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 December 31, 1998
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 January 31, 1999:
Common Stock, $1.50 par value - 141,648,081 shares outstanding
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DELTA AIR LINES, INC.
Consolidated Balance Sheets
(In Millions)
December 31 June 30
ASSETS 1998 1998
- --------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 618 $ 1,077
Short-term investments 186 557
Accounts receivable, net of allowance for uncollectible accounts
of $39 at December 31, 1998 and $36 at June 30, 1998 772 938
Deferred income taxes 488 464
Prepaid expenses and other 402 326
--------------- -------------
Total current assets 2,466 3,362
--------------- -------------
PROPERTY AND EQUIPMENT:
Flight equipment 12,056 11,180
Less: Accumulated depreciation 4,030 3,895
--------------- -------------
8,026 7,285
--------------- -------------
Flight equipment under capital leases 515 515
Less: Accumulated amortization 240 216
--------------- -------------
275 299
--------------- -------------
Ground property and equipment 3,523 3,285
Less: Accumulated depreciation 2,002 1,854
--------------- -------------
1,521 1,431
--------------- -------------
Advance payments for equipment 455 306
--------------- -------------
Total property and equipment 10,277 9,321
--------------- -------------
OTHER ASSETS:
Marketable equity securities 484 424
Investments in associated companies 339 326
Cost in excess of net assets acquired, net 274 265
Leasehold and operating rights, net 118 124
Other 769 781
--------------- -------------
Total other assets 1,984 1,920
--------------- -------------
Total assets $ 14,727 $ 14,603
=============== =============
The accompanying notes are an integral part of these consolidated balance
sheets.
2
DELTA AIR LINES, INC.
Consolidated Balance Sheets
(In Millions)
December 31 June 30
LIABILITIES AND SHAREOWNERS' EQUITY 1998 1998
- --------------------------------------------------------------------------------------------------------------------
(Unaudited)
CURRENT LIABILITIES:
Current maturities of long-term debt $ - $ 67
Current obligations under capital leases 73 63
Notes payable 250 -
Accounts payable and miscellaneous accrued liabilities 2,017 2,025
Air traffic liability 1,404 1,667
Accrued salaries and vacation pay 482 553
Accrued rent 230 202
--------------- -------------
Total current liabilities 4,456 4,577
--------------- -------------
NONCURRENT LIABILITIES:
Long-term debt 1,524 1,533
Postretirement benefits 1,895 1,873
Accrued rent 666 651
Capital leases 196 249
Deferred income taxes 427 262
Other 539 511
--------------- -------------
Total noncurrent liabilities 5,247 5,079
--------------- -------------
DEFERRED CREDITS:
Deferred gain on sale and leaseback transactions 667 694
Manufacturers' and other credits 79 55
--------------- -------------
Total deferred credits 746 749
--------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 3)
EMPLOYEE STOCK OWNERSHIP PLAN
PREFERRED STOCK:
Series B ESOP Convertible Preferred Stock (issued and outstanding
6,579,710 shares at December 31, 1998 and 6,603,429 shares at
June 30, 1998) 474 475
Unearned compensation under
employee stock ownership plan (273) (300)
--------------- -------------
201 175
--------------- -------------
SHAREOWNERS' EQUITY:
Common Stock at par (total shares issued: 177,653,427 shares at
December 31, 1998 and 176,566,178 shares at June 30, 1998) 266 265
Additional paid-in capital 3,090 3,034
Accumulated other comprehensive income 125 89
Retained earnings 2,196 1,687
Treasury stock at cost (36,139,165 shares at December 31, 1998
and 26,115,784 shares at June 30, 1998) (1,600) (1,052)
--------------- -------------
Total shareowners' equity 4,077 4,023
--------------- -------------
Total liabilities and shareowners' equity $ 14,727 $ 14,603
=============== =============
The accompanying notes are an integral part of these consolidated balance
sheets.
