DELTA AIR LINES, INC. 10-K

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Our business and operating results continue to be significantly impacted by the COVID-19 pandemic. However, as described further below, we have seen improvement in our business beginning in March 2021 and progressing through 2021. Given the drastic and unprecedented impact of the pandemic on our operating results in 2020, we believe that for the financial highlights discussion below, a comparison of our results in 2021 to both 2020 and 2019 allows for a better understanding of the full impact of the COVID-19 pandemic and the progress of our recovery. This section of Form 10-K, however, does not address certain items regarding the year ended December 31, 2019. Discussion and analysis of 2019 and year-to-year comparisons between 2020 and 2019 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, 2020. 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 as well as the material risk factors included elsewhere in this Annual Report on Form 10-K. The table below shows certain key financial measures for the years ended December 31, 2021, 2020 and 2019: Year Ended December 31, 2021 vs 2020 % Increase (Decrease) (1) 2021 vs 2019 % Increase (Decrease) (1) (in millions) 2021 2020 2019 Total operating revenue $ 29,899 $ 17,095 $ 47,007 75 % (36) % Total operating expense 28,013 29,564 40,389 (5) % (31) % Total non-operating expense, net (1,488) (3,118) (420) (52) % NM Income/(loss) before income taxes 398 (15,587) 6,198 NM (94) % (1) Certain variances are labeled as not meaningful ("NM") throughout management's discussion and analysis. Financial Highlights - 2021 Compared to 2019 Our pre-tax income for 2021 was $398 million, which includes recognition of $4.5 billion in grants from the Payroll Support Program Extension ("PSP2") and Payroll Support Program 3 ("PSP3"). This is a $5.8 billion decrease compared to 2019 primarily due to the impact of the COVID-19 pandemic on our business which resulted in a 36% decrease in revenue, partially offset by a reduction in operating expense, including the government grant recognition. Pre-tax loss, adjusted (a non-GAAP financial measure) which excludes the government grant recognition and other items was $3.4 billion, a decrease of $9.6 billion compared to 2019. Revenue. Compared to 2019, our operating revenue decreased $17.1 billion, or 36% due to reduced demand resulting from the COVID-19 pandemic. The length and severity of the reduction in travel demand due to the COVID-19 pandemic remains uncertain; however, with continued distribution of effective vaccines and easing of travel advisories and restrictions, we believe customer confidence will continue to grow, leading to increased demand during 2022. We expect domestic leisure travel to exceed 2019 levels in 2022, while we expect business travel to continue to return as many companies are expected to expand "return to office" plans throughout 2022. International demand recovery has been uneven as the COVID-19 variants and related travel restrictions impact various countries within our international network, though we believe demand will begin accelerating in the second half of 2022 as travel restrictions are lifted. We continue to monitor risks to the pace of recovery from COVID-19 variants, the effectiveness of vaccine programs and travel advisories and restrictions. We are planning for our system capacity to be approximately 15% lower in the March 2022 quarter than the March 2019 quarter and approximately 10% lower for the full year of 2022 compared to 2019. Operating Expense. Total operating expense decreased $12.4 billion, or 31%, compared to 2019, primarily resulting from recognition of the grants from PSP2 and PSP3, lower volume-related expenses (mainly fuel and passenger commissions and other selling expenses), lower salaries and related costs and profit sharing expense, and significant cost reduction measures taken across all aspects of our operation in response to the COVID-19 pandemic. These decreases were partially offset by an increase in expenses related to refinery sales to third parties, reflected in ancillary business and refinery expense, as well as recovery related and transition costs incurred (e.g., aircraft reactivation, hiring, training, overtime and reservations volume) as we return closer to pre-pandemic levels of demand and capacity. Total operating expense, adjusted (a non-GAAP financial measure) decreased $10.9 billion, or 27% compared to 2019. Delta Air Lines, Inc. 2021 Form 10-K 34 Item 7. MD&A - Financial Highlights Our total operating cost per available seat mile ("CASM") decreased 2% to 14.40 cents compared to 2019, primarily due to the cost reductions discussed above and partially offset by a 29% decrease in capacity. Non-fuel unit costs ("CASM-Ex", a non-GAAP financial measure) increased 11% to 12.12 cents due to the 29% decrease in capacity, despite a decline in adjusted operating expenses. Minimizing unit cost increases is important to delivering on our overall financial objectives. During 2022, however, we expect non-fuel unit costs to increase 7%-10% compared to 2019. This expected unit cost increase is primarily due to 2022 capacity projected to be lower than 2019, costs associated with rebuilding our network, investments to support an elevated customer experience and our premium brand focus, and inflation and labor cost escalation in the underlying business. We expect non-fuel unit cost increases compared to 2019 to moderate in future years as we return to and exceed pre-pandemic capacity and benefit from cost reduction measures implemented during 2020 that were structural in nature. We have experienced, and expect to continue experiencing, increased cost inflation as a result of global macroeconomic trends, actions we took in response to the COVID-19 pandemic and labor shortages at our suppliers. Actions we have taken to mitigate the impact of expected inflation include leveraging scale and efficiency in our underlying business through improved asset utilization and seeking productivity improvements through increased scale efficiencies and technology enhancements. Non-Operating Results. Total non-operating expense was $1.5 billion in 2021, $1.1 billion higher than 2019, primarily due to higher interest expense as a result of our increased debt balances due to the financing arrangements entered into during 2020. Cash Flow. Our liquidity at December 31, 2021 was $14.2 billion, an $8.2 billion increase compared to December 31, 2019 as a result of proceeds from loans and debt issuances and other liquidity initiatives. During 2021, operating activities provided $3.3 billion, including $4.5 billion from the payroll support program grants, which was partially offset by the $1.5 billion in contributions we made to our defined benefit pension plans. During 2021, we incurred approximately $900 million of net investing cash outflows, primarily for $3.2 billion capital expenditures, partially offset by $2.4 billion of net redemptions of short-term investments. Capital expenditures primarily related to the purchase of aircraft, fleet modifications, our airport redevelopment projects and technology enhancements. These results generated $1.3 billion of free cash flow (a non-GAAP financial measure) in 2021 compared to $4.2 billion in 2019. Also, during 2021 we had cash outflows of approximately $5.8 billion related to repayments of our debt and finance leases, including approximately $3.8 billion for early repayments and the remainder from scheduled maturities. The non-GAAP financial measures pre-tax loss, adjusted, operating expense, adjusted, CASM-Ex and free cash flow used above are defined and reconciled in "Supplemental Information" below. Financial Highlights - 2021 Compared to 2020 Our 2021 pre-tax income improved $16.0 billion compared to 2020. This was primarily due to the restructuring charges, investment impairments and equity method losses recorded during 2020 and a partial recovery in the demand for air travel during 2021, which resulted in a 75% increase in revenue. Pre-tax loss, adjusted (a non-GAAP financial measure) was $3.4 billion, an increase of $5.6 billion compared to 2020. Revenue. Compared to 2020, our 2021 operating revenue increased $12.8 billion, or 75%, primarily due to increased travel demand. Operating Expense. Total operating expense decreased $1.6 billion, or 5%, compared to 2020, primarily resulting from the reduction in restructuring charges and recognition of the PSP2 and PSP3 grants. These decreases were almost fully offset by higher volume-related expenses associated with the increase in capacity and demand, mainly fuel and aircraft maintenance and higher salaries and related costs and an increase in expenses related to refinery sales to third parties, reflected in ancillary business and refinery expense. Total operating expense, adjusted (a non-GAAP financial measure) increased $5.1 billion, or 21% compared to 2020. Our CASM decreased 35% to 14.40 cents compared to 2020, primarily due to a 45% increase in capacity and reduction in operating expense from the reduction in restructuring charges and recognition of the PSP2 and PSP3 grants as noted above. CASM-Ex (a non-GAAP financial measure) decreased 22% to 12.12 cents. Delta Air Lines, Inc. 2021 Form 10-K 35 Item 7. MD&A - Financial Highlights Non-Operating Results. Total non-operating expense was $1.5 billion in 2021, $1.6 billion lower than 2020 primarily due to impairments and our proportionate share of equity method losses related to our investments in LATAM and Grupo Aeroméxico in 2020, which were zero in 2021, and mark-to-market gains on certain of our other equity investments. These decreases were partially offset by higher interest expense as a result of our increased debt balances due to the financing arrangements entered into during 2020 and losses on debt extinguishment. Cash Flow. The $1.3 billion of free cash flow generated in 2021 compared to $4.3 billion of negative free cash flow in 2020. Environmental Sustainability During 2021, we built on our previously announced plan to invest $1.0 billion through the end of 2030 toward airline carbon neutrality by committing to, among other things, set medium- and long-term climate goals that are aligned with applicable SBTi frameworks, as described further in Part I, Item 1, "Business - Environmental Sustainability." We expect our path toward achievement of these ambitious climate goals to depend heavily on increased use of SAF, which is not presently available at scale or at prices competitive to jet fuel, and improved fuel efficiency from fleet renewal and operational initiatives. During 2021, we signed agreements with numerous