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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 September 30, 2016
Or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-5424
deltacra01a01a01a02a08.jpg
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 September 30, 2016:
Common Stock, $0.0001 par value - 736,384,650 shares outstanding
This document is also available through our website at http://ir.delta.com/.
 



Table of Contents
 
 
 
Page
 
 
 
 
 
 
 
 




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, 2015 (“Form 10-K”) and in "Part II, Item 1A. Risk Factors" of our Form 10-Q for the quarterly period ended June 30, 2016, 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


REVIEW REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of
Delta Air Lines, Inc.

We have reviewed the consolidated balance sheet of Delta Air Lines, Inc. (the Company) as of September 30, 2016, and the related condensed consolidated statements of operations and comprehensive income for the three-month and nine-month periods ended September 30, 2016 and 2015 and condensed consolidated statements of cash flows for the nine-month periods ended September 30, 2016 and 2015. These financial statements are the responsibility of the Company's management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Delta Air Lines, Inc. as of December 31, 2015 and the related consolidated statements of operations, comprehensive income, cash flows and stockholders' equity for the year then ended (not presented herein) and we expressed an unqualified audit opinion on those consolidated financial statements in our report dated February 5, 2016.
            

 
/s/ Ernst & Young LLP
Atlanta, Georgia
 
October 13, 2016
 


2



DELTA AIR LINES, INC.
Consolidated Balance Sheets
(Unaudited)
(in millions, except share data)
September 30,
2016
 
December 31,
2015
ASSETS
Current Assets:
 
 
 
Cash and cash equivalents
$
1,638

 
$
1,972

Short-term investments
1,514

 
1,465

Accounts receivable, net of an allowance for uncollectible accounts of $13 and $9 at September 30, 2016
and December 31, 2015, respectively
1,996

 
2,020

Fuel inventory
424

 
379

Expendable parts and supplies inventories, net of an allowance for obsolescence of $108 and $114
at September 30, 2016 and December 31, 2015, respectively
351

 
318

Hedge derivatives asset
496

 
1,987

Prepaid expenses and other
910

 
915

Total current assets
7,329

 
9,056

Property and Equipment, Net:
 
 
 
Property and equipment, net of accumulated depreciation and amortization of $12,106 and $10,871
at September 30, 2016 and December 31, 2015, respectively
24,105

 
23,039

Other Assets:
 
 
 
Goodwill
9,794

 
9,794

Identifiable intangibles, net of accumulated amortization of $824 and $811 at September 30, 2016
and December 31, 2015, respectively
4,848

 
4,861

Deferred income taxes, net
3,150

 
4,956

Other noncurrent assets
1,722

 
1,428

Total other assets
19,514

 
21,039

Total assets
$
50,948

 
$
53,134

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
 
 
 
Current maturities of long-term debt and capital leases
$
1,092

 
$
1,563

Air traffic liability
5,142

 
4,503

Accounts payable
2,567

 
2,743

Accrued salaries and related benefits
2,628

 
3,195

Hedge derivatives liability
724

 
2,581

Frequent flyer deferred revenue
1,628

 
1,635

Other accrued liabilities
1,366

 
1,306

Total current liabilities
15,147

 
17,526

Noncurrent Liabilities:
 
 
 
Long-term debt and capital leases
6,473

 
6,766

Pension, postretirement and related benefits
12,587

 
13,855

Frequent flyer deferred revenue
2,275

 
2,246

Other noncurrent liabilities
1,956

 
1,891

Total noncurrent liabilities
23,291


24,758

Commitments and Contingencies

 
 
Stockholders' Equity:
 
 
 
Common stock at $0.0001 par value; 1,500,000,000 shares authorized, 750,515,601 and 799,850,675
shares issued at September 30, 2016 and December 31, 2015, respectively

 

Additional paid-in capital
8,887

 
10,875

Retained earnings
11,109

 
7,623

Accumulated other comprehensive loss
(7,212
)
 
(7,275
)
Treasury stock, at cost, 14,130,951 and 21,066,684 shares at September 30, 2016 and December 31, 2015,
respectively
(274
)
 
(373
)
Total stockholders' equity
12,510

 
10,850

Total liabilities and stockholders' equity
$
50,948

 
$
53,134

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

3


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

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions, except per share data)
2016
 
2015
 
2016
 
2015
Operating Revenue:
 
 
 
 
 
 
 
Passenger:
 
 
 
 
 
 
 
Mainline
$
7,615

 
$
8,059

 
$
21,530

 
$
22,195

Regional carriers
1,456

 
1,536

 
4,273

 
4,462

  Total passenger revenue
9,071

 
9,595

 
25,803

 
26,657

Cargo
167

 
196

 
494

 
620

Other
1,245

 
1,316

 
3,884

 
3,925

  Total operating revenue
10,483

 
11,107

 
30,181

 
31,202

 
 
