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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 March 31, 2018
Or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-5424
deltacra01a01a01a02a35.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 March 31, 2018:
Common Stock, $0.0001 par value - 702,478,205 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, 2017 ("Form 10-K") and "Item 1A. Risk Factors" of Part II of this Form 10-Q, 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


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

Results of Review of Interim Financial Statements
        
We have reviewed the accompanying consolidated balance sheet of Delta Air Lines, Inc. (the Company) as of March 31, 2018, the related condensed consolidated statements of operations and comprehensive income and cash flows for the three-month periods ended March 31, 2018 and 2017, and the related notes (collectively referred to as the “condensed consolidated interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated interim financial statements 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) (PCAOB), the consolidated balance sheet of Delta Air Lines, Inc. as of December 31, 2017, and the related consolidated statements of operations, comprehensive income, cash flows, and stockholders' equity for the year then ended, and the related notes (not presented herein); and in our report dated February 23, 2018, we expressed an unqualified audit opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2017, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

These financial statements are the responsibility of the Company's management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the SEC and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial statements 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 PCAOB, 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.
            

 
/s/ Ernst & Young LLP
Atlanta, Georgia
 
April 12, 2018
 


2



DELTA AIR LINES, INC.
Consolidated Balance Sheets
(Unaudited)
(in millions, except share data)
March 31,
2018
 
December 31,
2017
ASSETS
Current Assets:
 
 
 
Cash and cash equivalents
$
1,447

 
$
1,814

Short-term investments
523

 
825

Accounts receivable, net of an allowance for uncollectible accounts of $13 and $12 at March 31, 2018
and December 31, 2017, respectively
2,568

 
2,377

Fuel inventory
723

 
916

Expendable parts and supplies inventories, net of an allowance for obsolescence of $119 and $113
at March 31, 2018 and December 31, 2017, respectively
423

 
413

Prepaid expenses and other
2,040

 
1,499

Total current assets
7,724

 
7,844

Property and Equipment, Net:
 
 
 
Property and equipment, net of accumulated depreciation and amortization of $14,585 and $14,097
at March 31, 2018 and December 31, 2017, respectively
27,096

 
26,563

Other Assets:
 
 
 
Goodwill
9,794

 
9,794

Identifiable intangibles, net of accumulated amortization of $849 and $845 at March 31, 2018
and December 31, 2017, respectively
4,843

 
4,847

Deferred income taxes, net
1,175

 
1,354

Other noncurrent assets
3,446

 
3,309

Total other assets
19,258

 
19,304

Total assets
$
54,078

 
$
53,711

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
 
 
 
Current maturities of long-term debt and capital leases
$
2,289

 
$
2,242

Air traffic liability
6,233

 
4,364

Accounts payable
3,351

 
3,674

Accrued salaries and related benefits
1,915

 
3,022

Frequent flyer deferred revenue
2,758

 
2,762

Fuel card obligation
1,062

 
1,067

Other accrued liabilities
2,404

 
1,868

Total current liabilities
20,012

 
18,999

Noncurrent Liabilities:
 
 
 
Long-term debt and capital leases
6,360

 
6,592

Pension, postretirement and related benefits
9,193

 
9,810

Frequent flyer deferred revenue
3,636

 
3,559

Other noncurrent liabilities
2,320

 
2,221

Total noncurrent liabilities
21,509


22,182

Commitments and Contingencies

 

Stockholders' Equity:
 
 
 
Common stock at $0.0001 par value; 1,500,000,000 shares authorized, 710,603,639 and 714,674,160
shares issued at March 31, 2018 and December 31, 2017, respectively

 

Additional paid-in capital
11,967

 
12,053

Retained earnings
8,465

 
8,256

Accumulated other comprehensive loss
(7,681
)
 
(7,621
)
Treasury stock, at cost, 8,125,434 and 7,476,181 shares at March 31, 2018 and December 31, 2017,
respectively
(194
)
 
(158
)
Total stockholders' equity
12,557

 
12,530

Total liabilities and stockholders' equity
$
54,078

 
$
53,711

 
 
 
 
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 March 31,
(in millions, except per share data)
2018
 
2017
Operating Revenue:
 
 
 
Passenger
$
8,765

 
$
8,178

Cargo
202

 
163

Other
1,001

 
760

  Total operating revenue
9,968

 
9,101

 
 
 
 
Operating Expense:
 
 
 
Salaries and related costs
2,584

 
2,386

Aircraft fuel and related taxes
1,856

 
1,482

Regional carriers expense, excluding fuel
856

 
864

Depreciation and amortization
610

 
537

Contracted services
544

 
505

Ancillary businesses and refinery
493

 
292

Aircraft maintenance materials and outside repairs
435

 
432

Passenger commissions and other selling expenses
427

 
404

Landing fees and other rents
373

 
361

Passenger service
263

 
234

Profit sharing
183

 
151

Aircraft rent
94

 
84

Other
410

 
370

Total operating expense
9,128

 
8,102

 
 
 
 
Operating Income
840

 
999

 
 
 
 
Non-Operating Expense:

 

Interest expense, net
(102
)
 
(94
)
Unrealized gain/(loss) on investments, net
18

 

Miscellaneous, net
(38
)
 
(56
)
Total non-operating expense, net
(122
)
 
(150
)
 
 
 
 
Income Before Income Taxes
718

 
849

 
 
 
 
