September 2019 Quarter Financial Highlights
Our pre-tax income for the September 2019 quarter was $1.9 billion, representing a $259 million increase compared to the corresponding prior year quarter primarily resulting from a 5.1% increase in revenue. Pre-tax income, adjusted (a non-GAAP financial measure) was $2.0 billion, an increase of $361 million compared to the corresponding prior year period.
Revenue. Compared to the September 2018 quarter, our operating revenue increased $607 million, or 5.1%, primarily from growth in all components of passenger revenue, with premium product ticket revenue driving more than half of the improvement, and strong growth in both loyalty and maintenance, repair and overhaul ("MRO") revenue. The improvement in operating revenue on 3.9% higher capacity generated a 1.1% increase in total revenue per available seat mile ("TRASM") and a 2.5% increase in TRASM, adjusted (a non-GAAP financial measure) compared to the September 2018 quarter.
Operating Expense. Total operating expense increased $181 million, or 1.8%, primarily resulting from higher employee costs. Our consolidated operating cost per available seat mile ("CASM") decreased 2.1% to 13.85 cents compared to the September 2018 quarter, primarily due to lower fuel costs and higher capacity. Non-fuel unit costs ("CASM-Ex" a non-GAAP financial measure) increased 2.4% to 9.84 cents compared to the September 2018 quarter, due to employee wage increases, record passenger volumes and the effects of weather-related operational disruptions.
Non-Operating Results. Total non-operating expense was $124 million in the September 2019 quarter compared to income of $43 million in the September 2018 quarter, primarily due to unrealized losses on our equity investments.
Free Cash Flow. Strong earnings during the quarter resulted in $2.2 billion of operating cash flow, enabling $945 million of capital investments including $549 million of aircraft purchases and cabin enhancements. These results generated $1.4 billion of free cash flow (a non-GAAP financial measure) compared to $655 million in the September 2018 quarter.
The above non-GAAP financial measures for pre-tax income, adjusted, TRASM, adjusted, CASM-Ex and free cash flow, are defined and reconciled in "Supplemental Information" below.
Results of Operations - Three Months Ended September 30, 2019 and 2018
Operating Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
Increase (Decrease)
|
% Increase (Decrease)
|
(in millions)(1)
|
2019
|
2018
|
Ticket - Main cabin
|
$
|
6,021
|
|
$
|
5,873
|
|
$
|
148
|
|
2.5
|
%
|
Ticket - Business cabin and premium products
|
4,008
|
|
3,680
|
|
328
|
|
8.9
|
%
|
Loyalty travel awards
|
732
|
|
678
|
|
54
|
|
8.0
|
%
|
Travel-related services
|
649
|
|
565
|
|
84
|
|
14.9
|
%
|
Total passenger revenue
|
$
|
11,410
|
|
$
|
10,796
|
|
$
|
614
|
|
5.7
|
%
|
Cargo
|
189
|
|
226
|
|
(37
|
)
|
(16.5
|
)%
|
Other
|
961
|
|
931
|
|
30
|
|
3.2
|
%
|
Total operating revenue
|
$
|
12,560
|
|
$
|
11,953
|
|
$
|
607
|
|
5.1
|
%
|
|
|
|
|
|
TRASM (cents)
|
|
16.58
|
¢
|
|
16.40
|
¢
|
|
0.18
|
¢
|
1.1
|
%
|
Third-party refinery sales(2)
|
(0.01
|
)
|
(0.15
|
)
|
0.14
|
|
NM
|
|
DGS sale adjustment(2)
|
—
|
|
(0.09
|
)
|
0.09
|
|
NM
|
|
TRASM, adjusted
|
|
16.57
|
¢
|
|
16.17
|
¢
|
|
0.41
|
¢
|
2.5
|
%
|
|
|
(1)
|
The reconciliation above may not calculate exactly due to rounding.
|
|
|
(2)
|
For additional information on adjustments to TRASM, see "Supplemental Information" below.
|
Ticket and Loyalty Travel Awards Revenue
Ticket, including both main and business cabin and premium products, and loyalty travel awards revenue increased $476 million and $54 million, respectively, compared to the September 2018 quarter. Business cabin and premium products ticket revenue includes revenues from fare products other than main cabin, including Delta One, Delta Premium Select, First Class and Comfort+. The growth in ticket revenue was enabled by both business and leisure demand strength. We continue to take delivery of new aircraft that include more premium seats, while also generating higher load factor for premium products.
Passenger Revenue by Geographic Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
vs. Three Months Ended September 30, 2018
|
(in millions)
|
Three Months Ended September 30, 2019
|
Passenger Revenue
|
RPMs (Traffic)
|
ASMs (Capacity)
|
Passenger Mile Yield
|
PRASM
|
Load Factor
|
Domestic
|
$
|
7,971
|
|
7.8
|
%
|
7.0
|
%
|
4.5
|
%
|
0.7
|
%
|
3.2
|
%
|
2.1
|
|
pts
|
Atlantic
|
2,060
|
|
3.2
|
%
|
5.4
|
%
|
4.9
|
%
|
(2.0
|
)%
|
(1.6
|
)%
|
0.5
|
|
pts
|
Latin America
|
683
|
|
1.2
|
%
|
(1.9
|
)%
|
(2.3
|
)%
|
3.2
|
%
|
3.6
|
%
|
0.3
|
|
pts
|
Pacific
|
696
|
|
(4.6
|
)%
|
2.7
|
%
|
3.3
|
%
|
(7.2
|
)%
|
(7.6
|
)%
|
(0.4
|
)
|
pts
|
Total
|
$
|
11,410
|
|
5.7
|
%
|
5.6
|
%
|
3.9
|
%
|
0.1
|
%
|
1.7
|
%
|
1.4
|
|
pts
|
Passenger revenue increased $614 million, or 5.7%, compared to the September 2018 quarter. Passenger revenue per available seat mile ("PRASM") increased 1.7%, and passenger mile yield increased 0.1% on 3.9% higher capacity. Load factor increased 1.4 points from the prior year to 88.3%.
Domestic unit revenue increased 3.2%, resulting from our commercial initiatives, including our premium products, as well as high load factors driven by a combination of strong demand and limited industry capacity growth.
Passenger revenue related to our international regions increased 1.1% year-over-year on capacity increases in the Atlantic and Pacific regions and yield growth in Latin America. This growth in passenger revenue was achieved despite the negative impact of foreign currency fluctuations.
Atlantic unit revenue decreased due to foreign currency fluctuations between the U.S. dollar and the Euro and British pound, the uncertain economic outlook in Europe and increased industry capacity. These conditions were partially offset by growth in premium product demand and strong U.S. point of sale.
Unit revenue increased in Latin America for the fourth consecutive quarter as a result of yield growth, mainly in Brazil on reduced industry capacity from the U.S. and in Mexico beach markets. Unit revenue and yield increases were achieved despite the negative impact of Hurricane Dorian in the Bahamas. In the September 2019 quarter we announced our plan to enter into a strategic alliance with LATAM, which is expected to provide greater customer convenience, a more seamless travel experience and to better connect customers from and throughout the Americas.
Unit revenue decreased in the Pacific region primarily due to double-digit capacity growth to Japan and Korea from new routes introduced over the last year, trade related uncertainty and foreign currency fluctuations. We continued to reshape our Pacific network with the August announcement that beginning in March 2020 we will transfer our U.S.-Tokyo services from Narita to Haneda airport, Tokyo's preferred airport for corporate customers.
