What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-02-12 compared with 2020-02-13 · 655 added, 344 removed, 269 unchanged (79% of the section changed)

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

This section of this Form 10-K does not address certain items regarding the year ended December 31, 2017.

This section of Form 10-K does not address certain items regarding the year ended December 31, 2018.

Discussion and analysis of 2018 and year-to-year comparisons between 2019 and 2018 not included in this Form 10-K can be found in "Item 7.

Management's Discussion and Analysis" of our Annual Report on Form 10-K for the year ended December 31, 2019.

Year in Review

Delta had a strong year in 2019, delivering record financial results and making significant progress on strategic priorities.

We leveraged our brand momentum to drive strong revenue growth and improvement in pre-tax income, margin, earnings per share and free cash flow over 2018.

Strategic accomplishments during the year include our renewed agreement with American Express and announcing plans to enter into a strategic alliance with LATAM.

Our pre-tax income for 2019 was $6.2 billion, representing a $1 billion, or 20%, increase compared to the prior year.

Diluted earnings per share of $7.30 improved 29% over 2018.

Our $8.4 billion of cash flows from operations helped fund $4.9 billion in capital expenditures, resulting in free cash flow of $4.2 billion, representing a $1.8 billion improvement to the prior year.

We returned 72% of free cash flow, or $3 billion, to shareholders through share repurchases and dividends.

The improvement in earnings and cash flow primarily resulted from a $2.6 billion increase in revenue and lower fuel expense on an 8% decrease in the market price per gallon of fuel and improved fuel efficiency.

We continued to run the world’s most reliable airline and set a new record for zero cancel days with 165 cancel-free days across the system and 281 on our mainline operations.

Industry-leading operational performance, our culture of service and continued product investments supported record customer satisfaction scores.

In 2019, we increased net promoter scores in every geographic region, highlighted by a 5-point improvement in the Domestic region to 50%.

Strong Brand Drives Revenue Growth

Compared to 2018, our operating revenue increased $2.6 billion, or 5.8%, on balanced growth across our diverse revenue streams, with premium product ticket revenue driving nearly half of the improvement, and strong growth in both loyalty and MRO revenue.

Total revenue per available seat mile ("TRASM") and TRASM, adjusted (a non-GAAP financial measure) increased 1.2% and 2.8%, respectively, compared to the prior year, led by (1) unit revenue growth in our Domestic and Latin regions, (2) demand strength in both business and leisure segments and (3) strong growth in premium products and non-ticket revenues.

Total loyalty revenue grew 18% in 2019.

Solid Cost Performance

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited Consolidated Financial Statements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K.

Impact of the COVID-19 Pandemic

The unprecedented, widespread and persistent impact of COVID-19 and the related travel restrictions and social distancing measures implemented throughout the world have significantly reduced demand for air travel.

After initially impacting our service to China beginning in January 2020, the spread of the virus and the resulting global pandemic have significantly affected our entire network.

Beginning in March 2020, large public events were cancelled, governmental authorities began imposing restrictions on non-essential activities, businesses suspended travel and popular leisure destinations temporarily closed to visitors.

Certain countries that are key markets for our business have imposed bans on international travelers for specified periods or indefinitely.

As a result, demand for travel declined at a rapid pace in the March 2020 quarter and has remained depressed, which has had an unprecedented and materially adverse impact on our results of operations and financial position.

Although demand has improved at a slow pace since that time, it remains significantly below pre-pandemic levels.

The exact timing and pace of the recovery remain uncertain as certain markets have reopened, some of which have since experienced a resurgence of COVID-19 cases, while others, particularly international markets, remain closed or are enforcing extended quarantines for most U.S.

and numerous other countries are now also requiring airline passengers to provide negative COVID-19 test results prior to travel into their countries.

Additionally, some states have instituted travel restrictions, advisories or quarantines for travelers from other states within the U.S.

We expect the demand environment to remain depressed until effective vaccines become broadly available, vaccination becomes widespread globally and travel restrictions and advisories begin to ease.

Our forecasted expense and liquidity management initiatives may be modified as the demand environment evolves.

In response to these developments, we have implemented enhanced measures focusing on the safety of our customers and employees, while at the same time seeking to mitigate the impact on our financial position and operations and to position our business for recovery.

Taking Care of our Customers and Employees.

The safety of our customers and employees is our primary focus.

As the COVID-19 pandemic has progressed, we have taken numerous steps to help promote the safety of our customers and employees on the ground and in the air in keeping with current health-expert recommendations, including:

• Adopting new cleaning procedures on all flights, including regular disinfectant electrostatic spraying on aircraft and sanitizing high-touch areas like tray tables, entertainment screens, armrests and seat-back pockets.

• Taking steps to help employees and customers practice social distancing and promote safety, including:

◦ Creating a Global Cleanliness Division to ensure a consistently safe and sanitized experience across our facilities and aircraft.

◦ Beginning in May 2020, requiring all customers and customer-facing employees to wear masks.

◦ Capping load factors throughout our aircraft and blocking middle seats through at least April 30, 2021.

◦ Modifying our boarding and deplaning processes, while providing limited food and beverage service that is designed to reduce physical touch points.

◦ Encouraging social distancing throughout all aspects of our operation.

◦ Implementing significant workforce social distancing and protection measures, including reconfiguring call center spaces to promote social distancing, increasing cleaning and disinfecting of our facilities and encouraging employees to work remotely when possible.

• Giving customers flexibility to plan and re-book travel, including extending expiration on certain tickets and travel credits through December 2022, eliminating change fees for domestic tickets and international tickets originating from North America, with the exception of Basic Economy tickets, and waiving change fees for all tickets purchased before March 30, 2021.

Additionally, we are extending 2020 Medallion Status an additional year, rolling Medallion Qualification Miles into 2021 and extending Delta SkyMiles American Express Card benefits and Delta Sky Club memberships.

Delta Air Lines, Inc.

2020 Form 10-K 30

MD&A - Financial Highlights

• Offering pay protection to employees who have tested positive for COVID-19, who must quarantine due to exposure to COVID-19, who are considered being at high-risk for illness from COVID-19 according to the Centers for Disease Control and Prevention ("CDC") guidelines and do not have the ability to work remotely.

• Offering on-site rapid COVID-19 testing in most locations and making at-home testing available for all U.S.-based employees.

We have also added rapid testing in most U.S.

hubs for active flight crews.

Capacity Reductions.

Beginning in the second half of March 2020, we experienced a precipitous decrease in demand as COVID-19 spread throughout the world.

While we have increased capacity compared to the lowest levels in April 2020, system capacity remains significantly lower than prior to the COVID-19 pandemic.

During 2020, system capacity was reduced approximately 50% compared to 2019, with international capacity reduced by approximately 65% and domestic capacity reduced by approximately 45%.

System capacity for the March 2020 through December 2020 period, excluding the pre-pandemic months of January and February, was reduced by approximately 60%, with international capacity reduced by approximately 75% and domestic capacity reduced by approximately 50%.

For the March 2021 quarter, system capacity is expected to be down approximately 30%-40% compared to the March 2019 quarter.

As a result of reduced demand and lower capacity, we retired 227 aircraft in 2020 and have temporarily parked approximately 125 aircraft as of December 31, 2020.

Expense Management.

In response to the reduction in revenue, we have implemented, and will continue to implement, cost saving initiatives, including the following in 2020:

• Reducing capacity as described above to align with expected demand, which has resulted in removing from active service approximately 350 aircraft as of December 31, 2020, including certain fleets or aircraft that we have decided to early retire as described below.

• Consolidating our footprint at our airport facilities, including temporarily closing some Delta Sky Clubs.

• Avoiding furloughs for our U.S.

employees and reducing employee-related costs, through the following:

◦ Voluntary unpaid leaves of 30 days to 12 months offered to most employees.

Approximately 50,000 of our employees have taken or have elected to take voluntary leaves at various times during 2020 and, for those taking leaves up to 12 months, continuing through 2021.

◦ Offering employees early retirement and voluntary separation programs, with approximately 18,000 employees electing to participate.

See Note 11 of the Notes to the Consolidated Financial Statements for additional information.

◦ Reaching an agreement with ALPA that protects our pilots from furlough through April 2022.

◦ From April 1 through December 31, 2020, salary reductions of 100% for our CEO, 50% for our officers and a 25% reduction in work hours for all other management and most front-line employee work groups.

• Delaying or eliminating nearly all other discretionary spending.

Balance Sheet, Cash Flow and Liquidity.

Our cash, cash equivalents, short-term investments and aggregate principal amount committed and available to be drawn under our revolving credit facilities ("liquidity") as of December 31, 2020 was $16.7 billion as a result of the following actions to increase liquidity and strengthen our financial position during the year ended December 31, 2020:

• Completing financing transactions for an aggregate principal amount of approximately $25.9 billion.

• Receiving $5.6 billion as part of the CARES Act payroll support program as described in "Government Support Programs" below.

• Reducing planned capital expenditures by approximately $2.8 billion for the year to $1.9 billion, including restructuring our aircraft order books for future aircraft deliveries, delaying aircraft modifications and postponing certain information technology initiatives and ground equipment replacement.

See Note 12 of the Notes to the Consolidated Financial Statements for additional information about our aircraft purchase commitments.

• Amending our credit facilities to replace fixed charge coverage ratio covenants with liquidity-based covenants.

• Suspending share repurchases and dividends indefinitely and postponing voluntary pension funding.

In addition, in January 2021 we received $1.4 billion with respect to the payroll support program extension described below, with the remaining $1.5 billion expected in the March 2021 quarter.

In response to the impact that the demand environment has had on our financial condition, our credit rating was downgraded by Standard & Poor's to BB in March 2020 and by Fitch to BB+ in April 2020.

Our credit rating from Moody's remains Baa3.

See "Financial Condition and Liquidity - Sources and Uses of Liquidity" for additional information.

Our debt agreements contain various affirmative, negative and financial covenants.

See Note 8 of the Notes to the Consolidated Financial Statements for additional information on these covenants.

Delta Air Lines, Inc.

2020 Form 10-K 31

MD&A - Financial Highlights

Government Support Programs

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted into law.

The CARES Act is a support package intended to assist many aspects of the American economy, including providing the airline industry with up to $25 billion in grants and loans to be used for employee wages, salaries and benefits.

In April 2020, we entered into an agreement with the U.S.

Department of the Treasury to receive emergency support through the CARES Act payroll support program, which totaled $5.6 billion.

The support payments were conditioned on our agreement to comply with a variety of conditions, including to refrain from conducting involuntary employee layoffs or furloughs through September 30, 2020.

The support payments consisted of $4.0 billion in a grant and $1.6 billion in an unsecured 10-year low interest loan.

The loan bears interest at an annual rate of 1.00% for the first five years (through April 2025) and the Secured Overnight Financing Rate ("SOFR") plus 2.00% in the final five years.

In return, we issued to the U.S.

Department of the Treasury warrants to acquire more than 6.7 million shares of Delta common stock, which represented approximately 1% of our outstanding shares.

These warrants have an initial exercise price of $24.39 per share, subject to adjustment in certain cases, and a five-year term.

The relative fair value of the warrants issued in 2020 is recorded within stockholder's equity and as a discount reducing the carrying value of the loan which is being amortized as interest expense in our Consolidated Statements of Operations ("income statement") over the term of the loan.

The proceeds of the 2020 CARES Act grant were recorded in cash and cash equivalents when received and were recognized as contra-expense in government grant recognition in our income statement over the periods that the funds were intended to compensate.

See Note 8 of the Notes to the Consolidated Financial Statements for further discussion of the unsecured loan and warrants to acquire Delta shares issued under the CARES Act payroll support program.

Finally, the CARES Act also provides for deferred payment of the employer portion of social security taxes through the end of 2020, with 50% of the deferred amount due December 31, 2021 and the remaining 50% due December 31, 2022.

This provided us with approximately $200 million of additional liquidity during 2020.

On December 27, 2020, an additional COVID-19 support bill was enacted into law, which extends the payroll support program of the CARES Act and provides an additional $15 billion in grants and loans to be used for airline employee wages, salaries and benefits.

In January 2021, we entered into a payroll support program extension agreement with the U.S.

Department of the Treasury.

We expect to receive $2.9 billion in payroll support payments, which must be used exclusively for the payment of employee wages, salaries and benefits and are conditioned on our agreement to refrain from conducting involuntary employee layoffs or furloughs from the date of the extension agreement through March 2021.

Other conditions include prohibitions on share repurchases and dividends through March 2022 and certain limitations on executive compensation until October 2022.

The Department of Transportation also has the authority until March 1, 2022 to require airlines that received payroll support program funds to maintain scheduled air service deemed necessary to any point served by the airline before March 1, 2020.

The expected support payments consist of approximately $2.0 billion in grants and $830 million in an unsecured 10-year low interest loan.

We received the first installment of $1.4 billion under the agreement on January 15, 2021 and expect to receive the balance in the March 2021 quarter.

The loan bears interest at an annual rate of 1.00% for the first five years (through January 15, 2026) and the applicable SOFR plus 2.00% in the final five years.

Approximately 70% of the payment received on January 15, 2021 was in the form of a grant, and approximately 30% was in the form of an unsecured loan.

We issued a promissory note for approximately $400 million with respect to the term loan, which will increase to its full principal amount as the balance of payroll support payments is received.

In connection with receipt of these payments, we also expect to issue to the U.S.

Department of the Treasury warrants to acquire shares of Delta common stock, which we expect to be approximately 2.1 million shares representing less than 0.5% of our outstanding shares.

Approximately one-half of the expected warrants were issued on January 15, 2021 and the remaining warrants will be issued as the balance of payroll support payments is received.

These warrants have an initial exercise price of $39.73 per share, subject to adjustment in certain cases, and a five-year term.

Delta Air Lines, Inc.

