Exhibit 13
Glossary of Defined Terms
ABO - ACCUMULATED BENEFIT OBLIGATION - The actuarial present value of benefits
(whether vested or nonvested) attributed by the pension benefit formula, under
Delta's defined benefit pension plans, to employee service rendered before a
specified date and based on employee service length and compensation levels
prior to that date. The accumulated benefit obligation differs from the
projected benefit obligation in that it includes no assumption about future
compensation levels.
APBO - ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION - The actuarial present
value of benefits (other than pensions) attributed to employee service rendered
before a specified date under Delta's postretirement welfare benefit plans.
AIR TRAFFIC LIABILITY - A liability on Delta's Consolidated Balance Sheets that
represents amounts received for the sale of passenger tickets for which
services have not yet been provided. As the transportation service is provided
by Delta, the amount paid for the service is removed from air traffic liability
and is recognized as revenue.
ASM - AVAILABLE SEAT MILE - A measure of capacity which is calculated by
multiplying the total number of seats available for transporting passengers by
the total number of miles flown during a reporting period.
CARGO TON MILES - The total number of tons of cargo transported during a
reporting period, multiplied by the total number of miles cargo is flown.
CARGO TON MILE YIELD - The amount of cargo revenue earned per cargo ton mile
during a reporting period.
CASM - (OPERATING) COST PER AVAILABLE SEAT MILE - The amount of operating cost
incurred per available seat mile during a reporting period. Also referred to as
unit cost.
EETC - Enhanced equipment trust certificate. These certificates do not
represent obligations of Delta, but represent an undivided interest in a pass
through trust which has purchased equipment notes issued by Delta. The
equipment notes are full recourse obligations of Delta and are secured by
certain aircraft.
FUEL PRICE NEUTRALIZED CASM - The amount of operating cost incurred per
available seat mile during a reporting period, adjusting average fuel price per
gallon to equal the prior year.
NET DEBT-TO-CAPITAL RATIO - A measure of leverage which is calculated by
dividing net debt by total capitalization. Net debt includes short-term and
long-term debt, capital lease obligations and the present value of operating
lease obligations, reduced by cash and short-term investments. Capital includes
total debt and shareowners' equity, including Series B ESOP Convertible
Preferred Stock.
PASSENGER LOAD FACTOR - A measure of utilized available seating capacity, which
is calculated by dividing RPMs by ASMs for a reporting period.
PASSENGER MILE YIELD - The amount of passenger revenue earned per revenue
passenger mile during a reporting period.
PBO - PROJECTED BENEFIT OBLIGATION - The actuarial present value as of a date
of all benefits attributed by the pension benefit formula, under Delta's
defined benefit pension plans, to employee service rendered prior to that date.
The projected benefit obligation is measured using assumptions about future
compensation levels.
RASM - (OPERATING OR PASSENGER) REVENUE PER AVAILABLE SEAT MILE - The amount of
operating or passenger revenue earned per available seat mile during a
reporting period. Passenger RASM is also referred to as unit revenue.
RPM - REVENUE PASSENGER MILE - One revenue-paying passenger transported one
mile. RPMs are calculated by multiplying the number of revenue passengers by
the number of miles they are flown for the reporting period. Also referred to
as traffic.
SECTION 1110 - Section 1110 of the U.S. Bankruptcy Code enables a lessor or
secured creditor to a U.S. airline to repossess eligible equipment that secures
the lease or security interest 60 days after the airline files a petition for
bankruptcy protection, unless the airline cures the default and agrees to meet
its future obligations to the creditor under the lease or security agreement.
12
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
BUSINESS ENVIRONMENT
Since September 11, 2001, Delta and the airline industry have faced
unprecedented challenges. Our industry has experienced substantial revenue
declines and cost increases, creating industry-wide liquidity issues which have
resulted in two major airlines filing for bankruptcy. The following discussion
was prepared as of March 12, 2003.
REVENUES
The depressed revenue environment is the result of various factors, including
(1) a sharp decline in high-yield business travel after the September 11, 2001
terrorist attacks; (2) industry capacity exceeding demand, which has resulted in
heavy fare discounting to stimulate demand; (3) a government-imposed passenger
security fee adopted after September 11, 2001, which we have not been able to
pass on to our customers because of the weak demand situation; and (4) a
reduction in traffic due to the real and perceived "hassle factor" resulting
from increased airport security measures. Additionally, our revenues have been
adversely impacted by the continuing weakness of the U.S. and world economies,
the growth of low-cost carriers and increased price-sensitivity in customers'
purchasing behavior.
The following table shows the change in our traffic, capacity and yield for the
year ended December 31, 2002, compared to the years ended December 31, 2001 and
2000:
2002 vs. 2001(1) 2002 vs. 2000
---------------- -------------
Traffic 0% (10%)
Capacity(2) (4%) (9%)
Yield (5%) (13%)
(1) During 2001, our financial performance was materially adversely
affected by (i) the September 11, 2001 terrorist attacks; (ii) the
slowing U.S. and world economies; (iii) the cancellation of a
substantial number of flights due to a job action by some Delta pilots
and public concern over a possible strike by Delta pilots; and (iv) the
Comair, Inc. (Comair) pilot strike, which resulted in Comair's
suspension of operations between March 26, 2001 and July 1, 2001, and
its gradual return to prestrike service levels following the strike.
(2) We currently have 25 mainline aircraft that remain temporarily grounded
as a result of capacity reductions implemented since September 11,
2001.
Operating revenues in 2002 were $13.3 billion, a 4% decrease from $13.9 billion
in 2001 and a 21% decrease from $16.7 billion in 2000. We have announced
initiatives to mitigate revenue pressures, such as our plans to implement a
marketing agreement with Continental Airlines and Northwest Airlines, and the
launch in April 2003 of a low-fare carrier, Song. Because of the difficult
revenue environment, however, we do not expect significant improvement in our
revenues in 2003.
COSTS
Our cost pressures in 2002 included increases in (1) pension expense due
primarily to increased obligations resulting from declining interest rates, a
decrease in fair value of our pension plan assets, as well as scheduled pilot
pay increases; (2) interest expense primarily due to an increase in debt
outstanding; (3) war and terrorism risk insurance premiums; and (4) security
costs. These costs increased by a total of approximately $645 million from 2001
to 2002. In addition, aircraft fuel prices began to rise significantly beginning
in November 2002, reflecting both the Middle East uncertainty and the Venezuelan
political crisis.
To mitigate these cost pressures, we implemented cost savings initiatives after
September 11, 2001 and throughout 2002 which resulted in approximately $1
billion in savings in 2002. These initiatives included (1) a decrease in salary
expense related to our 2001 workforce reduction programs, partially offset by
pilot and mechanic rate increases; (2) a decrease in passenger commission
expense due to the elimination of travel agent base commissions for tickets sold
in the U.S. and Canada; and (3) declines in contract work, aircraft maintenance
materials volume, advertising expenditures, passenger service expense and
professional fees. While these savings were significant, and resulted in a net
decrease in unit costs compared to 2001, our unit cost remained higher than our
unit revenue.
During 2003, we expect pension, interest and fuel expenses to increase by
approximately $600 million to $800 million compared to 2002, not including the
impact of events outside our control, such as a war with Iraq or other
geopolitical risks. Assuming the Federal Aviation Administration (FAA) continues
to sell war and terrorism risk insurance to airlines at current rates and there
are no changes to our security requirements in 2003, we expect insurance and
security costs to remain relatively flat as compared to 2002. For additional
information on our war and terrorism risk insurance, see Note 19 of the Notes to
the Consolidated Financial Statements.
INITIATIVES
We believe it is essential for us to continue to reduce our costs. Accordingly,
we have initiated actions to reduce costs and capital expenditures in 2003 and
later years, with the goal of reducing non-fuel unit costs by 15% by the end of
2005. These initiatives include the following:
- - Reducing staffing by up to an additional 8,000 jobs. We estimate that
our workforce reduction programs announced in 2002 will result in
approximately $350 million in annual
13
Management's Discussion and Analysis of Financial Condition and Results of
Operations
savings, with $250 million being realized in 2003. Most of these job
reductions will be complete by May 1, 2003. We recorded a pretax charge
of $127 million in the December 2002 quarter related to these workforce
reduction programs and expect to record a pretax charge of
approximately $43 million in the March 2003 quarter for the associated
cost of curtailing the pension and postretirement obligations for
employees participating in these programs. See Notes 16 and 17 of the
Notes to the Consolidated Financial Statements for additional
information on this charge.
- - Investing in technology to improve efficiencies. These initiatives
include installing over 400 additional self-service kiosks in airports
during 2003 and implementing an SAP inventory and supply chain
management system.
- - Utilizing our regional jet aircraft to decrease the average number of
available seats per aircraft while increasing the number of flights in
certain locations. This will allow us to better match capacity with
demand.
- - Modifying our employee benefits programs through a strategic benefits
review. Beginning in 2003, we implemented changes to our healthcare
benefits which we expect to offset rising healthcare costs in 2003 by
approximately $80 million. In July 2003, we will begin the migration
to a new cash balance pension plan, which we anticipate will result in
cost savings of approximately $600 million over the next five years,
including $120 million in 2003.
- - Making significant changes to our fleet plan by (1) reducing costs
through fleet simplification and (2) reducing capital expenditures in
2003 and 2004 by deferring delivery of 31 aircraft, which will result
in no scheduled mainline aircraft deliveries during this two-year
period.
LIQUIDITY
Due to the depressed revenue environment and cost pressures, we borrowed $2.6
billion in 2002. The net proceeds from these transactions were primarily used to
finance aircraft and repay certain debt obligations. All of our borrowings in
2002 were secured by aircraft.
At February 28, 2003, we had cash and cash equivalents totaling $1.9 billion.
This reflects (1) the proceeds from our sale on January 30, 2003 of $392 million
principal amount of insured enhanced equipment trust certificates, which is due
in installments through January 2008 and is secured by 12 mainline aircraft
owned by us, and (2) our purchase on February 25, 2003, of a portion of
outstanding ESOP Notes for $74 million. We also have $500 million of liquidity
available under a secured credit facility which expires on August 21, 2003, and
unencumbered assets available for use in potential financing transactions.
We estimate that the value of our unencumbered aircraft assets at February 28,
2003 is approximately $3.6 billion, (excluding the aircraft that would secure
the $500 million secured credit facility described above), approximately $800
million of which consists of aircraft that are eligible under Section 1110.
Because this provision provides protection to lessors and creditors, and because
Section 1110 aircraft are generally newer, they are more desirable to lenders as
collateral in financing transactions than aircraft that are not eligible under
Section 1110.
The values of our unencumbered aircraft assets were derived by us from published
third-party estimates of the "base value" of similar aircraft using certain
assumptions and may not accurately reflect the current market value of the
aircraft. Base value is an estimate of the underlying economic value of an
aircraft based on historic and future value trends in a stable market
environment, while current market value is the value of the aircraft in the
actual market; both methods assume an aircraft is in average condition and in
its "highest and best use." Given the difficult business environment, there is
no assurance we would have access to financing using these aircraft as
collateral. In any event, the amount we could finance using these aircraft would
likely be significantly less than their base value.
As a result of our revenue and cost initiatives described above, we believe that
our cash flows from operations in 2003 will be sufficient to fund our daily
operations and non-fleet capital expenditures. This expectation reflects the
softness in traffic and advance bookings we are now experiencing as a result of
public concern over possible military action in Iraq. Because we cannot predict
either the occurrence or the scope and duration of events that are beyond our
control, the actual effect on our business of the current geopolitical risks may
differ materially from the level we have assumed.
We expect capital expenditures in 2003 to total approximately $1.5 billion,
including $1.0 billion for regional jet aircraft and $500 million for non-fleet
capital expenditures. We have available commitments from a third party to
provide long-term financing on a secured basis for a substantial portion of our
commitments for regional jet aircraft to be delivered through 2004.
14
We have approximately $700 million of current debt maturities and capital lease
obligations due in 2003, including $301 million under a Reimbursement Agreement
and related letters of credit that terminate on June 8, 2003 (see Note 6 of the
Notes to the Consolidated Financial Statements). We will also be required to pay
(1) $102 million related to additional letters of credit under the Reimbursement
Agreement mentioned above and (2) $250 million under a receivables
securitization agreement when it expires on March 31, 2003 (see Note 8 of the
Notes to the Consolidated Financial Statements). We are seeking to renew or
refinance the receivables and letter of credit facilities, but there is no
assurance we will be able to do so. In addition, our estimated pension funding
is approximately $80 million for 2003.
We expect to meet our obligations as they come due through available cash and
cash equivalents, investments, internally generated funds and borrowings under
existing and new financing transactions. We do not expect new financing
transactions to be available on an unsecured basis. While we expect secured
financing to be available to us on commercially reasonable terms, in the current
business environment access to financing cannot be assured. Failure to obtain
new financing could have a material adverse effect on our liquidity.
2003 RESULTS
Based on the difficult business environment discussed above, we anticipate our
net loss for the March 2003 quarter to be greater than our March 2002 quarter
net loss. We also expect to report a net loss for 2003. In addition, the
following significant external risks exist, which could adversely impact our
results of operations, our financial condition and our ability to access capital
markets for additional financing:
- - The possibility of a war with Iraq and other geopolitical risks, which
could have a material adverse impact on our results of operations and
cash flows.
- - Two major competitors, United and US Airways, are currently operating
under bankruptcy protection. Historically, air carriers involved in
reorganizations have undertaken substantial fare discounts in order to
maintain cash flows and to enhance customer loyalty. Such fare
discounting has lowered, and may continue to lower, yields for all
airlines. Moreover, carriers operating in bankruptcy, or that
successfully emerge from bankruptcy, may be able to achieve reduced
costs which could place us at a competitive disadvantage.
- - The possibility that other carriers may file for bankruptcy protection.
2002 Compared to 2001
NET INCOME (LOSS) AND EARNINGS (LOSS) PER SHARE (EPS)
We recorded a consolidated net loss of $1.3 billion ($10.44 diluted EPS) in
2002, compared to a consolidated net loss of $1.2 billion ($9.99 diluted EPS) in
2001.
OPERATING REVENUES
Operating revenues were $13.3 billion in 2002, decreasing 4% from $13.9 billion
in 2001. Passenger revenues fell 5% to $12.3 billion. RPMs were flat on a
capacity decline of 4%, while passenger mile yield decreased 5% to 12.08(cents).
The decreases in operating revenues, passenger revenues and passenger mile yield
from depressed 2001 levels reflect the continuing effects of the September 11
terrorist attacks on our business and other factors negatively impacting the
revenue environment, which are discussed in the Business Environment section of
Management's Discussion and Analysis on pages 13-15.
NORTH AMERICAN PASSENGER REVENUES
North American passenger revenues fell 6% to $10.0 billion. RPMs increased 1% on
a capacity decrease of 3%, while passenger mile yield decreased 7%. The decline
in passenger mile yield reflects the challenging revenue environment, including
significant fare discounting as well as a substantial reduction in high-yield
business traffic after the September 11 terrorist attacks.
INTERNATIONAL PASSENGER REVENUES
International passenger revenues decreased 2% to $2.3 billion. RPMs fell 2% on a
capacity decline of 7%, while passenger mile yield increased 1%. The decline in
our international capacity was primarily driven by reductions in our Pacific
operations due to weak demand.
CARGO AND OTHER REVENUES
Cargo revenues decreased 9% to $458 million. This reflects a 7% decline due to
FAA security measures adopted after September 11, 2001, that prohibit passenger
airlines from transporting mail weighing more than 16 ounces, which previously
represented approximately 50% of our mail business. The decline in cargo
revenues also reflects a 2% decrease due to lower domestic freight volumes and
yields. Cargo ton miles decreased 6% and cargo ton mile yield decreased 4%.
Other revenues increased 29% to $526 million, primarily reflecting a 12%
increase due to higher administrative service fees and a 12% increase due to
higher codeshare revenues.
15
Management's Discussion and Analysis of Financial Condition and Results of
Operations
OPERATING EXPENSES
Operating expenses for 2002 totaled $14.6 billion, decreasing 6% from $15.5
billion in 2001. Operating capacity decreased 4% to 142 billion ASMs. CASM fell
2% to 10.31(cents), while fuel price neutralized CASM fell 1% to 10.34(cents).
Operating expenses include asset writedowns, restructuring and related items,
net totaling a $439 million charge in 2002 and a $1.1 billion charge in 2001, as
well as Stabilization Act compensation of $34 million in 2002 and $634 million
in 2001 (see Notes 16 and 19, respectively, of the Notes to the Consolidated
Financial Statements). Excluding these items, operating expenses decreased 5% to
$14.2 billion, CASM fell 1% to 10.03(cents), and fuel price neutralized CASM
fell 1% to 10.06(cents).
Salaries and related costs totaled $6.2 billion in 2002, a 1% increase from $6.1
billion in 2001. This reflects a 6% increase from higher pension expense and a
5% increase due to higher salary and benefit rates, primarily for pilots and
mechanics. These increases were largely offset by decreases due to workforce
reductions implemented after we reduced capacity following September 11, 2001.
