filings.toolsItem 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Highlights - 2016 Compared to 2015
Our pre-tax income for 2016 was $6.6 billion, representing a $521 million decrease compared to the prior year as lower passenger revenue and higher salaries and related costs offset the benefits of lower fuel prices. Pre-tax income, adjusted for special items (a non-GAAP financial measure) was $6.1 billion, an increase of $206 million, or 3.5%. Special items in 2016 were related to fuel hedge MTM adjustments and settlements and Virgin Atlantic MTM adjustments, which totaled $450 million and $115 million, respectively.
Revenue. Our operating revenue decreased $1.1 billion, or 2.6%, and passenger revenue per available seat mile ("PRASM") decreased 4.9% on 2.1% higher capacity compared to 2015. The decrease in PRASM was largely driven by competitive pressure in the current low fuel price environment and the impact of U.S. dollar strength on tickets sold in international markets, which are predominantly priced in local currency.
Operating Expense. Total operating expense decreased $215 million and our consolidated operating cost per available seat mile ("CASM") decreased 2.6% to 12.98 cents compared to 2015, primarily due to lower fuel prices, partially offset by higher salaries and related costs. During 2016, Brent crude oil averaged $44 per barrel compared to the average of nearly $52 per barrel during 2015. Salaries and related costs were higher as a result of the pay rate increase for pilots resulting from a new pilot contract ratified in the December 2016 quarter that was retroactive to January 1, 2016 and pay rate increases for eligible merit, ground and flight attendant employees effective in the December 2015 quarter.
Non-fuel unit costs ("CASM-Ex, including profit sharing" a non-GAAP financial measure) increased 3.7% to 10.13 cents due to the pay rate increases discussed above and other product and service investments, which were partially offset by productivity gains from our fleet, technology and supply chain initiatives.
The non-GAAP financial measures for pre-tax income, adjusted for special items, and CASM-Ex, used above and adjusted net debt, used below, are defined and reconciled in "Supplemental Information" below.
Company Initiatives
Our employees are an important part of Delta's success and underpin the quality, customer service and operational reliability that is core to Delta's brand. During the December 2016 quarter, Delta pilots ratified a new contract that included an 18% pay rate increase that was retroactive to January 1, 2016. This increase for pilots followed pay rate increases for the majority of other employees during the December 2015 quarter. In addition, our profit sharing payment to employees in February 2017 will be the third consecutive annual profit sharing payment of more than one billion dollars. We have paid eligible employees more than $5 billion in profit sharing since the program started in 2007. We expect to continue to pay our employees industry leading total compensation because sharing the success that our employees help produce is core to Delta's culture and important to providing the best travel experience for our customers and producing solid results for shareholders.
Running a reliable, customer-focused airline has produced a solid return on invested capital ("ROIC", see calculation in "Supplemental Information" below) of 26.1% in 2016, despite the pressure from employee investments discussed above. This financial performance has allowed us to improve our balance sheet by reducing debt and capital lease obligations to $7.3 billion and adjusted net debt (a non-GAAP financial measure) to $6.1 billion, increase funding of our defined benefit pension plans and increase the amount of capital returned to our shareholders. We are focused on delivering additional value for shareholders in the future through revenue growth, cost productivity and prudent deployment of cash flows.
Driving Revenue Growth
Operational Reliability
A key driver of our revenue growth is higher customer satisfaction resulting from strong operational reliability. We have significantly invested in our business since 2010 to improve our operational performance, which consistently ranks first among the major U.S. carriers. During 2016, we operated 241 days with zero mainline canceled flights, a nearly 50% improvement over our 2015 performance. In addition, our reported completion factor of 99.6% and on-time arrival rate of nearly 87% places us at the top of the major global U.S. carriers. This operational excellence resulted in consistent increases in our domestic net promoter score, including our highest reported score of 44% in November.
Global Strategy
We continue to expand our global network by strengthening our presence in major and developing markets around the world in an effort to increase and diversify our network into high revenue and high growth markets. The growth of our global presence will enable customers to seamlessly connect to more places while enjoying a consistent, high-quality travel experience. We are deploying this strategy through investments and relationships in the Atlantic, Latin America and the Pacific.
Atlantic. In 2017, we plan to build on our presence in our strategically advantaged hubs in London, Paris and Amsterdam, while de-emphasizing higher Europe point-of-sale markets. Alongside our 49% equity investment in Virgin Atlantic, we have an antitrust immunized joint venture with the U.K.-based carrier. This joint venture has significantly improved our presence in London, one of the largest revenue markets from the U.S., while also enhancing our transatlantic network including our existing joint venture relationship with Air France-KLM and Alitalia. Our Atlantic senior decision-making functions are located in Europe for close coordination with our joint venture airlines.
Latin America. We are focused on maximizing the value of our relationships with other carriers in Latin America while deriving value from the recent investments in our network, product and service.
During 2015, we announced our intention to create an antitrust immunized commercial joint venture with Aeroméxico and to acquire additional shares of the capital stock of Grupo Aeroméxico through a cash tender offer, both subject to regulatory approvals. The Mexican and U.S. regulators approved antitrust immunity for the joint venture during 2016, subject to certain conditions. Delta and Aeroméxico have accepted the conditions and are in the process of implementing the necessary actions in order to satisfy the conditions. We expect both the joint venture to be implemented and the tender offer to be completed in the first half of 2017. As a result of the tender offer, when combined with our current holdings and derivative positions, we would own up to 49% of the outstanding capital stock of Grupo Aeroméxico.
We also own 9.5% of GOL's outstanding capital stock as part of our long-term strategy to strengthen the opportunity we see in Brazil. In conjunction with our investment, we and GOL have extended our existing commercial agreements.
Pacific. We continue to execute the multi-year restructuring of our Pacific operations by reorienting our network from Tokyo-Narita to Shanghai, through our partnership with China Eastern Airlines, and Seoul, through our partnership with Korean Air. During 2016, the U.S. Department of Transportation announced that we have been awarded two daytime slot pairs at Tokyo's Haneda Airport (from Los Angeles and Minneapolis). We commenced these routes and canceled other routes in the Pacific region during the December 2016 quarter. Concurrent with these changes, we are increasing our presence in China, the largest transpacific market from the U.S. We hold a 3.2% stake in China Eastern and are expanding our relationship through co-location in the same terminal at Shanghai’s Pudong airport for a seamless travel experience. China Eastern is one of the largest airlines in China with a route network covering more than 200 destinations in over 25 countries. In addition, we are working to expand our trans-Pacific partnership with Korean Air, including expanded codeshare offerings and the commencement of a daily, non-stop flight between Atlanta and Seoul during the June 2017 quarter.
Cost Productivity
Over the long-term, we continue to focus on maintaining the rate of non-fuel unit cost growth at less than 2% annually. We continue to leverage our expertise in supply chain and aircraft maintenance to improve our productivity. Additionally, we are investing in technology projects to improve the customer experience in a cost-efficient manner.
Prudent Deployment of Cash Flows
As part of our previously announced long-term goals, we target $8-9 billion in annual operating cash flow and $4-5 billion in annual free cash flow. We use approximately 50% of our operating cash flow to reinvest in the business for long-term growth opportunities. The remaining free cash flow is used to further strengthen the balance sheet to reduce debt levels, make incremental pension contributions and return capital to shareholders through dividends and share repurchases.
Investing in our Facilities
We are working closely with airport authorities throughout our network to enhance facilities in order to both improve our operational efficiency and to better serve our customers. These efforts include, but are not limited to, future airport renovation and redevelopment projects at New York-LaGuardia airport, Los Angeles International Airport ("LAX") and Hartsfield-Jackson Atlanta International Airport and the recently-completed redevelopment of New York-JFK airport. In addition, we are modernizing our Sky Clubs, including the recent openings of flagship locations in Atlanta and Seattle, and improving the food, beverage and services offered throughout the Sky Club network. Finally, we continue to make significant investments in technologies that improve the customer experience including delta.com, mobile device applications, check-in kiosks, employee customer service applications and airport information displays.
Strengthened Balance Sheet
A key tenet of our strategy is to operate the company with investment grade financial metrics. Since beginning our balance sheet improvement strategy in 2009, we have reduced our adjusted net debt by nearly $11 billion, which has significantly reduced our annual interest expense. As a result of these efforts, we have received upgrades to our credit ratings by all three major ratings agencies, including investment grade ratings from Moody's and Fitch. In addition, because we have a significant net underfunded pension liability, we have been making pension contributions above the minimum amount required. Our goal remains to achieve at least an 80% funded status for the pension plan by 2020.
Increased Capital Returns to Owners
While we have been reducing our debt levels and investing in the business, we have been increasing our capital returns to shareholders, returning a total of $3.1 billion in 2016 through dividends and share repurchases. Since first implementing our quarterly dividend in 2013, we have increased the dividend per share by 50% annually and paid $1.2 billion in total dividends, including $509 million in 2016. Through dividends and share repurchases, we have returned nearly $7.4 billion to shareholders since 2013, while reducing outstanding shares by approximately 14% compared to the beginning of 2013.
