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 March 31, 1996
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 April 30, 1996:
Common Stock, $3.00 par value - 51,410,440 shares outstanding
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- -----------------------------
DELTA AIR LINES, INC.
Consolidated Balance Sheets (Unaudited)
(In Millions)
March 31 June 30
ASSETS 1996 1995
- ------ --------- ---------
CURRENT ASSETS:
Cash and cash equivalents $ 1,056 $ 1,233
Short-term investments 504 529
Accounts and notes receivable, net 1,058 755
Maintenance and operating supplies 60 68
Deferred income taxes 210 234
Prepaid expenses and other 244 195
-------- --------
Total current assets 3,132 3,014
-------- --------
PROPERTY AND EQUIPMENT:
Flight equipment owned 7,950 9,288
Less: Accumulated depreciation 3,149 4,209
-------- --------
4,801 5,079
-------- --------
Flight equipment under capital leases 528 537
Less: Accumulated amortization 127 99
-------- --------
401 438
-------- --------
Ground property and equipment 2,590 2,442
Less: Accumulated depreciation 1,492 1,354
-------- --------
1,098 1,088
-------- --------
Advance payments for equipment 285 331
-------- --------
6,585 6,936
-------- --------
OTHER ASSETS:
Deferred income taxes 648 506
Marketable equity securities 475 398
Postemployment benefits 301 294
Cost in excess of net assets acquired, net 268 274
Non-operating property, net 148 155
Investments in associated companies 268 265
Leasehold and operating rights, net 145 177
Other 141 124
-------- --------
2,394 2,193
-------- --------
$12,111 $12,143
======== ========
The accompanying notes are an integral part of these consolidated balance
sheets.
2
DELTA AIR LINES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN MILLIONS EXCEPT SHARE AMOUNTS)
MARCH 31 JUNE 30
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
- ------------------------------------ -------- -------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 159 $ 151
Current obligations under capital leases 57 61
Accounts payable and accrued liabilities 1,742 1,621
Air traffic liability 1,340 1,143
Accrued vacation pay 225 167
Accrued rent 175 235
Income taxes payable 38 63
------- -------
Total current liabilities 3,736 3,441
------- -------
NONCURRENT LIABILITIES:
Long-term debt 2,462 2,683
Postretirement benefits 1,777 1,714
Accrued rent 599 556
Capital leases 391 438
Other 235 395
------- -------
5,464 5,786
------- -------
DEFERRED CREDITS:
Deferred gain on sale and leaseback transactions 817 860
Manufacturers and other credits 122 109
------- -------
939 969
------- -------
COMMITMENTS AND CONTINGENCIES (NOTES 6 AND 8)
EMPLOYEE STOCK OWNERSHIP PLAN
PREFERRED STOCK:
Series B ESOP Convertible Preferred Stock,
$1.00 par value, $72.00 stated and liquidation value;
Issued and outstanding 6,751,289 shares at March 31,
1996 and 6,786,632 shares at June 30, 1995 486 489
Less: Unearned compensation under
employee stock ownership plan 348 369
------- -------
138 120
------- -------
STOCKHOLDERS' EQUITY:
Series C Convertible Preferred Stock,
$1.00 par value, $50,000 liquidation preference;
Issued and outstanding 22,995 shares at March 31, 1996
and 23,000 shares at June 30, 1995 - -
Common stock, $3.00 par value; Authorized, 150,000,000 shares;
Issued 55,020,265 shares at March 31, 1996
and 54,537,103 shares at June 30, 1995 165 164
Additional paid-in capital 2,043 2,016
Net unrealized gain on marketable securities 132 83
Accumulated deficit (263) (184)
Less: Treasury stock at cost, 3,639,842 shares at
March 31, 1996, and 3,721,093 shares at June 30, 1995 243 252
------- -------
1,834 1,827
------- -------
$12,111 $12,143
======= =======
The accompanying notes are an integral part of these consolidated balance sheets.
3
DELTA AIR LINES, INC.
Consolidated Statements of Operations
(Unaudited)
(In Millions, except Share Data)
Three Months Ended
March 31
-------------------
1996 1995
-------- --------
OPERATING REVENUES:
Passenger $ 2,774 $ 2,685
Cargo 126 134
Other, net 64 83
-------- --------
Total operating revenues 2,964 2,902
-------- --------
OPERATING EXPENSES:
Salaries and related costs 1,077 1,102
Aircraft fuel 365 321
Passenger commissions 241 285
Contracted services 187 155
Other selling expenses 159 172
Depreciation and amortization 156 147
Aircraft rent 138 171
Aircraft maintenance materials and outside repairs 88 109
Passenger service 87 92
Facilities and other rent 82 110
Landing fees 59 65
Restructuring and other non-recurring charges 556 -
Other 156 133
-------- --------
Total operating expenses 3,351 2,862
-------- --------
OPERATING INCOME (LOSS) (387) 40
-------- --------
OTHER INCOME (EXPENSE):
Interest expense (56) (70)
Interest capitalized 6 8
Interest income 18 21
Miscellaneous, net (27) (10)
-------- --------
(59) (51)
-------- --------
LOSS BEFORE INCOME TAXES (446) (11)
INCOME TAXES CREDITED, NET 170 -
-------- --------
NET LOSS (276) (11)
PREFERRED STOCK DIVIDENDS (22) (22)
-------- --------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (298) $ (33)
-------- --------
PRIMARY AND FULLY DILUTED LOSS PER SHARE $ (5.77) $ (0.66)
-------- --------
WEIGHTED AVERAGE SHARES USED IN PER SHARE COMPUTATION:
Primary 51,652,524 50,637,033
Fully Diluted 51,652,524 50,637,033
DIVIDENDS PER COMMON SHARE $ 0.05 $ 0.05
The accompanying notes are an integral part of these consolidated statements.
4
DELTA AIR LINES, INC.
Statistical Summary
(Unaudited)
Three Months Ended
March 31
---------------------
1996 1995
-------- --------
Statistical Summary:
Revenue Passengers Enplaned (000) 22,459 20,900
Revenue Passenger Miles (millions) 20,972 19,758
Available Seat Miles (millions) 31,634 31,571
Passenger Mile Yield 13.23 c 13.59 c
Operating Revenue per Available Seat Mile 9.37 c 9.19 c
Operating Cost Per Available Seat Mile 10.59 c 9.07 c
Operating Cost per Available Seat Mile -
Excluding Restructuring and
Other Non-Recurring Charges 8.84 c 9.07 c
Passenger Load Factor 66.30 % 62.58 %
Break-Even Passenger Load Factor 75.55 % 61.64 %
Break-Even Passenger Load Factor -
Excluding Restructuring and
Other Non-Recurring Charges 62.26 % 61.64 %
Revenue Ton Miles (millions) 2,427 2,332
Cargo Ton Miles (millions) 330 356
Cargo Ton Mile Yield 38.06 c 37.77 c
Fuel Gallons Consumed (millions) 604 609
Average Price Per Fuel Gallon 60.39 c 52.72 c
Number of Aircraft in Fleet at End of Period 539 544
Full-time Equivalent Employees at End of Period 57,278 60,315
5
DELTA AIR LINES, INC.