2020 Form 10-K 32

MD&A - Financial Highlights

Financial Highlights - 2020 Compared to 2019

Our pre-tax loss for 2020 was $15.6 billion, representing a $21.8 billion decrease compared to the prior year primarily due to the impact of the COVID-19 pandemic on our business which resulted in a 64% decrease in revenue and $8.2 billion of restructuring charges and $2.4 billion in investment impairments and equity method losses.

Pre-tax loss, adjusted (a non-GAAP financial measure) was $9.0 billion, a decrease of $15.2 billion compared to the prior year.

Adjustments for 2020 were primarily related to restructuring charges from fleet retirement decisions, voluntary early retirement and separation programs charges and investment impairments and equity method losses, which were partially offset by recognition of the CARES Act grant.

Compared to 2020, our operating revenue decreased $29.9 billion, or 64% due to reduced demand resulting from the COVID-19 pandemic.

Operating Expense.

Operating expense increased $1.2 billion, or 3.1%, primarily due to higher revenue- and capacity-related expenses including wages and profit sharing for employees and contracted services expense.

Salaries and related costs were higher due to pay rate increases for eligible employees implemented during 2019, while profit sharing was higher due to increased profitability in 2019.

The increase in contracted services expense predominantly relates to services performed by Delta Global Services ("DGS") that were recorded in salaries and related costs prior to the sale of that business in December 2018.

These increases were partially offset by lower fuel expense on an 8% decrease in the market price per gallon of fuel and improved fuel efficiency driven by our ongoing fleet transformation.

Our operating cost per available seat mile ("CASM") decreased 1.3% to 14.67 cents compared to 2018, primarily due to lower fuel expense and a 4.6% increase in capacity.

Non-fuel unit costs ("CASM-Ex", a non-GAAP financial measure) increased 2.0% to 10.52 cents due to the higher revenue- and capacity-related expense increases discussed above.

Non-Operating Expense.

Total non-operating expense was $420 million during 2019 compared to $113 million in 2018, primarily due to an increase in pension and related expense compared to the prior year, partially offset by higher gains on investments.

Expanding Our Global Network

In 2019, international revenues grew 2.7% on a 3.3% increase in capacity.

We continued to make significant progress in expanding our global reach by acquiring an equity stake in Hanjin-KAL, the largest shareholder of Korean Air, and announcing plans to enter into a strategic alliance with LATAM and completing a tender offer to acquire a 20% equity stake which closed in January 2020.

Effective in January 2020, we combined our separate transatlantic joint venture agreements with Air France-KLM and Virgin Atlantic into a single three-party transatlantic joint venture.

In addition, we continue to make progress on our joint venture agreement with WestJet with respect to trans-border routes between the U.S.

This agreement remains subject to required regulatory approvals.

Investing for the Future

Our $8.4 billion of cash flows from operations helped fund $4.9 billion in capital expenditures for the business.

As part of our multi-year fleet transformation, we took delivery of 88 new aircraft, including A321-200s, B-737-900ERs, A350-900s, A330-900s, A220-100s and CRJ-900s.

These deliveries allowed for the retirement of older, less fuel efficient aircraft, including the announced retirement of our MD-90 fleet by the end of 2022.

We also made significant investments in cabin interior refurbishments, Sky Clubs and technology.

The non-GAAP financial measures free cash flow, TRASM, adjusted and CASM-Ex used above, are defined and reconciled in "Supplemental Information" below.

Total operating expense decreased $10.8 billion, or 27%, compared to the prior year, primarily resulting from lower volume and selling-related expenses including fuel, lower profit sharing, recognition of the CARES Act payroll support program grant and significant cost reduction measures taken across all aspects of our operation in response to the COVID-19 pandemic, partially offset by restructuring charges.

Total operating expense, adjusted (a non-GAAP financial measure) decreased $16.0 billion, or 40% compared to the prior year.

Our total operating cost per available seat mile ("CASM") increased 50% to 22.01 cents compared to the prior year, primarily due to the 51% decrease in capacity, which was partially offset by the significant cost reduction measures discussed above.

Non-fuel unit costs ("CASM-Ex", a non-GAAP financial measure) increased 43% to 15.61 cents and consolidated CASM, adjusted (a non-GAAP financial measure, which includes aircraft fuel costs) increased 23% to 17.96 cents.

Non-Operating Results.

Total non-operating expense was $3.1 billion in 2020, $2.7 billion higher than the prior year primarily resulting from impairments and our proportionate share of equity method losses related to our investments in LATAM, Grupo Aeroméxico and Virgin Atlantic, and higher interest expense as a result of our increased debt balances due to the financing arrangements entered into during 2020.

Our liquidity at December 31, 2020 was $16.7 billion, a $10.8 billion increase compared to December 31, 2019 as a result of proceeds from loans and debt issuances (including our SkyMiles financing arrangements and aircraft financings), support payments under the CARES Act payroll support program and other liquidity initiatives.

Losses during 2020 resulted in operating activities using $3.8 billion.

During 2020 we incurred $9.2 billion of investing cash outflows, primarily related to the purchase of short-term investments and our tender offer to acquire shares of LATAM in January 2020.

These results generated $4.3 billion of negative free cash flow (a non-GAAP financial measure) in 2020 compared to $4.2 billion of free cash flow in 2019.

The non-GAAP financial measures pre-tax loss, adjusted, operating expense, adjusted, CASM-Ex, consolidated CASM, adjusted, and free cash flow used above are defined and reconciled in "Supplemental Information" below.

Delta Air Lines, Inc.

2020 Form 10-K 33

MD&A - Results of Operations

Results of Operations

14 unchanged sentences

(0.86) (0.04) (0.82) NM

DGS sale adjustment (1)

— (0.09) 0.09 NM

Delta Private Jets adjustment (2)

— (0.07) 0.07 (100) %

TRASM, adjusted (cents) 11.87 ¢ 16.97 ¢ (5.10) ¢ (30) %

(1) This reconciliation may not recalculate due to rounding.

(2) For additional information on adjustments to TRASM, see "Supplemental Information" below.

Passenger Revenue

Ticket revenues, including both main cabin and business cabin and premium products increased $2.0 billion compared to the year ended December 31, 2018.

Business cabin and premium products ticket revenue includes revenues from fare products other than main cabin, including Delta One, Delta Premium Select, First Class and Comfort+.

The growth in ticket revenue was driven by strength in the Delta brand and products, capitalizing on healthy industry business and leisure demand.

We continue to take delivery of new aircraft that include more premium seats, while also generating higher paid load factor for premium products.

Loyalty travel awards revenue increased $249 million compared to the year ended December 31, 2018 due to growth in mileage redemptions.

Travel-related services increased $315 million compared to the year ended December 31, 2018 primarily due to increases in checked baggage and ticket change revenues.

Operating Revenue

Compared to the year ended December 31, 2019, our operating revenue decreased $29.9 billion, or 64%, due to reduced demand resulting from the COVID-19 pandemic.

The decrease in operating revenue, on a 51% decrease in capacity, generated a 25% decrease in total revenue per available seat mile ("TRASM") and a 30% decrease in TRASM, adjusted compared to 2019.

The increase in third-party refinery sales resulted from the refinery's shift to producing more non-jet fuel products due to the decline in demand for jet fuel.

See "Refinery Segment" below for additional details on the refinery's operations during 2020.

We have historically generated cargo revenues in domestic and international markets through the use of cargo space on regularly scheduled passenger aircraft.

In 2020, following the onset of the COVID-19 pandemic, reduced industry 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 then being utilized for passenger travel).

These two factors contributed to the smaller percentage decline in cargo revenue, than in passenger revenue, compared to the prior year.

The length and severity of the reduction in travel demand due to the COVID-19 pandemic are uncertain, as described in Item 1A.

Risk Factors, but we currently expect three phases in 2021.

We anticipate that the early part of the year will be characterized by fluctuating demand.

With continued distribution of effective vaccines and easing of travel advisories and restrictions, we believe customer confidence will grow, leading to increased demand in the spring and summer of 2021.

We expect vaccination to become widespread during the second half of 2021, resulting in sustained demand improvement.

Delta Air Lines, Inc.

2020 Form 10-K 34

MD&A - Results of Operations

Passenger Revenue by Geographic Region

8 unchanged sentences

Total passenger revenue $ 12,883 (70) % (69) % (51) % (1) % (38) % (32) pts

Passenger revenue increased $2.5 billion, or 6.3%, compared to the prior year.

PRASM increased 1.7% and passenger mile yield increased 0.8% on 4.6% higher capacity.

Load factor increased 0.8 pts from the prior year to 86.3%.

Domestic unit revenue increased 2.4%, resulting from our commercial initiatives, including our premium products, as well as high load factors driven by a combination of strong demand and limited industry capacity growth.

Passenger revenue related to our international regions increased 2.7% year-over-year primarily due to capacity growth in the Atlantic region and yield strength in the Latin America region.

This growth in passenger revenue was achieved despite the negative impact of foreign currency fluctuations.

Atlantic unit revenues decreased due to foreign currency fluctuations between the U.S.

dollar and the Euro and British pound, the uncertain economic outlook in Europe and increased industry capacity.

These conditions were partially offset by growth in premium product demand and strong U.S.

point of sale.

Unit revenue increased in Latin America principally as a result of yield growth, mainly due to reduced industry capacity in Brazil and improvements in Mexico beach markets.

In the September 2019 quarter we announced our plan to enter into a strategic alliance with LATAM, which is expected to provide great customer convenience, a more seamless travel experience and to better connect customers between North and South America.

Unit revenue decreased in the Pacific region primarily on persistent economic and trade related uncertainty, foreign currency fluctuations and increased capacity to China, Japan and Korea due to our network transformation.

Despite these challenges, our joint venture with Korean Air has enabled solid traffic growth and we have continued to reshape our Pacific network with the announcements that in the March 2020 quarter we will transfer our U.S.-Tokyo services from Narita to Haneda airport, Tokyo's preferred airport for corporate customers, and shift our Beijing service to the new Beijing Daxing airport.

Starting in February 2020, we temporarily suspended flights between the U.S.

and China as the result of an outbreak of a novel coronavirus originating in Wuhan, Hubei Province, China.

We have suspended flights between the U.S.

and China through April 30, will continue to monitor the situation closely and may make additional adjustments.

Passenger revenue decreased $29.4 billion, or 70%, compared to the prior year.

PRASM decreased 38% and passenger mile yield decreased 1% on 51% lower capacity.

Load factor decreased 32 pts from the prior year to 55%.

We began waiving changes fees on most tickets during 2020 and subsequently changed our policy with respect to change fees, as described above in "Taking Care of our Customers and Employees." We do not expect these policy changes to materially affect our revenue in future periods.

Prior to the initial effects of the COVID-19 pandemic in March 2020, domestic results were strong with revenue nearly 10% higher than the prior year period.

However, due to the decrease in customer demand beginning in March, passenger unit revenue related to our domestic region decreased 42% with capacity down 43% compared to the prior year.

We are planning for improvement to the demand environment, primarily from leisure customers, to continue in 2021, though still significantly lower than the comparable period in 2019.

We remain optimistic about the ultimate recovery of business travel, but are unable to predict the timing or extent of that recovery.

International

Passenger revenue related to our international regions decreased 76% compared to the prior year.

The reductions in revenue and capacity presented in the table above were a result of reduced demand and government travel directives and quarantines limiting or suspending air travel due to the global spread of COVID-19.

Additionally, many countries have implemented international testing requirements, which has slowed demand in the short-term but is expected to enhance the long-term recovery of international air travel.

We expect this significantly lower demand environment to continue into 2021, with improvement expected after the recovery in domestic travel.

As an initial step to this recovery, in December 2020 we became the first U.S.

airline to offer flights between the U.S.

and Europe that allow customers to avoid quarantine upon arrival after testing negative for the virus prior to travel and upon arrival in Amsterdam and Rome.

During 2020 we transferred our U.S.-Tokyo services from Narita to Haneda airport, Tokyo's preferred airport for corporate customers, and continued to develop our network connectivity with our joint venture partner Korean Air at Seoul-Incheon airport.

In each of the international regions we continue to monitor government travel directives and customer demand and will adjust flight schedules accordingly.

Prior to the COVID-19 pandemic, we completed two transactions to further strengthen our international partnerships.

In the Atlantic region, effective January 2020, we combined our separate transatlantic joint venture agreements with Air France-KLM and Virgin Atlantic into a single three-party transatlantic joint venture.

This enhanced joint venture is designed to strengthen collaboration between the three airlines and is expected to provide customers with increased access to destinations across North America, the U.K.

In the Latin America region, in January 2020, we completed the tender offer to acquire 20% of the shares of LATAM as part of our plan to create a strategic alliance.

Additionally, in the March 2020 quarter, we started codesharing for certain flights operated by LATAM.

In May 2020, we signed a trans-American joint venture agreement with LATAM that, subject to regulatory approvals, will combine our highly complementary route networks between North and South America, with the goal of providing customers with a seamless travel experience and industry-leading connectivity.

We believe this alliance will generate growth opportunities, building upon Delta's and LATAM's global footprint and joint ventures.

See Note 5 of the Notes to the Consolidated Financial Statements for additional information on our strategic alliance with LATAM and the impact of its bankruptcy filing.

Delta Air Lines, Inc.

2020 Form 10-K 35

MD&A - Results of Operations

Other Revenue

2 unchanged sentences

(in millions) 2020 2019

Loyalty program $ 1,962 $ 1,459 $ 503 34.5 %

Ancillary businesses and refinery $ 1,798 $ 1,297 $ 501 39 %

Loyalty program 1,458 1,962 (504) (26) %

Miscellaneous 348 718 (370) (52) %

Total other revenue $ 3,604 $ 3,977 $ (373) (9) %

Loyalty Program.

Loyalty program revenues relate primarily to brand usage by third parties and include the redemption of miles for non-travel awards.