Results of Operations - 2016 Compared to 2015
Operating Revenue
| Year Ended December 31, | Increase (Decrease) | % Increase (Decrease) | |||||||||
| (in millions) | 2016 | 2015 | |||||||||
| Passenger: | |||||||||||
| Mainline | $ | 28,105 | $ | 28,898 | $ | (793 | ) | (2.7 | )% | ||
| Regional carriers | 5,672 | 5,884 | (212 | ) | (3.6 | )% | |||||
| Total passenger revenue | 33,777 | 34,782 | (1,005 | ) | (2.9 | )% | |||||
| Cargo | 668 | 813 | (145 | ) | (17.8 | )% | |||||
| Other | 5,194 | 5,109 | 85 | 1.7 | % | ||||||
| Total operating revenue | $ | 39,639 | $ | 40,704 | $ | (1,065 | ) | (2.6 | )% |
Passenger Revenue
| Increase (Decrease) vs. Year Ended December 31, 2015 | ||||||||||||||||
| (in millions) | Year Ended December 31, 2016 | Passenger Revenue | RPMs (Traffic) | ASMs (Capacity) | Passenger Mile Yield | PRASM | Load Factor | |||||||||
| Mainline | $ | 17,932 | — | % | 4.3 | % | 5.2 | % | (4.1 | )% | (5.0 | )% | (0.8 | ) | pts | |
| Regional carriers | 5,672 | (3.6 | )% | 0.6 | % | 1.0 | % | (4.2 | )% | (4.6 | )% | (0.3 | ) | pts | ||
| Domestic | 23,604 | (0.9 | )% | 3.6 | % | 4.5 | % | (4.4 | )% | (5.2 | )% | (0.6 | ) | pts | ||
| Atlantic | 5,185 | (6.5 | )% | (1.7 | )% | 0.3 | % | (4.9 | )% | (6.8 | )% | (1.7 | ) | pts | ||
| Pacific | 2,616 | (12.8 | )% | (4.6 | )% | (6.6 | )% | (8.6 | )% | (6.7 | )% | 1.8 | pts | |||
| Latin America | 2,372 | (1.8 | )% | 3.5 | % | 0.8 | % | (5.1 | )% | (2.6 | )% | 2.3 | pts | |||
| Total | $ | 33,777 | (2.9 | )% | 1.7 | % | 2.1 | % | (4.5 | )% | (4.9 | )% | (0.3 | ) | pts |
Passenger revenue decreased $1.0 billion over the prior year. PRASM decreased 4.9% and passenger mile yield decreased 4.5% on 2.1% higher capacity. Load factor was 0.3 points lower than the prior year at 84.6%.
Unit revenues of the domestic region decreased 5.2%, resulting from weakness in the close-in yield environment during most of the year despite strong volume.
Revenues related to our international regions decreased 7.2% year-over-year primarily due to yield declines resulting from imbalances between supply and demand, principally in the Atlantic region and China, the impact of foreign currency fluctuations, continued reductions in international fuel surcharges and economic challenges in certain regions.
In the Atlantic, the unit revenue decline predominantly resulted from lower yields driven by industry capacity growth
outpacing passenger demand and the strength of the U.S. dollar. In core European markets, U.S. point-of-sale demand was strong and recovered quickly following the Brussels airport terrorist attack in March. However, Europe point-of sale demand has been soft largely due to the impact of weaker Euro exchange rates. In 2017, we will continue to build on our presence in our strategically advantaged hubs in London, Paris and Amsterdam.
Unit revenue declines in the Pacific compared to 2015 primarily resulted from lower yen hedge gains, lower international fuel surcharges and yield declines resulting from industry capacity growth between the U.S. and China. We expect the significant capacity growth over the last three years in the U.S. to Shanghai market to slow in 2017 as both Chinese and U.S. carriers reach their respective frequency caps. During the September 2016 quarter, the U.S. Department of Transportation announced that we have been awarded two daytime slot pairs at Tokyo's Haneda Airport (from Los Angeles and Minneapolis). We commenced these routes and canceled other routes in the Pacific region during the December 2016 quarter as part of our ongoing optimization of the Pacific region.
Although Latin America unit revenues declined compared to 2015, unit revenues improved in the second half of 2016 compared to the second half of 2015. We expect these positive trends to continue in 2017 as we continue to invest in higher performing Mexican business markets. An Open Skies agreement between the U.S. and Mexico took effect in August 2016 and our application for antitrust immunity with Aeroméxico was approved in the December 2016 quarter, which should continue to strengthen our performance in the important Mexican business markets.
Cargo Revenue
Cargo revenue decreased $145 million, or 17.8%, primarily due to weaker international demand compared to the prior year.
Other Revenue
| Year Ended December 31, | Increase (Decrease) | % Increase (Decrease) | |||||||||
| (in millions) | 2016 | 2015 | |||||||||
| Loyalty programs | $ | 1,782 | $ | 1,584 | $ | 198 | 12.5 | % | |||
| Administrative fees, club and on-board sales | 1,205 | 1,261 | (56 | ) | (4.4 | )% | |||||
| Ancillary businesses and refinery(1) | 1,129 | 1,158 | (29 | ) | (2.5 | )% | |||||
| Baggage fees | 881 | 885 | (4 | ) | (0.5 | )% | |||||
| Other | 197 | 221 | (24 | ) | (10.9 | )% | |||||
| Total other revenue | $ | 5,194 | $ | 5,109 | $ | 85 | 1.7 | % |
| (1) | Ancillary businesses and refinery include aircraft maintenance and staffing services we provide to third parties, our vacation wholesale operations and refinery sales to third parties. These revenues are not related to the generation of a seat mile. |
Other revenue increased $85 million, or 1.7%, in 2016 primarily due to increased loyalty programs revenues from our co-brand credit card partnership with American Express resulting from new credit card accounts.
Operating Expense
| Year Ended December 31, | Increase (Decrease) | % Increase (Decrease) | |||||||||
| (in millions) | 2016 | 2015 | |||||||||
| Salaries and related costs | $ | 10,034 | $ | 8,776 | $ | 1,258 | 14.3 | % | |||
| Aircraft fuel and related taxes | 5,133 | 6,544 | (1,411 | ) | (21.6 | )% | |||||
| Regional carriers expense | 4,311 | 4,241 | 70 | 1.7 | % | ||||||
| Contracted services | 1,991 | 1,848 | 143 | 7.7 | % | ||||||
| Depreciation and amortization | 1,902 | 1,835 | 67 | 3.7 | % | ||||||
| Aircraft maintenance materials and outside repairs | 1,823 | 1,848 | (25 | ) | (1.4 | )% | |||||
| Passenger commissions and other selling expenses | 1,710 | 1,672 | 38 | 2.3 | % | ||||||
| Landing fees and other rents | 1,490 | 1,493 | (3 | ) | (0.2 | )% | |||||
| Profit sharing | 1,115 | 1,490 | (375 | ) | (25.2 | )% | |||||
| Passenger service | 907 | 872 | 35 | 4.0 | % | ||||||
| Aircraft rent | 285 | 250 | 35 | 14.0 | % | ||||||
| Restructuring and other | — | 35 | (35 | ) | NM(1) | ||||||
| Other | 1,986 | 1,998 | (12 | ) | (0.6 | )% | |||||
| Total operating expense | $ | 32,687 | $ | 32,902 | $ | (215 | ) | (0.7 | )% |
| (1) | Due to the nature of amounts recorded within restructuring and other, a year-over-year comparison is not meaningful. For a discussion of charges recorded in restructuring and other, see Note 14 of the Notes to the Consolidated Financial Statements. |
Salaries and Related Costs. The increase in salaries and related costs was principally due to pay rate increases given to eligible employees which includes an 18% pay rate increase for pilots resulting from a new pilot contract ratified in the December 2016 quarter that was retroactive to January 1, 2016. Additionally, in the December 2015 quarter, base pay rates increased 14.5% for eligible merit, ground and flight attendant employees in conjunction with changes in their profit sharing program.
