DELTA AIR LINES, INC. 10-K

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section of Form 10-K does not address certain items regarding the year ended December 31, 2021. Discussion and analysis of 2021 and year-to-year comparisons between 2022 and 2021 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, 2022. 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. 2023 Financial Overview Our 2023 operating income was $5.5 billion, an improvement of $1.9 billion compared to 2022, while operating income, adjusted (a non-GAAP financial measure) which excludes one-time pilot agreement expenses and other items was $6.3 billion, an increase of $2.8 billion compared to 2022. Operating income and operating income, adjusted increased primarily from increases in revenue as described below. Revenue. Compared to 2022, our 2023 operating revenue increased $7.5 billion, or 15%, primarily due to a 17% increase in capacity driven by an increase in demand for international travel and continuing strength in demand for domestic travel and premium products. Total revenue, adjusted (a non-GAAP financial measure) increased in 2023 by $9.1 billion, or 20%, compared to 2022. Adjustments were primarily to exclude revenue related to refinery sales to third parties. Operating Expense. Total operating expense increased $5.6 billion, or 12%, compared to 2022, primarily resulting from higher employee related costs from increased wages and profit sharing, pilot agreement and related expenses and higher volume-related expenses associated with the 17% increase in capacity, partially offset by lower 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 $6.3 billion, or 15%, compared to 2022. Adjustments were primarily to exclude expenses related to refinery sales to third parties and the pilot agreement and related expenses. Our total operating cost per available seat mile ("CASM") decreased 4% compared to 2022 to 19.31 cents, primarily due to a 17% increase in capacity, as well as lower fuel expense and lower expenses related to refinery sales to third parties. Non-fuel unit costs ("CASM-Ex", a non-GAAP financial measure), which excludes fuel, expenses related to refinery sales to third parties, and other items, increased 2.3% to 13.17 cents. Non-Operating Results. Total non-operating income was $87 million in 2023 compared to total non-operating expense of $1.7 billion in 2022 primarily due to mark-to-market gains on certain of our equity investments and lower interest expense as a result of our debt reduction initiatives, partially offset by increased pension related expenses. Cash Flow. During 2023, operating activities provided cash flows of $6.5 billion, primarily from ticket sales. Investing activities resulted in net cash outflows of approximately $3.1 billion, primarily for $5.3 billion of capital expenditures, partially offset by $2.2 billion of net redemptions of short-term investments. After adjusting for the pilot agreement payment and certain other activities, these results generated $2.0 billion of free cash flow (a non-GAAP financial measure) in 2023. Also, during 2023 we had cash outflows of approximately $4.1 billion related to repayments of our debt and finance leases, including approximately $2.0 billion for early repayments and the remainder from scheduled maturities. Our cash, cash equivalents, short-term investments and aggregate principal amount committed and available to be drawn under our revolving credit facilities ("liquidity") at December 31, 2023 was $6.8 billion. The non-GAAP financial measures of operating income, adjusted, total revenue, adjusted, total operating expense, adjusted, CASM-Ex and free cash flow used above are defined and reconciled in "Supplemental Information" below. Delta Air Lines, Inc. | 2023 Form 10-K 34 Item 7. MD&A - Results of Operations Results of Operations Operating Revenue Year Ended December 31, Increase (Decrease) % Increase (Decrease) (in millions) (1) 2023 2022 Ticket - Main cabin $ 24,477 $ 20,396 $ 4,081 20 % Ticket - Premium products 19,119 15,230 3,889 26 % Loyalty travel awards 3,462 2,898 564 19 % Travel-related services 1,851 1,694 157 9 % Total passenger revenue $ 48,909 $ 40,218 $ 8,691 22 % Cargo 723 1,050 (327) (31) % Other 8,416 9,314 (898) (10) % Total operating revenue $ 58,048 $ 50,582 $ 7,466 15 % TRASM (cents) 21.34 ¢ 21.69 ¢ (0.35) ¢ (2) % Third-party refinery sales (2) (1.24) (2.13) 0.89 (42) % TRASM, adjusted (cents) 20.10 ¢ 19.55 ¢ 0.55 ¢ 3 % (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 $7.5 billion, or 15%, compared to 2022 due primarily to a 17% increase in capacity driven by an increase in demand for international travel and continuing strength in demand for domestic travel, with growth in revenue from premium products outpacing main cabin. This increase was partially offset by lower third-party refinery sales recorded in other revenue. Total revenue per available seat mile ("TRASM") decreased 2% in large part as a result of the decline in third-party refinery sales. See "Refinery Segment" below for additional details on the refinery's operations, including third-party refinery sales recorded in other revenue, during each period. Passenger Revenue by Geographic Region Increase (Decrease) vs. Year Ended December 31, 2022 (in millions) Year Ended December 31, 2023 Passenger Revenue RPMs (Traffic) ASMs (Capacity) Passenger Mile Yield PRASM Load Factor Domestic $ 33,968 12 % 10 % 10 % 2 % 2 % 1 pt Atlantic 9,057 49 % 34 % 30 % 11 % 15 % 3 pts Latin America 3,798 31 % 22 % 16 % 8 % 13 % 4 pts Pacific 2,086 101 % 104 % 75 % (2) % 15 % 11 pts Total passenger revenue $ 48,909 22 % 19 % 17 % 2 % 4 % 3 pts Domestic Domestic passenger unit revenue ("PRASM") for 2023 increased 2% compared to 2022 due to a 12% increase in revenue on a 10% increase in capacity and a slight increase in load factor. Domestic