10-Q 1 g65348e10-q.txt DELTA AIR LINES, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended September 30, 2000 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-5424 DELTA AIR LINES, INC. State of Incorporation: Delaware IRS Employer Identification No.: 58-0218548 Hartsfield Atlanta International Airport, Atlanta, Georgia 30320 Telephone: (404) 715-2600 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Number of shares outstanding by each class of common stock, as of October 31, 2000: Common Stock, $1.50 par value - 122,960,787 shares outstanding 2 DELTA AIR LINES, INC. CONSOLIDATED BALANCE SHEETS (IN MILLIONS, EXCEPT SHARE DATA)
SEPTEMBER 30 JUNE 30 2000 2000 ------------ -------- ASSETS (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 1,387 $ 1,252 Short-term investments 478 493 Accounts receivable, net of allowance for uncollectible accounts of $35 at September 30, 2000 and $34 at June 30, 2000 700 739 Deferred income taxes 355 356 Fuel hedge contracts, at market value 502 -- Prepaid expenses and other 516 612 -------- -------- Total current assets 3,938 3,452 -------- -------- PROPERTY AND EQUIPMENT: Flight equipment 16,402 15,625 Less: Accumulated depreciation 5,029 4,930 -------- -------- 11,373 10,695 -------- -------- Flight equipment under capital leases 529 506 Less: Accumulated amortization 315 303 -------- -------- 214 203 -------- -------- Ground property and equipment 4,272 4,212 Less: Accumulated depreciation 2,306 2,250 -------- -------- 1,966 1,962 -------- -------- Advance payments for equipment 464 525 -------- -------- Total property and equipment 14,017 13,385 -------- -------- OTHER ASSETS: Investments in equity securities 316 396 Investments in associated companies 219 242 Cost in excess of net assets acquired, net 2,167 2,183 Leasehold and operating rights, net 101 104 Other 1,047 804 -------- -------- Total other assets 3,850 3,729 -------- -------- Total assets $ 21,805 $ 20,566 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 2 3 DELTA AIR LINES, INC. CONSOLIDATED BALANCE SHEETS (IN MILLIONS, EXCEPT SHARE DATA)
SEPTEMBER 30 JUNE 30 LIABILITIES AND SHAREOWNERS' EQUITY 2000 2000 ------------ -------- (Unaudited) CURRENT LIABILITIES: Current maturities of long-term debt $ 526 $ 526 Current obligations under capital leases 44 43 Accounts payable and miscellaneous accrued liabilities 2,548 2,318 Air traffic liability 1,875 1,920 Accrued salaries and related benefits 944 920 Accrued rent 197 213 -------- -------- Total current liabilities 6,134 5,940 -------- -------- NONCURRENT LIABILITIES: Long-term debt 4,448 4,378 Postretirement benefits 2,020 2,008 Accrued rent 731 742 Capital leases 154 147 Deferred income taxes 1,236 869 Other 441 458 -------- -------- Total noncurrent liabilities 9,030 8,602 -------- -------- DEFERRED CREDITS: Deferred gain on sale and leaseback transactions 581 592 Manufacturers' and other credits 354 345 -------- -------- Total deferred credits 935 937 -------- -------- COMMITMENTS AND CONTINGENCIES (NOTES 5 AND 9) EMPLOYEE STOCK OWNERSHIP PLAN PREFERRED STOCK: Series B ESOP Convertible Preferred Stock (issued and outstanding 6,415,582 shares at September 30, 2000 and 6,455,372 shares at June 30, 2000) 462 465 Unearned compensation under employee stock ownership plan (231) (251) -------- -------- 231 214 -------- -------- SHAREOWNERS' EQUITY: Common stock at par (total shares issued: 180,703,301 shares at September 30, 2000 and 180,356,181 shares at June 30, 2000) 272 271 Additional paid-in capital 3,260 3,245 Accumulated other comprehensive income 503 40 Retained earnings 4,168 4,043 Treasury stock at cost (57,751,090 shares at September 30, 2000 and 57,716,615 shares at June 30, 2000) (2,728) (2,726) -------- -------- Total shareowners' equity 5,475 4,873 -------- -------- Total liabilities and shareowners' equity $ 21,805 $ 20,566 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 3 4 DELTA AIR LINES, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN MILLIONS, EXCEPT SHARE DATA)
THREE MONTHS ENDED SEPTEMBER 30 -------------------------------- 2000 1999 -------------- -------------- OPERATING REVENUES: Passenger $ 4,050 $ 3,593 Cargo 141 140 Other, net 154 96 -------------- -------------- Total operating revenues 4,345 3,829 OPERATING EXPENSES: Salaries and related costs 1,514 1,306 Aircraft fuel 533 367 Depreciation and amortization 281 263 Other selling expenses 190 160 Passenger commissions 164 203 Contracted services 239 213 Landing fees and other rents 199 180 Aircraft rent 183 154 Aircraft maintenance materials and outside repairs 184 166 Passenger service 134 133 Asset writedowns and other special charges 22 149 Other 192 199 -------------- -------------- Total operating expenses 3,835 3,493 -------------- -------------- OPERATING INCOME 510 336 -------------- -------------- OTHER INCOME (EXPENSE): Interest expense, net (64) (33) Gains from the sale of investments -- 252 Miscellaneous income, net 12 14 Fair value adjustments of SFAS 133 derivatives (66) -- -------------- -------------- (118) 233 -------------- -------------- INCOME BEFORE INCOME TAXES 392 569 INCOME TAXES PROVIDED, NET (159) (225) -------------- -------------- NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 233 344 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET OF TAX (100) (66) -------------- -------------- NET INCOME 133 278 PREFERRED STOCK DIVIDENDS (4) (3) -------------- -------------- NET INCOME AVAILABLE TO COMMON SHAREOWNERS $ 129 $ 275 ============== ============== BASIC EARNINGS PER SHARE BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $ 1.86 $ 2.47 ============== ============== BASIC EARNINGS PER SHARE $ 1.05 $ 1.99 ============== ============== DILUTED EARNINGS PER SHARE BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $ 1.77 $ 2.33 ============== ============== DILUTED EARNINGS PER SHARE $ 1.01 $ 1.88 ============== ============== WEIGHTED AVERAGE SHARES USED IN PER SHARE COMPUTATION: Basic 122,925,632 138,300,991 Diluted 130,531,655 147,360,186 DIVIDENDS PER COMMON SHARE $ 0.025 $ 0.025 ============== ==============
