The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Condensed Consolidated Financial Statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes included in our 2021 Form 10-K.
Our business and operating results continued to be impacted by the COVID-19 pandemic in the
March 2022quarter. We have seen continued improvement in our business during the March 2022quarter, which we expect to continue throughout 2022. Given the drastic and unprecedented impact of the COVID-19 pandemic on our operating results in 2021 and 2020, we believe that a comparison of our results in the March 2022quarter to both the March 2021and March 2019quarters in this overview section allows for a better understanding of the full impact of the COVID-19 pandemic and the progress of our recovery.
The table below shows certain key financial measures and statistics for the three months ended.
Three Months Ended March 31, 2022 vs. 2021 % 2022 vs. 2019 % Increase Increase (in millions) 2022 2021 2019 (Decrease) (1) (Decrease) (1) Total operating revenue
$ 9,348 $ 4,150 $ 10,472125 % (11) % Total operating expense 10,131 5,548 9,452 83 % 7 % Operating (loss)/income (783) (1,398) 1,020 (44) % NM Available seat miles ("ASM") 51,810 40,118 62,416 29 % (17) %
(1)Certain deviations are labeled as Not Material (“NM”) throughout Management’s Discussion and Analysis.
Our operating loss for the
March 2022quarter was $783 million, an improvement of $615 millioncompared to the March 2021quarter. This improvement was primarily due to a $4.2 billion, or 151%, increase in passenger revenue as a result of increased demand and capacity, partially offset by a $1.1 billionincrease in fuel expense, $1.2 billionof Payroll Support Programs ("PSP") grant proceeds recognized during the March 2021quarter and increases in other volume related expenses as we continue to restore our operation.
Compared to the operating result of
Revenue. Compared to the
Compared to the
March 2019quarter, our operating revenue was $1.1 billionlower, or 11%, on 17% lower system capacity, due primarily to the continued impact of the COVID-19 pandemic on travel demand, partially offset by higher refinery third party sales. We expect system capacity to be approximately 85% recovered in the June 2022quarter compared to the June 2019quarter. We have the ability to return to 2019 capacity levels by the end of 2022, if demand warrants. Beginning in the latter half of the March 2021quarter, we began to see bookings, primarily among domestic consumers, improve from the low levels of 2020. Throughout 2021, demand continued to improve, with some variability in periods of rising COVID-19 cases attributable to variants of the virus. Consumer demand accelerated through the March 2022quarter, highlighted by strong spring break performance. As the omicron variant faded, offices reopened and travel restrictions were lifted, leading to improved demand for business travel and a strengthened fare environment. The sale of tickets to domestic business customers (i.e., both corporate and contracted small- and medium-sized enterprises), including tickets for travel during and beyond the quarter ("domestic corporate advance sales"), significantly improved during the March 2022quarter. We remain optimistic about the ultimate recovery of business travel; however, we are unable to fully predict the pace of that recovery. Delta Air Lines, Inc. March 2022Form 10-Q 18 -------------------------------------------------------------------------------- Item 2. MD&A International revenue continues to lag the recovery in domestic travel due to certain international testing requirements and travel restrictions, but improved in the March 2022quarter to approximately 55% recovered compared to the March 2019quarter. During the March 2022quarter, many European countries removed entry testing requirements for vaccinated travelers. The sale of tickets to international business customers (i.e., both corporate and contracted small- and medium-sized enterprises), including tickets for travel during and beyond the quarter ("international corporate advance sales"), significantly improved during the March 2022quarter. Despite the recent policy changes and improved advance sales, we expect the lower international revenue environment to continue through at least the second quarter of 2022, with the recovery of international revenue continuing to trail domestic revenue. Operating Expense. Total operating expense in the March 2022quarter increased $4.6 billion, or 83%, compared to the March 2021quarter, primarily resulting from increased fuel costs due to both an increase in fuel price and increased capacity and higher volume-related expenses associated with the increase in capacity and demand, mainly aircraft maintenance and higher salaries and related costs. The increase also resulted from $1.2 billionof PSP grant proceeds recognized during the March 2021quarter, which reduced expenses and an increase in expenses related to refinery sales to third parties, reflected in ancillary business and refinery expense. Total operating expense, adjusted (a non-GAAP financial measure) for the March 2022quarter increased $2.7 billion, or 43%, compared to the March 2021quarter. Adjustments were primarily to exclude expenses related to refinery sales to third parties and PSP grant proceeds in the March 2021quarter. Total operating expense in the March 2022quarter increased $679 million, or 7%, compared to the March 2019quarter, primarily resulting from increased expenses related to refinery sales to third parties, reflected in ancillary business and refinery expense. Total operating expense, adjusted (a non-GAAP financial measure) for the March 2022quarter decreased $400 million, or 4%, compared to the March 2019quarter. Adjustments were primarily to exclude expenses related to refinery sales to third parties.