revenue in 2023 was above 2022 levels as we experienced strong revenue results across the domestic network, with coastal hub markets such as New York and Boston improving significantly compared to the prior year, domestic business travel revenue improving and a 10% increase in domestic capacity compared to 2022. We believe spending patterns for services are returning to historical levels compared to spending on goods. We also experienced higher growth in premium product revenue (including Delta One, First Class, Delta Premium Select and Delta Comfort+) compared to main cabin with the delivery of new aircraft that include more premium seat capacity and an increase in yield in premium products compared to main cabin, as we see more consumers choosing these premium offerings. In 2024, we expect moderate capacity growth of single digits. Delta Air Lines, Inc. | 2023 Form 10-K 35 Item 7. MD&A - Results of Operations International International passenger revenue for 2023 increased 49% with capacity up 31% compared to 2022. Passenger revenue increased in each geographic region with the Atlantic region experiencing the largest absolute improvement, as travel to many European destinations increased. Consumers showed a strong desire for transatlantic travel, driving higher revenue and passenger unit revenue during 2023 on 30% capacity growth compared to 2022. This has been led by demand for travel to leisure destinations in Europe and premium products. Latin America region revenue increased during 2023 compared to 2022, due to strong demand for leisure destinations in South America and the Caribbean on a 16% increase in capacity. In addition, during the first year of our joint venture with LATAM, we have streamlined travel between North and South America while expanding connections in each of our key hub airports. The Pacific region benefited from improved demand for travel to the region, particularly to Japan, on 75% increased capacity following the lifting of pandemic-related travel restrictions and the performance of our joint venture with Korean Air. Other Revenue Year Ended December 31, Increase (Decrease) % Increase (Decrease) (in millions) 2023 2022 Refinery $ 3,379 $ 4,977 $ (1,598) (32) % Loyalty program 3,093 2,597 496 19 % Ancillary businesses 840 846 (6) (1) % Miscellaneous 1,104 894 210 23 % Total other revenue $ 8,416 $ 9,314 $ (898) (10) % Refinery. This represents refinery sales to third parties. These sales decreased $1.6 billion compared to 2022. The decrease in third-party refinery sales resulted from lower pricing and a turnaround which was completed between September and November 2023. 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. This relates to revenues from brand usage by third parties and other performance obligations embedded in miles sold, as well as redemption of miles for non-travel awards. These revenues are mainly driven by customer spend on American Express cards and new cardholder acquisitions. Revenues from our relationship with American Express increased compared to 2022 driven by co-brand card spend growth. Ancillary Businesses. This includes aircraft maintenance services we provide to third parties and our vacation wholesale operations. Miscellaneous. This is primarily composed of lounge access, including access provided to certain American Express cardholders, and codeshare revenues. The increase in miscellaneous is primarily due to increased revenue from Delta Sky Club access. Delta Air Lines, Inc. | 2023 Form 10-K 36 Item 7. MD&A - Results of Operations Operating Expense Year Ended December 31, Increase (Decrease) % Increase (Decrease) (1) (in millions) 2023 2022 Salaries and related costs $ 14,607 $ 11,902 $ 2,705 23 % Aircraft fuel and related taxes 11,069 11,482 (413) (4) % Ancillary businesses and refinery 4,172 5,756 (1,584) (28) % Contracted services 4,041 3,345 696 21 % Landing fees and other rents 2,563 2,181 382 18 % Aircraft maintenance materials and outside repairs 2,432 1,982 450 23 % Depreciation and amortization 2,341 2,107 234 11 % Passenger commissions and other selling expenses 2,334 1,891 443 23 % Regional carrier expense 2,200 2,051 149 7 % Passenger service 1,750 1,453 297 20 % Profit sharing 1,383 563 820 146 % Pilot agreement and related expenses 864 — 864 NM Aircraft rent 532 508 24 5 % Other 2,239 1,700 539 32 % Total operating expense $ 52,527 $ 46,921 $ 5,606 12 % (1) Certain variances are labeled as not meaningful ("NM") throughout management's discussion and analysis. Salaries and Related Costs. Delta pilots ratified a new four-year Pilot Working Agreement effective January 1, 2023. The agreement includes numerous work rule changes and pay rate increases during the four-year term, including an initial pay rate increase of 18%. Additional effects of this agreement are described below under pilot agreement and related expenses. We also implemented base pay increases for eligible non-pilot employees of 5% effective April 1, 2023. Further, we have approximately 8,000 more employees as of December 31, 2023 than at December 31, 2022 principally in in-flight service, flight operations and aircraft maintenance, in order to support the growth in our operations. Each of these actions contributed to the increase in salaries and related costs. Aircraft Fuel and Related Taxes. Fuel expense decreased $413 million compared to 2022 primarily due to an 18% decrease in the market price of jet fuel partially offset by a 15% increase in consumption on a 17% increase in capacity. 