2012



MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  

 

Financial Highlights - 2012 Compared to 2011  

 

Our net income for 2012 was $1.0 billion , or $1.19 per diluted share. Total operating revenue increased $1.6 billion , or 4% , over 2011 , primarily due to higher passenger revenue due to yield improvement. Fuel expense, including our contract carriers under capacity purchase agreements, increased due to a 6% increase in our average price per gallon, despite a 2% decrease in consumption.  

 

Passenger revenue increased $1.6 billion due to a 5% year over year improvement in passenger mile yield on flat traffic, while capacity declined 2% . Passenger revenue per available seat mile ("PRASM") increased 7% over 2011 , reflecting higher revenue under corporate travel contracts and improvements in our products and services.  

 

Total operating expense increased $1.4 billion over 2011 , driven primarily by higher fuel expense and salaries and related costs. Our fuel expense increased $468 million (including our contract carriers under capacity purchase agreements) compared to 2011 due to a 6% increase in our average price per gallon, despite a 2% decrease in consumption. During 2012, we recorded losses of $66 million due to changes in the fair value of our fuel hedge portfolio. Excluding mark-to-market adjustments recorded in periods other than the settlement period ("MTM adjustments"), our average fuel price for the year was $3.26 per gallon, compared to $3.05 per gallon for 2011 .  

 

Our consolidated operating cost per available seat mile ("CASM") for 2012 increased 6% to $14.97 cent s, primarily reflecting increased fuel price. For 2012 , CASM-Ex was $8.92 cent s, or 5% higher than 2011 . The non-GAAP financial measures used in this section are defined in "Supplemental Information" below.  

 

Company Initiatives  

 

Strengthening the Balance Sheet  

 

We will continue to focus on cash flow generation with the goal of further strengthening our balance sheet. We finished 2012 with $5.2 billion in unrestricted liquidity (consisting of cash, cash equivalents, short-term investments and undrawn revolving credit facility capacity). During 2012, we generated $2.5 billion in cash from operating activities, and reduced debt by $1.1 billion and funded capital expenditures while maintaining a solid liquidity position.  

 

Structural Cost Initiatives  

 

We implemented a $1 billion structural cost initiatives program. 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  

Other costs to improve network efficiency and to reduce transportation expense.  

 

We anticipate realizing the benefits