Income Tax Provision
(171
)
 
(288
)
 
 
 
 
Net Income
$
547

 
$
561

 
 
 
 
Basic Earnings Per Share
$
0.78

 
$
0.77

Diluted Earnings Per Share
$
0.77

 
$
0.77

Cash Dividends Declared Per Share
$
0.31

 
$
0.20

 
 
 
 
Comprehensive Income
$
487

 
$
626

 
 
 
 
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)
 
Three Months Ended March 31,
(in millions)
2018
 
2017
Net Cash Provided by (Used in) Operating Activities
$
1,343

 
$
(830
)
 
 
 
 
Cash Flows from Investing Activities:
 
 
 
Property and equipment additions:
 
 
 
Flight equipment, including advance payments
(991
)
 
(595
)
Ground property and equipment, including technology
(274
)
 
(207
)
Purchase of equity investments

 
(622
)
Purchase of short-term investments
(63
)
 
(463
)
Redemption of short-term investments
363

 
207

Other, net
38

 
(28
)
Net cash used in investing activities
(927
)

(1,708
)
 
 
 
 
Cash Flows from Financing Activities:
 
 
 
Payments on long-term debt and capital lease obligations
(244
)
 
(288
)
Repurchase of common stock
(325
)
 
(200
)
Cash dividends
(217
)
 
(149
)
Fuel card obligation
(5
)
 
334

Proceeds from long-term obligations

 
2,004

Other, net
4

 
(21
)
Net cash (used in) provided by financing activities
(787
)
 
1,680

 
 
 
 
Net Decrease in Cash, Cash Equivalents and Restricted Cash
(371
)
 
(858
)
Cash, cash equivalents and restricted cash at beginning of period
1,853

 
2,826

Cash, cash equivalents and restricted cash at end of period
$
1,482

 
$
1,968

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

 
$
350

Flight and ground equipment acquired under capital leases
50

 
186

 
 
 
 
 
 
 
 
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Balance Sheets to the total of the same such amounts shown above:
 
Three Months Ended March 31,
(in millions)
2018
 
2017
Current assets:
 
 
 
Cash and cash equivalents
$
1,447

 
$
1,907

Restricted cash included in prepaid expenses and other
35

 
61

Total cash, cash equivalents and restricted cash
$
1,482

 
$
1,968

 
 
 
 
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, 2017.

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 months ended March 31, 2018 are not necessarily indicative of operating results for the entire year.

We recast prior period financial statements to conform with the adoption of the revenue recognition and retirement benefits standards, described below. In addition, we have reclassified regional carriers fuel expense from regional carriers expense to aircraft fuel and related taxes, and consolidated ancillary businesses and refinery expenses into one financial statement line item, in addition to making other classification changes to conform to the current year presentation.

Unless otherwise noted, all amounts disclosed are stated before consideration of income taxes.

Recent Accounting Standards

Standards Effective in Future Years

Leases. In 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, "Leases (Topic 842)." This standard will require 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. We will adopt this standard effective January 1, 2019.

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 Condensed Consolidated Statements of Operations and Comprehensive Income ("income statement") or the Condensed Consolidated Statements of Cash Flows ("cash flows statement"). Information about our undiscounted future lease payments and the timing of those payments is in Note 7, "Lease Obligations," in our Form 10-K.

Comprehensive Income. In February 2018, the FASB issued ASU No. 2018-02, "Income Statement—Reporting Comprehensive Income (Topic 220)." This standard provides an option to reclassify stranded tax effects within accumulated other comprehensive income/(loss) ("AOCI") to retained earnings due to the U.S. federal corporate income tax rate change in the Tax Cuts and Jobs Act of 2017. This standard is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. We have not completed our assessment, but the adoption of the standard may impact tax amounts stranded in AOCI related to our pension plans. We will adopt this standard effective January 1, 2019.

Recently Adopted Standards

Revenue from Contracts with Customers. In 2014, the FASB issued 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. We adopted this standard using the full retrospective transition method effective January 1, 2018 and recast prior year results as shown below.


6


While the adoption of the new standard did not have a significant effect on earnings, approximately $2 billion of certain annual revenues that were previously classified in other revenue have been reclassified to passenger revenue. These revenues include baggage fees, administrative charges and other travel-related fees, which are deemed part of the single performance obligation of providing passenger transportation.

In addition, the adoption of the new standard increases the rate used to account for frequent flyer miles. We previously analyzed 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 changed our valuation of a mileage credit to an analysis of the award redemption value. The new valuation considers the quantitative value a passenger receives by redeeming miles for a ticket rather than paying cash. This change increased our frequent flyer liability at December 31, 2017 by $2.2 billion. The mileage deferral and redemption rates are approximately the same; therefore, assuming stable volume, there would not be a significant change in revenue recognized from the program in a given period.

The adoption of the new standard also reduced our air traffic liability at December 31, 2017 by $524 million. This change primarily results from estimating the tickets that will expire unused and recognizing revenue at the scheduled flight date rather than when the unused tickets expire.

See Note 2, "Revenue Recognition," for more information.

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 cash flows statement, respectively. We adopted these standards effective January 1, 2018.

Financial Instruments. In 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. In February 2018, the FASB issued ASU No. 2018-03, "Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10)" to clarify certain aspects of ASU No. 2016-01. We adopted these standards effective January 1, 2018.