Other Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
Increase (Decrease)
|
% Increase (Decrease)
|
(in millions)
|
2019
|
2018
|
Loyalty program
|
$
|
485
|
|
$
|
369
|
|
$
|
116
|
|
31.4
|
%
|
Ancillary businesses and refinery
|
291
|
|
433
|
|
(142
|
)
|
(32.8
|
)%
|
Miscellaneous
|
185
|
|
129
|
|
56
|
|
43.4
|
%
|
Total other revenue
|
$
|
961
|
|
$
|
931
|
|
$
|
30
|
|
3.2
|
%
|
Loyalty Program. Loyalty program revenues relate to brand usage by third parties and other performance obligations embedded in mileage credits sold, including redemption of mileage credits for non-travel awards.
Effective January 1, 2019, we amended our co-brand agreement with American Express, and we also amended other agreements with American Express during the March quarter. The new agreements increase the value we receive and extend the terms to 2029. Under the agreements, we sell mileage credits to American Express and allow American Express to market its services or products using our brand and customer database. The products and services sold with the mileage credits (such as award travel, priority boarding, baggage fee waivers, lounge access and the use of our brand) are consistent with previous agreements. We continue to use the accounting method that allocates the consideration received based on the relative selling prices of those products and services.
The relative value of the brand component has increased, resulting in an additional $130 million primarily within other revenue during the September 2019 quarter. We expect the amended agreements to generate incremental revenues of approximately $500 million during 2019.
Ancillary Businesses and Refinery. Ancillary businesses and refinery includes aircraft maintenance services we provide to third parties, our vacation wholesale operations, our private jet operations and refinery sales to third parties. Refinery sales to third parties, which are at or near cost, decreased $102 million compared to the September 2018 quarter. September 2018 quarter results also included $63 million of revenue from DGS, which was sold in December 2018 and is no longer reflected in ancillary businesses and refinery. These decreases were mitigated by growth in our MRO revenues, which increased $18 million to $209 million during the September 2019 quarter.
Miscellaneous. Miscellaneous revenue is primarily composed of lounge access and codeshare revenues.
Operating Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
Increase (Decrease)
|
% Increase (Decrease)
|
(in millions)
|
2019
|
2018
|
Salaries and related costs
|
$
|
2,884
|
|
$
|
2,753
|
|
$
|
131
|
|
4.8
|
%
|
Aircraft fuel and related taxes
|
2,239
|
|
2,498
|
|
(259
|
)
|
(10.4
|
)%
|
Regional carriers expense, excluding fuel
|
900
|
|
885
|
|
15
|
|
1.7
|
%
|
Contracted services
|
685
|
|
562
|
|
123
|
|
21.9
|
%
|
Depreciation and amortization
|
631
|
|
573
|
|
58
|
|
10.1
|
%
|
Passenger commissions and other selling expenses
|
539
|
|
535
|
|
4
|
|
0.7
|
%
|
Aircraft maintenance materials and outside repairs
|
424
|
|
371
|
|
53
|
|
14.3
|
%
|
Landing fees and other rents
|
460
|
|
439
|
|
21
|
|
4.8
|
%
|
Profit sharing
|
517
|
|
399
|
|
118
|
|
29.6
|
%
|
Ancillary businesses and refinery
|
279
|
|
410
|
|
(131
|
)
|
(32.0
|
)%
|
Passenger service
|
345
|
|
329
|
|
16
|
|
4.9
|
%
|
Aircraft rent
|
110
|
|
99
|
|
11
|
|
11.1
|
%
|
Other
|
476
|
|
455
|
|
21
|
|
4.6
|
%
|
Total operating expense
|
$
|
10,489
|
|
$
|
10,308
|
|
$
|
181
|
|
1.8
|
%
|
Salaries and related costs. The increase in salaries and related costs is primarily due to pay rate increases for eligible employees. This increase is partially offset by salaries for DGS employees, which are no longer included in salaries and related costs following the sale of that business in December 2018. DGS-related expenses are now recorded in contracted services.
Aircraft Fuel and Related Taxes. Fuel expense decreased $259 million compared to the prior year quarter primarily due to an approximately 10% decrease in the market price per gallon of jet fuel, partially offset by a 2% increase in consumption.
The table below shows the impact of hedging and the refinery on fuel expense and average price per gallon, adjusted (non-GAAP financial measures):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Price Per Gallon
|
|
Three Months Ended September 30,
|
Change
|
Three Months Ended September 30,
|
Change
|
(in millions, except per gallon data) (1)
|
2019
|
2018
|
2019
|
2018
|
Fuel purchase cost(2)
|
$
|
2,313
|
|
$
|
2,526
|
|
$
|
(213
|
)
|
$
|
2.00
|
|
$
|
2.23
|
|
$
|
(0.23
|
)
|
Fuel hedge impact
|
(25
|
)
|
(16
|
)
|
(9
|
)
|
(0.02
|
)
|
(0.01
|
)
|
(0.01
|
)
|
Refinery segment impact
|
(49
|
)
|
(12
|
)
|
(37
|
)
|
(0.04
|
)
|
(0.01
|
)
|
(0.03
|
)
|
Total fuel expense
|
$
|
2,239
|
|
$
|
2,498
|
|
$
|
(259
|
)
|
$
|
1.94
|
|
$
|
2.21
|
|
$
|
(0.27
|
)
|
MTM adjustments and settlements(3)
|
25
|
|
16
|
|
9
|
|
0.02
|
|
0.01
|
|
0.01
|
|
Total fuel expense, adjusted
|
$
|
2,264
|
|
$
|
2,514
|
|
$
|
(249
|
)
|
$
|
1.96
|
|
$
|
2.22
|
|
$
|
(0.25
|
)
|
|
|
(1)
|
The reconciliation above may not calculate exactly due to rounding.
|
|
|
(2)
|
Market price for jet fuel at airport locations, including related taxes and transportation costs.
|
|
|
(3)
|
Mark-to-market ("MTM") adjustments and settlements include the effects of the derivative transactions disclosed in Note 5 of the Notes to the Condensed Consolidated Financial Statements. For the reason fuel expense is adjusted for MTM adjustments and settlements, see "Supplemental Information" below.
|
Contracted Services. The increase in contracted services expense predominantly relates to services performed by DGS that were recorded in salaries and related costs prior to the sale of that business in December 2018.
Depreciation and Amortization. The increase in depreciation and amortization primarily results from new aircraft deliveries, fleet modifications and technology enhancements.
Aircraft Maintenance Materials and Outside Repairs. Aircraft maintenance materials and outside repairs consist of costs associated with the maintenance of aircraft used in our operations. The increase primarily relates to a higher volume of scheduled engine overhauls on certain aircraft.
Profit Sharing. Our profit sharing program pays 10% to all eligible employees for the first $2.5 billion of annual profit and 20% of annual profit above $2.5 billion.
Ancillary Businesses and Refinery. Ancillary businesses and refinery includes expenses associated with aircraft maintenance services we provide to third parties, our vacation wholesale operations, our private jet operations and refinery sales to third parties. Refinery sales to third parties, which are at or near cost, decreased $102 million compared to the September 2018 quarter. In addition, costs related to services performed by DGS on behalf of third parties were recorded in ancillary businesses and refinery prior to the sale of that business in December 2018. These decreases were partially offset by growth in our MRO business, as discussed above.