Aircraft Fuel and Related Taxes. Including our regional carriers, fuel expense decreased $1.6 billion compared to the prior year due to an 18% decrease in the market price per gallon of fuel and lower fuel hedge losses, partially offset by a loss from our refinery segment in the current year compared to a profit in the prior year and a 0.7% increase in consumption. The table below presents fuel expense, including our regional carriers:
| Year Ended December 31, | (Decrease) | % (Decrease) | |||||||||
| (in millions) | 2016 | 2015 | |||||||||
| Aircraft fuel and related taxes(1) | $ | 5,133 | $ | 6,544 | $ | (1,411 | ) | ||||
| Aircraft fuel and related taxes included within regional carriers expense | 852 | 1,035 | (183 | ) | |||||||
| Total fuel expense | $ | 5,985 | $ | 7,579 | $ | (1,594 | ) | (21.0 | )% |
| (1) | Includes the impact of fuel hedging and refinery results described further in the table below. |
The table below shows the impact of hedging and the refinery on fuel expense and average price per gallon, adjusted (non-GAAP financial measures):
| Average Price Per Gallon | |||||||||||||||||||
| Year Ended December 31, | Increase (Decrease) | Year Ended December 31, | Increase (Decrease) | ||||||||||||||||
| (in millions, except per gallon data) | 2016 | 2015 | 2016 | 2015 | |||||||||||||||
| Fuel purchase cost(1) | $ | 5,579 | $ | 6,934 | $ | (1,355 | ) | $ | 1.39 | $ | 1.74 | $ | (0.35 | ) | |||||
| Airline segment fuel hedge losses(2) | 281 | 935 | (654 | ) | 0.07 | 0.23 | (0.16 | ) | |||||||||||
| Refinery segment impact(2) | 125 | (290 | ) | 415 | 0.03 | (0.07 | ) | 0.10 | |||||||||||
| Total fuel expense | $ | 5,985 | $ | 7,579 | $ | (1,594 | ) | $ | 1.49 | $ | 1.90 | $ | (0.41 | ) | |||||
| MTM adjustments and settlements(3) | 450 | 1,301 | (851 | ) | 0.11 | 0.33 | (0.22 | ) | |||||||||||
| Total fuel expense, adjusted | $ | 6,435 | $ | 8,880 | $ | (2,445 | ) | $ | 1.60 | $ | 2.23 | $ | (0.63 | ) |
| (1) | Market price for jet fuel at airport locations, including related taxes and transportation costs. |
| (2) | Includes the impact of pricing arrangements between the airline and refinery segments with respect to the refinery's inventory price risk. For additional information regarding the refinery segment impact, see "Refinery Segment" below. |
| (3) | MTM adjustments and settlements include the effects of the derivative transactions discussed in Note 4 of the Notes to the Consolidated Financial Statements. For additional information and the reason for adjusting fuel expense, see "Supplemental Information" below. |
Regional Carriers Expense. The increase in regional carriers expense was primarily due to increases in aircraft maintenance and scheduled contract carrier rate escalations, partially offset by lower fuel cost from the decrease in the market price of fuel.
Contracted Services. The increase in contracted services expense predominantly related to costs associated with the 2.1% increase in capacity and additional temporary staffing.
Profit Sharing. The decrease in profit sharing was primarily due to an adjustment to the profit sharing calculation. 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. Beginning with 2016 (to be paid out in 2017), the profit sharing program for merit, ground and flight attendant employees was adjusted to pay 10% of annual pre-tax profit (as defined by the terms of the program) and, if we exceed our prior-year results, the program will pay 20% of the year-over-year increase in pre-tax profit to eligible employees. For years prior to 2016, our profit sharing program paid 10% to all eligible employees for the first $2.5 billion of annual profit and 20% of annual profit above $2.5 billion. The profit sharing program for pilots remains unchanged from the prior year and will continue under its current terms.
Results of Operations - 2015 Compared to 2014
Operating Revenue
| Year Ended December 31, | Increase (Decrease) | % Increase (Decrease) | |||||||||
| (in millions) | 2015 | 2014 | |||||||||
| Passenger: | |||||||||||
| Mainline | $ | 28,898 | $ | 28,688 | $ | 210 | 0.7 | % | |||
| Regional carriers | 5,884 | 6,266 | (382 | ) | (6.1 | )% | |||||
| Total passenger revenue | 34,782 | 34,954 | (172 | ) | (0.5 | )% | |||||
| Cargo | 813 | 934 | (121 | ) | (13.0 | )% | |||||
| Other | 5,109 | 4,474 | 635 | 14.2 | % | ||||||
| Total operating revenue | $ | 40,704 | $ | 40,362 | $ | 342 | 0.8 | % |
Passenger Revenue
| Increase (Decrease) vs. Year Ended December 31, 2014 | ||||||||||||||||
| (in millions) | Year Ended December 31, 2015 | Passenger Revenue | RPMs (Traffic) | ASMs (Capacity) | Passenger Mile Yield | PRASM | Load Factor | |||||||||
| Mainline | $ | 17,933 | 5.4 | % | 6.7 | % | 6.1 | % | (1.2 | )% | (0.6 | )% | 0.5 | pts | ||
| Regional carriers | 5,884 | (6.1 | )% | (2.2 | )% | (4.0 | )% | (4.0 | )% | (2.1 | )% | 1.5 | pts | |||
| Domestic | 23,817 | 2.3 | % | 5.1 | % | 4.1 | % | (2.6 | )% | (1.8 | )% | 0.8 | pts | |||
| Atlantic | 5,548 | (4.8 | )% | 0.6 | % | 3.2 | % | (5.3 | )% | (7.7 | )% | (2.1 | ) | pts | ||
| Pacific | 3,002 | (12.2 | )% | (2.3 | )% | (5.0 | )% | (10.2 | )% | (7.6 | )% | 2.3 | pts | |||
| Latin America | 2,415 | (0.4 | )% | 5.1 | % | 5.7 | % | (5.3 | )% | (5.8 | )% | (0.5 | ) | pts | ||
| Total consolidated | $ | 34,782 | (0.5 | )% | 3.3 | % | 3.0 | % | (3.7 | )% | (3.3 | )% | 0.2 | pts |
Passenger revenue decreased $172 million over the prior year. PRASM decreased 3.3% and passenger mile yield decreased 3.7% on 3.0% higher capacity. Load factor was 0.2 points higher than the prior year at 84.9%.
Unit revenues of the mainline domestic region decreased 0.6%, resulting from weaker yields in certain markets, which were nearly offset by the strong performance in Atlanta, New York, Seattle and Los Angeles.
Regional carriers passenger revenue decreased 6.1% on a 4.0% reduction in capacity. During 2015, we removed thirty 50-seat regional aircraft as part of our strategy to restructure our domestic fleet.
Revenues related to our international regions decreased 6.0% year-over-year primarily due to the impact of the strong U.S. dollar and reductions in international fuel surcharges. These challenges were addressed through capacity reductions implemented in the December 2015 quarter.
In the Atlantic region, unit revenue declines in Africa, the Middle East and Russia were partially offset by strength in core European markets. Unit revenue declines in the Pacific primarily resulted from the strength of the U.S. dollar and lower international fuel surcharges. We continued to optimize the Pacific region in order to improve margins by reducing our winter capacity, including the cancellation of our Seattle to Tokyo-Haneda route in the June 2015 quarter and downgauging via the continued retirement of the B-747-400 fleet during the second half of 2015. In addition, we made a strategic investment in, and established a long-term commercial relationship with, China Eastern. Latin America saw capacity growth of 5.7%, the majority of which occurred during the first half of 2015. In the December 2015 quarter, we continued to invest in higher performing markets such as Mexico and the Caribbean, while reducing capacity in Brazil due to its challenging economic environment.
Other Revenue
| Year Ended December 31, | Increase (Decrease) | % Increase (Decrease) | |||||||||
| (in millions) | 2015 | 2014 | |||||||||
| Loyalty programs | $ | 1,584 | $ | 1,309 | $ | 275 | 21.0 | % | |||
| Administrative fees, club and on-board sales | 1,261 | 1,194 | 67 | 5.6 | % | ||||||
| Ancillary businesses and refinery(1) | 1,158 | 880 | 278 | 31.6 | % | ||||||
| Baggage fees | 885 | 863 | 22 | 2.5 | % | ||||||
| Other | 221 | 228 | (7 | ) | (3.1 | )% | |||||
| Total other revenue | $ | 5,109 | $ | 4,474 | $ | 635 | 14.2 | % |
| (1) | Ancillary businesses and refinery include aircraft maintenance and staffing services we provide to third parties, our vacation wholesale operations and refinery sales to third parties. These revenues are not related to the generation of a seat mile. |
Other revenue increased $635 million, or 14.2%, primarily due to loyalty program revenues including our agreement with American Express, third-party refinery sales and maintenance sales to third parties by our MRO services business.
Operating Expense
| Year Ended December 31, | Increase (Decrease) | % Increase (Decrease) | |||||||||
| (in millions) | 2015 | 2014 | |||||||||
| Salaries and related costs | $ | 8,776 | $ | 8,120 | $ | 656 | 8.1 | % | |||
| Aircraft fuel and related taxes | 6,544 | 11,668 | (5,124 | ) | (43.9 | )% | |||||
| Regional carriers expense | 4,241 | 5,237 | (996 | ) | (19.0 | )% | |||||
| Aircraft maintenance materials and outside repairs | 1,848 | 1,828 | 20 | 1.1 | % | ||||||
| Contracted services | 1,848 | 1,749 | 99 | 5.7 | % | ||||||
| Depreciation and amortization | 1,835 | 1,771 | 64 | 3.6 | % | ||||||
| Passenger commissions and other selling expenses | 1,672 | 1,700 | (28 | ) | (1.6 | )% | |||||
| Landing fees and other rents | 1,493 | 1,442 | 51 | 3.5 | % | ||||||
| Profit sharing | 1,490 | 1,085 | 405 | 37.3 | % | ||||||
| Passenger service | 872 | 810 | 62 | 7.7 | % | ||||||
| Aircraft rent | 250 | 233 | 17 | 7.3 | % | ||||||
| Restructuring and other | 35 | 716 | (681 | ) | NM(1) | ||||||
| Other | 1,998 | 1,797 | 201 | 11.2 | % | ||||||
| Total operating expense | $ | 32,902 | $ | 38,156 | $ | (5,254 | ) | (13.8 | )% |
| (1) | Due to the nature of amounts recorded within restructuring and other, a year-over-year comparison is not meaningful. For a discussion of charges recorded in restructuring and other, see Note 14 of the Notes to the Consolidated Financial Statements. |
Salaries and Related Costs. The increase in salaries and related costs was primarily due to higher pilot and flight attendant block hours and pay rate increases implemented in both the first half of 2015 and December 2015. Base pay rates increased 14.5% for eligible merit, ground and flight attendant employees effective December 1, 2015.
