NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Delta Air Lines, Inc., a Delaware corporation, provides scheduled air transportation for passengers and cargo throughout the United States ("U.S.") and around the world. Our Consolidated Financial Statements include the accounts of Delta Air Lines, Inc. and our wholly owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the U.S. ("GAAP"). We do not consolidate the financial statements of any company in which we have an ownership interest of
50%
or less. We are not the primary beneficiary of, nor do we have a controlling financial interest in, any variable interest entity. Accordingly, we have not consolidated any variable interest entity.
We have marketing alliances with other airlines to enhance our access to domestic and international markets. These arrangements may include codesharing, reciprocal frequent flyer program benefits, shared or reciprocal access to passenger lounges, joint promotions, common use of airport gates and ticket counters, ticket office co-location and other marketing agreements. We have received antitrust immunity for certain marketing arrangements, which enables us to offer a more integrated route network and develop common sales, marketing and discount programs for customers. Some of our marketing arrangements provide for the sharing of revenues and expenses. Revenues and expenses associated with collaborative arrangements are presented on a gross basis in the applicable line items on our Consolidated Statements of Operations.
We reclassified certain prior period amounts to conform to the current period presentation. Unless otherwise noted, all amounts disclosed are stated before consideration of income taxes.
Use of Estimates
We are required to make estimates and assumptions when preparing our Consolidated Financial Statements in accordance with GAAP. These estimates and assumptions affect the amounts reported in our Consolidated Financial Statements and the accompanying notes. Actual results could differ materially from those estimates.
Recent Accounting Standards
Standards Effective in Future Years
Revenue from Contracts with Customers
.
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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. Interpretations are on-going and could have a significant impact on our implementation. While we currently believe the adoption will have little effect on earnings, the classification of certain transactions within revenues and between revenues and operating expenses may change. Also, the adoption may increase the rate used to account for frequent flyer miles, which would impact the balance of the frequent flyer liability. We plan to adopt the standard effective January 1, 2018.
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 have not completed our assessment, but we believe adoption of this standard will have a significant impact on our Consolidated Balance Sheets. However, we do not expect the adoption to have a significant impact on the recognition, measurement or presentation of lease expenses within the Consolidated Statements of Operations or the Consolidated Statements of Cash Flows. Information about our undiscounted future lease payments and the timing of those payments is in Note 7, "Lease Obligations."
Statement of Cash Flows.
In the second half of 2016, the FASB issued ASU Nos. 2016-15 and 2016-18 related to the classification of certain cash receipts and cash payments and the presentation of restricted cash within an entity's statement of cash flows, respectively. These standards are effective for interim and annual reporting periods beginning after December 15, 2017, but early adoption is permitted. We do not expect these standards to have a material impact on our Consolidated Statements of Cash Flows.
Financial Instruments
.
In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments—Overall (Subtopic 825-10)." This standard makes several changes, including the elimination of the available-for-sale classification of equity investments, and requires equity investments with readily determinable fair values to be measured at fair value with changes in fair value recognized in net income. It is effective for interim and annual periods beginning after December 15, 2017.
Our investments in the parent companies of Aeroméxico and GOL are currently accounted for as available-for-sale with changes in fair value recognized in other comprehensive income. At the time of adoption, any amounts in accumulated other comprehensive income/(loss) ("AOCI") related to equity investments would be reclassified to retained earnings. As of December 31, 2016, a net unrealized loss of
$38 million
related to these investments was recorded in AOCI on our Consolidated Balance Sheet.
Recently Adopted Standards
Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share.
In May 2015, the FASB issued ASU No. 2015-07, "Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)." Under the new standard, investments for which fair value is measured at net asset value per share (or its equivalent) using the practical expedient will no longer be categorized in the fair value hierarchy. We adopted this standard effective January 1, 2016 and have updated our presentation of investments measured at net asset value accordingly. See Note 8, "Employee Benefit Plans" for more information.
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 since the investment was acquired. Under the new guidance, at the point an investment qualifies for the equity method, any unrealized gain or loss in AOCI will be recognized in non-operating income/expense.
We adopted this standard during the March 2016 quarter. Although none of our available-for-sale or cost investments qualified for use of the equity method during 2016, we expect the tender offer for additional capital stock of Grupo Aeroméxico to be completed in the March 2017 quarter, at which point our investment will qualify for the equity method of accounting.
For more information about our investments and the proposed cash tender offer for shares of Grupo Aeroméxico see Note 3, "Investments."
Share-Based Compensation
.
In March 2016, the FASB issued ASU No. 2016-09, "Compensation—Stock Compensation (Topic 718)." This standard makes changes 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. It also clarifies the statement of cash flows presentation for certain components of share-based awards.
We adopted this standard during the June 2016 quarter. The adoption of this standard resulted in the recognition of
$95 million
of previously unrecognized excess tax benefits in deferred income taxes, net and an increase in retained earnings on our Consolidated Balance Sheet as of the beginning of the current year and the recognition of
$33 million
of excess tax benefits in our income tax provision for the year ended December 31, 2016.
Cash and Cash Equivalents and Short-Term Investments
Short-term, highly liquid investments with maturities of three months or less when purchased are classified as cash and cash equivalents. Investments with maturities of greater than three months, but not in excess of one year, when purchased are classified as short-term investments. Investments with maturities beyond one year when purchased may be classified as short-term investments if they are expected to be available to support our short-term liquidity needs. All short-term investments are classified as either available-for-sale or held-to-maturity, and realized gains and losses are recorded using the specific identification method.
Accounts Receivable
Accounts receivable primarily consist of amounts due from credit card companies from the sale of passenger airline tickets, customers of our aircraft maintenance and cargo transportation services and other companies for the purchase of mileage credits under our frequent flyer program (the "SkyMiles program"). We provide an allowance for uncollectible accounts equal to the estimated losses expected to be incurred based on historical chargebacks, write-offs, bankruptcies and other specific analyses. Bad debt expense was not material in any period presented.
Inventories
Spare Parts.
Inventories of expendable parts related to flight equipment, which cannot be economically repaired, reconditioned or reused after removal from the aircraft, are carried at moving average cost and charged to operations as consumed. An allowance for obsolescence is provided over the remaining useful life of the related fleet. We also provide allowances for parts identified as excess or obsolete to reduce the carrying costs to the lower of cost or net realizable value. These parts are assumed to have an estimated residual value of
5%
of the original cost.
Refinery.
Refined product, feedstock and blendstock inventories, all of which are finished goods, are carried at recoverable cost. We use jet fuel in our airline operations that is produced by the refinery and procured through the exchange with third parties of gasoline, diesel and other refined products ("non-jet fuel products") the refinery produces. Cost is determined using the first-in, first-out method. Costs include the raw material consumed plus direct manufacturing costs (such as labor, utilities and supplies) incurred and an applicable portion of manufacturing overhead.
Accounting for Refinery Related Buy/Sell Agreements
To the extent that we receive jet fuel for non-jet fuel products exchanged under buy/sell agreements, we account for these transactions as nonmonetary exchanges. We have recorded these nonmonetary exchanges at the carrying amount of the non-jet fuel products transferred within aircraft fuel and related taxes on the Consolidated Statements of Operations.
Derivatives
Changes in aircraft fuel prices, interest rates and foreign currency exchange rates impact our results of operations.
In an effort to manage our exposure to these risks, we enter into derivative contracts and adjust our derivative portfolio as market conditions change.
We recognize derivative contracts at fair value on our Consolidated Balance Sheets.
Not Designated as Accounting Hedges.
During the years 2014 to 2016, we did not designate our fuel derivative contracts as accounting hedges. We recorded changes in the fair value of our fuel hedges in aircraft fuel and related taxes. These changes in fair value include settled gains and losses as well as mark-to-market adjustments ("MTM adjustments"). 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.
Designated as Cash Flow Hedges.
For derivative contracts designated as cash flow hedges (interest rate contracts and foreign currency exchange contracts), the effective portion of the gain or loss on the derivative is reported as a component of AOCI and reclassified into earnings in the same period in which the hedged transaction affects earnings. The effective portion of the derivative represents the change in fair value of the hedge that offsets the change in fair value of the hedged item. To the extent the change in the fair value of the hedge does not perfectly offset the change in the fair value of the hedged item, the ineffective portion of the hedge is immediately recognized in non-operating expense.
Designated as Fair Value Hedges.
For derivative contracts designated as fair value hedges (interest rate contracts), the gain or loss on the derivative is reported in earnings and an equivalent amount is reflected as a change in the carrying value of long-term debt and capital leases, with an offsetting loss or gain recognized in current earnings. We include the gain or loss on the hedged item in the same account as the offsetting loss or gain on the related derivative contract, resulting in no impact to our Consolidated Statements of Operations.
The following table summarizes the risk each type of derivative contract is hedging and the classification of related gains and losses on our Consolidated Statements of Operations:
|
|
|
|
Derivative Type
|
Hedged Risk
|
Classification of Gains and Losses
|
Fuel hedge contracts
|
Fluctuations in jet fuel prices
|
Aircraft fuel and related taxes
|
Interest rate contracts
|
Increases in interest rates
|
Interest expense, net
|
Foreign currency exchange contracts
|
Fluctuations in foreign currency exchange rates
|
Passenger revenue
|
The following table summarizes the accounting treatment of our derivative contracts:
|
|
|
|
|
Impact of Unrealized Gains and Losses
|
Accounting Designation
|
Effective Portion
|
Ineffective Portion
|
Not designated as hedges
|
Change in fair value of hedge is recorded in earnings
|
Designated as cash flow hedges
|
Market adjustments are recorded in AOCI
|
Excess, if any, over effective portion of hedge is recorded in non-operating expense
|
Designated as fair value hedges
|
Market adjustments are recorded in long-term debt and capital leases
|
Excess, if any, over effective portion of hedge is recorded in non-operating expense
|
We perform, at least quarterly, an assessment of the effectiveness of our derivative contracts 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. We believe our derivative contracts that continue to be designated as hedges, consisting of interest rate and foreign currency exchange contracts, will continue to be highly effective in offsetting changes in fair value or cash flow, respectively, attributable to the hedged risk.
Cash flows associated with purchasing and settling hedge contracts generally are classified as operating cash flows. However, if a hedge contract includes a significant financing element at inception, cash flows associated with the hedge contract are recorded as financing cash flows.
Hedge Margin.
In accordance with our fuel, interest rate and foreign currency hedge contracts, we may require counterparties to fund the margin associated with our gain position and/or counterparties may require us to fund the margin associated with our loss position on these contracts. The amount of the margin, if any, is periodically adjusted based on the fair value of the hedge contracts. The margin requirements are intended to mitigate a party's exposure to the risk of counterparty default. We do not offset margin funded to counterparties or margin funded to us by counterparties against fair value amounts recorded for our hedge contracts.
The hedge margin we receive from counterparties is recorded in cash and cash equivalents or prepaid expenses and other, with the offsetting obligation in accounts payable. The hedge margin we provide to counterparties is recorded in prepaid expenses and other.
Long-Lived Assets
The following table summarizes our property and equipment:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in millions, except for estimated useful life)
|
Estimated Useful Life
|
2016
|
2015
|
Flight equipment
|
20-32 years
|
$
|
28,135
|
|
$
|
26,057
|
|
Ground property and equipment
|
3-40 years
|
6,581
|
|
5,862
|
|
Flight and ground equipment under capital leases
|
Shorter of lease term or estimated useful life
|
1,056
|
|
1,112
|
|
Advance payments for equipment
|
|
1,059
|
|
879
|
|
Less: accumulated depreciation and amortization
(1)
|
|
(12,456
|
)
|
(10,871
|
)
|
Total property and equipment, net
|
|
$
|
24,375
|
|
$
|
23,039
|
|
|
|
(1)
|
Includes accumulated amortization for flight and ground equipment under capital leases in the amount of
$757 million
and
$782 million
at
December 31, 2016
and
2015
, respectively.
|
We record property and equipment at cost and depreciate or amortize these assets on a straight-line basis to their estimated residual values over their estimated useful lives. The estimated useful life for leasehold improvements is the shorter of lease term or estimated useful life. Depreciation and amortization expense related to our property and equipment was
$1.9 billion
,
$1.8 billion
and
$1.7 billion
for each of the years ended
December 31, 2016
,
2015
and
2014
, respectively. Residual values for owned aircraft, engines, spare parts and simulators are generally
5%
to
10%
of cost.
We capitalize certain internal and external costs incurred to develop and implement software and amortize those costs over an estimated useful life of
three
to
10
years. Included in the depreciation and amortization expense discussed above, we recorded
$160 million
,
$148 million
and
$129 million
for amortization of capitalized software for the years ended
December 31, 2016
,
2015
and
2014
, respectively. The net book value of these assets totaled
$549 million
and
$420 million
at
December 31, 2016
and
2015
, respectively.