Consolidated Statements of Operations
(Unaudited)
(In Millions, except Share Data)
Nine Months Ended
March 31
---------------------
1996 1995
-------- --------
OPERATING REVENUES:
Passenger $ 8,486 $ 8,315
Cargo 389 427
Other, net 220 236
-------- --------
Total operating revenues 9,095 8,978
-------- --------
OPERATING EXPENSES:
Salaries and related costs 3,165 3,314
Aircraft fuel 1,068 1,039
Passenger commissions 765 905
Contracted services 522 397
Other selling expenses 454 487
Depreciation and amortization 476 467
Aircraft rent 417 515
Aircraft maintenance materials and outside repairs 299 332
Passenger service 282 343
Facilities and other rent 304 322
Landing fees 184 198
Restructuring and other non-recurring charges 556 -
Other 436 447
-------- --------
Total operating expenses 8,928 8,766
-------- --------
OPERATING INCOME 167 212
OTHER INCOME (EXPENSE):
Interest expense (204) (220)
Interest capitalized 20 23
Interest income 65 71
Miscellaneous, net (35) 2
-------- --------
(154) (124)
-------- --------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 13 88
INCOME TAXES PROVIDED, NET (19) (45)
-------- --------
NET INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE (6) 43
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX - 114
-------- --------
NET INCOME (LOSS) (6) 157
PREFERRED STOCK DIVIDENDS (66) (66)
-------- --------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (72) $ 91
======== ========
PRIMARY AND FULLY DILUTED INCOME (LOSS) PER COMMON SHARE:
Before cumulative effect of accounting change $ (1.39) $ (0.45)
Cumulative effect of accounting change - 2.25
-------- --------
$ (1.39) $ 1.80
======== ========
WEIGHTED AVERAGE SHARES USED IN PER SHARE COMPUTATION:
Primary 51,484,055 50,600,736
Fully Diluted 51,484,055 50,600,736
DIVIDENDS PER COMMON SHARE $ 0.15 $ 0.15
The accompanying notes are an integral part of these consolidated statements.
6
DELTA AIR LINES, INC.
Statistical Summary
(Unaudited)
Nine Months Ended
March 31
---------------------
1996 1995
-------- --------
Statistical Summary:
Revenue Passengers Enplaned (000) 66,427 66,769
Revenue Passenger Miles (millions) 64,515 64,566
Available Seat Miles (millions) 97,251 97,660
Passenger Mile Yield 13.15 c 12.88 c
Operating Revenue per Available Seat Mile 9.35 c 9.19 c
Operating Cost Per Available Seat Mile 9.18 c 8.98 c
Operating Cost Per Available Seat Mile -
Excluding Restructuring and
Other Non-Recurring Charges 8.61 c 8.98 c
Passenger Load Factor 66.34 % 66.11 %
Break-Even Passenger Load Factor 65.03 % 64.43 %
Break-Even Passenger Load Factor -
Excluding Restructuring and
Other Non-Recurring Charges 60.68 % 64.43 %
Revenue Ton Miles (millions) 7,477 7,597
Cargo Ton Miles (millions) 1,025 1,140
Cargo Ton Mile Yield 37.99 c 37.45 c
Fuel Gallons Consumed (millions) 1,863 1,902
Average Price Per Fuel Gallon 57.30 c 54.66 c
Number of Aircraft in Fleet at End of Period 539 544
Full-Time Equivalent Employees at End of Period 57,278 60,315
7
DELTA AIR LINES, INC.
Consolidated Statements of Cash Flows (Unaudited)
(In Millions)
Nine Months Ended
March 31
-----------------
1996 1995
-------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (6) $ 157
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Cumulative effect of accounting change - (114)
Restructuring and other non-recurring charges 556 -
Depreciation and amortization 476 467
Deferred income taxes (146) (38)
Amortization of deferred gain on sale and
leaseback transactions (43) (44)
Rental expense in excess of (less than) payments (17) 9
Postemployment benefits expense less than payments (18) (14)
Pension expense less than payments (97) (71)
Compensation under ESOP 29 31
Postretirement benefits expense in excess of payments 47 55
Changes in certain assets and liabilities:
Decrease (increase) in receivables (303) 224
Decrease (increase) in other current assets (41) 3
Increase (decrease) in air traffic liability 197 (144)
Increase (decrease) in accounts payable and
accrued liabilities 121 (35)
Increase in other payables 33 51
Decrease in other noncurrent liabilities (41) -
Other, net (88) 47
------ ------
Net cash provided by operating activities 659 584
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions:
Flight equipment, including advance payments (381) (255)
Ground property and equipment (177) (113)
Decrease (increase) in short-term investments, net 25 (355)
Debtor-in-possession loan repayment - 115
Proceeds from sale of flight equipment 23 99
------ ------
Net cash used in investing activities (510) (509)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 24 -
Payments on long-term debt and capital lease obligations (267) (557)
Net short-term borrowings - 29
Cash dividends (83) (83)
------ ------
Net cash used in financing activities (326) (611)
------ ------
NET DECREASE IN CASH AND CASH EQUIVALENTS (177) (536)
Cash and cash equivalents at beginning of period 1,233 1,302
------ ------
Cash and cash equivalents at end of period $1,056 $ 766
====== ======
8
DELTA AIR LINES, INC.
Notes to Consolidated Financial Statements
March 31, 1996
(Unaudited)
1. ACCOUNTING AND REPORTING POLICIES:
The Company's accounting and reporting policies are summarized in Note 1
(page 27) of the Notes to Consolidated Financial Statements in Delta's 1995
Annual Report to Stockholders. These interim financial statements should be
read in conjunction with the financial statements and the notes thereto
included in the Company's 1995 Annual Report to Stockholders. In the
opinion of management, the accompanying unaudited financial statements
reflect all adjustments, consisting of normal recurring accruals (except
with respect to the $556 million pretax charge for restructuring and other
non-recurring charges discussed in Note 11), necessary for a fair statement
of results for the interim periods.
Effective January 1, 1996, Delta began recording revenue from charter
operations as passenger revenue. Prior to that date, revenue from charter
operations had been recorded as other operating revenue, net. Certain
amounts in the Consolidated Statements of Operations for the three months
and nine months ended March 31, 1995, and the nine months ended March 31,
1996, have been reclassified to conform with the current financial statement
presentation.
During fiscal 1996, Delta elected to adopt before its required
implementation date Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" (SFAS 121).
2. INVESTMENTS IN DEBT AND EQUITY SECURITIES:
At March 31, 1996, the gross unrealized gain on the Company's investment
in Singapore Airlines Limited was $184 million and the gross unrealized gain
on the Company's investment in Swissair, Swiss Air Transport Company Ltd.
was $25 million. The $132 million unrealized gain, net of the related $77
million deferred tax provision, on these investments is reflected in
stockholders' equity.