Aircraft Fuel and Related Taxes. Including our regional carriers, fuel expense decreased $5.9 billion compared to the prior year due to a 43.5% decrease in the market price per gallon of fuel, an increase in Monroe's profitability and reduced hedge losses, partially offset by a 2.4% increase in consumption. The table below presents fuel expense, including our regional carriers:
| Year Ended December 31, | (Decrease) | % (Decrease) | |||||||||
| (in millions) | 2015 | 2014 | |||||||||
| Aircraft fuel and related taxes(1) | $ | 6,544 | $ | 11,668 | $ | (5,124 | ) | ||||
| Aircraft fuel and related taxes included within regional carriers expense | 1,035 | 1,844 | (809 | ) | |||||||
| Total fuel expense | $ | 7,579 | $ | 13,512 | $ | (5,933 | ) | (43.9 | )% |
| (1) | Includes the impact of fuel hedging and refinery results described further in the table below. |
The table below shows the impact of hedging and the refinery on fuel expense and average price per gallon, adjusted:
| Average Price Per Gallon | |||||||||||||||||||
| Year Ended December 31, | Increase (Decrease) | Year Ended December 31, | Increase (Decrease) | ||||||||||||||||
| (in millions, except per gallon data) | 2015 | 2014 | 2015 | 2014 | |||||||||||||||
| Fuel purchase cost(1) | $ | 6,934 | $ | 11,350 | $ | (4,416 | ) | $ | 1.74 | $ | 2.91 | $ | (1.17 | ) | |||||
| Airline segment fuel hedge losses(2) | 935 | 2,258 | (1,323 | ) | 0.23 | 0.58 | (0.35 | ) | |||||||||||
| Refinery segment impact(2) | (290 | ) | (96 | ) | (194 | ) | (0.07 | ) | (0.02 | ) | (0.05 | ) | |||||||
| Total fuel expense | $ | 7,579 | $ | 13,512 | $ | (5,933 | ) | $ | 1.90 | $ | 3.47 | $ | (1.57 | ) | |||||
| MTM adjustments and settlements(3) | 1,301 | (2,346 | ) | 3,647 | 0.33 | (0.60 | ) | 0.93 | |||||||||||
| Total fuel expense, adjusted | $ | 8,880 | $ | 11,166 | $ | (2,286 | ) | $ | 2.23 | $ | 2.87 | $ | (0.64 | ) |
| (1) | Market price for jet fuel at airport locations, including related taxes and transportation costs. |
| (2) | Includes the impact of pricing arrangements between the airline and refinery segments with respect to the refinery's inventory price risk. For additional information regarding the refinery segment impact, see "Refinery Segment" below. |
| (3) | MTM adjustments and settlements include the effects of the derivative transactions discussed in Note 4 of the Notes to the Consolidated Financial Statements. For additional information and the reason for adjusting fuel expense, see "Supplemental Information" below. |
Regional Carriers Expense. The reduction in regional carriers expense was primarily due to lower fuel cost from a decrease in the price per gallon of fuel, lower capacity and reduced maintenance expenses. During 2015, we removed thirty 50-seat
regional aircraft as part of our strategy to restructure our domestic fleet.
Contracted Services. The increase in contracted services expense predominantly related to costs associated with the 3.0% increase in capacity and additional temporary staffing.
Depreciation and Amortization. Depreciation and amortization expense increased year-over-year primarily due to investments in new A330-300, B-737-900ER and CRJ-900 aircraft and aircraft modifications that upgraded aircraft interiors and enhanced our product offering.
Landing Fees and Other Rents. Landing fees and other rents increased principally due to an increased number of departures and higher rental rates.
Profit Sharing. The increase in profit sharing was driven by an increase in full year pre-tax income compared to the prior year. 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 years prior to 2016, our profit sharing program paid 10% to all employees for the first $2.5 billion of annual profit and 20% of annual profit above $2.5 billion.
Beginning with 2016 pre-tax profit (to be paid out in 2017), the profit sharing program for merit, ground and flight attendant employees has been adjusted to pay 10% of annual pre-tax profit (as defined by the terms of the program) and, if we exceed our prior-year results, the program will pay 20% of the year-over-year increase in pre-tax profit to eligible employees. The profit sharing program for pilots remained unchanged and will continue in 2016 under its terms.
Passenger Service. Passenger service expense includes the costs for onboard food and beverage, cleaning and supplies. This expense increased year-over-year primarily due to costs associated with enhancements to our onboard product offering and the 3.3% increase in traffic.
Other. Other operating expense increased primarily due to costs associated with sales of non-jet fuel products to third parties by our oil refinery.
Non-Operating Results
| Year Ended December 31, | Favorable | |||||||||||||||
| (in millions) | 2016 | 2015 | 2014 | 2016 vs. 2015 | 2015 vs. 2014 | |||||||||||
| Interest expense, net | $ | (388 | ) | $ | (481 | ) | $ | (650 | ) | $ | 93 | $ | 169 | |||
| Miscellaneous, net | 72 | (164 | ) | (484 | ) | 236 | 320 | |||||||||
| Total non-operating expense, net | $ | (316 | ) | $ | (645 | ) | $ | (1,134 | ) | $ | 329 | $ | 489 |
The decline in interest expense, net in both comparative periods resulted from reduced levels of debt and from the refinancing of debt obligations at lower interest rates. The principal amount of debt and capital leases has declined from $11.7 billion at the beginning of 2014 to $7.4 billion at December 31, 2016.
Miscellaneous, net was favorable primarily due to lower foreign exchange losses compared to 2015. Also contributing to the increase is our proportionate share of earnings from our equity investment in Virgin Atlantic. The increase from Virgin Atlantic primarily resulted from year-over-year profit and improvements in MTM adjustments on fuel hedges. In 2015, miscellaneous, net was favorable primarily due to a reduction in debt extinguishment losses together with year-over-year profits and improvements in MTM adjustments on fuel hedges from Virgin Atlantic compared to 2014.
Income Taxes
Our effective tax rate for 2016 was 34.1%. We expect our annual effective tax rate to be between 34% and 35% for 2017. The reduction in our rate from prior years was primarily related to differences in our global tax rates. At December 31, 2016, we had approximately $5.9 billion of U.S. federal pre-tax net operating loss carryforwards, which do not begin to expire until 2027. Accordingly, we believe we will not pay any cash federal income taxes before 2019. See Note 10 of the Notes to the Consolidated Financial Statements for more information.
Refinery Segment
The refinery primarily produces gasoline, diesel and jet fuel. Monroe exchanges the non-jet fuel products the refinery produces with third parties for jet fuel consumed in our airline operations. The jet fuel produced and procured through exchanging gasoline and diesel fuel produced by the refinery provided approximately 175,000 barrels per day for use in our airline operations during 2016. We believe that the jet fuel supply resulting from the refinery's operation has contributed to the reduction in the market price of jet fuel, and thus lowered our cost of jet fuel compared to what it otherwise would have been.
The refinery recorded operating revenues of $3.8 billion in 2016, compared to $4.7 billion in 2015. Operating revenues in 2016 were primarily composed of $2.7 billion of non-jet fuel products exchanged with third parties to procure jet fuel and $695 million of sales of jet fuel to the airline segment. Refinery revenues decreased compared to the prior year due to an oversupply of crude in the market, which drove lower pricing of refined products throughout the oil industry.
The refinery recorded a loss of $125 million in 2016, compared to profits of $290 million and $96 million recorded in 2015 and 2014, respectively. The refinery's loss in 2016, compared to profits in the preceding two years, was primarily due to higher RINs costs and lower distillate crack spreads.
A refinery is subject to annual EPA requirements to blend renewable fuels into the gasoline and on-road diesel fuel it produces. Alternatively, a refinery may purchase renewable energy credits, called RINs, from third parties in the secondary market. Because the refinery, operated by Monroe, does not blend renewable fuels, it has purchased its entire RINs requirement in the secondary market. We recognized $171 million, $75 million and $111 million of expense related to the RINs requirement in 2016, 2015 and 2014, respectively. RINs expense increased during 2016 primarily as a result of a significant increase in the unit cost of RINs from approximately 58 cents per RIN during 2015 to 84 cents per RIN during 2016.
For more information regarding the refinery's results, see Note 13 of the Notes to the Consolidated Financial Statements.
Financial Condition and Liquidity
We expect to meet our cash needs for the next 12 months from cash flows from operations, cash and cash equivalents, short-term investments and financing arrangements. As of December 31, 2016, we had $5.7 billion in unrestricted liquidity, consisting of $3.2 billion in cash and cash equivalents and short-term investments and $2.5 billion in undrawn revolving credit facilities. During 2016, we generated $7.2 billion in cash from operating activities, which we used to fund capital expenditures of $3.4 billion, return $3.1 billion to shareholders and reduce the principal on our debt and capital lease obligations by $1.3 billion.
