DELTA AIR LINES, INC.
Consolidated Statements of Cash Flows
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Year Ended December 31,
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(in millions)
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2019
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2018
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2017
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Cash Flows From Operating Activities:
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Net income
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$
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4,767
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$
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3,935
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$
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3,205
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Adjustments to reconcile net income to net cash provided by operating activities:
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Depreciation and amortization
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2,581
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2,329
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2,222
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Deferred income taxes
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1,473
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1,364
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2,242
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Pension, postretirement and postemployment payments greater than expense
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(922)
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(790)
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(3,302)
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Changes in certain assets and liabilities:
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Receivables
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(775)
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108
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(428)
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Fuel inventory
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(139)
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324
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(397)
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Prepaid expenses and other current assets
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94
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(440)
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(57)
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Air traffic liability
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454
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297
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284
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Loyalty program deferred revenue
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87
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319
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399
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Profit sharing
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354
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233
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(51)
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Accounts payable and accrued liabilities
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144
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(418)
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955
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Other, net
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307
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(247)
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(49)
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Net cash provided by operating activities
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8,425
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7,014
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5,023
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Cash Flows From Investing Activities:
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Property and equipment additions:
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Flight equipment, including advance payments
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(3,344)
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(3,704)
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(2,704)
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Ground property and equipment, including technology
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(1,592)
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(1,464)
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(1,187)
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Purchase of equity investments
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(170)
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—
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(1,245)
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Sale of equity investments
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279
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28
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—
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Purchase of short-term investments
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—
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(145)
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(925)
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Redemption of short-term investments
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206
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766
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584
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Other, net
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58
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126
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211
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Net cash used in investing activities
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(4,563)
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(4,393)
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(5,266)
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Cash Flows From Financing Activities:
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Payments on debt and finance lease obligations
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(3,320)
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(3,052)
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(1,258)
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Repurchase of common stock
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(2,027)
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(1,575)
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(1,677)
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Cash dividends
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(980)
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(909)
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(731)
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Fuel card obligation
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(339)
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7
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636
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Proceeds from short-term obligations
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1,750
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—
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—
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Proceeds from long-term obligations
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2,057
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3,745
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2,454
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Other, net
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(21)
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58
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(154)
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Net cash used in financing activities
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(2,880)
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(1,726)
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(730)
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Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash
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982
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895
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(973)
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Cash, cash equivalents and restricted cash at beginning of period
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2,748
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1,853
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2,826
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Cash, cash equivalents and restricted cash at end of period
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$
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3,730
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$
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2,748
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$
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1,853
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Supplemental Disclosure of Cash Paid for Interest
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$
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481
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$
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376
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$
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390
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Non-Cash Transactions:
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Treasury stock contributed to our qualified defined benefit pension plans
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$
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—
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$
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—
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$
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350
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Right-of-use assets acquired under operating leases
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464
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1,041
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—
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Flight and ground equipment acquired under finance leases
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650
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93
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261
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Operating leases converted to finance leases
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190
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7
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—
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The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Balance Sheets to the total of the same such amounts shown above:
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Year Ended December 31,
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(in millions)
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2019
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2018
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2017
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Current assets:
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Cash and cash equivalents
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$
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2,882
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$
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1,565
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$
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1,814
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Restricted cash included in prepaid expenses and other
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212
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47
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39
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Noncurrent assets:
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Cash restricted for airport construction
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636
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1,136
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—
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Total cash, cash equivalents and restricted cash
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$
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3,730
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$
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2,748
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$
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1,853
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The accompanying notes are an integral part of these Consolidated Financial Statements.
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DELTA AIR LINES, INC.
Consolidated Statements of Stockholders' Equity
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Common Stock
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Additional
Paid-In Capital
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Retained
Earnings
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Accumulated
Other
Comprehensive Loss
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Treasury Stock
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(in millions, except per share data)
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Shares
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Amount
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Shares
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Amount
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Total
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Balance at January 1, 2017
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745
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$
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—
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$
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12,294
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$
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6,895
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$
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(7,636)
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14
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$
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(274)
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$
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11,279
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Net income
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—
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—
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—
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3,205
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—
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—
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—
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3,205
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Dividends declared
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—
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—
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—
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(731)
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—
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—
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—
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(731)
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Other comprehensive income
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—
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—
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—
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—
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15
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—
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—
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15
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Shares of common stock issued and compensation expense associated with equity awards (Treasury shares withheld for payment of taxes, $48.31(1) per share)
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1
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—
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107
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—
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—
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1
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(39)
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68
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Stock options exercised
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2
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—
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28
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—
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—
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—
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—
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28
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Treasury stock, net, contributed to our qualified defined benefit pension plans
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—
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—
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188
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—
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—
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(8)
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155
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343
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Stock purchased and retired
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(33)
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—
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(564)
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(1,113)
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—
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—
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—
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(1,677)
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Balance at December 31, 2017
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715
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—
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12,053
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8,256
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(7,621)
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7
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(158)
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12,530
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Net income
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—
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—
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—
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3,935
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—
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—
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—
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3,935
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Change in accounting principle and other
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—
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—
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—
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(154)
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(106)
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—
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—
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(260)
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Dividends declared
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—
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—
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—
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(909)
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—
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—
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—
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(909)
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Other comprehensive loss
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—
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—
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—
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—
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(98)
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—
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—
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(98)
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Shares of common stock issued and compensation expense associated with equity awards (Treasury shares withheld for payment of taxes, $54.90(1) per share)
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1
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—
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91
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—
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—
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1
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(40)
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51
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Stock options exercised
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1
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—
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13
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—
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—
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—
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—
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13
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Stock purchased and retired
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(29)
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—
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(486)
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(1,089)
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—
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—
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—
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(1,575)
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Balance at December 31, 2018
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688
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—
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11,671
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10,039
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(7,825)
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8
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(198)
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13,687
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Net income
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—
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—
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—
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4,767
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—
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—
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—
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4,767
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|
Dividends declared
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—
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—
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—
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(981)
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—
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—
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—
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(981)
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Other comprehensive loss
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—
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—
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—
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—
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(164)
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|
—
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—
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(164)
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Shares of common stock issued and compensation expense associated with equity awards (Treasury shares withheld for payment of taxes, $50.20(1) per share)
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2
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|
—
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114
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—
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—
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|
1
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(38)
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|
76
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Stock purchased and retired
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(38)
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|
—
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(656)
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(1,371)
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—
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|
—
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|
—
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(2,027)
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Balance at December 31, 2019
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652
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|
$
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—
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$
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11,129
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$
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12,454
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|
$
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(7,989)
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9
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$
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(236)
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$
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15,358
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(1)Weighted average price per share.
The accompanying notes are an integral part of these Consolidated Financial Statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Delta Air Lines, Inc., a Delaware corporation, provides scheduled air transportation for passengers and cargo throughout the United States ("U.S.") and around the world. Our Consolidated Financial Statements include the accounts of Delta Air Lines, Inc. and our wholly owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the U.S. ("GAAP"). We do not consolidate the financial statements of any company in which we have voting rights of 50% or less. We are not the primary beneficiary of, nor do we have a controlling financial interest in, a material variable interest entity. Accordingly, we have not consolidated a material variable interest entity.
We have marketing alliances with other airlines to enhance our access to domestic and international markets. These arrangements may include codesharing, reciprocal loyalty program benefits, shared or reciprocal access to passenger lounges, joint promotions, common use of airport gates and ticket counters, ticket office co-location and other marketing agreements. We have received antitrust immunity for certain marketing arrangements, which enables us to offer a more integrated route network and develop common sales, marketing and discount programs for customers. Some of our marketing arrangements provide for the sharing of revenues and expenses. Revenues and expenses associated with collaborative arrangements are presented on a gross basis in the applicable line items on our Consolidated Statements of Operations ("income statement").
We have reclassified certain prior period amounts to conform to the current period presentation. Unless otherwise noted, all amounts disclosed are stated before consideration of income taxes.
Use of Estimates
We are required to make estimates and assumptions when preparing our Consolidated Financial Statements in accordance with GAAP. These estimates and assumptions affect the amounts reported in our Consolidated Financial Statements and the accompanying notes. Actual results could differ materially from those estimates.
Recent Accounting Standards
Standards Effective in Future Years
Credit Losses. In 2016, the Financial 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 after December 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 effective January 1, 2020.
Recently Adopted Standards
Comprehensive Income. In February 2018, the FASB issued ASU No. 2018-02, "Income Statement—Reporting Comprehensive Income (Topic 220)." This standard provides an option to reclassify stranded tax effects within accumulated other comprehensive income/(loss) ("AOCI") to retained earnings due to the U.S. federal corporate income tax rate change in the Tax Cuts and Jobs Act of 2017. We adopted this standard effective January 1, 2019 with the election not to reclassify $1.2 billion of stranded tax effects, primarily related to our pension plans, from AOCI to retained earnings.
Significant Accounting Policies
Our significant accounting policies are disclosed below or included within the topic-specific notes included herein.
Cash and Cash Equivalents and Short-Term Investments
Short-term, highly liquid investments with maturities of three months or less when purchased are classified as cash and cash equivalents. Investments with maturities of greater than three months, but not in excess of one year, when purchased are classified as short-term investments. Investments with maturities beyond one year when purchased may be classified as short-term investments if they are expected to be available to support our short-term liquidity needs. Our short-term investments were classified as fair value investments and gains and losses were recorded in non-operating expense.
Inventories
Fuel. As part of our strategy to mitigate the cost of the refining margin reflected in the price of jet fuel our wholly owned subsidiaries, Monroe Energy, LLC and MIPC, LLC (collectively, "Monroe"), operate the Trainer oil refinery. Refined product, feedstock and blendstock inventories, all of which are finished goods, are carried at recoverable cost. We use jet fuel in our airline operations that is produced by the refinery and procured through the exchange with third parties of gasoline, diesel and other refined products ("non-jet fuel products") the refinery produces. Cost is determined using the first-in, first-out method. Costs include the raw material consumed plus direct manufacturing costs (such as labor, utilities and supplies) incurred and an applicable portion of manufacturing overhead.
Expendables Parts and Supplies. Inventories of expendable parts related to flight equipment, which cannot be economically repaired, reconditioned or reused after removal from the aircraft, are carried at moving average cost and charged to operations as consumed. An allowance for obsolescence is provided over the remaining useful life of the related fleet. We also provide allowances for parts identified as excess or obsolete to reduce the carrying costs to the lower of cost or net realizable value. These parts are assumed to have an estimated residual value of 5% of the original cost.
Accounting for Refinery Related Buy/Sell Agreements
To the extent that we receive jet fuel for non-jet fuel products exchanged under buy/sell agreements, we account for these transactions as nonmonetary exchanges. We have recorded these nonmonetary exchanges at the carrying amount of the non-jet fuel products transferred within aircraft fuel and related taxes on the income statement.
Derivatives
Changes in fuel prices, interest rates and foreign currency exchange rates impact our results of operations. In an effort to manage our exposure to these risks, we may enter into derivative contracts and adjust our derivative portfolio as market conditions change. We recognize derivative contracts at fair value on our Consolidated Balance Sheets ("balance sheets").
The following table summarizes the risk hedged and the classification of related gains and losses in our income statement, by each type of derivative contract:
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Derivative Type
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Hedged Risk
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Classification of Gains and Losses
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Fuel hedge contracts
|
Fluctuations in fuel prices
|
Aircraft fuel and related taxes
|
Interest rate contracts
|
Increases in interest rates
|
Interest expense, net
|
Foreign currency exchange contracts
|
Fluctuations in foreign currency exchange rates
|
Passenger revenue or non-operating expense (See Note 5)
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The following table summarizes the accounting treatment of our derivative contracts:
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Accounting Designation
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Impact of Unrealized Gains and Losses
|
Not designated as hedges
|
Change in fair value(1) of hedge is recorded in earnings
|
Designated as cash flow hedges
|
Market adjustments are recorded in AOCI
|
Designated as fair value hedges
|
Market adjustments are recorded in debt and finance leases
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(1)Including settled gains and losses as well as mark-to-market adjustments ("MTM adjustments").
We perform, at least quarterly, an assessment of the effectiveness of our derivative contracts designated as hedges, including assessing the possibility of counterparty default. If we determine that a derivative is no longer expected to be highly effective, we discontinue hedge accounting prospectively and recognize subsequent changes in the fair value of the hedge in earnings. We believe our derivative contracts that continue to be designated as hedges, consisting of interest rate and foreign currency exchange contracts, will continue to be highly effective in offsetting changes in fair value or cash flow, respectively, attributable to the hedged risk.
Cash flows associated with purchasing and settling hedge contracts generally are classified as operating cash flows. However, if a hedge contract includes a significant financing element at inception, cash flows associated with the hedge contract are recorded as financing cash flows.
Hedge Margin. The hedge margin we receive from counterparties is recorded in cash, with the offsetting obligation in accounts payable. The hedge margin we provide to counterparties is recorded in prepaid expenses and other. We do not offset margin funded to counterparties or margin funded to us by counterparties against fair value amounts recorded for our hedge contracts.
Long-Lived Assets
The following table summarizes our property and equipment:
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|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in millions, except for estimated useful life)
|
Estimated Useful Life
|
2019
|
2018
|
Flight equipment
|
20-34 years
|
$
|
36,713
|
|
$
|
33,898
|
|
Ground property and equipment
|
3-40 years
|
5,721
|
|
4,667
|
|
Information technology-related assets
|
3-15 years
|
3,276
|
|
3,361
|
|
Flight and ground equipment under finance leases
|
Shorter of lease term or estimated useful life
|
1,608
|
|
1,055
|
|
Advance payments for equipment
|
|
1,019
|
|
1,177
|
|
Less: accumulated depreciation and amortization(1)
|
|
(17,027)
|
|
(15,823)
|
|
Total property and equipment, net
|
|
$
|
31,310
|
|
$
|
28,335
|
|
(1)Includes accumulated amortization for flight and ground equipment under finance leases in the amount of $546 million and $566 million at December 31, 2019 and 2018, respectively.
