DAL 6.30.2012 10Q


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
R
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
Or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-5424
DELTA AIR LINES, INC.
(Exact name of registrant as specified in its charter)

State of Incorporation: Delaware

I.R.S. Employer Identification No.: 58-0218548

Post Office Box 20706, Atlanta, Georgia 30320-6001

Telephone: (404) 715-2600
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes R No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes R No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer 
R
Accelerated filer 
o
Non-accelerated filer 
o
Smaller reporting company
o
 
(Do not check if a smaller reporting company)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No R
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes R No o
Number of shares outstanding by each class of common stock, as of June 30, 2012:
Common Stock, $0.0001 par value - 850,311,450 shares outstanding
This document is also available through our website at http://www.delta.com/about_delta/investor_relations.
 




Table of Contents
 
 
 
Page
 
 
 
 
 
 
 
 





Unless otherwise indicated, the terms “Delta,” “we,” “us,” and “our” refer to Delta Air Lines, Inc. and its subsidiaries.

FORWARD-LOOKING STATEMENTS

Statements in this Form 10-Q (or otherwise made by us or on our behalf) that are not historical facts, including statements about our estimates, expectations, beliefs, intentions, projections or strategies for the future, may be “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or our present expectations. Known material risk factors applicable to Delta are described in “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (“Form 10-K”) and in "Part II, Item 1A. Risk Factors" in this Form 10-Q, other than risks that could apply to any issuer or offering. All forward-looking statements speak only as of the date made, and we undertake no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this report.


1




DELTA AIR LINES, INC.
Consolidated Balance Sheets
(Unaudited)
(in millions, except share data)
June 30,
2012
 
December 31,
2011
ASSETS
Current Assets:
 
 
 
Cash and cash equivalents
$
2,539

 
$
2,657

Short-term investments
959

 
958

Restricted cash, cash equivalents and short-term investments
368

 
305

Accounts receivable, net of an allowance for uncollectible accounts of $37 and $33
at June 30, 2012 and December 31, 2011, respectively
1,828

 
1,563

Expendable parts and supplies inventories, net of an allowance for obsolescence of $112 and $101
at June 30, 2012 and December 31, 2011, respectively
393

 
367

Deferred income taxes, net
488

 
461

Prepaid expenses and other
1,882

 
1,418

Total current assets
8,457

 
7,729

Property and Equipment, Net:
 
 
 
Property and equipment, net of accumulated depreciation and amortization of $6,141 and $5,472
at June 30, 2012 and December 31, 2011, respectively
20,609

 
20,223

Other Assets:
 
 
 
Goodwill
9,794

 
9,794

Identifiable intangibles, net of accumulated amortization of $634 and $600
at June 30, 2012 and December 31, 2011, respectively
4,716

 
4,751

Other noncurrent assets
1,144

 
1,002

Total other assets
15,654

 
15,547

Total assets
$
44,720

 
$
43,499

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
 
 
 
Current maturities of long-term debt and capital leases
$
1,779

 
$
1,944

Air traffic liability
5,006

 
3,480

Accounts payable
2,175

 
1,600

Frequent flyer deferred revenue
1,665

 
1,849

Accrued salaries and related benefits
1,229

 
1,367

Taxes payable
722

 
594

Fuel card obligation
476

 
318

Other accrued liabilities
1,641

 
1,549

Total current liabilities
14,693

 
12,701

Noncurrent Liabilities:
 
 
 
Long-term debt and capital leases
11,221

 
11,847

Pension, postretirement and related benefits
13,613

 
14,200

Frequent flyer deferred revenue
2,651

 
2,700

Deferred income taxes, net
2,071

 
2,028

Other noncurrent liabilities
1,606

 
1,419

Total noncurrent liabilities
31,162


32,194

Commitments and Contingencies
 
 
 
Stockholders' Deficit:
 
 
 
Common stock at $0.0001 par value; 1,500,000,000 shares authorized, 866,728,208 and 861,499,734
shares issued at June 30, 2012 and December 31, 2011, respectively

 

Additional paid-in capital
14,031

 
13,999

Accumulated deficit
(8,442
)
 
(8,398
)
Accumulated other comprehensive loss
(6,490
)
 
(6,766
)
Treasury stock, at cost, 16,416,758 and 16,253,791 shares at June 30, 2012 and
December 31, 2011, respectively
(234
)
 
(231
)
Total stockholders' deficit
(1,135
)
 
(1,396
)
Total liabilities and stockholders' deficit
$
44,720

 
$
43,499

 
 
 
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

2



DELTA AIR LINES, INC.
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(Unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions, except per share data)
2012
 
2011
 
2012
 
2011
Operating Revenue:
 
 
 
 
 
 
 
Passenger:
 
 
 
 
 
 
 
Mainline
$
6,644

 
$
6,204

 
$
12,306

 
$
11,334

Regional carriers
1,807

 
1,687

 
3,371

 
3,132

  Total passenger revenue
8,451

 
7,891

 
15,677

 
14,466

Cargo
262

 
264

 
506

 
514

Other
1,019

 
998

 
1,962

 
1,920

  Total operating revenue
9,732

 
9,153

 
18,145

 
16,900

 
 
 
 
 
 
 
 
Operating Expense:
 
 
 
 
 
 
 
Aircraft fuel and related taxes
3,305

 
2,663

 
5,538

 
4,829

Salaries and related costs
1,825

 
1,739

 
3,588

 
3,466

Contract carrier arrangements
1,416

 
1,410

 
2,791

 
2,710

Aircraft maintenance materials and outside repairs
548

 
485

 
1,109

 
970

Depreciation and amortization
388

 
381

 
774

 
757

Passenger commissions and other selling expenses
393

 
440

 
773

 
809

Contracted services
397

 
415

 
775

 
840

Landing fees and other rents
347

 
320

 
652

 
633

Passenger service
187

 
181

 
358

 
345

Aircraft rent
68

 
74

 
143

 
152

Profit sharing
135

 
8

 
135

 
8

Restructuring and other items
193

 
144

 
181

 
151

Other
396

 
412

 
812

 
841

Total operating expense
9,598

 
8,672

 
17,629

 
16,511

 
 
 
 
 
 
 
 
Operating Income
134

 
481

 
516

 
389

 
 
 
 
 
 
 
 
Other (Expense) Income:

 

 

 

Interest expense, net
(207
)
 
(233
)
 
(428
)
 
(454
)
Amortization of debt discount, net
(49
)
 
(46
)
 
(100
)
 
(93
)
Loss on extinguishment of debt

 
(13
)
 

 
(33
)
Miscellaneous, net
(42
)
 
6

 
(25
)
 
(4
)
Total other expense, net
(298
)
 
(286
)
 
(553
)
 
(584
)
 
 
 
 
 
 
 
 
Income (Loss) Before Income Taxes
(164
)
 
195

 
(37
)
 
(195
)
 
 
 
 
 
 
 
 
Income Tax (Provision) Benefit
(4
)
 
3

 
(7
)
 
75

 
 
 
 
 
 
 
 
Net Income (Loss)
$
(168
)
 
$
198

 
$
(44
)
 
$
(120
)
 
 
 
 
 
 
 
 
Basic Earnings (Loss) per Share
$
(0.20
)
 
$
0.24

 
$
(0.05
)
 
$
(0.14
)
Diluted Earnings (Loss) per Share
$
(0.20
)
 
$
0.23

 
$
(0.05
)
 
$
(0.14
)
 
 
 
 
 
 
 
 
Comprehensive Income (Loss)
$
(140
)
 
$
8

 
$
232

 
$
(135
)
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

3



DELTA AIR LINES, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Six Months Ended June 30,
(in millions)
2012
 
2011
Net Cash Provided by Operating Activities
$
1,463

 
$
1,774

 
 