Our investments in GOL Linhas Aéreas Inteligentes, the parent company of VRG Linhas Aéreas (operating as GOL), and China Eastern were accounted for as available-for-sale with changes in fair value recognized in other comprehensive income. At the time of adoption, we reclassified an unrealized gain of $162 million related to these investments from AOCI to retained earnings.

Our investment in Air France-KLM was accounted for at cost during 2017 as our investment agreement restricts the sale or transfer of these shares for five years. Upon adopting ASU Nos. 2016-01 and 2018-03, we recognized a $148 million gain in unrealized gain/(loss) on investments related to the value of Air France-KLM's stock compared to our investment basis at December 31, 2017. Consistent with our investments in GOL and China Eastern, this investment is now accounted for at fair value with changes in fair value recognized in net income.

Retirement Benefits. In 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. We adopted this standard effective January 1, 2018. The components of the net (benefit) cost are shown in Note 7, "Employee Benefit Plans." As a result of the adoption, for the three months ended March 31, 2017, we reclassified $12 million from operating expense into non-operating expense in our income statement.





7


Impact of Recently Adopted Standards

We recast certain prior period amounts to conform with the adoption of the revenue recognition and retirement benefits standards, as shown in the tables below.
 
Three Months Ended March 31, 2017

(in millions, except per share data)
As Previously Reported
Adjustments
Current Presentation
Income statement:
 
 
 
Passenger revenue
$
7,688

$
490

$
8,178

Cargo revenue
160

3

163

Other revenue
1,300

(540
)
760

Operating expense
8,095

7

8,102

Non-operating expense
(138
)
(12
)
(150
)
Income tax provision
(312
)
24

(288
)
Net income
603

(42
)
561

Diluted earnings per share
$
0.82

$
(0.05
)
$
0.77

 
December 31, 2017

(in millions)
As Previously Reported
Adjustments
Current Presentation
Balance sheet:
 
 
 
Deferred income taxes, net
$
935

$
419

$
1,354

Air traffic liability
4,888

(524
)
4,364

Frequent flyer deferred revenue (current and noncurrent)
4,118

2,203

6,321

Other accrued and other noncurrent liabilities
3,969

120

4,089

Retained earnings
9,636

(1,380
)
8,256




8


NOTE 2. REVENUE RECOGNITION

Passenger Revenue

Passenger revenue is primarily composed of passenger ticket sales, loyalty travel awards and travel-related services performed in conjunction with a passenger’s flight.
 
Three Months Ended March 31,
(in millions)
2018
2017
Ticket
$
7,653

$
7,105

Loyalty travel awards
618

582

Travel-related services
494

491

Total passenger revenue
$
8,765

$
8,178



Ticket

Passenger tickets. We record sales of passenger tickets to be flown by us or that we sell on behalf of other airlines in air traffic liability. Passenger revenue is recognized when we provide transportation or when ticket breakage occurs. For tickets that we sell on behalf of other airlines, we reduce the air traffic liability when consideration is remitted to those airlines. We periodically evaluate the estimated air traffic liability and record any adjustments in our income statement. These adjustments relate primarily to refunds, exchanges, transactions with other airlines and other items for which final settlement occurs in periods subsequent to the sale of the related tickets at amounts other than the original sales price.

We recognized $2.1 billion in passenger revenue during each of the three months ended March 31, 2018 and 2017 that was recorded in our air traffic liability balances of $4.4 billion and $4.1 billion at December 31, 2017 and 2016, respectively. We expect the remaining balance of the December 31, 2017 liability to be recognized during 2018.

Ticket breakage. We estimate the value of tickets that will expire unused and recognize revenue at the scheduled flight date.

Regional carriers. Our regional carriers include both our contract carrier agreements with third-party regional carriers ("contract carriers") and Endeavor Air, Inc. ("Endeavor"), our wholly owned subsidiary. Our contract carrier agreements are primarily structured as capacity purchase agreements where we purchase all or a portion of the contract carrier's capacity and are responsible for selling the seat inventory we purchase. We record revenue related to our capacity purchase agreements in passenger revenue and the related expenses in regional carriers expense, excluding fuel.

Loyalty Travel Awards

Loyalty travel awards revenue is related to the redemption of mileage credits for travel. We recognize loyalty travel award revenue in passenger revenue as mileage credits are redeemed and travel is provided. See below for discussion of our frequent flyer program accounting policies.

Travel-Related Services

Travel-related services are primarily composed of services performed in conjunction with a passenger’s flight, including administrative fees (such as ticket change fees), baggage fees and on-board sales. We recognize revenue for these services when the related transportation service is provided. Prior to the adoption of the new standard, the majority of these fees were classified in other revenue.


9


Frequent Flyer Program

Our frequent flyer program (the "SkyMiles program") generates customer loyalty by rewarding customers with incentives to travel on Delta. This program allows customers to earn mileage credits by flying on Delta, Delta Connection and airlines that participate in the SkyMiles program. When traveling, customers earn redeemable mileage credits based on the passenger's loyalty program status and travel fare paid. Customers can also earn mileage credits through participating companies such as credit card companies, hotels and car rental agencies. To facilitate transactions with participating companies, we sell mileage credits to non-airline businesses, customers and other airlines. Mileage credits are redeemable by customers in future periods for air travel on Delta and participating airlines, membership in our Sky Club and other program awards.

