DAL 6.30.2011 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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R | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2011
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Or |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 001-5424
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 R 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 R 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” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer | R | Accelerated filer | o | Non-accelerated filer | o | Smaller reporting company | o |
| (Do not check if a smaller reporting company) | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No R
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes R No o
Number of shares outstanding by each class of common stock, as of June 30, 2011:
Common Stock, $0.0001 par value - 846,062,700 shares outstanding
This document is also available through our website at http://www.delta.com/about_delta/investor_relations.
Table of Contents
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, 2010 (“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.
DELTA AIR LINES, INC.
Consolidated Balance Sheets
(Unaudited)
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| | | | | | | |
(in millions, except share data) | June 30, 2011 | | December 31, 2010 |
ASSETS |
Current Assets: | | | |
Cash and cash equivalents | $ | 2,855 |
| | $ | 2,892 |
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Short-term investments | 967 |
| | 718 |
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Restricted cash, cash equivalents and short-term investments | 432 |
| | 409 |
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Accounts receivable, net of an allowance for uncollectible accounts of $39 and $40 | | | |
at June 30, 2011 and December 31, 2010, respectively | 1,885 |
| | 1,456 |
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Expendable parts and supplies inventories, net of an allowance for obsolescence of $104 and $104 | | | |
at June 30, 2011 and December 31, 2010, respectively | 403 |
| | 318 |
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Deferred income taxes, net | 342 |
| | 355 |
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Prepaid expenses and other | 1,179 |
| | 1,159 |
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Total current assets | 8,063 |
| | 7,307 |
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Property and Equipment, Net: | | | |
Property and equipment, net of accumulated depreciation and amortization of $4,820 and $4,164 | | | |
at June 30, 2011 and December 31, 2010, respectively | 20,315 |
| | 20,307 |
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Other Assets: | | | |
Goodwill | 9,794 |
| | 9,794 |
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Identifiable intangibles, net of accumulated amortization of $565 and $530 | | | |
at June 30, 2011 and December 31, 2010, respectively | 4,714 |
| | 4,749 |
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Other noncurrent assets | 992 |
| | 1,031 |
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Total other assets | 15,500 |
| | 15,574 |
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Total assets | $ | 43,878 |
| | $ | 43,188 |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
Current Liabilities: | | | |
Current maturities of long-term debt and capital leases | $ | 1,635 |
| | $ | 2,073 |
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Air traffic liability | 5,001 |
| | 3,306 |
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Accounts payable | 1,900 |
| | 1,713 |
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Frequent flyer deferred revenue | 1,687 |
| | 1,690 |
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Accrued salaries and related benefits | 1,086 |
| | 1,370 |
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Taxes payable | 766 |
| | 579 |
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Other accrued liabilities | 727 |
| | 654 |
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Total current liabilities | 12,802 |
| | 11,385 |
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Noncurrent Liabilities: | | | |
Long-term debt and capital leases | 13,026 |
| | 13,179 |
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Pension, postretirement and related benefits | 11,307 |
| | 11,493 |
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Frequent flyer deferred revenue | 2,662 |
| | 2,777 |
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Deferred income taxes, net | 1,913 |
| | 1,924 |
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Other noncurrent liabilities | 1,383 |
| | 1,533 |
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Total noncurrent liabilities | 30,291 |
| | 30,906 |
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Commitments and Contingencies | | | |
Stockholders' Equity: | | | |
Common stock at $0.0001 par value; 1,500,000,000 shares authorized, 860,344,084 and 847,716,723 | | | |
shares issued at June 30, 2011 and December 31, 2010, respectively | — |
| | — |
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Additional paid-in capital | 13,964 |
| | 13,926 |
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Accumulated deficit | (9,372 | ) | | (9,252 | ) |
Accumulated other comprehensive loss | (3,593 | ) | | (3,578 | ) |
Treasury stock, at cost, 14,281,384 and 12,993,100 shares at June 30, 2011 and | | | |
December 31, 2010, respectively | (214 | ) | | (199 | ) |
Total stockholders' equity | 785 |
| | 897 |
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Total liabilities and stockholders' equity | $ | 43,878 |
| | $ | 43,188 |
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. |
DELTA AIR LINES, INC.
Consolidated Statements of Operations
(Unaudited)
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| Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions, except per share data) | 2011 | | 2010 | | 2011 | | 2010 |
Operating Revenue: | | | | | | | |
Passenger: | | | | | | | |
Mainline | $ | 6,207 |
| | $ | 5,480 |
| | $ | 11,341 |
| | $ | 9,966 |
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Regional carriers | 1,684 |
| | 1,529 |
| | 3,125 |
| | 2,849 |
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Total passenger revenue | 7,891 |
| | 7,009 |
| | 14,466 |
| | 12,815 |
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Cargo | 264 |
| | 211 |
| | 514 |
| | 387 |
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Other | 998 |
| | 948 |
| | 1,920 |
| | 1,814 |
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Total operating revenue | 9,153 |
| | 8,168 |
| | 16,900 |
| | 15,016 |
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Operating Expense: | | | | | | | |
Aircraft fuel and related taxes | 2,663 |
| | 1,960 |
| | 4,829 |
| | 3,643 |
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Salaries and related costs | 1,739 |
| | 1,702 |
| | 3,466 |
| | 3,374 |
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Contract carrier arrangements | 1,410 |
| | 972 |
| | 2,710 |
| | 1,889 |
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Aircraft maintenance materials and outside repairs | 485 |
| | 395 |
| | 970 |
| | 769 |
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Contracted services | 415 |
| | 366 |
| | 840 |
| | 758 |
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Passenger commissions and other selling expenses | 440 |
| | 377 |
| | 809 |
| | 741 |
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Depreciation and amortization | 381 |
| | 379 |
| | 757 |
| | 764 |
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Landing fees and other rents | 320 |
| | 324 |
| | 633 |
| | 637 |
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Passenger service | 181 |
| | 165 |
| | 345 |
| | 303 |
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Aircraft rent | 74 |
| | 101 |
| | 152 |
| | 213 |
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Profit sharing | 8 |
| | 90 |
| | 8 |
| | 90 |
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Restructuring and other items | 144 |
| | 82 |
| | 151 |
| | 136 |
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Other | 412 |
| | 403 |
| | 841 |
| | 779 |
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Total operating expense | 8,672 |
| | 7,316 |
| | 16,511 |
| | 14,096 |
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Operating Income | 481 |
| | 852 |
| | 389 |
| | 920 |
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Other (Expense) Income: | | | | | | | |
Interest expense, net | (233 | ) | | (255 | ) | | (454 | ) | | (501 | ) |
Amortization of debt discount, net | (46 | ) | | (57 | ) | | (93 | ) | | (117 | ) |
Loss on extinguishment of debt | (13 | ) | | — |
| | (33 | ) | | — |
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Miscellaneous, net | 6 |
| | (72 | ) | | (4 | ) | | (80 | ) |
Total other expense, net | (286 | ) | | (384 | ) | | (584 | ) | | (698 | ) |
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Income (Loss) Before Income Taxes | 195 |
| | 468 |
| | (195 | ) | | 222 |
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Income Tax Benefit (Provision) | 3 |
| | (1 | ) | | 75 |
| | (11 | ) |
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Net Income (Loss) | $ | 198 |
| | $ | 467 |
| | $ | (120 | ) | | $ | 211 |
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Basic Earnings (Loss) Per Share | $ | 0.24 |
| | $ | 0.56 |
| | $ | (0.14 | ) | | $ | 0.25 |
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Diluted Earnings (Loss) Per Share | $ | 0.23 |
| | $ | 0.55 |
| | $ | (0.14 | ) | | $ | 0.25 |
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. |
DELTA AIR LINES, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
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| Six Months Ended June 30, |
(in millions) | 2011 | | 2010 |
Net cash provided by operating activities | $ | 1,774 |
| | $ | 2,000 |
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Cash Flows From Investing Activities: | | | |
Property and equipment additions: | | | |
Flight equipment, including advance payments | (481 | ) | | (449 | ) |
Ground property and equipment, including technology | (172 | ) | | (75 | ) |
Purchase of short-term investments | (479 | ) | | — |
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Redemption of short-term investments | 250 |
| | 73 |
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Other investments | — |
| | (98 | ) |
Other, net | 8 |
| | (6 | ) |
Net cash used in investing activities | (874 | ) | | (555 | ) |
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Cash Flows From Financing Activities: | | | |
Payments on long-term debt and capital lease obligations | (2,394 | ) | | (1,622 | ) |
Proceeds from long-term obligations | 1,599 |
| | — |
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Debt issuance costs | (58 | ) | | — |
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Restricted cash and cash equivalents | (84 | ) | | — |
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Other, net | — |
| | 4 |
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Net cash used in financing activities | (937 | ) | | (1,618 | ) |
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Net Decrease in Cash and Cash Equivalents | (37 | ) | | (173 | ) |
Cash and cash equivalents at beginning of period | 2,892 |
| | 4,607 |
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Cash and cash equivalents at end of period | $ | 2,855 |
| | $ | 4,434 |
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Non-cash transactions: | | | |
Flight equipment under capital leases | $ | 89 |
| | $ | 199 |
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Debt discount on American Express Agreement | — |
| | 110 |
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. |
DELTA AIR LINES, INC.
Notes to the Condensed Consolidated Financial Statements
June 30, 2011
(Unaudited)
NOTE 1. BASIS OF PRESENTATION AND 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. These financial statements 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. We reclassified certain prior period amounts, none of which were material, to conform to the current period presentation.
Management believes the accompanying unaudited Condensed Consolidated Financial Statements reflect all adjustments, including normal recurring items and restructuring and other 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, changes in global economic conditions and other factors, operating results for the three and six months ended June 30, 2011 are not necessarily indicative of operating results for the entire year.
On July 1, 2010, we sold Compass Airlines, Inc. (“Compass”) and Mesaba Aviation, Inc. (“Mesaba”), our wholly-owned subsidiaries, to Trans States Airlines Inc. (“Trans States”) and Pinnacle Airlines Corp. (“Pinnacle”), respectively. The sales of Compass and Mesaba did not have a material impact on our Condensed Consolidated Financial Statements. Upon the closing of these transactions, we entered into new or amended long-term capacity purchase agreements with Compass, Mesaba, and Pinnacle. Prior to these sales, expenses related to Compass and Mesaba as our wholly-owned subsidiaries were reported in the applicable expense line items. Subsequent to these sales, expenses related to Compass and Mesaba are reported as contract carrier arrangements expense.
Recent Accounting Standards
Revenue Arrangements with Multiple Deliverables
In October 2009, the Financial Accounting Standards Board ("FASB") issued "Revenue Arrangements with Multiple Deliverables." The standard (1) revises guidance on when individual deliverables may be treated as separate units of accounting, (2) establishes a selling price hierarchy for determining the selling price of a deliverable, (3) eliminates the residual method for revenue recognition and (4) provides guidance on allocating consideration among separate deliverables. This guidance applies only to contracts entered into or materially modified after December 31, 2010. We adopted this standard on a prospective basis beginning January 1, 2011. The adoption of this standard did not have a material impact on the timing of revenue recognition or its allocation.