Aircraft fuel expense totaled $1.7 billion during 2002, a 7% decrease from $1.8
billion during 2001. Total gallons consumed decreased 5% mainly due to capacity
reductions. The average fuel price per gallon fell 2% to 66.94(cents). Our fuel
cost is shown net of fuel hedge gains of $136 million for 2002 and $299 million
for 2001. Approximately 56% and 58% of our aircraft fuel requirements were
hedged during 2002 and 2001, respectively. For additional information about our
fuel hedge contracts, see Note 4 of the Notes to the Consolidated Financial
Statements.
Depreciation and amortization expense fell 11% in 2002, reflecting a 6% decrease
due to a change in our asset base and a 5% decrease due to our adoption on
January 1, 2002, of Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets" (SFAS 142). SFAS 142 requires that
goodwill and certain other intangible assets no longer be amortized (see Note 5
of the Notes to the Consolidated Financial Statements).
Contracted services expense declined 1% primarily due to a 4% decrease from
fewer contract workers across all workgroups, partially offset by a 3% increase
due to higher security costs. Landing fees and other rents rose 7%, of which 3%
was related to an increase in landing fee rates and 2% was due to lower costs in
2001 resulting from Comair's reduced operations in 2001 due to its pilot strike
and gradual return to previous levels of service after the strike. Aircraft
maintenance materials and outside repairs expense fell 11%, primarily reflecting
a reduction in maintenance volume and materials consumption due to the timing of
maintenance events. Aircraft rent expense decreased 4%, primarily due to lower
numbers of leased aircraft during the March, June and September 2002 quarters
resulting from our fleet simplification efforts. Other selling expenses fell
13%, of which 6% was due to lower costs associated with our mileage partnership
programs and 4% was due to reduced advertising and promotion spending.
Passenger commission expense declined 40%, primarily due to a change in our
commission rate structure. On March 14, 2002, we eliminated travel agent base
commissions for tickets sold in the U.S. and Canada. Passenger service expense
decreased 20%, primarily due to meal service reductions.
Asset writedowns, restructuring and related items, net totaled $439 million in
2002 compared to $1.1 billion in 2001. Our 2002 charge consists of $251 million
in asset writedowns, $127 million related to our 2002 workforce reduction
programs, $93 million for the temporary carrying cost of surplus pilots and
grounded aircraft, $30 million due to the deferred delivery of certain mainline
aircraft, $14 million for the closure of certain leased facilities and $3
million related to other items, partially offset by a $79 million reversal of
certain reserves. Our 2001 charge consists of $566 million related to our 2001
workforce reduction programs, $363 million from a decrease in value of certain
aircraft and other fleet-related charges, $160 million related primarily to
discontinued contracts, facilities and information technology projects and $30
million for the temporary carrying cost of surplus pilots and grounded aircraft.
See Note 16 of the Notes to the Consolidated Financial Statements for additional
information on these asset writedowns, restructuring and related items, net.
Stabilization Act compensation totaled $34 million in 2002 compared to $634
million in 2001, representing amounts we recognized as compensation in the
applicable period under the Air Transportation Safety and System Stabilization
Act (Stabilization Act). See Note 19 of the Notes to the Consolidated Financial
Statements for additional information.
16
Other operating expenses decreased 11% primarily due to declines in
miscellaneous expenses such as supplies, utilities, interrupted operation
expenses and professional fees, which were partially offset by a 19% increase in
expenses due to a rise in war and terrorism risk insurance rates.
OPERATING INCOME (LOSS) AND OPERATING MARGIN
We incurred an operating loss of $1.3 billion in 2002, compared to an operating
loss of $1.6 billion in 2001. Operating margin was (10%) and (12%) for 2002 and
2001, respectively. Excluding asset writedowns, restructuring and related items,
net, and Stabilization Act compensation discussed above, we incurred an
operating loss of $904 million in 2002, compared to an operating loss of $1.1
billion in 2001. Operating margin excluding these items was (7%) and (8%) for
2002 and 2001, respectively.
OTHER INCOME (EXPENSE)
Other expense totaled $693 million during 2002, compared to other expense of
$262 million in 2001. Included in these results are the following:
- - A $127 million gain in 2001 on the sale of certain investments. This
primarily relates to a $111 million gain on the sale of our equity
interest in SkyWest, Inc., the parent company of SkyWest Airlines, and
an $11 million gain from the sale of our equity interest in Equant,
N.V., an international data network services company.
- - A $39 million charge in 2002 compared to a $68 million gain in 2001 for
fair value adjustments of financial instruments accounted for under
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). This relates to derivative instruments we use
in our fuel hedging program and to our equity warrants and other
similar rights in certain companies.
- - A $42 million charge for the extinguishment of debt and a $13 million
loss for the reduction in value of certain investments in 2002.
The change in other income (expense) is also attributable to the following:
- - Interest expense increased $147 million in 2002 compared to 2001,
primarily due to higher levels of outstanding debt.
- - Interest income decreased $53 million in 2002 due to lower interest
rates and a lower average cash balance compared to 2001.
- - Miscellaneous income, net was $1 million in 2002 compared to a $47
million expense in 2001, due primarily to increased earnings from our
equity investment in WORLDSPAN, L.P. (Worldspan), a computer
reservations system partnership.
2001 Compared to 2000
NET INCOME (LOSS) AND EARNINGS (LOSS) PER SHARE
We recorded a consolidated net loss of $1.2 billion ($9.99 diluted EPS) in 2001
and consolidated net income of $828 million ($6.28 diluted EPS) in 2000.
OPERATING REVENUES
Operating revenues were $13.9 billion in 2001, decreasing 17% from $16.7 billion
in 2000. Passenger revenues fell 17% to $13.0 billion. RPMs declined 10% on a
capacity decrease of 5%, while passenger mile yield declined 8% to 12.74(cents).
These decreases were primarily the result of the effects of the terrorist
attacks on September 11, the slowing U.S. and world economies and pilot labor
issues at both Delta and Comair.
NORTH AMERICAN PASSENGER REVENUES
North American passenger revenues fell 19% to $10.6 billion. RPMs decreased 11%
on a capacity decrease of 6%, while passenger mile yield decreased 9%. These
decreases resulted from the September 11 terrorist attacks, the slowing economy
and pilot labor issues.
INTERNATIONAL PASSENGER REVENUES
International passenger revenues decreased 6% to $2.3 billion. RPMs fell 6%
mainly due to the terrorist attacks on September 11 and the slowing U.S. and
world economies. Passenger mile yield remained flat while capacity increased 2%,
reflecting our international expansion, particularly in Latin American markets.
CARGO AND OTHER REVENUES
Cargo revenues decreased 13% to $506 million. This reflects an 8% decline due to
lower mail revenues resulting from the implementation of new FAA restrictions on
mail and weak U.S. and world economies, and a 5% decrease due to a decline in
freight volumes, also resulting from the slowing U.S. and world economies. Cargo
ton miles decreased 15% and cargo ton mile yield increased 2%. Other revenues
decreased 18% to $409 million, primarily due to lower codeshare revenues,
resulting from the terrorist attacks on September 11 and the slowing U.S. and
world economies.
17
Management's Discussion and Analysis of Financial Condition and Results of
Operations
OPERATING EXPENSES
Operating expenses for 2001 totaled $15.5 billion, increasing 2% from $15.1
billion in 2000. Operating capacity decreased 5% to 148 billion ASMs. CASM rose
7% to 10.47(cents), and fuel price neutralized CASM grew 7% to 10.45(cents).
Operating expenses include asset writedowns, restructuring and related items,
net totaling a $1.1 billion charge in 2001 and a $108 million charge in 2000, as
well as Stabilization Act compensation of $634 million in 2001 (see Notes 16 and
19, respectively, of the Notes to the Consolidated Financial Statements).
Excluding these items, operating expenses remained flat at $15.0 billion, CASM
rose 5% to 10.14(cents), and fuel price neutralized CASM grew 5% to
10.12(cents).
Salaries and related costs increased 3% during 2001 to $6.1 billion, primarily
due to a rise in costs associated with a new collective bargaining agreement
between Delta and its pilots.
Aircraft fuel expense decreased 8% in 2001. Total gallons consumed decreased 9%
due primarily to a decrease in flights resulting from the September 11 terrorist
attacks and the Comair pilot strike, as well as fuel efficiencies realized from
our fleet renewal efforts. The average fuel price per gallon rose 2% to
68.60(cents). Our fuel cost is shown net of fuel hedge gains of $299 million for
2001 and $684 million for 2000. Approximately 58% and 67% of our aircraft fuel
requirements were hedged during 2001 and 2000, respectively. For additional
information about our fuel hedge contracts, see Note 4 of the Notes to the
Consolidated Financial Statements.
Depreciation and amortization expense rose 8% in 2001 due to the acquisition of
additional aircraft and ground equipment. Contracted services expense increased
5% resulting primarily from a 1% rise due to rate increases for building and
equipment maintenance and a 1% increase due to a rise in security costs. Landing
fees and other rents rose 1%. This change includes a 2% rise from increased
rates at various locations and a 2% decrease due to Comair's reduced operations
from its pilot strike. Aircraft maintenance materials and outside repairs
expense grew 11% due primarily to the timing of certain maintenance work.
Aircraft rent expense decreased 1% due to a decrease in the number of leased
aircraft.
Other selling expenses decreased 10% due to a lower volume of credit card
charges from lower revenue. Passenger commission expense declined 18%, primarily
as a result of lower passenger revenues. Passenger service expense decreased 1%.
Asset writedowns, restructuring and related items, net totaled $1.1 billion in
2001 compared to $108 million in 2000. Our 2001 charge is described on page 16.
Our 2000 charge consists of $86 million related to our decision to offer an
early retirement medical option program and $22 million from the closure of our
Pacific gateway in Portland, Oregon. See Note 16 of the Notes to the
Consolidated Financial Statements for additional information on these asset
writedowns, restructuring and related items, net.
Stabilization Act compensation totaled $634 million in 2001. This represents the
amount we recognized in 2001 as compensation under the Stabilization Act. See
Note 19 of the Notes to the Consolidated Financial Statements for additional
information.
Other operating expenses decreased 4% as a result of decreases in miscellaneous
expenses such as fuel-related taxes, interrupted trip expenses and professional
fees, which were partially offset by a 2% increase due to new uniform costs and
a 3% increase due to higher insurance expenses.
OPERATING INCOME (LOSS) AND OPERATING MARGIN
We incurred an operating loss of $1.6 billion in 2001, compared to operating
income of $1.6 billion in 2000. Operating margin was (12%) and 10% for 2001 and
2000, respectively. Excluding asset writedowns, restructuring and related items,
net and Stabilization Act compensation discussed above, we incurred an operating
loss of $1.1 billion in 2001, compared to operating income of $1.7 billion in
2000. Operating margin excluding these items was (8%) and 10% for 2001 and 2000,
respectively.
OTHER INCOME (EXPENSE)
Other expense totaled $262 million during 2001, compared to other expense of $88
million in 2000. Included in these results are the following:
- - A $301 million gain in 2000 for the sale of certain investments. This
includes a $73 million gain from the sale of 1.2 million shares
of priceline.com, Incorporated (priceline) common stock and a $228
million non-cash gain from the exchange of six million shares of
priceline common stock for priceline preferred stock.
- - A $127 million gain in 2001 on the sale of certain investments. This
primarily relates to a $111 million gain on the sale of our equity
interest in SkyWest, Inc., the parent company of SkyWest Airlines and
an $11 million gain from the sale of our equity interest in Equant,
N.V., an international data network services company.
18
- - A $68 million gain in 2001 compared to a $159 million charge in 2000
for fair value adjustments of financial instruments accounted for under
SFAS 133. This relates to derivative instruments we use in our fuel
hedging program and to our equity warrants and other similar rights in
certain companies.
- - A $16 million one-time, non-cash gain in 2000 related to our equity
investment in Worldspan. This gain represents our share of Worldspan's
favorable outcome in certain arbitration proceedings.
The change in other income (expense) is also attributable to the following:
- - Interest expense increased $119 million in 2001 primarily due to higher
levels of outstanding debt;
- - Interest income decreased $34 million in 2001 primarily due to lower
interest rates; and
- - Miscellaneous expense, net was $47 million in 2001 compared to $27
million in income in 2000 mainly due to a decrease in our equity
earnings from Worldspan.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
During 2000 we recorded a $164 million cumulative effect, non-cash charge ($100
million net of tax, or $0.77 diluted EPS) resulting from our adoption of SFAS
133 on July 1, 2000 (see Note 4 of the Notes to the Consolidated Financial
Statements).
Financial Condition and Liquidity
SOURCES AND USES OF CASH
2OO2
Cash and cash equivalents totaled $2.0 billion at December 31, 2002, compared to
$2.2 billion at December 31, 2001. For 2002, net cash provided by operations
totaled $285 million, including receipt of (1) a $472 million tax refund due to
a new tax law and (2) $112 million in compensation under the Stabilization Act.
Our cash flows from significant financing and investing activities are described
below.
Capital expenditures, including aircraft acquisitions made under seller
financing arrangements, were $2.0 billion during 2002 and included the
acquisition of four B-737-800, three B-767-400, one B-777-200, 34 CRJ-200 and
15 CRJ-700 aircraft.
Debt and capital lease obligations, including current maturities and short-term
obligations, totaled $10.9 billion at December 31, 2002, compared to $9.4
billion at December 31, 2001. During 2002, we entered into or amended the
following credit facilities to increase our liquidity (see Note 6 of the Notes
to the Consolidated Financial Statements):
- - We issued a total of $1.4 billion of enhanced equipment trust
certificates, which are secured by 17 B-737-800, one B-757-200, eight
B-767-300ER and six B-767-400 aircraft. These financings are due in
installments through January 2023. At December 31, 2002, there was $1.4
billion outstanding under these financings.
- - In addition to the enhanced equipment trust certificates described
above, during 2002 we borrowed $1.2 billion, which is due in
installments through June 2019 and is secured by 56 regional jet
aircraft, five B-737-800 aircraft, three B-767-300ER aircraft and two
B-767-300 aircraft. At December 31, 2002, there was $1.2 billion in
borrowings outstanding under these financings. These transactions
resulted in the termination of a $350 million short-term facility that
we had entered into in January 2002.
- - On January 31, 2002, we entered into a facility to finance, on a
secured basis at the time of acquisition, certain future deliveries of
regional jet aircraft. At December 31, 2002, total borrowings available
to us under this facility, as amended, were $197 million, of which $31
million was outstanding.
- - On August 22, 2002, we amended and restated an existing credit facility
to (1) extend the term from December 27, 2002 to August 21, 2003 and
(2) reduce the maximum amount we may borrow under this agreement from
$625 million to $500 million. Any borrowings under this facility will
be secured by certain aircraft owned by us. At December 31, 2002, no
borrowings were outstanding under this facility.
- - In October 2002, we amended our unsecured letter of credit
Reimbursement Agreement with Commerzbank AG and a group of banks to (1)
eliminate the debt-to-equity ratio and secured debt covenants from that
agreement and (2) add a covenant requiring us to maintain a minimum of
$1 billion of unrestricted cash, cash equivalents and short-term
investments as of the end of each month, beginning on October 31, 2002.
The Reimbursement Agreement and the related letters of credit will
terminate on June 8, 2003.
In addition, during 2002, we deferred delivery of the following 31 mainline
aircraft:
19
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- - five B-737-800 aircraft deferred from 2003 to 2006;
- - 23 B-737-800 aircraft deferred from 2004 to 2007;
- - one B-777-200 aircraft deferred from 2004 to 2006; and
- - two B-777-200 aircraft deferred from 2005 to 2006.
As a result of these deferrals, we have no mainline aircraft deliveries
scheduled in 2003 or 2004, which will reduce capital expenditures by
approximately $1.3 billion during that two-year period.
Shareowners' equity was $893 million at December 31, 2002 and $3.8 billion at
December 31, 2001. The decrease in our shareowners' equity is primarily due to
the $1.6 billion non-cash charge to equity related to our pension plans (see
Note 11 of the Notes to the Consolidated Financial Statements) and our
consolidated net loss in 2002. These items, as well as an increase in
outstanding debt, have caused our net debt-to-capital ratio, which includes
implied debt from operating leases, to increase to 94% at December 31, 2002 from
80% at December 31, 2001.
For additional information on our liquidity, see the Business Environment
section of Management's Discussion and Analysis on pages 13-15.
WORKING CAPITAL POSITION
As of December 31, 2002, we had negative working capital of $2.6 billion,
compared to negative working capital of $2.8 billion at December 31, 2001.
A negative working capital position is normal for us, typically due to our air
traffic liability and the fact that we primarily generate revenue by providing
air transportation through the utilization of property and equipment, which are
classified as long-term assets. Our negative working capital position also
reflects our losses over the past two years.
CREDIT RATINGS AND COVENANTS
At December 31, 2002, our senior unsecured long-term debt was rated Ba3 by
Moody's and BB- by Standard and Poor's. On February 18, 2003, Standard & Poor's
lowered their ratings on certain of our enhanced equipment trust certificates.
