ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Financial Highlights - 2015 Compared to 2014

Our pre-tax income for 2015 was $7.2 billion, representing a $6.1 billion increase compared to the prior year predominantly as a result of lower fuel prices and strong non-fuel cost controls. Pre-tax income, adjusted for special items (a non-GAAP financial measure) increased $1.3 billion, or 29.3%, to $5.9 billion. Special items in 2015 were primarily related to fuel hedge MTM adjustments and settlements, which totaled $1.3 billion.

Revenue. Our operating revenue increased $342 million compared to the prior year primarily resulting from our Branded Fares initiative and our agreement with American Express. Passenger revenue per available seat mile ("PRASM") decreased 3.3% on 3.0% higher capacity. The decrease in PRASM was largely driven by competitive pressure in the current low fuel price environment and the impact of U.S. dollar strength on tickets sold in international markets, which are predominantly priced in local currency.

Operating Expense. Total operating expense decreased $5.3 billion from 2014 driven by lower fuel prices, partially offset by fuel hedge losses, higher salaries and related costs and profit sharing. During 2015, Brent crude oil averaged $52 per barrel and closed the year below $40 per barrel, which is significantly lower than the average of $99 per barrel during 2014. Salaries and related costs were higher as a result of increases in pilot and flight attendant block hours due to higher capacity and pay rate increases implemented in 2015.

Our consolidated operating cost per available seat mile ("CASM") for 2015 decreased 16.3% to 13.33 cents from 15.92 cents in 2014, on a 3.0% increase in capacity, primarily due to lower fuel prices. Non-fuel unit costs ("CASM-Ex," a non-GAAP financial measure) were flat in 2015 compared to 2014 at 9.17 cents due to strong non-fuel cost controls and the strength of the U.S. dollar. Our 2015 unit cost performance was in-line with our goal of limiting non-fuel unit cost growth to below 2% annually.

The non-GAAP financial measures for pre-tax income, adjusted for special items and CASM-Ex used in this section and return on invested capital ("ROIC") and adjusted net debt, used in the section below, are defined and reconciled in "Supplemental Information" below.

Company Initiatives

Running a reliable, customer-focused airline has produced a higher ROIC (a non-GAAP financial measure), which increased from 20.7% in 2014 to 28.3% in 2015. This improved financial performance has allowed us to improve our balance sheet by reducing adjusted net debt (a non-GAAP financial measure) to $6.7 billion, increase funding of our defined benefit pension plans and increase the amount of capital returned to our shareholders. We are focused on delivering additional value for shareholders in the future through revenue growth, cost productivity and prudent deployment of cash flows.

Driving Revenue Growth

Operational Reliability

A key driver of our revenue growth is higher customer satisfaction resulting from strong operational reliability. We have significantly invested in our business since 2010 to improve our operational performance, which consistently ranks first among the major U.S. carriers. During 2015, we operated 161 days with zero mainline canceled flights, a 69% improvement over our 2014 performance. In addition, our reported completion factor of 99.6% and on-time arrival rate of 85.9% places us at the top among the major global U.S. carriers. This operational excellence resulted in a four point increase in our domestic net promoter score compared to 2014. Accordingly, our corporate ticket volume increased 4% in 2015, reflecting our reliable service and high-quality product.

Global Strategy

We are expanding our global network. Under this strategy, we are strengthening our presence in major and developing markets around the world in an effort to increase and diversify our network into high revenue and high growth markets. The growth of our global presence will enable customers to seamlessly connect to more places while enjoying a consistent, high-quality travel experience. We are deploying this strategy through investments in Europe, Asia and Latin America.

Europe. Alongside our 49% equity investment in Virgin Atlantic, we implemented an antitrust immunized joint venture with the U.K.-based carrier. This joint venture has significantly improved our presence in London, one of the largest revenue markets from the U.S., while also enhancing our transatlantic network including our existing joint venture relationship with Air France-KLM and Alitalia. We have also moved senior decision-making functions to Amsterdam for closer coordination with our joint venture airlines. We anticipate the co-location of these management functions will optimize the benefits of our joint ventures.

Asia. As part of the strategy to improve our Pacific operations, we are increasing our presence in China, the largest transpacific market from the U.S. To this end, during 2015, we acquired shares of China Eastern for $450 million, which provides us with a 3.5% stake in the airline. In conjunction with this transaction, we and China Eastern entered into a new commercial agreement to expand our relationship and better connect the networks of the two airlines. China Eastern is one of the largest airlines in China with a route network covering more than 200 destinations in over 25 countries. In addition, we are restructuring our Pacific fleet by removing less efficient B-747-400 aircraft and replacing them with smaller-gauge, widebody aircraft to better match capacity with demand in an effort to improve our margins.

Latin America. We are focused on maximizing the value of our relationships while deriving value from the recent investments in our network, product and service. Our capacity growth has been focused on higher performing markets such as Mexico and the Caribbean, while we have reduced capacity in markets challenged by weakening currencies and slowing economies such as Brazil.

During the December 2015 quarter, we announced a plan to acquire additional capital stock of Grupo Aeroméxico through a cash tender offer. Following the completion of the tender offer, when combined with our existing share ownership, we expect to own up to 49% of Grupo Aeroméxico's outstanding shares. We have submitted an application for an antitrust immunized joint venture with Aeroméxico, which we expect will be approved in 2016, and is intended to allow us to benefit from an improved level of coordination.

Also, during 2015, we acquired additional preferred shares of GOL's parent company for $50 million, increasing our ownership to 9.5% of its outstanding capital stock, as part of our long-term strategy to strengthen the opportunity we see in Brazil. In conjunction with our investment, we and GOL agreed to extend our existing commercial agreements.

Cost Productivity

We continue to focus on maintaining the rate of non-fuel unit cost growth at less than 2% annually. An important component of this effort relates to maximizing the benefits of scale throughout the network. Domestic fleet upgauging allows us to increase capacity on fewer departures, thereby improving our unit cost performance. In addition, we are leveraging our expertise in supply chain and aircraft maintenance to improve our productivity. Finally, we are investing in technology projects to improve the customer experience in a cost-efficient manner.

The Delta pilots collective bargaining agreement became amendable as of December 31, 2015. We are in discussions with representatives of the Delta pilots to amend the collective bargaining agreement. Our employees, including pilots, are an important part of Delta’s success and the underpinning of the quality and operational reliability that has become part of Delta’s brand. We expect to continue to pay our employees industry leading total compensation that will enable Delta’s continued success.

Prudent Deployment of Cash Flows

As part of our long-term plan, we target $7-8 billion in annual operating cash flow and $4-5 billion in annual free cash flow. We use approximately 50% of our operating cash flow to reinvest in the business for long-term growth opportunities. The remaining free cash flow is used to further strengthen the balance sheet by reducing debt levels, make incremental pension contributions and return capital to shareholders through dividends and share repurchases.

Strengthened Balance Sheet

A key tenet of our strategy is to operate the company with investment grade financial metrics. Since beginning our balance sheet improvement strategy in 2009, we have reduced our adjusted net debt by over $10 billion, which has significantly reduced our annual interest expense. In addition, we have a significant net underfunded pension liability. We have been making pension contributions above the minimum amount required, with a goal of achieving 80% funded status for the pension plan by 2020. Because of statutory pension funding relief that applies to us, we have until 2031 to fully fund our pension plans.

Increased Capital Returns to Owners

While we have been reducing our debt levels and investing in the business, we have been increasing our capital returns to shareholders, returning a total of $2.6 billion in 2015 through dividends and share repurchases. Since first implementing our quarterly dividend in 2013, we have increased the dividend per share by 50% annually, and paid $712 million in total dividends, including $359 million in 2015. Through dividends and share repurchases, we have returned over $4 billion to shareholders since 2013, while reducing outstanding shares by approximately 9% compared to the beginning of 2013.