Results of Operations - Nine Months Ended September 30, 2019 and 2018
Operating Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
Increase (Decrease)
|
% Increase (Decrease)
|
(in millions)(1)
|
2019
|
2018
|
Ticket - Main cabin
|
$
|
16,680
|
|
$
|
16,139
|
|
$
|
541
|
|
3.4
|
%
|
Ticket - Business cabin and premium products
|
11,306
|
|
10,375
|
|
931
|
|
9.0
|
%
|
Loyalty travel awards
|
2,174
|
|
1,976
|
|
198
|
|
10.0
|
%
|
Travel-related services
|
1,872
|
|
1,617
|
|
255
|
|
15.8
|
%
|
Total passenger revenue
|
$
|
32,032
|
|
$
|
30,107
|
|
$
|
1,925
|
|
6.4
|
%
|
Cargo
|
567
|
|
651
|
|
(84
|
)
|
(12.9
|
)%
|
Other
|
2,969
|
|
2,938
|
|
31
|
|
1.1
|
%
|
Total operating revenue
|
$
|
35,568
|
|
$
|
33,696
|
|
$
|
1,872
|
|
5.6
|
%
|
|
|
|
|
|
TRASM (cents)
|
|
16.94
|
¢
|
|
16.78
|
¢
|
|
0.16
|
¢
|
1.0
|
%
|
Third-party refinery sales(2)
|
(0.05
|
)
|
(0.27
|
)
|
0.22
|
|
NM
|
|
DGS sale adjustment(2)
|
—
|
|
(0.09
|
)
|
0.09
|
|
NM
|
|
TRASM, adjusted
|
|
16.90
|
¢
|
|
16.42
|
¢
|
|
0.48
|
¢
|
2.9
|
%
|
|
|
(1)
|
The reconciliation above may not calculate exactly due to rounding.
|
|
|
(2)
|
For additional information on adjustments to TRASM, see "Supplemental Information" below.
|
Ticket and Loyalty Travel Awards Revenue
Ticket, including both main and business cabin and premium products, and loyalty travel awards revenue increased $1.5 billion and $198 million, respectively, compared to the nine months ended September 30, 2018. Business cabin and premium products ticket revenue includes revenues from fare products other than main cabin, including Delta One, Delta Premium Select, First Class and Comfort+. The growth in ticket revenue was enabled by both business and leisure demand strength. We continue to take delivery of new aircraft that include more premium seats, while also generating higher load factor for premium products.
Passenger Revenue by Geographic Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
vs. Nine Months Ended September 30, 2018
|
(in millions)
|
Nine Months Ended September 30, 2019
|
Passenger Revenue
|
RPMs (Traffic)
|
ASMs (Capacity)
|
Passenger Mile Yield
|
PRASM
|
Load Factor
|
Domestic
|
$
|
22,755
|
|
7.9
|
%
|
7.0
|
%
|
5.1
|
%
|
0.8
|
%
|
2.6
|
%
|
1.5
|
|
pts
|
Atlantic
|
5,042
|
|
4.3
|
%
|
5.0
|
%
|
5.0
|
%
|
(0.7
|
)%
|
(0.7
|
)%
|
—
|
|
pts
|
Latin America
|
2,298
|
|
3.2
|
%
|
(0.7
|
)%
|
(1.3
|
)%
|
3.9
|
%
|
4.5
|
%
|
0.5
|
|
pts
|
Pacific
|
1,937
|
|
(0.7
|
)%
|
3.9
|
%
|
5.3
|
%
|
(4.4
|
)%
|
(5.6
|
)%
|
(1.1
|
)
|
pts
|
Total
|
$
|
32,032
|
|
6.4
|
%
|
5.6
|
%
|
4.5
|
%
|
0.7
|
%
|
1.8
|
%
|
0.9
|
|
pts
|
Passenger revenue increased $1.9 billion, or 6.4%, compared to the nine months ended September 30, 2018. PRASM increased 1.8% and passenger mile yield increased 0.7% on 4.5% higher capacity. Load factor increased 0.9 points from the prior year period to 86.5%.
Domestic unit revenue increased 2.6%, resulting from our commercial initiatives, including our premium products, as well as high load factors driven by a combination of strong demand and limited industry capacity growth.
Passenger revenue related to our international regions increased 2.9% year-over-year on capacity increases in the Atlantic and Pacific regions and yield growth in Latin America. This growth in passenger revenue was achieved despite the negative impact of foreign currency fluctuations.
Atlantic unit revenue decreased due to foreign currency fluctuations between the U.S. dollar and the Euro and British pound, the uncertain economic outlook in Europe and increased industry capacity. These conditions were partially offset by growth in premium product demand and strong U.S. point of sale.
Unit revenue increased in Latin America as a result of yield growth, mainly in Brazil on reduced industry capacity from the U.S. and in Mexico beach markets. In the September 2019 quarter we announced our plan to enter into a strategic alliance with LATAM, which is expected to provide greater customer convenience, a more seamless travel experience and to better connect customers from and throughout the Americas.
Unit revenue decreased in the Pacific region primarily due to higher capacity to China, Japan and Korea from new routes introduced over the last year, reduced business demand due to an extended Japanese holiday period, trade related uncertainty and foreign currency fluctuations. Despite these challenges, our joint venture with Korean has enabled solid traffic growth and we have continued to reshape our Pacific network with the August announcement that beginning in March 2020 we will transfer our U.S.-Tokyo services from Narita to Haneda airport, Tokyo's preferred airport for corporate customers.
Other Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
Increase (Decrease)
|
% Increase (Decrease)
|
(in millions)
|
2019
|
2018
|
Loyalty program
|
$
|
1,443
|
|
$
|
1,075
|
|
$
|
368
|
|
34.2
|
%
|
Ancillary businesses and refinery
|
990
|
|
1,475
|
|
(485
|
)
|
(32.9
|
)%
|
Miscellaneous
|
536
|
|
388
|
|
148
|
|
38.1
|
%
|
Total other revenue
|
$
|
2,969
|
|
$
|
2,938
|
|
$
|
31
|
|
1.1
|
%
|
Loyalty Program. Loyalty program revenues relate to brand usage by third parties and other performance obligations embedded in mileage credits sold, including redemption of mileage credits for non-travel awards.
Effective January 1, 2019, we amended our co-brand agreement with American Express, and we also amended other agreements with American Express during the March quarter. The new agreements increase the value we receive and extend the terms to 2029. Under the agreements, we sell mileage credits to American Express and allow American Express to market its services or products using our brand and customer database. The products and services sold with the mileage credits (such as award travel, priority boarding, baggage fee waivers, lounge access and the use of our brand) are consistent with previous agreements. We continue to use the accounting method that allocates the consideration received based on the relative selling prices of those products and services.
The relative value of the brand component has increased, resulting in an additional $400 million primarily within other revenue during the nine months ended September 30, 2019. We expect the amended agreements to generate incremental revenues of approximately $500 million during 2019.
