March 2016
Quarter Financial Highlights
Our pre-tax income for the
March 2016
quarter was
$1.4 billion
, representing a
$248 million
increase compared to the corresponding prior year period predominantly as a result of lower fuel prices and strong corporate demand, partially offset by higher salaries and related costs and profit sharing. Pre-tax income, adjusted for special items (a non-GAAP financial measure), increased
$966 million
, to
$1.6 billion
. Special items were primarily related to hedge mark-to-market ("MTM") adjustments and settlements, which totaled
$155 million
in the March 2016 quarter and
$589 million
in the March 2015 quarter.
Revenue.
Our operating revenue decreased
$137 million
, or
1.5%
, compared to the
March 2015
quarter resulting from the impact of U.S. dollar strength on tickets sold in international markets, which are predominantly priced in local currency. These factors were mitigated by our targeted capacity actions and other commercial initiatives as load factor was
0.4 points
higher than the prior year quarter at
82.1%
. Passenger revenue per available seat mile ("PRASM") decreased
4.6%
on
2.7%
higher capacity for the same reasons as operating revenue and as a result of volatility in the domestic close-in yield environment.
Operating Expense.
Total operating expense decreased
$279 million
from the
March 2015
quarter driven by lower fuel prices, partially offset by higher salaries and related costs and profit sharing. During the March 2016 quarter, Brent crude oil averaged $34 per barrel, which is significantly lower than the average of $54 per barrel during the March 2015 quarter. Salaries and related costs were higher as a result of pay rate increases implemented subsequent to the
March 2015
quarter.
Our consolidated operating cost per available seat mile ("CASM") for the
March 2016
quarter decreased
6.1%
to
13.26 cents
from
14.12 cents
in the
March 2015
quarter, on a
2.7%
increase in capacity, primarily due to lower fuel prices. Non-fuel unit costs ("CASM-Ex, including profit sharing," a non-GAAP financial measure) increased
4.5%
to
10.33 cents
compared to the
March 2015
quarter principally due to pay rate increases, profit sharing and enhancements to our products and operations, which are partially offset by the impact of U.S. dollar strength on costs incurred in other currencies and cost savings resulting from our domestic fleet restructuring initiatives.
The non-GAAP financial measures for pre-tax income, adjusted for special items and CASM-Ex, including profit sharing are defined and reconciled in "Supplemental Information" below.
Results of Operations -
Three Months Ended
March 31, 2016
and
2015
Operating Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
Increase (Decrease)
|
% Increase (Decrease)
|
(in millions)
|
2016
|
2015
|
Passenger:
|
|
|
|
|
Mainline
|
$
|
6,444
|
|
$
|
6,549
|
|
$
|
(105
|
)
|
(1.6
|
)%
|
Regional carriers
|
1,318
|
|
1,374
|
|
(56
|
)
|
(4.1
|
)%
|
Total passenger revenue
|
7,762
|
|
7,923
|
|
(161
|
)
|
(2.0
|
)%
|
Cargo
|
162
|
|
217
|
|
(55
|
)
|
(25.3
|
)%
|
Other
|
1,327
|
|
1,248
|
|
79
|
|
6.3
|
%
|
Total operating revenue
|
$
|
9,251
|
|
$
|
9,388
|
|
$
|
(137
|
)
|
(1.5
|
)%
|
Passenger Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
vs. Three Months Ended March 31, 2015
|
(in millions)
|
Three Months Ended March 31, 2016
|
Passenger Revenue
|
RPMs
(1)
(Traffic)
|
ASMs
(2)
(Capacity)
|
Passenger Mile Yield
|
PRASM
(3)
|
Load Factor
|
Mainline
|
$
|
4,211
|
|
3.2
|
%
|
7.2
|
%
|
8.0
|
%
|
(3.7
|
)%
|
(4.4
|
)%
|
(0.6
|
)
|
pts
|
Regional carriers
|
1,318
|
|
(4.1
|
)%
|
0.5
|
%
|
0.1
|
%
|
(4.5
|
)%
|
(4.2
|
)%
|
0.2
|
|
pts
|
Domestic
|
5,529
|
|
1.4
|
%
|
6.0
|
%
|
6.5
|
%
|
(4.4
|
)%
|
(4.8
|
)%
|
(0.3
|
)
|
pts
|
Atlantic
|
919
|
|
(9.7
|
)%
|
(3.4
|
)%
|
(3.5
|
)%
|
(6.6
|
)%
|
(6.4
|
)%
|
0.1
|
|
pts
|
Pacific
|
637
|
|
(13.9
|
)%
|
(5.1
|
)%
|
(9.0
|
)%
|
(9.2
|
)%
|
(5.3
|
)%
|
3.6
|
|
pts
|
Latin America
|
677
|
|
(4.8
|
)%
|
6.8
|
%
|
4.8
|
%
|
(10.8
|
)%
|
(9.2
|
)%
|
1.5
|
|
pts
|
Total
|
$
|
7,762
|
|
(2.0
|
)%
|
3.3
|
%
|
2.7
|
%
|
(5.1
|
)%
|
(4.6
|
)%
|
0.4
|
|
pts
|
|
|
(1)
|
Revenue passenger miles (“RPMs”)
|
|
|
(2)
|
Available seat miles (“ASMs”)
|
|
|
(3)
|
Passenger revenue per ASM (“PRASM”)
|
Passenger revenue decreased
$161 million
, or
2.0%
, compared to the
March 2015
quarter. PRASM decreased
4.6%
and passenger mile yield decreased
5.1%
on
2.7%
higher capacity. Load factor was
0.4 points
higher than the prior year quarter at
82.1%
.