 
 
Cash Flows From Investing Activities:
 
 
 
Property and equipment additions:
 
 
 
Flight equipment, including advance payments
(609
)
 
(481
)
Ground property and equipment, including technology
(395
)
 
(172
)
Purchase of investments
(479
)
 
(479
)
Redemption of investments
514

 
250

Other, net
(32
)
 
8

Net cash used in investing activities
(1,001
)

(874
)
 
 
 
 
Cash Flows From Financing Activities:
 
 
 
Payments on long-term debt and capital lease obligations
(741
)
 
(2,394
)
Proceeds from long-term obligations

 
1,599

Debt issuance costs

 
(58
)
Restricted cash and cash equivalents

 
(84
)
Fuel card obligation, net
158

 

Other, net
3

 

Net cash used in financing activities
(580
)
 
(937
)
 
 
 
 
Net Decrease in Cash and Cash Equivalents
(118
)
 
(37
)
Cash and cash equivalents at beginning of period
2,657

 
2,892

Cash and cash equivalents at end of period
$
2,539

 
$
2,855

 
 
 
 
Non-cash transactions:
 
 
 
SkyMiles used pursuant to advance purchase under American Express Agreements
$
(167
)
 
$

JFK redevelopment project funded by third parties
154

 
43

Flight equipment under capital leases

 
89

 
 
 
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.



4



DELTA AIR LINES, INC.
Notes to the Condensed Consolidated Financial Statements
June 30, 2012
(Unaudited)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of Delta Air Lines, Inc. and our wholly-owned subsidiaries. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information. Consistent with these requirements, this Form 10-Q does not include all the information required by GAAP for complete financial statements. As a result, this Form 10-Q should be read in conjunction with the Consolidated Financial Statements and accompanying Notes in our Form 10-K.

Management believes the accompanying unaudited Condensed Consolidated Financial Statements reflect all adjustments, including normal recurring items and restructuring and other items, considered necessary for a fair statement of results for the interim periods presented.

Due to seasonal variations in the demand for air travel, the volatility of aircraft fuel prices, changes in global economic conditions and other factors, operating results for the three and six months ended June 30, 2012 are not necessarily indicative of operating results for the entire year.

Recent Accounting Standards

In June 2011, the Financial Accounting Standards Board issued "Presentation of Comprehensive Income." The standard revises the presentation and prominence of the items reported in other comprehensive income and is effective retrospectively for fiscal years beginning after December 15, 2011. We adopted this standard in the March 2012 quarter and have presented comprehensive income (loss) on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

NOTE 2. OIL REFINERY ACQUISITION

On June 22, 2012 (the "Closing Date"), our wholly-owned subsidiary, Monroe Energy, LLC (“Monroe”), acquired an oil refinery located near Philadelphia, Pennsylvania from Phillips 66. Monroe invested $180 million to acquire the refinery and is expected to receive a $30 million grant from the Commonwealth of Pennsylvania and Delaware County that will be used to offset the purchase price of the acquisition. The acquisition includes pipelines and transportation assets that will allow Monroe to supply jet fuel to Delta's operations throughout the Northeast, including our New York hubs at LaGuardia Airport ("LaGuardia") and John F. Kennedy International Airport ("JFK").

Monroe has entered into strategic agreements with BP and Phillips 66. Under a three-year agreement, BP will supply crude oil to be refined at the facility. Monroe will spend approximately $100 million to convert the facility to maximize jet fuel production and will sell the jet fuel produced to Delta for use in its operations in the Northeast. In addition to jet fuel, the refining process will produce gas, diesel fuel, and other refined products ("non-jet fuel products"). Monroe will exchange these non-jet fuel products for jet fuel from Phillips 66 and BP to be used in Delta's operations throughout the U.S.

Jet fuel costs have continued to increase in recent years, making fuel expense our single largest expense. Because global demand for jet fuel and related products is increasing at the same time that jet fuel refining capacity is decreasing in the U.S. (particularly in the Northeast), the refinery mark-up or margin reflected in the prices we pay for jet fuel has increased. Our ability to acquire jet fuel from Monroe and the strategic agreements with BP and Phillips 66 are expected to reduce our fuel costs.

We accounted for the refinery acquisition as a business combination. The refinery, pipeline, and transportation assets acquired were recorded in property, plant, and equipment at $180 million based on our initial estimate of their respective fair values on the Closing Date. In connection with the closing, we also purchased $50 million of inventory, primarily crude oil, that was at the refinery on the Closing Date, which was recorded in prepaid expenses and other.

5




NOTE 3. FAIR VALUE MEASUREMENTS

Assets (Liabilities) Measured at Fair Value on a Recurring Basis
(in millions)
June 30,
2012
Level 1
Level 2
Level 3
Cash equivalents
$
2,243

$
2,243

$

$

Short-term investments
959

959



Restricted cash equivalents and investments
382

382



Long-term investments
196

83

24

89

Hedge derivatives, net
 
 
 
 
Fuel hedge contracts
(253
)
28

(281
)

Interest rate contracts
(78
)

(78
)

Foreign currency exchange contracts
(6
)

(6
)


(in millions)
December 31, 2011
Level 1
Level 2
Level 3
Cash equivalents
$
2,357

$
2,357

$

$

Short-term investments
958

958



Restricted cash equivalents and investments
341

341



Long-term investments
188

55

24

109

Hedge derivatives, net
 
 
 
 
Fuel hedge contracts
70


70


Interest rate contracts
(91
)

(91
)

Foreign currency exchange contracts
(89
)

(89
)


Cash Equivalents, Short-term Investments and Restricted Cash Equivalents and Investments. Cash equivalents and short-term investments generally consist of money market funds and treasury bills. Restricted cash equivalents and investments are primarily held to meet certain projected self-insurance obligations and generally consist of money market funds and time deposits. These investments are recorded at cost, which approximates fair value. Fair value is based on the market approach using prices and other relevant information generated by market transactions involving identical or comparable assets.

Long-term Investments. Our long-term investments are classified in other noncurrent assets and comprised of equity investments in GOL and Aeroméxico, auction rate securities and other long-term investments.

Hedge Derivatives. Our derivative contracts are generally negotiated with counterparties without going through a public exchange. Accordingly, our fair value assessments give consideration to the risk of counterparty default (as well as our own credit risk).

Fuel Derivatives. Our fuel hedge portfolio consists of call options; put options; combinations of two or more call options and put options; swap contracts; and futures contracts. The products underlying the hedge contracts include heating oil, crude oil, jet fuel and diesel fuel, as these commodities are highly correlated with the price of jet fuel that we consume. Option contracts are valued under the income approach using option pricing models based on data either readily observable in public markets, derived from public markets or provided by counterparties who regularly trade in public markets. Volatilities used in these valuations ranged from 14% to 44% depending on the maturity dates, underlying commodities and strike prices of the option contracts. Swap contracts are valued under the income approach using a discounted cash flow model based on data either readily observable or derived from public markets. Discount rates used in these valuations vary with the maturity dates of the respective contracts and are based on LIBOR. Futures contracts and options on futures contracts are traded on a public exchange and are valued based on quoted market prices.

Interest Rate Derivatives. Our interest rate derivatives consist of swap contracts and are valued primarily based on data readily observable in public markets.


6



Foreign Currency Derivatives. 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 4. DERIVATIVES

Our results of operations are impacted by changes in aircraft fuel prices, interest rates and foreign currency exchange rates. In an effort to manage our exposure to these risks, we enter into derivative contracts and adjust our derivative portfolio as market conditions change.