We record property and equipment at cost and depreciate or amortize these assets on a straight-line basis to their estimated residual values over their estimated useful lives. The estimated useful life for leasehold improvements is the shorter of lease term or estimated useful life. Depreciation and amortization expense related to our property and equipment was $2.6 billion, $2.3 billion and $2.2 billion for the years ended December 31, 2019, 2018 and 2017, respectively. Residual values for owned aircraft, engines, spare parts and simulators are generally 5% to 10% of cost.
We capitalize certain internal and external costs incurred to develop and implement software and amortize those costs over an estimated useful life of three to ten years. Included in the depreciation and amortization expense discussed above, we recorded $239 million, $205 million and $187 million for amortization of capitalized software for the years ended December 31, 2019, 2018 and 2017, respectively. The net book value of these assets, which are included in information technology-related assets above, totaled $1.1 billion and $819 million at December 31, 2019 and 2018, respectively.
Our tangible assets consist primarily of flight equipment, which is mobile across geographic markets. Accordingly, assets are not allocated to specific geographic regions.
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.
Goodwill and Other Intangible Assets
Our goodwill and identifiable intangible assets relate to the airline segment. We apply a fair value-based impairment test to the carrying value of goodwill and indefinite-lived intangible assets on an annual basis (as of October 1) and, if certain events or circumstances indicate that an impairment loss may have been incurred, on an interim basis. We assess the value of our goodwill and indefinite-lived assets under either a qualitative or quantitative approach. Under a qualitative approach, we consider various market factors, including 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.
We value goodwill and indefinite-lived intangible assets primarily using market and income approach valuation techniques. These measurements include the following key assumptions: (1) forecasted revenues, expenses and cash flows, (2) terminal period revenue growth and cash flows, (3) an estimated weighted average cost of capital, (4) assumed discount rates depending on the asset and (5) a tax rate. These assumptions are consistent with those 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.
Changes in certain events and circumstances could result in impairment or a change from indefinite-lived to definite-lived. Factors which could cause impairment include, but are not limited to, (1) negative trends in our market capitalization, (2) reduced profitability resulting from lower passenger mile yields or higher input costs (primarily related to fuel and employees), (3) lower passenger demand as a result of weakened U.S. and global economies, (4) interruption to our operations due to a prolonged employee strike, terrorist attack or other reasons, (5) changes to the regulatory environment (e.g., diminished slot 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.
Goodwill. 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). If the reporting unit's fair value exceeds its carrying value, no further testing is required. If it does not, we recognize an impairment charge if the carrying value of the reporting unit exceeds its estimated fair value.
Identifiable Intangible Assets. Indefinite-lived assets are not amortized and consist of routes, slots, the Delta tradename and assets related to alliances and collaborative arrangements. Definite-lived intangible assets consist primarily of marketing and maintenance service agreements and are amortized on a straight-line basis or under the undiscounted cash flows method over the estimated economic life of the respective agreements. Costs incurred to renew or extend the term of an intangible asset are expensed as incurred.
We assess our indefinite-lived assets under a qualitative or quantitative approach. We analyze market factors to determine if events and circumstances have affected the fair value of the indefinite-lived intangible assets. If we determine that it is more likely than not that the asset value may be impaired, we use the quantitative approach to assess the asset's fair value and the amount of the impairment. We perform the quantitative impairment test for indefinite-lived intangible assets by comparing the asset's fair value to its carrying value. Fair value is estimated based on (1) recent market transactions, where available, (2) the royalty method for the Delta tradename (which assumes hypothetical royalties generated from using our tradename) or (3) projected discounted future cash flows (an income approach). We recognize an impairment charge if the asset's carrying value exceeds its estimated fair value.
Income Taxes
We account for deferred income taxes under the liability method. We recognize deferred tax assets and liabilities based on the tax effects of temporary differences between the financial statement and tax basis of assets and liabilities, as measured by current enacted tax rates. Deferred tax assets and liabilities are net by jurisdiction and are recorded as noncurrent on the balance sheet.
We have elected to recognize earnings of foreign affiliates that are determined to be global intangible low tax income in the period it arises and do not recognize deferred taxes for basis differences that may reverse in future years.
A valuation allowance is recorded to reduce deferred tax assets when necessary. We periodically assess whether it is more likely than not that we will generate sufficient taxable income to realize our deferred income tax assets. We establish valuation allowances if it is not likely we will realize our deferred income tax assets. In making this determination, we consider all available positive and negative evidence and make certain assumptions. We consider, among other things, projected future taxable income, scheduled reversals of deferred tax liabilities, the overall business environment, our historical financial results and tax planning strategies.
Fuel Card Obligation
We have a purchasing card with American Express for the purpose of buying jet fuel and crude oil. The card currently carries a maximum credit limit of $1.1 billion and must be paid monthly. At December 31, 2019 and 2018, we had $736 million and $1.1 billion outstanding on this purchasing card, respectively, and the activity was classified as a financing activity in our Consolidated Statements of Cash Flows.
Retirement of Repurchased Shares
We immediately retire shares repurchased pursuant to our share repurchase program. We allocate the share purchase price in excess of par value between additional paid-in capital and retained earnings.
Manufacturers' Credits
We periodically receive credits in connection with the acquisition of aircraft and engines. These credits are deferred until the aircraft and engines are delivered, and then applied as a reduction to the cost of the related equipment.
Maintenance Costs
We record maintenance costs related to our fleet in aircraft maintenance materials and outside repairs. Maintenance costs are expensed as incurred, except for costs incurred under power-by-the-hour contracts, which are expensed based on actual hours flown. Power-by-the-hour contracts transfer certain risk to third-party service providers and fix the amount we pay per flight hour to the service provider in exchange for maintenance and repairs under a predefined maintenance program. Modifications that enhance the operating performance or extend the useful lives of airframes or engines are capitalized and amortized over the remaining estimated useful life of the asset or the remaining lease term, whichever is shorter.
Advertising Costs
We expense advertising costs in passenger commissions and other selling expenses in the year the advertising first takes place. Advertising expense was $288 million, $267 million and $273 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Commissions
Passenger sales commissions are recognized in operating expense when the related revenue is recognized.
Subsequent Event
Starting in February 2020, we temporarily suspended flights between the U.S. and China as the result of an outbreak of a novel coronavirus originating in Wuhan, Hubei Province, China. We have suspended flights between the U.S. and China through April 30, will continue to monitor the situation closely and may make additional adjustments. Given the uncertainty about the situation, we currently cannot estimate the impact to our financial statements. Flights to and from China have historically represented less than 2% of our revenue. We are currently exploring options for the redeployment of aircraft to other routes within our diverse global network.
NOTE 2. REVENUE RECOGNITION
Passenger Revenue
Passenger revenue is primarily composed of passenger ticket sales, loyalty travel awards and travel-related services performed in conjunction with a passenger’s flight.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
(in millions)
|
2019
|
2018
|
2017
|
Ticket
|
$
|
36,908
|
|
$
|
34,950
|
|
$
|
32,467
|
|
Loyalty travel awards
|
2,900
|
|
2,651
|
|
2,403
|
|
Travel-related services
|
2,469
|
|
2,154
|
|
2,077
|
|
Total passenger revenue
|
$
|
42,277
|
|
$
|
39,755
|
|
$
|
36,947
|
|
Ticket
Passenger Tickets. We defer sales of passenger tickets to be flown by us or that we sell on behalf of other airlines in air traffic liability. Passenger revenue is recognized when we provide transportation or when ticket breakage occurs. For tickets that we sell on behalf of other airlines, we reduce the air traffic liability when consideration is remitted to those airlines. We periodically evaluate the estimated air traffic liability and record any adjustments in our income statement. These adjustments relate primarily to refunds, exchanges, ticket breakage, transactions with other airlines and other items for which final settlement occurs in periods subsequent to the sale of the related tickets at amounts other than the original sales price.
Approximately $3.8 billion, $3.5 billion and $3.5 billion of the prior year air traffic liability related to passenger ticket sales (which excludes those tickets sold on behalf of other airlines) was recognized in passenger revenue during the years ended December 31, 2019, 2018 and 2017, respectively.
Ticket Breakage. We estimate the value of tickets that will expire unused and recognize revenue at the scheduled flight date.
Regional Carriers. Our regional carriers include both third-party regional carriers with which we have contract carrier agreements ("contract carriers") and Endeavor Air, Inc., our wholly owned subsidiary. Our contract carrier agreements are primarily structured as capacity purchase agreements where we purchase all or a portion of the contract carrier's capacity and are responsible for selling the seat inventory we purchase. We record revenue related to our capacity purchase agreements in passenger revenue and the related expenses in regional carriers expense, excluding fuel.
Loyalty Travel Awards
Loyalty travel awards revenue is related to the redemption of miles for travel. We recognize loyalty travel awards revenue in passenger revenue as miles are redeemed and transportation is provided. See below for discussion of our loyalty program accounting policies.
Travel-Related Services
Travel-related services are primarily composed of services performed in conjunction with a passenger’s flight, including administrative fees (such as ticket change fees), baggage fees and on-board sales. We recognize revenue for these services when the related transportation service is provided.
Loyalty Program
Our SkyMiles loyalty program generates customer loyalty by rewarding customers with incentives to travel on Delta. This program allows customers to earn mileage credits ("miles") by flying on Delta, 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 on Delta and other participating airlines, membership in our Sky 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.
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.
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 ended December 31, 2019, 2018 and 2017, total cash sales from marketing agreements were $4.2 billion, $3.5 billion and $3.2 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 to Delta-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 to Delta Sky Club lounges and receive priority boarding and other benefits while traveling on Delta. Additionally, participants in the American Express Membership Rewards program may exchange their points for 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.
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 to Delta Sky Club lounges and other benefits while traveling on Delta, (4) brand value (using estimated royalties generated from the use of our brand) and (5) volume discounts provided to certain partners.
Effective January 1, 2019, we amended our co-brand agreement with American Express, and we also amended other agreements with American Express during the current year. The new agreements increase the value we receive and extend the terms to 2029. The products and services delivered are consistent with previous agreements, and we continue to 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 access Delta Sky Club lounges is recognized as miscellaneous in other revenue as access is provided. Revenue allocated to the remaining performance obligations, primarily brand value, is recorded as loyalty program in other revenue as miles are delivered.
Current Activity of the Loyalty Program. Miles are combined in one homogeneous pool and are not separately identifiable. As such, the revenue is comprised of miles that were part of the loyalty program deferred revenue balance at the beginning of the period as well as miles that were issued during the period.
The table below presents the activity of the current and noncurrent loyalty program liability, and includes miles earned through travel and miles sold to participating companies, which are primarily through marketing agreements.
|
|
|
|
|
|
|
|
|
(in millions)
|
2019
|
2018
|
Balance at January 1
|
$
|
6,641
|
|
$
|
6,321
|
|
Miles earned
|
3,156
|
|
3,142
|
|
Travel miles redeemed
|
(2,900)
|
|
(2,651)
|
|
Non-travel miles redeemed
|
(169)
|
|
(171)
|
|
Balance at December 31
|
$
|
6,728
|
|
$
|
6,641
|
|
The timing of mile redemptions can vary widely; however, the majority of new miles are redeemed within two years.
Revenue by Geographic Region
Operating revenue for the airline segment is recognized in a specific geographic region based on the origin, flight path and destination of each flight segment. The majority of the revenues of the refinery, consisting of fuel sales to the airline, have been eliminated in the Consolidated Financial Statements. The remaining operating revenue for the refinery segment is included in the domestic region. Our passenger and operating revenue by geographic region is summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger Revenue
|
|
|
|
Operating Revenue
|
|
|
|
Year Ended December 31,
|
|
|
|
Year Ended December 31,
|
|
|
(in millions)
|
2019
|
2018
|
2017
|
|
2019
|
2018
|
2017
|
Domestic
|
$
|
30,367
|
|
$
|
28,159
|
|
$
|
26,079
|
|
|
$
|
33,284
|
|
$
|
31,233
|
|
$
|
28,850
|
|
Atlantic
|
6,381
|
|
6,165
|
|
5,537
|
|
|
7,363
|
|
7,042
|
|
6,297
|
|
Latin America
|
3,002
|
|
2,888
|
|
2,862
|
|
|
3,343
|
|
3,181
|
|
3,133
|
|
Pacific
|
2,527
|
|
2,543
|
|
2,469
|
|
|
3,017
|
|
2,982
|
|
2,858
|
|
Total
|
$
|
42,277
|
|
$
|
39,755
|
|
$
|
36,947
|
|
|
$
|
47,007
|
|
$
|
44,438
|
|
$
|
41,138
|
|
Cargo Revenue
Cargo revenue is recognized when we provide the transportation.
Other Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
(in millions)
|
2019
|
2018
|
2017
|
Loyalty program
|
$
|
1,962
|
|
$
|
1,459
|
|
$
|
1,269
|
|
Ancillary businesses and refinery
|
1,297
|
|
1,801
|
|
1,591
|
|
Miscellaneous
|
718
|
|
558
|
|
587
|
|
Total other revenue
|
$
|
3,977
|
|
$
|
3,818
|
|
$
|
3,447
|
|
Loyalty Program. Loyalty program revenues relate primarily to brand usage by third parties and include the redemption of miles for non-travel awards. These revenues are included within the total cash sales from marketing agreements, discussed above.
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. Third-party refinery production sales are at or near cost; accordingly, the margin on these sales is de minimis. See Note 15, "Segments," for more information on revenue recognition within our refinery segment.
In January 2020, we combined Delta Private Jets, our wholly owned subsidiary which provides private jet operations, with Wheels Up. Upon closing, we received an equity stake in Wheels Up and Delta Private Jets will no longer be reflected in ancillary businesses and refinery. See Note 4, "Investments," for more information on this transaction.
