DELTA AIR LINES, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes and other financial information included elsewhere in the Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes included in our 2019 Annual Report on Form 10-K.
Impact of the COVID-19 Pandemic
The unprecedented and rapid spread of COVID-19 and the related travel restrictions and social distancing measures implemented throughout the world have significantly reduced demand for air travel. After initially impacting our service toChina beginning in January, the spread of the virus and the resulting global pandemic next affected the majority of our international network and ultimately has significantly affected our domestic network. Beginning in March, large public events were cancelled, governmental authorities began imposing restrictions on non-essential activities, businesses suspended travel and popular leisure destinations temporarily closed to visitors. Certain countries that are key markets for our business have imposed bans on international travelers for specified periods or indefinitely. As a result, demand for travel declined at a rapid pace and has remained depressed, which has had an unprecedented and materially adverse impact on our revenues and financial position. Although demand improved through the quarter, it remains significantly below the prior year. The exact timing and pace of the recovery are uncertain as certain markets have reopened, some of which have since experienced a resurgence of COVID-19 cases, while others, particularly international markets, remain closed or are enforcing extended quarantines for mostU.S. residents. Additionally, some states have instituted travel restrictions or advisories for travelers from other states. Our forecasted expense and liquidity management initiatives may be modified as the demand environment evolves. In response to these developments, beginning in March and continuing throughout theJune 2020 quarter, we have implemented enhanced measures focusing on the safety of our customers and employees, while at the same time seeking to mitigate the impact on our financial position and operations. Taking Care of our Customers and Employees. The safety of our customers and employees is our primary focus. As the COVID-19 pandemic has progressed, we have taken numerous steps to help promote the safety of our customers and employees on the ground and in the air in keeping with current health-expert recommendations, including: •Adopting new cleaning procedures on all flights, including disinfectant electrostatic spraying on aircraft and sanitizing high-touch areas like tray tables, entertainment screens, armrests and seat-back pockets before each flight. •Taking steps to help employees and customers practice social distancing and promote safety, including: •Creating a Global Cleanliness Division to ensure a consistently safe and sanitized experience across our facilities and aircraft. •Requiring all customers and customer-facing employees to wear masks. •Blocking middle seats and capping load factor at 60% throughout our aircraft through at leastSeptember 30, 2020 . •Modifying our boarding and deplaning processes, while providing food and beverage service that is designed to reduce physical touch points. •Installing plexiglass shields at allDelta check-in counters,Delta Sky Clubs and gate counters across theU.S. as well as adding social distance markers in the check-in lobby,Delta Sky Clubs , at the gate and throughout the jetbridge. •Implementing significant workforce social distancing and protection measures, including reconfiguring call center spaces to promote social distancing, increasing cleaning and disinfecting of our facilities and having virtually all employees who can telecommute do so. •Giving customers flexibility to plan, re-book and travel including extending expiration on travel credits throughSeptember 2022 . Additionally, we are extending 2020 Medallion Status an additional year, rolling Medallion Qualification Miles into 2021 and extendingDelta SkyMiles American Express Card benefits andDelta Sky Club memberships. •Offering pay protection to employees who have been diagnosed with COVID-19, who must quarantine due to exposure to COVID-19 or who have self-identified as being at high-risk for illness from COVID-19 according to theCenters for Disease Control and Prevention ("CDC") guidelines and do not have the ability to telecommute (throughJuly 31 for high-risk individuals). 28 -------------------------------------------------------------------------------- •Beginning inJune 2020 , onsite COVID-19 testing became available for employees in selectDelta hubs. Testing began in ourAtlanta andMinneapolis hubs and is expanding through theSeptember 2020 quarter, with the expectation that all employees will be tested. Capacity Reductions. Beginning in the second half of March, we experienced a precipitous decrease in demand as COVID-19 spread throughout the world. We significantly reduced our system capacity to a level that maintained essential services to align capacity with expected demand. For theJune 2020 quarter, system capacity was reduced 85% compared to theJune 2019 quarter, with international capacity reduced by 94% and domestic flying reduced by 80%. For theSeptember 2020 quarter, system capacity is expected to be down approximately 60% compared to theSeptember 2019 quarter, with international capacity to be reduced approximately 80% and domestic capacity to be reduced approximately 50%. As a result of reduced demand expectations and lower capacity in theSeptember 2020 quarter and beyond, we have parked approximately 50% of our fleet, including the permanent retirement of certain aircraft, as discussed further below. Expense Management. In response to the reduction in revenue, we have implemented, and will continue to implement, cost saving initiatives, including: •Reducing capacity as described above to align with expected demand, which has resulted in parking approximately 600 aircraft as ofJune 30, 2020 . In theJune 2020 quarter we retired our MD-90 fleet, seven 767-300ER aircraft and 10 A320 aircraft and will retire our 777 and 737-700 fleets byOctober 2020 . These retirement decisions follow theMarch 2020 quarter decision to accelerate the retirement of our MD-88 fleet fromDecember 2020 toJune 2020 . •Consolidating our footprint at our airport facilities, including temporarily closing mostDelta Sky Clubs . •Reducing employee-related costs, including: •Voluntary unpaid leaves of 30 days to 12 months offered to most employees. Approximately 45,000 of our employees have taken or have volunteered to take voluntary leaves. •Offering employees early retirement and voluntary separation programs, with most departures scheduled forAugust 1, 2020 . The enrollment period for these programs will close inJuly 2020 . See Note 8 of the Notes to the Condensed Consolidated Financial Statements for additional information. ?Pilots are also eligible for an early retirement program, however, separation dates will be based on training and staffing requirements. •Salary reductions of 50% for our officers and, with respect to our director level employees through theJune 2020 quarter, 25%. Beginning in theSeptember 2020 quarter, a 25% reduction in work hours has been implemented for our director level employees, consistent with the 25% reduction in work hours for all other management and most front-line employee work groups. •Instituting a company-wide hiring freeze. •Delaying non-essential maintenance projects and eliminating nearly all other discretionary spending. Balance Sheet, Cash Flow and Liquidity. Our cash, cash equivalents, short-term investments and aggregate principal amount committed and available to be drawn under our revolving credit facilities balance ("liquidity") as ofJune 30, 2020 was$15.7 billion as a result of the following actions to increase liquidity and strength our financial position during the six months endedJune 30, 2020 : •Reducing planned capital expenditures by approximately$3.5 billion for the year, including working with original equipment manufacturers ("OEM") to optimize the timing of our future aircraft deliveries, delaying aircraft modifications and postponing certain information technology initiatives and replacement of ground equipment. •Receiving$4.9 billion as part of the CARES Act payroll support program as described below. •Obtaining financing through the following actions: •Drawing$3.0 billion from our previously undrawn revolving credit facilities. We have extended the maturity for$1.3 billion of these borrowings fromApril 2021 toApril 2022 and also secured$2.7 billion of these borrowings with our Pacific route authorities and certain related assets. •Entering into a$3.0 billion 364-day secured term loan facility. •Entering into$2.8 billion of sale-leaseback transactions. •Issuing$3.5 billion of senior secured notes and entering into a$1.5 billion term loan, both of which are secured by certain slots, gates and routes. •Issuing$1.3 billion of unsecured notes. •Completing$1.4 billion in transactions secured by aircraft, including EETC issuances and aircraft loans. •Amending our credit facilities to replace fixed charge coverage ratio covenants with liquidity-based covenants. •Suspending share repurchases and dividends. •Postponing$500 million of planned voluntary pension funding.