The accompanying notes are an integral part of these consolidated financial statements. 4 5 DELTA AIR LINES, INC. STATISTICAL SUMMARY* (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30 ---------------------------------- STATISTICAL SUMMARY: 2000 1999 --------------- --------------- Revenue Passenger Miles (millions) 29,243 28,296 Available Seat Miles (millions) 38,090 37,732 Passenger Mile Yield 12.53c. 12.26c. Operating Revenue Per Available Seat Mile 10.37c. 9.82c. Operating Cost Per Available Seat Mile 9.14c. 8.61c. Passenger Load Factor 76.78% 74.99% Breakeven Passenger Load Factor 66.96% 65.18% Passengers Enplaned (thousands) 27,351 27,183 Revenue Ton Miles (millions) 3,369 3,268 Cargo Ton Miles (millions) 444 437 Cargo Ton Mile Yield 31.23c. 31.93c. Fuel Gallons Consumed (millions) 705 713 Average Price Per Fuel Gallon, net of hedging gains 68.71c. 50.23c. Number of Aircraft in Fleet at End of Period 602 586 Average Full-Time Equivalent Employees 74,200 72,300
* This summary excludes the statistics of Atlantic Southeast Airlines, Inc. and Comair, Inc., as well as the impact of unusual items, which are described under "Unusual Items" on page 14 of this Form 10-Q. 5 6 DELTA AIR LINES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN MILLIONS)
THREE MONTHS ENDED SEPTEMBER 30 ----------------------------- 2000 1999 --------- --------- CASH PROVIDED BY OPERATING ACTIVITIES: Net Income $ 133 $ 278 Adjustments to reconcile net income to cash provided by operating activities, net 596 430 Changes in certain assets and liabilities, net 279 (337) --------- --------- Net cash provided by operating activities 1,008 371 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Property and equipment additions: Flight equipment, including advance payments (986) (480) Ground property and equipment (107) (103) Decrease (increase) in short-term investments, net 15 (74) Proceeds from sale of investments -- 115 Proceeds from sale of flight equipment 203 95 --------- --------- Net cash used in investing activities (875) (447) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock 14 10 Repurchase of common stock (2) (45) Payments on long-term debt and capital lease obligations (15) (69) Payments on notes payable (58) (42) Issuance of long-term obligations 66 571 Issuance of notes payable -- 42 Cash dividends (3) (4) --------- --------- Net cash provided by financing activities 2 463 --------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS 135 387 Cash and cash equivalents at beginning of period 1,252 1,124 --------- --------- Cash and cash equivalents at end of period $ 1,387 $ 1,511 ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest (net of amounts capitalized) $ 98 $ 65 Income taxes $ 27 $ 55
The accompanying notes are an integral part of these condensed consolidated financial statements. 6 7 DELTA AIR LINES, INC. Notes to Consolidated Financial Statements September 30, 2000 (Unaudited) 1. ACCOUNTING AND REPORTING POLICIES Delta's accounting and reporting policies are summarized in Note 1 of the Notes to the Consolidated Financial Statements (pages 38-39) in our 2000 Annual Report to Shareowners and in Note 7 of this Form 10-Q. These interim financial statements should be read in conjunction with the consolidated financial statements and the accompanying notes in our 2000 Annual Report to Shareowners. Management believes that the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring items, necessary for a fair statement of results for the interim periods presented. Due to seasonal variations in the demand for air travel, operating results for an interim period are not necessarily indicative of operating results for the entire year. We have reclassified certain amounts in the prior period to be consistent with the presentation of our current period financial statements. 2. SHAREOWNERS' EQUITY During the September 2000 quarter, we issued a total of 347,120 shares of common stock under our broad-based employee stock option plans, 1989 Stock Incentive Plan, Dividend Reinvestment and Stock Purchase Plan, and Non-Employee Directors' Stock Plan. 3. GEOGRAPHIC INFORMATION Delta is managed as a single business unit that provides air transportation for passengers and cargo. Our operating revenues by geographic region are summarized in the following table:
For the Three Months Ended: ------------------------------------------- (In Millions) September 30, 2000 September 30, 1999 ------------------------------------------------------------------------------------------------------- North America $ 3,499 $ 3,128 Atlantic 639 519 Latin America 114 87 Pacific 93 95 --------- --------- Total $ 4,345 $ 3,829 ========= =========
7 8 4. AIRCRAFT PURCHASE COMMITMENTS Our total aircraft fleet, options and rolling options at September 30, 2000 are summarized in the following table. Options have scheduled delivery slots. Rolling options replace options and are assigned delivery slots as options expire or are exercised.
