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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
Or
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
 
Trading 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, a smaller reporting company, or an emerging growth 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.
Large Accelerated Filer
þ
Accelerated Filer 
o
Non-accelerated Filer 
o
Smaller Reporting Company
Emerging Growth Company
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 No þ
Number of shares outstanding by each class of common stock, as of June 30, 2019:
Common Stock, $0.0001 par value - 650,200,617 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 June 30, 2019, the related condensed consolidated statements of operations and comprehensive income, and the consolidated statements of stockholders' equity for the three-month and six-month periods ended June 30, 2019 and 2018, the condensed consolidated statements of cash flows for the six-month periods ended June 30, 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
 
July 11, 2019
 


2



DELTA AIR LINES, INC.
Consolidated Balance Sheets
(Unaudited)
(in millions, except share data)
June 30,
2019
 
December 31,
2018
ASSETS
Current Assets:
 
 
 
Cash and cash equivalents
$
2,009

 
$
1,565

Accounts receivable, net of an allowance for uncollectible accounts of $14 and $12 at June 30,
2019 and December 31, 2018, respectively
2,844

 
2,314

Fuel inventory
590

 
592

Expendable parts and supplies inventories, net of an allowance for obsolescence of $96 and $102
at June 30, 2019 and December 31, 2018, respectively
493

 
463

Prepaid expenses and other
1,198

 
1,406

Total current assets
7,134

 
6,340

 
 
 
 
Noncurrent Assets:
 
 
 
Property and equipment, net of accumulated depreciation and amortization of $17,005 and $15,823
at June 30, 2019 and December 31, 2018, respectively
30,165

 
28,335

Operating lease right-of-use assets
5,906

 
5,994

Goodwill
9,781

 
9,781

Identifiable intangibles, net of accumulated amortization of $868 and $862 at June 30, 2019
and December 31, 2018, respectively
4,824

 
4,830

Cash restricted for airport construction
893

 
1,136

Other noncurrent assets
3,815

 
3,850

Total noncurrent assets
55,384

 
53,926

Total assets
$
62,518

 
$
60,266

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
 
 
 
Current maturities of long-term debt and finance leases
$
2,281

 
$
1,518

Current maturities of operating leases
841

 
955

Air traffic liability
6,616

 
4,661

Accounts payable
3,359

 
2,976

Accrued salaries and related benefits
2,617

 
3,287

Loyalty program deferred revenue
3,048

 
2,989

Fuel card obligation
1,067

 
1,075

Other accrued liabilities
1,335

 
1,117

Total current liabilities
21,164

 
18,578

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

 
8,253

Pension, postretirement and related benefits
8,516

 
9,163

Loyalty program deferred revenue
3,606

 
3,652

Noncurrent operating leases
5,539

 
5,801

Other noncurrent liabilities
2,025

 
1,132

Total noncurrent liabilities
27,396


28,001

 
 
 
 
Commitments and Contingencies

 

 
 
 
 
Stockholders' Equity:
 
 
 
Common stock at $0.0001 par value; 1,500,000,000 shares authorized, 659,145,280 and 688,136,306
shares issued at June 30, 2019 and December 31, 2018, respectively

 

Additional paid-in capital
11,201

 
11,671

Retained earnings
10,686

 
10,039

Accumulated other comprehensive loss
(7,694
)
 
(7,825
)
Treasury stock, at cost, 8,944,663 and 8,191,831 shares at June 30, 2019 and
December 31, 2018, respectively
(235
)
 
(198
)
Total stockholders' equity
13,958

 
13,687

Total liabilities and stockholders' equity
$
62,518

 
$
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 June 30,
 
Six Months Ended June 30,
(in millions, except per share data)
2019
 
2018
 
2019
 
2018
Operating Revenue:
 
 
 
 
 
 
 
Passenger
$
11,368

 
$
10,546

 
$
20,622

 
$
19,311

Cargo
186

 
223

 
378

 
425

Other
982

 
1,006

 
2,008

 
2,007

  Total operating revenue
12,536

 
11,775

 
23,008

 
21,743

 
 
 
 
 
 
 
 
Operating Expense:
 
 
 
 
 
 
 
Salaries and related costs
2,752

 
2,668

 
5,391

 
5,252

Aircraft fuel and related taxes
2,291

 
2,341

 
4,269

 
4,195

Regional carriers expense, excluding fuel
905

 
863

 
1,798

 
1,701

Depreciation and amortization
713

 
583

 
1,328

 
1,186

Contracted services
657

 
540

 
1,288

 
1,084

Passenger commissions and other selling expenses
538

 
511

 
965

 
938

Aircraft maintenance materials and outside repairs
434

 
427

 
910

 
862

Landing fees and other rents
442

 
425

 
861

 
814

Profit sharing
518

 
404

 
739

 
592

Ancillary businesses and refinery
316

 
494

 
667

 
987

Passenger service
322

 
300

 
593

 
563

Aircraft rent
107

 
97

 
209

 
191

Other
413

 
438

 
842

 
850

Total operating expense
10,408

 
10,091

 
19,860

 
19,215

 
 
