10-Q 1 dal630201410q.htm 10-Q DAL 6.30.2014 10Q


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
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)

State of Incorporation: Delaware

I.R.S. Employer Identification No.: 58-0218548

Post Office Box 20706, Atlanta, Georgia 30320-6001

Telephone: (404) 715-2600
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 þ 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 þ No o
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 
þ
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 þ
Number of shares outstanding by each class of common stock, as of June 30, 2014:
Common Stock, $0.0001 par value - 843,005,966 shares outstanding
This document is also available through our website at http://www.delta.com/about_delta/investor_relations.
 









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-Q (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 “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 (“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.


1




DELTA AIR LINES, INC.
Consolidated Balance Sheets
(Unaudited)
(in millions, except share data)
June 30,
2014
 
December 31,
2013
ASSETS
Current Assets:
 
 
 
Cash and cash equivalents
$
3,362

 
$
2,844

Short-term investments
719

 
959

Restricted cash, cash equivalents and short-term investments
121

 
122

Accounts receivable, net of an allowance for uncollectible accounts of $24 and $23 at June 30, 2014 and
December 31, 2013, respectively
2,104

 
1,609

Fuel inventory
604

 
706

Expendable parts and supplies inventories, net of an allowance for obsolescence of $124 and $118
at June 30, 2014 and December 31, 2013, respectively
357

 
357

Deferred income taxes, net
2,029

 
1,736

Prepaid expenses and other
1,221

 
1,318

Total current assets
10,517

 
9,651

Property and Equipment, Net:
 
 
 
Property and equipment, net of accumulated depreciation and amortization of $8,548 and $7,792
at June 30, 2014 and December 31, 2013, respectively
22,048

 
21,854

Other Assets:
 
 
 
Goodwill
9,794

 
9,794

Identifiable intangibles, net of accumulated amortization of $771 and $738
at June 30, 2014 and December 31, 2013, respectively
4,625

 
4,658

Deferred income taxes, net
4,102

 
4,992

Other noncurrent assets
1,105

 
1,303

Total other assets
19,626

 
20,747

Total assets
$
52,191

 
$
52,252

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
 
 
 
Current maturities of long-term debt and capital leases
$
1,233

 
$
1,547

Air traffic liability
5,803

 
4,122

Accounts payable
2,536

 
2,300

Accrued salaries and related benefits
1,802

 
1,926

Frequent flyer deferred revenue
1,674

 
1,861

Taxes payable
790

 
673

Fuel card obligation
603

 
602

Other accrued liabilities
768

 
1,121

Total current liabilities
15,209

 
14,152

Noncurrent Liabilities:
 
 
 
Long-term debt and capital leases
9,089

 
9,795

Pension, postretirement and related benefits
11,523

 
12,392

Frequent flyer deferred revenue
2,432

 
2,559

Other noncurrent liabilities
1,735

 
1,711

Total noncurrent liabilities
24,779


26,457

Commitments and Contingencies
 
 
 
Stockholders' Equity:
 
 
 
Common stock at $0.0001 par value; 1,500,000,000 shares authorized, 862,693,843 and 869,484,981
shares issued at June 30, 2014 and December 31, 2013, respectively

 

Additional paid-in capital
13,687

 
13,982

Retained earnings
3,962

 
3,049

Accumulated other comprehensive loss
(5,137
)
 
(5,130
)
Treasury stock, at cost, 19,687,877 and 18,041,848 shares at June 30, 2014 and
December 31, 2013, respectively
(309
)
 
(258
)
Total stockholders' equity
12,203

 
11,643

Total liabilities and stockholders' equity
$
52,191

 
$
52,252

 
 
 
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

2



DELTA AIR LINES, INC.
Condensed Consolidated Statements of Operations and Comprehensive Income
(Unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions, except per share data)
2014
 
2013
 
2014
 
2013
Operating Revenue:
 
 
 
 
 
 
 
Passenger:
 
 
 
 
 
 
 
Mainline
$
7,582

 
$
6,796

 
$
13,806

 
$
12,656

Regional carriers
1,684

 
1,698

 
3,137

 
3,158

  Total passenger revenue
9,266

 
8,494

 
16,943

 
15,814

Cargo
230

 
232

 
447

 
470

Other
1,125

 
981

 
2,147

 
1,923

  Total operating revenue
10,621

 
9,707

 
19,537

 
18,207

 
 
 
 
 
 
 
 
Operating Expense:
 
 
 
 
 
 
 
Aircraft fuel and related taxes
2,434

 
2,595

 
4,660

 
4,884

Salaries and related costs
2,046

 
1,922

 
4,015

 
3,833

Regional carrier expense
1,361

 
1,444

 
2,680

 
2,843

Aircraft maintenance materials and outside repairs
466

 
472

 
914

 
963

Depreciation and amortization
451

 
415

 
893

 
820

Contracted services
440

 
409

 
867

 
810

Passenger commissions and other selling expenses
440

 
408

 
813

 
765

Landing fees and other rents
355

 
359

 
696

 
682

Profit sharing
340

 
118

 
439

 
138

Passenger service
215

 
197

 
388

 
361

Aircraft rent
56

 
55

 
107

 
115

Restructuring and other items
30

 
34

 
79

 
136

Other
408

 
365

 
787

 
721

Total operating expense
9,042

 
8,793

 
17,338

 
17,071

 
 
 
 
 
 
 
 
Operating Income
1,579

 
914

 
2,199

 
1,136

 
 
 
 
 
 
 
 
Other (Expense) Income:

 

 
 
 
 
Interest expense, net
(155
)
 
(172
)
 
(320
)
 
(350
)
Amortization of debt discount, net
(18
)
 
(41
)
 
(39
)
 
(83
)
Loss on extinguishment of debt
(111
)
 

 
(129
)
 

Miscellaneous, net
3

 
(15
)
 
(78
)
 
(14
)
Total other expense, net
(281
)
 
(228
)
 
(566
)
 
(447
)
 
 
 
 
 
 
 
 
Income Before Income Taxes
1,298

 
686

 
1,633

 
689

 
 
 
 
 
 
 
 
Income Tax (Provision) Benefit
(497
)
 
(1
)
 
(619
)
 
3

 
 
 
 
 
 
 
 
Net Income
$
801

 
$
685

 
$
1,014

 
$
692

 
 
 
 
 
 
 
 
Basic Earnings Per Share
$
0.95

 
$
0.81

 
$
1.20

 
$
0.81

Diluted Earnings Per Share
$
0.94

 
$
0.80

 
$
1.19

 
$
0.81

Cash Dividends Declared Per Share
$
0.06

 
$

 
$
0.12

 
$

 
 
 
 
 
 
 
 
Comprehensive Income
$
803

 
$
780

 
$
1,007

 
$
938

 
 
 
 
 
 
 
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

3



DELTA AIR LINES, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Six Months Ended June 30,
(in millions)
2014
 
2013
Net Cash Provided by Operating Activities
$
3,007

 
$
2,212

 
 
 
 
Cash Flows From Investing Activities:
 
 
 
Property and equipment additions:
 
 
 
Flight equipment, including advance payments
(857
)
 
(765
)
Ground property and equipment, including technology
(275
)
 
(220
)
Purchase of Virgin Atlantic shares

 
(360
)
Purchase of short-term investments
(240
)
 
(479
)
Redemption of short-term investments
493

 
612

Other, net
37

 
21

Net cash used in investing activities
(842
)

(1,191
)
 
 
 
 
Cash Flows From Financing Activities:
 
 
 
Payments on long-term debt and capital lease obligations
(1,477
)
 
(621
)
Repurchase of common stock
(350
)
 

Cash dividends
(101
)
 

Proceeds from long-term obligations
273

 

Fuel card obligation
1

 
149

Other, net
7

 

Net cash used in financing activities
(1,647
)
 
(472
)
 
 
 
 
Net Increase in Cash and Cash Equivalents
518

 
549

Cash and cash equivalents at beginning of period
2,844

 
2,416

Cash and cash equivalents at end of period
$
3,362

 
$
2,965

 
 
 
 
Non-Cash Transactions:
 
 
 
Flight equipment under capital leases
$
28

 
$

SkyMiles used pursuant to advance purchase under American Express Agreements

 
167

Build-to-suit leased facilities
5

 
85

 
 
 
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.



