DAL 6.30.2013 10Q


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
R
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2013
Or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-5424
DELTA AIR LINES, INC.
(Exact name of registrant as specified in its charter)

State of Incorporation: Delaware

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

Post Office Box 20706, Atlanta, Georgia 30320-6001

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No R
Number of shares outstanding by each class of common stock, as of June 30, 2013:
Common Stock, $0.0001 par value - 857,950,580 shares outstanding
This document is also available through our website at http://www.delta.com/about_delta/investor_relations.
 



Table of Contents
 
 
 
Page
 
 
 
 
 
 
Item 5. Other Information
 
 




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

FORWARD-LOOKING STATEMENTS

Statements in this Form 10-Q (or otherwise made by us or on our behalf) that are not historical facts, including statements about our estimates, expectations, beliefs, intentions, projections or strategies for the future, may be “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or our present expectations. Known material risk factors applicable to Delta are described in “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 (“Form 10-K”) and in "Part II, Item 1A. Risk Factors" in this Form 10-Q, other than risks that could apply to any issuer or offering. All forward-looking statements speak only as of the date made, and we undertake no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this report.


1



DELTA AIR LINES, INC.
Consolidated Balance Sheets
(Unaudited)
(in millions, except share data)
June 30,
2013
 
December 31,
2012
ASSETS
Current Assets:
 
 
 
Cash and cash equivalents
$
2,965

 
$
2,416

Short-term investments
958

 
958

Restricted cash, cash equivalents and short-term investments
173

 
375

Accounts receivable, net of an allowance for uncollectible accounts of $22 and $36
at June 30, 2013 and December 31, 2012, respectively
2,084

 
1,693

Fuel inventory
586

 
619

Expendable parts and supplies inventories, net of an allowance for obsolescence of $125 and $127
at June 30, 2013 and December 31, 2012, respectively
376

 
404

Deferred income taxes, net
451

 
463

Prepaid expenses and other
1,302

 
1,344

Total current assets
8,895

 
8,272

Property and Equipment, Net:
 
 
 
Property and equipment, net of accumulated depreciation and amortization of $7,286 and $6,656
at June 30, 2013 and December 31, 2012, respectively
21,049

 
20,713

Other Assets:
 
 
 
Goodwill
9,794

 
9,794

Identifiable intangibles, net of accumulated amortization of $702 and $670
at June 30, 2013 and December 31, 2012, respectively
4,692

 
4,679

Other noncurrent assets
1,342

 
1,092

Total other assets
15,828

 
15,565

Total assets
$
45,772

 
$
44,550

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
 
 
 
Current maturities of long-term debt and capital leases
$
1,695

 
$
1,627

Air traffic liability
5,310

 
3,696

Accounts payable
2,571

 
2,293

Frequent flyer deferred revenue
1,638

 
1,806

Accrued salaries and related benefits
1,414

 
1,680

Taxes payable
789

 
585

Fuel card obligation
604

 
455

Other accrued liabilities
754

 
1,128

Total current liabilities
14,775

 
13,270

Noncurrent Liabilities:
 
 
 
Long-term debt and capital leases
10,526

 
11,082

Pension, postretirement and related benefits
15,356

 
16,005

Frequent flyer deferred revenue
2,582

 
2,628

Deferred income taxes, net
2,037

 
2,047

Other noncurrent liabilities
1,680

 
1,649

Total noncurrent liabilities
32,181


33,411

Commitments and Contingencies
 
 
 
Stockholders' Deficit:
 
 
 
Common stock at $0.0001 par value; 1,500,000,000 shares authorized, 875,870,354 and 867,866,505
shares issued at June 30, 2013 and December 31, 2012, respectively
—

 
—

Additional paid-in capital
14,150

 
14,069

Accumulated deficit
(6,748
)
 
(7,389
)
Accumulated other comprehensive loss
(8,331
)
 
(8,577
)
Treasury stock, at cost, 17,919,774 and 16,464,472 shares at June 30, 2013 and
December 31, 2012, respectively
(255
)
 
(234
)
Total stockholders' deficit
(1,184
)
 
(2,131
)
Total liabilities and stockholders' deficit
$
45,772

 
$
44,550

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

2


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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions, except per share data)
2013
 
2012
 
2013
 
2012
Operating Revenue:
 
 
 
 
 
 
 
Passenger:
 
 
 
 
 
 
 
Mainline
$
6,796

 
$
6,620

 
$
12,656

 
$
12,282

Regional carriers
1,698

 
1,811

 
3,158

 
3,375

  Total passenger revenue
8,494

 
8,431

 
15,814

 
15,657

Cargo
232

 
262

 
470

 
506

Other
981

 
1,039

 
1,923

 
1,982

  Total operating revenue
9,707

 
9,732

 
18,207

 
18,145

 
 
 
 
 
 
 
 
Operating Expense:
 
 
 
 
 
 
 
Aircraft fuel and related taxes
2,595

 
3,305

 
4,884

 
5,538

Salaries and related costs
1,922

 
1,825

 
3,833

 
3,588

Regional carrier expense
1,444

 
1,416

 
2,843

 
2,791

Aircraft maintenance materials and outside repairs
472

 
548

 
963

 
1,109

Depreciation and amortization
415

 
388

 
820

 
774

Contracted services
409

 
397

 
810

 
775

Passenger commissions and other selling expenses
408

 
393

 
765

 
773

Landing fees and other rents
359

 
347

 
682

 
652

Passenger service
197

 
187

 
361

 
358

Profit sharing
118

 
135

 
138

 
135

Aircraft rent
55

 
68

 
115

 
143

Restructuring and other items
34

 
193

 
136

 
181

Other
365

 
396

 
721

 
812

Total operating expense
8,793

 
9,598

 
17,071

 
17,629

 
 
 
 
 
 
 
 
Operating Income
914

 
134

 
1,136

 
516

 
 
 
 
 
 
 
 
Other (Expense) Income:

 

 
 
 
 
Interest expense, net
(172
)
 
(207
)
 
(350
)
 
(428
)
Amortization of debt discount, net
(41
)
 
(49
)
 
(83
)
 
(100
)
Miscellaneous, net
(15
)
 
(42
)
 
(14
)
 
(25
)
Total other expense, net
(228
)
 
(298
)
 
(447
)
 
(553
)
 
 
 
 
 
 
 
 
Income (Loss) Before Income Taxes
686

 
(164
)
 
689

 
(37
)
 
 
 
 
 
 
 
 
Income Tax (Provision) Benefit
(1
)
 
(4
)
 
3

 
(7
)
 
 
 
 
 
 
 
 
Net Income (Loss)
$
685

 
$
(168
)
 
$
692

 
$
(44
)
 
 
 
 
 
 
 
 
Basic Earnings (Loss) Per Share
$
0.81

 
$
(0.20
)
 
$
0.81

 
$
(0.05
)
Diluted Earnings (Loss) Per Share
$
0.80

 
$
(0.20
)
 
$
0.81

 
$
(0.05
)
 
 
 
 
 
 
 
 
Comprehensive Income (Loss)
$
780

 
$
(140
)
 
$
938

 
$
232

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

3


DELTA AIR LINES, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Six Months Ended June 30,
(in millions)
2013
 
2012
Net Cash Provided by Operating Activities
$
2,212

 
$
1,463

 
 
 
 
Cash Flows From Investing Activities:
 
 
 
Property and equipment additions:
 
 
 
Flight equipment, including advance payments
(765
)
 
(609
)
Ground property and equipment, including technology
(220
)
 
(395
)
Purchase of investments
(479
)
 
