DELTA AIR LINES, INC. This section of this Form 10-K does not address certain items regarding the year endedDecember 31, 2017 . Discussion and analysis of 2017 and year-to-year comparisons between 2018 and 2017 not included in this Form 10-K can be found in "Item 7. Management's Discussion and Analysis" of our Annual Report on Form 10-K for the year endedDecember 31, 2018 .
Year in Review
Delta had a strong year in 2019, delivering record financial results and making significant progress on strategic priorities. We leveraged our brand momentum to drive strong revenue growth and improvement in pre-tax income, margin, earnings per share and free cash flow over 2018. Strategic accomplishments during the year include our renewed agreement with American Express and announcing plans to enter into a strategic alliance with LATAM. Our pre-tax income for 2019 was$6.2 billion , representing a$1 billion , or 20%, increase compared to the prior year. Diluted earnings per share of$7.30 improved 29% over 2018. Our$8.4 billion of cash flows from operations helped fund$4.9 billion in capital expenditures, resulting in free cash flow of$4.2 billion , representing a$1.8 billion improvement to the prior year. We returned 72% of free cash flow, or$3 billion , to shareholders through share repurchases and dividends. The improvement in earnings and cash flow primarily resulted from a$2.6 billion increase in revenue and lower fuel expense on an 8% decrease in the market price per gallon of fuel and improved fuel efficiency. We continued to run the world's most reliable airline and set a new record for zero cancel days with 165 cancel-free days across the system and 281 on our mainline operations. Industry-leading operational performance, our culture of service and continued product investments supported record customer satisfaction scores. In 2019, we increased net promoter scores in every geographic region, highlighted by a 5-point improvement in the Domestic region to 50%.
Strong Brand Drives Revenue Growth
Compared to 2018, our operating revenue increased$2.6 billion , or 5.8%, on balanced growth across our diverse revenue streams, with premium product ticket revenue driving nearly half of the improvement, and strong growth in both loyalty and MRO revenue. Total revenue per available seat mile ("TRASM") and TRASM, adjusted (a non-GAAP financial measure) increased 1.2% and 2.8%, respectively, compared to the prior year, led by (1) unit revenue growth in our Domestic and Latin regions, (2) demand strength in both business and leisure segments and (3) strong growth in premium products and non-ticket revenues. Total loyalty revenue grew 18% in 2019.
Solid Cost Performance
Operating Expense. Operating expense increased$1.2 billion , or 3.1%, primarily due to higher revenue- and capacity-related expenses including wages and profit sharing for employees and contracted services expense. Salaries and related costs were higher due to pay rate increases for eligible employees implemented during 2019, while profit sharing was higher due to increased profitability in 2019. The increase in contracted services expense predominantly relates to services performed byDelta Global Services ("DGS") that were recorded in salaries and related costs prior to the sale of that business inDecember 2018 . These increases were partially offset by lower fuel expense on an 8% decrease in the market price per gallon of fuel and improved fuel efficiency driven by our ongoing fleet transformation. Our operating cost per available seat mile ("CASM") decreased 1.3% to14.67 cents compared to 2018, primarily due to lower fuel expense and a 4.6% increase in capacity. Non-fuel unit costs ("CASM-Ex", a non-GAAP financial measure) increased 2.0% to10.52 cents due to the higher revenue- and capacity-related expense increases discussed above. Non-Operating Expense. Total non-operating expense was$420 million during 2019 compared to$113 million in 2018, primarily due to an increase in pension and related expense compared to the prior year, partially offset by higher gains on investments. 29 --------------------------------------------------------------------------------
Expanding Our Global Network
In 2019, international revenues grew 2.7% on a 3.3% increase in capacity. We continued to make significant progress in expanding our global reach by acquiring an equity stake in Hanjin-KAL, the largest shareholder ofKorean Air , and announcing plans to enter into a strategic alliance with LATAM and completing a tender offer to acquire a 20% equity stake which closed inJanuary 2020 . Effective inJanuary 2020 , we combined our separate transatlantic joint venture agreements with Air France-KLM andVirgin Atlantic into a single three-party transatlantic joint venture. In addition, we continue to make progress on our joint venture agreement with WestJet with respect to trans-border routes between theU.S. andCanada . This agreement remains subject to required regulatory approvals.
Investing for the Future
Our$8.4 billion of cash flows from operations helped fund$4.9 billion in capital expenditures for the business. As part of our multi-year fleet transformation, we took delivery of 88 new aircraft, including A321-200s, B-737-900ERs, A350-900s, A330-900s, A220-100s and CRJ-900s. These deliveries allowed for the retirement of older, less fuel efficient aircraft, including the announced retirement of our MD-90 fleet by the end of 2022. We also made significant investments in cabin interior refurbishments,Sky Clubs and technology.
The non-GAAP financial measures free cash flow, TRASM, adjusted and CASM-Ex used above, are defined and reconciled in "Supplemental Information" below.
30
--------------------------------------------------------------------------------Results of Operations
Operating Revenue
Year Ended December 31, Increase % Increase
(in millions) 2019 2018 (Decrease) (Decrease)
Ticket - Main cabin $ 21,919 $ 21,196 $ 723 3.4 %
Ticket - Business cabin and premium products 14,989 13,754 1,235 9.0 %
Loyalty travel awards 2,900 2,651 249 9.4 %
Travel-related services 2,469 2,154 315 14.6 %
Total passenger revenue $ 42,277 $ 39,755 $ 2,522 6.3 %
Cargo 753 865 (112) (12.9) %
Other 3,977 3,818 159 4.2 %
Total operating revenue $ 47,007 $ 44,438 $ 2,569 5.8 %
TRASM (cents) 17.07 ¢ 16.87 ¢ 0.20 ¢ 1.2 %
Third-party refinery sales(1) (0.04) (0.21) 0.17 NM
DGS sale adjustment(1) - (0.09) 0.09 NM
TRASM, adjusted (cents) 17.03 ¢ 16.57 ¢ 0.46 ¢ 2.8 %
(1)For additional information on adjustments to TRASM, see "Supplemental Information" below.