corporate and agency customers to offset the premium from our SAF purchases. While we do not expect a material adverse effect on our Consolidated Financial Statements in the near term from the use of SAF, we are unable to predict the financial impact of increased use of SAF on our Consolidated Financial Statements over the longer term, as government policies and incentives for, and sufficient third-party investment in, SAF are necessary to make its use in larger quantities commercially and economically feasible. In addition, our fleet renewal efforts will require extensive capital investment in future periods. In the near-term and subject to market dynamics, we also expect to continue the purchase and retirement of verified carbon offsets in support of our $1.0 billion airline carbon neutrality goal. During 2021, we incurred $95 million of expense related to carbon offsets. This amount consists of $30 million to address 13 million metric tons of carbon emissions generated by our airline segment from March 1 to December 31, 2020 through carbon offsets, as well as an additional $65 million for the purchase and retirement of carbon offsets related to a portion of our airline segment's 2021 carbon emissions. The cost of carbon offsets increased significantly during 2021 and will likely continue to do so, which could adversely affect our financial results as we purchase such offsets either in support of our $1.0 billion airline carbon neutrality goal or in satisfaction of future obligations under CORSIA, which are described further in Part I, Item 1, "Business - Environmental Regulation." Delta Air Lines, Inc. 2021 Form 10-K 36 Item 7. MD&A - Results of Operations Results of Operations Operating Revenue Year Ended December 31, Increase (Decrease) % Increase (Decrease) (in millions) (1) 2021 2020 Ticket - Main cabin $ 11,626 $ 6,676 $ 4,950 74 % Ticket - Business cabin and premium products 7,713 4,294 3,419 80 % Loyalty travel awards 1,786 935 851 91 % Travel-related services 1,394 978 416 43 % Total passenger revenue $ 22,519 $ 12,883 $ 9,636 75 % Cargo 1,032 608 424 70 % Other 6,348 3,604 2,744 76 % Total operating revenue $ 29,899 $ 17,095 $ 12,804 75 % TRASM (cents) 15.37 ¢ 12.73 ¢ 2.64 ¢ 21 % Third-party refinery sales (2) (1.66) (0.86) (0.80) 93 % TRASM, adjusted (cents) 13.71 ¢ 11.87 ¢ 1.84 ¢ 16 % (1) Total amounts in the table above may not calculate exactly due to rounding. (2) For additional information on adjustments to TRASM, see "Supplemental Information" below. Operating Revenue Our operating revenue increased $12.8 billion, or 75%, compared to the year ended December 31, 2020 due primarily to increased demand in 2021 as a result of the continued recovery from the COVID-19 pandemic. The increase in operating revenue, on a 45% increase in capacity, generated a 21% increase in total revenue per available seat mile ("TRASM") and a 16% increase in TRASM, adjusted (a non-GAAP financial measure) compared to 2020. See "Refinery Segment" below for additional details on the refinery's operations, including third-party refinery sales recorded in other revenue, during each period. 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 cargo capacity drove a significant increase in our cargo yield, and we also generated cargo revenue through the operation of cargo-only charter flights (i.e., using aircraft in our fleet not being utilized for passenger travel to fly cargo internationally). This trend continued in 2021, and we would expect capacity constraints and elevated market yields to continue through 2022 while the industry rebuilds international networks to pre-pandemic levels. Compared to 2020, we flew additional cargo volume as international networks returned, coupled with a continued increase in yield driven by a combination of constrained capacity and increased demand. Passenger Revenue by Geographic Region Increase (Decrease) vs. Year Ended December 31, 2020 (in millions) Year Ended December 31, 2021 Passenger Revenue RPMs (Traffic) ASMs (Capacity) Passenger Mile Yield PRASM Load Factor Domestic $ 18,468 84 % 98 % 45 % (7) % 27 % 20 pts Atlantic 1,777 52 % 56 % 42 % (3) % 7 % 5 pts Latin America 1,873 68 % 82 % 79 % (8) % (6) % 1 pt Pacific 401 (28) % (55) % (2) % 58 % (26) % (27) pts Total passenger revenue $ 22,519 75 % 83 % 45 % (5) % 21 % 15 pts Delta Air Lines, Inc. 2021 Form 10-K 37 Item 7. MD&A - Results of Operations Domestic Domestic passenger unit revenue ("PRASM") for the year ended December 31, 2021 increased 27% with capacity up 45% compared to the year ended December 31, 2020 as a result of the low levels of capacity and demand during 2020 due to the COVID-19 pandemic and the ongoing recovery throughout 2021. Beginning in the latter half of the March 2021 quarter, we began to see bookings, primarily leisure, improve from the low levels of 2020. Throughout 2021, demand continued to improve, with some variability in periods of rising COVID-19 cases attributable to variants of the virus. We remain optimistic about the ultimate recovery of business travel which has been recovering at a slower pace than consumer. We expect this demand to continue to be led by small- and medium-sized businesses and accelerate in the first half of 2022 as more corporate offices reopen; we are, however, unable to fully predict the pace of that recovery. International International passenger revenue for the year ended December 31, 2021 increased 43% with capacity up 45% compared to the year ended December 31, 2020 as travel to certain destinations has resumed or increased. Additionally, while some countries have removed or eased travel restrictions, many countries maintained or reinstituted international testing requirements and travel restrictions, which have restrained demand in the short term but are expected to support the long-term recovery of international air travel. In November 2021, travel restrictions on most fully vaccinated foreign visitors to the United States were lifted. This action made travel to the U.S. by many foreign nationals possible for the first time in 18 months. Despite this policy change, we expect the significantly lower international demand environment to continue through at least the beginning of 2022, with the recovery pace continuing to trail domestic travel. The Atlantic and Pacific regions continue to be the most impacted by the restrictions described above. However, during 2021, we began, resumed or increased our service to certain countries in the Atlantic region based on their lifting or easing of travel restrictions. Travel in the Pacific region is largely limited to essential travel, and we expect only small demand improvements until government restrictions ease with minimal improvement until at least the second half of 2022. We will continue to be agile in the restoration of our international network based on changes in government restrictions and consumer demand. The Latin America region has shown the most recovery of the international regions, with continued demand improvement for leisure destinations in the Caribbean, Mexico and Central America. We expect this trend to continue through 2022 with the recovery in the Atlantic and Pacific regions lagging behind Latin America. Ticket Validity Flexibility In order to provide our customers more flexibility and time to plan or rebook their travel, we made the following changes to our ticket and travel credit expiration dates. In the March 2021 quarter, we announced the extension of the validity of all passenger tickets and travel credits purchased or expiring in 2021 to December 31, 2022, which allowed for tickets to be rebooked through December 31, 2022 for travel through 2023. In January 2022, we announced that all existing travel credit holders will have until December 31, 2023 to rebook their ticket for travel throughout 2024. Additionally, all Delta customers with upcoming 2022 travel or who purchase a ticket in 2022 will also have the flexibility to rebook their ticket through December 31, 2023, and travel throughout 2024. During 2020, with the exception of Basic Economy, we eliminated change fees for all tickets originating in North America and waived change fees for tickets originating outside of North America. We also implemented a temporary waiver that allowed Basic Economy tickets with travel for 2021, which are normally non-changeable, to be changed without paying a fee regardless of origin or destination. Starting January 1, 2022, Basic Economy tickets may be cancelled for a fee to receive a partial ticket credit. We do not expect the updated change fee policies to materially affect our revenue in future periods; however, our estimates of revenue that will be recognized for tickets that expire unused ("ticket breakage") may vary in future periods due to the extension of the validity of passenger tickets and travel credits. Delta Air Lines, Inc. 2021 Form 10-K 38 Item 7. MD&A - Results of Operations Other Revenue Year Ended December 31, Increase (Decrease) % Increase (Decrease) (in millions) 2021 2020 Refinery $ 3,229 $ 1,150 $ 2,079 181 % Loyalty program 1,770 1,458 312 21 % Ancillary businesses 793 648 145 22 % Miscellaneous 556 348 208 60 % Total other revenue $ 6,348 $ 3,604 $ 2,744 76 % Refinery. This represents refinery sales to third parties. These sales, which are at or near cost, increased $2.1 billion compared to 2020. The increase in third-party refinery sales resulted from the refinery's shift to producing and selling more non-jet fuel products due to the lower level of demand for jet fuel compared to historical levels, in addition to higher pricing during 2021. See "Refinery Segment" below for additional details on the refinery's operations, including third-party refinery sales recorded in other revenue, during each period. Loyalty Program. Loyalty program revenues relate to brand usage by third parties and other performance obligations embedded in miles sold, including redemption of miles for non-travel awards. These revenues are mainly driven by customer spend on American Express cards and new cardholder acquisitions. As co-brand card spend and card acquisitions continue to be strong, revenues from our relationship with American Express increased in the year ended December 31, 2021 compared to 2020. Ancillary Businesses. Ancillary businesses includes aircraft maintenance services we provide to third parties and our vacation wholesale operations. Miscellaneous. Miscellaneous revenue is primarily composed of lounge access, including access provided to certain American Express cardholders, and codeshare revenues. Compared to 2020, these transactions have increased due to the ongoing recovery of our business that continued to materialize in 2021. Our