Ancillary Businesses and Refinery. Ancillary businesses and refinery includes aircraft maintenance services we provide to third parties, our vacation wholesale operations, our private jet operations and refinery sales to third parties. Refinery sales to third parties, which are at or near cost, decreased $442 million compared to the nine months ended September 30, 2018. The 2018 results also included $182 million of revenue from DGS, which was sold in December 2018 and is no longer reflected in ancillary businesses and refinery. These decreases were mitigated by growth in our MRO revenues, which increased $120 million to $646 million during the nine months ended September 30, 2019.
Miscellaneous. Miscellaneous revenue is primarily composed of lounge access and codeshare revenues.
Operating Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
Increase (Decrease)
|
% Increase (Decrease)
|
(in millions)
|
2019
|
2018
|
Salaries and related costs
|
$
|
8,275
|
|
$
|
8,004
|
|
$
|
271
|
|
3.4
|
%
|
Aircraft fuel and related taxes
|
6,508
|
|
6,693
|
|
(185
|
)
|
(2.8
|
)%
|
Regional carriers expense, excluding fuel
|
2,698
|
|
2,586
|
|
112
|
|
4.3
|
%
|
Contracted services
|
1,974
|
|
1,646
|
|
328
|
|
19.9
|
%
|
Depreciation and amortization
|
1,960
|
|
1,759
|
|
201
|
|
11.4
|
%
|
Passenger commissions and other selling expenses
|
1,505
|
|
1,473
|
|
32
|
|
2.2
|
%
|
Aircraft maintenance materials and outside repairs
|
1,334
|
|
1,233
|
|
101
|
|
8.2
|
%
|
Landing fees and other rents
|
1,321
|
|
1,254
|
|
67
|
|
5.3
|
%
|
Profit sharing
|
1,256
|
|
991
|
|
265
|
|
26.7
|
%
|
Ancillary businesses and refinery
|
945
|
|
1,396
|
|
(451
|
)
|
(32.3
|
)%
|
Passenger service
|
938
|
|
892
|
|
46
|
|
5.2
|
%
|
Aircraft rent
|
318
|
|
291
|
|
27
|
|
9.3
|
%
|
Other
|
1,317
|
|
1,305
|
|
12
|
|
0.9
|
%
|
Total operating expense
|
$
|
30,349
|
|
$
|
29,523
|
|
$
|
826
|
|
2.8
|
%
|
Salaries and related costs. The increase in salaries and related costs is primarily due to pay rate increases for eligible employees. This increase is partially offset by salaries for DGS employees, which are no longer included in salaries and related costs following the sale of that business in December 2018. DGS-related expenses are now recorded in contracted services.
Aircraft Fuel and Related Taxes. Fuel expense decreased $185 million compared to the prior year due to an approximately 6% decrease in the market price per gallon of jet fuel, which was partially offset by a 2% increase in consumption and reduced profitability at our refinery.
The table below shows the impact of hedging and the refinery on fuel expense and average price per gallon, adjusted (non-GAAP financial measures):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Price Per Gallon
|
|
Nine Months Ended September 30,
|
Change
|
Nine Months Ended September 30,
|
Change
|
(in millions, except per gallon data) (1)
|
2019
|
2018
|
2019
|
2018
|
Fuel purchase cost(2)
|
$
|
6,568
|
|
$
|
6,814
|
|
$
|
(246
|
)
|
$
|
2.04
|
|
$
|
2.17
|
|
$
|
(0.13
|
)
|
Fuel hedge impact
|
(8
|
)
|
(20
|
)
|
12
|
|
—
|
|
(0.01
|
)
|
0.01
|
|
Refinery segment impact
|
(52
|
)
|
(101
|
)
|
49
|
|
(0.01
|
)
|
(0.03
|
)
|
0.02
|
|
Total fuel expense
|
$
|
6,508
|
|
$
|
6,693
|
|
$
|
(185
|
)
|
$
|
2.03
|
|
$
|
2.13
|
|
$
|
(0.10
|
)
|
MTM adjustments and settlements(3)
|
8
|
|
20
|
|
(12
|
)
|
—
|
|
0.01
|
|
(0.01
|
)
|
Total fuel expense, adjusted
|
$
|
6,516
|
|
$
|
6,713
|
|
$
|
(197
|
)
|
$
|
2.03
|
|
$
|
2.14
|
|
$
|
(0.11
|
)
|
|
|
(1)
|
The reconciliation above may not calculate exactly due to rounding.
|
|
|
(2)
|
Market price for jet fuel at airport locations, including related taxes and transportation costs.
|
|
|
(3)
|
MTM adjustments and settlements include the effects of the derivative transactions disclosed in Note 5 of the Notes to the Condensed Consolidated Financial Statements. For additional information and the reason for adjusting fuel expense, see "Supplemental Information" below.
|
Contracted Services. The increase in contracted services expense predominantly relates to services performed by DGS that were recorded in salaries and related costs prior to the sale of that business in December 2018.
Depreciation and Amortization. The increase in depreciation and amortization primarily results from $93 million of accelerated depreciation in the nine months ended September 30, 2019 due to the decision to early retire our MD-90 fleet by the end of 2022, new aircraft deliveries, fleet modifications and technology enhancements. See Note 8 of the Notes to the Condensed Consolidated Financial Statements for additional information on the planned early retirement of our MD-90 fleet.
Aircraft Maintenance Materials and Outside Repairs. Aircraft maintenance materials and outside repairs consist of costs associated with the maintenance of aircraft used in our operations. The increase primarily relates to a higher volume of scheduled engine overhauls on certain aircraft during the September 2019 quarter.
Profit Sharing. Our profit sharing program pays 10% to all eligible employees for the first $2.5 billion of annual profit and 20% of annual profit above $2.5 billion.
Ancillary Businesses and Refinery. Ancillary businesses and refinery includes expenses associated with aircraft maintenance services we provide to third parties, our vacation wholesale operations, our private jet operations and refinery sales to third parties. Refinery sales to third parties, which are at or near cost, decreased $442 million compared to the nine months ended September 30, 2018. In addition, costs related to services performed by DGS on behalf of third parties were recorded in ancillary businesses and refinery prior to the sale of that business in December 2018. These decreases were partially offset by growth in our MRO business, as discussed above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Operating Results
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
(in millions)
|
2019
|
2018
|
Favorable (Unfavorable)
|
2019
|
2018
|
Favorable (Unfavorable)
|
Interest expense, net
|
$
|
(70
|
)
|
$
|
(73
|
)
|
$
|
3
|
|
$
|
(228
|
)
|
$
|
(244
|
)
|
$
|
16
|
|
Unrealized gain/(loss) on investments, net
|
(35
|
)
|
50
|
|
(85
|
)
|
(17
|
)
|
(171
|
)
|
154
|
|
Miscellaneous, net
|
(19
|
)
|
66
|
|
(85
|
)
|
(174
|
)
|
48
|
|
(222
|
)
|
Total non-operating (expense)/income, net
|
$
|
(124
|
)
|
$
|
43
|
|
$
|
(167
|
)
|
$
|
(419
|
)
|
$
|
(367
|
)
|
$
|
(52
|
)
|
Interest expense decreased compared to the prior year periods as a result of lower interest rates on our debt.
Unrealized gain/(loss) on investments reflects the unrealized gains and losses on our equity investments in GOL, China Eastern, Air France-KLM and Korean. See Note 4 of the Notes to the Condensed Consolidated Financial Statements for additional information on our equity investments.