4



DELTA AIR LINES, INC.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of Delta Air Lines, Inc. and our wholly-owned subsidiaries. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information. Consistent with these requirements, this Form 10-Q does not include all the information required by GAAP for complete financial statements. As a result, this Form 10-Q should be read in conjunction with the Consolidated Financial Statements and accompanying Notes in our Form 10-K. Unless otherwise noted, all amounts disclosed are stated before consideration of income taxes.

Management believes the accompanying unaudited Condensed Consolidated Financial Statements reflect all adjustments, including normal recurring items and restructuring and other items, considered necessary for a fair statement of results for the interim periods presented.

Due to seasonal variations in the demand for air travel, the volatility of aircraft fuel prices, changes in global economic conditions and other factors, operating results for the three and six months ended June 30, 2014 and June 30, 2013 are not necessarily indicative of operating results for the entire year.

Recent Accounting Standards

Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board issued ASU No. 2014-09, "Revenue from Contracts with Customers." While the standard supersedes existing revenue recognition guidance, it closely aligns with current GAAP. Under the new standard, revenue is recognized at the time a good or service is transferred to a customer for the amount of consideration received for that specific good or service. It is effective for annual reporting periods beginning after December 15, 2016, including interim reporting periods, and early adoption is not permitted. Entities may use a full retrospective approach or report the cumulative effect as of the date of adoption. We are currently evaluating the impact, if any, the adoption of this standard will have on our Consolidated Financial Statements.

NOTE 2. OIL REFINERY

Fuel expense is our single largest expense. In recent years, global demand for jet fuel and related products has increased while jet fuel refining capacity has decreased in the U.S. (particularly in the Northeast), resulting in increases in the refining margin reflected in the prices we paid for jet fuel. In June 2012, we purchased an oil refinery as part of our strategy to mitigate the increasing cost of the refining margin we pay.

Refinery Operations and Strategic Agreements

The refinery's production consists of jet fuel, as well as gasoline, diesel and other refined products ("non-jet fuel products"). We use several counterparties to exchange gas and diesel the refinery produces for jet fuel consumed in our airline operations. A multi-year product exchange agreement with a significant counterparty, BP Products North America, Inc., was terminated early effective July 1, 2014, and replaced with another counterparty. The gross fair value of the products exchanged under these agreements during the three and six months ended June 30, 2014 was $1.5 billion and $2.5 billion, respectively, compared to $1.3 billion and $2.7 billion during the three and six months ended June 30, 2013, respectively.


5



Segment Reporting

Segment results are prepared based on our internal accounting methods described below, with reconciliations to consolidated amounts in accordance with GAAP. Our segments are not designed to measure operating income or loss directly related to the products and services included in each segment on a stand-alone basis.
(in millions)
Airline
Refinery
 
Intersegment Sales/Other
 
Consolidated
Three Months Ended June 30, 2014
 
 
 
 
 
 
Operating revenue:
$
10,621

$
2,018

 
 
 
$
10,621

Sales to airline segment
 
 
 
$
(387
)
(1) 
 
Exchanged products
 
 
 
(1,524
)
(2) 
 
Sales of refined products to third parties
 
 
 
(107
)
(3) 
 
Operating income
1,566

13

 

 
1,579

Interest expense, net
155


 

 
155

Depreciation and amortization
445

6

 

 
451

Total assets, end of period
50,948

1,243

 

 
52,191

Capital expenditures
511

7

 

 
518

Three Months Ended June 30, 2013
 
 
 
 
 
 
Operating revenue:
$
9,707

$
1,864

 
 
 
$
9,707

Sales to airline segment
 
 
 
$
(315
)
(1) 
 
Exchanged products
 
 
 
(1,347
)
(2) 
 
Sales of refined products to third parties
 
 
 
(202
)
(3) 
 
Operating income (loss)
965

(51
)
 

 
914

Interest expense, net
172


 

 
172

Depreciation and amortization
411

4

 

 
415

Total assets, end of period
44,567

1,205

 

 
45,772

Capital expenditures
332

6

 

 
338

(1) 
Represents transfers, valued on a market price basis, from the refinery to the airline segment for use in airline operations. We determine market price by reference to the market index for the primary delivery location, which is New York Harbor, for jet fuel from the refinery.
(2) 
Represents value of products delivered under our strategic agreements, as discussed above, determined on a market price basis.
(3) 
Represents sales of refined products to third parties. These sales were at or near cost; accordingly, the margin on these sales is de minimis.

6



(in millions)
Airline
Refinery
 
Intersegment Sales/Other
 
Consolidated
Six Months Ended June 30, 2014
 
 
 
 
 
 
Operating revenue:
$
19,537

$
3,481

 
 
 
$
19,537

Sales to airline segment
 
 
 
$
(636
)
(1) 
 
Exchanged products
 
 
 
(2,527
)
(2) 
 
Sales of refined products to third parties
 
 
 
(318
)
(3) 
 
Operating income (loss)
2,227

(28
)
 

 
2,199

Interest expense, net
320


 

 
320

Depreciation and amortization
882

11

 

 
893

Capital expenditures
1,103

29

 

 
1,132

Six Months Ended June 30, 2013
 
 
 
 
 
 
Operating revenue:
$
18,207

$
3,595

 
 
 
$
18,207

Sales to airline segment
 
 
 
$
(607
)
(1) 
 
Exchanged products
 
 
 
(2,668
)
(2) 
 
Sales of refined products to third parties
 
 
 
(320
)
(3) 
 
Operating income (loss)
1,209

(73
)
 

 
1,136

Interest expense, net
350


 

 
350

Depreciation and amortization
812

8

 

 
820

Capital expenditures
973

12

 

 
985


(1) 
Represents transfers, valued on a market price basis, from the refinery to the airline segment for use in airline operations. We determine market price by reference to the market index for the primary delivery location, which is New York Harbor, for jet fuel from the refinery.
(2) 
Represents value of products delivered under our strategic agreements, as discussed above, determined on a market price basis.
(3) 
Represents sales of refined products to third parties. These sales were at or near cost; accordingly, the margin on these sales is de minimis.

NOTE 3. FAIR VALUE MEASUREMENTS

Assets (Liabilities) Measured at Fair Value on a Recurring Basis
(in millions)
June 30,
2014
Level 1
Level 2
Cash equivalents
$
2,813

$
2,813

$

Short-term investments
719

719


Restricted cash equivalents and investments
99

99


Long-term investments
127

97

30

Hedge derivatives, net
 
 
 
Fuel hedge contracts
255

19

236

Interest rate contracts
(33
)

(33
)
Foreign currency exchange contracts
146


146



7



(in millions)
December 31,
2013
Level 1
Level 2
Cash equivalents
$
2,487

$
2,487

$

Short-term investments
959

959


Restricted cash equivalents and investments
118

118


Long-term investments
109

80

29

Hedge derivatives, net
 
 
 
Fuel hedge contracts
314

16

298

Interest rate contracts
(67
)

(67
)
Foreign currency exchange contracts
257


257


Cash equivalents, short-term investments and restricted cash equivalents and investments. Cash equivalents and short-term investments generally consist of money market funds and treasury bills. Restricted cash equivalents and investments primarily support letters of credit that meet certain projected self-insurance obligations and airport commitments and generally consist of money market funds and time deposits. These investments are recorded at cost, which approximates fair value. Fair value is based on a market approach using prices and other relevant information generated by market transactions involving identical or comparable assets.

Long-term investments. Our long-term investments that are measured at fair value primarily consist of 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. Shares of the parent companies of Aeroméxico and GOL are traded on public exchanges and we have valued our investments based on quoted market prices. The investments are classified in other noncurrent assets.

Hedge derivatives. Our derivative contracts are generally negotiated with counterparties without going through a public exchange. Accordingly, our fair value assessments give consideration to the risk of counterparty default (as well as our own credit risk).