network of Delta Sky Club lounges was fully reopened by the end of July 2021 after some lounges temporarily closed at the onset of the pandemic in 2020. Delta Air Lines, Inc. 2021 Form 10-K 39 Item 7. MD&A - Results of Operations Operating Expense Year Ended December 31, Increase (Decrease) % Increase (Decrease) (in millions) 2021 2020 Salaries and related costs $ 9,728 $ 9,001 $ 727 8 % Aircraft fuel and related taxes 5,633 3,176 2,457 77 % Ancillary businesses and refinery 3,957 1,785 2,172 122 % Contracted services 2,420 1,953 467 24 % Landing fees and other rents 2,019 1,833 186 10 % Depreciation and amortization 1,998 2,312 (314) (14) % Regional carrier expense 1,736 1,584 152 10 % Aircraft maintenance materials and outside repairs 1,401 822 579 70 % Passenger commissions and other selling expenses 953 643 310 48 % Passenger service 756 551 205 37 % Aircraft rent 430 399 31 8 % Restructuring charges (19) 8,219 (8,238) (100) % Profit sharing 108 — 108 NM Government grant recognition (4,512) (3,946) (566) 14 % Other 1,405 1,232 173 14 % Total operating expense $ 28,013 $ 29,564 $ (1,551) (5) % 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, implemented cost saving initiatives related to our fleet and operations, offered employees voluntary separation programs and delayed or eliminated nearly all discretionary spending. During 2021, distribution of vaccines continued, travel restrictions and advisories eased and customer confidence continued to grow despite the negative impact of COVID-19 virus variants in the second half of 2021. As a result, we saw revenue and capacity return and related operating expense line items increase. The continued restoration of our operations was the primary driver for the increases in contracted services, landing fees and other rents, passenger commissions and other selling expenses, passenger service and other expense. Other year-over-year fluctuations are discussed below. Salaries and Related Costs. In the second half of 2020, approximately 18,000 employees elected to participate in voluntary separation programs, which initially reduced our workforce by approximately 20%, though some of those positions have subsequently been filled. Since the beginning of 2021, we have hired approximately 11,000 employees in certain areas, including flight operations, airport customer service and reservations and customer care, in order to support our operations as demand and capacity return. 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. On January 1, 2021, employees were restored to full work hours, officer salaries were restored and during 2021 we recalled approximately 1,700 pilots from inactive status back to active service. Additionally, we offered voluntary unpaid leaves of absence for periods ranging from 30 days up to 12 months and approximately 50,000 and 20,000 of our employees elected to take a leave of absence at various times throughout 2020 and 2021, respectively. These actions resulted in higher salaries and related costs in 2021 compared to 2020. Delta Air Lines, Inc. 2021 Form 10-K 40 Item 7. MD&A - Results of Operations Aircraft Fuel and Related Taxes. Fuel expense increased $2.5 billion compared to 2020 primarily due to a 44% increase in consumption on a 45% increase in capacity, and a 31% increase in the market price of jet fuel. Additionally, during 2021, we purchased and retired $95 million of carbon offsets, of which $30 million relates to 13 million metric tons of carbon emissions generated by our airline segment from March 1 to December 31, 2020 as well as $65 million which relates to a portion of 2021 carbon emissions generated by our airline segment. In the table below, these costs are shown in the carbon offset costs line item. Fuel expense and average price per gallon Average Price Per Gallon Year Ended December 31, Increase (Decrease) Year Ended December 31, Increase (Decrease) (in millions, except per gallon data) 2021 2020 2021 2020 Fuel purchase cost (1) $ 5,527 $ 2,938 $ 2,589 $ 1.99 $ 1.52 $ 0.47 Carbon offset costs 95 — 95 0.03 — 0.03 Fuel hedge impact 9 22 (13) — 0.01 (0.01) Refinery segment impact 2 216 (214) — 0.11 (0.11) Total fuel expense $ 5,633 $ 3,176 $ 2,457 $ 2.02 $ 1.64 $ 0.38 (1) Market price for jet fuel at airport locations, including related taxes and transportation costs. Ancillary Businesses and Refinery. Ancillary businesses and refinery includes expenses associated with refinery sales to third parties, aircraft maintenance services we provide to third parties and our vacation wholesale operations. Increased expenses were primarily related to refinery sales to third parties, which are at or near cost and increased $2.1 billion compared to 2020. The increase compared to 2020 was driven by higher pricing during 2021, with lower production and demand for both jet and non-jet fuel products during 2020. The cost of aircraft maintenance services we provide to third parties increased compared to 2020 due to the increase in flights operated worldwide in 2021. Depreciation and Amortization. Depreciation and amortization decreased compared to 2020 primarily due to the aircraft that were retired or impaired during 2020. As we acquire new aircraft to provide an improved customer experience, greater fuel efficiency and thus reduced carbon emissions, better operating economics and more premium products, we expect depreciation expense to increase in future years. Regional Carrier Expense. Regional carrier expense increased compared to 2020 due to an increase in utilization as a result of the increased demand discussed above. Until 2021, we allocated certain costs (such as landing fees and other rents, salaries and related costs and contracted services) to regional carrier expense in our Consolidated Statements of Operations ("income statement") based on relevant statistics (such as passenger counts). Beginning in 2021 we ceased performing this allocation and have reclassified the costs presented in prior periods to align with this presentation. This reclassification better reflects the nature of, and how management views, these regional carrier related expenses. This allocation was approximately $900 million in 2020. The amounts in regional carrier expense under the current presentation represent the accrual of payments to our regional carriers under capacity purchase agreements, maintenance costs related to our regional fleet and the expenses of our wholly owned regional subsidiary, Endeavor Air, Inc. Aircraft Maintenance Materials and Outside Repairs. Maintenance expense increased compared to 2020 as we returned aircraft to service and to support our operational reliability. The increase compared to 2020 was particularly pronounced due to the significantly reduced capacity during 2020 and the large number of aircraft we had parked during that time. Aircraft Rent. Most aircraft operating lease expenses are recorded in aircraft rent and are contractually fixed. Therefore, the increase in aircraft rent was more muted than our other operating expense line items when compared to 2020. Restructuring Charges. During 2020, we recorded restructuring charges of $8.2 billion for items such as fleet impairments and voluntary early retirement and separation programs following strategic business decisions in response to the COVID-19 pandemic. In the year ended December 31, 2021, we recognized $19 million of adjustments to certain of those restructuring charges, representing changes in our estimates. See Note 15 of the Notes to the Consolidated Financial Statements for additional information about the restructuring charges recorded in 2020. Delta Air Lines, Inc. 2021 Form 10-K 41 Item 7. MD&A - Results of Operations Profit Sharing. To recognize the extraordinary efforts of our employees through the pandemic, we will make a special profit-sharing payment to eligible employees in February 2022, based on the adjusted pre-tax profit earned during the second half of 2021. Government Grant Recognition. During the year ended December 31, 2021, we received a total of $6.4 billion under the PSP2 and PSP3 agreements with the U.S. Department of the Treasury, which we were required to use exclusively for the payment of employee wages, salaries and benefits. The support payments included grants totaling $4.5 billion that were recognized as contra-expense in 2021 over the period that the funds were used. The amount recognized in 2021 exceeded the amount recognized during 2020 due to the increase in grants received during the year. See Note 6 of the Notes to the Condensed Consolidated Financial Statements for additional information on PSP2 and PSP3. Non-Operating Results Year Ended December 31, Favorable (Unfavorable) (in millions) 2021 2020 Interest expense, net $ (1,279) $ (929) $ (350) Impairments and equity method losses (337) (2,432) 2,095 Gain/(loss) on investments, net 56 (105) 161 Loss on extinguishment of debt (319) (8) (311) Pension and related benefit/(expense) 451 219 232 Miscellaneous, net (60) 137 (197) Total non-operating expense, net $ (1,488) $ (3,118) $ 1,630 Interest expense, net. Interest expense, net includes interest expense and interest income. This increased as a result of the additional interest expense related to financing arrangements entered into during 2020. See Note 6 of the Notes to the Consolidated Financial Statements for additional information on recent financings and repayments. We have begun reducing the total amount of interest expense by pre-paying our debt in addition to periodic amortization payments and scheduled maturities. This began with early repayments made during the December 2020 quarter and continued with multiple early repayments during 2021 including the early repayment of our $1.5 billion secured term loan, approximately $450 million of various Enhanced Equipment Trust Certificates ("EETCs"), approximately $850 million of certain notes through a cash tender offer and $647 million of other secured certificates, unsecured notes and a portion of the SkyMiles Term Loan through repurchases on the open market. We will continue to seek opportunities to pre-pay our debt, in addition to periodic amortization payments and scheduled maturities, during 2022 and beyond. Impairments and equity method losses. Impairments and equity method losses in 2021 reflect our share of Virgin Atlantic's equity method losses. Impairments and equity method losses in 2020 reflected 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 basis of these investments to zero during the June 2020 quarter. See Note 4 of the Notes to the Consolidated Financial Statements for additional information on our equity investments. Gain/(loss) on investments, net. See Note 4 of the Notes to the Consolidated