(479
)
Virgin Atlantic investment
(360
)
 
—

Redemption of investments
612

 
514

Other, net
21

 
(32
)
Net cash used in investing activities
(1,191
)

(1,001
)
 
 
 
 
Cash Flows From Financing Activities:
 
 
 
Payments on long-term debt and capital lease obligations
(621
)
 
(741
)
Fuel card obligation
149

 
158

Other, net
—

 
3

Net cash used in financing activities
(472
)
 
(580
)
 
 
 
 
Net Increase (Decrease) in Cash and Cash Equivalents
549

 
(118
)
Cash and cash equivalents at beginning of period
2,416

 
2,657

Cash and cash equivalents at end of period
$
2,965

 
$
2,539

 
 
 
 
Non-Cash Transactions:
 
 
 
SkyMiles used pursuant to advance purchase under American Express Agreements
$
167

 
$
167

Build-to-suit leased facilities
85

 
154

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



4


DELTA AIR LINES, INC.
Notes to the Condensed Consolidated Financial Statements
June 30, 2013
(Unaudited)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of Delta Air Lines, Inc. and our wholly-owned subsidiaries. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information. Consistent with these requirements, this Form 10-Q does not include all the information required by GAAP for complete financial statements. As a result, this Form 10-Q should be read in conjunction with the Consolidated Financial Statements and accompanying Notes in our Form 10-K. We reclassified certain prior period amounts, none of which were material individually or in total, to conform to the current period presentation.

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

Due to seasonal variations in the demand for air travel, the volatility of aircraft fuel prices, changes in global economic conditions and other factors, operating results for the three and six months ended June 30, 2013 are not necessarily indicative of operating results for the entire year.

As described in Note 12, we became the sole owner of Pinnacle Airlines, Inc. ("Pinnacle") on May 1, 2013 pursuant to a confirmed plan of reorganization in the bankruptcy cases of Pinnacle and its affiliates. Prior to this acquisition, Pinnacle served as a Delta Connection carrier under a capacity purchase agreement where we purchased all of Pinnacle's seat inventory and marketed it under the Delta tradename. Accordingly, Pinnacle's passenger revenue was included in regional carriers passenger revenue in Delta's Consolidated Statements of Operations and Comprehensive Income (Loss). All of the expenses Delta incurred under this arrangement were included in contract carrier arrangements expense. Subsequent to this acquisition, we have maintained this presentation and have re-titled contract carrier arrangements expense to regional carrier expense to reflect the inclusion of a wholly-owned regional carrier. This presentation aligns with the regional revenue presentation on the Consolidated Statements of Operations and Comprehensive Income (Loss).

Accounting for Refinery Related Buy/Sell Agreements

To the extent that we receive jet fuel for non-jet fuel products (as defined in Note 2 below) exchanged under buy/sell agreements, we account for these transactions as non-monetary exchanges. We have recorded these non-monetary exchanges at the carrying amount of the non-jet fuel products transferred within aircraft fuel and related taxes on the Consolidated Statement of Operations.

Recent Accounting Standards

Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income

Recently issued accounting guidance revises the reporting of items reclassified out of accumulated other comprehensive income and is effective for fiscal years beginning after December 15, 2012. We adopted this guidance in the March 2013 quarter and have presented amounts reclassified out of accumulated other comprehensive income in a note to the financial statements. For more information about accumulated other comprehensive income (loss), see Note 10.


5


NOTE 2. OIL REFINERY

Fuel expense is our single largest expense. Prior to our acquisition of the oil refinery, global demand for jet fuel and related products had increased while jet fuel refining capacity had decreased in the U.S. (particularly in the Northeast), resulting in increases in the refining margin reflected in the prices we paid for jet fuel. In June 2012, we purchased an oil refinery as part of our strategy to mitigate the increasing cost of the refining margin we are paying.

Refinery Operations and Strategic Agreements

The refinery's production consists of jet fuel, as well as gasoline, diesel and other refined products ("non-jet fuel products"). Under a multi-year agreement, we are exchanging a significant portion of the non-jet fuel products with Phillips 66 for jet fuel to be used in our airline operations. In addition, we are selling most of the remaining production of non-jet fuel products to BP under a long-term buy/sell agreement, effectively exchanging those non-jet fuel products for jet fuel. Substantially all of the refinery's production of non-jet fuel products is included in these agreements. The gross fair value of the products exchanged under these agreements during the three and six months ended June 30, 2013 was $1.3 billion and $2.7 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
Three Months Ended June 30
 
 
 
 
 
 
Operating revenue:
$
9,707

$
1,864

 
 
 
$
9,707

Sales to airline segment
 
 
 
$
(315
)
(1) 
 
Exchanged products
 
 
 
(1,347
)
(2) 
 
Sales of refined products to third parties
 
 
 
(202
)
(3) 
 
Operating income (loss)(4)
965

(51
)
 
—

 
914

Interest expense, net
172

—

 
—

 
172

Depreciation and amortization expense
411

4

 
—

 
415

Total assets, end of period
44,567

1,205

 
—

 
45,772

Capital expenditures
332

6

 
—

 
338

Six Months Ended June 30
 
 
 
 
 
 
Operating revenue:
$
18,207

$
3,595

 
 
 
$
18,207

Sales to airline segment
 
 
 
$
(607
)
(1) 
 
Exchanged products
 
 
 
(2,668
)
(2) 
 
Sales of refined products to third parties
 
 
 
(320
)
(3) 
 
Operating income (loss)(4)
1,209

(73
)
 
—

 
1,136

Interest expense, net
350

—

 
—

 
350

Depreciation and amortization expense
812

8

 
—

 
820

Capital expenditures
973

12

 
—

 
985

(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 for jet fuel from the refinery, which is New York harbor.
(2) 
Represents value of products exchanged under our buy/sell agreements, as discussed above, determined on a market price basis.
(3) 
Represents sales of refined products to third parties. These sales were at or near cost; accordingly, the margin on these sales is de minimis.
(4) 
Includes allocations of $25 million and $44 million of losses for the three and six months ended June 30, 2013, respectively from the refinery segment to the airline segment, representing a portion of the refinery's inventory price risk.


6


NOTE 3. FAIR VALUE MEASUREMENTS

Assets (Liabilities) Measured at Fair Value on a Recurring Basis
(in millions)
June 30,
2013
Level 1
Level 2
Level 3
Cash equivalents
$
2,629

$
2,629

$
—

$
—

Short-term investments
958

958

—

—

Restricted cash equivalents and investments
172

172

—

—

Long-term investments
92

65

27

—

Hedge derivatives, net
 
 
 
 
Fuel contracts
88

2

86

—

Interest rate contracts
(69
)
—

(69
)
—

Foreign currency exchange contracts
264

—

264

—


(in millions)
December 31,
2012
Level 1
Level 2
Level 3
Cash equivalents
$
2,176

$
2,176

$
—

$
—

Short-term investments
958

958

—

—

Restricted cash equivalents and investments
344

344

—

—

Long-term investments
208

100

27

81

Hedge derivatives, net
 
 
 
 
Fuel contracts
249

27

222

—

Interest rate contracts
(66
)
—

(66
)
—

Foreign currency exchange contracts
123

—

123

—


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

Long-term Investments. Our long-term investments measured at fair value, primarily consisting of equity investments in Grupo Aeroméxico, S.A.B. de C.V., the parent company of Aeroméxico and GOL Linhas Aéreas Inteligentes, S.A, the parent company of GOL, are classified in other noncurrent assets. Shares of Aeroméxico and GOL are traded on public exchanges and we have valued our investments based on quoted market prices. During the three months ended June 30, 2013, we sold our remaining auction rate securities, which were previously classified as Level 3 instruments.