Current Fleet ---------------------------------- Rolling Aircraft Type Owned Leased Total Orders Options Options ------------- ----- ------ ----- ------ ------- ------- B-727-200 85 10 95 -- -- -- B-737-200 1 53 54 -- -- -- B-737-300 -- 26 26 -- -- -- B-737-800 31 -- 31 101 60 253 B-757-200 74 41 115 6 20 75 B-767-200 15 -- 15 -- -- -- B-767-300 4 24 28 -- -- -- B-767-300ER 49 8 57 1 11 13 B-767-400 5 -- 5 16 24 15 B-777-200 7 -- 7 6 20 26 L-1011-1 6 -- 6 -- -- -- L-1011-250 5 -- 5 -- -- -- L-1011-500 7 -- 7 -- -- -- MD-11 8 7 15 -- -- -- MD-88 63 57 120 -- -- -- MD-90 16 -- 16 -- -- -- ATR-72 4 15 19 -- -- -- EMB-120 49 13 62 -- -- -- CRJ-200 21 117 138 103 231 -- CRJ-700 -- -- -- 57 165 -- --- --- --- --- --- --- Total 450 371 821 290 531 382 === === === === === ===
During the September 2000 quarter, we accepted delivery of seven new B-737-800 aircraft, four new B-757-200 aircraft, and five new B-767-400 aircraft. We sold and leased back seven CRJ-200 aircraft. We also sold one B-767-300ER aircraft, five B-727-200 aircraft, and two EMB-120 aircraft. We retired one L-1011-1 aircraft and one EMB-120 aircraft. Subsequent to September 30, 2000, we accepted delivery of the following new aircraft: one B-767-400 aircraft, three B-737-800 aircraft, two B-757-200 aircraft and three CRJ-200 aircraft. 8 9 Future expenditures for aircraft and engines on order at October 31, 2000 are estimated to be $8.9 billion, as follows:
Amount Year Ending June 30 (In Millions) ------------------- ------------- Remainder of 2001 $1,870 2002 2,400 2003 1,370 2004 1,130 2005 1,400 After 2006 740 ------ Total $8,910 ======
5. COMPREHENSIVE INCOME Comprehensive income includes unrealized gains and losses on marketable equity securities and changes in the fair value of certain derivative financial instruments which qualify for hedge accounting. Comprehensive income totaled $596 million and $230 million for the three months ended September 30, 2000 and 1999, respectively. The difference between net income and comprehensive income for the quarters ended September 30, 2000 and 1999 is detailed in the following table:
For the Three Months Ended: ------------------------------------------ (In Millions) September 30, 2000 September 30, 1999 ---------------------------------------------------------------------------------------------------- Net income $ 133 $ 278 -------- -------- Unrealized gain (loss) on marketable equity securities, net of deferred taxes 25 (47) Unrealized gain (loss) on derivative instruments, net of deferred taxes 437 -- Other 1 (1) -------- -------- Total other comprehensive income 463 (48) Comprehensive income $ 596 $ 230 ======== ========
As of September 30, 2000, we had recorded $413 million as unrealized gains on open fuel hedge contracts in accordance with Statement of Financial Accounting Standard (SFAS) No. 133. This amount is included in unrealized gains on derivative instruments in the table above. We anticipate that $281 million of unrealized fuel hedge gains will become realized over the next 12 months. Upon the adoption of SFAS 133 on July 1, 2000, we recorded unrealized fuel hedge gains of $416 million. We anticipate $289 million of that total to be realized over the 12 months following July 1, 2000. For additional information on the adoption of SFAS 133, see Note 7 of the Notes to the Consolidated Financial Statements in this Form 10-Q. 9 10 6. SALE OF RECEIVABLES During fiscal 1999, we sold a defined pool of our accounts receivable, on a revolving basis, through a wholly owned subsidiary to a third party. We initially sold receivables with a fair value of $547 million to the subsidiary. In exchange for the receivables sold, we received cash and a subordinated promissory note. The balance of the subordinated promissory note was $175 million at September 30, 2000, and is included in accounts receivable on our Consolidated Balance Sheets. As part of the agreement, the subsidiary is required to pay fees to a third party based upon the amounts invested by the third party. This expense is included in miscellaneous income, net in our Consolidated Statements of Income. For additional information regarding Delta's sale of a defined pool of our accounts receivable, see Note 16 of the Notes to the Consolidated Financial Statements (page 51) in our 2000 Annual Report to Shareowners. 7. ADOPTION OF NEW ACCOUNTING STANDARD On July 1, 2000, we adopted SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. SFAS 133 requires us to recognize all derivative instruments on the balance sheet at fair value. The adoption of SFAS 133 impacts the accounting for our fuel hedging program and our holdings of equity warrants and other similar rights. FUEL HEDGING Our results of operations can be significantly impacted by changes in the price and availability of aircraft fuel. To manage the risks associated with changes in aircraft fuel prices, we use options, forwards and other similar derivative instruments, which have maturities of up to 36 months. Because there is not a readily available market for derivatives in aircraft fuel, we use heating oil contracts to reduce our risk exposure to the movement of aircraft fuel prices. The changes in the market value of our heating oil contracts (also referred to as "fuel hedge contracts") have