Results of Operations - 2015 Compared to 2014

Operating Revenue

	Year Ended December 31,				Increase (Decrease)			% Increase (Decrease)
(in millions)	2015		2014		Increase (Decrease)			% Increase (Decrease)
Passenger:
Mainline	$	28,898	$	28,688	$	210		0.7	%
Regional carriers	5,884		6,266		(382		)	(6.1	)%
Total passenger revenue	34,782		34,954		(172		)	(0.5	)%
Cargo	813		934		(121		)	(13.0	)%
Other	5,109		4,474		635			14.2	%
Total operating revenue	$	40,704	$	40,362	$	342		0.8	%

Passenger Revenue

			Increase (Decrease) vs. Year Ended December 31, 2014
(in millions)	Year Ended December 31, 2015		Passenger Revenue		RPMs(Traffic)		ASMs (Capacity)		Passenger Mile Yield		PRASM		Load Factor
Mainline	$	17,933	5.4	%	6.7	%	6.1	%	(1.2	)%	(0.6	)%	0.5		pts
Regional carriers	5,884		(6.1	)%	(2.2	)%	(4.0	)%	(4.0	)%	(2.1	)%	1.5		pts
Domestic	23,817		2.3	%	5.1	%	4.1	%	(2.6	)%	(1.8	)%	0.8		pts
Atlantic	5,548		(4.8	)%	0.6	%	3.2	%	(5.3	)%	(7.7	)%	(2.1	)	pts
Pacific	3,002		(12.2	)%	(2.3	)%	(5.0	)%	(10.2	)%	(7.6	)%	2.3		pts
Latin America	2,415		(0.4	)%	5.1	%	5.7	%	(5.3	)%	(5.8	)%	(0.5	)	pts
Total	$	34,782	(0.5	)%	3.3	%	3.0	%	(3.7	)%	(3.3	)%	0.2		pts

Passenger revenue decreased $172 million over the prior year. PRASM decreased 3.3% and passenger mile yield decreased 3.7% on 3.0% higher capacity. Load factor was 0.2 points higher than the prior year at 84.9%.

Unit revenues of the mainline domestic region decreased 0.6%, resulting from weaker yields in certain markets, which were nearly offset by the strong performance in Atlanta, New York, Seattle and Los Angeles.

Regional carriers passenger revenue decreased 6.1% on a 4.0% reduction in capacity. During 2015, we removed thirty 50-seat regional aircraft as part of our strategy to restructure our domestic fleet.

Revenues related to our international regions decreased 6.0% year-over-year primarily due to the impact of the strong U.S. dollar and reductions in international fuel surcharges. These challenges have been addressed through capacity reductions implemented in the December 2015 quarter.

In the Atlantic region, unit revenue declines in Africa, the Middle East and Russia were partially offset by strength in core European markets. Unit revenue declines in the Pacific primarily resulted from the strength of the U.S. dollar and lower international fuel surcharges. We continue to optimize the Pacific region in order to improve margins by reducing our winter capacity, including the cancellation of our Seattle to Tokyo-Haneda route in the June 2015 quarter and downgauging via the continued retirement of the B-747-400 fleet during the second half of 2015. In addition, we have made a strategic investment in, and established a long-term commercial relationship with, China Eastern. Latin America saw capacity growth of 5.7%, the majority of which occurred during the first half of 2015. In the December 2015 quarter, we continued to invest in higher performing markets such as Mexico and the Caribbean, while reducing capacity in Brazil due to its challenging economic environment.

Other Revenue. Other revenue increased $635 million, or 14.2%, primarily due to loyalty program revenues including our agreement with American Express, sales of non-jet fuel products to third parties by our oil refinery and maintenance sales to third parties by our MRO services business.

Operating Expense

	Year Ended December 31,				Increase (Decrease)			% Increase (Decrease)
(in millions)	2015		2014		Increase (Decrease)			% Increase (Decrease)
Salaries and related costs	$	8,776	$	8,120	$	656		8.1	%
Aircraft fuel and related taxes	6,544		11,668		(5,124		)	(43.9	)%
Regional carriers expense	4,241		5,237		(996		)	(19.0	)%
Aircraft maintenance materials and outside repairs	1,848		1,828		20			1.1	%
Contracted services	1,848		1,749		99			5.7	%
Depreciation and amortization	1,835		1,771		64			3.6	%
Passenger commissions and other selling expenses	1,672		1,700		(28		)	(1.6	)%
Landing fees and other rents	1,493		1,442		51			3.5	%
Profit sharing	1,490		1,085		405			37.3	%
Passenger service	872		810		62			7.7	%
Aircraft rent	250		233		17			7.3	%
Restructuring and other	35		716		(681		)	NM⁽¹⁾
Other	1,998		1,797		201			11.2	%
Total operating expense	$	32,902	$	38,156	$	(5,254	)	(13.8	)%

(1) Due to the nature of amounts recorded within restructuring and other, a year-over-year comparison is not meaningful. For a discussion of charges recorded in restructuring and other, see Note 15 of the Notes to the Consolidated Financial Statements.

Salaries and Related Costs. The increase in salaries and related costs is primarily due to higher pilot and flight attendant block hours and pay rate increases implemented in both the first half of 2015 and December 2015. Base pay rates increased 14.5% for eligible merit, ground and flight attendant employees effective December 1, 2015.

Aircraft Fuel and Related Taxes. Including our regional carriers, fuel expense decreased $5.9 billion compared to the prior year due to a 43.5% decrease in the market price per gallon of fuel, an increase in Monroe's profitability and reduced hedge losses, partially offset by a 2.4% increase in consumption. The table below presents fuel expense, including our regional carriers:

	Year Ended December 31,				Increase (Decrease)			% Increase (Decrease)
(in millions, except per gallon data)	2015		2014		Increase (Decrease)			% Increase (Decrease)
Aircraft fuel and related taxes⁽¹⁾	$	6,544	$	11,668	$	(5,124	)
Aircraft fuel and related taxes included within regional carriers expense	1,035		1,844		(809		)
Total fuel expense	$	7,579	$	13,512	$	(5,933	)	(43.9	)%

(1) Includes the impact of fuel hedging and refinery results described further in the table below.

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

										Average Price Per Gallon
	Year Ended December 31,						Increase (Decrease)			Year Ended December 31,						Increase (Decrease)
(in millions, except per gallon data)	2015			2014			Increase (Decrease)			2015			2014			Increase (Decrease)
Fuel purchase cost⁽¹⁾	$	6,934		$	11,350		$	(4,416	)	$	1.74		$	2.91		$	(1.17	)
Airline segment fuel hedge losses⁽²⁾	935			2,258			(1,323		)	0.23			0.58			(0.35		)
Refinery segment impact⁽²⁾	(290		)	(96		)	(194		)	(0.07		)	(0.02		)	(0.05		)
Total fuel expense	$	7,579		$	13,512		$	(5,933	)	$	1.90		$	3.47		$	(1.57	)
MTM adjustments and settlements⁽³⁾	1,301			(2,346		)	3,647			0.33			(0.60		)	0.93
Total fuel expense, adjusted	$	8,880		$	11,166		$	(2,286	)	$	2.23		$	2.87		$	(0.64	)

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

(2) Includes the impact of pricing arrangements between the airline and refinery segments with respect to the refinery's inventory price risk. For additional information regarding the refinery segment impact, see "Refinery Segment" below.

(3) MTM adjustments and settlements include the effects of the derivative transactions discussed in Note 4 of the Notes to the Consolidated Financial Statements. For additional information and the reason for adjusting fuel expense, see "Supplemental Information" below.