Sources of Liquidity
Operating Activities
Cash flows from operating activities continue to provide our primary source of liquidity. We generated positive cash flows from operations of $7.2 billion in 2016, $7.9 billion in 2015 and $4.9 billion in 2014. We also expect to generate positive cash flows from operations in 2017.
Our operating cash flows can be impacted by the following factors:
Seasonality of Advance Ticket Sales. We sell tickets for air travel in advance of the customer's travel date. When we receive a cash payment at the time of sale, we record the cash received on advance sales as deferred revenue in air traffic liability. The air traffic liability increases during the winter and spring as advanced ticket sales grow prior to the summer peak travel season and decreases during the summer and fall months.
Fuel and Fuel Hedge Margins. Including our regional carriers, fuel expense represented 18.3% of our total operating expenses for 2016. The market price for jet fuel is highly volatile, which can impact the comparability of our cash flows from operations from period to period.
As part of our fuel hedging program, we may be required to post margin to counterparties when our portfolio is in a loss position. Conversely, if our portfolio with counterparties is in a gain position, we may receive margin. Our future cash flows are impacted by the nature of our derivative contracts and the market price of the commodities underlying those derivative contracts. Our hedge contracts were in a net loss position at December 31, 2016 and 2015, resulting in $38 million and $119 million, respectively, of margin postings to counterparties.
Timing of SkyMiles Sales. In December 2011, we amended our American Express agreements and agreed to sell $675 million of unrestricted SkyMiles to American Express in each December from 2011 through 2014. Pursuant to the December 2011 amendment, American Express purchased $675 million of unrestricted SkyMiles in each of those years with the final payment in 2014. The SkyMiles purchased in December 2014 were utilized by American Express in 2015. There were no advanced sales of SkyMiles in 2015 or 2016.
Pension Contributions. We sponsor defined benefit pension plans for eligible employees and retirees. These plans are closed to new entrants and are frozen for future benefit accruals. Our funding obligations for these plans are governed by the Employee Retirement Income Security Act, as modified by the Pension Protection Act of 2006. In 2016, we contributed $1.3 billion, including $950 million in cash and shares of our common stock from treasury with a value of $350 million, to our qualified defined benefit pension plans during the first half of 2016. As a result of these contributions, we satisfied, on an accelerated basis, our 2016 required contributions for our defined benefit plans, including more than $750 million above the minimum funding requirements. We contributed $1.2 billion and $917 million in 2015 and 2014, respectively. We estimate our funding under these plans will total at least $1.2 billion in 2017, including $700 million above the minimum funding requirements.
Profit Sharing. Our broad-based employee profit sharing program provides that, for each year in which we have an annual pre-tax profit, as defined by the terms of the program, we will pay a specified portion of that profit to employees. In determining the amount of profit sharing, the program defines profit as pre-tax profit adjusted for profit sharing and certain other items.
We paid $1.5 billion in February 2016, $1.1 billion in two payments, $756 million in February 2015 and more than $300 million in October 2014, and $506 million in February 2014 to our employees in recognition of their contributions toward meeting our financial goals. During the year ended December 2016, we recorded $1.1 billion in profit sharing expense based on 2016 pre-tax profit, which will be paid to employees in February 2017.
Beginning with 2016 (to be paid out in 2017), the profit sharing program for merit, ground and flight attendant employees was adjusted to pay 10% of annual pre-tax profit (as defined by the terms of the program) and, if we exceed our prior-year results, the program will pay 20% of the year-over-year increase in pre-tax profit to eligible employees. For years prior to 2016, our profit sharing program paid 10% to all eligible employees for the first $2.5 billion of annual profit and 20% of annual profit above $2.5 billion. The profit sharing program for pilots remains unchanged from the prior year and will continue under its current terms.
Investing Activities
Capital Expenditures. Our capital expenditures were $3.4 billion in 2016, $2.9 billion in 2015 and $2.2 billion in 2014. Our capital expenditures during 2016 were primarily related to the purchase of B-737-900ER aircraft to replace a portion of our older B-757-200 aircraft, purchases of A321-200 and A330-300 aircraft, advanced deposit payments on future aircraft order commitments and seat density projects for our domestic fleet. Our capital expenditures during 2015 and 2014 were primarily for the purchase of aircraft and modifications to upgrade aircraft interiors that enhance our product offering.
We have committed to future aircraft purchases that will require significant capital investment and have obtained long-term financing commitments for a substantial portion of the purchase price of these aircraft. We expect that we will invest approximately $3.5 billion in 2017 primarily for (a) aircraft, including deliveries of B-737-900ERs, A321-200s and A350-900s, along with advance deposit payments for these and our new A330-900neo and CS100 orders as well as for (b) aircraft modifications, the majority of which relate to increasing the seat density and enhancing the cabins on our domestic fleet. We expect that the 2017 investments will be funded primarily through cash flows from operations.
Equity Investments. We own 4.2% of the outstanding shares of Grupo Aeroméxico, and we have derivative contracts that may be settled for shares of Grupo Aeroméxico. Our total derivative contract holdings represent 12.8% of Grupo Aeroméxico's shares. During 2015, we announced our intention to create an antitrust immunized commercial joint venture with Aeroméxico and to acquire additional shares of the capital stock of Grupo Aeroméxico through a cash tender offer, both subject to regulatory approvals. The Mexican and U.S. regulators approved antitrust immunity for the joint venture during 2016, subject to certain conditions. Delta and Aeroméxico have accepted the conditions and are in the process of implementing the necessary actions in order to satisfy the conditions. We expect both the joint venture to be implemented and the tender offer to be completed in the first half of 2017. As a result of the tender offer, when combined with our current holdings and derivative positions, we would own up to 49% of the outstanding capital stock of Grupo Aeroméxico. The total amount to be paid for the tender offer shares and the shares underlying the derivatives is expected to be up to $765 million.
LAX Redevelopment. During the September 2016 quarter, we executed a new lease agreement with Los Angeles World Airports ("LAWA"), which owns and operates LAX, and announced plans to modernize, upgrade and connect Terminals 2 and 3 at LAX over the next seven years. Based on the lease agreement, we will design and manage the construction of the initial investment of $350 million to renovate gate areas, support space and other amenities for passengers, upgrade the baggage handling systems in the terminals and facilitate the relocation of those airlines currently located in Terminals 2 and 3 to Terminals 5, 6 and Tom Bradley International Terminal ("TBIT"). Subject to required approvals, we have an option to expand the project, which could cost an additional $1.5 billion and would include (1) redevelopment of Terminal 3 and enhancement of Terminal 2, (2) rebuild of the ticketing, arrival hall and security checkpoint, (3) construction of infrastructure for the planned airport people mover (4) ramp improvements and (5) construction of a secure connector to the north side of TBIT. We expect a substantial majority of the project costs will be funded by a quasi-governmental entity.
Financing Activities
Debt and Capital Leases. The principal amount of debt and capital leases has declined from $11.7 billion at the beginning of 2014 to $7.4 billion at December 31, 2016. Since December 31, 2009, we have reduced our principal amount of debt and capital leases by $10.9 billion. We have focused on reducing our total debt in recent years as part of our strategy to strengthen our balance sheet. As a result, we received upgrades to our credit ratings by all three major rating agencies, including investment grade ratings from Moody's and Fitch. Continued improvement in our credit ratings could result in lower costs of borrowing, among other benefits.
At December 31, 2016, our ratings were:
| Rating Agency | Current Rating | Outlook |
| Moody's | Baa3 | Stable |
| Fitch | BBB- | Stable |
| Standard & Poor's | BB+ | Positive |
In connection with the retirement and termination of the outstanding loans under our existing $2.5 billion Senior Secured Credit Financing Facilities (due April 2016 and April 2017), we completed refinancing transactions in August 2015 with new debt consisting of $2.0 billion of Senior Secured Credit Facilities and $500 million of 2015-1 pass through certificates. The Senior Secured Credit Facilities consist of a $1.5 billion Revolving Credit Facility and a $500 million Term Loan Facility.
Capital Returns to Shareholders. Since 2013, our Board of Directors has implemented three programs to return capital to shareholders through quarterly dividends and share repurchases. Since first implementing our quarterly dividend in 2013, we have increased the dividend per share by 50% annually and paid $1.2 billion in total dividends, including $509 million in 2016. Through dividends and share repurchases, we have returned nearly $7.4 billion to shareholders since 2013, while reducing outstanding shares by approximately 14% compared to the beginning of 2013. During 2016 alone, we repurchased and retired 60 million shares at a cost of $2.6 billion.
| (in millions, except repurchase price) | Share Repurchase Authorization | Average Repurchase Price | Planned Completion Date | Authorization Remaining | |||||||
| May 2013 Program | $ | 500 | $ | 28.43 | June 30, 2016 | Completed June 2014 | |||||
| May 2014 Program | $ | 2,000 | $ | 42.86 | December 31, 2016 | Completed June 2015 | |||||
| May 2015 Program | $ | 5,000 | $ | 44.03 | December 31, 2017 | $ | 1,350 |
On February 10, 2017, the Board of Directors declared a $0.2025 per share dividend for shareholders of record as of February 24, 2017.