In 2018, we sold DAL Global Services, LLC ("DGS"), which provides aviation-related, ground support equipment maintenance and professional security services, to AirCo Aviation Services, LLC ("AirCo"), a subsidiary of Argenbright Holdings, LLC. Accordingly, DGS is no longer reflected within ancillary businesses and refinery in 2019.
Miscellaneous. Miscellaneous revenue is primarily composed of lounge access and codeshare revenues.
Accounts Receivable
Accounts receivable primarily consist of amounts due from credit card companies from the sale of passenger tickets, ancillary businesses and refinery sales, and other companies for the purchase of miles under the loyalty program. We provide an allowance for uncollectible accounts equal to the estimated losses expected to be incurred based on historical chargebacks, write-offs, bankruptcies and other specific analyses. Bad debt expense was not material in any period presented.
Passenger Taxes and Fees
We are required to charge certain taxes and fees on our passenger tickets, including U.S. federal transportation taxes, federal security charges, airport passenger facility charges and foreign arrival and departure taxes. These taxes and fees are assessments on the customer for which we act as a collection agent. Because we are not entitled to retain these taxes and fees, we do not include such amounts in passenger revenue. We record a liability when the amounts are collected and reduce the liability when payments are made to the applicable government agency or operating carrier (i.e., for codeshare-related fees).
NOTE 3. FAIR VALUE MEASUREMENTS
Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability.
•Level 1. Observable inputs such as quoted prices in active markets;
•Level 2. Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
•Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
Assets and liabilities measured at fair value are based on the valuation techniques identified in the tables below. The valuation techniques are as follows:
(a)Market Approach. Prices and other relevant information generated by observable transactions involving identical or comparable assets or liabilities; and
(b)Income Approach. Techniques to convert future amounts to a single present value amount based on market expectations (including present value techniques and option-pricing models).
Assets (Liabilities) Measured at Fair Value on a Recurring Basis(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
Valuation
Technique
|
(in millions)
|
Total
|
Level 1
|
Level 2
|
|
Cash equivalents
|
$
|
586
|
|
$
|
586
|
|
$
|
—
|
|
(a)
|
Restricted cash equivalents
|
847
|
|
847
|
|
—
|
|
(a)
|
Long-term investments
|
1,099
|
|
881
|
|
218
|
|
(a)
|
Hedge derivatives, net
|
|
|
|
|
Fuel hedge contracts
|
1
|
|
(1)
|
|
2
|
|
(a)(b)
|
Interest rate contracts
|
61
|
|
—
|
|
61
|
|
(a)
|
Foreign currency exchange contracts
|
6
|
|
—
|
|
6
|
|
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
Valuation
Technique
|
(in millions)
|
Total
|
Level 1
|
Level 2
|
|
Cash equivalents
|
$
|
1,222
|
|
$
|
1,222
|
|
$
|
—
|
|
(a)
|
Restricted cash equivalents
|
1,183
|
|
1,183
|
|
—
|
|
(a)
|
Short-term investments
|
|
|
|
|
U.S. government securities
|
50
|
|
45
|
|
5
|
|
(a)
|
Asset- and mortgage-backed securities
|
36
|
|
—
|
|
36
|
|
(a)
|
Corporate obligations
|
90
|
|
—
|
|
90
|
|
(a)
|
Other fixed income securities
|
27
|
|
—
|
|
27
|
|
(a)
|
Long-term investments
|
1,090
|
|
880
|
|
210
|
|
(a)
|
Hedge derivatives, net
|
|
|
|
|
Fuel hedge contracts
|
15
|
|
20
|
|
(5)
|
|
(a)(b)
|
Interest rate contracts
|
1
|
|
—
|
|
1
|
|
(a)
|
Foreign currency exchange contracts
|
(3)
|
|
—
|
|
(3)
|
|
(a)
|
(1)See Note 10, "Employee Benefit Plans," for fair value of benefit plan assets.
Cash Equivalents and Restricted Cash Equivalents. Cash equivalents generally consist of money market funds. Restricted cash equivalents generally consist of money market funds, time deposits, commercial paper and negotiable certificates of deposit, which primarily relate to proceeds from debt issued to finance a portion of the construction costs for the new terminal facilities at New York's LaGuardia Airport. The fair value of these cash equivalents is based on a market approach using prices generated by market transactions involving identical or comparable assets.
Short-Term Investments. The fair values of our short-term investments were based on a market approach using industry standard valuation techniques that incorporated observable inputs such as quoted market prices, interest rates, benchmark curves, credit ratings of the security or other observable information and were recorded in prepaid expenses and other on the balance sheet.
Long-Term Investments. Our long-term investments that are measured at fair value primarily consist of equity investments which are valued based on market prices or other observable transactions and are recorded in other noncurrent assets on our balance sheet. See Note 4, "Investments," for further information on our equity investments.
Hedge Derivatives. A portion of our derivative contracts are negotiated over-the-counter with counterparties without going through a public exchange. Accordingly, our fair value assessments give consideration to the risk of counterparty default (as well as our own credit risk). Such contracts are classified as Level 2 within the fair value hierarchy. The remainder of our hedge contracts are comprised of futures contracts, which are traded on a public exchange. These contracts are classified within Level 1 of the fair value hierarchy.
•Fuel Contracts. Our fuel hedge portfolio consists of options, swaps and futures. Option and swap contracts are valued under income approaches using option pricing models and discounted cash flow models, respectively, based on data either readily observable in public markets, derived from public markets or provided by counterparties who regularly trade in public markets. Futures contracts and options on futures contracts are traded on a public exchange and valued based on quoted market prices.
•Interest Rate Contracts. Our interest rate derivatives are swap contracts, which are valued based on data readily observable in public markets.
•Foreign Currency Exchange Contracts. Our foreign currency derivatives consist of forward contracts and are valued based on data readily observable in public markets.
NOTE 4. INVESTMENTS
Long-Term Investments
We have developed strategic relationships with a number of airlines and airline services companies through equity investments and other forms of cooperation and support. Our equity investments reinforce our commitment to these relationships and provide us with the ability to participate in strategic decision-making, often through representation on the boards of directors of the investee.
During the years ended December 31, 2019 and 2018, we recorded net gains on our equity investments of $119 million and $38 million, respectively, which were recorded in gain/(loss) on investments in our income statement within non-operating expense. These net gains were primarily driven by changes in stock prices and foreign currency fluctuations as well as the sale of certain investments, as described below. During 2017, before we adopted the new financial instruments accounting standard in 2018, we recorded unrealized gains and losses on available-for-sale investments in AOCI.
Fair Value Investments
Our investments accounted for at fair value are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ownership Interest
|
|
|
Carrying Value
|
|
(in millions)
|
December 31, 2019
|
December 31, 2018
|
|
December 31, 2019
|
December 31, 2018
|
Air France-KLM
|
9
|
%
|
9
|
%
|
|
$
|
418
|
|
$
|
408
|
|
China Eastern
|
3
|
%
|
3
|
%
|
|
258
|
|
259
|
|
Hanjin-KAL
|
10
|
%
|
—
|
%
|
|
205
|
|
—
|
|
GOL
|
—
|
%
|
9
|
%
|
|
|
—
|
|
213
|
|
Other investments
|
|
|
|
|
|
218
|
|
210
|
|
Total fair value investments
|
|
|
|
$
|
1,099
|
|
$
|
1,090
|
|
During 2019, we acquired 10% of the outstanding shares of Hanjin-KAL, the largest shareholder of Korean Air.
In the December 2019 quarter we sold our 9% ownership stake of GOL Linhas Aéreas Inteligentes, the parent company of VRG Linhas Aéreas (operating as GOL), for $278 million. The gain on sale of our investment in GOL is recorded in gain/(loss) on investments within non-operating expense in our income statement.
Additionally, GOL has a $300 million five-year term loan facility with third parties maturing in 2020, which we have guaranteed. Our guaranty is secured by GOL's ownership interest in Smiles, GOL's publicly-traded loyalty program. Because GOL remains in compliance with the terms of its loan facility, we have not recorded a liability on our balance sheet as of December 31, 2019.
Equity Method Investments
We account for the investments listed below under the equity method of accounting.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ownership Interest
|
|
|
Carrying Value
|
|
(in millions)
|
December 31, 2019
|
December 31, 2018
|
|
December 31, 2019
|
December 31, 2018
|
Grupo Aeroméxico (1)
|
51
|
%
|
51
|
%
|
|
$
|
833
|
|
$
|
897
|
|
Virgin Atlantic (2)
|
49
|
%
|
49
|
%
|
|
375
|
|
383
|
|
AirCo
|
49
|
%
|
49
|
%
|
|
142
|
|
109
|
|
(1)Grupo Aeroméxico's corporate bylaws (as authorized by the Mexican Foreign Investment Commission) limit our voting interest to a maximum of 49%. Therefore, we account for our investment under the equity method. Due to Aeroméxico's share repurchase program, our equity stake in Grupo Aeroméxico has increased to a non-controlling 51% interest.
(2)We have a non-controlling equity stake in Virgin Atlantic Limited, the parent company of Virgin Atlantic Airways, and similar non-controlling interests in certain affiliated Virgin Atlantic companies.
Our portion of Grupo Aeroméxico's and Virgin Atlantic's financial results are recorded in miscellaneous, net in our income statement under non-operating expense, and our share of AirCo's financial results is recorded in contracted services in our income statement as this entity is integral to the operations of our business. We also have an investment in JFK IAT Member LLC which is accounted for under the equity method and is discussed further in Note 9, "Airport Redevelopment."
Our equity method investments are recorded in other noncurrent assets on our balance sheet. If an equity method investment experiences a loss in fair value that is determined to be other than temporary, we will reduce our basis in the investment to fair value and record the loss in gain/(loss) on investments.
In September 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. In January 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. 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.
In January 2020, we combined Delta Private Jets, our wholly owned subsidiary which provides private jet operations, with Wheels Up. Upon closing, we received a 27% equity stake in Wheels Up, which will be accounted for under the equity method beginning in the March 2020 quarter.
NOTE 5. DERIVATIVES AND RISK MANAGEMENT
Changes in fuel prices, interest rates and foreign currency exchange rates impact our results of operations. In an effort to manage our exposure to these risks, we may enter into derivative contracts and adjust our derivative portfolio as market conditions change. We recognize derivative contracts at fair value on our balance sheets.
Fuel Price Risk
Our derivative contracts to hedge the financial risk from changing fuel prices are primarily related to Monroe’s inventory. During the years ended December 31, 2019, 2018 and 2017, fuel hedges did not have a significant impact in our income statement.
Interest Rate Risk
Our exposure to market risk from adverse changes in interest rates is primarily associated with our debt obligations. Market risk associated with our fixed and variable rate debt relates to the potential reduction in fair value and negative impact to future earnings, respectively, from an increase in interest rates.
In an effort to manage our exposure to the risk associated with our variable rate debt, we periodically enter into interest rate swaps. We designate interest rate contracts used to convert the interest rate exposure on a portion of our debt portfolio from a floating rate to a fixed rate as cash flow hedges, while those contracts converting our interest rate exposure from a fixed rate to a floating rate are designated as fair value hedges.
We also have exposure to market risk from adverse changes in interest rates associated with our cash and cash equivalents and benefit plan obligations. Market risk associated with our cash and cash equivalents relates to the potential decline in interest income from a decrease in interest rates. Pension, postretirement, postemployment and worker's compensation obligation risk relates to the potential increase in our future obligations and expenses from a decrease in interest rates used to discount these obligations.
Foreign Currency Exchange Rate Risk
We are subject to foreign currency exchange rate risk because we have revenue, expense and equity investments denominated in foreign currencies. To manage exchange rate risk, we execute both our international revenue and expense transactions in the same foreign currency to the extent practicable. From time to time, we may also enter into foreign currency option and forward contracts.
In November 2019, we entered into a three and a half-year U.S. dollar-South Korean won ("KRW") cross currency swap with a notional value of 177 billion KRW. This swap is intended to mitigate foreign currency volatility resulting from our KRW-denominated investment in Hanjin-KAL. During the year ended December 31, 2019, we recorded an unrealized loss on this swap of $3 million, which is reflected in gain/(loss) on investments, net within non-operating expense.
In January 2018, we entered into a three-year U.S. dollar-Euro cross currency swap with a notional value of €375 million. This swap was intended to mitigate foreign currency volatility resulting from our Euro-denominated investment in Air France-KLM. In response to favorable changes in interest rates and the U.S. dollar-Euro exchange rate, we settled the cross currency swap in August 2018. Upon settlement, we recognized gains of $18 million in miscellaneous in our income statement within non-operating expense. Subsequently, we entered into a new U.S. dollar-Euro cross currency swap with a notional value of €397 million and a maturity date in December 2020. During the years ended December 31, 2019 and 2018, we recorded an unrealized gain of $13 million and an unrealized loss of $4 million, respectively, on this swap which is reflected in gain/(loss) on investments, net within non-operating expense.