Unit revenues of the mainline domestic region and regional carriers decreased
4.4%
and
4.2%
, respectively, resulting from volatility in the close-in yield environment, which was partially offset by strong corporate demand and other commercial initiatives.
Revenues related to our international regions decreased
9.5%
year-over-year primarily due to the continued strength of the U.S. dollar, reductions in international fuel surcharges and economic challenges in certain regions. We continue to address these challenges by adjusting capacity to meet demand.
In the Atlantic, the unit revenue decline predominantly resulted from the strength of the U.S. dollar. In core European markets, U.S. point-of-sale demand was strong and recovered quickly following the events in Brussels. However, Europe point-of-sale demand has been softer largely due to the weak Euro.
Unit revenue declines in the Pacific primarily resulted from the strength of the U.S. dollar and lower international fuel surcharges, although we expect currency headwinds to moderate during 2016 if the Japanese Yen remains stable following its recent strengthening. We continued to optimize the Pacific region in order to improve margins by reducing our capacity
9.0%
during the March 2016 quarter.
Unit revenues declined in Latin America principally as a result of economic challenges in Brazil. We continued to address unit revenue declines by investing in higher performing markets such as Mexico and the Caribbean, while reducing capacity by nearly 25% in Brazil during the March 2016 quarter.
Cargo Revenue.
Cargo revenue decreased
$55 million
, or
25.3%
, primarily due to weaker international demand compared to the
March 2015
quarter.
Other Revenue.
Other revenue increased
$79 million
, or
6.3%
, primarily due to loyalty program revenues and settlements associated with our transatlantic joint venture agreements.
Operating Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
Increase (Decrease)
|
% Increase (Decrease)
|
(in millions)
|
2016
|
2015
|
Salaries and related costs
|
$
|
2,311
|
|
$
|
2,092
|
|
$
|
219
|
|
10.5
|
%
|
Aircraft fuel and related taxes
|
1,227
|
|
1,835
|
|
(608
|
)
|
(33.1
|
)%
|
Regional carriers expense
|
1,006
|
|
1,053
|
|
(47
|
)
|
(4.5
|
)%
|
Depreciation and amortization
|
486
|
|
470
|
|
16
|
|
3.4
|
%
|
Contracted services
|
476
|
|
441
|
|
35
|
|
7.9
|
%
|
Aircraft maintenance materials and outside repairs
|
449
|
|
452
|
|
(3
|
)
|
(0.7
|
)%
|
Passenger commissions and other selling expenses
|
388
|
|
386
|
|
2
|
|
0.5
|
%
|
Landing fees and other rents
|
348
|
|
373
|
|
(25
|
)
|
(6.7
|
)%
|
Profit sharing
|
272
|
|
136
|
|
136
|
|
100.0
|
%
|
Passenger service
|
189
|
|
190
|
|
(1
|
)
|
(0.5
|
)%
|
Aircraft rent
|
66
|
|
60
|
|
6
|
|
10.0
|
%
|
Other
|
493
|
|
502
|
|
(9
|
)
|
(1.8
|
)%
|
Total operating expense
|
$
|
7,711
|
|
$
|
7,990
|
|
$
|
(279
|
)
|
(3.5
|
)%
|
Salaries and Related Costs.
The increase in salaries and related costs is primarily due to pay rate increases implemented in 2015. In the December 2015 quarter, base pay rates increased 14.5% for eligible merit, ground and flight attendant employees, in conjunction with changes in the profit sharing program.
Aircraft Fuel and Related Taxes.