Fuel Hedge Restructuring. During 2015, we effectively deferred settlement of a portion of our hedge portfolio until 2016 by entering into fuel derivative transactions that, excluding market movements from the date of inception, settled and provided approximately $300 million in cash receipts during the second half of 2015 and required approximately $300 million in cash payments in 2016. We early terminated certain of these deferral transactions in 2015. As a result, we reported $429 million in cash receipts and $71 million in cash payments associated with these deferral transactions in 2015.
During the March 2016 quarter, we entered into transactions to further defer settlement of a portion of our hedge portfolio until 2017. These deferral transactions, excluding market movements from the date of inception, provided approximately $300 million in cash receipts during the second half of 2016 and require approximately $300 million in cash payments in 2017.
During the June 2016 quarter, we early terminated certain of our outstanding deferral transactions and made cash payments of $170 million, including normal settlements. As a result, during the year ended December 31, 2016, we reported $291 million in cash receipts and $451 million in cash payments associated with these transactions. For additional information regarding these deferral transactions, see Note 4 to the Notes to the Consolidated Financial Statements.
Undrawn Lines of Credit
We have $2.5 billion available in undrawn revolving lines of credit. Our credit facilities have covenants, including minimum collateral coverage ratios. If we are not in compliance with these covenants, we may be required to repay amounts borrowed under the credit facilities or we may not be able to draw on them. We currently have a substantial amount of unencumbered assets available to pledge as collateral.
Covenants
We were in compliance with the covenants in our financing agreements at December 31, 2016.
Contractual Obligations
The following table summarizes our contractual obligations at December 31, 2016 that we expect will be paid in cash. The table does not include amounts that are contingent on events or other factors that are uncertain or unknown at this time, including legal contingencies, uncertain tax positions and amounts payable under collective bargaining arrangements, among others. In addition, the table does not include expected significant cash payments representing obligations that arise in the ordinary course of business that do not include contractual commitments.
The amounts presented are based on various estimates, including estimates regarding the timing of payments, prevailing interest rates, volumes purchased, the occurrence of certain events and other factors. Accordingly, the actual results may vary materially from the amounts presented in the table.
| Contractual Obligations by Year**(1)** | |||||||||||||||||||||
| (in millions) | 2017 | 2018 | 2019 | 2020 | 2021 | Thereafter | Total | ||||||||||||||
| Long-term debt (see Note 6) | |||||||||||||||||||||
| Principal amount | $ | 1,038 | $ | 2,160 | $ | 1,289 | $ | 527 | $ | 345 | $ | 1,753 | $ | 7,112 | |||||||
| Interest payments | 311 | 259 | 172 | 114 | 91 | 214 | 1,161 | ||||||||||||||
| Capital lease obligations (see Note 7) | |||||||||||||||||||||
| Principal amount | 122 | 70 | 51 | 39 | 22 | 20 | 324 | ||||||||||||||
| Interest payments | 23 | 15 | 9 | 4 | 2 | 1 | 54 | ||||||||||||||
| Operating lease payments (see Note 7) | 1,572 | 1,443 | 1,304 | 1,133 | 862 | 6,781 | 13,095 | ||||||||||||||
| Aircraft purchase commitments (see Note 9) | 2,580 | 2,980 | 3,380 | 1,730 | 1,130 | 660 | 12,460 | ||||||||||||||
| Contract carrier obligations (see Note 9) | 2,039 | 1,827 | 1,562 | 1,220 | 737 | 1,196 | 8,581 | ||||||||||||||
| Employee benefit obligations (see Note 8) | 657 | 535 | 552 | 598 | 561 | 9,950 | 12,853 | ||||||||||||||
| Other obligations | 1,290 | 410 | 260 | 200 | 200 | 1,330 | 3,690 | ||||||||||||||
| Total | $ | 9,632 | $ | 9,699 | $ | 8,579 | $ | 5,565 | $ | 3,950 | $ | 21,905 | $ | 59,330 |
| (1) | For additional information, see the Notes to the Consolidated Financial Statements referenced in the table above. |
Long-Term Debt, Principal Amount. Represents scheduled principal payments on long-term debt.
Long-Term Debt, Interest Payments. Represents estimated interest payments under our long-term debt based on the interest rates specified in the applicable debt agreements. Interest payments on variable interest rate debt were calculated using London interbank offered rates ("LIBOR") at December 31, 2016.
Operating Lease Payments. Represents our minimum rental commitments under noncancelable operating leases (including certain aircraft flown by regional carriers).
Aircraft Purchase Commitments. Represents our commitments to purchase 51 B-737-900ER, 67 A321-200, 75 CS100, 25 A330-900neo, 25 A350-900 and two A330-300 aircraft.
Contract Carrier Obligations. Represents our estimated minimum fixed obligations under capacity purchase agreements with third-party regional carriers. The reported amounts are based on (1) the required minimum levels of flying by our contract carriers under the applicable agreements and (2) assumptions regarding the costs associated with such minimum levels of flying.
Employee Benefit Obligations. Represents primarily (1) our estimated minimum required funding for our qualified defined benefit pension plans based on actuarially determined estimates and (2) projected future benefit payments from our unfunded postretirement and postemployment plans. For additional information about our employee benefit obligations, see "Critical Accounting Policies and Estimates."
Other Obligations. Represents estimated purchase obligations under which we are required to make minimum payments for goods and services, including, but not limited to, insurance, marketing, maintenance, technology, sponsorships and other third-party services and products.
Critical Accounting Policies and Estimates
Our critical accounting policies and estimates are those that require significant judgments and estimates. Accordingly, the actual results may differ materially from these estimates. For a discussion of these and other accounting policies, see Note 1 of the Notes to the Consolidated Financial Statements.
Frequent Flyer Program
Our SkyMiles program offers incentives to travel on Delta. This program allows customers to earn mileage credits by flying on Delta, Delta Connection and airlines that participate in the SkyMiles program, as well as through participating companies such as credit card companies, hotels and car rental agencies. We sell mileage credits to non-airline businesses, customers and other airlines. Effective January 1, 2015, the SkyMiles program was modified from a model in which customers earn redeemable mileage credits based on distance traveled to a model based on ticket price. This award change did not affect the way we account for the program.
The SkyMiles program includes two types of transactions that are considered revenue arrangements with multiple deliverables. As discussed below, these are (1) passenger ticket sales earning mileage credits and (2) the sale of mileage credits to participating companies with which we have marketing agreements. Mileage credits are a separate unit of accounting as they can be redeemed by customers in future periods for air travel on Delta and participating airlines, membership in our Sky Club and other program awards.
Passenger Ticket Sales Earning Mileage Credits. Passenger ticket sales earning mileage credits under our SkyMiles program provide customers with (1) mileage credits earned and (2) air transportation. We value each deliverable on a standalone basis. Our estimate of the selling price of a mileage credit is based on an analysis of our sales of mileage credits to other airlines and customers, which is re-evaluated at least annually. We use established ticket prices to determine the estimated selling price of air transportation. We allocate the total amount collected from passenger ticket sales between the deliverables based on their relative selling prices.
We defer revenue for the mileage credits related to passenger ticket sales when the credits are earned and recognize it as passenger revenue when miles are redeemed and services are provided. We record the air transportation portion of the passenger ticket sales in air traffic liability and recognize these amounts in passenger revenue when we provide transportation or when the ticket expires unused. A hypothetical 10% increase in our estimate of the standalone selling price of a mileage credit would decrease passenger revenue by approximately $50 million, as a result of an increase in the amount of revenue deferred from the mileage component of passenger ticket sales.
Sale of Mileage Credits. Customers may earn mileage credits through participating companies such as credit card companies, hotels and car rental agencies with which we have marketing agreements to sell mileage credits. Our contracts to sell mileage credits under these marketing agreements have multiple deliverables, as defined below.
Our most significant contract to sell mileage credits relates to our co-brand credit card relationship with American Express. In December 2014, we amended our marketing agreements with American Express, which increased the value we receive under the agreements and extended the term to 2022. The amended agreements became effective January 1, 2015. We account for the agreements consistent with the accounting method that allocates the consideration received to the individual products and services delivered based on their relative selling prices. We determined our best estimate of the selling prices by considering discounted cash flow analysis using multiple inputs and assumptions, including: (1) the expected number of miles awarded and number of miles redeemed, (2) the rate at which we sell mileage credits to other airlines, (3) published rates on our website for baggage fees, discounted access to Delta Sky Club lounges and other benefits while traveling on Delta and (4) brand value. The increased value received under the amended agreements increases the amount of deferred revenue for the travel component and increases the value of the other deliverables, which are recognized in other revenue as they are provided.
We recognize revenue as we deliver each sales element. We defer the travel deliverable (mileage credits) as part of frequent flyer deferred revenue and recognize passenger revenue as the mileage credits are used for travel. The revenue allocated to the remaining deliverables is recorded in other revenue. We recognize the revenue for these services as they are performed.
Breakage. For mileage credits that we estimate are not likely to be redeemed ("breakage"), we recognize the associated value proportionally during the period in which the remaining mileage credits are expected to be redeemed. We use statistical models to estimate breakage based on historical redemption patterns. A change in assumptions as to the period over which mileage credits are expected to be redeemed, the actual redemption activity for mileage credits or the estimated fair value of mileage credits expected to be redeemed could have a material impact on our revenue in the year in which the change occurs and in future years. At December 31, 2016, the aggregate deferred revenue balance associated with the SkyMiles program was $3.9 billion. A hypothetical 1% change in the number of outstanding miles estimated to be redeemed would result in a $31 million impact on our deferred revenue liability at December 31, 2016.