Hedge Position as of December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Volume
|
|
Final Maturity Date
|
Prepaid Expenses and Other
|
Other Noncurrent Assets
|
Other Accrued Liabilities
|
Other Noncurrent Liabilities
|
Hedge Derivatives, net
|
Designated as hedges
|
|
|
|
|
|
|
|
|
Interest rate contracts (fair value hedges)
|
1,872
|
U.S. dollars
|
|
April 2028
|
$
|
12
|
|
$
|
53
|
|
$
|
(4)
|
|
$
|
—
|
|
$
|
61
|
|
Not designated as hedges
|
|
|
|
|
|
|
|
|
Foreign currency exchange contract
|
397
|
Euros
|
|
December 2020
|
9
|
|
—
|
|
—
|
|
—
|
|
9
|
|
Foreign currency exchange contract
|
177,045
|
South Korean won
|
|
April 2023
|
1
|
|
—
|
|
—
|
|
(4)
|
|
(3)
|
|
Fuel hedge contracts
|
243
|
gallons - crude oil and refined products
|
|
July 2020
|
16
|
|
—
|
|
(15)
|
|
—
|
|
1
|
|
Total derivative contracts
|
|
|
|
|
$
|
38
|
|
$
|
53
|
|
$
|
(19)
|
|
$
|
(4)
|
|
$
|
68
|
|
Hedge Position as of December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Volume
|
|
Final Maturity Date
|
Prepaid Expenses and Other
|
Other Noncurrent Assets
|
Other Accrued Liabilities
|
Other Noncurrent Liabilities
|
Hedge Derivatives, net
|
Designated as hedges
|
|
|
|
|
|
|
|
|
Interest rate contracts (fair value hedges)
|
1,893
|
U.S. dollars
|
|
April 2028
|
$
|
—
|
|
$
|
8
|
|
$
|
(7)
|
|
$
|
—
|
|
$
|
1
|
|
Foreign currency exchange contracts
|
6,934
|
Japanese yen
|
|
November 2019
|
1
|
|
—
|
|
—
|
|
—
|
|
1
|
|
Not designated as hedges
|
|
|
|
|
|
|
|
|
Foreign currency exchange contract
|
397
|
Euros
|
|
December 2020
|
13
|
|
—
|
|
—
|
|
(17)
|
|
(4)
|
|
Fuel hedge contracts
|
219
|
gallons - crude oil and refined products
|
|
December 2019
|
30
|
|
—
|
|
(15)
|
|
—
|
|
15
|
|
Total derivative contracts
|
|
|
|
$
|
44
|
|
$
|
8
|
|
$
|
(22)
|
|
$
|
(17)
|
|
$
|
13
|
|
Balance Sheet Location of Hedged Item in Fair Value Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount of Hedge Instruments
|
|
|
Cumulative Amount of Fair Value Hedge Adjustments
|
|
(in millions)
|
December 31, 2019
|
December 31, 2018
|
|
December 31, 2019
|
December 31, 2018
|
Current maturities of debt and finance leases
|
$
|
(19)
|
|
$
|
(11)
|
|
|
$
|
8
|
|
$
|
7
|
|
Debt and finance leases
|
(1,783)
|
|
(1,870)
|
|
|
53
|
|
(8)
|
|
Offsetting Assets and Liabilities
We have master netting arrangements with our counterparties giving us the right to offset hedge assets and liabilities. However, we have elected not to offset the fair value positions recorded on our balance sheets. The following table shows the net fair value of our counterparty positions had we elected to offset.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Prepaid Expenses and Other
|
Other Noncurrent Assets
|
Other Accrued Liabilities
|
Other Noncurrent Liabilities
|
Hedge Derivatives, Net
|
December 31, 2019
|
|
|
|
|
|
Net derivative contracts
|
$
|
24
|
|
$
|
53
|
|
$
|
(5)
|
|
$
|
(4)
|
|
$
|
68
|
|
December 31, 2018
|
|
|
|
|
|
Net derivative contracts
|
$
|
35
|
|
$
|
—
|
|
$
|
(13)
|
|
$
|
(9)
|
|
$
|
13
|
|
Designated Hedge Gains (Losses)
Gains (losses) related to our designated hedge contracts during the years ended December 31, 2019, 2018 and 2017 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Reclassified from AOCI to Earnings
|
|
|
|
Gain (Loss) Recognized in Other Comprehensive Income (Loss)
|
|
|
(in millions)
|
2019
|
2018
|
2017
|
|
2019
|
2018
|
2017
|
Foreign currency exchange contracts (1)
|
$
|
1
|
|
$
|
(3)
|
|
$
|
10
|
|
|
$
|
—
|
|
$
|
1
|
|
$
|
(43)
|
|
(1)Earnings on our designated foreign currency exchange contracts are recorded in passenger revenue in the income statement. These hedge contracts settled during the year ended December 31, 2019.
Not Designated Hedge Gains (Losses)
Gains (losses) related to our foreign currency exchange and fuel contracts are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain (Loss) Recognized in Income
|
|
Gain (Loss) Recognized in Income
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
(in millions)
|
|
|
|
2019
|
2018
|
2017
|
Foreign currency exchange contracts
|
|
Gain/(loss) on investments, net
|
|
$
|
10
|
|
$
|
(4)
|
|
$
|
—
|
|
Fuel hedge contracts
|
|
Aircraft fuel and related taxes
|
|
(41)
|
|
52
|
|
(81)
|
|
Total
|
|
|
|
$
|
(31)
|
|
$
|
48
|
|
$
|
(81)
|
|
Credit Risk
To manage credit risk associated with our fuel price, interest rate and foreign currency hedging programs, we evaluate counterparties based on several criteria including their credit ratings and limit our exposure to any one counterparty.
Our hedge contracts often contain margin funding requirements. The margin funding requirements may cause us to post margin to counterparties or may cause counterparties to post margin to us as market prices in the underlying hedged items change. Due to the fair value position of our hedge contracts, we posted margin of $34 million as of December 31, 2019 and held margin of $9 million as of December 31, 2018.
Our accounts receivable are generated largely from the sale of passenger airline tickets and cargo transportation services, the majority of which are processed through major credit card companies. We also have receivables from the sale of miles under our loyalty program to participating airlines and non-airline businesses such as credit card companies, hotels, car rental agencies and ridesharing companies. The credit risk associated with our receivables is minimal.
Self-Insurance Risk
We self-insure a portion of our losses from claims related to workers' compensation, environmental issues, property damage, medical insurance for employees and general liability. Losses are accrued based on an estimate of the aggregate liability for claims incurred, using independent actuarial reviews based on standard industry practices and our historical experience.
NOTE 6. INTANGIBLE ASSETS
Indefinite-Lived Intangible Assets
|
|
|
|
|
|
|
|
|
|
Carrying Value at December 31,
|
|
(in millions)
|
2019
|
2018
|
International routes and slots
|
$
|
2,583
|
|
$
|
2,583
|
|
Airline alliances
|
1,005
|
|
661
|
|
Delta tradename
|
850
|
|
850
|
|
Domestic slots
|
622
|
|
622
|
|
Total
|
$
|
5,060
|
|
$
|
4,716
|
|
International Routes and Slots. Our international routes and slots primarily relate to Pacific route authorities and slots at capacity-constrained airports in Asia, and slots at London-Heathrow airport.
Airline Alliances. Our airline alliances intangible assets primarily relate to our commercial agreements with SkyTeam partners and LATAM.
Domestic Slots. Our domestic slots relate to our slots at New York-LaGuardia and Washington-Reagan National airports.
Definite-Lived Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
(in millions)
|
Gross
Carrying
Value
|
Accumulated
Amortization
|
|
Gross
Carrying
Value
|
Accumulated
Amortization
|
Marketing agreements
|
$
|
730
|
|
$
|
(692)
|
|
|
$
|
730
|
|
$
|
(687)
|
|
Contracts
|
193
|
|
(128)
|
|
|
193
|
|
(122)
|
|
Other
|
53
|
|
(53)
|
|
|
53
|
|
(53)
|
|
Total
|
$
|
976
|
|
$
|
(873)
|
|
|
$
|
976
|
|
$
|
(862)
|
|
Amortization expense was $11 million for the year ended December 31, 2019 and $17 million for each of the years ended December 31, 2018 and 2017. Based on our definite-lived intangible assets at December 31, 2019, we estimate that we will incur approximately $9 million of amortization expense annually from 2020 through 2024.
NOTE 7. DEBT
The following table summarizes our debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity
|
|
|
Interest Rate(s)(1)
Per Annum at
|
|
|
December 31,
|
|
(in millions)
|
Dates
|
|
|
December 31, 2019
|
|
|
2019
|
2018
|
Unsecured notes
|
2020
|
to
|
2029
|
2.60%
|
|
to
|
4.38%
|
|
$
|
5,550
|
|
$
|
4,050
|
|
Financing arrangements secured by aircraft:
|
|
|
|
|
|
|
|
|
Certificates(2)
|
2020
|
to
|
2027
|
3.20%
|
|
to
|
8.02%
|
|
1,669
|
|
1,837
|
|
Notes(2)
|
2020
|
to
|
2025
|
1.99%
|
|
to
|
6.08%
|
|
1,193
|
|
1,787
|
|
NYTDC Special Facilities Revenue Bonds, Series 2018(2)
|
2022
|
to
|
2036
|
4.00%
|
|
to
|
5.00%
|
|
1,383
|
|
1,383
|
|
Other financings(2)(3)
|
2021
|
to
|
2030
|
2.51%
|
|
to
|
8.75%
|
|
196
|
|
251
|
|
2018 Unsecured Revolving Credit Facility
|
2021
|
to
|
2023
|
undrawn
|
|
variable
|
|
—
|
|
—
|
|
Other revolving credit facilities
|
2020
|
to
|
2021
|
undrawn
|
|
variable
|
|
—
|
|
—
|
|
Total secured and unsecured debt
|
|
|
|
|
|
|
9,991
|
|
9,308
|
|
Unamortized premium and debt issuance cost, net and other
|
|
|
|
|
|
|
115
|
|
60
|
|
Total debt
|
|
|
|
|
|
|
10,106
|
|
9,368
|
|
Less: current maturities
|
|
|
|
|
|
|
(2,054)
|
|
(1,409)
|
|
Total long-term debt
|
|
|
|
|
|
|
$
|
8,052
|
|
$
|
7,959
|
|
(1)Certain aircraft and other financings are comprised of variable rate debt. All variable rates are equal to LIBOR (generally subject to a floor) or another index rate, in each case plus a specified margin.
(2)Due in installments.
(3)Primarily includes unsecured bonds and debt secured by certain accounts receivable and real estate.
2019 Unsecured Notes
In October 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"). These Notes are included in Unsecured notes in the table above. 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 in January 2020. See Note 4, "Investments," for further information on our investment in LATAM.
2019-1 EETC
We completed a $500 million offering of Pass Through Certificates, Series 2019-1 ("2019-1 EETC") utilizing a pass through trust during 2019. This amount is included in Certificates in the table above. The details of the 2019-1 EETC, which is secured by 14 aircraft, are shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Total Principal
|
Fixed Interest Rate
|
Issuance Date
|
Final Maturity Date
|
2019-1 Class AA Certificates
|
$
|
425
|
|
3.204
|
%
|
March 2019
|
April 2024
|
2019-1 Class A Certificates
|
75
|
|
3.404
|
%
|
March 2019
|
April 2024
|
Total
|
$
|
500
|
|
|
|
|
2019 Unsecured Term Loan
In February 2019, we entered into a $1 billion term loan issued by two lenders, which was subsequently repaid by the end of the June 2019 quarter. We used the net proceeds of the term loan to accelerate planned 2019 repurchases under our share repurchase program.
Financial Covenants
We were in compliance with the covenants in our financing agreements at December 31, 2019.
Availability Under Revolving Credit Facilities
The table below shows availability under revolving credit facilities, all of which were undrawn, as of December 31, 2019:
|
|
|
|
|
|
(in millions)
|
|
2018 Unsecured Revolving Credit Facility
|
$
|
2,650
|
|
Other revolving credit facilities
|
459
|
|
Total availability under revolving credit facilities
|
$
|
3,109
|
|
Future Maturities
The following table summarizes scheduled maturities of our debt for the years succeeding December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Total Debt
|
|
Amortization of
Debt Premium and Debt Issuance Cost, net and other
|
|
|
2020
|
$
|
2,060
|
|
|
$
|
13
|
|
|
|
2021
|
1,094
|
|
|
15
|
|
|
|
2022
|
1,708
|
|
|
16
|
|
|
|
2023
|
932
|
|
|
11
|
|
|
|
2024
|
1,508
|
|
|
10
|
|
|
|
Thereafter
|
2,689
|
|
|
50
|
|
|
|
Total
|
$
|
9,991
|
|
|
$
|
115
|
|
|
$
|
10,106
|
|
Fair Value of Debt
Market risk associated with our fixed- and variable-rate debt relates to the potential reduction in fair value and negative impact to future earnings, respectively, from an increase in interest rates. The fair value of debt, shown below, is principally based on reported market values, recently completed market transactions and estimates based on interest rates, maturities, credit risk and underlying collateral. Debt is primarily classified as Level 2 within the fair value hierarchy.
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in millions)
|
2019
|
2018
|
Net carrying amount
|
$
|
10,106
|
|
$
|
9,368
|
|
Fair value
|
$
|
10,400
|
|
$
|
9,400
|
|
NOTE 8. LEASES
During 2018, we adopted ASU No. 2016-02, “Leases (Topic 842),” which requires leases with durations greater than twelve months to be recognized on the balance sheet. We adopted the standard using the modified retrospective approach with an effective date of January 1, 2018. Prior year financial statements were not recast under the new standard. We elected the package of transition provisions available for expired or existing contracts, which allowed us to carryforward our historical assessments of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs.
For leases with terms greater than 12 months, we record the related asset and obligation at the present value of lease payments over the term. Many of our leases include rental escalation clauses, renewal options and/or termination options that are factored into our determination of lease payments when appropriate. We do not separate lease and nonlease components of contracts, except for regional aircraft and information technology ("IT") assets as discussed below.
When available, we use the rate implicit in the lease to discount lease payments to present value; however, we have an insignificant number of leases representing an immaterial portion of our lease liability that provide readily determinable implicit rates. When the rate implicit in the lease is not available, we use our incremental borrowing rate, which is based on the estimated interest rate for collateralized borrowing over a similar term of the lease at commencement date.
Some of our aircraft lease agreements include provisions for residual value guarantees. These provisions primarily relate to our regional aircraft and the amounts are not significant. We do not have other forms of variable interests with the lessors of our leased assets, other than at New York-JFK, in which we are not the primary beneficiary as discussed in Note 9, "Airport Redevelopment," and one lessor, in which we have a variable interest in certain immaterial aircraft leases, that we have consolidated.