We review flight equipment and other long-lived assets used in operations for impairment losses when events and circumstances indicate the assets may be impaired. Factors which could be indicators of impairment include, but are not limited to, (1) a decision to permanently remove flight equipment or other long-lived assets from operations, (2) significant changes in the estimated useful life, (3) significant changes in projected cash flows, (4) permanent and significant declines in fleet fair values and (5) changes to the regulatory environment. For long-lived assets held for sale, we discontinue depreciation and record impairment losses when the carrying amount of these assets is greater than the fair value less the cost to sell.
To determine whether impairments exist for aircraft used in operations, we group assets at the fleet-type level (the lowest level for which there are identifiable cash flows) and then estimate future cash flows based on projections of capacity, passenger mile yield, fuel costs, labor costs and other relevant factors. If an impairment occurs, the impairment loss recognized is the amount by which the fleet's carrying amount exceeds its estimated fair value. We estimate aircraft fair values using published sources, appraisals and bids received from third parties, as available.
Goodwill and Other Intangible Assets
Our goodwill and identifiable intangible assets relate to the airline segment.
We apply a fair value-based impairment test to the carrying value of goodwill and indefinite-lived intangible assets on an annual basis (as of October 1) and, if certain events or circumstances indicate that an impairment loss may have been incurred, on an interim basis. We assess the value of our goodwill and indefinite-lived assets under either a qualitative or quantitative approach. Under a qualitative approach, we consider various market factors, including the key assumptions listed below. We analyze these factors to determine if events and circumstances have affected the fair value of goodwill and indefinite-lived intangible assets. If we determine that it is more likely than not that the asset may be impaired, we use the quantitative approach to assess the asset's fair value and the amount of the impairment. Under a quantitative approach, we calculate the fair value of the asset using the key assumptions listed below.
We value goodwill and indefinite-lived intangible assets primarily using market capitalization and income approach valuation techniques. These measurements include the following key assumptions:
(1) forecasted revenues, expenses and cash flows, (2) terminal period revenue growth and cash flows, (3) an estimated weighted average cost of capital, (4) assumed discount rates depending on the asset and (5) a tax rate. These assumptions are consistent with those hypothetical market participants would use. Since we are required to make estimates and assumptions when evaluating goodwill and indefinite-lived intangible assets for impairment, actual transaction amounts may differ materially from these estimates.
Changes in certain events and circumstances could result in impairment or a change from indefinite-lived to definite-lived. Factors which could cause impairment include, but are not limited to, (1) negative trends in our market capitalization, (2) reduced profitability resulting from lower passenger mile yields or higher input costs (primarily related to fuel and employees), (3) lower passenger demand as a result of weakened U.S. and global economies, (4) interruption to our operations due to a prolonged employee strike, terrorist attack, or other reasons, (5) changes to the regulatory environment (e.g., diminished slot restrictions or additional Open Skies agreements), (6) competitive changes by other airlines and (7) strategic changes to our operations leading to diminished utilization of the intangible assets.
Goodwill.
When we evaluate goodwill for impairment using a quantitative approach, we estimate the fair value of the reporting unit by considering both market capitalization and projected discounted future cash flows (an income approach).
If the reporting unit's fair value exceeds its carrying value, no further testing is required. If, however, the reporting unit's carrying value exceeds its fair value, we then determine the amount of the impairment charge, if any. We recognize an impairment charge if the carrying value of the reporting unit's goodwill exceeds its estimated fair value.
Identifiable Intangible Assets.
Indefinite-lived assets are not amortized and consist of routes, slots, the Delta tradename and assets related to SkyTeam. Definite-lived intangible assets consist primarily of marketing agreements and are amortized on a straight-line basis or under the undiscounted cash flows method over the estimated economic life of the respective agreements. Costs incurred to renew or extend the term of an intangible asset are expensed as incurred.
We assess our indefinite-lived assets under a qualitative or quantitative approach. We analyze market factors to determine if events and circumstances have affected the fair value of the indefinite-lived intangible assets. If we determine that it is more likely than not that the asset value may be impaired, we use the quantitative approach to assess the asset's fair value and the amount of the impairment. We perform the quantitative impairment test for indefinite-lived intangible assets by comparing the asset's fair value to its carrying value. Fair value
is estimated based on (1) recent market transactions, where available, (2) the royalty method for the Delta tradename (which assumes hypothetical royalties generated from using our tradename) or (3) projected discounted future cash flows (an income approach).
We recognize an impairment charge if the asset's carrying value exceeds its estimated fair value.
Income Taxes
We account for deferred income taxes under the liability method. We recognize deferred tax assets and liabilities based on the tax effects of temporary differences between the financial statement and tax basis of assets and liabilities, as measured by current enacted tax rates. Deferred tax assets and liabilities are recorded net as noncurrent deferred income taxes. A valuation allowance is recorded to reduce deferred tax assets when necessary.
Fuel Card Obligation
We have a purchasing card with American Express for the purpose of buying jet fuel and crude oil. The card currently carries a maximum credit limit of
$800 million
and must be paid monthly. At
December 31, 2016
and
December 31, 2015
, we had
$432 million
and
$221 million
, respectively, outstanding on this purchasing card, which was classified as a fuel card obligation within other accrued liabilities and a financing activity in our Consolidated Statements of Cash Flows.
Retirement of Repurchased Shares
We immediately retire substantially all shares upon repurchase. Historically, we recorded the share purchase price in excess of par value to additional paid-in capital ("APIC"). During the current year, we changed our presentation by reclassifying a portion of the amounts previously recorded from APIC to retained earnings in each of the years presented. The reclassification reduced retained earnings by
$2.1 billion
at December 31, 2015. We will continue in future periods to allocate the share purchase price in excess of par value between APIC and retained earnings.
Passenger Tickets
We record sales of passenger tickets in air traffic liability. Passenger revenue is recognized when we provide transportation or when the ticket expires unused, reducing the related air traffic liability. We periodically evaluate the estimated air traffic liability and record any adjustments in our Consolidated Statements of Operations. These adjustments relate primarily to refunds, exchanges, transactions with other airlines and other items for which final settlement occurs in periods subsequent to the sale of the related tickets at amounts other than the original sales price.
Passenger Taxes and Fees
We are required to charge certain taxes and fees on our passenger tickets, including U.S. federal transportation taxes, federal security charges, airport passenger facility charges and foreign arrival and departure taxes. These taxes and fees are assessments on the customer for which we act as a collection agent. Because we are not entitled to retain these taxes and fees, we do not include such amounts in passenger revenue. We record a liability when the amounts are collected and reduce the liability when payments are made to the applicable government agency or operating carrier.
Frequent Flyer Program
Our SkyMiles program offers incentives to travel on Delta. This program allows customers to earn mileage credits by flying on Delta, Delta Connection and airlines that participate in the SkyMiles program, as well as through participating companies such as credit card companies, hotels and car rental agencies. We sell mileage credits to non-airline businesses, customers and other airlines. Effective January 1, 2015, the SkyMiles program was modified from a model in which customers earn redeemable mileage credits based on distance traveled to a model based on ticket price. This award change did not affect the way we account for the 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.
Passenger ticket sales earning mileage credits under our SkyMiles program provide customers with (1) mileage credits earned and (2) air transportation. We value each deliverable on a standalone basis. Our estimate of the selling price of a mileage credit is based on an analysis of our sales of mileage credits to other airlines and customers, which is re-evaluated at least annually. We use established ticket prices to determine the estimated selling price of air transportation. We allocate the total amount collected from passenger ticket sales between the deliverables based on their relative selling prices.
We defer revenue for the mileage credits related to passenger ticket sales when the credits are earned and recognize it as passenger revenue when miles are redeemed and services are provided. We record the air transportation portion of the passenger ticket sales 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 under these marketing agreements have multiple deliverables, as defined below.
Our most significant contract to sell mileage credits relates to our co-brand credit card relationship with American Express. Our agreements with American Express provide for joint marketing, grant certain benefits to Delta-American Express co-branded credit card holders ("Cardholders") and American Express Membership Rewards program participants and allow American Express to market using our customer database. Cardholders earn mileage credits for making purchases using co-branded cards, may check their first bag for free, are granted discounted access to Delta Sky Club lounges and receive other benefits while traveling on Delta. These benefits that we provide in the form of separate products and services under the SkyMiles agreements are referred to as "deliverables." Additionally, participants in the American Express Membership Rewards program may exchange their points for mileage credits under the SkyMiles program. As a result, we sell mileage credits at agreed-upon rates to American Express for provision to their customers under the co-brand credit card program and the Membership Rewards program.
In December 2014, we amended our marketing agreements with American Express, which increased the value we receive under the agreements and extended the term to 2022. The amended agreements became effective January 1, 2015. We account for the agreements consistent with the accounting method that allocates the consideration received to the individual products and services delivered based on their relative selling prices. We determined our best estimate of the selling prices by considering discounted cash flow analysis using multiple inputs and assumptions, including: (1) the expected number of miles awarded and number of miles redeemed, (2) the rate at which we sell mileage credits to other airlines, (3) published rates on our website for baggage fees, discounted access to Delta Sky Club lounges and other benefits while traveling on Delta and (4) brand value. The increased value received under the amended agreements increases the amount of deferred revenue for the travel component and increases the value of the other deliverables.
We recognize revenue as we deliver each sales element. We defer the travel deliverable (mileage credits) as part of frequent flyer deferred revenue and recognize passenger revenue as the mileage credits are used for travel. The revenue allocated to the remaining deliverables is recorded in other revenue. We recognize the revenue for these services as they are performed.
Breakage.
For mileage credits that we estimate are not likely to be redeemed ("breakage"), we recognize the associated value proportionally during the period in which the remaining mileage credits are expected to be redeemed. Management uses statistical models to estimate breakage based on historical redemption patterns. A change in assumptions as to the period over which mileage credits are expected to be redeemed, the actual redemption activity for mileage credits or the estimated fair value of mileage credits expected to be redeemed could have a material impact on our revenue in the year in which the change occurs and in future years.
Regional Carriers Revenue
Our regional carriers include both our contract carrier agreements with third-party regional carriers ("contract carriers") and Endeavor Air, Inc. ("Endeavor"), our wholly owned subsidiary. Our contract carrier agreements are structured as either (1) capacity purchase agreements where we purchase all or a portion of the contract carrier's capacity and are responsible for selling the seat inventory we purchase or (2) revenue proration agreements, which are based on a fixed dollar or percentage division of revenues for tickets sold to passengers traveling on connecting flight itineraries. We record revenue related to our contract carriers and Endeavor in regional carriers passenger revenue and the related expenses in regional carriers expense.
Cargo Revenue
Cargo revenue is recognized when we provide the transportation.
Other Revenue
Other revenue is primarily comprised of (1) loyalty programs, (2) administrative fees, club and on-board sales (3) ancillary businesses and refinery and (4) baggage fees.
Manufacturers' Credits
We periodically receive credits in connection with the acquisition of aircraft and engines. These credits are deferred until the aircraft and engines are delivered, and then applied as a reduction to the cost of the related equipment.
Maintenance Costs
We record maintenance costs to aircraft maintenance materials and outside repairs. Maintenance costs are expensed as incurred, except for costs incurred under power-by-the-hour contracts, which are expensed based on actual hours flown. Power-by-the-hour contracts transfer certain risk to third-party service providers and fix the amount we pay per flight hour to the service provider in exchange for maintenance and repairs under a predefined maintenance program. Modifications that enhance the operating performance or extend the useful lives of airframes or engines are capitalized and amortized over the remaining estimated useful life of the asset or the remaining lease term, whichever is shorter.
Advertising Costs
We expense advertising costs in passenger commissions and other selling expenses in the year incurred. Advertising expense was
$277 million
for the year ended
December 31, 2016
and approximately
$225 million
for the years ended December 31,
2015
and
2014
, respectively.
Commissions
Passenger sales commissions are recognized in operating expense when the related revenue is recognized.
NOTE 2
. FAIR VALUE MEASUREMENTS
Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability.
|
|
•
|
Level 1.
Observable inputs such as quoted prices in active markets;
|
|
|
•
|
Level 2
. Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
|
|
|
•
|
Level 3
. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
|
Assets and liabilities measured at fair value are based on the valuation techniques identified in the tables below. The valuation techniques are as follows:
|
|
(a)
|
Market approach
. Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities; and
|
|
|
(b)
|
Income approach.