Effective January 1, 2019, we amended our co-brand agreement with American Express, and we also amended other agreements with American Express during the March quarter.

The new agreements increase the value we receive and extend the terms to 2029.

Under the agreements, we sell miles to American Express and allow American Express to market its services or products using our brand and customer database.

The products and services sold with the miles (such as award travel, priority boarding, baggage fee waivers, lounge access and the use of our brand) are consistent with previous agreements.

We continue to use the accounting method that allocates the consideration received based on the relative selling prices of those products and services.

The increase in loyalty program revenues are primarily related to brand usage by American Express.

Ancillary Businesses and Refinery.

Ancillary businesses and refinery includes aircraft maintenance provided to third parties, our vacation wholesale operations, our private jet operations and refinery sales to third parties.

Refinery sales to third parties, which are at or near cost, decreased $451 million compared to 2018.

The 2018 results also included $244 million of third-party revenue from DGS, which was sold in December 2018.

These decreases were mitigated by growth in our MRO revenues, which increased $175 million to $877 million during 2019.

In January 2020, we combined Delta Private Jets, our wholly owned subsidiary which provides private jet operations, with Wheels Up.

Upon closing, we received a 27% equity stake in Wheels Up.

Delta Private Jets will no longer be consolidated and annual revenues of approximately $200 million, which have historically been generated ratably through the year, will no longer be reflected in ancillary businesses and refinery revenue.

Ancillary businesses and refinery includes refinery sales to third parties, aircraft maintenance provided to third parties and our vacation wholesale operations.

Refinery sales to third parties, which are at or near cost, increased $1.1 billion compared to 2019.

The increase in third-party refinery sales resulted from the refinery's shift to producing more non-jet fuel products due to the decline in demand for jet fuel.

The increase in refinery sales was partially offset by an approximately $270 million, or approximately 30%, decline in revenue from aircraft maintenance services we provide to third parties, which decreased due to the reduction in flights operated worldwide.

In addition, results for 2019 also included approximately $200 million of revenue from Delta Private Jets, which was combined with Wheels Up in January 2020 and is no longer reflected in ancillary businesses and refinery.

Loyalty Program.

Loyalty program revenues relate primarily 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, which declined at a lower rate than air travel, during the year.

Miscellaneous.

Miscellaneous revenue is primarily composed of lounge access and codeshare revenues, with lounge access revenue driving the majority of the $160 million increase compared to 2018.

We continually enhance the customer experience at our lounges, which also included opening three new Sky Clubs during 2019 in Austin, Phoenix and New Orleans.

Miscellaneous revenue is primarily composed of lounge access and codeshare revenues.

The volume of these transactions has fallen compared to 2019, due to the impact of, and our response to, the COVID-19 pandemic.

Delta Air Lines, Inc.

2020 Form 10-K 36

MD&A - Results of Operations

Operating Expense

5 unchanged sentences

Regional carriers expense, excluding fuel 2,479 3,584 (1,105) (31) %

Contracted services 2,641 2,175 466 21.4 %

Depreciation and amortization 2,312 2,581 (269) (10) %

Passenger commissions and other selling expenses 1,993 1,941 52 2.7 %

Ancillary businesses and refinery 1,785 1,245 540 43 %

Contracted services 1,778 2,641 (863) (33) %

Landing fees and other rents 1,518 1,762 (244) (14) %

Aircraft maintenance materials and outside repairs 822 1,751 (929) (53) %

Profit sharing 1,643 1,301 342 26.3 %

Passenger commissions and other selling expenses 582 1,993 (1,411) (71) %

Passenger service 523 1,251 (728) (58) %

Ancillary businesses and refinery 1,245 1,695 (450) (26.5) %

Aircraft rent 399 423 (24) (6) %

Restructuring charges 8,219 — 8,219 NM

Government grant recognition (3,946) — (3,946) NM

Profit sharing — 1,643 (1,643) (100) %

Other 1,163 1,771 (608) (34) %

Total operating expense $ 29,564 $ 40,389 $ (10,825) (27) %

As discussed above under "Expense Management," in response to the reduced demand and related reduction in revenue following the onset of the COVID-19 pandemic in early 2020, we quickly reduced capacity to more closely align with demand and implemented cost saving initiatives related to our fleet and operations and delayed or eliminated nearly all discretionary spending.

As a result, most operating expense line items decreased significantly in 2020 compared to 2019.

Operating expenses decreased primarily due to the voluntary separation programs and work hour reductions described below, the many cost reduction measures and programs implemented in response to the COVID-19 pandemic and the reduction in volume and selling-related costs.

During 2021, as effective vaccines become broadly available, vaccination becomes widespread globally, travel restrictions and advisories begin to ease and customer confidence begins to grow, we expect operating expense to increase as capacity and revenue return.

However, we believe that many of the cost savings achieved during 2020 were structural in nature, which we expect to lead to lower non-fuel unit cost in the future.

The discussion below is focused largely on the year-over-year changes in certain operating expense line items that were not primarily driven by the reduction in capacity or revenue.

These include many of the cost reduction measures and programs we implemented in response to the COVID-19 pandemic.

Salaries and Related Costs.

The increase in salaries and related costs is primarily due to pay rate increases for eligible employees.

This increase is partially offset by salaries for DGS employees, which are no longer included in salaries and related costs following the sale of that business in December 2018.

DGS-related expenses are now recorded in contracted services.

The decrease in salaries and related costs is primarily due to actions taken in response to the decreased demand for air travel due to the COVID-19 pandemic.

Beginning in March 2020 and continuing through December 2020, we reduced salaries by 100% for our CEO and 50% for our officers.

In addition, we reduced work hours by 25% for all other management and most front-line employee work groups.

We offered voluntary unpaid leaves of absence for periods ranging from 30 days up to 12 months and approximately 50,000 of our employees elected a leave at various times throughout 2020.

Also, during the September 2020 quarter, approximately 18,000 employees elected to participate in voluntary separation programs, reducing our workforce by approximately 20%.

We expect the lower headcount following these voluntary separation programs to mitigate the impact on salaries and related costs from the restoration of salaries and work hours in 2021, enabling us to maintain lower costs compared to 2019.

Delta Air Lines, Inc.

2020 Form 10-K 37

MD&A - Results of Operations

Aircraft Fuel and Related Taxes.

Fuel expense decreased $501 million compared to the prior year despite a 4.6% increase in capacity, due to an 8% decrease in the market price per gallon of fuel and improved fuel efficiency driven by our investment in new aircraft.

Fuel expense decreased $5.3 billion compared to the prior year due to a 51% decrease in capacity and an approximately 25% decrease in the market price per gallon of jet fuel.

The table below shows the impact of hedging and the refinery on fuel expense and average price per gallon, adjusted (non-GAAP financial measures):

Average Price Per Gallon

Fuel expense and average price per gallon Average Price Per Gallon

Year Ended December 31, Increase

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Refinery segment impact (3)

216 (76) 292 0.11 (0.02) 0.13

Total fuel expense $ 3,176 $ 8,519 $ (5,343) $ 1.64 $ 2.02 $ (0.38)

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(10) (14) 4 (0.01) — (0.01)

Delta Private Jets adjustment (5)

— (28) 28 — (0.01) 0.01

Total fuel expense, adjusted $ 3,166 $ 8,477 $ (5,311) $ 1.64 $ 2.01 $ (0.37)

1 unchanged sentence

(2) Market price for jet fuel at airport locations, including related taxes and transportation costs.

(3) Refer to "Refinery Segment" below for additional information about our refinery's operations.

(4) MTM adjustments and settlements on hedges include the effects of the derivative transactions disclosed in Note 6 of the Notes to the Consolidated Financial Statements.

For additional information and the reason for adjusting fuel expense, see "Supplemental Information" below.

Contracted Services.

The increase in contracted services expense predominantly relates to services performed by DGS that were recorded in salaries and related costs prior to the sale of that business in December 2018.

During 2018, DGS incurred expenses of approximately $350 million related to internal Delta services that were primarily recorded in salaries and related costs.

After the sale of DGS to a third party, we now record these expenses and our portion of the new entity's ("AirCo") financial results under the equity method of accounting, in contracted services.

(5) Because we combined Delta Private Jets with Wheels Up in January 2020, we have excluded the impact of Delta Private Jets from 2019 results for comparability.

Depreciation and Amortization.

The increase in depreciation and amortization primarily results from $79 million of accelerated depreciation due to the decision to early retire our MD-90 fleet by the end of 2022, new aircraft deliveries, fleet modifications and technology enhancements.

As we take delivery of new aircraft, we continue to evaluate our current fleet compared to network requirements.

See Note 11 of the Notes to the Consolidated Financial Statements for additional information on the planned early retirement of our MD-90 fleet.

In addition to investing in our fleet, we have also increased our technology investments in an effort to enhance interactions with our customers and allow us to deliver more personalized service, further enhancing the customer experience and strengthening our brand and competitive position.

During 2019, we delivered several capabilities that enable our front-line employees to personalize their interactions with our customers, added self-service features on the FlyDelta app, including automatic international check-in, integrated security wait times and the ability to pre-select meals in Delta One and domestic First Class.

In addition, we expanded facial recognition biometric boarding for international travelers in the Atlanta, Minneapolis-St.

Paul and Salt Lake City airports.

These increased capital expenditures have led to a corresponding increase in depreciation and amortization.

Aircraft Maintenance Materials and Outside Repairs.

Aircraft maintenance materials and outside repairs consist of costs associated with the maintenance of aircraft used in our operations.

The increase primarily relates to a higher volume of scheduled engine overhauls on certain aircraft during the second half of 2019.

Profit Sharing.

Profit sharing expense increased $342 million to $1.6 billion, marking the sixth consecutive year that Delta employees will receive over $1 billion in recognition of their contributions to the company's performance.

The increase in profit sharing is related to higher profit during the year.

Our profit sharing program pays 10% to all eligible employees for the first $2.5 billion of annual profit and 20% of annual profit above $2.5 billion.

The decrease in depreciation and amortization is primarily due to aircraft that have been retired or impaired during 2020, including the MD-88, MD-90, 717, 737-700, 767-300ER and 777 fleet types, as well as certain A320 aircraft.

Impairments and other charges related to the retirement of these fleets are reflected in restructuring charges.

See Note 2 of the Notes to the Consolidated Financial Statements for additional information about these fleet retirements.

Ancillary Businesses and Refinery.

Ancillary businesses and refinery includes expenses associated with aircraft maintenance services we provide to third parties, our vacation wholesale operations, our private jet operations and refinery sales to third parties.

Expenses related to refinery sales to third parties, which are at or near cost, decreased $451 million compared to the prior year.

In addition, approximately $200 million of costs related to services performed by DGS on behalf of third parties were recorded in ancillary businesses and refinery prior to the sale of that business in December 2018.

These decreases were partially offset by growth in our MRO business, as discussed above.

In January 2020, we combined Delta Private Jets, our wholly owned subsidiary which provides private jet operations, with Wheels Up.

Upon closing, we received a 27% equity stake in Wheels Up.

Delta Private Jets will no longer be consolidated and annual costs of approximately $200 million, which have historically been incurred ratably through the year, will no longer be reflected in ancillary businesses and refinery expense.

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.

These refinery cost of sales increased $1.1 billion compared to 2019.

Due to the decrease in demand for jet fuel following the onset of the COVID-19 pandemic, the refinery shifted production to more non-jet fuel products, which increased the sales to third parties during 2020 compared to the prior year period.

The increase in refinery costs was partially offset by a decrease of approximately $260 million in the cost of aircraft maintenance services we provide to third parties compared to 2019 due to the reduction in flights operated worldwide.

In addition, approximately $180 million of costs related to services performed by Delta Private Jets in 2019 were recorded in ancillary businesses and refinery prior to the combination of that business with Wheels Up in January 2020.

Aircraft Rent.

Most aircraft operating lease expenses are recorded in aircraft rent and are contractually fixed.

Therefore, aircraft rent did not decline to the same extent as our other operating expense line items compared to 2019.

Restructuring Charges.

Restructuring charges are composed of various expenses that resulted from our response to the unprecedented impact on our business from the COVID-19 pandemic primarily due to fleet impairment and related charges and voluntary separation program charges.

See Note 2 of the Notes to the Consolidated Financial Statements for additional information about these restructuring charges.

Government Grant Recognition.

In April 2020, we entered into an agreement with the U.S.

Department of the Treasury to receive emergency support through the CARES Act payroll support program, which totaled $5.6 billion.

The support payments included a grant of $4.0 billion that was fully recognized as a contra-expense in 2020 over the period that the funds were intended to benefit.

We expect to receive approximately $2.9 billion in the March 2021 quarter as part of the payroll support program extension, of which approximately $2.0 billion is expected to be in the form of grants that we plan to recognize as contra-expense during the first half of 2021.

See Note 2 of the Notes to the Consolidated Financial Statements for additional information about government support programs, including the CARES Act.

Delta Air Lines, Inc.

2020 Form 10-K 38

MD&A - Non-Operating Results

Non-Operating Results

2 unchanged sentences

Interest expense, net $ (929) $ (301) $ (628)

Impairments and equity method losses (2,432) (62) (2,370)

Gain/(loss) on investments, net (105) 119 (224)

1 unchanged sentence

Total non-operating expense, net $ (3,118) $ (420) $ (2,698)

Interest Expense.

At December 31, 2018, the principal amount of debt and finance leases was $9.7 billion.

During 2019, we issued $1.5 billion of unsecured notes and $500 million of aircraft secured EETC debt.

As a result of the debt issuances, partially offset by principal payments, the amount of debt and finance leases was $11.0 billion at December 31, 2019.

Despite the increase in debt during the current year, interest expense decreased $10 million compared to the prior year due to recent refinancing transactions at lower interest rates resulting from our improvement to investment grade credit rating in recent years and the favorable interest rate environment.