Aircraft
As of December 31, 2019, including aircraft operated by our regional carriers, we leased 343 aircraft, of which 130 were under finance leases and 213 were operating leases. Our aircraft leases had remaining lease terms of one month to 12 years. Aircraft finance leases continue to be reported on our balance sheet, while operating leases were added to the balance sheet in 2018 with the adoption of the new standard.
In addition, we have regional aircraft leases that are embedded within our capacity purchase agreements and included in the right-of-use ("ROU") asset and lease liability. We allocated the consideration in each capacity purchase agreement to the lease and nonlease components based on their relative standalone value. Lease components of these agreements consist of 162 aircraft as of December 31, 2019 and nonlease components primarily consist of flight operations, in-flight and maintenance services. We determined our best estimate of the standalone value of the individual components by considering observable information including rates paid by our wholly owned subsidiary, Endeavor Air, Inc., and rates published by independent valuation firms. See Note 11, "Commitments and Contingencies," for additional information about our capacity purchase agreements.
With the adoption of the new lease standard in 2018, we determined that the CRJ-200 fleet operated by our wholly-owned subsidiary, Endeavor, was impaired due to insufficient future cash flows projected for the fleet. Therefore, we recorded a transition adjustment that reduced equity by $284 million (net of tax) as of January 1, 2018, which reflects the difference in fair value compared to the basis of the ROU asset.
Airport Facilities
Our facility leases are primarily for space at approximately 300 airports around the world that we serve. These leases are classified as operating leases and reflect our use of airport terminals, office space, cargo warehouses and maintenance facilities. We generally lease space from government agencies that control the use of the airport. The remaining lease terms vary from one month to 31 years. At the majority of the U.S. airports, the lease rates depend on airport operating costs or use of the facilities and are reset at least annually. Because of the variable nature of the rates, these leases are not recorded on our balance sheet as a ROU asset and lease liability.
Some airport facilities have fixed payment schedules, the most significant of which are New York-LaGuardia and New York-JFK. For those airport leases, we have recorded a ROU asset and lease liability representing the fixed component of the lease payment. See Note 9, "Airport Redevelopment," for more information on our significant airport redevelopment projects.
Other Ground Property and Equipment
We lease certain IT assets (including servers, mainframes, etc.), ground support equipment (including tugs, tractors, fuel trucks and de-icers), and various other equipment. The remaining lease terms range from one month to seven years. Certain leased IT assets are embedded within various service agreements. The lease components included in those agreements are included in the ROU asset and lease liability, and the amounts are not significant.
Lease Position
The table below presents the lease-related assets and liabilities recorded on the balance sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in millions)
|
Classification on the Balance Sheet
|
2019
|
2018
|
Assets
|
|
|
|
Operating lease assets
|
Operating lease right-of-use assets
|
$
|
5,627
|
|
$
|
5,994
|
|
Finance lease assets
|
Property and equipment, net
|
1,062
|
|
490
|
|
Total lease assets
|
|
$
|
6,689
|
|
$
|
6,484
|
|
|
|
|
|
Liabilities
|
|
|
|
Current
|
|
|
|
Operating
|
Current maturities of operating leases
|
$
|
801
|
|
$
|
955
|
|
Finance
|
Current maturities of debt and finance leases
|
233
|
|
109
|
|
Noncurrent
|
|
|
|
Operating
|
Noncurrent operating leases
|
5,294
|
|
5,801
|
|
Finance
|
Debt and finance leases
|
821
|
|
294
|
|
Total lease liabilities
|
|
$
|
7,149
|
|
$
|
7,159
|
|
|
|
|
|
Weighted-average remaining lease term
|
|
|
|
Operating leases
|
|
12 years
|
12 years
|
Finance leases
|
|
5 years
|
7 years
|
Weighted-average discount rate
|
|
|
|
Operating leases(1)
|
|
3.73
|
%
|
3.69
|
%
|
Finance leases
|
|
3.46
|
%
|
5.23
|
%
|
(1)Upon adoption of the new lease standard, discount rates used for existing leases were established at January 1, 2018.
Lease Costs
The table below presents certain information related to the lease costs for finance and operating leases.
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(in millions)
|
2019
|
2018
|
Finance lease cost
|
|
|
Amortization of leased assets
|
$
|
110
|
|
$
|
100
|
|
Interest of lease liabilities
|
29
|
|
22
|
|
Operating lease cost(1)
|
1,013
|
|
994
|
|
Short-term lease cost(1)
|
500
|
|
458
|
|
Variable lease cost(1)
|
1,456
|
|
1,427
|
|
Total lease cost
|
$
|
3,108
|
|
$
|
3,001
|
|
(1)Expenses are classified within aircraft rent, landing fees and other rents and regional carriers expense, excluding fuel on the income statement. For the year ended December 31, 2019, $174 million and $64 million of the operating and variable lease costs, respectively, and for the year ended December 31, 2018, $150 million, $18 million and $48 million of the operating, short-term and variable lease costs, respectively, are attributable to our regional carriers.
In 2017, operating lease expense, excluding landing fees, was approximately $1.6 billion, which includes leases of certain aircraft under capacity purchase agreements. Expenses were primarily classified within aircraft rent, landing fees and other rents and regional carriers expense.
Other Information
The table below presents supplemental cash flow information related to leases.
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(in millions)
|
2019
|
2018
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
Operating cash flows for operating leases
|
$
|
1,166
|
|
$
|
1,271
|
|
Operating cash flows for finance leases
|
27
|
|
22
|
|
Financing cash flows for finance leases
|
192
|
|
108
|
|
Undiscounted Cash Flows
The table below reconciles the undiscounted cash flows for each of the first five years and total of the remaining years to the finance lease liabilities and operating lease liabilities recorded on the balance sheet.
|
|
|
|
|
|
|
|
|
(in millions)
|
Operating Leases
|
Finance Leases
|
2020
|
$
|
1,003
|
|
$
|
264
|
|
2021
|
836
|
|
239
|
|
2022
|
729
|
|
174
|
|
2023
|
698
|
|
124
|
|
2024
|
628
|
|
180
|
|
Thereafter
|
3,821
|
|
179
|
|
Total minimum lease payments
|
7,715
|
|
1,160
|
|
Less: amount of lease payments representing interest
|
(1,620)
|
|
(106)
|
|
Present value of future minimum lease payments
|
6,095
|
|
1,054
|
|
Less: current obligations under leases
|
(801)
|
|
(233)
|
|
Long-term lease obligations
|
$
|
5,294
|
|
$
|
821
|
|
As of December 31, 2019, we had additional leases that had not yet commenced of $888 million. These leases will commence in 2020 to 2024 with lease terms of 5 to 12 years.
NOTE 9. AIRPORT REDEVELOPMENT
New York-JFK Airport
In 2015, we completed two phases of redevelopment at New York-JFK's Terminal 4 to facilitate convenient connections for our passengers and improve coordination with our SkyTeam alliance partners. Terminal 4 is operated by JFK International Air Terminal LLC ("IAT"), a private party, under its lease with the Port Authority of New York and New Jersey ("Port Authority"). In December 2010, we entered into a 33-year agreement with IAT ("Sublease") to sublease space in Terminal 4. Also, in 2010, the Port Authority issued approximately $800 million principal amount of special project bonds to fund the majority of the project.
We managed the project and bore the construction risk, including cost over-runs. Prior to 2018, we accounted for this project by recording an asset for project costs (e.g., design, permitting, labor and other general construction costs), regardless of funding source, and a construction obligation equal to project costs funded by parties other than us. Our rental payments reduced the construction obligation and resulted in the recording of interest expense, calculated using the effective interest method. Upon adoption of the new lease standard during 2018, the project cost asset and construction obligation were derecognized and we recorded a transition adjustment that increased equity by $40 million (net of tax). Following derecognition of these assets and liabilities, we recognized a ROU asset and lease liability representing the fixed component of the lease payments.
We have an equity method investment in JFK IAT Member LLC, which owns IAT, our sublessor at Terminal 4. The Sublease requires us to pay certain fixed management fees. We determined the investment is a variable interest entity and assessed whether we have a controlling financial interest in IAT. Our rights under the Sublease, with respect to management of Terminal 4, are consistent with rights granted to an anchor tenant under a standard airport lease. Accordingly, we do not consolidate this entity in our Consolidated Financial Statements.
We are now planning for further expansion of Terminal 4. Subject to approval of the Board of the Port Authority, IAT and the Port Authority will finalize and enter a lease amendment for the expansion and renovation of the Terminal 4 arrivals and departures hall, the addition of 16 new gates to Concourse A, the renovation of existing concourses and roadway upgrades to improve access for vehicles.
Los Angeles International Airport ("LAX")
We executed a modified lease agreement during 2016 with the City of Los Angeles ("the City") which owns and operates LAX, and announced plans to modernize, upgrade and connect Terminals 2 and 3 at LAX. Under the lease agreement, we have relocated certain airlines and other tenants 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 the Tom Bradley International Terminal. Construction is expected to be completed by 2024.
Under the lease agreement and subsequent project component approvals by the City's Board of Airport Commissioners, the City has appropriated to date approximately $1.6 billion to purchase completed project assets. The lease allows for a maximum reimbursement by the City of $1.8 billion. Costs we incur in excess of such maximum will not be reimbursed by the City.
A substantial majority of the project costs are being funded through the Regional Airports Improvement Corporation ("RAIC"), a California public benefit corporation, using an $800 million revolving credit facility provided by a group of lenders. The credit facility was executed during 2017 and 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.
Based on our assessment of the project, we concluded that we do not control the underlying assets being constructed, and therefore, we do not have the project asset or related obligation recorded on our balance sheet.
New York-LaGuardia Airport
As part of the terminal redevelopment project at LaGuardia Airport, we are partnering with the Port Authority to replace Terminals C and D with a new state-of-the-art terminal facility consisting of 37 gates across four concourses connected to a central headhouse. The terminal will feature a new, larger Delta Sky Club, wider concourses, more gate seating and 30 percent more concessions space than the existing terminals. The facility will also offer direct access between the parking garage and terminal and improved roadways and drop-off/pick-up areas. The design of the new terminal will integrate sustainable technologies and improvements in energy efficiency. Construction will be phased to limit passenger inconvenience and is expected to be completed by 2026.
In connection with the redevelopment, during 2017, we entered into an amended and restated terminal lease with the Port Authority with a term through 2050. Pursuant to the lease agreement we will (1) fund (through debt issuance and existing cash) and undertake the design, management and construction of the terminal and certain off-premises supporting facilities, (2) receive a Port Authority contribution of $600 million to facilitate construction of the terminal and other supporting infrastructure, (3) be responsible for all operations and maintenance during the term of the lease and (4) have preferential rights to all gates in the terminal subject to Port Authority requirements with respect to accommodation of designated carriers. We currently expect our net project cost to be approximately $3.3 billion and we bear the risks of project construction, including any potential cost over-runs. Using funding provided by cash flows from operations and/or financing arrangements, we spent approximately $562 million on this project during 2019. See Note 7, "Debt," for additional information on the debt related to this redevelopment project, NYTDC Special Facilities Revenue Bonds, Series 2018.
As we are funding the majority of the LaGuardia redevelopment project, we account for the related assets as leasehold improvements. We entered into loan agreements to fund a portion of the construction, which are recorded on our balance sheet as debt with the proceeds reflected as restricted cash.
NOTE 10. EMPLOYEE BENEFIT PLANS
We sponsor defined benefit and defined contribution pension plans, healthcare plans and disability and survivorship plans for eligible employees and retirees and their eligible family members.
Defined Benefit Pension Plans. We sponsor defined benefit pension plans for eligible employees and retirees. These plans are closed to new entrants and frozen for future benefit accruals. The Pension Protection Act of 2006 allows commercial airlines to elect alternative funding rules ("Alternative Funding Rules") for defined benefit plans that are frozen. We elected the Alternative Funding Rules under which the unfunded liability for a frozen defined benefit plan may be amortized over a fixed 17-year period and is calculated using an 8.85% discount rate until the 17-year period expires for all frozen defined benefit plans by the end of 2024. We have no minimum funding requirements in 2020, but we plan to voluntarily contribute approximately $500 million to these plans.
Defined Contribution Pension Plans. We sponsor several defined contribution plans. These plans generally cover different employee groups and employer contributions vary by plan. The costs associated with our defined contribution pension plans were $991 million, $926 million and $875 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Postretirement Healthcare Plans. We sponsor healthcare plans that provide benefits to eligible retirees and their dependents who are under age 65. We have generally eliminated company-paid post age 65 healthcare coverage, except for (1) subsidies available to a limited group of retirees and their dependents and (2) a group of retirees who retired prior to 1987. Benefits under these plans are funded from current assets and employee contributions. During 2018, we remeasured our postretirement obligation to reflect a curtailment of our postretirement healthcare plans.
Postemployment Plans. We provide certain other welfare benefits to eligible former or inactive employees after employment but before retirement, primarily as part of the disability and survivorship plans. Substantially all employees are eligible for benefits under these plans in the event of death and/or disability.