Techniques to convert future amounts to a single present value amount based on market expectations (including present value techniques and option-pricing models).
|
Assets (Liabilities) Measured at Fair Value on a Recurring Basis
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
Valuation
Technique
|
(in millions)
|
Total
|
Level 1
|
Level 2
|
Cash equivalents
|
$
|
2,279
|
|
$
|
2,279
|
|
$
|
—
|
|
(a)
|
Short-term investments
|
|
|
|
|
U.S. government and agency securities
|
112
|
|
86
|
|
26
|
|
(a)
|
Asset- and mortgage-backed securities
|
68
|
|
—
|
|
68
|
|
(a)
|
Corporate obligations
|
295
|
|
—
|
|
295
|
|
(a)
|
Other fixed income securities
|
12
|
|
—
|
|
12
|
|
(a)
|
Restricted cash equivalents and investments
|
61
|
|
61
|
|
—
|
|
(a)
|
Long-term investments
|
139
|
|
115
|
|
24
|
|
(a)
|
Hedge derivatives, net
|
|
|
|
|
Fuel hedge contracts
|
(324
|
)
|
(26
|
)
|
(298
|
)
|
(a)(b)
|
Interest rate contract
|
6
|
|
—
|
|
6
|
|
(a)(b)
|
Foreign currency exchange contracts
|
27
|
|
—
|
|
27
|
|
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
Valuation
Technique
|
(in millions)
|
Total
|
Level 1
|
Level 2
|
Cash equivalents
|
$
|
1,543
|
|
$
|
1,543
|
|
$
|
—
|
|
(a)
|
Short-term investments
|
|
|
|
|
|
|
U.S. government securities
|
151
|
|
74
|
|
77
|
|
(a)
|
Asset- and mortgage-backed securities
|
380
|
|
—
|
|
380
|
|
(a)
|
Corporate obligations
|
896
|
|
—
|
|
896
|
|
(a)
|
Other fixed income securities
|
38
|
|
—
|
|
38
|
|
(a)
|
Restricted cash equivalents and investments
|
49
|
|
49
|
|
—
|
|
(a)
|
Long-term investments
|
155
|
|
130
|
|
25
|
|
(a)
|
Hedge derivatives, net
|
|
|
|
|
Fuel hedge contracts
|
(672
|
)
|
65
|
|
(737
|
)
|
(a)(b)
|
Interest rate contract
|
(3
|
)
|
—
|
|
(3
|
)
|
(a)(b)
|
Foreign currency exchange contracts
|
94
|
|
—
|
|
94
|
|
(a)
|
|
|
(1)
|
See
Note 8
, "Employee Benefit Plans," for fair value of benefit plan assets.
|
Cash Equivalents and Restricted Cash Equivalents and Investments.
Cash equivalents generally consist of money market funds. Restricted cash equivalents and investments generally consist of money market funds and time deposits, which primarily support letters of credit that relate to certain projected self-insurance obligations and airport commitments. The fair value of these investments is based on a market approach using prices and other relevant information generated by market transactions involving identical or comparable assets.
Short-Term Investments.
The fair values of short-term investments are based on a market approach using industry standard valuation techniques that incorporate observable inputs such as quoted market prices, interest rates, benchmark curves, credit ratings of the security and other observable information.
Long-Term Investments.
Our long-term investments that are measured at fair value primarily consist of equity investments in Grupo Aeroméxico, the parent company of Aeroméxico, and GOL Linhas Aéreas Inteligentes, the parent company of VRG Linhas Aéreas (operating as GOL). Shares of the parent companies of Aeroméxico and GOL are traded on public exchanges, and we value our investments based on quoted market prices. The investments are classified in other noncurrent assets.
Hedge Derivatives.
A portion of our derivative contracts are negotiated over-the-counter with counterparties without going through a public exchange. Accordingly, our fair value assessments give consideration to the risk of counterparty default (as well as our own credit risk). Such contracts are classified as Level 2 within the fair value hierarchy. The remainder of our hedge contracts are comprised of futures contracts, which are traded on a public exchange. These contracts are classified within
Level 1 of the fair value hierarchy.
|
|
•
|
Fuel Contracts.
Our fuel hedge portfolio consists of options, swaps and futures. The hedge contracts include crude oil, diesel fuel and jet fuel, as these commodities are highly correlated with the price of jet fuel that we consume. Option contracts are valued under an 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
18%
to
41%
depending on the maturity dates, underlying commodities and strike prices of the option contracts. Swap contracts are valued under an income approach using a discounted cash flow model based on data either readily observable or provided by counterparties who regularly trade in public markets. Discount rates used in these valuations vary with the maturity dates of the respective contracts and are based on the London interbank offered rate ("LIBOR"). Futures contracts and options on futures contracts are traded on a public exchange and valued based on quoted market prices.
|
|
|
•
|
Interest Rate Contract.
Our interest rate derivative is a swap contract, which is valued based on data readily observable in public markets.
|
|
|
•
|
Foreign Currency Exchange Contracts.
Our foreign currency derivatives consist of Japanese yen and Canadian dollar forward contracts and are valued based on data readily observable in public markets.
|
NOTE 3
. INVESTMENTS
Short-Term Investments
The estimated fair values of short-term investments, which approximate cost at
December 31, 2016
, are shown below by contractual maturity. Actual maturities may differ from contractual maturities because issuers of the securities may have the right to retire our investments without prepayment penalties.
|
|
|
|
|
|
|
(in millions)
|
Available-
For-Sale
|
Due in one year or less
|
$
|
160
|
|
Due after one year through three years
|
239
|
|
Due after three years through five years
|
65
|
|
Due after five years
|
23
|
|
Total
|
$
|
487
|
|
Long-Term Investments
We have developed strategic relationships with certain airlines through equity investments and other forms of cooperation and support. These strategic relationships are important to us as they improve coordination with these airlines and enable our customers to seamlessly reach more destinations. We collectively consider several factors in determining other-than-temporary impairment losses, including the current and expected long-term business prospects of the issuer, our ability and intent to hold the investment until the price recovers and the length of time and relative magnitude of the price decline.
Available-for-Sale
|
|
•
|
Aeroméxico
.
We own
4.2%
of the outstanding shares of Grupo Aeroméxico, and we have derivative contracts that may be settled for shares of Grupo Aeroméxico
, including one obtained in the September 2016 quarter.
Our total derivative contract holdings represent
12.8%
of Grupo Aeroméxico's shares.
During 2015, we announced our intention to create an antitrust immunized commercial joint venture with Aeroméxico and to acquire additional shares of the capital stock of Grupo Aeroméxico through a cash tender offer, both subject to regulatory approvals. The Mexican and U.S. regulators approved antitrust immunity for the joint venture during 2016, subject to certain conditions. Delta and Aeroméxico have accepted the conditions and are in the process of implementing the necessary actions in order to satisfy the conditions. We expect both the joint venture to be implemented and the tender offer to be completed in the first half of 2017. As a result of the tender offer, when combined with our current holdings and derivative positions, we would own up to
49%
of the outstanding capital stock of Grupo Aeroméxico.
The total amount to be paid for the tender offer shares and the shares underlying the derivatives is expected to be up to
$765 million
.
|
|
|
•
|
GOL.
During 2015, we acquired preferred shares of GOL's parent company, increasing our ownership to
9.5%
of GOL's outstanding capital stock. Additionally, GOL entered into a
$300 million
five
-year term loan facility with third parties, which we have guaranteed. Our guaranty is primarily secured by GOL's ownership interest in Smiles, GOL's publicly-traded loyalty program. As GOL remains in compliance with the terms of its loan facility, we have not recorded a liability on our Consolidated Balance Sheets as of
December 31, 2016
. In conjunction with these transactions, we and GOL agreed to extend our existing commercial agreements.
|
Challenges in the Brazilian economy and GOL's financial performance caused the stock price of GOL's parent company to decline during 2015. However, during 2016, GOL's stock price increased more than
200%
at its peak in October 2016, before settling to an
80%
increase at December 31, 2016. The current year increase in the stock price was due to improvements in both the economic conditions in Brazil and the financial performance of the company. At December 31, 2016, the fair value of our investment in GOL's parent company was
$46 million
with a
$44 million
loss recorded in AOCI at December 31, 2016. The loss recorded in AOCI as of December 31, 2015 was
$84 million
. We determined the investment is not impaired as the decline as of October 2016 was not significant and GOL's management is continuing to execute measures to maximize operational and network efficiency and control costs, which we anticipate will further improve GOL's financial performance and the fair value of our investment in the near future.
Cost Method
|
|
•
|
China Eastern.
During 2015, we acquired shares of China Eastern, which provide us with a
3.2%
stake in the airline as of December 31, 2016. As the investment agreement restricts our sale or transfer of these shares for a period of three years, we will account for the investment at cost until the September 2017 quarter. Although China Eastern shares are actively traded on a public exchange, it is not practicable to estimate the fair value of the investment due to the restriction on our ability to sell or transfer the shares.
|
We have evaluated whether the decline in the value of China Eastern's shares would impair our investment. We considered the recent conditions and outlook for both China Eastern and the broader Chinese economy, as well as the nature of our investment in China Eastern. Although the market price of China Eastern’s stock at December 31, 2016 was
6%
below the market price of the stock on our acquisition date, the stock has recently traded above the book value of our investment. We have the intent and ability to hold our investment in China Eastern to allow for the recovery of its market value as China Eastern is a strategic investment for us and operates as an extension of our global network.
Equity Method Investment
Virgin Atlantic
. We have
a non-controlling
49%
equity stake in Virgin Atlantic Limited, the parent company of Virgin Atlantic Airways
. In addition, during 2014, we began an antitrust immunized joint venture with Virgin Atlantic, which allows for joint marketing and sales, coordinated pricing and revenue management, network planning and scheduling and other coordinated activities with respect to operations on routes between North America and the United Kingdom. As a result of this relationship, our customers have increased access and frequencies to London's Heathrow airport from points in the U.S., primarily from our hub at New York's JFK airport. We account for the investment under the equity method of accounting and recognize our portion of Virgin Atlantic's financial results in miscellaneous, net in our Consolidated Statements of Operations.
NOTE 4
. DERIVATIVES AND RISK MANAGEMENT
Changes in aircraft fuel prices, interest rates and foreign currency exchange rates impact our results of operations.
In an effort to manage our exposure to these risks, we enter into derivative contracts and adjust our derivative portfolio as market conditions change.
Aircraft Fuel Price Risk
Changes in aircraft fuel prices materially impact our results of operations.
We have recently managed our fuel price risk through a hedging program intended to reduce the financial impact from changes in the price of jet fuel as jet fuel prices are subject to potential volatility.
In response to this volatility, during the March 2015 quarter, we entered into transactions that effectively deferred settlement of a portion of our hedge portfolio. These deferral transactions, excluding market movements from the date of inception, provided approximately
$300 million
in cash receipts during the second half of 2015 and required approximately
$300 million
in cash payments in 2016. We early terminated certain of the March 2015 quarter deferral transactions in the second half of 2015.
During the March 2016 quarter, 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, provided approximately
$300 million
in cash receipts during the second half of 2016 and require approximately
$300 million
in cash payments in 2017.
Subsequently,
to better participate in the low fuel price environment, we entered into derivatives designed to offset and effectively neutralize our existing airline segment hedge positions
, which include the deferral transactions discussed above. As a result, we locked in the amount of the net hedge settlements for the remainder of 2016 and 2017. During the June 2016 quarter, we early settled
$455 million
of our airline segment's 2016 positions.
During the years ended December 31, 2016 and 2015, we recorded fuel hedge losses of
$366 million
and
$741 million
, respectively. Cash flows associated with the deferral transactions are reported as cash flows from financing activities within our Consolidated Statements of Cash Flows.
Interest Rate Risk
Our exposure to market risk from adverse changes in interest rates is primarily associated with our long-term debt obligations. Market risk associated with our fixed and variable rate long-term debt relates to the potential reduction in fair value and negative impact to future earnings, respectively, from an increase in interest rates.
In an effort to manage our exposure to the risk associated with our variable rate long-term debt, we periodically enter into interest rate swaps. We designate interest rate contracts used to convert the interest rate exposure on a portion of our debt portfolio from a floating rate to a fixed rate as cash flow hedges, while those contracts converting our interest rate exposure from a fixed rate to a floating rate are designated as fair value hedges.
We also have exposure to market risk from adverse changes in interest rates associated with our cash and cash equivalents and benefit plan obligations. Market risk associated with our cash and cash equivalents relates to the potential decline in interest income from a decrease in interest rates. Pension, postretirement, postemployment and worker's compensation obligation risk relates to the potential increase in our future obligations and expenses from a decrease in interest rates used to discount these obligations.
Foreign Currency Exchange Rate Risk
We are subject to foreign currency exchange rate risk because we have revenue and expense denominated in foreign currencies with our primary exposures being the Japanese yen and Canadian dollar. To manage exchange rate risk, we execute both our international revenue and expense transactions in the same foreign currency to the extent practicable.
From time to time, we may also enter into foreign currency option and forward contracts.
These foreign currency exchange contracts are designated as cash flow hedges.