Regional Carriers Expense. The reduction in regional carriers expense is primarily due to lower fuel cost from a decrease in the price per gallon of fuel, lower capacity and reduced maintenance expenses. During 2015, we removed thirty 50-seat regional aircraft as part of our strategy to restructure our domestic fleet.

Contracted Services. The increase in contracted services expense predominantly related to costs associated with the 3.0% increase in capacity and additional temporary staffing.

Depreciation and Amortization. Depreciation and amortization expense increased year-over-year primarily due to investments in new A330-300, B-737-900ER and CRJ-900 aircraft and aircraft modifications that upgraded aircraft interiors and enhanced our product offering.

Landing Fees and Other Rents. Landing fees and other rents increased principally due to increased number of departures and higher rental rates.

Profit Sharing. The increase in profit sharing is driven by an increase in full year pre-tax income compared to the prior year. 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. For years prior to 2016, our profit sharing program paid 10% to employees for the first $2.5 billion of annual profit and 20% of annual profit above $2.5 billion.

Beginning with 2016 pre-tax profit (to be paid out in 2017), the profit sharing formula will be adjusted to pay 10% of annual pre-tax profit (as defined by the terms of the program) and, if we exceed our prior-year results, the program will pay 20% of the year-over-year increase in pre-tax profit to eligible employees. The profit sharing program for pilots remains unchanged and will continue in 2016 under its terms.

Passenger Service. Passenger service expense includes the costs for onboard food and beverage, cleaning and supplies. This expense increased year-over-year primarily due to costs associated with enhancements to our onboard product offering and the 3.3% increase in traffic.

Other. Other operating expense increased primarily due to costs associated with sales of non-jet fuel products to third parties by our oil refinery.

Results of Operations - 2014 Compared to 2013

Operating Revenue

	Year Ended December 31,				Increase			% Increase
(in millions)	2014		2013		Increase			% Increase
Passenger:
Mainline	$	28,688	$	26,534	$	2,154		8.1	%
Regional carriers	6,266		6,408		(142		)	(2.2	)%
Total passenger revenue	34,954		32,942		2,012			6.1	%
Cargo	934		937		(3		)	(0.3	)%
Other	4,474		3,894		580			14.9	%
Total operating revenue	$	40,362	$	37,773	$	2,589		6.9	%

Passenger Revenue

			Increase (Decrease) vs. Year Ended December 31, 2013
(in millions)	Year Ended December 31, 2014		Passenger Revenue		RPMs(Traffic)		ASMs (Capacity)		Passenger Mile Yield		PRASM		Load Factor
Mainline	$	17,017	11.9	%	6.5	%	4.1	%	5.1	%	7.5	%	2.0		pts
Regional carriers	6,266		(2.2	)%	(1.5	)%	(3.8	)%	(0.7	)%	1.7	%	1.9		pts
Domestic	23,283		7.7	%	5.0	%	2.4	%	2.6	%	5.2	%	2.4		pts
Atlantic	5,826		3.0	%	(0.1	)%	0.9	%	3.0	%	2.1	%	(0.8	)	pts
Pacific	3,421		(4.0	)%	(1.2	)%	(0.2	)%	(2.8	)%	(3.8	)%	(0.9	)	pts
Latin America	2,424		14.8	%	16.7	%	17.7	%	(1.6	)%	(2.5	)%	(0.7	)	pts
Total consolidated	$	34,954	6.1	%	4.1	%	3.0	%	2.0	%	3.0	%	0.9		pts

Passenger revenue increased $2.0 billion, or 6.1%, over prior year. PRASM increased 3.0% and passenger mile yield increased 2.0% on 3.0% higher capacity. Load factor was 0.9 points higher than prior year at 84.7%.

Our geographic regions generally performed well compared to the prior year, with the domestic region leading year-over-year unit revenue improvement. Unit revenues of the domestic region rose 5.2% led by strong performances from our hubs in Atlanta, New York-LaGuardia and Seattle.

Revenues related to our international regions increased 3.0% year-over-year primarily due to 17.7% capacity growth in the Latin America region as a result of our efforts to improve connections with GOL and Aeroméxico. GOL and Aeroméxico contributed a significant portion of the traffic from the U.S. to Brazil and into key Mexico markets, respectively. Despite these contributions, Latin America unit revenues declined 2.5% as a result of the capacity increase, some business demand weakness associated with the FIFA World Cup in Brazil and economic concerns in Venezuela. Atlantic unit revenue increased 2.1% driven by yield improvements. While our joint venture with Virgin Atlantic reflected solid revenue growth, especially in London-Heathrow, Atlantic yields experienced pressure from the impact of geopolitical and health concerns related to service to Africa, the Middle East and Russia. Our Pacific region experienced a 3.8% decline in unit revenues driven by lower yield, primarily due to the weakening of the Japanese yen.

Other Revenue. Other revenue increased $580 million, or 14.9%, primarily due to an increase in sales of SkyMiles, settlements associated with our transatlantic joint venture agreements and sales of non-jet fuel products to third parties by our oil refinery.

Operating Expense

	Year Ended December 31,				Increase (Decrease)			% Increase (Decrease)
(in millions)	2014		2013		Increase (Decrease)			% Increase (Decrease)
Salaries and related costs	$	8,120	$	7,720	$	400		5.2	%
Aircraft fuel and related taxes	11,668		9,397		2,271			24.2	%
Regional carriers expense	5,237		5,669		(432		)	(7.6	)%
Aircraft maintenance materials and outside repairs	1,828		1,852		(24		)	(1.3	)%
Contracted services	1,749		1,665		84			5.0	%
Depreciation and amortization	1,771		1,658		113			6.8	%
Passenger commissions and other selling expenses	1,700		1,603		97			6.1	%
Landing fees and other rents	1,442		1,410		32			2.3	%
Profit sharing	1,085		506		579			NM
Passenger service	810		762		48			6.3	%
Aircraft rent	233		209		24			11.5	%
Restructuring and other	716		402		314			NM⁽¹⁾
Other	1,797		1,520		277			18.2	%
Total operating expense	$	38,156	$	34,373	$	3,783		11.0	%

(1) Due to the nature of amounts recorded within restructuring and other, a year-over-year comparison is not meaningful. For a discussion of charges recorded in restructuring and other, see Note 15 of the Notes to the Consolidated Financial Statements.

Salaries and Related Costs. The increase in salaries and related costs is primarily due to investments in our employees and an increase in pilot and flight attendant block hours, partially offset by lower pension expense.

Fuel Expense. Compared to the prior year, consolidated fuel expense increased $2.0 billion due to unfavorable MTM adjustments on fuel hedges resulting from the significant decrease in crude oil prices during the year (from a high of $115 per barrel in June to a low of $57 per barrel at December 31, 2014) and a 1.7% increase in consumption, partially offset by a 7.8% decrease in fuel market price per gallon and increased profitability at Monroe. The table below presents fuel expense, gallons consumed and our average price per gallon, including the impact of hedging and the refinery:

	Year Ended December 31,				Increase (Decrease)			% Increase (Decrease)
(in millions, except per gallon data)	2014		2013		Increase (Decrease)			% Increase (Decrease)
Aircraft fuel and related taxes⁽¹⁾	$	11,668	$	9,397	$	2,271
Aircraft fuel and related taxes included within regional carriers expense	1,844		2,067		(223		)
Total fuel expense	$	13,512	$	11,464	$	2,048		17.9	%

(1) Includes the impact of fuel hedging and refinery results described further in the table below.