3
Consolidated Statements of Operations
(Unaudited)
(In Millions, Except Share Data)
Three Months Ended Six Months Ended
December 31 December 31
---------------------------- ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
Operating Revenues:
Passenger $ 3,135 $ 3,133 $ 6,622 $ 6,396
Cargo 150 160 290 303
Other, net 163 141 338 288
------------ ------------ ------------ ------------
Total operating revenues 3,448 3,434 7,250 6,987
Operating Expenses:
Salaries and related costs 1,217 1,206 2,454 2,410
Aircraft fuel 351 409 689 817
Passenger commissions 208 235 459 501
Depreciation and amortization 233 211 451 409
Contracted services 193 169 376 341
Other selling expenses 179 170 375 334
Landing fees and other rent 164 153 344 322
Aircraft rent 146 137 291 274
Aircraft maintenance materials and outside repairs 138 126 281 250
Passenger service 124 105 257 217
Other 175 181 401 349
------------ ------------ ------------ ------------
Total operating expenses 3,128 3,102 6,378 6,224
------------ ------------ ------------ ------------
Operating Income 320 332 872 763
------------ ------------ ------------ ------------
Other Income (Expense):
Interest expense (43) (49) (92) (99)
Interest capitalized 12 10 22 18
Interest income 12 23 33 40
Miscellaneous income (expense), net 19 (3) 23 8
------------ ------------ ------------ ------------
- (19) (14) (33)
------------ ------------ ------------ ------------
Income Before Income Taxes 320 313 858 730
Income Taxes Provided, Net (126) (123) (338) (287)
------------ ------------ ------------ ------------
Net Income 194 190 520 443
Preferred Stock Dividends (3) (3) (5) (5)
------------ ------------ ------------ ------------
Net Income Available
To Common Shareowners $ 191 $ 187 $ 515 $ 438
============ ============ ============ ============
Basic Income Per Common Share $ 1.34 $ 1.26 $ 3.54 $ 2.96
============ ============ ============ ============
Diluted Income Per Common Share $ 1.29 $ 1.20 $ 3.38 $ 2.84
============ ============ ============ ============
Weighted Average Shares Used In Per Share
Computation:
Basic 142,655,879 148,486,232 145,292,702 147,960,154
Diluted 149,432,270 157,185,368 153,406,063 155,697,590
Dividends Per Common Share $ 0.025 $ 0.025 $ 0.050 $ 0.050
The accompanying notes are an integral part of these consolidated statements.
4
Statistical Summary
(Unaudited)
Three Months Ended Six Months Ended
December 31 December 31
----------------------------------- ---------------------------------
1998 1997 1998 1997
-------------- ------------- -------------- --------------
Statistical Summary:
Passengers Enplaned (thousands) 25,547 25,487 53,149 51,993
Revenue Passenger Miles (millions) 24,823 24,144 52,935 50,729
Available Seat Miles (millions) 35,923 34,908 72,596 70,591
Operating Margin 9.3 % 9.7 % 12.0 % 10.9 %
Passenger Mile Yield 12.63 cents 12.97 cents 12.51 cents 12.61 cents
Operating Revenue Per Available Seat Mile 9.60 cents 9.84 cents 9.99 cents 9.90 cents
Operating Cost Per Available Seat Mile 8.71 cents 8.89 cents 8.79 cents 8.82 cents
Passenger Load Factor 69.10 % 69.16 % 72.92 % 71.86 %
Breakeven Passenger Load Factor 62.06 % 61.83 % 63.32 % 63.29 %
Revenue Ton Miles (millions) 2,920 2,883 6,149 5,956
Cargo Ton Miles (millions) 438 469 856 884
Cargo Ton Mile Yield 34.38 cents 34.20 cents 33.84 cents 34.24 cents
Fuel Gallons Consumed (millions) 680 660 1,382 1,342
Average Price Per Fuel Gallon 51.61 cents 61.94 cents 49.88 cents 60.91 cents
Number of Aircraft in Fleet at End of Period 581 559 581 559
Average Full-Time Equivalent Employees 71,300 66,400 71,100 65,800
5
DELTA AIR LINES, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In Millions)
Six Months Ended
December 31
--------------------------------
1998 1997
------------- -------------
CASH PROVIDED BY OPERATING ACTIVITIES:
Net Income $ 520 $ 443
Adjustments to reconcile net income to cash
provided by operating activities, net 625 614
Changes in certain assets and liabilities, net (197) 153
------------- -------------
Net cash provided by operating activities 948 1,210
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions:
Flight equipment, including advance payments (1,173) (842)
Ground property and equipment (223) (121)
Decrease in short-term investments, net 369 10
Other, net 7 -
------------- -------------
Net cash used in investing activities (1,020) (953)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 38 189
Repurchase of common stock (550) (210)
Payments on long-term debt and capital lease obligations (117) (51)
Payments on notes payable (27) -
Issuance of notes payable 277 -
Income tax benefit from exercise of stock options 13 25
Cash dividends (21) (22)
------------- -------------
Net cash used in financing activities (387) (69)
------------- -------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (459) 188
Cash and cash equivalents at beginning of period 1,077 662
------------- -------------
Cash and cash equivalents at end of period $ 618 $ 850
============= =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 77 $ 90
Income taxes $ 192 $ 153
The accompanying notes are an integral part of these condensed consolidated
statements.
6
DELTA AIR LINES, INC.
Notes to Consolidated Financial Statements
December 31, 1998
(Unaudited)
1. ACCOUNTING AND REPORTING POLICIES:
The Company's accounting and reporting policies are summarized in Note 1
(page 39) of the Notes to Consolidated Financial Statements in Delta's 1998
Annual Report to Shareowners. These interim financial statements should be
read in conjunction with the consolidated financial statements and the notes
thereto included in the Company's 1998 Annual Report to Shareowners. In the
opinion of management, 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. Certain prior year amounts have been reclassified to conform with
the current year financial statement presentation.
As a result of a review of its aircraft fleet plan and comparable industry
practices, the Company increased the depreciable life of certain new
generation aircraft types from 20 to 25 years. The change in estimate was
effective July 1, 1998, and resulted in lower depreciation expense of
approximately $49 million ($0.34 basic and $0.32 diluted earnings per common
share) for the six months ended December 31, 1998.