Hedge Position as of
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Volume
|
Final Maturity Date
|
Hedge Derivatives Asset
|
Other Noncurrent Assets
|
Hedge Derivatives Liability
|
Other Noncurrent Liabilities
|
Hedge Derivatives, net
|
Designated as hedges
|
|
|
|
|
|
|
|
Interest rate contract (fair value hedge)
|
349
|
|
U.S. dollars
|
August 2022
|
$
|
2
|
|
$
|
4
|
|
$
|
—
|
|
$
|
—
|
|
$
|
6
|
|
Foreign currency exchange contracts
|
54,853
|
|
Japanese yen
|
February 2019
|
31
|
|
3
|
|
(4
|
)
|
(3
|
)
|
27
|
|
335
|
|
Canadian dollars
|
January 2019
|
Not designated as hedges
|
|
|
|
|
|
|
|
Fuel hedge contracts
(1)
|
197
|
|
gallons - crude oil, diesel and jet fuel
|
January 2018
|
360
|
|
—
|
|
(684
|
)
|
—
|
|
(324
|
)
|
Total derivative contracts
|
|
|
$
|
393
|
|
$
|
7
|
|
$
|
(688
|
)
|
$
|
(3
|
)
|
$
|
(291
|
)
|
|
|
(1)
|
As discussed above, we have early settled $455 million of our airline segment's 2016 hedge positions and entered into derivatives designed to offset and effectively neutralize our 2017 airline segment hedge positions. The dollar amounts shown above primarily represent the offsetting derivatives that were used to neutralize the 2016 and 2017 airline segment hedge portfolio.
|
Hedge Position as of
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Volume
|
Final Maturity Date
|
Hedge Derivatives Asset
|
Other Noncurrent Assets
|
Hedge Derivatives Liability
|
Other Noncurrent Liabilities
|
Hedge Derivatives, net
|
Designated as hedges
|
|
|
|
|
|
|
|
Interest rate contract (fair value hedge)
|
384
|
|
U.S. dollars
|
August 2022
|
$
|
4
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(7
|
)
|
$
|
(3
|
)
|
Foreign currency exchange contracts
|
46,920
|
|
Japanese yen
|
July 2018
|
76
|
|
20
|
|
(1
|
)
|
(1
|
)
|
94
|
|
395
|
|
Canadian dollars
|
Not designated as hedges
|
|
|
|
|
|
|
|
Fuel hedge contracts
|
887
|
|
gallons - crude oil, diesel and jet fuel
|
November 2017
|
1,907
|
|
4
|
|
(2,580
|
)
|
(3
|
)
|
(672
|
)
|
Total derivative contracts
|
|
|
$
|
1,987
|
|
$
|
24
|
|
$
|
(2,581
|
)
|
$
|
(11
|
)
|
$
|
(581
|
)
|
Offsetting Assets and Liabilities
We have master netting arrangements with our counterparties giving us the right to offset hedge assets and liabilities. However, we have elected not to offset the fair value positions recorded on our Consolidated Balance Sheets. The following table shows the net fair value of our counterparty positions had we elected to offset.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Hedge Derivatives Asset
|
Other Noncurrent Assets
|
Hedge Derivatives Liability
|
Other Noncurrent Liabilities
|
Hedge Derivatives, Net
|
December 31, 2016
|
|
|
|
|
|
Net derivative contracts
|
$
|
31
|
|
$
|
6
|
|
$
|
(326
|
)
|
$
|
(2
|
)
|
$
|
(291
|
)
|
December 31, 2015
|
|
|
|
|
|
Net derivative contracts
|
$
|
143
|
|
$
|
21
|
|
$
|
(737
|
)
|
$
|
(8
|
)
|
$
|
(581
|
)
|
Designated Hedge Gains (Losses)
Gains (losses) related to our designated hedge contracts during the years ended December 31,
2016
,
2015
and
2014
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Portion Reclassified from AOCI to Earnings
|
|
Effective Portion Recognized in Other Comprehensive (Loss) Income
|
(in millions)
|
2016
|
2015
|
2014
|
|
2016
|
2015
|
2014
|
Interest rate contracts
|
$
|
—
|
|
$
|
—
|
|
$
|
(31
|
)
|
|
$
|
—
|
|
$
|
—
|
|
$
|
38
|
|
Foreign currency exchange contracts
|
37
|
|
198
|
|
158
|
|
|
(68
|
)
|
(130
|
)
|
(34
|
)
|
Total designated
|
$
|
37
|
|
$
|
198
|
|
$
|
127
|
|
|
$
|
(68
|
)
|
$
|
(130
|
)
|
$
|
4
|
|
As of
December 31, 2016
,
we have recorded
$27 million
of net gains on cash flow hedge contracts in AOCI, which are scheduled to settle and be reclassified into earnings within the next 12 months.
Credit Risk
To manage credit risk associated with our aircraft fuel price, interest rate and foreign currency hedging programs, we evaluate counterparties based on several criteria including their credit ratings and limit our exposure to any one counterparty.
Our hedge contracts contain margin funding requirements.
The margin funding requirements may cause us to post margin to counterparties or may cause counterparties to post margin to us as market prices in the underlying hedged items change.
Due to the fair value position of our hedge contracts, we posted margin of
$38 million
and
$119 million
as of
December 31, 2016
and
2015
, respectively.
Our accounts receivable are generated largely from the sale of passenger airline tickets and cargo transportation services, the majority of which are processed through major credit card companies. We also have receivables from the sale of mileage credits under our SkyMiles program to participating airlines and non-airline businesses such as credit card companies, hotels and car rental agencies. The credit risk associated with our receivables is minimal.
Self-Insurance Risk
We self-insure a portion of our losses from claims related to workers' compensation, environmental issues, property damage, medical insurance for employees and general liability. Losses are accrued based on an estimate of the aggregate liability for claims incurred, using independent actuarial reviews based on standard industry practices and our historical experience.
NOTE 5
. INTANGIBLE ASSETS
Indefinite-Lived Intangible Assets
|
|
|
|
|
|
|
|
|
Carrying Value at December 31,
|
(in millions)
|
2016
|
2015
|
International routes and slots
|
$
|
2,563
|
|
$
|
2,563
|
|
Delta tradename
|
850
|
|
850
|
|
SkyTeam-related assets
|
661
|
|
661
|
|
Domestic slots
|
622
|
|
622
|
|
Total
|
$
|
4,696
|
|
$
|
4,696
|
|
International Routes and Slots.
Our international routes and slots primarily relate to Pacific route authorities and slots at capacity-constrained airports in Asia, including Tokyo-Narita airport, and slots at London-Heathrow airport.
Domestic Slots.
Our domestic slots relate to our slots at New York-LaGuardia and Washington-Reagan National airports.
Definite-Lived Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
(in millions)
|
Gross
Carrying
Value
|
Accumulated
Amortization
|
|
Gross
Carrying
Value
|
Accumulated
Amortization
|
Marketing agreements
|
$
|
730
|
|
$
|
(667
|
)
|
|
$
|
730
|
|
$
|
(658
|
)
|
Contracts
|
193
|
|
(108
|
)
|
|
193
|
|
(100
|
)
|
Other
|
53
|
|
(53
|
)
|
|
53
|
|
(53
|
)
|
Total
|
$
|
976
|
|
$
|
(828
|
)
|
|
$
|
976
|
|
$
|
(811
|
)
|
Amortization expense was
$17 million
,
$18 million
and
$55 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively. We estimate that we will incur approximately
$16 million
of amortization expense annually through 2021.
NOTE 6
. LONG-TERM DEBT
The following table summarizes our long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity
|
Interest Rate(s) Per Annum at
|
December 31,
|
(in millions)
|
Dates
|
December 31, 2016
|
2016
|
2015
|
Pacific Facilities
(1)
:
|
|
|
|
|
|
|
|
|
Pacific Term Loan B-1
(2)
|
October 2018
|
3.25%
|
variable
(4)
|
$
|
1,059
|
|
$
|
1,067
|
|
Pacific Term Loan B-2
(2)
|
April 2016
|
n/a
|
n/a
|
—
|
|
388
|
|
Pacific Revolving Credit Facility
|
2017
|
to
|
2018
|
undrawn
|
variable
(4)
|
—
|
|
—
|
|
2015 Credit Facilities
(1)
:
|
|
|
|
|
|
|
|
|
Term Loan Facility
(2)
|
August 2022
|
3.25%
|
variable
(4)
|
495
|
|
499
|
|
Revolving Credit Facility
|
August 2020
|
undrawn
|
variable
(4)
|
—
|
|
—
|
|
Financing arrangements secured by aircraft:
|
|
|
|
|
|
|
|
|
Certificates
(3)
|
2017
|
to
|
2027
|
3.63%
|
to
|
8.03%
|
2,777
|
|
3,264
|
|
Notes
(3)
|
2017
|
to
|
2027
|
1.54%
|
to
|
6.76%
|
2,488
|
|
2,564
|
|
Other financings
(3)(5)
|
2017
|
to
|
2031
|
2.02%
|
to
|
8.75%
|
293
|
|
316
|
|
Other revolving credit facilities
(1)
|
2017
|
to
|
2017
|
undrawn
|
variable
(4)
|
—
|
|
—
|
|
Total secured and unsecured debt
|
|
|
|
|
|
|
7,112
|
|
8,098
|
|
Unamortized discount and debt issue cost, net
|
|
|
|
|
|
|
(104
|
)
|
(152
|
)
|
Total debt
|
|
|
|
|
|
|
7,008
|
|
7,946
|
|
Less: current maturities
|
|
|
|
|
|
|
(1,009
|
)
|
(1,415
|
)
|
Total long-term debt
|
|
|
|
|
|
|
$
|
5,999
|
|
$
|
6,531
|
|
|
|
(1)
|
Guaranteed by substantially all of our domestic subsidiaries (the "Guarantors").
|
|
|
(2)
|
Borrowings must be repaid annually in an amount equal to
1%
per year of the original principal amount (paid in equal quarterly installments), with the balance due on the final maturity date.
|
|
|
(4)
|
Interest rate equal to LIBOR (generally subject to a floor) or another index rate, in each case plus a specified margin. Additionally, certain aircraft and other financings are comprised of variable rate debt.
|
|
|
(5)
|
Primarily includes loans secured by certain accounts receivable and real estate.
|
Key Financial Covenants
We were in compliance with the covenants on our financing agreements at
December 31, 2016
.
Pacific Facilities.
Our obligations under the Pacific Facilities are secured by a first lien on our Pacific route authorities and certain related assets. The Pacific Facilities include affirmative, negative and financial covenants that could 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.
|
|
|
Minimum fixed charge coverage ratio
(1)
|
1.20:1
|
Minimum unrestricted liquidity
|
|
Unrestricted cash, permitted investments and undrawn revolving credit facilities
|
$2.0 billion
|
Minimum collateral coverage ratio
(2)
|
1.60:1
|
|
|
(1)
|
Defined as the ratio of (a) earnings before interest, taxes, depreciation, amortization and aircraft rent and other adjustments to net income to (b) the sum of gross cash interest expense (including the interest portion of our capitalized lease obligations) and cash aircraft rent expense, for the 12-month period ending as of the last day of each fiscal quarter.
|
|
|
(2)
|
Defined as the ratio of (a) certain of the collateral that meet specified eligibility standards to (b) the sum of the aggregate outstanding obligations and certain other obligations.
|
2015 Credit Facilities.
Our obligations under the 2015 Credit Facilities are secured by liens on certain of our and the Guarantors’ assets, including accounts receivable, aircraft, spare engines, non-Pacific international routes, domestic slots and certain investment property. The 2015 Credit Facilities include affirmative, negative and financial covenants that may restrict our ability to, among other things, make investments, sell or otherwise dispose of assets if not in compliance with the collateral coverage ratio tests, pay dividends or repurchase stock. These covenants require us to maintain:
|
|
|
Minimum unrestricted liquidity
|
|
Unrestricted cash, permitted investments and undrawn revolving credit facilities
|
$2.0 billion
|
Minimum collateral coverage ratio
(1)
|
1.60:1
|
|
|
(1)
|
Defined as the ratio of (a) certain of the collateral that meet specified eligibility standards to (b) the sum of the aggregate outstanding obligations under the 2015 Credit Facilities and certain other obligations.
|
Under the 2015 Credit Facilities, if the Minimum Collateral Coverage Ratio is not maintained, we must either provide additional collateral to secure our obligations, or we must reduce the secured obligations under the facilities by an amount necessary to maintain compliance with the collateral coverage ratio. The 2015 Credit Facilities contain events of default customary for similar financings, including cross-defaults to other material indebtedness and certain change of control events. Upon the occurrence of an event of default, the outstanding obligations under the 2015 Credit Facilities may be accelerated and become due and payable immediately.