To reflect the mileage credits earned, the SkyMiles program includes two types of transactions that are considered revenue arrangements with multiple performance obligations: (1) mileage credit earned with travel and (2) mileage credit sold to participating companies.

Passenger ticket sales earning mileage credits. Passenger ticket sales earning mileage credits under our SkyMiles program provide customers with (1) mileage credits earned and (2) air transportation. We value each performance obligation on a standalone basis. To value the mileage credits earned, we consider the quantitative value a passenger receives by redeeming miles for a ticket rather than paying cash, which is referred to as equivalent ticket value ("ETV").

We defer revenue for the mileage credits when earned and recognize loyalty travel awards in passenger revenue as the miles are redeemed and services are provided. We record the air transportation portion of the passenger ticket sales in air traffic liability and recognize passenger revenue when we provide transportation or if the ticket goes unused.

Sale of mileage credits. Customers may earn mileage credits based on their spending with participating companies such as credit card companies, hotels and car rental agencies with which we have marketing agreements to sell mileage credits. Our contracts to sell mileage credits under these marketing agreements have multiple performance obligations. During the three months ended March 31, 2018 and 2017, total cash sales from marketing agreements were $841 million and $757 million, respectively, which are allocated to travel and other performance obligations, as discussed below.

Our most significant contract to sell mileage credits relates to our co-brand credit card relationship with American Express. Our agreements with American Express provide for joint marketing, grant certain benefits to Delta-American Express co-branded credit card holders ("Cardholders") and American Express Membership Rewards program participants, and allow American Express to market using our customer database. Cardholders earn mileage credits for making purchases using co-branded cards, may check their first bag for free, are granted discounted access to Delta Sky Club lounges and receive other benefits while traveling on Delta. Additionally, participants in the American Express Membership Rewards program may exchange their points for mileage credits under the SkyMiles program. We sell mileage credits at agreed-upon rates to American Express which are then provided to their customers under the co-brand credit card program and the Membership Rewards program.

We account for marketing agreements, including American Express, consistent with the accounting method that allocates the consideration received to the individual products and services delivered. We allocate the value based on the relative selling prices of those products and services, which generally consist of award travel, baggage fee waivers, lounge access and the use of our brand. We determined our best estimate of the selling prices by considering discounted cash flow analysis using multiple inputs and assumptions, including: (1) the expected number of miles awarded and number of miles redeemed, (2) ETV for the award travel obligation, (3) published rates on our website for baggage fees, discounted access to Delta Sky Club lounges and other benefits while traveling on Delta and (4) brand value.

We defer the amount for award travel obligation as part of frequent flyer deferred revenue and recognize loyalty travel awards in passenger revenue as the mileage credits are used for travel. Revenue allocated to services performed in conjunction with a passenger’s flight, such as baggage fee waivers, is recognized as travel-related services in passenger revenue when the related service is performed. Revenue allocated to access to Delta Sky Club lounges is recognized as miscellaneous in other revenue as access is provided. Revenue allocated to the remaining performance obligations, primarily brand value, is recorded as loyalty program in other revenue over time as miles are delivered.


10


Mileage breakage. For mileage credits that we estimate are not likely to be redeemed ("breakage"), we recognize the associated value proportionally during the period in which the remaining mileage credits are expected to be redeemed. Management uses statistical models to estimate breakage based on historical redemption patterns. A change in assumptions as to the period over which mileage credits are expected to be redeemed, the actual redemption activity for mileage credits or the estimated fair value of mileage credits expected to be redeemed could have a material impact on our revenue in the year in which the change occurs and in future years.

Current activity of frequent flyer program. Mileage credits are combined in one homogeneous pool and are not separately identifiable. As such, the revenue is comprised of miles that were part of the frequent flyer deferred revenue balance at the beginning of the period as well as miles that were issued during the period.

The table below presents the activity of the current and noncurrent frequent flyer liability, and includes miles earned through travel and miles sold, which are primarily through marketing agreements.
(in millions)
 
 
2018
2017
Balance at January 1
 
 
$
6,321

$
5,922

Travel mileage credits redeemed
 
 
(618
)
(582
)
Non-travel mileage credits redeemed
 
 
(40
)
(40
)
Mileage credits earned
 
 
731

690

Balance at March 31
 
 
$
6,394

$
5,990



The timing of mileage redemptions can vary widely; however, the majority of new miles are redeemed within approximately two years.

Passenger Revenue by Geographic Region

Passenger revenue is recognized in a specific geographic region based on the origin and destination of each flight segment. Our passenger revenue by geographic region (as defined by the U.S. Department of Transportation) is summarized in the following table:
 
Three Months Ended March 31,
(in millions)
2018
2017
Domestic
$
6,301

$
5,894

Atlantic
1,059

923

Latin America
827

793

Pacific
578

568

Total passenger revenue
$
8,765

$
8,178



Cargo Revenue

Cargo revenue is recognized when we provide the transportation.

Other Revenue
 
Three Months Ended March 31,
(in millions)
2018
2017
Ancillary businesses and refinery
$
521

$
312

Loyalty program
347

305

Miscellaneous
133

143

Total other revenue
$
1,001

$
760



Ancillary businesses and refinery. Ancillary businesses and refinery includes aircraft maintenance and staffing services we provide to third parties, our vacation wholesale operations, our private jet operations and refinery production sales to third parties. Third-party refinery production sales are at or near cost; accordingly, the margin on these sales is de minimis. See Note 10, "Segments," for more information on revenue recognition within our refinery segment.

