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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, 2019
Or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-5424
deltacra01a01a01a02a58.jpg
DELTA AIR LINES, INC.
(Exact name of registrant as specified in its charter)
Delaware
58-0218548
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
Post Office Box 20706
 
Atlanta, Georgia
30320-6001
(Address of principal executive offices)
(Zip Code)
 
 
Registrant's telephone number, including area code: (404) 715-2600
Title of each class
 
Name of each exchange on which registered
 
Ticker Symbol
Common Stock, par value $0.0001 per share
 
New York Stock Exchange
 
DAL
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 every Interactive Data File required to be submitted 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 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
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, 2019:
Common Stock, $0.0001 par value - 654,996,477 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, 2018 ("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


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, 2019, the related condensed consolidated statements of operations and comprehensive income, cash flows, and stockholders' equity for the three-month periods ended March 31, 2019 and 2018, 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, 2018, 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 15, 2019, 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, 2018, 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 10, 2019
 


2



DELTA AIR LINES, INC.
Consolidated Balance Sheets
(Unaudited)
(in millions, except share data)
March 31,
2019
 
December 31,
2018
ASSETS
Current Assets:
 
 
 
Cash and cash equivalents
$
1,910

 
$
1,565

Accounts receivable, net of an allowance for uncollectible accounts of $14 and $12 at March 31,
2019 and December 31, 2018, respectively
3,154

 
2,314

Fuel inventory
601

 
592

Expendable parts and supplies inventories, net of an allowance for obsolescence of $97 and $102
at March 31, 2019 and December 31, 2018, respectively
470

 
463

Prepaid expenses and other
1,061

 
1,406

Total current assets
7,196

 
6,340

 
 
 
 
Noncurrent Assets:
 
 
 
Property and equipment, net of accumulated depreciation and amortization of $16,401 and $15,823
at March 31, 2019 and December 31, 2018, respectively
29,139

 
28,335

Operating lease right-of-use assets
6,036

 
5,994

Goodwill
9,781

 
9,781

Identifiable intangibles, net of accumulated amortization of $865 and $862 at March 31, 2019
and December 31, 2018, respectively
4,827

 
4,830

Cash restricted for airport construction
1,018

 
1,136

Other noncurrent assets
3,844

 
3,850

Total noncurrent assets
54,645

 
53,926

Total assets
$
61,841

 
$
60,266

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
 
 
 
Current maturities of long-term debt and finance leases
$
3,055

 
$
1,518

Current maturities of operating leases
941

 
955

Air traffic liability
6,600

 
4,661

Accounts payable
3,214

 
2,976

Accrued salaries and related benefits
2,037

 
3,287

Loyalty program deferred revenue
3,013

 
2,989

Fuel card obligation
1,066

 
1,075

Other accrued liabilities
1,397

 
1,117

Total current liabilities
21,323

 
18,578

 
 
 
 
Noncurrent Liabilities:
 
 
 
Long-term debt and finance leases
7,710

 
8,253

Pension, postretirement and related benefits
9,086

 
9,163

Loyalty program deferred revenue
3,611

 
3,652

Noncurrent operating leases
5,805

 
5,801

Other noncurrent liabilities
1,395

 
1,132

Total noncurrent liabilities
27,607


28,001

 
 
 
 
Commitments and Contingencies

 

 
 
 
 
Stockholders' Equity:
 
 
 
Common stock at $0.0001 par value; 1,500,000,000 shares authorized, 663,896,862 and 688,136,306
shares issued at March 31, 2019 and December 31, 2018, respectively

 

Additional paid-in capital
11,254

 
11,671

Retained earnings
9,656

 
10,039

Accumulated other comprehensive loss
(7,766
)
 
(7,825
)
Treasury stock, at cost, 8,900,385 and 8,191,831 shares at March 31, 2019 and
December 31, 2018, respectively
(233
)
 
(198
)
Total stockholders' equity
12,911

 
13,687

Total liabilities and stockholders' equity
$
61,841

 
$
60,266

 
 
 
 
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)
2019
 
2018
Operating Revenue:
 
 
 
Passenger
$
9,254

 
$
8,765

Cargo
192

 
202

Other
1,026

 
1,001

  Total operating revenue
10,472

 
9,968

 
 
 
 
Operating Expense:
 
 
 