Benefit Obligations, Fair Value of Plan Assets and Funded Status
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Postretirement and Postemployment Benefits
|
|
|
December 31,
|
|
|
December 31,
|
|
(in millions)
|
2019
|
2018
|
|
2019
|
2018
|
Benefit obligation at beginning of period
|
$
|
19,809
|
|
$
|
21,696
|
|
|
$
|
3,225
|
|
$
|
3,504
|
|
Service cost
|
—
|
|
—
|
|
|
83
|
|
85
|
|
Interest cost
|
833
|
|
781
|
|
|
137
|
|
126
|
|
Actuarial loss (gain)
|
1,678
|
|
(1,560)
|
|
|
226
|
|
(142)
|
|
Benefits paid, including lump sums and annuities
|
(1,107)
|
|
(1,093)
|
|
|
(315)
|
|
(306)
|
|
Participant contributions
|
—
|
|
—
|
|
|
23
|
|
26
|
|
Curtailment
|
—
|
|
—
|
|
|
—
|
|
(68)
|
|
Settlements
|
(14)
|
|
(15)
|
|
|
—
|
|
—
|
|
Benefit obligation at end of period(1)
|
$
|
21,199
|
|
$
|
19,809
|
|
|
$
|
3,379
|
|
$
|
3,225
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of period
|
$
|
13,459
|
|
$
|
14,744
|
|
|
$
|
637
|
|
$
|
866
|
|
Actual gain (loss) on plan assets
|
2,485
|
|
(700)
|
|
|
134
|
|
(72)
|
|
Employer contributions
|
1,022
|
|
523
|
|
|
159
|
|
152
|
|
Participant contributions
|
—
|
|
—
|
|
|
23
|
|
26
|
|
Benefits paid, including lump sums and annuities
|
(1,107)
|
|
(1,093)
|
|
|
(346)
|
|
(335)
|
|
Settlements
|
(14)
|
|
(15)
|
|
|
—
|
|
—
|
|
Fair value of plan assets at end of period
|
$
|
15,845
|
|
$
|
13,459
|
|
|
$
|
607
|
|
$
|
637
|
|
|
|
|
|
|
|
Funded status at end of period
|
$
|
(5,354)
|
|
$
|
(6,350)
|
|
|
$
|
(2,772)
|
|
$
|
(2,588)
|
|
(1)At the end of each year presented, our accumulated benefit obligations for our pension plans are equal to the benefit obligations shown above.
During 2019, net actuarial losses increased our benefit obligation due to the decrease in discount rates, while in 2018 our obligations decreased due to the actuarial gains from an increase in discount rates. These gains and losses are recorded in AOCI and reflected in the table below.
A net actuarial loss of $333 million will be amortized from AOCI into net periodic benefit cost in 2020. Amounts are generally amortized from AOCI over the expected future lifetime of plan participants.
Balance Sheet Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Postretirement and Postemployment Benefits
|
|
|
December 31,
|
|
|
December 31,
|
|
(in millions)
|
2019
|
2018
|
|
2019
|
2018
|
Current liabilities
|
$
|
(19)
|
|
$
|
(27)
|
|
|
$
|
(125)
|
|
$
|
(123)
|
|
Noncurrent liabilities
|
(5,335)
|
|
(6,323)
|
|
|
(2,647)
|
|
(2,465)
|
|
Total liabilities
|
$
|
(5,354)
|
|
$
|
(6,350)
|
|
|
$
|
(2,772)
|
|
$
|
(2,588)
|
|
|
|
|
|
|
|
Net actuarial loss
|
$
|
(8,765)
|
|
$
|
(8,682)
|
|
|
$
|
(715)
|
|
$
|
(613)
|
|
Prior service credit
|
—
|
|
—
|
|
|
38
|
|
47
|
|
Total accumulated other comprehensive loss, pre-tax
|
$
|
(8,765)
|
|
$
|
(8,682)
|
|
|
$
|
(677)
|
|
$
|
(566)
|
|
Net Periodic (Benefit) Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
Other Postretirement and Postemployment Benefits
|
|
|
|
Year Ended December 31,
|
|
|
|
Year Ended December 31,
|
|
|
(in millions)
|
2019
|
2018
|
2017
|
|
2019
|
2018
|
2017
|
Service cost
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
$
|
83
|
|
$
|
85
|
|
$
|
87
|
|
Interest cost
|
833
|
|
781
|
|
853
|
|
|
137
|
|
126
|
|
138
|
|
Expected return on plan assets
|
(1,186)
|
|
(1,318)
|
|
(1,143)
|
|
|
(47)
|
|
(67)
|
|
(69)
|
|
Amortization of prior service credit
|
—
|
|
—
|
|
—
|
|
|
(9)
|
|
(24)
|
|
(26)
|
|
Recognized net actuarial loss
|
291
|
|
267
|
|
262
|
|
|
37
|
|
36
|
|
32
|
|
Settlements
|
5
|
|
4
|
|
3
|
|
|
—
|
|
—
|
|
—
|
|
Curtailment
|
—
|
|
—
|
|
—
|
|
|
—
|
|
(53)
|
|
—
|
|
Net periodic (benefit) cost
|
$
|
(57)
|
|
$
|
(266)
|
|
$
|
(25)
|
|
|
$
|
201
|
|
$
|
103
|
|
$
|
162
|
|
Service cost is recorded in salaries and related costs in the income statement while other components are recorded within miscellaneous under non-operating expense.
Assumptions
We used the following actuarial assumptions to determine our benefit obligations and our net periodic benefit cost for the periods presented:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Benefit Obligations(1)
|
2019
|
2018
|
Weighted average discount rate
|
3.40
|
%
|
4.33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Net Periodic Benefit Cost(1)
|
2019
|
2018
|
2017
|
Weighted average discount rate - pension benefit
|
4.33
|
%
|
3.69
|
%
|
4.14
|
%
|
Weighted average discount rate - other postretirement benefit
|
4.32
|
%
|
3.69
|
%
|
4.19
|
%
|
Weighted average discount rate - other postemployment benefit
|
4.32
|
%
|
3.65
|
%
|
4.14
|
%
|
Weighted average expected long-term rate of return on plan assets
|
8.97
|
%
|
8.97
|
%
|
8.96
|
%
|
Assumed healthcare cost trend rate for the next year(2)
|
6.50
|
%
|
6.75
|
%
|
7.00
|
%
|
(1)Future employee compensation levels do not impact our frozen defined benefit pension plans or other postretirement plans and impact only a small portion of our other postemployment obligation.
(2)Healthcare cost trend rate is assumed to decline gradually to 5.00% by 2026 and remain unchanged thereafter.
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 ended December 31, 2019 was 8.97%.
Healthcare Cost Trend Rate. Assumed healthcare cost trend rates have an effect on the amounts reported for the other postretirement benefit plans. A 1% change in the healthcare cost trend rate used in measuring the plan benefit obligation for these plans would have the following effects:
|
|
|
|
|
|
|
|
|
(in millions)
|
1% Increase
|
1% (Decrease)
|
Increase (decrease) in total service and interest cost
|
$
|
1
|
|
$
|
(2)
|
|
Increase (decrease) in the accumulated plan benefit obligation
|
4
|
|
(14)
|
|
Life Expectancy. Changes in life expectancy may significantly impact our benefit obligations and future net periodic benefit cost. We use the Society 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 for U.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.
Benefit Payments
Benefit payments in the table below are based on the same assumptions used to measure the related benefit obligations. Actual benefit payments may vary significantly from these estimates. Benefits earned under our pension plans and certain postemployment benefit plans are expected to be paid from funded benefit plan trusts, while our other postretirement benefits are funded from current assets.
The following table summarizes the benefit payments that are scheduled to be paid in the years ending December 31:
|
|
|
|
|
|
|
|
|
(in millions)
|
Pension Benefits
|
Other Postretirement and Postemployment Benefits
|
2020
|
$
|
1,170
|
|
$
|
324
|
|
2021
|
1,188
|
|
327
|
|
2022
|
1,211
|
|
324
|
|
2023
|
1,226
|
|
321
|
|
2024
|
1,239
|
|
317
|
|
2025-2029
|
6,248
|
|
1,520
|
|
Plan Assets
We have adopted and implemented investment policies for our defined benefit pension plans that incorporate strategic asset allocation mixes intended to best meet the plans' long-term obligations, while maintaining an appropriate level of risk and liquidity. These asset portfolios employ a diversified mix of investments, which are reviewed periodically. Active management strategies are utilized where feasible in an effort to realize investment returns in excess of market indices. Derivatives in the plans are primarily used to manage risk and gain asset class exposure while still maintaining liquidity. As part of these strategies, the plans are required to hold cash collateral associated with certain derivatives. Our investment strategies target a mix of 30-50% growth-seeking assets, 25-35% income-generating assets and 30-40% risk-diversifying assets. Risk diversifying assets include hedged mandates implementing long-short, market neutral and relative value strategies that invest primarily in publicly-traded equity, fixed income, foreign currency and commodity securities and are used to improve the impact of active management on the plans.
Benefit Plan Assets Measured at Fair Value on a Recurring Basis
Benefit Plan Assets. Benefit plan assets relate to our defined benefit pension plans and certain of our postemployment benefit plans. These investments are presented net of the related benefit obligation in pension, postretirement and related benefits on the balance sheets. See Note 3, "Fair Value," for a description of the levels within the fair value hierarchy and associated valuation techniques used to measure fair value. The following table shows our benefit plan assets by asset class.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
December 31, 2018
|
|
|
|
Valuation Technique
|
(in millions)
|
Level 1
|
Level 2
|
Total
|
|
Level 1
|
Level 2
|
Total
|
|
|
Equities and equity-related instruments
|
$
|
840
|
|
$
|
49
|
|
$
|
889
|
|
|
$
|
400
|
|
$
|
100
|
|
$
|
500
|
|
|
(a)
|
Delta common stock
|
737
|
|
—
|
|
737
|
|
|
675
|
|
—
|
|
675
|
|
|
(a)
|
Cash equivalents
|
327
|
|
952
|
|
1,279
|
|
|
312
|
|
708
|
|
1,020
|
|
|
(a)
|
Fixed income and fixed income-related instruments
|
97
|
|
3,472
|
|
3,569
|
|
|
233
|
|
2,157
|
|
2,390
|
|
|
(a)(b)
|
Benefit plan assets
|
$
|
2,001
|
|
$
|
4,473
|
|
$
|
6,474
|
|
|
$
|
1,620
|
|
$
|
2,965
|
|
$
|
4,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments measured at net asset value ("NAV")(1)
|
|
|
9,854
|
|
|
|
|
9,136
|
|
|
|
Total benefit plan assets
|
|
|
$
|
16,328
|
|
|
|
|
$
|
13,721
|
|
|
|
(1) Investments that were measured at NAV per share (or its equivalent) as a practical expedient have not been classified in the fair value hierarchy.
Equities and Equity-Related Instruments. These investments include common stock and equity-related instruments. Common stock is valued at the closing price reported on the active market on which the individual securities are traded. Equity-related instruments include investments in securities traded on exchanges, including listed futures and options, which are valued at the last reported sale prices on the last business day of the year or, if not available, the last reported bid prices. Over-the-counter securities are valued at the bid prices or the average of the bid and ask prices on the last business day of the year from published sources or, if not available, from other sources considered reliable, generally broker quotes.
Delta Common Stock. In both 2017 and 2016, we contributed $350 million of Delta common stock as a portion of the employer contribution to certain of our defined benefit pension plans. The Delta common stock investment is managed by an independent fiduciary.
Cash Equivalents. These investments primarily consist of high-quality, short-term obligations that are a part of institutional money market mutual funds that are valued using current market quotations or an appropriate substitute that reflects current market conditions.
Fixed Income and Fixed Income-Related Instruments. These investments include corporate bonds, government bonds, collateralized mortgage obligations and other asset-backed securities, and are generally valued at the bid price or the average of the bid and ask price. Prices are based on pricing models, quoted prices of securities with similar characteristics or broker quotes. Fixed income-related instruments include investments in securities traded on exchanges, including listed futures and options, which are valued at the last reported sale prices on the last business day of the year, or if not available, the last reported bid prices. Over-the-counter securities are valued at the bid prices or the average of the bid and ask prices on the last business day of the year from published sources or, if not available, from other sources considered reliable, generally broker quotes.
The following table summarizes investments measured at fair value based on NAV per share as a practical expedient:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
December 31, 2018
|
|
|
(in millions)
|
Fair Value
|
Redemption Frequency
|
Redemption Notice Period
|
|
Fair Value
|
Redemption Frequency
|
Redemption Notice Period
|
Hedge funds and hedge fund-related strategies(5)
|
$
|
5,588
|
|
(4)
|
2-180 Days
|
|
$
|
5,264
|
|
(4)
|
2-180 Days
|
Commingled funds, private equity and private equity-related instruments(5)
|
1,834
|
|
(4)
|
2-30 Days
|
|
1,591
|
|
(4)
|
2-30 Days
|
Fixed income and fixed income-related instruments(5)
|
958
|
|
(4)
|
15-90 Days
|
|
769
|
|
(2)
|
15-90 Days
|
Real assets(5)
|
758
|
|
(3)
|
N/A
|
|
|
807
|
|
(3)
|
N/A
|
|
Other
|
716
|
|
(1) (2)
|
2-90 Days
|
|
705
|
|
(1) (2)
|
2-90 Days
|
Total investments measured at NAV
|
$
|
9,854
|
|
|
|
|
$
|
9,136
|
|
|
|
(1)Monthly
(2)Semi-monthly
(3)Semi-annually and annually
(4)Various. Includes funds with weekly, monthly, semi-monthly, quarterly and custom redemption frequencies as well as funds with a redemption window following the anniversary of the initial investment.
(5)Unfunded commitments were $393 million for commingled funds, private equity and private equity-related instruments, $254 million for fixed income and fixed income-related instruments, $203 million for real assets and $76 million for hedge funds and hedge fund-related strategies at December 31, 2019.
Hedge Funds and Hedge Fund-Related Strategies. These investments are primarily made through shares of limited partnerships or similar structures for which a liquid secondary market does not exist. Investments in these strategies are typically valued monthly by third-party administrators or valuation agents with an annual audit performed by an independent third party.
Commingled Funds, Private Equity and Private Equity-Related Instruments. These investments include commingled funds invested in common stock, as well as private equity and private equity-related instruments. Commingled funds are valued based on quoted market prices of the underlying assets owned by the fund. Private equity and private equity-related strategies are typically valued quarterly by the fund managers using valuation models where one or more of the significant inputs into the model cannot be observed and which require the development of assumptions. There is an annual audit performed by an independent third party.