Passenger Revenue
Ticket revenues, including both main cabin and business cabin and premium products increased$2.0 billion compared to the year endedDecember 31, 2018 . Business cabin and premium products ticket revenue includes revenues from fare products other than main cabin, includingDelta One ,Delta Premium Select, First Class and Comfort+. The growth in ticket revenue was driven by strength in theDelta brand and products, capitalizing on healthy industry business and leisure demand. We continue to take delivery of new aircraft that include more premium seats, while also generating higher paid load factor for premium products. Loyalty travel awards revenue increased$249 million compared to the year endedDecember 31, 2018 due to growth in mileage redemptions. Travel-related services increased$315 million compared to the year endedDecember 31, 2018 primarily due to increases in checked baggage and ticket change revenues.
Passenger Revenue by
Increase (Decrease) vs. Year Ended December 31, 2018
Year Ended December Passenger Passenger Mile
(in millions) 31, 2019 Revenue
RPMs (Traffic) ASMs (Capacity) Yield PRASM Load Factor
Domestic $ 30,367 7.8 % 6.8 % 5.3 % 1.0 % 2.4 % 1.2 pts
Atlantic 6,381 3.5 % 4.8 % 4.4 % (1.3) % (0.9) % 0.4 pts
Latin America 3,002 4.0 % (0.1) % (0.9) % 4.0 % 4.9 % 0.7 pts
Pacific 2,527 (0.6) % 3.5 % 5.0 % (4.0) % (5.3) % (1.2) ptsTotal passenger revenue$ 42,277 6.3 % 5.5 % 4.6 % 0.8 % 1.7 % 0.8 pts
Passenger revenue increased
Domestic unit revenue increased 2.4%, 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.
31
--------------------------------------------------------------------------------
Passenger revenue related to our international regions increased 2.7%
year-over-year primarily due to capacity growth in the
Atlantic unit revenues decreased due to foreign currency fluctuations between theU.S. dollar and the Euro and British pound, the uncertain economic outlook inEurope and increased industry capacity. These conditions were partially offset by growth in premium product demand and strongU.S. point of sale. Unit revenue increased inLatin America principally as a result of yield growth, mainly due to reduced industry capacity inBrazil and improvements inMexico beach markets. In theSeptember 2019 quarter we announced our plan to enter into a strategic alliance with LATAM, which is expected to provide great customer convenience, a more seamless travel experience and to better connect customers betweenNorth and South America . Unit revenue decreased in the Pacific region primarily on persistent economic and trade related uncertainty, foreign currency fluctuations and increased capacity toChina ,Japan andKorea due to our network transformation. Despite these challenges, our joint venture withKorean Air has enabled solid traffic growth and we have continued to reshape our Pacific network with the announcements that in theMarch 2020 quarter we will transfer ourU.S. -Tokyo services fromNarita toHaneda airport ,Tokyo's preferred airport for corporate customers, and shift ourBeijing service to the newBeijing Daxing airport . Starting inFebruary 2020 , we temporarily suspended flights between theU.S. andChina as the result of an outbreak of a novel coronavirus originating inWuhan ,Hubei Province ,China . We have suspended flights between theU.S. andChina throughApril 30 , will continue to monitor the situation closely and may make additional adjustments. Other Revenue Year Ended December 31, Increase % Increase (in millions) 2019 2018 (Decrease) (Decrease) Loyalty program$ 1,962 $ 1,459 $ 503 34.5 % Ancillary businesses and refinery 1,297 1,801 (504) (28.0) % Miscellaneous 718 558 160 28.7 % Total other revenue$ 3,977 $ 3,818 $ 159 4.2 %
Loyalty Program. Loyalty program revenues relate primarily to brand usage by third parties and include the redemption of miles for non-travel awards.
EffectiveJanuary 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 miles 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 miles (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 increase in loyalty program revenues are primarily related to brand usage by American Express. Ancillary Businesses and Refinery. Ancillary businesses and refinery includes aircraft maintenance provided 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$451 million compared to 2018. The 2018 results also included$244 million of third-party revenue from DGS, which was sold inDecember 2018 . These decreases were mitigated by growth in our MRO revenues, which increased$175 million to$877 million during 2019. InJanuary 2020 , we combinedDelta Private Jets, our wholly owned subsidiary which provides private jet operations, withWheels Up . Upon closing, we received a 27% equity stake inWheels Up .Delta Private Jets will no longer be consolidated and annual revenues of approximately$200 million , which have historically been generated ratably through the year, will no longer be reflected in ancillary businesses and refinery revenue. Miscellaneous. Miscellaneous revenue is primarily composed of lounge access and codeshare revenues, with lounge access revenue driving the majority of the$160 million increase compared to 2018. We continually enhance the customer experience at our lounges, which also included opening three newSky Clubs during 2019 inAustin ,Phoenix andNew Orleans . 32 --------------------------------------------------------------------------------
Operating Expense
Year Ended December 31, Increase % Increase
(in millions) 2019 2018 (Decrease) (Decrease)
Salaries and related costs $ 11,225 $ 10,743 $ 482 4.5 %
Aircraft fuel and related taxes 8,519 9,020 (501) (5.6) %
Regional carriers expense, excluding fuel 3,584 3,438 146 4.2 %
Contracted services 2,641 2,175 466 21.4 %
Depreciation and amortization 2,581 2,329 252 10.8 %
Passenger commissions and other selling
expenses 1,993 1,941 52 2.7 %
Landing fees and other rents 1,762 1,662 100 6.0 %
Aircraft maintenance materials and outside
repairs 1,751 1,575 176 11.2 %
Profit sharing 1,643 1,301 342 26.3 %
Passenger service 1,251 1,178 73 6.2 %
Ancillary businesses and refinery 1,245 1,695 (450) (26.5) %
Aircraft rent 423 394 29 7.4 %
Other 1,771 1,723 48 2.8 %
Total operating expense $ 40,389 $ 39,174 $ 1,215 3.1 %
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 $501 million compared to
the prior year despite a 4.6% increase in capacity, due to an 8% decrease in the
market price per gallon of fuel and improved fuel efficiency driven by our
investment in new aircraft.