Goodwill and Indefinite-Lived Intangible Assets
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 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 using the key assumptions listed below.
When we evaluate goodwill for impairment using a quantitative approach, we estimate the fair value of the reporting unit by considering both market capitalization and projected discounted future cash flows (an income approach). When we perform a quantitative impairment assessment of our indefinite-lived intangible assets, fair value is estimated based on (1) recent market transactions, where available, (2) the royalty method for the Delta tradename (which assumes hypothetical royalties generated from using our tradename) or (3) projected discounted future cash flows (an income approach).
Key Assumptions. The key assumptions in our impairment tests include: (1) forecasted revenues, expenses and cash flows, (2) terminal period revenue growth and cash flows, (3) an estimated weighted average cost of capital, (4) assumed discount rates depending on the asset and (5) a tax rate. These assumptions are consistent with those hypothetical market participants would use. Since we are required to make estimates and assumptions when evaluating goodwill and indefinite-lived intangible assets for impairment, actual transaction amounts may differ materially from these estimates. In addition, we consider the amount by which the intangible assets' fair values exceeded their respective carrying values in the most recent fair value measurements calculated using a quantitative approach.
Changes in certain events and circumstances could result in impairment or a change from indefinite-lived to definite-lived. Factors which could cause impairment include, but are not limited to, (1) negative trends in our market capitalization, (2) reduced profitability resulting from lower passenger mile yields or higher input costs (primarily related to fuel and employees), (3) lower passenger demand as a result of 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 restrictions or additional Open Skies agreements), (6) competitive changes by other airlines and (7) strategic changes to our operations leading to diminished utilization of the intangible assets.
We assessed each of the above assumptions in our most recent impairment analyses. The combination of our most recently completed annual results and our projected revenues, expenses and cash flows more than offset any negative events and circumstances. The stabilized operating environment for U.S. airlines has led to improved financial results.
Goodwill. Our goodwill balance, which is related to the airline segment, was $9.8 billion at December 31, 2016. Based upon our qualitative assessment of all relevant factors, including applicable factors noted in "Key Assumptions" above, we determined that there was no indication that goodwill was impaired.
Identifiable Intangible Assets. Our identifiable intangible assets, which are related to the airline segment, had a net carrying amount of $4.8 billion at December 31, 2016, of which $4.7 billion related to indefinite-lived intangible assets. Indefinite-lived assets are not amortized and consist primarily of routes, slots, the Delta tradename and assets related to SkyTeam and collaborative arrangements. Definite-lived assets consist primarily of marketing and maintenance service agreements.
In 2016, we performed qualitative assessments of our indefinite-lived intangible assets other than the Pacific routes and slots asset, including applicable factors noted in "Key Assumptions" above, and determined that there was no indication that the assets were impaired. Our qualitative assessments include analyses and weighting of all relevant factors, which impact the fair value of our indefinite-lived intangible assets.
We obtained the Pacific routes and slots asset as part of the acquisition of Northwest Airlines in 2008. This intangible asset is composed of Pacific route authorities and takeoff and landing rights ("slots") at capacity-constrained airports in Asia, including Tokyo-Narita airport. Changes in key inputs and assumptions, including (1) new or enhanced joint ventures or alliances, (2) legislative or regulatory changes, including access to Tokyo's Haneda airport, (3) foreign currency exchange rates, (4) fuel costs and (5) Pacific region profitability, could impact the value of this asset in the future. We performed a quantitative assessment of our Pacific routes and slots indefinite-lived intangible asset and determined that there was no indication that the asset was impaired as the fair value significantly exceeded the carrying value.
Long-Lived Assets
Our flight equipment and other long-lived assets have a recorded value of $24.4 billion at December 31, 2016. This value is based on various factors, including the assets' estimated useful lives and salvage values. We review flight equipment and other long-lived assets used in operations for impairment losses when events and circumstances indicate the assets may be impaired. Factors which could be indicators of impairment include, but are not limited to, (1) a decision to permanently remove flight equipment or other long-lived assets from operations, (2) significant changes in the estimated useful life, (3) significant changes in projected cash flows, (4) permanent and significant declines in fleet fair values and (5) changes to the regulatory environment. For long-lived assets held for sale, we discontinue depreciation and record impairment losses when the carrying amount of these assets is greater than the fair value less the cost to sell.
To determine whether impairments exist for aircraft used in operations, we group assets at the fleet-type level (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 impairment occurs, the impairment loss recognized is the amount by which the fleet'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.
Defined Benefit Pension Plans
We sponsor defined benefit pension plans for eligible employees and retirees. These plans are closed to new entrants and frozen for future benefit accruals. As of December 31, 2016, the unfunded benefit obligation for these plans recorded on our Consolidated Balance Sheet was $10.6 billion. During 2016, we contributed $1.3 billion to these plans and recorded $251 million of expense in salaries and related costs on our Consolidated Statement of Operations. In 2017, we estimate we will contribute at least $1.2 billion to these plans, including $700 million of contributions above the minimum funding requirements. The most critical assumptions impacting our defined benefit pension plan obligations and expenses are the discount rate, the expected long-term rate of return on plan assets and life expectancy.
Weighted Average Discount Rate. We determine our weighted average discount rate on our measurement date primarily by reference to annualized rates earned on high-quality fixed income investments and yield-to-maturity analysis specific to our estimated future benefit payments. We used a weighted average discount rate to value the obligations of 4.20% and 4.57% at December 31, 2016 and 2015, respectively. Our weighted average discount rate for net periodic pension benefit cost in each of the past three years has varied from the rate selected on our measurement date, ranging from 4.99% to 4.13% between 2014 and 2016.
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 expected long-term rate of return on assets for net periodic pension benefit cost for the year ended December 31, 2016 was 8.94%.
The impact of a 0.50% change in these assumptions is shown in the table below:
| Change in Assumption | Effect on 2017 Pension Expense | Effect on Accrued Pension Liability at December 31, 2016 | ||||
| 0.50% decrease in weighted average discount rate | $ | (5 | ) million | $ | 1.3 | billion |
| 0.50% increase in weighted average discount rate | $ | 2 | million | $ | (1.2 | ) billion |
| 0.50% decrease in expected long-term rate of return on assets | $ | 55 | million | $ | — | |
| 0.50% increase in expected long-term rate of return on assets | $ | (55 | ) million | $ | — |
Life Expectancy. Changes in life expectancy may significantly change our benefit obligations and future expense. We use the Society of Actuaries' ("SOA") published mortality data, other publicly available information and our own perspective of future longevity to develop our best estimate of life expectancy. In 2014, the SOA published updated mortality tables for U.S. plans and an updated improvement scale, which both reflected significant improvements in longevity. Since then, the SOA has published annual updates to their improvement scale. Each year we consider updates by the SOA in setting our mortality assumptions for purposes of measuring pension and other postretirement and postemployment benefit obligations.
Funding. Our funding obligations for qualified defined benefit plans are governed by the Employee Retirement Income Security Act. The Pension Protection Act of 2006 allows commercial airlines to elect alternative funding rules ("Alternative Funding Rules") for defined benefit plans that are frozen. We elected the Alternative Funding Rules under which the unfunded liability for a frozen defined benefit plan may be amortized over a fixed 17-year period and is calculated using an 8.85% discount rate.
While the Pension Protection Act makes our funding obligations for these plans more predictable, factors outside our control continue to have an impact on the funding requirements. Estimates of future funding requirements are based on various assumptions and can vary materially from actual funding requirements. Assumptions include, among other things, the actual and projected market performance of assets, statutory requirements and demographic data for participants. For additional information, see Note 8 of the Notes to the Consolidated Financial Statements.
Recent Accounting Standards
Revenue from Contracts with Customers
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." Under this ASU and subsequently issued amendments, revenue is recognized at the time a good or service is transferred to a customer for the amount of consideration received. Entities may use a full retrospective approach or report the cumulative effect as of the date of adoption. The standard is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption of the standard is permitted, but not before December 15, 2016.
We are currently evaluating how the adoption of the revenue recognition standard will impact our Consolidated Financial Statements. Interpretations are on-going and could have a significant impact on our implementation. While we currently believe the adoption will have little effect on earnings, the classification of certain transactions within revenues and between revenues and operating expenses may change. Also, the adoption may increase the rate used to account for frequent flyer miles, which would impact the balance of the frequent flyer liability. We plan to adopt the standard effective January 1, 2018.
Leases
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." This standard will require all leases with durations greater than twelve months to be recognized on the balance sheet and is effective for interim and annual reporting periods beginning after December 15, 2018, although early adoption is permitted.
We have not completed our assessment, but we believe adoption of this standard will have a significant impact on our Consolidated Balance Sheets. However, we do not expect the adoption to have a significant impact on the recognition, measurement or presentation of lease expenses within the Consolidated Statements of Operations or the Consolidated Statements of Cash Flows. Information about our undiscounted future lease payments and the timing of those payments is in Note 7 of the Notes to the Consolidated Financial Statements.
