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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, 2017
Or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-5424
deltacra01a01a01a02a25.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,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer 
þ
Accelerated filer 
o
Non-accelerated filer 
o
(Do not check if a smaller reporting company)
Smaller reporting company
o
Emerging growth company
o
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
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, 2017:
Common Stock, $0.0001 par value - 712,973,139 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, 2016 ("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


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, 2017, and the related condensed consolidated statements of operations and comprehensive income for the three-month and nine-month periods ended September 30, 2017 and 2016 and the condensed consolidated statements of cash flows for the nine-month periods ended September 30, 2017 and 2016. 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, 2016, and the related consolidated statements of operations, comprehensive income (loss), 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 13, 2017.
            

 
/s/ Ernst & Young LLP
Atlanta, Georgia
 
October 11, 2017
 


2



DELTA AIR LINES, INC.
Consolidated Balance Sheets
(Unaudited)
(in millions, except share data)
September 30,
2017
 
December 31,
2016
ASSETS
Current Assets:
 
 
 
Cash and cash equivalents
$
1,478

 
$
2,762

Short-term investments
960

 
487

Accounts receivable, net of an allowance for uncollectible accounts of $12 and $15 at September 30, 2017
and December 31, 2016, respectively
2,399

 
2,064

Fuel inventory
720

 
519

Expendable parts and supplies inventories, net of an allowance for obsolescence of $124 and $110
at September 30, 2017 and December 31, 2016, respectively
416

 
372

Prepaid expenses and other
1,110

 
1,247

Total current assets
7,083

 
7,451

Property and Equipment, Net:
 
 
 
Property and equipment, net of accumulated depreciation and amortization of $13,766 and $12,456
at September 30, 2017 and December 31, 2016, respectively
25,900

 
24,375

Other Assets:
 
 
 
Goodwill
9,794

 
9,794

Identifiable intangibles, net of accumulated amortization of $841 and $828 at September 30, 2017
and December 31, 2016, respectively
4,851

 
4,844

Deferred income taxes, net
1,422

 
3,064

Other noncurrent assets
2,878

 
1,733

Total other assets
18,945

 
19,435

Total assets
$
51,928

 
$
51,261

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
 
 
 
Current maturities of long-term debt and capital leases
$
1,224

 
$
1,131

Air traffic liability
5,528

 
4,626

Accounts payable
3,059

 
2,572

Accrued salaries and related benefits
2,683

 
2,924

Frequent flyer deferred revenue
1,759

 
1,648

Other accrued liabilities
2,243

 
2,338

Total current liabilities
16,496

 
15,239

Noncurrent Liabilities:
 
 
 
Long-term debt and capital leases
7,584

 
6,201

Pension, postretirement and related benefits
9,565

 
13,378

Frequent flyer deferred revenue
2,281

 
2,278

Other noncurrent liabilities
2,001

 
1,878

Total noncurrent liabilities
21,431


23,735

Commitments and Contingencies

 

Stockholders' Equity:
 
 
 
Common stock at $0.0001 par value; 1,500,000,000 shares authorized, 720,433,073 and 744,886,938
shares issued at September 30, 2017 and December 31, 2016, respectively

 

Additional paid-in capital
12,133

 
12,294

Retained earnings
9,502

 
7,903

Accumulated other comprehensive loss
(7,476
)
 
(7,636
)
Treasury stock, at cost, 7,459,934 and 14,149,229 shares at September 30, 2017 and December 31, 2016,
respectively
(158
)
 
(274
)
Total stockholders' equity
14,001

 
12,287

Total liabilities and stockholders' equity
$
51,928

 
$
51,261

 
 
 
 
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)
2017
 
2016
 
2017
 
2016
Operating Revenue:
 
 
 
 
 
 
 
Passenger:
 
 
 
 
 
 
 
Mainline
$
7,924

 
$
7,615

 
$
22,027

 
$
21,530

Regional carriers
1,475

 
1,456

 
4,291

 
4,273

  Total passenger revenue
9,399

 
9,071

 
26,318

 
25,803

Cargo
187

 
167

 
530

 
494

Other
1,474

 
1,245

 
4,151

 
3,884

  Total operating revenue
11,060

 
10,483

 
30,999

 
30,181

 
 
 
 
 
 
 
 
Operating Expense:
 
 
 
 
 
 
 