Miscellaneous, net is primarily composed of our proportionate share of earnings/losses from our equity investments in Virgin Atlantic and Grupo Aeroméxico, pension-related benefits/costs, charitable contributions and foreign exchange gains/losses. Our equity investment earnings and foreign exchange gains/losses vary and impact the comparability of miscellaneous, net from period to period.
Income Taxes
We project that our annual effective tax rate for 2019 will be between 23% and 24%. In certain interim periods, we may have adjustments to our net deferred tax liabilities as a result of changes in prior year estimates and tax laws enacted during the period, which will impact the effective tax rate for that interim period.
Refinery Segment
The refinery ("Monroe") primarily produces gasoline, diesel and jet fuel. Monroe exchanges the non-jet fuel products the refinery produces with third parties for jet fuel consumed in our airline operations. The jet fuel produced and procured through exchanging gasoline and diesel fuel produced by the refinery provides approximately 200,000 barrels per day, or approximately 75% of our consumption, for use in our airline operations. We believe that the jet fuel supply resulting from the refinery's operation contributes to reducing the market price of jet fuel and thus lowers our cost of jet fuel compared to what it otherwise would be.
The refinery recorded operating revenue of $1.5 billion and $4.3 billion in the three and nine months ended September 30, 2019, compared to $1.6 billion and $4.8 billion in the three and nine months ended September 30, 2018. Operating revenue in the three and nine months ended September 30, 2019 was primarily composed of $1.1 billion and $3.0 billion of non-jet fuel products exchanged with third parties to procure jet fuel, $304 million and $882 million of sales of jet fuel to the airline segment and $52 million and $360 million of non-jet fuel product sales. Refinery revenues decreased compared to the prior year period due to lower costs of crude oil leading to lower pricing for associated refined products, partially offset by higher refinery run rates during the quarter.
The refinery recorded operating income of $49 million and $52 million in the three and nine months ended September 30, 2019, compared to operating income of $12 million and $101 million in three and nine months ended September 30, 2018.
A refinery is subject to annual U.S. Environmental Protection Agency requirements to blend renewable fuels into the gasoline and on-road diesel fuel it produces. Alternatively, a refinery may purchase renewable energy credits, called Renewable Identification Numbers ("RINs"), from third parties in the secondary market. The refinery purchases the majority of its RINs requirement in the secondary market.
For more information regarding the refinery's results, see Note 10 of the Notes to the Condensed Consolidated Financial Statements.
Operating Statistics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
% Increase
(Decrease)
|
Nine Months Ended September 30,
|
% Increase
(Decrease)
|
Consolidated(1)
|
2019
|
2018
|
2019
|
2018
|
Revenue passenger miles (in millions)
|
66,862
|
|
63,320
|
|
5.6
|
|
%
|
181,652
|
|
172,002
|
|
5.6
|
|
%
|
Available seat miles (in millions)
|
75,742
|
|
72,875
|
|
3.9
|
|
%
|
209,911
|
|
200,842
|
|
4.5
|
|
%
|
Passenger mile yield
|
|
17.07
|
¢
|
|
17.05
|
¢
|
0.1
|
|
%
|
|
17.63
|
¢
|
|
17.50
|
¢
|
0.7
|
|
%
|
PRASM
|
|
15.06
|
¢
|
|
14.81
|
¢
|
1.7
|
|
%
|
|
15.26
|
¢
|
|
14.99
|
¢
|
1.8
|
|
%
|
TRASM
|
|
16.58
|
¢
|
|
16.40
|
¢
|
1.1
|
|
%
|
|
16.94
|
¢
|
|
16.78
|
¢
|
1.0
|
|
%
|
TRASM, adjusted(2)
|
|
16.57
|
¢
|
|
16.17
|
¢
|
2.5
|
|
%
|
|
16.90
|
¢
|
|
16.42
|
¢
|
2.9
|
|
%
|
CASM
|
|
13.85
|
¢
|
|
14.14
|
¢
|
(2.1
|
)
|
%
|
|
14.46
|
¢
|
|
14.70
|
¢
|
(1.6
|
)
|
%
|
CASM-Ex(2)
|
|
9.84
|
¢
|
|
9.61
|
¢
|
2.4
|
|
%
|
|
10.31
|
¢
|
|
10.18
|
¢
|
1.3
|
|
%
|
Passenger load factor
|
88.3
|
%
|
86.9
|
%
|
1.4
|
|
pts
|
86.5
|
%
|
85.6
|
%
|
0.9
|
|
pts
|
Fuel gallons consumed (in millions)
|
1,154
|
|
1,135
|
|
1.8
|
|
%
|
3,215
|
|
3,137
|
|
2.5
|
|
%
|
Average price per fuel gallon(3)
|
$
|
1.94
|
|
$
|
2.21
|
|
(12.2
|
)
|
%
|
$
|
2.03
|
|
$
|
2.13
|
|
(4.7
|
)
|
%
|
Average price per fuel gallon, adjusted(3)(4)
|
$
|
1.96
|
|
$
|
2.22
|
|
(11.5
|
)
|
%
|
$
|
2.03
|
|
$
|
2.14
|
|
(5.3
|
)
|
%
|
|
|
(1)
|
Includes the operations of our regional carriers under capacity purchase agreements.
|
|
|
(2)
|
Non-GAAP financial measure defined and reconciled to TRASM and CASM, respectively, in "Supplemental Information" below.
|
|
|
(3)
|
Includes the impact of fuel hedge activity and refinery segment results.
|
|
|
(4)
|
Non-GAAP financial measure defined and reconciled to average fuel price per gallon in "Results of Operations" for the three and nine months ended September 30, 2019 and 2018.