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
Year Ended December
Year Ended December 31, 31,
(in millions, except per gallon Increase
data)(1) 2019 2018 (Decrease) 2019 2018 Increase (Decrease)
Fuel purchase cost(2) $ 8,581 $ 9,131 $ (550) $ 2.04 $ 2.22 $ (0.18)
Fuel hedge impact 14 (53) 67 - (0.01) 0.01
Refinery segment impact (76) (58) (18) (0.02) (0.01) (0.01)
Total fuel expense $ 8,519 $ 9,020 $ (501) $ 2.02 $ 2.20 $ (0.18)
MTM adjustments and settlements on
hedges(3) (14) 53 (67) - 0.01 (0.01)
Total fuel expense, adjusted
$ 2.02 $ 2.21 $ (0.19) (1)This reconciliation 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 on hedges include the effects of the derivative transactions disclosed in Note 5 of the Notes to the 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 inDecember 2018 . During 2018, DGS incurred expenses of approximately$350 million related to internalDelta services that were primarily recorded in salaries and related costs. After the sale of DGS to a third party, we now record these expenses and our portion of the new entity's ("AirCo") financial results under the equity method of accounting, in contracted services. 33 -------------------------------------------------------------------------------- Depreciation and Amortization. The increase in depreciation and amortization primarily results from$79 million of accelerated depreciation due to the decision to early retire our MD-90 fleet by the end of 2022, new aircraft deliveries, fleet modifications and technology enhancements. As we take delivery of new aircraft, we continue to evaluate our current fleet compared to network requirements. See Note 11 of the Notes to the Consolidated Financial Statements for additional information on the planned early retirement of our MD-90 fleet. In addition to investing in our fleet, we have also increased our technology investments in an effort to enhance interactions with our customers and allow us to deliver more personalized service, further enhancing the customer experience and strengthening our brand and competitive position. During 2019, we delivered several capabilities that enable our front-line employees to personalize their interactions with our customers, added self-service features on the FlyDelta app, including automatic international check-in, integrated security wait times and the ability to pre-select meals inDelta One and domestic First Class. In addition, we expanded facial recognition biometric boarding for international travelers in theAtlanta ,Minneapolis-St. Paul andSalt Lake City airports. These increased capital expenditures have led to a corresponding increase in depreciation and amortization. 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 second half of 2019. Profit Sharing. Profit sharing expense increased$342 million to$1.6 billion , marking the sixth consecutive year thatDelta employees will receive over$1 billion in recognition of their contributions to the company's performance. The increase in profit sharing is related to higher profit during the year. 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. Expenses related to refinery sales to third parties, which are at or near cost, decreased$451 million compared to the prior year. In addition, approximately$200 million of 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 inDecember 2018 . These decreases were partially offset by growth in our MRO business, as discussed above. InJanuary 2020 , we combinedDelta Private Jets, our wholly owned subsidiary which provides private jet operations, withWheels Up . Upon closing, we received a 27% equity stake inWheels Up .Delta Private Jets will no longer be consolidated and annual costs of approximately$200 million , which have historically been incurred ratably through the year, will no longer be reflected in ancillary businesses and refinery expense. 34 --------------------------------------------------------------------------------
Non-Operating Results
Year Ended December 31, Favorable (Unfavorable)
(in millions) 2019 2018 2019 vs. 2018
Interest expense, net $ (301) $ (311) $ 10
Gain/(loss) on investments, net 119 38 81
Miscellaneous, net (238) 160 (398)
Total non-operating expense, net $ (420) $
(113)
Interest Expense. AtDecember 31, 2018 , the principal amount of debt and finance leases was$9.7 billion . During 2019, we issued$1.5 billion of unsecured notes and$500 million of aircraft secured EETC debt. As a result of the debt issuances, partially offset by principal payments, the amount of debt and finance leases was$11.0 billion atDecember 31, 2019 . Despite the increase in debt during the current year, interest expense decreased$10 million compared to the prior year due to recent refinancing transactions at lower interest rates resulting from our improvement to investment grade credit rating in recent years and the favorable interest rate environment.
Gain/(Loss) on Investments. Gain/(loss) on investments reflects the gains and losses on our equity investments. The increase compared to 2018 primarily results from unrealized gains in Hanjin-KAL and Air France-KLM.
Miscellaneous. Miscellaneous, net is primarily composed of pension and related
expense, our proportionate share of earnings from our equity investments in
The change from 2019 compared to 2018 primarily results from the unfavorable movement in pension and related expense and the sale of our DGS entity in 2018. The pension and related expense was$65 million in 2019 compared to a benefit of$245 million in 2018. In 2018, the sale of our DGS entity to a subsidiary ofArgenbright Holdings, LLC resulted in a gain of$91 million .
Our equity investment earnings and foreign exchange gains/(losses) fluctuate and thus impact the comparability of miscellaneous from period to period.
Income Taxes
Our effective tax rate for 2019 was 23.1%. We expect our annual effective tax
rate to be between 23% and 24% for 2020. At
For more information about our income taxes, see Note 12 of the Notes to the Consolidated Financial Statements.