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) 2023 2022 2023 2022 Fuel purchase cost (1) $ 11,506 $ 12,230 $ (724) $ 2.93 $ 3.58 $ (0.65) Fuel hedge impact (52) 29 (81) (0.01) 0.01 (0.02) Refinery segment impact (385) (777) 392 (0.10) (0.23) 0.13 Total fuel expense $ 11,069 $ 11,482 $ (413) $ 2.82 $ 3.36 $ (0.54) (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. The decline in these expenses was primarily related to lower refinery sales to third parties, which decreased $1.6 billion compared to 2022. The decrease in third-party refinery sales resulted from lower pricing and the turnaround, which was completed between September and November 2023. Contracted Services. Contracted services expenses increased compared to 2022 due to higher-volume related expenses associated with increased capacity, in addition to inflationary pressures. Delta Air Lines, Inc. | 2023 Form 10-K 37 Item 7. MD&A - Results of Operations Landing Fees and Other Rents. The increase in landing fees and other rents resulted from higher rates charged by airports following extensive redevelopment projects at numerous facilities and more flights compared to 2022 that contributed to our increased capacity. Aircraft Maintenance Materials and Outside Repairs. Aircraft maintenance materials and outside repairs increased as we continued to invest in the operational reliability of our fleet, in particular related to engine overhauls on our B-757 aircraft, in addition to higher material costs. Passenger Commissions and Other Selling Expenses. The increase in passenger revenue in 2023, compared to 2022, directly led to increased passenger commissions and selling expenses. Passenger Service. Passenger service expenses increased compared to 2022 due to higher volume-related expenses associated with increased traffic. Profit Sharing. Profit sharing increased by $820 million during 2023 due to higher profit during the year. Our profit sharing program pays 10% to all eligible employees for the first $2.5 billion of annual profit, as defined by the terms of the program, and 20% of annual profit above $2.5 billion. Pilot agreement and related expenses. In addition to the actions in salaries and related costs described above, the ratified pilot agreement also includes a provision for a one-time payment made upon ratification during 2023 of $735 million. Additionally, we recorded adjustments to other benefit-related items of approximately $130 million. Other. The increase in other is primarily due to higher volume-related expenses associated with increased capacity, such as flight crew and other employee travel and incidental costs, and inflationary pressures. Non-Operating Results Year Ended December 31, Favorable (Unfavorable) (in millions) 2023 2022 Interest expense, net $ (834) $ (1,029) $ 195 Gain/(loss) on investments, net 1,263 (783) 2,046 Loss on extinguishment of debt (63) (100) 37 Pension and related (expense)/benefit (244) 292 (536) Miscellaneous, net (35) (127) 92 Total non-operating income/(expense), net $ 87 $ (1,747) $ 1,834 Interest expense, net. Interest expense, net includes interest expense and interest income. This decreased as compared to 2022 as a result of our reduced interest expense resulting from our debt reduction initiatives and increased interest income. We are reducing the total amount of interest expense by pre-paying our debt in addition to periodic amortization payments and scheduled maturities. During 2023, we made $4.1 billion of payments on debt and finance lease obligations, including early repayment activities of $1.4 billion in principal for the early repurchase of various secured and unsecured notes and the SkyMiles Term Loan on the open market and $585 million in early principal repayments on various notes secured by aircraft. We will continue to seek opportunities to pre-pay our debt, in addition to periodic amortization payments and scheduled maturities, during 2024 and beyond. Interest income increased as a result of higher interest rates and higher short-term investment balances throughout most of 2023. 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. The increase compared to 2022 is due to net unrealized gains on our equity investments during 2023, primarily Wheels Up, Hanjin-KAL and LATAM. During 2023, we recorded a $786 million mark-to-market gain on our investment in Wheels Up based on the closing price of its shares as traded on the New York Stock Exchange. As of December 31, 2023, Wheels Up's public float was under 5% of the total outstanding shares which contributed to significant volatility in the value of our Wheels Up equity investment since the announcement of Wheels Up's credit facility in September 2023. Net unrealized losses on our equity investments during 2022 were primarily related to LATAM, Hanjin-KAL and Wheels Up. Delta Air Lines, Inc. | 2023 Form 10-K 38 Item 7. MD&A - Non-Operating Results Loss on extinguishment of debt. Loss on extinguishment of debt reflects the losses incurred in the early repayment of debt referenced above. Pension and related (expense)/benefit. Pension and related (expense)/benefit reflects the net periodic (cost)/benefit of our pension and other postretirement and postemployment benefit plans. 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 our share of net results from our equity method investments, charitable contributions and foreign exchange gains/(losses). See Note 4 of the Notes to the Consolidated Financial Statements for additional information on our equity investments. Income Taxes Our effective tax rate for 2023 was 18%. Our effective tax rate in 2023 was impacted by mark-to-market adjustments on our equity investments which are considered capital assets for tax purposes. As of December 31, 2023, we had approximately $4.5 billion of U.S. federal pre-tax net operating loss carryforwards which we are expecting to utilize by the end of 2025. Approximately $800 million of these net operating loss carryforwards were generated prior to 2018 and will not begin to expire until 2029, while the remaining net operating loss carryforwards do not expire. We expect our annual effective tax rate to be between 23% and 25% for 2024. In certain interim periods, we may have adjustments to our net deferred tax assets as a result of changes in prior year estimates, mark-to-market adjustments on our equity investments and tax laws enacted during the period, which will impact the effective tax rate for that period. 