Gain/(Loss) on Investments.

Gain/(loss) on investments reflects the gains and losses on our equity investments.

The increase compared to 2018 primarily results from unrealized gains in Hanjin-KAL and Air France-KLM.

Miscellaneous.

Miscellaneous, net is primarily composed of pension and related expense, our proportionate share of earnings from our equity investments in Virgin Atlantic and Grupo Aeroméxico, charitable contributions and foreign exchange gains/(losses).

The change from 2019 compared to 2018 primarily results from the unfavorable movement in pension and related expense and the sale of our DGS entity in 2018.

The pension and related expense was $65 million in 2019 compared to a benefit of $245 million in 2018.

In 2018, the sale of our DGS entity to a subsidiary of Argenbright Holdings, LLC resulted in a gain of $91 million.

Our equity investment earnings and foreign exchange gains/(losses) fluctuate and thus impact the comparability of miscellaneous from period to period.

Interest expense, net.

Interest expense increased compared to 2019 as a result of the financing arrangements entered into during 2020.

See Note 2 and Note 8 of the Notes to the Consolidated Financial Statements for additional information on recent financings.

As a result of the increase in our outstanding debt since the onset of the pandemic, we expect to incur approximately $350 million in quarterly interest expense at the beginning of 2021.

However, we expect to reduce those expenses during 2021 by paying down our debt in addition to scheduled maturities.

Impairments and equity method losses.

Impairments and equity method losses reflects our share of LATAM and Grupo Aeroméxico's equity method results prior to their respective bankruptcy filings, our share of Virgin Atlantic's equity method results and the impairments reducing the carrying value of these investments to zero during the June 2020 quarter.

See Note 5 of the Notes to the Consolidated Financial Statements for additional information on our equity investments.

Gain/(loss) on investments, net.

Gain/(loss) on investments, net reflects the gains and losses on our equity investments measured at fair value on a recurring basis.

See Note 5 of the Notes to the Consolidated Financial Statements for additional information on our equity investments.

Miscellaneous, net.

Miscellaneous, net includes pension and related expense, foreign exchange gains/losses, charitable contributions and gains and losses resulting from other transactions.

Foreign exchange gains/losses vary and impact the comparability of miscellaneous, net from period to period.

The increase in 2020 compared to the prior year is primarily due to the $240 million gain recognized as a result of the combination of Delta Private Jets with Wheels Up in January 2020 and favorable movement in pension and related expense in 2020 compared to 2019.

Our effective tax rate for 2020 was 21%.

We expect our annual effective tax rate to be between 23% and 24% for 2020.

At December 31, 2019, we had approximately $1.9 billion of U.S.

federal pre-tax net operating loss carryforwards, which do not begin to expire until 2027.

We believe we will utilize the majority of our remaining federal net operating losses and tax credits during 2020.

As of December 31, 2020, we had approximately $5.7 billion of U.S.

federal pre-tax net operating loss carryforwards, of which $2.0 billion was generated prior to 2018 and will not begin to expire until 2027, and under current tax law, the remaining amount has no expiration.

For more information about our income taxes, see Note 13 of the Notes to the Consolidated Financial Statements.

Delta Air Lines, Inc.

2020 Form 10-K 39

MD&A - Refinery Segment

Refinery Segment

The refinery primarily produces gasoline, diesel and jet fuel.

Monroe exchanges the non-jet fuel products the refinery produces with third parties for jet fuel consumed in our airline operations.

The jet fuel produced and procured through exchanging gasoline and diesel fuel produced by the refinery provides approximately 200,000 barrels per day, or approximately 75% of our consumption, for use in our airline operations.

We believe that the jet fuel supply resulting from the refinery's operation contributes to reducing the market price of jet fuel and thus lowers our cost of jet fuel compared to what it otherwise would be.

During the December 2018 quarter, the refinery completed a planned maintenance event ("turnaround") and did not produce any refined products for approximately 60 days.

The turnaround was in accordance with the long-term maintenance plan for the facility to allow for the safe completion of major repairs and upgrades.

The refinery operated by our subsidiary Monroe Energy, LLC and MIPC, LLC (collectively, "Monroe") primarily produces gasoline, diesel and jet fuel.

Monroe has agreements in place to exchange the non-jet fuel products the refinery produces with third parties for jet fuel consumed in our airline operations.

Historically, the jet fuel produced and procured through exchanging gasoline and diesel fuel produced by the refinery provided approximately 200,000 barrels per day, or approximately 75% of our pre-COVID-19 pandemic consumption, for use in our airline operations.

We believe that the jet fuel supply resulting from the refinery's operation generally contributes to reducing the market price of jet fuel and lowers our cost of jet fuel compared to what it otherwise would be.

The refinery’s production has also been altered by the dramatic change in economic conditions caused by the COVID-19 pandemic.

During 2020, the refinery operated at 60% – 90% of normal production levels, largely due to the significant decrease in the demand for jet fuel.

Additionally, due to the decrease in demand for jet fuel, the refinery has shifted production to produce more non-jet fuel products.

Those non-jet fuel products will continue to be exchanged for jet fuel to the extent that the refinery can balance refinery sales with jet fuel demand.

The refinery recorded operating revenues of $3.1 billion in 2020, compared to $5.6 billion in 2019.

Operating revenues in 2019 were primarily composed of $4.0 billion of non-jet fuel products exchanged with third parties to procure jet fuel, $1.1 billion of sales of jet fuel to the airline segment and $395 million of non-jet fuel product sales.

Refinery revenues increased compared to the prior year due to higher throughput and yields offset by lower costs of crude oil leading to lower pricing for associated refined products.

The refinery recorded operating income of $76 million and $58 million in 2019 and 2018, respectively.

The refinery's operating income in 2019 was higher primarily due to the 60 day cessation of operations during the turnaround in the December 2018 quarter and favorable market conditions year over year.

As a result of the refinery's shift to producing more non-jet fuel products, operating revenues in 2020 were composed of $1.5 billion of non-jet fuel products exchanged with third parties to procure jet fuel, $1.1 billion of refinery sales to third parties, $307 million of non-jet fuel product sales and $214 million of sales of jet fuel to the airline segment.

Refinery revenues decreased compared to the prior year periods due to lower refinery run rates during the year, as well as lower pricing for refined products.

The refinery recorded an operating loss of $216 million in 2020, compared to operating income of $76 million in 2019.

The operating loss in 2020 compared to income in 2019 was mainly driven by an increase in RINs compliance costs discussed below and the reduction in revenue, which was partially offset by cost savings resulting from decreased production levels.

A refinery is subject to annual EPA requirements to blend renewable fuels into the gasoline and on-road diesel fuel it produces.

1 unchanged sentence

The refinery operated by Monroe purchases the majority of its RINs requirement in the secondary market.

Observable RINs prices stabilized in 2019 after significant fluctuations in previous years, with Monroe incurring $58 million in RINs compliance costs during the current year.

Observable RINs prices increased throughout 2020, with Monroe incurring $172 million in RINs compliance costs during 2020 as compared to $58 million in 2019.

For more information regarding the refinery's results, see Note 16 of the Notes to the Consolidated Financial Statements.

Operating Statistics

Year Ended December 31,

Consolidated (1)

2020 2019 2018

Revenue passenger miles (in millions) 73,412 237,680 225,243

Available seat miles (in millions) 134,339 275,379 263,365

Passenger mile yield 17.55 ¢ 17.79 ¢ 17.65 ¢

Passenger revenue per available seat mile 9.59 ¢ 15.35 ¢ 15.09 ¢

Total revenue per available seat mile 12.73 ¢ 17.07 ¢ 16.87 ¢

Total operating cost per available seat mile ("CASM") 22.01 ¢ 14.67 ¢ 14.87 ¢

Load factor 55 % 86 % 86 %

Fuel gallons consumed (in millions) 1,935 4,214 4,113

Average price per fuel gallon (2)

$ 1.64 $ 2.02 $ 2.20

Approximate full-time equivalent employees, end of period 74,000 91,000 89,000

(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) Includes the impact of fuel hedge activity and refinery segment results.

Delta Air Lines, Inc.

2020 Form 10-K 40

MD&A - Financial Condition and Liquidity

Financial Condition and Liquidity

We expect to meet our cash needs for the next 12 months with cash flows from operations, cash and cash equivalents, restricted cash equivalents and financing arrangements.

As of December 31, 2019, we had $6.0 billion in unrestricted liquidity, consisting of $2.9 billion in cash and cash equivalents and $3.1 billion in undrawn revolving credit facilities.

During 2019, we used existing cash and cash generated from operations to fund capital expenditures of $4.9 billion, and return $3.0 billion to shareholders.

Sources of Liquidity

As a result of the COVID-19 pandemic, we took actions to increase liquidity and strengthen our financial position, which included the following during 2020.

We are continuing to monitor and carefully manage our liquidity.

• Completing financing transactions for an aggregate principal amount of approximately $25.9 billion, which are discussed in "Financing Activities" below.

• Receiving $5.6 billion as part of the CARES Act payroll support program as described in "Government Support Programs" above.

See Note 12 of the Notes to the Consolidated Financial Statements for additional information about our aircraft purchase commitments.

• Amending our credit facilities to replace fixed charge coverage ratio covenants with liquidity-based covenants.

• Suspending share repurchases and dividends indefinitely and postponing voluntary pension funding.

As of December 31, 2020, we had $16.7 billion in cash, cash equivalents, short-term investments and aggregate principal amount committed and available to be drawn under our revolving credit facilities.

In addition, in January 2021 we received $1.4 billion with respect to the payroll support program extension described below, with the remaining $1.5 billion expected in the March 2021 quarter.

We expect to meet our liquidity needs for the next twelve months with cash and cash equivalents, short-term investments, financing arrangements, government assistance under the payroll support program, restricted cash equivalents and cash flows from operations.

We expect to meet our long-term liquidity needs with cash flows from operations and financing arrangements.

We have unencumbered assets available for potential financing arrangements, if needed.

During 2020, we used existing cash and cash received from financings to fund capital expenditures of $1.9 billion, of which the largest portion was incurred before the onset of the COVID-19 pandemic, and to return $604 million to shareholders also before the onset of the global pandemic.

Capital expenditures in 2020 following the onset of the COVID-19 pandemic were limited to only those critical to our operation.

The following discussion of liquidity evaluates various material cash requirements from known contractual and other obligations, but does not include amounts that are contingent on events or other factors that are uncertain or unknown at this time, including legal contingencies, uncertain tax positions and amounts payable under collective bargaining arrangements, among others.

The amounts presented are based on various estimates, including estimates regarding the timing of payments, prevailing interest rates, volumes purchased, the occurrence of certain events and other factors.

Accordingly, the actual results may vary materially from the amounts discussed herein.

Sources and Uses of Liquidity

Operating Activities

Cash flows from operating activities continue to provide our primary source of liquidity.

We generated cash flows from operations of $8.4 billion in 2019 and $7.0 billion in 2018.

We also expect to continue generating cash flows from operations in 2020.

Operating activities in 2020 used $3.8 billion compared to providing $8.4 billion in 2019.

Including the $2.9 billion in payroll support payments we expect to receive during the March 2021 quarter, if the demand environment evolves as described above we expect to generate positive cash flows from operations during 2021.

As described above, we are planning for demand recovery throughout much of 2021, with sustained demand improvement expected during the second half of 2021.

Delta Air Lines, Inc.

2020 Form 10-K 41

MD&A - Financial Condition and Liquidity

Our operating cash flows are impacted by the following factors:

2 unchanged sentences

When we receive a cash payment at the time of sale, we record the cash received on advance sales as deferred revenue in air traffic liability.

The air traffic liability increases during the winter and spring as advanced ticket sales grow prior to the summer peak travel season and decreases during the summer and fall months.

Fuel expense represented approximately 21% of our total operating expenses for 2019.

The air traffic liability has historically increased during the winter and spring as advanced ticket sales grow prior to the summer peak travel season and decreased during the summer and fall months.

However, the ongoing reduction in demand for air travel due to the COVID-19 pandemic has resulted in an unprecedented low level of advance bookings and the associated cash received, as well as significant ticket cancellations which led to issuance of cash refunds or travel credits to customers.

The total value of cash refunds, excluding taxes and related fees, issued to customers during 2020 was approximately $3.1 billion.

Travel credits represented approximately 65% of the air traffic liability as of December 31, 2020.

The length and severity of the reduction in travel demand due to the COVID-19 pandemic are uncertain, as described in Item 1A.

Risk Factors, but we currently expect three phases in 2021.

We anticipate that the early part of the year will be characterized by fluctuating demand.

We expect vaccination to become widespread during the second half of 2021, resulting in sustained demand improvement.

Fuel expense represented approximately 11% of our total operating expense for 2020.

The market price for jet fuel is volatile, which can impact the comparability of our periodic cash flows from operations.

Pension Contributions.

We expect fuel consumption to be lower through the March 2021 quarter than the comparable quarter in 2020, as only the final weeks of the March 2020 quarter were significantly impacted by the COVID-19 pandemic.

Through the remainder of 2021, as effective vaccines become broadly available, vaccination becomes widespread globally, travel restrictions and advisories begin to ease and customer confidence begins to grow, we expect capacity to return and fuel consumption to increase compared to the comparable period of 2020, though we still expect it to be lower than the comparable period in 2019.

Employee Benefit Obligations.

We sponsor defined benefit pension plans for eligible employees and retirees.

1 unchanged sentence

Our funding obligations for these plans are governed by the Employee Retirement Income Security Act, as modified by the Pension Protection Act of 2006.

We had no minimum funding requirements in 2019.

We had no minimum funding requirements in 2019 or 2020, we have no such requirements in 2021, and based on our current projections, we do not expect any minimum required contributions until 2025.