We determined that the only revenue arrangements impacted by the adoption of this standard are those associated with our frequent flyer program (the "SkyMiles Program"). The SkyMiles Program includes two types of transactions that are considered revenue arrangements with multiple deliverables. As discussed below, these are (1) passenger ticket sales earning mileage credits and (2) the sale of mileage credits to participating companies with which we have marketing agreements. Mileage credits are a separate unit of accounting as they can be redeemed by customers in future periods for air travel on Delta and participating airlines, membership in our Sky Club and other program awards.
Passenger Ticket Sales Earning Mileage Credits. The SkyMiles Program allows customers to earn mileage credits by flying on Delta, regional air carriers with which we have contract carrier agreements and airlines that participate in the SkyMiles Program. We applied the new standard to passenger ticket sales earning mileage credits under our SkyMiles Program, as we provide the customers with two deliverables: (1) mileage credits earned and (2) air transportation. The new guidance requires us to value each component of the arrangement on a standalone basis. Our estimate of the standalone selling price of a mileage credit is based on an analysis of sales of mileage credits to other airlines. We use established ticket prices to determine the standalone selling price of air transportation. Under the new guidance, we allocate the total amount collected from passenger ticket sales between the deliverables based on their relative selling prices.
We continue to defer revenue from the mileage credit component of passenger ticket sales and recognize it as passenger revenue when miles are redeemed and services are provided. We also continue to record the portion of the passenger ticket sales for air transportation in air traffic liability and recognize these amounts in passenger revenue when we provide transportation or when the ticket expires unused.
Sale of Mileage Credits. Customers may earn mileage credits through 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 as a part of these marketing agreements have two deliverables: (1) the mileage credits sold and (2) the marketing component. Our most significant contract to sell mileage credits relates to our co-brand credit card relationship with American Express. The guidance does not apply to our existing contract with American Express or other contracts to sell mileage credits unless those contracts are materially modified. Therefore, we continue to use the residual method for revenue recognition and value only the mileage credits. Under the residual method, the portion of the revenue from the mileage component is deferred and recognized as passenger revenue when miles are redeemed and services are provided. The portion of the revenue received in excess of the fair value of mileage credits sold is recognized in income as other revenue when the related marketing services are provided. We determine the value of a mileage credit based on an analysis of sales of mileage credits to other airlines.
If we enter into new contracts or materially modify existing contracts to sell mileage credits related to our SkyMiles Program, we will value the standalone selling price of the marketing component and allocate the revenue from the contract based on the relative selling price of the mileage credits and the marketing component. This could impact our deferral rate or cause an adjustment to our deferred revenue balance, in the case of a modification, which could materially impact our future financial results.
Fair Value Measurement and Disclosure Requirements
In May 2011, the FASB issued "Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs." The standard revises guidance for fair value measurement and expands the disclosure requirements. It is effective for fiscal years beginning after December 15, 2011. We are currently evaluating the impact that the adoption of this standard will have on our Consolidated Financial Statements.
Presentation of Comprehensive Income
In June 2011, the FASB issued "Presentation of Comprehensive Income." The standard revises guidance for the presentation and prominence of the items reported in other comprehensive income. It is effective for fiscal years beginning after December 15, 2011. We are currently evaluating the impact that the adoption of this standard will have on our Consolidated Financial Statements.
NOTE 2. FAIR VALUE MEASUREMENTS
Assets (Liabilities) Measured at Fair Value on a Recurring Basis
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(in millions) | June 30, 2011 | Level 1 | Level 2 | Level 3 |
Cash equivalents | $ | 2,612 |
| $ | 2,612 |
| $ | — |
| $ | — |
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Short-term investments | 967 |
| 967 |
| — |
| — |
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Restricted cash equivalents and short-term investments | 469 |
| 469 |
| — |
| — |
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Long-term investments | 136 |
| — |
| 27 |
| 109 |
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Hedge derivatives, net | | | | |
Fuel derivatives | 135 |
| — |
| 135 |
| — |
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Interest rate derivatives | (68 | ) | — |
| (68 | ) | — |
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Foreign currency derivatives | (70 | ) | — |
| (70 | ) | — |
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(in millions) | December 31, 2010 | Level 1 | Level 2 | Level 3 |
Cash equivalents | $ | 2,696 |
| $ | 2,696 |
| $ | — |
| $ | — |
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Short-term investments | 718 |
| 718 |
| — |
| — |
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Restricted cash equivalents and short-term investments | 440 |
| 440 |
| — |
| — |
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Long-term investments | 144 |
| — |
| 25 |
| 119 |
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Hedge derivatives, net | | | | |
Fuel derivatives | 351 |
| — |
| 351 |
| — |
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Interest rate derivatives | (74 | ) | — |
| (74 | ) | — |
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Foreign currency derivatives | (96 | ) | — |
| (96 | ) | — |
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Cash Equivalents, Short-term Investments and Restricted Cash Equivalents and Short-term Investments. Cash equivalents and short-term investments generally consist of money market funds and treasury bills. Restricted cash equivalents and short-term investments generally consist of money market funds and time deposits, which are primarily held to meet certain projected self-insurance obligations. These investments are recorded in restricted cash, cash equivalents and short-term investments and other noncurrent assets. Cash equivalents, short-term investments and restricted cash equivalents and short-term investments are recorded at cost, which approximates fair value. Fair value is based on the market approach using prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
Long-term Investments. Long-term investments are comprised primarily of student loan backed and insured auction rate securities, which are recorded at fair value. At June 30, 2011 and December 31, 2010, the fair value of our auction rate securities was $109 million and $119 million, respectively. The cost of these investments was $133 million and $143 million, respectively. These investments are classified as long-term in other noncurrent assets.
Because auction rate securities are not actively traded, fair values were estimated by discounting the cash flows expected to be received over the remaining maturities of the underlying securities. We based the valuations on our assessment of observable yields on instruments bearing comparable risks and considered the creditworthiness of the underlying debt issuer. Changes in market conditions could result in further adjustments to the fair value of these securities.
Hedge Derivatives. Our derivative instruments are comprised of contracts that are privately negotiated 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).
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• | Fuel Derivatives. Our fuel derivative instruments generally consist of three-way collar, swap, collar, and call option contracts with heating oil, Brent crude oil ("Brent"), West Texas Intermediate crude oil ("WTI") and jet fuel as the underlying commodities. Three-way collar, collar, and call option contracts are valued under the 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 15% to 38% depending on the maturity dates of the contracts. Swap contracts are valued under the income approach using a discounted cash flow model based on data either readily observable or derived from public markets. Discount factors used in these valuations ranged from 0.996 to 0.999 based on interest rates applicable to the maturity dates of the contracts. |
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• | Interest Rate Derivatives. Our interest rate derivative instruments consist of swap contracts and are valued primarily based on data readily observable in public markets. |
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• | Foreign Currency Derivatives. Our foreign currency derivative instruments consist of Japanese yen and Canadian dollar forward contracts and are valued based on data readily observable in public markets. |
For additional information regarding the composition and classification of our derivative instruments on the Consolidated Balance Sheets, see Note 3.
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. In the table below, the aggregate fair value of debt was based primarily on reported market values, recently completed market transactions and estimates based on interest rates, maturities, credit risk and underlying collateral.
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(in millions) | June 30, 2011 | December 31, 2010 |
Total debt at par value | $ | 14,739 |
| $ | 15,442 |
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Unamortized discount, net | (847 | ) | (935 | ) |
Net carrying amount | $ | 13,892 |
| $ | 14,507 |
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Fair value | $ | 14,700 |
| $ | 15,400 |
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NOTE 3. RISK MANAGEMENT AND FINANCIAL INSTRUMENTS
Our results of operations are significantly impacted by changes in aircraft fuel prices, interest rates and foreign currency exchange rates. In an effort to manage our exposure to these risks, we enter into derivative instruments and monitor and adjust our portfolio of these instruments.
During the six months ended June 30, 2011, we transitioned our fuel hedge portfolio from primarily WTI to a combination of heating oil, Brent, WTI and jet fuel as the underlying commodities. We also entered into derivative instruments that effectively converted a portion of our heating oil positions to jet fuel positions. These additional derivatives reduce our exposure to price differentials between heating oil and jet fuel.
Our hedge portfolio uses common derivative contracts, including three-way collar, swap, collar, and call option contracts. Three-way collars provide protection against rising fuel prices to a preset ceiling, above which we are exposed to market prices, while providing benefit when fuel prices decrease, as long as they remain above a preset floor.
In June 2011, we discontinued hedge accounting for our existing fuel derivative instruments, which were previously designated as accounting hedges. Prior to this change in accounting designation, gains or losses on these instruments were deferred in accumulated other comprehensive loss until contract settlement. Because these fuel derivative instruments are no longer designated as accounting hedges, we will record market adjustments for the changes in their fair value to earnings during their remaining contract terms. At June 30, 2011, $114 million of unrealized gains remained in accumulated other comprehensive loss on the Consolidated Balance Sheet related to these instruments. We will reclassify these gains to earnings on the original contract settlement dates through June 2012.
Hedge Gains (Losses)
Gains (losses) recorded on the Condensed Consolidated Financial Statements related to our hedge contracts, including those previously designated as accounting hedges, are as follows:
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| Effective Portion Recognized in Other Comprehensive Income (Loss) | Effective Portion Reclassified from Accumulated Other Comprehensive Loss to Earnings | Ineffective Portion Recognized in Other (Expense) Income |
(in millions) | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 |
Three Months Ended June 30 | | | | | | |
Fuel hedge swaps, call options and collars(1) | $ | (154 | ) | $ | (285 | ) | $ | 74 |
| $ | (14 | ) | $ | — |
| $ | (46 | ) |
Interest rate swaps(2) | (11 | ) | (28 | ) | — |
| — |
| — |
| — |
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Foreign currency exchange forwards(3) | (33 | ) | (10 | ) | (11 | ) | (4 | ) | — |
| — |
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Total designated | $ | (198 | ) | $ | (323 | ) | $ | 63 |
| $ | (18 | ) | $ | — |
| $ | (46 | ) |
Six Months Ended June 30 | | | | | | |
Fuel hedge swaps, call options and collars(1) | $ | (66 | ) | $ | (226 | ) | $ | 134 |
| $ | (26 | ) | $ | (10 | ) | $ | (37 | ) |
Interest rate swaps(2) | 7 |
| (39 | ) | — |
| — |
| — |
| — |
|
Foreign currency exchange forwards(3) | 26 |
| (8 | ) | (22 | ) | (9 | ) | — |
| — |
|
Total designated | $ | (33 | ) | $ | (273 | ) | $ | 112 |
| $ | (35 | ) | $ | (10 | ) | $ | (37 | ) |
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(1) | Gains (losses) on fuel hedge contracts reclassified from accumulated other comprehensive loss are recorded in aircraft fuel and related taxes. For the three and six months ended June 30, 2011, we recorded mark-to-market gains of $33 million and $80 million, respectively, related to contracts that were not designated as hedges in aircraft fuel and related taxes. |
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(2) | Gains (losses) on interest rate swaps reclassified from accumulated other comprehensive loss are recorded in interest expense. |
| |
(3) | Gains (losses) on foreign currency exchange contracts reclassified from accumulated other comprehensive loss are recorded in passenger revenue. |
We perform, at least quarterly, both a prospective and retrospective assessment of the effectiveness of our derivative instruments designated as hedges, including assessing the possibility of counterparty default. If we determine that a derivative is no longer expected to be highly effective, we discontinue hedge accounting prospectively and recognize subsequent changes in the fair value of the hedge in earnings. As a result of our effectiveness assessment at June 30, 2011, we believe our derivative instruments that continue to be designated as hedges, consisting of interest rate swap and foreign currency exchange forward contracts, will continue to be highly effective in offsetting changes in cash flow attributable to the hedged risk.
