The strength of Delta’s long-term business model was on full display Thursday as the airline reported GAAP pre-tax income of $2.4 billion and adjusted pre-tax income of $1.7 billion amid a dip in unit revenues - the amount of money collected for every mile each seat is flown - and the start of climbing fuel prices.

Delta’s solid profit was achieved despite the airline reporting a 4.9 percent year-over-year dip in unit revenues for the quarter. The airline is now setting its sights on returning to positive unit revenue growth by the end of 2016, as fuel prices rise.

“As we look to the remainder of the year, the large year-on-year savings driven by lower fuel are largely behind us,” said CEO Ed Bastian. “It is important to achieving our long-term financial targets that we get unit revenues back to a positive trajectory.”

With foreign currency under heightened pressure from the steep drop in the British Pound and the economic uncertainty from the United Kingdom’s decision to exit the European Union, Delta has decided to reduce 6 points of U.S.-U.K. capacity from its winter schedule. These actions will reduce system capacity by about one point in the December 2016 quarter and Delta now expects to grow its system capacity by 1 percent year over year during this time.

“While the revenue environment remains challenging, with persistent headwinds from close-in domestic yields and geopolitical uncertainty, we remain focused on achieving our goal of positive unit revenues by year end,” said Glen Hauenstein, Delta’s president.  “We’ll continue to move quickly and aggressively with all our commercial levers, including an incremental 1 point reduction in our December quarter capacity levels, to make sure we create the momentum we need to achieve this goal.”

Despite significant investments in Delta people, products and services, Delta’s non-fuel cost growth remains on track to be below 2 percent for the year, and was flat in the second quarter.

Delta’s GAAP fuel expense declined $305 million and adjusted fuel expense declined $408 million year over year due to lower market fuel prices. And while Delta’s hedge losses for the quarter totaled $614 million - $455 million of which was early settlements – it does not expect additional hedge losses in 2016.

Delta generated $3.2 billion in GAAP operating cash flow, $2.6 billion in adjusted operating cash flow and $1.6 billion of free cash flow during the quarter that allowed for the following investments: 

1. $1 billion into the business, including $880 million in fleet investments
2. $135 million in pension plan contributions, completing its planned $1.3 billion in pension contributions for the year.
3. Returned $1.1 billion to shareholders, comprised of $103 million of dividends and $1 billion in share repurchases

During the quarter, FitchRatings upgraded Delta’s corporate credit rating to BBB-, an investment-grade rating, in recognition of the airline’s improved financial strength.

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. Adjusting for these items allows investors to better understand and analyze our core operational performance in the periods shown.

 

Restructuring and other. Because of the variability in restructuring and other, the adjustment for this item is helpful to investors to analyze the company’s recurring core performance in the period shown.
Virgin Atlantic MTM adjustments. We record our proportionate share of earnings from our equity investment in Virgin Atlantic in non-operating expense. We adjust for Virgin Atlantic's MTM adjustments to allow investors to better understand and analyze the company’s core financial performance in the periods shown.

 

Income tax. We included the income tax effect of adjustments when presenting net income, adjusted. We believe that presenting the income tax effect of adjustments allows investors to better understand and analyze the company’s core financial performance in the periods shown.

 

 

 

Fuel expense, adjusted and Average fuel price per gallon, adjusted. The tables below show the components of fuel expense, including the impact of the refinery segment and hedging on fuel expense and average price per gallon. We then adjust for MTM adjustments and settlements for the reason described below:

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. Adjusting for these items allows investors to better understand and analyze our core operational performance in the periods shown.

Operating Cash Flow, adjusted. We adjusted operating cash flow because management believes this metric is helpful to investors to evaluate the company's ability to generate cash that is available for use for capital expenditures, debt service or general corporate initiatives. Adjustments include:

Hedge deferral settlements. During the June 2016 quarter, we early terminated certain of our outstanding deferral transactions and made cash payments of $170 million, including normal settlements. Operating cash flow is adjusted to include these deferral settlements in order to allow investors to better understand the total net impact of hedging activities in the period shown.

Hedge margin and other. Operating cash flow is adjusted for hedge margin as we believe this adjustment removes the impact of current market volatility on our unsettled hedges and allows investors to better understand and analyze the company’s core operational performance in the periods shown.

Free Cash Flow. We present free cash flow because management believes this metric is helpful to investors to evaluate the company's ability to generate cash that is available for use for debt service or general corporate initiatives. Adjustments include:

Hedge deferral settlements. During the June 2016 quarter, we early terminated certain of our outstanding deferral transactions and made cash payments of $170 million, including normal settlements. Free cash flow is adjusted to include these deferral settlements in order to allow investors to better understand the total net impact of hedging activities in the period shown.

Hedge margin and other. Free cash flow is adjusted for hedge margin as we believe this adjustment removes the impact of current market volatility on our unsettled hedges and allows investors to better understand and analyze the company’s core operational performance in the periods shown.