Fuel contracts. Our fuel hedge portfolio consists of call options, put options, swaps and futures. 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. Option contracts are valued under an income approach using option pricing models based on data either readily observable in public markets, derived from public markets or provided by counterparties who regularly trade in public markets. Volatilities used in these valuations ranged from 8% to 22% depending on the maturity dates, underlying commodities and strike prices of the option contracts. Swap contracts are valued under an income approach using a discounted cash flow model based on data either readily observable or derived from public markets. Discount rates used in these valuations vary with the maturity dates of the respective contracts and are based on LIBOR. Futures contracts and options on futures contracts are traded on a public exchange and valued based on quoted market prices.

Interest rate contracts. Our interest rate derivatives consist of swap contracts and are valued primarily based on data readily observable in public markets.

Foreign currency exchange contracts. Our foreign currency derivatives consist of Japanese yen and Canadian dollar forward contracts and are valued based on data readily observable in public markets.


8



NOTE 4. DERIVATIVES

Changes in aircraft fuel prices, interest rates and foreign currency exchange rates impact our results of operations. In an effort to manage our exposure to these risks, we enter into derivative contracts and adjust our derivative portfolio as market conditions change.

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 from changes in the price of jet fuel. We utilize several different contract and commodity types in this program and frequently test their 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.

We generally do not designate our fuel derivative contracts as accounting hedges. We record changes in the fair value of our fuel hedges in aircraft fuel and related taxes. These changes in fair value include settled gains and losses as well as mark-to-market adjustments ("MTM adjustments"). MTM adjustments are based on market prices as of the end of the reporting period for contracts settling in future periods. During the three months ended June 30, 2014 and 2013, we recorded $97 million in fuel hedge gains and $78 million in fuel hedge losses, respectively. During the six months ended June 30, 2014 and 2013, we recorded $175 million in fuel hedge gains and $1 million in fuel hedge losses, respectively.

Hedge Position as of June 30, 2014
(in millions)
Notional Balance
Final Maturity Date
Prepaid Expenses and Other
Other Noncurrent Assets
Other Accrued Liabilities
Other Noncurrent Liabilities
Hedge Derivatives, Net
Designated as hedges
 
 
 
 
 
 
 
 
Interest rate contracts (cash flow hedges)
$
234

U.S. dollars
May 2019
$

$

$
(8
)
$
(12
)
$
(20
)
Interest rate contracts (fair value hedges)
$
430

U.S. dollars
August 2022


(2
)
(11
)
(13
)
Foreign currency exchange contracts
111,262

Japanese yen
January 2017
109

44

(2
)
(5
)
146

448

Canadian dollars
 
 
 
 
 
Not designated as hedges
 
 
 
 
 
 
 
 
Fuel hedge contracts
4,229

gallons - crude oil, diesel and jet fuel
December 2015
411

14

(165
)
(5
)
255

Total derivative contracts
 
 
$
520

$
58

$
(177
)
$
(33
)
$
368


Hedge Position as of December 31, 2013
(in millions)
Notional Balance
Final Maturity Date
Prepaid Expenses and Other
Other Noncurrent Assets
Other Accrued Liabilities
Other Noncurrent Liabilities
Hedge Derivatives, Net
Designated as hedges
 
 
 
 
 
 
 
 
Interest rate contracts (cash flow hedges)
$
477

U.S. dollars
May 2019
$

$

$
(17
)
$
(26
)
$
(43
)
Interest rate contracts (fair value hedges)
$
445

U.S. dollars
August 2022


(2
)
(22
)
(24
)
Foreign currency exchange contracts
120,915

Japanese yen
August 2016
157

100



257

438

Canadian dollars
 
 
 
 
 
Not designated as hedges
 
 
 
 
 
 
 
 
Fuel hedge contracts
5,318

gallons - crude oil, diesel and jet fuel
March 2015
428

29

(127
)
(16
)
314

Total derivative contracts
 
 
$
585

$
129

$
(146
)
$
(64
)
$
504



9



Offsetting Assets and Liabilities

We have master netting arrangements with all of our counterparties giving us the right of setoff. We have elected not to offset the fair value positions recorded on our Consolidated Balance Sheets. The following table shows the potential net fair value positions had we elected to offset.
(in millions)
Prepaid Expenses and Other
Other Noncurrent Assets
Other Accrued Liabilities
Other Noncurrent Liabilities
Hedge Derivatives, Net
June 30, 2014
 
 
 
 
 
Net derivative contracts
$
355

$
52

$
(11
)
$
(28
)
$
368

December 31, 2013
 
 
 
 
 
Net derivative contracts
$
456

$
116

$
(19
)
$
(49
)
$
504


Designated Hedge Gains (Losses)

Gains (losses) related to our designated hedge contracts are as follows:
 
Effective Portion Reclassified from AOCI to Earnings
 
Effective Portion Recognized in Other Comprehensive Income
(in millions)
2014
2013
 
2014
2013
Three Months Ended June 30,
 
 
 
 
 
Interest rates contracts
$
(19
)
$

 
$
21

$
15

Foreign currency exchange contracts
28

24

 
(60
)
54

Total designated
$
9

$
24


$
(39
)
$
69

Six Months Ended June 30,
 
 
 
 
 
Interest rates contracts
$
(19
)
$

 
$
23

$
21

Foreign currency exchange contracts
71

45

 
(111
)
141

Total designated
$
52

$
45


$
(88
)
$
162


As of June 30, 2014, we have recorded $107 million of net gains on cash flow hedge contracts in accumulated other comprehensive loss, which are scheduled to settle and be reclassified into earnings within the next 12 months.

Credit Risk

To manage credit risk associated with our aircraft fuel price, interest rate and foreign currency hedging programs, we evaluate counterparties based on several criteria including their credit ratings and limit our exposure to any one counterparty.

Our 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. Due to the fair value position of our hedge contracts, we received net margin of $5 million and $65 million as of June 30, 2014 and December 31, 2013, respectively. Margin received is recorded in accounts payable and margin posted is recorded in prepaid expenses and other.


10



NOTE 5. LONG-TERM DEBT

Fair Value of Debt

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. In the table below, the aggregate fair value of debt is based primarily on reported market values, recently completed market transactions and estimates based on interest rates, maturities, credit risk and underlying collateral and is classified primarily as Level 2 within the fair value hierarchy.
(in millions)
June 30,
2014
December 31,
2013
Total debt at par value
$
10,083

$
11,228

Unamortized discount, net
(227
)
(383
)
Net carrying amount
$
9,856

$
10,845

Fair value
$
10,500

$
11,600


Debt Extinguishment

During the three and six months ended June 30, 2014, we extinguished $748 million and $873 million of existing debt under our secured financing arrangements prior to scheduled maturity. We recorded losses on extinguishment of debt for the difference between the principal paid and the carrying value of the debt, which included unamortized discounts or premiums and unamortized issuance costs. The losses also included premiums paid to retire the debt. During the three and six months ended June 30, 2014, we recorded losses of $111 million and $129 million, respectively, in connection with the early extinguishment of debt obligations. The losses primarily relate to unamortized debt discounts resulting from fair value adjustments recorded in the 2008 purchase accounting of Northwest Airlines.

Covenants

We were in compliance with the covenants in our financing agreements at June 30, 2014.
 
NOTE 6. COMMITMENTS AND CONTINGENCIES

Aircraft Purchase and Lease Commitments

In June 2014, we finalized an agreement with Airbus to purchase an additional 15 A321-200 aircraft with deliveries beginning in 2018.

At June 30, 2014, future aircraft purchase commitments totaled approximately $8.9 billion and included 78 B-737-900ER, 45 A321-200, 18 B-787-8, 14 CRJ-900, and 10 A330-300 aircraft. We have obtained long-term financing commitments for a substantial portion of the purchase price of these aircraft, except for the 18 B-787-8 aircraft. Our purchase commitment for the 18 B-787-8 aircraft provides for certain aircraft substitution rights.
(in millions)
Total
Six months ending December 31, 2014
$
615

2015
1,355

2016
1,730

2017
1,500

2018
1,035

Thereafter
2,700

Total
$
8,935


We also have agreements with Southwest Airlines and The Boeing Company to lease an additional 52 B-717-200 aircraft, and deliveries will continue through 2015.