2. AIRCRAFT PURCHASE COMMITMENTS:
At December 31, 1998, the Company's aircraft fleet, purchase commitments,
options (which have scheduled delivery slots) and rolling options (which
replace options and are assigned delivery slots as options expire or are
exercised) were:
Current Fleet
--------------------------------------------
Rolling
Aircraft Type Owned Leased Total Orders Options Options
- ---------------------- ------------- ----------- ------------ ----------- ---------- -----------
B-727-200 117 10 127 0 0 0
B-737-200 1 53 54 0 0 0
B-737-300 0 26 26 0 0 0
B-737-600/700/800 5 0 5 96 60 273
B-757-200 58 41 99 19 20 81
B-767-200 15 0 15 0 0 0
B-767-300 3 24 27 1 0 0
B-767-300ER 35 8 43 9 11 18
B-767-400ER 0 0 0 21 24 25
B-777-200 0 0 0 14 20 30
L-1011-1 16 0 16 0 0 0
L-1011-250 6 0 6 0 0 0
L-1011-500 12 0 12 0 0 0
MD-11 8 7 15 0 0 0
MD-88 63 57 120 0 0 0
MD-90 16 0 16 0 0 0
------------- ----------- ------------ ----------- ---------- -----------
Total 355 226 581 160 135 427
============= =========== ============ =========== ========== ===========
7
During the December 1998 quarter, Delta accepted delivery of five new B-737-
800 aircraft, three new B-757-200 aircraft, one new B-767-300 aircraft and
two new B-767-300ER aircraft. Delta also exercised options for one B-737-800
aircraft and two B-757-200 aircraft, and placed additional orders for twelve
B-737-800 aircraft and seven B-757-200 aircraft. In addition, the Company
retired four B-727-200 aircraft, one L-1011-1 aircraft and three L-1011-500
aircraft. The aircraft acquisitions and retirements are part of the
Company's ongoing fleet simplification strategy.
Subsequent to December 31, 1998, Delta accepted delivery of one new B-737-
800 aircraft, one new B-757-200 aircraft, and one new B-767-300ER aircraft.
Future expenditures for aircraft, engines and engine hushkits on firm order
at December 31, 1998 are estimated to be $7.1 billion, as follows:
Amount
Years Ending June 30 (In Millions)
-------------------- --------------
Remainder of fiscal year 1999 $ 820
2000 2,060
2001 2,060
2002 320
2003 320
After 2003 1,560
-------
Total $7,140
=======
3. CONTINGENCIES:
Delta is a defendant in certain legal actions relating to alleged employment
discrimination practices, antitrust matters, environmental issues and other
matters concerning Delta's business. Although the ultimate outcome of these
matters cannot be predicted with certainty, management believes that the
resolution of these actions is not likely to have a material adverse effect
on Delta's consolidated financial statements.
4. SHAREOWNERS' EQUITY:
On October 22, 1998, Delta's shareowners approved an amendment to the
Company's Certificate of Incorporation to increase the authorized Common
Stock of the Company from 150 million shares, par value $3.00 per share, to
450 million shares, par value $1.50 per share, and to effect a two-for-one
split of the issued Common Stock. This amendment became effective on
November 2, 1998. All references in this Form 10-Q to the number of shares
of Common Stock (including references to the number of common shares
relating to the Company's broad-based employee stock option programs and its
Common Stock repurchase programs), the Company's earnings per common share
and per share Common Stock prices have been restated to reflect this Common
Stock split.
8
During the December 1998 quarter, the Company issued a total of 140,726
common shares, at an average price of $43.84 per share, under its broad-
based employee stock option plans, 1989 Stock Incentive Plan, Dividend
Reinvestment and Stock Purchase Plan, and Non-Employee Directors' Stock
Plan. In addition, the Company distributed a total of 45,500 shares of
Common Stock from treasury under its 1989 Stock Incentive Plan.
The Company has two common stock repurchase programs. The Company's Board of
Directors authorized the Company to repurchase its Common Stock and Common
Stock equivalents (1) for an aggregate purchase price of up to $750 million
from time to time through December 31, 1999 (July 1998 Authorization); and
(2) in connection with the Company's broad-based employee stock option plans
(April 1996 Authorization). During the December 1998 quarter, the Company
repurchased (1) 2,110,889 common shares, at an average price of $49.81 per
share, under the July 1998 Authorization; and (2) 83,611 common shares, at
an average price of $46.76 per share, under the April 1996 Authorization.
Since the adoption of the July 1998 Authorization, the Company has purchased
a total of 9,379,645 shares of Common Stock for an aggregate purchase price
of $506 million under that program.
At December 31, 1998, 40,339,469 common shares were reserved for issuance
under the Company's broad-based employee stock option plans; 14,936,290
common shares were reserved for issuance under the 1989 Stock Incentive
Plan; 11,288,150 common shares were reserved for conversion of the Series B
ESOP Convertible Preferred Stock; 495,753 common shares were reserved for
issuance under the Non-Employee Directors' Stock Plan; and 250,000 common
shares were reserved for issuance under the Non-Employee Directors' Stock
Option Plan.