a high correlation to changes in aircraft fuel prices and, therefore, qualify as cash flow hedges under SFAS 133. Upon adoption of SFAS 133, we recorded the fair market value of our fuel hedge contracts on our Consolidated Balance Sheet. On an ongoing basis, we will adjust our balance sheet to reflect the current fair market value of our fuel hedge contracts. The related gains or losses on these contracts are deferred in shareowners' equity (as a component of comprehensive income). These deferred gains and losses are recognized in income in the period in which the related aircraft fuel purchases being hedged are consumed and recognized in expense. However, to the extent that the change in value of a fuel hedge contract does not perfectly offset the change in the value of the aircraft fuel purchase being hedged, that ineffective portion of the hedge is immediately recognized in income. In calculating the ineffective portion of our hedge performance under SFAS 133, we exclude 10 11 the time value component related to any option premiums paid and recognize the amount in income during the life of the contract. The ineffective portion of the hedge returns, including those related to time value, are included in our Consolidated Statement of Income as fair value adjustments of SFAS 133 derivatives. EQUITY WARRANTS AND OTHER SIMILAR RIGHTS In addition to derivatives used in the fuel hedging program, we own equity warrants and other similar rights in certain companies, primarily priceline.com (priceline). For additional information regarding our equity interests in priceline, see Note 2 of the Notes to the Consolidated Financial Statements (page 40) in our 2000 Annual Report to Shareowners. At September 30, 2000, our equity warrants and other similar rights in priceline consisted of the following: (1) a warrant which, subject to certain conditions, gives us the right to purchase up to 5.5 million shares of priceline common stock; and (2) six million shares of priceline's preferred stock which are convertible at our option into priceline common stock on a one-for-one basis. SFAS 133 requires us to separate the value of the preferred stock's convertible feature and account for it as a standalone equity right. These equity rights will now be accounted for as derivative instruments under SFAS 133, and these changes in fair value are required to be reflected in current period earnings. At June 30, 2000, the book value of our holdings in priceline preferred stock was $245 million. At the date of adoption of SFAS 133, the conversion feature embedded in our priceline preferred stock had an estimated fair value of $130 million. The remaining value of the priceline preferred stock is accounted for as an available-for-sale debt security and recorded at amortized cost in investments in equity securities on our Consolidated Balance Sheet in accordance with SFAS 115. The change in market value of our priceline warrant, our warrants in other companies and the conversion feature of our priceline preferred stock is recorded in our Consolidated Statements of Income as fair value adjustments of SFAS 133 derivatives. The impact of adopting SFAS 133 on our Consolidated Statement of Income is as follows (in millions):
Income (Expense) --------------- For the Cumulative Quarter Ended Effect at July 1, September 30, 2000 2000 Total ----------------- --------------- ------------ Write-off of fuel hedge contract premiums $ (143) $ (25) $ (168) "Ineffective" portion of fuel hedge contracts 16 86 102 Fair value adjustment of equity rights (37) (127) (164) ------------ ------------ ------------ Total pre-tax $ (164) $ (66) $ (230) ============ ============ ============ Total after-tax $ (100) $ (41) $ (141) ============ ============ ============
11 12 8. EARNINGS PER SHARE We calculate basic earnings per share by dividing the income available to common shareowners by the weighted average number of common shares outstanding. Diluted earnings per share includes the dilutive effects of stock options and convertible securities. The following table shows our computation of basic and diluted earnings per share:
Three Months Ended ----------------------------------- September 30 September 30 2000 1999 ------------ ------------ (In millions, except per share data) BASIC: Net income $ 133 $ 278 Dividends on allocated Series B ESOP Convertible Preferred Stock (4) (3) ------------ ------------ Income available to common shareowners $ 129 $ 275 ============ ============ Weighted average shares outstanding 122.9 138.3 ============ ============ Basic earnings per share $ 1.05 $ 1.99 ============ ============ DILUTED: Net income $ 133 $ 278 Adjustment to net income assuming conversion of allocated Series B ESOP Convertible Preferred Stock (1) (1) ------------ ------------ Income available to common shareowners $ 132 $ 277 ============ ============ Weighted average shares outstanding 122.9 138.3 Additional shares assuming: Conversion of allocated Series B ESOP Convertible Preferred Stock 5.5 5.1 Exercise of stock options 1.9 3.8 Conversion of performance-based stock units 0.2 0.2 ------------ ------------ Weighted average shares outstanding as adjusted 130.5 147.4 ============ ============ Diluted earnings per share $ 1.01 $ 1.88 ============ ============