11



Venezuelan Currency Devaluation

As of June 30, 2014, we had $194 million of unrestricted cash on our Consolidated Balance Sheet related to our 2013 and 2014 Venezuelan ticket sales for which repatriation has been requested, but not yet authorized. While the cash is available for use in Venezuela, our ability to repatriate these funds has been severely limited due to Venezuelan government controls. Cash related to 2013 sales of $109 million is stated at the official exchange rate of 6.3 bolivars per US dollar. The remaining $85 million is related to our 2014 sales and stated at the then current SICAD I reference rate of 10.6 bolivars per US dollar. The SICAD I reference rate is a complementary currency auction system that was created by the Venezuelan government in 2013 for purposes of exchanging currency.

In January 2014, the Venezuelan government affirmed the official exchange rate for 2013 sales and announced that some sectors of the economy, including airlines, will use the SICAD I reference rate for 2014 sales and repatriation requests. At the time of the announcement, we recorded a $23 million charge in miscellaneous, net within other (expense) income to reflect the devaluation of currency related to January 2014 sales that were denominated in bolivars. We are recording all sales subsequent to January 2014 at the then current SICAD I reference rate.

Part of the unrestricted cash balance is for advanced ticket sales for which we have yet to provide services. In connection with our ongoing repatriation concerns, we have recently announced our decision to significantly reduce service to Venezuela beginning August 1, 2014. We will refund tickets previously sold for flights to and from Venezuela originally scheduled on or after August 1, 2014. These refunds will be made in local currency and will reduce our cash balances in Venezuela. Until the remaining funds can be repatriated, they are at risk of future devaluations.

Legal Contingencies

We are involved in various legal proceedings related to employment practices, environmental issues, antitrust matters and other matters concerning our business. We record liabilities for losses from legal proceedings when we determine that it is probable that the outcome in a legal proceeding will be unfavorable and the amount of loss can be reasonably estimated. We cannot reasonably estimate the potential loss for certain legal proceedings because, for example, the litigation is in its early stages or the plaintiff does not specify the damages being sought. Although the outcome of the legal proceedings in which we are involved cannot be predicted with certainty, management believes that the resolution of these matters will not have a material adverse effect on our Condensed Consolidated Financial Statements.

Other Contingencies

General Indemnifications

We are the lessee under many commercial real estate leases. It is common in these transactions for us, as the lessee, to agree to indemnify the lessor and the lessor's related parties for tort, environmental and other liabilities that arise out of or relate to our use or occupancy of the leased premises. This type of indemnity would typically make us responsible to indemnified parties for liabilities arising out of the conduct of, among others, contractors, licensees and invitees at, or in connection with, the use or occupancy of the leased premises. This indemnity often extends to related liabilities arising from the negligence of the indemnified parties, but usually excludes any liabilities caused by either their sole or gross negligence or their willful misconduct.

Our aircraft and other equipment lease and financing agreements typically contain provisions requiring us, as the lessee or obligor, to indemnify the other parties to those agreements, including certain of those parties' related persons, against virtually any liabilities that might arise from the use or operation of the aircraft or such other equipment.

We believe that our insurance would cover most of our exposure to liabilities and related indemnities associated with the commercial real estate leases and aircraft and other equipment lease and financing agreements described above. While our insurance does not typically cover environmental liabilities, we have certain insurance policies in place as required by applicable environmental laws.

Certain of our aircraft and other financing transactions include provisions that require us to make payments to preserve an expected economic return to the lenders if that economic return is diminished due to certain changes in laws or regulations. In certain of these financing transactions, we also bear the risk of certain changes in tax laws that would subject payments to non-U.S. lenders to withholding taxes.


12



We cannot reasonably estimate our potential future payments under the indemnities and related provisions described above because we cannot predict (1) when and under what circumstances these provisions may be triggered and (2) the amount that would be payable if the provisions were triggered because the amounts would be based on facts and circumstances existing at such time.

Employees Under Collective Bargaining Agreements

At June 30, 2014, we had approximately 80,720 full-time equivalent employees. Approximately 18% of these employees were represented by unions.

Other

We have certain contracts for goods and services that require us to pay a penalty, acquire inventory specific to us or purchase contract-specific equipment, as defined by each respective contract, if we terminate the contract without cause prior to its expiration date. Because these obligations are contingent on our termination of the contract without cause prior to its expiration date, no obligation would exist unless such a termination occurs.

NOTE 7. RESTRUCTURING AND OTHER ITEMS

We recorded restructuring charges of $30 million and $34 million in the June 2014 and 2013 quarters, respectively, and $79 million and $136 million for the six months ended June 30, 2014 and 2013, respectively, related to our fleet restructuring initiative and certain other items. Under the fleet restructuring initiative, we are focused on removing older, less efficient aircraft from our fleet and replacing them with B-737-900ER, B-717-200 and CRJ-900 aircraft. These restructuring charges include remaining lease payments for grounded aircraft, the acceleration of depreciation and lease return costs.

As we restructure our fleet and assess our fleet plans, we will continue to evaluate older, retiring aircraft and related equipment for changes in depreciable life, impairment and lease termination costs. The retirement of aircraft, when permanently removed from our fleet, will likely result in lease termination and other charges. The timing and amount of these charges will depend on a number of factors, including final negotiations with lessors, the timing of removing aircraft from service and ultimate disposition of aircraft included in the fleet restructuring program. We expect to benefit from reduced future maintenance cost and improved operational and fuel efficiency over the life of the new aircraft.

The following table shows the balances and activity for lease restructuring charges:
(in millions)
Total
Liability as of December 31, 2013
$
168

Additional costs and expenses
66

Payments
(21
)
Liability as of June 30, 2014
$
213


In June 2014, we announced a voluntary retirement program to eligible U.S. employees. We will record a charge in connection with this program when voluntary severance commitments are finalized during the September 2014 quarter.


13



NOTE 8. EMPLOYEE BENEFIT PLANS

The following table shows the components of net periodic cost:
 
Pension Benefits
Other Postretirement and
Postemployment Benefits
(in millions)
2014
2013
2014
2013
Three Months Ended June 30,
 
 
 
 
Service cost
$

$

$
13

$
12

Interest cost
232

215

39

36

Expected return on plan assets
(207
)
(184
)
(21
)
(21
)
Amortization of prior service credit


(7
)
(7
)
Recognized net actuarial loss
33

55

1

6

Net periodic cost
$
58

$
86

$
25

$
26

Six Months Ended June 30,
 
 
 
 
Service cost
$

$

$
26

$
24

Interest cost
464

430

78

72

Expected return on plan assets
(414
)
(368
)
(42
)
(42
)
Amortization of prior service credit


(14
)
(14
)
Recognized net actuarial loss
67

111

2

12

Settlements

6



Net periodic cost
$
117

$
179

$
50

$
52


NOTE 9. ACCUMULATED OTHER COMPREHENSIVE LOSS

The following tables show the components of accumulated other comprehensive loss:
(in millions)
Pension and Other Benefits Liabilities
Derivative Contracts
Total(1)
Balance at December 31, 2013
$
(5,349
)
$
219

$
(5,130
)
Changes in value (net of tax effect of $12)
19

(23
)
(4
)
Reclassifications into earnings (net of tax effect of $2)(3)
30

(33
)
(3
)
Balance at June 30, 2014
$
(5,300
)
$
163

$
(5,137
)

(in millions)
Pension and Other Benefits Liabilities
Derivative Contracts(2)
Total
Balance at December 31, 2012
$
(8,314
)
$
(263
)
$
(8,577
)
Changes in value (net of tax effect of $0)
(29
)
207

178

Reclassifications into earnings (net of tax effect of $0)(3)
113

(45
)
68

Balance at June 30, 2013
$
(8,230
)
$
(101
)
(8,331
)

(1) 
Includes $1.9 billion of deferred income tax expense, primarily related to pension obligations, that will not be recognized in net income until the pension obligations are fully extinguished, which is not expected to occur for at least 25 years.
(2) 
Includes $321 million of deferred income tax expense that remained in accumulated other comprehensive loss until December 2013 when all amounts in accumulated other comprehensive loss that related to fuel derivatives designated as accounting hedges were recognized in the Consolidated Statement of Operations.
(3) 
Amounts reclassified from accumulated other comprehensive loss for the pension and other benefits liability are recorded in salaries and related costs in the Condensed Consolidated Statements of Operations and Comprehensive Income, and the amounts for derivative contracts are recorded in interest expense, net and passenger revenue, in the Condensed Consolidated Statements of Operations and Comprehensive Income.