As of June 30, 2011, we recorded in accumulated other comprehensive loss on the Consolidated Balance Sheet $62 million of net gains on hedge contracts scheduled to settle in the next 12 months.
Hedge Position
The following table reflects the fair value asset (liability) positions of our hedge contracts:
|
| | | | | | | | | | | | | | | | | |
(in millions, unless otherwise stated) | Notional Balance | Maturity Date | Prepaid Expenses and Other Assets | Other Noncurrent Assets | Other Accrued Liabilities | Other Noncurrent Liabilities | Hedge Margin Receivable (Payable), net |
As of June 30, 2011: | | | | | | | |
Designated as hedges | | | | | | | |
Interest rate swaps | $1,066 | August 2011 - May 2019 | $ | — |
| $ | — |
| $ | (31 | ) | $ | (37 | ) | |
Foreign currency exchange forwards | 154.9 billion Japanese yen; 333 million Canadian dollars | July 2011 - January 2014 | 1 |
| 3 |
| (53 | ) | (21 | ) | |
Total designated | | | 1 |
| 3 |
| (84 | ) | (58 | ) | |
Not designated as hedges | | | | | | | |
Fuel hedge three-way collars, swaps, collars and call options | 1.4 billion gallons - Heating oil, Brent, WTI and jet fuel | July 2011 - June 2012 | 201 |
| — |
| (66 | ) | — |
| |
Total derivative instruments | | | $ | 202 |
| $ | 3 |
| $ | (150 | ) | $ | (58 | ) | $ | 9 |
|
As of December 31, 2010: | | | | | | | |
Designated as hedges | | | | | | | |
Fuel hedge swaps, collars and call options | 1.5 billion gallons - WTI | January 2011 - February 2012 | $ | 328 |
| $ | 24 |
| $ | — |
| $ | — |
| |
Interest rate swaps and call options | $1,143 | August 2011 - May 2019 | — |
| — |
| (35 | ) | (39 | ) | |
Foreign currency exchange forwards | 141.1 billion Japanese yen; 233 million Canadian dollars | January 2011 - November 2013 | — |
| — |
| (60 | ) | (36 | ) | |
Total designated | | | 328 |
| 24 |
| (95 | ) | (75 | ) | |
Not designated as hedges | | | | | | | |
Fuel hedge swaps | 192 million gallons - WTl and crude oil products | January 2011 - December 2011 | 27 |
| 14 |
| (19 | ) | (8 | ) | |
Total derivative instruments | | | $ | 355 |
| $ | 38 |
| $ | (114 | ) | $ | (83 | ) | $ | (119 | ) |
As of June 30, 2011, our open fuel hedge position is as follows:
|
| | | | | |
(in millions, unless otherwise stated) | Percentage of Projected Fuel Consumption Hedged | Fair Value at June 30, 2011 |
Six months ending December 31, 2011(1) | 57 | % | $ | 94 |
|
Year ending December 31, 2012 | 7 |
| 41 |
|
Total | | $ | 135 |
|
| |
(1) | 41% of projected fuel consumption is hedged using three-way collars. |
Credit Risk
To manage credit risk associated with our aircraft fuel price, interest rate and foreign currency hedging programs, we select counterparties based on their credit ratings and limit our exposure to any one counterparty. We monitor these programs and our relative market position with each counterparty.
Our hedge contracts contain margin funding requirements, which are driven by changes in the price of the underlying commodity. Our margin funding requirements may require us to post margin to counterparties or may require our counterparties to post margin to us as market prices in the underlying hedge items change. Due to the fair value position of our hedge contracts as of June 30, 2011, we paid $9 million in net hedge margin to counterparties.
NOTE 4. DEBT
Pacific Routes Term Loan Facility due 2016
During the March 2011 quarter, we amended our $250 million first lien term loan facility, which is secured by our Pacific route authorities and certain related assets (the “Pacific Routes Term Loan Facility”), to, among other things, (1) reduce the interest rate, (2) extend the maturity date from September 2013 to March 2016 and (3) modify certain negative covenants and default provisions to be substantially similar to those described below under “Senior Secured Credit Facilities due 2016 and 2017.” The Pacific Routes Term Loan Facility bears interest at a variable rate equal to LIBOR, which shall not be less than 1.25%, or another index rate, in each case plus a specified margin. As of June 30, 2011, the Pacific Routes Term Loan Facility had an interest rate of 4.25% per annum.
Certificates
In February 2011, we completed a $100 million offering of Pass Through Certificates, Series 2010-1B (the “2010-1B EETC”), and a $135 million offering of Pass Through Certificates, Series 2010-2B (the “2010-2B EETC”) through pass through trusts. We received $192 million in net proceeds. The remaining $43 million in proceeds from the 2010-2B EETC offering is being held in escrow until we refinance 10 aircraft currently securing the 2001-1 EETC, which matures in September 2011. Accordingly, we reclassified $43 million of principal related to the 2001-1 EETC from current maturities to long-term debt. The 2010-1B EETC, which is secured by 24 aircraft, bears interest at a fixed rate of 6.375% per year and has a final maturity in January 2016. The 2010-2B EETC, which will be secured by 28 aircraft, bears interest at a fixed rate of 6.75% per year and has a final maturity in November 2015.
In April 2011, we completed a $293 million offering of Pass Through Certificates, Series 2011-1A (the “2011-1A EETC”), through a pass through trust. The proceeds are being held in escrow until we refinance 26 aircraft currently securing the 2001-1 EETC, which matures in September 2011. The 2011-1A EETC bears interest at a fixed rate of 5.3% per year and has a final maturity in April 2019. At June 30, 2011, $273 million of the $293 million principal amount of the 2001-1 EETC is classified as long-term debt.
During the six months ended June 30, 2011, we used $51 million in proceeds, which was previously held in escrow under our 2010-2A EETC, to refinance six aircraft. At June 30, 2011, $489 million was held in escrow under the 2010-2A, 2010-2B and 2011-1A EETCs and was not recorded on the Consolidated Balance Sheet. We have no right to these funds until the equipment notes securing the certificates are issued.
We assessed whether the pass through trusts formed for the certificates are variable interest entities required to be consolidated. We do not have a variable interest in and have not consolidated the related trusts because our only obligation with respect to the trusts is to make interest and principal payments on the equipment notes held by the trusts.
Senior Secured Credit Facilities due 2016 and 2017
In April 2011, we entered into senior secured first-lien credit facilities (the “Senior Secured Credit Facilities”) to borrow up to $2.6 billion. The Senior Secured Credit Facilities consist of a $1.2 billion first-lien revolving credit facility, up to $500 million of which may be used for the issuance of letters of credit (the “Revolving Credit Facility”), and a $1.4 billion first-lien term loan facility (the “Term Loan Facility”). At June 30, 2011, the Term Loan Facility was outstanding and the Revolving Credit Facility was undrawn.
In connection with entering into the Senior Secured Credit Facilities, we retired the outstanding loans under our $2.5 billion senior secured exit financing facilities (due April 2012 and April 2014), and terminated those facilities as well as an existing undrawn $100 million revolving credit facility.
Borrowings under the Term Loan Facility must be repaid annually in an amount equal to 1% of the original principal amount (to be paid in equal quarterly installments). All remaining borrowings under the Term Loan Facility are due in April 2017. Borrowings under the Revolving Credit Facility are due in April 2016. The Senior Secured Credit Facilities bear interest at a variable rate equal to LIBOR, which shall not be less than 1.25%, or another index rate, in each case plus a specified margin. As of June 30, 2011, the Term Loan Facility had an interest rate of 5.5% per annum.
Our obligations under the Senior Secured Credit Facilities are guaranteed by substantially all of our domestic subsidiaries (the “Guarantors”). The Senior Secured Credit Facilities and the related guarantees are secured by liens on certain of our and the Guarantors' assets, including accounts receivable, inventory, flight equipment, ground property and equipment, non-Pacific international routes and domestic slots (the “Collateral”).
The Senior Secured Credit Facilities include affirmative, negative and financial covenants that restrict our ability to, among other things, make investments, sell or otherwise dispose of Collateral if we are not in compliance with the collateral coverage ratio tests described below, pay dividends or repurchase stock. These covenants require us to maintain:
| |
• | a minimum fixed charge coverage ratio (defined as the ratio of (1) earnings before interest, taxes, depreciation, amortization and aircraft rent, and other adjustments to (2) the sum of gross cash interest expense (including the interest portion of our capitalized lease obligations) and cash aircraft rent expense, for successive trailing 12-month periods ending at each quarter-end date through the last maturity date of the Senior Secured Credit Facilities), which minimum ratio is 1.20:1; |
| |
• | not less than $1.0 billion of unrestricted cash, cash equivalents and permitted investments and maintain $2.0 billion of unrestricted cash, cash equivalents and permitted investments plus unused commitments available under the Revolving Credit Facility and any other revolving credit facilities; |
| |
• | a minimum total collateral coverage ratio (defined as the ratio of (1) certain of the Collateral that meets specified eligibility standards to (2) the sum of the aggregate outstanding obligations under the Senior Secured Credit Facilities and the aggregate amount of certain hedging obligations then outstanding (the "Total Obligations")) of 1.67:1 at all times; and |
| |
• | a minimum non-route collateral coverage ratio (defined as the ratio of (1) certain of the Collateral that meets specified eligibility standards other than non-Pacific international routes to (2) the Total Obligations) of 0.75:1 at all times. |
If either of the collateral coverage ratios is not maintained, we must either provide additional collateral to secure our obligations, or we must repay the loans under the Senior Secured Credit Facilities by an amount necessary to maintain compliance with the collateral coverage ratios.