11


Loyalty program. Loyalty program revenues relate to brand usage and other performance obligations embedded in mileage credits sold, including non-travel mileage credits redeemed. These revenues are included within the total cash sales from marketing agreements, discussed above.

Miscellaneous. Miscellaneous revenue is primarily composed of lounge access and codeshare revenues.

Accounts Receivable

Accounts receivable primarily consist of amounts due from credit card companies from the sale of passenger tickets, customers of our cargo services, ancillary businesses and refinery sales, and other companies for the purchase of mileage credits under the SkyMiles program. We provide an allowance for uncollectible accounts equal to the estimated losses expected to be incurred based on historical chargebacks, write-offs, bankruptcies and other specific analyses. Bad debt expense was not material in any period presented.

Passenger Taxes and Fees

We are required to charge certain taxes and fees on our passenger tickets, including U.S. federal transportation taxes, federal security charges, airport passenger facility charges and foreign arrival and departure taxes. These taxes and fees are assessments on the customer for which we act as a collection agent. Because we are not entitled to retain these taxes and fees, we do not include such amounts in passenger revenue. We record a liability when the amounts are collected and reduce the liability when payments are made to the applicable government agency or operating carrier (i.e., for codeshare-related fees).


NOTE 3. FAIR VALUE MEASUREMENTS

Assets (Liabilities) Measured at Fair Value on a Recurring Basis
(in millions)
March 31,
2018
Level 1
Level 2
Cash equivalents
$
876

$
876

$

Short-term investments
 
 

U.S. government and agency securities
78

66

12

Asset- and mortgage-backed securities
119


119

Corporate obligations
247


247

Other fixed income securities
79


79

Restricted cash equivalents and investments
34

34


Long-term investments
1,001

972

29

Hedge derivatives, net
 
 
 
Fuel hedge contracts
(3
)
(5
)
2

Foreign currency exchange contracts
(32
)

(32
)
(in millions)
December 31,
2017
Level 1
Level 2
Cash equivalents
$
1,357

$
1,357

$

Short-term investments
 
 


U.S. government and agency securities
93

84

9

Asset- and mortgage-backed securities
173


173

Corporate obligations
467


467

Other fixed income securities
92


92

Restricted cash equivalents and investments
38

38


Long-term investments
513

485

28

Hedge derivatives, net
 
 
 
Fuel hedge contracts
(66
)
(43
)
(23
)
Foreign currency exchange contracts
(17
)

(17
)


12


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 relate to certain 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 are measured at fair value primarily consist of equity investments in the parent company of GOL, China Eastern and, as of January 1, 2018, Air France-KLM. Our investments are valued based on market prices and 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 and refined products, as these commodities are highly correlated with the price of 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 12% to 36% 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 based on maturity dates utilizing 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.

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


NOTE 4. INVESTMENTS

Short-Term Investments

The estimated fair values of short-term investments, which approximate cost at March 31, 2018, 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.
(in millions)
Total
Due in one year or less
$
120

Due after one year through three years
374

Due after three years through five years
13

Due after five years
16

Total
$
523




13


Long-Term Investments

We have developed strategic relationships with a number of airlines through equity investments and 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. We have a non-controlling 49% equity stake in Grupo Aeroméxico, the parent company of Aeroméxico.

Virgin Atlantic. We have a non-controlling 49% equity stake in Virgin Atlantic Limited, the parent company of Virgin Atlantic Airways.

We account for these investments under the equity method of accounting and recognize our portion of their financial results in miscellaneous, net in our income statement under non-operating expense.

Fair Value Investments

Air France-KLM. We own 10% of the outstanding shares of our joint venture partner, Air France-KLM. In addition, we are working to develop a combined long-term joint venture with Air France-KLM and Virgin Atlantic.

GOL. Through our investment in preferred shares of GOL's parent company, we own 9% of GOL's outstanding capital stock.

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 March 31, 2018.

China Eastern. We have a 3% equity interest in China Eastern.

We account for these investments at fair value with adjustments to fair value recognized in unrealized gain/(loss) on investments in our income statement under non-operating expense.



14


NOTE 5. DERIVATIVES AND RISK MANAGEMENT

Changes in 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.

Fuel Price Risk

Changes in 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 fuel as fuel prices are subject to potential volatility. In addition, we enter into derivatives with third parties to hedge financial risk related to Monroe’s refining margins.

During the three months ended March 31, 2018 and 2017 we recorded fuel hedge gains of $2 million and $57 million, respectively.

Foreign Currency Exchange Risk

We are subject to foreign currency exchange rate risk because we have revenue and expense denominated in foreign currencies with our primary exposures being the Japanese yen, Canadian dollar and Euro. To manage exchange rate risk, we execute both our international revenue and expense transactions in the same foreign currency to the extent practicable. From time to time, we may also enter into foreign currency option and forward contracts. Our Japanese yen and Canadian dollar foreign currency exchange contracts are designated as cash flow hedges.

In January 2018, we entered into a three-year U.S. dollar-Euro cross currency swap with a notional value of 375 million Euro. This swap is intended to mitigate foreign currency volatility resulting from our Euro-denominated investment in Air France-KLM. During the three months ended March 31, 2018, we recorded losses of $16 million, which are reflected in unrealized gain/loss on investments in the income statement.