Cash flow. Our cash, cash equivalents, short-term investments and aggregate principal amount committed and available to be drawn under our revolving credit facilities (“cash”) at
March 2022quarter, the air traffic liability increased approximately $2.8 billion. We sell tickets for air travel in advance of the customer's travel date and the cash received on these advance sales is recorded as deferred revenue in our air traffic liability. Passenger revenue is recognized and the air traffic liability is reduced when we provide transportation services. The increase in the air traffic liability exceeds our historical seasonal increase, reflecting the continued restoration of our business. As discussed above, consumer demand for travel accelerated through the quarter. Domestic corporate advance sales for the March 2022quarter were approximately 50% recovered compared to the March 2019quarter and the month of March was approximately 70% recovered versus 2019. The domestic corporate advance sales recovery was also nearly 40 percentage points higher in the March 2022quarter compared to the March 2021quarter. International corporate advance sales for the March 2022quarter were approximately 35% recovered compared to the March 2019quarter, with the month of March improving to approximately 50% compared to March 2019. Internationally, Transatlantic improved the most as European countries reopened. The international corporate advance sales recovery was also nearly 30 percentage points higher in the March 2022quarter compared to the March 2021quarter.
In addition, total cash sales to American Express were
Also during the quarter, investing activities used a net of
$749 million, primarily for capital expenditures, partially offset by net redemptions of short-term investments. These activities resulted in $197 millionof free cash flow (a non-GAAP financial measure) in the March 2022quarter. Also, during the March 2022quarter we had cash outflows of approximately $1.4 billionrelated to repayments of our debt and finance leases.
The non-GAAP financial measures referenced above for operating expenses, adjusted and free cash flow are defined and reconciled in “Supplementary Information” below.
Delta Air Lines, Inc. March 2022Form 10-Q 19 -------------------------------------------------------------------------------- Item 2. MD&A Environmental Sustainability. During 2022, we are continuing to develop our climate transition plan and to have our medium- and long-term climate goals, including our goal of achieving net zero greenhouse gas emissions no later than 2050, validated by the Science Based Targets initiative, as described in our 2021 Form 10-K. We expect our path toward achievement of these goals to depend heavily on increased use of sustainable aviation fuel ("SAF") which is not presently available at scale or at prices competitive to jet fuel, and improved fuel efficiency from fleet renewal and operational initiatives. In the three months ended March 31, 2022, we also incurred $47 millionof expense related to carbon offset credits, which relates to a portion of our airline segment's 2021 carbon emissions. Delta Air Lines, Inc. March 2022Form 10-Q 20 -------------------------------------------------------------------------------- Item 2. MD&A - Results of Operations Results of Operations - Three Months Ended March 31, 2022and 2021
Three Months Ended March 31, % Increase (in millions)(1) 2022 2021 Increase (Decrease) (Decrease) Ticket - Main cabin
$ 3,448 $ 1,353 $ 2,095155 % Ticket - Premium products 2,538 924 1,614 175 % Loyalty travel awards 543 241 302 125 % Travel-related services 378 230 148 64 % Total passenger revenue $ 6,907 $ 2,748 $ 4,159151 % Cargo 289 215 74 34 % Other 2,152 1,187 965 81 % Total operating revenue $ 9,348 $ 4,150 $ 5,198125 % TRASM (cents) 18.04 ¢ 10.34 ¢ 7.70 ¢ 74 % Third-party refinery sales (2.29) (1.35) (0.94) 70 % TRASM, adjusted(2) 15.75 ¢ 9.00 ¢ 6.75 ¢ 75 % (1)Total amounts in the table above may not calculate exactly due to rounding. (2)TRASM, adjusted is a non-GAAP financial measure. For additional information on adjustments to TRASM, see "Supplemental Information" below.