35
--------------------------------------------------------------------------------Refinery Segment
The refinery 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. During theDecember 2018 quarter, the refinery completed a planned maintenance event ("turnaround") and did not produce any refined products for approximately 60 days. The turnaround was in accordance with the long-term maintenance plan for the facility to allow for the safe completion of major repairs and upgrades. The refinery recorded operating revenues of$5.6 billion in 2019, compared to$5.5 billion in 2018. Operating revenues in 2019 were primarily composed of$4.0 billion of non-jet fuel products exchanged with third parties to procure jet fuel,$1.1 billion of sales of jet fuel to the airline segment and$395 million of non-jet fuel product sales. Refinery revenues increased compared to the prior year due to higher throughput and yields offset by lower costs of crude oil leading to lower pricing for associated refined products. The refinery recorded operating income of$76 million and$58 million in 2019 and 2018, respectively. The refinery's operating income in 2019 was higher primarily due to the 60 day cessation of operations during the turnaround in theDecember 2018 quarter and favorable market conditions year over year. A refinery is subject to annualEPA requirements to blend renewable fuels into the gasoline and on-road diesel fuel it produces. Alternatively, a refinery may purchase renewable energy credits, called RINs, from third parties in the secondary market. The refinery operated byMonroe purchases the majority of its RINs requirement in the secondary market. Observable RINs prices stabilized in 2019 after significant fluctuations in previous years, withMonroe incurring$58 million in RINs compliance costs during the current year.
For more information regarding the refinery's results, see Note 15 of the Notes to the Consolidated Financial Statements.
36
--------------------------------------------------------------------------------Financial Condition and Liquidity
We expect to meet our cash needs for the next 12 months with cash flows from operations, cash and cash equivalents, restricted cash equivalents and financing arrangements. As ofDecember 31, 2019 , we had$6.0 billion in unrestricted liquidity, consisting of$2.9 billion in cash and cash equivalents and$3.1 billion in undrawn revolving credit facilities. During 2019, we used existing cash and cash generated from operations to fund capital expenditures of$4.9 billion , and return$3.0 billion to shareholders.
Sources of Liquidity
Operating Activities
Cash flows from operating activities continue to provide our primary source of liquidity. We generated cash flows from operations of$8.4 billion in 2019 and$7.0 billion in 2018. We also expect to continue generating cash flows from operations in 2020.
Our operating cash flows are 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 2019. The market price for jet fuel is volatile, which can impact the comparability of our periodic cash flows from operations.
Pension Contributions. We sponsor defined benefit pension plans for eligible employees and retirees. These plans are closed to new entrants and are frozen for future benefit accruals. Our funding obligations for these plans are governed by the Employee Retirement Income Security Act, as modified by the Pension Protection Act of 2006. We had no minimum funding requirements in 2019. However, during 2019, we voluntarily contributed$1 billion to these plans. We contributed$500 million to these plans during 2018. We have no minimum funding requirements in 2020, but we plan to voluntarily contribute approximately$500 million to these 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. We pay profit sharing annually in February. We paid$1.3 billion in 2019 and$1.1 billion in 2018 to our employees in recognition of their contributions toward meeting our financial goals. During the year endedDecember 31, 2019 , we recorded$1.6 billion in profit sharing expense based on 2019 pre-tax profit, which we will pay to employees inFebruary 2020 . EffectiveOctober 1, 2017 , we aligned our profit sharing plans under a single formula. Under this formula, 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 . Prior to that time, the profit sharing program for pilots used this formula but in the first nine months of 2017, the profit sharing program for merit, ground and flight attendant employees paid 10% of annual profit and, if we exceeded our prior-year results, the program paid 20% of the year-over-year increase in profit to eligible employees. 37 --------------------------------------------------------------------------------
Investing Activities
Capital Expenditures. Our capital expenditures were
As part of a multi-year initiative, we are investing in aircraft intended to provide more premium products, improved customer experience, greater fuel efficiency and better operating economics. We have committed to future aircraft purchases that will require significant capital investment and have obtained, but are under no obligation to use, long-term financing commitments for a substantial portion of the purchase price of a significant number of these aircraft. We expect that we will invest approximately$4.5 billion in 2020 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. We expect that the investments in 2020 will be funded principally through cash flows from operations. InOctober 2019 , theOffice of the U.S. Trade Representative announced a 10% tariff on new aircraft imported fromEurope . We are evaluating the impact of this announcement on our future Airbus deliveries.
Equity Investments. During 2019, we acquired 10% of the outstanding shares of
Hanjin-KAL, the largest shareholder of
InSeptember 2019 we announced our plan to enter into a strategic alliance with LATAM Airlines Group S.A ("LATAM") as well as acquire up to a 20% interest through a tender offer. InJanuary 2020 we acquired 20% of the shares of LATAM for$1.9 billion , or$16 per share. In addition, to support the establishment of the strategic alliance, we will invest$350 million ,$200 million of which was disbursed in 2019. An additional$50 million is scheduled to be disbursed during 2020. 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 uponDelta 's and LATAM's global footprint and joint ventures, includingDelta 's existing partnership with Aeroméxico. We have sold our GOL ownership stake and are winding down our commercial agreements with GOL to facilitate the formation of our strategic alliance with LATAM.
See Note 4 of the Notes to the Consolidated Financial Statements for more information on our equity investments.
Los Angeles International Airport ("LAX") Construction. We executed a modified lease agreement during 2016 with theCity 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 from 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 theTom Bradley International Terminal . Construction is expected to be completed by 2024.