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. The jet fuel produced and procured through exchanging gasoline and diesel fuel produced by the refinery typically provides approximately 200,000 barrels per day, or approximately 75% of our consumption, for use in our airline operations. Between mid-September 2023 and mid-November 2023, the refinery completed a turnaround and did not produce any refined products during this time. The turnaround was in accordance with the long-term maintenance plan for the facility to allow for the safe completion of major repairs and upgrades. Refinery segment financial information Year Ended December 31, % Increase (Decrease) (in millions, except per gallon data) 2023 2022 Exchange products $ 2,354 $ 3,475 (32) % Sales of refined products 304 278 9 % Sales to airline segment 1,535 1,976 (22) % Third-party refinery sales 3,379 4,977 (32) % Operating revenue $ 7,572 $ 10,706 (29) % Operating income $ 385 $ 777 (50) % Refinery segment impact on average price per fuel gallon $ (0.10) $ (0.23) (57) % Refinery revenues decreased in 2023, primarily driven by the decrease in exchange products and third-party refinery sales. These decreases resulted from lower pricing and the turnaround, which was completed between September and November 2023. The refinery operating income decreased in 2023 mainly due to lower pricing and the turnaround. Delta Air Lines, Inc. | 2023 Form 10-K 39 Item 7. MD&A - Refinery Segment A refinery is subject to annual EPA requirements to blend renewable fuels into the gasoline and on-road diesel fuel it produces. A refinery may meet its obligation by blending the necessary volumes of renewable fuels, by purchasing RINs in the open market or through a combination of blending and purchasing RINs. Because Monroe is able to blend only a small amount of renewable fuels, it must purchase the majority of its RINs requirement in the secondary market. Monroe incurred $323 million in RINs compliance costs during 2023, compared to $576 million incurred in 2022. Observable RINs prices declined during 2023 and we acquired RINs assets to satisfy substantially all of our 2023 RINs obligation. During 2023, we retired approximately $700 million of our 2021 and 2022 RINs assets to settle our 2021 and 2022 obligations prior to the compliance deadlines. For more information regarding the refinery's results, see Note 14 of the Notes to the Consolidated Financial Statements. Operating Statistics Year Ended December 31, Consolidated (1) 2023 2022 Revenue passenger miles (in millions) 232,241 195,480 Available seat miles (in millions) 272,033 233,226 Passenger mile yield 21.06 ¢ 20.57 ¢ Passenger revenue per available seat mile ("PRASM") 17.98 ¢ 17.24 ¢ Total revenue per available seat mile ("TRASM") 21.34 ¢ 21.69 ¢ TRASM, adjusted (2) 20.10 ¢ 19.55 ¢ Cost per available seat mile ("CASM") 19.31 ¢ 20.12 ¢ CASM-Ex (2) 13.17 ¢ 12.87 ¢ Passenger load factor 85 % 84 % Fuel gallons consumed (in millions) 3,926 3,412 Average price per fuel gallon (3) $ 2.82 $ 3.36 Average price per fuel gallon, adjusted (2)(3) $ 2.83 $ 3.36 Approximate full-time equivalent employees, end of period 103,000 95,000 (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 refinery segment results and fuel hedge activity. Delta Air Lines, Inc. | 2023 Form 10-K 40 Item 7. MD&A - Financial Condition and Liquidity Financial Condition and Liquidity As of December 31, 2023, we had $6.8 billion in cash, cash equivalents, short-term investments and aggregate principal amount committed and available to be drawn under our revolving credit facilities ("liquidity"). 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. Sources and Uses of Liquidity Operating Activities Operating activities in 2023 provided $6.5 billion of cash flow compared to $6.4 billion in 2022. We expect to continue generating cash flows from operations during 2024. 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. Fuel . Fuel expense represented approximately 21% of our total operating expense during 2023. 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 decreased in 2023. We expect elevated jet fuel prices in comparison to historical levels to continue during the beginning of 2024 due to current market conditions, further exacerbated by geopolitical events. As capacity increased throughout the year, fuel consumption was higher in 2023 than 2022 as well. We expect fuel consumption to increase in 2024 aligned with capacity, partially offset by improvements in the 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 generally 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 2023, and have no such requirements in 2024. At the current level of funding, plan assets and investment returns are expected to satisfy a majority of future benefit payments. 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. 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. Profit Sharing. Our broad-based employee profit sharing program provides that, for each year in which we have an annual pre-tax profit, as defined by the terms of the program, we will pay a specified portion of that profit to employees. In determining the amount of profit sharing, the program defines profit as pre-tax profit adjusted for profit sharing and certain other items. We pay profit sharing annually in February. We paid $563 million in 2023 to our employees in recognition of their contributions toward meeting our financial goals. During the year ended December 31, 2023, we recorded $1.4 billion in profit sharing expense based on 2023 pre-tax profit, which we will pay to employees in February 2024. Delta Air Lines, Inc. | 2023 Form 10-K 41 Item 7. MD&A - Financial Condition and Liquidity 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, 2023 the total of these minimum amounts was $8.8 billion and range from approximately $1.3 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, 2023 we had a total of $9.2 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. We are enhancing and expanding our facilities at Terminal 4 of JFK to strengthen our competitive position and offer a premium travel experience for customers in New York City. 