However, during 2019, we voluntarily contributed $1 billion to these plans.

We contributed $500 million to these plans during 2018.

We have no minimum funding requirements in 2020, but we plan to voluntarily contribute approximately $500 million to these plans.

As a part of our liquidity initiatives we suspended voluntary pension funding that we were previously planning in 2020.

We plan to contribute at least $500 million to these plans in 2021.

In addition, we have employee benefit obligations relating primarily to projected future benefit payments from our unfunded postretirement and postemployment plans.

See Note 11 of the Notes to the Consolidated Financial Statements for more information on our employee benefit obligations.

Voluntary Separation Programs.

In 2020, we recorded a $3.4 billion charge associated with voluntary early retirement and separation programs and other employee benefit charges.

Approximately $720 million of this charge was disbursed in cash payments to participants during 2020.

An additional approximately $250 million of cash payments were disbursed in 2020 related to unused vacation and other benefits, which were accrued prior to the voluntary programs charge.

We anticipate that approximately $600 million in cash payments will be made to participants in the voluntary separation programs in 2021 and the remaining payments in 2022 and beyond.

Profit Sharing.

Our broad-based employee profit sharing program provides that, for each year in which we have an annual pre-tax profit, as defined by the terms of the program, we will pay a specified portion of that profit to employees.

In determining the amount of profit sharing, the program defines profit as pre-tax profit adjusted for profit sharing and certain other items.

We pay profit sharing annually in February.

We paid $1.3 billion in 2019 and $1.1 billion in 2018 to our employees in recognition of their contributions toward meeting our financial goals.

During the year ended December 31, 2019, we recorded $1.6 billion in profit sharing expense based on 2019 pre-tax profit, which we will pay to employees in February 2020.

Effective October 1, 2017, we aligned our profit sharing plans under a single formula.

Under this formula, our profit sharing program pays 10% to all eligible employees for the first $2.5 billion of annual profit and 20% of annual profit above $2.5 billion.

Prior to that time, the profit sharing program for pilots used this formula but in the first nine months of 2017, the profit sharing program for merit, ground and flight attendant employees paid 10% of annual profit and, if we exceeded our prior-year results, the program paid 20% of the year-over-year increase in profit to eligible employees.

We paid $1.6 billion in profit sharing in February 2020 related to our 2019 pre-tax profit in recognition of our employees' contributions toward meeting our financial goals.

We will not have a profit sharing payment in 2021 based on the pre-tax loss in 2020.

Government Support Programs.

See "Financing Activities" below for discussion of the impact to our liquidity from the government support programs in 2020 and 2021.

Contract Carrier Obligations.

We have certain estimated minimum fixed obligations under capacity purchase agreements with third-party regional carriers.

These minimum amounts are based on the required minimum levels of flying by the regional carriers under the respective agreements and assumptions regarding the costs associated with such minimum levels of flying.

As of December 31, 2020 the total of these minimum amounts was $7.7 billion, which range from approximately $800 million to $1.4 billion on an annual basis over the next five years.

See Note 12 of the Notes to the Consolidated Financial Statements for more information on our contract carrier obligations.

Delta Air Lines, Inc.

2020 Form 10-K 42

MD&A - Financial Condition and Liquidity

Operating Lease Obligations.

As described further in Note 9 of the Notes to the Consolidated Financial Statements, as of December 31, 2020 we had a total of $8.6 billion of minimum operating lease obligations.

These minimum lease payments range from approximately $700 million to $900 million on an annual basis over the next five years.

Other Obligations.

We have certain purchase obligations under which we are required to make minimum payments for goods and services, including, but not limited to, aviation-related, maintenance, professional security, insurance, marketing, technology, sponsorships and other third-party services and products.

As of December 31, 2020, we had approximately $8.0 billion of such obligations, which range from approximately $400 million to $900 million on an annual basis over the next five years.

Investing Activities

Short-Term Investments.

Using a portion of the proceeds we obtained through our financing transactions discussed below, in 2020 we acquired a net of $5.8 billion in short-term investments.

See Note 4 of the Notes to the Consolidated Financial Statements for further information on these investments.

Capital Expenditures.

Our capital expenditures were $4.9 billion in 2019 and $5.2 billion in 2018.

Our capital expenditures are primarily related to the purchase of aircraft, fleet modifications and technology enhancements.

As part of a multi-year initiative, we are investing in aircraft intended to provide more premium products, improved customer experience, greater fuel efficiency and better operating economics.

We have committed to future aircraft purchases that will require significant capital investment and have obtained, but are under no obligation to use, long-term financing commitments for a substantial portion of the purchase price of a significant number of these aircraft.

We expect that we will invest approximately $4.5 billion in 2020 primarily for aircraft, including deliveries and advance deposit payments, as well as aircraft modifications, the majority of which relate to cabin enhancements throughout our fleet.

We expect that the investments in 2020 will be funded principally through cash flows from operations.

In October 2019, the Office of the U.S.

Trade Representative announced a 10% tariff on new aircraft imported from Europe.

We are evaluating the impact of this announcement on our future Airbus deliveries.

Our capital expenditures were $1.9 billion in 2020, of which the largest portion was incurred before the onset of the COVID-19 pandemic, and $4.9 billion in 2019.

In 2020, we restructured our aircraft order books with Airbus and MHI RJ Aviation Group (manufacturer of CRJ aircraft) in an effort to better match the timing of aircraft deliveries with our network and financial needs over the next several years.

The restructuring reduced our aircraft purchase commitments by more than $2 billion in 2020 and by more than $5 billion through 2022.

The shift in delivery timing is intended to allow us to continue simplifying and modernizing our fleet while maintaining our Airbus order book.

We expect that we will have capital expenditures of approximately $2.5 billion in 2021 primarily for aircraft, including deliveries and advance deposit payments, as well as aircraft modifications, the majority of which relate to cabin improvements and technology enhancements.

We expect that the capital expenditures in 2021 will be funded through either cash flows from operations or financing arrangements.

We have committed to future aircraft purchases and have obtained, but are under no obligation to use, long-term financing commitments for a substantial portion of the purchase price of the aircraft.

See Note 12 of the Notes to the Consolidated Financial Statements for more information on our aircraft purchase commitments.

In connection with a dispute brought at the World Trade Organization against the EU and certain member states to address state subsidies in the large civil aircraft sector, the U.S.

Trade Representative has imposed tariffs on certain products imported from the EU, including 15% tariffs on certain new aircraft and certain airplane parts originating in France and Germany.

We are pursuing strategies to minimize the impact, if any, of these tariffs on our business.

Equity Investments.

During 2019, we acquired 10% of the outstanding shares of Hanjin-KAL, the largest shareholder of Korean Air for $170 million.

In September 2019 we announced our plan to enter into a strategic alliance with LATAM Airlines Group S.A ("LATAM") as well as acquire up to a 20% interest through a tender offer.

In January 2020 we acquired 20% of the shares of LATAM for $1.9 billion, or $16 per share.

In addition, to support the establishment of the strategic alliance, we will invest $350 million, $200 million of which was disbursed in 2019.

An additional $50 million is scheduled to be disbursed during 2020.

As part of our planned strategic alliance with LATAM, we have also agreed to acquire four A350 aircraft from LATAM and plan to assume ten of LATAM's A350 purchase commitments from Airbus, with deliveries through 2025.

This alliance is expected to generate new growth opportunities, building upon Delta's and LATAM's global footprint and joint ventures, including Delta's existing partnership with Aeroméxico.

We have sold our GOL ownership stake and are winding down our commercial agreements with GOL to facilitate the formation of our strategic alliance with LATAM.

In January 2020, we acquired 20% of the shares of LATAM for $1.9 billion, or $16 per share, through a tender offer.

In addition, to support the establishment of our strategic alliance, we agreed to make transition payments to LATAM totaling $350 million, of which $75 million remains to be paid by the end of 2021.

As part of our planned strategic alliance with LATAM, we have also assumed 10 of LATAM's A350 purchase commitments with Airbus for deliveries through 2025.

We believe this alliance will generate growth opportunities, building upon Delta's and LATAM's global footprint and joint ventures.

During 2020, we acquired through open market transactions, additional outstanding shares of Hanjin-KAL, the largest shareholder of Korean Air, for $158 million.

As of December 31, 2020 our equity ownership interest in Hanjin-KAL was approximately 13%.

See Note 5 of the Notes to the Consolidated Financial Statements for more information on our equity investments.

Los Angeles International Airport ("LAX") Construction.

We executed a modified lease agreement during 2016 with the City of Los Angeles ("the City") which owns and operates LAX, and announced plans to modernize, upgrade and connect Terminals 2 and 3 at LAX.

Under the lease agreement, we have relocated certain airlines and other tenants from Terminals 2 and 3 to Terminals 5 and 6 and undertaken various initial projects to enable operations from Terminals 2 and 3 during the project.

We are now designing and constructing the redevelopment of Terminal 3 and enhancement of Terminal 2, which also includes rebuilding the ticketing and arrival halls and security checkpoint, construction of core infrastructure to support the City's planned airport people mover, ramp improvements and construction of a secure connector to the north side of the Tom Bradley International Terminal.

We executed a modified lease agreement during 2016 with the City of Los Angeles (the "City"), which owns and operates LAX, and announced plans to modernize, upgrade and provide post-security connection to Terminals 2 and 3.

Construction is underway, which includes a new centralized ticketing and arrival hall, a new security checkpoint, core infrastructure to support the City's planned airport people mover, ramp improvements and a post-security connector to the north side of the Tom Bradley International Terminal.

Delta Air Lines, Inc.

2020 Form 10-K 43

MD&A - Financial Condition and Liquidity

Given reduced passenger volumes resulting from the COVID-19 pandemic, we have accelerated the construction schedule for this project.

Additionally, in 2020, we enhanced the project’s scope to include a more customer-friendly design of Terminal 3, a Delta One lounge and expanded Delta Sky Club, and baggage system upgrades designed to increase the terminals’ operational efficiency going forward.

Construction is expected to be completed by 2023.

Under the lease agreement and subsequent project component approvals by the City's Board of Airport Commissioners, the City has appropriated to date approximately $1.6 billion to purchase completed project assets.

The lease allows for a maximum reimbursement by the City of $1.8 billion.

Costs we incur in excess of such maximum will not be reimbursed by the City.

The project is expected to cost approximately $2.3 billion.

A substantial majority of the project costs are being funded through the Regional Airports Improvement Corporation ("RAIC"), a California public benefit corporation, using an $800 million revolving credit facility provided by a group of lenders.

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Loans made under the credit facility are being repaid with the proceeds from the City’s purchase of completed project assets.

Using funding provided by cash flows from operations and/or the credit facility, we spent approximately $176 million on this project during 2019 and expect to spend approximately $240 million during 2020.

Under the lease agreement and subsequent project component approvals by the City's Board of Airport Commissioners, the City has appropriated to date approximately $1.8 billion to purchase completed project assets, representing the maximum allowable reimbursement by the City.

Costs incurred in excess of the $1.8 billion maximum will not be reimbursed by the City.

We currently expect our net project costs to be approximately $500 million, of which approximately $200 million has been reflected as investing activities in our cash flows statement since the project started in 2017.

In 2020, $315 million was spent on this project, with $293 million paid by the credit facility and $22 million paid directly by Delta.

Approximately $550 million is expected to be spent on the project during 2021, with $445 million to be paid by the credit facility and $105 million to be paid directly by Delta.

New York-LaGuardia Redevelopment.

As part of the terminal redevelopment project at LaGuardia Airport, we are partnering with the Port Authority of New York and New Jersey ("Port Authority") to replace Terminals C and D with a new state-of-the-art terminal facility consisting of 37 gates across 4 concourses connected to a central headhouse.

The terminal will feature a new, larger Delta Sky Club, wider concourses, more gate seating and 30 percent more concessions space than the existing terminals.

The terminal will feature a new, larger Delta Sky Club, wider concourses, more gate seating and 75% more concessions space than the existing terminals.

The facility will also offer direct access between the parking garage and terminal and improved roadways and drop-off/pick-up areas.

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In connection with the redevelopment, during 2017, we entered into an amended and restated terminal lease with the Port Authority with a term through 2050.

Pursuant to the lease agreement we will (1) fund (through debt issuance and existing cash) and undertake the design, management and construction of the terminal and certain off-premises supporting facilities, (2) receive a Port Authority contribution of $600 million to facilitate construction of the terminal and other supporting infrastructure, (3) be responsible for all operations and maintenance during the term of the lease and (4) have preferential rights to all gates in the terminal subject to Port Authority requirements with respect to accommodation of designated carriers.

Pursuant to the lease agreement, as amended to date, we will (1) fund (through debt issuance and existing cash) and undertake the design, management and construction of the terminal and certain off-premises supporting facilities, (2) receive a Port Authority contribution of $481 million to facilitate construction of the terminal and other supporting infrastructure, (3) be responsible for all operations and maintenance during the term of the lease and (4) have preferential rights to all gates in the terminal subject to Port Authority requirements with respect to accommodation of designated carriers.

We currently expect our net project cost to be approximately $3.5 billion and we bear the risks of project construction, including any potential cost over-runs.

Using funding provided by cash flows from operations and/or financing arrangements, we spent approximately $562 million on this project during 2019 and expect to spend approximately $700 million during 2020.

In the December 2019 quarter, we opened Concourse G, the first of the four new concourses housing seven of the 37 new gates.

Not only does this deliver the first direct impact to the Delta passenger experience, it also represents the first major phasing milestone.

This new concourse will allow us to vacate portions of the existing terminals which can then be demolished and made ready for the next phase of construction.

Using funding primarily provided by existing financing arrangements, we spent approximately $600 million during 2020, bringing the total amount spent on the project to date to approximately $1.5 billion.

We expect to spend approximately $900 million during 2021, of which a substantial majority will be paid using cash restricted for airport construction.