We continue to evaluate leveraging our unencumbered assets to pursue future financing opportunities and our possible participation in the CARES Act loan program, discussed below.
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In response to the impact that the demand environment has had on our financial
condition, our credit rating has been downgraded by Standard & Poor's to BB in
March 2020 and by Fitch to BB+ in April 2020 . Our credit rating from Moody's
remains Baa3.
Our primary credit facilities have various financial and other covenants that
require us to maintain a minimum liquidity ratio and a minimum collateral
coverage ratio. The minimum liquidity ratio replaced the fixed charge coverage
ratio previously in the facilities as part of the amendments we completed in
June 2020 . We expect to remain in compliance with these and other covenants in
our debt agreements.
On March 27, 2020 , President Trump signed the Coronavirus Aid, Relief, and
Economic Security Act ("CARES Act") into law. The CARES Act is a relief package
intended to assist many aspects of the American economy, including providing the
airline industry with up to $25 billion in grants to be used for employee wages,
salaries and benefits.
In April 2020 , we entered into an agreement with the U.S. Department of the
Treasury to receive $5.4 billion in emergency relief through the CARES Act
payroll support program to be paid in installments through July 2020 . The relief
payments are conditioned on our agreement to refrain from conducting involuntary
employee layoffs or furloughs through September 30, 2020 . Other conditions
include prohibitions on share repurchases and dividends through September 30,
2021 , continuing essential air service as directed by the U.S. Department of
Transportation and certain limitations on executive compensation. The relief
payments include $3.8 billion in a grant and $1.6 billion in an unsecured
10-year low interest loan. The loan bears interest at an annual rate of 1.00%
for the first five years (through April 2025 ) and the Secured Overnight
Financing Rate ("SOFR") plus 2.00% in the final five years. In return, we agreed
to issue to the U.S. Department of the Treasury warrants to acquire over
6.5 million shares of Delta common stock. These warrants have an exercise price
of $24.39 per share and a five-year term.
The relative fair value of the warrants is recorded within stockholder's equity
and as a discount reducing the carrying value of the loan which will be
amortized as interest expense in our income statement over the term of the loan.
The proceeds of the grant are recorded in cash and cash equivalents when
received and will be recognized as contra-expense in CARES Act grant recognition
in our income statement over the periods that the funds are intended to
compensate, which is expected to be through the end of 2020.
In the June 2020 quarter, we received $4.9 billion under the CARES Act payroll
support program, which consists of $3.5 billion in a grant and $1.4 billion in
an unsecured loan. The remaining amount will be received in July 2020 . As of
June 30, 2020 , we recognized $1.3 billion of the grant as contra-expense with
the remaining $2.2 billion recorded as a deferred contra-expense in other
accrued liabilities on our balance sheet. We expect to recognize the remainder
of the grant proceeds from the CARES Act payroll support program as
contra-expense by the end of 2020.
The CARES Act also provides for up to $25 billion in secured loans to the
airline industry. We are eligible and have entered into a non-binding letter of
intent to the U.S. Department of the Treasury for $4.6 billion under the loan
program. We have not decided if we will participate, and we have until September
30, 2020 to decide whether to participate in this program.
Finally, the CARES Act also provides for deferred payment of the employer
portion of social security taxes through the end of 2020, with 50% of the
deferred amount due
Our pre-tax loss for theJune 2020 quarter was$7.0 billion , representing an$8.9 billion decrease compared to the corresponding prior year quarter primarily resulting from an 88% decrease in revenue on the reduction in demand from the impact of the pandemic. Pre-tax loss, adjusted (a non-GAAP financial measure) was$3.9 billion , a decrease of$5.9 billion compared to the corresponding prior year period. Adjustments for theJune 2020 quarter were primarily related to restructuring charges, CARES Act grant recognition and impairments and equity method losses.
Revenue. Compared to the
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Operating Expense. Total operating expense decreased $4.1 billion , or 40%,
compared to the prior year quarter, primarily resulting from lower
volume-related expenses, including fuel. This decrease was achieved despite $2.5
billion in restructuring charges which were partially offset by a $1.3 billion
contra-expense from the payroll support program grant. Total adjusted operating
expense for the June quarter decreased $5.5 billion , or 53%, compared to the
June 2019 quarter.