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"). We have a long-term agreement with IAT to sublease space in Terminal 4 through 2043. In 2021, the Port Authority approved plans to renovate and expand Terminal 4 in order to facilitate Delta's relocation from Terminal 2 and consolidation of its operations into Terminal 4. The project is adding 10 new gates and other complementary facilities, including an additional Delta Sky Club and a new Delta premium lounge. The project is estimated to cost approximately $1.6 billion and will be funded primarily with bonds issued in 2022 by the New York Transportation Development Corporation ("NYTDC") for which our landlord, IAT, is the obligor. The majority of project costs are being used to expand or modify Delta's leased premises. Construction started in late 2021 and in 2023 we substantially completed a majority of Delta's portion of the project and consolidated all operations to Terminal 4. 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, 2023, we had approximately $9.2 billion of such obligations, which range from approximately $300 million to $1.1 billion on an annual basis over the next five years. Investing Activities Short-Term Investments. In 2023, we redeemed a net of $2.2 billion in short-term investments. See Note 1 and 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 $5.3 billion and $6.4 billion in 2023 and 2022, 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 2024 capital spend of approximately $5 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 $17.5 billion as of December 31, 2023. 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 completed terminal redevelopment features a new, larger Delta Sky Club, wider concourses, more gate seating and nearly double the amount of concessions space than the prior terminals. The completed facility also offers direct access between the parking garage and terminal and improved roadways and drop-off/pick-up areas. Construction is underway and is being phased to limit passenger inconvenience. We have opened Concourse E, Concourse G, the headhouse (including the Delta Sky Club), the terminal roadways and portions of Concourse D and Concourse F. Due to an acceleration effort that commenced in 2020, substantial completion is expected by the end of 2024. Delta Air Lines, Inc. | 2023 Form 10-K 42 Item 7. MD&A - Financial Condition and Liquidity 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 (1) are funding (through debt issuance and existing cash) and undertaking the design, management and construction of the terminal and certain off-premises supporting facilities, (2) are receiving a Port Authority contribution of approximately $500 million to facilitate construction of the terminal and other supporting infrastructure, (3) will be responsible for all operations and maintenance during the term of the lease and (4) will have preferential rights to all gates in the terminal subject to Port Authority requirements with respect to accommodation of designated carriers. The project is expected to cost $4.3 billion and the total amount spent to date is approximately $3.7 billion. We currently expect our net project cost to be approximately $3.8 billion and we bear the risks of project construction, including any potential cost over-runs. We entered into loan agreements to fund a portion of the construction, which are recorded on our Consolidated Balance Sheets ("balance sheets") as debt with the proceeds reflected as restricted cash. Using funding primarily provided by these arrangements, we spent approximately $500 million, $650 million and $950 million during 2023, 2022 and 2021, respectively. We expect to spend approximately $500 million during 2024. See Note 6 of the Notes to the Consolidated Financial Statements for additional information on the debt related to the redevelopment project, including the $878 million of NYTDC Special Facilities Revenue Bonds, Series 2023 issued during 2023. Los Angeles International Airport ("LAX") Construction. As part of the terminal redevelopment project at LAX, we are modernizing, upgrading, and providing post-security connection to Terminals 2 and 3. We announced this project and executed a modified lease agreement during 2016 with the City of Los Angeles (the "City"), which owns and operates LAX. This project 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. The project is expected to cost approximately $2.4 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 we have guaranteed the obligations of the RAIC under the credit facility. During 2023, the revolving credit facility agreement was amended and the revolver capacity was reduced to $626 million. 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 $600 million, of which approximately $350 million has been reflected as investing activities and approximately $200 million as operating activities in our cash flows statement since the project started in 2017. 