Financial Statements for additional information on our equity investments measured at fair value on a recurring basis. Loss on extinguishment of debt. Loss on extinguishment of debt reflects the losses incurred in the early repayment of the notes, outstanding term loan and EETCs mentioned above. See Note 6 of the Notes to the Consolidated Financial Statements for additional information on the early repayment of debt. Pension and related benefit/(expense). Pension and related benefit/(expense) reflects the net periodic benefit/(cost) of our pension and other postretirement and postemployment benefit plans. Based on our current level of funding, we have modified, and continue to evaluate, the asset allocation mix to reduce the investment risk of the portfolio. The lower risk profile of the portfolio is projected to result in a lower expected long-term rate of return on plan assets in 2022. We expect pension and related benefits to decline in 2022 compared to 2021. See Note 9 of the Notes to the Consolidated Financial Statements for additional information on our employee benefit plans. Miscellaneous, net. Miscellaneous, net primarily includes foreign exchange gains/(losses) and charitable contributions. Miscellaneous, net in 2020 included the $240 million gain recognized as a result of the combination of Delta Private Jets with Wheels Up in January 2020. Delta Air Lines, Inc. 2021 Form 10-K 42 Item 7. MD&A - Income Taxes Income Taxes Our effective tax rate for 2021 was 30%. As of December 31, 2021 , w e had approximately $4.8 billion of U.S. federal pre-tax net operating loss carryforwards, of which $1.1 billion was generated prior to 2018 and will not begin to expire until 2029. Under current tax law, the remaining amount has no expiration. For more information about our income taxes, see Note 11 of the Notes to the Consolidated Financial Statements. Refinery Segment The refinery operated by our wholly-owned subsidiary 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. The refinery’s production has also been altered by the dramatic change in economic conditions caused by the COVID-19 pandemic. During 2021, the refinery progressively increased operations, ending the year at near pre-pandemic levels. Refinery segment financial information Year Ended December 31, (in millions, except per gallon data) 2021 2020 % Increase (Decrease) Exchange products $ 2,293 $ 1,472 56 % Sales of refined products 40 307 (87) % Sales to airline segment 492 214 130 % Third-party refinery sales 3,229 1,150 181 % Operating revenue $ 6,054 $ 3,143 93 % Operating loss $ (2) $ (216) (99) % Refinery segment impact on average price per fuel gallon $ — $ 0.11 (100) % Refinery revenues increased from $3.1 billion in 2020 to $6.1 billion in 2021, primarily driven by the increase in third-party refinery sales. The increase in third-party refinery sales resulted from the refinery's shift to producing and selling more non-jet fuel products due to the lower level of demand for jet fuel compared to historical levels, in addition to higher pricing during 2021. The refinery decreased its operating loss from $216 million in 2020 to $2 million in 2021 mainly due to the increased production and pricing, partially offset by higher Renewable Identification Numbers ("RINs") compliance costs discussed below. A refinery is subject to annual EPA requirements to blend renewable fuels into the gasoline and on-road diesel fuel it produces. Alternatively, a refinery may purchase RINs from third parties in the secondary market. The Monroe refinery purchases the majority of its RINs in the secondary market. Monroe incurred $422 million in RINs compliance costs during 2021, of which $98 million related to accrual rate increases on the prior year obligation, in addition to $172 million accrued in 2020. Observable RIN prices increased significantly through the first half of 2021, ending 2021 at nearly double the market price at the end of 2020. At December 31, 2021, we had a net fair value obligation of $497 million. Our obligation as of December 31, 2021 was calculated using the EPA's proposed Renewable Fuel Standard ("RFS") volume requirements for 2020 and 2021, which were issued in December 2021. The EPA has not finalized the compliance deadlines to retire our obligations for 2020 and 2021, but we expect those deadlines to be within one year of the effective date of the new RFS volume requirements. For more information regarding the refinery's results, see Note 14 of the Notes to the Consolidated Financial Statements. Delta Air Lines, Inc. 2021 Form 10-K 43 Item 7. MD&A - Operating Statistics Operating Statistics Year Ended December 31, Consolidated (1) 2021 2020 2019 Revenue passenger miles (in millions) 134,692 73,412 237,680 Available seat miles (in millions) 194,474 134,339 275,379 Passenger mile yield 16.72 ¢ 17.55 ¢ 17.79 ¢ Passenger revenue per available seat mile ("PRASM") 11.58 ¢ 9.59 ¢ 15.35 ¢ Total revenue per available seat mile ("TRASM") 15.37 ¢ 12.73 ¢ 17.07 ¢ TRASM, adjusted (2) 13.71 ¢ 11.87 ¢ 16.97 ¢ Cost per available seat mile ("CASM") 14.40 ¢ 22.01 ¢ 14.67 ¢ CASM-Ex (2) 12.12 ¢ 15.61 ¢ 10.88 ¢ Passenger load factor 69 % 55 % 86 % Fuel gallons consumed (in millions) 2,778 1,935 4,214 Average price per fuel gallon (3) $ 2.02 $ 1.64 $ 2.02 Average price per fuel gallon, adjusted (2)(3) $ 2.02 $ 1.64 $ 2.01 Approximate full-time equivalent employees, end of period 83,000 74,000 91,000 (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) Non-GAAP financial measures are defined and reconciled to TRASM, CASM and average fuel price per gallon, respectively, in "Supplemental Information" below. (3) Includes the impact of fuel hedge activity, refinery segment results and carbon offset costs. Delta Air Lines, Inc. 2021 Form 10-K 44 Item 7. MD&A - Financial Condition and Liquidity Financial Condition and Liquidity As of December 31, 2021, we had $14.2 billion in cash, cash equivalents, short-term investments and aggregate principal amount committed and available to be drawn under our revolving credit facilities. We expect to meet our liquidity needs for the next twelve months with cash and cash equivalents, short-term investments, 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 are continuing to evaluate the appropriate level of liquidity to maintain following the COVID-19 pandemic though, at least in the near term, we expect this level to be higher than the liquidity maintained prior to the pandemic. By 2024, we expect liquidity to be between $5 billion and $6 billion as we work to reduce our financial obligations and reinvest in the business. Sources and Uses of Liquidity Operating Activities Operating activities in 2021 provided $3.3 billion, including funds received from the government support programs described in "Financing Activities" below, compared to using $3.8 billion in 2020. We expect to continue generating positive cash flows from operations during 2022. Our operating cash flow is impacted by the following factors: Seasonality of Advance Ticket Sales . We sell tickets for air travel in advance of the customer's travel date. When we receive a cash payment at the time of sale, we record the cash received on advance sales as deferred revenue in air traffic liability. The air traffic liability typically increases during the winter and spring months as advanced ticket sales grow prior to the summer peak travel season and decreases during the summer and fall months. However, the reduction in demand for air travel due to the COVID-19 pandemic resulted in a lower level of advance bookings and the associated cash received than we have historically experienced which has impacted the typical seasonal trend of air traffic liability since March 2020. Domestic demand has improved since the latter half of the March 2021 quarter as consumers have regained confidence to travel and increased ticket purchases for travel further in advance. We experienced small moderations in demand growth during parts of the second half of 2021 due to a rise in COVID-19 cases attributable to COVID-19 virus variants. Our air traffic liability remains above historical levels with travel credits representing approximately 45% of the balance as of December 31, 2021. This compares to approximately 65% as of December 31, 2020 and approximately 20% prior to the onset of the COVID-19 pandemic. Fuel . Fuel expense represented approximately 20% of our total operating expense during 2021. The market price for jet fuel is volatile, which can impact the comparability of our periodic cash flows from operations. The average fuel price per gallon increased in 2021. As capacity and demand increased throughout the year, fuel consumption was higher in 2021 than 2020 as well. We expect that fuel consumption will continue to increase throughout 2022 as we return closer to pre-pandemic levels of demand for air travel, partially offset by increases in fuel efficiency of our fleet. We expect our commitment to environmental sustainability to depend on increased use of SAF, which is not presently available at scale or at prices competitive to jet fuel. While we do not expect a material adverse effect on our Consolidated Financial Statements in the near-term from the use of SAF, we are unable to predict the financial impact of increased use of SAF on our Consolidated Financial Statements over the longer term as government policies and incentives for, and sufficient third-party investment in, SAF are necessary to make its use in larger quantities commercially and economically feasible. Employee Benefit Obligations. We sponsor defined benefit pension plans for eligible employees and retirees. These plans are closed to new entrants and are frozen for future benefit accruals. Our funding obligations for these plans are governed by the Employee Retirement Income Security Act ("ERISA") and any applicable legislation. We had no minimum funding requirements in 2020 or 2021, and have no such requirements in 2022. However, we voluntarily contributed $1.5 billion to these plans during 2021. At this level of funding, investment returns are expected to satisfy future benefit payments, which we believe would eliminate further material voluntary or required cash contributions to the plans under the terms of ERISA. Further, based on this level of funding, we have modified, and continue to evaluate, the asset allocation mix to reduce the investment risk of the portfolio. Estimates of future funding requirements are based on various assumptions and could vary materially from actual funding requirements. Assumptions include, among other things, the actual and projected market performance of assets, statutory requirements and demographic data for participants. Delta Air Lines, Inc. 2021 Form 10-K 45 Item 7. MD&A - Financial Condition and Liquidity In addition, we have employee benefit obligations relating primarily to projected future benefit payments from our unfunded postretirement and postemployment plans. See Note 9 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 $575 million of this charge was disbursed in cash payments to participants during 2021 in addition to $720 million disbursed in 2020. We anticipate that a total of approximately $500 million in cash payments will be made to participants in the voluntary separation programs in 2022 and the remaining payments in 2023 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. We did not have a profit sharing payment for 2020 based on the pre-tax loss incurred in that year. To recognize the extraordinary efforts of our employees through the pandemic, we will make a special profit-sharing payment to eligible employees in February 2022, based on the adjusted pre-tax profit earned during the second half of 2021. We will pay $108 million in profit sharing in February 2022. Government Support Programs. See "Financing Activities" below for discussion of the impact to our liquidity from the government support programs in 2020 and 2021. We included $4.5 billion and $3.9 billion of grants received in our operating cash flow for the years ended December 31, 2021 and 2020, respectively. 