Under the lease agreement and subsequent project component approvals by the
City's
A substantial majority of the project costs are being funded through theRegional Airports Improvement Corporation ("RAIC"), aCalifornia public benefit corporation, using an$800 million revolving credit facility provided by a group of lenders. The credit facility was executed during 2017 and amended in 2019 and we have guaranteed the obligations of the RAIC under the credit facility. Loans made under the credit facility are being 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 spent approximately$176 million on this project during 2019 and expect to spend approximately$240 million during 2020. 38 -------------------------------------------------------------------------------- New York-LaGuardia Redevelopment. As part of the terminal redevelopment project atLaGuardia Airport , we are partnering with thePort Authority of New York and New Jersey ("Port Authority") to replace Terminals C and D with a new state-of-the-art terminal facility consisting of 37 gates across 4 concourses connected to a central headhouse. The terminal will feature a new, largerDelta 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 thePort 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 aPort 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 toPort 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 spent approximately$562 million on this project during 2019 and expect to spend approximately$700 million during 2020. In theDecember 2019 quarter, we opened Concourse G, the first of the four new concourses housing seven of the 37 new gates. Not only does this deliver the first direct impact to theDelta passenger experience, it also represents the first major phasing milestone. This new concourse will allow us to vacate portions of the existing terminals which can then be demolished and made ready for the next phase of construction. The next major milestone will be the opening of the headhouse and Concourse E, which is scheduled for 2022.
Financing Activities
Debt and Finance Leases. InFebruary 2019 , we entered into a$1 billion term loan issued by two lenders, which was subsequently repaid by the end of theJune 2019 quarter. We used the net proceeds of the term loan to accelerate planned 2019 repurchases under our share repurchase program. In theMarch 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 were used for general corporate purposes, including to refinance debt maturing during 2019. InOctober 2019 we issued$1.5 billion in aggregate principal amount of unsecured notes, consisting of$900 million of 2.9% Notes due 2024 and$600 million of 3.75% Notes due 2029 (collectively, the "Notes"). We used the net proceeds from the offering of these Notes to fund a portion of the tender offer to acquire common shares of LATAM inJanuary 2020 . During 2019, the three major credit rating agencies reaffirmed our investment-grade ratings: Rating Agency Current Rating Outlook Fitch BBB- Stable Moody's Baa3 Stable Standard & Poor's BBB- Stable Capital Returns to Shareholders. Since first implementing our quarterly dividend in 2013, we have annually increased the dividend per share and paid$3.8 billion in total dividends, including$980 million in 2019. Through dividends and share repurchases, we have returned$15.3 billion to shareholders since 2013, while reducing outstanding shares by approximately 25% compared to the beginning of 2013. During 2019, we repurchased and retired 38 million shares at a cost of$2.0 billion .
On
Undrawn Lines of Credit
We have$3.1 billion available in 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. 39 --------------------------------------------------------------------------------
Covenants
We were in compliance with the covenants in our financing agreements at
Contractual Obligations
The following table summarizes our contractual obligations atDecember 31, 2019 that we expect will be paid in cash. The table does not include amounts that are contingent on events or other factors that are uncertain or unknown at this time, including legal contingencies, uncertain tax positions and amounts payable under collective bargaining arrangements, among others. In addition, the table does not include expected significant cash payments representing obligations that arise in the ordinary course of business that do not include contractual commitments.
The amounts presented are based on various estimates, including estimates regarding the timing of payments, prevailing interest rates, volumes purchased, the occurrence of certain events and other factors. Accordingly, the actual results may vary materially from the amounts presented in the table.
Contractual Obligations by Year(1)
(in millions) 2020 2021 2022 2023 2024 Thereafter Total
Debt (see Note 7)
Principal amount $ 2,060 $ 1,094 $ 1,708 $ 932 $ 1,508 $ 2,689 $ 9,991
Interest payments 307 295 246 185 154 635 1,822
Finance lease obligations (see Note 8)
Principal amount 233 213 156 111 171 169 1,053
Interest payments 31 26 18 13 9 10 107
Operating lease obligations (see Note 8) 1,031 913 825
803 738 4,293 8,603
Aircraft purchase commitments (see Note
11) 2,980 3,740 3,390 1,640 500 1,440 13,690
Contract carrier obligations (see Note 11) 1,750 1,432 1,377 1,132 1,002 2,349 9,042
Employee benefit obligations (see Note 10) 134 133 119 110 102 4,650 5,248
Other obligations 2,993 919 1,137 807 596 5,904 12,356
Total $ 11,519 $ 8,765 $ 8,976 $ 5,733 $ 4,780 $ 22,139 $ 61,912 (1)For additional information, see the Notes to the Consolidated Financial Statements referenced in the table above.
Debt, Principal Amount. Represents scheduled principal payments on debt.
Debt, Interest Payments. Represents estimated interest payments based on
interest rates specified in our applicable debt agreements. Interest payments on
variable interest rate debt were calculated using LIBOR at
Finance and Operating Lease Obligations. Refer to Note 8 of the Notes to the Consolidated Financial Statements for additional information regarding finance and operating leases.
Aircraft Purchase Commitments. Refer to the aircraft purchase commitments table in Item 2 for additional information about our future aircraft purchases.
Contract Carrier Obligations. Represents our estimated minimum fixed obligations
under capacity purchase agreements with third-party regional carriers. The
reported amounts are based on (1) the required minimum levels of flying by our
contract carriers under the applicable agreements and (2) assumptions regarding
the costs associated with such minimum levels of flying.
Employee Benefit Obligations. Represents primarily (1) projected future benefit
payments from our unfunded postretirement and postemployment plans and (2) our
estimated minimum required funding for our qualified defined benefit pension
plans based on actuarially determined estimates. For additional information
about our defined benefit pension plan obligations, see "Critical Accounting
Policies and Estimates."
Other Obligations. Represents estimated purchase obligations under which we are
required to make minimum payments for goods and services, including, but not
limited to, aviation-related, maintenance, professional security, insurance,
marketing, technology, sponsorships and other third-party services and products.
This also includes obligations related to our investment in and planned
strategic alliance with LATAM.
40
--------------------------------------------------------------------------------Critical Accounting Policies and Estimates
Our critical accounting policies and estimates are those that require significant judgments and estimates. Accordingly, the actual results may differ materially from these estimates. For a discussion of these and other accounting policies, see Note 1 of the Notes to the Consolidated Financial Statements.