7



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

•
Fuel Derivatives. Our fuel hedge portfolio consists of call options; put options; combinations of two or more call options and put options; swap contracts; and futures contracts. The products underlying the hedge contracts include crude oil, diesel fuel, jet fuel and heating oil as these commodities are highly correlated with the price of jet fuel that we consume. Option contracts are valued under an income approach using option pricing models based on data either readily observable in public markets, derived from public markets or provided by counterparties who regularly trade in public markets. Volatilities used in these valuations ranged from 11% to 29% depending on the maturity dates, underlying commodities and strike prices of the option contracts. Swap contracts are valued under an income approach using a discounted cash flow model based on data either readily observable or derived from public markets. Discount rates used in these valuations vary with the maturity dates of the respective contracts and are based on LIBOR. Futures contracts and options on futures contracts are traded on a public exchange and valued based on quoted market prices.

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

•
Foreign Currency Derivatives. Our foreign currency derivatives consist of Japanese yen and Canadian dollar forward contracts and are valued based on data readily observable in public markets.

NOTE 4. DERIVATIVES

Changes in aircraft 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 enter into derivative contracts and adjust our derivative portfolio as market conditions change.

Aircraft Fuel Price Risk

Changes in aircraft fuel prices materially impact our results of operations. We actively manage our fuel price risk through a hedging program intended to reduce the financial impact on us from changes in the price of jet fuel. This fuel hedging program utilizes several different contract and commodity types. The economic effectiveness of this hedge portfolio is frequently tested against our financial targets. The hedge portfolio is rebalanced from time to time according to market conditions, which may result in locking in gains or losses on hedge contracts prior to their settlement dates.

We generally do not designate our fuel derivative contracts as accounting hedges.We record changes in the fair value of our fuel hedges in aircraft fuel and related taxes. These changes in fair value include settled gains and losses as well as mark to market adjustments ("MTM adjustments"). MTM adjustments are based on market prices as of the end of the reporting period for contracts settling in future periods. During the three months ended June 30, 2013 and 2012, we recorded $78 million and $716 million in fuel hedge losses, respectively. During the six months ended June 30, 2013 and 2012, we recorded $1 million and $520 million in fuel hedge losses, respectively.


8


Hedge Position as of June 30, 2013
(in millions)
Notional Balance
Final Maturity Date
Prepaid Expenses and Other
Other Noncurrent Assets
Other Accrued Liabilities
Other Noncurrent Liabilities
Hedge Derivatives, Net
Designated as hedges
 
 
 
 
 
 
 
 
Interest rate contracts (cash flow hedges)
$
670

U.S. dollars
May 2019
$
—

$
—

$
(20
)
$
(31
)
$
(51
)
Interest rate contracts (fair value hedges)
$
455

U.S. dollars
August 2022
—

—

(2
)
(16
)
(18
)
Foreign currency exchange contracts
139,967

Japanese yen
June 2016
146

118

—

—

264

460

Canadian dollars
 
 
 
 
 
Not designated as hedges
 
 
 
 
 
 
 
 
Fuel contracts
3,634

gallons - crude oil, diesel and jet fuel
December 2014
258

10

(170
)
(10
)
88

Total derivative contracts
 
 
$
404

$
128

$
(192
)
$
(57
)
$
283


Hedge Position as of December 31, 2012
(in millions)
Notional Balance
Final Maturity Date
Prepaid Expenses and Other
Other Noncurrent Assets
Other Accrued Liabilities
Other Noncurrent Liabilities
Hedge Derivatives, Net
Designated as hedges
 
 
 
 
 
 
 
 
Interest rate contracts (cash flow hedges)
$
740

U.S. dollars
May 2019
$
—

$
—

$
(22
)
$
(48
)
$
(70
)
Interest rate contracts (fair value hedges)
$
469

U.S. dollars
August 2022
—

6

(2
)
—

4

Foreign currency exchange contracts
119,277

Japanese yen
December 2015
62

63

(1
)
(1
)
123

430

Canadian dollars
 
 
 
 
 
Not designated as hedges
 
 
 
 
 
 
 
 
Fuel contracts
1,792

gallons - heating oil, crude oil and jet fuel
December 2013
511

—

(262
)
—

249

Total derivative contracts
 
 
$
573

$
69

$
(287
)
$
(49
)
$
306


Offsetting Assets and Liabilities

We have master netting arrangements with all of our counterparties giving us the right of setoff. We have elected not to offset the fair value positions recorded on our Consolidated Balance Sheets. The following table shows the potential net fair value positions had we elected to offset.
(in millions)
Prepaid Expenses and Other
Other Noncurrent Assets
Other Accrued Liabilities
Other Noncurrent Liabilities
Hedge Derivatives, Net
June 30, 2013
 
 
 
 
 
Net derivative contracts
$
240

$
121

$
(28
)
$
(50
)
$
283

December 31, 2012
 
 
 
 
 
Net derivative contracts
$
320

$
69

$
(34
)
$
(49
)
$
306


9



Hedge Gains (Losses)
For the three and six months ended June 30, 2013 and 2012, gains (losses) related to our designated hedge contracts are as follows:
 
Effective Portion Reclassified from AOCI to Earnings
 
Effective Portion Recognized in Other Comprehensive Income
(in millions)
2013
2012
 
2013
2012
Three Months Ended June 30
 
 
 
 
 
Foreign currency exchange contracts
$
24

$
—

 
$
54

$
(40
)
Six Months Ended June 30
 
 
 
 
 
Foreign currency exchange contracts
$
45

$
(13
)
 
$
141

$
83


As of June 30, 2013, we have recorded $146 million of net gains on cash flow hedge contracts in accumulated other comprehensive loss, which are scheduled to settle and be reclassified into earnings within the next 12 months.

Credit Risk

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

Our hedge contracts contain margin funding requirements. The margin funding requirements may cause us to post margin to counterparties or may cause counterparties to post margin to us as market prices in the underlying hedged items change. Due to the fair value position of our hedge contracts, we posted net margin of $49 million and received net margin of $62 million as of June 30, 2013 and December 31, 2012, respectively. Margin received is recorded in accounts payable and margin posted is recorded in prepaid expenses and other.

NOTE 5. LONG-TERM DEBT

Fair Value of Debt

Market risk associated with our fixed and variable rate long-term debt relates to the potential reduction in fair value and negative impact to future earnings, respectively, from an increase in interest rates. In the table below, the aggregate fair value of debt is based primarily on reported market values, recently completed market transactions and estimates based on interest rates, maturities, credit risk and underlying collateral and is classified primarily as Level 2 within the fair value hierarchy.
(in millions)
June 30,
2013
December 31,
2012
Total debt at par value
$
12,155

$
12,633

Unamortized discount, net
(467
)
(527
)
Net carrying amount
$
11,688

$
12,106

Fair value
$
12,500

$
13,000


Covenants

We were in compliance with all covenants in our financing agreements at June 30, 2013.


10


NOTE 6. COMMITMENTS AND CONTINGENCIES

Aircraft Purchase and Lease Commitments

Future aircraft purchase commitments at June 30, 2013 total approximately $7.7 billion and include 100 B-737-900ER aircraft, 18 B-787-8 aircraft and 40 CRJ-900 aircraft. Our purchase commitment for 18 B-787-8 aircraft provides for certain aircraft substitution rights. We have obtained long-term financing commitments for a substantial portion of the purchase price of 40 CRJ-900 and 100 B-737-900ER aircraft.
(in millions)
Total
Six months ending December 31, 2013
$
775

2014
1,500

2015
790

2016
785

2017
735

Thereafter
3,110

Total
$
7,695


We also have agreements with Southwest Airlines and The Boeing Company to lease 88 B-717-200 aircraft. Deliveries will begin later this year and continue through 2015. Our aircraft purchase commitments do not include orders that we have for five A319-100 aircraft and two A320-200 aircraft because we have the right to cancel these orders.