Both Moody's and Standard & Poor's outlooks for our long-term credit ratings are
negative. Our current credit ratings have negatively impacted our ability (1) to
issue unsecured debt, (2) to renew outstanding letters of credit that back
certain of our obligations and (3) to obtain certain financial instruments that
we use in our fuel hedging program. They have also increased the cost of our
financing transactions and the amount of collateral required for certain
financial instruments and insurance coverage. Subsequent to December 31, 2002,
our collateral requirements related to our workers' compensation insurance
increased by $55 million. As discussed in Note 8 of the Notes to the
Consolidated Financial Statements, we may be required to repurchase outstanding
receivables that we sold to a third party ($250 million at December 31, 2002) if
our senior unsecured long-term debt is rated either below Ba3 by Moody's or
below BB- by Standard & Poor's.
We have obtained from a third party unsecured letters of credit totaling $409
million relating to bonds issued by various municipalities to finance
construction at certain airport facilities leased to us. As discussed under
"Letter of Credit Enhanced Municipal Bonds" in Note 6 of the Notes to the
Consolidated Financial Statements, we will be required to accelerate the
repayment of these obligations if we do not extend those letters of credit prior
to their expiration on June 8, 2003.
The Reimbursement Agreement relating to the letters of credit described in the
above paragraph contains covenants that (1) require us to maintain a minimum of
$1 billion of unrestricted cash, cash equivalents and short-term investments at
the end of each month; (2) limit the amount of current debt and convertible
subordinated debt that we may have outstanding; and (3) limit our annual flight
equipment rental expense. It also provides that, upon the occurrence of a change
in control of Delta, we shall, at the request of the banks, deposit cash
collateral with the banks in an amount equal to all letters of credit
outstanding and other amounts we owe under the agreement. We are in compliance
with all of our financial covenants.
PRIOR YEARS
2001
Cash and cash equivalents totaled $2.2 billion at December 31, 2001. Net cash
provided by operations totaled $236 million during 2001, including $556 million
of compensation received under the Stabilization Act. Capital expenditures,
including aircraft acquisitions made under seller financing arrangements, were
$2.9 billion during 2001 and included the acquisition of 27 B-737-800, three
B-757-200, two B-767-300ER, six B-767-400, 23 CRJ-200 and four CRJ-100 aircraft.
Debt and capital lease obligations, including current maturities and short-term
obligations, totaled $9.4 billion at December 31, 2001. Of this amount, $2.3
billion of secured long-term debt was issued during the year.
20
2000
Cash, cash equivalents and short-term investments totaled $1.6 billion at
December 31, 2000. Net cash provided by operations totaled $2.9 billion during
2000. Capital expenditures were $4.1 billion during 2000 and included the
acquisition of 24 B-737-800, 12 B-757-200, seven B-767-300ER, 12 B-767-400, 11
CRJ-200, 19 CRJ-100 and seven ATR-72 aircraft. We also paid $232 million to
complete our acquisition of Comair Holdings, Inc. Debt and capital lease
obligations, including current maturities and short-term obligations, totaled
$6.0 billion at December 31, 2000. Of this amount, $1.9 billion of long-term
debt was issued during the year (including $1.5 billion of secured debt).
Financial Position
DECEMBER 31, 2002 COMPARED TO DECEMBER 31, 2001
This section discusses certain changes in our Consolidated Balance Sheets which
are not otherwise discussed in this Annual Report.
Prepaid expenses and other current assets increased by 23%, or $66 million,
primarily due to our recognition of an intangible asset in connection with the
recording of an additional minimum pension liability and an increase in prepaid
aircraft rent. Investments in debt and equity securities decreased 66%, or $63
million, primarily due to the partial exercise of our price-line warrants and
the sale of a portion of the related shares, as well as a decrease in fair value
of our equity securities. Restricted investments for the Boston airport terminal
project decreased 12%, or $58 million, due to the capitalization of project
expenditures and interest paid. Other noncurrent assets increased 47%, or $472
million, due to an increase in our deferred tax assets and our recognition of an
intangible asset in connection with the recording of an additional minimum
pension liability.
Taxes payable decreased 18%, or $187 million, primarily due to a decrease in
ticket, transportation and airport taxes payable for which payment was deferred
under the Stabilization Act until January 2002. Accrued salaries and benefits
increased 22%, or $244 million, primarily due to an increase in the number of
retired employees and employees on leave and severance programs.
Pension and related benefits increased $2.9 billion, primarily due to an
additional minimum pension liability recorded at December 31, 2002. For
additional information on our employee benefit plans, see Note 11 of the Notes
to the Consolidated Financial Statements.
CONTRACTUAL OBLIGATIONS
The following table provides a summary of our debt obligations, capital lease
obligations, operating lease payments, estimated future expenditures for
aircraft and engines and certain other material purchase obligations as of
December 31, 2002. This table excludes other obligations that we may have, such
as pension obligations (discussed in Note 11 of the Notes to the Consolidated
Financial Statements). The table also excludes information about our obligations
related to our contract carrier agreements (discussed below) due to the fact
that costs beyond 2003 are not reasonably estimable at this time.
Contractual Payments Due by Period
----------------------------------------------------------------------------------
(in millions) Total 2003 2004 2005 2006 2007 After 2007
------- ------ ------ ------ ------ ------ ----------
Debt(1) $10,740 $ 666 $ 623 $1,203 $ 602 $ 285 $ 7,361
Capital Lease Obligations(2) 172 40 31 24 16 15 46
Operating Lease Payments(3) 12,744 1,277 1,203 1,176 1,128 1,042 6,918
Estimated Future Expenditures
for Aircraft and Engines(4) 5,027 1,024 672 1,191 1,281 859 --
Other Purchase Obligations 66 33 33 -- -- -- --
------- ------ ------ ------ ------ ------ ---------
Total $28,749 $3,040 $2,562 $3,594 $3,027 $2,201 $14,325
======= ====== ====== ====== ====== ====== =========
(1) These amounts are included on our Consolidated Balance Sheets. A
portion of this debt is backed by letters of credit totaling $305
million at December 31, 2002, which expire on June 8, 2003. See Note 6
of the Notes to the Consolidated Financial Statements for additional
information about our debt and related matters.
(2) The present value of these obligations, excluding interest, is included
on our Consolidated Balance Sheets. See Note 7 of the Notes to the
Consolidated Financial Statements for additional information about our
capital lease obligations.
(3) Our operating lease obligations are described in Note 7 of the Notes to
the Consolidated Financial Statements. A portion of these obligations
is backed by letters of credit totaling $104 million at December 31,
2002, which expire on June 8, 2003. See Note 6 of the Notes to the
Consolidated Financial Statements for additional information about
these letters of credit.
(4) Our estimated future expenditures for aircraft and engines are
discussed in Note 9 of the Notes to the Consolidated Financial
Statements.
21
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Our estimated pension funding is approximately $80 million for 2003 and between
$350 million and $450 million for 2004. These funding estimates are based on
various assumptions, including actual market performance of our plan assets and
future 30-year U.S. Treasury bond yields. Our 2004 estimate could change
significantly prior to the funding date and funding beyond 2004 is not
reasonably estimable at this time. Pension funding requirements are governed by
ERISA and subject to certain federal tax regulations. See Note 11 of the Notes
to the Consolidated Financial Statements for additional information about our
pension plans.
In addition, we have contractual obligations related to our contract carrier
agreements with SkyWest Airlines, Atlantic Coast Airlines and Chautauqua
Airlines. We estimate that our obligations under these contracts will total
approximately $780 million in 2003. Costs beyond 2003 under these agreements
will be impacted by certain variable operating costs that cannot be reasonably
determined at this time. See Note 9 of the Notes to the Consolidated Financial
Statements for additional information about these agreements.
OFF-BALANCE SHEET ARRANGEMENTS
SALE OF RECEIVABLES
We are a party to an agreement under which we sell a defined pool of our
accounts receivable, on a revolving basis, through a special-purpose, wholly
owned subsidiary to a third party. In accordance with accounting principles
generally accepted in the United States of America (GAAP), we do not consolidate
this subsidiary in our Consolidated Financial Statements. This agreement is
scheduled to terminate on March 31, 2003. If the agreement is not renewed prior
to this date, we will be required to repurchase outstanding receivables which
totaled $250 million at December 31, 2002. This amount is not included on our
Consolidated Balance Sheets. See Note 8 of the Notes to the Consolidated
Financial Statements for additional information about this agreement.
OTHER
LEGAL CONTINGENCIES
We are involved in legal proceedings relating to antitrust matters, employment
practices, environmental issues and other matters concerning our business. We
cannot reasonably estimate the potential loss for certain legal proceedings
because, for example, the litigation is in its early stages or the plaintiff
does not specify damages being sought. Although the ultimate outcome of these
matters cannot be predicted with certainty, we believe that the resolution of
these actions will not have a material adverse effect on our Consolidated
Financial Statements.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make certain estimates and assumptions. We periodically evaluate
these estimates and assumptions, which are based on historical experience,
changes in the business environment and other factors that management believes
to be reasonable under the circumstances. Actual results may differ materially
from these estimates.
Rules proposed by the Securities and Exchange Commission define critical
accounting estimates as those accounting estimates which (1) require management
to make assumptions about matters that are highly uncertain at the time the
estimate is made and (2) would have resulted in material changes to our
Consolidated Financial Statements if different estimates, which we reasonably
could have used, were made. Our critical accounting estimates are briefly
described below. Additional information about these estimates and our
significant accounting policies are included in Notes 1, 5, 10 and 11 of the
Notes to the Consolidated Financial Statements.
GOODWILL
On January 1, 2002, we adopted SFAS 142, which addresses financial accounting
and reporting for goodwill and other intangible assets, including when and how
to perform impairment tests of recorded balances.
We have three reporting units that have assigned goodwill: Delta-mainline,
Atlantic Southeast Airlines, Inc. (ASA) and Comair. Quoted stock market prices
are not available for these individual reporting units. Accordingly, consistent
with SFAS 142, our methodology for estimating the fair value of each reporting
unit primarily considers discounted future cash flows. In applying this
methodology, we (1) make assumptions about each reporting unit's future cash
flows based on capacity, yield, traffic, operating costs and other relevant
factors and (2) discount those cash flows based on each reporting unit's
weighted average cost of capital. Changes in these assumptions may have a
material impact on our Consolidated Financial Statements.
22
INCOME TAX VALUATION ALLOWANCE
In accordance with SFAS No. 109, "Accounting for Income Taxes" (SFAS 109),
deferred tax assets should be reduced by a valuation allowance if it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. In making this determination, we consider both positive and negative
evidence and make certain assumptions, including projections of taxable income.
Changes in these assumptions may have a material impact on our Consolidated
Financial Statements.
PENSION PLANS
We sponsor defined benefit pension plans (Plans) for eligible employees and
retirees. The impact of the Plans on our Consolidated Financial Statements as of
December 31, 2002 and 2001 and for each of the three years in the period ended
December 31, 2002 is presented in Note 11 of the Notes to the Consolidated
Financial Statements. We currently estimate that our defined benefit pension
expense in 2003 will be approximately $335 million. The effect of our Plans on
our Consolidated Financial Statements is subject to many assumptions. We believe
the most critical assumptions are (1) the weighted average discount rate; (2)
the rate of increase in future compensation levels; and (3) the expected
long-term rate of return on Plan assets.
We determine our weighted average discount rate on our measurement date
primarily by reference to annualized rates earned on high quality fixed income
investments and yield-to-maturity analysis specific to our estimated future
benefit payments. Lowering our discount rate (6.75% at September 30, 2002) by
0.5% would increase our accrued pension cost by approximately $730 million at
December 31, 2002 and increase our estimated pension expense in 2003 by
approximately $80 million.
Our rate of increase in future compensation levels is based primarily on labor
contracts currently in effect with our employees under collective bargaining
agreements and expected future pay rate increases for other employees.
Increasing our estimated rate of increase in future compensation levels (2.67%
at September 30, 2002) by 0.5% would increase our estimated pension expense in
2003 by approximately $40 million.
The expected long-term rate of return on our Plan assets is based primarily on
Plan-specific asset/liability investment studies performed by outside
consultants and recent and historical returns on our Plans' assets. Lowering our
expected long-term rate of return (9% at September 30, 2002) by 0.5% would
increase our estimated pension expense in 2003 by approximately $60 million.
MARKET RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS
We have market risk exposure related to aircraft fuel prices, stock prices,
interest rates and foreign currency exchange rates. Market risk is the potential
negative impact of adverse changes in these prices or rates on our Consolidated
Financial Statements. To manage the volatility relating to these exposures, we
periodically enter into derivative transactions pursuant to stated policies (see
Notes 3 and 4 of the Notes to the Consolidated Financial Statements). Management
expects adjustments to the fair value of financial instruments accounted for
under SFAS 133 to result in ongoing volatility in earnings and shareowners'
equity.
The following sensitivity analyses do not consider the effects of a decline in
demand for air travel, the economy as a whole or additional actions by
management to mitigate our exposure to a particular risk. For these and other
reasons, the actual results of changes in these prices or rates may differ
materially from the following hypothetical results.
AIRCRAFT FUEL PRICE RISK
Our results of operations may be significantly impacted by changes in the price
of aircraft fuel. To manage this risk, we periodically enter into heating and
crude oil derivative contracts to hedge a portion of our projected annual
aircraft fuel requirements. Heating and crude oil prices have a highly
correlated relationship to fuel prices, making these derivatives effective in
offsetting changes in the cost of aircraft fuel. We do not enter into fuel hedge
contracts for speculative purposes. These contracts are intended to reduce our
exposure to changes in aircraft fuel prices.
The following table shows our fuel hedging position based on instruments held at
December 31, 2002, as supplemented by fuel hedge contracts acquired through
March 12, 2003:
% of Projected
Aircraft Fuel
Requirements Average Hedge
Hedged Price per Gallon
-------------- ----------------
March 2003 Quarter 77% 79.10(cents)
June 2003 Quarter 78% 78.27(cents)
September 2003 Quarter 52% 78.88(cents)
December 2003 Quarter 36% 74.25(cents)
Year Ending December 31, 2003 61% 78.08(cents)
Year Ending December 31, 2004 10% 68.88(cents)
23
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The fair values of our heating and crude oil derivative instruments were $73
million at December 31, 2002 and $64 million at December 31, 2001. A 10%
decrease in the average annual price of heating and crude oil would have
decreased the fair values of these instruments by $70 million at December
31, 2002.
During 2002, aircraft fuel accounted for 12% of our total operating expenses.
Based on our projected aircraft fuel consumption of 2.4 billion gallons for
2003, a 10% rise in our jet fuel prices would increase our aircraft fuel expense
by approximately $46 million in 2003. This analysis includes the effects of fuel
hedging instruments in place at December 31, 2002.
For additional information regarding our aircraft fuel price risk management
program, see Note 4 of the Notes to the Consolidated Financial Statements.
EQUITY SECURITIES RISK
We hold equity-based interests, including warrants and other similar rights, in
certain companies, primarily priceline and Republic Airways Holdings, Inc.
(Republic). The estimated fair values and aggregate unrealized and unrecognized
losses from these investments were $31 million and $9 million, respectively, at
December 31, 2002. At December 31, 2001, the estimated fair values of our
equity-based interests totaled $81 million, with aggregate unrealized and
unrecognized losses of $3 million. The risk associated with these investments is
the potential loss in fair value resulting from a decrease in the price of the
issuer's common stock. Based on the fair value of these equity-based interests
at December 31, 2002, a 10% decline in the price of the underlying common stock
would decrease the fair value of these instruments by approximately $3 million.
For additional information regarding our equity-based interests, see Note 2 of
the Notes to the Consolidated Financial Statements.
INTEREST RATE RISK
Our exposure to market risk due to changes in interest rates primarily relates
to our long-term debt obligations and cash investment portfolio.
Market risk associated with our long-term debt is the potential change in fair
value resulting from a change in interest rates. A 10% decrease in average
annual interest rates would have increased the estimated fair value of our
long-term debt by approximately $395 million at December 31, 2002, and $373
million at December 31, 2001. To manage our interest rate exposure, we have
entered into two interest rate swap agreements. At December 31, 2002, the fair
value of these agreements was $21 million. A 10% increase in average annual
interest rates would have had an immaterial effect on the fair value of these
instruments at December 31, 2002. A 10% increase in average annual interest
rates would have had an approximately $17 million impact on our interest expense
in 2002. For additional information on our interest rate swap and long-term debt
agreements, see Notes 4 and 6 of the Notes to the Consolidated Financial
Statements.
Market risk associated with our cash portfolio is the potential change in
earnings resulting from a change in interest rates. Based on our average balance
of cash and cash equivalents during 2002, a 10% decrease in average annual
interest rates would have decreased our interest income by approximately $4
million.
FOREIGN CURRENCY EXCHANGE RATE RISK
We have limited revenues and expenses denominated in foreign currencies. As a
result, we are exposed to limited foreign currency exchange rate risk. The
majority of our exposure results from transactions denominated in the euro,
British pound and Canadian dollar. To manage exchange rate risk, we net foreign
currency revenues and expenses, to the extent practicable, to take advantage of
natural offsets. We may use foreign currency option and forward contracts with
maturities of up to 12 months to manage the remaining net exposure. We did not
have any of these instruments outstanding at December 31, 2002. Based on our
average annual net foreign currency positions during 2002, a 10% adverse change
in average annual foreign currency exchange rates would not have had a material
impact on our Consolidated Financial Statements.