Hedge Position as of March 31, 2018
(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
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
18,701

Japanese yen
November 2019
$
1

$
1

$
(14
)
$
(4
)
$
(16
)
166

Canadian dollars
May 2020
Not designated as hedges
 
 
 
 
 
 
 
 
Foreign currency exchange contract
375

Euros
December 2020
7



(23
)
(16
)
Fuel hedge contracts
267

gallons - crude oil and refined products
December 2019
1,001

53

(1,006
)
(51
)
(3
)
Total derivative contracts
 
 
$
1,009

$
54

$
(1,020
)
$
(78
)
$
(35
)

Hedge Position as of December 31, 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
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
23,512

Japanese yen
November 2019
$
1

$
1

$
(13
)
$
(6
)
$
(17
)
490

Canadian dollars
May 2020
Not designated as hedges
 
 
 
 
 
 
 
 
Fuel hedge contracts
249

gallons - crude oil and refined products
May 2019
638

8

(694
)
(18
)
(66
)
Total derivative contracts
 
 
$
639

$
9

$
(707
)
$
(24
)
$
(83
)

15


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
March 31, 2018
 
 
 
 
 
Net derivative contracts
$
21

$
1

$
(31
)
$
(26
)
$
(35
)
December 31, 2017
 
 
 
 
 
Net derivative contracts
$

$
1

$
(68
)
$
(16
)
$
(83
)


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)
2018
2017
 
2018
2017
Three Months Ended March 31,
 
 
 
 
 
Foreign currency exchange contracts
$
(4
)
$
7

 
$
1

$
(25
)


Credit Risk

To manage credit risk associated with our 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.


NOTE 6. 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)
March 31,
2018
December 31,
2017
Total debt at par value
$
8,326

$
8,539

Unamortized discount and debt issue cost, net
(92
)
(99
)
Net carrying amount
$
8,234

$
8,440

 
 
 
Fair value
$
8,400

$
8,700



Covenants

We were in compliance with the covenants in our financings at March 31, 2018.
 


16


NOTE 7. EMPLOYEE BENEFIT PLANS

The following table shows the components of net (benefit) cost:
 
Pension Benefits
Other Postretirement and Postemployment Benefits
(in millions)
2018
2017
2018
2017
Three Months Ended March 31,
 
 
 
 
Service cost
$

$

$
21

$
22

Interest cost
195

213

32

35

Expected return on plan assets
(329
)
(286
)
(17
)
(17
)
Amortization of prior service credit


(7
)
(7
)
Recognized net actuarial loss
66

66

10

8

Net (benefit) cost
$
(68
)
$
(7
)
$
39

$
41



Service cost is recorded in salaries and related costs in the income statement while all other components are recorded within miscellaneous, net under non-operating expense.


NOTE 8. COMMITMENTS AND CONTINGENCIES

Aircraft Purchase and Lease Commitments

Our future aircraft purchase commitments totaled approximately $17.2 billion at March 31, 2018:
(in millions)
Total
Nine months ending December 31, 2018
$
2,480

2019
3,360

2020
3,270

2021
3,880

2022
2,450

Thereafter
1,740

Total
$
17,180



Our future aircraft purchase commitments included the following aircraft at March 31, 2018:
Aircraft Type
 
Purchase Commitments
A321-200
 
85

A321-200neo
 
100

A330-900neo
 
25

A350-900
 
17

B-737-900ER
 
36

CS100
 
75

Total
 
338



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.


17


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

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.


18


NOTE 9. ACCUMULATED OTHER COMPREHENSIVE LOSS
  
The following tables show the components of accumulated other comprehensive loss:
(in millions)
Pension and Other Benefits Liabilities(3)
Derivative Contracts and Other
Available-for-Sale Investments
Total
Balance at January 1, 2018 (net of tax effect of $1,400)
$
(7,812
)
$
85

$
106

$
(7,621
)
Changes in value (net of tax effect of $2)

(7
)

(7
)
Reclassifications into retained earnings (net of tax effect of $61)(1)


(106
)
(106
)
Reclassifications into earnings (net of tax effect of $15)(2)
51

2


53

Balance at March 31, 2018 (net of tax effect of $1,448)
$
(7,761
)
$
80

$

$
(7,681
)

 
 
 
 
 
Balance at January 1, 2017 (net of tax effect of $1,458)
$
(7,714
)
$
114

$
(36
)
$
(7,636
)
Changes in value (net of tax effect of $5)

(12
)
48

36

Reclassifications into earnings (net of tax effect of $17)(2)
41

(4
)
(8
)
29

Balance at March 31, 2017 (net of tax effect of $1,446)
$
(7,673
)
$
98

$
4

$
(7,571
)


(1) 
The reclassification into retained earnings relates to our investments in GOL, China Eastern and other available-for-sale investments, and the related conversion to accounting for changes in fair value of these investments from AOCI to the income statement. See Note 1, "Summary of Significant Accounting Policies," for more information.
(2) 
Amounts reclassified from AOCI for pension and other benefits liabilities and for derivative contracts designated as foreign currency cash flow hedges are recorded in miscellaneous, net and in passenger revenue, respectively, in the income statement. The reclassification into earnings for investments relates to our investment in Grupo Aeroméxico and the related conversion to accounting under the equity method. The reclassification of the unrealized gain was recorded to non-operating expense in our income statement.
(3) 
Includes $700 million of deferred income tax expense primarily related to pension and other benefit obligations that will not be recognized in net income until these obligations are fully extinguished. We consider all income sources, including other comprehensive income, in determining the amount of tax benefit allocated to continuing operations.