Legal Contingencies

We are involved in various legal proceedings related to employment practices, environmental issues, antitrust matters and other matters concerning our business. We record liabilities for losses from legal proceedings when we determine that it is probable that the outcome in a legal proceeding will be unfavorable and the amount of loss can be reasonably estimated. We cannot reasonably estimate the potential loss for certain legal proceedings because, for example, the litigation is in its early stages or the plaintiff does not specify the damages being sought. Although the outcome of the legal proceedings in which we are involved cannot be predicted with certainty, management believes that the resolution of these matters will not have a material adverse effect on our Condensed Consolidated Financial Statements.

Other Contingencies

General Indemnifications

We are the lessee under many commercial real estate leases. It is common in these transactions for us, as the lessee, to agree to indemnify the lessor and the lessor's related parties for tort, environmental and other liabilities that arise out of or relate to our use or occupancy of the leased premises. This type of indemnity would typically make us responsible to indemnified parties for liabilities arising out of the conduct of, among others, contractors, licensees and invitees at, or in connection with, the use or occupancy of the leased premises. This indemnity often extends to related liabilities arising from the negligence of the indemnified parties, but usually excludes any liabilities caused by either their sole or gross negligence or their willful misconduct.

Our aircraft and other equipment lease and financing agreements typically contain provisions requiring us, as the lessee or obligor, to indemnify the other parties to those agreements, including certain of those parties' related persons, against virtually any liabilities that might arise from the use or operation of the aircraft or such other equipment.

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

Certain of our aircraft and other financing transactions include provisions that require us to make payments to preserve an expected economic return to the lenders if that economic return is diminished due to certain changes in law or regulations. In certain of these financing transactions, we also bear the risk of certain changes in tax laws that would subject payments to non-U.S. lenders to withholding taxes.

11



We cannot reasonably estimate our potential future payments under the indemnities and related provisions described above because we cannot predict (1) when and under what circumstances these provisions may be triggered and (2) the amount that would be payable if the provisions were triggered because the amounts would be based on facts and circumstances existing at such time.

Employees Under Collective Bargaining Agreements

At June 30, 2013, we had approximately 79,600 full-time equivalent employees. Approximately 18% of these employees were represented by unions.

War-Risk Insurance Contingency

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

Other

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


12


NOTE 7. RESTRUCTURING AND OTHER ITEMS

The following table shows amounts recorded in restructuring and other items on the Condensed Consolidated Statements of Operations and Comprehensive Income:
 
Three Months Ended June 30,
Six Months Ended June 30,
(in millions)
2013
2012
2013
2012
Severance and related costs
$
—

$
171

$
—

$
171

Facilities, fleet and other
34

22

136

49

Gain on slot exchange
—

—

—

(39
)
Total restructuring and other items
$
34

$
193

$
136

$
181


Facilities, Fleet and Other. We recorded charges of 136 million in the six months ended June 30, 2013, primarily related to our domestic fleet restructuring initiative. Under the domestic fleet restructuring initiative, we are focused on removing older, less efficient aircraft from our fleet and replacing them with B-737-900ER, B-717-200 and CRJ-900 aircraft that we have committed to acquire. These fleet restructuring charges are related to older, retiring aircraft, including remaining lease payments for grounded aircraft, the acceleration of aircraft depreciation and lease return costs during the period.

As we restructure our fleet and assess our fleet plans, we will continue to evaluate older, retiring aircraft and related equipment for changes in depreciable life, impairment and lease termination costs. The associated retirement of aircraft will result in material lease termination and other charges over this period. The timing and amount of these charges will depend on a number of factors, including our final negotiations with lessors, the timing of removing aircraft from service and ultimate disposition of aircraft included in the fleet restructuring program. We expect to benefit from reduced future maintenance cost and improved operational and fuel efficiency that we will experience over the life of the new aircraft.

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

The following table shows the balances and activity for restructuring charges:
(in millions)
Severance and Related Costs
Lease Restructuring
Balance as of December 31, 2012
$
49

$
77

Additional costs and expenses
—

6

Payments
(46
)
(7
)
Other
(3
)
(5
)
Balance as of June 30, 2013
$
—

$
71



13


NOTE 8. EMPLOYEE BENEFIT PLANS

The following table shows the components of net periodic cost:
 
Pension Benefits
Other Postretirement and
Postemployment Benefits
(in millions)
2013
2012
2013
2012
Three Months Ended June 30
 
 
 
 
Service cost
$
—

$
—

$
12

$
14

Interest cost
215

232

36

41

Expected return on plan assets
(184
)
(176
)
(21
)
(19
)
Amortization of prior service benefit
—

—

(7
)
(6
)
Recognized net actuarial loss
55

36

6

6

Settlements
—

—

—

104

Net periodic cost
$
86

$
92

$
26

$
140

Six Months Ended June 30
 
 
 
 
Service cost
$
—

$
—

$
24

$
29

Interest cost
430

464

72

82

Expected return on plan assets
(368
)
(352
)
(42
)
(38
)
Amortization of prior service benefit
—

—

(14
)
(9
)
Recognized net actuarial loss
111

72

12

12

Settlements
6

—

—

104

Net periodic cost
$
179

$
184

$
52

$
180


NOTE 9. INCOME TAXES

Valuation Allowance

We periodically assess whether it is more likely than not that we will generate sufficient taxable income to realize our deferred income tax assets. We establish valuation allowances if it is not likely we will realize our deferred income tax assets. In making this determination, we consider all available positive and negative evidence and make certain assumptions. We consider, among other things, our deferred tax liabilities, the overall business environment, our historical financial results, our industry's historically cyclical financial results and potential current and future tax planning strategies.

We recorded a full valuation allowance in 2004 due to our cumulative three year loss position at that time, compounded by the negative industry-wide business trends and outlook. At June 30, 2013, we had a $10.6 billion valuation allowance established against our deferred income tax assets, which represents a full valuation allowance against our net deferred income tax asset.

During 2012, we moved from a cumulative loss position over the previous three years to a cumulative income position for the first time since we established the full valuation allowance. While this is positive information, we concluded as of June 30, 2013 that the valuation allowance was still needed on our net deferred tax assets based upon the weight of the factors described above, especially considering our history that included six consecutive years of losses. We continue to evaluate our cumulative income position and income trend as well as our future projections of sustained profitability. We evaluate whether this profitability trend constitutes sufficient positive evidence to support a reversal of our valuation allowance (in full or in part). If this profitability trend continues for the remainder of 2013 and this level of profitability is projected in the future, we anticipate that we may reverse substantially all of our valuation allowance as early as the end of 2013.