|
Fleet Information
As part of our fleet transformation, during the quarter we took delivery of 20 mainline aircraft and one CRJ-900 aircraft, and removed 14 aircraft from our active fleet. Our operating aircraft fleet and commitments at September 30, 2019 are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Fleet(1)
|
|
Commitments
|
Aircraft Type
|
Owned
|
Finance Lease
|
Operating Lease
|
Total
|
Average Age
|
Purchase
|
Options
|
B-717-200
|
3
|
|
21
|
|
67
|
|
91
|
|
18.1
|
—
|
|
—
|
|
B-737-700
|
10
|
|
—
|
|
—
|
|
10
|
|
10.7
|
—
|
|
—
|
|
B-737-800
|
73
|
|
4
|
|
—
|
|
77
|
|
18.0
|
—
|
|
—
|
|
B-737-900ER
|
88
|
|
—
|
|
42
|
|
130
|
|
3.1
|
—
|
|
—
|
|
B-757-200
|
91
|
|
7
|
|
2
|
|
100
|
|
22.1
|
—
|
|
—
|
|
B-757-300
|
16
|
|
—
|
|
—
|
|
16
|
|
16.6
|
—
|
|
—
|
|
B-767-300ER
|
56
|
|
—
|
|
—
|
|
56
|
|
23.3
|
—
|
|
—
|
|
B-767-400ER
|
21
|
|
—
|
|
—
|
|
21
|
|
18.8
|
—
|
|
—
|
|
B-777-200ER
|
8
|
|
—
|
|
—
|
|
8
|
|
19.8
|
—
|
|
—
|
|
B-777-200LR
|
10
|
|
—
|
|
—
|
|
10
|
|
10.5
|
—
|
|
—
|
|
A220-100
|
24
|
|
1
|
|
—
|
|
25
|
|
0.4
|
20
|
|
—
|
|
A220-300
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
50
|
|
50
|
|
A319-100
|
55
|
|
—
|
|
2
|
|
57
|
|
17.6
|
—
|
|
—
|
|
A320-200
|
58
|
|
—
|
|
4
|
|
62
|
|
24.1
|
—
|
|
—
|
|
A321-200
|
51
|
|
12
|
|
31
|
|
94
|
|
1.5
|
33
|
|
—
|
|
A321-200neo
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
100
|
|
100
|
|
A330-200
|
11
|
|
—
|
|
—
|
|
11
|
|
14.5
|
—
|
|
—
|
|
A330-300
|
28
|
|
—
|
|
3
|
|
31
|
|
10.7
|
—
|
|
—
|
|
A330-900neo
|
3
|
|
1
|
|
—
|
|
4
|
|
0.2
|
31
|
|
—
|
|
A350-900
|
13
|
|
—
|
|
—
|
|
13
|
|
1.6
|
16
|
|
—
|
|
MD-88
|
54
|
|
10
|
|
—
|
|
64
|
|
28.7
|
—
|
|
—
|
|
MD-90
|
30
|
|
—
|
|
—
|
|
30
|
|
22.4
|
—
|
|
—
|
|
Total
|
703
|
|
56
|
|
151
|
|
910
|
|
15.0
|
250
|
|
150
|
|
|
|
(1)
|
Excludes certain aircraft we own, lease or have committed to purchase (including 8 CRJ-900 aircraft) that are operated by regional carriers on our behalf shown in the table below.
|
We have agreed to acquire four A350 aircraft from LATAM, which are included in the table above. In addition, we plan to assume ten of LATAM's A350 purchase commitments from Airbus, with deliveries through 2025. For more information regarding our planned strategic alliance with LATAM, see Note 4, "Investments", of the Notes to the Condensed Consolidated Financial Statements.
The following table summarizes the aircraft fleet operated by regional carriers on our behalf at September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fleet Type
|
|
Carrier
|
CRJ-200
|
CRJ-700
|
CRJ-900
|
Embraer 170
|
Embraer 175
|
Total
|
Endeavor Air, Inc.(1)
|
42
|
|
5
|
|
109
|
|
—
|
|
—
|
|
156
|
|
SkyWest Airlines, Inc.
|
75
|
|
14
|
|
43
|
|
—
|
|
54
|
|
186
|
|
Compass Airlines, Inc. (2)
|
—
|
|
—
|
|
—
|
|
—
|
|
36
|
|
36
|
|
Republic Airways, Inc.
|
—
|
|
—
|
|
—
|
|
22
|
|
16
|
|
38
|
|
GoJet Airlines, LLC (3)
|
—
|
|
20
|
|
7
|
|
—
|
|
—
|
|
27
|
|
Total
|
117
|
|
39
|
|
159
|
|
22
|
|
106
|
|
443
|
|
|
|
(1)
|
Endeavor Air, Inc. is a wholly owned subsidiary of Delta.
|
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(2)
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In the September 2019 quarter we and Compass Airlines, Inc., agreed not to renew our contract and to end our relationship by the end of 2020.
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(3)
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In the September 2019 quarter we and GoJet Airlines, LLC, agreed not to renew our CRJ-700 contract and to end those operations by the end of 2020. The seven CRJ-900 are under contract through 2022 and subject to further negotiation.
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Financial Condition and Liquidity
We expect to meet our cash needs for the next twelve months with cash flows from operations, cash and cash equivalents, restricted cash equivalents and financing arrangements. As of September 30, 2019, we had $5.0 billion in unrestricted liquidity, consisting of $1.9 billion in cash and cash equivalents and $3.1 billion in available revolving credit facilities. During the nine months ended September 30, 2019, we used existing cash, cash received from financings and cash generated from operations to fund capital expenditures of $3.9 billion and return $2.5 billion to shareholders.
Sources of Liquidity
Operating Activities
We generated cash flows from operations of $7.5 billion and $5.8 billion in the nine months ended September 30, 2019 and 2018, respectively. We expect to continue generating cash flows from operations during the remainder of 2019.
Our operating cash flow is impacted by the following factors:
Seasonality of Advance Ticket Sales. We sell tickets for air travel in advance of the customer's travel date. When we receive a cash payment at the time of sale, we record the cash received on advance sales as deferred revenue in air traffic liability. The air traffic liability increases during the winter and spring as advanced ticket sales grow prior to the summer peak travel season and decreases during the summer and fall months.
Fuel. Fuel expense represented approximately 21% of our total operating expenses for the nine months ended September 30, 2019. The market price for jet fuel is volatile, which can impact the comparability of our periodic cash flows from operations.
Pension Contributions. We have no minimum funding requirements in 2019. However, we voluntarily contributed $500 million to our qualified defined benefit pension plans during the June 2019 quarter. During the March 2018 quarter we also voluntarily contributed $500 million to our qualified defined benefit pension plans.
Profit Sharing. Our broad-based employee profit sharing program provides that for each year in which we have an annual pre-tax profit, as defined by the terms of the program, we will pay a specified portion of that profit to employees. In determining the amount of profit sharing, the program defines profit as pre-tax profit adjusted for profit sharing and certain other items. During the nine months ended September 30, 2019, we accrued $1.3 billion in profit sharing expense based on the year-to-date performance and current expectations for 2019 profit.
We paid $1.3 billion in profit sharing in February 2019 related to our 2018 pre-tax profit in recognition of our employees' contributions toward meeting our financial goals. The 2019 profit sharing payment will be made in February 2020.
Investing Activities
Capital Expenditures. Our capital expenditures were $3.9 billion and $3.8 billion for the nine months ended September 30, 2019 and 2018, respectively. Our capital expenditures during the nine months ended September 30, 2019 were primarily related to the purchases of aircraft, fleet modifications and technology enhancements.
We have committed to future aircraft purchases and have obtained, but are under no obligation to use, long-term financing commitments for a substantial portion of the purchase price of certain aircraft. Our expected 2019 investments of $4.5 billion will be primarily for aircraft, including deliveries and advance deposit payments, as well as aircraft modifications, the majority of which relate to cabin enhancements throughout our fleet.
In October 2019, the Office of the U.S. Trade Representative announced a 10% tariff on new aircraft imported from Europe. We are evaluating the impact of this announcement on our future Airbus deliveries.
Equity Investments. We have acquired 10% of the outstanding shares of Hanjin-KAL, the largest shareholder of Korean Air, during 2019, for $170 million.
In the September 2019 quarter we announced our plan to enter into a strategic alliance with LATAM Airlines Group S.A. Subject to regulatory approval, specifically requirements under the Hart-Scott-Rodino Antitrust Improvement Act, we plan to commence a tender offer for the acquisition of up to 20% of the common shares of LATAM at a price per share of $16, to be funded with newly issued debt and available cash. In addition, to support the establishment of the strategic alliance, we will invest $350 million, $150 million of which was disbursed in the September 2019 quarter. As part of our planned strategic alliance with LATAM, we have also agreed to acquire four A350 aircraft from LATAM and plan to assume ten of LATAM's A350 purchase commitments from Airbus, with deliveries through 2025.