 
 
 
 
 
 
Operating Expense:
 
 
 
 
 
 
 
Salaries and related costs
2,463

 
2,276

 
7,165

 
6,563

Aircraft fuel and related taxes
1,422

 
1,819

 
3,877

 
5,111

Regional carriers expense
1,119

 
1,073

 
3,221

 
3,223

Contracted services
520

 
477

 
1,480

 
1,375

Depreciation and amortization
474

 
466

 
1,430

 
1,384

Aircraft maintenance materials and outside repairs
462

 
479

 
1,357

 
1,430

Passenger commissions and other selling expenses
466

 
463

 
1,291

 
1,270

Landing fees and other rents
399

 
403

 
1,123

 
1,164

Profit sharing
326

 
563

 
922

 
1,110

Passenger service
264

 
247

 
674

 
664

Aircraft rent
72

 
63

 
204

 
183

Other
527

 
565

 
1,505

 
1,640

Total operating expense
8,514

 
8,894

 
24,249

 
25,117

 
 
 
 
 
 
 
 
Operating Income
1,969

 
2,213

 
5,932

 
6,085

 
 
 
 
 
 
 
 
Non-Operating Expense:

 

 
 
 
 
Interest expense, net
(95
)
 
(121
)
 
(295
)
 
(379
)
Miscellaneous, net
26

 
(20
)
 
47

 
(82
)
Total non-operating expense, net
(69
)
 
(141
)
 
(248
)
 
(461
)
 
 
 
 
 
 
 
 
Income Before Income Taxes
1,900

 
2,072

 
5,684

 
5,624

 
 
 
 
 
 
 
 
Income Tax Provision
(641
)
 
(757
)
 
(1,933
)
 
(2,078
)
 
 
 
 
 
 
 
 
Net Income
$
1,259

 
$
1,315

 
$
3,751

 
$
3,546

 
 
 
 
 
 
 
 
Basic Earnings Per Share
$
1.70

 
$
1.67

 
$
4.95

 
$
4.42

Diluted Earnings Per Share
$
1.69

 
$
1.65

 
$
4.92

 
$
4.37

Cash Dividends Declared Per Share
$
0.2025

 
$
0.135

 
$
0.4725

 
$
0.315

 
 
 
 
 
 
 
 
Comprehensive Income
$
1,326

 
$
1,287

 
$
3,814

 
$
3,541

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

4


DELTA AIR LINES, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Nine Months Ended September 30,
(in millions)
2016
 
2015
Net Cash Provided by Operating Activities
$
6,080

 
$
6,448

 
 
 
 
Cash Flows from Investing Activities:
 
 
 
Property and equipment additions:
 
 
 
Flight equipment, including advance payments
(2,149
)
 
(1,583
)
Ground property and equipment, including technology
(448
)
 
(484
)
Purchase of equity investments

 
(500
)
Purchase of short-term investments
(1,480
)
 
(740
)
Redemption of short-term investments
1,436

 
510

Other, net
41

 
21

Net cash used in investing activities
(2,600
)

(2,776
)
 
 
 
 
Cash Flows from Financing Activities:
 
 
 
Payments on long-term debt and capital lease obligations
(1,403
)
 
(2,151
)
Repurchase of common stock
(2,301
)
 
(1,775
)
Cash dividends
(360
)
 
(254
)
Fuel card obligation
(14
)
 
(343
)
Payments on hedge derivative contracts
(401
)
 
(17
)
Proceeds from hedge derivative contracts
166

 
145

Proceeds from short-term obligations
68

 

Proceeds from long-term obligations
450

 
1,038

Other, net
(19
)
 
(34
)
Net cash used in financing activities
(3,814
)
 
(3,391
)
 
 
 
 
Net (Decrease) Increase in Cash and Cash Equivalents
(334
)
 
281

Cash and cash equivalents at beginning of period
1,972

 
2,088

Cash and cash equivalents at end of period
$
1,638

 
$
2,369

 
 
 
 
Non-Cash Transactions:
 
 
 
Treasury stock contributed to our qualified defined benefit pension plans
$
350

 
$

Flight equipment acquired under capital leases
55

 
104

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



5


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 and 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 for the year ended December 31, 2015.

Management believes the accompanying unaudited Condensed Consolidated Financial Statements reflect all adjustments, including normal recurring 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 and other factors, operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of operating results for the entire year.

We reclassified certain prior period amounts to conform to the current period presentation. Unless otherwise noted, all amounts disclosed are stated before consideration of income taxes.

Recent Accounting Standards

Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." Under this ASU and subsequently issued amendments, revenue is recognized at the time a good or service is transferred to a customer for the amount of consideration received. Entities may use a full retrospective approach or report the cumulative effect as of the date of adoption. The standard is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption of the standard is permitted, but not before December 15, 2016. We are currently evaluating how the adoption of the revenue recognition standard will impact our Consolidated Financial Statements.