Delta's other investments in available-for-sale securities are recorded as
short-term investments in the Company's Consolidated Balance Sheets. The
proceeds from sales of these securities during the March 1996 quarter
totaled $143 million, which resulted in a realized loss, computed on a
specific identification basis, of less than $1 million. The net unrealized
gain on short-term investments reflected in stockholders' equity at
March 31, 1996, was less than $1 million, net of the related tax benefit.
9
3. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT:
Fuel Hedging
Under the Company's fuel hedging program, the Company may enter into
certain contracts with counterparties, not to exceed one year in duration,
to manage the Company's exposure to increases in jet fuel prices. Gains and
losses resulting from fuel hedging transactions are recognized as a
component of fuel expense when the underlying fuel being hedged is used.
Any premiums paid to enter into hedging contracts are recorded as a prepaid
expense and amortized to fuel expense over the respective contract periods.
At March 31, 1996, the fair value of outstanding contracts was immaterial.
The Company is exposed to losses in the event of non-performance by
counterparties to fuel hedging transactions, but it does not expect any
counterparty to fail to meet its obligations. To manage its credit risk,
the Company selects counterparties based on their credit ratings, limits
its exposure to any one counterparty under defined guidelines, and monitors
the market position of the program and its relative market position with
each counterparty.
Hull and General Liability Insurance
During the December 1995 quarter, the Company renewed its aircraft hull and
general liability insurance policies (the Policies) for the year beginning
December 18, 1995 and ending December 17, 1996. In entering into these
renewals, it was Delta's goal to maintain insurance in amounts that it
deems adequate while achieving premium savings under the Policies.
Accordingly, Delta's captive insurance subsidiary agreed to reimburse the
primary insurers for losses under the Policies in an amount not to exceed
$100 million per occurrence and $118 million in the aggregate for this
policy year. The obligations of the primary insurers in relation to the
insureds under the Policies will not be limited or reduced in any way by
this reimbursement obligation.
The reimbursement obligation of Delta's captive insurance subsidiary to the
primary insurers will be supported by letters of credit issued by one or
more third parties. The letters of credit will have an aggregate stated
amount equal to the maximum reimbursement obligation. To the extent the
primary insurers make draws under the letters of credit, Delta will be
required to reimburse the issuers of the letters of credit.
Delta will accrue amounts estimated to be payable for probable losses under
the reimbursement agreements with the primary insurers, as incurred. The
methods of making such estimates and establishing the resulting accrued
liabilities will be reviewed on an ongoing basis and adjusted as required.
10
4. SALE OF RECEIVABLES:
During fiscal 1995, Delta elected to discontinue selling new receivables
under a revolving accounts receivable facility, and the Senior Certificate
related to this facility, which was in the principal amount of $229 million
at June 30, 1995, was reduced to $0 on August 14, 1995. This transaction
was recorded as a reduction of cash from operating activities in the
Company's Consolidated Statements of Cash Flows for the nine months ended
March 31, 1996, and an increase in accounts receivable on the Company's
Consolidated Balance Sheets at March 31, 1996. For additional information
regarding the sale of receivables, see Note 5 (page 30) of the Notes to
Consolidated Financial Statements in Delta's 1995 Annual Report to
Stockholders.
5. LONG-TERM DEBT:
During the March 1996 quarter, the Company voluntarily repurchased and
retired $98 million principal amount of its long-term debt. As a result of
these transactions, the Company recognized a net pretax loss of $7 million
during the quarter ended March 31, 1996; this amount is included in
miscellaneous, net in the Company's Consolidated Statements of Operations.
The Company's 1995 Bank Credit Agreement provides for unsecured borrowings
of up to $1.25 billion on a revolving basis until September 26, 2000. At
March 31, 1996, no borrowings were outstanding under the 1995 Bank Credit
Agreement, but there is currently outstanding a letter of credit in the
amount of $470 million to credit enhance the Delta Family-Care Savings
Plan's 1990 Series C Guaranteed Serial ESOP Notes, which are guaranteed by
Delta. The letter of credit, which is utilizing $470 million of the
available commitment under the 1995 Bank Credit Agreement, covers the $290
million outstanding principal amount of the 1990 Series C Guaranteed Serial
ESOP Notes, up to $148 million of Make Whole Premium Amount and
approximately one year of interest on the 1990 Series C Guaranteed Serial
ESOP Notes. For additional information regarding Delta's long-term debt,
including the 1990 Series C Guaranteed Serial ESOP Notes, see Note 4 (page
8) of the Notes to Consolidated Financial Statements in Delta's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1995 and Note 7
(page 30) of the Notes to Consolidated Financial Statements in Delta's 1995
Annual Report to Stockholders. As of May 6, 1996, Delta's long-term senior
unsecured debt was rated Baa3 by Moody's and BB+ by Standard & Poor's.
During the nine months ended March 31, 1996 and 1995, Delta made cash
interest payments, net of interest capitalized, of $151 million and $159
million, respectively.
11
6. AIRCRAFT PURCHASE AND SALE COMMITMENTS:
On January 29, 1996, Delta and The Boeing Company (Boeing) amended certain
contracts under which Delta purchases aircraft from Boeing. As a result of
these amendments, Delta received refunds of certain advance payments from
Boeing. These refunds were in excess of amounts Delta paid for flight
equipment, including advance payments, during the quarter ended March 31,
1996. For additional information regarding the Boeing contract amendments,
see Note 6 (page 12) of the Notes to Consolidated Financial Statements in
Delta's Quarterly Report on Form 10-Q/A for the quarter ended December 31,
1995.
At March 31, 1996, the Company's aircraft fleet, purchase commitments and
options were:
CURRENT FLEET
-----------------------
AIRCRAFT TYPE OWNED LEASED TOTAL ORDERS OPTIONS
--------------- ----- ------ ----- ------ -------
B-727-200 106 26 132 - -
B-737-200 1 53 54 - -
B-737-300 - 13 13 - -
B-757-200 45 41 86 4 29
B-767-200 15 - 15 - -
B-767-300 2 24 26 2 -
B-767-300ER 9 7 16 15 14
L-1011-1 31 - 31 - -
L-1011-200 1 - 1 - -
L-1011-250 6 - 6 - -
L-1011-500 17 - 17 - -
MD-11 4 7 11 4 21
MD-88 63 57 120 - 19
MD-90 11 - 11 28 50
--- --- --- -- ---
311 228 539 53 133
=== === === == ===
The aircraft orders include eight MD-90 aircraft scheduled for delivery after
fiscal 1996 that are subject to reconfirmation by Delta. The MD-88 aircraft
options may be converted to MD-90 aircraft orders, and the B-767-300ER
aircraft options may be converted to B-767-300 aircraft orders, at Delta's
election.
Subsequent to March 31, 1996, Delta accepted delivery of one MD-11 aircraft
and one MD-90 aircraft. Additionally, Delta returned three B-727-200 aircraft
to their lessors.