This alliance is expected to generate new growth opportunities, building upon Delta's and LATAM's global footprint and joint ventures, including Delta's existing partnership with Aeroméxico. We plan to sell our GOL ownership stake and wind down our commercial agreements with GOL to facilitate the formation of our strategic alliance with LATAM.
Los Angeles International Airport ("LAX") Construction. We executed a modified lease agreement during 2016 with the City of Los Angeles ("the City"), which owns and operates LAX, and announced plans to modernize, upgrade and connect Terminals 2 and 3 at LAX. Under the lease agreement, we have relocated certain airlines and other tenants located in Terminals 2 and 3 to Terminals 5 and 6 and undertaken various initial projects to enable operations from Terminals 2 and 3 during the project. We are now designing and constructing the redevelopment of Terminal 3 and enhancement of Terminal 2, which also includes rebuilding the ticketing and arrival halls and security checkpoint, construction of core infrastructure to support the City's planned airport people mover, ramp improvements and construction of a secure connector to the north side of the Tom Bradley International Terminal. Construction is expected to be completed by 2024.
Under the lease agreement and subsequent project component approvals by the City's Board of Airport Commissioners, the City has appropriated to date approximately $1.6 billion to purchase completed project assets. The lease allows for a maximum reimbursement by the City of $1.8 billion. Costs we incur in excess of such a maximum will not be reimbursed by the City.
A substantial majority of the project costs will be funded through the Regional Airports Improvement Corporation ("RAIC"), a California public benefit corporation, using an $800 million revolving credit facility provided by a group of lenders. The credit facility was executed during 2017, and we have guaranteed the obligations of the RAIC under the credit facility. Loans made under the credit facility will be repaid with the proceeds from the City’s purchase of completed project assets. Using funding provided by cash flows from operations and/or the credit facility, we expect to spend approximately $200 million on this project during 2019, of which $134 million was incurred in the nine months ended September 30, 2019.
New York-LaGuardia Redevelopment. As part of the terminal redevelopment project at LaGuardia Airport, we are partnering with the Port Authority of New York and New Jersey (the “Port Authority”) to replace Terminals C and D with a new state-of-the-art terminal facility consisting of 37 gates across four concourses connected to a central headhouse. The terminal will feature a new, larger Delta Sky Club, wider concourses, more gate seating and 30 percent more concessions space than the existing terminals. The facility will also offer direct access between the parking garage and terminal and improved roadways and drop-off/pick-up areas. The design of the new terminal will integrate sustainable technologies and improvements in energy efficiency. Construction will be phased to limit passenger inconvenience and is expected to be completed by 2026.
In connection with the redevelopment, during 2017, we entered into an amended and restated terminal lease with the Port Authority with a term through 2050. Pursuant to the lease agreement we will (1) fund (through debt issuance and existing cash) and undertake the design, management and construction of the terminal and certain off-premises supporting facilities, (2) receive a Port Authority contribution of $600 million to facilitate construction of the terminal and other supporting infrastructure, (3) be responsible for all operations and maintenance during the term of the lease and (4) have preferential rights to all gates in the terminal subject to Port Authority requirements with respect to accommodation of designated carriers. We currently expect our net project cost to be approximately $3.3 billion and we bear the risks of project construction, including any potential cost over-runs. Using funding provided by cash flows from operations and/or financing arrangements, we expect to spend approximately $560 million on this project during 2019, of which $430 million was incurred in the nine months ended September 30, 2019.
Financing Activities
Debt and Finance Leases. In February 2019, we entered into a $1 billion term loan issued by two lenders, which was subsequently repaid by the end of the June 2019 quarter. We used the net proceeds of the term loan to accelerate planned 2019 repurchases under our share repurchase program.
In the March 2019 quarter, we completed a $500 million offering of Pass Through Certificates, Series 2019-1 ("2019-1 EETC") through a pass through trust. The net proceeds of the offering are being used for general corporate purposes, including to refinance debt maturing during 2019.
The principal amount of debt and finance leases was $10.0 billion at September 30, 2019.
Capital Return to Shareholders. During the nine months ended September 30, 2019, we repurchased and retired 34 million shares of our common stock at a cost of $1.8 billion.
In the September 2019 quarter, the Board of Directors approved and we paid a quarterly dividend of $0.4025 per share, for total cash dividends of $260 million. In addition, on October 9, 2019, the Board of Directors approved and we will pay a quarterly dividend of $0.4025 per share to shareholders of record as of November 13, 2019.
Undrawn Lines of Credit
We have $3.1 billion available in undrawn revolving lines of credit. These credit facilities include covenants customary for financing of this type. If we are not in compliance with these covenants, we may be required to repay amounts borrowed under the credit facilities or we may not be able to draw on them.
Covenants
We were in compliance with the covenants in our financings at September 30, 2019.
Critical Accounting Policies and Estimates
Except as set forth below, for information regarding our Critical Accounting Policies and Estimates, see the "Critical Accounting Policies and Estimates" section of "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Form 10-K.
Loyalty Program
Our SkyMiles loyalty program generates customer loyalty by rewarding customers with incentives to travel on Delta. This program allows customers to earn mileage credits by flying on Delta, Delta Connection and other airlines that participate in the loyalty program. When traveling, customers earn redeemable mileage credits based on the passenger's loyalty program status and ticket price. Customers can also earn mileage credits through participating companies such as credit card companies, hotels, car rental agencies and ridesharing companies. To facilitate transactions with participating companies, we sell mileage credits to non-airline businesses, customers and other airlines. Mileage credits are redeemable by customers in future periods for air travel on Delta and other participating airlines, membership in our Sky Club and other program awards.
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 and American Express Membership Rewards program participants, and allow American Express to market its services or products using our customer database. Cardholders earn mileage credits for making purchases using co-branded cards, and certain cardholders may also check their first bag for free, are granted discounted access to Delta Sky Club lounges and receive priority boarding and other benefits while traveling on Delta. Additionally, participants in the American Express Membership Rewards program may exchange their points for mileage credits under the loyalty program. We sell mileage credits at agreed-upon rates to American Express which are then provided to their customers under the co-brand credit card program and the Membership Rewards program.
We account for marketing agreements, including those with American Express, consistent with the accounting method that allocates the consideration received to the individual products and services delivered. We allocate the value based on the relative selling prices of those products and services, which generally consist of award travel, priority boarding, baggage fee waivers, lounge access and the use of our brand. We determine our best estimate of the selling prices by considering a discounted cash flow analysis using multiple inputs and assumptions, including: (1) the expected number of miles awarded and number of miles redeemed, (2) ETV for the award travel obligation, (3) published rates on our website for baggage fees, discounted access to Delta Sky Club lounges and other benefits while traveling on Delta and (4) brand value.
Effective January 1, 2019, we amended our co-brand agreement with American Express, and we also amended other agreements with American Express during the current year. The new agreements increase the value we receive and extend the terms to 2029. The products and services delivered are consistent with previous agreements, and we continue to use the accounting method that allocates the consideration received based on the relative selling prices of those products and services.