14


NOTE 10. ACCUMULATED OTHER COMPREHENSIVE LOSS

The following tables show the components of accumulated other comprehensive loss:
(in millions)
Pension and Other Benefits Liabilities
Derivative Contracts(1)
Deferred Tax Impact
Total
Balance at December 31, 2012
$
(5,147
)
$
(286
)
$
(3,144
)
$
(8,577
)
Changes in value
(29
)
207

—

178

Reclassifications into earnings:
 
 
 
 
     Actuarial losses(2)
113

—

—

113

     Foreign currency exchange contracts(3)
—

(45
)
—

(45
)
Total reclassification into earnings
113

(45
)
—

68

Tax effect
(33
)
(61
)
94

—

Balance at June 30, 2013
$
(5,096
)
$
(185
)
$
(3,050
)
$
(8,331
)
 
(in millions)
Pension and Other Benefits Liabilities
Derivative Contracts(1)
Deferred Tax Impact
Total
Balance at December 31, 2011
$
(3,899
)
$
(413
)
$
(2,454
)
$
(6,766
)
Changes in value
127

72

—

199

Reclassifications into earnings:
 
 
 
 
     Actuarial losses(2)
78

—

—

78

     Foreign currency exchange contracts(3)
—

(1
)
—

(1
)
Total reclassification into earnings
78

(1
)
—

77

Tax effect
(75
)
(30
)
105

—

Balance at June 30, 2012
$
(3,769
)
$
(372
)
$
(2,349
)
$
(6,490
)

(1) 
Includes $321 million of deferred income tax expense that will remain in AOCI until all amounts in AOCI that relate to fuel derivatives which are designated as accounting hedges are recognized in the Consolidated Statement of Operations.
(2) 
Reclassified to salaries and related costs
(3) 
Reclassified to passenger revenue

NOTE 11. EARNINGS (LOSS) PER SHARE

We calculate basic earnings (loss) per share by dividing net income by the weighted average number of common shares outstanding. The following table shows the computation of basic and diluted earnings (loss) per share:
 
Three Months Ended June 30,
Six Months Ended June 30,
(in millions, except per share data)
2013
2012
2013
2012
Net income (loss)
$
685

$
(168
)
$
692

$
(44
)
 
 
 
 
 
Basic weighted average shares outstanding
850

845

849

844

Dilutive effect of share based awards
9

—

7

—

Diluted weighted average shares outstanding
859

845

856

844

 
 
 
 
 
Basic earnings (loss) per share
$
0.81

$
(0.20
)
$
0.81

$
(0.05
)
Diluted earnings (loss) per share
$
0.80

$
(0.20
)
$
0.81

$
(0.05
)
 
 
 
 
 
Antidilutive common stock equivalents excluded from diluted earnings per share
12

23

13

23



15


NOTE 12. OTHER INVESTMENTS

Pinnacle Acquisition

In May 2013, Pinnacle emerged from bankruptcy and we became its sole owner pursuant to a confirmed plan of reorganization. Consideration totaled $30 million, primarily consisting of previous loans and advances we made to Pinnacle. The primary assets acquired and liabilities assumed related to 16 CRJ-900 aircraft with a fair value of $270 million and related debt of $240 million. These aircraft and 181 other aircraft operated by Pinnacle were already in service to Delta; accordingly, our capacity is unaffected by the acquisition.

Transatlantic Joint Venture With Virgin Atlantic

In June 2013, we purchased 49% of Virgin Atlantic, a privately held London-based airline, from Singapore Airlines for $360 million, which is accounted for under the equity method. We also entered into an agreement with Virgin Atlantic for a proposed joint venture with respect to operations on non-stop routes between the United Kingdom and North America. We and Virgin Atlantic have filed an application with the U.S. Department of Transportation for U.S. antitrust immunity with respect to the joint venture.

NOTE 13. DIVIDEND PAYABLE

In May 2013, we announced a plan to return more than $1 billion to shareholders over the next three years. As part of this plan, our Board of Directors initiated a quarterly dividend program and declared a $0.06 per share dividend for shareholders of record as of August 9, 2013. This dividend will be paid on September 10, 2013. In addition, the Board of Directors authorized a $500 million share repurchase program, to be completed no later than June 30, 2016.

16


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

June 2013 Quarter Financial Highlights

Our net income for the June 2013 quarter was $685 million, or $0.80 per diluted share, which was an $853 million improvement year over year. Total operating revenue of $9.7 billion was consistent with the June 2012 quarter. Fuel expense decreased $724 million due to lower fuel hedge losses and a 7% decrease in the market price per gallon of jet fuel, partially offset by a 1% increase in consumption. For additional information regarding fuel expense, see "Fuel Expense" below.

Revenue. Passenger revenue increased $63 million due to 1% higher traffic and capacity. Passenger revenue per available seat mile ("PRASM") was consistent with the June 2012 quarter.

Operating Expense. Total operating expense decreased $805 million over the June 2012 quarter, driven primarily by lower fuel expense, aircraft maintenance and restructuring charges. Our consolidated operating cost per available seat mile ("CASM") for the June 2013 quarter decreased 9% to 14.69 cents from 16.16 cents in the June 2012 quarter, primarily reflecting decreased fuel expense. For the June 2013 quarter, CASM-Ex (a non-GAAP financial measure) was 8.98 cents, or 2.5% higher than the June 2012 quarter, primarily due to increased salary expense. The non-GAAP financial measures used in this section are defined and reconciled in "Supplemental Information" below.

Fuel expense for the June 2013 quarter was $3.1 billion, including regional carriers; our average price per gallon, adjusted was $3.03 (a non-GAAP financial measure as defined and reconciled in "Operating Expense" below) which was $0.34 lower than the June 2012 quarter. For a discussion regarding fuel expense (including the refinery results) see page 19.

Company Initiatives

Capital Deployment Program

In May 2013, we announced a plan to return more than $1 billion to shareholders over the next three years. As part of this plan, our Board of Directors initiated a quarterly dividend program and declared a $0.06 per share dividend for shareholders of record as of August 9, 2013. This dividend will be paid on September 10, 2013. In addition, the Board of Directors authorized a $500 million share repurchase program, to be completed no later than June 30, 2016.

Strengthening the Balance Sheet

We continue to focus on cash flow generation toward our goal of further strengthening our balance sheet. We finished the June 2013 quarter with $5.7 billion in unrestricted liquidity (consisting of cash, cash equivalents, short-term investments and undrawn revolving credit facility capacity). During the first six months of 2013, we generated $2.2 billion in cash from operating activities, reduced debt by $488 million and funded capital expenditures, while maintaining a solid liquidity position.

Structural Cost Initiatives

We initiated a $1 billion structural cost initiatives program in 2012. These initiatives are designed to improve our cost efficiency while maintaining our operational performance and revenue generation and include:

•Domestic fleet restructuring to retire older, less efficient aircraft from our fleet;
•Maintenance redesign, focusing on improving our processes and resource management;
•Distribution platforms to increase the use of cost effective and value-added distribution channels such as delta.com;
•Staffing efficiency to generate higher productivity levels through technology and improved staffing models; and
•Emphasis on other costs to improve efficiency.

We are realizing a portion of the benefits of the structural cost initiatives in 2013. The increase in CASM-Ex in the first half of 2013 is expected to moderate in the second half of the year, with the benefits of these initiatives increasing through 2015.


17


Domestic fleet restructuring is a key part of our structural cost initiatives, and is focused on lowering unit costs while investing in our fleet to enhance the customer experience. We are restructuring our domestic fleet by reducing our 50-seat regional flying and replacing other older, less cost effective aircraft with newer, more efficient aircraft. Agreements with SkyWest Airlines, Inc. and Bombardier Aerospace, as well as our acquisition of Pinnacle Airlines, Inc., have produced a path for us to eliminate more than 200 50-seat aircraft. We are replacing these aircraft and older B-757-200 aircraft with more efficient and customer preferred CRJ-900, B-717-200 and B-737-900ER aircraft.