Salaries and related costs
2,715

 
2,463

 
7,804

 
7,165

Aircraft fuel and related taxes
1,519

 
1,422

 
4,207

 
3,877

Regional carriers expense
1,156

 
1,119

 
3,347

 
3,221

Depreciation and amortization
574

 
474

 
1,649

 
1,430

Contracted services
561

 
520

 
1,627

 
1,480

Aircraft maintenance materials and outside repairs
503

 
462

 
1,496

 
1,357

Passenger commissions and other selling expenses
482

 
466

 
1,344

 
1,291

Landing fees and other rents
400

 
399

 
1,144

 
1,123

Passenger service
315

 
264

 
806

 
674

Profit sharing
314

 
326

 
803

 
922

Aircraft rent
89

 
72

 
259

 
204

Other
593

 
527

 
1,593

 
1,505

Total operating expense
9,221

 
8,514

 
26,079

 
24,249

 
 
 
 
 
 
 
 
Operating Income
1,839

 
1,969

 
4,920

 
5,932

 
 
 
 
 
 
 
 
Non-Operating Expense:

 

 
 
 
 
Interest expense, net
(100
)
 
(95
)
 
(297
)
 
(295
)
Miscellaneous, net
66

 
26

 
(12
)
 
47

Total non-operating expense, net
(34
)
 
(69
)
 
(309
)
 
(248
)
 
 
 
 
 
 
 
 
Income Before Income Taxes
1,805

 
1,900

 
4,611

 
5,684

 
 
 
 
 
 
 
 
Income Tax Provision
(627
)
 
(641
)
 
(1,606
)
 
(1,933
)
 
 
 
 
 
 
 
 
Net Income
$
1,178

 
$
1,259

 
$
3,005

 
$
3,751

 
 
 
 
 
 
 
 
Basic Earnings Per Share
$
1.64

 
$
1.70

 
$
4.15

 
$
4.95

Diluted Earnings Per Share
$
1.64

 
$
1.69

 
$
4.13

 
$
4.92

Cash Dividends Declared Per Share
$
0.31

 
$
0.20

 
$
0.71

 
$
0.47

 
 
 
 
 
 
 
 
Comprehensive Income
$
1,251

 
$
1,326

 
$
3,165

 
$
3,814

 
 
 
 
 
 
 
 
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)
2017
 
2016
Net Cash Provided by Operating Activities
$
3,230

 
$
6,080

 
 
 
 
Cash Flows from Investing Activities:
 
 
 
Property and equipment additions:
 
 
 
Flight equipment, including advance payments
(1,905
)
 
(2,149
)
Ground property and equipment, including technology
(826
)
 
(448
)
Purchase of equity investments
(795
)
 

Purchase of short-term investments
(868
)
 
(1,480
)
Redemption of short-term investments
395

 
1,436

Other, net
(35
)
 
41

Net cash used in investing activities
(4,034
)

(2,600
)
 
 
 
 
Cash Flows from Financing Activities:
 
 
 
Payments on long-term debt and capital lease obligations
(819
)
 
(1,403
)
Repurchase of common stock
(1,350
)
 
(2,301
)
Cash dividends
(516
)
 
(360
)
Fuel card obligation
341

 
(14
)
Proceeds from long-term obligations
2,004

 
450

Other, net
(140
)
 
(186
)
Net cash used in financing activities
(480
)
 
(3,814
)
 
 
 
 
Net Decrease in Cash and Cash Equivalents
(1,284
)
 
(334
)
Cash and cash equivalents at beginning of period
2,762

 
1,972

Cash and cash equivalents at end of period
$
1,478

 
$
1,638

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

 
$
350

Flight and ground equipment acquired under capital leases
249

 
55

 
 
 
 
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, 2016.

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, 2017 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

Standards Effective in Future Years

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)." The standard is effective for interim and annual reporting periods beginning after December 15, 2017. 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. We expect to use the full retrospective transition method and will adopt the standard effective January 1, 2018.

While we believe the adoption will not have a significant effect on earnings, certain revenues that are currently classified in other revenue will be reclassified to passenger revenue. These include baggage fees, administrative charges and other travel-related fees, which may be deemed part of the single performance obligation of providing passenger transportation. We expect that these revenues, which are approximately $2 billion annually, will be reclassified from the current presentation in other revenue to passenger revenue after adoption.