The table below shows the impact of hedging and the refinery on fuel expense and average price per gallon, adjusted:

										Average Price Per Gallon
	Year Ended December 31,						Increase (Decrease)			Year Ended December 31,						Increase (Decrease)
(in millions, except per gallon data)	2014			2013			Increase (Decrease)			2014			2013			Increase (Decrease)
Fuel purchase cost⁽¹⁾	$	11,350		$	11,792		$	(442	)	$	2.91		$	3.09		$	(0.18	)
Airline segment fuel hedge losses (gains)⁽²⁾	2,258			(444		)	2,702			0.58			(0.12		)	0.70
Refinery segment impact⁽²⁾	(96		)	116			(212		)	(0.02		)	0.03			(0.05		)
Total fuel expense	$	13,512		$	11,464		$	2,048		$	3.47		$	3.00		$	0.47
MTM adjustments⁽³⁾	(2,346		)	276			(2,622		)	(0.60		)	0.07			(0.67		)
Total fuel expense, adjusted	$	11,166		$	11,740		$	(574	)	$	2.87		$	3.07		$	(0.20	)

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

(2) Includes the impact of pricing arrangements between the airline and refinery segments with respect to the refinery's inventory price risk. For additional information regarding the refinery segment impact, see "Refinery Segment" below.

(3) MTM adjustments include the effects of the derivative transactions discussed in Note 4 of the Notes to the Consolidated Financial Statements. For additional information and the reason for adjusting fuel expense, see "Supplemental Information" below.

Regional Carriers Expense. The reduction in regional carriers expense is primarily due to lower fuel expense from both a decrease in the cost of fuel per gallon and a 3.8% decrease in capacity and fewer required maintenance events. During 2014, we removed thirty-five 50-seat regional aircraft from our fleet as part of our strategy to restructure our domestic fleet.

Aircraft Maintenance Materials and Outside Repairs. Aircraft maintenance materials and outside repairs consists of costs associated with maintenance of aircraft used in our operations and costs associated with maintenance sales to third parties by our MRO services business. The reduction in aircraft maintenance materials and outside repairs is due primarily to lower engine maintenance volume and a contract settlement charge in 2013, partially offset by a higher volume of cost of sales from our MRO business.

Contracted Services. Contracted services expense increased year-over-year due primarily to costs associated with the 3.0% increase in capacity.

Depreciation and Amortization. Depreciation and amortization expense increased year-over-year primarily due to our investment in new B-737-900ER and CRJ-900 aircraft, the purchase of aircraft off-lease and aircraft modifications that upgraded aircraft interiors and enhanced our product offering.

Passenger Commissions and Other Selling Expenses. Passenger commissions and other selling expenses increased on higher passenger revenue.

Profit Sharing. The increase in profit sharing is driven by an increase in full year pre-tax income, excluding profit sharing and certain other items, compared to the prior year.

Aircraft Rent. Aircraft rent increased year-over-year due primarily to the addition of leased B-717-200 and B-737-900ER aircraft delivered during the year, partially offset by the retirement of certain B-747-400 aircraft.

Other. Other operating expense increased primarily due to costs associated with sales of non-jet fuel products to third parties by our oil refinery.

Non-Operating Results

	Year Ended December 31,									Favorable (Unfavorable)
(in millions)	2015			2014			2013			2015 vs. 2014		2014 vs. 2013
Interest expense, net	$	(481	)	$	(650	)	$	(852	)	$	169	$	202
Miscellaneous, net	(164		)	(484		)	(21		)	320		(463		)
Total non-operating expense, net	$	(645	)	$	(1,134	)	$	(873	)	$	489	$	(261	)

The decline in interest expense, net results from reduced levels of debt and unamortized debt discounts and from the refinancing of debt obligations at lower interest rates. The principal amount of debt and capital leases has declined from $13.2 billion at the beginning of 2013 to $8.5 billion at December 31, 2015.

Miscellaneous, net is favorable primarily due to a reduction in debt extinguishment losses compared to 2014. The debt extinguishment losses primarily related to unamortized debt discounts resulting from fair value adjustments recorded in the 2008 purchase accounting of Northwest Airlines. We did not early extinguish any debt in 2013. Also contributing to the increase is our proportionate share of earnings from our equity investment in Virgin Atlantic. The gain from Virgin Atlantic primarily results from year-over-year profit and improvements in MTM adjustments on fuel hedges.

Income Taxes

Our effective tax rate for 2015 was 36.8%. We expect our annual effective tax rate to be between 35% and 36% for 2016. The expected reduction in our rate from prior years is primarily related to differences in our global tax rates. In certain periods we may have adjustments to our deferred tax assets as a result of changes in prior year estimates and tax laws enacted during the period, which will impact the effective tax rate for that period. At December 31, 2015, we had approximately $9.5 billion of U.S. federal pre-tax net operating loss carryforwards, which do not begin to expire until 2024. Accordingly, we believe we will not pay any cash federal income taxes before 2018. See Note 11 of the Notes to the Consolidated Financial Statements for more information.

We released substantially all of our valuation allowance against our net deferred tax assets on December 31, 2013. The release of the allowance primarily resulted in a net tax benefit of $8.0 billion that was recorded in income tax (provision) benefit in our Consolidated Statement of Operations.

Refinery Segment

The refinery primarily produces gasoline, diesel and jet fuel. Monroe exchanges substantially all 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 provided approximately 171,000 barrels (approximately seven million gallons) per day for use in our airline operations during 2015. We believe that the increase in jet fuel supply due to the refinery's operation has reduced the overall market price of jet fuel, and thus lowered our cost of jet fuel.

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 renewable energy credits, called RINs, from third parties in the secondary market. Because the refinery operated by Monroe does not blend renewable fuels, it must purchase its entire RINs requirement in the secondary market or obtain a waiver from the EPA. We recognized $75 million, $111 million and $64 million of expense related to the RINs requirement in 2015, 2014 and 2013, respectively. We are in possession of the RINs needed to satisfy our 2013 obligation and a portion of our 2014 and 2015 obligations.

The refinery recorded a profit of $290 million in 2015, compared to $96 million in 2014 and a loss of $116 million recorded in 2013. The refinery's profitability improved year-over-year despite lower revenues resulting from a decline in refined fuel market prices. The refinery’s increase in profits was attributable to higher product crack spreads and higher throughput as a result of enhanced operational reliability, logistical improvements and utilization of intermediates (partially refined fuels). For more information regarding the refinery’s results, see Note 14 of the Notes to the Consolidated Financial Statements.

Financial Condition and Liquidity

We expect to meet our cash needs for the next 12 months from cash flows from operations, cash and cash equivalents, short-term investments and financing arrangements. As of December 31, 2015, we had $5.6 billion in unrestricted liquidity, consisting of $3.4 billion in cash and cash equivalents and short-term investments and $2.2 billion in undrawn revolving credit facilities. During 2015, we generated $7.9 billion in cash from operating activities, which we used to fund capital expenditures of $2.9 billion, return $2.6 billion to shareholders, reduce the principal on our debt and capital lease obligations by $1.5 billion and fund equity investments of $500 million, while maintaining a solid liquidity position.

Sources of Liquidity

Operating Activities

Cash flows from operating activities continue to provide our primary source of liquidity. We generated positive cash flows from operations of $7.9 billion in 2015, $4.9 billion in 2014 and $4.5 billion in 2013. We also expect to generate positive cash flows from operations in 2016.

Our operating cash flows can be 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 increases during the winter and spring as advanced ticket sales grow prior to the summer peak travel season and decreases during the summer and fall months.

Fuel and Fuel Hedge Margins. Including our regional carriers, fuel expense represented 23.0% of our total operating expenses for 2015. The market price for jet fuel is highly volatile, which can impact the comparability of our cash flows from operations from period to period.

As part of our fuel hedging program, we may be required to post margin to counterparties when our portfolio is in a loss position. Conversely, if our portfolio with counterparties is in a gain position, we may receive margin. Our future cash flows are impacted by the nature of our derivative contracts and the market price of the commodities underlying those derivative contracts. Our hedge contracts were in a net loss position at December 31, 2015 and 2014, resulting in $119 million and $925 million, respectively, of margin postings to counterparties.

Timing of SkyMiles Sales. In December 2011, we amended our American Express agreements and agreed to sell $675 million of unrestricted SkyMiles to American Express in each December from 2011 through 2014. Pursuant to the December 2011 amendment, American Express purchased $675 million of unrestricted SkyMiles in each of those years with the final payment in 2014. The SkyMiles purchased in December 2014 were utilized by American Express in 2015. There were no advanced sales of SkyMiles in 2015.

Pension Contributions. 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, as modified by the Pension Protection Act of 2006. In 2015, we contributed $1.2 billion to our qualified defined benefit pension plans. As a result of these contributions, we satisfied, on an accelerated basis, our 2015 required contributions for our defined benefit plans including nearly $600 million above the minimum funding requirements. We contributed $917 million and $914 million in 2014 and 2013, respectively, including $250 million above the minimum funding levels in each of those years. We estimate our funding under these plans will total at least $1.0 billion in 2016, including $500 million above the minimum funding requirements.

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. For years prior to 2016, our profit sharing program paid 10% to employees for the first $2.5 billion of annual profit and 20% of annual profit above $2.5 billion.

We made profit sharing payments of $756 million, $821 million and $372 million in 2015, 2014 and 2013, respectively, in recognition of our employees' contributions toward meeting our financial goals. During the year ended December 2015, we recorded $1.5 billion in profit sharing expense based on 2015 pre-tax profit, which will be paid to employees in February 2016.

Beginning with 2016 pre-tax profit (to be paid out in 2017), the profit sharing formula will be adjusted to pay 10% of annual pre-tax profit (as defined by the terms of the program) and, if we exceed our prior-year results, the program will pay 20% of the year-over-year increase in pre-tax profit to eligible employees. The profit sharing program for pilots remains unchanged and will continue in 2016 under its terms.

Investing Activities

Capital Expenditures. Our capital expenditures were $2.9 billion in 2015, $2.2 billion in 2014 and $2.5 billion in 2013. Our capital expenditures during 2015 were primarily related to the purchase of B-737-900ER aircraft to replace a portion of our older B-757-200 aircraft, purchases of A330-300 aircraft, advance deposit payments on A321-200 aircraft and seat density projects for our domestic fleet. Our capital expenditures during 2014 and 2013 were primarily for the purchase of aircraft and modifications to upgrade aircraft interiors that enhance our product offering.

We have committed to future aircraft purchases that will require significant capital investment and have obtained long-term financing commitments for a substantial portion of the purchase price of these aircraft. We expect that we will invest approximately $3 billion in 2016 primarily for (1) aircraft, including deliveries of B-737-900ERs, A321-200s and A330-300s, along with advance deposit payments for these and our new A330-900neo and A350-900 orders and used E190-100 orders, as well as for (2) aircraft modifications, the majority of which relate to increasing the seat density and enhancing the cabins on our domestic fleet. We expect that the 2016 investments will be funded primarily through cash flows from operations.

Equity Investments. Our equity investments during 2015 were comprised of $450 million for China Eastern shares and $50 million for preferred shares in GOL's parent company. For additional information regarding these investments, see Note 3 of the Notes to the Consolidated Financial Statements.

During the December 2015 quarter, we announced a plan to acquire additional capital stock of Grupo Aeroméxico through a cash tender offer. Following the completion of the tender offer, when combined with our existing share ownership, we expect to own up to 49% of Grupo Aeroméxico's outstanding shares. This approximately $750 million capital investment is subject to regulatory approvals and the tender offer would likely commence in the June 2016 quarter.

Financing Activities

Debt and Capital Leases. The principal amount of debt and capital leases has declined from $13.2 billion at the beginning of 2013 to $8.5 billion at December 31, 2015. Since December 31, 2009, we have reduced our principal amount of debt and capital leases by $9.8 billion. These debt reductions also serve to reduce our total future interest expense. We have focused on reducing our total debt in recent years as part of our strategy to strengthen our balance sheet. As a result, we received upgrades to our credit rating by all three major rating agencies during 2015, to the following ratings:

Rating Agency	Current Rating	Outlook
Standard & Poor's	BB+	Stable
Moody's	Ba2	Positive
Fitch	BB+	Positive

Continued improvement in our credit ratings to investment grade would likely result in lower costs of borrowing, among other things.

In connection with the retirement and termination of the outstanding loans under our existing $2.5 billion Senior Secured Credit Financing Facilities (due April 2016 and April 2017), we completed refinancing transactions in August 2015 with new debt consisting of the Senior Secured Credit Facilities ($2.0 billion) and the 2015-1 EETC ($500 million). The Senior Secured Credit Facilities consist of a $1.5 billion Revolving Credit Facility and a $500 million Term Loan Facility.

Capital Returns to Shareholders. Since 2013, our Board of Directors has implemented three programs to return capital to shareholders through quarterly dividends and share repurchases. Since first implementing our quarterly dividend in 2013, we have increased the dividend per share by 50% annually, and paid $712 million in total dividends, including $359 million in 2015. Through dividends and share repurchases, we have returned over $4 billion to shareholders since 2013, while reducing outstanding shares by approximately 9% compared to the beginning of 2013. During 2015 alone, we repurchased and retired 48.4 million shares at a cost of $2.2 billion.

(in millions, except dividends per share)	Dividends per Share		Share Repurchase Authorization		Average Repurchase Price		Completion Date	Authorization Remaining
May 2013 Program	$	0.060	$	500	$	28.43	June 30, 2016	Completed June 2014
May 2014 Program	$	0.090	$	2,000	$	42.86	December 31, 2016	Completed June 2015
May 2015 Program	$	0.135	$	5,000	$	45.77	December 31, 2017		$	3,950

On February 3, 2016, the Board of Directors declared a $0.135 per share dividend for shareholders of record as of February 17, 2016.

Fuel Hedge Restructuring. During 2015, we effectively deferred settlement of a portion of our hedge portfolio until 2016 by entering into fuel derivative transactions that, excluding market movements from the date of inception, would settle and provide approximately $300 million in cash receipts during the second half of 2015 and require approximately $300 million in cash payments in 2016. We early terminated certain of these deferral transactions in 2015. As a result, we reported $429 million in cash receipts and $71 million in cash payments associated with these deferral transactions.

Undrawn Lines of Credit

We have $2.2 billion available in undrawn revolving lines of credit. Our credit facilities have covenants, including minimum collateral coverage ratios. If we are not in compliance with these covenants, we may be required to repay amounts borrowed under the credit facilities or we may not be able to draw on them. We currently have a substantial amount of unencumbered assets available to pledge as collateral.

Covenants

We were in compliance with the covenants in our financing agreements at December 31, 2015.

Contractual Obligations

The following table summarizes our contractual obligations at December 31, 2015 that we expect will be paid in cash. The table does not include amounts that are contingent on events or other factors that are uncertain or unknown at this time, including legal contingencies, uncertain tax positions and amounts payable under collective bargaining arrangements, among others. In addition, the table does not include expected significant cash payments representing obligations that arise in the ordinary course of business that do not include contractual commitments.

The amounts presented are based on various estimates, including estimates regarding the timing of payments, prevailing interest rates, volumes purchased, the occurrence of certain events and other factors. Accordingly, the actual results may vary materially from the amounts presented in the table.