Non-Operating Results. Total non-operating expense was $2.2 billion in the June
2020 quarter, $2.0 billion higher than the June 2019 quarter, primarily due to
impairments and our proportionate share of our equity method investment losses
related to our investments in LATAM, Grupo Aeroméxico and Virgin Atlantic .
Cash Flow. Losses during the quarter due to the COVID-19 pandemic resulted in
operating activities using $290 million . During the quarter, we incurred $4.1
billion of investing cash outflows, primarily related to the purchase of
short-term investments, ending the quarter with $4.3 billion of short-term
investments in addition to $11.4 billion of cash and cash equivalents. These
results generated $21 million of negative free cash flow (a non-GAAP financial
measure) compared to $1.8 billion of free cash flow in the June 2019 quarter.
Despite this negative free cash flow, we ended the June 2020 quarter with $15.7
billion of liquidity due to proceeds from loans, debt issuances and
sale-leaseback transactions, relief payments under the CARES Act payroll support
program and other liquidity initiatives.
The above non-GAAP financial measures for pre-tax loss, adjusted, operating expenses, adjusted, and free cash flow are defined and reconciled in "Supplemental Information" below.
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Results of Operations - Three Months Ended
Operating Revenue
Three Months Ended June 30,
(in millions)(1) 2020 2019 Increase (Decrease) % Increase (Decrease)
Ticket - Main cabin $ 378 $ 5,938 $ (5,560) (94) %
Ticket - Business cabin and premium
products 190 4,031 (3,841) (95) %
Loyalty travel awards 45 751 (706) (94) %
Travel-related services 65 648 (583) (90) %
Total passenger revenue $ 678 $ 11,368 $ (10,690) (94) %
Cargo 108 186 (78) (42) %
Other 682 982 (300) (31) %
Total operating revenue $ 1,468 $ 12,536 $ (11,068) (88) %
TRASM (cents) 13.85 ¢ 17.47 ¢ (3.62) ¢ (21) %
Third-party refinery sales(2) (2.76) (0.06) (2.70) NM
Delta Private Jets adjustment(2) - (0.07) 0.07 NM
TRASM, adjusted 11.10 ¢ 17.35 ¢ (6.25) ¢ (36) %
(1)This reconciliation may not calculate exactly due to rounding. (2)For additional information on adjustments to TRASM, see "Supplemental Information" below.
Operating Revenue
Compared to theJune 2019 quarter, our operating revenue decreased$11.1 billion , or 88%, due to reduced demand resulting from the COVID-19 pandemic. The decrease in operating revenue generated a 21% decrease in TRASM and a 36% decrease in TRASM, adjusted compared to theJune 2019 quarter. The increase in third-party refinery sales resulted from the refinery's shift to producing more non-jet fuel products due to the decline in demand for jet fuel. The length and severity of the reduction in travel demand due to the COVID-19 pandemic are uncertain. We expect these trends in revenue to continue until the global pandemic has moderated and demand for air travel returns.
Passenger Revenue by
Increase (Decrease)
vs. Three Months Ended June 30, 2019
Three Months Ended Passenger Mile
(in millions) June 30, 2020 Passenger Revenue RPMs (Traffic) ASMs (Capacity) Yield PRASM Load Factor
Domestic $ 564 (93) % (92) % (80) % (9) % (65) % (55) pts
Atlantic 64 (97) % (98) % (95) % 49 % (37) % (50) pts
Latin America 18 (98) % (98) % (97) % 49 % (30) % (47) pts
Pacific 32 (95) % (96) % (90) % 29 % (50) % (52) pts
Total $ 678 (94) % (94) % (85) % 4 % (60) % (54) pts
Passenger revenue decreased $10.7 billion , or 94%, compared to the June 2019
quarter. Passenger revenue per available seat mile ("PRASM") decreased 60%, and
passenger mile yield increased 4% on 85% lower capacity. Load factor decreased
54 points from the prior year to 34%.
Domestic
Passenger unit revenue related to our domestic region for theJune 2020 quarter decreased 65% with capacity down 80% compared to the prior year period. We are planning for incremental improvement to the demand environment to continue in theSeptember 2020 quarter and beyond, though still significantly lower than the prior year period. Specifically, we are planning for our domestic capacity to be approximately 50% lower in theSeptember 2020 quarter than theSeptember 2019 quarter. 32 --------------------------------------------------------------------------------
International
Passenger revenue related to our international regions decreased 97% year-over-year. The reductions in revenue and capacity discussed below were a result of reduced demand and government travel directives limiting or suspending air travel due to the spread of COVID-19. We expect this significantly lower demand environment to continue in theSeptember 2020 quarter, and beyond, with improvement expected to lag behind the domestic recovery once government travel restrictions begin to lift and customer demand starts to return.Atlantic . Unit revenue decreased 37% on a capacity reduction of 95% in theJune 2020 quarter compared to the prior year period. We are planning for our capacity in theSeptember 2020 quarter to be approximately 80% lower than theSeptember 2019 quarter.Latin America . Unit revenue decreased 30% on a capacity reduction of 97% in theJune 2020 quarter compared to the prior year period. We are planning for our capacity in theSeptember 2020 quarter to be approximately 80% lower than theSeptember 2019 quarter. InMay 2020 , we signed a trans-American joint venture agreement with LATAM that, subject to regulatory approvals, will combine our highly complementary route networks betweenNorth and South America , with the goal of providing customers with a seamless travel experience and industry-leading connectivity. We continue to believe this alliance will generate growth opportunities, building uponDelta 's and LATAM's global footprint and joint ventures. See Note 5 of the Notes to the Condensed Consolidated Financial Statements for additional information on our strategic alliance with LATAM and the impact of its recent bankruptcy filing. Pacific. Unit revenue decreased 50% on a capacity reduction of 90% in theJune 2020 quarter compared to the prior year period. We are planning for our capacity in theSeptember 2020 quarter to be approximately 80% lower than theSeptember 2019 quarter.