 
 
 
 
 
 
Operating Income
2,128

 
1,684

 
3,148

 
2,528

 
 
 
 
 
 
 
 
Non-Operating Expense:

 

 
 
 
 
Interest expense, net
(75
)
 
(79
)
 
(158
)
 
(170
)
Unrealized gain/(loss) on investments, net
(82
)
 
(238
)
 
18

 
(220
)
Miscellaneous, net
(64
)
 
19

 
(155
)
 
(19
)
Total non-operating expense, net
(221
)
 
(298
)
 
(295
)
 
(409
)
 
 
 
 
 
 
 
 
Income Before Income Taxes
1,907

 
1,386

 
2,853

 
2,119

 
 
 
 
 
 
 
 
Income Tax Provision
(464
)
 
(350
)
 
(680
)
 
(525
)
 
 
 
 
 
 
 
 
Net Income
$
1,443

 
$
1,036

 
$
2,173

 
$
1,594

 
 
 
 
 
 
 
 
Basic Earnings Per Share
$
2.22

 
$
1.49

 
$
3.30

 
$
2.28

Diluted Earnings Per Share
$
2.21

 
$
1.49

 
$
3.29

 
$
2.27

Cash Dividends Declared Per Share
$
0.35

 
$
0.31

 
$
0.70

 
$
0.61

 
 
 
 
 
 
 
 
Comprehensive Income
$
1,515

 
$
1,111

 
$
2,304

 
$
1,609

 
 
 
 
 
 
 
 
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)
 
Six Months Ended June 30,
(in millions)
2019
 
2018
Net Cash Provided by Operating Activities
$
5,223

 
$
4,270

 
 
 
 
Cash Flows from Investing Activities:
 
 
 
Property and equipment additions:
 
 
 
Flight equipment, including advance payments
(2,226
)
 
(2,263
)
Ground property and equipment, including technology
(694
)
 
(580
)
Purchase of short-term investments

 
(118
)
Redemption of short-term investments
206

 
421

Purchase of equity investments
(89
)
 

Other, net
132

 
70

Net cash used in investing activities
(2,671
)

(2,470
)
 
 
 
 
Cash Flows from Financing Activities:
 
 
 
Payments on long-term debt and finance lease obligations
(2,450
)
 
(2,093
)
Repurchase of common stock
(1,593
)
 
(925
)
Cash dividends
(461
)
 
(430
)
Proceeds from short-term obligations
1,750

 

Proceeds from long-term obligations
500

 
3,124

Other, net
(17
)
 
(69
)
Net cash used in financing activities
(2,271
)
 
(393
)
 
 
 
 
Net Increase in Cash, Cash Equivalents and Restricted Cash Equivalents
281

 
1,407

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

 
1,853

Cash, cash equivalents and restricted cash equivalents at end of period
$
3,029

 
$
3,260

 
 
 
 
Non-Cash Transactions:
 
 
 
Right-of-use assets acquired under operating leases
$
357

 
$
576

Operating leases converted to finance leases
189

 

Flight and ground equipment acquired under finance leases
158

 
33

 
 
 
 
 
 
 
 
The following table provides a reconciliation of cash, cash equivalents and restricted cash equivalents reported within the Consolidated Balance Sheets to the total of the same such amounts shown above:
 
June 30,
(in millions)
2019
 
2018
Current assets:
 
 
 
Cash and cash equivalents
$
2,009

 
$
1,886

Restricted cash included in prepaid expenses and other
127

 
48

Noncurrent assets:
 
 
 
Cash restricted for airport construction
893

 
1,326

Total cash, cash equivalents and restricted cash equivalents
$
3,029

 
$
3,260

 
 
 
 
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

Net income



1,443




1,443

Dividends declared



(229
)



(229
)
Other comprehensive income




72



72

Shares of common stock issued and compensation expense associated with equity awards (Treasury shares withheld for payment of taxes, $55.06(1) per share)


31




(2
)
29

Stock options exercised








Stock purchased and retired
(5
)

(84
)
(184
)



(268
)
Balance at June 30, 2019
659

$

$
11,201

$
10,686

$
(7,694
)
9

$
(235
)
$
13,958


(1) 
Weighted average price per share.
 