Including our regional carriers, fuel expense decreased
$705 million
compared to the prior year quarter due to a 39% decrease in the market price per gallon of fuel and reduced fuel hedge losses, partially offset by losses from our refinery segment and a
1.3%
increase in consumption. The table below presents fuel expense including our regional carriers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
Increase (Decrease)
|
% Increase (Decrease)
|
(in millions)
|
2016
|
2015
|
Aircraft fuel and related taxes
(1)
|
$
|
1,227
|
|
$
|
1,835
|
|
$
|
(608
|
)
|
|
Aircraft fuel and related taxes included within regional carriers expense
|
167
|
|
264
|
|
(97
|
)
|
|
Total fuel expense
|
$
|
1,394
|
|
$
|
2,099
|
|
$
|
(705
|
)
|
(33.6
|
)%
|
|
|
(1)
|
Includes the impact of fuel hedging and refinery results described further in the table below.
|
The table below shows the impact of hedging and the refinery on fuel expense and average price per gallon, adjusted (non-GAAP financial measures):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Price Per Gallon
|
|
Three Months Ended March 31,
|
Change
|
Three Months Ended March 31,
|
Change
|
(in millions, except per gallon data)
|
2016
|
2015
|
2016
|
2015
|
Fuel purchase cost
(1)
|
$
|
1,093
|
|
$
|
1,718
|
|
$
|
(625
|
)
|
$
|
1.18
|
|
$
|
1.87
|
|
$
|
(0.69
|
)
|
Airline segment fuel hedge losses
(2)
|
273
|
|
467
|
|
(194
|
)
|
0.29
|
|
0.51
|
|
(0.22
|
)
|
Refinery segment impact
(2)
|
28
|
|
(86
|
)
|
114
|
|
0.03
|
|
(0.09
|
)
|
0.12
|
|
Total fuel expense
|
$
|
1,394
|
|
$
|
2,099
|
|
$
|
(705
|
)
|
$
|
1.50
|
|
$
|
2.29
|
|
$
|
(0.79
|
)
|
MTM adjustments and settlements
(3)
|
(155
|
)
|
589
|
|
(744
|
)
|
(0.17
|
)
|
0.64
|
|
(0.81
|
)
|
Total fuel expense, adjusted
|
$
|
1,239
|
|
$
|
2,688
|
|
$
|
(1,449
|
)
|
$
|
1.33
|
|
$
|
2.93
|
|
$
|
(1.60
|
)
|
|
|
(1)
|
Market price for jet fuel at airport locations, including related taxes and transportation costs.
|
|
|
(2)
|
Includes the impact of pricing arrangements between the airline and refinery segments with respect to the refinery's inventory price risk.
For additional information regarding the refinery segment impact, see "Refinery Segment" below.
|
|
|
(3)
|
MTM adjustments and settlements include the effects of the derivative transactions discussed in Note 4 of the Notes to the Condensed Consolidated Financial Statements. For additional information and the reason for adjusting fuel expense, see "Supplemental Information" below.
|
Regional Carriers Expense.
The reduction in regional carrier expense is primarily due to lower fuel cost from a decrease in the market price of fuel.
Contracted Services.
The increase in contracted services expense predominantly related to costs associated with the
2.7%
increase in capacity and additional temporary staffing.
Profit Sharing.
The increase in profit sharing is driven by an increase in the projected full year pre-tax income compared to the prior year.
Our broad-based employee profit sharing program provides that, for each year in which we have an annual pre-tax profit, as defined by the terms of the program, we will pay a specified portion of that profit to employees. In determining the amount of profit sharing, the program defines profit as pre-tax profit adjusted for profit sharing and certain other items.
In 2015, our profit sharing program paid 10% to employees for the first $2.5 billion of annual profit and 20% of annual profit above $2.5 billion. Beginning with 2016 pre-tax profit (for the profit sharing payment in 2017), the profit sharing formula has been adjusted to pay 10% of annual pre-tax profit (as defined by the terms of the program) and, if we exceed our prior-year results, the program will pay 20% of the year-over-year increase in pre-tax profit to eligible employees. The profit sharing program for pilots remains unchanged from the prior year.
|
|
|
|
|
|
|
|
|
|
|
Non-Operating Results
|
Three Months Ended March 31,
|
|
(in millions)
|
2016
|
2015
|
Favorable
|
Interest expense, net
|
$
|
(107
|
)
|
$
|
(131
|
)
|
$
|
24
|
|
Miscellaneous, net
|
1
|
|
(81
|
)
|
82
|
|
Total non-operating expense, net
|
$
|
(106
|
)
|
$
|
(212
|
)
|
$
|
106
|
|
The decline in interest expense, net results from reduced levels of debt and from the refinancing of debt obligations at lower interest rates. The principal amount of debt and capital leases has declined from $9.6 billion at
March 31, 2015
to
$8.6 billion
at
March 31, 2016
.