Compared to the
March 2021quarter, our operating revenue increased $5.2 billion, or 125%, due to the continued recovery in demand from the COVID-19 pandemic and higher refinery third party sales. The increase in operating revenue, on a 29% increase in capacity, resulted in a 74% increase in total revenue per available seat mile ("TRASM") and a 75% increase in TRASM, adjusted compared to the March 2021quarter. The growth in passenger revenue was due to increased demand in both main cabin and premiums products, with premium products experiencing a quicker recovery than main cabin.
See “Refinery Segment” below for details of refinery operations, including refinery sales to third parties recognized in other income.
We have historically generated cargo revenues in domestic and international markets through the use of cargo space on regularly scheduled passenger aircraft. In 2020 and 2021, following the onset of the COVID-19 pandemic, reduced industry cargo capacity drove a significant increase in our cargo yield, and we also generated cargo revenue through the operation of cargo-only charter flights (i.e., using aircraft in our fleet not being utilized for passenger travel to fly cargo internationally). The higher cargo yield trend has continued into the
March 2022quarter driving the increase in revenue compared to the March 2021quarter. We expect capacity constraints and elevated market yields to continue through 2022 while the industry rebuilds international networks to pre-pandemic levels.
Passenger revenue per
Increase (Decrease) vs. Three Months Ended March 31, 2021 Three Months Ended Passenger Mile (in millions) March 31, 2022 Passenger Revenue RPMs (Traffic) ASMs (Capacity) Yield PRASM Load Factor Domestic $ 5,563 144 % 105 % 29 % 19 % 90 % 29 pts Atlantic 539 281 % 320 % 108 % (9) % 83 % 33 pts Latin America 680 158 % 93 % (1) % 33 % 160 % 38 pts Pacific 125 100 % 106 % 3 % (3) % 95 % 17 pts Total $ 6,907 151 % 116 % 29 % 17 % 95 % 30 pts Domestic Domestic passenger unit revenue ("PRASM") increased in the
March 2022quarter compared to the March 2021quarter as a result of the higher levels of capacity and demand during the March 2022quarter due to the ongoing recovery in the period. Delta Air Lines, Inc. March 2022 Form 10-Q 21 -------------------------------------------------------------------------------- Item 2. MD&A - Results of Operations The March 2022quarter domestic consumer revenue was above March 2021quarter levels. After starting with somewhat muted demand recovery due to rising COVID-19 cases attributable to variants of the virus, revenue recovery accelerated during the quarter as consumers continued to show increased confidence in travel. We also remain optimistic about the ultimate recovery of business travel, which is comprised of both corporate managed travel and small- and medium-sized businesses, and expect the recovery of both of these components to continue to increase throughout 2022. Business travel demand in the March 2022quarter was the highest since the onset of the COVID-19 pandemic.
International passenger revenue for the
March 2022quarter increased compared to the March 2021quarter as travel to certain destinations has resumed or increased. While some countries have removed or eased travel restrictions, many countries still maintain international testing requirements and travel restrictions, which have restrained demand in the short-term. In November 2021, travel restrictions for fully vaccinated foreign visitors to the United Stateswere lifted. This action made travel to the U.S.by many foreign nationals possible for the first time in 18 months. Despite this policy change, we expect the lower international revenue environment to continue through at least the second quarter of 2022, with the recovery of international revenue continuing to trail domestic revenue. We will continue to be nimble in the restoration of our international network based on changes in government restrictions and consumer demand. The Atlanticregion continues to improve, despite the conflict in Ukraine, as western European countries remove or ease travel restrictions. In February 2022, we suspended our codeshare services operated in conjunction with Russian national airline, Aeroflot, which is not expected to have a material impact on our Atlanticregion revenues as Russiaand Ukrainerepresent less than one percent of our Atlanticregion traffic.
The Pacific region continues to be the most impacted by the restrictions described above. Travel in the Pacific region remains largely limited to essential travel, and we expect only small demand improvements until government restrictions ease, such as
South Korea'srecent announcement that vaccinated travelers would be able to enter the country without quarantine beginning on April 1, 2022. Ticket Validity Flexibility In order to provide our customers more flexibility and time to plan or rebook their travel, in January 2022, we announced that all existing travel credit holders will have until December 31, 2023to rebook their ticket for travel throughout 2024. Additionally, all Deltacustomers with upcoming 2022 travel or who purchase a ticket in 2022 will also have the flexibility to rebook their ticket through December 31, 2023, and travel throughout 2024. We estimate the value of ticket breakage and recognize the related revenue at the scheduled flight date. Our ticket breakage estimates are primarily based on historical experience, ticket contract terms and customers' travel behavior. Given the impact of the COVID-19 pandemic on customer behavior and changes made in ticket validity terms, as well as the elimination of change fees for most tickets, our estimates of revenue that will be recognized from the air traffic liability for unused tickets may vary in future periods. Delta Air Lines, Inc. March 2022 Form 10-Q 22 -------------------------------------------------------------------------------- Item 2. MD&A - Results of Operations Other Revenue Three Months Ended March 31, % Increase (in millions) 2022 2021 Increase (Decrease) (Decrease) Refinery $ 1,187 $ 540$ 647 120 % Loyalty program 571 368 203 55 % Ancillary businesses 209 186 23 12 % Miscellaneous 185 93 92 99 % Total other revenue $ 2,152 $ 1,187$ 965 81 % Refinery. This represents refinery sales to third parties. These sales, which are at or near cost, increased $647 millioncompared to the March 2021quarter. The increase in third-party refinery sales resulted from higher pricing and production during the March 2022quarter compared to the March 2021quarter. See "Refinery Segment" below for additional details on the refinery's operations, including third party refinery sales recorded in other revenue. Loyalty Program. Loyalty program revenues relate to brand usage by third parties and other performance obligations embedded in miles sold, including redemption of miles for non-travel awards. These revenues are mainly driven by customer spend on American Express cards and new cardholder acquisitions. As co-brand card spend and card acquisitions continue to be strong, revenues from our relationship with American Express increased in the March 2022quarter compared to 2021.
Related companies. Ancillary business revenue includes aircraft maintenance services we provide to third parties and our vacation wholesale business.
Miscellaneous. Miscellaneous revenue is primarily composed of lounge access, including access provided to certain American Express cardholders, and codeshare revenues. The volume of these transactions has increased compared to the
March 2021quarter due to the ongoing recovery of our business that continued to materialize in the March 2022quarter. Our network of Delta Sky Clublounges was fully reopened by the end of July 2021after some lounges temporarily closed at the onset of the pandemic in 2020. Delta Air Lines, Inc. March 2022 Form 10-Q 23 -------------------------------------------------------------------------------- Item 2. MD&A - Results of Operations Operating Expense Three Months Ended March 31, % Increase (in millions) 2022 2021 Increase (Decrease) (Decrease) Salaries and related costs $ 2,826 $ 2,202 $ 62428 % Aircraft fuel and related taxes 2,092 1,017 1,075 106 % Ancillary businesses and refinery 1,382 706 676 96 % Contracted services 753 519 234 45 % Depreciation and amortization 506 492 14 3 % Landing fees and other rents 504 493 11 2 % Regional carrier expense 491 401 90 22 % Aircraft maintenance materials and outside repairs 465 294 171 58 % Passenger commissions and other selling expenses 312 110 202 184 % Passenger service 275 118 157 133 % Aircraft rent 122 104 18 17 % Restructuring charges (5) (44) 39 (89) % Government grant recognition - (1,186) 1,186 (100) % Other 408 322 86 27 % Total operating expense $ 10,131 $ 5,548 $ 4,58383 % Salaries and Related Costs. During 2021, we continued to offer voluntary unpaid leaves of absence in response to the COVID-19 pandemic for periods ranging from 30 days up to 12 months and approximately 13,000 of our employees elected to take a leave of absence during the March 2021quarter. In the March 2022quarter we no longer offered these leaves of absence as the program terminated by the end of the September 2021quarter. Additionally, we hired approximately 15,000 employees since the March 2021quarter, of which approximately 4,000 were in the March 2022quarter, in certain areas, including flight operations, reservations and customer care and airport customer service, in order to support our operations as demand and capacity returns. These actions resulted in higher salaries and related costs during the March 2022quarter compared to the March 2021quarter.
Aircraft Fuel and Related Taxes. Fuel expense increased
$1.1 billioncompared to the March 2021quarter primarily due to a 71% increase in the market price of jet fuel and a 38% increase in consumption on a comparable increase in capacity. We expect this elevated jet fuel cost to continue throughout 2022 due to recent market disruptions, further exacerbated by geopolitical events.
Moreover, during the
Fuel expenses and average price per gallon
Average Price Per Gallon Three Months Ended March 31, Three Months Ended March 31, (in millions, except per Increase gallon data) 2022 2021 Increase (Decrease) 2022 (Decrease) 2021 Fuel purchase cost(1)
$ 2,102 $ 895 $ 1,207 $ 2.81 $ 1.64 $ 1.17Carbon offset costs 47 20 27 0.06 0.04 0.02 Fuel hedge impact (4) (23) 19 (0.01) (0.04) 0.03 Refinery segment impact (53) 125 (178) (0.07) 0.23 (0.30) Total fuel expense $ 2,092 $ 1,017 $ 1,075 $ 2.79 $ 1.87 $ 0.92
(1) Market price of jet fuel at airport locations, including related taxes and transportation costs.
Delta Air Lines, Inc. March 2022Form 10-Q 24 -------------------------------------------------------------------------------- Item 2. MD&A - Results of Operations Ancillary Businesses and Refinery. Ancillary businesses and refinery includes expenses associated with refinery sales to third parties, aircraft maintenance services we provide to third parties and our vacation wholesale operations. Increased expenses were primarily related to refinery sales to third parties, which are at or near cost. The refinery cost of sales increased $647 millioncompared to the March 2021quarter. The increase in third-party refinery sales resulted from higher pricing and production during the March 2022quarter compared to the March 2021quarter.
Contractual Services. During the
Regional Carrier Expenses. Spending by regional carriers increased from
Aircraft maintenance equipment and exterior repairs. Maintenance expenses have increased compared to
Passenger commissions and other selling expenses. Compared to the
March 2021quarter, passenger revenue increased 151% in the March 2022quarter, which was the primary reason for the increase in passenger commissions and other selling expenses.
Passenger service. Passenger service increased from
quarter due to the increase in traffic mentioned above.
Restructuring Charges. During 2020, we recorded restructuring charges for items such as fleet impairments and voluntary early retirement and separation programs following strategic business decisions in response to the COVID-19 pandemic. In the
March 2022quarter, we recognized $5 millionof net adjustments to certain of those restructuring charges, representing changes in our estimates, compared to $44 millionof net adjustments in the March 2021quarter.
Recognition of government grants. During the
Non-Operating Results Three Months Ended March 31, Favorable (in millions) 2022 2021 (Unfavorable) Interest expense, net $ (274)
$ (361)$ 87 Equity method results - (54) 54 Gain/(loss) on investments, net (147) 262 (409) Loss on extinguishment of debt (25) (56) 31 Pension and related benefit/(expense) 73 107 (34) Miscellaneous, net (44) (15) (29) Total non-operating expense, net $
Interest expense, net. Interest expense, net includes interest expense and interest income. This decreased compared to the
March 2021quarter as a result of our debt reduction initiatives since the December 2020quarter. During 2021, we made payments of approximately $5.8 billionrelated to our debt and finance leases, which included approximately $3.8 billionfor early repayments. We have continued to pay down our debt in the March 2022quarter with $1.4 billionof payments on debt and finance lease obligations, including $199 millionfor the early repurchase of various secured notes and unsecured notes through repurchases on the open market. We continue to seek opportunities to pre-pay our debt, in addition to periodic amortization and scheduled maturities, during the remainder of 2022 and beyond.
Results according to the equity method. The results of the equity method in 2021 reflected our share of
Delta Air Lines, Inc. March 2022Form 10-Q 25 -------------------------------------------------------------------------------- Item 2. MD&A - Non-Operating Results Gain/(loss) on investments, net. Changes in the valuation of investments accounted for at fair value are recorded in gain/(loss) on investments, net and are driven by changes in stock prices, foreign currency fluctuations and other valuation techniques for investments in companies without publicly-traded shares. See Note 4 of the Notes to the Condensed Consolidated Financial Statements for additional information on our equity investments measured at fair value on a recurring basis.
Loss on extinguishment of debt. The loss on extinguishment of debt reflects the losses incurred on the early redemption of the notes mentioned above.
Pension and related benefit/(expense). Pension and related benefit/(expense) reflects the net periodic benefit/(cost) of our pension and other postretirement and postemployment benefit plans. Based on our level of funding at year-end, we have modified the strategic asset allocation mix to reduce the investment risk of the portfolio. As a result of the lower risk profile of the portfolio, the weighted average expected long-term rate of return on our defined benefit pension plan assets for 2022 net periodic benefit cost is 7.0%.
Miscellaneous, neat. Miscellaneous, net primarily includes foreign exchange gains/(losses) and charitable contributions.
We project that our annual effective tax rate for 2022 will be approximately 25%. In certain interim periods, we may have adjustments to our net deferred tax assets as a result of changes in prior year estimates and tax laws enacted during the period, which will impact the effective tax rate for that interim period. Refinery Segment
The refinery operated by Monroe primarily produces gasoline, diesel and jet fuel. Monroe trades jet fuel products that the refinery produces with third parties for jet fuel consumed in our flight operations. Historically, jet fuel produced and purchased through the exchange of gasoline and diesel fuel produced by the refinery has supplied approximately 200,000 barrels per day, or approximately 75% of our pre-pandemic COVID-19 consumption, for use in our air operations.
In the three months ended
Financial information of the refinery sector
Three Months Ended March
Increase % Increase (in millions, except per gallon data) 2022 2021 (Decrease) (Decrease) Exchange products $ 809
$ 503 $ 30661 % Sales of refined products 26 4 22 NM Sales to airline segment 291 - 291 NM Third party refinery sales 1,187 540 647 120 % Operating revenue $ 2,313 $ 1,047 $ 1,266121 % Operating income/(loss) $ 53 $ (125) $ 178NM Refinery segment impact on airline average price per fuel gallon $ (0.07) $ 0.23 $ (0.30)NM Refinery revenues increased compared to the three months ended March 31, 2021due primarily to higher pricing and production during the March 2022quarter compared to the March 2021quarter. The refinery generated operating income of $53 millionin the March 2022quarter compared to an operating loss of $125 millionin the March 2021quarter which was driven by the revenue increase described above, and partially offset by increased expense associated with the higher levels of production. Delta Air Lines, Inc. March 2022 Form 10-Q 26 -------------------------------------------------------------------------------- Item 2. MD&A - Refinery Segment A refineryis subject to annual U.S. Environmental Protection Agency(" EPA") requirements to blend renewable fuels into the gasoline and on-road diesel fuel it produces. Alternatively, a refinery may purchase Renewable Identification Numbers ("RINs") from third parties in the secondary market. The Monroe refinerypurchases the majority of its RINs in the secondary market. Observable RINs prices increased slightly during the March 2022quarter and Monroe incurred $85 millionin RINs compliance costs during the three months ended March 31, 2022compared to $158 millionin the three months ended March 31, 2021. The higher expense in the March 2021quarter resulted from a larger increase in observable RINs prices during that period compared to the slight increase in the March 2022quarter. At March 31, 2022, we had a net fair value obligation of $430 millionrelated to RINs compliance costs. Our obligation as of March 31, 2022was calculated using the proposed Renewable Fuel Standard ("RFS") volume requirements, which were issued in December 2021. The EPAhas not finalized the compliance deadlines to retire our obligations for 2020 and 2021, but we expect those deadlines to be within one year of the effective date of the new RFS volume requirements.
For more information on the refinery’s results, see note 9 to the condensed consolidated financial statements.
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