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, 2021 the total of these minimum amounts was $11.7 billion, which range from approximately $1.5 billion to $1.6 billion on an annual basis over the next five years. See Note 10 of the Notes to the Consolidated Financial Statements for more information on our contract carrier obligations. Operating Lease Obligations. As described further in Note 7 of the Notes to the Consolidated Financial Statements, as of December 31, 2021 we had a total of $9.8 billion of minimum operating lease obligations. These minimum lease payments range from approximately $800 million to $1.0 billion on an annual basis over the next five years. New York-JFK Airport Expansion. In 2015, we completed two phases of redevelopment at New York-JFK's Terminal 4 to facilitate convenient connections for our passengers and improve coordination with our SkyTeam alliance partners. Terminal 4 is operated by JFK International Air Terminal LLC ("IAT"), a private party, under its lease with the Port Authority of New York and New Jersey ("Port Authority"). In December 2010, we entered into a 33-year agreement with IAT to sublease space in Terminal 4. Also, in 2010, the Port Authority issued approximately $800 million principal amount of special project bonds (the "Series 8 Bonds") to fund the majority of the project. In December 2020, the NYTDC issued approximately $611 million principal amount of special project bonds to refinance the outstanding balance of the Series 8 Bonds. During 2021, we signed an amendment to the Sublease for additional gates at JFK, increasing our lease obligation by $1.2 billion. We continue to plan for further expansion of Terminal 4 and during 2021, the Port Authority approved modified project plans to renovate Terminal 4 and add 10 new gates enabling us to move out of Terminal 2 and consolidate our operations at Terminal 4. The project is estimated to cost approximately $1.5 billion, and we expect to amend the Sublease in the March 2022 quarter. Construction started in late 2021 with the project estimated to be complete by the end of 2023. 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, insurance, marketing, technology, sponsorships and other third-party services and products. As of December 31, 2021, we had approximately $8.0 billion of such obligations, which range from approximately $300 million to $800 million on an annual basis over the next five years. Delta Air Lines, Inc. 2021 Form 10-K 46 Item 7. MD&A - Financial Condition and Liquidity Investing Activities Short-Term Investments. In 2021 we redeemed a net of $2.4 billion in short-term investments. See Note 3 of the Notes to the Consolidated Financial Statements for further information on these investments. Capital Expenditures. Our capital expenditures (i.e., property and equipment additions in our Consolidated Statements of Cash Flows ("cash flows statement")) were $3.2 billion and $1.9 billion in 2021 and 2020, respectively. Our capital expenditures are primarily related to the purchases of aircraft, airport construction projects, fleet modifications and technology enhancements. 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. Excluding the New York-LaGuardia airport project discussed below, our expected 2022 capital expenditures of approximately $6.0 billion, which may vary depending on financing decisions, will be primarily for aircraft, including deliveries and advance deposit payments, as well as fleet modifications and technology enhancements. As described in Part I, Item 1. "Business - Environmental Sustainability," aircraft fleet renewal is an important component of our environmental sustainability strategy and the path to achievement of our ambitious climate goals, which will continue to require extensive capital investment in future periods. See Note 10 of the Notes to the Consolidated Financial Statements for additional information regarding our aircraft purchase commitments, which totaled approximately $16.2 billion as of December 31, 2021. New York-LaGuardia Redevelopment. As part of the terminal redevelopment project at LaGuardia Airport, we are partnering with the Port Authority to replace Terminals C and D with a new state-of-the-art terminal facility consisting of 37 gates across four concourses connected to a central headhouse. The terminal will feature a new, larger Delta Sky Club, wider concourses, more gate seating and nearly double the amount of 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. The design of the new terminal will integrate sustainable technologies and improvements in energy efficiency. Construction is underway and is being phased to limit passenger inconvenience. Due to an acceleration effort that commenced in 2020, completion is expected by 2025. 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, 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 approximately $500 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 primarily provided by existing financing arrangements, we spent approximately $950 million, which is primarily reflected in investing activities in our cash flows statement, during 2021, bringing the total amount spent on the project to date to approximately $2.5 billion. We expect to spend approximately $750 million during 2022, of which a majority will be paid using cash restricted for airport construction. See Note 6 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 four new concourses, housing seven of the 37 new gates. Not only did the new Concourse G provide 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 the second quarter of 2022. 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 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. Given reduced passenger volumes resulting from the COVID-19 pandemic, we accelerated the construction schedule for this project in 2020. Additionally, in 2020, we enhanced the project’s scope to include a more customer-friendly design of Terminal 3, an expanded Delta Sky Club and baggage system upgrades designed to increase the terminals’ operational efficiency going forward. Construction is expected to be completed in 2023. Delta Air Lines, Inc. 2021 Form 10-K 47 Item 7. MD&A - Financial Condition and Liquidity 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 a revolving credit facility provided by a group of lenders. The credit facility was executed in 2017 and amended in 2020, and we have guaranteed the obligations of the RAIC under the credit facility. The revolving credit facility agreement was amended again in January 2022, increasing the revolver capacity from $800 million to $1.1 billion. Loans made under the credit facility are being repaid with the proceeds from the City’s purchase of completed project assets. 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 $250 million has been reflected as investing activities in our cash flows statement since the project started in 2017. In 2021, $487 million was spent on this project, with $450 million paid by the credit facility and $37 million paid directly by Delta. Approximately $500 million is expected to be spent on the project during 2022, with $325 million to be paid by the credit facility and $175 million to be paid directly by Delta. Equity Investments. To support our international presence, we are investing in Virgin Atlantic, Grupo Aeroméxico and LATAM as each carrier emerges from restructuring or recapitalization processes. After investing approximately $630 million in these carriers during 2021, we expect to invest another approximately $600 million during 2022 for a total combined investment of new capital in these carriers of approximately $1.2 billion. Upon completion of their respective processes, we expect to receive an approximately 20% equity stake in Grupo Aeroméxico and an approximately 10% equity stake in LATAM, while maintaining our 49% equity stake in Virgin Atlantic. See Note 4 of the Notes to the Consolidated Financial Statements for additional information on our equity investments Financing Activities Debt and Finance Leases. See Note 6 of the Notes to the Consolidated Financial Statements for additional information on recent financings and repayments. In 2021, we had cash outflows of approximately $5.8 billion related to repayments of our debt and finance leases, including approximately $3.8 billion for the early repayment of the term loan secured by certain of our slots, gates and routes, various EETCs, certain notes through a cash tender offer and other various unsecured notes, secured certificates and SkyMiles term loan. We will continue to seek opportunities to pre-pay our debt, in addition to periodic amortization payments and scheduled maturities, during 2022 and beyond. The principal amount of our debt and finance leases was $27.1 billion at December 31, 2021. Future Debt Obligations. As described further in Note 6 of the Notes to the Consolidated Financial Statements, as of December 31, 2021, scheduled maturities of our debt in 2022 and 2023 were $1.5 billion and $2.5 billion, respectively, with maturities from 2024 through 2026 ranging between $3.1 billion and $4.2 billion annually. As of December 31, 2021, scheduled maturities after 2026 aggregate to $10.9 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, 2021, these interest obligations total