We defer the amount for award travel obligation as part of loyalty program deferred revenue and recognize loyalty travel awards in passenger revenue as the mileage credits are used for travel. Revenue allocated to services performed in conjunction with a passenger’s flight, such as baggage fee waivers, is recognized as travel-related services in passenger revenue when the related service is performed. Revenue allocated to access Delta Sky Club lounges is recognized as miscellaneous in other revenue as access is provided. Revenue allocated to the remaining performance obligations, primarily brand value, is recorded as loyalty program in other revenue over time as miles are delivered.
Recent Accounting Standards
Comprehensive Income. In February 2018, the FASB issued ASU No. 2018-02, "Income Statement—Reporting Comprehensive Income (Topic 220)." This standard provides an option to reclassify stranded tax effects within AOCI to retained earnings due to the U.S. federal corporate income tax rate change in the Tax Cuts and Jobs Act of 2017. This standard is effective for interim and annual reporting periods beginning after December 15, 2018. We adopted this standard effective January 1, 2019 with the election not to reclassify $1.2 billion of stranded tax effects, primarily related to our pension plans, from AOCI to retained earnings.
Supplemental Information
We sometimes use information ("non-GAAP financial measures") that is derived from the Condensed Consolidated Financial Statements, but that is not presented in accordance with GAAP. Under the U.S. Securities and Exchange Commission rules, non-GAAP financial measures may be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for or superior to GAAP results. The reconciliations presented below of the non-GAAP measures used in this 10-Q may not calculate exactly due to rounding.
Pre-tax income, adjusted
The following table shows a reconciliation of pre-tax income (a GAAP measure) to pre-tax income, adjusted (a non-GAAP financial measure). We adjust pre-tax income for the following items to determine pre-tax income, adjusted for the reasons described below.
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MTM adjustments and settlements. MTM adjustments are defined as fair value changes recorded in periods other than the settlement period. Such fair value changes are not necessarily indicative of the actual settlement value of the underlying hedge in the contract settlement period. Settlements represent cash received or paid on hedge contracts settled during the period.
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•
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Equity investment MTM adjustments. We record our proportionate share of earnings/loss from our equity investments in Virgin Atlantic and Aeroméxico in non-operating expense. We adjust for our equity method investees' hedge portfolio MTM adjustments to allow investors to better understand and analyze our core operational performance in the periods shown.
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Unrealized gain/loss on investments. We record the unrealized gains/losses on our equity investments in GOL, China Eastern, Air France-KLM and Korean, which are accounted for at fair value in non-operating expense. Adjusting for these gains/losses allows investors to better understand and analyze our core operational performance in the periods shown.
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•
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DGS sale adjustment. Because we sold DGS in December 2018, we have excluded the impact of DGS from 2018 results for comparability.
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Three Months Ended September 30,
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(in millions)
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2019
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2018
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Pre-tax income
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$
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1,947
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$
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1,688
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Adjusted for:
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MTM adjustments and settlements
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(25
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)
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(16
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)
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Equity investment MTM adjustments
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10
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(7
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)
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Unrealized gain/loss on investments
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35
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(50
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)
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DGS sale adjustment
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—
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(9
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)
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Pre-tax income, adjusted
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$
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1,967
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$
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1,606
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TRASM, adjusted
The following table shows a reconciliation of TRASM (a GAAP measure) to TRASM, adjusted (a non-GAAP financial measure). We adjust TRASM for the following items to determine TRASM, adjusted for the reasons described below.
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•
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Third-party refinery sales. We adjust TRASM for refinery sales to third parties to determine TRASM, adjusted because these revenues are not related to our airline segment. TRASM, adjusted therefore provides a more meaningful comparison of revenue from our airline operations to the rest of the airline industry.
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•
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DGS sale adjustment. We adjust for the DGS sale for the same reason described above under the heading pre-tax income, adjusted.
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2019
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2018
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2019
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2018
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TRASM
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16.58
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¢
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16.40
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¢
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16.94
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¢
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16.78
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¢
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Adjusted for:
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Third-party refinery sales
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(0.01
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)
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(0.15
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)
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(0.05
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)
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(0.27
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)
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DGS sale adjustment
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—
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(0.09
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)
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—
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(0.09
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)
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TRASM, adjusted
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16.57
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¢
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16.17
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¢
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|
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16.90
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¢
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16.42
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¢
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CASM-Ex
The following table shows a reconciliation of CASM (a GAAP measure) to CASM-Ex (a non-GAAP financial measure). We adjust CASM for the following items to determine CASM-Ex for the reasons described below.
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•
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Aircraft fuel and related taxes. The volatility in fuel prices impacts the comparability of year-over-year financial performance. The adjustment for aircraft fuel and related taxes allows investors to better understand and analyze our non-fuel costs and year-over-year financial performance.
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•
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Ancillary businesses and refinery. We adjust for expenses related to aircraft maintenance we provide to third parties, our vacation wholesale operations, our private jet operations, as well as refinery cost of sales to third parties. Results from 2018 also include staffing services performed by DGS. Because these businesses are not related to the generation of a seat mile, we adjust for the costs related to these areas to provide a more meaningful comparison of the costs of our airline operations to the rest of the airline industry.
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•
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Profit sharing. We adjust for profit sharing because this adjustment allows investors to better understand and analyze our recurring cost performance and provides a more meaningful comparison of our core operating costs to the airline industry.
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2019
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2018
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2019
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2018
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CASM
|
|
13.85
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¢
|
|
14.14
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¢
|
|
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14.46
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¢
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14.70
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¢
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Adjusted for:
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Aircraft fuel and related taxes
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(2.96
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)
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(3.43
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)
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(3.10
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)
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(3.33
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)
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Ancillary businesses and refinery
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(0.37
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)
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(0.56
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)
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(0.45
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)
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(0.70
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)
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Profit sharing
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(0.68
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)
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(0.54
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)
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(0.60
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)
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(0.49
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)
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CASM-Ex
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9.84
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¢
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9.61
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¢
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|
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10.31
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¢
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10.18
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¢
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Free Cash Flow
We present free cash flow because management believes this metric is helpful to investors to evaluate the company's ability to generate cash that is available for use for debt service or general corporate initiatives. Adjustments include:
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•
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Net redemptions of short-term investments. Net redemptions of short-term investments represent the net purchase and sale activity of investments and marketable securities in the period, including gains and losses. We adjust for this activity to provide investors a better understanding of the company's free cash flow generated by our operations.
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•
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Strategic investments. Cash flows related to our investment in Hanjin-KAL, the largest shareholder of Korean Air, are included in our GAAP investing activities. We adjust free cash flow for this activity because it provides a more meaningful comparison to the airline industry.
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•
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Net cash flows related to certain airport construction projects and other. Cash flows related to certain airport construction projects are included in our GAAP operating activities and capital expenditures. We have adjusted for these items, which were primarily funded by cash restricted for airport construction, to provide investors a better understanding of the company's free cash flow and capital expenditures that are core to our operational performance in the periods shown.
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Three Months Ended September 30,
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(in millions)
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2019
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2018
|
Net cash provided by operating activities
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$
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2,245
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$
|
1,500
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Net cash used in investing activities
|
(1,125
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)
|
(903
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)
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Adjustments:
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Net redemptions of short-term investments
|
—
|
|
(42
|
)
|
Strategic investments
|
81
|
|
—
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Net cash flows related to certain airport construction projects and other
|
229
|
|
100
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|
Total free cash flow
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$
|
1,430
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$
|
655
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