Aircraft Fuel Price Risk

Our results of operations are materially impacted by changes in aircraft fuel prices. We actively manage our fuel price risk through a hedging program intended to generate a positive cash position to defray the cost of jet fuel purchases during upward fuel price movements, while preserving participation in downward price movements of jet fuel to the extent practical. This fuel hedging program utilizes several different contract and commodity types, which are intended to create a risk mitigating hedge portfolio. The economic effectiveness of this hedge portfolio is frequently tested against our financial targets. The hedge portfolio is rebalanced from time to time according to market conditions, which may result in locking in gains or losses on hedge contracts prior to their settlement dates.

Effective June 2011, we stopped designating substantially all of our new fuel derivative contracts as accounting hedges and discontinued hedge accounting for our then existing fuel derivative contracts that previously had been designated as accounting hedges. As a result, we record market adjustments for changes in fair value to earnings in aircraft fuel and related taxes. Prior to this change in accounting designation, gains or losses on these contracts were deferred in accumulated other comprehensive income (loss) ("AOCI") until contract settlement. We anticipate that all amounts relating to our fuel derivative contracts in AOCI will be recognized by the end of 2012.

The following table shows the impact of fuel hedge gains (losses) for both designated and undesignated contracts on aircraft fuel and related taxes:
 
Three Months Ended June 30,
Six Months Ended June 30,
(in millions)
2012
2011
2012
2011
Market adjustments for changes in fair value
$
(718
)
$
33

$
(535
)
$
80

Effective portion reclassified from AOCI to earnings
2

74

15

134

(Loss) gain recorded in aircraft fuel and related taxes
$
(716
)
$
107

$
(520
)
$
214


As a result of the significant decline in fuel prices during the June 2012 quarter, we recorded losses of $718 million due to changes in the fair value of our fuel hedge portfolio. The majority of these losses relate to mark-to-market adjustments for fuel hedges settling in future periods. These adjustments are based on market prices as of the end of the reporting period and assumptions described in Note 3. The following tables reflect the estimated fair value asset (liability) positions, notional balances and maturity dates of our hedge contracts:

Hedge Position as of June 30, 2012
(in millions)
Notional Balance
Final Maturity Date
Prepaid Expenses and Other
Other Noncurrent Assets
Other Accrued Liabilities
Other Noncurrent Liabilities
Hedge Derivatives, net
Designated as hedges
 
 
 
 
 
 
 
 
Interest rate contracts (cash flow hedges)
$
906

U.S. dollars
May 2019
$

$

$
(26
)
$
(55
)
$
(81
)
Interest rate contracts (fair value hedges)
$
485

U.S. dollars
August 2022

5

(2
)

3

Foreign currency exchange contracts
102,599

Japanese yen
November 2014
8

7

(17
)
(4
)
(6
)
312

Canadian dollars
 
 
 
 
 
Not designated as hedges
 
 
 
 
 
 
 
 
Fuel hedge contracts
2,682

gallons - heating oil, crude oil, jet fuel and diesel
December 2013
541

125

(839
)
(80
)
(253
)
Total derivative contracts
 
 
$
549

$
137

$
(884
)
$
(139
)
$
(337
)

7




Hedge Position as of December 31, 2011
(in millions)
Notional Balance
Final Maturity Date
Prepaid Expenses and Other
Other Noncurrent Assets
Other Accrued Liabilities
Other Noncurrent Liabilities
Hedge Derivatives, net
Designated as hedges
 
 
 
 
 
 
 
 
Interest rate contracts (cash flow hedges)
$
989

U.S. dollars
May 2019
$

$

$
(27
)
$
(57
)
$
(84
)
Interest rate contracts (fair value hedges)
$
500

U.S. dollars
August 2022



(7
)
(7
)
Foreign currency exchange contracts
126,993

Japanese yen
April 2014
7

5

(58
)
(43
)
(89
)
313

Canadian dollars
 
 
 
 
 
Not designated as hedges
 
 
 
 
 
 
 
 
Fuel hedge contracts
1,225

gallons - heating oil, crude oil, jet fuel and diesel
December 2012
570


(500
)

70

Total derivative contracts
 
 
$
577

$
5

$
(585
)
$
(107
)
$
(110
)

Hedge Gains (Losses)

Gains (losses) related to our designated hedge contracts, including those previously designated as accounting hedges, are as follows:
 
Effective Portion Reclassified from AOCI to Earnings
 
Effective Portion Recognized in Other Comprehensive Income/(Loss)
(in millions)
2012
2011
 
2012
2011
Three Months Ended June 30
 
 
 
 
 
Fuel hedge contracts
$
2

$
74

 
$
(2
)
$
(154
)
Interest rate contracts


 
(3
)
(11
)
Foreign currency exchange contracts

(11
)
 
(40
)
(33
)
Total designated
$
2

$
63

 
$
(45
)
$
(198
)
Six Months Ended June 30
 
 
 
 
 
Fuel hedge contracts
$
15

$
134

 
$
(15
)
$
(66
)
Interest rate contracts


 
3

7

Foreign currency exchange contracts
(13
)
(22
)
 
83

26

Total designated
$
2

$
112

 
$
71

$
(33
)
 
Credit Risk

To manage credit risk associated with our aircraft fuel price, interest rate and foreign currency hedging programs, we select counterparties based on their credit ratings and limit our exposure to any one counterparty.

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 $350 million and $30 million as of June 30, 2012 and December 31, 2011, respectively. These amounts are recorded in prepaid expenses and other.


8



NOTE 5. LONG-TERM DEBT

Fair Value of Debt

Market risk associated with our fixed and variable rate long-term debt relates to the potential reduction in fair value and negative impact to future earnings, respectively, from an increase in interest rates. In the table below, the aggregate fair value of debt was based primarily on reported market values, recently completed market transactions and estimates based on interest rates, maturities, credit risk and underlying collateral and is classified primarily as Level 2 within the fair value hierarchy.
(in millions)
June 30,
2012
December 31,
2011
Total debt at par value
$
12,944

$
13,797

Unamortized discount, net
(625
)
(737
)
Net carrying amount
$
12,319

$
13,060

Fair value
$
13,100

$
13,600


Certificates

In July 2012, we completed a $480 million offering of Pass Through Certificates, Series 2012-1 ("2012-1 EETC") through a pass through trust. We plan to use the proceeds (currently held in escrow) primarily to refinance aircraft securing the Delta 2002-1 EETC, which matured on July 2, 2012, and the Northwest 2001-2 EETC, which is scheduled to mature in August 2013 and is expected to be prepaid in the September 2012 quarter. The details of the offering are shown in the table below:
(in millions)
Total Principal
Fixed Interest Rate
Offering Completion Date
Final Maturity Date
Collateral
2012-1A
$
354

4.750%
July 2012
May 2020
31 aircraft
2012-1B
126

6.875%
July 2012
May 2019
31 aircraft (1)
 
$
480



 
 

(1) 
The B tranche is secured by the same aircraft that secure the A tranche.

Covenants

We were in compliance with all covenants in our financing agreements at June 30, 2012.

NOTE 6. COMMITMENTS AND CONTINGENCIES

Aircraft Commitments

Future aircraft purchase commitments at June 30, 2012 total approximately $6.8 billion and include 100 B-737-900ER aircraft, 18 B-787-8 aircraft and 11 previously owned MD-90 aircraft. We have obtained committed long-term financing for a substantial portion of the purchase price of these aircraft.

In July 2012, we finalized an agreement with Southwest Airlines and The Boeing Company to add 88 B-717-200 aircraft with deliveries beginning in 2013 and continuing through 2015.

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. We cannot reasonably estimate the potential loss for certain legal proceedings because, for example, the litigation is in its early stages or the plaintiff does not specify the damages being sought. Although the outcome of the legal proceedings in which we are involved cannot be predicted with certainty, management believes that the resolution of these matters will not have a material adverse effect on our Condensed Consolidated Financial Statements.




9



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 such other equipment.

We believe that our insurance would cover most of our exposure to liabilities and related indemnities associated with the commercial real estate leases and aircraft and other equipment lease and financing agreements described above. While our insurance does not typically cover environmental liabilities, we have certain insurance policies in place as required by applicable environmental laws.

Certain of our aircraft and other financing transactions include provisions 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 June 30, 2012, we had approximately 80,600 full-time equivalent employees. Approximately 15% of these employees were represented by unions.

During the June 2012 quarter, we reached an agreement with the Air Line Pilots Association, International (“ALPA”) to modify the existing collective bargaining agreement, which covers approximately 10,700 Delta pilots. The agreement, which was ratified by the pilots in June 2012 and took effect on July 1, 2012, becomes amendable on December 31, 2015.

War-Risk Insurance Contingency

As a result of the terrorist attacks on September 11, 2001, aviation insurers significantly (1) reduced the maximum amount of insurance coverage available to commercial air carriers for liability to persons (other than employees or passengers) for claims from acts of terrorism, war or similar events and (2) increased the premiums for such coverage and for aviation insurance in general. Since September 24, 2001, the U.S. government has been providing U.S. airlines with war-risk insurance to cover losses, including those resulting from terrorism, to passengers, third parties (ground damage) and the aircraft hull. The U.S. Secretary of Transportation has extended coverage through September 30, 2013, and we expect the coverage to be further extended. The withdrawal of government support of airline war-risk insurance would require us to obtain war-risk insurance coverage commercially, if available. Such commercial insurance could have substantially less desirable coverage than currently provided by the U.S. government, may not be adequate to protect our risk of loss from future acts of terrorism, may result in a material increase to our operating expense or may not be obtainable at all, resulting in an interruption to our operations.

Other

We have certain contracts for goods and services that require us to pay a penalty, acquire inventory specific to us or purchase equipment specific to a contract, if we terminate this type of contract without cause prior to its expiration date. Because these obligations are contingent on our termination of a contract without cause prior to its expiration date, no obligation would exist unless such a termination occurs.

10




NOTE 7. RESTRUCTURING AND OTHER ITEMS

The following table shows amounts recorded in restructuring and other items on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss):
 
Three Months Ended June 30,
Six Months Ended June 30,
(in millions)
2012
2011
2012
2011
Severance and related costs
$
171

$
80

$
171

$
80

Facilities, fleet and other
22

64

49

71

Gain on slot exchange


(39
)

Total restructuring and other items
$
193

$
144

$
181

$
151


Severance and Related Costs. During the March 2012 quarter, we announced voluntary workforce reduction programs primarily for eligible U.S. non-pilot employees. Approximately 2,000 employees enrolled in these programs in the June 2012 quarter and became eligible for retiree healthcare benefits. As a result, we recorded a $171 million charge for severance and related retiree healthcare costs, including $104 million of special termination benefits (see Note 8).

The following table shows the balances and activity for restructuring charges:
(in millions)
Severance and Related Costs
Lease Restructuring
Balance as of December 31, 2011
$
46

$
64

Additional costs and expenses
67

3

Payments
(28
)
(6
)
Balance as of June 30, 2012
$
85

$
61


Gain on Slot Exchange. During December 2011, we closed transactions with US Airways where we received takeoff and landing rights (each a "slot pair") at LaGuardia in exchange for slot pairs at Reagan National. In approving these transactions, the Department of Transportation restricted our use of the exchanged slots. We recorded a $78 million deferred gain in December 2011. We recognized $39 million of this deferred gain in the March 2012 quarter as half of the restrictions lapsed and will recognize the remainder of the deferred gain in the September 2012 quarter as the remaining restrictions lapsed on July 11, 2012.


11



NOTE 8. EMPLOYEE BENEFIT PLANS

The following table shows the components of net periodic cost:
 
Pension Benefits
Other Postretirement and
Postemployment Benefits
(in millions)
2012
2011
2012
2011
Three Months Ended June 30
 
 
 
 
Service cost
$

$

$
14

$
13

Interest cost
232

242

41

45

Expected return on plan assets
(176
)
(181
)
(19
)
(22
)
Amortization of prior service benefit


(6
)
(1
)
Recognized net actuarial loss (gain)
36

14

6

(3
)
Special termination benefits


104


Net periodic cost
$
92

$
75

$
140

$
32

Six Months Ended June 30
 
 
 
 
Service cost
$

$

$
29

$
26

Interest cost
464

484

82

90

Expected return on plan assets
(352
)
(362
)
(38
)
(45
)
Amortization of prior service benefit


(9
)
(1
)
Recognized net actuarial loss (gain)
72

28

12

(6
)
Special termination benefits


104


Net periodic cost
$
184

$
150

$
180

$
64


During the six months ended June 30, 2012, we remeasured our postretirement healthcare obligation to account for changes to retiree medical benefits resulting from the final integration of wages and benefits following our merger with Northwest Airlines and the voluntary workforce reduction programs offered to eligible employees. As a result, we recorded $104 million of special termination benefits in restructuring and other items (see Note 7).

NOTE 9. INCOME TAXES

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, our deferred tax liabilities, the overall business environment, our historical financial results, our industry's historically cyclical financial results and potential current and future tax planning strategies.

We recorded a full valuation allowance in 2004 due to our cumulative three year loss position at that time, compounded by the negative industry-wide business trends and outlook. At June 30, 2012, we had a $10.6 billion valuation allowance established against our deferred income tax assets, which represents a full valuation allowance against our net deferred income tax asset.

During the March 2012 quarter, we moved from a cumulative loss position over the previous three years to a cumulative income position for the first time since we established the full valuation allowance. We concluded that the valuation allowance was still needed on our net deferred tax assets based upon the weight of the factors described above. If our cumulative income position continues to increase and our future projections indicate sustained profitability, we will evaluate whether this profitability trend constitutes sufficient positive evidence to support a reversal of our valuation allowance (in full or in part).

12




Income Tax Allocation

We consider all income sources, including other comprehensive income, in determining the amount of tax benefit allocated to continuing operations (the "Income Tax Allocation"). During 2009, as a result of the Income Tax Allocation, we recorded a non-cash deferred income tax expense of $321 million on other comprehensive income as a result of hedge gains on fuel derivatives and an offsetting non-cash income tax expense of $321 million. This deferred income tax expense will remain in AOCI until all amounts in AOCI that relate to fuel derivatives which are designated as accounting hedges are recognized in the Consolidated Statement of Operations. We anticipate that all amounts relating to our fuel derivative contracts in AOCI will be recognized by the end of 2012. As a result, a non-cash income tax expense of $321 million will be recognized in the December 2012 quarter unless we enter into and designate additional fuel derivative contracts as accounting hedges prior to the settlement date of the outstanding contracts.

NOTE 10. EARNINGS (LOSS) PER SHARE

We calculate basic earnings (loss) per share by dividing net income (loss) by the weighted average number of common shares outstanding. Shares issuable upon the satisfaction of certain conditions are considered outstanding and included in the computation of basic earnings (loss) per share. The following table shows the computation of basic and diluted earnings (loss) per share:
 
Three Months Ended June 30,
Six Months Ended June 30,
(in millions, except per share data)
2012
2011
2012
2011
Net income (loss)
$
(168
)
$
198

$
(44
)
$
(120
)
 
 
 
 
 
Basic weighted average shares outstanding
845

838

844

838

Dilutive effect of share based awards

6



Diluted weighted average shares outstanding
845

844

844

838

 
 
 
 
 
Basic earnings (loss) per share
$
(0.20
)
$
0.24

$
(0.05
)
$
(0.14
)
Diluted earnings (loss) per share
$
(0.20
)
$
0.23

$
(0.05
)
$
(0.14
)
 
 
 
 
 
Antidilutive common stock equivalents excluded from diluted earnings (loss) per share
23

25

23

31


13



ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

June 2012 Quarter Financial Highlights

Our net loss for the June 2012 quarter was $168 million, or $0.20 per diluted share. Total operating revenue increased $579 million, or 6%, over the June 2011 quarter, primarily due to higher passenger revenue. This increase in revenue was offset by higher fuel expense, which includes market losses for fuel hedge contracts primarily settling in future periods, and a charge for severance and related retiree healthcare costs.

Passenger revenue increased $560 million due to a 7% year over year improvement in passenger mile yield on flat traffic, while capacity declined 1%. Passenger revenue per available seat mile ("PRASM") increased 8% over the June 2011 quarter, reflecting fare increases and higher revenue under corporate travel contracts.

Total operating expense increased $926 million over the June 2011 quarter, driven primarily by higher fuel expense. Our fuel expense increased $618 million (including our contract carriers under capacity purchase agreements) compared to the June 2011 quarter despite declines in market fuel prices and a 2% decrease in consumption. As a result of the significant decline in fuel prices during the June 2012 quarter, we recorded losses of $716 million due to changes in the fair value of our fuel hedge portfolio. The majority of these losses relate to mark-to-market adjustments for fuel hedges settling in future periods.

Excluding mark-to-market adjustments recorded in periods other than the settlement period ("MTM adjustments"), our average fuel price for the quarter was $3.37 per gallon, compared to $3.22 per gallon for the June 2011 quarter. Operating expense excluding fuel increased $308 million over the June 2011 quarter, driven by increases in wages and benefits and maintenance costs. Additionally, during the June 2012 quarter, we recorded a $171 million charge for severance and related retiree healthcare costs. Our consolidated operating cost per available seat mile ("CASM") for the June 2012 quarter increased 12.1% to 16.16 cents from 14.42 cents in the June 2011 quarter, primarily reflecting the market loss on fuel hedges and a 1% decline in capacity. For the June 2012 quarter, CASM-Ex was 8.77 cents, or 3.6% higher than the June 2011 quarter. The non-GAAP financial measures used in this paragraph are defined in "Supplemental Information" below.

During the June 2012 quarter, we reduced our total debt and capital leases by $376 million and ended the quarter with $5.3 billion in unrestricted liquidity, consisting of cash and cash equivalents, short-term investments and availability under credit facilities.

Oil Refinery Acquisition

On June 22, 2012, our wholly-owned subsidiary, Monroe Energy, LLC (“Monroe”), acquired an oil refinery located near Philadelphia, Pennsylvania from Phillips 66. Monroe invested $180 million to acquire the refinery and is expected to receive a $30 million grant from the Commonwealth of Pennsylvania and Delaware County that will be used to offset the purchase price of the acquisition. The acquisition includes pipelines and transportation assets that will allow Monroe to supply jet fuel to Delta's operations throughout the Northeast, including our New York hubs at LaGuardia Airport ("LaGuardia") and John F. Kennedy International Airport ("JFK").

Monroe has entered into strategic agreements with BP and Phillips 66. Under a three-year agreement, BP will supply crude oil to be refined at the facility. Monroe will spend approximately $100 million to convert the facility to maximize jet fuel production and will sell the jet fuel produced to Delta for use in its operations in the Northeast. In addition to jet fuel, the refining process will produce gas, diesel fuel, and other refined products ("non-jet fuel products"). Monroe will exchange these non-jet fuel products for jet fuel from Phillips 66 and BP to be used in Delta's operations throughout the U.S. We expect that our modifications to maximize jet fuel production will be completed this year and we will begin producing jet fuel in the fall.

14




Jet fuel costs have continued to increase in recent years, making fuel expense our single largest expense. Because global demand for jet fuel and related products is increasing at the same time that jet fuel refining capacity is decreasing in the U.S. (particularly in the Northeast), the refinery mark-up or margin reflected in the prices we pay for jet fuel has increased. Our ability to acquire jet fuel from Monroe and the strategic agreements with BP and Phillips 66 are expected to reduce our fuel costs.

Pilot Agreement

During the June 2012 quarter, we reached an agreement with the Air Line Pilots Association, International (“ALPA”) to modify the existing collective bargaining agreement covering Delta’s pilots. The agreement, which was ratified by the pilots in June 2012, provides career growth opportunities as well as pay and benefits improvements for our pilots including increases to base pay and changes to our profit sharing program. The agreement will also provide Delta with productivity gains and support our domestic fleet restructuring.

Domestic Fleet Restructuring

Our domestic fleet restructuring will focus on lowering unit costs while investing in our fleet to enhance the customer experience. As part of this effort, in July 2012, we finalized an agreement with Southwest Airlines and The Boeing Company ("Boeing") to add 88 B-717-200 aircraft to our fleet. Delivery of the aircraft will begin next year, with 16 scheduled to enter our fleet in 2013. We will receive 36 aircraft deliveries in each of 2014 and 2015. The B-717-200 aircraft will primarily replace small 50-seat regional jets on a capacity neutral basis. These 110-seat aircraft will feature new, fully upgraded interiors, with 12 First Class seats, 15 Economy Comfort seats and in-flight WiFi throughout the aircraft.

During 2011, we entered into an agreement with Boeing to purchase 100 new fuel efficient B-737-900ER aircraft. We will add these aircraft to our fleet between 2013 and 2018, primarily replacing older B-757 and B-767 aircraft. The state-of-the-art B-737-900ER will offer an industry leading customer experience, including expanded carry-on baggage space and a roomier cabin. Additionally, we continue to upgrade our fleet with the addition of previously owned MD-90 jets, retiring less efficient aircraft.

We continue to assess our fleet and expect to add the aircraft discussed above on a capacity neutral basis, as we retire older less efficient aircraft. We will evaluate older, retiring fleets and related equipment for changes in depreciable life and/or impairment. As a result of adding the B-717-200 aircraft, we estimate that our total lease payments, including both capital and operating leases, will be approximately $1.6 billion in 2013, $1.6 billion in 2014, $1.5 billion in 2015, $1.4 billion in 2016 and $8.8 billion after 2016.

New York Strategy

Strengthening our position in New York City continues to be an important part of our network strategy. As discussed below, key components of this strategy are operating a domestic hub at LaGuardia and creating a state-of-the-art facility at JFK. In May 2012, we announced new and expanded service to 10 popular leisure destinations (in addition to the service expansion discussed below) in the Caribbean, Bermuda, and Florida from LaGuardia and JFK. These flights are expected to begin operating in late 2012 and 2013.

LaGuardia. During December 2011, we closed transactions with US Airways where we received takeoff and landing rights (each a "slot pair") at LaGuardia in exchange for slot pairs at Reagan National. This exchange allows us to operate a new domestic hub at LaGuardia.

We have increased service at LaGuardia by 60% from the prior year's summer schedule, adding 100 new flights and a total of 26 new destinations. The first phase of new flights began on March 25 and the second phase commenced on July 11. We currently operate about 260 daily flights between LaGuardia and 60 cities, which is more than any other airline. Our expanded schedule adds nonstop service to top U.S. business markets and additional frequencies to business markets currently served.

In addition, we are investing $160 million in a renovation and expansion project at LaGuardia to enhance the customer experience. In April 2012, we broke ground on the project, which includes a connector linking Terminals C and D, a new SkyClub in Terminal C and expanded security lanes in both terminals.


15



JFK. While our expanded LaGuardia schedule is focused on providing industry-leading domestic service, we are optimizing our international and trans-continental flight schedule at JFK during 2012 to facilitate convenient connections for our passengers and improve coordination with our SkyTeam alliance partners.

At JFK, we currently operate domestic flights primarily at Terminal 2 and international flights at Terminal 3 and, to a lesser extent, Terminal 4. Our five-year $1.2 billion renovation project at JFK, which began in 2010, is on schedule. The expansion and enhancement of Terminal 4, which includes the construction of nine new international gates, commenced in 2011 and is expected to be open in the spring of 2013. Upon completion of the Terminal 4 expansion, we will relocate our operations from Terminal 3 to Terminal 4, proceed with the demolition of Terminal 3, and thereafter conduct coordinated flight operations from Terminals 2 and 4. Once our project is complete, we expect that passengers will benefit from an enhanced customer experience and improved operational performance, including reduced taxi times and better on-time performance.

Results of Operations - June 2012 and 2011 Quarters

Operating Revenue
 
Three Months Ended June 30,
 
 
(in millions)
2012
2011
Increase
%
Increase
Passenger:
 
 
 
 
Mainline
$
6,644

$
6,204

$
440

7
 %
Regional carriers
1,807

1,687

120

7
 %
Total passenger revenue
8,451

7,891

560

7
 %
Cargo
262

264

(2
)
(1
)%
Other
1,019

998

21

2
 %
Total operating revenue
$
9,732

$
9,153

$
579

6
 %

 
 
Increase (Decrease)
vs. three months ended June 30, 2011
(in millions)
Three Months Ended June 30, 2012
Passenger
Revenue
RPMs(1)
(Traffic)
ASMs(2)
(Capacity)
Passenger Mile
Yield
PRASM (3)
Load
Factor
Domestic
$
3,727

7
%
1
 %
(1
)%
6
%
8
%
1.2
 pts
Atlantic
1,584

1
%
(5
)%
(7
)%
7
%
9
%
1.5
 pts
Pacific
860

20
%
11
 %
10
 %
8
%
9
%
1.1
 pts
Latin America
473

8
%
3
 %
 %
5
%
8
%
2.8
 pts
Total Mainline
6,644

7
%
1
 %
(1
)%
6
%
8
%
1.4
 pts
Regional carriers
1,807

7
%
(2
)%
(3
)%
9
%
11
%
1.2
 pts
Total passenger revenue
$
8,451

7
%
 %
(1
)%
7
%
8
%
1.4
 pts

(1) 
Revenue passenger miles (“RPMs”)
(2) 
Available seat miles (“ASMs”)
(3) 
Passenger revenue per ASM (“PRASM”)

Passenger Revenue. Passenger revenue increased $560 million, or 7%, due to an improvement in the passenger mile yield of 7% on flat traffic, despite a 1% decline in capacity. Passenger mile yield and unit revenue increased due to fare increases, higher revenue under corporate travel contracts and improvements in our products and services.

International mainline passenger revenue increased due to increased fares, including fuel surcharges, and improved business and leisure travel demand. Atlantic PRASM was up 9%, driven by a 7% increase in yield and a 7% reduction in capacity. In early 2011, we faced industry overcapacity in the transatlantic market and in connection with our joint venture partners, AirFrance-KLM and Alitalia, we have reduced capacity in underperforming markets. Pacific passenger revenue increased 20% on a 10% and 11% increase in capacity and traffic, respectively. These results reflect higher yield and traffic, as demand returned to levels seen prior to the March 2011 earthquake and tsunami in Japan.


16



Operating Expense
 
Three Months Ended June 30,
Increase
(Decrease)
% Increase
(Decrease)
(in millions)
2012
2011
Aircraft fuel and related taxes
$
3,305

$
2,663

$
642

24
 %
Salaries and related costs
1,825

1,739

86

5
 %
Contract carrier arrangements
1,416

1,410

6

 %
Aircraft maintenance materials and outside repairs
548

485

63

13
 %
Depreciation and amortization
388

381

7

2
 %
Passenger commissions and other selling expenses
393

440

(47
)
(11
)%
Contracted services
397

415

(18
)
(4
)%
Landing fees and other rents
347

320

27

8
 %
Passenger service
187

181

6

3
 %
Aircraft rent
68

74

(6
)
(8
)%
Profit sharing
135

8

127

NM

Restructuring and other items
193

144

49

34
 %
Other
396

412

(16
)
(4
)%
Total operating expense
$
9,598

$
8,672

$
926

11
 %
 
Fuel Expense. Including contract carriers under capacity purchase agreements, fuel expense increased $618 million despite a 2% decline in consumption. The table below presents fuel expense, gallons consumed, and our average price per fuel gallon, including the impact of fuel hedge losses of $716 million in the June 2012 quarter:
 
Three Months Ended June 30,
Increase
(Decrease)
% Increase
(Decrease)
(in millions, except per gallon data)
2012
2011
Aircraft fuel and related taxes(1)
$
3,305

$
2,663

$
642

 
Aircraft fuel and related taxes included within contract carrier arrangements
521

545

(24
)


Total fuel expense
$
3,826

$
3,208

$
618

19
 %
 
 
 
 
 
Total fuel consumption (gallons)
968

992

(24
)
(2
)%
Average price per fuel gallon
$
3.95

$
3.23

$
0.72

22
 %
(1) 
Includes the impact of fuel hedge activity described further in the table below.

The table below shows the impact of hedging on fuel expense and average price per fuel gallon:
 
 
Average Price Per Gallon
 
Three Months Ended June 30,
Change
Three Months Ended June 30,
Change
(in millions, except per gallon data)
2012
2011
2012
2011
Fuel purchase cost
$
3,110

$
3,315

$
(205
)
$
3.21

$
3.34

$
(0.13
)
Fuel hedge losses (gains)
716

(107
)
823

0.74

(0.11
)
0.85

Total fuel expense
$
3,826

$
3,208

$
618

$
3.95

$
3.23

$
0.72

MTM adjustments
(561
)
(11
)
(550
)
(0.58
)
(0.01
)
(0.57
)
Total fuel expense, adjusted
$
3,265

$
3,197

$
68

$
3.37

$
3.22

$
0.15


Fuel expense increased due to fuel hedge losses recorded in the June 2012 quarter, as significant fuel price declines in the June 2012 quarter resulted in a decrease in the value of our fuel hedge portfolio. During the three months ended June 30, 2012, our fuel hedge losses of $716 million included $561 million in losses for MTM adjustments. These adjustments are based on market prices as of the end of the reporting period and assumptions described in Note 3. Such market prices are not necessarily indicative of the actual future value of the underlying hedge in the contract settlement period. Therefore, we adjust fuel expense for these items to arrive at a more meaningful measure of fuel cost. Our average price per fuel gallon, adjusted (a non-GAAP financial measure as defined in "Supplemental Information" below), was $3.37 for the June 2012 quarter.


17



Salaries and related costs. The increase in salaries and related costs is primarily due to employee pay increases, increases in pension expense and other benefits, offset by a 2% decrease in staffing.

During the June 2012 quarter, we reached an agreement with ALPA that increases pay and benefits for our pilots. Our pilots and substantially all other employees received base pay increases on July 1, 2012 and will receive additional increases on January 1, 2013. These increases are designed both to recognize the upcoming change to the profit sharing program described below and to accelerate the planned 2013 pay increase for non-pilot employees.

Aircraft maintenance and outside repairs. Aircraft maintenance materials and outside repairs consists of costs associated with (1) maintenance of aircraft used in our operations and (2) maintenance sales to third parties by our MRO services business. The increase in aircraft maintenance materials and outside repairs is primarily due to the cyclical timing of maintenance events on our fleet.

Passenger commissions and other selling expenses. The decrease in passenger commissions and other selling expenses is primarily due to lower credit card fees, booking fees and international commission rates, partially offset by increases in sales.

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 terms of the program specify the exclusion of special items, such as MTM adjustments and restructuring and other items, from pre-tax profit. During the June 2012 quarter, our profit sharing program was modified so that we will pay 10% of profits, on the first $2.5 billion of profits effective January 1, 2013 compared to paying 15% of profits for 2012. Under the program, we will continue to pay 20% of profits above $2.5 billion.