24
Forward-Looking Information
Statements in this Annual Report (or otherwise made by Delta or on Delta's
behalf), which are not historical facts, including statements about Delta's
estimates, expectations, beliefs, intentions, projections or strategies for the
future, may be "forward-looking statements" as defined in the Private Securities
Litigation Reform Act of 1995. Forward-looking statements involve risks and
uncertainties that could cause actual results to differ materially from
historical experience or Delta's present expectations. Factors that could cause
these differences include, but are not limited to:
1. The many effects on Delta and the airline industry from the terrorist
attacks on the United States on September 11, 2001, including the
following:
- The adverse impact of the terrorist attacks on the demand for
air travel;
- The change in Delta's operations and higher costs resulting
from, and customer reaction to, new airline and airport
security directives;
- The availability and cost of war and terrorism risk and other
insurance for Delta;
- Potential declines in the values of the aircraft in Delta's
fleet or facilities and any related asset impairment charges;
2. The availability to Delta of financing on commercially reasonable
terms, which may be influenced by, among other things, airline
bankruptcies, the creditworthiness of the airline industry in general
and Delta in particular, and actions by credit rating agencies;
3. Continued geopolitical uncertainty, including additional terrorist
activity and/or war with Iraq;
4. General economic conditions, both in the United States and in our
markets outside the United States;
5. The willingness of customers to travel generally, and with Delta
specifically, which could be affected by factors such as Delta's and
the industry's safety record and geopolitical uncertainty;
6. Competitive factors in our industry, such as airline bankruptcies, the
airline pricing environment, the growth of low-cost carriers,
international alliances, codesharing programs, capacity decisions by
competitors and mergers and acquisitions;
7. Outcomes of negotiations on collective bargaining agreements and other
labor issues;
8. Changes in the availability or cost of aircraft fuel or fuel hedges;
9. Disruptions to operations due to adverse weather conditions and air
traffic control-related constraints;
10. Actions by the United States or foreign governments, including the FAA
and other regulatory agencies; and
11. The outcome of Delta's litigation.
Caution should be taken not to place undue reliance on Delta's forward-looking
statements, which represent Delta's views only as of March 12, 2003, and which
Delta has no current intention to update.
25
Consolidated Balance Sheets
December 31, 2002 and 2001
Assets
(in millions) 2002 2001
------- -------
CURRENT ASSETS:
Cash and cash equivalents $ 1,969 $ 2,210
Restricted cash 134 --
Accounts receivable, net of an allowance for uncollectible accounts of $33
at December 31, 2002, and $43 at December 31, 2001 292 368
Income tax receivable 319 --
Expendable parts and supplies inventories, net of an allowance for obsolescence
of $183 at December 31, 2002, and $139 at December 31, 2001 164 181
Deferred income taxes 668 518
Prepaid expenses and other 356 290
------- -------
Total current assets 3,902 3,567
------- -------
PROPERTY AND EQUIPMENT:
Flight equipment 20,295 19,427
Accumulated depreciation (6,109) (5,730)
------- -------
Flight equipment, net 14,186 13,697
------- -------
Flight and ground equipment under capital leases 439 382
Accumulated amortization (297) (262)
------- -------
Flight and ground equipment under capital leases, net 142 120
------- -------
Ground property and equipment 4,270 4,412
Accumulated depreciation (2,206) (2,355)
------- -------
Ground property and equipment, net 2,064 2,057
------- -------
Advance payments for equipment 132 223
------- -------
Total property and equipment, net 16,524 16,097
------- -------
OTHER ASSETS:
Investments in debt and equity securities 33 96
Investments in associated companies 174 180
Goodwill 2,092 2,092
Operating rights and other intangibles, net of accumulated amortization
of $172 at December 31, 2002, and $246 at December 31, 2001 102 94
Restricted investments for Boston airport terminal project 417 475
Other noncurrent assets 1,476 1,004
------- -------
Total other assets 4,294 3,941
------- -------
Total assets $24,720 $23,605
======= =======
26
Liabilities and Shareowners' Equity
(in millions, except share data) 2002 2001
------- -------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 666 $ 260
Short-term obligations -- 765
Current obligations under capital leases 27 31
Accounts payable, deferred credits and other accrued liabilities 1,921 1,617
Air traffic liability 1,270 1,224
Taxes payable 862 1,049
Accrued salaries and related benefits 1,365 1,121
Accrued rent 344 336
------- -------
Total current liabilities 6,455 6,403
------- -------
NONCURRENT LIABILITIES:
Long-term debt 9,576 7,781
Long-term debt issued by Massachusetts Port Authority (Note 6) 498 498
Capital leases 100 68
Postretirement benefits 2,282 2,292
Accrued rent 739 781
Deferred income taxes -- 465
Pension and related benefits 3,242 359
Other 93 105
------- -------
Total noncurrent liabilities 16,530 12,349
------- -------
DEFERRED CREDITS:
Deferred gains on sale and leaseback transactions 478 519
Deferred revenue and other credits 100 310
------- -------
Total deferred credits 578 829
------- -------
COMMITMENTS AND CONTINGENCIES (NOTES 3, 4, 6, 7, 8 AND 9)
EMPLOYEE STOCK OWNERSHIP PLAN PREFERRED STOCK:
Series B ESOP Convertible Preferred Stock, $1.00 par value, $72.00 stated and
liquidation value; 6,065,489 shares issued and outstanding at December 31,
2002, and 6,278,210 shares issued and outstanding at December 31, 2001 437 452
Unearned compensation under Employee Stock Ownership Plan (173) (197)
------- -------
Total Employee Stock Ownership Plan Preferred Stock 264 255
------- -------
SHAREOWNERS' EQUITY:
Common stock, $1.50 par value; 450,000,000 shares authorized; 180,903,373 shares issued
at December 31, 2002, and 180,890,356 shares issued at December 31, 2001 271 271
Additional paid-in capital 3,263 3,267
Retained earnings 1,639 2,930
Accumulated other comprehensive income (loss) (1,562) 25
Treasury stock at cost, 57,544,168 shares at December 31, 2002, and 57,644,690
shares at December 31, 2001 (2,718) (2,724)
------- -------
Total shareowners' equity 893 3,769
------- -------
Total liabilities and shareowners' equity $24,720 $23,605
======= =======
The accompanying notes are an integral part of these Consolidated Financial
Statements.
27
Consolidated Statements of Operations
For the years ended December 31, 2002, 2001 and 2000
(in millions, except per share data) 2002 2001 2000
- ------------------------------------ -------- -------- --------
OPERATING REVENUES:
Passenger $ 12,321 $ 12,964 $ 15,657
Cargo 458 506 583
Other, net 526 409 501
-------- -------- --------
Total operating revenues 13,305 13,879 16,741
OPERATING EXPENSES:
Salaries and related costs 6,165 6,124 5,971
Aircraft fuel 1,683 1,817 1,969
Depreciation and amortization 1,148 1,283 1,187
Contracted services 1,003 1,016 966
Landing fees and other rents 834 780 771
Aircraft maintenance materials and outside repairs 711 801 723
Aircraft rent 709 737 741
Other selling expenses 539 616 688
Passenger commissions 322 540 661
Passenger service 372 466 470
Asset writedowns, restructuring and related items, net 439 1,119 108
Stabilization Act compensation (34) (634) --
Other 723 816 849
-------- -------- --------
Total operating expenses 14,614 15,481 15,104
OPERATING INCOME (LOSS) (1,309) (1,602) 1,637
-------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense (646) (499) (380)
Interest income 36 89 123
Loss on extinguishment of ESOP Notes (42) -- --
Gain (loss) from sale of investments, net (3) 127 301
Fair value adjustments of SFAS 133 derivatives (39) 68 (159)
Miscellaneous income (expense), net 1 (47) 27
-------- -------- --------
Total other income (expense) (693) (262) (88)
INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE (2,002) (1,864) 1,549
INCOME TAX BENEFIT (PROVISION) 730 648 (621)
-------- -------- --------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF TAX (1,272) (1,216) 928
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE,
NET OF TAX OF $64 MILLION IN 2000 -- -- (100)
-------- -------- --------
NET INCOME (LOSS) (1,272) (1,216) 828
PREFERRED STOCK DIVIDENDS (15) (14) (13)
-------- -------- --------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREOWNERS $ (1,287) $ (1,230) $ 815
-------- -------- --------
BASIC EARNINGS (LOSS) PER SHARE BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE $ (10.44) $ (9.99) $ 7.39
-------- -------- --------
BASIC EARNINGS (LOSS) PER SHARE $ (10.44) $ (9.99) $ 6.58
-------- -------- --------
DILUTED EARNINGS (LOSS) PER SHARE BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE $ (10.44) $ (9.99) $ 7.05
-------- -------- --------
DILUTED EARNINGS (LOSS) PER SHARE $ (10.44) $ (9.99) $ 6.28
-------- -------- --------
The accompanying notes are an integral part of these Consolidated Financial
Statements.
28
Consolidated Statements of Cash Flows
For the years ended December 31, 2002, 2001 and 2000
(in millions) 2002 2001 2000
- -------------- -------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,272) $ (1,216) $ 828
Adjustments to reconcile net income (loss) to cash provided by
operating activities:
Cumulative effect of change in accounting principle -- -- 100
Asset and other writedowns 287 339 --
Depreciation and amortization 1,181 1,283 1,187
Deferred income taxes (411) (648) 396
Fair value adjustments of SFAS 133 derivatives 39 (68) 159
Pension, postretirement and postemployment expense in excess of
(less than) payments 177 419 (17)
Loss on extinguishment of ESOP Notes 42 -- --
Dividends (less than) in excess of equity income (3) 51 (28)
Loss (gain) from sale of investments, net 3 (127) (301)
Income tax benefit from exercise of stock options -- -- 5
Changes in certain current assets and liabilities:
(Increase) decrease in receivables (243) 47 86
Increase in restricted cash (134) -- --
(Increase) decrease in prepaid expenses and other current assets (35) 60 92
Increase (decrease) in air traffic liability 46 (215) (49)
Increase in other payables, deferred credits and accrued liabilities 675 274 395
Other, net (67) 37 45
-------- -------- --------
Net cash provided by operating activities 285 236 2,898
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions:
Flight equipment, including advance payments (922) (2,321) (3,426)
Ground property and equipment, including technology (364) (472) (634)
Decrease (increase) in restricted investments related to the Boston
airport terminal project 58 (485) --
Decrease in short-term investments, net 5 238 456
Proceeds from sales of flight equipment 100 66 384
Proceeds from sales of investments 24 286 73
Acquisitions of companies, net of cash acquired -- -- (232)
Other, net (10) (8) (17)
-------- -------- --------
Net cash used in investing activities (1,109) (2,696) (3,396)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt and capital lease obligations (734) (173) (853)
Prepayment of long-term lease obligations -- -- (215)
Cash dividends (39) (40) (40)
Issuance of long-term obligations 2,554 2,335 1,867
Issuance of long-term debt by Massachusetts Port Authority -- 498 --
(Payments on) proceeds from short-term obligations and notes payable, net (1,144) 701 (51)
Issuance of common stock -- 2 33
Repurchase of common stock -- -- (502)
Payments on extinguishment of ESOP Notes (42) -- --
Other, net (12) (17) --
-------- -------- --------
Net cash provided by financing activities 583 3,306 239
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (241) 846 (259)
Cash and cash equivalents at beginning of year 2,210 1,364 1,623
-------- -------- --------
Cash and cash equivalents at end of year $ 1,969 $ 2,210 $ 1,364
-------- -------- --------
SUPPLEMENTAL DISCLOSURE OF CASH PAID (REFUNDED) FOR:
Interest, net of amounts capitalized $ 569 $ 490 $ 410
Income taxes $ (649) $ (103) $ 131
NON-CASH TRANSACTIONS:
Aircraft delivered under seller-financing $ 705 $ 77 $ --
Aircraft capital leases from sale and leaseback transactions $ 52 $ -- $ --
The accompanying notes are an integral part of these Consolidated Financial
Statements.
29
Consolidated Statements of Shareowners' Equity
For the years ended December 31, 2002, 2001 and 2000
Accumulated
Additional Other
Common Paid-in Retained Comprehensive Treasury
(in millions, except share data) Stock Capital Earnings Income (Loss) Stock Total
- ------------------------------- ------ ---------- -------- ------------- -------- -------
BALANCE AT DECEMBER 31, 1999 $270 $ 3,222 $ 3,377 $ 266 $(2,227) $ 4,908
COMPREHENSIVE INCOME:
Net income -- -- 828 -- -- 828
Other comprehensive income -- -- -- 94 -- 94
-------
TOTAL COMPREHENSIVE INCOME (SEE NOTE 14) 922
Dividends on common stock ($0.10) per share) -- -- (12) -- -- (12)
Dividends on Series B ESOP Convertible
Preferred Stock allocated shares -- -- (13) -- -- (13)
Issuance of 729,426 shares of common stock under
dividend reinvestment and stock purchase plan
and stock options ($44.86 per share(1)) 1 32 -- -- -- 33
Repurchase of 10,626,104 common shares
($47.26 per share(1)) -- -- -- -- (502) (502)
Income tax benefit from exercise of stock options -- 5 -- -- -- 5
Transfers and forfeitures of 16,580 shares of
common from Treasury under stock incentive
plan ($52.61 per share(1)) -- -- -- -- 1 1
Other -- 5 (4) -- -- 1
---- ------- ------- ------- ------- -------
BALANCE AT DECEMBER 31, 2000 271 3,264 4,176 360 (2,728) 5,343
---- ------- ------- ------- ------- -------
COMPREHENSIVE LOSS:
Net loss -- -- (1,216) -- -- (1,216)
Other comprehensive loss -- -- -- (335) -- (335)
-------
TOTAL COMPREHENSIVE LOSS (SEE NOTE 14) -- -- -- -- -- (1,551)
Dividends on common stock ($0.10 per share) -- -- (12) -- -- (12)
Dividends on Series B ESOP Convertible
Preferred Stock allocated shares -- -- (14) -- -- (14)
Issuance of 126,299 shares of common stock under
dividend reinvestment and stock purchase plan
and stock options ($38.10 per share(1)) -- 5 -- -- -- 5
Transfers and forfeitures of 105,995 shares of
common from Treasury under stock incentive
plan ($37.10 per share(1)) -- (4) -- -- 4 --
Other -- 2 (4) -- -- (2)
---- ------- ------- ------- ------- -------
BALANCE AT DECEMBER 31, 2001 271 3,267 2,930 25 (2,724) 3,769
---- ------- ------- ------- ------- -------
COMPREHENSIVE LOSS:
Net loss -- -- (1,272) -- -- (1,272)
Other comprehensive loss -- -- -- (1,587) -- (1,587)
-------
TOTAL COMPREHENSIVE LOSS (SEE NOTE 14) (2,859)
Dividends on common stock ($0.10 per share) -- -- (12) -- -- (12)
Dividends on Series B ESOP Convertible
Preferred Stock allocated shares -- -- (15) -- -- (15)
Issuance of 13,017 shares of common stock
under stock purchase plan and stock options
($15.70 per share(1)) -- -- -- -- -- --
Forfeitures of 82,878 shares of common to
Treasury under stock incentive plan
($27.31 per share(1)) -- -- -- -- (2) (2)
Transfers of 183,400 shares of common from
Treasury under stock incentive plan
($47.11 per share(1)) -- (5) -- -- 8 3
Other -- 1 8 -- -- 9
---- ------- ------- ------- ------- -------
BALANCE AT DECEMBER 31, 2002 $271 $ 3,263 $ 1,639 $(1,562) $(2,718) $ 893
==== ======= ======= ======= ======= =======
(1) Average price per share
The accompanying notes are an integral part of these Consolidated Financial
Statements.
30
Notes to the Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
BASIS OF PRESENTATION
Delta Air Lines, Inc. (a Delaware corporation) is a major air carrier that
provides air transportation for passengers and cargo throughout the U.S. and
around the world. Our Consolidated Financial Statements include the accounts of
Delta Air Lines, Inc. and our wholly owned subsidiaries, including ASA Holdings,
Inc. (ASA Holdings) and Comair Holdings, Inc. (Comair Holdings), collectively
referred to as Delta. ASA Holdings is the parent company of Atlantic Southeast
Airlines, Inc. (ASA), and Comair Holdings is the parent company of Comair, Inc.
(Comair). We completed our acquisitions of ASA Holdings and Comair Holdings in
April 1999 and in January 2000, respectively. We have eliminated all material
intercompany transactions in our Consolidated Financial Statements. These
Consolidated Financial Statements have been prepared in accordance with
accounting principles generally accepted in the United States of America (GAAP).
We have reclassified certain prior period amounts in our Consolidated Financial
Statements to be consistent with our current period presentation. The effect of
these reclassifications is not material.
We do not consolidate the financial statements of any company in which we have
an ownership interest of 50% or less unless we control that company. During
2002, 2001 and 2000, we did not control any company in which we had an ownership
interest of 50% or less.