In each of these regions, we continue to monitor government travel directives and customer demand and will adjust flight schedules accordingly.
Other Revenue
Three Months Ended June 30,
(in millions) 2020 2019 Increase (Decrease) % Increase (Decrease)
Loyalty program $ 269 $ 484 $ (215) (44) %
Ancillary businesses and refinery 390 330 60 18 %
Miscellaneous 23 168 (145) (86) %
Total other revenue $ 682 $ 982 $ (300) (31) %
Loyalty Program. Loyalty program revenues relate to brand usage by third parties
and other performance obligations embedded in miles sold, including redemption
of miles for non-travel awards. These revenues are mainly driven by customer
spend on American Express cards, which has experienced a decline in demand,
although less severe than air travel, during the quarter.
Ancillary Businesses and Refinery. Ancillary businesses and refinery includes
aircraft maintenance services we provide to third parties, our vacation
wholesale operations and refinery sales to third parties. Refinery sales to
third parties, which are at or near cost, increased $252 million compared to the
June 2019 quarter. The increase in third-party refinery sales resulted from the
refinery's shift to producing more non-jet fuel products due to the decline in
demand for jet fuel. The increase in refinery sales was partially offset by a
$105 million decline in revenue from aircraft maintenance services we provide to
third parties, which decreased due to the reduction in flights operated
worldwide. In addition, the June 2019 quarter results included $49 million of
revenue from Delta Private Jets, which was combined with Wheels Up in January
2020 and is no longer reflected in ancillary businesses and refinery.
Miscellaneous. Miscellaneous revenue is primarily composed of lounge access and
codeshare revenues. The volume of these transactions has fallen compared to the
June 2019 quarter due to the impact of, and our response to, the COVID-19
pandemic.
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Three Months Ended June 30,
(in millions) 2020 2019 Increase (Decrease) % Increase (Decrease)
Salaries and related costs $ 2,086 $ 2,752 $ (666) (24) %
Aircraft fuel and related taxes 372 2,291 (1,919) (84) %
Regional carriers expense, excluding fuel 497 905 (408) (45) %
Depreciation and amortization 591 713 (122) (17) %
Contracted services 344 657 (313) (48) %
Landing fees and other rents 350 442 (92) (21) %
Ancillary businesses and refinery 401 316 85 27 %
Aircraft maintenance materials and outside
repairs 43 434 (391) (90) %
Passenger commissions and other selling
expenses 45 538 (493) (92) %
Passenger service 88 322 (234) (73) %
Aircraft rent 96 107 (11) (10) %
Restructuring charges 2,454 - 2,454 NM
CARES Act grant recognition (1,280) - (1,280) NM
Profit sharing - 518 (518) (100) %
Other 196 413 (217) (53) %
Total operating expense $ 6,283 $ 10,408 $ (4,125) (40) %
Salaries and Related Costs. The decrease in salaries and related costs is
primarily due to actions taken as a result of decreased demand for air travel
due to the COVID-19 pandemic. Beginning in March 2020 , we instituted a hiring
freeze, reduced salaries by 50% and 25% for our officer and director level
employees, respectively, and reduced work hours by 25% for all other management
and most front-line employee work groups. Beginning in the September 2020
quarter, the 25% work-hour reduction will apply to our director level employees
in place of the 25% salary reduction. These aforementioned reductions will
continue through the September 2020 quarter. Additionally, approximately 45,000
of our employees have taken or will be taking a voluntary unpaid leave of
absence for periods ranging from 30 days up to 12 months. Also, during the June
2020 quarter, we announced voluntary separation programs primarily for eligible
U.S. employees. As a result, we expect salaries and related costs to decline in
future periods versus the comparable prior year period.
Aircraft Fuel and Related Taxes. Fuel expense decreased $1.9 billion compared to
the prior year quarter primarily due to an 85% decrease in consumption and an
approximately 30% decrease in the market price per gallon of jet fuel. We expect
consumption in future periods to decline versus the comparable prior year
period, in line with the expected capacity reductions discussed above.
The table below shows the impact of hedging and the refinery on fuel expense and average price per gallon, adjusted (non-GAAP financial measures):
Average Price Per Gallon
Three Months Ended June Three Months Ended June
30, 30,
(in millions, except per gallon Increase
data) (1) 2020 2019 (Decrease) 2020 2019 Increase (Decrease)
Fuel purchase cost(2) $ 244 $ 2,318 $ (2,075) $ 1.47 $ 2.11 $ (0.64)
Fuel hedge impact 14 10 5 0.09 - 0.09
Refinery segment impact 114 (37) 151 0.69 (0.03) 0.72
Total fuel expense $ 372 $ 2,291 $ (1,920) $ 2.25 $ 2.08 $ 0.17
MTM adjustments and
settlements(3) (14) (10) (5) (0.09) (0.01) (0.08)
Delta Private Jets adjustment(4) - (8) 8 - (0.01) 0.01
Total fuel expense, adjusted $ 357 $ 2,274 $ (1,916) $ 2.16 $ 2.07 $ 0.09
(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)Mark-to-market ("MTM") adjustments and settlements include the effects of the
derivative transactions disclosed in Note 6 of the Notes to the Condensed
Consolidated Financial Statements. For additional information and the reason for
adjusting fuel expense, see "Supplemental Information" below.
(4)Because we combined Delta Private Jets with Wheels Up in January 2020 , we
have excluded the impact of Delta Private Jets from 2019 results for
comparability.
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Regional Carriers Expense, Excluding Fuel. The decrease in regional carriers
expense is due to the decreased capacity and utilization of these carriers. We
expect regional carriers expense to decline in future periods versus the
comparable prior year period due to the capacity reductions discussed above.