Restructuring and other items. Due to the nature of amounts recorded within restructuring and other items, a year over year comparison is not meaningful. For a discussion of charges recorded in restructuring and other items, see Note 7 of the Notes to the Condensed Consolidated Financial Statements.

During the March 2012 quarter, we announced voluntary workforce reduction programs primarily for eligible U.S. non-pilot employees. Approximately 2,000 employees enrolled in these programs in the June 2012 quarter and became eligible for retiree healthcare benefits. As a result, we recorded a $171 million charge for severance and related retiree healthcare costs (see Note 7).

18



Results of Operations - Six Months Ended June 30, 2012 and 2011

Operating Revenue
 
Six Months Ended June 30,
 
 
(in millions)
2012
2011
Increase
%
Increase
Passenger:
 
 
 
 
Mainline
$
12,306

$
11,334

$
972

9
 %
Regional carriers
3,371

3,132

239

8
 %
Total passenger revenue
15,677

14,466

1,211

8
 %
Cargo
506

514

(8
)
(2
)%
Other
1,962

1,920

42

2
 %
Total operating revenue
$
18,145

$
16,900

$
1,245

7
 %

 
 
Increase (Decrease)
vs. six months ended June 30, 2011
(in millions)
Six Months Ended June 30, 2012
Passenger
Revenue
RPMs(1)
(Traffic)
ASMs(2)
(Capacity)
Passenger Mile
Yield
PRASM (3)
Load
Factor
Domestic
$
6,921

8
%
1
 %
(2
)%
7
%
10
%
2.0
 pts
Atlantic
2,672

4
%
(4
)%
(8
)%
8
%
13
%
3.6
 pts
Pacific
1,717

17
%
8
 %
5
 %
9
%
12
%
1.9
 pts
Latin America
996

10
%
3
 %
 %
7
%
10
%
2.3
 pts
Total Mainline
12,306

9
%
1
 %
(2
)%
8
%
11
%
2.4
 pts
Regional carriers
3,371

8
%
(1
)%
(3
)%
8
%
10
%
1.6
 pts
Total passenger revenue
$
15,677

8
%
1
 %
(2
)%
8
%
11
%
2.3
 pts

(1) 
Revenue passenger miles (“RPMs”)
(2) 
Available seat miles (“ASMs”)
(3) 
Passenger revenue per ASM (“PRASM”)

Passenger Revenue. Passenger revenue increased $1.2 billion, or 8%, due to an improvement in the passenger mile yield of 8% , despite a 2% decline in capacity. Passenger mile yield and unit revenue increased due to fare increases, higher revenue under corporate travel contracts and improvements in our products and services.
  
International mainline passenger revenue increased due to increased fares, including fuel surcharges, and improved business and leisure travel demand. Atlantic PRASM was up 13%, driven by a 8% increase in yield and a 8% reduction in capacity. In early 2011, we faced industry overcapacity in the transatlantic market and in connection with our joint venture partners, AirFrance-KLM and Alitalia, we have reduced capacity in underperforming markets. Pacific passenger revenue increased 17% on a 5% and 8% increase in capacity and traffic, respectively. These results reflect higher yield and traffic, as demand returned to levels seen prior to the March 2011 earthquake and tsunami in Japan.


19



Operating Expense
 
Six Months Ended June 30,
Increase (Decrease)
% Increase (Decrease)
(in millions)
2012
2011
Aircraft fuel and related taxes
$
5,538

$
4,829

$
709

15
 %
Salaries and related costs
3,588

3,466

122

4
 %
Contract carrier arrangements
2,791

2,710

81

3
 %
Aircraft maintenance materials and outside repairs
1,109

970

139

14
 %
Depreciation and amortization
774

757

17

2
 %
Passenger commissions and other selling expenses
773

809

(36
)
(4
)%
Contracted services
775

840

(65
)
(8
)%
Landing fees and other rents
652

633

19

3
 %
Passenger service
358

345

13

4
 %
Aircraft rent
143

152

(9
)
(6
)%
Profit sharing
135

8

127

NM

Restructuring and other items
181

151

30

20
 %
Other
812

841

(29
)
(3
)%
Total operating expense
$
17,629

$
16,511

$
1,118

7
 %

Fuel Expense. Including contract carriers under capacity purchase agreements, fuel expense increased $748 million despite a 3% decline in consumption. The table below presents fuel expense, gallons consumed, and our average price per fuel gallon, including the impact of fuel hedge losses of $520 million during the six months ended June 30, 2012:
 
Six Months Ended June 30,
Increase
(Decrease)
% Increase
(Decrease)
(in millions, except per gallon data)
2012
2011
Aircraft fuel and related taxes(1)
$
5,538

$
4,829

$
709

 
Aircraft fuel and related taxes included within contract carrier arrangements
1,047

1,008

39

 
Total fuel expense
$
6,585

$
5,837

$
748

13
 %
 
 
 
 
 
Total fuel consumption (gallons)
1,854

1,911

(57
)
(3
)%
Average price per fuel gallon
$
3.55

$
3.05

$
0.50

16
 %
(1) 
Includes the impact of fuel hedge activity described further in the table below.

The table below shows the impact of hedging on fuel expense and average price per fuel gallon:
 
 
Average Price Per Gallon
 
Six Months Ended June 30,
Change
Six Months Ended June 30,
Change
(in millions, except per gallon data)
2012
2011
2012
2011
Fuel purchase cost
$
6,065

$
6,051

$
14

$
3.27

$
3.16

$
0.11

Fuel hedge losses (gains)
520

(214
)
734

0.28

(0.11
)
0.39

Total fuel expense
$
6,585

$
5,837

$
748

$
3.55

$
3.05

$
0.50

MTM adjustments
(410
)
18

(428
)
(0.22
)
0.01

(0.23
)
Total fuel expense, adjusted
$
6,175

$
5,855

$
320

$
3.33

$
3.06

$
0.27


Fuel expense increased primarily due to fuel hedge losses recorded in the six months ended June 30, 2012, as significant fuel price declines in the June 2012 quarter resulted in a decrease in the value of our fuel hedge portfolio. During the six months ended June 30, 2012, our net fuel hedge losses of $520 million included $410 million in losses for MTM adjustments. These adjustments are based on market prices as of the end of the reporting period and assumptions described in Note 3. Such market prices are not necessarily indicative of the actual future value of the underlying hedge in the contract settlement period. Therefore, we adjust fuel expense for these items to arrive at a more meaningful measure of fuel cost. Our average price per fuel gallon, adjusted (a non-GAAP financial measure as defined in "Supplemental Information" below), was $3.33 for the six months ended June 30, 2012 quarter.

20




Salaries and related costs. The increase in salaries and related costs is primarily due to employee pay increases, increases in pension expense and other benefits, offset by a 3% decrease in staffing.

Aircraft maintenance materials and outside repairs. Aircraft maintenance materials and outside repairs consists of costs associated with (1) maintenance of aircraft used in our operations and (2) maintenance sales to third parties by our MRO services business. Costs associated with the maintenance of our fleet increased primarily to the cyclical timing of maintenance events on our fleet. Additionally, costs associated with our MRO services business increased year-over-year due primarily to increased sales, reflected in other revenue above.

Passenger commissions and other selling expenses. The decrease in passenger commissions and other selling expenses is primarily due to lower credit card fees, booking fees and international commission rates, partially offset by increases in sales.

Contracted Services. Contracted services expense improved year-over-year due primarily to the impact of severe winter storms on our operations in the March 2011 quarter.

Restructuring and other items. Due to the nature of amounts recorded within restructuring and other items, a year over year comparison is not meaningful. For a discussion of charges recorded in restructuring and other items, see Note 7 of the Notes to the Condensed Consolidated Financial Statements.