In 2012, we entered into an agreement with Bombardier Aerospace to purchase 40 CRJ-900 aircraft with 12 deliveries this year and 28 in 2014. Also in 2012, we finalized agreements with Southwest Airlines and The Boeing Company ("Boeing") to lease 88 B-717-200 aircraft. Delivery of the aircraft will begin in September 2013, with a total of 16 aircraft expected to be delivered in 2013 and 36 aircraft deliveries in each of 2014 and 2015. These B-717-200 aircraft are 110-seat aircraft and will feature new, fully upgraded interiors, with 12 First Class seats, 15 Economy Comfort seats and in-flight WiFi throughout the cabin.

In 2011, we entered into an agreement with Boeing to purchase 100 new fuel efficient B-737-900ER aircraft. We will add these aircraft to our fleet beginning in September 2013 through 2018, primarily replacing older B-757-200 aircraft. We expect the B-737-900ER to offer an industry leading customer experience, including expanded carry-on baggage space and a spacious cabin. Additionally, we continue to increase our MD-90 fleet with previously owned aircraft that offer a lower total cost of ownership.

As we restructure our fleet and assess our fleet plans, we will continue to evaluate older, retiring aircraft and related equipment for changes in depreciable life, impairment and lease termination costs. The associated retirement of aircraft will result in material lease termination and other charges over this period. The timing and amount of these charges will depend on a number of factors, including our final negotiations with lessors, the timing of removing aircraft from service and ultimate disposition of aircraft included in the fleet restructuring program. We expect to benefit from reduced future maintenance cost and improved operational and fuel efficiency that we will experience over the life of the new aircraft.

New York Strategy, including our investment in Virgin Atlantic

In addition to building a domestic hub at LGA and creating a state of the art facility at JFK, we purchased a 49% interest in Virgin Atlantic from Singapore Airlines for $360 million. We plan to collaborate with Virgin Atlantic for operations on non-stop routes between the United Kingdom and North America, and have applied for antitrust immunity with the Department of Transportation. The antitrust immunized joint venture will allow for joint marketing and sales, coordinated pricing and revenue management, network planning and scheduling with respect to operations on joint venture routes between New York and London. Virgin Atlantic has a significant presence at London's Heathrow airport, which is access controlled. London's Heathrow airport is the airport of choice for business travelers traveling to and from London. Along with our state of the art facility at JFK, we believe our relationship with Virgin Atlantic will provide our customers superior service and connectivity between New York and London.

LaGuardia. During December 2011, we closed transactions with US Airways where we received takeoff and landing rights (each a "slot pair") at LaGuardia in exchange for slot pairs at Reagan National. This exchange allows us to operate a new domestic hub at LaGuardia. We have increased capacity at LaGuardia by 41% since March 2012, adding 110 new flights and a total of 27 new destinations. We currently operate about 270 daily flights between LaGuardia and 63 cities, more than any other airline.

We are also investing more than $160 million in a renovation and expansion project at LaGuardia to enhance the customer experience. In December 2012, we opened a connector linking Terminals C and D and in September 2012 we opened a new SkyClub in Terminal C. Ongoing investments include expanded security lanes and a baggage handling system in both terminals as well as an expanded SkyClub in Terminal D.

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


18


Prior to beginning our JFK redevelopment project, we primarily operated domestic flights out of Terminal 2 and international flights out of Terminal 3. Our initial five-year project at JFK to expand and enhance Terminal 4, which began in 2010 is on schedule. We have constructed nine new international gates in Terminal 4, which opened in May 2013. We have relocated our operations from Terminal 3 to our newly constructed facilities at Terminal 4 and have begun the demolition of Terminal 3. During 2013, we announced plans for an additional $180 million expansion project that will add 11 gates at Terminal 4. With the expansion, we will relocate our regional jet operations from Terminal 2 to Terminal 4. We expect that passengers will benefit from an enhanced customer experience and improved operational performance, including reduced taxi times and better on-time performance.

Fuel Expense, including refinery results

Fuel Expense. Fuel expense is our largest expense, representing approximately 35% of total operating expenses. For the June 2013 quarter, our total fuel expense decreased $724 million (including our regional carriers under capacity purchase agreements) compared to the June 2012 quarter. Excluding mark-to-market adjustments on hedges recorded in periods other than the settlement period ("MTM adjustments"), our fuel price per gallon, adjusted (a non-GAAP financial measure) for the quarter was $3.03 per gallon, compared to $3.37 per gallon for the June 2012 quarter. The market volatility of jet fuel prices greatly impacts our financial results. We manage our fuel cost through three primary methods: purchase agreements, fuel hedging and the operation of a refinery.
Fuel Purchase Cost. The market price per gallon of jet fuel decreased 7%, compared to the June 2012 quarter, which lowered our purchase cost of fuel. This decrease was partially offset by a 1% increase in consumption on higher capacity.
Fuel Hedging Program Impact. We actively manage our fuel price risk through a hedging program intended to reduce the financial impact on us from changes in the price of jet fuel.

During the June 2013 quarter, our consolidated fuel hedge loss was $78 million. This hedge loss included $125 million of MTM loss adjustments. These MTM adjustments are based on market prices as of the end of the reporting period for contracts settling in future periods. Such market prices are not necessarily indicative of the actual future value of the underlying hedge in the contract settlement period.

Refinery Segment Impact. Global demand for jet fuel and related products continues to increase while jet fuel refining capacity has declined in the U.S. (particularly in the Northeast), which increases the price we paid for jet fuel. We purchased an oil refinery in June 2012 as part of our strategy to manage the cost of jet fuel. Production at the refinery commenced in September 2012.
The refinery produces primarily gasoline, diesel and jet fuel. Under multi-year agreements, we are effectively exchanging the non-jet fuel products with Phillips 66 and BP for jet fuel to be used in our airline operations. The refinery produced 182,000 barrels per day in the June 2013 quarter. The jet fuel produced and procured through exchanging gasoline and diesel fuel produced by the refinery provided approximately 156,000 barrels per day of jet fuel for use in airline operations.

A refinery must satisfy U.S. Environmental Protection Agency requirements that are established each year 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. We believe that holders of RINs are withholding them from the secondary market as a consequence of these requirements, which have been increasing annually. This reduction of available RINs significantly impairs the secondary market as a means of compliance. The Company is pursuing regulatory and legislative solutions to this problem.
Because the refinery operated by Monroe does not blend renewable fuels, it must purchase its entire RINs requirement in the secondary market or obtain a waiver from the EPA and is, therefore exposed to the market price of RINs. The average historical price of RINs ranged from $0.02 to $0.05 per RIN in prior years, but increased to over $0.80 per RIN during the first half of 2013. Purchasing RINs, if available in the secondary market, at the current market price or higher prices would have a material impact on our results of operations and cash flows for the full year. For the June 2013 quarter, we recognized approximately $50 million of expense related to these renewable energy regulations, which is included in the refinery's results.
The refinery recorded a loss of $51 million in the June 2013 quarter, or five cents per gallon. The loss is primarily attributable to higher RINs expense as mentioned above. However, we believe the increase of jet fuel in the marketplace from our refinery's production has contributed to the reduction of overall jet fuel prices, and lowered our cost of jet fuel.


19


Results of Operations - Three Months Ended June 30, 2013 and 2012

Operating Revenue
 
Three Months Ended June 30,
 
 
(in millions)
2013
2012
Increase (Decrease)
% Increase
 (Decrease)
Passenger:
 
 
 
 
Mainline
$
6,796

$
6,620

$
176

3
 %
Regional carriers
1,698

1,811

(113
)
(6
)%
Total passenger revenue
8,494

8,431

63

1
 %
Cargo
232

262

(30
)
(11
)%
Other
981

1,039

(58
)
(6
)%
Total operating revenue
$
9,707

$
9,732

$
(25
)
—
 %

 
 
Increase (Decrease)
vs. Three Months Ended June 30, 2012
(in millions)
Three Months Ended June 30, 2013
Passenger
Revenue
RPMs(1)
(Traffic)
ASMs(2)
(Capacity)
Passenger Mile
Yield
PRASM(3)
Load
Factor
Domestic
$
3,885

4
 %
1
 %
3
 %
2
 %
1
 %
(1.4
) pts
Atlantic
1,578

2
 %
2
 %
1
 %
1
 %
1
 %
0.5
 pts
Pacific
841

(2
)%
1
 %
(3
)%
(3
)%
—
 %
2.7
 pts
Latin America
492

4
 %
6
 %
2
 %
(2
)%
1
 %
2.9
 pts
Total Mainline
6,796

3
 %
2
 %
2
 %
1
 %
1
 %
—

Regional carriers
1,698

(6
)%
(7
)%
(4
)%
1
 %
(2
)%
(2.6
) pts
Total passenger revenue
$
8,494

1
 %
1
 %
1
 %
—
 %
—
 %
(0.3
) pts

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

Passenger Revenue. Passenger revenue increased $63 million, or 1%, as PRASM and passenger mile yield were consistent with the June 2012 quarter. Capacity increased 1% in the domestic region and was consistent with the June 2012 quarter in international regions.

International mainline passenger revenue remained flat over June quarter 2012. Atlantic PRASM was up 1%, driven by a 1% increase in yield. Latin America passenger revenue increased 4%, driven by a 6% increase in traffic, partially offset by a 2% decline in yield. Pacific passenger revenue was negatively impacted by the weakening of the Japanese yen.


20


Operating Expense
 
Three Months Ended June 30,
Increase
(Decrease)
% Increase
(Decrease)
(in millions)
2013
2012
Aircraft fuel and related taxes
$
2,595

$
3,305

$
(710
)
(21
)%
Salaries and related costs
1,922

1,825

97

5
 %
Regional carrier expense
1,444

1,416

28

2
 %
Aircraft maintenance materials and outside repairs
472

548

(76
)
(14
)%
Depreciation and amortization
415

388

27

7
 %
Contracted services
409

397

12

3
 %
Passenger commissions and other selling expenses
408

393

15

4
 %
Landing fees and other rents
359

347

12

3
 %
Passenger service
197

187

10

5
 %
Profit sharing
118

135

(17
)
(13
)%
Aircraft rent
55

68

(13
)
(19
)%
Restructuring and other items
34

193

(159
)
(82
)%
Other
365

396

(31
)
(8
)%
Total operating expense
$
8,793

$
9,598

$
(805
)
(8
)%
 
Fuel Expense. Including regional carriers under capacity purchase agreements, fuel expense decreased $724 million due to a 7% decrease in fuel purchase cost price per gallon and lower fuel hedge losses, partially offset by a 1% increase in consumption. The table below presents fuel expense, gallons consumed and average price per gallon, including the impact of hedging and the refinery:
 
Three Months Ended June 30,
Increase
(Decrease)
% Increase
(Decrease)
(in millions, except per gallon data)
2013
2012
Aircraft fuel and related taxes(1)
$
2,595

$
3,305

$
(710
)
 
Aircraft fuel and related taxes included within regional carrier expense
507

521

(14
)
 
Total fuel expense
$
3,102

$
3,826

$
(724
)
(19
)%
 
 
 
 
 
Total fuel consumption (gallons)
981

968

13

1
 %
Average price per gallon
$
3.16

$
3.95

(0.79
)
(20
)%

(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, which is a non-GAAP financial measure. We exclude MTM adjustments, which are based on market prices as of the end of the reporting period for contracts settling in future periods, since such market prices are not necessarily indicative of the actual future value of the underlying hedge in the contract settlement period.
 
 
Average Price Per Gallon
 
Three Months Ended June 30,
Change
Three Months Ended June 30,
Change
(in millions, except per gallon data)(1)
2013
2012
2013
2012
Fuel purchase cost
$
2,935

$
3,110

$
(175
)
$
2.99

$
3.21

$
(0.22
)
Airline segment fuel hedge losses
116

716

(600
)
0.12

0.74

(0.62
)
Refinery segment impact
51

—

51

0.05

—

0.05

Total fuel expense
$
3,102

$
3,826

$
(724
)
$
3.16

$
3.95

$
(0.79
)
MTM adjustments
(125
)
(561
)
$
436

(0.13
)
(0.58
)
$
0.45

Total fuel expense, adjusted
$
2,977

$
3,265

$
(288
)
$
3.03

$
3.37

$
(0.34
)

(1)
Includes loss allocation of $25 million for the three months ended June 30, 2013 from the refinery segment to the airline segment, representing a portion of the refinery's inventory price risk.

21



Salaries and Related Costs. The increase in salaries and related costs is primarily due to employee pay increases.

Aircraft Maintenance Materials and Outside Repairs. Aircraft maintenance materials and outside repairs consists of costs associated with maintenance of aircraft used in our operations and costs associated with maintenance sales to third parties by our MRO services business. The decrease in maintenance costs is primarily due to lower costs of sales on lower sales to third parties of our MRO services and the cyclical timing of maintenance events on our fleet.

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


22


Results of Operations - Six Months Ended June 30, 2013 and 2012

Operating Revenue
 
Six Months Ended June 30,
 
 
(in millions)
2013
2012
Increase (Decrease)
% Increase
 (Decrease)
Passenger:
 
 
 
 
Mainline
$
12,656

$
12,282

$
374

3
 %
Regional carriers
3,158

3,375

(217
)
(6
)%
Total passenger revenue
15,814

15,657

157

1
 %
Cargo
470

506

(36
)
(7
)%
Other
1,923

1,982

(59
)
(3
)%
Total operating revenue
$
18,207

$
18,145

$
62

—
 %

 
 
Increase (Decrease)
vs. Six Months Ended June 30, 2012
(in millions)
Six Months Ended June 30, 2013
Passenger
Revenue
RPMs(1)
(Traffic)
ASMs(2)
(Capacity)
Passenger Mile
Yield
PRASM(3)
Load
Factor
Domestic
$
7,300

5
 %
1
 %
2
 %
4
 %
3
 %
(0.5
) pts
Atlantic
2,596

(1
)%
(2
)%
(4
)%
1
 %
3
 %
1.9
 pts
Pacific
1,713

1
 %
2
 %
(2
)%
(1
)%
2
 %
3.0
 pts
Latin America
1,047

5
 %
7
 %
2
 %
(2
)%
3
 %
3.8
 pts
Total Mainline
12,656

3
 %
1
 %
—
 %
2
 %
3
 %
1.0
 pts
Regional carriers
3,158

(6
)%
(8
)%
(6
)%
2
 %
—
 %
(1.8
) pts
Total passenger revenue
$
15,814

1
 %
—
 %
(1
)%
1
 %
2
 %
0.6
 pts

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

Passenger Revenue. Passenger revenue increased $157 million, or 1%, on a 2% PRASM increase and a 1% increase in passenger mile yield. Capacity was consistent with the six months ended June 30, 2012 in the domestic region and decreased 2% in international regions.

International mainline passenger revenue increased 1% over the six months ended June 30, 2012. Atlantic PRASM was up 3%, driven by a 1% increase in yield on a 4% reduction in capacity. Latin America passenger revenue increased 5%, driven by a 7% increase in traffic offset by a 2% decline in yield.


23


Operating Expense
 
Six Months Ended June 30,
Increase
(Decrease)
% Increase
(Decrease)
(in millions)
2013
2012
Aircraft fuel and related taxes
$
4,884

$
5,538

$
(654
)
(12
)%
Salaries and related costs
3,833

3,588

245

7
 %
Regional carrier expense
2,843

2,791

52

2
 %
Aircraft maintenance materials and outside repairs
963

1,109

(146
)
(13
)%
Depreciation and amortization
820

774

46

6
 %
Contracted services
810

775

35

5
 %
Passenger commissions and other selling expenses
765

773

(8
)
(1
)%
Landing fees and other rents
682

652

30

5
 %
Passenger service
361

358

3

1
 %
Profit sharing
138

135

3

2
 %
Aircraft rent
115

143

(28
)
(20
)%
Restructuring and other items
136

181

(45
)
(25
)%
Other
721

812

(91
)
(11
)%
Total operating expense
$
17,071

$
17,629

$
(558
)
(3
)%
 
Fuel Expense. Including regional carriers under capacity purchase agreements, fuel expense decreased $675 million due to a 5% decrease in fuel purchase cost price per gallon and lower fuel hedge losses. The table below presents fuel expense, gallons consumed and average price per gallon, including the impact of hedging and the refinery:
 
Six Months Ended June 30,
Increase
(Decrease)
% Increase
(Decrease)
(in millions, except per gallon data)
2013
2012
Aircraft fuel and related taxes(1)
$
4,884

$
5,538

$
(654
)
 
Aircraft fuel and related taxes included within regional carrier expense
1,026

1,047

(21
)
 
Total fuel expense
$
5,910

$
6,585

$
(675
)
(10
)%
 
 
 
 
 
Total fuel consumption (gallons)
1,856

1,854

2

—
 %
Average price per gallon
$
3.18

$
3.55

$
(0.37
)
(10
)%

(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
 
Six Months Ended June 30,
Change
Six Months Ended June 30,
Change
(in millions, except per gallon data)(1)
2013
2012
2013
2012
Fuel purchase cost
$
5,779

$
6,065

$
(286
)
$
3.11

$
3.27

$
(0.16
)
Airline segment fuel hedge losses
58

520

(462
)
0.03

0.28

(0.25
)
Refinery segment impact
73

—

73

0.04

—

0.04

Total fuel expense
$
5,910

$
6,585

$
(675
)
$
3.18

$
3.55

$
(0.37
)
MTM adjustments
(101
)
(410
)
309

(0.05
)
(0.22
)
0.17

Total fuel expense, adjusted
$
5,809

$
6,175

$
(366
)
$
3.13

$
3.33

$
(0.20
)

(1)
Includes loss allocation of $44 million for the six months ended June 30, 2013 from the refinery segment to the airline segment, representing a portion of the refinery's inventory price risk.



24


Salaries and Related Costs. The increase in salaries and related costs is primarily due to employee pay increases.

Aircraft Maintenance Materials and Outside Repairs. Aircraft maintenance materials and outside repairs consists of costs associated with maintenance of aircraft used in our operations and costs associated with maintenance sales to third parties by our MRO services business. The decrease in maintenance costs is primarily due to lower costs of sales on lower sales to third parties of our MRO services and the cyclical timing of maintenance events on our fleet.

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


25


Income Taxes

The following table shows the components of our income tax benefit (provision):
 
Three Months Ended June 30,
Six Months Ended June 30,
(in millions)
2013
2012
2013
2012
International and state income tax provision
$
(7
)
$
(4
)
$
(9
)
$
(7
)
Alternative minimum tax refunds
6

—

12

—

Income tax (provision) benefit
$
(1
)
$
(4
)
$
3

$
(7
)

We consider all income sources, including other comprehensive income, in determining the amount of tax benefit allocated to continuing operations. During the Six Months Ended three and six months ended June 30, 2013 and 2012, we did not record an income tax provision for U.S. federal income tax purposes since our deferred tax assets are fully reserved by a valuation allowance. At June 30, 2013, we had a $10.6 billion valuation allowance established against our deferred income tax assets. During 2012, we moved from a cumulative loss position over the previous three years to a cumulative income position for the first time since we established the full valuation allowance. While this is positive information, we concluded as of June 30, 2013 that the valuation allowance was still needed on our net deferred tax assets, especially considering our history that included six consecutive years of losses. We continue to evaluate our cumulative income position and income trend as well as our future projections of sustained profitability. We evaluate whether this profitability trend constitutes sufficient positive evidence to support a reversal of our valuation allowance (in full or in part). If this profitability trend continues for the remainder of 2013 and this level of profitability is projected in the future, we anticipate that we may reverse substantially all of our valuation allowance as early as the end of 2013.

Operating Statistics

The following table sets forth our operating statistics:
 
Three Months Ended June 30,
Six Months Ended June 30,
Consolidated(1)
2013
2012
2013
2012
Revenue passenger miles (millions)
50,781

50,520

93,859

93,871

Available seat miles (millions)
59,880

59,382

112,902

113,790

Passenger mile yield

16.73
¢

16.69
¢

16.85
¢

16.68
¢
Passenger revenue per available seat mile

14.19
¢

14.20
¢

14.01
¢

13.76
¢
Operating cost per available seat mile (CASM)

14.69
¢

16.16
¢

15.12
¢

15.49
¢
CASM-Ex(2)

8.98
¢

8.77
¢

9.34
¢

9.01
¢
Passenger load factor
84.8
%
85.1
%
83.1
%
82.5
%
Fuel gallons consumed (millions)
981

968

1,856

1,854

Average price per gallon(3)
$
3.16

$
3.95

$
3.18

$
3.55

Average price per gallon, adjusted(2)
$
3.03

$
3.37

$
3.13

$
3.33

Full-time equivalent employees, end of period
79,629

80,646

 
 

(1) 
Includes the operations of our regional carriers under capacity purchase agreements. Full-time equivalent employees exclude employees of regional carriers that we do not own.
(2) 
Non-GAAP financial measure as defined in "Operating Expense" above.
(3) 
Includes the impact of fuel hedge activity.


26


Fleet Information

Our operating aircraft fleet, commitments and options at June 30, 2013 are summarized in the following tables:
 
Current Fleet(1)
 
Commitments
 
Aircraft Type
Owned
Capital
Lease
Operating
Lease
Total
Average
Age
 
Purchase(2)(3)(4)
Lease
 
Options(4)
B-717-200
—

—

—

—

—

 
—

88

—

B-737-700
10

—

—

10

4.4

 
—

—

—

B-737-800
73

—

—

73

12.4

 
—

—

—

B-737-900ER
—

—

—

—

—

 
100

—

30

B-747-400
4

9

3

16

19.6

 
—

—

—

B-757-200
89

28

29

146

19.5

 
—

—

—

B-757-300
16

—

—

16

10.3

 
—

—

—

B-767-300
10

2

4

16

22.4

 
—

—

—

B-767-300ER
51

5

2

58

17.3

 
—

—

3

B-767-400ER
21

—

—

21

12.3

 
—

—

5

B-777-200ER
8

—

—

8

13.4

 
—

—

—

B-777-200LR
10

—

—

10

4.2

 
—

—

8

B-787-8
—

—

—

—

—

 
18

—

—

A319-100
55

—

2

57

11.4

 
—

—

—

A320-200
50

—

19

69

18.3

 
—

—

—

A330-200
11

—

—

11

8.2