See Note 8 of the Notes to the Consolidated Financial Statements for additional information on the debt related to this redevelopment project, the New York Transportation Development Corporation ("NYTDC") Special Facilities Revenue Bonds, Series 2018 and NYTDC Special Facilities Revenue Bonds, Series 2020.

In 2019, we opened Concourse G, the first of the four new concourses housing seven of the 37 new gates.

Not only did it deliver the first direct impact to the Delta passenger experience, it also represented the first major phasing milestone.

The next major milestone will be the opening of the headhouse and Concourse E, which is scheduled for 2022.

Delta Air Lines, Inc.

2020 Form 10-K 44

MD&A - Financial Condition and Liquidity

Financing Activities

Debt and Finance Leases.

In February 2019, we entered into a $1 billion term loan issued by two lenders, which was subsequently repaid by the end of the June 2019 quarter.

We used the net proceeds of the term loan to accelerate planned 2019 repurchases under our share repurchase program.

In the March 2019 quarter, we completed a $500 million offering of Pass Through Certificates, Series 2019-1 ("2019-1 EETC") through a pass through trust.

The net proceeds of the offering were used for general corporate purposes, including to refinance debt maturing during 2019.

In October 2019 we issued $1.5 billion in aggregate principal amount of unsecured notes, consisting of $900 million of 2.9% Notes due 2024 and $600 million of 3.75% Notes due 2029 (collectively, the "Notes").

We used the net proceeds from the offering of these Notes to fund a portion of the tender offer to acquire common shares of LATAM in January 2020.

During 2019, the three major credit rating agencies reaffirmed our investment-grade ratings:

During 2020, we took quick and decisive action to mitigate liquidity risk following the onset of the global pandemic by obtaining approximately $25.9 billion from financing transactions.

A summary of these transactions is listed below.

As our liquidity position began to stabilize during 2020, we repaid approximately $5.6 billion of future debt maturities, including $2.6 billion under our revolving credit facilities which had been drawn down in March 2020.

See Note 2, Note 8 and Note 9 of the Notes to the Consolidated Financial Statements for additional information.

• Raising $9.0 billion through the issuance of notes and entry into a term loan facility, each secured by certain assets related to our SkyMiles program.

• Issuing $3.5 billion of senior secured notes and entering into a $1.5 billion term loan, both of which are secured by certain slots, gates and routes.

• Entering into a $3.0 billion 364-day secured term loan facility with an original maturity in March 2021, which was repaid early and terminated in October 2020.

• Entering into $2.8 billion of sale-leaseback transactions.

Approximately $2.3 billion of these transactions were treated as financing activities with the remainder treated as investing activities.

See Note 9 of the Notes to the Consolidated Financial Statements for additional information.

• Entering into a promissory note for the $1.6 billion CARES Act payroll support program loan.

• Entering into loan agreements to borrow $1.5 billion from the NYTDC in connection with NYTDC's issuance of Special Facilities Revenue Bonds, Series 2020, to finance, among other things, a portion of the construction costs for the new terminal facilities at LaGuardia Airport.

• Completing $1.7 billion in transactions secured by aircraft, including EETC issuances and aircraft loans.

• Issuing $1.3 billion of unsecured notes.

In addition, in January 2021 we received $1.4 billion with respect to the payroll support program extension described below, with the remaining $1.5 billion expected in the March 2021 quarter.

The principal amount of our debt and finance leases was $29.4 billion at December 31, 2020.

Future Debt Obligations.

As described further in Note 8 of the Notes to the Consolidated Financial Statements, as of December 31, 2020, scheduled maturities of our debt in 2021 and 2022 were $1.5 billion and $1.9 billion, respectively, with maturities from 2023 through 2025 ranging between $3 billion and $5 billion annually.

As of December 31, 2020, scheduled maturities after 2025 aggregate to $12.5 billion.

In addition, we are obligated to make periodic interest payments at fixed and variable rates, depending on the terms of the applicable debt agreements.

Based on applicable interest rates and scheduled debt maturities as of December 31, 2020, these interest obligations total approximately $7.2 billion and range from approximately $700 million to $1.4 billion on an annual basis over the next five years.

In addition to payment of scheduled debt maturities, we expect to pay down our debt in 2021, and therefore reduce our future interest obligations.

Our current ratings from the three major credit rating agencies are summarized in the table below:

Credit agency ratings information

Rating Agency Current Rating Outlook

Fitch BBB- Stable

Moody's Baa3 Stable

Standard & Poor's BBB- Stable

Fitch BB+ Negative

Moody's Baa3 Negative

Standard & Poor's BB Negative

Finance Lease Obligations.

As described further in Note 9 of the Notes to the Consolidated Financial Statements as of December 31, 2020 we had a total of $1.3 billion of minimum finance lease obligations.

These minimum lease payments range from approximately $100 million to $300 million on an annual basis over the next five years.

Capital Returns to Shareholders.

Since first implementing our quarterly dividend in 2013, we have annually increased the dividend per share and paid $3.8 billion in total dividends, including $980 million in 2019.

Through dividends and share repurchases, we have returned $15.3 billion to shareholders since 2013, while reducing outstanding shares by approximately 25% compared to the beginning of 2013.

During 2019, we repurchased and retired 38 million shares at a cost of $2.0 billion.

On February 6, 2020, the Board of Directors approved and we will pay a quarterly dividend of $0.4025 per share to shareholders of record as of February 20, 2020.

In early March 2020, we suspended both our share repurchase program and future dividends due to the impact of the pandemic.

Prior to suspending these activities, in the March 2020 quarter, we repurchased and retired 6 million shares of our common stock at a cost of $344 million and paid a quarterly dividend of $260 million.

The CARES Act payroll support program initially restricted share repurchases and the payment of dividends through September 2021, which have been continued to March 2022 under the terms of the payroll support extension.

Delta Air Lines, Inc.

2020 Form 10-K 45

MD&A - Financial Condition and Liquidity

Undrawn Lines of Credit.

We have $3.1 billion available in revolving lines of credit.

These credit facilities include covenants customary for financing of this type.

If we are not in compliance with these covenants, we may be required to repay amounts borrowed under the credit facilities or we may not be able to draw on them.

We were in compliance with the covenants in our financing agreements at December 31, 2019.

Contractual Obligations

The following table summarizes our contractual obligations at December 31, 2019 that we expect will be paid in cash.

The table does not include amounts that are contingent on events or other factors that are uncertain or unknown at this time, including legal contingencies, uncertain tax positions and amounts payable under collective bargaining arrangements, among others.

In addition, the table does not include expected significant cash payments representing obligations that arise in the ordinary course of business that do not include contractual commitments.

Accordingly, the actual results may vary materially from the amounts presented in the table.

Contractual Obligations by Year (1)

(in millions) 2020 2021 2022 2023 2024 Thereafter Total

Debt (see Note 7)

Principal amount $ 2,060 $ 1,094 $ 1,708 $ 932 $ 1,508 $ 2,689 $ 9,991

Interest payments 307 295 246 185 154 635 1,822

Finance lease obligations (see Note 8)

Principal amount 233 213 156 111 171 169 1,053

Interest payments 31 26 18 13 9 10 107

Operating lease obligations (see Note 8)

1,031 913 825 803 738 4,293 8,603

Aircraft purchase commitments (see Note 11)

2,980 3,740 3,390 1,640 500 1,440 13,690

Contract carrier obligations (see Note 11)

1,750 1,432 1,377 1,132 1,002 2,349 9,042

Employee benefit obligations (see Note 10)

134 133 119 110 102 4,650 5,248

Other obligations 2,993 919 1,137 807 596 5,904 12,356

Total $ 11,519 $ 8,765 $ 8,976 $ 5,733 $ 4,780 $ 22,139 $ 61,912

(1) For additional information, see the Notes to the Consolidated Financial Statements referenced in the table above.

Debt, Principal Amount.

Represents scheduled principal payments on debt.

Debt, Interest Payments.

Represents estimated interest payments based on interest rates specified in our applicable debt agreements.

Interest payments on variable interest rate debt were calculated using LIBOR at December 31, 2019.

Finance and Operating Lease Obligations.

Refer to Note 8 of the Notes to the Consolidated Financial Statements for additional information regarding finance and operating leases.

Aircraft Purchase Commitments.

Refer to the aircraft purchase commitments table in Item 2 for additional information about our future aircraft purchases.

Contract Carrier Obligations.

Represents our estimated minimum fixed obligations under capacity purchase agreements with third-party regional carriers.

The reported amounts are based on (1) the required minimum levels of flying by our contract carriers under the applicable agreements and (2) assumptions regarding the costs associated with such minimum levels of flying.

Employee Benefit Obligations.

Represents primarily (1) projected future benefit payments from our unfunded postretirement and postemployment plans and (2) our estimated minimum required funding for our qualified defined benefit pension plans based on actuarially determined estimates.

For additional information about our defined benefit pension plan obligations, see "Critical Accounting Policies and Estimates."

Other Obligations.

Represents estimated purchase obligations under which we are required to make minimum payments for goods and services, including, but not limited to, aviation-related, maintenance, professional security, insurance, marketing, technology, sponsorships and other third-party services and products.

This also includes obligations related to our investment in and planned strategic alliance with LATAM.

Critical Accounting Policies and Estimates

Our critical accounting policies and estimates are those that require significant judgments and estimates.

As of December 31, 2020 we had approximately $2.6 billion undrawn and available under our revolving credit facilities.

In addition, we had outstanding letters of credit as of December 31, 2020, including approximately $300 million that reduced the availability under our revolvers and approximately $300 million that did not affect the availability under our revolvers.

We were in compliance with the covenants in our debt agreements at December 31, 2020.

See Note 8 of the Notes to the Consolidated Financial Statements for more information on the covenants in our debt agreements.

Critical Accounting Estimates

Our critical accounting estimates are those estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our consolidated results of operations or financial condition.

Accordingly, the actual results may differ materially from these estimates.

For a discussion of these and other accounting policies, see Note 1 of the Notes to the Consolidated Financial Statements.

For a discussion of our significant accounting policies, see Note 1 of the Notes to the Consolidated Financial Statements, unless otherwise noted below.

Loyalty Program

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This program allows customers to earn mileage credits ("miles") by flying on Delta, Delta Connection and other airlines that participate in the loyalty program.

When traveling, customers earn redeemable miles based on the passenger's loyalty program status and ticket price.

When traveling, customers earn miles based on the passenger's loyalty program status and ticket price.

Customers can also earn miles through participating companies such as credit card companies, hotels, car rental agencies and ridesharing companies.

To facilitate transactions with participating companies, we sell miles to non-airline businesses, customers and other airlines.

Miles are redeemable by customers in future periods for air travel on Delta and other participating airlines, membership in our Sky Club and other program awards.

To reflect the miles earned, the loyalty program includes two types of transactions that are considered revenue arrangements with multiple performance obligations:

(1) miles earned with travel and (2) miles sold to participating companies.

To facilitate transactions with participating companies, we sell miles to non-airline businesses, customers and other airlines.

The loyalty program includes two types of transactions that are considered revenue arrangements with multiple performance obligations (1) passenger ticket sales earning miles and (2) sale of miles to participating companies.

Passenger Ticket Sales Earning Miles.

Passenger ticket sales earning miles under our loyalty program provide customers with (1) miles earned and (2) air transportation, which are considered performance obligations.

Passenger ticket sales earning miles provide customers with (1) miles earned and (2) air transportation, which are each considered performance obligations.

We value each performance obligation on a standalone basis.

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We use statistical models to estimate breakage based on historical redemption patterns.

A change in assumptions as to the actual redemption activity for miles or the estimated fair value of miles expected to be redeemed could have a material impact on our revenue in the year in which the change occurs and in future years.

A change in assumptions to the redemption activity for miles or the estimated fair value of miles expected to be redeemed could have a material impact on our revenue in the year in which the change occurs and in future years.

We recognize breakage proportionally during the period in which the remaining miles are actually redeemed.

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A hypothetical 10% increase in our estimate of the ETV of a mile would decrease annual passenger revenue by approximately $40 million, as a result of an increase in the amount of revenue deferred from the mileage component of passenger ticket sales.

Sale of Miles.

Customers may earn miles based on their spending with participating companies such as credit card companies, hotels, car rental agencies and ridesharing companies with which we have marketing agreements to sell miles.

Sale of Miles to Participating Companies.

Customers earn miles based on their spending with participating companies such as credit card companies, hotels, car rental agencies and ridesharing companies with which we have marketing agreements to sell miles.

Our contracts to sell miles under these marketing agreements have multiple performance obligations.

Payments are typically due monthly based on the volume of miles sold during the period, and the terms of our marketing contracts are from one to eleven years.

Payments are typically due to us monthly based on the volume of miles sold during the period, and the initial terms of our marketing contracts are from three to eleven years.

During the years ended December 31, 2020 and 2019, total cash sales from marketing agreements were $2.8 billion and $4.2 billion, respectively, which are allocated to travel and other performance obligations, as discussed below.

Delta Air Lines, Inc.

2020 Form 10-K 46

MD&A - Critical Accounting Estimates

Our most significant contract to sell miles relates to our co-brand credit card relationship with American Express.

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We sell miles at agreed-upon rates to American Express which are then provided to their customers under the co-brand credit card program and the Membership Rewards program.

Effective January 1, 2019, we amended our co-brand and other agreements with American Express which increased the value we receive and extended the terms to 2029.

The products and services delivered are consistent with previous agreements.

We account for marketing agreements, including those with American Express, by allocating the consideration received to the individual products and services delivered.

We allocate the value based on the relative selling prices of those products and services, which generally consist of award travel, priority boarding, baggage fee waivers, lounge access and the use of our brand.