The Senior Secured Credit Facilities contain events of default customary for similar financings, including cross-defaults to other material indebtedness and certain change of control events. The Senior Secured Credit Facilities also include events of default specific to our business, including the suspension of all or substantially all of our flights and operations for more than five consecutive days (other than as a result of a Federal Aviation Administration suspension due to extraordinary events similarly affecting other major U.S. air carriers). Upon the occurrence of an event of default, the outstanding obligations under the Senior Secured Credit Facilities may be accelerated and become due and payable immediately.
Future Maturities
The following table summarizes scheduled maturities of our debt, including current maturities, at June 30, 2011:
|
| | | | | | | | | |
Years Ending December 31, (in millions) | Total Secured and Unsecured Debt | Amortization of Debt Discount, net | |
Six months ending December 31, 2011 | $ | 880 |
| $ | (103 | ) | |
2012 | 1,838 |
| (203 | ) | |
2013 | 1,568 |
| (166 | ) | |
2014 | 2,305 |
| (111 | ) | |
2015 | 1,425 |
| (76 | ) | |
Thereafter | 6,723 |
| (188 | ) | |
Total | $ | 14,739 |
| $ | (847 | ) | $ | 13,892 |
|
Covenants
We were in compliance with all covenants in our financing agreements at June 30, 2011.
NOTE 5. PURCHASE COMMITMENTS AND CONTINGENCIES
Aircraft Purchase Commitments
The following table summarizes our aircraft purchase commitments at June 30, 2011:
|
| | | |
Years Ending December 31, (in millions) | Total |
Six months ending December 31, 2011 | $ | 30 |
|
2012 | 70 |
|
2020 to 2022 | 2,500 |
|
Total | $ | 2,600 |
|
Our aircraft purchase commitments at June 30, 2011 relate to 18 B-787-8 aircraft and 14 previously owned MD-90 aircraft. Our aircraft purchase commitments do not include orders for five A319-100 aircraft and two A320-200 aircraft because we have the right to cancel these orders.
Contract Carrier Agreements
During the six months ended June 30, 2011, we had contract carrier agreements with nine contract carriers, including our wholly-owned subsidiary, Comair. For additional information about our contract carrier agreements, see Note 7 of the Notes to the Consolidated Financial Statements in our Form 10-K.
Contingencies Related to Termination of Contract Carrier Agreements
We may terminate without cause the Chautauqua agreement at any time and the Shuttle America agreement at any time after January 2016 by providing certain advance notice. If we terminate either the Chautauqua or Shuttle America agreements without cause, Chautauqua or Shuttle America, respectively, has the right to (1) assign to us leased aircraft that the airline operates for us, provided we are able to continue the leases on the same terms the airline had prior to the assignment and (2) require us to purchase or lease any aircraft the airline owns and operates for us at the time of the termination. If we are required to purchase aircraft owned by Chautauqua or Shuttle America, the purchase price would be equal to the amount necessary to (1) reimburse Chautauqua or Shuttle America for the equity it provided to purchase the aircraft and (2) repay in full any debt outstanding at such time that is not being assumed in connection with such purchase. If we are required to lease aircraft owned by Chautauqua or Shuttle America, the lease would have (1) a rate equal to the debt payments of Chautauqua or Shuttle America for the debt financing of the aircraft calculated as if 90% of the aircraft was debt financed by Chautauqua or Shuttle America and (2) other specified terms and conditions. Because these contingencies depend on our termination of the agreements without cause prior to their expiration dates, no obligation exists unless such termination occurs.
We estimate that the total fair values, determined as of June 30, 2011, of the aircraft Chautauqua or Shuttle America could assign to us or require that we purchase if we terminate without cause our contract carrier agreements with those airlines (the "Put Right") are approximately $140 million and $430 million, respectively. The actual amount we may be required to pay in these circumstances may be materially different from these estimates. If the Put Right is exercised, we must also pay the exercising carrier 10% interest (compounded monthly) on the equity the carrier provided when it purchased the put aircraft. These equity amounts for Chautauqua and Shuttle America total $25 million and $52 million, respectively.
Legal Contingencies
We are involved in various legal proceedings related to employment practices, environmental issues, antitrust matters and other matters concerning our business. We cannot reasonably estimate the potential loss for certain legal proceedings because, for example, the litigation is in its early stages or the plaintiff does not specify the damages being sought.
Credit Card Processing Agreements
Our VISA/MasterCard and American Express credit card processing agreements provide that no cash reserve ("Reserve") is required, and no withholding of payment related to receivables collected will occur, except in certain circumstances, including when we do not maintain a required level of unrestricted cash. In circumstances in which the credit card processor can establish a Reserve or withhold payments, the amount of the Reserve or payments that may be withheld would be equal to the potential liability of the credit card processor for tickets purchased with VISA/MasterCard or American Express credit cards, as applicable, that had not yet been used for travel. There was no Reserve or amounts withheld as of June 30, 2011 or December 31, 2010.
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, occupancy or construction 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 such 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, which 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.
Employees Under Collective Bargaining Agreements
At June 30, 2011, we had approximately 82,300 full-time equivalent employees. Approximately 16% of these employees were represented by unions.
In connection with efforts to resolve union representation for employee groups where representation has not been resolved following our merger with Northwest Airlines Corporation ("Northwest"), the National Mediation Board (“NMB”) held elections during 2010 for certain employee groups, including flight attendants and fleet service, stores, and passenger service employees. In each case, the employee groups rejected representation by the unions and the unions filed claims with the NMB alleging that we interfered with the elections. While we are vigorously challenging the interference claims, we cannot predict when or how these matters will be resolved for each workgroup.
War-Risk Insurance Contingency
As a result of the terrorist attacks on September 11, 2001, aviation insurers significantly (1) reduced the maximum amount of insurance coverage available to commercial air carriers for liability to persons (other than employees or passengers) for claims from acts of terrorism, war or similar events and (2) increased the premiums for such coverage and for aviation insurance in general. Since September 24, 2001, the U.S. government has been providing U.S. airlines with war-risk insurance to cover losses, including those resulting from terrorism, to passengers, third parties (ground damage) and the aircraft hull. The U.S. Secretary of Transportation has extended coverage through September 30, 2011, and we expect the coverage to be further extended. The withdrawal of government support of airline war-risk insurance would require us to obtain war-risk insurance coverage commercially, if available. Such commercial insurance could have substantially less desirable coverage than currently provided by the U.S. government, may not be adequate to protect our risk of loss from future acts of terrorism, may result in a material increase to our operating expense or may not be obtainable at all, resulting in an interruption to our operations.
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.
NOTE 6. EMPLOYEE BENEFIT PLANS
The following table shows the components of net periodic cost:
|
| | | | | | | | | | | | |
| Pension Benefits | Other Postretirement and Postemployment Benefits |
(in millions) | 2011 | 2010 | 2011 | 2010 |
Three Months Ended June 30 | | | | |
Service cost | $ | — |
| $ | — |
| $ | 13 |
| $ | 15 |
|
Interest cost | 242 |
| 246 |
| 45 |
| 49 |
|
Expected return on plan assets | (181 | ) | (170 | ) | (22 | ) | (23 | ) |
Amortization of prior service benefit | — |
| — |
| (1 | ) | (1 | ) |
Recognized net actuarial loss (gain) | 14 |
| 12 |
| (3 | ) | (1 | ) |
Settlements | — |
| 4 |
| — |
| — |
|
Net periodic cost | $ | 75 |
| $ | 92 |
| $ | 32 |
| $ | 39 |
|
Six Months Ended June 30 | | | | |
Service cost | $ | — |
| $ | — |
| $ | 26 |
| $ | 30 |
|
Interest cost | 484 |
| 492 |
| 90 |
| 98 |
|
Expected return on plan assets | (362 | ) | (339 | ) | (45 | ) | (46 | ) |
Amortization of prior service benefit | — |
| — |
| (1 | ) | (2 | ) |
Recognized net actuarial loss (gain) | 28 |
| 24 |
| (6 | ) | (2 | ) |
Settlements | — |
| 6 |
| — |
| — |
|
Net periodic cost | $ | 150 |
| $ | 183 |
| $ | 64 |
| $ | 78 |
|
NOTE 7. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table shows the components of accumulated other comprehensive loss:
|
| | | | | | | | | | | | |
(in millions) | Pension and Other Benefits Liabilities | Derivative Instruments | Valuation Allowance | Total |
Balance at December 31, 2010 | $ | (2,053 | ) | $ | (312 | ) | $ | (1,213 | ) | $ | (3,578 | ) |
Changes in fair value | — |
| 214 |
| — |
| 214 |
|
Reclassification into earnings | 10 |
| (49 | ) | — |
| (39 | ) |
Tax effect | (4 | ) | (61 | ) | 65 |
| — |
|
Balance at March 31, 2011 | $ | (2,047 | ) | $ | (208 | ) | $ | (1,148 | ) | $ | (3,403 | ) |
Changes in fair value | — |
| (135 | ) | — |
| (135 | ) |
Reclassification into earnings | 8 |
| (63 | ) | — |
| (55 | ) |
Tax effect | (3 | ) | 73 |
| (70 | ) | — |
|
Balance at June 30, 2011 | $ | (2,042 | ) | $ | (333 | ) | $ | (1,218 | ) | $ | (3,593 | ) |
Total other comprehensive income for the three months ended June 30, 2011 and 2010 was $8 million and $116 million, respectively. Total other comprehensive loss for the six months ended June 30, 2011 and 2010 was $135 million and $79 million, respectively.
NOTE 8. RESTRUCTURING AND OTHER ITEMS
The following table shows charges recorded in restructuring and other items on the Consolidated Statements of Operations:
|
| | | | | | | | | | | | |
| Three Months Ended June 30, | Six Months Ended June 30, |
(in millions) | 2011 | 2010 | 2011 | 2010 |
Severance and related costs | $ | 80 |
| $ | — |
| $ | 80 |
| $ | 8 |
|
Facilities and fleet | 64 |
| 36 |
| 71 |
| 36 |
|
Merger-related items | — |
| 46 |
| — |
| 92 |
|
Total restructuring and other items | $ | 144 |
| $ | 82 |
| $ | 151 |
| $ | 136 |
|
Severance and related costs. During the June 2011 quarter, we offered voluntary workforce reduction programs to align staffing with expected future capacity. Approximately 2,000 employees elected to participate in these programs. Charges primarily represent severance costs related to employees who elected to participate in the voluntary programs.
Facilities and fleet. During the June 2011 quarter, we recorded charges related to our facilities consolidation and fleet assessments. Charges recorded in the June 2010 quarter relate to the impairment of retired dedicated freighter aircraft.
Merger-related items. Merger-related items are costs associated with Northwest and the integration of Northwest operations into Delta.