5. COMPREHENSIVE INCOME:
During the September 1998 quarter, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," which establishes standards for the reporting of comprehensive
income and its components. The adoption of SFAS No. 130 had no net effect
on the Company's net income or shareowners' equity for the three and six
months ended December 31, 1998 and 1997. Total comprehensive income for the
three months ended December 31, 1998 and 1997 was $268 million and $173
million, respectively. For the six months ended December 31, 1998 and 1997,
total comprehensive income was $557 million and $410 million, respectively.
9
6. EARNINGS PER SHARE:
During the December 1997 quarter, Delta adopted SFAS No. 128, "Earnings per
Share," which established new standards for computing and presenting income
per share data. The following table shows a reconciliation of the numerator
(net income) and denominator (average shares outstanding) used in computing
basic and diluted income per share:
Three Months Ended Six Months Ended
December 31 December 31
------------------------------------- ---------------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(In Millions, except per share data)
BASIC:
Net income $ 194 $ 190 $ 520 $ 443
Preferred stock dividends (3) (3) (5) (5)
----------- ----------- ----------- -----------
Income available to common
shareowners $ 191 $ 187 $ 515 $ 438
Weighted average shares outstanding 142.7 148.5 145.3 148.0
Basic income per common share $ 1.34 $ 1.26 $ 3.54 $ 2.96
=========== =========== =========== ===========
DILUTED:
Net income $ 194 $ 190 $ 520 $ 443
Adjustment to net income assuming
conversion of Series B ESOP
Convertible Preferred Stock (1) (1) (2) (1)
----------- ----------- ----------- -----------
Income available to
common shareowners $ 193 $ 189 $ 518 $ 442
Weighted average shares outstanding 142.7 148.5 145.3 148.0
Conversion of Series B ESOP
Convertible Preferred Stock 4.7 4.2 4.7 4.2
Exercise of stock options 2.0 4.5 3.4 3.5
----------- ----------- ----------- -----------
Average shares outstanding as adjusted 149.4 157.2 153.4 155.7
Diluted income per common share $ 1.29 $ 1.20 $ 3.38 $ 2.84
=========== =========== =========== ===========
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
FINANCIAL CONDITION
Cash and cash equivalents and short-term investments totaled $804 million at
December 31, 1998, compared to $1.63 billion at June 30, 1998. This 51% decline
was largely due to aircraft acquisitions and Common Stock repurchases during the
September 1998 and December 1998 quarters. During the six months ended December
31, 1998, the principal sources of funds were $948 million of cash from
operations, $277 million from the issuance of short-term obligations, and $51
million (including an income tax benefit of $13 million related to the exercise
of stock options) from the issuance of 1,086,964 common shares primarily under
the Company's broad-based employee stock option plans. The decrease in cash from
operations for the six months ended December 31, 1998 compared to the six months
ended December 31, 1997 was primarily attributable to $310 million received
during the September 1997 quarter from Delta's frequent flyer partners for the
prepayment of mileage credits.
During the six months ended December 31, 1998, the Company invested $1.17
billion in flight equipment and $223 million in ground property and equipment;
paid $550 million to repurchase 10,012,122 common shares; made principal
payments of $117 million on long-term debt and capital lease obligations; and
paid $21 million in cash dividends. The Company may prepay its long-term debt
and repurchase Common Stock from time to time. For information regarding Delta's
Common Stock repurchase authorizations, see Note 4 of the Notes to Consolidated
Financial Statements in this Form 10-Q and Note 14 (page 51) of the Notes to
Consolidated Financial Statements in Delta's 1998 Annual Report to Shareowners.
As of December 31, 1998, the Company had negative working capital of $1.99
billion, compared to negative working capital of $1.22 billion at June 30, 1998.
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 borrowings and proceeds from sale
and leaseback transactions.
At December 31, 1998, the Company had $1.25 billion of credit available on a
revolving basis under its 1997 Bank Credit Agreement. As of that date, no
borrowings or letters of credit were outstanding under the agreement. See Note 6
(page 43) of the Notes to Consolidated Financial Statements in Delta's 1998
Annual Report to Shareowners for additional information regarding the 1997 Bank
Credit Agreement.
At December 31, 1998, long-term debt and capital lease obligations, including
current maturities, totaled $1.79 billion, compared to $1.91 billion at June 30,
1998. Shareowners' equity was $4.08 billion at December 31, 1998 and $4.02
billion at June 30, 1998. The Company's debt-to-equity position, including
current maturities, was 30% debt and 70% equity at December 31, 1998 and 32%
debt and 68% equity at June 30, 1998.
11
At December 31, 1998, 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). Delta is required to purchase the Series C ESOP Notes in certain
circumstances. See Note 6 (page 43) of the Notes to Consolidated Financial
Statements in Delta's 1998 Annual Report to Shareowners.
On December 22, 1998, the Company issued promissory notes with an aggregate
principal amount of $250 million for general corporate purposes. The notes bear
interest based on the three month LIBOR rate. The notes are payable on June 29,
1999, and are reflected in notes payable on the accompanying Consolidated
Balance Sheet.