Loyalty Program
Our SkyMiles loyalty program generates customer loyalty by rewarding customers with incentives to travel onDelta . This program allows customers to earn mileage credits ("miles") by flying onDelta ,Delta Connection and other airlines that participate in the loyalty program. When traveling, customers earn redeemable miles based on the passenger's loyalty program status and ticket price. Customers can also earn miles through participating companies such as credit card companies, hotels, car rental agencies and ridesharing companies. To facilitate transactions with participating companies, we sell miles to non-airline businesses, customers and other airlines. Miles are redeemable by customers in future periods for air travel onDelta and other participating airlines, membership in ourSky Club and other program awards. To reflect the miles earned, the loyalty program includes two types of transactions that are considered revenue arrangements with multiple performance obligations: (1) miles earned with travel and (2) miles sold to participating companies. Passenger Ticket Sales Earning Miles. Passenger ticket sales earning miles under our loyalty program provide customers with (1) miles earned and (2) air transportation, which are considered performance obligations. We value each performance obligation on a standalone basis. To value the miles earned, we consider the quantitative value a passenger receives by redeeming miles for a ticket rather than paying cash, which is referred to as equivalent ticket value ("ETV"). Our estimate of ETV is adjusted for miles that are not likely to be redeemed ("breakage"). We use statistical models to estimate breakage based on historical redemption patterns. A change in assumptions as to the actual redemption activity for miles or the estimated fair value of miles expected to be redeemed could have a material impact on our revenue in the year in which the change occurs and in future years. We recognize breakage proportionally during the period in which the remaining miles are actually redeemed. AtDecember 31, 2019 , the aggregate deferred revenue balance associated with the SkyMiles program was$6.7 billion . A hypothetical 10% change in the number of outstanding miles estimated to be redeemed would result in an impact of approximately$200 million on annual revenue recognized. We defer revenue for the miles when earned and recognize loyalty travel awards in passenger revenue as the miles are redeemed and transportation is provided. We record the air transportation portion of the passenger ticket sales in air traffic liability and recognize passenger revenue when we provide transportation or if the ticket goes unused. A hypothetical 10% increase in our estimate of the ETV of a mile would decrease annual passenger revenue by approximately$100 million , as a result of an increase in the amount of revenue deferred from the mileage component of passenger ticket sales. Sale of Miles. Customers may earn miles based on their spending with participating companies such as credit card companies, hotels, car rental agencies and ridesharing companies with which we have marketing agreements to sell miles. Our contracts to sell miles under these marketing agreements have multiple performance obligations. Payments are typically due monthly based on the volume of miles sold during the period, and the terms of our marketing contracts are from one to eleven years. During the years endedDecember 31, 2019 and 2018, total cash sales from marketing agreements were$4.2 billion and$3.5 billion , respectively, which are allocated to travel and other performance obligations, as discussed below. Our most significant contract to sell miles relates to our co-brand credit card relationship with American Express. Our agreements with American Express provide for joint marketing, grant certain benefits toDelta -American Express co-branded credit card holders ("cardholders") and American Express Membership Rewards program participants, and allow American Express to market its services or products using our customer database. Cardholders earn miles for making purchases using co-branded cards, and certain cardholders may also check their first bag for free, are granted discounted access toDelta Sky Club lounges and receive priority boarding and other benefits while traveling onDelta . Additionally, participants in the American Express Membership Rewards program may exchange their points for miles under the loyalty program. We sell miles 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. 41 -------------------------------------------------------------------------------- We account for marketing agreements, including those with American Express, by allocating 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 using 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 adjusted for breakage, (3) published rates on our website for baggage fees, discounted access toDelta Sky Club lounges and other benefits while traveling onDelta , (4) brand value (using estimated royalties generated from the use of our brand) and (5) volume discounts provided to certain partners. EffectiveJanuary 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 allocate 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 miles 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 accessDelta 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 as miles are delivered.
We apply a fair value-based impairment test to the carrying value of goodwill and indefinite-lived intangible assets on an annual basis (as ofOctober 1 ) and, if certain events or circumstances indicate that an impairment loss may have been incurred, on an interim basis. We assess the value of our goodwill and indefinite-lived assets under either a qualitative or quantitative approach. Under a qualitative approach, we consider various market factors, including certain of the key assumptions listed below. We analyze these factors to determine if events and circumstances have affected the fair value of goodwill and indefinite-lived intangible assets. If we determine that it is more likely than not that the asset may be impaired, we use the quantitative approach to assess the asset's fair value and the amount of the impairment. Under a quantitative approach, we calculate the fair value of the asset incorporating the key assumptions listed below into our calculation. When we evaluate goodwill for impairment using a quantitative approach, we estimate the fair value of the reporting unit by considering both comparable public company multiples (a market approach) and projected discounted future cash flows (an income approach). When we perform a quantitative impairment assessment of our indefinite-lived intangible assets, fair value is estimated based on (1) recent market transactions, where available, (2) the royalty method for theDelta tradename (which assumes hypothetical royalties generated from using our tradename) or (3) projected discounted future cash flows (an income approach). Key Assumptions. The key assumptions in our impairment tests include: (1) forecasted revenues, expenses and cash flows, (2) terminal period revenue growth and cash flows, (3) an estimated weighted average cost of capital, (4) assumed discount rates depending on the asset and (5) a tax rate. These assumptions are consistent with those that hypothetical market participants would use. Because we are required to make estimates and assumptions when evaluating goodwill and indefinite-lived intangible assets for impairment, actual transaction amounts may differ materially from these estimates. In addition, when performing a qualitative valuation, we consider the amount by which the intangible assets' fair values exceeded their respective carrying values in the most recent fair value measurements calculated using a quantitative approach. Changes in certain events and circumstances could result in impairment or a change from indefinite-lived to definite-lived. Factors which could cause impairment include, but are not limited to, (1) negative trends in our market capitalization, (2) reduced profitability resulting from lower passenger mile yields or higher input costs (primarily related to fuel and employees), (3) lower passenger demand as a result of weakenedU.S. and global economies, (4) interruption to our operations due to a prolonged employee strike, terrorist attack or other reasons, (5) changes to the regulatory environment (e.g., diminished slot access or additional Open Skies agreements), (6) competitive changes by other airlines and (7) strategic changes to our operations leading to diminished utilization of the intangible assets. We assessed each of the above assumptions in our most recent impairment analyses. The combination of our most recently completed annual results and our projected revenues, expenses and cash flows more than offset any negative events and circumstances. 42 --------------------------------------------------------------------------------Goodwill . Our goodwill balance, which is related to the airline segment, was$9.8 billion atDecember 31, 2019 . Based upon our quantitative assessment of all relevant factors, including applicable factors noted in "Key Assumptions" above, we determined that the fair value of goodwill significantly exceeded the carrying value and, therefore, there was no indication that goodwill was impaired. Identifiable Intangible Assets. Our identifiable intangible assets, which are related to the airline segment, had a net carrying amount of$5.2 billion atDecember 31, 2019 , of which$5.1 billion related to indefinite-lived intangible assets. Indefinite-lived assets are not amortized and consist primarily of routes, slots, theDelta tradename and assets related to SkyTeam and collaborative arrangements. Definite-lived assets consist primarily of marketing and maintenance service agreements.