The following table shows the balances and activity for restructuring charges:
|
| | | | | | | | | |
(in millions) | Severance and Related Costs | Facilities and Other | Total |
Balance as of December 31, 2010 | $ | 20 |
| $ | 85 |
| $ | 105 |
|
Additional cost and expenses | 80 |
| — |
| 80 |
|
Payments | (12 | ) | (11 | ) | (23 | ) |
Balance as of June 30, 2011 | $ | 88 |
| $ | 74 |
| $ | 162 |
|
NOTE 9. INCOME TAXES
We recorded an income tax benefit of $75 million for the six months ended June 30, 2011, primarily related to the recognition of alternative minimum tax refunds received for 2008 and 2009.
We consider all income sources, including other comprehensive income, in determining the amount of tax benefit allocated to continuing operations (the “Income Tax Allocation”). For the year ended December 31, 2009, as a result of the Income Tax Allocation, we recorded a non-cash income tax benefit of $321 million on the loss from continuing operations, with an offsetting non-cash income tax expense of $321 million in other comprehensive income. The income tax expense will remain in accumulated other comprehensive loss until all amounts deferred into accumulated other comprehensive loss related to fuel derivatives (while those instruments were designated as accounting hedges) are recognized in the Consolidated Statement of Operations.
NOTE 10. EARNINGS (LOSS) PER SHARE
We calculate basic earnings (loss) per share by dividing the net income (loss) by the weighted average number of common shares outstanding. Shares issuable upon the satisfaction of certain conditions are considered outstanding and included in the computation of basic earnings (loss) per share.
The following table shows the computation of basic and diluted earnings (loss) per share:
|
| | | | | | | | | | | | |
| Three Months Ended June 30, | Six Months Ended June 30, |
(in millions, except per share data) | 2011 | 2010 | 2011 | 2010 |
Net income (loss) | $ | 198 |
| $ | 467 |
| $ | (120 | ) | $ | 211 |
|
| | | | |
Basic weighted average shares outstanding | 838 |
| 834 |
| 838 |
| 833 |
|
Dilutive effects of share based awards | 6 | 8 | — |
| 9 |
Diluted weighted average shares outstanding | 844 | 842 | 838 | 842 |
| | | | |
Basic earnings (loss) per share | $ | 0.24 |
| $ | 0.56 |
| $ | (0.14 | ) | $ | 0.25 |
|
Diluted earnings (loss) per share | $ | 0.23 |
| $ | 0.55 |
| $ | (0.14 | ) | $ | 0.25 |
|
| | | | |
Antidilutive common stock equivalents excluded from diluted earnings (loss) per share | 25 | 23 | 31 | 22 |
During the six months ended June 30, 2011, we issued nine million shares of common stock to settle the remaining bankruptcy claims under Delta's Plan of Reorganization. As of June 30, 2011, one million shares of Delta common stock were reserved for issuance to holders of allowed general, unsecured claims under Northwest's Plan of Reorganization. Delta and Northwest emerged from Chapter 11 in 2007.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 2011 Quarter Financial Highlights
We reported net income of $198 million for the June 2011 quarter, compared to net income of $467 million for the June 2010 quarter. Total operating revenue increased $1.0 billion, primarily due to higher passenger revenues as we were able to adjust ticket prices in response to higher fuel prices. Fuel prices increased 39%, or $1.0 billion, compared to the June 2010 quarter. In addition, our June 2011 quarter results reflect the impact of the March earthquake and tsunami in Japan, which negatively impacted passenger revenue by approximately $125 million.
We ended the June 2011 quarter with $5.6 billion in unrestricted liquidity, consisting of cash and cash equivalents, short-term investments and availability under credit facilities. The liquidity balance reflects cash from operations of $1.0 billion.
Our consolidated operating cost per available seat mile ("CASM") for the June 2011 quarter increased to 14.42 cents compared to 12.46 cents in the June 2010 quarter, primarily reflecting higher fuel costs. CASM, excluding fuel and special items (a non-GAAP financial measure as defined in "Supplemental Information" below), for the June 2011 quarter was 8.46 cents, a 4.8% increase compared to the June 2010 quarter that primarily reflects higher maintenance volumes and higher revenue-related expenses. Our average fuel price for the June 2011 quarter was $3.23 per gallon, compared to $2.32 per gallon for the June 2010 quarter. Our average fuel price adjusted for mark-to-market adjustments for fuel hedges recorded in periods other than the settlement period (a non-GAAP financial measure as defined in “Supplemental Information” below) was $3.22 per gallon for the June 2011 quarter. At June 30, 2011, our fuel hedge portfolio had a fair value asset position of $135 million.
Increases in jet fuel prices and other cost pressures adversely affected our financial results. As previously announced, we are taking the following actions which are intended to mitigate the impact of higher fuel prices on our financial results and to reduce our non-fuel unit costs to 2010 levels by the end of 2011:
| |
• | Adjusting fares in response to higher fuel prices; |
| |
• | Reducing December 2011 quarter system capacity by 4-5% year-over-year, focused in markets where revenues do not cover higher fuel costs. Domestic capacity is expected to decrease 1-3%, which includes reductions at our Memphis hub. International capacity is expected to decrease 4-6%, which includes reductions of 10-12% in our transatlantic capacity. The joint venture partners - Delta, AirFrance-KLM and Alitalia - plan to reduce their combined year-over-year fourth quarter transatlantic capacity by 7-9%; |
| |
• | Retiring 140 of our least efficient aircraft by the end of 2012, including the DC9-50 and regional turboprop fleets and 60 50-seat regional jets, with half of these aircraft to be retired in 2011; |
| |
• | Offering voluntary workforce reduction programs to resize our workforce. Approximately 2,000 employees elected to participate in these programs; and |
| |
• | Consolidating facilities in Atlanta, Minneapolis, Cincinnati and Memphis. |
Fleet Strategy
We continue to focus on investing in our existing fleet, including investments in our domestic mainline aircraft to: (1) add winglets to increase fuel efficiency and (2) expand the first class cabin on certain of our domestic mainline fleet in response to business customer demand. We are also investing in our international transoceanic aircraft to enhance our product by featuring full flat bed seats in BusinessElite and in-seat audio and video in all cabins. In addition, we are making investments in our regional aircraft product to create a consistent experience to offer first class cabins on our 70 and 76 seat regional jets.
Throughout 2010 and in the first six months of 2011, we purchased or leased 25 previously owned MD-90 aircraft at significantly lower ownership and total cost relative to comparable new aircraft. Over the next two to three years, we expect to bring into service 30 to 40 previously owned MD-90 aircraft (including the 25 aircraft described above) to offset a portion of our planned retirement of 140 less efficient aircraft. The retirement of these aircraft is expected to result in maintenance savings beginning in the second half of 2011. We are also evaluating the future replacement needs for our domestic mainline fleet, including seeking to acquire previously owned aircraft or placing an aircraft order to replace less efficient aircraft. If an aircraft order is placed, we would not expect deliveries to begin prior to 2013.
New York Strategy
Strengthening our position in New York City is an important part of our network strategy. As discussed below, key components of this strategy are operating a domestic hub at New York's LaGuardia Airport and creating a state-of-the-art facility at New York's John F. Kennedy International Airport ("JFK").
In May 2011, we entered into a new agreement with US Airways under which (1) Delta would acquire 132 pairs of takeoff and landing rights (each, a "slot pair") at LaGuardia from US Airways and (2) US Airways would acquire from Delta 42 slot pairs at Reagan National and the rights to operate additional daily service to Sao Paulo, Brazil in 2015, and Delta would pay US Airways $66.5 million. In addition, the transaction could result in the divestiture of up to 16 slot pairs at LaGuardia and eight slot pairs at Reagan National to airlines with limited or no service at those airports. The completion of the transaction is subject to certain conditions, including government and regulatory approvals. Our new agreement replaces a 2009 agreement that was approved by the U.S. Department of Transportation, but under terms not acceptable to Delta and US Airways, and never completed.
At JFK, we currently operate domestic flights primarily at Terminal 2, and international flights at Terminal 3 and, to a lesser extent, Terminal 4. During the December 2010 quarter, we began a redevelopment project at JFK that includes the (1) enhancement and expansion of Terminal 4, including the construction of nine new gates; (2) construction of a passenger connector between Terminal 2 and Terminal 4; (3) demolition of the outdated Terminal 3, which was constructed in 1960; and (4) development of the Terminal 3 site for aircraft parking positions. We estimate this project will cost approximately $1.2 billion and will be completed in stages over five years. Upon completion of the Terminal 4 expansion, expected to occur in 2013, we will relocate our operations from Terminal 3 to Terminal 4; proceed with demolition activities in Terminal 3; and thereafter conduct coordinated flight operations from Terminals 2 and 4. Once our project is complete, we expect that passengers will benefit from an enhanced customer experience and improved operational performance, including reduced taxi times and better on-time performance. For additional information, see Note 8 of the Notes to the Consolidated Financial Statements in our Form 10-K.
Results of Operations - June 2011 and 2010 Quarters
Operating Revenue
|
| | | | | | | | | | | |
| Three Months Ended June 30, | | |
(in millions) | 2011 | 2010 | Increase | % Increase |
Passenger: | | | | |
Mainline | $ | 6,207 |
| $ | 5,480 |
| $ | 727 |
| 13 | % |
Regional carriers | 1,684 |
| 1,529 |
| 155 |
| 10 | % |
Total passenger revenue | 7,891 |
| 7,009 |
| 882 |
| 13 | % |
Cargo | 264 |
| 211 |
| 53 |
| 25 | % |
Other | 998 |
| 948 |
| 50 |
| 5 | % |
Total operating revenue | $ | 9,153 |
| $ | 8,168 |
| $ | 985 |
| 12 | % |
|
| | | | | | | | | | | | | | | | |
| | Increase (Decrease) vs. Three Months Ended June 30, 2010 |
(in millions) | Three Months Ended June 30, 2011 | Passenger Revenue | RPMs(1) (Traffic) | ASMs (2) (Capacity) | Passenger Mile Yield | PRASM(3) | Load Factor |
Domestic | $ | 3,475 |
| 12 | % | (1 | )% | — | % | 12 | % | 12 | % | (0.4 | ) | pts |
Atlantic | 1,570 |
| 16 | % | 5 | % | 8 | % | 10 | % | 7 | % | (2.2 | ) | pts |
Pacific | 722 |
| 14 | % | 2 | % | 8 | % | 11 | % | 6 | % | (4.3 | ) | pts |
Latin America | 440 |
| 18 | % | 2 | % | 4 | % | 16 | % | 14 | % | (1.1 | ) | pts |
Total Mainline | 6,207 |
| 13 | % | 1 | % | 3 | % | 12 | % | 10 | % | (1.5 | ) | pts |
Regional carriers | 1,684 |
| 10 | % | (2 | )% | (2 | )% | 12 | % | 12 | % | (0.1 | ) | pts |
Total passenger revenue | $ | 7,891 |
| 13 | % | 1 | % | 2 | % | 12 | % | 10 | % | (1.3 | ) | pts |
| |
(1) | Revenue passenger miles (“RPMs”) |
| |
(2) | Available seat miles (“ASMs”) |
| |
(3) | Passenger revenue per ASM (“PRASM”) |
Mainline Passenger Revenue. Mainline passenger revenue increased primarily due to an improvement in the passenger mile yield from fare increases implemented in response to higher fuel prices.
| |
• | Domestic. Domestic mainline passenger revenue increased 12% due to a 12% improvement in PRASM while capacity remained flat. The improvement in PRASM reflects a higher passenger mile yield driven by fare increases. |
| |
• | International. International mainline passenger revenue increased 16% due to an 8% improvement in PRASM on a 7% capacity increase. Passenger mile yield increased 11%, reflecting increased business and leisure travel and increased fares, including fuel surcharges. Atlantic passenger revenue increased 16% due to a 10% improvement in passenger mile yield on higher capacity. We intend to reduce capacity in the Atlantic market during the second half of the year to align with expected demand. Pacific passenger revenue increased due to an improvement in passenger mile yield and a stronger revenue environment, partially offset by a negative impact of approximately $125 million during the June 2011 quarter from the March earthquake and tsunami in Japan. Latin America passenger revenue benefited from a stronger revenue environment in the June 2011 quarter for both business and leisure travel with higher PRASM and passenger mile yield driven by fare increases. |
Regional carriers. Passenger revenue from regional carriers increased 10% due to a 12% improvement in PRASM on a 2% decline in capacity. Passenger mile yield increased 12%, reflecting fare increases we implemented in response to increased fuel prices.