Salaries and related costs
2,639

 
2,584

Aircraft fuel and related taxes
1,978

 
1,856

Regional carriers expense, excluding fuel
893

 
838

Contracted services
632

 
544

Depreciation and amortization
615

 
603

Aircraft maintenance materials and outside repairs
476

 
435

Passenger commissions and other selling expenses
427

 
427

Landing fees and other rents
419

 
389

Ancillary businesses and refinery
351

 
493

Passenger service
271

 
263

Profit sharing
220

 
188

Aircraft rent
102

 
94

Other
429

 
410

Total operating expense
9,452

 
9,124

 
 
 
 
Operating Income
1,020

 
844

 
 
 
 
Non-Operating Expense:

 

Interest expense, net
(83
)
 
(92
)
Unrealized gain on investments, net
100

 
18

Miscellaneous, net
(91
)
 
(38
)
Total non-operating expense, net
(74
)
 
(112
)
 
 
 
 
Income Before Income Taxes
946

 
732

 
 
 
 
Income Tax Provision
(216
)
 
(175
)
 
 
 
 
Net Income
$
730

 
$
557

 
 
 
 
Basic Earnings Per Share
$
1.10

 
$
0.79

Diluted Earnings Per Share
$
1.09

 
$
0.79

Cash Dividends Declared Per Share
$
0.35

 
$
0.31

 
 
 
 
Comprehensive Income
$
789

 
$
603

 
 
 
 
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)
2019
 
2018
Net Cash Provided by Operating Activities
$
1,951

 
$
1,372

 
 
 
 
Cash Flows from Investing Activities:
 
 
 
Property and equipment additions:
 
 
 
Flight equipment, including advance payments
(1,059
)
 
(991
)
Ground property and equipment, including technology
(301
)
 
(274
)
Purchase of short-term investments

 
(63
)
Redemption of short-term investments
206

 
363

Other, net
49

 
38

Net cash used in investing activities
(1,105
)

(927
)
 
 
 
 
Cash Flows from Financing Activities:
 
 
 
Payments on long-term debt and finance lease obligations
(1,285
)
 
(244
)
Repurchase of common stock
(1,325
)
 
(325
)
Cash dividends
(233
)
 
(217
)
Proceeds from short-term obligations
1,750

 

Proceeds from long-term obligations
500

 

Other, net
(16
)
 
(30
)
Net cash used in financing activities
(609
)
 
(816
)
 
 
 
 
Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash
237

 
(371
)
Cash, cash equivalents and restricted cash at beginning of period
2,748

 
1,853

Cash, cash equivalents and restricted cash at end of period
$
2,985

 
$
1,482

 
 
 
 
Non-Cash Transactions:
 
 
 
Flight and ground equipment acquired under operating leases
$
274

 
$
361

Flight and ground equipment acquired under finance leases
3

 
26

 
 
 
 
 
 
 
 
 
 
 
 
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:
 
March 31,
(in millions)
2019
 
2018
Current assets:
 
 
 
Cash and cash equivalents
$
1,910

 
$
1,447

Restricted cash included in prepaid expenses and other
57

 
35

Noncurrent assets:
 
 
 
Cash restricted for airport construction
1,018

 

Total cash, cash equivalents and restricted cash
$
2,985

 
$
1,482

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


5


DELTA AIR LINES, INC.
Consolidated Statements of Stockholders' Equity
(Unaudited)

 
Common Stock
Additional
Paid-In Capital
 Retained
Earnings
Accumulated
Other
Comprehensive Loss
Treasury Stock
 
(in millions, except per share data)
Shares
Amount
Shares
Amount
Total
Balance at December 31, 2018
688

$

$
11,671

$
10,039

$
(7,825
)
8

$
(198
)
$
13,687

Net income



730




730

Dividends declared



(232
)



(232
)
Other comprehensive income




59



59

Shares of common stock issued and compensation expense associated with equity awards (Treasury shares withheld for payment of taxes, $49.75(1) per share)
2


27



1

(35
)
(8
)
Stock options exercised








Stock purchased and retired
(26
)

(444
)
(881
)



(1,325
)
Balance at March 31, 2019
664

$

$
11,254

$
9,656

$
(7,766
)
9

$
(233
)
$
12,911



 
Common Stock
Additional
Paid-In Capital
 Retained
Earnings
Accumulated
Other
Comprehensive Loss
Treasury Stock
 
(in millions, except per share data)
Shares
Amount
Shares
Amount
Total
Balance at December 31, 2017
715

$

$
12,053

$
8,256

$
(7,621
)
7

$
(158
)
$
12,530

Net income



557




557

Change in accounting principle and other



(139
)
(106
)


(245
)
Dividends declared



(216
)



(216
)
Other comprehensive income




46



46

Shares of common stock issued and compensation expense associated with equity awards (Treasury shares withheld for payment of taxes, $55.08(1) per share)
1


10



1

(36
)
(26
)
Stock options exercised
1


1





1

Stock purchased and retired
(6
)

(97
)
(228
)



(325
)
Balance at March 31, 2018
711

$

$
11,967

$
8,230

$
(7,681
)
8

$
(194
)
$
12,322


(1) 
Weighted average price per share.