In 2019, we performed quantitative assessments of our indefinite-lived intangible assets, including applicable factors noted in "Key Assumptions" above, and determined that there was no indication that the assets were impaired as the fair value of each asset exceeded its carrying value by at least 15%.
Long-Lived Assets
Our flight equipment, which consists of aircraft and associated engines and parts, and other long-lived assets have a recorded value of$31.3 billion atDecember 31, 2019 . This value is based on various factors, including the assets' estimated useful lives and salvage values. We review flight equipment and other long-lived assets used in operations for impairment losses when events and circumstances indicate the assets may be impaired. Factors which could be indicators of impairment include, but are not limited to, (1) a decision to permanently remove flight equipment or other long-lived assets from operations, (2) significant changes in the estimated useful life, (3) significant changes in projected cash flows, (4) permanent and significant declines in fleet fair values and (5) changes to the regulatory environment. For long-lived assets held for sale, we discontinue depreciation and record impairment losses when the carrying amount of these assets is greater than the fair value less the cost to sell. To determine whether impairments exist for aircraft used in operations, we group assets at the fleet-type level or at the contract level for aircraft operated by regional carriers (i.e., the lowest level for which there are identifiable cash flows) and then estimate future cash flows based on projections of capacity, passenger mile yield, fuel costs, labor costs and other relevant factors. If an asset group is impaired, the impairment loss recognized is the amount by which the asset group's carrying amount exceeds its estimated fair value. We estimate aircraft fair values using published sources, appraisals and bids received from third parties, as available. As part of our ongoing fleet transformation, during 2019 we committed to accelerating the retirement of our MD-90 fleet. This fleet will now be retired by the end of 2022, which is approximately two years earlier than previously planned. We evaluated the MD-90 fleet and determined that the fleet was not impaired as the future cash flows from operation of the fleet through the updated retirement date significantly exceeded the carrying value. However, the decision to retire the fleet by 2022, including the permanent retirement of 35 aircraft during 2019, resulted in accelerated depreciation of$79 million during 2019, which is recorded in depreciation and amortization in our income statement.
Defined Benefit Pension Plans
We sponsor defined benefit pension plans for eligible employees and retirees. These plans are closed to new entrants and frozen for future benefit accruals. As ofDecember 31, 2019 , the unfunded benefit obligation for these plans recorded on our balance sheet was$5.4 billion . We had no minimum funding requirements in 2019. However, during 2019, we voluntarily contributed$1 billion to these plans. We have no minimum funding requirements in 2020, but we plan to voluntarily contribute approximately$500 million to these plans. The most critical assumptions impacting our defined benefit pension plan obligations and net periodic benefit cost are the discount rate, the expected long-term rate of return on plan assets and life expectancy. Weighted Average Discount Rate. We determine our weighted average discount rate on our measurement date primarily by reference to annualized rates earned on high-quality fixed income investments and yield-to-maturity analysis specific to our estimated future benefit payments. We used a weighted average discount rate to value the obligations of 3.40% and 4.33% atDecember 31, 2019 and 2018, respectively. Our weighted average discount rate for net periodic benefit cost in each of the past three years has varied from the rate selected on our measurement date, ranging from 3.69% to 4.33%. 43 -------------------------------------------------------------------------------- Expected Long-Term Rate of Return. Our expected long-term rate of return on plan assets is based primarily on plan-specific investment studies using historical market return and volatility data. Modest excess return expectations versus some public market indices are incorporated into the return projections based on the actively managed structure of the investment programs and their records of achieving such returns historically. We also expect to receive a premium for investing in less liquid private markets. We review our rate of return on plan assets assumptions annually. Our annual investment performance for one particular year does not, by itself, significantly influence our evaluation. The investment strategy for our defined benefit pension plan assets is to earn a long-term return that meets or exceeds our annualized return target while taking an acceptable level of risk and maintaining sufficient liquidity to pay current benefits and other cash obligations of the plan. This is achieved by investing in a globally diversified mix of public and private equity, fixed income, real assets, hedge funds and other assets and instruments. Our weighted average expected long-term rate of return on assets for net periodic benefit cost for the year endedDecember 31, 2019 was 8.97%. The impact of a 0.50% change in these assumptions is shown in the table below: Effect on Accrued Effect on 2020 Pension Liability at Change in Assumption Pension Benefit Cost December 31, 2019 0.50% decrease in weighted average discount rate$ (13) million $ 1.3 billion 0.50% increase in weighted average discount rate $
9 million