Financial Instruments
In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments—Overall (Subtopic 825-10)." This standard makes several changes, including the elimination of the available-for-sale classification of equity investments, and requires equity investments with readily determinable fair values to be measured at fair value with changes in fair value recognized in net income. It is effective for interim and annual periods beginning after December 15, 2017.
Our investments in the parent companies of Aeroméxico and GOL are currently accounted for as available-for-sale with changes in fair value recognized in other comprehensive income. At the time of adoption, any amounts in accumulated other comprehensive income/(loss) ("AOCI") related to equity investments would be reclassified to retained earnings. As of December 31, 2016, a net unrealized loss of $38 million related to these investments was recorded in AOCI on our Consolidated Balance Sheet.
Equity Method Investments
In March 2016, the FASB issued ASU No. 2016-07, "Investments—Equity Method and Joint Ventures (Topic 323)." This standard eliminates the requirement that when an existing cost method investment qualifies for use of the equity method, an investor must restate its historical financial statements, as if the equity method had been used since the investment was acquired. Under the new guidance, at the point an investment qualifies for the equity method, any unrealized gain or loss in AOCI will be recognized in non-operating income/expense.
We adopted this standard during the March 2016 quarter. Although none of our available-for-sale or cost investments qualified for use of the equity method during 2016, we expect the tender offer for additional capital stock of Grupo Aeroméxico to be completed in the March 2017 quarter, at which point our investment will qualify for the equity method of accounting.
Statement of Cash Flows
In the second half of 2016, the FASB issued ASU Nos. 2016-15 and 2016-18 related to the classification of certain cash receipts and cash payments and the presentation of restricted cash within an entity's statement of cash flows, respectively. These standards are effective for interim and annual reporting periods beginning after December 15, 2017, but early adoption is permitted. We do not expect these standards to have a material impact on our Consolidated Statements of Cash Flows.
Supplemental Information
We sometimes use information ("non-GAAP financial measures") that is derived from the Consolidated Financial Statements but that is not presented in accordance with GAAP. Under the U.S. Securities and Exchange Commission rules, non-GAAP financial measures may be considered in addition to results prepared in accordance with GAAP but should not be considered a substitute for or superior to GAAP results.
The following table shows a reconciliation of pre-tax income (a GAAP measure) to pre-tax income, adjusted for special items (a non-GAAP financial measure). We adjust pre-tax income for the following items to determine pre-tax income, adjusted for special items, for the reasons described below:
| • | MTM adjustments and settlements. MTM adjustments are defined as fair value changes recorded in periods other than the settlement period. Such fair value changes are not necessarily indicative of the actual settlement value of the underlying hedge in the contract settlement period. Settlements represent cash received or paid on hedge contracts settled during the period. These items adjust fuel expense to show the economic impact of hedging, including cash received or paid on hedge contracts during the period. Adjusting for these items allows investors to better understand and analyze our core operational performance in the periods shown. |
| • | Restructuring and other. Because of the variability in restructuring and other, the adjustment for this item is helpful to investors to analyze our recurring core performance in the periods shown. |
| • | Virgin Atlantic MTM adjustments. We record our proportionate share of earnings from our equity investment in Virgin Atlantic in non-operating expense. We adjust for Virgin Atlantic's MTM adjustments to allow investors to better understand and analyze our core financial performance in the periods shown. |
| Year Ended December 31, | ||||||
| (in millions) | 2016 | 2015 | ||||
| Pre-tax income | $ | 6,636 | $ | 7,157 | ||
| Adjusted for: | ||||||
| MTM adjustments and settlements | (450 | ) | (1,301 | ) | ||
| Restructuring and other | — | 35 | ||||
| Virgin Atlantic MTM adjustments | (115 | ) | (26 | ) | ||
| Pre-tax income, adjusted for special items | $ | 6,071 | $ | 5,865 |
The following table shows a reconciliation of CASM (a GAAP measure) to CASM-Ex, including profit sharing (a non-GAAP financial measure). We adjust CASM for the following items to determine CASM-Ex, including profit sharing for the reasons described below:
| • | Aircraft fuel and related taxes. The volatility in fuel prices impacts the comparability of year-over-year financial performance. The adjustment for aircraft fuel and related taxes (including our regional carriers) allows investors to better understand and analyze our non-fuel costs and year-over-year financial performance. |
| • | Restructuring and other. Because of the variability in restructuring and other, the adjustment for this item is helpful to investors to analyze our recurring core performance in the periods shown. |
| • | Other expenses. Other expenses include aircraft maintenance and staffing services we provide to third parties, our vacation wholesale operations and refinery cost of sales to third parties. Because these businesses are not related to the generation of a seat mile, we adjust for the costs related to these sales to provide a more meaningful comparison of the costs of our airline operations to the rest of the airline industry. |
| Year Ended December 31, | ||||||
| 2016 | 2015 | |||||
| CASM (cents) | 12.98 | ¢ | 13.33 | ¢ | ||
| Adjusted for: | ||||||
| Aircraft fuel and related taxes | (2.38 | ) | (3.07 | ) | ||
| Restructuring and other | — | (0.01 | ) | |||
| Other expenses | (0.47 | ) | (0.48 | ) | ||
| CASM-Ex, including profit sharing | 10.13 | ¢ | 9.77 | ¢ |
The following table shows our calculation of ROIC. We present ROIC as management believes this metric is helpful to investors in assessing our ability to generate returns using its invested capital. ROIC is operating income, adjusted, divided by adjusted average invested capital. We adjust operating income for MTM adjustments and settlements and restructuring and other for the same reasons discussed above for pre-tax income. All adjustments to calculate ROIC are intended to provide a more meaningful comparison of our results to the airline industry and other high-quality industrial companies.
| Year Ended | ||||
| (in millions, except % of return) | December 31, 2016 | |||
| Operating income | $ | 6,952 | ||
| Adjusted for: | ||||
| MTM adjustments and settlements | (450 | ) | ||
| Restructuring and other | — | |||
| 7x annual interest expense included in aircraft rent | 188 | |||
| Amortization of retirement actuarial loss | 231 | |||
| Operating income, adjusted | $ | 6,921 | ||
| Adjusted book value of equity | $ | 19,954 | ||
| Average adjusted net debt | 6,601 | |||
| Adjusted average invested capital(1) | $ | 26,555 | ||
| ROIC | 26.1 | % |
| (1) | Adjusted average invested capital represents the sum of the average book value of equity at the end of the last five quarters, adjusted for pension and fuel hedge impacts within other comprehensive income. Average adjusted net debt is calculated using amounts as of the end of the last five quarters. |
The following table shows a reconciliation of adjusted net debt. We use adjusted total debt, including aircraft rent and long-term adjusted debt and capital leases, to present estimated financial obligations. We reduce adjusted total debt by cash, cash equivalents and short-term investments, and hedge margin (receivable) payable, resulting in adjusted net debt, to present the amount of assets needed to satisfy the debt. We believe this metric is helpful to investors in assessing the company’s overall debt profile. We reduce adjusted total debt by the amount of hedge margin (receivable) payable, which reflects cash (posted to) received from counterparties, as we believe this removes the impact of current market volatility on our unsettled hedges and is a better representation of the continued progress we have made on our debt initiatives.
| (in millions) | December 31, 2016 | December 31, 2009 | |||||||
| Debt and capital lease obligations | $ | 7,332 | $ | 17,198 | |||||
| Plus: unamortized discount, net and debt issuance costs | 104 | 1,123 | |||||||
| Adjusted debt and capital lease obligations | 7,436 | 18,321 | |||||||
| Plus: 7x last twelve months' aircraft rent | 1,995 | 3,360 | |||||||
| Adjusted total debt | 9,431 | 21,681 | |||||||
| Less: cash, cash equivalents and short-term investments | (3,249 | ) | (4,678 | ) | |||||
| Less: hedge margin (receivable) payable | (38 | ) | 10 | ||||||
| Adjusted net debt | $ | 6,144 | $ | 17,013 |
Glossary of Defined Terms
ASM - Available Seat Mile. A measure of capacity. ASMs equal the total number of seats available for transporting passengers during a reporting period multiplied by the total number of miles flown during that period.
CASM - (Operating) Cost per Available Seat Mile. The amount of operating cost incurred per ASM during a reporting period. CASM is also referred to as "unit cost."
CASM-Ex, including profit sharing - The amount of operating cost incurred per ASM during a reporting period, adjusted for aircraft fuel and related taxes, restructuring and other and other expenses, including aircraft maintenance and staffing services we provide to third parties, our vacation wholesale operations and refinery cost of sales to third parties.
Passenger Load Factor - A measure of utilized available seating capacity calculated by dividing RPMs by ASMs for a reporting period.
Passenger Mile Yield or Yield - The amount of passenger revenue earned per RPM during a reporting period.
PRASM - Passenger Revenue per ASM. The amount of passenger revenue earned per ASM during a reporting period. PRASM is also referred to as "unit revenue."
RPM - Revenue Passenger Mile. One revenue-paying passenger transported one mile. RPMs equal the number of revenue passengers during a reporting period multiplied by the number of miles flown by those passengers during that period. RPMs are also referred to as "traffic."
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