Depreciation and Amortization. The decrease in depreciation and amortization is
primarily due to aircraft that have been retired and thus no longer incur
depreciation. Retirement of the MD-88 and MD-90 fleets, as well as 10 A320 and
seven 767-300ER aircraft, was completed in the June 2020 quarter. The 777 and
737-700 fleets are expected to be retired by October 2020 . Impairments related
to the retirements of these fleets are reflected in restructuring charges,
discussed below. See Note 2 of the Notes to the Condensed Consolidated Financial
Statements for additional information about these fleet retirements. We expect
depreciation and amortization expense to decline in future periods versus the
comparable prior year period due to these retirements.
Contracted Services. The decrease in contracted services is due to reduced utilization of services resulting from the decreased capacity. We expect contracted services expense to decline in future periods versus the comparable prior year period due to the capacity reductions discussed above.
Landing Fees and Other Rents. A portion of our landing fees and other rents are variable in nature and are dependent on factors such as the number of departures. The decrease in landing fees and other rents is due to the reduction in capacity and number of flights operated during theJune 2020 quarter. We expect landing fees and other rents to decline in future periods versus the comparable prior year period due to the capacity reductions discussed above. Ancillary Businesses and Refinery. Ancillary businesses and refinery includes expenses associated with aircraft maintenance services we provide to third parties, our vacation wholesale operations and refinery sales to third parties. Increased expenses were primarily related to refinery sales to third parties, which are at or near cost. These refinery cost of sales increased$252 million compared to theJune 2019 quarter. Due to the decrease in demand for jet fuel, the refinery has shifted production to more non-jet fuel products, which is expected to increase the sales to third parties during the second half of 2020 compared to the prior year period. The increase in refinery costs was partially offset by lower expenses related to aircraft maintenance services we provide to third parties compared to theJune 2019 quarter due to the reduction in flights operated worldwide. In addition, costs related to services performed byDelta Private Jets in theJune 2019 quarter were recorded in ancillary businesses and refinery prior to the combination of that business withWheels Up inJanuary 2020 . Aircraft Maintenance Materials and Outside Repairs. The reduction in aircraft maintenance materials and outside repairs is a result of the reduction in capacity and the large number of aircraft we parked in theJune 2020 quarter, as well as the initiative to delay non-essential maintenance projects. Passenger Commissions and Other Selling Expenses. The decrease in passenger commissions and other selling expenses is primarily related to the significant reduction in demand for travel due to the impact of the COVID-19 pandemic. We expect passenger commissions and other selling expenses to decline in future periods versus the comparable prior year period due to the capacity reductions discussed above.
Passenger Service. The decrease in passenger service expenses is due to the
decrease in the number of flights and passengers in the
Restructuring Charges. Restructuring charges are composed of various expenses that resulted from the unprecedented impact on our business from the COVID-19 pandemic, including fleet impairment charges and reserves recognized on receivables. In theJune 2020 quarter we recorded impairment charges of$1.4 billion related to the 777 fleet,$330 million related to the MD-90 fleet,$220 million related to the 737-700 fleet,$180 million related to the seven retired 767-300ER aircraft and$60 million related to the 10 retired A320 aircraft. In theJune 2020 quarter we recorded$98 million of reserves against outstanding receivables fromVirgin Atlantic , Virgin Australia, LATAM, Grupo Aeroméxico and others reflecting our expected recoveries given their restructuring efforts or recent bankruptcy filings. CARES Act Grant Recognition. InApril 2020 , we entered into an agreement with theU.S. Department of the Treasury to receive$5.4 billion in emergency relief through the CARES Act payroll support program to be paid in installments throughJuly 2020 . The relief payments include a grant of$3.8 billion , of which we received$3.5 billion in theJune 2020 quarter, that is being recognized as a contra-expense over the periods that the funds are intended to compensate. We expect to recognize the remainder of the grant proceeds from the CARES Act payroll support program as contra-expense by the end of 2020. 35 -------------------------------------------------------------------------------- Profit Sharing. Our profit sharing program pays 10% to all eligible employees for the first$2.5 billion of annual profit and 20% of annual profit above$2.5 billion . The decrease in profit sharing is due to the current expectations for a pre-tax loss in 2020 compared to expectations for pre-tax income in theJune 2019 quarter. Other. The decrease in other expense is primarily driven by lower volume-related costs resulting from the decreased capacity during theJune 2020 quarter. We expect other expense to decline in future periods versus the comparable prior year period due to the capacity reductions discussed above. 36 --------------------------------------------------------------------------------
Results of Operations - Six Months Ended
Operating Revenue
Six Months Ended June 30,
(in millions)(1) 2020 2019 Increase (Decrease) % Increase (Decrease)
Ticket - Main cabin $ 4,173 $ 10,659 $ (6,486) (61) %
Ticket - Business cabin and premium
products 2,905 7,298 (4,393) (60) %
Loyalty travel awards 588 1,442 (854) (59) %
Travel-related services 581 1,223 (642) (52) %
Total passenger revenue $ 8,247 $ 20,622 $ (12,375) (60) %
Cargo 261 378 (117) (31) %
Other 1,552 2,008 (456) (23) %
Total operating revenue $ 10,060 $ 23,008 $ (12,948) (56) %
TRASM (cents) 14.48 ¢ 17.15 ¢ (2.67) ¢ (16) %
Third-party refinery sales(2) (0.42) (0.07) (0.35) NM
Delta Private Jets adjustment(2) - (0.07) 0.07 NM
TRASM, adjusted 14.06 ¢ 17.01 ¢ (2.95) ¢ (17) %
(1)The reconciliation above may not calculate exactly due to rounding. (2)For additional information on adjustments to TRASM, see "Supplemental Information" below.
Operating Revenue
Compared to the six months endedJune 30, 2019 , our operating revenue decreased$12.9 billion , or 56%, due to reduced demand resulting from the COVID-19 pandemic beginning in the second half ofMarch 2020 . The decrease in operating revenue generated a 16% decrease in TRASM and a 17% decrease in TRASM, adjusted compared to the six months endedJune 30, 2019 . The length and severity of the reduction in travel demand due to the COVID-19 pandemic are uncertain. We expect these trends in revenue to continue until the global pandemic has moderated and demand for air travel returns.