14



NOTE 10. EARNINGS PER SHARE

We calculate basic earnings per share by dividing net income by the weighted average number of common shares outstanding, excluding restricted shares. Antidilutive common stock equivalents excluded from the diluted earnings per share calculation are not material. The following table shows the computation of basic and diluted earnings per share:
 
Three Months Ended June 30,
Six Months Ended June 30,
(in millions, except per share data)
2014
2013
2014
2013
Net income
$
801

$
685

$
1,014

$
692

 
 
 
 
 
Basic weighted average shares outstanding
841

850

843

849

Dilutive effect of share-based awards
9

9

9

7

Diluted weighted average shares outstanding
850

859

852

856

 
 
 
 
 
Basic earnings per share
$
0.95

$
0.81

$
1.20

$
0.81

Diluted earnings per share
$
0.94

$
0.80

$
1.19

$
0.81


NOTE 11. DIVIDEND AND SHARE REPURCHASE

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. On April 25, 2014, the Board of Directors declared the fourth dividend payment in this program, a $0.06 per share dividend for shareholders of record as of May 9, 2014. This dividend was paid in May 2014 and totaled $50 million. Including the $51 million payment in the first quarter, dividends paid in 2014 total $101 million.

Also as a part of the May 2013 plan, the Board of Directors authorized a $500 million share repurchase program to be completed no later than June 30, 2016. During the six months ended June 30, 2014, we repurchased and retired 7.3 million shares at a cost of $250 million, bringing our total repurchases under the program to $500 million, which completed our May 2013 share repurchase authorization.

In May 2014, we announced the next phase of capital returns to shareholders. As part of this phase, the Board of Directors approved a program to increase the quarterly dividend by 50% to $0.09 per share beginning in the September 2014 quarter. Additionally, the Board authorized a new $2 billion share repurchase program to be completed no later than December 31, 2016. Together, the increased dividend program and the new repurchase program are expected to return an additional $2.75 billion to shareholders through 2016. During the three months ended June 30, 2014, we repurchased and retired 2.5 million shares at a cost of $100 million under the new repurchase program.


15



ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

June 2014 Quarter Financial Highlights

Our pre-tax income for the June 2014 quarter was $1.3 billion, representing a $612 million improvement over the corresponding prior year period. We realized pre-tax margin expansion of five points primarily due to higher revenues.

Revenue. Our passenger revenue increased $772 million compared to the June 2013 quarter due to 5% higher traffic, 3% higher capacity and a 6% increase in passenger revenue per available seat mile ("PRASM"). Our ability to maintain revenue momentum was driven by a solid demand environment, higher corporate sales, merchandising initiatives and our investments in New York and Seattle.

Operating Expense. Total operating expense increased $249 million from the June 2013 quarter. Our consolidated operating cost per available seat mile ("CASM") for the June 2014 quarter decreased 0.4% to 14.63 cents from 14.69 cents in the June 2013 quarter, on a 3% increase in capacity. CASM-Ex (a non-GAAP financial measure) was flat at 8.98 cents compared to the June 2013 quarter.

The increase in our total operating expense reflects higher profit sharing, higher salaries and related costs and volume-based cost increases driven by the increase in capacity, partially offset by lower fuel expense. The increases in profit sharing and salaries and related costs were driven by our current expectations for 2014 pre-tax profit and employee investments, respectively. Including our regional carriers, fuel expense was $2.9 billion for the June 2014 quarter. Our average fuel price per gallon was $2.93, which was 23 cents lower than the same period in 2013. Our average fuel price per gallon, adjusted (a non-GAAP financial measure) was 10 cents lower than the same period in 2013. Our fuel cost includes net fuel hedge gains in the airline segment for the June 2014 quarter of $99 million and a profit on refinery operations of $13 million.

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 - Three Months Ended June 30, 2014 and 2013 - Operating Expense" below.

Company Initiatives

In 2014, we continue to focus on investments in our network, product and operations, which are producing sustainable revenue gains, and maintaining cost performance. These initiatives include:

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, facility improvements at our hubs at LaGuardia and JFK in New York and the creation of an international gateway in Seattle.

Maintaining Cost Performance. As part of our ongoing efforts to maintain cost performance, we are focused on capping the rate of non-fuel unit cost growth at less than 2% annually. 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 replacing a significant portion of our 50-seat regional flying with more efficient and customer preferred CRJ-900 and B-717-200 aircraft and replacing older, less cost effective B-757-200 aircraft with B-737-900ER aircraft. During the June 2014 quarter, we took delivery of seven CRJ-900, 12 B-717-200 and four B-737-900ER aircraft. We will retire a significant portion of the 50-seat regional fleet that we lease as part of the fleet restructuring activities. We expect to continue to recognize restructuring charges, representing the remaining obligations under the leases, as we retire the leased aircraft. Although many factors could change over the fleet restructuring period, we currently estimate that future charges will be between $120 million and $220 million, in addition to the $30 million recorded during the June 2014 quarter.

For more in-depth discussion regarding these initiatives, refer to Management's Discussion and Analysis in our Form 10-K.

16




Increasing Shareholder Value

We continue to focus on cash flow generation with the goal of further strengthening our balance sheet. We finished the June 2014 quarter with $6.0 billion in unrestricted liquidity (consisting of cash, cash equivalents, short-term investments and undrawn revolving credit facilities). During the six months ended June 30, 2014, we generated $3.0 billion in cash from operating activities, which we used to reduce debt and capital lease obligations by $1.5 billion, fund capital expenditures of $1.1 billion and return $451 million to shareholders, while maintaining a solid liquidity position.

We also contributed $905 million to our qualified defined benefit pension plans during the first four months of 2014. As a result of these contributions, we satisfied, on an accelerated basis, the required contributions for our defined benefit plans for 2014, including $250 million above the minimum funding requirements.

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. On April 25, 2014, the Board of Directors declared the fourth dividend payment in this program, a $0.06 per share dividend for shareholders of record as of May 9, 2014. This dividend was paid in May 2014 and totaled $50 million. Including the $51 million payment in the first quarter, dividends paid in 2014 total $101 million.

Also as a part of the May 2013 plan, the Board of Directors authorized a $500 million share repurchase program to be completed no later than June 30, 2016. During the six months ended June 30, 2014, we repurchased and retired 7.3 million shares at a cost of $250 million, bringing our total repurchases under the program to $500 million, which completed our May 2013 share repurchase authorization.

In May 2014, we announced the next phase of capital returns to shareholders. As part of this phase, the Board of Directors approved a program to increase the quarterly dividend by 50% to $0.09 per share beginning in the September 2014 quarter. Additionally, the Board authorized a new $2 billion share repurchase program to be completed no later than December 31, 2016. Together, the increased dividend program and the new repurchase program are expected to return an additional $2.75 billion to shareholders through 2016. During the three months ended June 30, 2014, we repurchased and retired 2.5 million shares at a cost of $100 million under the new repurchase program.
 
SkyMiles Program

During the March 2014 quarter, we announced that we would be making changes to the SkyMiles program. Effective January 1, 2015, the SkyMiles program will be modified from the current model in which customers earn redeemable mileage points based on distance traveled to one based on ticket price. Customers will be able to earn between five and 11 miles per dollar spent based on their SkyMiles status, and will continue to earn up to an additional two miles per dollar when using their Delta SkyMiles Credit Card, for a total of up to 13 miles per dollar. The updated program will better reward customers who spend more with Delta and give them improved mileage-earning opportunities.

The SkyMiles program will also include a new award redemption structure that will improve award seat availability at the lowest point redemption levels, offer one-way awards at half the price of round-trip, provide new miles plus cash award options, as well as make significant improvements to delta.com and Delta reservations award shopping tools.