Fixed Income and Fixed Income-Related Instruments. These investments include commingled funds invested in debt obligations. Commingled funds are valued based on quoted market prices of the underlying assets owned by the fund. Private fixed income strategies are typically valued monthly or quarterly by the fund managers or third-party valuation agents using valuation models where one or more of significant inputs into the model cannot be observed and which require the development of assumptions. There is an annual audit performed by an independent third party.
Real Assets. These investments include real estate, energy, timberland, agriculture and infrastructure. The valuation of real assets requires significant judgment due to the absence of quoted market prices as well as the inherent lack of liquidity and the long-term nature of these assets. Real assets are typically valued quarterly by the fund managers using valuation models where one or more of the significant inputs into the model cannot be observed and which require the development of assumptions. There is an annual audit performed by an independent third party.
Other. Primarily includes globally-diversified, risk-managed commingled funds consisting mainly of equity, fixed income and commodity exposures. Investments in these strategies are typically valued monthly by third-party administrators or valuation agents with an annual audit performed by an independent third party.
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.
Other
We also sponsor defined benefit pension plans for eligible employees in certain foreign countries. These plans did not have a material impact on our Consolidated Financial Statements in any period presented.
Profit Sharing Program
Our broad-based employee profit sharing program provides that, for each year in which we have an annual pre-tax profit, as defined by the terms of the program, we will pay a specified portion of that profit to employees. In determining the amount of profit sharing, the program defines profit as pre-tax profit adjusted for profit sharing and certain other items. For the years ended December 31, 2019, 2018 and 2017, we recorded expenses of $1.6 billion, $1.3 billion and $1.1 billion under the profit sharing program, respectively.
Effective October 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.
NOTE 11. COMMITMENTS AND CONTINGENCIES
Aircraft Purchase Commitments
Our future aircraft purchase commitments totaled approximately $13.7 billion at December 31, 2019:
|
|
|
|
|
|
(in millions)
|
Total
|
2020
|
$
|
2,980
|
|
2021
|
3,740
|
|
2022
|
3,390
|
|
2023
|
1,640
|
|
2024
|
500
|
|
Thereafter
|
1,440
|
|
Total
|
$
|
13,690
|
|
Our future aircraft purchase commitments included the following aircraft at December 31, 2019:
|
|
|
|
|
|
Aircraft Type
|
Purchase Commitments
|
A220-100
|
17
|
|
A220-300
|
50
|
|
A321-200
|
31
|
|
A321-200neo
|
100
|
|
A330-900neo (1)
|
33
|
|
A350-900
|
16
|
|
CRJ-900
|
6
|
|
Total
|
253
|
|
(1) Includes two A330-900neo lease commitments with one in each of 2020 and 2021.
MD-90 Fleet Retirement
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. 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.
LATAM A350 Commitments
We have agreed to acquire four A350 aircraft from LATAM, which are included as purchase commitments in the table above. In addition, we plan to assume ten of LATAM's A350 purchase commitments from Airbus, with deliveries through 2025. See Note 4, "Investments," for further information on our investment in LATAM.
Contract Carrier Agreements
We have contract carrier agreements with regional carriers expiring from 2020 to 2029.
Capacity Purchase Agreements. Most of our contract carriers operate for us under capacity purchase agreements. Under these agreements, the contract carriers operate some or all of their aircraft using our flight designator codes, and we control the scheduling, pricing, reservations, ticketing and seat inventories of those aircraft and retain the revenues associated with those flights. We pay those airlines an amount, as defined in the applicable agreement, which is based on a determination of their cost of operating those flights and other factors intended to approximate market rates for those services.
The following table shows our minimum fixed obligations under our existing capacity purchase agreements with third-party regional carriers. The obligations set forth in the table contemplate minimum levels of flying by the contract carriers under the respective agreements and also reflect assumptions regarding certain costs associated with the minimum levels of flying such as the cost of fuel, labor, maintenance, insurance, catering, property tax and landing fees. Accordingly, our actual payments under these agreements could differ materially from the minimum fixed obligations set forth in the table below.
|
|
|
|
|
|
(in millions)
|
Amount (1)(2)
|
2020
|
$
|
1,750
|
|
2021
|
1,432
|
|
2022
|
1,377
|
|
2023
|
1,132
|
|
2024
|
1,002
|
|
Thereafter
|
2,349
|
|
Total
|
$
|
9,042
|
|
(1)These amounts exclude contract carrier payments accounted for as operating leases of aircraft, which are described in Note 8, "Leases."
(2)In January 2020, we agreed not to renew our CRJ-900 contract with GoJet Airlines, LLC and to end those operations by the end of 2020. The table above reflects our commitments under that contract as of December 31, 2019.
Revenue Proration Agreement. As of December 31, 2019, a portion of our contract carrier agreement with SkyWest Airlines, Inc. was structured as a revenue proration agreement. This revenue proration agreement establishes a fixed dollar or percentage division of revenues for tickets sold to passengers traveling on connecting flight itineraries.
Legal Contingencies
We are involved in various legal proceedings related to employment practices, environmental issues, antitrust matters and other matters concerning our business. We record liabilities for losses from legal proceedings when we determine that it is probable that the outcome in a legal proceeding will be unfavorable and the amount of loss can be reasonably estimated. Although the outcome of the legal proceedings in which we are involved cannot be predicted with certainty, we believe that the resolution of current matters will not have a material adverse effect on our Consolidated Financial Statements.
Credit Card Processing Agreements
Our VISA/MasterCard and American Express credit card processing agreements provide that no cash reserve ("Reserve") is required, and no withholding of payment related to receivables collected will occur, except in certain circumstances, including when we do not maintain a required level of liquidity as outlined in the merchant processing agreements. In circumstances in which the credit card processor can establish a Reserve or withhold payments, the amount of the Reserve or payments that may be withheld would be equal to the potential liability of the credit card processor for tickets purchased with VISA/MasterCard or American Express credit cards, as applicable, that had not yet been used for travel. We did not have a Reserve or an amount withheld as of December 31, 2019 or 2018.
Other Contingencies
General Indemnifications
We are the lessee under many commercial real estate leases. It is common in these transactions for us, as the lessee, to agree to indemnify the lessor and the lessor's related parties for tort, environmental and other liabilities that arise out of or relate to our use or occupancy of the leased premises. This type of indemnity would typically make us responsible to indemnified parties for liabilities arising out of the conduct of, among others, contractors, licensees and invitees at, or in connection with, the use or occupancy of the leased premises. This indemnity often extends to related liabilities arising from the negligence of the indemnified parties, but usually excludes any liabilities caused by either their sole or gross negligence or their willful misconduct.
Our aircraft and other equipment lease and financing agreements typically contain provisions requiring us, as the lessee or obligor, to indemnify the other parties to those agreements, including certain of those parties' related persons, against virtually any liabilities that might arise from the use or operation of the aircraft or other equipment.
We believe that our insurance would cover most of our exposure to liabilities and related indemnities associated with the commercial real estate leases and aircraft and other equipment lease and financing agreements described above. While our insurance does not typically cover environmental liabilities, we have insurance policies in place as required by applicable environmental laws.
Some of our aircraft and other financing transactions include provisions that require us to make payments to preserve an expected economic return to the lenders if that economic return is diminished due to specified changes in law or regulations. In some of these financing transactions, we also bear the risk of changes in tax laws that would subject payments to non-U.S. lenders to withholding taxes.
We cannot reasonably estimate our potential future payments under the indemnities and related provisions described above because we cannot predict (1) when and under what circumstances these provisions may be triggered and (2) the amount that would be payable if the provisions were triggered because the amounts would be based on facts and circumstances existing at such time.
Employees Under Collective Bargaining Agreements
As of December 31, 2019, we had approximately 91,000 full-time equivalent employees, approximately 19% of whom were represented by unions. The following table shows our domestic airline employee groups that are represented by unions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Group
|
Approximate Number of Active Employees Represented
|
|
Union
|
Date on which Collective Bargaining Agreement Becomes Amendable
|
Delta Pilots
|
13,082
|
|
|
ALPA
|
December 31, 2019
|
Delta Flight Superintendents (Dispatchers)
|
443
|
|
|
PAFCA
|
November 1, 2024
|
Endeavor Air Pilots
|
1,872
|
|
|
ALPA
|
January 1, 2024
|
Endeavor Air Flight Attendants
|
1,492
|
|
|
AFA
|
December 31, 2018
|
We are in discussions with representatives of our pilots and Endeavor Air flight attendants regarding terms of amendable collective bargaining agreements.
In addition to the domestic airline employee groups discussed above, 199 refinery employees of Monroe are represented by the United Steel Workers under an agreement that expires on February 28, 2022. This agreement is governed by the National Labor Relations Act, which generally allows either party to engage in self help upon the expiration of the agreement.
Other
We have certain contracts for goods and services that require us to pay a penalty, acquire inventory specific to us or purchase contract-specific equipment, as defined by each respective contract, if we terminate the contract without cause prior to its expiration date. Because these obligations are contingent on our termination of the contract without cause prior to its expiration date, no obligation would exist unless such a termination occurs.
NOTE 12. INCOME TAXES
Income Tax Provision
Our income tax provision consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
(in millions)
|
2019
|
2018
|
2017
|
Current tax benefit (provision):
|
|
|
|
Federal
|
$
|
94
|
|
$
|
187
|
|
$
|
(4)
|
|
State and local
|
(39)
|
|
(26)
|
|
5
|
|
International
|
(13)
|
|
(13)
|
|
(54)
|
|
Deferred tax provision:
|
|
|
|
|
|
Federal
|
(1,343)
|
|
(1,226)
|
|
(2,093)
|
|
State and local
|
(130)
|
|
(138)
|
|
(149)
|
|
Income tax provision
|
$
|
(1,431)
|
|
$
|
(1,216)
|
|
$
|
(2,295)
|
|
The following table presents the principal reasons for the difference between the effective tax rate and the U.S. federal statutory income tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2019
|
2018
|
2017
|
U.S. federal statutory income tax rate
|
21.0
|
%
|
21.0
|
%
|
35.0
|
%
|
State taxes, net of federal benefit
|
2.3
|
|
2.5
|
|
1.8
|
|
Foreign tax rate differential
|
—
|
|
0.1
|
|
(2.2)
|
|
Tax Cuts and Jobs Act adjustment
|
—
|
|
(0.5)
|
|
7.2
|
|
Other
|
(0.2)
|
|
0.5
|
|
—
|
|
Effective income tax rate
|
23.1
|
%
|
23.6
|
%
|
41.8
|
%
|
Following the enactment of the Tax Cuts and Jobs Act of 2017 ("2017 tax reform"), we recorded a provisional tax expense estimate of $395 million resulting in a 7.2% increase in our effective tax rate during 2017. The provisional estimate included recognition of tax expense related to certain of our undistributed foreign earnings and tax expense to decrease our federal net deferred tax asset to a 21% statutory tax rate. During 2018 we recognized a $26 million benefit resulting in a 0.5% reduction to our 2018 effective tax rate after finalizing the impact of the 2017 tax reform.
At December 31, 2019, we had a basis difference in our investments in foreign subsidiaries of $212 million which is considered to be indefinitely reinvested.
Deferred Taxes
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. The following table shows significant components of our deferred tax assets and liabilities:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in millions)
|
2019
|
2018
|
Deferred tax assets:
|
|
|
Net operating loss carryforwards
|
$
|
560
|
|
$
|
674
|
|
Pension, postretirement and other benefits
|
2,241
|
|
2,435
|
|
Alternative minimum tax credit carryforward
|
94
|
|
189
|
|
Deferred revenue
|
1,667
|
|
1,620
|
|
Operating lease liabilities
|
1,446
|
|
1,579
|
|
Other
|
350
|
|
357
|
|
Valuation allowance
|
(58)
|
|
(13)
|
|
Total deferred tax assets
|
$
|
6,300
|
|
$
|
6,841
|
|
Deferred tax liabilities:
|
|
|
Depreciation
|
$
|
5,190
|
|
$
|
4,185
|
|
Operating lease right-of-use assets
|
1,298
|
|
1,388
|
|
Intangible assets
|
1,049
|
|
1,052
|
|
Other
|
99
|
|
137
|
|
Total deferred tax liabilities
|
$
|
7,636
|
|
$
|
6,762
|
|
|
|
|
Net deferred tax (liabilities) assets(1)
|
$
|
(1,336)
|
|
$
|
79
|
|
(1)At December 31, 2019, the net deferred tax liabilities of $1.3 billion included $120 million of net state deferred tax assets, which are recorded in other noncurrent assets, and $1.5 billion of net federal deferred tax liabilities, which are recorded in deferred income taxes, net. At December 31, 2018, the net deferred tax assets of $79 million included $242 million of net state deferred tax assets, which are recorded in other noncurrent assets, and $163 million of net federal deferred tax liabilities, which are recorded in deferred income taxes, net.
At December 31, 2019, we had $94 million of federal alternative minimum tax credit carryforwards. As a result of the Tax Cuts and Jobs Act of 2017, this credit becomes refundable to us if not used by 2021. We have $1.9 billion of federal pre-tax net operating loss carryforwards, which will not begin to expire until 2027.
Income Tax Allocation
We consider all income sources, including other comprehensive income, in determining the amount of tax benefit allocated to continuing operations ("Income Tax Allocation"). The 2017 tax reform reduced the statutory tax rate in the U.S. from 35% to 21%. GAAP requires that the tax expense related to tax law changes be recognized in current earnings, even when a portion of the related deferred tax asset originated through amounts recognized in AOCI. As a result, $672 million of income tax expense remains in AOCI, primarily related to pension obligations, and will not be recognized in net income until the pension obligations are fully extinguished.
Other
The amount of, and changes to, our uncertain tax positions were not material in any of the years presented. We are currently under audit by the IRS for the 2019, 2018 and 2017 tax years.