12
Future expenditures for aircraft, engines and engine hushkits on firm order
at March 31, 1996, are estimated to be $2.5 billion, excluding aircraft
orders subject to reconfirmation by Delta, as follows:
AMOUNT
YEARS ENDING JUNE 30 (IN MILLIONS)
-------------------- -------------
Remainder of fiscal year 1996 $ 190
1997 860
1998 850
1999 460
2000 70
After 2000 90
------
Total $2,520
======
7. POSTEMPLOYMENT BENEFITS:
The Company provides certain benefits to its former or inactive
employees after employment but before retirement. Such benefits primarily
include those related to disability and survivorship plans. Effective July
1, 1994, Delta adopted Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits" (SFAS 112), which
requires recognition of the liability for postemployment benefits during the
period of employment.
Adoption of SFAS 112 resulted in a cumulative after-tax transition
benefit of $114 million for the nine months ended March 31, 1995, primarily
due to the net overfunded status of the Company's disability and
survivorship plans. Future period expenses will vary based on actual claims
experience and the return on plan assets.
8. CONTINGENCIES:
The Company is a defendant in certain legal actions relating to
alleged employment discrimination practices, antitrust matters,
environmental issues and other matters concerning the Company's business.
Although the ultimate outcome of these matters cannot be predicted with
certainty and could have a material adverse effect on Delta's consolidated
financial condition, results of operations or liquidity, management
presently believes that the resolution of these actions is not likely to
have a material adverse effect on Delta's consolidated financial condition,
results of operations or liquidity.
13
9. STOCKHOLDERS' EQUITY:
During the March 1996 quarter, the Company issued 169,110 common shares, at
an average price of $53.08 per share, under the 1989 Stock Incentive Plan,
2,092 common shares, at an average price of $75.15 per share, under the
Dividend Reinvestment and Stock Purchase Plan, and 29 common shares, at an
average price of $74.72 per share, under the Non-Employee Directors' Stock
Plan. The Company also issued 2,223 common shares upon the conversion of
2,922 depositary shares (each of which represents 1/1,000th of a share of
Series C Convertible Preferred Stock), and 151 common shares upon the
conversion of less than $1 million principal amount at stated maturity of
the 3.23% Convertible Subordinated Notes due 2003. Additionally, during the
March 1996 quarter, the Company transferred from its treasury, at an average
cost of $67.80 per share, 50,815 common shares to the Delta Family-Care
Savings Plan and 37 common shares under the 1989 Stock Incentive Plan.
At March 31, 1996, 5,355,400 common shares were reserved for issuance under
the 1989 Stock Incentive Plan; 5,791,417 common shares were reserved for
conversion of the Series B ESOP Convertible Preferred Stock; 17,486,809
common shares were reserved for conversion of the Series C Convertible
Preferred Stock; and 10,147,579 common shares were reserved for conversion
of the 3.23% Convertible Subordinated Notes due 2003.
10. INCOME TAXES:
Income taxes are provided at the estimated annual effective tax rate, which
differs from the federal statutory rate of 35%, primarily due to state
income taxes and the effect of certain expenses that are not deductible for
income tax purposes.
The Company made income tax payments in excess of refunds received of $191
million and $25 million during the nine months ended March 31, 1996 and
1995, respectively.
11. RESTRUCTURING CHARGES:
During the March 1996 quarter, Delta recorded a $556 million
pretax charge for restructuring and other non-recurring charges. The
charges include a $452 million write-down of Delta's Lockheed L-1011 fleet
and related assets. In connection with its decision to accelerate the
replacement of its 55 L-1011 aircraft fleet, the Company performed an
evaluation to determine, in accordance with SFAS 121, if future cash flows
(undiscounted and without interest charges) expected to result from the use
and the eventual disposition of the L-1011 fleet will be less than the
aggregate carrying amount of the L-1011 aircraft and related assets. As a
result of the evaluation, the Company's management determined that the
estimated future cash flows expected to be generated by L-1011 assets will
be less than their carrying amount, and therefore the L-1011 assets are
impaired as defined by SFAS 121. When impairment of an asset exists,
entities are required to write-down the related asset to current fair market
value. The reduced carrying amount is considered the new cost basis of the
related assets under SFAS 121; accordingly, reduction of the L-1011 assets'
original cost basis of approximately $1.738 billion, including the $452
million write-down noted above, is reflected in the accompanying
Consolidated Balance Sheet at March 31, 1996. In
14
determining fair market value of L-1011 assets, the Company considered
recent transactions involving sales of L-1011 aircraft and market trends in
disposition of aircraft.
The remaining $104 million in restructuring and other non-
recurring charges, net of reversals of approximately $45 million related to
the Company's $526 million restructuring charge recorded in June 1994,
represents expenses related to the continuation of the Company's Leadership
7.5 cost reduction program, including previously announced non-pilot
workforce reductions, lease termination and other costs associated with
discontinued routes and abandoned facilities.
12. SUBSEQUENT EVENTS:
On April 25, 1996, Delta's Board of Directors adopted, subject to
stockholder approval, two broad-based non-qualified stock option programs
for Delta personnel involving approximately 24.7 million shares of Delta
common stock. For additional information see Part II, Item 5 of this Form
10-Q.
On April 25, 1996, Delta's Board of Directors authorized the Company to
repurchase up to 24.7 million shares of its common stock and common stock
equivalents. For additional information see Part II, Item 5 of this Form
10-Q.
On April 29, 1996, Delta and the Air Line Pilots Association, International
entered into a new collective bargaining agreement for the Company's
approximately 8,000 pilots, which provides for, among other things, an
enhanced early retirement program for up to 500 pilots. For additional
information see Part II, Item 5 of this Form 10-Q.
At May 15, 1996, Delta had outstanding approximately $800 million principal
amount at stated maturity of 3.23 % Convertible Subordinated Notes due June
15, 2003 (the Notes). On May 15, 1996, the Company gave notice that it has
elected to redeem effective June 15, 1996 all of the outstanding Notes. For
additional information see Part I, Item 2 of this Form 10-Q.
15
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations
- ---------------------
FINANCIAL CONDITION
During the nine months ended March 31, 1996, Delta invested $381 million in
flight equipment, net of advance payment refunds received from Boeing (see Note
6 of Notes to Consolidated Financial Statements), and $177 million in ground
property and equipment; made payments of $267 million on long-term debt and
capital lease obligations, which included Delta's voluntary repurchase and
retirement of $216 million principal amount of long-term debt; and paid $83
million in cash dividends. The principal sources of these funds were $659
million of cash from operations, net of $229 million used to reduce to $0 the
Senior Certificate related to the sale of receivables (see Note 4 of the Notes
to Consolidated Financial Statements); $202 million from cash reserves; $24
million from the issuance of common stock; and $23 million from the sale of
flight equipment. Cash and cash equivalents and short-term investments totaled
$1.6 billion at March 31, 1996, compared to $1.8 billion at June 30, 1995. The
Company may repurchase its long-term debt and common stock (including common
stock equivalents) from time to time.