In addition, we expect that the adoption will increase the rate used to account for frequent flyer miles. We currently analyze our standalone sales of mileage credits to other airlines and customers to establish the accounting value for frequent flyer miles. Considering the guidance in the new standard, we expect to change our valuation of a mileage credit to an analysis of the award redemption value. The new valuation will consider the quantitative value a passenger receives by redeeming miles rather than paying cash for an award ticket. We expect this change to significantly increase our frequent flyer liability. The mileage deferral and redemption rates would be approximately the same; therefore, assuming stable volume, we do not expect there would be a significant change in revenue recognized from the program. We continue to evaluate this and the other impacts to the financial statements due to the adoption of the new standard.

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.


6


We have not completed our assessment, but the adoption of this standard will have a significant impact on our Consolidated Balance Sheets. However, we do not expect the adoption to have a significant impact on 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. We will adopt this standard effective January 1, 2019.

Statement of Cash Flows. In 2016, the FASB issued ASU Nos. 2016-15 and 2016-18 related to the classification of certain cash receipts and cash payments and the presentation of restricted cash within an entity's statement of cash flows, respectively. These standards are effective for interim and annual reporting periods beginning after December 15, 2017. We will adopt these standards effective January 1, 2018. We do not expect these standards to have a material impact on our Consolidated Statements of Cash Flows.

Financial Instruments. In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments—Overall (Subtopic 825-10)." This standard makes several changes, including the elimination of the available-for-sale classification of equity investments, and requires equity investments with readily determinable fair values to be measured at fair value with changes in fair value recognized in net income. It is effective for interim and annual periods beginning after December 15, 2017. We will adopt this standard effective January 1, 2018.

Our investments in GOL Linhas Aéreas Inteligentes, the parent company of VRG Linhas Aéreas (operating as GOL), and China Eastern are currently accounted for as available-for-sale with changes in fair value recognized in other comprehensive income. At the time of adoption, any amounts in accumulated other comprehensive income/(loss) ("AOCI") related to equity investments would be reclassified to retained earnings. As of September 30, 2017, an unrealized gain of $49 million related to these investments is recorded in AOCI.

Retirement Benefits. In March 2017, the FASB issued ASU No. 2017-07, "Compensation—Retirement Benefits (Topic 715)." This standard requires an entity to report the service cost component in the same line item as other compensation costs. The other components of net (benefit) cost will be required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. This standard is effective for interim and annual reporting periods beginning after December 15, 2017. We will adopt the standard effective January 1, 2018. The components of the net (benefit) cost are shown in Note 6, "Employee Benefit Plans."

Recently Adopted Standards

Equity Method Investments. In March 2016, the FASB issued ASU No. 2016-07, "Investments—Equity Method and Joint Ventures (Topic 323)." This standard eliminates a previous requirement that an investor must restate its historical financial statements when an existing cost method investment qualifies for use of the equity method 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 AOCI will be recognized through earnings. We adopted this standard in 2016 and converted our investment in Group Aeroméxico to the equity method upon completion of the tender offer for additional capital stock during the March 2017 quarter.



7


NOTE 2. FAIR VALUE MEASUREMENTS

Assets (Liabilities) Measured at Fair Value on a Recurring Basis
(in millions)
September 30,
2017
Level 1
Level 2
Cash equivalents
$
169

$
169

$

Short-term investments
 
 

U.S. government and agency securities
152

142

10

Asset- and mortgage-backed securities
188


188

Corporate obligations
519


519

Other fixed income securities
101


101

Restricted cash equivalents and investments
39

39


Long-term investments
399

371

28

Hedge derivatives, net
 
 
 
Fuel hedge contracts
(139
)
(31
)
(108
)
Interest rate contract
(4
)

(4
)
Foreign currency exchange contracts
(22
)

(22
)
(in millions)
December 31,
2016
Level 1
Level 2
Cash equivalents
$
2,279

$
2,279

$

Short-term investments
 
 


U.S. government and agency securities
112

86

26

Asset- and mortgage-backed securities
68


68

Corporate obligations
295


295

Other fixed income securities
12


12

Restricted cash equivalents and investments
61

61


Long-term investments
139

115

24

Hedge derivatives, net
 
 
 
Fuel hedge contracts
(324
)
(26
)
(298
)
Interest rate contract
6


6

Foreign currency exchange contracts
27


27



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 primarily support letters of credit that relate to certain projected self-insurance obligations and airport 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 have historically been measured at fair value primarily consist of equity investments in Grupo Aeroméxico, the parent company of Aeroméxico, and the parent company of GOL. During the March 2017 quarter, we completed a tender offer for additional shares of Grupo Aeroméxico. With the completion of the tender offer, our investment is accounted for under the equity method and is no longer measured at fair value on a recurring basis. As of September 30, 2017, our long-term investments include our shares in China Eastern and the parent company of GOL. Our investments are valued based on market prices and are classified in other noncurrent assets.