12 13 9. SUBSEQUENT EVENT On October 18, 2000, Delta announced plans for a $1.6 billion terminal expansion and redevelopment project at New York's John F. Kennedy International Airport. For information on this subject, see "Airport Facilities Project at John F. Kennedy International Airport" on page 2 of Delta's Current Report on Form 8-K dated November 7, 2000. On November 7, 2000, Delta agreed to sell in a public offering $1.5 billion aggregate principal amount of Pass Through Certificates, Series 2000-1 (Certificates), consisting of $341 million of 7.38% Class A-1 Certificates, $738 million of 7.57% Class A-2 Certificates, $183 million of 7.92% Class B Certificates, and $238 million of 7.78% Class C Certificates. Each class of Certificates represents an undivided interest in a pass through trust which will be formed by Delta and which will purchase equipment notes (Equipment Notes) issued by Delta and having the same interest rates and maturities as the related Certificates. Principal payments on the Equipment Notes related to the Class A-1 Certificates are amortizing with a final payment date of May 18, 2010; principal payments on the Equipment Notes related to the Class A-2, Class B and Class C Certificates are bullet maturities due November 18, 2010, November 18, 2010 and November 18, 2005, respectively. The Equipment Notes are full recourse obligations of Delta secured separately by a security interest in certain aircraft owned by Delta, consisting of 20 Boeing 737-832 aircraft, 18 Boeing 757-232 aircraft and 6 Boeing 767-332ER aircraft. The Certificates do not represent interests in or obligations of Delta. The closing of the sale of the Certificates is scheduled for November 16, 2000. Delta plans to use the net proceeds of this offering for general corporate purposes, including the repayment of the $500 million credit facility that Delta obtained to finance its purchase of ASA Holdings, Inc. in 1999. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 NET INCOME AND EARNINGS PER SHARE For the quarter ended September 30, 2000, Delta reported unaudited consolidated operating income of $510 million and net income of $133 million. Operating margin, which is the ratio of operating income to operating revenues, was 12%. For the quarter ended September 30, 1999, we recorded operating income of $336 million, net income of $278 million, and an operating margin of 9%. Excluding unusual items (as described below), net income was $273 million in the September 2000 quarter and $282 million in the September 1999 quarter. Basic earnings per share totaled $1.05 for the September 2000 quarter compared to $1.99 for the September 1999 quarter. Diluted earnings per share totaled $1.01 in the September 2000 13 14 quarter compared to $1.88 in the September 1999 quarter. Excluding unusual items, diluted earnings per share was $2.08 for the September 2000 quarter compared to $1.91 for the September 1999 quarter. UNUSUAL ITEMS During the September 2000 quarter, we recorded a $144 million charge, net of tax, as a result of the following unusual items: - a $141 million non-cash charge, net of tax, due to our adoption of SFAS 133. For additional information on this subject, see Note 7 of the Notes to Consolidated Financial Statements on pages 10-11 of this Form 10-Q. - a $13 million restructuring charge, net of tax, as a result of our decision to discontinue our Pacific gateway in Portland, Oregon. - a one-time $10 million non-cash gain, net of tax, related to our equity investment in WORLDSPAN, L.P. During the September 1999 quarter, we recorded a $3 million charge, net of tax, as a result of the following unusual items: - a $154 million gain, net of tax, from the sale of our equity interest in Singapore Airlines Limited and a portion of our equity investment in priceline. - a $91 million non-cash charge, net of tax, for asset writedowns and other special charges. - a $66 million cumulative effect charge, net of tax, for the adoption of Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements." For additional information on these matters, see Notes 2, 6 and 18, respectively, of the Notes to the Consolidated Financial Statements in our 2000 Annual Report to Shareowners. ACQUISITION OF ASA HOLDINGS, INC. AND COMAIR HOLDINGS, INC. We acquired ASA Holdings, Inc. (ASA) and Comair Holdings, Inc. (Comair) in fiscal 1999 and fiscal 2000, respectively. Our Consolidated Statement of Income for the September 2000 quarter includes the results of operations of ASA and Comair for that period. Our Consolidated Statement of Income for the September 1999 quarter includes the results of operations of ASA for that period. For additional information regarding our acquisition of ASA and Comair, see Note 17 of the Notes to the Consolidated Financial Statements in our 2000 Annual Report to Shareowners. 