At its meeting on January 28, 1999, Delta's Board of Directors declared a cash
dividend of 2.5 cents per common share, payable March 1, 1999, to shareowners of
record on February 17, 1999.
RESULTS OF OPERATIONS
Three Months Ended December 31, 1998 and 1997
- ---------------------------------------------
For the quarter ended December 31, 1998, Delta recorded unaudited consolidated
operating income of $320 million and net income of $194 million. For the quarter
ended December 31, 1997, Delta recorded operating income of $332 million and net
income of $190 million. The Company's operating margin (ratio of operating
income to operating revenue) for the quarter ended December 31, 1998 was 9.3%,
compared to 9.7% for the quarter ended December 31, 1997.
Operating revenues in the December 1998 quarter totaled $3.45 billion, an
increase of less than 1% from $3.43 billion in the December 1997 quarter.
Passenger revenue increased less than 1% to $3.13 billion, the result of a 3%
increase in revenue passenger miles offset by a 3% decrease in passenger mile
yield.
Domestic passenger revenue declined less than 1% to $2.60 billion for the
December 1998 quarter, reflecting a 1% gain in domestic revenue passenger miles,
offset by a 2% decline in domestic passenger mile yield. The rise in domestic
revenue passenger miles was primarily due to a 1% increase in domestic capacity.
Lower passenger mile yield reflects generally lower industry-wide passenger
yields due to "sale" fares offered by a competitor following resolution of its
pilot strike and lower demand in certain leisure markets due to mild winter
weather. The passenger mile yield was also negatively impacted by increased
competition from a low-fare carrier in one of Delta's major hubs.
International passenger revenue in the December 1998 quarter rose 2%, to $534
million, reflecting an 8% increase in international revenue passenger miles,
partially offset by a 5% decline in international passenger mile yield. The
increase in international revenue passenger miles reflects the Company's
continued international expansion. The decline in international passenger mile
yield is primarily due to increased competitive pressures resulting from
industry-wide capacity increases on Atlantic and Latin American routes and lower
demand on Pacific routes resulting from the Asian economic slowdown.
12
Cargo revenue fell 6% to $150 million in the December 1998 quarter. Cargo ton
miles decreased 7%, while the cargo ton mile yield increased 1%. The decrease in
cargo ton miles was due to the continued shifting of U.S. Postal Service
business from passenger carriers to dedicated air-freight carriers and ground
transportation providers as well as industry-wide overcapacity in international
markets. The cargo ton mile yield increase was primarily a result of increased
sales of higher-margin products in the domestic market. All other revenue, net,
increased 15%, to $163 million, largely due to improved results from frequent
flyer partnership programs and increased administrative service charges.
Operating expenses for the December 1998 quarter totaled $3.13 billion, rising
1% from the December 1997 quarter on an operating capacity increase of 3% to
35.92 billion available seat miles. Salaries and related costs grew 1%,
reflecting a 7% increase in average full-time equivalent employees, partially
offset by a decrease in salary related expenses, mainly due to the effect of
accumulated returns on pension plan assets. Consistent with its customer service
initiatives, the Company has increased staffing in the areas of in-flight
service, airport customer service, technical operations, and reservations.
Aircraft fuel expense decreased 14% as the average fuel price per gallon fell
17% to 51.61 cents, partially offset by a 3% increase in fuel gallons consumed.
Rentals and landing fees rose 7% due to higher terminal facility rent expense at
certain locations. Aircraft rentals increased 7% as a result of an increased
number of leased aircraft. Passenger commissions were 12% lower than the
December 1997 quarter, reflecting lower effective commission rates primarily
attributable to a rate reduction implemented by the Company in September 1997.
The lower effective commission rates are recognized over time as the tickets
sold under the new commission rates are used. Other selling expenses increased
5%, primarily due to higher advertising and promotion expense. Passenger service
expense grew 18% as a result of on-board product enhancements and increased
passenger traffic. Contracted services expense increased 14% due to higher
information technology costs, and rate increases in ground handling and cabin
cleaning contracts. Aircraft maintenance expenses were 10% higher resulting from
the expiration of engine warranties and other costs associated with the
maturation of the fleet. Depreciation and amortization expense rose 10% mainly
due to the acquisition of 24 additional aircraft since the December 1997 quarter
and higher software amortization. The depreciation increase was partially offset
by the increase in the depreciable life of certain aircraft types, effective
July 1, 1998. (See Note 1 of the Notes to Consolidated Financial Statements in
this Form 10-Q.) The 3% reduction in other costs was primarily attributable to
lower non-payroll taxes, insurance and interrupted operations expense.
Nonoperating income in the December 1998 quarter was less than $1 million,
compared to nonoperating expense of $19 million in the December 1997 quarter.
The rise in nonoperating income is primarily the result of a gain on the sale of
the Company's investment in a ground handling company in the United Kingdom,
partially offset by a charge related to the settlement of a frequent flyer
program class action lawsuit.