approximately $5.5 billion and range from approximately $500 million to $1.0 billion on an annual basis over the next five years. In addition to payment of scheduled debt maturities, we expect to continue paying down our debt in 2022, 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 BB+ Negative Moody's Baa3 Stable Standard & Poor's BB Stable Delta Air Lines, Inc. 2021 Form 10-K 48 Item 7. MD&A - Financial Condition and Liquidity Finance Lease Obligations. As described further in Note 7 of the Notes to the Consolidated Financial Statements as of December 31, 2021 we had a total of $2.0 billion of minimum finance lease obligations. These minimum lease payments range from approximately $200 million to $400 million on an annual basis over the next five years. Undrawn Lines of Credit. As of December 31, 2021 we had approximately $2.9 billion undrawn and available under our revolving credit facilities. In addition, we had $300 million outstanding letters of credit as of December 31, 2021 that did not affect the availability under our revolvers. Covenants. We were in compliance with the covenants in our debt agreements at December 31, 2021. See Note 6 of the Notes to the Consolidated Financial Statements for more information on the covenants in our debt agreements. Delta Air Lines, Inc. 2021 Form 10-K 49 Item 7. MD&A - Critical Accounting Estimates 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 our significant accounting policies, see Note 1 of the Notes to the Consolidated Financial Statements, unless otherwise noted below. Loyalty Program Our SkyMiles loyalty program generates customer loyalty by rewarding customers with incentives to travel on Delta. This program allows customers to earn mileage credits ("miles") by flying on Delta, Delta Connection carriers and other airlines that participate in the loyalty program. When traveling, customers earn miles primarily based on the passenger's loyalty program status, fare class and ticket price. Customers can also earn miles through participating companies such as credit card companies, hotels, car rental agencies and ridesharing companies. Miles are redeemable by customers in future periods for air travel on Delta and other participating airlines, access to our Sky Club and other program awards. 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 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. To value the miles earned, we consider the quantitative value a passenger receives by redeeming miles for a ticket rather than paying cash, which is referred to as equivalent ticket value ("ETV"). Our estimate of ETV is adjusted for miles that are not likely to be redeemed ("mileage breakage"). We use statistical models to estimate mileage breakage based on historical redemption patterns. 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 mileage breakage proportionally during the period in which the remaining miles are actually redeemed. At December 31, 2021, the aggregate deferred revenue balance associated with the SkyMiles program was $7.6 billion. A hypothetical 10% change in the number of outstanding miles estimated to be redeemed would result in an impact of approximately $140 million on total operating revenue recognized for the year ended December 31, 2021. We defer revenue for the miles when earned and recognize loyalty travel awards in passenger revenue as the miles are redeemed and transportation is provided. We record the air transportation portion of the passenger ticket sales in air traffic liability and recognize passenger revenue when we provide transportation or if the ticket goes unused. A hypothetical 10% increase in our estimate of the ETV of a mile would have decreased total operating revenue by approximately $60 million for the year ended December 31, 2021, as a result of an increase in the amount of revenue deferred associated with the miles earned. 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 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, 2021, 2020 and 2019, total cash sales from marketing agreements related to our loyalty program were $4.1 billion, $2.9 billion and $4.2 billion, respectively, which are allocated to travel and other performance obligations, as discussed below. Our most significant contract to sell miles relates to our co-brand credit card relationship with American Express. Our agreements with American Express provide for joint marketing, grant certain benefits to Delta-American Express co-branded credit card holders ("cardholders") and American Express Membership Rewards program participants, and allow American Express to market its services or products using our customer database. Cardholders earn miles for making purchases using co-branded cards, and certain cardholders may also check their first bag for free, are granted discounted access to Delta Sky Club lounges and receive priority boarding and other benefits while traveling on Delta. Additionally, participants in the American Express Membership Rewards program may exchange their points for miles under the loyalty program. 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. Delta Air Lines, Inc. 2021 Form 10-K 50 Item 7. MD&A - Critical Accounting Estimates We account for marketing agreements, including those with American Express, by allocating the consideration 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 mileage 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. Revenue allocated to access Delta Sky Club lounges is recognized as miscellaneous in other revenue as access is provided. Revenue allocated to the remaining performance obligations, primarily brand value, is recorded as loyalty program in other revenue as miles are delivered. The timing of mile redemptions can vary widely; however, the majority of new miles have historically been redeemed within two years of being earned. The loyalty program deferred revenue classified as a current liability represents our current estimate of revenue expected to be recognized in the next twelve months based on projected redemptions, while the balance classified as a noncurrent liability represents our current estimate of revenue expected to be recognized beyond twelve months. Compared to pre-pandemic levels, a larger portion of mile redemptions is projected to occur beyond twelve months and is therefore reflected as a noncurrent liability as of December 31, 2021. We will continue to monitor redemptions as the situation evolves. For additional information on our significant accounting policies related to the loyalty program, see Note 2 of the Notes to the Consolidated Financial Statements. Passenger Ticket Sales We defer sales of passenger tickets to be flown by us or that we sell on behalf of other airlines in our air traffic liability. Passenger revenue is recognized when we provide transportation or when the ticket expires unused ("ticket breakage"). For tickets that we sell on behalf of other airlines, we reduce the air traffic liability when consideration is remitted to those airlines. The air traffic liability primarily includes sales of passenger tickets with scheduled departure dates in the future and credits which can be applied as payment toward the cost of a ticket ("travel credits"). Travel credits are typically issued as a result of ticket cancellations prior to their expiration dates. We periodically evaluate the estimated air traffic liability and may record adjustments in our income statement. These adjustments relate primarily to refunds, exchanges, ticket breakage, transactions with other airlines and other items for which final settlement occurs in periods subsequent to the sale of the related tickets at amounts other than the original sales price. We have experienced significant ticket cancellations, particularly in the early months of the pandemic in 2020. During 2020, with the exception of Basic Economy, we eliminated change fees for all tickets originating in North America and waived change fees for tickets originating outside of North America. In the March 2021 quarter, we announced the extension of the validity of all passenger tickets and travel credits purchased or expiring in 2021 to December 31, 2022, which allowed for tickets to be rebooked through December 31, 2022 for travel through 2023. In January 2022, we announced that all existing travel credit holders will have until December 31, 2023 to rebook their ticket for travel throughout 2024. Additionally, all Delta customers with upcoming 2022 travel or who purchase a ticket in 2022 will also have the flexibility to rebook their ticket through December 31, 2023, and travel throughout 2024. We estimate the value of ticket breakage and recognize revenue at the scheduled flight date. Our ticket breakage estimates are primarily based on historical experience, ticket contract terms and customers’ travel behavior. Given the impact of the COVID-19 pandemic on customer behavior and changes made in ticket validity terms, as well as the elimination of change fees for most tickets, our estimates of revenue that will be recognized from the air traffic liability for unused tickets may vary in future periods. Travel credits represented approximately 45% of the air traffic liability as of December 31, 2021. This compares to approximately 65% as of December 31, 2020 and approximately 20% prior to the onset of the COVID-19 pandemic. For additional information on our significant accounting policies related to passenger ticket sales, see Note 2 of the Notes to the Consolidated Financial Statements. Delta Air Lines, Inc. 2021 Form 10-K 51 Item 7. MD&A - Critical Accounting Estimates Long-Lived Assets Our long-lived lived assets, including flight equipment, which consists of aircraft and associated engines and parts, operating lease right-of-use ("ROU") assets and other long-lived assets, which have a recorded value of approximately $36.0 billion at December 31, 2021, are recorded in property and equipment, net and operating lease right-of-use assets on our balance sheets. This value is based on various factors, including the assets' acquisition costs, estimated useful lives, salvage values, discounted lease payments and lease terms. We review flight equipment, ROU assets and other long-lived assets used in operations for impairment losses when events and circumstances indicate the assets may be impaired. Factors which could be indicators of impairment include, but are not limited to (1) a decision to permanently remove flight equipment or other long-lived assets from operations, (2) significant changes in the estimated useful life, (3) significant changes in projected cash flows, (4) permanent and significant declines in fleet fair values and (5) changes to the regulatory environment. For long-lived assets held for sale, we discontinue depreciation and record impairment losses when the carrying amount of these assets is greater than the fair value less the cost to sell. To determine whether impairments exist for aircraft used in operations, we group assets at the fleet type level 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. 