NOTE 13. EQUITY AND EQUITY COMPENSATION
Equity
We are authorized to issue 2.0 billion shares of capital stock, of which up to 1.5 billion may be shares of common stock, par value $0.0001 per share, and up to 500 million may be shares of preferred stock.
Preferred Stock. We may issue preferred stock in one or more series. The Board of Directors is authorized (1) to fix the descriptions, powers (including voting powers), preferences, rights, qualifications, limitations and restrictions with respect to any series of preferred stock and (2) to specify the number of shares of any series of preferred stock. We have not issued any preferred stock.
Treasury Stock. We generally withhold shares of Delta common stock to cover employees' portion of required tax withholdings when employee equity awards are issued or vest. These shares are valued at cost, which equals the market price of the common stock on the date of issuance or vesting. The weighted average cost per share held in treasury was $26.37 and $24.14 as of December 31, 2019 and 2018, respectively.
Equity Compensation
Our broad-based equity and cash compensation plan provides for grants of restricted stock, stock options, performance awards, including cash incentive awards and other equity-based awards (the "Plan"). Shares of common stock issued under the Plan may be made available from authorized, but unissued, common stock or common stock we acquire. If any shares of our common stock are covered by an award that expires, is canceled, forfeited or otherwise terminates without delivery of shares (including shares surrendered or withheld for payment of taxes related to an award), such shares will again be available for issuance under the Plan except for (i) any shares tendered in payment of an option, (ii) shares withheld to satisfy any tax withholding obligation with respect to the exercise of an option or stock appreciation right ("SAR") or (iii) shares covered by a stock-settled SAR or other awards that were not issued upon the settlement of the award. The Plan authorizes the issuance of up to 163 million shares of common stock. As of December 31, 2019, there were 25 million shares available for future grants.
We make long-term incentive awards annually to eligible employees under the Plan. Generally, awards vest over time, subject to the employee's continued employment. Equity compensation expense, including awards payable in common stock or cash, is recognized in salaries and related costs over the employee's requisite service period (generally, the vesting period of the award) and totaled $161 million, $159 million and $169 million for the years ended December 31, 2019, 2018 and 2017, respectively. We record expense on a straight-line basis for awards with installment vesting. As of December 31, 2019, unrecognized costs related to unvested shares and stock options totaled $94 million. We expect substantially all unvested awards to vest and recognize forfeitures as they occur.
Restricted Stock. Restricted stock is common stock that may not be sold or otherwise transferred for a period of time and is subject to forfeiture in certain circumstances. The fair value of restricted stock awards is based on the closing price of the common stock on the grant date. As of December 31, 2019, there were 2.6 million unvested restricted stock awards.
Stock Options. Stock options are granted with an exercise price equal to the closing price of Delta common stock on the grant date and generally have a 10-year term. We determine the fair value of stock options at the grant date using an option pricing model. As of December 31, 2019, there were 3.9 million outstanding stock option awards with a weighted average exercise price of $49.57 of which 1.4 million were exercisable.
Performance Awards. Performance awards are long-term incentive opportunities, which are payable in common stock or cash, and are generally contingent upon our achieving certain financial goals.
Other. During 2019 and 2018, we recognized $1 million and $7 million, respectively, of excess tax benefits in our income tax provision.
NOTE 14. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table shows the components of accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Pension and Other Benefits Liabilities(2)
|
Derivative Contracts and Other
|
Available-for-Sale Investments(3)
|
Total
|
Balance at January 1, 2017 (net of tax effect of $1,458)
|
$
|
(7,714)
|
|
$
|
114
|
|
$
|
(36)
|
|
$
|
(7,636)
|
|
Changes in value (net of tax effect of $32)
|
(264)
|
|
(23)
|
|
150
|
|
(137)
|
|
Reclassifications into earnings (net of tax effect of $90)(1)
|
166
|
|
(6)
|
|
(8)
|
|
152
|
|
Balance at December 31, 2017 (net of tax effect of $1,400)
|
(7,812)
|
|
85
|
|
106
|
|
(7,621)
|
|
Changes in value (net of tax effect of $88)
|
(294)
|
|
7
|
|
—
|
|
(287)
|
|
Reclassifications into retained earnings (net of tax effect of $61)
|
—
|
|
—
|
|
(106)
|
|
(106)
|
|
Reclassifications into earnings (net of tax effect of $57)(1)
|
181
|
|
8
|
|
—
|
|
189
|
|
Balance at December 31, 2018 (net of tax effect $1,492)
|
(7,925)
|
|
100
|
|
—
|
|
(7,825)
|
|
Changes in value (net of tax effect of $133)
|
(422)
|
|
7
|
|
—
|
|
(415)
|
|
Reclassifications into earnings (net of tax effect of $76)(1)
|
252
|
|
(1)
|
|
—
|
|
251
|
|
Balance at December 31, 2019 (net of tax effect of $1,549)
|
$
|
(8,095)
|
|
$
|
106
|
|
$
|
—
|
|
$
|
(7,989)
|
|
(1)Amounts reclassified from AOCI for pension and other benefits liabilities and for derivative contracts designated as foreign currency cash flow hedges are recorded in miscellaneous, net in non-operating expense and in passenger revenue, respectively, in the income statement.
(2)Includes $672 million of deferred income tax expense primarily related to pension and other benefit obligations that will not be recognized in net income until these obligations are fully extinguished. We consider all income sources, including other comprehensive income, in determining the amount of tax benefit allocated to continuing operations.
(3)The 2017 reclassification into earnings for available-for-sale investments relates to our investment in Grupo Aeroméxico and the related conversion to accounting under the equity method. The reclassification of the unrealized gain was recorded to non-operating expense in our income statement. The 2018 reclassification into retained earnings relates to our investments in GOL, China Eastern and other previously designated available-for-sale investments, and the related conversion to accounting for changes in fair value of these investments from AOCI to the income statement.
NOTE 15. SEGMENTS
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker and is used in resource allocation and performance assessments. Our chief operating decision maker is considered to be our executive leadership team. Our executive leadership team regularly reviews discrete information for our two operating segments, which are determined by the products and services provided: our airline segment and our refinery segment.
Airline Segment
Our airline segment is managed as a single business unit that provides scheduled air transportation for passengers and cargo throughout the U.S. and around the world and includes our loyalty program, as well as other ancillary airline services. This allows us to benefit from an integrated revenue pricing and route network. Our flight equipment forms one fleet, which is deployed through a single route scheduling system. When making resource allocation decisions, our chief operating decision maker evaluates flight profitability data, which considers aircraft type and route economics, but gives no weight to the financial impact of the resource allocation decision on an individual carrier basis. Our objective in making resource allocation decisions is to optimize our consolidated financial results.
Refinery Segment
In 2012, our wholly owned subsidiaries, Monroe Energy, LLC, and MIPC, LLC (collectively, "Monroe"), acquired the Trainer oil refinery and related assets located near Philadelphia, Pennsylvania, as part of our strategy to mitigate the cost of the refining margin reflected in the price of jet fuel. The acquisition included pipelines and terminal assets that allow the refinery to supply jet fuel to our airline operations throughout the Northeastern U.S., including our New York hubs at LaGuardia and JFK.
Our refinery segment operates for the benefit of the airline segment by providing jet fuel to the airline segment from its own production and through jet fuel obtained through agreements with third parties. The refinery's production consists of jet fuel as well as non-jet fuel products. We use several counterparties to exchange the non-jet fuel products produced by the refinery for jet fuel consumed in our airline operations. The gross fair value of the products exchanged under these agreements during the years ended December 31, 2019, 2018 and 2017 was $4.0 billion, $3.6 billion and $3.2 billion, respectively.
Segment Reporting
Segment results are prepared based on our internal accounting methods described below, with reconciliations to consolidated amounts in accordance with GAAP. Our segments are not designed to measure operating income or loss directly related to the products and services included in each segment on a stand-alone basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Airline
|
|
Refinery
|
|
|
Intersegment Sales/Other
|
|
|
Consolidated
|
|
Year Ended December 31, 2019
|
|
|
|
|
|
|
Operating revenue:
|
$
|
46,910
|
|
$
|
5,558
|
|
|
|
|
$
|
47,007
|
|
Sales to airline segment
|
|
|
|
$
|
(1,103)
|
|
(1)
|
|
Exchanged products
|
|
|
|
(3,963)
|
|
(2)
|
|
Sales of refined products
|
|
|
|
(395)
|
|
(3)
|
|
Operating income
|
6,542
|
|
76
|
|
|
|
|
6,618
|
|
Interest expense (income), net
|
327
|
|
(26)
|
|
|
|
|
301
|
|
Depreciation and amortization
|
2,581
|
|
99
|
|
|
(99)
|
|
(4)
|
2,581
|
|
Total assets, end of period
|
62,793
|
|
1,739
|
|
|
|
|
64,532
|
|
Capital expenditures
|
4,880
|
|
56
|
|
|
|
|
4,936
|
|
Year Ended December 31, 2018
|
|
|
|
|
|
|
Operating revenue:
|
$
|
43,890
|
|
$
|
5,458
|
|
|
|
|
$
|
44,438
|
|
Sales to airline segment
|
|
|
|
$
|
(962)
|
|
(1)
|
|
Exchanged products
|
|
|
|
(3,596)
|
|
(2)
|
|
Sales of refined products
|
|
|
|
(352)
|
|
(3)
|
|
Operating income
|
5,206
|
|
58
|
|
|
|
|
5,264
|
|
Interest expense (income), net
|
334
|
|
(23)
|
|
|
|
|
311
|
|
Depreciation and amortization
|
2,329
|
|
67
|
|
|
(67)
|
|
(4)
|
2,329
|
|
Total assets, end of period
|
58,561
|
|
1,705
|
|
|
|
|
60,266
|
|
Capital expenditures
|
5,005
|
|
163
|
|
|
|
|
5,168
|
|
Year Ended December 31, 2017
|
|
|
|
|
|
|
Operating revenue:
|
$
|
40,636
|
|
$
|
5,039
|
|
|
|
|
$
|
41,138
|
|
Sales to airline segment
|
|
|
|
$
|
(886)
|
|
(1)
|
|
Exchanged products
|
|
|
|
(3,240)
|
|
(2)
|
|
Sales of refined products
|
|
|
|
(411)
|
|
(3)
|
|
Operating income
|
5,856
|
|
110
|
|
|
|
|
5,966
|
|
Interest expense (income), net
|
403
|
|
(7)
|
|
|
|
|
396
|
|
Depreciation and amortization
|
2,222
|
|
47
|
|
|
(47)
|
|
(4)
|
2,222
|
|
Total assets, end of period
|
51,544
|
|
2,127
|
|
|
|
|
53,671
|
|
Capital expenditures
|
3,743
|
|
148
|
|
|
|
|
3,891
|
|
(1)Represents transfers, valued on a market price basis, from the refinery to the airline segment for use in airline operations. We determine market price by reference to the market index for the primary delivery location, which is New York Harbor, for jet fuel from the refinery.
(2)Represents value of products delivered under our exchange agreements, as discussed above, determined on a market price basis.
(3)These sales were at or near cost; accordingly, the margin on these sales is de minimis.
(4)Refinery segment operating results, including depreciation and amortization, are included within aircraft fuel and related taxes in our income statement.
NOTE 16. EARNINGS PER SHARE
We calculate basic earnings per share by dividing net income by the weighted average number of common shares outstanding, excluding restricted shares. We calculate diluted earnings per share by dividing net income by the weighted average number of common shares outstanding plus the dilutive effect of outstanding share-based awards, including stock options and restricted stock awards. Antidilutive common stock equivalents excluded from the diluted earnings per share calculation are not material. The following table shows our computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
(in millions, except per share data)
|
2019
|
2018
|
2017
|
Net income
|
$
|
4,767
|
|
$
|
3,935
|
|
$
|
3,205
|
|
|
|
|
|
Basic weighted average shares outstanding
|
651
|
|
691
|
|
720
|
|
Dilutive effect of share-based awards
|
2
|
|
3
|
|
3
|
|
Diluted weighted average shares outstanding
|
653
|
|
694
|
|
723
|
|
|
|
|
|
Basic earnings per share
|
$
|
7.32
|
|
$
|
5.69
|
|
$
|
4.45
|
|
Diluted earnings per share
|
$
|
7.30
|
|
$
|
5.67
|
|
$
|
4.43
|
|
NOTE 17. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes our unaudited results of operations on a quarterly basis. The quarterly earnings per share amounts for a year will not add to the earnings per share for that year due to the weighting of shares used in calculating per share data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended,
|
|
|
|
(in millions, except per share data)
|
March 31
|
June 30
|
September 30
|
December 31
|
2019
|
|
|
|
|
Operating revenue
|
$
|
10,472
|
|
$
|
12,536
|
|
$
|
12,560
|
|
$
|
11,439
|
|
Operating income
|
1,020
|
|
2,128
|
|
2,071
|
|
1,399
|
|
Net income
|
730
|
|
1,443
|
|
1,495
|
|
1,099
|
|
Basic earnings per share
|
$
|
1.10
|
|
$
|
2.22
|
|
$
|
2.32
|
|
$
|
1.71
|
|
Diluted earnings per share
|
$
|
1.09
|
|
$
|
2.21
|
|
$
|
2.31
|
|
$
|
1.71
|
|
2018
|
|
|
|
|
Operating revenue
|
$
|
9,968
|
|
$
|
11,775
|
|
$
|
11,953
|
|
$
|
10,742
|
|
Operating income
|
844
|
|
1,684
|
|
1,645
|
|
1,090
|
|
Net income
|
557
|
|
1,036
|
|
1,322
|
|
1,019
|
|
Basic earnings per share
|
$
|
0.79
|
|
$
|
1.49
|
|
$
|
1.93
|
|
$
|
1.50
|
|
Diluted earnings per share
|
$
|
0.79
|
|
$
|
1.49
|
|
$
|
1.92
|
|
$
|
1.49
|
|