Pretax income of $320 million for the December 1998 quarter resulted in an
income tax provision of $126 million. After a $3 million provision for preferred
stock dividends, net income available to common shareowners was $191 million.
13
Six Months Ended December 31, 1998 and 1997
- --------------------------------------------
For the six months ended December 31, 1998, Delta recorded unaudited operating
income of $872 million and net income of $520 million. For the six months ended
December 31, 1997, the Company recorded operating income of $763 million and net
income of $443 million. The Company's operating margin for the six months ended
December 31, 1998 was 12.0%, compared to 10.9% for the six months ended December
31, 1997.
Operating revenues for the six months ended December 31, 1998 totaled $7.25
billion, a 4% increase from $6.99 billion for the six months ended December
1997. Passenger revenue rose 4% to $6.62 billion, reflecting a 4% increase in
revenue passenger miles, partially offset by a decrease of 1% in passenger mile
yield.
Domestic passenger revenue rose 3% to $5.36 billion, reflecting 3% growth in
domestic revenue passenger miles and a 1% increase in passenger mile yield.
Revenue passenger mile growth is primarily due to generally favorable economic
conditions, increased traffic during the September 1998 quarter (including the
effects of a competitor's pilot strike), as well as overall improved asset
utilization. The rise in domestic passenger mile yield is due to the domestic
business fare increase implemented during September 1997, improved revenue
management models, and the reallocation of assets to higher return markets,
partially offset by the Company's matching of "sale" fares offered by a
competitor during the December 1998 quarter following resolution of its pilot
strike, and increased competition from a low-fare carrier in one of Delta's
major hubs.
International passenger revenue grew 5% to $1.26 billion, reflecting an increase
in revenue passenger miles of 10%, partially offset by a 5% decline in passenger
mile yield. The increase in international revenue passenger miles reflects
Delta's continued international expansion. The decline in international
passenger mile yield is primarily due to increased competitive pressures
resulting from industry-wide capacity increases on Atlantic and Latin American
routes and the combination of lower business demand on the Pacific routes
resulting from the Asian economic slowdown and an increase in industry-wide
capacity in the U.S.-Japan market.
Cargo revenue fell 4% to $290 million. Cargo ton miles dropped 3%, and the cargo
ton mile yield decreased 1%, largely due to industry-wide overcapacity in
international markets, as well as the continued shift of certain U.S. Postal
Service business from passenger carriers to dedicated air-freight carriers and
ground transportation providers. All other revenue, net, increased 18% to $338
million, due to higher revenues from frequent flyer partnership programs and
administrative service charges.
Operating expenses for the six months ended December 1998 totaled $6.38 billion,
an increase of 3% compared to the six months ended December 1997. Operating
capacity increased 3% to 72.60 billion available seat miles. Salaries and
related costs increased 2% primarily due to a 7% growth in average full-time
equivalent employees, partially offset by a decrease in salary related expenses,
mainly due to the effect of accumulated returns on pension plan assets.
Headcount increased in the areas of in-flight service, airport customer service,
technical operations, and reservations, consistent with the Company's customer
service initiatives. Aircraft fuel expense decreased 16% as the average fuel
price per gallon fell 18% to 49.88 cents, partially offset by a 3% increase in
fuel gallons consumed. Rentals and landing fees rose 6% due to higher facility
rents at certain locations. Aircraft rental expense increased 6% as a result of
new operating leases entered into during the last twelve months. Passenger
commissions declined 8% due to lower commission rates, partially offset by
higher passenger revenue. Other selling expenses increased 12%, mainly the
result of
14
higher credit card service charges and higher advertising and promotion expense.
Passenger service expense grew 19%, primarily the result of higher food costs
associated with increased passenger traffic and product enhancements. Contracted
services expense was up 10% due to increased information technology costs, as
well as rate increases in ground handling and cabin cleaning contracts. Aircraft
maintenance expense rose 13% due to the timing of scheduled heavy maintenance
visits, the expiration of engine warranties, and other costs associated with the
maturation of the fleet. Depreciation and amortization expense increased 10%,
largely due to the acquisition of additional flight and ground equipment,
partially offset by the increase in the depreciable lives of certain aircraft
types. (See Note 1 of the Notes to Consolidated Financial Statements in this
Form 10-Q.) Other costs were 15% higher, reflecting higher Year 2000 and other
consulting fees, expenses associated with customer loyalty programs, and higher
communications costs.
Nonoperating expense for the six months ended December 1998 totaled $14 million,
compared to nonoperating expense of $33 million for the six months ended
December 1997. Interest expense fell 7% to $92 million, due to lower levels of
debt outstanding. Interest income declined 18% to $33 million due to lower
average cash and cash equivalent balances, as well as lower effective interest
rates. Miscellaneous income for the six months ended December 31, 1998 totaled
$23 million, primarily the result of a gain on the sale of the Company's
investment in a ground handling company in the United Kingdom, partially offset
by a charge related to the settlement of a frequent flyer program class action
lawsuit.