As of March 31, 1996, the Company had negative working capital of $604 million,
compared to negative working capital of $427 million at June 30, 1995. A
negative working capital position is normal for Delta and does not indicate a
lack of liquidity. The Company expects to meet its current obligations as they
become due through available cash, short-term investments and internally
generated funds, supplemented as necessary by debt financings and proceeds from
sale and leaseback transactions. At March 31, 1996, the Company had $780
million of credit available under its 1995 Bank Credit Agreement, subject to
compliance with certain conditions. For additional information regarding
Delta's long-term debt, see Note 5 of the Notes to Consolidated Financial
Statements.
At March 31, 1996, long-term debt and capital lease obligations, including
current maturities, totaled $3.1 billion, compared to $3.3 billion at June 30,
1995. Stockholders' equity was $1.8 billion at March 31, 1996 and June 30,
1995. The Company's debt-to-equity position, including current maturities, was
63% debt and 37% equity at March 31, 1996, compared to 65% debt and 35% equity
at June 30, 1995.
At March 31, 1996, there was outstanding $290 million principal amount of the
Delta Family-Care Savings Plan's Series C Guaranteed Serial ESOP Notes (Series C
ESOP Notes), which are guaranteed by Delta. The Series C ESOP Notes currently
have the benefit of a credit enhancement in the form of a letter of credit in
the amount of $470 million under Delta's 1995 Bank Credit Agreement. Delta is
required to purchase the Series C ESOP Notes in certain circumstances. For
additional information regarding the Series C ESOP Notes, see Note 7 (page 30)
of the Notes to Consolidated Financial Statements in Delta's 1995 Annual Report
to Stockholders.
At its meeting on April 25, 1996, Delta's Board of Directors declared cash
dividends of five cents per common share and $875.00 per share of Series C
Convertible Preferred Stock ($0.875 per depositary share), both payable June 1,
1996, to stockholders of record on May 9, 1996.
16
Currently, Delta has outstanding approximately $800 million principal amount at
stated maturity of 3.23 % Convertible Subordinated Notes due June 15, 2003 (the
Notes). On May 15, 1996, the Company gave notice that it has elected to
redeem effective June 15, 1996 (the Redemption Date) all of the outstanding
Notes at a redemption price equal to 78.23% of the principal amount at
stated maturity of each Note, together with accrued and unpaid interest to the
Redemption Date. The redemption price, together with accrued and unpaid interest
to the Redemption Date, shall be due and payable on June 17, 1996. The Notes are
convertible by the holders thereof into shares of Delta common stock at any time
until 5 p.m. Eastern Daylight Time on June 17, 1996 at a conversion rate equal
to 12.68 shares of common stock for each $1,000 principal amount at stated
maturity of the Notes, subject to adjustment in certain circumstances. For
additional information regarding the Notes, see Note 7 (page 30) of the Notes to
Consolidated Financial Statements in Delta's 1995 Annual Report to Stockholders.
See Note 11 of the Notes to Consolidated Financial Statements in this Form 10-Q
for information regarding the Company's write-down of its L-1011 fleet and
related assets as part of a $556 million pretax charge for restructuring and
other non-recurring charges.
See Part II, Item 5 of this Form 10-Q for information regarding (1) the
Company's new collective bargaining agreement with the Company's pilots; (2) the
Board of Director's adoption, subject to stockholder approval, of two broad
based stock option programs for Delta personnel involving approximately 24.7
million shares of Delta common stock; (3) the Board of Directors' authorizing
the Company to repurchase up to 24.7 million shares of its common stock and
common stock equivalents; (4) Delta employee attendance at regularly scheduled
quarterly meetings of Delta's Board of Directors; and (5) other compensation
matters regarding Company personnel.
17
RESULTS OF OPERATIONS
Three Months Ended March 31, 1996 and 1995
- ------------------------------------------
For the quarter ended March 31, 1996, Delta recorded an unaudited net loss of
$276 million ($5.77 primary and fully diluted loss per common share after
preferred stock dividend requirements) and an operating loss of $387 million.
For the quarter ended March 31, 1995, the Company recorded a net loss of $11
million ($0.66 primary and fully diluted loss per common share after preferred
stock dividend requirements) and operating income of $40 million. The March
1996 quarter results include a $556 million pretax charge for restructuring and
other non-recurring charges which are primarily non-cash expenses. For
additional information regarding these charges, see Note 11 of the Notes to
Consolidated Financial Statements in this Form 10-Q.
Excluding the effect of the $556 million pretax charge, the Company recorded
unaudited net income of $63 million ($.80 primary and fully diluted income per
common share after preferred stock dividend requirements) and operating income
of $169 million for the quarter ended March 31, 1996.
The improvement in operating results for the March 1996 quarter (excluding the
$556 million pretax charge) compared to the March 1995 quarter reflects a 2%
increase in operating revenues and a 2% decrease in operating expenses primarily
due to initiatives under the Company's Leadership 7.5 cost reduction program.
Operating revenues in the March 1996 quarter totaled $2.96 billion, an increase
of 2% from $2.90 billion in the March 1995 quarter. Passenger revenue increased
3% to $2.77 billion, reflecting a 6% increase in revenue passenger miles,
partially offset by a 3% decline in the passenger mile yield. The increase in
passenger traffic and the decrease in passenger mile yield is primarily due to
discount fare promotions resulting from the continued presence of low-cost, low-
fare carriers in domestic markets served by Delta.
Cargo revenue decreased 6% to $126 million, as cargo ton miles declined 7% while
the cargo ton mile yield increased less than 1%. The decrease in cargo ton
miles and increase in the ton mile yield are primarily due to the cancellation
of service on certain international routes and the resulting decrease in the
average cargo trip length. All other revenue, net decreased 23% to $64 million,
mainly due to a one-time refund of certain employee transportation charges and
lower revenues from certain marketing programs.
Operating expenses for the March 1996 quarter totaled $3.35 billion, an increase
of 17% from the March 1995 quarter. Operating capacity increased less than 1%
to 31.63 billion available seat miles, and operating cost per available seat
mile increased 17% to 10.59 cents. Excluding the $556 million pretax charge
recorded in the March 1996 quarter, operating cost per available seat mile
decreased 3% to 8.84 cents. Salaries and related costs decreased 2%, primarily
due to a 5% reduction in full-time equivalent employees and reductions in
related benefits costs, partially offset by accruals under the Company's profit
sharing programs. The decrease in full-time equivalent employees was primarily
due to workforce reductions under the Company's Leadership 7.5 cost reduction
program. Aircraft fuel expense increased 14%, as the average price per fuel
gallon increased 15% to 60.39 cents while fuel gallons consumed decreased 1%.
Passenger commissions declined 15%, mainly due to lower base commission rates.