Passenger Revenue by
Increase (Decrease)
vs. Six Months Ended June 30, 2020
Six Months Ended Passenger Mile
(in millions) June 30, 2020 Passenger Revenue RPMs (Traffic) ASMs (Capacity) Yield PRASM Load Factor
Domestic $ 6,165 (58) % (57) % (43) % (4) % (28) % (21) pts
Atlantic 882 (70) % (69) % (62) % (4) % (20) % (14) pts
Latin America 783 (52) % (52) % (47) % 1 % (9) % (8) pts
Pacific 417 (66) % (67) % (60) % 3 % (15) % (15) pts
Total $ 8,247 (60) % (59) % (48) % (2) % (23) % (18) pts
Passenger revenue decreased $12.4 billion , or 60%, compared to the six months
ended June 30, 2019 . PRASM decreased 23% and passenger mile yield decreased 2%
on 48% lower capacity. Load factor decreased 18 points from the prior year
period to 67%.
Domestic
Prior to the initial effects of the COVID-19 pandemic inMarch 2020 , domestic results were strong with revenue nearly 10% higher than the prior year period. However, due to the decrease in customer demand beginning in March, passenger unit revenue related to our domestic region decreased 28% with capacity down 43% compared to the prior year period. We are planning for incremental improvement to the demand environment to continue in theSeptember 2020 quarter and beyond, though still significantly lower than the prior year period. 37 --------------------------------------------------------------------------------
International
Passenger revenue related to our international regions decreased 64% year-over-year. The reductions in revenue and capacity discussed below were a result of reduced demand and government travel directives limiting or suspending air travel due to the spread of COVID-19. We expect this significantly lower demand environment to continue in theSeptember 2020 quarter, and beyond, with improvement expected to lag behind the domestic recovery once government travel restrictions begin to be lifted and customer demand starts to return.Atlantic . Unit revenue decreased 20% on a capacity reduction of 62% in the six months endedJune 30, 2020 compared to the prior year period.Latin America . Unit revenue decreased 9% on a capacity reduction of 47% in the six months endedJune 30, 2020 compared to the prior year period. Pacific. Unit revenue decreased 15% on a capacity reduction of 60% in the six months endedJune 30, 2020 compared to the prior year period. Also, as previously announced, inMarch 2020 we transferred ourU.S. -Tokyo services fromNarita toHaneda airport ,Tokyo's preferred airport for corporate customers.
In each of these regions we continue to monitor government travel directives and customer demand and will adjust flight schedules accordingly.
Prior to the COVID-19 pandemic, we completed two transactions to further strengthen our international partnerships. In theAtlantic region, effectiveJanuary 2020 , we combined our separate transatlantic joint venture agreements with Air France-KLM andVirgin Atlantic into a single three-party transatlantic joint venture. This enhanced joint venture is designed to strengthen collaboration between the three airlines and is expected to provide customers with increased access to destinations acrossNorth America , theU.K. andEurope . In theLatin America region, inJanuary 2020 , we completed the tender offer to acquire 20% of the shares of LATAM as part of our plan to enter into a strategic alliance. Additionally, in theMarch 2020 quarter, we started codesharing for certain flights operated by LATAM. InMay 2020 , we signed a trans-American joint venture agreement with LATAM that, subject to regulatory approvals, will combine our highly complementary route networks betweenNorth and South America , with the goal of providing customers with a seamless travel experience and industry-leading connectivity. We continue to believe this alliance will generate growth opportunities, building uponDelta 's and LATAM's global footprint and joint ventures. See Note 5 of the Notes to the Condensed Consolidated Financial Statements for additional information on our strategic alliance with LATAM and the impact of its recent bankruptcy filing. Other Revenue Six Months Ended June 30, (in millions) 2020 2019 Increase (Decrease) % Increase (Decrease) Loyalty program$ 743 $ 958 $ (215) (22) % Ancillary businesses and refinery 613 699 (86) (12) % Miscellaneous 196 351 (155) (44) % Total other revenue$ 1,552 $ 2,008 $ (456) (23) % Loyalty Program. Loyalty program revenues relate to brand usage by third parties and other performance obligations embedded in miles sold, including redemption of miles for non-travel awards. These revenues are mainly driven by customer spend on American Express cards, which has experienced a decline in demand, although less severe than air travel. Ancillary Businesses and Refinery. Ancillary businesses and refinery includes aircraft maintenance services we provide to third parties, our vacation wholesale operations and refinery sales to third parties. Refinery sales to third parties, which are at or near cost, increased$203 million compared to the six months endedJune 30, 2019 . The increase in third-party refinery sales resulted from the refinery's shift to producing more non-jet fuel products due to the decline in demand for jet fuel. The increase in refinery sales was partially offset by a$150 million decline in revenue from aircraft maintenance services we provide to third parties, which decreased due to the reduction in flights operated worldwide. In addition, the six months endedJune 30, 2019 results also included$100 million of revenue fromDelta Private Jets, which was combined withWheels Up inJanuary 2020 and is no longer reflected in ancillary businesses and refinery. Miscellaneous. Miscellaneous revenue is primarily composed of lounge access and codeshare revenues. The volume of these transactions has fallen compared to the six months endedJune 30, 2019 due to the impact of, and our response to, the COVID-19 pandemic. 38 --------------------------------------------------------------------------------
Operating Expense
Six Months Ended June 30,
(in millions) 2020 2019 Increase (Decrease) % Increase (Decrease)
Salaries and related costs $ 4,858 $ 5,391 $ (533) (10) %
Aircraft fuel and related taxes 1,967 4,269 (2,302) (54) %
Regional carriers expense, excluding fuel 1,399 1,798 (399) (22) %
Depreciation and amortization 1,268 1,328 (60) (5) %
Contracted services 1,019 1,288 (269) (21) %
Landing fees and other rents 817 861 (44) (5) %
Ancillary businesses and refinery 620 667 (47) (7) %
Aircraft maintenance materials and outside
repairs 512 910 (398) (44) %
Passenger commissions and other selling
expenses 403 965 (562) (58) %
Passenger service 345 593 (248) (42) %
Aircraft rent 196 209 (13) (6) %
Restructuring charges 2,454 - 2,454 NM
CARES Act grant recognition (1,280) - (1,280) NM
Profit sharing - 739 (739) (100) %
Other 707 842 (135) (16) %
Total operating expense $ 15,285 $ 19,860 $ (4,575) (23) %
Salaries and Related Costs. The decrease in salaries and related costs is
primarily due to actions taken as a result of decreased demand for air travel
due to the COVID-19 pandemic. Beginning in March 2020 , we instituted a hiring
freeze, reduced salaries by 50% and 25% for our officer and director level
employees, respectively, and reduced work hours by 25% for all other management
and most front-line employee work groups. Beginning in the September 2020
quarter, the 25% work-hour reduction will apply to our director level employees
in place of the 25% salary reduction. These aforementioned reductions will
continue through the September 2020 quarter. Additionally, approximately 45,000
of our employees have taken or will be taking a voluntary unpaid leave of
absence for periods ranging from 30 days up to 12 months. Also, during the June
2020 quarter, we announced voluntary separation programs primarily for eligible
U.S. employees. As a result, we expect salaries and related costs to decline in
future periods versus the comparable prior year period.