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



6


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, 2018.

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, 2019 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

Comprehensive Income. In February 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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. We adopted this standard effective January 1, 2019 with the election not to reclassify $1.2 billion of stranded tax effects related to our pension plans from AOCI to retained earnings.


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)
2019
2018
Ticket
$
7,988

$
7,653

Loyalty travel awards
692

618

Travel-related services
574

494

Total passenger revenue
$
9,254

$
8,765



We recognized approximately $2.7 billion in passenger revenue during the three months ended March 31, 2019 that was recorded in our air traffic liability balance at December 31, 2018. We expect the remaining balance of the December 31, 2018 liability to be recognized by the end of 2019.


7



Other Revenue
 
Three Months Ended March 31,
(in millions)
2019
2018
Loyalty program
$
474

$
347

Ancillary businesses and refinery
369

521

Miscellaneous
183

133

Total other revenue
$
1,026

$
1,001



Loyalty Program

Our SkyMiles loyalty 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 other airlines that participate in the loyalty program. When traveling, customers earn redeemable mileage credits based on the passenger's loyalty program status and ticket price. 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 other participating airlines, membership in our Sky Club and other program awards. During the three months ended March 31, 2019 and 2018, total cash sales from marketing agreements related to our loyalty program were $980 million and $841 million, respectively, which are allocated to travel and other performance obligations.

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 its services or products using our customer database. Cardholders earn mileage credits for making purchases using co-branded cards, and certain cardholders may also check their first bag for free, are granted discounted access to Delta Sky Club lounges and receive priority boarding and other benefits while traveling on Delta. Additionally, participants in the American Express Membership Rewards program may exchange their points for mileage credits under the loyalty 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 those with 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, priority boarding, baggage fee waivers, lounge access and the use of our brand. We determined our best estimate of the selling prices by considering a discounted cash flow analysis using multiple inputs and assumptions, including: (1) the expected number of miles awarded and number of miles redeemed, (2) equivalent ticket value ("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.

Effective January 1, 2019, we amended our co-brand agreement with American Express, and we also amended other agreements with American Express during the March quarter. The new agreements increase the value we receive and extend the terms to 2029. The products and services delivered are consistent with previous agreements, and we continue to use the accounting method that allocates the consideration received based on the relative selling prices of those products and services.

We defer the amount for award travel obligation as part of loyalty program 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 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.


8


Current Activity of the Loyalty 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 loyalty 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 loyalty liability and includes miles earned through travel and miles sold to participating companies, which are primarily through marketing agreements.
(in millions)
 
 
2019
2018
Balance at January 1
 
 
$
6,641

$
6,321

Mileage credits earned
 
 
720

731

Travel mileage credits redeemed
 
 
(692
)
(618
)
Non-travel mileage credits redeemed
 
 
(45
)
(40
)
Balance at March 31
 
 
$
6,624

$
6,394



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

Revenue by Geographic Region

Operating revenue for the airline segment is recognized in a specific geographic region based on the origin, flight path and destination of each flight segment. The majority of the revenues of the refinery, consisting of fuel sales to the airline, have been eliminated in the Condensed Consolidated Financial Statements. The remaining operating revenue for the refinery segment is included in the domestic region. Our passenger and operating revenue by geographic region (as defined by the U.S. Department of Transportation) is summarized in the following table:
 
Passenger Revenue
 
Operating Revenue
 
Three Months Ended March 31,
 
Three Months Ended March 31,
(in millions)
2019
2018
 
2019
2018
Domestic
$
6,713

$
6,282

 
$
7,487

$
7,111

Atlantic
1,103

1,070

 
1,316

1,253

Latin America
855

830

 
964

917

Pacific
583

583

 
705

687

Total
$
9,254

$
8,765

 
$
10,472

$
9,968




NOTE 3. FAIR VALUE MEASUREMENTS

Assets (Liabilities) Measured at Fair Value on a Recurring Basis
(in millions)
March 31,
2019
Level 1
Level 2
Cash equivalents
$
1,508