Availability Under Revolving Credit Facilities
The table below shows availability under revolving credit facilities, all of which were undrawn, as of
December 31, 2016
:
|
|
|
|
|
(in millions)
|
|
Revolving Credit Facility
|
$
|
1,500
|
|
Pacific Revolving Credit Facility
|
450
|
|
Other revolving credit facilities
|
513
|
|
Total availability under revolving credit facilities
|
$
|
2,463
|
|
Future Maturities
The following table summarizes scheduled maturities of our debt for the years succeeding
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Total Debt
|
|
Amortization of
Debt Discount and Debt Issuance Cost, net
|
|
|
2017
|
$
|
1,038
|
|
|
$
|
(28
|
)
|
|
|
2018
|
2,160
|
|
|
(35
|
)
|
|
|
2019
|
1,289
|
|
|
(23
|
)
|
|
|
2020
|
527
|
|
|
(5
|
)
|
|
|
2021
|
345
|
|
|
(5
|
)
|
|
|
Thereafter
|
1,753
|
|
|
(8
|
)
|
|
|
Total
|
$
|
7,112
|
|
|
$
|
(104
|
)
|
|
$
|
7,008
|
|
Fair Value of Debt
Market risk associated with our fixed- and variable-rate long-term debt relates to the potential reduction in fair value and negative impact to future earnings, respectively, from an increase in interest rates. The fair value of debt, shown below, is principally based on reported market values, recently completed market transactions and estimates based on interest rates, maturities, credit risk and underlying collateral. Long-term debt is primarily classified as Level 2 within the fair value hierarchy.
|
|
|
|
|
|
|
|
|
December 31,
|
(in millions)
|
2016
|
2015
|
Total debt at par value
|
$
|
7,112
|
|
$
|
8,098
|
|
Unamortized discount and debt issuance cost, net
|
(104
|
)
|
(152
|
)
|
Net carrying amount
|
$
|
7,008
|
|
$
|
7,946
|
|
Fair value
|
$
|
7,300
|
|
$
|
8,400
|
|
NOTE 7
. LEASE OBLIGATIONS
We lease aircraft, airport terminals, maintenance facilities, ticket offices and other property and equipment from third parties. Rental expense for operating leases, which is recorded on a straight-line basis over the life of the lease term, totaled
$1.3 billion
for the year ended
December 31, 2016
and
$1.2 billion
for the years ended December 31,
2015
and
2014
. Amounts due under capital leases are recorded as liabilities, while assets acquired under capital leases are recorded as property and equipment. Amortization of assets recorded under capital leases is included in depreciation and amortization expense. Our airport terminal leases include contingent rents, which vary based upon facility usage, enplanements, aircraft weight and other factors. Many of our aircraft, facility and equipment leases include rental escalation clauses and/or renewal options. Our leases do not include residual value guarantees and we are not the primary beneficiary in or have other forms of variable interest with the lessor of the leased assets. As a result, we have not consolidated any of the entities that lease to us.
The following tables summarize our minimum rental commitments under capital leases and noncancelable operating leases (including certain aircraft flown by regional carriers) with initial or remaining terms in excess of one year for the years succeeding
December 31, 2016
:
Capital Leases
|
|
|
|
|
(in millions)
|
Total
|
2017
|
$
|
145
|
|
2018
|
85
|
|
2019
|
60
|
|
2020
|
43
|
|
2021
|
24
|
|
Thereafter
|
21
|
|
Total minimum lease payments
|
378
|
|
Less: amount of lease payments representing interest
|
(54
|
)
|
Present value of future minimum capital lease payments
|
324
|
|
Less: current obligations under capital leases
|
(122
|
)
|
Long-term capital lease obligations
|
$
|
202
|
|
Operating Leases
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Delta Lease Payments
(1)
|
Contract Carrier Aircraft Lease Payments
(2)
|
Total
|
2017
|
$
|
1,302
|
|
$
|
270
|
|
$
|
1,572
|
|
2018
|
1,194
|
|
249
|
|
1,443
|
|
2019
|
1,084
|
|
220
|
|
1,304
|
|
2020
|
962
|
|
171
|
|
1,133
|
|
2021
|
766
|
|
96
|
|
862
|
|
Thereafter
|
6,533
|
|
248
|
|
6,781
|
|
Total minimum lease payments
|
$
|
11,841
|
|
$
|
1,254
|
|
$
|
13,095
|
|
|
|
(1)
|
Includes payments accounted for as construction obligations.
|
|
|
(2)
|
Represents the minimum lease obligations under our contract carrier agreements with Compass Airlines, LLC, ExpressJet Airlines, Inc., GoJet Airlines, LLC, Republic Airline, Inc. (as successor by merger to Shuttle America Corporation) and SkyWest Airlines, Inc.
|
JFK Construction Obligation
In 2015, we completed our redevelopment project at New York-JFK's Terminal 4 to facilitate convenient connections for our passengers and improve coordination with our SkyTeam alliance partners. Terminal 4 is operated by JFK International Air Terminal LLC ("IAT"), a private party, under its lease with the Port Authority of New York and New Jersey ("Port Authority"). In December 2010, we entered into a 33-year agreement with IAT ("Sublease") to sublease space in Terminal 4. Also, in 2010, the Port Authority issued approximately
$800 million
principal amount of special project bonds to fund the majority of the project.
We managed the project and bore the construction risk, including cost overruns. We recorded an asset for project costs (e.g., design, permitting, labor and other general construction costs), regardless of funding source, and a construction obligation equal to project costs funded by parties other than us. Our rental payments reduce the construction obligation and result in the recording of interest expense, calculated using the effective interest method. As of December 31, 2016, we have recorded
$722 million
as a fixed asset and
$742 million
as the related construction obligation.
We have an equity-method investment in the entity which owns IAT, our sublessor at Terminal 4. The Sublease requires us to pay certain fixed management fees. We determined the investment is a variable interest entity and assessed whether we have a controlling financial interest in IAT. Our rights under the Sublease, with respect to management of Terminal 4, are consistent with rights granted to an anchor tenant under a standard airport lease. Accordingly, we do not consolidate the entity in which we have an investment in our Consolidated Financial Statements.
NOTE 8
. EMPLOYEE BENEFIT PLANS
We sponsor defined benefit and defined contribution pension plans, healthcare plans and disability and survivorship plans for eligible employees and retirees and their eligible family members.
Defined Benefit Pension Plans.
We sponsor defined benefit pension plans for eligible employees and retirees. These plans are closed to new entrants and frozen for future benefit accruals.
The Pension Protection Act of 2006 allows commercial airlines to elect alternative funding rules ("Alternative Funding Rules") for defined benefit plans that are frozen. We elected the Alternative Funding Rules under which the unfunded liability for a frozen defined benefit plan may be amortized over a fixed 17-year period and is calculated using an
8.85%
discount rate.
We estimate our funding under these plans will total at least
$1.2 billion
in 2017, including
$700 million
of contributions above the minimum funding requirements.
Defined Contribution Pension Plans.
Delta sponsors several defined contribution plans. These plans generally cover different employee groups and employer contributions vary by plan. The cost associated with our defined contribution pension plans is shown in the Net Periodic Cost table below.
Postretirement Healthcare Plans.
We sponsor healthcare plans that provide benefits to eligible retirees and their dependents who are under age
65
. We have generally eliminated company-paid post age
65
healthcare coverage, except for (1) subsidies available to a limited group of retirees and their dependents and (2) a group of retirees who retired prior to 1987. Benefits under these plans are funded from current assets and employee contributions.
Postemployment Plans.
We provide certain other welfare benefits to eligible former or inactive employees after employment but before retirement, primarily as part of the disability and survivorship plans. Substantially all employees are eligible for benefits under these plans in the event of death and/or disability.
Benefit Obligations, Fair Value of Plan Assets and Funded Status
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Postretirement and Postemployment Benefits
|
|
December 31,
|
|
December 31,
|
(in millions)
|
2016
|
2015
|
|
2016
|
2015
|
Benefit obligation at beginning of period
|
$
|
20,611
|
|
$
|
21,856
|
|
|
$
|
3,336
|
|
$
|
3,487
|
|
Service cost
|
—
|
|
—
|
|
|
68
|
|
62
|
|
Interest cost
|
917
|
|
884
|
|
|
147
|
|
141
|
|
Actuarial loss (gain)
|
411
|
|
(1,061
|
)
|
|
115
|
|
(88
|
)
|
Benefits paid, including lump sums and annuities
|
(1,071
|
)
|
(1,059
|
)
|
|
(318
|
)
|
(302
|
)
|
Participant contributions
|
—
|
|
—
|
|
|
31
|
|
36
|
|
Settlements
|
(9
|
)
|
(9
|
)
|
|
—
|
|
—
|
|
Benefit obligation at end of period
(1)
|
$
|
20,859
|
|
$
|
20,611
|
|
|
$
|
3,379
|
|
$
|
3,336
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of period
|
$
|
9,374
|
|
$
|
9,355
|
|
|
$
|
884
|
|
$
|
982
|
|
Actual gain (loss) on plan assets
|
687
|
|
(132
|
)
|
|
51
|
|
(25
|
)
|
Employer contributions
|
1,320
|
|
1,219
|
|
|
154
|
|
210
|
|
Participant contributions
|
—
|
|
—
|
|
|
31
|
|
36
|
|
Benefits paid, including lump sums and annuities
|
(1,071
|
)
|
(1,059
|
)
|
|
(336
|
)
|
(319
|
)
|
Settlements
|
(9
|
)
|
(9
|
)
|
|
—
|
|
—
|
|
Fair value of plan assets at end of period
|
$
|
10,301
|
|
$
|
9,374
|
|
|
$
|
784
|
|
$
|
884
|
|
|
|
|
|
|
|
Funded status at end of period
|
$
|
(10,558
|
)
|
$
|
(11,237
|
)
|
|
$
|
(2,595
|
)
|
$
|
(2,452
|
)
|
|
|
(1)
|
At the end of each year presented, our accumulated benefit obligations for our pension plans are equal to the benefit obligations shown above.
|
During
2016
, net actuarial losses increased our benefit obligation by
$526 million
primarily due to the decrease in discount rates from
2015
to
2016
. During
2015
, net actuarial gains decreased our benefit obligation by
$1.1 billion
primarily due to the increase in discount rates from
2014
to
2015
. These gains and losses are recorded in AOCI and reflected in the table below.
A net actuarial loss of
$268 million
will be amortized from AOCI into net periodic benefit cost in
2017
. Amounts are generally amortized from AOCI over the expected future lifetime of plan participants.
Balance Sheet Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Postretirement and Postemployment Benefits
|
|
December 31,
|
|
December 31,
|
(in millions)
|
2016
|
2015
|
|
2016
|
2015
|
Current liabilities
|
$
|
(30
|
)
|
$
|
(27
|
)
|
|
$
|
(125
|
)
|
$
|
(139
|
)
|
Noncurrent liabilities
|
(10,528
|
)
|
(11,210
|
)
|
|
(2,470
|
)
|
(2,313
|
)
|
Total liabilities
|
$
|
(10,558
|
)
|
$
|
(11,237
|
)
|
|
$
|
(2,595
|
)
|
$
|
(2,452
|
)
|
|
|
|
|
|
|
Net actuarial loss
|
$
|
(8,515
|
)
|
$
|
(8,124
|
)
|
|
$
|
(570
|
)
|
$
|
(458
|
)
|
Prior service credit
|
—
|
|
—
|
|
|
82
|
|
109
|
|
Total accumulated other comprehensive loss, pre-tax
|
$
|
(8,515
|
)
|
$
|
(8,124
|
)
|
|
$
|
(488
|
)
|
$
|
(349
|
)
|
Net Periodic Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Postretirement and
Postemployment Benefits
|
|
Year Ended December 31,
|
|
Year Ended December 31,
|
(in millions)
|
2016
|
2015
|
2014
|
|
2016
|
2015
|
2014
|
Service cost
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
$
|
68
|
|
$
|
62
|
|
$
|
52
|
|
Interest cost
|
917
|
|
884
|
|
928
|
|
|
147
|
|
141
|
|
155
|
|
Expected return on plan assets
|
(902
|
)
|
(879
|
)
|
(829
|
)
|
|
(74
|
)
|
(81
|
)
|
(84
|
)
|
Amortization of prior service credit
|
—
|
|
—
|
|
—
|
|
|
(26
|
)
|
(26
|
)
|
(26
|
)
|
Recognized net actuarial loss
|
233
|
|
232
|
|
134
|
|
|
24
|
|
24
|
|
4
|
|
Settlements
|
3
|
|
3
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
Net periodic cost
|
$
|
251
|
|
$
|
240
|
|
$
|
233
|
|
|
$
|
139
|
|
$
|
120
|
|
$
|
101
|
|
Defined contribution plan costs
|
733
|
|
592
|
|
551
|
|
|
—
|
|
—
|
|
—
|
|
Total cost
|
$
|
984
|
|
$
|
832
|
|
$
|
784
|
|
|
$
|
139
|
|
$
|
120
|
|
$
|
101
|
|
Assumptions
We used the following actuarial assumptions to determine our benefit obligations and our net periodic cost for the periods presented:
|
|
|
|
|
|
|
December 31,
|
Benefit Obligations
(1)(2)
|
2016
|
2015
|
Weighted average discount rate
|
4.20
|
%
|
4.57
|
%
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Net Periodic Cost
(2)
|
2016
|
2015
|
2014
|
Weighted average discount rate - pension benefit
|
4.57
|
%
|
4.13
|
%
|
4.99
|
%
|
Weighted average discount rate - other postretirement benefit
(3)
|
4.53
|
%
|
4.13
|
%
|
4.88
|
%
|
Weighted average discount rate - other postemployment benefit
|
4.50
|
%
|
4.13
|
%
|
5.00
|
%
|
Weighted average expected long-term rate of return on plan assets
|
8.94
|
%
|
8.94
|
%
|
8.94
|
%
|
Assumed healthcare cost trend rate
(4)
|
6.50
|
%
|
7.00
|
%
|
7.00
|
%
|
|
|
(1)
|
Our
2016
and
2015
benefit obligations are measured using a mortality table projected to
2022
.
|
|
|
(2)
|
Future compensation levels do not impact our frozen defined benefit pension plans or other postretirement plans and impact only a small portion of our other postemployment liability.
|
|
|
(3)
|
Our assumptions reflect various remeasurements of certain portions of our obligations and represent the weighted average of the assumptions used for each measurement date.
|
|
|
(4)
|
Assumed healthcare cost trend rate at
December 31, 2016
is assumed to decline gradually to
5.00%
by
2023
and remain level thereafter.
|
Healthcare Cost Trend Rate.