Aircraft Fuel and Related Taxes. Fuel expense decreased $2.3 billion compared to
the prior year due to a 49% decrease in consumption and an approximately 13%
decrease in the market price per gallon of jet fuel. We expect consumption to
decline in future periods versus the comparable prior year period, in line with
the expected capacity reductions discussed above.
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
Six Months Ended June 30, Six Months Ended June 30,
(in millions, except per gallon data) (1) 2020 2019 Change 2020 2019 Change
Fuel purchase cost(2) $ 1,875 $ 4,255 $ (2,380) $ 1.79 $ 2.06 $ (0.27)
Fuel hedge impact 7 17 (10) 0.01 0.01 -
Refinery segment impact 85 (3) 88 0.08 - 0.08
Total fuel expense $ 1,967 $ 4,269 $ (2,302) $ 1.88 $ 2.07 $ (0.19)
MTM adjustments and settlements(3) (7) (17) 10 (0.01) (0.01) -
Delta Private Jets adjustment(4) - (15) 15 - (0.01) 0.01
Total fuel expense, adjusted $ 1,959 $ 4,237 (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 include the effects of the derivative transactions disclosed in Note 6 of the Notes to the Condensed Consolidated Financial Statements. For additional information and the reason for adjusting fuel expense, see "Supplemental Information" below. (4)Because we combinedDelta Private Jets withWheels Up inJanuary 2020 , we have excluded the impact ofDelta Private Jets from 2019 results for comparability. 39 -------------------------------------------------------------------------------- Regional Carriers Expense, Excluding Fuel. The decrease in regional carriers expense is due to the decreased capacity and utilization of these carriers. We expect regional carriers expense to decline in future periods versus the comparable prior year period due to the capacity reductions discussed above. Depreciation and Amortization. The decrease in depreciation and amortization is primarily due to aircraft that have been retired and thus no longer incur depreciation. Retirement of the MD-88 and MD-90 fleets, as well as 10 A320 and seven 767-300ER aircraft, was completed in theJune 2020 quarter. The 777 and 737-700 fleets are expected to be retired byOctober 2020 . Impairments related to the retirements of these fleets are reflected in restructuring charges, discussed below. See Note 2 of the Notes to the Condensed Consolidated Financial Statements for additional information about these fleet retirements. Contracted Services. The decrease in contracted services is due to reduced utilization of services resulting from the decreased capacity discussed above. We expect contracted services expense to decline in future periods versus the comparable prior year period due to the capacity reductions discussed above. Ancillary Businesses and Refinery. Ancillary businesses and refinery includes expenses associated with aircraft maintenance services we provide to third parties, our vacation wholesale operations and refinery sales to third parties. The decrease in these expenses primarily related to a reduction in aircraft maintenance services we provide to third parties compared to the six months endedJune 30, 2019 due to the reduction in flights operated worldwide. In addition, costs related to services performed byDelta Private Jets in the six months endedJune 30, 2019 were recorded in ancillary businesses and refinery prior to the combination of that business withWheels Up inJanuary 2020 . These decreases were partially offset by the cost of refinery sales to third parties, which are at or near cost. These refinery cost of sales increased$203 million compared to the six months endedJune 30, 2019 . Due to the decrease in demand for jet fuel, the refinery has shifted production to more non-jet fuel products, which is expected to increase the sales to third parties during the second half of 2020 compared to the prior year period. Aircraft Maintenance Materials and Outside Repairs. The reduction in aircraft maintenance materials and outside repairs is a result of the reduction in capacity and large number of aircraft we parked since the beginning of the year, as well as the initiative to delay non-essential maintenance projects. Passenger Commissions and Other Selling Expenses. The decrease in passenger commissions and other selling expenses is primarily related to the significant reduction in demand for travel due to the impact of the COVID-19 pandemic. We expect passenger commissions and other selling expenses to decline in future periods versus the comparable prior year period due to the capacity reductions discussed above. Passenger Service. The decrease in passenger service expenses is due to the decrease in the number of flights and passengers during the six months endedJune 30, 2020 , which resulted in fewer passenger service expenses such as meals and catering. We expect passenger service expenses to decline in future periods versus the comparable prior year period due to the capacity reductions discussed above. Restructuring Charges. Restructuring charges are composed of various expenses that resulted from the unprecedented impact on our business from the COVID-19 pandemic, including fleet impairment charges and reserves recognized on receivables. In theJune 2020 quarter we recorded impairment charges of$1.4 billion related to the 777 fleet,$330 million related to the MD-90 fleet,$220 million related to the 737-700 fleet,$180 million related to the seven retired 767-300ER aircraft and$60 million related to the 10 retired A320 aircraft. In theJune 2020 quarter we recorded$98 million of reserves against outstanding receivables fromVirgin Atlantic , Virgin Australia, LATAM, Grupo Aeroméxico and others reflecting our expected recoveries given their restructuring efforts or recent bankruptcy filings. CARES Act Grant Recognition. InApril 2020 , we entered into an agreement with theU.S. Department of the Treasury to receive$5.4 billion in emergency relief through the CARES Act payroll support program to be paid in installments throughJuly 2020 . The relief payments include a grant$3.8 billion , of which we received$3.5 billion in theJune 2020 quarter, that is being recognized as a contra-expense over the periods that the funds are intended to compensate. We expect to recognize the remainder of the grant proceeds from the CARES Act payroll support program as contra-expense by the end of 2020. Profit Sharing. Our profit sharing program pays 10% to all eligible employees for the first$2.5 billion of annual profit and 20% of annual profit above$2.5 billion . The decrease in profit sharing is due to the current expectations for a pre-tax loss in 2020 compared to expectations for pre-tax income during the six months endedJune 30, 2019 . Other. The decrease in other expense is primarily driven by lower volume-related costs resulting from the decreased capacity during the six months endedJune 30, 2020 . 40 --------------------------------------------------------------------------------