Miscellaneous, net is favorable primarily due to our proportionate share of earnings from our equity investment in Virgin Atlantic and lower foreign exchange losses in the
March 2016
quarter compared to the
March 2015
quarter.
Income Taxes
We project that our annual effective tax rate for 2016 will be approximately 35%. The expected reduction in our rate from prior years is primarily related to differences in our global tax rates. In certain interim periods, we may have adjustments to our net deferred tax assets as a result of changes in prior year estimates and tax laws enacted during the period, which will impact the effective tax rate for that interim period. At
March 31, 2016
, we had approximately $8.5 billion of U.S. federal pre-tax net operating loss carryforwards, which do not begin to expire until 2024. Accordingly, we believe we will not pay any cash federal income taxes before 2018.
Refinery Segment
The refinery primarily produces gasoline, diesel and jet fuel. Monroe exchanges substantially all the non-jet fuel products it produces with third parties for jet fuel consumed in our airline operations. The jet fuel produced and procured through exchanging gasoline and diesel fuel produced by the refinery provided approximately
170,000
barrels per day for use in airline operations during the
March 2016
quarter. We believe that the jet fuel supply resulting from the refinery's operation has contributed to the reduction in the market price of jet fuel, and thus lowered our cost of jet fuel compared to what it otherwise would have been.
A refinery is subject to annual U.S. Environmental Protection Agency ("EPA") requirements to blend renewable fuels into the gasoline and on-road diesel fuel it produces. Alternatively, a refinery may purchase renewable energy credits, called RINs, from third parties in the secondary market. Because the refinery, operated by Monroe, does not blend renewable fuels, it must purchase its entire RINs requirement in the secondary market or obtain a waiver from the EPA. We recognized
$28 million
of expense related to the RINs requirement in each of the
three months ended
March 31, 2016
and
2015
. During the three months ended
March 31, 2016
, we retired our 2013 RINs obligation. Additionally, we are in possession of the RINs needed to satisfy a portion of our 2014 and 2015 obligations.
The refinery recorded a loss of
$28 million
and a profit of
$86 million
in the
three months ended
March 31, 2016
and
2015
, respectively. The refinery’s loss in the current period compared to a profit in the prior year was primarily attributable to lower product crack spreads. For more information regarding the refinery’s results, see
Note 9
of the Notes to the Condensed Consolidated Financial Statements.
Operating Statistics
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
Consolidated
(1)
|
2016
|
2015
|
Revenue passenger miles (in millions)
|
47,725
|
|
46,221
|
|
Available seat miles (in millions)
|
58,145
|
|
56,597
|
|
Passenger mile yield
|
|
16.26
|
¢
|
|
17.14
|
¢
|
Passenger revenue per available seat mile ("PRASM")
|
|
13.35
|
¢
|
|
14.00
|
¢
|
Operating cost per available seat mile ("CASM")
|
|
13.26
|
¢
|
|
14.12
|
¢
|
CASM-Ex, including profit sharing
(2)
|
|
10.33
|
¢
|
|
9.88
|
¢
|
Passenger load factor
|
82.1
|
%
|
81.7
|
%
|
Fuel gallons consumed (in millions)
|
930
|
|
918
|
|
Average price per fuel gallon
(3)
|
$
|
1.50
|
|
$
|
2.29
|
|
Average price per fuel gallon, adjusted
(3)(4)
|
$
|
1.33
|
|
$
|
2.93
|
|
Full-time equivalent employees, end of period
|
83,817
|
|
81,055
|
|
|
|
(1)
|
Includes the operations of our regional carriers under capacity purchase agreements. Full-time equivalent employees exclude employees of non-owned regional carriers.
|
|
|
(2)
|
Non-GAAP financial measure defined in "
March 2016
Quarter Financial Highlights" above. See reconciliation to CASM in "Supplemental Information" below.
|
|
|
(3)
|
Includes the impact of fuel hedge activity and refinery segment results.
|
|
|
(4)
|
Non-GAAP financial measure defined and reconciled to average fuel price per gallon in "Results of Operations - Three Months Ended March 31, 2016 and 2015" above.