Assumed healthcare cost trend rates have an effect on the amounts reported for the other postretirement benefit plans. A
1%
change in the healthcare cost trend rate used in measuring the accumulated plan benefit obligation for these plans, which provide benefits to eligible retirees and their dependents who are under age
65
, at
December 31, 2016
, would have the following effects:
|
|
|
|
|
|
|
|
(in millions)
|
1% Increase
|
1% Decrease
|
Increase (decrease) in total service and interest cost
|
$
|
1
|
|
$
|
(1
|
)
|
Increase (decrease) in the accumulated plan benefit obligation
|
12
|
|
(29
|
)
|
Expected Long-Term Rate of Return.
Our expected long-term rate of return on plan assets is based primarily on plan-specific investment studies using historical market return and volatility data.
Modest excess return expectations versus some public market indices are incorporated into the return projections based on the actively managed structure of the investment programs and their records of achieving such returns historically. We also expect to receive a premium for investing in less liquid private markets.
We review our rate of return on plan assets assumptions annually.
Our annual investment performance for one particular year does not, by itself, significantly influence our evaluation.
The investment strategy for our defined benefit pension plan assets is to earn a long-term return that meets or exceeds our annualized return target while taking an acceptable level of risk and maintaining sufficient liquidity to pay current benefits and other cash obligations of the plan. This is achieved by investing in a globally diversified mix of public and private equity, fixed income, real assets, hedge funds and other assets and instruments.
Our expected long-term rate of return on assets for net periodic pension benefit cost for the year ended
December 31, 2016
was
8.94%
.
Life Expectancy
.
Changes in life expectancy may significantly change our benefit obligations and future expense. We use the Society of Actuaries' ("SOA") published mortality data, other publicly available information and our own perspective of future longevity to develop our best estimate of life expectancy. In 2014, the SOA published updated mortality tables for U.S. plans and an updated improvement scale, which both reflected significant improvements in longevity. Since then, the SOA has published annual updates to their improvement scale. Each year we consider updates by the SOA in setting our mortality assumptions for purposes of measuring pension and other postretirement and postemployment benefit obligations.
Benefit Payments
Benefit payments in the table below are based on the same assumptions used to measure the related benefit obligations. Actual benefit payments may vary significantly from these estimates. Benefits earned under our pension plans and certain postemployment benefit plans are expected to be paid from funded benefit plan trusts, while our other postretirement benefits are funded from current assets.
The following table summarizes the benefit payments that are scheduled to be paid in the years ending December 31:
|
|
|
|
|
|
|
|
(in millions)
|
Pension Benefits
|
Other Postretirement and Postemployment Benefits
|
2017
|
$
|
1,154
|
|
$
|
281
|
|
2018
|
1,163
|
|
286
|
|
2019
|
1,184
|
|
284
|
|
2020
|
1,206
|
|
285
|
|
2021
|
1,224
|
|
287
|
|
2022-2026
|
6,326
|
|
1,443
|
|
Plan Assets
We have adopted and implemented investment policies for our defined benefit pension plans that incorporate strategic asset allocation mixes intended to best meet the plans' long-term obligations, while maintaining an appropriate level of risk and liquidity. These asset portfolios employ a diversified mix of investments, which are reviewed periodically. Active management strategies are utilized where feasible in an effort to realize investment returns in excess of market indices. Derivatives in the plans are primarily used to manage risk and gain asset class exposure while still maintaining liquidity. As part of these strategies, the plans are required to hold cash collateral associated with certain derivatives. Our investment strategies target a mix of
40
-
50%
growth-seeking assets,
20
-
30%
income-generating assets and
25
-
30%
risk-diversifying assets. Risk diversifying assets include hedged mandates implementing long-short, market neutral and relative value strategies that invest primarily in publicly-traded equity, fixed income, foreign currency and commodity securities and derivatives and are used in an attempt to improve the impact of active management on the plans.
Benefit Plan Assets Measured at Fair Value on a Recurring Basis
Benefit Plan Assets.
Benefit plan assets relate to our defined benefit pension plans and certain of our postemployment benefit plans that are funded through trusts. These investments are presented net of the related benefit obligation in pension, postretirement and related benefits on the Consolidated Balance Sheets. See
Note 2
of the Notes to the Consolidated Financial Statements for a description of the levels within the fair value hierarchy and associated valuation techniques used to measure fair value. The following table shows our benefit plan assets by asset class.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Valuation Technique
|
(in millions)
|
Level 1
|
Level 2
|
Total
|
|
Level 1
|
Level 2
|
Total
|
|
Equities and equity-related instruments
|
$
|
2,407
|
|
$
|
14
|
|
$
|
2,421
|
|
|
$
|
2,067
|
|
$
|
49
|
|
$
|
2,116
|
|
|
(a)
|
Cash equivalents
|
228
|
|
1,240
|
|
1,468
|
|
|
—
|
|
1,700
|
|
1,700
|
|
|
(a)
|
Fixed income and fixed income-related instruments
|
8
|
|
1,190
|
|
1,198
|
|
|
16
|
|
834
|
|
850
|
|
|
(a)(b)
|
Benefit plan assets
|
$
|
2,643
|
|
$
|
2,444
|
|
$
|
5,087
|
|
|
$
|
2,083
|
|
$
|
2,583
|
|
$
|
4,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments measured at net asset value ("NAV")
(1)
|
|
|
$
|
5,724
|
|
|
|
|
$
|
5,364
|
|
|
|
Total benefit plan assets
|
|
|
$
|
10,811
|
|
|
|
|
$
|
10,030
|
|
|
|
|
|
(1)
|
Investments that were measured at NAV per share (or its equivalent) as a practical expedient have not been classified in the fair value hierarchy.
|
Equities and Equity-Related Instruments.
Investments include common stock and equity-related instruments. Common stock is valued at the closing price reported on the active market on which the individual securities are traded. Equity-related instruments include investments in securities traded on exchanges, including listed futures and options, which are valued at the last reported sale prices on the last business day of the year or, if not available, the last reported bid prices. Over-the-counter securities are valued at the bid prices or the average of the bid and ask prices on the last business day of the year from published sources or, if not available, from other sources considered reliable, generally broker quotes.
Cash Equivalents.
These investments primarily consist of high-quality, short-term obligations that are a part of institutional money market mutual funds that are calculated using current market quotations or an appropriate substitute that reflects current market conditions.
Fixed Income and Fixed Income-Related Instruments.
Investments include corporate bonds, government bonds, collateralized mortgage obligations, and other asset-backed securities. These investments are generally valued at the bid price or the average of the bid and ask price. Prices are based on pricing models, quoted prices of securities with similar characteristics, or broker quotes. Fixed income-related instruments include investments in securities traded on exchanges, including listed futures and options, which are valued at the last reported sale prices on the last business day of the year, or if not available, the last reported bid prices. Over-the-counter securities are valued at the bid prices or the average of the bid and ask prices on the last business day of the year from published sources or, if not available, from other sources considered reliable, generally broker quotes.
The following table summarizes investments measured at fair value based on NAV per share as a practical expedient:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
(in millions)
|
Fair Value
|
Redemption Frequency
|
Redemption Notice Period
|
Unfunded Commitments
|
|
Fair Value
|
Redemption Frequency
|
Redemption Notice Period
|
Unfunded Commitments
|
Hedge funds
|
$
|
3,308
|
|
(5)
|
4-120 Days
|
$
|
—
|
|
|
$
|
2,990
|
|
(5)
|
5-120 Days
|
$
|
—
|
|
Commingled funds, private equities and equity-related instruments
|
1,214
|
|
(1) (3) (4)
|
15-30 Days
|
525
|
|
|
1,133
|
|
(1) (3) (4)
|
15-30 Days
|
345
|
|
Fixed income and fixed income-related instruments
|
270
|
|
(2)
|
5 Days
|
—
|
|
|
268
|
|
(2)
|
5 Days
|
5
|
|
Real assets
|
698
|
|
(3) (4)
|
N/A
|
529
|
|
|
635
|
|
(3) (4)
|
N/A
|
188
|
|
Other
|
234
|
|
(2)
|
2 Days
|
—
|
|
|
338
|
|
(1) (2)
|
2-270 Days
|
—
|
|
Total investments measured at NAV
|
$
|
5,724
|
|
|
|
$
|
1,054
|
|
|
$
|
5,364
|
|
|
|
$
|
538
|
|
|
|
(5)
|
Various. Includes funds with weekly, monthly, semi-monthly, quarterly and custom redemption frequencies as well as funds with a redemption window following the anniversary of the initial investment.
|
Hedge Funds.
Our hedge fund investments are primarily made through shares of limited partnerships or similar structures for which a liquid secondary market does not exist. Hedge funds are typically valued monthly by third-party administrators that have been appointed by the funds' general partners. Hedge funds have been valued using NAV as a practical expedient.
Commingled Funds, Private Equities, and Equity-Related Instruments.
Investments include commingled funds invested in common stock, private equity and equity-related instruments. Commingled funds are valued using NAV as a practical expedient divided by the number of shares outstanding. NAV is based on quoted market prices of the underlying assets owned by the fund. Private equity is valued based on valuation models where one or more of the significant inputs into the model cannot be observed and which require the development of assumptions. Equity-related instruments include investments in securities traded on exchanges, including listed futures and options, which are valued at the last reported sale prices on the last business day of the year or, if not available, the last reported bid prices. Over-the-counter securities are valued at the bid prices or the average of the bid and ask prices on the last business day of the year from published sources or, if not available, from other sources considered reliable, generally broker quotes.
Fixed Income and Fixed Income-Related Instruments.
Certain fixed income and fixed income related instruments have been valued using NAV as a practical expedient.
Real Assets.
These investments include real estate, energy, timberland and agriculture. The valuation of real assets requires significant judgment due to the absence of quoted market prices as well as the inherent lack of liquidity and the long-term nature of these assets. Investments are valued based on valuation models where one or more of the significant inputs into the model cannot be observed and which require the development of assumptions. We also assess the potential for adjustment to the fair value of these investments due to the lag in the availability of data. In these cases, we solicit preliminary valuation updates from the investment managers and use that information and corroborating data from public markets to determine any needed adjustments to estimate fair value. Real assets have been valued using NAV as a practical expedient.
Other.
Primarily includes globally-diversified, risk-managed commingled funds consisting mainly of equity, fixed income and commodity exposures.
Other
We also sponsor defined benefit pension plans for eligible employees in certain foreign countries. These plans did not have a material impact on our Consolidated Financial Statements in any period presented.
Profit Sharing Program
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.
For the years ended
December 31, 2016
,
2015
and
2014
, we recorded expenses of
$1.1 billion
,
$1.5 billion
and
$1.1 billion
under the profit sharing program, respectively.
In 2015 we announced certain changes to employee compensation.
Beginning with 2016 (to be paid out in 2017), the profit sharing program for merit, ground and flight attendant employees was 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. For years prior to 2016, our profit sharing program paid 10% to all eligible employees for the first $2.5 billion of annual profit and 20% of annual profit above $2.5 billion. The profit sharing program for pilots remains unchanged from the prior year and will continue under its current terms.
NOTE 9
. COMMITMENTS AND CONTINGENCIES
Aircraft Purchase and Lease Commitments
Our future aircraft purchase commitments totaled approximately
$12.5 billion
at
December 31, 2016
:
|
|
|
|
|
(in millions)
|
Total
|
2017
|
$
|
2,580
|
|
2018
|
2,980
|
|
2019
|
3,380
|
|
2020
|
1,730
|
|
2021
|
1,130
|
|
Thereafter
|
660
|
|
Total
|
$
|
12,460
|
|
Our future aircraft purchase commitments included the following aircraft at
December 31, 2016
:
|
|
|
|
Aircraft Type
|
Purchase Commitments
|
B-737-900ER
|
51
|
|
A321-200
|
67
|
|
A330-300
|
2
|
|
A330-900neo
|
25
|
|
A350-900
|
25
|
|
CS100
|
75
|
|
Total
|
245
|
|
Included within the aircraft purchase commitments listed above are agreements reached during the June 2016 quarter for the CS100 aircraft and certain A321-200 aircraft:
|
|
•
|
We reached an agreement with Bombardier to acquire
75
CS100 aircraft with deliveries beginning in 2018 and continuing through 2022. We have flexibility under the purchase agreement with respect to deferral, acceleration, conversion and a limited number of cancellation rights. The agreement also includes options to purchase
50
additional aircraft.
|
|
|
•
|
We entered into firm commitments with Airbus for the delivery of
37
additional A321-200 aircraft. Deliveries will begin in November 2017 and continue through 2019.
|
Contract Carrier Agreements
We have contract carrier agreements with regional carriers expiring from
2017
to
2027
.
