s operational disruption.
Interest expense increased $10 million year-over-year from debt issuances in the March quarter used to fund Delta’s defined benefit pension liabilities.
“The June quarter represented the peak for non-fuel cost pressures this year and we expect our CASM trajectory to moderate to approximately 2 percent for the September quarter as we annualize product investments, improve productivity through upgauging and better asset utilization, and lap one-time costs from last August’s technology outage,” said Paul Jacobson, Delta’s Chief Financial Officer. “Our cost foundation is an essential component of sustainable performance, allowing the benefits of our commercial initiatives to drive margin improvements in the future.”
Cash Flow, Shareholder Returns, and Adjusted Net Debt
Delta generated $2.8 billion of adjusted operating cash flow and $1.9 billion of free cash flow during the quarter. The company used this strong cash generation to invest nearly $1 billion into the business for aircraft purchases and improvements, facilities upgrades and technology.
In the first half of 2017, Delta contributed $3.5 billion to its defined benefit pension plans, bringing its unfunded pension liability to $6.9 billion, down $3.7 billion versus year-end 2016.
Adjusted net debt at the end of the quarter was $8.4 billion, up $2.3 billion versus year-end 2016 as a result of Delta’s March quarter 2017 unsecured debt issuance.
For the June quarter, the company returned $748 million to shareholders, comprised of $148 million of dividends and $600 million of share repurchases.
June Quarter Results
Special items for the quarter consist primarily of mark-to-market adjustments on fuel hedges.
Delta Air Lines serves more than 180 million customers each year. In 2017, Delta was named to Fortune’s top 50 Most Admired Companies in addition to being named the most admired airline for the sixth time in seven years. Additionally, Delta has ranked No.1 in the Business Travel News Annual Airline survey for an unprecedented six consecutive years. With an industry-leading global network, Delta and the Delta Connection carriers offer service to 334 destinations in 62 countries on six continents. Headquartered in Atlanta, Delta employs more than 80,000 employees worldwide and operates a mainline fleet of more than 800 aircraft. The airline is a founding member of the SkyTeam global alliance and participates in the industry’s leading transatlantic joint venture with Air France-KLM and Alitalia as well as a joint venture with Virgin Atlantic. Including its worldwide alliance partners, Delta offers customers more than 15,000 daily flights, with key hubs and markets including Amsterdam, Atlanta, Boston, Detroit, Los Angeles, Minneapolis/St. Paul, New York-JFK and LaGuardia, London-Heathrow, Paris-Charles de Gaulle, Salt Lake City, Seattle and Tokyo-Narita. Delta has invested billions of dollars in airport facilities, global products and services, and technology to enhance the customer experience in the air and on the ground. Additional information is available on the Delta News Hub, as well as delta.com, Twitter @DeltaNewsHub, Google.com/+Delta, and Facebook.com/delta.
(1) Note A to the attached Consolidated Statements of Operations provides a reconciliation of non-GAAP financial measures used in this release to the comparable GAAP metric and provides the reasons management uses those measures.
(2) CASM - Ex, including profit sharing: In addition to fuel expense, Delta believes adjusting for certain other expenses is helpful to investors because other expenses are not related to the generation of a seat mile. These expenses include aircraft maintenance and staffing services Delta provides to third parties, Delta's vacation wholesale operations and refinery cost of sales to third parties. The amounts excluded were $296 million and $284 million for the June 2017 and June 2016 quarters, and $588 million and $597 million for the six months ended June 30, 2017 and 2016, respectively. Management believes this methodology provides a more consistent and comparable reflection of Delta's airline operations.
(3) Normalized cost comparisons: Delta’s new pilot contract was ratified on December 1, 2016 and was retroactive to January 1, 2016. As a result, Delta recognized $475 million in retroactive wages and other benefits in the December 2016 quarter. Prior year cost comparisons are normalized for the portion of the pilot contract expense recognized in the December quarter 2016 attributable to the June quarter 2016. On a normalized basis, approximately $107 million of this amount related to the June 2016 quarter. We believe that adjusting this period allows investors to better understand and analyze the company's core operational performance on a year-over-year basis.
(4) Adjusted fuel expense reflects, among other things, the impact of mark-to-market (“MTM”) adjustments and settlements. MTM adjustments are defined as fair value changes recorded in periods other than the settlement period. Such fair value changes are not necessarily indicative of the actual settlement value of the underlying hedge in the contract settlement period. Settlements represent cash received or paid on hedge contracts settled during the period. These items adjust fuel expense to show the economic impact of hedging, including cash received or paid on hedge contracts during the period. See Note A for a reconciliation of adjusted fuel expense and average fuel price per gallon to the comparable GAAP metric.
Forward Looking Statements
Statements in this investor update that are not historical facts, including statements regarding our estimates, expectations, beliefs, intentions, projections or strategies for the future, may be "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. All forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from the estimates, expectations, beliefs, intentions, projections and strategies reflected in or suggested by the forward-looking statements. These risks and uncertainties include, but are not limited to, the effects of terrorist attacks or geopolitical conflict; the cost of aircraft fuel; the impact of fuel hedging activity including rebalancing our hedge portfolio, recording mark-to-market adjustments or posting collateral in connection with our fuel hedge contracts; the availability of aircraft fuel; the performance of our significant investments in airlines in other parts of the world; the possible effects of accidents involving our aircraft; the restrictions that financial covenants in our financing agreements could have on our financial and business operations; labor issues; interruptions or disruptions in service at one of our hub, gateway, or key airports; breaches or security lapses in our information technology systems; disruptions in our information technology infrastructure; our dependence on technology in our operations; the effects of weather, natural disasters and seasonality on our business; the effects of an extended disruption in services provided by third party regional carriers; failure or inability of insurance to cover a significant liability at Monroe’s Trainer refinery; the impact of environmental regulation on the Trainer refinery, including costs related to renewable fuel standard regulations; our ability to retain management and key employees; competitive conditions in the airline industry; the effects of extensive government regulation on our business; the sensitivity of the airline industry to prolonged periods of stagnant or weak economic conditions; uncertainty in economic conditions and regulatory environment in the United Kingdom leading up to and following the exit of the United Kingdom from the European Union; and the effects of the rapid spread of contagious illnesses. Additional information concerning risks and uncertainties that could cause differences between actual results and forward-looking statements is contained in our Securities and Exchange Commission filings, including our Annual Report on Form 10-K for the fiscal year ended Dec. 31, 2016. Caution should be taken not to place undue reliance on our forward-looking statements, which represent our views only as of July 13, 2017, and which we have no current intention to update.