Delta Air Lines announces December quarter and full year 2016 profit
Delta Air Lines today reported financial results for the December quarter and full year 2016. Highlights of those results, including both GAAP and adjusted metrics, are below and incorporated here.
Adjusted pre-tax income for the December 2016 quarter was $923 million, a $524 million decrease from the December 2015 quarter, primarily driven by the new pilot agreement. For the full year, adjusted pre-tax income increased 4 percent year over year to $6.1 billion.
“Delta had a year of record-breaking performance in 2016 – financially, operationally and for our customers – and it’s an honor to recognize our employees’ efforts this year with over $1 billion in profit sharing,” said Ed Bastian, Delta’s chief executive officer. “As we move into 2017, we are seeing our unit revenues turn positive which should return the company to margin expansion by the back half of the year. This will allow us to produce the solid returns and cash flows that investors rely upon from Delta.”
Delta’s operating revenue for the December quarter was down $44 million versus prior year. Passenger unit revenues declined 2.7 percent on a 0.9 percent increase in capacity.
“Delta’s commercial strategies and capacity actions combined with improving demand continue to drive benefit as we transition back into sustained positive unit revenues. For the March quarter, we expect a unit revenue increase of flat to up 2 percent, stemming the declines that have been ongoing for two years,” said Glen Hauenstein, Delta’s president. “We will remain conservative and keep our capacity growth in check until we see a further firming of these revenue trends in the near-term and longer-term, a return to our 17-19 percent operating margin target.”
March 2017 Quarter Guidance
For the March quarter, Delta is expecting pressures on margins as the pace of change in unit revenue will not match the cost impact of higher fuel prices and employee wage increases. This margin pressure is likely to peak in the March quarter, and the company expects margins to expand beginning in the second half of the year.
Adjusted fuel expense2 declined $240 million compared to the same period in 2015, as 12 percent higher market prices were offset by prior year hedge losses. Delta’s adjusted fuel price per gallon for the December quarter was $1.60.
CASM-Ex3 including profit sharing increased 10.6 percent for the December 2016 quarter compared to the prior year period primarily driven by the impact of the new pilot agreement ratified on December 1, 2016 with retroactive effect to January 1, 2016. Results for the December quarter include the full 2016 impact of the new contract totaling $475 million of expense, of which $380 million relates to the first three quarters of the year.
Non-operating expense declined $116 million for the quarter due to a $75 million loss in prior year for the write-off of Venezuela currency and $10 million of lower interest expense from Delta’s debt reduction initiatives.
“Delta’s cost and capital discipline has allowed us to consistently invest in our people and the customer experience, and do so in a way that keeps our unit cost growth manageable over time and generates sufficient cash flow for debt reduction and shareholder returns,” said Paul Jacobson, Delta’s chief financial officer. “We’ll continue to take this balanced approach – investing across the business to drive future earnings growth, further strengthening our investment grade balance sheet, and returning cash to our owners – as we drive sustainability for the long term.”
Cash Flow, Shareholder Returns, and Adjusted Net Debt
Delta generated $1.2 billion of adjusted operating cash flow and $640 million of free cash flow during the quarter. The company used this strong cash generation to invest $600 million into the business for aircraft modifications, facilities upgrades and technology improvements.
For the December quarter, the company returned $449 million to shareholders, comprised of $149 million of dividends and $300 million of share repurchases. Delta returned $3.1 billion to its owners in 2016 through dividends and share repurchases.
Adjusted net debt4 at the end of the quarter stood at $6.1 billion, a $500 million reduction compared to the end of 2015.
December Quarter and Full Year Results
- Note A to the attached Consolidated Statements of Operations provides a reconciliation of non-GAAP financial measures used in this release to the comparable GAAP metric and provides the reasons management uses those measures.
- Adjusted fuel expense reflects, among other things, the impact of mark-to-market (“MTM”) adjustments and settlements. MTM adjustments are defined as fair value changes recorded in periods other than the settlement period. Such fair value changes are not necessarily indicative of the actual settlement value of the underlying hedge in the contract settlement period. Settlements represent cash received or paid on hedge contracts settled during the period. These items adjust fuel expense to show the economic impact of hedging, including cash received or paid on hedge contracts during the period. See Note A for a reconciliation of adjusted fuel expense and average fuel price per gallon to the comparable GAAP metric.
- CASM – Ex, including profit sharing: In addition to fuel expense, Delta believes adjusting for certain other expenses is helpful to investors because other expenses are not related to the generation of a seat mile. These expenses include aircraft maintenance and staffing services Delta provides to third parties, Delta’s vacation wholesale operations and refinery cost of sales to third parties. The amounts excluded were $338 million and $213 million for the December 2016 and December 2015 quarters, respectively and $1.2 billion for both years ended December 31, 2016 and 2015. Management believes this methodology provides a more consistent and comparable reflection of Delta’s airline operations.
- Adjusted net debt includes $38 million and $119 million as of December 31, 2016 and December 31, 2015, respectively, of hedge margin receivable, which is cash that we have posted with counterparties as hedge margin. See Note A for additional information about our calculation of adjusted net debt.
Forward Looking Statements
Statements in this investor update that are not historical facts, including statements regarding 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. All forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from the estimates, expectations, beliefs, intentions, projections and strategies reflected in or suggested by the forward-looking statements. These risks and uncertainties include, but are not limited to, the effects of terrorist attacks or geopolitical conflict; the cost of aircraft fuel; the impact of rebalancing our hedge portfolio, recording mark-to-market adjustments or posting collateral in connection with our fuel hedge contracts; the availability of aircraft fuel; the possible effects of accidents involving our aircraft; the restrictions that financial covenants in our financing agreements will have on our financial and business operations; labor issues; interruptions or disruptions in service at one of our hub or gateway airports; disruptions or security breaches of our information technology infrastructure; our dependence on technology in our operations; the effects of weather, natural disasters and seasonality on our business; the effects of an extended disruption in services provided by third party regional carriers; failure or inability of insurance to cover a significant liability at Monroe’s Trainer refinery; the impact of environmental regulation on the Trainer refinery, including costs related to renewable fuel standard regulations; our ability to retain management and key employees; competitive conditions in the airline industry; the effects of extensive government regulation on our business; the sensitivity of the airline industry to prolonged periods of stagnant or weak economic conditions, including the effects of Brexit; and the effects of the rapid spread of contagious illnesses.
Additional information concerning risks and uncertainties that could cause differences between actual results and forward-looking statements is contained in our Securities and Exchange Commission filings, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 and our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2016. Caution should be taken not to place undue reliance on our forward-looking statements, which represent our views only as of January 12, 2017, and which we have no current intention to update.