CHANGE IN YEAR END
Effective December 31, 2000, we changed our year end from June 30 to December
31. Accordingly, this Annual Report includes audited Consolidated Balance Sheets
as of December 31, 2002 and 2001, and audited Consolidated Statements of
Operations, Cash Flows and Shareowners' Equity for the years ended December 31,
2002, 2001 and 2000.
USE OF ESTIMATES
We are required to make estimates and assumptions when preparing our
Consolidated Financial Statements in accordance with GAAP. These estimates and
assumptions affect the amounts reported in our financial statements and the
accompanying notes. Actual results could differ materially from those estimates.
NEW ACCOUNTING STANDARDS
On January 1, 2002, we adopted Statement of Financial Accounting Standards
(SFAS) No. 142, "Goodwill and Other Intangible Assets" (SFAS 142), which
addresses financial accounting and reporting for goodwill and other intangible
assets (see Note 5).
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
143, "Accounting for Asset Retirement Obligations" (SFAS 143), which is
effective for fiscal years beginning after June 15, 2002. We adopted SFAS 143 on
January 1, 2003. The adoption of SFAS 143 did not have a material impact on our
Consolidated Financial Statements.
On January 1, 2002, we adopted SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-lived Assets" (SFAS 144), which supersedes previous accounting
and reporting standards for (1) testing for impairment or disposal of long-lived
assets and (2) the disposal of segments of a business. Our impairment charges
recorded during 2002 were determined in accordance with SFAS 144 (see Note 16).
On October 1, 2002, we adopted SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections"
(SFAS 145), which, among other things, (1) requires that gains and losses due to
the extinguishment of debt be classified as extraordinary items on the
Consolidated Statements of Operations only if certain criteria are met and (2)
amends the accounting for sale and leaseback transactions. In accordance with
SFAS 145, we recorded a $42 million loss on the extinguishment of ESOP Notes in
other income (expense) on our 2002 Consolidated Statement of Operations (see
Note 6).
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" (SFAS 146), which supersedes previous
accounting and reporting standards for costs associated with exit or disposal
activities by requiring the related liability to be recognized and measured
initially at fair value when the liability is incurred. Under the previous
accounting
31
Notes to the Consolidated Financial Statements
and reporting standards, the liability for exit or disposal costs was recognized
at the date management committed to a plan. The adoption of SFAS 146 will impact
the timing of the recognition of liabilities related to future exit or disposal
activities and is effective for such activities that are initiated after
December 31, 2002.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" (SFAS 148), which amends SFAS No. 123,
"Accounting for Stock Based Compensation" (SFAS 123), by revising the methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. SFAS 148 also requires additional
disclosures in annual and interim financial statements related to stock-based
employee compensation. On December 31, 2002, we adopted SFAS 148 as it relates
to the additional disclosures required for registrants that account for employee
stock-based compensation under Accounting Principles Bulletin (APB) Opinion 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations.
For additional information, see our stock-based compensation policy in this Note
on page 36.
In November 2002, the FASB issued FASB Interpretation No. (FIN) 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45), which expands the disclosures a
guarantor is required to provide in its annual and interim financial statements
regarding its obligations for certain guarantees. Disclosures are required to be
included in financial statements issued after December 15, 2002 (see Note 9).
FIN 45 also requires the guarantor to recognize a liability for the fair value
of an obligation assumed for guarantees issued or modified after December 31,
2002.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities" (FIN 46), which addresses how to identify variable interest entities
and the criteria that require a company to consolidate such entities in its
financial statements. FIN 46 is effective on February 1, 2003 for new
transactions and on July 1, 2003 for existing transactions. We are evaluating
the impact of FIN 46 on our Consolidated Financial Statements.
During 2000, we adopted SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" (SFAS 133), as amended (see Note 4 for additional
information), and SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" (SFAS 140). The adoption of
SFAS 140 did not have a material impact on our Consolidated Financial
Statements.
CASH AND CASH EQUIVALENTS
We classify short-term, highly liquid investments with original maturities of
three months or less as cash and cash equivalents. These investments are
recorded at cost, which we believe approximates fair value.
Under our cash management system, we utilize controlled disbursement accounts
that are funded daily. Payments issued by us, which have not been presented to
the bank for payment, are recorded in accounts payable, deferred credits and
other accrued liabilities on our Consolidated Balance Sheets.
RESTRICTED ASSETS
We have restricted cash, which primarily relates to cash held as collateral to
support certain projected insurance obligations. At December 31, 2002,
restricted cash included in current assets on our Consolidated Balance Sheets
totaled $134 million.
We have restricted investments for the redevelopment and expansion of Terminal A
at Boston's Logan International Airport (see Note 6 for additional information
about this project). At December 31, 2002 and 2001, our restricted investments
included in other assets on our Consolidated Balance Sheets totaled $417 million
and $475 million, respectively.
DERIVATIVE FINANCIAL INSTRUMENTS
We account for derivative financial instruments in accordance with SFAS 133.
These derivative instruments include fuel hedge contracts, interest rate swap
agreements and equity warrants and other similar rights in certain companies
(see Note 4).
FUEL HEDGE CONTRACTS
Our fuel hedge contracts qualify as cash flow hedges under SFAS 133. We record
the fair value of our fuel hedge contracts on our Consolidated Balance Sheets
and regularly adjust the balances to reflect changes in the fair values of those
contracts.
32
Effective gains or losses related to the fair value adjustments of the fuel
hedge contracts are recorded in shareowners' equity as a component of
accumulated other comprehensive income (loss). These gains or losses are
recognized in aircraft fuel expense in the period in which the related aircraft
fuel purchases being hedged are consumed and when the fuel hedge contract is
settled. However, to the extent that the change in fair value of a fuel hedge
contract does not perfectly offset the change in the value of the aircraft fuel
being hedged, the ineffective portion of the hedge is immediately recognized as
a fair value adjustment of SFAS 133 derivatives in other income (expense) on our
Consolidated Statements of Operations. In calculating the ineffective portion of
our hedges under SFAS 133, we include all changes in the fair value attributable
to the time value component and recognize the amount in income during the life
of the contract. Prior to the adoption of SFAS 133, the fuel hedge gains or
losses that were netted against fuel expense included the total fuel-related
hedge premiums.
INTEREST RATE SWAP AGREEMENTS
Our interest rate swap agreements qualify as fair value hedges under SFAS 133.
We record the fair value of these interest rate swap agreements on our
Consolidated Balance Sheets and regularly adjust these amounts and the related
debt to reflect changes in their fair values. Net periodic interest rate swap
settlements are recorded as adjustments to interest expense in other income
(expense) on our Consolidated Statements of Operations.
EQUITY WARRANTS AND OTHER SIMILAR RIGHTS
We record our equity warrants and other similar rights in certain companies at
fair value at the date of acquisition in investments in debt and equity
securities on our Consolidated Balance Sheets. In accordance with SFAS 133, we
regularly adjust our Consolidated Balance Sheets to reflect the changes in the
fair values of the equity warrants and other similar rights, and recognize the
related gains or losses as fair value adjustments of SFAS 133 derivatives in
other income (expense) on our Consolidated Statements of Operations.
REVENUE RECOGNITION
PASSENGER REVENUES
We record sales of passenger tickets as air traffic liability on our
Consolidated Balance Sheets. Passenger revenues are recognized when we provide
the transportation, reducing the related air traffic liability. We periodically
evaluate the estimated air traffic liability and record any resulting
adjustments in the Consolidated Statements of Operations in the period that the
evaluations are completed.
We sell mileage credits in the SkyMiles(R) frequent flyer program to
participating partners such as credit card companies, hotels and car rental
agencies. A portion of the revenue from the sale of mileage credits is deferred
until the credits are redeemed for travel. For accounting purposes, we amortize
the deferred revenue on a straight-line basis over a 30-month period. The
majority of the revenue from the sale of mileage credits, including the
amortization of deferred revenue, is recorded in passenger revenue; the
remaining portion is recorded as an offset to other selling expenses.
CARGO REVENUES
Cargo revenues are recognized in our Consolidated Statements of Operations when
we provide the transportation.
OTHER, NET
We are party to codeshare agreements with certain foreign airlines. Under these
agreements, we sell seats on these airlines' flights, and they sell seats on our
flights, with each airline separately marketing its respective seats. The
revenue from our sale of codeshare seats flown by certain foreign airlines and
the direct costs incurred in marketing the codeshare flights are recorded in
other, net in operating revenues on our Consolidated Statements of Operations.
Our revenue from certain foreign airlines' sale of codeshare seats flown by us
is recorded in passenger revenue on our Consolidated Statements of Operations.
We record revenues under our contract carrier agreements, reduced by related
expenses, in other, net in operating revenues on our Consolidated Statements of
Operations (see Note 9).
33
Notes to the Consolidated Financial Statements
LONG-LIVED ASSETS
We record our property and equipment at cost and depreciate or amortize these
assets on a straight-line basis to their estimated residual values over their
respective estimated useful lives. Residual values for flight equipment range
from 5%-40% of cost. We also capitalize certain internal and external costs
incurred to develop internal-use software during the application stage; these
assets are included in ground property and equipment, net on our Consolidated
Balance Sheets. The estimated useful lives for major asset classifications are
as follows:
Asset Classification Estimated Useful Life
- -------------------- ---------------------
Owned flight equipment 15-25 years
Flight and ground equipment under capital lease Lease Term
Ground property and equipment 3-30 years
In accordance with SFAS 144, we record impairment losses on long-lived assets
used in operations when events and circumstances indicate the assets may be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than their carrying amounts. For long-lived assets held for
sale, we record impairment losses when the carrying amount is greater than
the fair value less the cost to sell. We discontinue depreciation of long-lived
assets once they are classified as held for sale.
To determine impairments for aircraft used in operations, we group assets at the
fleet type level (the lowest level for which there are identifiable cash flows)
and then estimate future cash flows based on projections of passenger yield,
fuel costs, labor costs and other relevant factors in the markets in which these
aircraft operate. If an impairment occurs, the amount of the impairment loss
recognized is the amount by which the carrying amount of the aircraft exceeds
the estimated fair value. Aircraft fair values are estimated by management using
published sources, appraisals and bids received from third parties, as
available.
GOODWILL AND OTHER INTANGIBLE ASSETS
Prior to our adoption of SFAS 142 on January 1, 2002, goodwill and other
intangible assets were amortized over their estimated useful lives (not to
exceed 40 years in the case of goodwill). Upon adoption of SFAS 142, we
discontinued the amortization of goodwill and other intangible assets with
indefinite useful lives. Instead, in accordance with SFAS 142, we now apply a
fair value-based impairment test to the net book value of goodwill and
indefinite-lived intangible assets on an annual basis and on an interim basis if
certain events or circumstances indicate that an impairment loss may have been
incurred. Intangible assets that have determinable useful lives continue to be
amortized on a straight-line basis over their remaining estimated useful lives.
Our leasehold and operating rights have definite useful lives and we will
continue to amortize these assets over their respective lease terms which range
from nine to 19 years.
SFAS 142 requires a two-step process in evaluating goodwill for impairment. The
first step requires the comparison of the fair value of each reporting unit to
its carrying value. We have identified three reporting units which have assigned
goodwill: Delta-mainline, ASA and Comair. Our methodology for estimating the
fair value of each reporting unit primarily considers discounted future cash
flows. If the fair value of a reporting unit exceeds its carrying value, then no
further testing is required. If the carrying value of a reporting unit exceeds
its fair value, however, a second step is required to determine the amount of
the impairment charge, if any. An impairment charge is recognized if the
carrying value of a reporting unit's goodwill exceeds its implied fair value.
We perform our impairment test for our indefinite-lived intangible assets by
comparing the fair value of each indefinite-lived intangible asset unit to its
carrying value. The fair value of the asset unit is estimated based on its
discounted future cash flows. We recognize an impairment charge if the carrying
value of the asset unit exceeds its estimated fair value.
The annual impairment test date for our goodwill and indefinite-lived intangible
assets is December 31 (see Note 5).
INTEREST CAPITALIZED
We capitalize interest on advance payments for the acquisition of new aircraft
and on construction of ground facilities as an additional cost of the related
assets. Interest is capitalized at our weighted average interest rate on
long-term debt or, if applicable, the
34
interest rate related to specific asset financings. Interest capitalization ends
when the equipment or facility is ready for service or its intended use.
Capitalized interest totaled $15 million, $32 million and $45 million for the
years ended December 31, 2002, 2001 and 2000, respectively.
EQUITY METHOD INVESTMENTS
We use the equity method to account for our 40% ownership interest in WORLD-
SPAN, L.P. (Worldspan), a computer reservations system partnership. Our equity
earnings from this investment totaled $43 million, $19 million and $59 million
for the years ended December 31, 2002, 2001 and 2000, respectively. We also
received cash dividends from Worldspan of $40 million, $70 million and $32
million for the years ended December 31, 2002, 2001 and 2000, respectively.
Worldspan provides computer reservation and related services for us, which
totaled approximately $180 million for the year ended December 31, 2002. At
December 31, 2002, we had a liability to Worldspan for $15 million which is
included in accounts payable, deferred credits and other accrued liabilities on
our Consolidated Balance Sheet.
We account for our 18% ownership interest in Orbitz, LLC (Orbitz), an on-line
travel agency, under the equity method. We use the equity method of accounting
for this investment because we believe we have the ability to exercise
significant influence, but not control, over the financial and operating
policies of Orbitz. This influence is evidenced by, among other things, our
right to appoint two of our senior officers to the 11 member Board of Managers
of Orbitz, which allows us to participate in Orbitz's financial and operating
decisions.
Our investments in Worldspan and Orbitz are recorded in investments in
associated companies on our Consolidated Balance Sheets.
INCOME TAXES
We account for deferred income taxes under the liability method in accordance
with SFAS No. 109, "Accounting for Income Taxes" (SFAS 109). Under this method,
we recognize deferred tax assets and liabilities based on the tax effects of
temporary differences between the financial statement and tax bases of assets
and liabilities, as measured by current enacted tax rates. A valuation allowance
is recorded to reduce deferred tax assets when determined necessary in
accordance with SFAS 109. Deferred tax assets and liabilities are recorded net
as current and noncurrent deferred income taxes on our Consolidated Balance
Sheets.
FREQUENT FLYER PROGRAM
We record an estimated liability for the incremental cost associated with
providing free transportation under our SkyMiles frequent flyer program when a
free travel award is earned. The liability is recorded in accounts payable,
deferred credits and other accrued liabilities on our Consolidated Balance
Sheets. It is adjusted periodically based on awards earned, awards redeemed,
changes in the SkyMiles program and changes in estimated incremental costs.
DEFERRED GAINS ON SALE AND LEASEBACK TRANSACTIONS
We amortize deferred gains on the sale and leaseback of property and equipment
under operating leases over the lives of these leases. The amortization of these
gains is recorded as a reduction in rent expense. Gains on the sale and
leaseback of property and equipment under capital leases reduce the carrying
value of the related assets.
MANUFACTURERS' CREDITS
We periodically receive credits in connection with the acquisition of aircraft
and engines. These credits are deferred until the aircraft and engines are
delivered, then applied on a pro rata basis as a reduction to the cost of the
related equipment.
MAINTENANCE COSTS
We record maintenance costs in operating expenses as they are incurred.
INVENTORIES
Inventories of expendable parts related to flight equipment are carried at cost
and charged to operations as consumed. An allowance for obsolescence for the
cost of these parts is provided over the remaining useful life of the related
fleet.
35
Notes to the Consolidated Financial Statements
ADVERTISING COSTS
We expense advertising costs as other selling expenses in the year incurred.
Advertising expense was $130 million, $153 million and $151 million for the
years ended December 31, 2002, 2001 and 2000, respectively.
COMMISSIONS
We record passenger commissions in prepaid expenses and other on our
Consolidated Balance Sheets when the related passenger tickets are sold.
Passenger commissions are recognized in operating expenses on our Consolidated
Statements of Operations when the transportation is provided and the related
revenue is recognized.
FOREIGN CURRENCY REMEASUREMENT
We remeasure assets and liabilities denominated in foreign currencies using
exchange rates in effect on the balance sheet date. Fixed assets and the related
depreciation or amortization charges are recorded at the exchange rates in
effect on the date we acquired the assets. Revenues and expenses denominated in
foreign currencies are remeasured using average exchange rates for all periods
presented. We recognize the resulting foreign exchange gains and losses as a
component of miscellaneous income (expense). These gains and losses are
immaterial for all periods presented.
STOCK-BASED COMPENSATION
We account for our stock-based compensation plans under the intrinsic value
method in accordance with APB 25 and related interpretations (see Note 12 for
additional information related to our stock-based compensation plans). No stock
option compensation expense is recognized in net income (loss) as all stock
options granted had an exercise price equal to the fair value of the underlying
common stock on the grant date.
The estimated fair values of stock options granted during the years ended
December 31, 2002, 2001 and 2000, were derived using the Black-Scholes model.