|
Fleet Information
Our operating aircraft fleet and commitments at
March 31, 2016
are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Fleet
(1)
|
Commitments
|
Aircraft Type
|
Owned
|
Capital Lease
|
Operating Lease
|
Total
|
Average Age
|
Purchase
(2)
|
Lease
|
B-717-200
|
2
|
|
13
|
|
75
|
|
90
|
|
14.6
|
—
|
|
—
|
|
B-737-700
|
10
|
|
—
|
|
—
|
|
10
|
|
7.2
|
—
|
|
—
|
|
B-737-800
|
73
|
|
—
|
|
—
|
|
73
|
|
15.2
|
—
|
|
—
|
|
B-737-900ER
|
37
|
|
—
|
|
19
|
|
56
|
|
1.4
|
64
|
|
—
|
|
B-747-400
|
4
|
|
5
|
|
—
|
|
9
|
|
24.0
|
—
|
|
—
|
|
B-757-200
|
81
|
|
16
|
|
8
|
|
105
|
|
19.3
|
—
|
|
—
|
|
B-757-300
|
16
|
|
—
|
|
—
|
|
16
|
|
13.1
|
—
|
|
—
|
|
B-767-300
|
13
|
|
—
|
|
—
|
|
13
|
|
24.7
|
—
|
|
—
|
|
B-767-300ER
|
54
|
|
4
|
|
—
|
|
58
|
|
20.0
|
—
|
|
—
|
|
B-767-400ER
|
21
|
|
—
|
|
—
|
|
21
|
|
15.1
|
—
|
|
—
|
|
B-777-200ER
|
8
|
|
—
|
|
—
|
|
8
|
|
16.2
|
—
|
|
—
|
|
B-777-200LR
|
10
|
|
—
|
|
—
|
|
10
|
|
7.0
|
—
|
|
—
|
|
B-787-8
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
18
|
|
—
|
|
A319-100
|
55
|
|
—
|
|
2
|
|
57
|
|
14.2
|
—
|
|
—
|
|
A320-200
|
58
|
|
—
|
|
11
|
|
69
|
|
21.1
|
—
|
|
—
|
|
A321-200
|
1
|
|
—
|
|
—
|
|
1
|
|
—
|
44
|
|
—
|
|
A330-200
|
11
|
|
—
|
|
—
|
|
11
|
|
11.0
|
—
|
|
—
|
|
A330-300
|
26
|
|
—
|
|
—
|
|
26
|
|
8.7
|
5
|
|
—
|
|
A330-900neo
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
25
|
|
—
|
|
A350-900
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
25
|
|
—
|
|
E190-100
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
19
|
|
—
|
|
MD-88
|
83
|
|
33
|
|
—
|
|
116
|
|
25.7
|
—
|
|
—
|
|
MD-90
|
62
|
|
3
|
|
—
|
|
65
|
|
19.1
|
—
|
|
—
|
|
Total
|
625
|
|
74
|
|
115
|
|
814
|
|
17.0
|
200
|
|
—
|
|
|
|
(1)
|
Excludes certain aircraft we own or lease, which are operated by regional carriers on our behalf shown in the table below.
|
|
|
(2)
|
Our purchase commitment for the
18
B-787-8 aircraft provides for certain aircraft substitution rights, including for our current orders of B-737-900ER aircraft.
|
The following table summarizes the aircraft fleet operated by our regional carriers on our behalf at
March 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fleet Type
|
|
Carrier
|
CRJ-200
|
CRJ-700
|
CRJ-900
|
Embraer 145
|
Embraer 170
|
Embraer 175
|
Total
|
Endeavor Air, Inc.
(1)
|
36
|
|
—
|
|
81
|
|
—
|
|
—
|
|
—
|
|
117
|
|
ExpressJet Airlines, Inc.
|
41
|
|
40
|
|
28
|
|
—
|
|
—
|
|
—
|
|
109
|
|
SkyWest Airlines, Inc.
|
58
|
|
20
|
|
36
|
|
—
|
|
—
|
|
—
|
|
114
|
|
Compass Airlines, Inc.
|
—
|
|
—
|
|
—
|
|
—
|
|
6
|
|
36
|
|
42
|
|
Shuttle America
|
—
|
|
—
|
|
—
|
|
41
|
|
14
|
|
16
|
|
71
|
|
GoJet Airlines, LLC
|
—
|
|
22
|
|
7
|
|
—
|
|
—
|
|
—
|
|
29
|
|
Total
|
135
|
|
82
|
|
152
|
|
41
|
|
20
|
|
52
|
|
482
|
|
|
|
(1)
|
Endeavor Air, Inc. is a wholly owned subsidiary of Delta.
|
Financial Condition and Liquidity
We expect to meet our cash needs for the next 12 months with cash flows from operations, cash and cash equivalents, short-term investments and financing arrangements. As of
March 31, 2016
, we had
$5.2 billion
in unrestricted liquidity, consisting of
$2.9 billion
in cash and cash equivalents and short-term investments and
$2.3 billion
in undrawn revolving credit facilities. During the
three months ended
March 31, 2016
, we generated
$1.0 billion
in cash from operating activities, which we used, along with existing cash, to fund capital expenditures of
$871 million
and return
$882 million
to shareholders, while maintaining a sufficient liquidity position.