$
1,508

$

Restricted cash equivalents
1,075

1,075


Long-term investments
1,174

970

204

Hedge derivatives, net
 
 
 
Fuel hedge contracts
7

1

6

Interest rate contracts
24


24

Foreign currency exchange contracts
8


8


9


(in millions)
December 31,
2018
Level 1
Level 2
Cash equivalents
$
1,222

$
1,222

$

Restricted cash equivalents
1,183

1,183


Short-term investments
 
 


U.S. government and agency securities
50

45

5

Asset- and mortgage-backed securities
36


36

Corporate obligations
90


90

Other fixed income securities
27


27

Long-term investments
1,084

880

204

Hedge derivatives, net
 
 
 
Fuel hedge contracts
15

20

(5
)
Interest rate contracts
1


1

Foreign currency exchange contracts
(3
)

(3
)


Cash Equivalents and Restricted Cash Equivalents. Cash equivalents generally consist of money market funds. Restricted cash equivalents generally consist of money market funds, time deposits, commercial paper and negotiable certificates of deposit, which primarily relate to proceeds from debt issued to finance a portion of the construction costs for the new terminal facilities at the LaGuardia Airport. The fair value of these cash equivalents is based on a market approach using prices generated by market transactions involving identical or comparable assets.

Short-Term Investments. The fair values of our short-term investments were based on a market approach using industry standard valuation techniques that incorporated observable inputs such as quoted market prices, interest rates, benchmark curves, credit ratings of the security or other observable information and were recorded in prepaid expenses and other on the Consolidated Balance Sheet ("balance sheet").

Long-Term Investments. Our long-term investments that are measured at fair value primarily consist of equity investments, which are valued based on market prices or other observable transactions and are recorded in other noncurrent assets on our balance sheet. See Note 4, "Investments," for further information on our equity investments.

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. Option and swap contracts are valued under income approaches using option pricing models and discounted cash flow models, respectively, based on data either readily observable in public markets, derived from public markets or provided by counterparties who regularly trade in public markets. Futures contracts and options on futures contracts are traded on a public exchange and valued based on quoted market prices.

Interest Rate Contracts. Our interest rate derivatives are swap contracts, which are valued based on data readily observable in public markets.

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



10


NOTE 4. INVESTMENTS

Long-Term Investments

We have developed strategic relationships with a number of airlines and airline services companies through equity investments and other forms of cooperation and support. Our equity investments reinforce our commitment to strategic relationships, which improve our coordination with these companies and enable our customers to seamlessly connect to more destinations while enjoying a consistent, high-quality travel experience.

During the three months ended March 31, 2019, we recorded a gain on our strategic investments of $100 million, which was recorded in unrealized gain on investments in our Condensed Consolidated Statements of Operations and Comprehensive Income ("income statement") under non-operating expense. This gain was driven by changes in stock prices and foreign currency fluctuations.

Equity Method Investments

We account for our investments in Aeroméxico, Virgin Atlantic and the parent company of DAL Global Services, LLC ("DGS") under the equity method of accounting. Our portion of Aeroméxico's and Virgin Atlantic's financial results are recorded in miscellaneous in our income statement under non-operating expense, and our portion of DGS's financial results are recorded in contracted services in our income statement as this entity is integral to the operations of our business. If an equity method investment experiences a loss in fair value that is determined to be other than temporary, we will reduce our basis in the investment to fair value and record the loss in unrealized gain/(loss) on investments.

Aeroméxico. Our non-controlling investment in Grupo Aeroméxico, the parent company of Aeroméxico, is accounted for under the equity method because Grupo Aeroméxico's corporate bylaws (as authorized by the Mexican Foreign Investment Commission) limit our voting interest to 49%. However, due to Aeroméxico's share repurchase program, our equity stake in Grupo Aeroméxico has increased to 51%. The investment is recorded at $864 million as of March 31, 2019.

Virgin Atlantic. We have a non-controlling 49% equity stake in Virgin Atlantic Limited, the parent company of Virgin Atlantic Airways, which is recorded at $356 million as of March 31, 2019.

DGS. We have a non-controlling 49% equity stake in the parent company of DGS, which is recorded at $111 million as of March 31, 2019. The parent company of DGS is a subsidiary of Argenbright Holdings, LLC that provides aviation-related, ground support equipment maintenance and professional security services.

Fair Value Investments

We account for the following investments at fair value with adjustments to fair value recognized in unrealized gain on investments within non-operating expense in our income statement.

Air France-KLM. We own 9% of the outstanding shares of Air France-KLM, which are recorded at $422 million as of March 31, 2019.