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. In 2023, we substantially completed all construction for this project. Wheels Up. We announced an expanded strategic partnership with Wheels Up, which included an agreement for a new credit facility to Wheels Up. This new credit facility is comprised of a $390 million term loan, of which we contributed $150 million and several other lenders contributed the remaining $240 million, and a $100 million liquidity facility that we made available to Wheels Up in the event the company's liquidity falls below $100 million. Our $150 million cash contribution was reflected as an investing outflow in our cash flows statement. Financing Activities Debt and Finance Leases. In 2023, we had cash outflows of approximately $4.1 billion related to repayments of our debt and finance leases, including early repayment activities of $1.4 billion in principal for the repurchase of various secured and unsecured notes and the SkyMiles Term Loan through repurchases on the open market and $585 million in early principal repayments on various notes secured by aircraft. We will continue to seek opportunities to pre-pay our debt, in addition to periodic amortization payments and scheduled maturities, during 2024 and beyond. In the March 2023 quarter, both Fitch and S&P credit rating agencies upgraded our debt rating outlooks to stable and positive, respectively. In the September 2023 quarter, S&P upgraded our credit rating to BB+. The principal amount of our debt and finance leases was $20.1 billion at December 31, 2023. Delta Air Lines, Inc. | 2023 Form 10-K 43 Item 7. MD&A - Financial Condition and Liquidity Future Debt Obligations. As described further in Note 6 of the Notes to the Consolidated Financial Statements, as of December 31, 2023, scheduled maturities of our debt in 2024 and 2025 were $2.6 billion and $2.0 billion, respectively, with maturities from 2026 through 2028 ranging between $1.9 billion and $2.6 billion annually. As of December 31, 2023, scheduled maturities after 2028 aggregate to $7.2 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, 2023, these interest obligations total approximately $4.0 billion and range from approximately $300 million to $800 million on an annual basis over the next five years. We will continue to seek opportunities to pre-pay our debt, in addition to periodic amortization payments and scheduled maturities, during 2024 and beyond. Finance Lease Obligations. As described further in Note 7 of the Notes to the Consolidated Financial Statements, as of December 31, 2023 we had a total of $1.6 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. Capital Returns to Shareholders. During 2023, we re-instated our quarterly dividend program with $0.10 per share payments in both the September 2023 and December 2023 quarters, resulting in total dividend payments during the year ended December 31, 2023 of $128 million. On February 8, 2024, the Board of Directors approved and we will pay a quarterly dividend of $0.10 per share on March 18, 2024 to shareholders of record as of February 26, 2024. Undrawn Lines of Credit. As of December 31, 2023 we had approximately $2.9 billion undrawn and available under our revolving credit facilities. In addition, we had $450 million of outstanding letters of credit as of December 31, 2023 that did not affect the availability under our revolvers. Covenants. We were in compliance with the covenants in our debt agreements at December 31, 2023. 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. | 2023 Form 10-K 44 Item 7. MD&A - Critical Accounting Estimates Critical Accounting Estimates Our critical accounting estimates are those estimates made in accordance with generally accepted accounting principles in the U.S. ("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 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. Miles are redeemable by customers in future periods for air travel on Delta and other participating airlines, access to Delta Sky Club and other program awards. To facilitate transactions with participating companies, we sell miles to non-airline businesses 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 regarding 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, 2023, the aggregate deferred revenue balance associated with the SkyMiles program was $8.4 billion. A hypothetical 10% change in the number of outstanding miles estimated to be redeemed would result in an impact of less than 1% of total operating revenue recognized for the year ended December 31, 2023. 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 less than 1% for the year ended December 31, 2023, 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, retail, ridesharing, car rental and hotel 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 one to thirteen years. During the years ended December 31, 2023, 2022 and 2021, total cash sales from marketing agreements related to our loyalty program were $6.9 billion, $5.7 billion and $4.1 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. | 2023 Form 10-K 45 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 Delta Sky Club lounge access 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 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 estimate of revenue expected to be recognized beyond twelve months. 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. 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 travel credits, which can be applied as payment toward the cost of a ticket. We periodically evaluate the estimated air traffic liability and may record adjustments in our Consolidated Statement of Operations ("income statement"). These adjustments relate primarily to tickets that expire unused ("ticket breakage"), refunds, exchanges, 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 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. At December 31, 2023, the aggregate air traffic liability balance was $7.0 billion. A hypothetical 10% change in the amount of tickets estimated to expire unused would result in an impact of less than 1% of total operating revenue for the year ended December 31, 2023. For additional information on our significant accounting policies related to passenger ticket sales, see Note 2 of the Notes to the Consolidated Financial Statements. 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. Delta Air Lines, Inc. | 2023 Form 10-K 46 Item 7. MD&A - Critical Accounting Estimates 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). Key Assumptions. The key assumptions in our impairment tests include (1) forecasted revenues, expenses and cash flows, (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 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, 2023. 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, 2023, 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 2023, we performed quantitative assessments of our goodwill and indefinite-lived intangible assets, including applicable factors noted in "Key Assumptions" above, and determined that there was no indication that the assets were impaired as the fair value of each asset exceeded its carrying value by at least 20%. Assumptions are sensitive to uncertainty about future events, the macroeconomic environment and other market-based risk factors. A change in key assumptions such as the discount rate or projected future revenues, expenses and cash flows could materially affect the determination of fair values. Management evaluated estimates and assumptions used in the valuations, considering market and industry-specific conditions. For additional information on our goodwill and indefinite-lived intangible assets' significant accounting policies and the related fair values and book values, see Note 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 generally closed to new entrants and frozen for future benefit accruals. As of December 31, 2023, the unfunded benefit obligation for these plans recorded on our balance sheets was $145 million, which is the net of our benefit obligation of $15.9 billion and plan assets of $15.8 billion. We had no minimum funding requirements in 2023, and have no such requirements in 2024. The most critical assumptions impacting our defined benefit pension plan obligations, plan assets and net periodic cost/(benefit) are the discount rate, the expected long-term rate of return on plan assets and life expectancy of plan participants. Discount Rate. We determine our 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 for each plan. We used a weighted average discount rate to value the obligations of 5.31% and 5.62% at December 31, 2023 and 2022, respectively. Delta Air Lines, Inc. | 2023 Form 10-K 47 Item 7. MD&A - Critical Accounting Estimates 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. 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. This is achieved by investing in a globally diversified mix of public and private equity, fixed income, real assets, hedge funds and other assets and instruments. The expected long-term rate of return on our defined benefit pension plan assets is 7.00%. 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 2024 Pension Cost/(Benefit) Effect on Accrued Pension Liability at December 31, 2023 0.50% decrease in weighted average discount rate $ (5) million $ 742 million 0.50% increase in weighted average discount rate $ 1 million $ (685) million 1.00% decrease in expected long-term rate of return on assets $ 150 million $ — 1.00% increase in expected long-term rate of return on assets $ (150) million $ — Life Expectancy . Changes in life expectancy may significantly impact our benefit obligations and future net periodic cost/(benefit). Each year we review information published by the Society of Actuaries and other publicly available information to develop our best estimate of life expectancy for purposes of measuring pension and other postretirement and postemployment benefit obligations. Funding. Our funding obligations for qualified defined benefit plans are governed by ERISA 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 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. 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. Delta Air Lines, Inc. | 2023 Form 10-K 48 Item 7. MD&A - Critical Accounting Estimates Recent Accounting Standards Standards Effective in Future Years Fair Value of Equity Investments. In June 2022, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2022-03, "Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions." Under this standard, a contractual restriction on the sale of an equity security is not considered in measuring the security's fair value. The standard also requires certain disclosures for equity securities that are subject to contractual restrictions. The ASU becomes effective January 1, 2024, however we early adopted this standard as of December 31, 2023. The new standard does not impact the valuation of our equity investments, but we have included the newly required disclosures related to the contractual sale restrictions associated with our investment in Wheels Up. See Note 4 of the Notes to the Consolidated Financial Statements for additional details. Segment Reporting. In November 2023, the FASB issued ASU No. 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures." This standard requires disclosure of significant segment expenses and other segment items by reportable segment. This ASU becomes effective for annual periods beginning in 2024 and interim periods in 2025. We are assessing the impact of this ASU and upon adoption expect that any impact would be limited to additional segment expense disclosures in the footnotes to our Consolidated Financial Statements. Income Taxes. In December 2023, the FASB issued ASU No. 