Leases

In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." This standard will require all leases with durations greater than twelve months to be recognized on the balance sheet and is effective for interim and annual reporting periods beginning after December 15, 2018, although early adoption is permitted.

Although we have not completed our assessment, we believe adoption of this standard will have a significant impact on our Consolidated Balance Sheets. However, we do not expect the adoption to change the recognition, measurement or presentation of lease expenses within the Consolidated Statements of Operations or the Consolidated Statements of Cash Flows. Information about our undiscounted future lease payments and the timing of those payments is in Note 7, "Lease Obligations," in our Form 10-K.

Equity Method Investments

In March 2016, the FASB issued ASU No. 2016-07, "Investments—Equity Method and Joint Ventures (Topic 323)." This standard eliminates the requirement that when an existing cost method investment qualifies for use of the equity method, an investor must restate its historical financial statements, as if the equity method had been used since the investment was acquired. Under the new guidance, at the point an investment qualifies for the equity method, any unrealized gain or loss in accumulated other comprehensive income/(loss) ("AOCI") will be recognized through earnings.


6


We early adopted this standard during the March 2016 quarter. Although none of our available-for-sale or cost investments qualified for use of the equity method during 2016, we expect the tender offer for additional capital stock of Grupo Aeroméxico to be completed in the next six months, at which point our investment will qualify for the equity method of accounting. As of September 30, 2016, the unrealized gain recorded in AOCI related to our investment in Grupo Aeroméxico was $4 million.

Share-Based Compensation

In March 2016, the FASB issued ASU No. 2016-09, "Compensation—Stock Compensation (Topic 718)." This standard makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. ASU 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based awards.

We early adopted this standard during the June 2016 quarter. The adoption of this standard resulted in the recognition of $95 million of previously unrecognized excess tax benefits in deferred income taxes, net and an increase to retained earnings on our Consolidated Balance Sheet as of the beginning of the current year and the recognition of $31 million of excess tax benefits to our income tax provision for the nine months ended September 30, 2016.


NOTE 2. FAIR VALUE MEASUREMENTS

Assets (Liabilities) Measured at Fair Value on a Recurring Basis
(in millions)
September 30,
2016
Level 1
Level 2
Cash equivalents
$
1,080

$
1,080

$

Short-term investments
 
 

U.S. government and agency securities
250

170

80

Asset- and mortgage-backed securities
265


265

Corporate obligations
880


880

Other fixed income securities
119


119

Restricted cash equivalents and investments
69

69


Long-term investments
161

135

26

Hedge derivatives, net
 
 
 
Fuel hedge contracts
(271
)
(4
)
(267
)
Interest rate contract
8


8

Foreign currency exchange contracts
(64
)

(64
)
(in millions)
December 31,
2015
Level 1
Level 2
Cash equivalents
$
1,543

$
1,543

$

Short-term investments
 
 


U.S. government and agency securities
151

74

77

Asset- and mortgage-backed securities
380


380

Corporate obligations
896


896

Other fixed income securities
38


38

Restricted cash equivalents and investments
49

49


Long-term investments
155

130

25

Hedge derivatives, net
 
 
 
Fuel hedge contracts
(672
)
65

(737
)
Interest rate contract
(3
)

(3
)
Foreign currency exchange contracts
94


94



7


Cash Equivalents and Restricted Cash Equivalents and Investments. Cash equivalents generally consist of money market funds. Restricted cash equivalents and investments generally consist of money market funds and time deposits, which relate to certain self-insurance obligations and facility lease commitments. The fair value of these investments is based on a market approach using prices and other relevant information generated by market transactions involving identical or comparable assets.

Short-Term Investments. The fair values of short-term investments are based on a market approach using industry standard valuation techniques that incorporate observable inputs such as quoted market prices, interest rates, benchmark curves, credit ratings of the security and other observable information.

Long-Term Investments. Our long-term investments that are measured at fair value primarily consist of equity investments in Grupo Aeroméxico, the parent company of Aeroméxico, and GOL Linhas Aéreas Inteligentes, the parent company of VRG Linhas Aéreas (operating as GOL). Shares of the parent companies of Aeroméxico and GOL are traded on public exchanges and have been valued based on quoted market prices. The investments are classified in other noncurrent assets.

Hedge Derivatives. A portion of our derivative contracts are negotiated over-the-counter 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). Such contracts are classified as Level 2 within the fair value hierarchy. The remainder of our hedge contracts are comprised of futures contracts, which are traded on a public exchange. These contracts are classified within Level 1 of the fair value hierarchy.