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

Net income



1,036




1,036

Change in accounting principle and other



(13
)



(13
)
Dividends declared



(213
)



(213
)
Other comprehensive income




75



75

Shares of common stock issued and compensation expense associated with equity awards (Treasury shares withheld for payment of taxes, $52.99(1) per share)


29




(2
)
27

Stock options exercised








Stock purchased and retired
(12
)

(189
)
(411
)



(600
)
Balance at June 30, 2018
699

$

$
11,807

$
8,629

$
(7,606
)
8

$
(196
)
$
12,634


(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 and six months ended June 30, 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, primarily 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 June 30,
 
Six Months Ended June 30,
(in millions)
2019
2018
 
2019
2018
Ticket
$
9,969

$
9,308

 
$
17,957

$
16,961

Loyalty travel awards
751

680

 
1,442

1,298

Travel-related services
648

558

 
1,223

1,052

Total passenger revenue
$
11,368

$
10,546

 
$
20,622

$
19,311



We recognized approximately $3.4 billion in passenger revenue during the six months ended June 30, 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 June 30,
 
Six Months Ended June 30,
(in millions)
2019
2018
 
2019
2018
Loyalty program
$
484

$
358

 
$
958

$
705

Ancillary businesses and refinery
330

522

 
699

1,042

Miscellaneous
168

126

 
351

260

Total other revenue
$
982

$
1,006

 
$
2,008

$
2,007



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, car rental agencies and ridesharing companies. 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 six months ended June 30, 2019 and 2018, total cash sales from marketing agreements related to our loyalty program were $2.0 billion and $1.7 billion, 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 determine 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 current year. 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
 
 
1,542

1,550

Travel mileage credits redeemed
 
 
(1,443
)
(1,298
)
Non-travel mileage credits redeemed
 
 
(86
)
(82
)
Balance at June 30
 
 
$
6,654

$
6,491



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 tables:
 
Passenger Revenue
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions)
2019
2018
 
2019
2018
Domestic
$
8,071

$
7,416

 
$
14,784

$
13,697

Atlantic
1,880

1,771

 
2,983

2,841

Latin America
760

722

 
1,615

1,553

Pacific
657

637

 
1,240

1,220

Total
$
11,368

$
10,546

 
$
20,622

$
19,311



 
Operating Revenue
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions)
2019
2018
 
2019
2018
Domestic
$
8,787

$
8,244

 
$
16,274

$
15,355

Atlantic
2,136

1,997

 
3,452

3,250

Latin America
838

791

 
1,802

1,708

Pacific
775

743

 
1,480

1,430

Total
$
12,536

$
11,775

 
$
23,008

$
21,743




9


NOTE 3. FAIR VALUE MEASUREMENTS

Assets (Liabilities) Measured at Fair Value on a Recurring Basis
(in millions)
June 30,
2019
Level 1
Level 2
Cash equivalents
$
1,648

$
1,648

$

Restricted cash equivalents
1,020

1,020


Long-term investments
1,185

980

205

Hedge derivatives, net
 
 
 
Fuel hedge contracts
(4
)
(18
)
14

Interest rate contracts
62


62

Foreign currency exchange contracts
3


3

(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.


10


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 forward contracts and are valued based on data readily observable in public markets.


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.

Equity Method Investments

We account for our investments in Aeroméxico, Virgin Atlantic and AirCo Aviation Services, LLC ("AirCo"), 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, net in our Condensed Consolidated Statements of Operations and Comprehensive Income ("income statement") under non-operating expense, and our share of AirCo's financial results is 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 $841 million as of June 30, 2019.

Virgin Atlantic. We have a non-controlling 49% equity stake in Virgin Atlantic Limited, the parent company of Virgin Atlantic Airways, and similar non-controlling interests in certain affiliated Virgin Atlantic companies. Our investment in these Virgin Atlantic companies is recorded at $365 million as of June 30, 2019.

AirCo. We have a non-controlling 49% equity stake in AirCo which is recorded at $111 million as of June 30, 2019. AirCo is a subsidiary of Argenbright Holdings, LLC that provides aviation-related services, ground support equipment maintenance and security.


11


Fair Value Investments

We account for the following investments at fair value with adjustments to fair value recognized in unrealized gain/(loss) on investments within non-operating expense in our income statement. During the three and six months ended June 30, 2019, we recorded a loss of $82 million and a gain of $18 million, respectively, on our fair value investments. These results were driven by changes in stock prices and foreign currency fluctuations.

Air France-KLM. We own 9% of the outstanding shares of Air France-KLM, which are recorded at $361 million as of June 30, 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 $279 million as of June 30, 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 June 30, 2019.

China Eastern. We own a 3% equity interest in China Eastern, which is recorded at $275 million as of June 30, 2019.

Korean. During the June 2019 quarter, we acquired 4% of the outstanding shares of Hanjin-KAL, the largest shareholder of Korean Air. This investment is recorded at $66 million as of June 30, 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.


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. 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. 


12


Hedge Position as of June 30, 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
$
8

$
59

$
(5
)
$

$
62

Not designated as hedges
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
397

Euros
December 2020
13



(10
)
3

Fuel hedge contracts
180

gallons - crude oil and refined products
December 2019
46


(50
)

(4
)
Total derivative contracts
 
 
$
67

$
59

$
(55
)
$
(10
)
$
61


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