17



Fuel Expense, including refinery results

Fuel Expense. Fuel expense is our largest expense, representing 32% of total operating expense. For the June 2014 quarter, total fuel expense (including our regional carriers) decreased $168 million compared to the same period in 2013. This decrease is primarily due to hedge gains in the current year compared to hedge losses in the prior year and profitability at Monroe, partially offset by higher market jet fuel prices and an increase in consumption. 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 the June 2014 quarter was $2.93 per gallon, compared to $3.03 per gallon in the June 2013 quarter.
Fuel Purchase Cost. The market price per gallon of jet fuel increased 4% compared to the June 2013 quarter.
Fuel Hedging Program Impact. We actively manage our fuel price risk through a hedging program intended to reduce the financial impact from changes in the price of jet fuel. During the June 2014 quarter, our consolidated fuel hedge gain was $97 million. This hedge gain included $1 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. The refinery primarily produces gasoline, diesel and jet fuel. Under multi-year agreements, we are effectively exchanging the non-jet fuel products the refinery produces with third parties for jet fuel consumed in our airline operations. The jet fuel produced and procured through exchanging gasoline and diesel fuel produced by the refinery provided approximately 166,000 barrels (approximately seven million gallons) per day for use in airline operations during the June 2014 quarter. A multi-year product exchange agreement with a significant counterparty, BP Products North America, Inc., was terminated early effective July 1, 2014, and replaced with another counterparty.
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 June 30, 2014 was $0.55 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. As of June 30, 2014, we have satisfied our RINs requirement with the EPA related to our 2012 and 2013 production. We recognized $20 million of expense related to the RINs requirement in the June 2014 quarter, 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 profit of $13 million in the June 2014 quarter. The refinery's results were impacted by the cost of RINs that continue to exceed 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.


18



Results of Operations - Three Months Ended June 30, 2014 and 2013

Operating Revenue
 
Three Months Ended June 30,
 
 
(in millions)
2014
2013
Increase (Decrease)
% Increase
 (Decrease)
Passenger:
 
 
 
 
Mainline
$
7,582

$
6,796

$
786

12
 %
Regional carriers
1,684

1,698

(14
)
(1
)%
Total passenger revenue
9,266

8,494

772

9
 %
Cargo
230

232

(2
)
(1
)%
Other
1,125

981

144

15
 %
Total operating revenue
$
10,621

$
9,707

$
914

9
 %

Passenger Revenue
 
 
Increase (Decrease)
vs. Three Months Ended June 30, 2013
(in millions)
Three Months Ended June 30, 2014
Passenger
Revenue
RPMs(1)
(Traffic)
ASMs(2)
(Capacity)
Passenger Mile
Yield
PRASM(3)
Load
Factor
Domestic
$
4,493

16
 %
8
 %
5
 %
7
 %
10
 %
2.3
 pts
Atlantic
1,666

6
 %
 %
(2
)%
6
 %
7
 %
1.3
 pts
Pacific
819

(3
)%
(1
)%
1
 %
(2
)%
(3
)%
(1.2
) pts
Latin America
604

23
 %
23
 %
24
 %
 %
(1
)%
(0.2
) pts
Total Mainline
7,582

12
 %
6
 %
4
 %
5
 %
7
 %
1.3
 pts
Regional carriers
1,684

(1
)%
(1
)%
(4
)%
 %
3
 %
2.5
 pts
Total Consolidated
$
9,266

9
 %
5
 %
3
 %
4
 %
6
 %
1.5
 pts

(1) 
Revenue passenger miles (“RPMs”)
(2) 
Available seat miles (“ASMs”)
(3) 
Passenger revenue per ASM (“PRASM”)

Passenger revenue increased $772 million, or 9%. PRASM increased 6% and passenger mile yield increased 4% during the June 2014 quarter compared to the June 2013 quarter.

Our geographic regions generally performed well compared to the same period in the prior year, with the domestic region leading unit revenue improvement. Unit revenues of the domestic region rose 10% led by strong performances from our hubs in Atlanta and New York-LaGuardia on the East Coast with Seattle producing solid results on the West Coast.

Revenues related to our international regions increased 6% year-over-year primarily due to 24% capacity growth in the Latin America region as a result of our efforts to improve connections with GOL and Aeroméxico. Latin America unit revenues declined 1% as a result of the capacity increase and some business demand weakness associated with the FIFA World Cup in Brazil. Atlantic unit revenue increased 7% driven by traffic and yield improvements on lower capacity. Our Pacific region experienced a 3% decline in unit revenues driven by lower yield primarily due to the effects of the devaluation of the Japanese yen.

Other Revenue. Other revenue increased $144 million, or 15%, primarily due to an increase in sales of SkyMiles and settlements associated with our transatlantic joint venture agreements.

19



Operating Expense
 
Three Months Ended June 30,
Increase
(Decrease)
% Increase
(Decrease)
(in millions)
2014
2013
Aircraft fuel and related taxes
$
2,434

$
2,595

$
(161
)
(6
)%
Salaries and related costs
2,046

1,922

124

6
 %
Regional carrier expense
1,361

1,444

(83
)
(6
)%
Aircraft maintenance materials and outside repairs
466

472

(6
)
(1
)%
Depreciation and amortization
451

415

36

9
 %
Contracted services
440

409

31

8
 %
Passenger commissions and other selling expenses
440

408

32

8
 %
Landing fees and other rents
355

359

(4
)
(1
)%
Profit sharing
340

118

222

NM(1)

Passenger service
215

197

18

9
 %
Aircraft rent
56

55

1

2
 %
Restructuring and other items
30

34

(4
)
NM(1)

Other
408

365

43

12
 %
Total operating expense
$
9,042

$
8,793

$
249

3
 %
 
(1)
NM - Not meaningful

Fuel Expense. Including our regional carriers, fuel expense decreased $168 million due to hedge gains in the current year versus hedge losses in the prior year and profitability at Monroe, partially offset by a 4% increase in fuel market price per gallon and a 2% increase in consumption. The table below presents fuel expense, gallons consumed and average price per gallon, including the impact of hedging and the refinery:
 
Three Months Ended June 30,
Increase
(Decrease)
% Increase
(Decrease)
(in millions, except per gallon data)
2014
2013
Aircraft fuel and related taxes(1)
$
2,434

$
2,595

$
(161
)
 
Aircraft fuel and related taxes included within regional carrier expense
500

507

(7
)
 
Total fuel expense
$
2,934

$
3,102

$
(168
)
(5
)%
 
 
 
 
 
Total fuel consumption (gallons)
1,001

981

20

2
 %
Average price per gallon
$
2.93

$
3.16

$
(0.23
)
(7
)%

(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
 
Three Months Ended June 30,
Change
Three Months Ended June 30,
Change
(in millions, except per gallon data)
2014
2013
2014
2013
Fuel purchase cost
$
3,046

2,935

$
111

$
3.04

$
2.99

$
0.05

Airline segment fuel hedge (gains) losses
(99
)
116

(215
)
(0.10
)
0.12

(0.22
)
Refinery segment impact
(13
)
51

(64
)
(0.01
)
0.05

(0.06
)
Total fuel expense
$
2,934

$
3,102

$
(168
)
$
2.93

$
3.16

$
(0.23
)
MTM adjustments
1

(125
)
126


(0.13
)
0.13

Total fuel expense, adjusted
$
2,935

$
2,977

$
(42
)
$
2.93

$
3.03

$
(0.10
)



20



Fuel Purchase Cost. Fuel purchase cost is based on the market price for jet fuel at airport locations.

Airline Segment Fuel Hedge Impact and MTM Adjustments. During the three months ended June 30, 2014, our airline segment fuel hedge gains of $99 million included $1 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 MTM adjustments are reflected in the table above to calculate an effective fuel cost for the period.

Refinery Segment 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 certain counterparties. As described in Note 2 of the Notes to the Condensed Consolidated Financial Statements, to the extent that we account for exchanges of refined products as nonmonetary transactions, we include the results of those transactions within fuel expense.

We adjust fuel expense for the items noted above to arrive at a more meaningful measure of fuel cost. Our average price per gallon, adjusted (a non-GAAP financial measure) was $2.93 for the three months ended June 30, 2014.

Salaries and Related Costs. The increase in salaries and related costs is primarily due to investments in our employees, partially offset by lower pension expense. We contributed $905 million to our qualified defined benefit pension plans in the first four months of 2014. As a result of these contributions, we satisfied, on an accelerated basis, the required contributions for our defined benefit plans for 2014, including $250 million above the minimum funding requirements.

Regional carrier expense. The reduction in regional carrier expense is primarily due to fewer required maintenance events resulting from the removal of some 50-seat regional aircraft from our fleet as part of our strategy to restructure our domestic fleet.

Depreciation and amortization. Depreciation and amortization expense increased year-over-year primarily due to investments in new B-737-900ER and CRJ-900 aircraft, the purchase of aircraft off-lease, and aircraft modifications that upgraded aircraft interiors and enhanced our product offering.

Contracted Services. Contracted services expense increased year-over-year due primarily to costs associated with the 3% increase in capacity.

Passenger commissions and other selling expenses. Passenger commissions and other selling expenses increased on higher passenger revenue.

Profit Sharing. The increase in profit sharing is driven by an increase in the projected full year pre-tax income compared to the prior year. 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 program defines profit as pre-tax profit excluding certain items. These items include profit sharing and special items, such as MTM adjustments and restructuring and other items. Our profit sharing program pays 10% to employees for the first $2.5 billion of annual profits and 20% of annual profits above $2.5 billion.

Passenger service. The increase in passenger service is driven by the 6% increase in mainline RPMs.

Aircraft Rent. Aircraft rent increased year-over-year due primarily to the addition of leased B-717-200 and B-737-900ER aircraft delivered during the period, partially offset by the purchase of various aircraft off-lease in 2013.

Restructuring and Other Items. Due to the nature of amounts recorded within restructuring and other items, a year over year comparison is not meaningful. For a discussion of charges recorded in restructuring and other items, see Note 7 of the Notes to the Condensed Consolidated Financial Statements.


21



Non-Operating Results
 
Three Months Ended June 30,
 
 
(in millions)
2014
2013
 
Favorable (Unfavorable)
Interest expense, net
$
(155
)
$
(172
)
 
$
17

Amortization of debt discount, net
(18
)
(41
)
 
23

Loss on extinguishment of debt
(111
)

 
(111
)
Miscellaneous, net
3

(15
)
 
18

Total other expense, net
$
(281
)
$
(228
)
 
$
(53
)

The declines in interest expense, net and amortization of debt discount, net are driven by reduced levels of debt and the refinancing of debt obligations at lower interest rates. Our principal amount of debt and capital leases has declined from $12.7 billion at June 30, 2013 to $10.6 billion at June 30, 2014.

During the three months ended June 30, 2014, we extinguished $748 million of existing debt under our secured financing arrangements prior to scheduled maturity. We recorded losses on extinguishment of debt for the difference between the principal paid and the carrying value of the debt, which included unamortized discounts or premiums and unamortized issuance costs. The losses also included premiums paid to retire the debt. During the three months ended June 30, 2014, we recorded a loss of $111 million in connection with the early extinguishment of debt obligations. The loss primarily relates to unamortized debt discounts resulting from fair value adjustments recorded in the 2008 purchase accounting of Northwest Airlines.

Miscellaneous, net is favorable primarily due to our proportionate share of earnings from our equity investment in Virgin Atlantic. We made a 49% ownership investment in Virgin Atlantic during the June 2013 quarter.

Income Taxes

We released substantially all of our valuation allowance against our net deferred tax assets on December 31, 2013. We project that our annual effective tax rate for 2014 will be approximately 38%. In certain interim periods, we may have adjustments to our net deferred tax assets as a result of changes in prior year estimates and tax laws enacted during the period, which will impact the effective tax rate for that interim period. At June 30, 2014, we had over $14 billion of U.S. federal pre-tax net operating loss carryforwards, which do not begin to expire until 2023. Accordingly, we believe we will not pay any cash federal income taxes during the next several years.


22



Results of Operations - Six Months Ended June 30, 2014 and 2013

Operating Revenue
 
Six Months Ended June 30,
 
 
(in millions)
2014
2013
Increase (Decrease)
% Increase
 (Decrease)
Passenger:
 
 
 
 
Mainline
$
13,806

$
12,656

$
1,150

9
 %
Regional carriers
3,137

3,158

(21
)
(1
)%
Total passenger revenue
16,943

15,814

1,129

7
 %
Cargo
447

470

(23
)
(5
)%
Other
2,147

1,923

224

12
 %
Total operating revenue
$
19,537

$
18,207

$
1,330

7
 %

Passenger Revenue
 
 
Increase (Decrease)
vs. Six Months Ended June 30, 2013
(in millions)
Six Months Ended June 30, 2014
Passenger
Revenue
RPMs(1)
(Traffic)
ASMs(2)
(Capacity)
Passenger Mile
Yield
PRASM(3)
Load
Factor
Domestic
$
8,228

13
 %
6
 %
3
 %
6
 %
9
 %
2.0
 pts
Atlantic
2,673

3
 %
 %
(2
)%
3
 %
5
 %
1.0
 pts
Pacific
1,646

(4
)%
 %
 %
(4
)%
(4
)%
(0.4
) pts
Latin America
1,259

20
 %
22
 %
21
 %
(1
)%
 %
0.6
 pts
Total Mainline
13,806

9
 %
5
 %
3
 %
4
 %
5
 %
1.3
 pts
Regional carriers
3,137

(1
)%
(1
)%
(4
)%
 %
4
 %
2.6
 pts
Total Consolidated
$
16,943

7
 %
4
 %
2
 %
3
 %
4
 %
1.5
 pts

(1) 
Revenue passenger miles (“RPMs”)
(2) 
Available seat miles (“ASMs”)
(3) 
Passenger revenue per ASM (“PRASM”)

Passenger revenue increased $1.1 billion, or 7%, on a 4% PRASM increase and a 3% increase in passenger mile yield. Revenues remained strong despite lower fuel prices.

Our geographic regions generally performed well compared to the same period in the prior year, with the domestic region leading unit revenue improvement. Unit revenues of the domestic region rose 9% led by strong performances from our hubs in Atlanta and New York-LaGuardia on the East Coast with Seattle producing solid results on the West Coast.

Revenues related to our international regions increased 4% year-over-year primarily due to 21% capacity growth in the Latin America region as a result of our efforts to improve connections with GOL and Aeroméxico. Latin America unit revenues were flat as a result of the increase in capacity, primarily to Mexico where business market performance was solid. Atlantic unit revenue increased 5% driven by yield improvements and a 1.0 point increase in load factor. Our Pacific region experienced a 4% decline in unit revenues driven by lower yield primarily due to the effects of the devaluation of the Japanese yen.

Other Revenue. Other revenue increased $224 million, or 12%, primarily due to an increase in sales of SkyMiles and settlements associated with our transatlantic joint venture agreements.


23



Operating Expense
 
Six Months Ended June 30,
Increase
(Decrease)
% Increase
(Decrease)
(in millions)
2014
2013
Aircraft fuel and related taxes
$
4,660

$
4,884

$
(224
)
(5
)%
Salaries and related costs
4,015

3,833

182

5
 %
Regional carrier expense
2,680

2,843

(163
)
(6
)%
Aircraft maintenance materials and outside repairs
914

963

(49
)
(5
)%
Depreciation and amortization
893

820

73

9
 %
Contracted services
867

810

57

7
 %
Passenger commissions and other selling expenses
813

765

48

6
 %
Landing fees and other rents
696

682

14

2
 %
Profit sharing
439

138

301

NM

Passenger service
388

361

27

7
 %
Aircraft rent
107

115

(8
)
(7
)%
Restructuring and other items
79

136

(57
)
NM

Other
787

721

66

9
 %
Total operating expense
$
17,338

$
17,071

$
267

2
 %

Fuel Expense. Including our regional carriers, fuel expense decreased $277 million due to hedge gains in the current year versus hedge losses in the prior year and a 1% decrease in fuel market price per gallon, partially offset by a 1% increase in consumption. The table below presents fuel expense, gallons consumed and average price per gallon, including the impact of hedging and the refinery:
 
Six Months Ended June 30,
Increase
(Decrease)
% Increase
(Decrease)
(in millions, except per gallon data)
2014
2013
Aircraft fuel and related taxes(1)
$
4,660