The following table includes the assumptions used in estimating fair values and
the resulting weighted average fair value of a stock option granted in the
periods presented:
Stock Options Granted
--------------------------------------
Assumption 2002 2001 2000
- ---------- -------- -------- --------
Risk-free interest rate 4.4% 5.8% 6.2%
Average expected life of stock options (in years) 6.7 7.5 7.5
Expected volatility of common stock 38.9% 26.9% 26.9%
Expected annual dividends on common stock $ 0.10 $ 0.10 $ 0.10
Weighted average fair value of a stock option granted $ 9 $ 20 $ 23
-------- -------- --------
The following table shows what our net income (loss) and earnings (loss) per
share would have been for the years ended December 31, 2002, 2001 and 2000, had
we accounted for our stock-based compensation plans under the fair value method
of SFAS 123 using the assumptions in the table above:
(in millions, except per share data) 2002 2001 2000
- ------------------------------------ --------- --------- --------
NET INCOME (LOSS):
As reported $ (1,272) $ (1,216) $ 828
Deduct: total stock option compensation expense
determined under the fair value based method, net of tax (47) (30) (27)
--------- --------- --------
As adjusted for the fair value method under SFAS 123 $ (1,319) $ (1,246) $ 801
========= ========= ========
BASIC EARNINGS (LOSS) PER SHARE:
As reported $ (10.44) $ (9.99) $ 6.58
As adjusted for the fair value method under SFAS 123 $ (10.82) $ (10.23) $ 6.36
--------- --------- --------
DILUTED EARNINGS (LOSS) PER SHARE:
As reported $ (10.44) $ (9.99) $ 6.28
As adjusted for the fair value method under SFAS 123 $ (10.82) $ (10.23) $ 6.07
--------- --------- --------
36
FAIR VALUE OF FINANCIAL INSTRUMENTS
We record our cash equivalents and short-term investments at cost, which we
believe approximates their fair values. The estimated fair values of other
financial instruments, including debt and derivative instruments, have been
determined using available market information and valuation methodologies,
primarily discounted cash flow analyses and the Black-Scholes model.
Note 2. Marketable and Other Equity Securities
PRICELINE.COM INCORPORATED (PRICELINE)
We are party to an agreement with priceline under which we (1) provide ticket
inventory that may be sold through priceline's Internet-based e-commerce system
and (2) received certain equity interests in priceline. We are required to
provide priceline access to unpublished fares.
2000
At January 1, 2000, our equity interests in priceline included (1) a warrant to
purchase up to 5.5 million shares of priceline common stock for $56.63 per share
(1999 Warrant) (see discussion below); (2) a right to exchange six million
shares of priceline common stock for six million shares of priceline convertible
preferred stock (Exchange Right); and (3) 7.2 million shares of priceline common
stock. During 2000, we (1) exercised the Exchange Right in full, receiving six
million shares of priceline Series A Convertible Preferred Stock (Series A
Preferred Stock); (2) sold 1.2 million shares of priceline common stock; and (3)
received 549,764 shares of priceline common stock as a dividend on the Series A
Preferred Stock. In our 2000 Consolidated Statement of Operations, we recognized
(1) a pretax gain of $301 million from the exercise of the Exchange Right and
the sale of priceline common stock and (2) other income of $14 million, pretax,
from the dividend.
The fair value of the 1999 Warrant on the date received was determined to be $61
million based on an independent third-party appraisal. This amount was
recognized in income ratably from November 1999 through November 2002.
On November 2, 2000, the 1999 Warrant was amended to reduce (1) the number of
shares underlying the warrant from 5.5 million to 4.7 million and (2) our per
share purchase price for those shares from $56.63 to $4.72 (Amended 1999
Warrant). The Amended 1999 Warrant became exercisable in full on January 1,
2001, and expires on November 17, 2004. The amendment of the 1999 Warrant did
not have a material impact on our Consolidated Financial Statements.
2001
On February 6, 2001, we and priceline agreed to restructure our investment in
priceline. We exchanged our six million shares of Series A Preferred Stock for
(1) 80,000 shares of priceline Series B Redeemable Preferred Stock (Series B
Preferred Stock) and (2) a warrant to purchase up to 26.9 million shares of
priceline common stock for $2.97 per share (2001 Warrant).
The Series B Preferred Stock (1) bears an annual per share dividend of
approximately 36 shares of priceline common stock; (2) has a liquidation
preference of $1,000 per share plus any dividends accrued or accumulated but not
yet paid (Liquidation Preference); (3) is subject to mandatory redemption on
February 6, 2007, at a price per share equal to the Liquidation Preference; and
(4) is subject to redemption in whole, at the option of us or priceline, if
priceline completes any of certain business combination transactions (Optional
Redemption).
Based on an independent third-party appraisal, at February 6, 2001, the fair
value of (1) the Series B Preferred Stock was estimated to be $80 million and
(2) the 2001 Warrant was estimated to be $46 million. The total fair value of
these securities equaled the carrying amount of the Series A Preferred Stock,
including its conversion feature and accumulated dividends on the date the
Series A Preferred Stock was exchanged for the Series B Preferred Stock and the
2001 Warrant. Accordingly, we did not recognize a gain or loss on this
transaction.
37
Notes to the Consolidated Financial Statements
As discussed above, the 2001 Warrant provides us with the right to purchase up
to an additional 26.9 million shares of priceline common stock for $2.97 per
share. We may exercise the 2001 Warrant, in whole or in part, at any time prior
to the close of business on February 6, 2007, unless all of the shares of Series
B Preferred Stock owned by us are redeemed in an Optional Redemption, in which
case we may not exercise the 2001 Warrant after the date of the Optional
Redemption. The exercise price may be paid by us only by the surrender of shares
of Series B Preferred Stock, valued at $1,000 per share.
The 2001 Warrant also provides that it will automatically be deemed exercised if
the closing sales price of priceline common stock exceeds $8.91 for 20
consecutive trading days. In that event, our rights in the shares of Series B
Preferred Stock necessary to pay the exercise price of the 2001 Warrant would
automatically be converted into the right to receive shares of priceline common
stock pursuant to the 2001 Warrant.
During 2001, we (1) exercised the 2001 Warrant in part to purchase 18.4 million
shares of priceline common stock, paying the exercise price by surrendering to
priceline 54,656 shares of Series B Preferred Stock; (2) sold 18.7 million
shares of priceline common stock; and (3) received 986,491 shares of priceline
common stock as a dividend on the Series B Preferred Stock. In our 2001
Consolidated Statement of Operations, we recognized (1) other income of $9
million, pretax, from the dividend and (2) a pretax gain of $4 million from the
exercise of the 2001 Warrant and the sale of priceline common stock.
2002
During 2002, we (1) exercised the 2001 Warrant in part to purchase 4.0 million
shares of priceline common stock, paying the exercise price by surrendering to
priceline 11,875 shares of Series B Preferred Stock; (2) sold 3.9 million shares
of priceline common stock; and (3) received 695,749 shares of priceline common
stock as dividends on the Series B Preferred Stock. In our 2002 Consolidated
Statement of Operations, we recognized (1) a pretax loss of $3 million from the
exercise of the 2001 Warrant and the sale of priceline common stock and (2)
other income of $2 million, pretax, from the dividends.
The following table represents our equity interests in priceline and their
respective carrying values at December 31, 2002 and 2001:
Number of Shares(1) Carrying Values
--------------------- ---------------------
(in millions, except shares of Series B Preferred Stock) 2002 2001 2002 2001
- -------------------------------------------------------- ------ ------ ----- -----
Series B Preferred Stock 13,469 25,344 $ 13 $ 25
2001 Warrant 4.5 8.5 3 31
Amended 1999 Warrant 4.7 4.7 -- 13
priceline common stock 2.1 1.3 3 7
------ ------ ----- -----
(1) We have certain registration rights relating to shares of priceline
common stock we acquire from the exercise of the Amended 1999 Warrant
or the 2001 Warrant or receive as dividends on the Series B Preferred
Stock.
The Series B Preferred Stock and priceline common stock are accounted for as
available-for-sale securities. In accordance with SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" (SFAS 115), the Series B
Preferred Stock and the priceline common stock are recorded at fair value in
investments in debt and equity securities on our Consolidated Balance Sheets.
Any changes in fair value of these assets are recorded, net of tax, in
accumulated other comprehensive income (loss). The Series B Preferred Stock is
recorded at face value, which we believe approximates fair value. The warrants
are recorded at fair value in investments in debt and equity securities on our
Consolidated Balance Sheets and any changes in fair value are recorded in other
income (expense) on our Consolidated Statements of Operations in accordance with
SFAS 133.
REPUBLIC AIRWAYS HOLDINGS, INC. (REPUBLIC)
On June 7, 2002, we entered into a contract carrier agreement with Chautauqua
Airlines, Inc. (Chautauqua), a regional air carrier which is a subsidiary of
Republic (see Note 9). In conjunction with this agreement, we received from
Republic (1) a warrant to purchase up to 1.5 million shares of Republic common
stock for $12.50 per share (2002 Warrant); (2) a warrant to purchase up to 1.5
million shares of Republic common stock at a price per share equal to 95% of the
public offering price per share in Republic's initial public offering of common
stock (IPO Warrant); (3) the right to purchase up to 5% of the shares of common
stock that
38
Republic offers for sale in its initial public offering at a price per share
equal to the initial public offering price; and (4) the right to receive a
warrant to purchase up to an additional 60,000 shares of Republic common stock
for each additional aircraft Chautauqua operates for us above the 22 aircraft
under the original contract carrier agreement.
The 2002 Warrant is exercisable in whole or in part at any time until June 7,
2012. The fair value of the 2002 Warrant on the date received was approximately
$11 million, and will be recognized in income ratably over a five-year period.
The carrying value of the 2002 Warrant was approximately $10 million at December
31, 2002. The 2002 Warrant is accounted for in the same manner as the priceline
warrants described above.
The IPO Warrant is exercisable in whole or in part at any time (1) beginning on
the closing date of Republic's initial public offering of common stock and (2)
subject to earlier cancellation if the contract carrier agreement is terminated
in certain circumstances, ending on the tenth anniversary of that closing date.
We will record the fair value of the IPO Warrant on the closing date of
Republic's initial public offering of common stock.
The 2002 Warrant, the IPO Warrant and the shares of Republic common stock
underlying these securities are not registered under the Securities Act of 1933;
however, we have certain demand and piggyback registration rights relating to
the underlying shares of Republic common stock.
OTHER
Our equity interest in SkyWest, Inc., the parent company of SkyWest Airlines,
was classified as an available-for-sale equity security under SFAS 115. During
2001, we sold our equity interest in SkyWest, Inc. for $125 million and recorded
a pretax gain of $111 million. We recorded this gain in our 2001 Consolidated
Statement of Operations in gain (loss) from sale of investments, net.
During 2001, we also sold our remaining equity interest in Equant, N.V.
(Equant), an international data services company, recognizing a pretax gain of
$11 million. We recorded this gain in our 2001 Consolidated Statement of
Operations in gain (loss) from sale of investments, net.
Note 3. Risk Management
AIRCRAFT FUEL PRICE RISK
Our results of operations can be significantly impacted by changes in the price
of aircraft fuel. To manage this risk, we periodically purchase options and
other similar non-leveraged derivative instruments and enter into forward
contracts for the purchase of fuel. These contracts may have maturities of up to
36 months. We may hedge up to 80% of our expected fuel requirements on a
12-month rolling basis. See Note 4 for additional information about our fuel
hedge contracts. We do not enter into fuel hedge contracts for speculative
purposes.
INTEREST RATE RISK
Our exposure to market risk due to changes in interest rates primarily relates
to our long-term debt obligations and cash portfolio. Market risk associated
with our long-term debt relates to the potential change in fair value resulting
from a change in interest rates as well as the potential increase in interest we
would pay on variable rate debt. At December 31, 2002 and 2001, approximately
26% and 25%, respectively, of our total debt was variable rate debt. Market risk
associated with our cash portfolio relates to the potential change in our
earnings resulting from a decrease in interest rates.
From time to time, we may enter into interest rate swap agreements, provided
that the notional amount of these transactions does not exceed 50% of our
long-term debt. See Note 4 for additional information about our interest rate
swap agreements. We do not enter into interest rate swap agreements for
speculative purposes.
39
FOREIGN CURRENCY EXCHANGE RISK
We are subject to foreign currency exchange risk because we have revenues and
expenses denominated in foreign currencies, primarily the euro, the British
pound and the Canadian dollar. To manage exchange rate risk, we net foreign
currency revenues and expenses, to the extent practicable. From time to time, we
may also enter into foreign currency options and forward contracts with
maturities of up to 12 months. We did not have any foreign currency hedge
contracts at December 31, 2002. The fair value of our foreign currency hedge
contracts was not material at December 31, 2001. We do not enter into foreign
currency hedge contracts for speculative purposes.
CREDIT RISK
To manage credit risk associated with our aircraft fuel price, interest rate and
foreign currency exchange risk management programs, we select counterparties
based on their credit ratings and limit our exposure to any one counterparty
under defined guidelines. We also monitor the market position of these programs
and our relative market position with each counterparty. The credit exposure
related to these programs was not significant at December 31, 2002 and 2001.
Our accounts receivable are generated largely from the sale of passenger airline
tickets and cargo transportation services to customers. The majority
of these sales are processed through major credit card companies, resulting in
accounts receivable which are generally short-term in duration. We also have
receivables from the sale of mileage credits to partners, such as credit card
companies, hotels and car rental agencies, that participate in our SkyMiles
program. We believe that the credit risk associated with these receivables is
minimal and that the allowance for uncollectible accounts that we have provided
is sufficient.
SELF-INSURANCE RISK
We self-insure a portion of our losses from claims related to workers'
compensation, environmental issues, property damage, medical insurance for
employees and general liability. Losses are accrued based on an estimate of the
ultimate aggregate liability for claims incurred, using independent actuarial
reviews based on standard industry practices and our actual experience. A
portion of our projected workers' compensation liability is secured with
restricted cash collateral (see Note 1).
Note 4. Derivative Instruments
On July 1, 2000, we adopted SFAS 133, as amended. SFAS 133 requires us to record
all derivative instruments on our Consolidated Balance Sheets at fair value and
to recognize certain non-cash changes in these fair values in our Consolidated
Statements of Operations. SFAS 133 impacts the accounting for our fuel hedging
program, our interest rate hedging program and our holdings of equity warrants
and other similar rights in certain companies.
The impact of SFAS 133 on our Consolidated Statements of Operations is
summarized as follows:
Income (Expense)
------------------------------------------------------------
FOR THE For the For the Six
YEAR ENDED Year Ended Months Ended Cumulative
DECEMBER 31, December 31, December 31, Effect
(in millions) 2002 2001 2000 July 1, 2000
- ------------- ------------ ------------ ------------ ------------
Write-off of fuel hedge contract premiums $ -- $ -- $ -- $ (143)
Change in time value of fuel hedge contracts (23) (1) 7 --
Ineffective portion of fuel hedge contracts 13 (3) (2) 16
Fair value adjustment of equity rights (29) 72 (164) (37)
------ ------ ------- -------
Fair value adjustments of SFAS 133 derivatives, pretax (39) 68 (159) (164)
------ ------ ------- -------
Total, net of tax $ (25) $ 41 S (97) $ (100)
====== ====== ======= =======
40
FUEL HEDGING PROGRAM
Because there is not a readily available market for derivatives in aircraft
fuel, we use heating and crude oil derivative contracts to manage our exposure
to changes in aircraft fuel prices. Changes in the fair value of these contracts
(fuel hedge contracts) are highly effective at offsetting changes in aircraft
fuel prices.
At December 31, 2002, our fuel hedge contracts had an estimated short-term fair
value of $68 million and an estimated long-term fair value of $5 million, with
unrealized gains of $29 million, net of tax, recorded in accumulated other
comprehensive income (loss). At December 31, 2001, our fuel hedge contracts had
an estimated short-term fair value of $55 million and an estimated long-term
fair value of $9 million, with unrealized gains of $25 million, net of tax,
recorded in accumulated other comprehensive income (loss). See Note 1 for
information about our accounting policy for fuel hedge contracts.
INTEREST RATE HEDGING PROGRAM
To manage our interest rate exposure, in July 2002, we entered into two interest
rate swap agreements relating to our (1) $300 million principal amount of
unsecured Series C Medium Term Notes due March 15, 2004, which pay interest at a
fixed rate of 6.65% per year and (2) $500 million principal amount of unsecured
Notes due December 15, 2005, which pay interest at a fixed rate of 7.70% per
year.
Under the first interest rate swap agreement, we are paying the London InterBank
Offered Rate (LIBOR) plus a margin per year and receiving 6.65% per year on a
notional amount of $300 million until March 15, 2004. Under the second
agreement, we are paying LIBOR plus a margin per year and receiving 7.70% per
year on a notional amount of $500 million until December 15, 2005.
At December 31, 2002, our interest rate swap agreements had an estimated
long-term fair value of $21 million which was recorded in other noncurrent
assets on our Consolidated Balance Sheets. In accordance with fair value hedge
accounting, we also recorded a $21 million increase to the carrying value of our
long-term debt. We did not have any interest rate swap agreements outstanding at
December 31, 2001. See Note 1 for information about our accounting policy for
interest rate swap agreements.