Fuel Contracts. Our fuel hedge portfolio consists of options, swaps and futures. 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 21% to 46% 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 provided by counterparties who regularly trade in public markets. Discount rates used in these valuations vary with the maturity dates of the respective contracts and are based on the London interbank offered rate ("LIBOR"). Futures contracts and options on futures contracts are traded on a public exchange and valued based on quoted market prices.

Interest Rate Contract. Our interest rate derivative is a swap contract, which is valued 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.


NOTE 3. INVESTMENTS

Short-Term Investments

The estimated fair values of short-term investments, which approximate cost at September 30, 2016, are shown below by contractual maturity. Actual maturities may differ from contractual maturities because issuers of the securities may have the right to retire our investments without prepayment penalties. Investments with maturities beyond one year when purchased may be classified as short-term investments if they are expected to be available to support our short-term liquidity needs.

(in millions)
Available-For-Sale
Due in one year or less
$
341

Due after one year through three years
940

Due after three years through five years
169

Due after five years
64

Total
$
1,514




8


Long-Term Investments

We have developed strategic relationships with certain international airlines through equity investments or other forms of cooperation and support. Strategic relationships improve our coordination with these airlines and enable our customers to seamlessly connect to more places while enjoying a consistent, high-quality travel experience.

Aeroméxico. We own 4.2% of the outstanding shares of Grupo Aeroméxico, and we have derivative contracts that may be settled for shares of Grupo Aeroméxico, including one obtained in the September 2016 quarter. Our total derivative contract holdings represent 12.9% of Grupo Aeroméxico's shares. During 2015, we announced our intention to acquire additional shares of the capital stock of Grupo Aeroméxico through a cash tender offer, subject to regulatory approvals. If approved, the tender offer is expected to be completed in the next six months. As a result of this tender offer, when combined with our current holdings, we would own up to 49% of the outstanding capital stock of Grupo Aeroméxico. Based on current exchange rates, the total amount to be paid for the additional shares and the shares underlying the derivatives would be approximately $710 million.

GOL. During 2015, we acquired preferred shares of GOL's parent company, increasing our ownership to 9.5% of GOL's outstanding capital stock. Additionally, GOL entered into a $300 million five-year term loan facility with third parties, which we have guaranteed. Our entire guaranty is secured by GOL's ownership interest in Smiles, GOL's publicly traded loyalty program. Because GOL remains in compliance with the terms of its loan facility, we have not recorded a liability on our Consolidated Balance Sheet as of September 30, 2016.

Challenges in the Brazilian economy and GOL’s recent financial performance have caused the fair value of our equity investment in GOL’s parent company to decline to $64 million with a $42 million loss recorded in AOCI at September 30, 2016. The loss recorded in AOCI as of December 31, 2015 was $84 million. As GOL’s shares have traded below our cost basis for longer than a year, we evaluated whether the investment was other-than-temporarily impaired. We determined the investment was not impaired as GOL’s management is executing measures to maximize operational and network efficiency and control costs, which we anticipate will improve GOL’s financial performance and the fair value of our investment. The market price of GOL's shares has more than doubled since December 31, 2015. In addition, we currently have the intent and ability to maintain our investment in GOL to allow for the recovery of its market value as GOL is a strategic investment for us and operates as an extension of our global network.

China Eastern. During 2015, we acquired shares of China Eastern, which provide us with a 3.2% stake in the airline. In conjunction with this transaction, we and China Eastern entered into a new commercial agreement to expand our relationship and better connect the networks of the two airlines. As the investment agreement restricts our sale or transfer of these shares for a period of three years after acquisition, we are accounting for the investment at cost during this period. Although China Eastern shares are actively traded on a public exchange, it is not practicable to estimate the fair value of the investment due to the restriction on our ability to sell or transfer the shares.

We have, however, evaluated whether the decline in the value of China Eastern's shares would impair our investment. We considered the recent conditions and outlook for both China Eastern and the broader Chinese economy, as well as the nature of our investment in China Eastern. We determined that the investment was not impaired as the share price decline primarily results from declines in the broader Chinese equity markets and is not specific to China Eastern's financial performance. In addition, we have the intent and ability to maintain our investment in China Eastern to allow for the recovery of its market value as China Eastern is a strategic investment for us and operates as an extension of our global network.


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 have historically managed our fuel price risk through a hedging program intended to reduce the financial impact from changes in the price of jet fuel as jet fuel prices are subject to potential volatility.


9


In response to this volatility, during the March 2015 quarter, we entered into transactions that effectively deferred settlement of a portion of our hedge portfolio. These deferral transactions, excluding market movements from the date of inception, provided approximately $300 million in cash receipts during the second half of 2015 and require approximately $300 million in cash payments in 2016. We early terminated certain of the March 2015 quarter deferral transactions in the second half of 2015.