8


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 35% 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, 2017, 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
$
412

Due after one year through three years
491

Due after three years through five years
37

Due after five years
20

Total
$
960




9


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.

Equity Method Investments

Aeroméxico. During the March 2017 quarter, we completed a $622 million tender offer for additional capital stock of Grupo Aeroméxico. Subsequently, during the September 2017 quarter, we settled for $173 million derivative contracts for additional shares of Grupo Aeroméxico, bringing our non-controlling equity investment in Grupo Aeroméxico to 49%. As a result of these increases in our ownership, we account for the investment under the equity method of accounting and recognize our portion of their results in non-operating expense in our Condensed Consolidated Statements of Operations and Comprehensive Income.

Virgin Atlantic. We have a non-controlling 49% equity stake in Virgin Atlantic Limited, the parent company of Virgin Atlantic Airways. We recognize our portion of Virgin Atlantic's financial results in non-operating expense in our Condensed Consolidated Statements of Operations and Comprehensive Income.

Available-for-Sale Investments

GOL. Through our investment in preferred shares of GOL's parent company, we own 9% of GOL's outstanding capital stock. Driven by an improved outlook for the Brazilian economy and the financial performance of the company, GOL's stock price has more than doubled since December 31, 2016 and exceeds the original cost of our investment. This unrealized gain of $50 million is recorded in AOCI.

Additionally, GOL has 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, 2017.

China Eastern. We have a 3% equity interest in China Eastern. Because the investment agreement with China Eastern restricts our sale or transfer of these shares through the September 2018 quarter, we had previously recorded this investment at cost. As we are now within one year of the lapse of these restrictions, we began accounting for the investment during the September 2017 quarter as available-for-sale with changes in fair value recorded in AOCI.

Cost Method Investments

Air France-KLM. Subsequent to the September 2017 quarter, we acquired 10% of the outstanding shares of our joint venture partner, Air France-KLM, for $448 million. Because our investment agreement restricts the sale or transfer of these shares for five years, we will account for this investment at cost. In addition, we are working to develop a combined long-term joint venture with Air France-KLM and Virgin Atlantic.



10


NOTE 4. DERIVATIVES AND RISK MANAGEMENT

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 recently 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.

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 required 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, provided 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, 2017, we recorded fuel hedge losses of $100 million and $3 million, respectively. During the three and nine months ended September 30, 2016, we recorded fuel hedge losses of $11 million and $326 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, 2017
(in millions)
Volume
Final Maturity Date
Prepaid Expenses and Other
Other Noncurrent Assets
Other Accrued Liabilities
Other Noncurrent Liabilities
Hedge Derivatives, net
Designated as hedges
 
 
 
 
 
 
 
 
Interest rate contract (fair value hedge)
320

U.S. dollars
August 2022
$

$

$

$
(4
)
$
(4
)
Foreign currency exchange contracts
29,396

Japanese yen
November 2019
3

1

(17
)
(9
)
(22
)
563

Canadian dollars
May 2020
Not designated as hedges
 
 
 
 
 
 
 
 
Fuel hedge contracts (1)
288

gallons - crude oil, diesel and jet fuel
December 2018
210

3

(335
)
(17
)
(139
)
Total derivative contracts
 
 
$
213

$
4

$
(352
)
$
(30
)
$
(165
)
(1) 
As discussed above, during 2016, we entered into fuel hedges designed to offset and effectively neutralize our 2017 airline segment hedge positions. The dollar amounts shown above primarily represent the offsetting derivatives that were used to neutralize the 2017 airline segment hedge portfolio.