Sources of Liquidity
Operating Activities
Cash flows from operating activities provide our primary source of liquidity. We generated positive cash flows from operations of
$1.0 billion
and
$1.6 billion
in the
three months ended
March 31, 2016
and
2015
, respectively. We also expect to generate positive cash flows from operations for the remainder of 2016.
Our operating cash flows can be impacted by the following factors:
Seasonality of Advance Ticket Sales.
We sell tickets for air travel in advance of the customer's travel date. When we receive a cash payment at the time of sale, we record the cash received on advance sales as deferred revenue in air traffic liability. The air traffic liability increases during the winter and spring as advanced ticket sales grow prior to the summer peak travel season and decreases during the summer and fall months.
Fuel and Fuel Hedge Margins.
Including our regional carriers, fuel expense represented approximately
18.1%
of our total operating expenses for the
three months ended
March 31, 2016
. The market price for jet fuel is highly volatile, which can impact the comparability of our cash flows from operations from period to period.
We have historically managed our fuel price risk through a hedging program intended to reduce the financial impact from changes in the price of jet fuel. Since 2014, however, jet fuel prices have consistently decreased and remain at low levels.
I
n order to better participate in the low fuel price environment, we reduced our hedging activity and entered into derivatives designed to offset and effectively terminate our existing airline segment hedge positions.
As a result, we have both neutralized our hedge portfolio and locked in net settlements of approximately
$725 million
in 2016
.
As part of our fuel hedging program, we may be required to post margin to counterparties when our portfolio is in a loss position. Conversely, if our portfolio with counterparties is in a gain position, we may receive margin. Our future cash flows are impacted by the nature of our derivative contracts and the market price of the commodities underlying those derivative contracts. Our hedge contracts were in a
net loss position at
March 31, 2016
, resulting in
$454 million
of margin postings to counterparties.
Pension Contributions.
We sponsor defined benefit pension plans for eligible employees and retirees. These plans are closed to new entrants and are frozen for future benefit accruals. Our funding obligations for these plans are governed by the Employee Retirement Income Security Act, as modified by the Pension Protection Act of 2006. We contributed
$1.2 billion
, including $825 million in cash and shares of our common stock from treasury with a value of
$350 million
, to our qualified defined benefit pension plans during the
three months ended
March 31, 2016
and contributed an additional $135 million in cash in April 2016. As a result of these contributions, we satisfied, on an accelerated basis, our 2016 required contributions for our defined benefit plans, including more than
$750 million
above the minimum funding requirements. During the
three months ended
March 31, 2015
, we contributed
$904 million
in cash to our qualified defined benefit pension plans.
Profit Sharing.
Our broad-based employee profit sharing program provides that, for each year in which we have an annual pre-tax profit, as defined by the terms of the program, we will pay a specified portion of that profit to employees. In determining the amount of profit sharing, the program defines profit as pre-tax profit adjusted for profit sharing and certain other items.
In 2015, our profit sharing program paid 10% to employees for the first $2.5 billion of annual profit and 20% of annual profit above $2.5 billion. Beginning with 2016 pre-tax profit (for the profit sharing payment in 2017), the profit sharing formula has been adjusted to pay 10% of annual pre-tax profit (as defined by the terms of the program) and, if we exceed our prior-year results, the program will pay 20% of the year-over-year increase in pre-tax profit to eligible employees. The profit sharing program for pilots remains unchanged from the prior year.
During the
three months ended
March 31, 2016
, we accrued
$272 million
in profit sharing expense based on current expectations for 2016 pre-tax profit.
We paid $1.5 billion in profit sharing in February 2016 related to our 2015 pre-tax profit in recognition of our employees' contributions toward meeting our financial goals. After making an advanced profit sharing payment of more than $300 million in October 2014, we paid an additional $756 million in profit sharing in February 2015 related to our 2014 pre-tax profit.
Investing Activities
Capital Expenditures.
Our capital expenditures were
$871 million
and
$586 million
for the
three months ended
March 31, 2016
and
2015
, respectively. Our capital expenditures during the
three months ended
March 31, 2016
were primarily related to the purchase of B-737-900ER aircraft to replace a portion of our older B-757-200 aircraft, purchases of A330-300 and A321-200 aircraft, advanced deposit payments on B-737-900ER, A350-900 and A321-200 aircraft, and seat density projects for our domestic fleet.
We have committed to future aircraft purchases that will require significant capital investment and have obtained, but are under no obligation to use, long-term financing commitments for a substantial portion of the purchase price of these aircraft. We expect that we will invest approximately $3 billion in 2016 primarily for (1) aircraft, including deliveries of B-737-900ERs, A321-200s, A330-300s and E190-100s, along with advance deposit payments for these and our A330-900neo and A350-900 orders, as well as for (2) aircraft modifications, the majority of which relate to increasing the seat density and enhancing the cabins on our domestic fleet. We expect that the remainder of the 2016 investments will be funded through cash flows from operations.