Cargo. Cargo revenue increased 25% due to a 12% improvement in yield and a 12% increase in volume.
Other. Other revenue increased due to a higher volume of engines repaired for third parties by our aircraft maintenance, repair and overhaul ("MRO") services business.
Operating Expense |
| | | | | | | | | | | |
| Three Months Ended June 30, | Increase (Decrease) | % Increase (Decrease) |
(in millions) | 2011 | 2010 |
Aircraft fuel and related taxes | $ | 2,663 |
| $ | 1,960 |
| $ | 703 |
| 36 | % |
Salaries and related costs | 1,739 |
| 1,702 |
| 37 |
| 2 | % |
Contract carrier arrangements | 1,410 |
| 972 |
| 438 |
| 45 | % |
Aircraft maintenance materials and outside repairs | 485 |
| 395 |
| 90 |
| 23 | % |
Contracted services | 415 |
| 366 |
| 49 |
| 13 | % |
Passenger commissions and other selling expenses | 440 |
| 377 |
| 63 |
| 17 | % |
Depreciation and amortization | 381 |
| 379 |
| 2 |
| 1 | % |
Landing fees and other rents | 320 |
| 324 |
| (4 | ) | (1 | )% |
Passenger service | 181 |
| 165 |
| 16 |
| 10 | % |
Aircraft rent | 74 |
| 101 |
| (27 | ) | (27 | )% |
Profit sharing | 8 |
| 90 |
| (82 | ) | (91 | )% |
Restructuring and other items | 144 |
| 82 |
| 62 |
| 76 | % |
Other | 412 |
| 403 |
| 9 |
| 2 | % |
Total operating expense | $ | 8,672 |
| $ | 7,316 |
| $ | 1,356 |
| 19 | % |
On July 1, 2010, we sold Compass and Mesaba to Trans States and Pinnacle, respectively. Upon the closing of these transactions, we entered into new or amended long-term capacity purchase agreements with Compass, Mesaba, and Pinnacle. Prior to these sales, expenses related to Compass and Mesaba as our wholly-owned subsidiaries were reported in the applicable expense line items. Subsequent to these sales, expenses related to Compass and Mesaba are reported as contract carrier arrangements expense.
Aircraft fuel and related taxes. Aircraft fuel and related taxes increased due to higher average unhedged fuel prices, which increased fuel costs $860 million, and capacity-related consumption increases of $56 million. The increase in aircraft fuel and related taxes was partially offset by $107 million in fuel hedge gains for the June 2011 quarter, compared to $14 million in fuel hedge losses for the June 2010 quarter, and the change in reporting described above due to the transactions involving Compass and Mesaba.
Salaries and related costs. Salaries and related costs increased due to a 4% increase in headcount and pay increases in prior periods to bring employees' pay consistent with industry peers, partially offset by the change in reporting described above due to the transactions involving Compass and Mesaba.
Contract carrier arrangements. Contract carrier arrangements expense increased as a result of the change in reporting described above due to the transactions involving Compass and Mesaba and $170 million in increased fuel costs from higher average fuel prices.
Aircraft maintenance materials and outside repairs. Aircraft maintenance materials and outside repairs increased primarily due to a higher volume of engines repaired for third parties by our MRO services business. This increased volume is also reflected in other revenue as described above.
Passenger commissions and other selling expenses. Passenger commissions and other selling expenses increased primarily due to higher revenue-related expenses, such as credit cards and sales commissions.
Restructuring and other items. Restructuring and other items increased $62 million, primarily due to the following:
| |
• | During the June 2011 quarter, we recorded an $80 million charge primarily related to severance costs associated with voluntary workforce reduction programs offered to align staffing with expected future capacity in which approximately 2,000 employees elected to participate and a $64 million charge related to our facilities consolidation and fleet assessments. |
| |
• | During the June 2010 quarter, we recorded a $46 million charge for merger-related items associated with Northwest and the integration of Northwest operations into Delta and a $36 million charge related to the impairment of retired dedicated freighter aircraft. |
Other (Expense) Income
Other expense, net for the June 2011 quarter was $286 million compared to $384 million for the June 2010 quarter. This change is attributable to the following:
|
| | | |
(in millions) | Favorable (Unfavorable) vs. Three Months Ended June 30, 2010 |
Interest expense, net | $ | 22 |
|
Amortization of debt discount, net | 11 |
|
Loss on extinguishment of debt | (13 | ) |
Mark-to-market adjustments on the ineffective portion of fuel hedge contracts | 46 |
|
Foreign currency exchange rates | 28 |
|
Other | 4 |
|
Total other expense, net | $ | 98 |
|
Income Taxes
We did not record an income tax provision for U.S federal income tax purposes as a result of our income in the June 2011 and 2010 quarters since our deferred tax assets are fully reserved by a valuation allowance.
Results of Operations - Six Months Ended June 30, 2011 and 2010
Operating Revenue
|
| | | | | | | | | | | |
| Six Months Ended June 30, | | |
(in millions) | 2011 | 2010 | Increase | % Increase |
Passenger: | | | | |
Mainline | $ | 11,341 |
| $ | 9,966 |
| $ | 1,375 |
| 14 | % |
Regional carriers | 3,125 |
| 2,849 |
| 276 |
| 10 | % |
Total passenger revenue | 14,466 |
| 12,815 |
| 1,651 |
| 13 | % |
Cargo | 514 |
| 387 |
| 127 |
| 33 | % |
Other | 1,920 |
| 1,814 |
| 106 |
| 6 | % |
Total operating revenue | $ | 16,900 |
| $ | 15,016 |
| $ | 1,884 |
| 13 | % |
|
| | | | | | | | | | | | | | | | |
| | Increase (Decrease) vs. Six Months Ended June 30, 2010 |
(in millions) | Six Months Ended June 30, 2011 | Passenger Revenue | RPMs (Traffic) | ASMs (Capacity) | Passenger Mile Yield | PRASM | Load Factor |
Domestic | $ | 6,376 |
| 11 | % | — | % | 1 | % | 11 | % | 10 | % | (0.9 | ) | pts |
Atlantic | 2,568 |
| 15 | % | 5 | % | 11 | % | 9 | % | 4 | % | (4.3 | ) | pts |
Pacific | 1,476 |
| 23 | % | 7 | % | 13 | % | 15 | % | 8 | % | (5.1 | ) | pts |
Latin America | 921 |
| 14 | % | (3 | )% | (1 | )% | 18 | % | 15 | % | (1.6 | ) | pts |
Total Mainline | 11,341 |
| 14 | % | 2 | % | 5 | % | 12 | % | 9 | % | (2.4 | ) | pts |
Regional carriers | 3,125 |
| 10 | % | (3 | )% | (2 | )% | 13 | % | 11 | % | (1.4 | ) | pts |
Total passenger revenue | $ | 14,466 |
| 13 | % | 1 | % | 4 | % | 12 | % | 9 | % | (2.2 | ) | pts |
Mainline Passenger Revenue. Mainline passenger revenue increased primarily due to an improvement in the passenger mile yield from fare increases implemented in response to higher fuel prices.
| |
• | Domestic. Domestic mainline passenger revenue increased 11% due to a 10% improvement in PRASM on a 1% increase in capacity. The improvement in PRASM reflects higher passenger mile yield driven by fare increases. |
| |
• | International. International mainline passenger revenue increased 17% due to a 7% improvement in PRASM on a 9% capacity increase. Passenger mile yield increased 13%, reflecting increased business and leisure travel and increased fares, including fuel surcharges. Atlantic passenger revenue increased 15% while PRASM increased 4%. We and the industry faced overcapacity, particularly in the March 2011 quarter, which prevented us from increasing ticket prices sufficiently to cover higher fuel prices. We intend to reduce capacity in the Atlantic market during the second half of the year to align with expected demand. Pacific passenger revenue increased as a result of an improvement in passenger mile yield and a stronger revenue environment, partially offset by a negative impact of approximately $160 million from the March earthquake and tsunami in Japan. Latin America passenger revenue benefited from higher passenger mile yield driven by fare increases. |
Regional carriers. Passenger revenue from regional carriers increased 10% due to an 11% improvement in PRASM on a 2% decline in capacity. Passenger mile yield increased 13%, reflecting fare increases we implemented in response to increased fuel prices.
Cargo. Cargo revenue increased 33% due to a 16% improvement in yield and a 15% increase in volume.
Other. Other revenue increased due to a higher volume of engines repaired for third parties by our MRO services business.