Pretax income of $858 million for the six months ended December 1998 resulted in
an income tax provision of $338 million. After a $5 million provision for
preferred stock dividends, net income available to common shareowners was $515
million.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
During the December 1998 quarter, the Company began to use foreign currency
options instead of forward contracts to manage its foreign currency exchange
rate risk. These options have maturities of up to six months. Management
believes that the change from forward contracts to options does not have a
material impact on the Company's exposure to foreign currency risk. For
additional information regarding the Company's exposure to certain market risks,
see "Market Risks Associated With Financial Instruments" (page 33), as well as
Notes 2 and 4 (page 40 and 41, respectively) of the Notes to Consolidated
Financial Statements, in Delta's 1998 Annual Report to Shareowners.
15
[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 December 31, 1998 and the
related consolidated statements of operations for the three-month and six-month
periods ended December 31, 1998 and 1997, and the condensed consolidated
statements of cash flows for the six-month periods ended December 31, 1998 and
1997. 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
February 5, 1999
16
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
- ------------------------------
For information regarding the Company's two-for-one Common Stock split, which
became effective at 5 p.m., eastern standard time, on November 2, 1998 (Stock
Split), see Note 4 of the Notes to Consolidated Financial Statements in this
Form 10-Q.
As a result of the Stock Split, the number of preferred stock purchase rights
(Rights) which accompany each outstanding share of Common Stock was adjusted
from one Right per common share to one-half Right per common share. The Rights
become exercisable only in certain circumstances. See Note 12 of the Notes to
Consolidated Financial Statements in Delta's 1998 Annual Report to Shareowners
for additional information regarding the Rights.
Also as a result of the Stock Split, each outstanding share of the Company's
Series B ESOP Convertible Preferred Stock was adjusted by changing (1) the
conversion price from $83.94 to $41.97; (2) the conversion rate from 0.8578 to
1.7155; and (3) the voting rights from one vote to two votes.
Under the Delta Air Lines, Inc. Directors' Deferred Compensation Plan (Plan),
members of the Company's 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 among
certain of 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 Delta Family-Care
Savings Plan is a fund invested primarily in Delta's Common Stock (Delta Common
Stock Fund). During the quarter ended December 31, 1998, a participant in the
Plan deferred $11,125 in the Delta Common Stock Fund investment return choice
(equivalent to approximately 221 shares of Delta Common Stock, as restated for
the Stock Split, at prevailing market prices). These transactions were not
registered under the Securities Act of 1933, as amended, in reliance on Section
4(2) of such Act.
17
ITEM 5. OTHER INFORMATION
- --------------------------
YEAR 2000
- ---------
The Company estimates that the total cost of achieving Year 2000 readiness for
its internal systems and equipment is approximately $120 million to $135
million, of which $73 million has been recognized as expense ($17 million of
which was incurred in the December 1998 quarter) in the Company's Consolidated
Statements of Operations through December 31, 1998. This estimate is a forward-
looking statement which involves a number of risks and uncertainties that could
cause the actual results to differ materially from the projected results.
Factors that may cause these differences include, but are not limited to, the
availability of qualified personnel and other information technology resources;
the ability to identify and remediate all affected systems and equipment; and
the actions of governmental agencies or other third parties with respect to Year
2000 problems. See pages 28-30 of the Company's 1998 Annual Report to
Shareowners for additional information regarding Delta's Year 2000 program.
EURO CURRENCY ISSUE
- -------------------
On January 1, 1999, certain members of the European Union introduced the "euro"
currency. During the December 1998 quarter, Delta completed modifications to its
internal customer reservations systems and business support systems to operate
in the euro environment. Delta also trained its employees to use the modified
systems and to process transactions involving the euro. For additional
information regarding Delta's euro currency issue, see pages 30-31 of the
Company's 1998 Annual Report to Shareowners.
BROAD-BASED STOCK OPTION PLANS
- ------------------------------
On October 24, 1996, the Company's shareowners approved two plans providing for
the issuance of non-qualified stock options to substantially all of Delta's non-
officer personnel to purchase a total of 49.4 million shares (as restated for
the Stock Split) of Common Stock. One plan is for eligible Delta personnel who
are not pilots (Nonpilot Plan); the other plan covers the Company's eligible
pilots (Pilot Plan).
The Nonpilot and Pilot Plans involve non-qualified stock options to purchase
29.4 million and 20 million shares of Common Stock, respectively. The plans
provide for grants in three annual installments at an exercise price equal to
the opening price of the Common Stock on the New York Stock Exchange on the
grant date. Stock options awarded under these plans are generally exercisable
beginning one year and ending ten years after their grant dates, and are not
transferable other than upon the death of the person granted the stock options.
On October 30, 1998, 1997 and 1996, Delta granted eligible personnel non-
qualified stock options to purchase 16.4 million, 16.6 million and 16.4 million
shares of Common Stock (as restated for the Stock Split), respectively, at
exercise prices of $50.59 per share, $49 per share and $34.50 per share (as
restated for the Stock Split), respectively.