11


Hedge Position as of December 31, 2016
(in millions)
Volume
Final Maturity Date
Prepaid Expenses and Other
Other Noncurrent Assets
Other Accrued Liabilities
Other Noncurrent Liabilities
Hedge Derivatives, net
Designated as hedges
 
 
 
 
 
 
 
 
Interest rate contract (fair value hedge)
349

U.S. dollars
August 2022
$
2

$
4

$

$

$
6

Foreign currency exchange contracts
54,853

Japanese yen
February 2019
31

3

(4
)
(3
)
27

335

Canadian dollars
January 2019
Not designated as hedges
 
 
 
 
 
 
 
 
Fuel hedge contracts (1)
197

gallons - crude oil, diesel and jet fuel
January 2018
360


(684
)

(324
)
Total derivative contracts
 
 
$
393

$
7

$
(688
)
$
(3
)
$
(291
)
(1) 
As discussed above, we early settled $455 million of our airline segment's 2016 fuel hedge positions and entered into hedges designed to offset and effectively neutralize 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.

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)
Prepaid Expenses and Other
Other Noncurrent Assets
Other Accrued Liabilities
Other Noncurrent Liabilities
Hedge Derivatives, net
September 30, 2017
 
 
 
 
 
Net derivative contracts
$
1

$

$
(140
)
$
(26
)
$
(165
)
December 31, 2016
 
 
 
 
 
Net derivative contracts
$
31

$
6

$
(326
)
$
(2
)
$
(291
)


Designated Hedge Gains (Losses)

Gains (losses) related to our foreign currency exchange contracts are as follows:
 
Effective Portion Reclassified from AOCI to Earnings
 
Effective Portion Recognized in Other Comprehensive Income
(in millions)
2017
2016
 
2017
2016
Three Months Ended September 30,
 
 
 
 
 
Foreign currency exchange contracts
$

$
(2
)
 
$
(15
)
$
(2
)
Nine Months Ended September 30,
 
 
 
 
 
Foreign currency exchange contracts
$
11

$
34

 
$
(48
)
$
(147
)


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.



12


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 classified as Level 2 within the fair value hierarchy.
(in millions)
September 30,
2017
December 31,
2016
Total debt at par value
$
8,473

$
7,112

Unamortized discount and debt issue cost, net
(97
)
(104
)
Net carrying amount
$
8,376

$
7,008

 
 
 
Fair value
$
8,700

$
7,300



Unsecured Debt Offering

During the March 2017 quarter, we issued $2.0 billion in aggregate principal amount of unsecured notes, consisting of $1.0 billion of 2.875% Notes due 2020 and $1.0 billion of 3.625% Notes due 2022 (collectively, the "Notes"). The Notes are equal in right of payment with all of our other unsubordinated indebtedness and senior in right of payment to all of our future subordinated debt.
The Notes are subject to covenants that, among other things, limit our ability to incur liens securing indebtedness for borrowed money or capital leases and engage in mergers and consolidations or transfer all or substantially all of our assets, in each case subject to certain exceptions. The Notes are also subject to customary event of default provisions, including cross-defaults to other material indebtedness.
If we experience certain changes of control and a ratings decline of either series of Notes by two of the ratings agencies to a rating below investment grade within a certain period of time following a change of control or public notice of the occurrence of a change of control, we must offer to repurchase such series.
Using the net proceeds from the $2.0 billion debt issuance and existing cash, we contributed $3.2 billion to our qualified defined benefit pension plans during the six months ended June 30, 2017. We also contributed shares of our common stock from treasury with a value of $350 million during the March 2017 quarter.
Covenants

We were in compliance with the covenants in our financings at September 30, 2017.
 


13


NOTE 6. EMPLOYEE BENEFIT PLANS

The following table shows the components of net (benefit) cost:
 
Pension Benefits
Other Postretirement and Postemployment Benefits
(in millions)
2017
2016
2017
2016
Three Months Ended September 30,
 
 
 
 
Service cost
$

$

$
22

$
17

Interest cost
213

229

35

37

Expected return on plan assets
(286
)
(226
)
(17
)
(18
)
Amortization of prior service credit


(7
)
(7
)
Recognized net actuarial loss
66

59

8

6

Net (benefit) cost
$
(7
)
$
62

$
41

$
35

 
 
 
 
 
Nine Months Ended September 30,
 
 
 
 
Service cost
$

$

$
66

$
51

Interest cost
639

687

105

111

Expected return on plan assets
(858
)
(678
)
(51
)
(54
)
Amortization of prior service credit