Contracted services expense rose 21%,
18
primarily the result of increased outsourcing of certain airport functions, and
higher expenses associated with inclement winter weather. Depreciation and
amortization expense rose 6%, the result of increased aircraft depreciation and
amortization due to the acquisition of additional owned aircraft and the
extension of leases on 40 B-737-200 aircraft in the June 1995 quarter which, for
accounting purposes, resulted in these leases being reclassified from operating
leases to capital leases. The increase in depreciation and amortization expense
was partially offset by certain international routes becoming fully amortized.
Other selling expenses decreased 8%, primarily due to lower advertising and
promotion expenses, partially offset by increased booking fee payments to
computer reservations system providers. Aircraft rent expense decreased 19% due
to the return of certain aircraft to lessors and the extension of leases on
40 B-737-200 aircraft as discussed previously. Facilities and other rent
decreased 25%, due to certain facilities rent accrual adjustments, the
subleasing of certain airport facilities and the reclassification of certain
unoccupied airport facilities costs to nonoperating categories. Aircraft
maintenance materials and outside repairs expense declined 19%, mainly the
result of lower engine and airframe materials usage and the elimination of
certain engine types from service due to fleet simplification. Passenger service
expense decreased 5%, the result of ongoing cost control programs. Landing fees
decreased 9%, mainly reflecting favorable rate adjustments and credits received
at certain airports. All other operating expenses increased 17%, primarily
reflecting the October 1, 1995 expiration of the exemption from the 4.3 cents
per gallon federal tax on commercial aviation jet fuel used in domestic
operations as well as higher supplies and inconvenienced passenger expenses
resulting from the inclement winter weather, partially offset by increased
services provided to outside parties.
Nonoperating expense in the March 1996 quarter totaled $59 million, compared to
nonoperating expense of $51 million in the March 1995 quarter. Interest expense
decreased 20% to $56 million, due to a lower average level of long-term debt,
partially offset by an increase in interest related to the extension and
reclassification of the B-737-200 aircraft leases previously discussed.
Interest income decreased 14% to $18 million, primarily due to lower interest
rates and a lower average level of short-term investments. Miscellaneous
expense, net increased to $27 million in the March 1996 quarter from $10 million
in the March 1995 quarter, due to equity losses from associated companies, costs
associated with the voluntary repurchase and retirement of long-term debt, and
foreign exchange losses.
Pretax losses of $446 million for the March 1996 quarter resulted in an income
tax credit of $170 million. After a $22 million provision for preferred stock
dividends, the net loss attributable to common stockholders was $298 million.
Nine Months Ended March 31, 1996 and 1995
- -----------------------------------------
For the nine months ended March 31, 1996, Delta recorded an unaudited net loss
of $6 million ($1.39 primary and fully diluted loss per common share after
preferred stock dividend requirements) and operating income of $167 million.
For the nine months ended March 31, 1995, the Company recorded net income of
$157 million ($1.80 primary and fully diluted income per common share after
preferred stock dividend requirements) and operating income of $212 million.
The results for the nine months ended March 31, 1996 include a $556 million
pretax charge for restructuring and other non-recurring charges which are
primarily non-cash expenses. For additional information regarding these
charges, see Note 11 of the Notes to Consolidated Financial Statements in this
Form 10-Q.
19
Net income for the nine months ended March 31, 1995 includes a one-time $114
million after-tax benefit ($2.25 primary and fully diluted benefit per common
share) related to the adoption, effective July 1, 1994, of SFAS 112, "Employers'
Accounting for Postemployment Benefits" (see Note 7 of the Notes to Consolidated
Financial Statements).
Excluding the effect of the $556 million pretax charge, the Company recorded
unaudited net income of $333 million ($5.20 primary and $4.36 fully diluted
income per common share after preferred stock dividend requirements) and
operating income of $723 million for the nine months ended March 31, 1996.
The improvement in operating results for the nine months ended March 31, 1996
(excluding the $556 million pretax charge), compared to the nine months ended
March 31, 1995, reflects a 1% increase in operating revenues and a 4% decrease
in operating expenses primarily due to initiatives under the Company's
Leadership 7.5 cost reduction program.
Operating revenues for the nine months ended March 31, 1996 increased 1% to
$9.10 billion. Passenger revenue increased 2% to $8.49 billion, reflecting a 2%
improvement in the passenger mile yield. Revenue passenger miles remained
virtually unchanged. The improvement in passenger mile yield is primarily due
to higher average fare levels in domestic and certain international markets.
Passenger revenue for the nine months ended March 31, 1996 and 1995, was
negatively impacted by the presence of low-cost, low-fare carriers in domestic
markets served by Delta.
Cargo revenue decreased 9% to $389 million, as cargo ton miles declined 10%
while the ton mile yield increased 1%. The decrease in cargo ton miles and
increase in the ton mile yield are primarily due to the cancellation of service
on certain international routes and the resulting decrease in the average cargo
trip length. All other revenue, net decreased 7% to $220 million, mainly due to
a one-time refund of certain employee transportation charges and lower revenues
from certain marketing programs.
Operating expenses for the nine months ended March 31, 1996 totaled $8.93
billion, an increase of 2% from the nine months ended March 31, 1995. Operating
capacity decreased less than 1% to 97.25 billion available seat miles, and
operating cost per available seat mile increased 2% to 9.18 cents. Excluding
the $556 million pretax charge recorded in the nine months ended
March 31, 1996, operating cost per available seat mile decreased 4% to 8.61
cents. Salaries and related costs decreased 5%, primarily due to a 5% reduction
in full-time equivalent employees and reductions in related benefits costs,
partially offset by accruals under the Company's profit sharing programs. The
decrease in full-time equivalent employees was primarily due to workforce
reductions under the Company's Leadership 7.5 cost reduction program. Aircraft
fuel expense increased 3%, as the average price per fuel gallon increased 5% to
57.30 cents while fuel gallons consumed decreased 2%. Passenger commissions
declined 15%, mainly due to the implementation of a maximum commission payment
on domestic tickets and lower base commission rates. Contracted services
expense rose 31%, primarily the result of increased outsourcing of certain
airport functions. Depreciation and amortization expense increased 2%, the
result of increased aircraft depreciation and amortization due to the
acquisition of additional owned aircraft and the extension of the 40 B-737-200
aircraft leases previously discussed, partially offset by the transfer of
certain ground equipment to associated companies and certain international
routes becoming fully amortized. Other selling expenses
decreased 7%, primarily due to lower advertising and promotion
20
expense, partially offset by increased booking fee payments to computer
reservations system providers. Aircraft rent expense decreased 19% due to the
return of certain aircraft to lessors and the extension of the 40 B-737-200
aircraft leases previously discussed. Facilities and other rent decreased 6%,
primarily due to certain facilities rent accrual adjustments, the subleasing of
certain airport facilities and the reclassification of certain airport
facilities costs to nonoperating categories. Aircraft maintenance materials and
outside repairs expense declined 10%, mainly due to lower engine and airframe
materials usage and the elimination of certain engine types from service due to
fleet simplification.