We determine our best estimate of the selling prices by using a discounted cash flow analysis using multiple inputs and assumptions, including:

(1) the expected number of miles awarded and number of miles redeemed, (2) ETV for the award travel obligation adjusted for breakage, (3) published rates on our website for baggage fees, discounted access to Delta Sky Club lounges and other benefits while traveling on Delta, (4) brand value (using estimated royalties generated from the use of our brand) and (5) volume discounts provided to certain partners.

Effective January 1, 2019, we amended our co-brand agreement with American Express, and we also amended other agreements with American Express during the current year.

The new agreements increase the value we receive and extend the terms to 2029.

The products and services delivered are consistent with previous agreements, and we continue to allocate the consideration received based on the relative selling prices of those products and services.

We defer the amount for award travel obligation as part of loyalty program deferred revenue and recognize loyalty travel awards in passenger revenue as the miles are used for travel.

We determine our best estimate of the selling prices by using a discounted cash flow analysis using multiple inputs and assumptions, including (1) the expected number of miles awarded and number of miles redeemed, (2) ETV for the award travel obligation adjusted for breakage, (3) published rates on our website for baggage fees, discounted access to Delta Sky Club lounges and other benefits while traveling on Delta, (4) brand value (using estimated royalties generated from the use of our brand) and (5) volume discounts provided to certain partners.

We defer the amount allocated to award travel as part of loyalty program deferred revenue and recognize loyalty travel awards in passenger revenue as the miles are redeemed and transportation is provided.

Revenue allocated to services performed in conjunction with a passenger’s flight, such as baggage fee waivers, is recognized as travel-related services in passenger revenue when the related service is performed.

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Revenue allocated to the remaining performance obligations, primarily brand value, is recorded as loyalty program in other revenue as miles are delivered.

For additional information on our significant accounting policies related to the loyalty program, see Note 3 of the Notes to the Consolidated Financial Statements.

Goodwill and Indefinite-Lived Intangible Assets

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Key Assumptions.

The key assumptions in our impairment tests include:

(1) forecasted revenues, expenses and cash flows, (2) terminal period revenue growth and cash flows, (3) an estimated weighted average cost of capital, (4) assumed discount rates depending on the asset and (5) a tax rate.

The key assumptions in our impairment tests include (1) forecasted revenues, expenses and cash flows, including the duration and extent of impact to our business and our alliance partners from the COVID-19 pandemic, (2) current discount rates, (3) observable market transactions and (4) anticipated changes to the regulatory environment (e.g., diminished slot access, additional Open Skies agreements or changes to antitrust approvals).

These assumptions are consistent with those that hypothetical market participants would use.

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In addition, when performing a qualitative valuation, we consider the amount by which the intangible assets' fair values exceeded their respective carrying values in the most recent fair value measurements calculated using a quantitative approach.

Delta Air Lines, Inc.

2020 Form 10-K 47

MD&A - Critical Accounting Estimates

Changes in certain events and circumstances could result in impairment or a change from indefinite-lived to definite-lived.

Factors which could cause impairment include, but are not limited to (1) negative trends in our market capitalization, (2) reduced profitability resulting from lower passenger mile yields or higher input costs (primarily related to fuel and employees), (3) lower passenger demand as a result of weakened U.S.

and global economies, (4) interruption to our operations due to a prolonged employee strike, terrorist attack or other reasons, (5) changes to the regulatory environment (e.g., diminished slot access or additional Open Skies agreements), (6) competitive changes by other airlines and (7) strategic changes to our operations leading to diminished utilization of the intangible assets.

We assessed each of the above assumptions in our most recent impairment analyses.

The combination of our most recently completed annual results and our projected revenues, expenses and cash flows more than offset any negative events and circumstances.

and global economies, global pandemics or other factors, (4) interruption to our operations due to a prolonged employee strike, terrorist attack or other reasons, (5) changes to the regulatory environment (e.g., diminished slot access, additional Open Skies agreements or changes to antitrust approvals), (6) competitive changes by other airlines and (7) strategic changes to our operations leading to diminished utilization of the intangible assets.

Our goodwill balance, which is related to the airline segment, was $9.8 billion at December 31, 2020.

Based upon our quantitative assessment of all relevant factors, including applicable factors noted in " Key Assumptions " above, we determined that the fair value of goodwill significantly exceeded the carrying value and, therefore, there was no indication that goodwill was impaired.

Based upon our quantitative assessment of all relevant factors, including applicable factors noted in "Key Assumptions" above in addition to the change in our market capitalization during the current year, we determined that the fair value of goodwill significantly exceeded the carrying value and, therefore, there was no indication that goodwill was impaired.

Identifiable Intangible Assets.

Our identifiable intangible assets, which are related to the airline segment, had a net carrying amount of $6.0 billion at December 31, 2020, of which $5.9 billion related to indefinite-lived intangible assets.

Indefinite-lived assets are not amortized and consist primarily of routes, slots, the Delta tradename and assets related to SkyTeam and collaborative arrangements.

Indefinite-lived assets are not amortized and consist of routes, slots, the Delta tradename and assets related to alliances and collaborative arrangements.

Definite-lived assets consist primarily of marketing and maintenance service agreements.

In 2019, we performed quantitative assessments of our indefinite-lived intangible assets, including applicable factors noted in " Key Assumptions " above, and determined that there was no indication that the assets were impaired as the fair value of each asset exceeded its carrying value by at least 15%.

Long-Lived Assets

In 2020, we performed quantitative assessments of our goodwill and indefinite-lived intangible assets, including applicable factors noted in "Key Assumptions" above, and determined that there was no indication that the assets were impaired as the fair value of each asset exceeded its carrying value by at least 10%.

Assumptions are sensitive to uncertainty about future events, the macroeconomic environment and other market-based risk factors.

A change in key assumptions such as the discount rate or projected future revenues, expenses and cash flows could materially affect the determination of fair values.

However, we believe the impact of the pandemic is temporary in nature and does not materially impact the long-range forecasts for our goodwill or indefinite-lived intangibles.

Management evaluated estimates and assumptions used in the valuations, considering market and industry-specific conditions.

For additional information on our goodwill and indefinite-lived intangible assets' significant accounting policies and the related fair values and book values, see Note 7 of the Notes to the Consolidated Financial Statements.

Property and Equipment, net

Our flight equipment, which consists of aircraft and associated engines and parts, and other long-lived assets have a recorded value of $26.5 billion at December 31, 2020.

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For long-lived assets held for sale, we discontinue depreciation and record impairment losses when the carrying amount of these assets is greater than the fair value less the cost to sell.

To determine whether impairments exist for aircraft used in operations, we group assets at the fleet-type level or at the contract level for aircraft operated by regional carriers (i.e., the lowest level for which there are identifiable cash flows) and then estimate future cash flows based on projections of capacity, passenger mile yield, fuel costs, labor costs and other relevant factors.

If an asset group is impaired, the impairment loss recognized is the amount by which the asset group's carrying amount exceeds its estimated fair value.

We estimate aircraft fair values using published sources, appraisals and bids received from third parties, as available.

As part of our ongoing fleet transformation, during 2019 we committed to accelerating the retirement of our MD-90 fleet.

This fleet will now be retired by the end of 2022, which is approximately two years earlier than previously planned.

We evaluated the MD-90 fleet and determined that the fleet was not impaired as the future cash flows from operation of the fleet through the updated retirement date significantly exceeded the carrying value.

However, the decision to retire the fleet by 2022, including the permanent retirement of 35 aircraft during 2019, resulted in accelerated depreciation of $79 million during 2019, which is recorded in depreciation and amortization in our income statement.

To determine whether impairments exist for active and temporarily parked aircraft, we group assets at the fleet type level or at the contract level for aircraft operated by third-party regional carriers (i.e., the lowest level for which there are identifiable cash flows) and then estimate future cash flows based on projections of capacity, passenger mile yield, fuel and labor costs and other relevant factors.

Given the substantial reduction in our active aircraft and diminished projections of future cash flows in the near term as a result of the COVID-19 pandemic, we evaluated our fleet during 2020 and determined that only the fleet types discussed in Note 2 of the Notes to the Consolidated Financial Statements were impaired, as the future cash flows from the operation of all other fleet types through the respective retirement dates exceeded the carrying value.

As we obtain greater clarity about the duration and extent of reduced demand and potentially execute further capacity adjustments, we will continue to evaluate our fleet compared to network requirements and may decide to retire additional aircraft.

Future decisions regarding the temporarily parked aircraft and the timing of any return to service will be dependent on the evolution of the demand environment.

Delta Air Lines, Inc.

2020 Form 10-K 48

MD&A - Critical Accounting Estimates

As a result of the COVID-19 pandemic and our response, we have removed certain aircraft from active service as of December 31, 2020, which includes owned and leased aircraft that are being retired early.

This resulted in impairment and other related charges of $4.4 billion, recorded in restructuring charges in our income statement.

These charges were calculated using Level 3 fair value inputs based primarily upon recent market transactions and third-party bids, which were corroborated with published pricing guides and our assessment of existing market conditions based on industry knowledge.

The effects of the COVID-19 pandemic in 2020 created additional estimation uncertainty as there is currently a limited market for aircraft and limited data on how the COVID-19 pandemic has affected the fair value of aircraft.

Following the impairment charges, the remaining aggregate net book value of these aircraft as of December 31, 2020 is approximately $500 million.

See Note 2 of the Notes to the Consolidated Financial Statements for additional details regarding these impairments and related charges.

Income Tax 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 available positive and negative evidence and make certain assumptions.

We consider, among other things, projected future taxable income, scheduled reversals of deferred tax liabilities, the overall business environment, our historical financial results and tax planning strategies.

In evaluating the likelihood of utilizing our net deferred income tax assets, the significant factors that we consider include (1) our recent history of profitability, (2) growth in the U.S.

and global economies, (3) forecast of airline revenue trends, (4) estimate of future fuel prices and (5) future impact of taxable temporary differences.

At December 31, 2020 our net deferred tax asset balance was $2.0 billion , including a $460 million valuation allowance primarily related to capital loss carryforwards and state net operating losses.

Although we are in a three year cumulative loss position as of December 31, 2020 , we have a recent history of significant earnings prior to the onset of the COVID-19 pandemic.

We expect to return to profitability as the effects of the pandemic subside and to generate sufficient taxable income to utilize our federal net operating loss carryforwards before any expire.

Our federal net operating loss carryforwards generated before 2018 do not begin to expire until 2027.

Under current tax law, federal net operating losses generated in 2020 do not expire.

Therefore, we have not recorded a valuation allowance on our deferred tax assets other than the capital loss carryforwards and state net operating losses that have short expiration periods.

Defined Benefit Pension Plans

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As of December 31, 2020, the unfunded benefit obligation for these plans recorded on our balance sheet was $6.1 billion.

We had no minimum funding requirements in 2019.

We had no minimum funding requirements in 2019 or 2020, we have no such requirements in 2021, and based on our current projections, we do not expect any minimum required contributions until 2025.

However, during 2019, we voluntarily contributed $1 billion to these plans.

We have no minimum funding requirements in 2020, but we plan to voluntarily contribute approximately $500 million to these plans.

As a part of our liquidity initiatives we suspended voluntary pension funding that we were previously planning in 2020.

We plan to contribute at least $500 million to these plans in 2021.

The most critical assumptions impacting our defined benefit pension plan obligations and net periodic benefit cost are the discount rate, the expected long-term rate of return on plan assets and life expectancy.

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Our weighted average expected long-term rate of return on assets for net periodic benefit cost for the year ended December 31, 2020 was 8.97%.

Delta Air Lines, Inc.

2020 Form 10-K 49

MD&A - Critical Accounting Estimates

The impact of a 0.50% change in these assumptions is shown in the table below:

Benefit plan effects of change in assumptions used

Change in Assumption Effect on 2021

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Assumptions include, among other things, the actual and projected market performance of assets, statutory requirements and demographic data for participants.

For additional information, see Note 10 of the Notes to the Consolidated Financial Statements.

Investments Valued at Net Asset Value ("NAV") Per Share.

On an annual basis we assess the potential for adjustments to the fair value of all investments.

Certain of our investments valued using NAV as a practical expedient have a lag in the availability of data.

These investments valued using NAV as a practical expedient are typically valued on a monthly or quarterly basis by third-party administrators, valuation agents or fund managers with an annual audit performed by an independent third party, but certain of these investments have a lag in the availability of data.

This primarily applies to private equity, private equity-related strategies and real assets.

We solicit valuation updates from the investment fund managers and use their information and corroborating data from public markets to determine any needed fair value adjustments.

For additional information on our significant accounting policies related to defined benefit pension plans, see Note 11 of the Notes to the Consolidated Financial Statements.

Recent Accounting Standards

Standards Effective in Future Years

Credit Losses.

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This model requires consideration of a broader range of reasonable and supportable information and requires an entity to estimate expected credit losses over the lifetime of the asset.

This standard is effective for interim and annual reporting periods beginning after December 15, 2019.

We do not expect adoption of this standard to have a material impact on our consolidated financial statements.

We will adopt the standard effective January 1, 2020.

Recently Adopted Standards

Comprehensive Income.

In February 2018, the FASB issued ASU No.

2018-02, "Income Statement—Reporting Comprehensive Income (Topic 220)." This standard provides an option to reclassify stranded tax effects within accumulated other comprehensive income/(loss) ("AOCI") to retained earnings due to the U.S.

federal corporate income tax rate change in the Tax Cuts and Jobs Act of 2017.

We adopted this standard effective January 1, 2019 with the election not to reclassify $1.2 billion of stranded tax effects, primarily related to our pension plans, from AOCI to retained earnings.

We adopted this standard effective January 1, 2020 and due to the COVID-19 pandemic, we recorded reserves on certain receivables, which are discussed further in Note 5 of the Notes to the Consolidated Financial Statements.

Income Taxes.

In 2019, the FASB issued ASU No.