	Contractual Obligations by Year⁽¹⁾
(in millions)	2016		2017		2018		2019		2020		Thereafter		Total
Long-term debt (see Note 6)
Principal amount	$	1,442	$	869	$	2,061	$	1,189	$	456	$	2,081	$	8,098
Interest payments	339		294		253		166		110		294		1,456
Capital lease obligations (see Note 7)
Principal amount	148		94		44		35		26		36		383
Interest payments	35		20		12		6		3		3		79
Operating lease payments (see Note 7)	1,583		1,440		1,307		1,158		1,053		6,220		12,761
Aircraft purchase commitments (see Note 10)	2,140		2,500		2,510		1,500		1,900		3,010		13,560
Contract carrier obligations (see Note 10)	2,160		2,270		2,110		1,960		1,650		2,170		12,320
Employee benefit obligations (see Note 9)	692		632		674		899		755		8,301		11,953
Other obligations	680		330		280		160		70		500		2,020
Total	$	9,219	$	8,449	$	9,251	$	7,073	$	6,023	$	22,615	$	62,630

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

Long-Term Debt, Principal Amount. Represents scheduled principal payments on long-term debt.

Long-Term Debt, Interest Payments. Represents estimated interest payments under our long-term debt based on the interest rates specified in the applicable debt agreements. Interest payments on variable interest rate debt were calculated using London interbank offered rates ("LIBOR") at December 31, 2015.

Operating Lease Payments. Represents our minimum rental commitments under noncancelable operating leases (including certain aircraft flown by regional carriers).

Aircraft Purchase Commitments. Represents our commitments to purchase 70 B-737-900ER, 45 A321-200, 25 A330-900neo, 25 A350-900, 19 E190-100, 18 B-787-8 and six A330-300 aircraft. Our purchase commitment for the 18 B-787-8 aircraft provides for certain aircraft substitution rights, including for our current orders of B-737-900ER aircraft.

Contract Carrier Obligations. Represents our estimated minimum fixed obligations under capacity purchase agreements with third-party regional carriers. The reported amounts are based on (1) the required minimum levels of flying by our contract carriers under the applicable agreements and (2) assumptions regarding the costs associated with such minimum levels of flying.

Employee Benefit Obligations. Represents primarily (1) our estimated minimum required funding for our qualified defined benefit pension plans based on actuarially determined estimates and (2) projected future benefit payments from our unfunded postretirement and postemployment plans. For additional information about our employee benefit obligations, see “Critical Accounting Policies and Estimates.”

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

Critical Accounting Policies and Estimates

Our critical accounting policies and estimates are those that require significant judgments and estimates. Accordingly, the actual results may differ materially from these estimates. For a discussion of these and other accounting policies, see Note 1 of the Notes to the Consolidated Financial Statements.

Frequent Flyer Program

Our SkyMiles Program offers incentives to travel on Delta. This program allows customers to earn mileage credits by flying on Delta, Delta Connection and airlines that participate in the SkyMiles Program, as well as through participating companies such as credit card companies, hotels and car rental agencies. We sell mileage credits to non-airline businesses, customers and other airlines. Effective January 1, 2015, the SkyMiles program was modified from a model in which customers earn redeemable mileage credits based on distance traveled to a model based on ticket price. This award change did not affect the way we account for the program.

The SkyMiles Program includes two types of transactions that are considered revenue arrangements with multiple deliverables. As discussed below, these are (1) passenger ticket sales earning mileage credits and (2) the sale of mileage credits to participating companies with which we have marketing agreements. Mileage credits are a separate unit of accounting as they can be redeemed by customers in future periods for air travel on Delta and participating airlines, membership in our Sky Club and other program awards.

Passenger Ticket Sales Earning Mileage Credits. Passenger ticket sales earning mileage credits under our SkyMiles Program provide customers with two deliverables: (1) mileage credits earned and (2) air transportation. We value each deliverable on a standalone basis. Our estimate of the selling price of a mileage credit is based on an analysis of our sales of mileage credits to other airlines and customers, which is re-evaluated at least annually. We use established ticket prices to determine the estimated selling price of air transportation. We allocate the total amount collected from passenger ticket sales between the deliverables based on their relative selling prices.

We defer revenue for the mileage credits related to passenger ticket sales when the credits are earned and recognize it as passenger revenue when miles are redeemed and services are provided. We record the air transportation portion of the passenger ticket sales in air traffic liability and recognize these amounts in passenger revenue when we provide transportation or when the ticket expires unused. A hypothetical 10% increase in our estimate of the standalone selling price of a mileage credit would decrease passenger revenue by approximately $48 million, as a result of an increase in the amount of revenue deferred from the mileage component of passenger ticket sales.

Sale of Mileage Credits. Customers may earn mileage credits through participating companies such as credit card companies, hotels and car rental agencies with which we have marketing agreements to sell mileage credits. Our contracts to sell mileage credits under these marketing agreements have multiple deliverables, as defined below.

Our most significant contract to sell mileage credits relates to our co-brand credit card relationship with American Express. In December 2014, we amended our marketing agreements with American Express which increased the value we receive under the agreements and extended the term to 2022. The amended agreements became effective January 1, 2015. The deliverables under the amended agreements are substantially similar to the previous agreement. We account for the amended agreements consistent with the accounting method adopted in September 2013 that allocates the consideration received to the individual products and services delivered based on their relative selling prices (discussed below). The increased value received under the amended agreements increases the amount of deferred revenue for the travel component and increases the value of the other deliverables, which are recognized in other revenue as they are provided.

In September 2013, we modified our marketing agreements with American Express, which required us to change the accounting method for recording SkyMiles sold. Under the previous method, the embedded premium or discount was allocated to the residual products or services in a combined transaction. The new method allocates consideration received based on the relative selling price of each product or service. We determined our best estimate of the selling prices by considering discounted cash flow analysis using multiple inputs and assumptions, including: (1) the expected number of miles awarded and number of miles redeemed, (2) the rate at which we sell mileage credits to other airlines, (3) published rates on our website for baggage fees, discounted access to Delta Sky Club lounges and other benefits while traveling on Delta and (4) brand value. The impact of adopting the relative selling price method re-allocated a portion of the embedded discount to the travel component, lowering the deferral rate we use to record miles sold under the agreements and increasing revenue recognized on the remaining deliverables.

We recognize revenue as we deliver each sales element. We defer the travel deliverable (mileage credits) as part of frequent flyer deferred revenue and recognize passenger revenue as the mileage credits are used for travel. The revenue allocated to the remaining deliverables is recorded in other revenue. We recognize the revenue for these services as they are performed.

Breakage. For mileage credits that we estimate are not likely to be redeemed (“breakage”), we recognize the associated value proportionally during the period in which the remaining mileage credits are expected to be redeemed. Management uses statistical models to estimate breakage based on historical redemption patterns. A change in assumptions as to the period over which mileage credits are expected to be redeemed, the actual redemption activity for mileage credits or the estimated fair value of mileage credits expected to be redeemed could have a material impact on our revenue in the year in which the change occurs and in future years. At December 31, 2015, the aggregate deferred revenue balance associated with the SkyMiles Program was $3.9 billion. A hypothetical 1% change in the number of outstanding miles estimated to be redeemed would result in a $29 million impact on our deferred revenue liability at December 31, 2015.

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 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 using the key assumptions listed below. If the asset's carrying value exceeds its fair value calculated using the quantitative approach, we will record an impairment charge for the difference in fair value and carrying value.

When we evaluate goodwill for impairment using a quantitative approach, we estimate the fair value of the reporting unit by considering both market capitalization 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) terminal period revenue growth and cash flows, (3) an estimated weighted average cost of capital, (4) assumed discount rates depending on the asset and (5) a tax rate. These assumptions are consistent with those hypothetical market participants would use. Since 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, 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. Factors which could cause impairment include, but are not limited to, (1) negative trends in our market capitalization, (2) reduced profitability resulting from lower passenger mile yields or higher input costs (primarily related to fuel and employees), (3) lower passenger demand as a result of weakened U.S. and global economies, (4) interruption to our operations due to a prolonged employee strike, terrorist attack, or other reasons, (5) changes to the regulatory environment (e.g., diminished slot restrictions or additional Open Skies agreements), (6) competitive changes by other airlines and (7) strategic changes to our operations leading to diminished utilization of the intangible assets.