Passenger service expense decreased 18%, the result of ongoing cost control
programs. Landing fees decreased 7%, mainly reflecting favorable rate
adjustments and credits received at certain airports. All other
operating expenses decreased 2%, primarily reflecting increased services
provided to outside parties, partially offset by the October 1, 1995 expiration
of the exemption from the 4.3 cents per gallon federal tax on commercial
aviation jet fuel used in domestic operations.
Nonoperating expense for the nine months ended March 31, 1996, totaled $154
million, compared to $124 million in the nine months ended March 31, 1995.
Interest expense decreased 7% to $204 million, due to a lower average level of
long-term debt, partially offset by an increase in interest related to the
extension and reclassification of the 40 B-737-200 aircraft leases previously
discussed. Interest income decreased 8% to $65 million, primarily due to lower
interest rates and a lower average level of short-term investments.
Miscellaneous expense, net was $35 million for the nine months ended March 31,
1996, primarily due to costs associated with the voluntary repurchase and
retirement of long-term debt and foreign exchange losses, compared to
miscellaneous income, net of $2 million for the nine months ended March 31,
1995.
Pretax income of $13 million for the nine months ended March 31, 1996, was
reduced by an income tax provision of $19 million. After a $66 million
provision for preferred stock dividends, the net loss attributable to common
stockholders was $72 million.
21
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and
the Board of Directors of
Delta Air Lines, Inc.:
We have reviewed the accompanying consolidated balance sheet of DELTA AIR LINES,
INC. (a Delaware Corporation) AND SUBSIDIARIES as of March 31, 1996 and the
related consolidated statements of operations for the three-month and nine-month
periods ended March 31, 1996 and 1995 and the consolidated statements of cash
flows for the nine-month periods ended March 31, 1996 and 1995. 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 generally accepted accounting principles.
Arthur Andersen LLP
Atlanta, Georgia
May 6, 1996
22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
As reported on page 16 of Delta's Annual Report on Form 10-K for the fiscal year
ended June 30, 1995, and page 17 of Delta's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1995, travel agents and a travel agency trade
association have filed more than 30 class action antitrust lawsuits in various
federal district courts against various airlines, including Delta, that
implemented new travel agent commission cap programs. The plaintiffs, who are
seeking unspecified treble damages under the antitrust laws and an injunction to
prevent the airlines from maintaining the new commission cap programs, allege
that the defendants conspired to reduce the commissions paid to travel agents in
violation of the Sherman Act. These cases have been consolidated for pretrial
proceedings before the United States District Court in Minneapolis which, on
September 27, 1995, denied a motion by the airline defendants to permit an
immediate appeal of the District Court's ruling denying the airlines' motions
for summary judgment. The jury trial of these actions is scheduled to begin on
September 4, 1996.
As reported on page 22 of Delta's Quarterly Report on Form 10-Q/A for the
quarter ended December 31, 1995, on November 9, 1995, ValuJet Airlines, Inc.
(ValuJet) filed a lawsuit against Delta and Trans World Airlines, Inc. (TWA) in
the United States District Court for the Northern District of Georgia alleging,
among other things, that (1) TWA breached an alleged agreement to lease certain
takeoff/landing slots (Slots) at New York's LaGuardia Airport (LaGuardia) to
ValuJet; (2) Delta tortiously interfered with the alleged contract between
ValuJet and TWA; (3) Delta and TWA conspired to restrain trade in violation of
Section 1 of the Sherman Act; and (4) Delta engaged in acts of monopolization
and attempted monopolization in violation of Section 2 of the Sherman Act.
ValuJet, which has requested a jury trial, is seeking injunctive relief,
unspecified compensatory damages, treble damages under the antitrust laws,
punitive damages, costs and attorney's fees, and such other relief as the Court
deems appropriate. On November 17, 1995, the District Court denied ValuJet's
motion for a preliminary injunction. On December 7, 1995, Delta filed its answer
denying liability and asserting various affirmative defenses. On February 15,
1996, Delta and TWA filed separate motions for summary judgment; ValuJet is
opposing these motions.
As reported on page 22 of Delta's Quarterly Report on Form 10-Q/A for the
quarter ended December 31, 1995, on January 10, 1996, a purported class action
complaint was filed against Delta and TWA in the United States District Court
for the Eastern District of New York, on behalf of persons who purchased tickets
on Delta for travel between LaGuardia and Atlanta beginning November 1, 1995.
The named plaintiff, who has requested a jury trial, makes antitrust allegations
and claims similar to those asserted by ValuJet in the lawsuit described in the
preceding paragraph. The named plaintiff seeks, on behalf of the purported
class, unspecified compensatory damages, treble damages under the antitrust
laws, injunctive relief, costs and attorney's fees, and such other relief as the
Court deems appropriate. On April 11, 1996, the United States District Court for
the Eastern District of New York granted Delta's and TWA's motions to transfer
this lawsuit to the United States District Court for the Northern District of
Georgia.
23
Item 5. Other Information
- -------------------------
New Collective Bargaining Agreement
- -----------------------------------
On April 29, 1996, Delta and the Air Line Pilots Association, International
(ALPA) entered into a new collective bargaining agreement for the Company's
approximately 8,000 pilots. The following summary of certain provisions of the
new collective bargaining agreement does not purport to be complete, and is
subject to, and qualified in its entirety by reference to, all the provisions of
the new collective bargaining agreement, which is being filed with this Form 10-
Q as Exhibit 10.
The new collective bargaining agreement, which generally became effective May 1,
1996, has a four-year term. It provides for, among other things, (1) a 2%
reduction in base salaries for four years, after which period the 2% reduction
will be rescinded; (2) reductions in certain other pay-related areas and
benefits; (3) certain productivity improvements, including changes in staffing
requirements; (4) additional pay reductions and productivity improvements
relating to the operation of the Company's B-737-200 aircraft, subject to
certain conditions; (5) job security protections for currently active pilots and
the recall of the approximately 260 remaining pilots on furlough by July 1,
1997; (6) a prohibition on the Company's engaging in code sharing with respect
to aircraft with over 70 seats that are operated by another U.S. airline,
subject to certain exceptions; (7) restrictions in certain circumstances on the
Company's entering into new code sharing arrangements involving aircraft
operated by foreign airlines; (8) an enhanced early retirement program for up to
500 pilots; (9) pilot participation in a profit sharing program; (10) a stock
option plan for pilots providing for grants of stock options covering a total of
ten million shares of Delta common stock in three equal installments; and (11)
ALPA's right to appoint an associate non-voting member of Delta's Board of
Directors.
ALPA has the right to reopen the new collective bargaining agreement in its
entirety if there is a Change of Control (as defined) of Delta or if any
required stockholder approval of the pilots' stock option plan is not obtained.
Change of Control is defined in the new contract to include, among other things,
the acquisition by a person or entity of more than 40% of Delta's outstanding
common stock. The pilots' stock option plan and a similar stock option plan for
nonpilot personnel will be presented to stockholders for approval as one
proposal at Delta's 1996 Annual Meeting of Stockholders, which is scheduled for
October 24, 1996.