During the March 2016 quarter, we entered into transactions to further defer settlement of a portion of our hedge portfolio until 2017. These deferral transactions, excluding market movements from the date of inception, would provide approximately $300 million in cash receipts during the second half of 2016 and require approximately $300 million in cash payments in 2017.

Subsequently, to better participate in the low fuel price environment, we entered into derivatives designed to offset and effectively neutralize our existing airline segment hedge positions, which include the deferral transactions discussed above. As a result, we locked in the amount of the net hedge settlements for the remainder of 2016 and 2017. During the June 2016 quarter, we early settled $455 million of our airline segment's 2016 positions.

During the three and nine months ended September 30, 2016, we recorded fuel hedge losses of $11 million and $326 million, respectively. During the three and nine months ended September 30, 2015, we recorded fuel hedge losses of $250 million and $563 million, respectively.

Cash flows associated with the deferral transactions are reported as cash flows from financing activities within our Condensed Consolidated Statements of Cash Flows.

Hedge Position as of September 30, 2016
(in millions)
Volume
Final Maturity Date
Hedge Derivatives Asset
Other Noncurrent Assets
Hedge Derivatives Liability
Other Noncurrent Liabilities
Hedge Derivatives, net
Designated as hedges
 
 
 
 
 
 
 
 
Interest rate contract (fair value hedge)
349

U.S. dollars
August 2022
$
3

$
5

$

$

$
8

Foreign currency exchange contracts
60,509

Japanese yen
February 2019
10

2

(44
)
(32
)
(64
)
396

Canadian dollars
Not designated as hedges
 
 
 
 
 
 
 
 
Fuel hedge contracts (1)
179

gallons - crude oil, diesel and jet fuel
December 2017
483

39

(680
)
(113
)
(271
)
Total derivative contracts
 
 
$
496

$
46

$
(724
)
$
(145
)
$
(327
)
(1) 
As discussed above, we have early settled $455 million of our airline segment's 2016 hedge positions and entered into hedges designed to offset and effectively terminate our 2017 airline segment hedge positions. The dollar amounts shown above primarily represent the offsetting derivatives that were used to neutralize the 2016 and 2017 airline segment hedge portfolio.


Hedge Position as of December 31, 2015
(in millions)
Volume
Final Maturity Date
Hedge Derivatives Asset
Other Noncurrent Assets
Hedge Derivatives Liability
Other Noncurrent Liabilities
Hedge Derivatives, net
Designated as hedges
 
 
 
 
 
 
 
 
Interest rate contract (fair value hedge)
384

U.S. dollars
August 2022
$
4

$

$

$
(7
)
$
(3
)
Foreign currency exchange contracts
46,920

Japanese yen
July 2018
76

20

(1
)
(1
)
94

395

Canadian dollars
Not designated as hedges
 
 
 
 
 
 
 
 
Fuel hedge contracts
887

gallons - crude oil, diesel and jet fuel
November 2017
1,907

4

(2,580
)
(3
)
(672
)
Total derivative contracts
 
 
$
1,987

$
24

$
(2,581
)
$
(11
)
$
(581
)


10


Offsetting Assets and Liabilities

We have master netting arrangements with our counterparties giving us the right to offset hedge assets and liabilities. However, we have elected not to offset the fair value positions recorded on our Consolidated Balance Sheets. The following table shows the net fair value positions by counterparty had we elected to offset.
(in millions)
Hedge Derivatives Asset
Other Noncurrent Assets
Hedge Derivatives Liability
Other Noncurrent Liabilities
Hedge Derivatives, net
September 30, 2016
 
 
 
 
 
Net derivative contracts
$
10

$
7

$
(238
)
$
(106
)
$
(327
)
December 31, 2015
 
 
 
 
 
Net derivative contracts
$
143

$
21

$
(737
)
$
(8
)
$
(581
)

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)
2016
2015
 
2016
2015
Three Months Ended September 30,
 
 
 
 
 
Foreign currency exchange contracts
$
(2
)
$
69

 
$
(2
)
$
(53
)
Nine Months Ended September 30,
 
 
 
 
 
Foreign currency exchange contracts
$
34

$
161

 
$
(147
)
$
(105
)


As of September 30, 2016, we have recorded $24 million of losses on cash flow hedge contracts in AOCI, 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 posted margin of $20 million and $119 million as of September 30, 2016 and December 31, 2015, respectively.


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. The fair value of debt, shown below, is principally based on reported market values, recently completed market transactions and estimates based on interest rates, maturities, credit risk and underlying collateral. Long-term debt is primarily classified as Level 2 within the fair value hierarchy.
(in millions)
September 30,
2016
December 31,
2015
Total debt at par value
$
7,402

$
8,098

Unamortized discount and debt issue cost, net
(110
)
(152
)
Net carrying amount
$
7,292

$
7,946

 
 
 
Fair value
$
7,700

$
8,400




11


Aircraft Financings

During the March 2016 quarter, we entered into financing arrangements to borrow $450 million, which are secured by 26 aircraft. These loans bear interest at a variable rate equal to LIBOR plus a specified margin and mature between 2019 and 2021.