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 a result of the COVID-19 pandemic and our response, we made decisions to remove certain aircraft from active service and to early retire certain fleets. We evaluated our fleet during 2020 and determined that only the fleet types discussed in Note 15 of the Notes to the Consolidated Financial Statements were impaired, as the future cash flows from the operation of other fleet types through the respective retirement dates exceeded the carrying value. 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 created additional estimation uncertainty as there was a limited market for aircraft and limited data on how the COVID-19 pandemic affected the fair value of aircraft. Due to the recovery in demand that we have experienced throughout 2021, we decided not to retire any additional aircraft and returned to service a majority of the aircraft that were temporarily parked in 2020. We recorded no further impairments during 2021. As we gained updated information during the year, we updated estimates to the 2020 fleet-related impairment charges and recorded adjustments of $19 million to certain of the restructuring charges during 2021. Following the impairment charges, the aggregate net book value of these aircraft as of December 31, 2021 and December 31, 2020 was approximately $340 million and $500 million, respectively, with the reduction in 2021 primarily due to aircraft sales. See Note 15 of the Notes to the Consolidated Financial Statements for additional details regarding these impairments and related charges. Goodwill and Indefinite-Lived Intangible Assets We apply a fair value-based impairment test to the carrying value of goodwill and indefinite-lived intangible assets on an annual basis (as of October 1) and, if certain events or circumstances indicate that an impairment loss may have been incurred, on an interim basis. We assess the value of our goodwill and indefinite-lived assets under either a qualitative or quantitative approach. Under a qualitative approach, we consider various market factors, including certain of the key assumptions listed below. We analyze these factors to determine if events and circumstances have affected the fair value of goodwill and indefinite-lived intangible assets. If we determine that it is more likely than not that the asset may be impaired, we use the quantitative approach to assess the asset's fair value and the amount of the impairment. Under a quantitative approach, we calculate the fair value of the asset incorporating the key assumptions listed below into our calculation. When we evaluate goodwill for impairment using a quantitative approach, we estimate the fair value of the reporting unit by considering both comparable public company multiples (a market approach) and projected discounted future cash flows (an income approach). When we perform a quantitative impairment assessment of our indefinite-lived intangible assets, fair value is estimated based on (1) recent market transactions, where available, (2) the royalty method for the Delta tradename (which assumes hypothetical royalties generated from using our tradename) or (3) projected discounted future cash flows (an income approach). Delta Air Lines, Inc. 2021 Form 10-K 52 Item 7. MD&A - Critical Accounting Estimates Key Assumptions. 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., changes in slot access and/or availability, additional Open Skies agreements or changes to antitrust approvals). These assumptions are consistent with those that hypothetical market participants would use. Because we are required to make estimates and assumptions when evaluating goodwill and indefinite-lived intangible assets for impairment, actual transaction amounts may differ materially from these estimates. In addition, 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. 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, 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., changes in slot access and/or availability, 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. Goodwill . Our goodwill balance, which is related to the airline segment, was $9.8 billion at December 31, 2021. 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, 2021, of which $5.9 billion related to indefinite-lived intangible assets. 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 2021, we performed qualitative 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. Our qualitative assessments include analyses and weighting of all relevant factors, which impact the fair value of our indefinite-lived intangible assets. For additional information on our goodwill and indefinite-lived intangible assets' significant accounting policies and the related fair values and book values, see Note 5 of the Notes to the Consolidated Financial Statements. Defined Benefit Pension Plans We sponsor defined benefit pension plans for eligible employees and retirees. These plans are closed to new entrants and frozen for future benefit accruals. As of December 31, 2021, the unfunded benefit obligation for these plans recorded on our Consolidated Balance Sheets ("balance sheets") was $1.6 billion. We had no minimum funding requirements in 2020 or 2021, and have no such requirements in 2022. However, we voluntarily contributed $1.5 billion to these plans during 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 of plan participants. Weighted Average Discount Rate. We determine our weighted average discount rate on our measurement date primarily by reference to annualized rates earned on high-quality fixed income investments and yield-to-maturity analyses specific to our estimated future benefit payments. We used a weighted average discount rate to value the obligations of 2.97% and 2.62% at December 31, 2021 and 2020, respectively. Our weighted average discount rate for net periodic benefit cost in each of the past three years has varied from the rate selected on our measurement date, ranging from 2.65% to 4.33%. Expected Long-Term Rate of Return. Our expected long-term rate of return on plan assets is based primarily on plan-specific investment studies using historical market return and volatility data. Modest excess return expectations versus some public market indices are incorporated into the return projections based on the actively managed structure of the investment programs and their records of achieving such returns historically. We also expect to receive a premium for investing in less liquid private markets. We review our rate of return on plan assets assumptions annually. Our annual investment performance for one particular year does not, by itself, significantly influence our evaluation. Our weighted average expected long-term rate of return on assets for net periodic benefit cost for the year ended December 31, 2021 was 8.98%. Delta Air Lines, Inc. 2021 Form 10-K 53 Item 7. MD&A - Critical Accounting Estimates The investment strategy for our defined benefit pension plan assets is to earn a long-term return that meets or exceeds our annualized return target while taking an acceptable level of risk and maintaining sufficient liquidity to pay current benefits and other cash obligations of the plan. Based on our current level of funding, we have modified, and continue to evaluate, the asset allocation mix to reduce the investment risk of the portfolio. The lower risk profile of the portfolio is projected to result in a lower expected long-term rate of return on plan assets in 2022. The impact of a 0.50% change in weighted average discount rate and 1.00% change in expected long-term rate of return on assets are shown in the table below: Benefit plan effects of change in assumptions used Change in Assumption Effect on 2022 Pension Benefit Cost Effect on Accrued Pension Liability at December 31, 2021 0.50% decrease in weighted average discount rate $ (17) million $ 1.2 billion 0.50% increase in weighted average discount rate $ 14 million $ (1.1) billion 1.00% decrease in expected long-term rate of return on assets $ 188 million $ — 1.00% increase in expected long-term rate of return on assets $ (188) million $ — Life Expectancy . Changes in life expectancy may significantly impact our benefit obligations and future net periodic benefit cost. We use the Society of Actuaries ("SOA") published mortality data and other publicly available information to develop our best estimate of life expectancy. The SOA publishes updated mortality tables for U.S. plans and updated improvement scales. Each year we consider updates by the SOA in setting our mortality assumptions for purposes of measuring pension and other postretirement and postemployment benefit obligations. Funding. Our funding obligations for qualified defined benefit plans are governed by the Employee Retirement Income Security Act and any applicable legislation. Under the Pension Protection Act of 2006, we elected alternative funding rules so that the unfunded liability for a frozen defined benefit plan may be amortized over a fixed 17-year period and is calculated using an 8.85% discount rate until the 17-year period expires for all frozen defined benefit plans by the end of 2024. Upon expiration, under recent legislation passed in 2021, any required funding would be amortized over a rolling 15-year period and calculated using a discount rate of no less than 4.75% through 2030. While this recent legislation makes our funding obligations for these plans more predictable, factors outside our control continue to have an impact on the funding requirements. Estimates of future funding requirements are based on various assumptions and can vary materially from actual funding requirements. Assumptions include, among other things, the actual and projected market performance of assets, statutory requirements and demographic data for participants. 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. 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 9 of the Notes to the Consolidated Financial Statements. 