Operating Expense |
| | | | | | | | | | | |
| Six Months Ended June 30, | Increase (Decrease) | % Increase (Decrease) |
(in millions) | 2011 | 2010 |
Aircraft fuel and related taxes | $ | 4,829 |
| $ | 3,643 |
| $ | 1,186 |
| 33 | % |
Salaries and related costs | 3,466 |
| 3,374 |
| 92 |
| 3 | % |
Contract carrier arrangements | 2,710 |
| 1,889 |
| 821 |
| 43 | % |
Aircraft maintenance materials and outside repairs | 970 |
| 769 |
| 201 |
| 26 | % |
Contracted services | 840 |
| 758 |
| 82 |
| 11 | % |
Passenger commissions and other selling expenses | 809 |
| 741 |
| 68 |
| 9 | % |
Depreciation and amortization | 757 |
| 764 |
| (7 | ) | (1 | )% |
Landing fees and other rents | 633 |
| 637 |
| (4 | ) | (1 | )% |
Passenger service | 345 |
| 303 |
| 42 |
| 14 | % |
Aircraft rent | 152 |
| 213 |
| (61 | ) | (29 | )% |
Profit sharing | 8 |
| 90 |
| (82 | ) | (91 | )% |
Restructuring and other items | 151 |
| 136 |
| 15 |
| 11 | % |
Other | 841 |
| 779 |
| 62 |
| 8 | % |
Total operating expense | $ | 16,511 |
| $ | 14,096 |
| $ | 2,415 |
| 17 | % |
On July 1, 2010, we sold Compass and Mesaba to Trans States and Pinnacle, respectively. Upon the closing of these transactions, we entered into new or amended long-term capacity purchase agreements with Compass, Mesaba, and Pinnacle. Prior to these sales, expenses related to Compass and Mesaba as our wholly-owned subsidiaries were reported in the applicable expense line items. Subsequent to these sales, expenses related to Compass and Mesaba are reported as contract carrier arrangements expense.
Aircraft fuel and related taxes. Aircraft fuel and related taxes increased due to higher average unhedged fuel prices, which increased fuel costs $1.4 billion, and capacity-related consumption increases of $159 million. The increase in aircraft fuel and related taxes was partially offset by $214 million in fuel hedge gains for the six months ended June 30, 2011, compared to $26 million in fuel hedge losses for the six months ended June 30, 2010, and the change in reporting described above due to the transactions involving Compass and Mesaba.
Salaries and related costs. Salaries and related costs increased due to a 4% increase in headcount and pay increases to bring employees' pay consistent with industry peers, partially offset by the change in reporting described above due to the transactions involving Compass and Mesaba.
Contract carrier arrangements. Contract carrier arrangements expense increased as a result of the change in reporting described above due to the transactions involving Compass and Mesaba and $290 million in increased fuel costs from higher average fuel prices.
Aircraft maintenance materials and outside repairs. Aircraft maintenance materials and outside repairs increased primarily due to a higher volume of engines repaired for third parties by our MRO services business. This increased volume is also reflected in other revenue as described above.
Restructuring and other items. Restructuring and other items increased $15 million, primarily due to the following:
| |
• | During the six months ended June 30, 2011, we recorded an $80 million charge primarily related to severance costs associated with voluntary workforce reduction programs offered to align staffing with expected future capacity in which approximately 2,000 employees elected to participate and a $71 million charge related to our facilities consolidation and fleet assessments. |
| |
• | During the six months ended June 30, 2010, we recorded a $92 million charge for merger-related items associated with Northwest and the integration of Northwest operations into Delta and a $36 million charge related to the impairment of retired dedicated freighter aircraft. |
Other (Expense) Income
Other expense, net for the six months ended June 30, 2011 was $584 million compared to $698 million for the six months ended June 30, 2010. This change is attributable to the following:
|
| | | |
(in millions) | Favorable (Unfavorable) vs. Six Months Ended June 30, 2010 |
Interest expense, net | $ | 47 |
|
Amortization of debt discount, net | 24 |
|
Loss on extinguishment of debt | (33 | ) |
Foreign currency exchange rates | 42 |
|
Mark-to-market adjustments on the ineffective portion of fuel hedge contracts | 27 |
|
Other | 7 |
|
Total other expense, net | $ | 114 |
|
Income Taxes
During the six months ended June 30, 2011, we recorded an income tax benefit of $75 million, primarily related to the recognition of alternative minimum tax refunds received for 2008 and 2009. We did not record an income tax provision for U.S. federal income tax purposes as a result of our income for the six months ended June 30, 2011 and 2010 since our deferred tax assets are fully reserved by a valuation allowance.
Operating Statistics
The following table sets forth our operating statistics:
|
| | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | Six Months Ended June 30, |
| 2011 | 2010 | 2011 | 2010 |
Consolidated(1): | | | | | | | | |
Revenue passenger miles (millions) | 50,366 | | 49,894 | | 93,295 | | 92,261 | |
Available seat miles (millions) | 60,141 | | 58,698 | | 116,360 | | 111,999 | |
Passenger mile yield | 15.67 |
| ¢ | 14.05 |
| ¢ | 15.51 |
| ¢ | 13.89 |
| ¢ |
Passenger revenue per available seat mile | 13.12 |
| ¢ | 11.94 |
| ¢ | 12.43 |
| ¢ | 11.44 |
| ¢ |
Operating cost per available seat mile | 14.42 |
| ¢ | 12.46 |
| ¢ | 14.19 |
| ¢ | 12.59 |
| ¢ |
Passenger load factor | 83.7 |
| % | 85.0 |
| % | 80.2 |
| % | 82.4 |
| % |
Fuel gallons consumed (millions) | 992 | | 965 | | 1,911 | | 1,836 | |
Average price per fuel gallon, net of hedging activity | $ | 3.23 |
| | $ | 2.32 |
| | $ | 3.05 |
| | $ | 2.28 |
| |
Full-time equivalent employees, end of period | 82,347 | | 81,916 | | 82,347 | | 81,916 | |
Mainline: | | | | | | | | |
Revenue passenger miles (millions) | 43,988 | | 43,398 | | 81,366 | | 79,929 | |
Available seat miles (millions) | 52,221 | | 50,642 | | 100,860 | | 96,252 | |
Operating cost per available seat mile | 13.29 |
| ¢ | 11.47 |
| ¢ | 13.03 |
| ¢ | 11.54 |
| ¢ |
Fuel gallons consumed (millions) | 809 | | 782 | | 1,553 | | 1,479 | |
Average price per fuel gallon, net of hedging activity | $ | 3.19 |
| | $ | 2.32 |
| | $ | 3.01 |
| | $ | 2.27 |
| |
| |
(1) | Includes the operations of our contract carriers under capacity purchase agreements, except full-time equivalent employees which excludes employees of contract carriers that we do not own. |
Fleet Information
Our active aircraft fleet, commitments, options and rolling options at June 30, 2011 are summarized in the following table:
|
| | | | | | | | | | | | | | | | |
| Current Fleet(1)(2) | | | |
Aircraft Type | Owned | Capital Lease | Operating Lease | Total | Average Age | Commitments(3) | Options(4) | Rolling Options(4) |
B-737-700 | 10 |
| — |
| — |
| 10 |
| 2.4 |
| — |
| — |
| — |
|
B-737-800 | 73 |
| — |
| — |
| 73 |
| 10.4 |
| — |
| 60 |
| 66 |
|
B-747-400 | 4 |
| 8 |
| 3 |
| 15 |
| 18.0 |
| — |
| — |
| — |
|
B-757-200 | 93 |
| 41 |
| 33 |
| 167 |
| 18.4 |
| — |
| — |
| — |
|
B-757-300 | 16 |
| — |
| — |
| 16 |
| 8.3 |
| — |
| — |
| — |
|
B-767-300 | 9 |
| 2 |
| 5 |
| 16 |
| 20.4 |
| — |
| — |
| — |
|
B-767-300ER | 50 |
| 4 |
| 4 |
| 58 |
| 15.2 |
| — |
| 5 |
| — |
|
B-767-400ER | 21 |
| — |
| — |
| 21 |
| 10.3 |
| — |
| 9 |
| — |
|
B-777-200ER | 8 |
| — |
| — |
| 8 |
| 11.4 |
| — |
| — |
| — |
|
B-777-200LR | 10 |
| — |
| — |
| 10 |
| 2.2 |
| — |
| 12 |
| — |
|
B-787-8 | — |
| — |
| — |
| — |
| — |
| 18 |
| — |
| — |
|
A319-100 | 55 |
| — |
| 2 |
| 57 |
| 9.4 |
| — |
| — |
| — |
|
A320-200 | 41 |
| — |
| 28 |
| 69 |
| 16.3 |
| — |
| — |
| — |
|
A330-200 | 11 |
| — |
| — |
| 11 |
| 6.2 |
| — |
| — |
| — |
|
A330-300 | 21 |
| — |
| — |
| 21 |
| 5.8 |
| — |
| — |
| — |
|
MD-88 | 66 |
| 51 |
| — |
| 117 |
| 21.0 |
| — |
| — |
| — |
|
MD-90 | 26 |
| — |
| — |
| 26 |
| 14.8 |
| 14 |
| 7 |
| — |
|
DC9-50 | 32 |
| — |
| — |
| 32 |
| 33.3 |
| — |
| — |
| — |
|
CRJ-100 | 16 |
| 13 |
| 17 |
| 46 |
| 13.3 |
| — |
| — |
| — |
|
CRJ-200 | — |
| — |
| 2 |
| 2 |
| 16.1 |
| — |
| — |
| — |
|
CRJ-700 | 15 |
| — |
| — |
| 15 |
| 7.6 |
| — |
| — |
| — |
|
CRJ-900 | 13 |
| — |
| — |
| 13 |
| 3.6 |
| — |
| — |
| — |
|
Embraer 175 | — |
| — |
| — |
| — |
| — |
| — |
| 36 |
| — |
|
Total Aircraft | 590 |
| 119 |
| 94 |
| 803 |
| 15.4 |
| 32 |
| 129 |
| 66 |
|
| |
(1) | Excludes all grounded aircraft, including seven DC9, ten SAAB 340B+ and 15 CRJ-100/200 aircraft that were grounded during the six months ended June 30, 2011. |
(2) Excludes 179 CRJ-200, 51 CRJ-900, 39 Embraer 170/175, 16 SAAB 340+ and 12 CRJ-700 aircraft, which we own or lease and which are operated by third party contract carriers on our behalf. These aircraft are included in the third party contract carriers table below.
(3) Excludes our orders for five A319-100 and two A320-200 aircraft because we have the right to cancel these orders.
(4) Aircraft options have scheduled delivery slots, while rolling options replace options and are assigned delivery slots as options expire or are exercised.
During the six months ended June 30, 2011 we:
| |
• | Purchased seven previously owned MD-90 aircraft; and |
| |
• | Leased four MD-90 and one B-757-200 aircraft. |
These aircraft are not included in the table above because they were not yet in service as of June 30, 2011.