18
PERSONNEL MATTERS
- -----------------
Changes in Compensation Program
- -------------------------------
During the December 1998 quarter, Delta announced changes to its compensation
program that apply to most domestic, noncontract employees. Effective January 1,
1999, the Company discontinued its broad-based profit sharing program; converted
the maximum 6% of annual base salary payout for eligible personnel under that
program to a 6% base salary increase for those personnel; and granted an
additional 2% base salary increase for eligible personnel. In January 1999, the
Company also made a profit sharing payment to eligible personnel of 6% of base
salary paid for the period July 1, 1998 through December 31, 1998. The Company
offered to make similar compensation program changes for its pilots, and the Air
Line Pilots Association, International (ALPA), the collective bargaining
representative of the Company's approximately 8,800 pilots, accepted this offer.
Pilot Collective Bargaining Agreement Matters
- ---------------------------------------------
On May 1, 1996, the Company and ALPA entered into a new collective bargaining
agreement (Existing Contract) covering the rates of pay, rules and working
conditions of the Company's pilots. The Existing Contract, which becomes
amendable on May 2, 2000, provides in part (1) that if the Company operates an
aircraft type (New Equipment) for which the rates of pay, rules and working
conditions (collectively, Pay Rates) are not set forth in the Existing
Agreement, the Company and ALPA will negotiate the Pay Rates applicable to the
New Equipment; (2) that pilots will fly the New Equipment whether or not Pay
Rates for the equipment have been agreed upon; but (3) that the pilots'
obligation to fly the New Equipment will end if Pay Rates have not been agreed
upon within six months after the Company places the New Equipment into
operation.
The Company has placed orders to purchase the following aircraft types, each of
which constitutes New Equipment under the Existing Contract: B-737-600/700/800
aircraft; B-777-200 aircraft; and B-767-400 aircraft. In addition, the Company
is leasing from a third party certain B-737-300 aircraft which also constitute
New Equipment under the Existing Contract. The Company placed the first of these
leased B-737-300 aircraft in service in July 1998, and accepted delivery of its
first B-737-800 aircraft in the December 1998 quarter.
In October 1997, the Company and ALPA began negotiations on the Pay Rates
applicable to B-737-600/700/800 aircraft and the B-737-300 aircraft discussed
above (B-737 New Equipment). ALPA announced plans to request pilots not to fly
the B-737 New Equipment subsequent to the six-month period after such aircraft
were initially placed in service unless and until Pay Rates for these aircraft
types were agreed upon. Additionally, in January 1998, the Company's pilots
voted to authorize ALPA to assess pilots 1% of their gross pay for up to nine
months to finance a contingency fund for pilots who would have flown these
aircraft.
On June 23, 1998, the Company and ALPA reached an agreement which establishes
industry leading Pay Rates applicable to the B-737 New Equipment (B-737
Agreement), subject to the approval of Delta's pilots. On October 16, 1998, ALPA
announced that the Company's pilots had
19
approved the B-737 Agreement, with 60% of the pilots who voted voting in favor
of that agreement.
In February 1999, the Company began negotiations with ALPA regarding the Pay
Rates applicable to the Company's B-777-200 aircraft. The outcome of these
negotiations cannot presently be determined. The Company plans to place the
B-777-200 aircraft type in service shortly after delivery, which is expected to
begin in March 1999.
The Company and ALPA plan to begin negotiations at a later date regarding the
Pay Rates applicable to the Company's B-767-400 aircraft. Delta is scheduled to
receive its first delivery of this aircraft type in May 2000.
The Existing Agreement provides that the parties may begin negotiations in March
2000 on a new collective bargaining agreement to replace the Existing Agreement.
In January 1999, ALPA and the Company agreed to begin these negotiations on the
earlier of September 1999 or the date that Delta and ALPA reach an agreement on
the Pay Rates applicable to the Company's B-777-200 aircraft.
FLIGHT SUPERINTENDENTS' CONTRACT
- --------------------------------
On December 18, 1998, the Company entered into a new collective bargaining
agreement with the Professional Airline Flight Controllers Association, the
collective bargaining representative for the Company's approximately 210 flight
superintendents. The new agreement replaces the collective bargaining agreement
which became amendable on January 1, 1999. The new agreement became effective on
January 1, 1999, provides for certain pay increases and becomes amendable on
January 1, 2003.
20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits
10. Non-Employee Directors' Stock Option Plan and Form of Award Agreement
dated October 22, 1998.
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:
On October 20, 1998, Delta filed a Current Report on Form 8-K dated October
19, 1998 regarding (1) the Company's unaudited financial results for the
September 1998 quarter; (2) its Common Stock repurchases during the
September 1998 quarter; and (3) the approval by the Company's pilots of an
agreement regarding pilot pay rates, rules and working conditions
applicable to the Company's B-737-600/700/800 aircraft and certain B-737-
300 aircraft.
On January 8, 1999, Delta filed a Current Report on Form 8-K to file
certain exhibits in connection with its Registration Statement on Form S-3
(File No. 333-58647). The exhibits filed relate to the offering by the
Company from time to time of up to $300 million aggregate principal amount
of Medium-Term Notes, Series C.
21
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/ Warren C. Jenson
------------------------
Warren C. Jenson
Executive Vice President and
Chief Financial Officer
February 12, 1999
22