Non-Operating Results

The following table shows the components of other expense, net:
 
Three Months Ended June 30,
(Unfavorable) Favorable
 
Six Months Ended June 30,
(Unfavorable) Favorable
(in millions)
2012
2011
 
2012
2011
Interest expense, net
$
(207
)
$
(233
)
$
26

 
$
(428
)
$
(454
)
$
26

Amortization of debt discount, net
(49
)
(46
)
(3
)
 
(100
)
(93
)
(7
)
Loss on extinguishment of debt

(13
)
13

 

(33
)
33

Foreign currency exchange
(37
)
3

(40
)
 
(15
)
6

(21
)
Miscellaneous, net
(5
)
3

(8
)
 
(10
)
(10
)

Total other expense, net
$
(298
)
$
(286
)
$
(12
)
 
$
(553
)
$
(584
)
$
31


Income Taxes

The following table shows the components of our income tax (provision) benefit:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions)
2012
2011
 
2012
2011
International and state income tax provision
$
(4
)
$
(3
)
 
$
(7
)
$
(3
)
Alternative minimum tax refunds and other

6

 

78

Income tax (provision) benefit
$
(4
)
$
3

 
$
(7
)
$
75


We consider all income sources, including other comprehensive income, in determining the amount of tax benefit allocated to continuing operations. During the three and six months ended June 30, 2012, we did not record an income tax provision for U.S. federal income tax purposes since our deferred tax assets are fully reserved by a valuation allowance. For a discussion of our valuation allowance, see Note 9 to the Notes of the Condensed Consolidated Financial Statements.


21



Operating Statistics

The following table sets forth our operating statistics:
 
Three Months Ended June 30,
Six Months Ended June 30,
Consolidated(1)
2012
2011
2012
2011
Revenue passenger miles (millions)
50,520

50,366

93,871

93,295

Available seat miles (millions)
59,382

60,141

113,790

116,360

Passenger mile yield

16.73
¢

15.67
¢

16.70
¢

15.51
¢
Passenger revenue per available seat mile

14.23
¢

13.12
¢

13.78
¢

12.43
¢
Operating cost per available seat mile (CASM)

16.16
¢

14.42
¢

15.49
¢

14.19
¢
CASM-Ex(2)

8.77
¢

8.46
¢

9.01
¢

8.70
¢
Passenger load factor
85.1
%
83.7
%
82.5
%
80.2
%
Fuel gallons consumed (millions)
968

992

1,854

1,911

Average price per fuel gallon(3)
$
3.95

$
3.23

$
3.55

$
3.05

Average price per fuel gallon, adjusted(2)
$
3.37

$
3.22

$
3.33

$
3.06

Full-time equivalent employees, end of period
80,646

82,347

 
 

(1) 
Includes the operations of our contract carriers under capacity purchase agreements, except full-time equivalent employees which excludes employees of contract carriers that we do not own.
(2) 
Non-GAAP financial measure as defined in "Supplemental Information" below.
(3) 
Includes the impact of fuel hedge activity.


22



Fleet Information

Our operating aircraft fleet, commitments, and options at June 30, 2012 are summarized in the following table:
 
Current Fleet(1)
 
 
Aircraft Type
Owned
Capital
Lease
Operating
Lease
Total
Average
Age
 
Commitments(2)
 
Options
B-737-700
10



10

3.4



B-737-800
73



73

11.4



B-737-900ER





100

30

B-747-400
4

8

3

15

19.0



B-757-200
89

34

34

157

19.1



B-757-300
16



16

9.3



B-767-300
10

2

4

16

21.4



B-767-300ER
50

4

4

58

16.3


4

B-767-400ER
21



21

11.3


7

B-777-200ER
8



8

12.4



B-777-200LR
10



10

3.2


12

B-787-8





18


A319-100
55


2

57

10.4



A320-200
41


28

69

17.3



A330-200
11



11

7.2



A330-300
21



21

6.8



MD-88
67

50


117

22.0



MD-90
36

8


44

15.4

11


DC9-50
19



19

34.1



CRJ-100
6

9

8

23

13.6



CRJ-700
15



15

1.3



CRJ-900
13



13

4.6



Embraer 175






36

Total
575

115

83

773

16.0

129

89


(1) 
Excludes certain aircraft we own or lease which are operated by third party contract carriers on our behalf shown in the table below.
(2) 
Excludes our orders for five A319-100 aircraft and two A320-200 aircraft because we have the right to cancel these orders.

In July 2012, we finalized an agreement with Southwest Airlines and Boeing to add 88 B-717-200 aircraft with deliveries beginning in 2013 and continuing through 2015.

The following table summarizes the aircraft fleet operated by third party contract carriers on our behalf at June 30, 2012:
 
Fleet Type
 
Carrier
CRJ-200
CRJ-700
CRJ-900
ERJ-145
Embraer 170
Embraer 175
Total
Pinnacle Airlines, Inc.
140


57




197

ExpressJet Airlines, Inc.
92

38

10




140

SkyWest Airlines, Inc.
63

17

21




101

Compass Airlines, Inc.




6

36

42

Shuttle America Corporation




14

16

30

Chautauqua Airlines, Inc.



24



24

GoJet Airlines, LLC

12





12

Total
295

67

88

24

20

52

546


Pinnacle Airlines Corp. ("Pinnacle") along with Pinnacle Airlines Inc. and other of its subsidiaries, filed for bankruptcy in April 2012. We do not believe that Pinnacle's bankruptcy filing will have a material effect on our operations or financial statements.


23



Financial Condition and Liquidity

We expect to meet our cash needs for the next 12 months from cash flows from operations, cash and cash equivalents, short-term investments and financing arrangements. As of June 30, 2012, we had $5.3 billion in unrestricted liquidity, including $1.8 billion in availability under credit facilities.

Debt and Capital Leases. At June 30, 2012, total debt and capital leases, including current maturities, was $13.0 billion, a $791 million reduction from December 31, 2011. Our ability to obtain additional financing, if needed, on acceptable terms could be adversely affected by the fact that a significant portion of our assets are subject to liens.

In July 2012, we completed a $480 million offering of Pass Through Certificates, Series 2012-1 ("2012-1 EETC") through a pass through trust. The 2012-1 EETC has a weighted average interest rate of 5.31% and matures in May 2020. We plan to use the proceeds (currently held in escrow) primarily to refinance aircraft securing the Delta 2002-1 EETC, which matured on July 2, 2012, and the Northwest 2001-2 EETC, which matures in August 2013 and is expected to be prepaid in the September 2012 quarter.

Pension Obligations. We sponsor defined benefit pension plans for eligible employees and retirees. These plans are closed to new entrants and are frozen for future benefit accruals. During the six months ended June 30, 2012, we contributed $678 million to our defined benefit pension plans. As a result of these contributions, we satisfied, on an accelerated basis, the minimum required contributions for our defined benefit pension plans for 2012.

Sources and Uses of Cash

Cash flows from operating activities

Cash provided by operating activities totaled $1.5 billion and $1.8 billion for the six months ended June 30, 2012 and 2011, respectively, primarily reflecting advance ticket sales for peak season travel and net income after adjusting for items such as depreciation and amortization.

During the six months ended June 30, 2012, cash provided by operating activities was reduced by $678 million in pension funding, $350 million in posted hedge margin and $264 million in profit sharing payments for 2011. During the six months ended June 30, 2011, cash provided by operating activities was reduced by $312 million in pension funding and $313 million in profit sharing payments for 2010.

Cash flows from investing activities

The following table shows the components of net cash used in investing activities:
 
Six Months Ended June 30,
(in millions)
2012
2011
Flight equipment
$
(609
)
$
(481
)
Tec