(21
)
(21
)
Recognized net actuarial loss
198

177

24

18

Net (benefit) cost
$
(21
)
$
186

$
123

$
105




NOTE 7. COMMITMENTS AND CONTINGENCIES

Aircraft Purchase and Lease Commitments

Our future aircraft purchase commitments totaled approximately $13.1 billion at September 30, 2017:
(in millions)
Total
Three months ending December 31, 2017
$
920

2018
3,480

2019
3,090

2020
2,160

2021
2,090

Thereafter
1,330

Total
$
13,070



Our future aircraft purchase commitments included the following aircraft at September 30, 2017:
Aircraft Type
 
Purchase Commitments
B-737-900ER
 
46

A321-200
 
96

A330-900neo
 
25

A350-900
 
23

CS100
 
75

Total
 
265



During the June 2017 quarter, we entered into agreements with Airbus SE to place an expanded A321-200 order for 40 firm additional aircraft and to defer 10 of our 25 A350-900 aircraft deliveries set for 2019-2020 by two to three years.


14


The Boeing Company recently filed a petition with the U.S. government alleging Bombardier has agreed to sell aircraft below cost and asking the government to impose duties on all U.S. imports of 100- to 150-seat Large Civil Aircraft from Canada. This includes the CS100 aircraft under our purchase agreement with Bombardier. Although certain preliminary determinations have been issued in favor of Boeing, the government's review of this matter is ongoing, with final decisions expected during 2018. Delta is not a party to the petition, but believes the petition is without merit.

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, we believe 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 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 law 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.

Other

During the September 2016 quarter, we announced plans to modernize, upgrade and connect Terminals 2 and 3 at Los Angeles International Airport (“LAX”) over the next seven years. A substantial majority of the project costs will be funded through the Regional Airports Improvement Corporation ("RAIC"), a California public benefit corporation, using a revolving credit facility provided by a group of lenders, whose aggregate commitments total $800 million. The credit facility was executed during the September 2017 quarter. We have guaranteed the obligations of the RAIC under the credit facility. Because the RAIC remains in compliance with the terms of its credit facility, we have not recorded a liability on our Consolidated Balance Sheet as of September 30, 2017.

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.

15


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, 2017 (net of tax effect of $1,458)
$
(7,714
)
$
97

$
(19
)
$
(7,636
)
Changes in value (net of tax effect of $4)

(23
)
76

53

Reclassifications into earnings (net of tax effect of $63)(1)
122

(7
)
(8
)
107

Balance at September 30, 2017 (net of tax effect of $1,391)
$
(7,592
)
$
67

$
49

$
(7,476
)

 
 
 
 
 
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
)


(1) 
Amounts reclassified from AOCI for pension and other benefits liabilities and derivative contracts designated as foreign currency cash flow hedges are recorded in salaries and related costs and in passenger revenue, respectively, in the Condensed Consolidated Statements of Operations and Comprehensive Income. The reclassification into earnings for investments relates to our investment in Grupo Aeroméxico during the March 2017 quarter with the conversion to accounting under the equity method. The reclassification of the unrealized gain was recorded to non-operating expense in our 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. We consider all income sources, including other comprehensive income, in determining the amount of tax benefit allocated to continuing operations.



16


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, 2017 was $910 million and $2.4 billion, respectively, compared to $734 million and $2.0 billion during the three and nine months ended September 30, 2016.
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, 2017
 
 
 
 
 
 
Operating revenue:
$
10,931

$
1,357

 
 
 
$
11,060

Sales to airline segment
 
 
 
$
(239
)
(1) 
 
Exchanged products
 
 
 
(910
)
(2) 
 
Sales of refined products
 
 
 
(79
)
(3) 
 
Operating income
1,802

37

 

 
1,839

Interest expense, net
100


 

 
100

Depreciation and amortization
563

11

 

 
574

Total assets, end of period
49,992

1,936

 

 
51,928

Capital expenditures
901

40

 

 
941

 
 
 
 
 
 
 
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
 
 
 
(54
)
(3) 
 
Operating income (loss)
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

 
(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) 
These sales were at or near cost; accordingly, the margin on these sales is de minimis.