Covenants

We were in compliance with the covenants in our financing agreements at September 30, 2016.
 

NOTE 6. EMPLOYEE BENEFIT PLANS

The following table shows the components of net periodic cost:
 
Pension Benefits
Other Postretirement and Postemployment Benefits
(in millions)
2016
2015
2016
2015
Three Months Ended September 30,
 
 
 
 
Service cost
$

$

$
17

$
16

Interest cost
229

221

37

35

Expected return on plan assets
(226
)
(220
)
(18
)
(20
)
Amortization of prior service credit


(7
)
(7
)
Recognized net actuarial loss
59

61

6

6

Net periodic cost
$
62

$
62

$
35

$
30

 
 
 
 
 
Nine Months Ended September 30,
 
 
 
 
Service cost
$

$

$
51

$
48

Interest cost
687

663

111

105

Expected return on plan assets
(678
)
(660
)
(54
)
(60
)
Amortization of prior service credit


(21
)
(21
)
Recognized net actuarial loss
177

177

18

18

Net periodic cost
$
186

$
180

$
105

$
90




NOTE 7. COMMITMENTS AND CONTINGENCIES

Aircraft Purchase and Lease Commitments

Our future aircraft purchase commitments totaled approximately $15.4 billion at September 30, 2016:
(in millions)
Total
Three months ending December 31, 2016
$
450

2017
2,690

2018
2,880

2019
3,380

2020
2,540

Thereafter
3,480

Total
$
15,420




12


Our future aircraft purchase commitments included the following aircraft at September 30, 2016:
Aircraft Type
 
Purchase Commitments
B-737-900ER
 
55

B-787-8
 
18

A321-200
 
71

A330-300
 
2

A330-900neo
 
25

A350-900
 
25

CS100
 
75

E190-100
 
8

Total
 
279



We have obtained, but are under no obligation to use, long-term financing commitments for a substantial portion of the purchase price of a significant number of these aircraft. Our purchase commitment for the 18 B-787-8 aircraft provides for certain aircraft substitution rights, including for our current orders of B-737-900ER aircraft.

During the June 2016 quarter, we reached an agreement with Bombardier to acquire 75 CS100 aircraft with deliveries beginning in 2018 and continuing through 2022. We have flexibility under the purchase agreement with respect to deferral, acceleration, conversion and a limited number of cancellation rights. The agreement also includes options to purchase 50 additional aircraft. Following the CS100 purchase agreement, we entered into an agreement to sell the E190-100 fleet following their delivery to us.

Also during the June 2016 quarter, we entered into firm commitments with Airbus for the delivery of 37 additional A321-200 aircraft. Deliveries will begin in November 2017 and continue through 2019.

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. 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 effect on our Condensed Consolidated Financial Statements.

Shuttle America

Shuttle America and its parent, Republic Airways Holdings (collectively, Republic Airways), filed for bankruptcy in February 2016. In connection with agreements to settle litigation currently pending between Republic Airways and Delta, wind-down 50-seat aircraft operations, return to full capacity of contracted operations for Embraer 170/175 aircraft and lease certain takeoff and landing slots at New York-LaGuardia, we entered into a debtor-in-possession credit agreement to provide up to $75 million in liquidity to Republic Airways. The debtor-in-possession credit agreement remained undrawn as of September 30, 2016. We do not believe that Republic Airways' bankruptcy filing will have a material effect on our operations or 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.

13


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 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.

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 September 30, 2016, we had approximately 84,000 full-time equivalent employees. Approximately 18% of these employees were represented by unions.

On September 30, 2016, we reached a comprehensive agreement in principle with the Air Line Pilots Association (“ALPA”) for a new Pilot Working Agreement. From this agreement in principle, a tentative agreement will be finalized and presented to ALPA’s Master Executive Council ("MEC"). If the MEC approves the tentative agreement, the agreement will be presented to our pilots for ratification. This process could take several months. If this new agreement is ratified, the pilots will receive an 18% pay increase retroactive to January 1, 2016.

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.