GOL. We own 9% of the outstanding capital stock of GOL Linhas Aéreas Inteligentes, the parent company of VRG Linhas Aéreas (operating as GOL), through ownership of its preferred shares. Our ownership stake is recorded at $217 million as of March 31, 2019.

Additionally, GOL has a $300 million five-year term loan facility with third parties, which we have guaranteed. Our 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 balance sheet as of March 31, 2019.

China Eastern. We own a 3% equity interest in China Eastern, which is recorded at $331 million as of March 31, 2019.

Alclear Holdings, LLC ("CLEAR"). We own a 7% equity interest in CLEAR.

Republic Airways. We own a 17% equity interest in Republic Airways Holdings Inc.

11


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. We recognize derivative contracts at fair value on our balance sheet.

Fuel Price Risk

Our derivative contracts to hedge the financial risk from changing fuel prices are primarily related to Monroe’s refining margins.

Interest Rate Risk

Our exposure to market risk from adverse changes in interest rates is primarily associated with our long-term debt obligations. 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.

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 and the 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 foreign currency exchange contracts are designated as cash flow hedges with gains or losses on the derivatives recorded in passenger revenue in the income statement in the same period in which the hedged transaction affects earnings.

Hedge Position as of March 31, 2019
(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 contracts (fair value hedges)
1,883

U.S. dollars
April 2028
$
1

$
28

$
(2
)
$
(3
)
$
24

Foreign currency exchange contracts
4,328

Japanese yen
November 2019
1




1

Not designated as hedges
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
397

Euros
December 2020
10



(3
)
7

Fuel hedge contracts
195

gallons - crude oil and refined products
December 2019
51


(44
)

7

Total derivative contracts
 
 
$
63

$
28

$
(46
)
$
(6
)
$
39



12


Hedge Position as of December 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
 
 
 
 
 
 
 
 
Interest rate contracts (fair value hedges)
1,893

U.S. dollars
April 2028
$

$
8

$
(7
)
$

$
1

Foreign currency exchange contracts
6,934

Japanese yen
November 2019
1




1

Not designated as hedges
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
397

Euros
December 2020
13



(17
)
(4
)
Fuel hedge contracts
219

gallons - crude oil and refined products
December 2019
30


(15
)

15

Total derivative contracts
 
 
$
44

$
8

$
(22
)
$
(17
)
$
13


Balance Sheet Location of Hedged Item in Fair Value Hedges
 
Carrying Amount of Hedge Instruments
 
Cumulative Amount of Fair Value Hedge Adjustments
(in millions)
March 31, 2019
December 31, 2018
 
March 31, 2019
December 31, 2018
Current maturities of long-term debt and finance leases
$
(16
)
$
(11
)
 
$
1

$
7

Long-term debt and finance leases
$
(1,878
)
$
(1,870
)
 
$
(25
)
$
(8
)


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 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, 2019
 
 
 
 
 
Net derivative contracts
$
21

$
28

$
(5
)
$
(5
)
$
39

December 31, 2018
 
 
 
 
 
Net derivative contracts
$
35

$

$
(13
)
$
(9
)
$
13



13



Designated Hedge Gains (Losses)

Gains (losses) related to our foreign currency exchange contracts are as follows:
 
Gains/(Losses) Reclassified from AOCI to Earnings(1)
 
Gains/(Losses) Recognized in Other Comprehensive Income
(in millions)
2019
2018
 
2019
2018
Three Months Ended March 31,
 
 
 
 
 
Foreign currency exchange contracts
$

$
(4
)
 
$
1

$
1



(1) 
Earnings on our foreign currency exchange contracts are recorded in passenger revenue in the income statement.

Not Designated Hedge Gains (Losses)

Gains (losses) related to our cross currency swap and fuel contracts are as follows:
 
 
Location of Gain (Loss) Recognized in Income
 
Amount of Gain (Loss) Recognized in Income
(in millions)
 
 
 
2019
2018
Three Months Ended March 31,
 
 
 
 
 
Foreign currency exchange contracts
 
Unrealized gain on investments, net
 
$
11

$
(16
)
Fuel hedge contracts
 
Aircraft fuel and related taxes
 
(54
)
2

Total
 
 
 
$
(43
)
$
(14
)


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.