EQUITY WARRANTS AND OTHER SIMILAR RIGHTS
We own equity warrants and other similar rights in certain companies, primarily
Republic and priceline. The total fair value of these rights at December 31,
2002 and 2001, was $14 million and $48 million, respectively. See Notes 1 and 2
for information about our accounting policy for these rights and the significant
rights that we own, respectively.
Note 5. Goodwill and Intangible Assets
On January 1, 2002, we adopted SFAS 142, which requires that we discontinue the
amortization of goodwill and other intangible assets with indefinite useful
lives. Instead, we now apply a fair value-based impairment test to the net book
value of goodwill and indefinite-lived intangible assets. See Note 1 for
information about our accounting policy for the impairment tests of goodwill and
other intangible assets.
41
The adoption of SFAS 142 decreased our operating expenses on our Consolidated
Statements of Operations by approximately $60 million, net of tax, for the year
ended December 31, 2002, due to the discontinuance of amortization of goodwill
and indefinite-lived intangible assets. The following table reconciles our
reported net income (loss) and earnings (loss) per share to adjusted net income
(loss) and earnings (loss) per share as if the non-amortization provisions of
SFAS 142 had been applied to prior year periods:
For the Years Ended December 31,
--------------------------------------
(in millions, except per share data) 2002 2001 2000
- ------------------------------------ --------- --------- ---------
Net income (loss) before cumulative effect of change in accounting principle $ (1,272) $ (1,216) $ 928
Net income (loss) $ (1,272) $ (1,216) $ 828
--------- --------- -------
Add back: goodwill and international route amortization, net of tax -- 60 60
--------- --------- -------
Adjusted net income (loss) before cumulative effect of change in accounting principle $ (1,272) $ (1,156) $ 988
Adjusted net income (loss) $ (1,272) $ (1,156) $ 888
--------- --------- -------
BASIC EARNINGS PER SHARE:
Net income (loss) before cumulative effect of change in accounting principle $ (10.44) $ (9.99) $ 7.39
Net income (loss) $ (10.44) $ (9.99) $ 6.58
--------- --------- -------
Add back: goodwill and international route amortization, net of tax -- 0.49 0.49
--------- --------- -------
Adjusted net income (loss) before cumulative effect of change in accounting principle $ (10.44) $ (9.50) $ 7.88
Adjusted net income (loss) $ (10.44) $ (9.50) $ 7.07
--------- --------- -------
DILUTED EARNINGS PER SHARE:
Net income (loss) before cumulative effect of change in accounting principle $ (10.44) $ (9.99) $ 7.05
Net income (loss) $ (10.44) $ (9.99) $ 6.28
--------- --------- -------
Add back: goodwill and international route amortization, net of tax -- 0.49 0.46
--------- --------- -------
Adjusted net income (loss) before cumulative effect of change in accounting principle $ (10.44) $ (9.50) $ 7.51
Adjusted net income (loss) $ (10.44) $ (9.50) $ 6.74
--------- --------- -------
During the March 2002 quarter, we completed the required initial test of
potential impairment of indefinite-lived intangible assets, other than goodwill;
that test indicated no impairment at the date of adoption of SFAS 142. The
following table presents information about our intangible assets, other than
goodwill, at December 31, 2002 and 2001:
2002 2001
------------------------------- -------------------------------
GROSS CARRYING ACCUMULATED Gross Carrying Accumulated
(in millions) AMOUNT AMORTIZATION Amount Amortization
- ------------- -------------- ------------ -------------- ------------
Amortized intangible assets:
Leasehold and operating rights $ 125 $ (86) $ 113 $ (81)
Other 3 (1) 2 (1)
------ ------ ------ ------
Total $ 128 $ (87) $ 115 $ (82)
====== ====== ====== ======
NET CARRYING Net Carrying
AMOUNT Amount
------------ ------------
Unamortized intangible assets:
International routes $ 60 $ 60
Other 1 1
---- ----
Total $ 61 $ 61
==== ====
During the June 2002 quarter, we completed our transitional goodwill impairment
test, which indicated no impairment at the date of adoption of SFAS 142. At
December 31, 2002, we performed the required annual impairment test of our
goodwill and indefinite-lived intangible assets, which also indicated no
impairment.
42
Note 6. Debt
The following table summarizes our debt at December 31, 2002 and 2001:
(dollars in millions) 2002 2001
------- ------
SECURED(1)
Series 2000-1 Enhanced Equipment Trust Certificates
7.38% Class A-1 due in installments from 2003 to May 18, 2010 $ 274 $ 308
7.57% Class A-2 due November 18, 2010 738 738
7.92% Class B due November 18, 2010 182 182
7.78% Class C due November 18, 2005 239 239
9.11% Class D due November 18, 2005 176 --
------- ------
1,609 1,467
------- ------
Series 2001-1 Enhanced Equipment Trust Certificates
6.62% Class A-1 due in installments from 2003 to March 18, 2011 262 300
7.11% Class A-2 due September 18, 2011 571 571
7.71% Class B due September 18, 2011 207 207
7.30% Class C due September 18, 2006 170 170
6.95% Class D due September 18, 2006 150 150
------- ------
1,360 1,398
------- ------
Series 2001-2 Enhanced Equipment Trust Certificates
3.11% Class A due in installments from 2003 to December 18, 2011(2) 423 449
4.31% Class B due in installments from 2003 to December 18, 2011(2) 254 282
5.66% Class C due in installments from 2005 to December 18, 2011(2) 80 --
------- ------
757 731
------- ------
Series 2002-1 Enhanced Equipment Trust Certificates
6.72% Class G-1 due in installments from 2003 to January 2, 2023 587 --
6.42% Class G-2 due July 2, 2012 370 --
7.78% Class C due in installments from 2003 to January 2, 2012 169 --
------- ------
1,126 --
------- ------
1.9%-5.9% Other aircraft financings due in installments from 2003 to June 19, 2019(2) 1,555 506
------- ------
Total secured debt 6,407 4,102
------- ------
UNSECURED
1997 Bank Credit Agreement, paid in full and terminated on May 1, 2002 -- 625
Massachusetts Port Authority Special Facilities Revenue Bonds
5.0-5.5% Series 2001A due in installments from 2012 to 2027 338 338
1.3%(2) Series 2001B due in installments from 2027 to January 1, 2031 80 80
1.4%(2) Series 2001C due in installments from 2027 to January 1, 2031 80 80
8.10% Series C Guaranteed Serial ESOP Notes, due in installments from 2003 to 2009 92 290
6.65% Medium-Term Notes, Series C, due March 15, 2004 300 300
7.7% Notes due December 15, 2005 500 500
7.9% Notes due December 15, 2009 499 499
9.75% Debentures due May 15, 2021 106 106
Development Authority of Clayton County, loan agreement,
3.2%(2)Series 2000A due June 1, 2029 65 65
3.3%(2)Series 2000B due May 1, 2035 116 116
3.3%(2) Series 2000C due May 1, 2033 120 120
8.3% Notes due December 15, 2029 925 925
8.125% Notes due July 1, 2039(3) 538 538
5.3% to 10.375% Other unsecured debt due 2003 to 2033 574 620
------- ------
Total unsecured debt 4,333 5,202
------- ------
Total debt 10,740 9,304
------- ------
Less: current maturities 666 1,025
------- ------
Total long-term debt $10,074 $8,279
======= ======
(1) Our secured debt is secured by first mortgage liens on a total of 249
aircraft (69 B-737-800, 32 B-757-200, two B-767-300, 28 B-767-300ER,
six B-767-400, four B-777-200, 93 CRJ-100/200, 11 EMB-120 and four
ATR-72) delivered new to us from March 1992 through December 2002.
These aircraft had an aggregate net book value of approximately $7.0
billion at December 31, 2002.
(2) Our variable interest rate long-term debt is shown using interest rates
in effect at December 31, 2002.
(3) The 8.125% Notes due 2039 are redeemable by us, in whole or in part, at
par on or after July 1, 2004.
43
Notes to the Consolidated Financial Statements
The fair value of our total debt was $9.5 billion and $8.9 billion at December
31, 2002 and 2001, respectively.
FUTURE MATURITIES
The following table summarizes the scheduled maturities of our debt at December
31, 2002, for the next five years and thereafter:
Years Ending December 31, Principal
(in millions) Amount
---------
2003 $ 666
2004 623
2005 1,203
2006 602
2007 285
After 2007 7,361
-------
Total $10,740
=======
BOSTON AIRPORT TERMINAL PROJECT
During 2001, we entered into lease and financing agreements with the
Massachusetts Port Authority (Massport) for the redevelopment and expansion of
Terminal A at Boston's Logan International Airport. The completion of this
project will enable us to consolidate all of our domestic operations at that
airport into one location. Construction began in the June 2002 quarter and
is expected to be completed during 2005. Project costs will be funded with $498
million in proceeds from Special Facilities Revenue Bonds issued by Massport on
August 16, 2001. We agreed to pay the debt service on the bonds under a
long-term lease agreement with Massport and issued a guarantee to the bond
trustee covering the payment of the debt service on the bonds. For additional
information about these bonds, see "Massachusetts Port Authority Special
Facilities Revenue Bonds" on the table on page 43. Because we have issued a
guarantee of the debt service on the bonds, we have included the bonds, as well
as the related bond proceeds, on our Consolidated Balance Sheets. The bonds are
reflected in noncurrent liabilities and the related proceeds, which are held in
trust, are reflected as restricted investments in other assets on our
Consolidated Balance Sheets.
LETTER OF CREDIT ENHANCED MUNICIPAL BONDS
In June 2000, the Development Authority of Clayton County (Development
Authority) issued $301 million principal amount of bonds in three series with
scheduled maturities between 2029 and 2035. The proceeds of this sale were used
to refund bonds that had been issued to finance certain of our facilities at
Hartsfield Atlanta International Airport. The new bonds are secured by the
Development Authority's pledge of revenues derived by the Development Authority
under related loan agreements between us and the Development Authority. The
Development Authority bonds currently bear interest at a variable rate which is
determined weekly. The bonds may be tendered for purchase by their holders on
seven days notice. Subject to certain conditions, tendered bonds will be
remarketed at then prevailing interest rates.
Principal and interest on the bonds, and the payment of the purchase price of
bonds tendered for purchase, are presently paid under three irrevocable,
direct-pay letters of credit totaling $305 million issued by Commerzbank AG
under a Reimbursement Agreement between us and a group of banks (Reimbursement
Agreement).
There are also outstanding under the Reimbursement Agreement irrevocable
direct-pay letters of credit totaling $104 million relating to $102 million
principal amount of bonds issued by other municipalities to build certain
airport facilities leased to us. These bonds currently bear interest at a
variable rate, which is determined weekly, and may be tendered for purchase by
their holders on seven days notice. We pay the debt service on these bonds under
long-term lease agreements (see Note 7). The related letters of credit are
similar to the letters of credit relating to the Development Authority bonds.
In October 2002, we and the banks that are parties to the Reimbursement
Agreement amended that agreement to eliminate covenants that limited our secured
debt and debt-to-equity ratio. We took this action to increase our financial
flexibility and because we believed we would not be in compliance with the
debt-to-equity covenant at December 31, 2002, due to the
44
combined effect of (1) the anticipated need to record at December 31, 2002, a
substantial non-cash charge to equity relating to our defined benefit pension
plans (see Note 11); (2) our increased debt levels; and (3) our continuing
losses since 2001. In consideration for these changes, we:
- - Agreed to comply with a new cash maintenance covenant that was added to
the Reimbursement Agreement. See the Covenants and Change in Control
Provisions section below.
- - Agreed that the Reimbursement Agreement and the letters of credit
issued thereunder would terminate on June 8, 2003. These letters of
credit were originally scheduled to expire between June 8, 2003 and
December 4, 2003.
- - Terminated in October 2002 a reimbursement agreement with Bayerische
Hypo-Und Vereinsbank AG and a group of banks (HVB Agreement) and the
related letter of credit that supported our obligations with respect to
the Series C Guaranteed Serial ESOP Notes (ESOP Notes). Several of the
banks that are parties to the Reimbursement Agreement also participated
in the HVB Agreement. The HVB Agreement was originally scheduled to
expire on May 19, 2003. See the ESOP Notes section below.
The Reimbursement Agreement generally provides that, if there is a drawing under
a letter of credit to purchase bonds that have been tendered, we may convert our
repayment obligation to a loan that becomes due and payable on the earlier of
(1) the date the related bonds are remarketed or (2) June 8, 2003.
Unless the letters of credit issued under the Reimbursement Agreement are
extended in a timely manner, we will be required to purchase on June 3, 2003,
five days prior to the expiration of the letters of credit, the related $403
million principal amount of tax-exempt municipal bonds. In these circumstances,
we could seek, but there is no assurance we would be able, to (1) sell the bonds
without a letter of credit enhancement at then prevailing fixed interest rates
or (2) replace the expiring letters of credit with a new letter of credit from
an alternate credit provider and remarket the related bonds.
ESOP NOTES
We guarantee the ESOP Notes issued by the Delta Family-Care Savings Plan. The
holders of the ESOP Notes were entitled to the benefits of an unconditional,
direct-pay letter of credit issued under the HVB Agreement. Required payments of
principal, interest and make-whole premium amounts on the ESOP Notes were paid
under the letter of credit. As part of the amendment to the Reimbursement
Agreement discussed above, we terminated the HVB Agreement on October 21, 2002.
To effect the termination of the HVB Agreement, on September 30, 2002, we
provided the required advance notice of our decision to terminate early the
letter of credit issued under that agreement. As a result of this action, each
holder of the ESOP Notes had the right to require us to purchase its ESOP Notes
before the termination of the letter of credit. Some, but not all, of the
holders of the ESOP Notes exercised this right. On October 15, 2002, we
purchased ESOP Notes for $215 million, covering $169 million principal amount of
ESOP Notes, $4 million of accrued interest and $42 million of make-whole
premium. The $42 million loss recognized for the make-whole premium related to
this extinguishment of debt was recorded in other income (expense) on our
Consolidated Statements of Operations.
As a result of the termination of the letter of credit issued under the HVB
Agreement, the holders of the remaining $92 million principal amount of ESOP
Notes that we did not purchase on October 15, 2002, had the right to tender
their ESOP Notes for purchase by January 26, 2003. Some, but not all, of the
remaining holders of the ESOP Notes exercised this right. On January 26, 2003,
we incurred an obligation to purchase on February 25, 2003, ESOP Notes for $74
million, covering $57 million principal amount of ESOP Notes, $3 million of
accrued interest and $14 million of make-whole premium. The $14 million loss
recognized for the make-whole premium related to this extinguishment of debt
will be recorded during the March 2003 quarter in other income (expense) on our
Consolidated Statements of Operations. Subsequent to our purchase of these ESOP
Notes, $35 million principal amount of ESOP Notes is held by third parties.
45
Notes to the Consolidated Financial Statements
COVENANTS AND CHANGE IN CONTROL PROVISIONS
The Reimbursement Agreement, as amended, contains covenants that (1) require us
to maintain a minimum of $1 billion of unrestricted cash, cash equivalents and
short-term investments at the end of each month; (2) limit the amount of current
debt and convertible subordinated debt that we may have outstanding; and (3)
limit our annual flight equipment rental expense. It also provides that, upon
the occurrence of a change in control of Delta, we shall, at the request of the
banks, deposit cash collateral with the banks in an amount equal to all letters
of credit outstanding and other amounts we owe under the Reimbursement
Agreement.
As is customary in the airline industry, our aircraft lease and financing
agreements require that we maintain certain levels of insurance coverage. We
were in compliance with all of the covenants and requirements discussed above at
December 31, 2002 and 2001.
OTHER FINANCING ARRANGEMENTS
On December 12, 2001, we entered into an agreement under which we were able to
borrow, prior to July 1, 2002, up to $935 million on a secured basis. Upon
completion of the Series 2002-1 enhanced equipment trust certificates financing
on April 30, 2002, this facility terminated. No borrowings were outstanding
under this facility during its term.
On December 28, 2001, we entered into a credit facility with certain banks under
which, as amended, we may borrow up to $500 million on a secured basis until
August 21, 2003, subject to certain conditions. The banks' lending commitment
under this facility is reduced, however, to the extent we receive net cash
proceeds from the issuance of certain financings. The interest rate under this
facility is, at our option, LIBOR or a specified base rate plus a margin that
varies depending on the period during which borrowings are outstanding. Any
borrowings under this facility will be secured by certain aircraft owned by us.
At December 31, 2002 and 2001, no borrowings were outstanding under this
facility.
On January 31, 2002, we entered into a facility under which we were able to
borrow up to approximately $350 million secured by certain regional jet aircraft
which we purchased for cash. This facility was scheduled to expire on February
1, 2003, except that amounts borrowed prior to that date were due between 366
days and 18 months after the date of borrowing. In December 2002, we utilized as
security for longer-term financings all of the regional jet aircraft that served
as collateral under this facility. As a result, we terminated this facility on
December 19, 2002. No borrowings were outstanding under this facility on that
date.