Equity Investments.
During 2015, we announced our intention to acquire additional shares of the capital stock of Grupo Aeroméxico through a cash tender offer, subject to regulatory approvals. If approved, the tender offer is expected to occur during 2016.
As a result of this tender offer, we would own up to 49% of the outstanding capital stock of Grupo Aeroméxico.
Based on current exchange rates, the total amount to be paid for the additional shares and the shares underlying the derivative would be up to $750 million.
Financing Activities
Debt and Capital Leases.
The principal amount of debt and capital leases was
$8.6 billion
at
March 31, 2016
. Since December 31, 2009, we have reduced our principal amount of debt and capital leases by
$9.7 billion
. We have focused on reducing our total debt in recent years as part of our strategy to strengthen our balance sheet. As a result, in the past year we have received upgrades to our credit ratings by all three major rating agencies, including an investment grade rating from Moody's. At
March 31, 2016
, our ratings were:
|
|
|
|
Rating Agency
|
Current Rating
|
Outlook
|
Moody's
|
Baa3
|
Stable
|
Standard & Poor's
|
BB+
|
Stable
|
Fitch
|
BB+
|
Positive
|
Continued improvement in our credit ratings would likely result in lower costs of borrowing, among other benefits.
Capital Return to Shareholders.
During the
three months ended
March 31, 2016
, we repurchased and retired 16.3 million shares at a cost of $775 million, including $350 million of shares repurchased in conjunction with the treasury stock contributed to our qualified defined benefit pension plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except dividends per share)
|
Dividends per Share
|
Share Repurchase Authorization
|
Average Repurchase Price
|
Completion Date
|
Authorization Remaining
|
May 2013 Program
|
$
|
0.060
|
|
$
|
500
|
|
$
|
28.43
|
|
June 30, 2016
|
Completed June 2014
|
May 2014 Program
|
$
|
0.090
|
|
$
|
2,000
|
|
$
|
42.86
|
|
December 31, 2016
|
Completed June 2015
|
May 2015 Program
|
$
|
0.135
|
|
$
|
5,000
|
|
$
|
46.47
|
|
December 31, 2017
|
|
$
|
3,175
|
|
Fuel Hedge Restructuring.
During the March 2015 quarter, we effectively deferred settlement of a portion of our hedge portfolio until 2016 by entering into fuel derivative transactions that, excluding market movements from the date of inception, would settle and provide approximately
$300 million
in cash receipts during the second half of 2015 and require approximately
$300 million
in cash payments in 2016.
We early terminated certain of these deferral transactions in the second half of 2015.
Due to the continued volatility in the fuel market, early in the
three months ended March 31, 2016
, we entered into transactions to further defer settlement of a portion of our hedge portfolio until 2017. These deferral transactions, excluding market movements from the date of inception, will settle and provide approximately
$300 million
in cash receipts during the second half of 2016 and require approximately
$300 million
in cash payments in 2017.
Undrawn Lines of Credit
We have
$2.3 billion
available in undrawn revolving lines of credit. Our credit facilities have covenants, including minimum collateral coverage ratios. If we are not in compliance with these covenants, we may be required to repay amounts borrowed under the credit facilities or we may not be able to draw on them. We currently have a substantial amount of unencumbered assets available to pledge as collateral.
Covenants
We were in compliance with the covenants in our financing agreements at March 31, 2016
.
Critical Accounting Policies and Estimates
For information regarding our Critical Accounting Policies and 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 from Contracts with Customers
In May 2014, the FASB issued ASU
No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." Under this ASU and subsequently issued amendments, revenue is recognized at the time a good or service is transferred to a customer for the amount of consideration received. Entities may use a full retrospective approach or report the cumulative effect as of the date of adoption. The standard is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption of the standard is permitted, but not before December 15, 2016. We are currently evaluating how the adoption of the revenue recognition standard will impact our Consolidated Financial Statements.
Leases
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." This standard will require all leases with durations greater than twelve months to be recognized on the balance sheet and
is effective for interim and annual reporting periods beginning after December 15, 2018, although early adoption is permitted.
We believe adoption of this standard will have a significant impact on our Consolidated Balance Sheets. Although we have not completed our assessment, we do not expect the adoption to change the recognition, measurement or presentation of lease expenses within the Consolidated Statements of Operations and Cash Flows.
Information about our undiscounted future lease payments and the timing of those payments is in
Note 7, "Lease Obligations," in our Form 10-K for the year ended December 31, 2015.