19


NOTE 10. 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 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 months ended March 31, 2018 and 2017 was $876 million and $733 million, 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 March 31, 2018
 
 
 
 
 
 
Operating revenue:
$
9,755

$
1,491

 
 
 
$
9,968

Sales to airline segment
 
 
 
$
(262
)
(1) 
 
Exchanged products
 
 
 
(876
)
(2) 
 
Sales of refined products
 
 
 
(140
)
(3) 
 
Operating income
796

44

 

 
840

Interest expense (income), net
107

(5
)
 

 
102

Depreciation and amortization
595

15

 

 
610

Total assets, end of period
52,116

1,962

 

 
54,078

Capital expenditures
1,250

15

 

 
1,265

 
 
 
 
 
 
 
Three Months Ended March 31, 2017
 
 
 
 
 
 
Operating revenue:
$
9,040

$
1,128

 
 
 
$
9,101

Sales to airline segment
 
 
 
$
(190
)
(1) 
 
Exchanged products
 
 
 
(733
)
(2) 
 
Sales of refined products
 
 
 
(144
)
(3) 
 
Operating income
955

44

 

 
999

Interest expense, net
94


 

 
94

Depreciation and amortization
527

10

 

 
537

Total assets, end of period
50,753

1,320

 

 
52,073

Capital expenditures
776

26

 

 
802

 
(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.












20


NOTE 11. RESTRUCTURING

The following table shows the balances and activity for restructuring charges:
(in millions)
Lease Restructuring
Liability as of January 1, 2018
$
237

Payments
(19
)
Additional expenses and other

Liability as of March 31, 2018
$
218



Restructuring charges primarily include remaining lease payments for permanently grounded aircraft related to domestic and Pacific fleet restructurings. The domestic fleet restructuring involves 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. The Pacific fleet restructuring resulted in the 2017 retirement of the B-747-400 fleet, which is being replaced with smaller-gauge, widebody aircraft to better match capacity with demand.


NOTE 12. 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 March 31,
(in millions, except per share data)
2018
2017
Net income
$
547

$
561

 
 
 
Basic weighted average shares outstanding
704

728

Dilutive effect of share-based awards
2

3

Diluted weighted average shares outstanding
706

731

 
 
 
Basic earnings per share
$
0.78

$
0.77

Diluted earnings per share
$
0.77

$
0.77





21


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

March 2018 Quarter Financial Highlights

Our pre-tax income for the March 2018 quarter was $718 million, representing a $131 million decrease compared to the corresponding prior year quarter primarily resulting from higher salaries and related costs, and fuel expense, partially offset by increased passenger revenue. Pre-tax income, adjusted for special items (a non-GAAP financial measure) was $676 million, a decrease of $104 million compared to the corresponding prior year period.

Revenue. Compared to the March 2017 quarter, our operating revenue increased $867 million, or 9.5%, on 2.7% higher capacity combined with robust demand and strong revenue momentum, continuing the growth trend from the last three quarters of 2017. Total revenue per available seat mile ("TRASM") increased 6.6% and TRASM, adjusted (a non-GAAP financial measure) increased 5.0% compared to the March 2017 quarter, led by (1) unit revenue growth in all geographic regions for the second consecutive quarter, (2) broad-based strength in both leisure and business demand, (3) foreign currency improvements, particularly in the Atlantic region, and (4) expansion of Branded Fares. Other revenue increased 31.7% primarily from growth in our co-brand credit card partnership with American Express and sales of non-jet fuel products to third parties by our refinery, resulting from higher sales volume.

Operating Expense. Total operating expense increased $1.0 billion, or 12.7%, and our consolidated operating cost per available seat mile ("CASM") increased 9.6% to 15.35 cents compared to the March 2017 quarter, primarily due to higher salaries and related costs, fuel expense and ancillary businesses and refinery. Salaries and related costs were higher due to pay rate increases for eligible merit, ground and flight attendant employees implemented in the June 2017 quarter. The increase in fuel expense primarily resulted from an approximately 23% increase in the market price per gallon of fuel and an increase in consumption consistent with our capacity growth in the quarter. The increase in ancillary businesses and refinery primarily resulted from $152 million of additional refinery sales to third parties.

Non-fuel unit costs ("CASM-Ex" a non-GAAP financial measure) increased 3.9% to 11.10 cents compared to the March 2017 quarter primarily due to the pay rate increases discussed above.

The non-GAAP financial measures for pre-tax income, adjusted for special items, and CASM-Ex, both used above, are defined and reconciled in "Supplemental Information" below. TRASM, adjusted is reconciled in "Operating Revenue" below.



22


Results of Operations - Three Months Ended March 31, 2018 and 2017

Operating Revenue
 
Three Months Ended March 31,
Increase (Decrease)
% Increase (Decrease)
(in millions)
2018
2017
Passenger
$
8,765

$
8,178

$
587

7.2
%
Cargo
202

163

39

23.4
%
Other
1,001

760

241

31.7
%
Total operating revenue
$
9,968

$
9,101

$
867

9.5
%
 
 
 
 
 
TRASM (cents)
$
16.77

$
15.73

$
1.04

6.6
%
Third-party refinery sales
(0.36
)
(0.11
)
$
(0.25
)
NM

TRASM, adjusted (cents)
$
16.41

$
15.62

$
0.79

5.0
%

Passenger Revenue

Passenger revenue is composed of passenger ticket sales, loyalty travel awards and travel-related services performed in conjunction with a passenger's flight.
 