We assessed each of the above assumptions in our most recent impairment analyses. The combination of our most recently completed annual results and our projected revenues, expenses and cash flows more than offset any negative events and circumstances. The stabilizing operating environment for U.S. airlines has resulted in annual yields increasing along with load factors, leading to improved financial results.

Goodwill. Our goodwill balance, which is related to the airline segment, was $9.8 billion at December 31, 2015. Based upon our quantitative assessment of all relevant factors, including applicable factors noted in "Key Assumptions" above, we determined that the fair value of goodwill significantly exceeded the carrying value and, therefore, there was no indication that goodwill was impaired.

Identifiable Intangible Assets. Our identifiable intangible assets, which are related to the airline segment, had a net carrying amount of $4.9 billion at December 31, 2015, of which $4.7 billion related to indefinite-lived intangible assets. Indefinite-lived assets are not amortized and consist primarily of routes, slots, the Delta tradename and assets related to SkyTeam and collaborative arrangements. Definite-lived assets consist primarily of marketing and maintenance service agreements.

In 2015, we performed quantitative assessments, including applicable factors noted in "Key Assumptions" above, of our indefinite-lived intangible assets (excluding six London-Heathrow slot pairs we acquired for $276 million during the December 2015 quarter) and determined that there was no indication that the assets were impaired as the fair values ranged from approximately 130% to 280% of the carrying values.

We obtained the Pacific routes and slots asset as part of the acquisition of Northwest Airlines in 2008 and is composed of Pacific route authorities and takeoff and landing rights (“slots”) at capacity-constrained airports in Asia, including Tokyo-Narita International Airport ("Narita"). This intangible asset supports Delta’s Narita hub activities and is essential to Delta's entire Pacific network. Changes in key inputs and assumptions, including (1) new or enhanced joint ventures or alliances, (2) foreign currency exchange rates, (3) fuel costs, legislative or regulatory changes, including changes in access to Tokyo-Haneda airport and (4) Pacific region profitability, could impact the value of this asset in the future.

Long-Lived Assets

Our flight equipment and other long-lived assets have a recorded value of $23.0 billion at December 31, 2015. This value is based on various factors, including the assets' estimated useful lives and salvage values. We record impairment losses on flight equipment and other long-lived assets used in operations when events and circumstances indicate the assets may be impaired and the estimated future cash flows generated by those assets are less than their carrying amounts. Factors which could cause 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 (the lowest level for which there are identifiable cash flows) and then estimate future cash flows based on projections of capacity, passenger mile yield, fuel costs, labor costs and other relevant factors. If an impairment occurs, the impairment loss recognized is the amount by which the fleet'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.

Income Tax Valuation Allowance

We periodically assess whether it is more likely than not that we will generate sufficient taxable income to realize our deferred income tax assets. We establish valuation allowances if it is not likely we will realize our deferred income tax assets. In making this determination, we consider all available positive and negative evidence and make certain assumptions. We consider, among other things, projected future taxable income, scheduled reversals of deferred tax liabilities, the overall business environment, our historical financial results and tax planning strategies. In evaluating the likelihood of utilizing our net deferred income tax assets, the significant factors that we consider include (1) our recent history of profitability, (2) growth in the U.S. and global economies, (3) forecast of airline revenue trends, (4) estimate of future fuel prices and (5) future impact of taxable temporary differences.

We recorded a full valuation allowance in 2004 due to our cumulative loss position at that time. During 2013, after considering all positive and negative evidence, we concluded that our deferred income tax assets are more likely than not to be realized. Accordingly, we released substantially all of the valuation allowance against our net deferred income tax assets. We recognized an $8.0 billion benefit in our provision for income taxes, primarily related to the valuation allowance release.

At the end of 2015 our net deferred tax asset balance was $5.0 billion, against which we maintained a $56 million valuation allowance, primarily related to state net operating losses, state credits and unrealized losses on investments, which have limited expiration periods.

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, 2015, the unfunded benefit obligation for these plans recorded on our Consolidated Balance Sheet was $11.2 billion. During 2015, we contributed $1.2 billion to these plans and recorded $240 million of expense in salaries and related costs on our Consolidated Statement of Operations. In 2016, we estimate we will contribute at least $1.0 billion to these plans, including $500 million of contributions above the minimum funding requirements, and that our expense will be approximately $250 million. The most critical assumptions impacting our defined benefit pension plan obligations and expenses are the discount rate, the expected long-term rate of return on plan assets and life expectancy.

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 analysis specific to our estimated future benefit payments. We used a weighted average discount rate to value the obligations of 4.57% and 4.14% at December 31, 2015 and 2014, respectively. Our weighted average discount rate for net periodic pension benefit cost in each of the past three years has varied from the rate selected on our measurement date, ranging from 4.10% to 4.99% between 2013 and 2015.

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. 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. Our expected long-term rate of return on assets for net periodic pension benefit cost for the year ended December 31, 2015 was 9%.

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

Change in Assumption	Effect on 2016 Pension Expense	Effect on Accrued Pension Liability at December 31, 2015
0.50% decrease in weighted average discount rate	-$1 million	+$1.3 billion
0.50% increase in weighted average discount rate	-$2 million	-$1.2 billion
0.50% decrease in expected long-term rate of return on assets	+$50 million	—
0.50% increase in expected long-term rate of return on assets	-$50 million	—

Life Expectancy. We have historically utilized the Society of Actuaries' ("SOA") published mortality data in developing a best estimate of life expectancy. During 2014, the SOA published updated mortality tables for U.S. plans and an updated improvement scale, which both reflect improved longevity. Based on an evaluation of these new tables and our perspective of future longevity, we updated the mortality assumptions in 2014 for purposes of measuring pension and other postretirement and postemployment benefit obligations. The improvement in life expectancy increases our benefit obligations and future expense as benefit payments are paid over an extended period of time. In 2015, we reviewed the mortality assumptions and concluded that the assumptions used in 2014 continue to represent our best estimate of long-term life expectancy. We will continue to review our assumptions on an annual basis.

Funding. Our funding obligations for qualified defined benefit plans are governed by the Employee Retirement Income Security Act. The Pension Protection Act of 2006 allows commercial airlines to elect alternative funding rules (“Alternative Funding Rules”) for defined benefit plans that are frozen. Delta elected the Alternative Funding Rules under which 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. In addition, because of statutory pension funding relief that applies to us, we have until 2031 to fully fund our pension plans.

While the Pension Protection Act 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. For additional information, see Note 9 of the Notes to the Consolidated Financial Statements.

Recent Accounting Standards

Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers." Under the new standard, revenue is recognized at the time a good or service is transferred to a customer for the amount of consideration received for that specific good or service. Entities may use a full retrospective approach or report the cumulative effect as of the date of adoption.

In August 2015, the FASB issued ASU No. 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," that deferred the effective date by one year to December 15, 2017 for interim and annual reporting periods beginning after that date. The FASB permitted early adoption of the standard, but not before the original effective date of December 15, 2016. We are currently evaluating how the adoption of this standard will impact our Consolidated Financial Statements.

Presentation of Debt Issuance Costs

During 2015, the FASB issued ASU Nos. 2015-03 and 2015-15, related to simplifying the presentation of debt issuance costs. These standards amend existing guidance to require the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability instead of as a deferred charge. It is effective for annual reporting periods beginning after December 15, 2015, but early adoption is permitted. We early adopted these standards in the December 2015 quarter, which we accounted for as a change in accounting principle and applied the guidance retrospectively. This change results in a reclassification of $32 million from prepaid expenses and other to current maturities of long-term debt and capital leases and $84 million from other noncurrent assets to long-term debt and capital leases as of December 31, 2014.

Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share

In May 2015, the FASB issued ASU No. 2015-07, "Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)." Under the new standard, investments for which fair value is measured at net asset value per share (or its equivalent) using the practical expedient will no longer be categorized in the fair value hierarchy. It is effective for interim and annual reporting periods beginning after December 15, 2015, but early adoption is permitted. We will adopt this standard effective January 1, 2016. We are currently assessing how the adoption of this standard will impact our Consolidated Financial Statements as our pension plan has a significant number of investments measured at net asset value.

Balance Sheet Classification of Deferred Taxes

In November 2015, the FASB issued ASU No. 2015-17, "Balance Sheet Classification of Deferred Taxes." This standard requires that deferred tax liabilities and assets be classified as noncurrent on the balance sheet. It is effective for interim and annual periods beginning after December 15, 2016, but early adoption is permitted. We early adopted this standard in the December 2015 quarter, which we accounted for as a change in accounting principle and applied the guidance retrospectively. This change results in the reclassification of $3.3 billion from current assets to deferred income taxes, net in other assets on our December 31, 2014 Consolidated Balance Sheet.

Financial Instruments

In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments—Overall (Subtopic 825-10)." This standard makes several modifications to Subtopic 825-10 including the elimination of the available-for-sale classification of equity investments, and requires equity investments with readily determinable fair values to be measured at fair value with changes in fair value recognized in net income. It is effective for interim and annual periods beginning after December 15, 2017.

Our investments in the parent companies of Aeroméxico and GOL are currently accounted for as available-for-sale with changes in fair value recognized in other comprehensive income. At the time of adoption, any amounts in accumulated other comprehensive income/(loss) ("AOCI") related to equity investments would be reclassified to non-operating expense/income. As of December 31, 2015, a net unrealized loss of $66 million related to these investments was recorded in AOCI on our Consolidated Balance Sheet.

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.

The following table shows a reconciliation of pre-tax income (a GAAP measure) to pre-tax income, adjusted for special items (a non-GAAP financial measure). We adjust pre-tax income for the following items to determine pre-tax income, adjusted for special items, for the reasons described below:

• MTM adjustments and settlements. MTM adjustments are defined as fair value changes recorded in periods other than the settlement period. Such fair value changes are not necessarily indicative of the actual settlement value of the underlying hedge in the contract settlement period. Settlements represent cash received or paid on hedge contracts settled during the period. These items adjust fuel expense to show the economic impact of hedging, including cash received or paid on hedge contracts during the period. Adjusting for these items allows investors to better understand and analyze our core operational performance in the periods shown.

• Restructuring and other. Because of the variability in restructuring and other, the adjustment for this item is helpful to investors to analyze our recurring core performance in the periods shown.

• Loss on extinguishment of debt. We adjusted for loss on extinguishment of debt in 2014 to assist investors with their analysis of our recurring core financial performance.

• Virgin Atlantic MTM adjustments. We record our proportionate share of earnings from our equity investment in Virgin Atlantic in other expense. We adjust for Virgin Atlantic's MTM adjustments to allow investors to better understand and analyze our core financial performance in the periods shown.

	Year Ended December 31,
(in millions)	2015			2014
Pre-tax income	$	7,157		$	1,072
Adjusted for:
MTM adjustments and settlements	(1,301		)	2,346
Restructuring and other	35			716
Loss on extinguishment of debt	—			268
Virgin Atlantic MTM adjustments	(26		)	134
Pre-tax income, adjusted for special items	$	5,865		$	4,536

The following table shows a reconciliation of CASM (a GAAP measure) to CASM-Ex (a non-GAAP financial measure). We adjust CASM for the following items to determine CASM-Ex for the reasons described below:

• 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 (including our regional carriers) 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.

• Restructuring and other. Because of the variability in restructuring and other, the adjustment for this item is helpful to investors to analyze our recurring core performance in the periods shown.

• Other expenses. Other expenses include aircraft maintenance and staffing services we provide to third parties, our vacation wholesale operations and refinery cost of sales to third parties. Because these businesses are not related to the generation of a seat mile, we adjust for the costs related to these sales to provide a more meaningful comparison of the costs of our airline operations to the rest of the airline industry.

	Year Ended December 31,
	2015			2014
CASM		13.33	¢		15.92	¢
Adjusted for:
Aircraft fuel and related taxes	(3.07		)	(5.64		)
Profit sharing	(0.60		)	(0.45		)
Restructuring and other	(0.01		)	(0.30		)
Other expenses	(0.48		)	(0.37		)
CASM-Ex		9.17	¢		9.16	¢

The following table shows a reconciliation of ROIC. We present ROIC as management believes this metric is helpful to investors in assessing our ability to generate returns using its invested capital. ROIC is operating income, adjusted, divided by adjusted average invested capital. We adjust operating income for MTM adjustments and settlements and restructuring and other for the same reasons discussed above for pre-tax income. All adjustments to calculate ROIC are intended to provide a more meaningful comparison of our results to the airline industry and other high-quality industrial companies.

	Year Ended December 31,
(in millions, except % of return)	2015			2014
Operating income	$	7,802		$	2,206
Adjusted for:
MTM adjustments and settlements	(1,301		)	2,346
Restructuring and other	35			716
7x annual interest expense included in aircraft rent	172			149
Amortization of retirement actuarial loss	230			112
Operating income, adjusted	$	6,938		$	5,529

Adjusted book value of equity	$	17,564		$	18,518
Average adjusted net debt	6,970			8,215
Adjusted average invested capital⁽¹⁾	$	24,534		$	26,733

ROIC	28.3		%	20.7		%

(1) Adjusted average invested capital represents the sum of the average book value of equity at the end of the last five quarters, adjusted for pension and fuel hedge impacts within other comprehensive income. Average adjusted net debt is calculated using amounts as of the end of the last five quarters.

The following table shows a reconciliation of adjusted net debt. We use adjusted total debt, including aircraft rent, in addition to long-term adjusted debt and capital leases, to present estimated financial obligations. We reduce adjusted debt by cash, cash equivalents and short-term investments and hedge margin receivable, resulting in adjusted net debt, to present the amount of assets needed to satisfy the debt. Management believes this metric is helpful to investors in assessing the company’s overall debt profile. Management has reduced adjusted debt by the amount of hedge margin receivable, which reflects cash posted to counterparties, as we believe this removes the impact of current market volatility on our unsettled hedges and is a better representation of the continued progress we have made on our debt initiatives.


(in millions)	December 31, 2015			December 31, 2009
Debt and capital lease obligations	$	8,329		$	17,198
Plus: unamortized discount, net and debt issuance costs	152			1,123
Adjusted debt and capital lease obligations	$	8,481		$	18,321
Plus: 7x last twelve months' aircraft rent	1,750			3,360
Adjusted total debt	10,231			21,681
Less: cash, cash equivalents and short-term investments	(3,437		)	(4,678		)
Less: hedge margin (receivable) payable	(119		)	10
Adjusted net debt	$	6,675		$	17,013

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 - (Operating) Cost per Available Seat Mile. The amount of operating cost incurred per ASM during a reporting period.

CASM-Ex - The amount of operating cost incurred per ASM during a reporting period, adjusted for aircraft fuel and related taxes, profit sharing, restructuring and other and other expenses, including aircraft maintenance and staffing services we provide to third parties, our vacation wholesale operations and refinery cost of sales to third parties.

Passenger 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.”

DAL - Delta Air Lines, Inc.