The following table summarizes the aircraft fleet operated by third party contract carriers on our behalf at June 30, 2011:
|
| | | | | | | | | | | | | | | | |
| Fleet Type | |
Carrier | CRJ-200 | CRJ-700 | CRJ-900 | ERJ-145 | Embraer 170 | Embraer 175 | SAAB 340+ | Total |
Atlantic Southeast Airlines, Inc. | 99 |
| 46 |
| 10 |
| — |
| — |
| — |
| — |
| 155 |
|
Pinnacle | 123 |
| — |
| 16 |
| — |
| — |
| — |
| — |
| 139 |
|
SkyWest Airlines, Inc. | 56 |
| 17 |
| 21 |
| — |
| — |
| — |
| — |
| 94 |
|
Chautauqua Airlines, Inc. | — |
| — |
| — |
| 24 |
| — |
| — |
| — |
| 24 |
|
Compass | — |
| — |
| — |
| — |
| 2 |
| 36 |
| — |
| 38 |
|
Mesaba | 21 |
| — |
| 41 |
| — |
| — |
| — |
| 16 |
| 78 |
|
Shuttle America Corporation | — |
| — |
| — |
| — |
| 3 |
| 16 |
| — |
| 19 |
|
Total | 299 |
| 63 |
| 88 |
| 24 |
| 5 |
| 52 |
| 16 |
| 547 |
|
Financial Condition and Liquidity
We expect to meet our cash needs for the next 12 months from cash flows from operations, cash and cash equivalents, short-term investments and financing arrangements. As of June 30, 2011, we had $5.6 billion in unrestricted liquidity, including $1.8 billion in availability under credit facilities. At June 30, 2011, total debt and capital leases, including current maturities, was $14.7 billion, a $591 million reduction from December 31, 2010. Our ability to obtain additional financing, if needed, on acceptable terms could be adversely affected by the fact that substantially all of our assets are subject to liens.
Liquidity and Financing Events
Liquidity and financing events since December 31, 2010 included the following (see also Note 4 to the Condensed Consolidated Financial Statements for additional information):
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• | 2010-1B EETC. We completed a $100 million offering of Pass Through Certificates, Series 2010-1B (the “2010-1B EETC”), through a pass through trust. The 2010-1B EETC, which is secured by 24 aircraft, bears interest at a fixed rate of 6.375% per year and has a final maturity in January 2016. |
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• | 2010-2B EETC. We completed a $135 million offering of Pass Through Certificates, Series 2010-2B (the “2010-2B EETC”), through a pass through trust. We received $92 million in net proceeds. The remaining $43 million is being held in escrow until we refinance 10 aircraft currently securing our 2001-1 EETC that matures in September 2011. The 2010-2B EETC, which will be secured by 28 aircraft, bears interest at a fixed rate of 6.75% per year and has a final maturity in November 2015. |
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• | Pacific Routes Term Loan Facility. We amended our $250 million first-lien term loan facility (the "Pacific Routes Term Loan Facility") to, among other things, reduce the interest rate and extend the maturity date from September 2013 to March 2016. At June 30, 2011, the Pacific Routes Term Loan Facility had an interest rate of 4.25% per annum. |
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• | 2011-1A EETC. We completed a $293 million offering of Pass Through Certificates, Series 2011-1A (the “2011-1A EETC”), through a pass through trust. The proceeds are being held in escrow until we refinance 26 aircraft currently securing our 2001-1 EETC, which matures in September 2011. The 2011-1A EETC bears interest at a fixed rate of 5.3% per year and has a final maturity in April 2019. |
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• | Senior Secured Credit Facilities. We entered into senior secured first-lien credit facilities (the "Senior Secured Credit Facilities") to borrow up to $2.6 billion. In connection with entering into the Senior Secured Credit Facilities, we retired outstanding loans under our $2.5 billion senior secured exit financing facilities and terminated those facilities and an existing $100 million revolving credit facility. The Senior Secured Credit Facilities bear interest at a variable rate equal to LIBOR, which shall not be less than 1.25%, or another index rate, in each case plus a specified margin and have final maturities in April 2016 and 2017. At June 30, 2011, the outstanding balances under the Senior Secured Credit Facilities had an interest rate of 5.5% per annum. |
Sources and Uses of Cash
Cash Flows From Operating Activities
Cash provided by operating activities totaled $1.8 billion for the six months ended June 30, 2011, primarily reflecting a $1.2 billion increase in advance ticket sales for peak season travel and $1.1 billion in net income after adjusting for items such as depreciation and amortization. Cash provided by operating activities for the six months ended June 30, 2011 was reduced by $313 million in profit sharing payments for 2010.
Cash provided by operating activities totaled $2.0 billion for the six months ended June 30, 2010, primarily reflecting (1) a $1.5 billion increase in advance ticket sales primarily for peak season travel, (2) $487 million in net income after adjusting for items such as depreciation and amortization and (3) a $455 million increase in accounts payable and accrued liabilities primarily related to increased operations due to seasonality and the improving economy. Cash provided by operating activities for the six months ended June 30, 2010 was partially offset by (1) a $285 million increase in accounts receivable associated with advance ticket sales and the timing of settlements and (2) a $179 million decrease in frequent flyer liability.
Cash Flows From Investing Activities
Cash used in investing activities totaled $874 million for the six months ended June 30, 2011, primarily reflecting investments of (1) $481 million for flight equipment, primarily aircraft modifications, including investments in full flat bed seats in BusinessElite and in-seat audio and video entertainment systems, and parts, (2) $229 million in net purchases of short-term investments and (3) $172 million for ground property and equipment. Included in flight equipment acquisitions are seven previously owned MD-90 aircraft.
Cash used in investing activities totaled $555 million for the six months ended June 30, 2010, primarily reflecting investments of $449 million for flight equipment and $75 million for ground property and equipment. Included in flight equipment acquisitions are seven previously owned MD-90 aircraft, four previously leased B-757-200 and two B-777-200LR aircraft.
Cash Flows From Financing Activities
Cash used in financing activities totaled $937 million for the six months ended June 30, 2011, reflecting the repayment of $1.0 billion in long-term debt and capital lease obligations, partially offset by $245 million in proceeds from aircraft financing. We also refinanced the loans under the $2.5 billion senior secured exit financing facilities as discussed above.
Cash used in financing activities totaled $1.6 billion for the six months ended June 30, 2010, reflecting the repayment of $1.6 billion in long-term debt and capital lease obligations, including repayment of $914 million of our Exit Revolving Facility.
Critical Accounting Policies and Estimates
For information regarding our Critical Accounting Estimates, see the “Critical Accounting Policies and Estimates” section of “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Form 10-K.
Recent Accounting Standards
Revenue Arrangements with Multiple Deliverables
In October 2009, the Financial Accounting Standards Board ("FASB") issued "Revenue Arrangements with Multiple Deliverables." The standard (1) revises guidance on when individual deliverables may be treated as separate units of accounting, (2) establishes a selling price hierarchy for determining the selling price of a deliverable, (3) eliminates the residual method for revenue recognition and (4) provides guidance on allocating consideration among separate deliverables. This guidance applies only to contracts entered into or materially modified after December 31, 2010. We adopted this standard on a prospective basis beginning January 1, 2011. The adoption of this standard did not have a material impact on the timing of revenue recognition or its allocation.
We determined that the only revenue arrangements impacted by the adoption of this standard are those associated with our frequent flyer program (the "SkyMiles Program"). The SkyMiles Program includes two types of transactions that are considered revenue arrangements with multiple deliverables. As discussed below, these are (1) passenger ticket sales earning mileage credits and (2) the sale of mileage credits to participating companies with which we have marketing agreements. Mileage credits are a separate unit of accounting as they can be redeemed by customers in future periods for air travel on Delta and participating airlines, membership in our Sky Club and other program awards.
Passenger Ticket Sales Earning Mileage Credits. The SkyMiles Program allows customers to earn mileage credits by flying on Delta, regional air carriers with which we have contract carrier agreements and airlines that participate in the SkyMiles Program. We applied the new standard to passenger ticket sales earning mileage credits under our SkyMiles Program, as we provide the customers with two deliverables: (1) mileage credits earned and (2) air transportation. The new guidance requires us to value each component of the arrangement on a standalone basis. Our estimate of the standalone selling price of a mileage credit is based on an analysis of sales of mileage credits to other airlines. We use established ticket prices to determine the standalone selling price of air transportation. Under the new guidance, we allocate the total amount collected from passenger ticket sales between the deliverables based on their relative selling prices.
We continue to defer revenue from the mileage credit component of passenger ticket sales and recognize it as passenger revenue when miles are redeemed and services are provided. We also continue to record the portion of the passenger ticket sales for air transportation in air traffic liability and recognize these amounts in passenger revenue when we provide transportation or when the ticket expires unused.
Sale of Mileage Credits. Customers may earn mileage credits through 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 as a part of these marketing agreements have two deliverables: (1) the mileage credits sold and (2) the marketing component. Our most significant contract to sell mileage credits relates to our co-brand credit card relationship with American Express. The guidance does not apply to our existing contract with American Express or other contracts to sell mileage credits unless those contracts are materially modified. Therefore, we continue to use the residual method for revenue recognition and value only the mileage credits. Under the residual method, the portion of the revenue from the mileage component is deferred and recognized as passenger revenue when miles are redeemed and services are provided. The portion of the revenue received in excess of the fair value of mileage credits sold is recognized in income as other revenue when the related marketing services are provided. We determine the value of a mileage credit based on an analysis of sales of mileage credits to other airlines.
If we enter into new contracts or materially modify existing contracts to sell mileage credits related to our SkyMiles Program, we will value the standalone selling price of the marketing component and allocate the revenue from the contract based on the relative selling price of the mileage credits and the marketing component. This could impact our deferral rate or cause an adjustment to our deferred revenue balance, in the case of a modification, which could materially impact our future financial results.
Fair Value Measurement and Disclosure Requirements
In May 2011, the FASB issued "Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs." The standard revises guidance for fair value measurement and expands the disclosure requirements. It is effective for fiscal years beginning after December 15, 2011. We are currently evaluating the impact that the adoption of this standard will have on our Consolidated Financial Statements.
Presentation of Comprehensive Income
In June 2011, the FASB issued "Presentation of Comprehensive Income." The standard revises guidance for the presentation and prominence of the items reported in other comprehensive income. It is effective for fiscal years beginning after December 15, 2011. We are currently evaluating the impact that the adoption of this standard will have on our Consolidated Financial Statements.
Supplemental Information
We sometimes use information that is derived from the Condensed Consolidated Financial Statements, but that is not presented in accordance with accounting principles generally accepted in the U.S. (“GAAP”). Certain of this information is considered to be “non-GAAP financial measures” under the U.S. Securities and Exchange Commission rules. The non-GAAP financial measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for or superior to GAAP results.
The following tables show reconciliations of non-GAAP financial measures to the corresponding GAAP financial measures. We exclude the following items from CASM:
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• | Aircraft fuel and related taxes. Management believes the volatility in fuel prices impacts the comparability of year-over-year financial performance. |
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• | Ancillary businesses. Ancillary businesses are not related to the generation of a seat mile. These businesses include aircraft maintenance and staffing services we provide to third parties and our vacation wholesale operations. |
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• | Profit sharing. Management believes the exclusion of this item provides a more meaningful comparison of our results to the airline industry and our prior year results. |
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• | Restructuring and other items. Management believes the exclusion of this item is helpful to investors to evaluate our recurring operational performance. |
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• | Mark-to-market ("MTM") adjustments. Management believes the adjustment of this item is helpful to evaluate our financial results related to operations in the period shown. |
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| Three Months Ended June 30, |
| 2011 | 2010 |