Non-Operating Results
Three Months Ended Six Months Ended
June 30, June 30,
Favorable Favorable
(in millions) 2020 2019 (Unfavorable) 2020 2019 (Unfavorable)
Interest expense, net $ (194) $ (75) $
(119)
(2,247)
Gain/(loss) on investments, net 8 (82) 90 (104) 18 (122)
Miscellaneous, net 45 (47) 92 299 (84) 383
Total non-operating expense, net
Interest expense. Interest expense increased compared to the prior year periods as a result of the financing arrangements entered into during the six months endedJune 30, 2020 . See Note 2 and Note 7 of the Notes to the Condensed Consolidated Financial Statements for additional information on recent financings. As our debt balance has increased, we expect interest expense to increase during the remainder of 2020 and the first half of 2021 compared to the prior year periods. Impairments and equity method losses. Impairments and equity method losses reflects our share of LATAM and Grupo Aeroméxico's equity method results prior to their respective bankruptcy filings, our share ofVirgin Atlantic's equity method results and the impairments reducing the basis of these investments to zero during theJune 2020 quarter. See Note 5 of the Notes to the Condensed Consolidated Financial Statements for additional information on our equity investments. Gain/(loss) on investments, net. Gain/(loss) on investments, net reflects the gains and losses on our equity investments measured at fair value on a recurring basis. Miscellaneous. Miscellaneous, net includes pension and related expense and foreign exchange gains/losses. Foreign exchange gains/losses vary and impact the comparability of miscellaneous, net from period to period. The increase in the six months endedJune 30, 2020 compared to the prior year period is primarily due to the$240 million gain recognized as a result of the combination ofDelta Private Jets withWheels Up inJanuary 2020 .
Income Taxes
We project that our annual effective tax rate for 2020 will be between 15% and 18%. In certain interim periods, we may have adjustments to our net deferred tax liabilities as a result of changes in prior year estimates and tax laws enacted during the period, which will impact the effective tax rate for that interim period. Refinery Segment The refinery operated by our subsidiaryMonroe Energy, LLC ("Monroe") primarily produces gasoline, diesel and jet fuel. Monroe exchanges the non-jet fuel products the refinery produces with third parties for jet fuel consumed in our airline operations. Historically, the jet fuel produced and procured through exchanging gasoline and diesel fuel produced by the refinery provided approximately 200,000 barrels per day, or approximately 75% of our consumption, for use in our airline operations. We believe that the jet fuel supply resulting from the refinery's operation contributes to reducing the market price of jet fuel and thus lowers our cost of jet fuel compared to what it otherwise would be. The refinery's production has also been altered by the dramatic change in economic conditions caused by the COVID-19 pandemic. During 2020, the refinery expects to operate at 60% - 90% of normal production levels, largely due to the significant decrease in the demand for jet fuel. Additionally, due to the decrease in demand for jet fuel, we have shifted our production to produce more non-jet fuel products. Those non-jet fuel products will continue to be exchanged for jet fuel to the extent that we can balance refinery sales with jet fuel demand. 41 -------------------------------------------------------------------------------- The refinery recorded operating revenue of$513 million and$1.7 billion in the three and six months endedJune 30, 2020 , compared to$1.5 billion and$2.8 billion in the three and six months endedJune 30, 2019 . As a result of the refinery's shift to producing more non-jet fuel products, operating revenue in the three months endedJune 30, 2020 was primarily composed of$153 million of non-jet fuel product sales and$292 million of refinery sales to third parties. Operating revenue during the six months endedJune 30, 2020 was primarily composed of$895 million of non-jet fuel products exchanged with third parties to procure jet fuel,$214 million of sales of jet fuel to the airline segment, and$296 million of non-jet fuel product sales. Refinery revenues decreased compared to the prior year periods due to lower refinery run rates during the quarter, as well as lower pricing for refined products. The refinery recorded operating losses of$114 million and$85 million in the three and six months endedJune 30, 2020 , compared to operating income of$37 million and$3 million in the three and six months endedJune 30, 2019 . A refinery is subject to annualU.S. Environmental Protection Agency requirements to blend renewable fuels into the gasoline and on-road diesel fuel it produces. Alternatively, a refinery may purchase renewable energy credits, called Renewable Identification Numbers ("RINs"), from third parties in the secondary market.The Monroe refinery purchases the majority of its RINs requirement in the secondary market.
For more information regarding the refinery's results, see Note 11 of the Notes to the Condensed Consolidated Financial Statements.
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