14


NOTE 6. DEBT

The following table summarizes our debt:
 
Maturity
Interest Rate(s)(1) Per Annum at
March 31,
December 31,
(in millions)
Dates
March 31, 2019
2019
2018
2019 Unsecured Term Loan
February 2020
3.39%
variable
$
700

$

Financing arrangements secured by aircraft:
 
 
 
 
 
 
 
 
Certificates(2)
2019
to
2027
3.20%
to
8.02%
2,276

1,837

Notes(2)
2019
to
2025
2.91%
to
6.46%
1,646

1,787

NYTDC Special Facilities Revenue Bonds, Series 2018(2)
2022
to
2036
4.00%
to
5.00%
1,383

1,383

Unsecured notes
2020
to
2028
2.60%
to
4.38%
4,050

4,050

Other financings(2)(3)
2019
to
2030
3.49%
to
8.75%
252

251

2018 Unsecured Revolving Credit Facility
2021
to
2023
undrawn
variable


Other revolving credit facilities
2019
to
2021
undrawn
variable


Total secured and unsecured debt
 
 
 
 
 
 
10,307

9,308

Unamortized premium and debt issue cost, net
 
 
 
 
 
 
82

60

Total debt
 
 
 
 
 
 
10,389

9,368

Less: current maturities
 
 
 
 
 
 
(2,954
)
(1,409
)
Total long-term debt
 
 
 
 
 
 
$
7,435

$
7,959

 
(1) 
Certain aircraft and other financings are comprised of variable rate debt. All variable rates are equal to LIBOR (generally subject to a floor) or another index rate, in each case plus a specified margin.
(2) 
Due in installments.
(3) 
Primarily includes unsecured bonds and debt secured by certain accounts receivable and real estate.

2019 Unsecured Term Loan

In February 2019, we entered into a $1 billion term loan issued by two lenders and subsequently repaid $300 million in March 2019. This loan, which is unsecured, bears interest at a variable rate equal to LIBOR plus a specified margin and is due in February 2020. We used the net proceeds of the term loan to accelerate planned 2019 repurchases under our share repurchase program.

2019-1 EETC

In March 2019, we completed a $500 million offering of Pass Through Certificates, Series 2019-1 ("2019-1 EETC") through a pass through trust. This amount is included in Certificates in the table above. The details of the 2019-1 EETC, which is secured by 14 aircraft, are shown in the table below:

(in millions)
Total Principal
Fixed Interest Rate
Issuance Date
Final Maturity Date
2019-1 Class AA Certificates
$
425

3.204%
March 2019
April 2024
2019-1 Class A Certificates
75

3.404%
March 2019
April 2024
Total
$
500

 
 
 



15


Availability Under Revolving Credit Facilities

The table below shows availability under revolving credit facilities, all of which were undrawn, as of March 31, 2019:
(in millions)
 
2018 Unsecured Revolving Credit Facility
$
2,650

Other revolving credit facilities

389

Total availability under revolving credit facilities
$
3,039



In February 2019, we drew $750 million from our 2018 Unsecured Revolving Credit Facility for general corporate purposes, which was fully repaid in March 2019.
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,
2019
December 31,
2018
Total debt at par value
$
10,307

$
9,308

Unamortized premium and debt issue cost, net

82

60

Net carrying amount
$
10,389

$
9,368

 
 
 
Fair value
$
10,600

$
9,400


Covenants

We were in compliance with the covenants in our financings at March 31, 2019.
 

NOTE 7. EMPLOYEE BENEFIT PLANS

The following table shows the components of net periodic (benefit) cost:
 
Pension Benefits
 
Other Postretirement and Postemployment Benefits
(in millions)
2019
2018
 
2019
2018
Three Months Ended March 31,
 
 
 
 
 
Service cost
$

$

 
$
21

$
21

Interest cost
208

195

 
34

32

Expected return on plan assets
(297
)
(329
)
 
(12
)
(17
)
Amortization of prior service credit


 
(2
)
(7
)
Recognized net actuarial loss
73

66

 
9

10

Net periodic (benefit) cost
$
(16
)
$
(68
)
 
$
50

$
39



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



16


NOTE 8. COMMITMENTS AND CONTINGENCIES

Aircraft Purchase Commitments

Our future aircraft purchase commitments, which enable our fleet transformation and goal of replacing 25% of our mainline fleet by 2023, totaled $15.1 billion at March 31, 2019:
(in millions)
Total
Nine months ending December 31, 2019
$
2,110

2020
3,140

2021
3,260

2022
2,790

2023
1,850

Thereafter
1,940

Total
$
15,090



Our future aircraft purchase commitments included the following aircraft at March 31, 2019:
Aircraft Type
Purchase Commitments
A220-100
31

A220-300
50

A321-200
53