Capacity Purchase Agreements
. Most of our contract carriers operate for us under capacity purchase agreements. Under these agreements, the contract carriers operate some or all of their aircraft using our flight designator codes, and we control the scheduling, pricing, reservations, ticketing and seat inventories of those aircraft and retain the revenues associated with those flights. We pay those airlines an amount, as defined in the applicable agreement, which is based on a determination of their cost of operating those flights and other factors intended to approximate market rates for those services.
The following table shows our minimum fixed obligations under our existing capacity purchase agreements with third-party regional carriers. The obligations set forth in the table contemplate minimum levels of flying by the contract carriers under the respective agreements and also reflect assumptions regarding certain costs associated with the minimum levels of flying such as the cost of fuel, labor, maintenance, insurance, catering, property tax and landing fees. Accordingly, our actual payments under these agreements could differ materially from the minimum fixed obligations set forth in the table below.
|
|
|
|
|
(in millions)
|
Amount
(1)
|
2017
|
$
|
2,039
|
|
2018
|
1,827
|
|
2019
|
1,562
|
|
2020
|
1,220
|
|
2021
|
737
|
|
Thereafter
|
1,196
|
|
Total
|
$
|
8,581
|
|
|
|
(1)
|
These amounts exclude contract carrier payments accounted for as operating leases of aircraft, which are described in
Note 7
.
|
Revenue Proration Agreement
. As of
December 31, 2016
, a portion of our contract carrier agreement with SkyWest Airlines, Inc. is structured as a revenue proration agreement. This revenue proration agreement establishes a fixed dollar or percentage division of revenues for tickets sold to passengers traveling on connecting flight itineraries.
Legal Contingencies
We are involved in various legal proceedings related to employment practices, environmental issues, antitrust matters and other matters concerning our business. We record liabilities for losses from legal proceedings when we determine that it is probable that the outcome in a legal proceeding will be unfavorable and the amount of loss can be reasonably estimated. Although the outcome of the legal proceedings in which we are involved cannot be predicted with certainty, we believe that the resolution of current matters will not have a material adverse effect on our Consolidated Financial Statements.
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 liquidity as outlined in the merchant processing agreements. 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. We did not have a Reserve or an amount withheld as of
December 31, 2016
or
2015
.
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 or occupancy 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 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 that 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
December 31, 2016
, we had approximately
84,000
full-time equivalent employees. Approximately
19%
of these employees were represented by unions. The following table shows our domestic airline employee groups that are represented by unions.
|
|
|
|
|
|
|
Employee Group
|
Approximate Number of Active Employees Represented
|
|
Union
|
Date on which Collective Bargaining Agreement Becomes Amendable
|
Delta Pilots
|
12,863
|
|
|
ALPA
|
December 31, 2019
|
Delta Flight Superintendents (Dispatchers)
|
415
|
|
|
PAFCA
|
March 31, 2018
|
Endeavor Air Pilots
|
1,527
|
|
|
ALPA
|
January 1, 2020
|
Endeavor Air Flight Attendants
|
1,132
|
|
|
AFA
|
December 31, 2018
|
Endeavor Air Dispatchers
|
47
|
|
|
PAFCA
|
December 31, 2018
|
In addition,
199
refinery employees of Monroe are represented by the United Steel Workers under an agreement that expires on February 28, 2019. This agreement is governed by the National Labor Relations Act
, which generally allows either party to engage in self help upon the expiration of the agreement.
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 10
. INCOME TAXES
Income Tax (Provision) Benefit
Our income tax (provision) benefit consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in millions)
|
2016
|
2015
|
2014
|
Current tax (provision) benefit:
|
|
|
|
|
|
|
Federal
|
$
|
—
|
|
$
|
(23
|
)
|
$
|
21
|
|
State and local
|
(28
|
)
|
(25
|
)
|
(9
|
)
|
International
|
(12
|
)
|
(2
|
)
|
(11
|
)
|
Deferred tax (provision) benefit:
|
|
|
|
|
|
|
Federal
|
(2,080
|
)
|
(2,409
|
)
|
(424
|
)
|
State and local
|
(143
|
)
|
(172
|
)
|
10
|
|
Income tax provision
|
$
|
(2,263
|
)
|
$
|
(2,631
|
)
|
$
|
(413
|
)
|
The following table presents the principal reasons for the difference between the effective tax rate and the U.S. federal statutory income tax rate:
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
2015
|
2014
|
U.S. federal statutory income tax rate
|
35.0
|
%
|
35.0
|
%
|
35.0
|
%
|
State taxes, net of federal benefit
|
1.8
|
|
1.8
|
|
2.0
|
|
Decrease in valuation allowance
|
—
|
|
(0.2
|
)
|
(2.4
|
)
|
Foreign tax rate differential
|
(2.0
|
)
|
—
|
|
—
|
|
Other
|
(0.7
|
)
|
0.2
|
|
3.9
|
|
Effective income tax rate
|
34.1
|
%
|
36.8
|
%
|
38.5
|
%
|
As of December 31, 2016, undistributed earnings of our foreign subsidiaries amounted to
$379 million
. We have not recognized income taxes on undistributed foreign earnings, which will be used in our international operations and will not be repatriated. It is not practicable to estimate the unrealized U.S. deferred tax liability due to uncertainty related to the timing or availability of foreign tax credits.
Deferred Taxes
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. The following table shows significant components of our deferred tax assets and liabilities:
|
|
|
|
|
|
|
|
|
December 31,
|
(in millions)
|
2016
|
2015
|
Deferred tax assets:
|
|
|
Net operating loss carryforwards
|
$
|
2,485
|
|
$
|
3,838
|
|
Pension, postretirement and other benefits
|
5,259
|
|
5,444
|
|
Fuel derivatives MTM adjustments
|
112
|
|
282
|
|
Alternative minimum tax credit carryforward
|
379
|
|
379
|
|
Deferred revenue
|
1,544
|
|
1,522
|
|
Other
|
963
|
|
1,047
|
|
Valuation allowance
|
(40
|
)
|
(56
|
)
|
Total deferred tax assets
|
$
|
10,702
|
|
$
|
12,456
|
|
Deferred tax liabilities:
|
|
|
Depreciation
|
$
|
5,701
|
|
$
|
5,490
|
|
Intangible assets
|
1,691
|
|
1,681
|
|
Other
|
246
|
|
329
|
|
Total deferred tax liabilities
|
$
|
7,638
|
|
$
|
7,500
|
|
|
|
|
Net deferred tax assets
|
$
|
3,064
|
|
$
|
4,956
|
|
At
December 31, 2016
, we had
$379 million
of federal alternative minimum tax credit carryforwards, which do not expire, and
$5.9 billion
of federal pre-tax net operating loss carryforwards, which will not begin to expire until
2027
.
Valuation Allowance
We periodically assess whether it is more likely than not that we will generate sufficient taxable income to realize our deferred income tax assets. We establish valuation allowances if it is not likely we will realize our deferred income tax assets. In making this determination, we consider all available positive and negative evidence and make certain assumptions. We consider, among other things, projected future taxable income, scheduled reversals of deferred tax liabilities, the overall business environment, our historical financial results and tax planning strategies.
Remaining valuation allowances
primarily related to state net operating losses, state credits and unrealized losses on investments, which have limited expiration periods.
The following table shows the balance of our valuation allowance and the associated activity:
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2016
|
2015
|
2014
|
Valuation allowance at beginning of period
|
$
|
56
|
|
$
|
46
|
|
$
|
177
|
|
Income tax provision
|
—
|
|
—
|
|
(9
|
)
|
Other comprehensive income tax (provision) benefit
|
(16
|
)
|
24
|
|
(3
|
)
|
Expirations
|
—
|
|
(4
|
)
|
(91
|
)
|
Release of valuation allowance
|
—
|
|
(10
|
)
|
(28
|
)
|
Valuation allowance at end of period
|
$
|
40
|
|
$
|
56
|
|
$
|
46
|
|
Uncertain Tax Positions
The amount of, and changes to, our uncertain tax positions were not material in any of the years presented. The amount of unrecognized tax benefits at December 31,
2016
,
2015
and
2014
was
$32 million
,
$32 million
and
$40 million
, respectively. We accrue interest and penalties related to unrecognized tax benefits in interest expense and operating expense, respectively. Interest and penalties are not material in any period presented.
We are currently under audit by the IRS for the 2016 and 2015 tax years.
NOTE 11
. EQUITY AND EQUITY COMPENSATION
Equity
We are authorized to issue
2.0 billion
shares of capital stock, of which up to
1.5 billion
may be shares of common stock, par value
$0.0001
per share, and up to
500 million
may be shares of preferred stock.
Preferred Stock.
We may issue preferred stock in one or more series. The Board of Directors is authorized (1) to fix the descriptions, powers (including voting powers), preferences, rights, qualifications, limitations and restrictions with respect to any series of preferred stock and (2) to specify the number of shares of any series of preferred stock. We have not issued any preferred stock.
Treasury Stock.
We generally withhold shares of Delta common stock to cover employees' portion of required tax withholdings when employee equity awards are issued or vest. These shares are valued at cost, which equals the market price of the common stock on the date of issuance or vesting. The weighted average cost of shares held in treasury was
$19.40
and
$17.70
as of
December 31, 2016
and
2015
, respectively.
Equity-Based Compensation
Our broad-based equity and cash compensation plan provides for grants of restricted stock, stock options, performance awards, including cash incentive awards and other equity-based awards (the "Plan"). Shares of common stock issued under the Plan may be made available from authorized, but unissued, common stock or common stock we acquire. If any shares of our common stock are covered by an award that is canceled, forfeited or otherwise terminates without delivery of shares (including shares surrendered or withheld for payment of the exercise price of an award or taxes related to an award), such shares will again be available for issuance under the Plan. The Plan authorizes the issuance of up to
163 million
shares of common stock. As of
December 31, 2016
, there were
31 million
shares available for future grants.
We make long-term incentive awards annually to eligible employees under the Plan. Generally, awards vest over time, subject to the employee's continued employment. Equity compensation expense for these awards is recognized in salaries and related costs over the employee's requisite service period (generally, the vesting period of the award) and totaled
$105 million
,
$76 million
and
$81 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively. We record expense on a straight-line basis for awards with installment vesting. As of
December 31, 2016
, unrecognized costs related to unvested shares and stock options totaled
$74 million
. We expect substantially all unvested awards to vest and recognize any forfeitures as they occur.
Restricted Stock
. Restricted stock is common stock that may not be sold or otherwise transferred for a period of time and is subject to forfeiture in certain circumstances. The fair value of restricted stock awards is based on the closing price of the common stock on the grant date. As of
December 31, 2016
, there were
2.8
million unvested restricted stock awards.
Stock Options.
Stock options are granted with an exercise price equal to the closing price of Delta common stock on the grant date and generally have a 10-year term. We determine the fair value of stock options at the grant date using an option pricing model. As of
December 31, 2016
, there were
2.8 million
outstanding stock option awards with a weighted average exercise price of
$21.22
, and
2.2 million
were exercisable.
Performance Shares.
Performance shares are long-term incentive opportunities, which are payable in common stock and/or cash, and are generally contingent upon our achieving certain financial goals.
Other.
As discussed in Note 1 of the Notes to the Consolidated Financial Statements, we adopted ASU 2016-09 in the June 2016 quarter. Prior to 2016,
no
tax benefit was recognized in equity related to equity-based compensation as our excess tax benefits did not reduce taxes payable. During 2016, we recognized
$33 million
of excess tax benefits in our income tax provision.
NOTE 12
. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table shows the components of accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Pension and Other Benefits Liabilities
(2)
|
Derivative Contracts
|
Investments
|
Total
|
Balance at January 1, 2014
|
$
|
(5,323
|
)
|
$
|
219
|
|
$
|
(26
|
)
|
$
|
(5,130
|
)
|
Changes in value (net of tax effect of $1,276)
|
(2,267
|
)
|
83
|
|
10
|
|
(2,174
|
)
|
Reclassification into earnings (net of tax effect of $4)
(1)
|
73
|
|
(80
|
)
|
—
|
|
(7
|
)
|
Balance at December 31, 2014
|
(7,517
|
)
|
222
|
|
(16
|
)
|
(7,311
|
)
|
Changes in value (net of tax effect of $41)
|
10
|
|
43
|
|
(45
|
)
|
8
|
|
Reclassification into earnings (net of tax effect of $16)
(1)
|
153
|
|
(125
|
)
|
—
|
|
28
|
|
Balance at December 31, 2015
|
(7,354
|
)
|
140
|
|
(61
|
)
|
(7,275
|
)
|
Changes in value (net of tax effect of $293)
|
(482
|
)
|
(19
|
)
|
42
|
|
(459
|
)
|
Reclassification into earnings (net of tax effect of $57)
(1)
|
122
|
|
(24
|
)
|
—
|
|
98
|
|
Balance at December 31, 2016
|
$
|
(7,714
|
)
|
$
|
97
|
|
$
|
(19
|
)
|
$
|
(7,636
|
)
|
|
|
(1)
|
Amounts reclassified from AOCI for pension and other benefits are recorded in salaries and related costs in the Consolidated Statements of Operations. Amounts reclassified from AOCI for derivative contracts designated as foreign currency cash flow hedges and interest rate cash flow hedges are recorded in passenger revenue and interest expense, net, respectively, in the Consolidated Statements of Operations.
|
|
|
(2)
|
Includes
$1.9 billion
of deferred income tax expense, primarily related to pension obligations, that will not be recognized in net income until the pension obligations are fully extinguished. We consider all income sources, including other comprehensive income, in determining the amount of tax benefit allocated to continuing operations.
|
NOTE 13
. SEGMENTS AND GEOGRAPHIC INFORMATION
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker and is used in resource allocation and performance assessments. Our chief operating decision maker is considered to be our executive leadership team. Our executive leadership team regularly reviews discrete information for our
two
operating segments, which are determined by the products and services provided: our airline segment and our refinery segment.