Three Months Ended March 31,
Increase (Decrease)
% Increase (Decrease)
(in millions)
2018
2017
Ticket
$
7,653

$
7,105

$
548

7.7
%
Loyalty travel awards
618

582

36

6.2
%
Travel-related services
494

491

3

0.6
%
Total passenger revenue
$
8,765

$
8,178

$
587

7.2
%

Ticket and Loyalty Travel Awards

Ticket and loyalty travel awards revenue increased $548 million and $36 million, respectively, compared to the March 2017 quarter, consistent with the geographic region discussion below.

Passenger Revenue by Geographic Region
 
 
Increase (Decrease)
vs. Three Months Ended March 31, 2017
(in millions)
Three Months Ended March 31, 2018
Passenger Revenue
RPMs (Traffic)
ASMs (Capacity)
Passenger Mile Yield
PRASM
Load Factor
Domestic
$
6,301

6.9
%
3.6
 %
4.2
 %
3.2
%
2.6
%
(0.5
)
pts
Atlantic
1,059

14.7
%
5.7
 %
2.9
 %
8.6
%
11.5
%
2.0

pts
Latin America
827

4.3
%
(1.5
)%
(1.4
)%
5.9
%
5.7
%
(0.1
)
pts
Pacific
578

1.7
%
(1.6
)%
(2.0
)%
3.4
%
3.9
%
0.4

pts
Total
$
8,765

7.2
%
2.8
 %
2.7
 %
4.3
%
4.3
%

pts


Passenger revenue increased $587 million, or 7.2%, compared to the March 2017 quarter. Passenger revenue per available seat mile ("PRASM") increased 4.3% and passenger mile yield increased 4.3% on 2.7% higher capacity. Load factor was the same as the prior year quarter at 82.9%.

Unit revenues of the domestic region increased 2.6%, resulting from our commercial initiatives, including differentiated products for our customers, known as Branded Fares, and an improving revenue environment. Our domestic operations have generated four consecutive quarters of year-over-year unit revenue growth, with robust demand for both leisure and business travel and business yield growth for the first time in several years.

23


Passenger revenues related to our international regions increased 7.9% year-over-year with strength in all three regions, despite reduced capacity in the Pacific and Latin America. During the quarter, we continued to expand our Branded Fares product throughout the international regions.

In the Atlantic, unit revenues increased 11.5% due to strengthening yields from business cabin traffic, currency improvements and load factor growth. Yield growth was particularly strong as we continue to leverage our alliance partners' hub positions in Europe's leading business markets of London, Amsterdam and Paris.

Unit revenues increased in Latin America principally as a result of unit revenue improvement in the Caribbean and Central America. Despite lingering hurricane damage in several markets, the Caribbean region's unit revenue growth was driven by yield and load factor. However, the Mexico market was challenged by increased industry capacity to business destinations and travel advisories, which pressured demand to beach destinations.

Unit revenues increased in the Pacific region due to yield strength as we refine the network to generate incremental value from our Korean alliance and differentiate our product offerings, including the expansion of Branded Fares. During the March 2018 quarter, we co-located with Korean Air into the new Terminal 2 at Seoul-Incheon, substantially reducing connecting times for customers, and received approval from Korean regulators for the launch of our joint venture. We also expanded service on our flagship A350-900 with Delta One suites and the Delta Premium Select cabin on routes from Detroit to Beijing and Atlanta to Seoul-Incheon.

Other Revenue
 
Three Months Ended March 31,
Increase (Decrease)
% Increase (Decrease)
(in millions)
2018
2017
Ancillary businesses and refinery
$
521

$
312

$
209

67.0
 %
Loyalty program
347

305

42

13.8
 %
Miscellaneous
133

143

(10
)
(7.0
)%
Total other revenue
$
1,001

$
760

$
241

31.7
 %

Ancillary businesses and refinery. Ancillary businesses and refinery includes aircraft maintenance and staffing services we provide to third parties, our vacation wholesale operations, our private jet operations and refinery sales to third parties. Refinery sales to third parties, which are at or near cost, increased $152 million compared to the March 2017 quarter.

Loyalty program. These revenues relate to brand usage and other performance obligations embedded in mileage credits sold, including non-travel mileage credits redeemed.



24


Operating Expense
 
Three Months Ended March 31,
Increase (Decrease)
% Increase (Decrease)
(in millions)
2018
2017
Salaries and related costs
$
2,584

$
2,386

$
198

8.3
 %
Aircraft fuel and related taxes
1,856

1,482

374

25.2
 %
Regional carriers expense, excluding fuel
856

864

(8
)
(0.9
)%
Depreciation and amortization
610

537

73

13.6
 %
Contracted services
544

505

39

7.7
 %
Ancillary businesses and refinery
493

292

201

68.8
 %
Aircraft maintenance materials and outside repairs
435

432

3

0.7
 %
Passenger commissions and other selling expenses
427

404

23

5.7
 %
Landing fees and other rents
373

361

12

3.3
 %
Passenger service
263

234

29

12.4
 %
Profit sharing
183

151

32