17


(in millions)
Airline
Refinery
 
Intersegment Sales/Other
 
Consolidated
Nine Months Ended September 30, 2017
 
 
 
 
 
 
Operating revenue:
$
30,742

$
3,624

 
 
 
$
30,999

Sales to airline segment
 
 
 
$
(622
)
(1) 
 
Exchanged products
 
 
 
(2,399
)
(2) 
 
Sales of refined products
 
 
 
(346
)
(3) 
 
Operating income
4,834

87

 

 
4,920

Interest expense, net
297


 

 
297

Depreciation and amortization
1,617

32

 

 
1,649

Capital expenditures
2,605

126

 

 
2,731

 
 
 
 
 
 
 
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
 
 
 
(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

(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) 
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 lease restructuring charges:
(in millions)
Lease Restructuring
Liability as of January 1, 2017
$
329

Payments
(63
)
Additional expenses and other
(10
)
Liability as of September 30, 2017
$
256



Lease restructuring charges include remaining lease payments for permanently grounded aircraft related to domestic and Pacific fleet restructurings. We are continuing to restructure our domestic fleet by replacing a portion of our 50-seat regional fleet with more efficient and customer preferred aircraft and replacing older, less cost effective B-757-200 aircraft with B-737-900ER aircraft. We are also restructuring our Pacific fleet by removing less efficient B-747-400 aircraft by the end of 2017 and replacing them with smaller-gauge, widebody aircraft to better match capacity with demand.



18


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)
2017
2016
 
2017
2016
Net income
$
1,178

$
1,259

 
$
3,005

$
3,751

 
 
 
 
 
 
Basic weighted average shares outstanding
716

740

 
724

758

Dilutive effect of share-based awards
3

4

 
3

4

Diluted weighted average shares outstanding
719

744

 
727

762

 
 
 
 
 
 
Basic earnings per share
$
1.64

$
1.70

 
$
4.15

$
4.95

Diluted earnings per share
$
1.64

$
1.69

 
$
4.13

$
4.92





19


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

September 2017 Quarter Financial Highlights

Our pre-tax income for the September 2017 quarter was $1.8 billion, representing a $95 million decrease compared to the corresponding prior year period resulting from higher salaries and related costs, fuel expense and depreciation expense, partially offset by increased passenger and other revenue.

Revenue

Our revenue increased $577 million, or 5.5%, and passenger revenue per available seat mile ("PRASM") increased 1.9%, including one point of negative impact from Hurricane Irma, on 1.6% higher capacity compared to the September 2016 quarter. Revenue improvement resulted from our commercial initiatives, including differentiated products for our customers, and strong leisure demand and an improving business revenue environment. Other revenue primarily increased from sales of non-jet fuel products to third parties by our oil refinery, consistent with stronger pricing of refined products throughout the oil industry, and growth in our loyalty programs revenue.

Operating Expense

Total operating expense increased $707 million, or 8.3%, and our consolidated operating cost per available seat mile ("CASM") increased 6.6% to 13.14 cents compared to the September 2016 quarter, primarily due to increases in salaries and related costs, fuel expense and depreciation expense.

Salaries and Related Costs. Salaries increased as a result of contractual pay rate increases for pilots and increases for eligible merit, ground and flight attendant employees.

Fuel Expense. The increase in fuel expense primarily resulted from an approximately 14% increase in our fuel purchase cost and a slight increase in consumption. These increases were partially offset by profits generated within our refinery segment in the September 2017 quarter.

Depreciation Expense. The increase in depreciation expense primarily resulted from new aircraft deliveries over the prior year, including B-737-900ER, A321-200, A330-300 and A350-900 aircraft, fleet modifications and accelerated depreciation due to the planned retirement of our MD-88 fleet and two B-767-300ER aircraft.

Non-fuel unit costs ("CASM-Ex, including profit sharing," a non-GAAP financial measure) increased 4.8% to 10.05 cents compared to the September 2016 quarter due to increases in salaries and related costs and depreciation expense, discussed above.

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



20


Results of Operations - Three Months Ended September 30, 2017 and 2016

Operating Revenue
 
Three Months Ended September 30,
Increase (Decrease)
% Increase (Decrease)
(in millions)
2017
2016
Passenger:
 
 
 
 
Mainline
$
7,924

$
7,615

$
309

4.1
%
Regional carriers
1,475

1,456

19

1.3
%
Total passenger revenue
9,399

9,071

328

3.6
%
Cargo
187

167

20

11.5
%
Other
1,474

1,245

229

18.4
%
Total operating revenue
$
11,060

$
10,483

$
577

5.5
%

Passenger Revenue
 
 
Increase (Decrease)
vs. Three Months Ended September 30, 2016
(in millions)