14


NOTE 8. ACCUMULATED OTHER COMPREHENSIVE LOSS
  
The following tables show the components of accumulated other comprehensive loss:
(in millions)
Pension and Other Benefits Liabilities(2)
Derivative Contracts
Investments
Total
Balance at January 1, 2016 (net of tax effect of $1,222)
$
(7,354
)
$
140

$
(61
)
$
(7,275
)
Changes in value (net of tax effect of $43)

(72
)
46

(26
)
Reclassifications into earnings (net of tax effect of $51)(1)
111

(22
)

89

Balance at September 30, 2016 (net of tax effect of $1,214)
$
(7,243
)
$
46

$
(15
)
$
(7,212
)

(in millions)
Pension and Other Benefits Liabilities(2)
Derivative Contracts
Investments
Total
Balance at January 1, 2015 (net of tax effect of $1,279)
$
(7,517
)
$
222

$
(16
)
$
(7,311
)
Changes in value (net of tax effect of $21)

35

(52
)
(17
)
Reclassifications into earnings (net of tax effect of $7)(1)
114

(102
)

12

Balance at September 30, 2015 (net of tax effect of $1,251)
$
(7,403
)
$
155

$
(68
)
$
(7,316
)


(1) 
Amounts reclassified from AOCI for pension and other benefits liabilities are recorded in salaries and related costs in the Condensed Consolidated Statements of Operations and Comprehensive Income. Amounts reclassified from AOCI for derivative contracts designated as foreign currency cash flow hedges are recorded in passenger revenue in the Condensed Consolidated Statements of Operations and Comprehensive Income.
(2) 
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.



15


NOTE 9. SEGMENTS

Refinery Operations

Our refinery segment operates for the benefit of the airline segment by providing jet fuel to the airline segment from its own production and through jet fuel obtained through agreements with third parties. 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 the non-jet fuel products produced by the refinery for jet fuel consumed in our airline operations. The gross fair value of the products exchanged under these agreements during the three and nine months ended September 30, 2016 was $734 million and $2.0 billion, respectively, compared to $761 million and $2.4 billion during the three and nine months ended September 30, 2015, respectively.
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 September 30, 2016
 
 
 
 
 
 
Operating revenue:
$
10,473

$
971

 
 
 
$
10,483

Sales to airline segment
 
 
 
$
(173
)
(1) 
 
Exchanged products
 
 
 
(734
)
(2) 
 
Sales of refined products to third parties
 
 
 
(54
)
(3) 
 
Operating income (loss)(4)
2,014

(45
)
 

 
1,969

Interest expense, net
94

1

 

 
95

Depreciation and amortization
464

10

 

 
474

Total assets, end of period
49,748

1,200

 

 
50,948

Capital expenditures
652

28

 

 
680

 
 
 
 
 
 
 
Three Months Ended September 30, 2015
 
 
 
 
 
 
Operating revenue:
$
10,994

$
1,258

 
 
 
$
11,107

Sales to airline segment
 
 
 
$
(267
)
(1) 
 
Exchanged products
 
 
 
(761
)
(2) 
 
Sales of refined products to third parties
 
 
 
(117
)
(3) 
 
Operating income(4)
2,107

106

 

 
2,213

Interest expense, net
121


 

 
121

Depreciation and amortization
458

8

 

 
466

Total assets, end of period
52,287

1,258

 

 
53,545

Capital expenditures
536

26

 

 
562

 
(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 exchange 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.
(4) 
Includes the impact of pricing arrangements between the airline and refinery segments with respect to the refinery's inventory price risk.

16


(in millions)
Airline
Refinery
 
Intersegment Sales/Other
 
Consolidated
Nine Months Ended September 30, 2016
 
 
 
 
 
 
Operating revenue:
$
30,043

$
2,763

 
 
 
$
30,181

Sales to airline segment
 
 
 
$
(495
)
(1) 
 
Exchanged products
 
 
 
(2,005
)
(2) 
 
Sales of refined products to third parties
 
 
 
(125
)
(3) 
 
Operating income (loss)(4)
6,015

(83
)
 

 
5,932

Interest expense, net
293

2

 

 
295

Depreciation and amortization
1,402

28

 

 
1,430

Capital expenditures
2,536

61

 

 
2,597

 
 
 
 
 
 
 
Nine Months Ended September 30, 2015
 
 
 
 
 
 
Operating revenue:
$
30,900

$
3,755

 
 
 
$
31,202

Sales to airline segment
 
 
 
$
(792
)
(1) 
 
Exchanged products
 
 
 
(2,401
)
(2) 
 
Sales of refined products to third parties
 
 
 
(260
)
(3) 
 
Operating income(4)
5,803

282

 

 
6,085

Interest expense, net
379


 

 
379

Depreciation and amortization
1,361

23

 

 
1,384

Capital expenditures
2,021

46

 

 
2,067

(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 exchange 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.
(4) 
Includes the impact of pricing arrangements between the airline and refinery segments with respect to the refinery's inventory price risk.