14 15 OPERATING REVENUES Our operating revenues totaled $4.3 billion in the September 2000 quarter, a 13% increase from $3.8 billion in the September 1999 quarter. Passenger revenue increased 13% to $4.1 billion, reflecting a 7% increase in revenue passenger miles and a 5% increase in passenger mile yield. These increases are due in part to the inclusion of Comair in our results of operations for the September 2000 quarter. NORTH AMERICAN PASSENGER REVENUES - North American passenger revenues rose 14% to $3.3 billion for the September 2000 quarter. Revenue passenger miles increased 8% on a capacity increase of 6%, while passenger mile yield increased 5%. These increases are primarily due to the inclusion of Comair, improved revenue management systems and a favorable U.S. economy. During the September 1999 quarter, our operations were adversely affected by flight cancellations related to Hurricane Floyd. INTERNATIONAL PASSENGER REVENUES - International passenger revenues increased 9% to $755 million during the September 2000 quarter. Revenue passenger miles increased 3% on a capacity increase of less than 1%, and passenger mile yield rose 6%. The increase in revenue passenger miles reflects Delta's continued international expansion, particularly in Latin American markets. The increase in passenger mile yield is primarily a result of stronger demand in the Atlantic market. CARGO REVENUES AND OTHER REVENUES - Cargo revenue rose less than 1% in the September 2000 quarter. Cargo ton miles increased 4%, while the cargo ton mile yield decreased 3%. The increase in cargo ton miles is attributable to higher mail and package volume from the growth in e-commerce. The decrease in cargo ton mile yield is due to increased competition, particularly in the European market. Other revenues increased 60% to $154 million, largely due to the inclusion of Comair and increases in revenue from codeshare and partner agreements. OPERATING EXPENSES Operating expenses for the September 2000 quarter totaled $3.8 billion, rising 10% from the September 1999 quarter. Operating capacity increased 5% to 40.2 billion available seat miles. Cost per available seat mile (CASM) increased 5% to 9.55 cents, while non-fuel CASM grew 1% to 8.22 cents. Excluding unusual items, operating expenses increased 14% from the September 1999 quarter and CASM increased 9% to 9.51 cents. Salaries and related costs grew 16%, reflecting a 14% increase in average full-time equivalent employees largely from the inclusion of Comair employees. The increase in salaries and related costs also reflects salary increases of 3% for pilots on January 1, 2000, and 3% for most domestic non-union employees on April 1, 2000. In addition, overtime costs increased due to heavier traffic, challenging weather and air traffic control issues. 15 16 Aircraft fuel expense increased 45% during the September 2000 quarter, with the average fuel price per gallon rising 40% to 70.36 cents. Total gallons consumed increased 4% due to increased operations on a 5% rise in capacity. Delta's fuel cost per gallon is net of gains of approximately $160 million on fuel hedging contracts, which hedged approximately 61% of our aircraft fuel requirements during the September 2000 quarter. Depreciation and amortization expense rose 7% due to the acquisition of new flight and ground equipment as well as the inclusion of Comair. Other selling expenses increased 19% due to higher advertising costs related to our new branding and our SkyTeam relationship, as well as the inclusion of Comair. Passenger commissions expense declined 19%, reflecting changes to the travel agent commission rate structure and our customers' increased use of lower cost distribution channels such as the Internet. Internet sales accounted for approximately 10% of passenger revenue in the September 2000 quarter compared to 5% in the September 1999 quarter. Contracted services expense increased 12% primarily due to the inclusion of Comair. Landing fees and other rents rose 11%, aircraft rental expense increased 19%, and aircraft maintenance materials and outside repair expense grew 11%, primarily due to the inclusion of Comair. The 4% reduction in other costs was primarily attributable to certain non-payroll tax initiatives and a reduction in discretionary spending. OTHER INCOME (EXPENSE) Nonoperating expense in the September 2000 quarter was $118 million, compared to nonoperating income of $233 million in the September 1999 quarter. This change is primarily a result of $252 million in pretax gains from the sale of investments in the September 1999 quarter. Interest expense, net increased 94% due to higher levels of debt outstanding. In addition, we recorded a $66 million pretax charge related to the adoption of SFAS 133. This reflects losses recognized on equity warrants and options of $127 million offset by fuel hedge ineffectiveness gains of $61 million (see Note 7). FINANCIAL CONDITION Cash and cash equivalents and short-term investments totaled $1.9 billion at September 30, 2000, compared to $1.7 billion at June 30, 2000. Our principal sources and uses of cash during the three months ended September 30, 2000 are detailed below: SOURCES: - Generated $1.0 billion of cash from operations. - Issued $66 million in long-term debt for aircraft financing. - Generated $203 million from the sale and leaseback of seven CRJ-200 aircraft and the sale of five B-727-200 aircraft, two EMB-120 aircraft, and one B-767-300ER aircraft. - Issued 347,120 shares of common stock for $14 million. 