Equity Method Investments
In March 2016, the FASB issued ASU No. 2016-07, "Investments—Equity Method and Joint Ventures (Topic 323)." This standard eliminates the requirement that when an existing cost method investment qualifies for use of the equity method, an investor must restate its historical financial statements, as if the equity method had been used during all previous periods. Under the new guidance, at the point an investment qualifies for the equity method, any unrealized gain or loss in AOCI will be recognized through earnings. The standard is effective for interim and annual reporting periods beginning after December 15, 2016, although early adoption is permitted.
We early adopted this standard in the March 2016 quarter.
Although none of our available-for-sale or cost investments qualified for use of the equity method during the quarter, we expect the tender offer for additional capital stock of Grupo Aeroméxico to be completed during 2016, at which point our investment will qualify for the equity method of accounting. As of March 31, 2016, the unrealized gain recorded in AOCI related to our investment in Grupo Aeroméxico was
$21 million
.
Share-Based Compensation
In March 2016, the FASB issued ASU No. 2016-09, "Compensation—Stock Compensation (Topic 718)." This standard makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. ASU 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based awards. The standard is effective for interim and annual reporting periods beginning after December 15, 2016, although early adoption is permitted. We are currently assessing how the adoption of this standard will impact our Consolidated Financial Statements.
Supplemental Information
We sometimes use information (“non-GAAP financial measures”) that is derived from the Condensed Consolidated Financial Statements, but that is not presented in accordance with GAAP. Under the U.S. Securities and Exchange Commission rules, non-GAAP financial measures may 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 table shows a reconciliation of pre-tax income (a GAAP measure) to pre-tax income, adjusted for special items (a non-GAAP financial measure). We adjust pre-tax income for the following items to determine pre-tax income, adjusted for special items, for the reasons described below:
|
|
•
|
MTM adjustments and settlements.
MTM adjustments are defined as fair value changes recorded in periods other than the settlement period. Such fair value changes are not necessarily indicative of the actual settlement value of the underlying hedge in the contract settlement period. Settlements represent cash received or paid on hedge contracts settled during the period. These items adjust fuel expense to show the economic impact of hedging, including cash received or paid on hedge contracts during the period. Adjusting for these items allows investors to better understand and analyze our core operational performance in the periods shown.
|
|
|
•
|
Restructuring and other.
Because of the variability in restructuring and other, the adjustment for this item is helpful to investors to analyze our recurring core performance in the period shown.
|
|
|
•
|
Virgin Atlantic MTM adjustments
. We record our proportionate share of earnings from our equity investment in Virgin Atlantic in non-operating expense. We adjust for Virgin Atlantic's MTM adjustments to allow investors to better understand and analyze our core financial performance in the periods shown.
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in millions)
|
2016
|
2015
|
Pre-tax income
|
$
|
1,434
|
|
$
|
1,186
|
|
Adjusted for:
|
|
|
MTM adjustments and settlements
(1)
|
155
|
|
(589
|
)
|
Restructuring and other
|
—
|
|
10
|
|
Virgin Atlantic MTM adjustments
|
(29
|
)
|
(13
|
)
|
Pre-tax income, adjusted for special items
|
$
|
1,560
|
|
$
|
594
|
|
|
|
(1)
|
The three months ended March 2015 includes $302 million to early settle contracts that were in a loss position and originally scheduled to expire in the second half of 2015.
|
The following table shows a reconciliation of CASM (a GAAP measure) to CASM-Ex, including profit sharing (a non-GAAP financial measure). We adjust CASM for the following items to determine CASM-Ex, including profit sharing, for the reasons described below:
|
|
•
|
Aircraft fuel and related taxes.
The volatility in fuel prices impacts the comparability of year-over-year financial performance. The adjustment for aircraft fuel and related taxes (including our regional carriers) allows investors to better understand and analyze our non-fuel costs and year-over-year financial performance.
|
|
|
•
|
Restructuring and other.
Because of the variability in restructuring and other, the adjustment for this item is helpful to investors to analyze our recurring core performance in the period shown.
|
|
|
•
|
Other expenses.
Other expenses include aircraft maintenance and staffing services we provide to third parties, our vacation wholesale operations and refinery cost of sales to third parties. Because these businesses are not related to the generation of a seat mile, we adjust for the costs related to these sales to provide a more meaningful comparison of the costs of our airline operations to the rest of the airline industry.
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
2015
|
CASM
|
|
13.26
|
¢
|
|
14.12
|
¢
|
Adjusted for:
|
|
|
Aircraft fuel and related taxes
|
(2.40
|
)
|
(3.71
|
)
|
Restructuring and other
|
—
|
|
(0.02
|
)
|
Other expenses
|
(0.53
|
)
|
(0.51
|
)
|
CASM-Ex
|
|
10.33
|
¢
|
|
9.88
|
¢
|