$
4,884

$
(224
)
 
Aircraft fuel and related taxes included within regional carrier expense
973

1,026

(53
)
 
Total fuel expense
$
5,633

$
5,910

$
(277
)
(5
)%
 
 
 
 
 
Total fuel consumption (gallons)
1,882

1,856

26

1
 %
Average price per gallon
$
2.99

$
3.18

$
(0.19
)
(6
)%

(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
 
Six Months Ended June 30,
Change
Six Months Ended June 30,
Change
(in millions, except per gallon data)
2014
2013
2014
2013
Fuel purchase cost
$
5,777

5,779

$
(2
)
$
3.07

$
3.11

$
(0.04
)
Airline segment fuel hedge (gains) losses
(172
)
58

(230
)
(0.09
)
0.03

(0.12
)
Refinery segment impact
28

73

(45
)
0.01

0.04

(0.03
)
Total fuel expense
$
5,633

$
5,910

$
(277
)
$
2.99

$
3.18

$
(0.19
)
MTM adjustments
(33
)
(101
)
68

(0.01
)
(0.05
)
0.04

Total fuel expense, adjusted
$
5,600

$
5,809

$
(209
)
$
2.98

$
3.13

$
(0.15
)


24



Fuel Purchase Cost. Fuel purchase cost is based on the market price for jet fuel at airport locations.

Airline Segment Fuel Hedge Impact and MTM Adjustments. During the six months ended June 30, 2014, our airline segment fuel hedge gains of $172 million included $33 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 MTM adjustments are reflected in the table above to calculate an effective fuel cost for the period.

Refinery Segment 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 certain counterparties. As described in Note 2 of the Notes to the Condensed Consolidated Financial Statements, to the extent that we account for exchanges of refined products as nonmonetary transactions, we include the results of those transactions within fuel expense.

We adjust fuel expense for the items noted above to arrive at a more meaningful measure of fuel cost. Our average price per gallon, adjusted (a non-GAAP financial measure) was $2.98 for the six months ended June 30, 2014.

Salaries and Related Costs. The increase in salaries and related costs is primarily due to investments in our employees, partially offset by lower pension expense. We contributed $905 million to our qualified defined benefit pension plans during the first four months of 2014. As a result of these contributions, we satisfied, on an accelerated basis, the required contributions for our defined benefit plans for 2014, including $250 million above the minimum funding requirements.

Regional carrier expense. The reduction in regional carrier expense is primarily due to fewer required maintenance events resulting from the removal of some 50-seat regional aircraft from our fleet as part of our strategy to restructure our domestic fleet and lower fuel cost.

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 costs associated with maintenance sales to third parties by our MRO services business. The reduction in aircraft maintenance materials and outside repairs is due primarily to the timing of airframe and engine maintenance volume, partially offset by higher cost of sales from our MRO business.

Depreciation and amortization. Depreciation and amortization expense increased year-over-year primarily due to investments in new B-737-900ER and CRJ-900 aircraft, the purchase of aircraft off-lease, and aircraft modifications that upgraded aircraft interiors and enhanced our product offering.

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 2% increase in capacity.

Passenger commissions and other selling expenses. Passenger commissions and other selling expenses increased on higher passenger revenue.

Profit Sharing. The increase in profit sharing is driven by an increase in the projected full year pre-tax income compared to the prior year. 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 program defines profit as pre-tax profit excluding certain items. These items include profit sharing and special items, such as MTM adjustments and restructuring and other items. Our profit sharing program pays 10% to employees for the first $2.5 billion of annual profits and 20% of annual profits above $2.5 billion.

Passenger service. The increase in passenger service is driven by the 5% increase in mainline RPMs.

Aircraft Rent. Aircraft rent decreased year-over-year due primarily to the purchase of various aircraft off-lease in 2013, partially offset by the addition of leased B-717-200 and B-737-900ER aircraft delivered during the period.

Restructuring and Other Items. Due to the nature of amounts recorded within restructuring and other items, a year over year comparison is not meaningful. For a discussion of charges recorded in restructuring and other items, see Note 7 of the Notes to the Condensed Consolidated Financial Statements.


25



Non-Operating Results
 
Six Months Ended June 30,
 
 
(in millions)
2014
2013
 
Favorable (Unfavorable)
Interest expense, net
$
(320
)
$
(350
)
 
$
30

Amortization of debt discount, net
(39
)
(83
)
 
44

Loss on extinguishment of debt
(129
)

 
(129
)
Miscellaneous, net
(78
)
(14
)
 
(64
)
Total other expense, net
$
(566
)
$
(447
)
 
$
(119
)

The declines in interest expense, net and amortization of debt discount, net are driven by reduced levels of debt and the refinancing of debt obligations at lower interest rates. Our principal amount of debt and capital leases has declined from $12.7 billion at June 30, 2013 to $10.6 billion at June 30, 2014.

During the six months ended June 30, 2014, we extinguished $873 million of existing debt under our secured financing arrangements prior to scheduled maturity. We recorded losses on extinguishment of debt for the difference between the principal paid and the carrying value of the debt, which included unamortized discounts or premiums and unamortized issuance costs. The losses also included premiums paid to retire the debt. During the six months ended June 30, 2014, we recorded a loss of $129 million in connection with the early extinguishment of debt obligations. The loss primarily relates to unamortized debt discounts resulting from fair value adjustments recorded in the 2008 purchase accounting of Northwest Airlines.

Miscellaneous, net is unfavorable primarily due to seasonal losses from our equity investment in Virgin Atlantic, foreign currency exchange rate losses primarily resulting from a weakening of the U.S. dollar versus the Japanese yen and a charge associated with the devaluation of the Venezuelan bolivar.

Income Taxes

We released substantially all of our valuation allowance against our net deferred tax assets on December 31, 2013. We project that our annual effective tax rate for 2014 will be approximately 38%. In certain interim periods, we may have adjustments to our net deferred tax assets as a result of changes in prior year estimates and tax laws enacted during the period, which will impact the effective tax rate for that interim period. At June 30, 2014, we had over $14 billion of U.S. federal pre-tax net operating loss carryforwards, which do not begin to expire until 2023. Accordingly, we believe we will not pay any cash federal income taxes during the next several years.


26



Operating Statistics

The following table sets forth our operating statistics:
 
Three Months Ended June 30,
Six Months Ended June 30,
Consolidated(1)
2014
2013
2014
2013
Revenue passenger miles (millions)
53,341

50,781

97,942

93,859

Available seat miles (millions)
61,817

59,880

115,721

112,902

Passenger mile yield

17.37
¢

16.73
¢

17.30
¢

16.85
¢
Passenger revenue per available seat mile

14.99
¢

14.19
¢

14.64
¢

14.01
¢
Operating cost per available seat mile (CASM)

14.63
¢

14.69
¢

14.98
¢

15.12
¢
CASM-Ex(2)

8.98
¢

8.98
¢

9.35
¢

9.34
¢
Passenger load factor
86.3
%
84.8
%
84.6
%
83.1
%
Fuel gallons consumed (millions)
1,001

981

1,882

1,856

Average price per gallon(3)
$
2.93

$
3.16

$
2.99

$
3.18

Average price per gallon, adjusted(4)
$
2.93

$
3.03

$
2.98

$
3.13

Full-time equivalent employees, end of period
80,723

79,629

 
 

(1) 
Includes the operations of our regional carriers. Full-time equivalent employees exclude employees of regional carriers that we do not own.
(2) 
Non-GAAP financial measure defined in "June 2014 Quarter Financial Highlights" above. See reconciliation to CASM in "Supplemental Information" below.
(3) 
Includes the impact of fuel hedge activity.
(4) 
Non-GAAP financial measure defined and reconciled in "Operating Expense" sections of Results of Operations for the three and six months ended June 30, 2014 and 2013.


27



Fleet Information

Our operating aircraft fleet, commitments and options at June 30, 2014 are summarized in the following tables:
 
Current Fleet(1)
 
Commitments
 
Aircraft Type
Owned
Capital
Lease
Operating
Lease
Total
Average
Age
 
Purchase(2)(3)
Lease
 
Options</