16 17 USES: - Invested $986 million in flight equipment and $107 million in ground property and equipment. - Made principal payments of $73 million on long-term debt, capital lease obligations and notes payable. - Paid $3 million in cash dividends on our common stock. Delta may prepay its long-term debt and repurchase common stock from time to time. For information regarding our common stock repurchase authorization, see Note 11 of the Notes to the Consolidated Financial Statements (page 49) in our 2000 Annual Report to Shareowners. As of September 30, 2000, we had a negative working capital position of $2.2 billion, compared to negative working capital of $2.5 billion at June 30, 2000. A negative working capital position is normal for us, primarily due to our air traffic liability, and does not indicate a lack of liquidity. We expect to meet our obligations as they become due through available cash, short-term investments and internally generated funds, supplemented as necessary by borrowings and proceeds from sale and leaseback transactions. At September 30, 2000, we had $1.25 billion of credit available under our 1997 Bank Credit Agreement. Long-term debt and capital lease obligations (including current maturities) totaled $5.2 billion at September 30, 2000, compared to $5.1 billion at June 30, 2000. Shareowners' equity was $5.5 billion at September 30, 2000 and $4.9 billion at June 30, 2000. Our net debt-to-capital position (including current maturities) was 70% at September 30, 2000, and 71% at June 30, 2000. For additional information regarding our credit agreements and long-term debt, see Note 5 of the Notes to the Consolidated Financial Statements (pages 42-44) in our 2000 Annual Report to Shareowners. In addition, on November 7, 2000, we agreed to sell in a public offering $1.5 billion aggregate principal amount of Pass Through Certificates (see Note 9 of the Notes to the Consolidated Financial Statements in this Form 10-Q). At its meeting on October 25, 2000, our Board of Directors declared a cash dividend of 2.5 cents per common share, payable December 1, 2000, to shareowners of record on November 8, 2000. RECENTLY ADOPTED ACCOUNTING STANDARDS Effective July 1, 2000, we adopted SFAS 133, as amended. In accordance with SFAS 133, we changed our method of accounting for derivative instruments. All derivatives are now reflected on our balance sheet at fair market value. For additional information on our adoption of SFAS 133, see Note 7 of the Notes to the Consolidated Financial Statements in this Form 10-Q. Effective July 1, 1999, we adopted SEC Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." The adoption of SAB 101 resulted in a cumulative effect charge of $66 million, net of tax, and decreased net income for fiscal 2000 by $21 million, net of 17 18 tax. For additional information, see Note 18 (page 52) of the Notes to the Consolidated Financial Statements in our 2000 Annual Report to Shareowners. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For information regarding our investment in Equant, N.V. and our investment in priceline, see Note 2 of the Notes to the Consolidated Financial Statements (pages 39-41) in our 2000 Annual Report to Shareowners. For additional information regarding Delta's exposure to market risks, see "Market Risks Associated With Financial Instruments" (pages 31-32), as well as Notes 2 and 4 (pages 39-42) of the Notes to the Consolidated Financial Statements, in our 2000 Annual Report to Shareowners. 18 19 [LETTERHEAD OF ARTHUR ANDERSEN LLP] REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Delta Air Lines, Inc.: We have reviewed the accompanying consolidated balance sheet of DELTA AIR LINES, INC. (a Delaware corporation) AND SUBSIDIARIES as of September 30, 2000, and the related consolidated statements of income and the condensed consolidated statements of cash flows for the three-month periods ended September 30, 2000 and 1999. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP ---------------------------------------- Atlanta, Georgia November 9, 2000 19 20 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES Under the Delta Air Lines, Inc. Directors' Deferred Compensation Plan, members of our Board of Directors may defer for a specified period all or any part of their cash compensation earned as a director. A participating director may choose an investment return on the deferred amount from the investment return choices available under the Delta Family-Care Savings Plan, a qualified defined contribution pension plan for eligible Delta personnel. One of the investment return choices under the Savings Plan is the Delta Common Stock Fund, a fund invested primarily in Delta's common stock. During the quarter ended September 30, 2000, participants in the Plan deferred $59,000 in the Delta Common Stock Fund investment return choice, which is equivalent to approximately 1,330 shares of Delta common stock at prevailing market prices. These transactions were not registered under the Securities Act of 1933 as amended, in reliance on Section 4(2) of that Act. 20 21 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At our Annual Meeting of Shareowners held on October 25, 2000, the owners of our common stock and Series B ESOP Convertible Preferred Stock, voting together as a single class, took the following actions: 1. Elected the persons named below to our Board of Directors by the following vote:
FOR WITHHELD Edwin L. Artzt 104,279,844 20,576,048 James L. Broadhead 121,385,923 3,469,969 Edward H. Budd 121,551,548 3,304,344 R. Eugene Cartledge 121,486,221 3,369,671 Mary Johnston Evans 121,438,472 3,417,420 George M.C. Fisher 121,611,423 3,244,469 David R. Goode 121,537,559 3,318,333 Gerald Grinstein 121,479,592 3,376,300 Leo F. Mullin 121,500,735 3,355,157 John F. Smith, Jr. 121,569,450 3,286,442 Andrew J. Young 120,968,192 3,887,700
There were no broker non-votes on this matter. 2. Ratified the appointment of Arthur Andersen LLP as our independent auditors for the calendar year ending December 31, 2000 by a vote of 123,517,819 FOR; 766,169 AGAINST; and 571,904 ABSTENTIONS. There were no broker non-votes on this matter. 3. Approved the adoption of the Delta 2000 Performance Compensation Plan by a vote of 79,123,856 FOR; 32,906,291 AGAINST; and 1,142,359 ABSTENTIONS. There were 11,683,386 broker non-votes on this matter. 4. Defeated a shareowner proposal relating to cumulative voting for directors by a vote of 13,957,851 FOR; 86,632,427 AGAINST; and 12,582,228 ABSTENTIONS. There were 11,683,386 broker non-votes on this matter. 5. Defeated a shareowner proposal linking executive compensation to employee satisfaction by a vote of 12,861,664 FOR; 99,325,244 AGAINST; and 985,598 ABSTENTIONS. There were 11,683,386 broker non-votes on this matter. 6. Defeated a shareowner proposal relating to executive severance agreements by a vote of 34,871,403 FOR; 76,379,825 AGAINST; and 1,921,278 ABSTENTIONS. There were 11,683,386 broker non-votes on this matter. 7. Defeated a shareowner proposal relating to executive stock option grants by a vote of 26,940,194 FOR; 84,278,998 AGAINST; and 1,953,314 ABSTENTIONS. There were 11,683,386 broker non-votes on this matter. 21 22 ITEM 5. OTHER INFORMATION BROAD-BASED STOCK OPTION PLANS For information regarding our broad-based employee stock option plans, see Note 15 of our 2000 Annual Report to Shareowners (pages 50-51) and Note 2 of the Notes to the Consolidated Financial Statements in this Form 10-Q. RE-PRICING OF PRICELINE.COM WARRANTS On September 30, 2000, Delta held a warrant which, subject to certain conditions, gave Delta the right to purchase up to 5.5 million shares of common stock of priceline for $56.625 per share. On November 2, 2000, Delta and priceline amended their warrant agreement (1) to reduce the 5.5 million shares underlying the warrant to 4.7 million shares; (2) to reduce Delta's per share purchase price for those shares to $4.7188; and (3) to provide that Delta may not sell or otherwise transfer more than 50% of the warrant or the underlying shares until November 2, 2001. In the opinion of management, the re-pricing of the warrant did not have a material impact on the Consolidated Financial Statements. PERSONNEL MATTERS In October 2000, Delta's approximately 11,000 ramp and cargo employees rejected representation by the Transport Workers Union of America, with 19% of the employees voting for union representation. The National Mediation Board (NMB) has authorized an election to determine whether to certify the International Association of Machinists and Aerospace Workers (IAM) as the collective bargaining representative of ASA's approximately 300 mechanics and related employees. The NMB will mail ballots to covered employees on November 15, 2000, and plans to announce the results of the vote on December 15, 2000. For the IAM to be certified as the representative of these employees, more than 50% of the employees must vote for union representation. For additional information regarding collective bargaining matters at Delta, ASA and Comair, see "Collective Bargaining Matters" in our 2000 Annual Report to Shareowners (pages 30-31), and "Personnel" in our Annual Report on Form 10-K (page 7) for the fiscal year ended June 30, 2000 (2000 Form 10-K). LEGAL PROCEEDINGS On October 20, 2000, the Superior Court of Fulton County, Georgia approved the settlement of the ASA shareowner litigation described in Delta's 2000 Form 10-K (pages 11-12). The time for appealing the Superior Court's order has not yet expired. On September 25, 2000, the Circuit Court of Boone County, Kentucky approved the settlement of the Comair shareowner litigation described in Delta's 2000 Form 10-K (page 12). The time for appealing the Circuit Court's order has now expired. 22 23 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 12. Computation of ratio of earnings to fixed charges. 15. Letter from Arthur Andersen LLP regarding unaudited interim financial information. 27. Financial Data Schedule (For SEC use only). (b) Reports on Form 8-K During the quarter ended September 30, 2000, Delta filed a Current Report on Form 8-K dated July 13, 2000, reporting that Delta's Board of Directors had approved a change of Delta's fiscal year end from June 30 to December 31, effective December 31, 2000. Subsequent to September 30, 2000, Delta filed a Current Report on Form 8-K dated November 7, 2000, regarding, among other things, its plans for a terminal expansion and redevelopment project at New York's John F. Kennedy International Airport. 23 24 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Delta Air Lines, Inc. --------------------- (Registrant) By: /s/ M. Michele Burns --------------------- M. Michele Burns Executive Vice President and Chief Financial Officer November 14, 2000 24