$ 78 million $ - 0.50% increase in expected long-term rate of return on assets$ (78) million $ - Life Expectancy. Changes in life expectancy may significantly impact our benefit obligations and future net periodic benefit cost. We use theSociety of Actuaries ("SOA") published mortality data and other publicly available information to develop our best estimate of life expectancy. The SOA publishes updated mortality tables forU.S. plans and updated improvement scales. Each year we consider updates by the SOA in setting our mortality assumptions for purposes of measuring pension and other postretirement and postemployment benefit obligations. Funding. Our funding obligations for qualified defined benefit plans are governed by the Employee Retirement Income Security Act. The Pension Protection Act of 2006 allows commercial airlines to elect alternative funding rules ("Alternative Funding Rules") for defined benefit plans that are frozen. We elected the Alternative Funding Rules under which the unfunded liability for a frozen defined benefit plan may be amortized over a fixed 17-year period and is calculated using an 8.85% discount rate until the 17-year period expires for all frozen defined benefit plans by the end of 2024. While the Pension Protection Act makes our funding obligations for these plans more predictable, factors outside our control continue to have an impact on the funding requirements. Estimates of future funding requirements are based on various assumptions and can vary materially from actual funding requirements. Assumptions include, among other things, the actual and projected market performance of assets, statutory requirements and demographic data for participants. For additional information, see Note 10 of the Notes to the Consolidated Financial Statements. Investments Valued at Net Asset Value ("NAV") Per Share. On an annual basis we assess the potential for adjustments to the fair value of all investments. Certain of our investments valued using NAV as a practical expedient have a lag in the availability of data. This primarily applies to private equity, private equity-related strategies and real assets. We solicit valuation updates from the investment fund managers and use their information and corroborating data from public markets to determine any needed fair value adjustments.
Recent Accounting Standards
Standards Effective in Future Years
Credit Losses. In 2016, theFinancial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." Under this ASU an entity is required to utilize an "expected credit loss model" on certain financial instruments, including trade and financing receivables. This model requires consideration of a broader range of reasonable and supportable information and requires an entity to estimate expected credit losses over the lifetime of the asset. This standard is effective for interim and annual reporting periods beginning afterDecember 15, 2019 . We do not expect adoption of this standard to have a material impact on our consolidated financial statements. We will adopt the standard effectiveJanuary 1, 2020 . 44 --------------------------------------------------------------------------------
Recently Adopted Standards
Comprehensive Income. InFebruary 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 accumulated other comprehensive income/(loss) ("AOCI") to retained earnings due to theU.S. federal corporate income tax rate change in the Tax Cuts and Jobs Act of 2017. We adopted this standard effectiveJanuary 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. 45 --------------------------------------------------------------------------------
Supplemental Information
We sometimes use information ("non-GAAP financial measures") that is derived
from the 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. Reconciliations below may not calculate exactly due to
rounding.
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 •Third-party refinery sales. We adjust TRASM for refinery sales to third parties 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.
•DGS sale adjustment. Because we sold DGS in
Year Ended December 31,
2019 2018
TRASM (cents) 17.07 ¢ 16.87 ¢
Adjusted for:
Third-party refinery sales (0.04) (0.21)
DGS sale adjustment - (0.09)
TRASM, adjusted 17.03 ¢ 16.57 ¢
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:
•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 understand and analyze our
non-fuel costs and year-over-year financial performance.
•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. 2018
results 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.
•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.
Year Ended December 31,
2019 2018
CASM (cents) 14.67 ¢ 14.87 ¢
Adjusted for:
Aircraft fuel and related taxes (3.10) (3.43)
Ancillary businesses and refinery (0.45) (0.64)
Profit sharing (0.60) (0.49)
CASM-Ex 10.52 ¢ 10.31 ¢
46--------------------------------------------------------------------------------
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: •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. •Strategic investments. Cash flows related to our investment in Hanjin-KAL, the largest shareholder ofKorean Air , are included in our GAAP investing activities. We adjust free cash flow for this activity to provide investors a better understanding of the company's free cash flow that is core to our operational performance. •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. Year Ended December 31, (in millions) 2019 2018 Net cash provided by operating activities$ 8,425 $ 7,014 Net cash used in investing activities (4,563) (4,393) Adjustments: Net redemptions of short-term investments (206) (621) Strategic investments 170 - Net cash flows related to certain airport construction projects and other 338 362 Free cash flow$ 4,164 $ 2,362 Glossary of Defined Terms ASM - Available Seat Mile. A measure of capacity. ASMs equal the total number of seats available for transporting passengers during a reporting period multiplied by the total number of miles flown during that period. CASM - (Operating) Cost per Available Seat Mile. The amount of operating cost incurred per ASM during a reporting period. CASM is also referred to as "unit cost."
CASM-Ex - The amount of operating cost incurred per ASM during a reporting period, adjusted for aircraft fuel and related taxes, ancillary businesses and refinery and profit sharing expenses.
Free Cash Flow - Represents the excess cash generated from operations after satisfying the investment needed to sustain and grow our business. The remaining funds are available to return to shareholders and other providers of capital.
Passenger Load Factor - A measure of utilized available seating capacity calculated by dividing RPMs by ASMs for a reporting period.
Passenger Mile Yield or Yield - The amount of passenger revenue earned per RPM during a reporting period.
PRASM - Passenger Revenue per ASM. The amount of passenger revenue earned per ASM during a reporting period. PRASM is also referred to as "unit revenue."
RPM - Revenue Passenger Mile. One revenue-paying passenger transported one mile. RPMs equal the number of revenue passengers during a reporting period multiplied by the number of miles flown by those passengers during that period. RPMs are also referred to as "traffic."
TRASM - Total Revenue per ASM. The amount of total revenue earned per ASM during a reporting period.
47--------------------------------------------------------------------------------
© Edgar Online, source