Airline Segment
Our airline segment is managed as a single business unit that provides scheduled air transportation for passengers and cargo throughout the U.S. and around the world and other ancillary airline services. This allows us to benefit from an integrated revenue pricing and route network. Our flight equipment forms one fleet, which is deployed through a single route scheduling system. When making resource allocation decisions, our chief operating decision maker evaluates flight profitability data, which considers aircraft type and route economics, but gives no weight to the financial impact of the resource allocation decision on an individual carrier basis. Our objective in making resource allocation decisions is to optimize our consolidated financial results.
Refinery Segment
In
June 2012
, our wholly owned subsidiaries, Monroe Energy, LLC, and MIPC, LLC (collectively, "Monroe"), acquired the Trainer oil refinery and related assets located near Philadelphia, Pennsylvania, as part of our strategy to mitigate the cost of the refining margin reflected in the price of jet fuel. The acquisition included pipelines and terminal assets that allow the refinery to supply jet fuel to our airline operations throughout the Northeastern U.S., including our New York hubs at LaGuardia and JFK. We accounted for the refinery acquisition as a business combination.
Our refinery segment operates for the benefit of the airline segment by providing jet fuel to the airline segment from its own production and through jet fuel obtained via exchange agreements with third parties. The refinery's production consists of jet fuel as well as non-jet fuel products. We use several counterparties to exchange the non-jet fuel products produced by the refinery for jet fuel consumed in our airline operations. The gross fair value of the products exchanged under these agreements during the years ended
December 31, 2016
,
2015
and
2014
was
$2.7 billion
,
$3.1 billion
and
$5.1 billion
, respectively.
Segment Reporting
Segment results are prepared based on our internal accounting methods described below, with reconciliations to consolidated amounts in accordance with GAAP. Our segments are not designed to measure operating income or loss directly related to the products and services included in each segment on a stand-alone basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Airline
|
Refinery
|
|
Intersegment Sales/Other
|
|
Consolidated
|
Year Ended December 31, 2016
|
|
|
|
|
|
|
Operating revenue:
|
$
|
39,406
|
|
$
|
3,843
|
|
|
|
|
$
|
39,639
|
|
Sales to airline segment
|
|
|
|
$
|
(695
|
)
|
(1)
|
|
Exchanged products
|
|
|
|
(2,658
|
)
|
(2)
|
|
Sales of refined products
|
|
|
|
(257
|
)
|
(3)
|
|
Operating income (loss)
(4)
|
7,077
|
|
(125
|
)
|
|
|
|
6,952
|
|
Interest expense, net
|
386
|
|
2
|
|
|
|
|
388
|
|
Depreciation and amortization
|
1,862
|
|
40
|
|
|
|
|
1,902
|
|
Total assets, end of period
|
49,930
|
|
1,331
|
|
|
|
|
51,261
|
|
Capital expenditures
|
3,270
|
|
121
|
|
|
|
|
3,391
|
|
Year Ended December 31, 2015
|
|
|
|
|
|
|
Operating revenue:
|
$
|
40,398
|
|
$
|
4,741
|
|
|
|
|
$
|
40,704
|
|
Sales to airline segment
|
|
|
|
$
|
(990
|
)
|
(1)
|
|
Exchanged products
|
|
|
|
(3,108
|
)
|
(2)
|
|
Sales of refined products
|
|
|
|
(337
|
)
|
(3)
|
|
Operating income
(4)
|
7,512
|
|
290
|
|
|
|
|
7,802
|
|
Interest expense, net
|
481
|
|
—
|
|
|
|
|
481
|
|
Depreciation and amortization
|
1,805
|
|
30
|
|
|
|
|
1,835
|
|
Total assets, end of period
|
51,785
|
|
1,349
|
|
|
|
|
53,134
|
|
Capital expenditures
|
2,853
|
|
92
|
|
|
|
|
2,945
|
|
Year Ended December 31, 2014
|
|
|
|
|
|
|
Operating revenue:
|
$
|
40,217
|
|
$
|
6,959
|
|
|
|
|
$
|
40,362
|
|
Sales to airline segment
|
|
|
|
$
|
(1,313
|
)
|
(1)
|
|
Exchanged products
|
|
|
|
(5,104
|
)
|
(2)
|
|
Sales of refined products
|
|
|
|
(397
|
)
|
(3)
|
|
Operating income
(4)
|
2,110
|
|
96
|
|
|
|
|
2,206
|
|
Interest expense, net
|
650
|
|
—
|
|
|
|
|
650
|
|
Depreciation and amortization
|
1,745
|
|
26
|
|
|
|
|
1,771
|
|
Total assets, end of period
|
52,896
|
|
1,109
|
|
|
|
|
54,005
|
|
Capital expenditures
|
2,184
|
|
65
|
|
|
|
|
2,249
|
|
|
|
(1)
|
Represents transfers, valued on a market price basis, from the refinery to the airline segment for use in airline operations. We determine market price by reference to the market index for the primary delivery location, which is New York Harbor, for jet fuel from the refinery.
|
|
|
(2)
|
Represents value of products delivered under our exchange agreements, as discussed above, determined on a market price basis.
|
|
|
(3)
|
These sales were at or near cost; accordingly, the margin on these sales is de minimis.
|
|
|
(4)
|
Includes the impact of pricing arrangements between the airline and refinery segments with respect to the refinery's inventory price risk.
|
Geographic Information
Operating revenue for the airline segment is recognized in a specific geographic region based on the origin, flight path and destination of each flight segment. The majority of the revenues of the refinery, consisting of fuel sales to the airline, have been eliminated in the Consolidated Financial Statements. The remaining operating revenue for the refinery segment is included in the domestic region.
Our operating revenue by geographic region (as defined by the U.S. Department of Transportation) is summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in millions)
|
2016
|
2015
|
2014
|
Domestic
|
$
|
28,108
|
|
$
|
27,884
|
|
$
|
26,898
|
|
Atlantic
|
5,919
|
|
6,505
|
|
6,757
|
|
Pacific
|
2,939
|
|
3,503
|
|
3,948
|
|
Latin America
|
2,673
|
|
2,812
|
|
2,759
|
|
Total
|
$
|
39,639
|
|
$
|
40,704
|
|
$
|
40,362
|
|
Our tangible assets consist primarily of flight equipment, which is mobile across geographic markets. Accordingly, assets are not allocated to specific geographic regions.
NOTE 14
. RESTRUCTURING AND OTHER
The following table shows amounts recorded in restructuring and other on our Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in millions)
|
2016
|
2015
|
2014
|
Fleet and other
|
$
|
—
|
|
$
|
35
|
|
$
|
758
|
|
Severance and related costs
|
—
|
|
—
|
|
71
|
|
Settlements
|
—
|
|
—
|
|
(113
|
)
|
Total restructuring and other
|
$
|
—
|
|
$
|
35
|
|
$
|
716
|
|
Fleet and Other
. In recent years, we have restructured our domestic fleet by replacing a portion of our
50
-seat regional fleet with more efficient and customer preferred CRJ-900 and B-717-200 aircraft and replacing older, less cost effective B-757-200 aircraft with B-737-900ER aircraft. Restructuring charges recorded during 2015 and 2014 include remaining lease payments, lease return costs for permanently grounded aircraft, impairments, accelerated aircraft depreciation and related equipment disposals.
During 2014, we decided to retire our fleet of
16
B-747-400 aircraft by the end of 2017. As part of the accelerated retirement, we recorded an impairment charge for the owned and capital leased aircraft. This impairment charge was calculated using Level 3 fair value inputs based primarily upon recent market transactions and existing market conditions. Also, we recorded a lease restructuring charge for the
three
B-747-400 aircraft under operating leases that were retired during 2014.
Severance and Related Costs
. During 2015, we announced a voluntary retirement program for eligible U.S. employees and an involuntary merit restructuring initiative. During 2016 and 2015, we recognized charges of
$11 million
and
$51 million
, respectively, in salaries and related costs in our Consolidated Statement of Operations in connection with these programs. During 2014, we announced a voluntary retirement program for eligible U.S. employees and recorded a
$71 million
charge in restructuring and other in our Consolidated Statement of Operations in connection with this program and other programs related to our Pacific strategy.
Settlements
. During 2014, we settled outstanding litigation resulting in a favorable settlement of
$67 million
and received an unrelated insurance settlement of
$46 million
.
The following table shows the balances and activity for restructuring charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and Related Costs
|
|
Lease Restructuring
|
(in millions)
|
2016
|
2015
|
2014
|
|
2016
|
2015
|
2014
|
Liability at beginning of period
|
$
|
52
|
|
$
|
42
|
|
$
|
—
|
|
|
$
|
415
|
|
$
|
462
|
|
$
|
168
|
|
Additional costs and expenses
|
11
|
|
51
|
|
71
|
|
|
1
|
|
41
|
|
349
|
|
Payments
|
(59
|
)
|
(41
|
)
|
(29
|
)
|
|
(85
|
)
|
(86
|
)
|
(55
|
)
|
Other
|
—
|
|
—
|
|
—
|
|
|
(2
|
)
|
(2
|
)
|
—
|
|
Liability at end of period
|
$
|
4
|
|
$
|
52
|
|
$
|
42
|
|
|
$
|
329
|
|
$
|
415
|
|
$
|
462
|
|
NOTE 15
. EARNINGS PER SHARE
We calculate basic earnings per share by dividing the net income by the weighted average number of common shares outstanding, excluding restricted shares. We calculate diluted earnings per share by dividing net income by the weighted average number of common shares outstanding plus the dilutive effect of outstanding share-based awards, including stock options and restricted stock awards. Antidilutive common stock equivalents excluded from the diluted earnings per share calculation are not material. The following table shows our computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in millions, except per share data)
|
2016
|
2015
|
2014
|
Net income
|
$
|
4,373
|
|
$
|
4,526
|
|
$
|
659
|
|
|
|
|
|
Basic weighted average shares outstanding
|
751
|
|
797
|
|
836
|
|
Dilutive effect of share-based awards
|
4
|
|
7
|
|
9
|
|
Diluted weighted average shares outstanding
|
755
|
|
804
|
|
845
|
|
|
|
|
|
Basic earnings per share
|
$
|
5.82
|
|
$
|
5.68
|
|
$
|
0.79
|
|
Diluted earnings per share
|
$
|
5.79
|
|
$
|
5.63
|
|
$
|
0.78
|
|
NOTE 16
. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes our unaudited results of operations on a quarterly basis. The quarterly earnings per share amounts for a year will not add to the earnings per share for that year due to the weighting of shares used in calculating per share data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended,
|
(in millions, except per share data)
|
March 31
|
June 30
|
September 30
|
December 31
|
2016
|
|
|
|
|
Operating revenue
|
$
|
9,251
|
|
$
|
10,447
|
|
$
|
10,483
|
|
$
|
9,458
|
|
Operating income
|
1,540
|
|
2,423
|
|
1,969
|
|
1,020
|
|
Net income
|
946
|
|
1,546
|
|
1,259
|
|
622
|
|
Basic earnings per share
|
$
|
1.22
|
|
$
|
2.04
|
|
$
|
1.70
|
|
$
|
0.85
|
|
Diluted earnings per share
|
$
|
1.21
|
|
$
|
2.03
|
|
$
|
1.69
|
|
$
|
0.84
|
|
2015
|
|
|
|
|
Operating revenue
|
$
|
9,388
|
|
$
|
10,707
|
|
$
|
11,107
|
|
$
|
9,502
|
|
Operating income
|
1,398
|
|
2,474
|
|
2,213
|
|
1,717
|
|
Net income
|
746
|
|
1,485
|
|
1,315
|
|
980
|
|
Basic earnings per share
|
$
|
0.91
|
|
$
|
1.85
|
|
$
|
1.67
|
|
$
|
1.26
|
|
Diluted earnings per share
|
$
|
0.90
|
|
$
|
1.83
|
|
$
|
1.65
|
|
$
|
1.25
|
|