NOTE 10. RESTRUCTURING

The following table shows the balances and activity for restructuring charges:
(in millions)
Severance and Related Costs
Lease Restructuring
Liability as of January 1, 2016
$
52

$
415

Additional costs and expenses
15


Payments
(48
)
(63
)
Liability as of September 30, 2016
$
19

$
352



Lease restructuring charges include remaining lease payments for permanently grounded aircraft related to domestic and Pacific fleet restructurings. Our domestic fleet restructuring initiative is replacing 50-seat regional aircraft and older B-757-200 aircraft with more efficient and customer preferred CRJ-900, B-717-200 and B-737-900ER aircraft. We are also restructuring our Pacific fleet by removing less efficient B-747-400 aircraft and replacing them with smaller-gauge, widebody aircraft to better match capacity with demand.



17


NOTE 11. 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. We calculate diluted earnings per share by dividing net income by the weighted average number of common shares outstanding plus the dilutive effect of outstanding share-based awards, including stock options and restricted stock awards. 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 September 30,
 
Nine Months Ended September 30,
(in millions, except per share data)
2016
2015
 
2016
2015
Net income
$
1,259

$
1,315

 
$
3,751

$
3,546

 
 
 
 
 
 
Basic weighted average shares outstanding
740

788

 
758

803

Dilutive effect of share-based awards
4

7

 
4

8

Diluted weighted average shares outstanding
744

795

 
762

811

 
 
 
 
 
 
Basic earnings per share
$
1.70

$
1.67

 
$
4.95

$
4.42

Diluted earnings per share
$
1.69

$
1.65

 
$
4.92

$
4.37




18


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

September 2016 Quarter Financial Highlights

Our pre-tax income for the September 2016 quarter was $1.9 billion, representing a $172 million decrease compared to the corresponding prior year period as lower passenger revenue, higher salaries and related costs and costs associated with a technology outage offset the benefit provided by lower fuel prices.

On the morning of August 8, 2016, our corporate data center suffered a loss of power leading to a widespread technology outage. The outage resulted from certain data center components failing to connect to backup power. As a result of the outage, we canceled approximately 2,300 flights over three days. The outage and subsequent recovery efforts reduced pre-tax income by an estimated $150 million.

Revenue. Our operating revenue decreased $624 million, or 5.6%, and passenger revenue per available seat mile ("PRASM") decreased 6.8% on 1.5% higher capacity compared to the September 2015 quarter, resulting primarily from the impact of U.S. dollar strength on sales in international markets, imbalances between supply and demand principally in the Atlantic region and China, weakness in the domestic close-in yield environment and the technology outage.

Operating Expense. Total operating expense decreased $380 million, and our consolidated operating cost per available seat mile ("CASM") decreased 5.7% to 12.33 cents compared to the September 2015 quarter, primarily due to lower fuel prices, which were partially offset by higher salaries and related costs as well as costs associated with the technology outage. During the September 2016 quarter, Brent crude oil averaged $46 per barrel compared to the average of $50 per barrel during the September 2015 quarter. Salaries and related costs were higher as a result of pay rate increases implemented during the December 2015 quarter.

Despite pay rate increases, non-fuel unit costs ("CASM-Ex, including profit sharing," a non-GAAP financial measure) only increased 0.1% to 9.58 cents compared to the September 2015 quarter due to the impact of cost savings resulting from our domestic upgauging and other initiatives.

In addition to the previously-implemented pay rate increases, on September 30, 2016, we reached a comprehensive agreement in principle with ALPA for a new Pilot Working Agreement. From this agreement in principle, a tentative agreement will be finalized and presented to ALPA’s MEC. If the MEC approves the tentative agreement, the agreement will be presented to our pilots for ratification. This process could take several months. If this new agreement is ratified, the pilots will receive an 18% pay increase retroactive to January 1, 2016.

The non-GAAP financial measure for CASM-Ex, including profit sharing is defined and reconciled in "Supplemental Information" below.



19


Results of Operations - Three Months Ended September 30, 2016 and 2015

Operating Revenue
 
Three Months Ended September 30,
Increase (Decrease)
% Increase (Decrease)
(in millions)
2016
2015
Passenger:
 
 
 
 
Mainline
$
7,615

$
8,059

$
(444
)
(5.5
)%
Regional carriers
1,456

1,536

(80
)
(5.2
)%
Total passenger revenue
9,071

9,595

(524
)
(5.5
)%
Cargo
167

196

(29
)
(14.8
)%
Other
1,245

1,316

(71
)
(5.4
)%
Total operating revenue
$
10,483

$
11,107

$
(624
)
(5.6
)%

Passenger Revenue
 
 
Increase (Decrease)
vs. Three Months Ended September 30, 2015
(in millions)
Three Months Ended September 30, 2016
Passenger Revenue
RPMs(1) (Traffic)
ASMs(2) (Capacity)
Passenger Mile Yield
PRASM
Load Factor
Mainline
$
4,615

(3.3
)%
2.0
 %
4.4
 %
(5.3
)%
(7.4
)%
(2.0
)
pts
Regional carriers
1,456