Delta believes the new collective bargaining agreement will improve the
Company's competitive position and make an important contribution to the
Company's efforts to achieve its cost reduction goals. Delta currently
estimates the new collective bargaining agreement, compared to the prior pilot
contract, will result in total savings of approximately $100 million in fiscal
year 1997, approximately $200 million in fiscal year 1998 and approximately $230
million in each of fiscal years 1999 and 2000, before considering any amounts to
be paid under the pilots' profit sharing program.
The pilots' profit sharing program generally provides for profit sharing
payments to eligible pilots for a particular fiscal year equal to the Company's
Profit Performance Level (as defined) multiplied by a pilot's Annual Base Salary
(as defined) for that year, and subtracting from that product a dollar amount
equal to the Offset (as defined). The Profit Performance Level for a given
fiscal year is the
24
Company's pretax income (after giving effect to profit sharing payments and
excluding any gains or losses on the disposition of flight equipment and less
preferred stock dividends) as a percent of the Company's total operating
revenues for that year. No payments are made if the Profit Performance Level is
less than 2%; the maximum Profit Performance Payment for purposes of the pilots'
profit sharing program is 10%. The Offset for any given fiscal year is the
product of a pilots' Annual Base Salary multiplied by the lesser of (1) 5%; or
(2) the percent of annual base salary (which is currently also 5%) by which
profit sharing awards for such year are reduced for participants in the
Company's profit sharing program for noncontract published scale personnel.
In connection with the pilots' enhanced early retirement program described
above, the Company expects to record a one-time pretax charge of approximately
$300 million in the June 1996 quarter, depending upon the number of pilots
electing early retirement and other factors which are not precisely determinable
at this time. Management believes that this charge is not likely to have a
material adverse effect on Delta's consolidated financial condition or
liquidity.
The above information regarding the cost savings that Delta currently
anticipates under the new collective bargaining agreement is forward-looking,
and the actual results could differ materially from the results that Delta
currently anticipates. The specific factors and events that could cause the
actual results to differ materially from the expected results include, among
other things, (1) ALPA's exercising its right to reopen the new contract if
there is a Change of Control of Delta or any required stockholder approval of
the pilots' stock option plan is not obtained; (2) the number of B-737-200
aircraft that Delta utilizes under reduced operating costs; (3) aircraft
deployment and utilization rates; and (4) competitive factors and general
economic conditions.
25
Broad Based Stock Option Programs
- ---------------------------------
On April 25, 1996, Delta's Board of Directors adopted, subject to stockholder
approval, two broad-based non-qualified stock option programs for Delta
personnel involving approximately 24.7 million shares of Delta common stock.
Under the two broad-based plans, nonqualified stock options will be granted to
Delta employees in their individual capacity. One plan is for approximately
47,000 Delta employees who are permanent full-time non-pilot personnel or non-
contract international personnel, and have one year of Delta service at the time
of each grant. The second plan is for approximately 8,000 Delta pilots.
The non-pilot and pilot plans involve stock options for 14.7 million and 10
million common shares, respectively. The size of the two plans is intended to
provide for an equivalent potential financial return for both nonpilots and
pilots as a percentage of base salary. Both plans provide for grants in three
equal annual installments at a stock option exercise price equal to the opening
price of Delta common stock on the New York Stock Exchange on the grant date.
The first grant is expected to occur soon after the Annual Meeting of
Stockholders in October 1996. Stock options awarded under these plans will
generally be exercisable beginning one year after their grant date and ending 10
years after the grant date. Stock options awarded under these plans are not
transferable other than upon the death of the person granted the option.
The pilot stock option plan is part of the new collective bargaining agreement
between the Company and ALPA. As discussed above, ALPA has the right to reopen
the new collective bargaining agreement in its entirety if any required
stockholder approval of the pilot plan is not obtained.
The stock option plans are subject to stockholder approval at Delta's 1996
Annual Meeting of Stockholders which is scheduled for October 24, 1996. Because
the two plans are related elements of Delta's program to more closely align the
interests of Delta people and stockholders and to link a portion of compensation
to performance, the two plans will be presented to stockholders as one proposal.
Stock Repurchase Authorization
- ------------------------------
On April 25, 1996, Delta's Board of Directors authorized the Company to
repurchase up to 24.7 million shares of its common stock and common stock
equivalents. Under this authorization, the Company may repurchase up to 6.2
million of these shares before the initial stock option grants under the broad-
based stock option plans become exercisable, and repurchase the remaining shares
as Delta personnel exercise their options. The stock repurchase program becomes
effective immediately. Repurchases will be subject to market conditions and may
be made on the open market or in privately negotiated transactions.
Employee Attendance at Board Meetings
- -------------------------------------
Beginning with its July 1996 meeting, Delta's Board of Directors has invited
representatives of Delta personnel to attend regularly scheduled, quarterly
meetings of the Board of Directors. As part of the recently ratified collective
bargaining agreement with ALPA, one pilot representative will attend. Other
Delta personnel will be represented through a new Delta Personnel Board Council
(Council) made up of one representative each from seven different personnel
groups:
26
Airport Customer Service/Cargo; In-Flight Service; Technical Operations;
Reservations Sales; Operational Support/Clerical; Field Sales/Sales Support
Center; and Supervisory/Administrative. The Council will choose three of its
members to represent the Council at each regularly scheduled, quarterly
meeting of the Board of Directors. Neither the Council representatives nor the
pilot representative will have voting rights at Delta's Board meetings.
Other Compensation Matters
Substantially all of Delta's U.S.-based non-contract personnel participate in
the Company's profit sharing programs. Under these programs, participants may
receive, subject to certain conditions, payments that are based on the Company's
profitability during the fiscal year. During the year, the Company accrues
amounts estimated to be payable under these programs.
Effective February 1, 1996, Delta restored to the base salaries of personnel who
participate in the Company's profit sharing programs the 5% reduction in base
salaries that had been implemented on February 1, 1993. On February 23, 1996,
personnel who participate in the profit sharing programs received a lump sum
advance profit sharing payment for fiscal 1996 equal to 5% of their base
salaries from July 1, 1995 through January 31, 1996. The value of the 5% base
salary restoration and the early profit sharing payment will be offset against
any profit sharing awards earned for fiscal 1996. Therefore, these changes are
not expected to result in an increase in operating expenses for fiscal 1996.
27
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits
10. Agreement dated April 29, 1996 between Delta Air Lines, Inc. and the
Air Line Pilots in the service of Delta Air Lines, Inc. as represented
by the Air Lines Pilots Association, International.
11. Statement regarding computation of per share earnings.
12. Statement regarding 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 March 31, 1996, Delta filed a Current Report
on Form 8-K dated February 29, 1996 relating to the public offering of
$79.6 million aggregate principal amount of 1996 Pass Through
Certificates, Series A1 and A2.
28
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/ Thomas J. Roeck, Jr.
------------------------------
Thomas J. Roeck, Jr.
Senior Vice President -Finance
and Chief Financial Officer
May 15, 1996
- ------------
(Date)
29