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 more likely than not that we will be unable to 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 significant 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. Delta Air Lines, Inc. 2021 Form 10-K 54 Item 7. MD&A - Critical Accounting Estimates At December 31, 2021 our net deferred tax asset balance was $1.3 billion , including an $833 million valuation allowance primarily related to capital loss carryforwards and certain state net operating losses. Although we have recent cumulative losses, we have a history of significant earnings prior to the onset of the COVID-19 pandemic. While we expect to return to sustained 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, the generation of future taxable income is dependent on many factors, including those which are out of our control, such as the demand for air travel and overall health of the economy. As such, there are no guarantees that a valuation allowance will not be required against some or all of our deferred tax assets in future periods. Our federal net operating loss carryforwards generated before 2018 do not begin to expire until 2029. Under current tax law, federal net operating losses generated after 2017 do not expire. Therefore, we have not recorded a valuation allowance on our deferred tax assets other than the capital loss carryforwards and certain state net operating losses that have short expiration periods. For additional information on our significant accounting policies related to income taxes, see Note 11 of the Notes to the Consolidated Financial Statements. Recent Accounting Standards Government Assistance . In 2021, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") No. 2021-10, "Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance." This ASU will require certain disclosures about the significant terms and conditions of material government assistance agreements in order to provide more consistent information to users of the financial statements. This standard is effective for annual reporting periods beginning after December 15, 2021, and early adoption is permitted. We determined that our material government assistance agreements are the payroll support program agreements under the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") and the program extensions, and we adopted the new standard in 2021. See Note 6 of the Notes to the Consolidated Financial Statements where we reflect the requirements of this new standard as it relates to our payroll support program disclosures. Delta Air Lines, Inc. 2021 Form 10-K 55 Item 7. MD&A - Supplemental Information Supplemental Information We sometimes use information ("non-GAAP financial measures") that is derived from the Consolidated Financial Statements, but that is not presented in accordance with GAAP. Under the U.S. Securities and Exchange Commission rules, non-GAAP financial measures may be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for or superior to GAAP results. Reconciliations below may not calculate exactly due to rounding. Included below are reconciliations of non-GAAP measures used within this Form 10-K to the most directly comparable GAAP financial measures. These reconciliations include certain adjustments to GAAP measures, which are directly related to the impact of COVID-19 and our response. These adjustments are made to provide comparability between the reported periods, if applicable, as indicated below: • Restructuring charges. During 2020, we recorded restructuring charges of $8.2 billion for items such as fleet impairments and voluntary early retirement and separation programs following strategic business decisions in response to the COVID-19 pandemic. In the year ended December 31, 2021, we recognized $19 million of adjustments to certain of those restructuring charges, representing changes in our estimates. • Government grant recognition. We recognized $4.5 billion and $3.9 billion of the grant proceeds from the payroll support program extensions as a contra-expense during 2021 and 2020, respectively. We recognized the grant proceeds as contra-expense based on the periods that the funds were intended to compensate and have fully used all proceeds from the payroll support program extensions. • Impairments and equity method losses. These adjustments relate to recording our share of losses recorded by our equity method investees. Additionally, during 2020, we recognized charges 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 early retirement and separation programs that were offered to our employees in 2020. • Loss on extinguishment of debt. This adjustment relates to the early termination of a portion of our debt. • Special profit-sharing payment. This adjustment is exclusive to 2021. To recognize the extraordinary efforts of our employees through the pandemic, we will make a special profit-sharing payment to eligible employees in February 2022, based on the adjusted pre-tax profit earned during the second half of 2021. 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. We also regularly adjust certain GAAP measures for the following items, if applicable, for the reasons indicated 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, and therefore we remove this impact to allow investors to better understand and analyze our core performance. Settlements represent cash received or paid on hedge contracts settled during the applicable period. • Equity investment MTM adjustments. We record our proportionate share of losses from our equity investments in non-operating expense. As a result of Grupo Aeroméxico's and LATAM’s bankruptcy filings in 2020, we discontinued accounting for these investments under the equity method at that time as we no longer had significant influence with those investees. 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 Air Lines, Inc. 2021 Form 10-K 56 Item 7. MD&A - Supplemental Information • Third-party refinery sales. Refinery sales to third parties, and related expenses, are not related to our airline segment. Excluding these sales therefore provides a more meaningful comparison of our airline operations to the rest of the airline industry. • 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 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. • 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. Pre-tax (loss)/income, adjusted reconciliation Year Ended December 31, (in millions) 2021 2020 2019 Pre-tax income/(loss) $ 398 $ (15,587) $ 6,198 Adjusted for: Restructuring charges (19) 8,219 — Government grant recognition (4,512) (3,946) — Impairments and equity method losses 337 2,172 — Pension settlement charges — 36 — Loss on extinguishment of debt 319 — — Special profit sharing payment 108 — — MTM adjustments and settlements on hedges 9 10 14 Equity investment MTM adjustments — (19) (14) MTM adjustments on investments (56) 119 13 Delta Private Jets adjustment — — 3 Pre-tax (loss)/income, adjusted $ (3,415) $ (8,996) $ 6,214 Operating expense, adjusted reconciliation Year Ended December 31, (in millions) 2021 2020 2019 Operating expense $ 28,013 $ 29,564 $ 40,389 Adjusted for: Restructuring charges 19 (8,219) — Government grant recognition 4,512 3,946 — Special profit sharing payment (108) — — MTM adjustments and settlements on hedges (9) (10) (14) Third-party refinery sales (3,229) (1,150) (97) Delta Private Jets adjustment — — (196) Operating expense, adjusted $ 29,197 $ 24,130 $ 40,082 Delta Air Lines, Inc. 2021 Form 10-K 57 Item 7. MD&A - Supplemental Information Fuel expense, adjusted and Average fuel price per gallon, adjusted reconciliations Average Price Per Gallon Year Ended December 31, Year Ended December 31, (in millions, except per gallon data) 2021 2020 2019 2021 2020 2019 Total fuel expense $ 5,633 $ 3,176 $ 8,519 $ 2.02 $ 1.64 $ 2.02 Adjusted for: MTM adjustments and settlements on hedges (9) (10) (14) — (0.01) — Delta Private Jets adjustment — — (28) — — (0.01) Total fuel expense, adjusted $ 5,625 $ 3,166 $ 8,477 $ 2.02 $ 1.64 $ 2.01 TRASM, adjusted reconciliation Year Ended December 31, (in cents) 2021 2020 2019 TRASM 15.37 ¢ 12.73 ¢ 17.07 ¢ Adjusted for: Third-party refinery sales (1.66) (0.86) (0.04) Delta Private Jets adjustment — — (0.07) TRASM, adjusted 13.71 ¢ 11.87 ¢ 16.97 ¢ CASM-Ex reconciliation Year Ended December 31, (in cents) 2021 2020 2019 CASM 14.40 ¢ 22.01 ¢ 14.67 ¢ Adjusted for: Restructuring charges 0.01 (6.12) — Government grant recognition 2.32 2.94 — Aircraft fuel and related taxes (2.90) (2.36) (3.10) Third-party refinery sales (1.66) (0.86) (0.04) Special profit sharing payment (0.06) — — Profit sharing — — (0.60) Delta Private Jets adjustment — — (0.06) CASM-Ex 12.12 ¢ 15.61 ¢ 10.88 ¢ Delta Air Lines, Inc. 2021 Form 10-K 58 Item 7. MD&A - Supplemental Information Free Cash Flow The following table shows a reconciliation of net cash provided by/(used in) operating activities (a GAAP measure) to free cash flow (a non-GAAP financial measure). 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 (redemptions)/purchases of short-term investments. Net (redemptions)/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 investments 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 because management believes investors should be informed that a portion of these capital expenditures from airport construction projects are either reimbursed by a third party or funded with restricted cash specific to these projects. Free cash flow reconciliation Year Ended December 31, (in millions) 2021 2020 2019 Net cash provided by/(used in) operating activities $ 3,264 $ (3,793) $ 8,425 Net cash used in investing activities (898) (9,238) (4,563) Adjusted for: Net (redemptions)/purchases of short-term investments (2,381) 5,792 (206) Strategic investments and related 181 2,192 170 Net cash flows related to certain airport construction projects and other 1,090 721 338 Free cash flow $ 1,255 $ (4,327) $ 4,164 Delta Air Lines, Inc. 2021 Form 10-K 59 Item 7. MD&A - Glossary of Defined Terms Glossary of Defined Terms ASM - Available Seat Mile. A measure of capacity. ASMs equal the total number of seats available for transporting passengers during a reporting period multiplied by the total number of miles flown during that period. CASM - (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 the items shown above in "Supplemental Information." 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. PRASM - Passenger Revenue per ASM. The amount of passenger revenue earned per ASM during a reporting period. PRASM is also referred to as "unit revenue." RPM - Revenue Passenger Mile. One revenue-paying passenger transported one mile. RPMs equal the number of revenue passengers during a reporting period multiplied by the number of miles flown by those passengers during that period. RPMs are also referred to as "traffic." TRASM - Total Revenue per ASM. 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 the item shown above in "Supplemental Information." Delta Air Lines, Inc. 2021 Form 10-K 60 Item 7A. Market Risk