2019-12, "Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes." This standard simplifies the accounting and disclosure requirements for income taxes by clarifying existing guidance to improve consistency in application of ASC 740.

This standard also removed the requirement to calculate income tax expense for the stand-alone financial statements of wholly owned subsidiaries.

We adopted the new standard effective January 1, 2020 with no impact on our Consolidated Financial Statements.

Delta Air Lines, Inc.

2020 Form 10-K 50

MD&A - Supplemental Information

Supplemental Information

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Reconciliations below may not calculate exactly due to rounding.

TRASM, adjusted

The following table shows a reconciliation of TRASM (a GAAP measure) to TRASM, adjusted (a non-GAAP financial measure).

We adjust TRASM for the following items to determine TRASM, adjusted for the reasons described below

Pre-Tax (Loss)/Income, adjusted

The following table shows a reconciliation of pre-tax (loss)/income (a GAAP measure) to pre-tax (loss)/income, adjusted (a non-GAAP financial measure).

In 2020, pre-tax (loss)/income, adjusted excludes the following items directly related to the impact of COVID-19 and our response for comparability with the prior period:

• Restructuring charges.

We recognized restructuring charges following strategic business decisions in response to the COVID-19 pandemic.

These charges primarily include impairments and related charges from retirement decisions related to approximately 400 aircraft and the voluntary early retirement and separation programs.

• Government grant recognition.

We recognized the full grant proceeds from the CARES Act payroll support program as a contra-expense in 2020.

We recognized the grant proceeds based on the periods that the funds were intended to benefit.

• Impairments and equity method losses.

During 2020, we recognized charges and the related income tax impacts from write-downs of our investments in LATAM and Grupo Aeroméxico following their financial losses and separate Chapter 11 bankruptcy filings, and the write-down of our investment in Virgin Atlantic based on our share of its losses.

• Pension settlement charges.

These charges were recognized in connection with the voluntary programs.

We also regularly adjust pre-tax (loss)/income for the following items to determine pre-tax (loss)/income, adjusted for the reasons described below:

• MTM adjustments and settlements on hedges.

Mark-to-market ( " MTM") adjustments are defined as fair value changes recorded in periods other than the settlement period.

Such fair value changes are not necessarily indicative of the actual settlement value of the underlying hedge in the contract settlement period.

Settlements represent cash received or paid on hedge contracts settled during the applicable period.

• Equity investment MTM adjustments.

We previously recorded our proportionate share of losses from our equity investments in Virgin Atlantic, Grupo Aeroméxico and LATAM in non-operating expense.

(As a result of Grupo Aeroméxico's and LATAM’s bankruptcy filings, we no longer have significant influence with Grupo Aeroméxico or LATAM and discontinued accounting for these investments under the equity method in the June 2020 quarter.) We adjust for our equity method investees' hedge portfolio MTM adjustments to allow investors to understand and analyze our core operational performance in the periods shown.

• MTM adjustments on investments.

Unrealized gains/losses result from our equity investments that are accounted for at fair value in non-operating expense.

The gains/losses are driven by changes in stock prices, foreign currency fluctuations and other valuation techniques for investments in companies without publicly-traded shares.

Adjusting for these gains/losses allows investors to better understand and analyze our core operational performance in the periods shown.

• Delta Private Jets adjustment .

Because we combined Delta Private Jets with Wheels Up in January 2020, we have excluded the impact of Delta Private Jets from 2019 results for comparability.

Delta Air Lines, Inc.

2020 Form 10-K 51

MD&A - Supplemental Information

Pre-tax (loss)/income, adjusted reconciliation

Year Ended December 31,

(in millions) 2020 2019

Pre-tax (loss)/income $ (15,587) $ 6,198

Restructuring charges 8,219 —

Government grant recognition (3,946) —

Impairments and equity method losses 2,172 —

Pension settlement charges 36 —

Adjusted for:

MTM adjustments and settlements on hedges 10 14

Equity investment MTM adjustments (19) (14)

MTM adjustments on investments 119 13

Delta Private Jets adjustment — 3

Pre-tax (loss)/income, adjusted $ (8,996) $ 6,214

Operating Expense, adjusted

The following table shows a reconciliation of operating expense (a GAAP measure) to operating expense, adjusted (a non-GAAP financial measure).

In 2020, operating expense, adjusted excludes the following items directly related to the impact of COVID-19 and our response:

restructuring charges and government grant recognition, as discussed above under the heading pre-tax (loss)/income, adjusted.

We also adjust operating expense for the following items for the reasons described below.

We adjust for MTM adjustments and settlements on hedges and Delta Private Jets adjustment for the same reasons described above under the heading pre-tax (loss)/income, adjusted.

• Third-party refinery sales.

We adjust TRASM for refinery sales to third parties because these revenues are not related to our airline segment.

TRASM, adjusted therefore provides a more meaningful comparison of revenue from our airline operations to the rest of the airline industry.

• DGS sale adjustment.

Because we sold DGS in December 2018, we have excluded the impact of DGS from 2018 results for comparability.

We adjust operating expense for refinery sales to third parties to determine operating expense, adjusted because these revenues, and related expenses, are not related to our airline segment.

Operating expense, adjusted therefore provides a more meaningful comparison of operating expenses from our airline operations to the rest of the airline industry.

Operating expense, adjusted reconciliation

Year Ended December 31,

(in millions) 2020 2019

Operating expense $ 29,564 $ 40,389

Restructuring charges (8,219) —

Government grant recognition 3,946 —

Adjusted for:

MTM adjustments and settlements on hedges (10) (14)

Third-party refinery sales (1,150) (97)

Delta Private Jets adjustment — (196)

Operating expense, adjusted $ 24,130 $ 40,082

Delta Air Lines, Inc.

2020 Form 10-K 52

MD&A - Supplemental Information

Free Cash Flow

We present free cash flow because management believes this metric is helpful to investors to evaluate the company's ability to generate cash that is available for use for debt service or general corporate initiatives.

Adjustments include:

• Net purchases of short-term investments.

Net purchases of short-term investments represent the net purchase and sale activity of investments and marketable securities in the period, including gains and losses.

We adjust for this activity to provide investors a better understanding of the company's free cash flow generated by our operations.

• Strategic investments and related.

Cash flows related to our investment in and related transactions with other airlines are included in our GAAP investing activities.

We adjust for this activity because it provides a more meaningful comparison to our airline industry peers.

• Net cash flows related to certain airport construction projects and other.

Cash flows related to certain airport construction projects are included in our GAAP operating activities and capital expenditures.

We have adjusted for these items, which were primarily funded by cash restricted for airport construction, to provide investors a better understanding of the company's free cash flow and capital expenditures that are core to our operational performance in the periods shown.

Free cash flow reconciliation

Year Ended December 31,

(in millions) 2020 2019

Net cash (used in)/provided by operating activities $ (3,793) $ 8,425

Net cash used in investing activities (9,238) (4,563)

Net purchases/(redemptions) of short-term investments 5,792 (206)

Strategic investments and related 2,192 170

Net cash flows related to certain airport construction projects and other 721 338

Free cash flow $ (4,327) $ 4,164

TRASM, adjusted

The following table shows a reconciliation of TRASM (a GAAP measure) to TRASM, adjusted (a non-GAAP financial

We adjust TRASM for refinery sales to third parties for the same reason described above under the heading operating expense, adjusted.

We adjust for Delta Private Jets for the same reason described above under the heading pre-tax (loss)/income, adjusted.

TRASM, adjusted reconciliation

Year Ended December 31,

TRASM (cents) 12.73 ¢ 17.07 ¢

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Third-party refinery sales (0.86) (0.04)

DGS sale adjustment — (0.09)

Delta Private Jets adjustment — (0.07)

TRASM, adjusted 11.87 ¢ 16.97 ¢

Delta Air Lines, Inc.

2020 Form 10-K 53

MD&A - Supplemental Information

The following table shows a reconciliation of CASM (a GAAP measure) to CASM-Ex (a non-GAAP financial measure).

We adjust CASM for the following items to determine CASM-Ex for the reasons described below:

In 2020, CASM-Ex excludes the following items directly related to the impact of COVID-19 and our response:

restructuring charges and government grant recognition, as discussed above under the heading pre-tax (loss)/income, adjusted.

We also adjust CASM for the following items to determine CASM-Ex for the reasons described below.

We adjust for refinery sales to third parties for the same reason described above under the heading operating expense, adjusted.

We adjust for Delta Private Jets for the same reason described above under the heading pre-tax (loss)/income, adjusted.

• Aircraft fuel and related taxes.

The volatility in fuel prices impacts the comparability of year-over-year financial performance.

The adjustment for aircraft fuel and related taxes allows investors to understand and analyze our non-fuel costs and year-over-year financial performance.

• Ancillary businesses and refinery.

We adjust for expenses related to aircraft maintenance we provide to third parties, our vacation wholesale operations, our private jet operations as well as refinery cost of sales to third parties.

2018 results also include staffing services performed by DGS.

Because these businesses are not related to the generation of a seat mile, we adjust for the costs related to these areas to provide a more meaningful comparison of the costs of our airline operations to the rest of the airline industry.

The adjustment for aircraft fuel and related taxes allows investors to better understand and analyze our non-fuel costs and year-over-year financial performance.

• Profit sharing.

We adjust for profit sharing because this adjustment allows investors to better understand and analyze our recurring cost performance and provides a more meaningful comparison of our core operating costs to the airline industry.

CASM-Ex reconciliation

Year Ended December 31,

CASM (cents) 22.01 ¢ 14.67 ¢

Restructuring charges (6.12) —

Government grant recognition 2.94 —

Adjusted for:

Aircraft fuel and related taxes (2.36) (3.10)

Ancillary businesses and refinery (0.45) (0.64)

Third-party refinery sales (0.86) (0.04)

Profit sharing — (0.60)

Delta Private Jets adjustment — (0.06)

CASM-Ex 15.61 ¢ 10.88 ¢

Free Cash Flow

Adjustments include:

• Net redemptions of short-term investments.

Net redemptions of short-term investments represent the net purchase and sale activity of investments and marketable securities in the period, including gains and losses.

We adjust for this activity to provide investors a better understanding of the company's free cash flow generated by our operations.

• Strategic investments.

Cash flows related to our investment in Hanjin-KAL, the largest shareholder of Korean Air, are included in our GAAP investing activities.

We adjust free cash flow for this activity to provide investors a better understanding of the company's free cash flow that is core to our operational performance.

• Net cash flows related to certain airport construction projects and other.

Cash flows related to certain airport construction projects are included in our GAAP operating activities and capital expenditures.

Consolidated CASM, adjusted

The following table shows a reconciliation of CASM (a GAAP measure) to consolidated CASM, adjusted (a non-GAAP financial measure).

In 2020, consolidated CASM, adjusted excludes the following items directly related to the impact of COVID-19 and our response:

restructuring charges and government grant recognition, as discussed above under the heading pre-tax (loss)/income, adjusted.

We also adjust CASM for MTM adjustments and settlements on hedges and for Delta Private Jets for the same reason described above under the heading pre-tax (loss)/income, adjusted.

We adjust for refinery sales to third parties for the same reason described above under the heading operating expense, adjusted.

Consolidated CASM, adjusted reconciliation

Year Ended December 31,

(in millions) 2019 2018

Net cash provided by operating activities $ 8,425 $ 7,014

Net cash used in investing activities (4,563) (4,393)

Net redemptions of short-term investments (206) (621)

Strategic investments 170 —

Net cash flows related to certain airport construction projects and other 338 362

Free cash flow $ 4,164 $ 2,362

CASM (cents) 22.01 ¢ 14.67 ¢

Restructuring charges (6.12) —

Government grant recognition 2.94 —

Adjusted for:

MTM adjustments and settlements on hedges (0.01) (0.01)

Third-party refinery sales (0.86) (0.04)

Delta Private Jets adjustment — (0.07)

Consolidated CASM, adjusted 17.96 ¢ 14.56 ¢

Delta Air Lines, Inc.

2020 Form 10-K 54

MD&A - Glossary of Defined Terms

Glossary of Defined Terms

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ASMs equal the total number of seats available for transporting passengers during a reporting period multiplied by the total number of miles flown during that period.

CASM - (Operating) Cost per Available Seat Mile.

CASM - (Total Operating) Cost per Available Seat Mile.

The amount of operating cost incurred per ASM during a reporting period.

CASM is also referred to as "unit cost."

CASM-Ex - The amount of operating cost incurred per ASM during a reporting period, adjusted for aircraft fuel and related taxes, ancillary businesses and refinery and profit sharing expenses.

Free Cash Flow - Represents the excess cash generated from operations after satisfying the investment needed to sustain and grow our business.

The remaining funds are available to return to shareholders and other providers of capital.

Passenger Load Factor - A measure of utilized available seating capacity calculated by dividing RPMs by ASMs for a reporting period.

CASM-Ex - The amount of operating cost incurred per ASM during a reporting period, adjusted for restructuring charges, government grant recognition, aircraft fuel and related taxes, third-party refinery sales, profit sharing expenses and Delta Private Jets.

Consolidated CASM, adjusted - The amount of operating cost incurred per ASM during a reporting period, adjusted for restructuring charges, government grant recognition, MTM adjustments and settlements on hedges, third-party refinery sales and Delta Private Jets.

Free Cash Flow - Represents the cash available for use for debt service or general corporate initiatives.

Load Factor - A measure of utilized available seating capacity calculated by dividing RPMs by ASMs for a reporting period.

Passenger Mile Yield or Yield - The amount of passenger revenue earned per RPM during a reporting period.

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The amount of total revenue earned per ASM during a reporting period.

TRASM, adjusted - The amount of total revenue earned per ASM during a reporting period, adjusted for third-party refinery sales and Delta Private Jets.

Delta Air Lines, Inc.

2020 Form 10-K 55

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis