Years of deep financial losses carry a silver lining for airlines: a reprieve on income taxes when their fortunes improve.
Delta Air Lines (DAL) earned $2.7 billion last year but paid no income taxes because of the big losses it posted in 2008 and 2009, totaling nearly $2 billion, and that’s just a small chunk of the total past losses the company can use to defray future earnings. The third-largest U.S. airline is sitting on more than $15 billion in what are called net operating loss carry forwards, an accounting device that lets a company apply past financial losses to future tax bills. Under accounting rules, corporations are required to value their deferred tax assets based on the performance of their business and tax rates.
Delta reported fourth-quarter earnings of $558 million on Tuesday and reversed the value of its deferred tax assets, booking an $8 billion noncash gain to end 2013. Valuing a corporate tax benefit into the future is a tricky accounting exercise, but Delta calculated that its $15 billion in losses equate to an $8 billion benefit to offset future taxes, airline spokesman Trebor Banstetter said. “I would anticipate that there’ll be some adjustments to it” over time, he says. The airline said today that it will begin booking taxes at a 39 percent rate, but that expense will be only on paper and won’t require any cash outlay.
Given the size of its past losses, Delta isn’t likely to face a cash hit for income taxes anytime soon. “I’d say it’s at least three years, conservatively,” figures Jim Corridore, an airline analyst with Standard & Poor’s (MHFI).
Other airlines are also benefiting thanks to past losses. United (UAL) is carrying about $10.3 billion of past losses on its books and doesn’t expect to pay any income taxes for 2014. Before its December merger with American Airlines (AAL), US Airways recorded $187 million in noncash charges for income taxes last year after having run through its old losses. In a Jan. 15 regulatory filing, the new airline said the legacy American unit had $5.7 billion in net operating losses, giving it about $4.3 billion it can apply to future income taxes. The company expects to pay a 25 percent tax rate—only on paper—on earnings for the fourth quarter when American reports its full-year results on Jan. 28.
“It’s the weak sisters, the high-yield group, that are dealing with this,” says Vicki Bryan, a senior bond analyst at Gimme Credit. Consistently profitable companies—and airlines such as Southwest (LUV) and Alaska (ALK)—have no operating losses help curb their tax bills.