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures." This standard enhances disclosures related to income taxes, including the rate reconciliation and information on income taxes paid. This ASU becomes effective January 1, 2025. We are assessing the impact of this ASU and upon adoption may be required to include certain additional disclosures in the footnotes to our Consolidated Financial Statements. Delta Air Lines, Inc. | 2023 Form 10-K 49 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. Included below are reconciliations of non-GAAP measures used within this Form 10-K to the most directly comparable GAAP financial measures. Reconciliations below may not calculate exactly due to rounding. These reconciliations include certain adjustments to GAAP measures to provide comparability between the reported periods, if applicable, as 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. • One-time pilot agreement expenses. During 2023, Delta pilots ratified a new four-year Pilot Working Agreement effective January 1, 2023. The agreement includes a provision for a one-time payment made upon ratification in the March 2023 quarter of $735 million. Additionally, we recorded adjustments to other benefit-related items of approximately $130 million. Adjusting for these expenses allows investors to better understand and analyze our core cost performance. • Restructuring charges. During 2020, we recorded restructuring charges for items such as fleet impairments and voluntary early retirement and separation programs following strategic business decisions in response to the COVID-19 pandemic. During 2022, we recognized adjustments to certain of those restructuring charges, representing changes in our estimates. • 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. Operating income, adjusted reconciliation Year Ended December 31, (in millions) 2023 2022 Operating income $ 5,521 $ 3,661 Adjusted for: MTM adjustments and settlements on hedges (52) 29 One-time pilot agreement expenses 864 — Restructuring charges — (124) Operating income, adjusted $ 6,334 $ 3,566 Delta Air Lines, Inc. | 2023 Form 10-K 50 Item 7. MD&A - Supplemental Information Total revenue, adjusted reconciliation Year Ended December 31, (in millions) 2023 2022 Total revenue $ 58,048 $ 50,582 Adjusted for: Third-party refinery sales (3,379) (4,977) Total revenue, adjusted $ 54,669 $ 45,605 Operating expense, adjusted reconciliation Year Ended December 31, (in millions) 2023 2022 Operating expense $ 52,527 $ 46,921 Adjusted for: Third-party refinery sales (3,379) (4,977) MTM adjustments and settlements on hedges 52 (29) One-time pilot agreement charges (864) — Restructuring charges — 124 Operating expense, adjusted $ 48,335 $ 42,039 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) 2023 2022 2023 2022 Total fuel expense $ 11,069 $ 11,482 $ 2.82 $ 3.36 Adjusted for: MTM adjustments and settlements on hedges 52 (29) 0.01 (0.01) Total fuel expense, adjusted $ 11,121 $ 11,453 $ 2.83 $ 3.36 TRASM, adjusted reconciliation Year Ended December 31, (in cents) 2023 2022 TRASM 21.34 ¢ 21.69 ¢ Adjusted for: Third-party refinery sales (1.24) (2.13) TRASM, adjusted 20.10 ¢ 19.55 ¢ CASM-Ex reconciliation Year Ended December 31, (in cents) 2023 2022 CASM 19.31 ¢ 20.12 ¢ Adjusted for: Third-party refinery sales (1.24) (2.13) Aircraft fuel and related taxes (4.07) (4.92) Profit sharing (0.51) (0.24) One-time pilot agreement expenses (0.32) — Restructuring charges — 0.05 CASM-Ex 13.17 ¢ 12.87 ¢ Delta Air Lines, Inc. | 2023 Form 10-K 51 Item 7. MD&A - Supplemental Information Free Cash Flow The following table shows a reconciliation of net cash provided by 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 of short-term investments. Net redemptions of short-term investments represent the net purchase and sale activity of investments and marketable securities in the period, including gains and losses. We adjust for this activity to provide investors a better understanding of the company's free cash flow generated by our operations. • Strategic investments 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. • Financed aircraft acquisitions. This adjustment reflects aircraft deliveries that are leased as capital expenditures. The adjustment is based on their original contractual purchase price or an estimate of the aircraft's fair value and provides a more meaningful view of our investing activities. • Pilot agreement payment . In the March 2023 quarter, Delta pilots ratified a new four-year Pilot Working Agreement effective January 1, 2023. The agreement includes a provision for a one-time payment made upon ratification in the March 2023 quarter of $735 million. Adjusting for this item provides investors a better understanding of our recurring free cash flow generated by our operations. Free cash flow reconciliation Year Ended December 31, (in millions) 2023 Net cash provided by operating activities $ 6,464 Net cash used in investing activities (3,148) Adjusted for: Net redemptions of short-term investments (2,235) Strategic investments and related 152 Net cash flows related to certain airport construction projects and other 496 Financed aircraft acquisitions (461) Pilot agreement payment 735 Free cash flow $ 2,003 Delta Air Lines, Inc. | 2023 Form 10-K 52 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 - A measure of net cash from operating and investing activities, adjusted for items shown above in "Supplemental Information." Represents the cash available for use for debt service or general corporate initiatives. Liquidity - Includes our cash and cash-like assets, including cash equivalents and short-term investments, as well as aggregate principal amount committed and available to be drawn under our revolving credit facilities. 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 "passenger unit revenue." RPM - Revenue Passenger Mile. One revenue-paying passenger transported one mile is one RPM. 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. | 2023 Form 10-K 53 Item 7A. Market Risk