Also on January 31, 2002, we entered into a facility to finance, on a secured
basis at the time of acquisition, certain future deliveries of regional jet
aircraft. At December 31, 2002, the total borrowings available to us under this
facility, as amended, were $197 million, of which $31 million was outstanding.
Borrowings under this facility (1) are due between 366 days and 18 months after
the date of borrowing (subject to earlier repayment if certain longer-term
financing is obtained for these aircraft) and (2) bear interest at LIBOR plus a
margin.
We have available to us long-term, secured financing commitments from a third
party that we may elect to use for a substantial portion of the commitments for
regional jet aircraft to be delivered to ASA and Comair through 2004 (see Note
9). Any borrowings under these commitments would be at a fixed interest rate
determined by reference to 10-year U.S. Treasury Notes and would have various
repayment dates.
46
Note 7. Lease Obligations
We lease aircraft, airport terminal and maintenance facilities, ticket offices
and other property and equipment. Rental expense for operating leases, which is
recorded on a straight-line basis over the life of the lease, totaled
$1.3 billion for each year ended December 31, 2002, 2001 and 2000. Amounts due
under capital leases are recorded as liabilities. Our interest in assets
acquired under capital leases is recorded as property and equipment on our
Consolidated Balance Sheets. Amortization of assets recorded under capital
leases is included in depreciation and amortization expense on our Consolidated
Statements of Operations. Our leases do not include residual value guarantees.
The following table summarizes, as of December 31, 2002, our minimum rental
commitments under capital leases and noncancelable operating leases with initial
or remaining terms in excess of one year:
Years Ending December 31, Capital Operating
(in millions) Leases Leases
------- ---------
2003 $ 40 $ 1,277
2004 31 1,203
2005 24 1,176
2006 16 1,128
2007 15 1,042
After 2007 46 6,918
---- -------
Total minimum lease payments 172 $12,744
Less: lease payments that represent interest 45 -------
----
Present value of future minimum capital lease payments 127
Less: current obligations under capital leases 27
----
Long-term capital lease obligations $100
====
The total minimum rental commitments under operating leases in the table above
do not include approximately $144 million in future minimum lease payments which
we expect to receive under noncancelable subleases.
As of December 31, 2002, we operated 313 aircraft under operating leases and 45
aircraft under capital leases. These leases have remaining terms ranging from
one month to 15 years.
Certain municipalities have issued special facilities revenue bonds to build or
improve airport and maintenance facilities leased to us. The facility lease
agreements require us to make rental payments sufficient to pay principal and
interest on the bonds. The above table includes $1.8 billion of operating lease
rental commitments for such payments.
Note 8. Sale of Receivables
We are party to an agreement, as amended, under which we sell a defined pool of
our accounts receivable, on a revolving basis, through a special-purpose, wholly
owned subsidiary, which then sells an undivided interest in the defined pool of
accounts receivable to a third party. In accordance with SFAS 140, this
subsidiary is not consolidated in our Consolidated Financial Statements. We
retain servicing and record-keeping responsibilities for the receivables sold,
the fair value of which is not material at December 31, 2002 and 2001.
In exchange for the sale of receivables, we receive (1) cash up to a maximum of
$250 million from the subsidiary's sale of an undivided interest in the pool of
receivables to the third party and (2) a subordinated promissory note from the
subsidiary, less certain program fees. Proceeds from new securitizations under
this agreement were approximately $38 million for the year ended December 31,
2002, which are recorded as cash flows from operations on our Consolidated
Statements of Cash Flows. The amount of the promissory note fluctuates because
it represents the portion of the purchase price payable for the volume of
receivables sold. The principal amount of the promissory note was $67 million
and $144 million at December 31, 2002 and 2001, respectively, and is included in
accounts receivable on our Consolidated Balance Sheets. Additionally, our
investment in the subsidiary, which represents our funding of the entity,
totaled $117 million at December 31, 2002, and is recorded in investments in
associated companies on our Consolidated Balance Sheets.
47
Notes to the Consolidated Financial Statements
The program fees related to this agreement are paid to the third party based on
the amounts invested by the third party. These fees were $4 million, $14 million
and $22 million for the years ended December 31, 2002, 2001 and 2000,
respectively, and are recorded in miscellaneous income (expense), net included
in other income (expense) on our Consolidated Statements of Operations.
This agreement, as amended during the June 2002 quarter, expires on March 31,
2003. However, the third party may terminate this agreement prior to its
scheduled termination date if our senior unsecured long-term debt is rated
either below Ba3 by Moody's or below BB- by Standard & Poor's. If this agreement
is terminated under these circumstances or upon expiration, we would be required
to repurchase the funded receivables, which totaled $250 million at December 31,
2002. At December 31, 2002, our senior unsecured long-term debt was rated Ba3 by
Moody's and BB- by Standard & Poor's. Both Moody's and Standard & Poor's ratings
outlook for our long-term debt is negative.
Note 9. Purchase Commitments and Contingencies
AIRCRAFT & ENGINE ORDER COMMITMENTS
Future expenditures for aircraft and engines on firm order as of December 31,
2002 are estimated to be $5.0 billion. The following table shows the timing of
these commitments:
Year Ending December 31,
(in billions) Amount
------
2003 $1.0
2004 0.7
2005 1.2
2006 1.3
2007 0.8
After 2007 --
----
Total $5.0
====
CONTRACT CARRIER AGREEMENT COMMITMENTS
We have contract carrier agreements with two regional air carriers, Atlantic
Coast Airlines (ACA) and SkyWest Airlines, Inc. (SkyWest), which expire in 2010.
During the June 2002 quarter, we entered into a contract carrier agreement with
a third regional air carrier, Chautauqua Airlines, which expires in 2012.
Chautauqua began operations under our Delta Connection program in November 2002.
Under these contract carrier agreements, we schedule certain aircraft that are
operated by those airlines using our flight code, sell the seats on those
flights and retain the related revenues. We pay those airlines an amount that is
based on their cost of operating those flights plus a specified margin. The
following table shows the number of aircraft and available seat miles (ASMs)
operated for us by the regional air carriers, and our expenses related to the
contract carrier agreements for the years ended December 31, 2002, 2001 and
2000:
(in millions, except aircraft) 2002 2001 2000
------ ------ ----
Number of aircraft operated(1) 100 72 23
ASMs(1,2) 3,513 1,562 328
Expenses $ 561 $ 240 $ 89
------ ------ ----
(1) These amounts are unaudited.
(2) These ASMs are not included in our ASMs on pages 11 and 68.
We expect to incur approximately $780 million in expenses related to these
contract carrier agreements in 2003. We anticipate that the number of aircraft
operated for us by these regional air carriers will increase to 136 by December
31, 2003, including the 12 additional Chautauqua aircraft discussed in Note 22.
See Note 1 for information about our accounting policy for revenues and expenses
related to our contract carrier agreements.
48
We may terminate the ACA and SkyWest agreements without cause at any time by
giving the airlines certain advance notice. If we terminate the ACA agreement in
this manner, ACA has the right to (1) assign to us leased aircraft that it
operates for us, provided we are able to continue the leases on the same
financial terms ACA had prior to the assignment, and (2) require us to purchase,
at fair value, aircraft that ACA operates for us and owns at the time of the
termination. If we terminate the SkyWest agreement in this manner, SkyWest has
the right to assign to us leased regional jet aircraft that it operates for us,
provided we are able to continue the leases on the same terms SkyWest had prior
to the assignment.
We may not terminate the Chautauqua agreement without cause during the
approximately first five years of its term. After that period, we may terminate
this agreement without cause at any time. If we terminate the Chautauqua
agreement in this manner, Chautauqua has the right to (1) assign to us leased
aircraft that it operates for us, provided we are able to continue the leases on
the same terms Chautauqua had prior to the assignment, and (2) require us to
purchase or sublease any of the aircraft that it owns and operates for us. If we
are required to purchase aircraft owned by Chautauqua, the purchase price would
be equal to the amount necessary (1) to reimburse Chautauqua for the equity it
provided to purchase the aircraft and (2) to repay in full any debt outstanding
at such time that is not being assumed in connection with such purchase. If we
are required to sublease aircraft owned by Chautauqua, the sublease would have
(1) a rate equal to the debt payments of Chautauqua for the debt financing of
the aircraft calculated as if 90% of the aircraft was debt financed by
Chautauqua and (2) specified other terms and conditions.
We estimate that the total fair value of the aircraft that all three regional
air carriers could assign to us or require that we purchase is approximately
$1.5 billion.
LEGAL CONTINGENCIES
We are involved in legal proceedings relating to antitrust matters, employment
practices, environmental issues and other matters concerning our business. We
cannot reasonably estimate the potential loss for certain legal proceedings
because, for example, the litigation is in its early stages or the plaintiff
does not specify damages being sought. Although the ultimate outcome of our
legal proceedings cannot be predicted with certainty, we believe that the
resolution of these actions will not have a material adverse effect on our
Consolidated Financial Statements.
OTHER CONTINGENCIES
REGIONAL AIRPORTS IMPROVEMENT CORPORATION (RAIC)
In 1996, the RAIC refinanced $88 million in Facilities Sublease Revenue Bonds
which had been initially issued in 1985 for the construction of certain airport
terminal facilities at Los Angeles International Airport for Western Airlines
(Western) prior to our merger with them. We are obligated under a facilities
sublease with the RAIC to pay the trustee rent in an amount sufficient to pay
the debt service on the bonds. When the bonds were refinanced in 1996, we also
provided a guarantee to the bond trustee covering the payment of the debt
service on the bonds substantially similar to the guarantee provided by Western
in 1985. In November 2002, the City of Los Angeles (City) deposited in escrow
with the bond trustee approximately $38 million as prepayment of an ongoing
rental credit for certain City areas within the terminal facilities constructed
and financed with the bonds. Subsequent to December 31, 2002, these escrow funds
were used to purchase, at a discount in the open market, and retire
approximately $41 million principal amount of the bonds.
GENERAL INDEMNIFICATIONS
We are the lessee under many real estate leases. It is common in these
commercial lease transactions for us, as the lessee, to agree to indemnify the
lessor and other related third parties for tort, environmental and other
liabilities that arise out of or relate to our use or occupancy of the leased
premises. Typically, this type of indemnity would make us responsible to
indemnified parties for liabilities arising out of the conduct of, among others,
contractors, licensees and invitees at or in connection with the use or
occupancy of the leased premises. Often, this indemnity extends to related
liabilities arising from the negligence of the indemnified parties, but usually
excludes any liabilities caused by their gross negligence or willful misconduct.
Our aircraft and other equipment lease and financing agreements typically
contain provisions requiring us, as the lessee or obligor, to indemnify the
other parties to those agreements, including certain related parties, against
virtually any liabilities that might arise from the condition, use or operation
of the aircraft or such other equipment.
49
Notes to the Consolidated Financial Statements
We believe that our insurance coverage would cover most, but not all, of such
liabilities and related indemnities associated with the types of lease and
financing agreements described above, including real estate leases.
Certain of our aircraft and other financing transactions also often include
provisions which require us to make payments to the lenders to preserve an
expected economic return to the lenders if that economic return is diminished
due to certain changes in law or regulations. In certain of these financing
transactions, we also bear the risk of certain changes in tax laws that would
subject payments to non-U.S. lenders to withholding taxes.
We cannot reasonably estimate our potential future payments under the
indemnities and related provisions described above.
EMPLOYEES UNDER COLLECTIVE BARGAINING AGREEMENTS
At December 31, 2002, Delta, ASA and Comair had a total of approximately 75,100
full-time equivalent employees. Approximately 18% of these employees, including
all of our pilots, are represented by labor unions. Approximately 3% of our
total full-time equivalent employees are covered under collective bargaining
agreements that are either in negotiations or will become amendable by December
31, 2003. ASA is currently in collective bargaining negotiations with the Air
Line Pilots Association, International, which represents ASA's approximately
1,520 pilots. This contract became amendable in September 2002. The outcome of
these collective bargaining negotiations cannot presently be determined. In
addition, ASA's contract with the Association of Flight Attendants, which
represents ASA's approximately 775 flight attendants, becomes amendable in
September 2003.
Note 10. Income Taxes
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and income tax purposes. See Note 1 for information about our
accounting policy for income taxes. At December 31, 2002, we had $349 million of
federal alternative minimum tax (AMT) credit carryforward, which does not
expire. We also had federal and state pretax net operating loss carryforwards of
approximately $3.3 billion at December 31, 2002, substantially all of which will
not expire until 2022. The following table shows significant components of our
deferred tax assets and liabilities at December 31, 2002 and 2001:
(in millions) 2002 2001
------- -------
DEFERRED TAX ASSETS:
Net operating loss carryforwards $ 1,256 $ 911
Additional minimum pension liability (see Note 14) 972 --
Postretirement benefits 909 1,025
Other employee benefits 404 254
AMT credit carryforward 349 23
Gains on sale and leaseback transactions, net 217 239
Rent expense 215 220
Other 508 455
Valuation allowance (16) (16)
------- -------
Total deferred tax assets $ 4,814 $ 3,111
======= =======
DEFERRED TAX LIABILITIES:
Depreciation and amortization $ 3,639 $ 2,696
Other 332 362
------- -------
Total deferred tax liabilities $ 3,971 $ 3,058
======= =======
The following table shows the current and noncurrent deferred tax assets
(liabilities) recorded on our Consolidated Balance Sheets at December 31, 2002
and 2001:
(in millions) 2002 2001
---- -----
Current deferred tax assets, net $668 $ 518
Noncurrent deferred tax assets (liabilities), net 175 (465)
---- -----
Total deferred tax assets, net $843 $ 53
==== =====
50
Based on the actions we have taken and will continue to take to improve
financial performance and other relevant factors, we believe that it is more
likely than not that our net deferred tax assets recorded at December 31, 2002,
will be fully realized.
Our income tax benefit (provision) for the years ended December 31, 2002, 2001
and 2000 consisted of:
(in millions) 2002 2001 2000
---- ---- -----
Current tax benefit (provision) $319 $ -- $(230)
Deferred tax benefit (provision) 407 644 (396)
Tax benefit of dividends on allocated Series B ESOP Convertible
Preferred Stock 4 4 5
---- ---- -----
Income tax benefit (provision) $730 $648 $(621)
==== ==== =====
The following table presents the principal reasons for the difference between
our effective income tax rate and the U.S. federal statutory income tax rate for
the years ended December 31, 2002, 2001 and 2000:
2002 2001 2000
----- ----- ----
U.S. federal statutory income tax rate (35.0)% (35.0)% 35.0%
State taxes, net of federal income tax effect (2.4) (2.6) 3.4
Meals and entertainment 0.7 1.0 1.1
Amortization -- 1.0 1.0
Municipal bond interest -- (0.1) (0.2)
Increase in valuation allowance -- 0.8 --
Other, net 0.2 0.1 (0.2)
----- ----- ----
Effective income tax rate (36.5)% (34.8)% 40.1%
===== ===== ====
Note 11. Employee Benefit Plans
We sponsor qualified and non-qualified defined benefit pension plans, defined
contribution pension plans, healthcare plans, and disability and survivorship
plans for eligible employees and retirees, and their eligible family members. We
reserve the right to modify or terminate these plans as to all participants and
beneficiaries at any time, except as restricted by the Internal Revenue Code or
the Employee Retirement Income Security Act (ERISA).
DEFINED BENEFIT PENSION PLANS
Our qualified defined benefit pension plans meet or exceed ERISA's minimum
funding requirements as of December 31, 2002. Our non-qualified pension plans
are funded primarily with current assets.
The following table shows the change in the projected benefit obligation for our
defined benefit pension plans for the years ended December 31, 2002 and 2001 (as
measured at September 30, 2002 and 2001):
(in millions) 2002 2001
-------- --------
Projected benefit obligation at beginning of period $ 10,657 $ 9,263
Service cost 282 246
Interest cost 825 763
Actuarial loss 798 531
Benefits paid (888) (623)
Special termination benefits -- 185
Curtailment loss -- 30
Plan amendments 8 262
-------- --------
Projected benefit obligation at end of period $ 11,682 $ 10,657
======== ========
The special termination benefits and curtailment loss reflected in the table
above relate to the workforce reduction programs offered to certain of our
employees in 2001. In December 2002, we recorded a $7 million pretax charge for
special termination benefits related to the 2002 workforce reduction programs.
During the March 2003 quarter, we will record a $47 million pretax charge for
the associated cost of curtailing the pension obligations for participants in
the 2002 workforce reduction programs.
51
Notes to the Consolidated Financial Statements
See Note 16 for additional information about our 2002 and 2001 workforce
reduction programs.
The following table shows the change in the fair value of our defined benefit
pension plan assets for the years ended December 31, 2002 and 2001 (as measured
at September 30, 2002 and 2001):
(in millions) 2002 2001
------ -------
Fair value of plan assets at beginning of period $8,304 $10,398
Actual loss on plan assets (718) (1,521)
Employer contributions 77 50
Benefits paid (888) (623)
------ -------
Fair value of plan assets at end of period $6,775 $ 8,304
====== =======
The accrued pension cost recognized for these plans on our Consolidated Balance
Sheets at December 31, 2002 and 2001 is computed as follows:
(in millions) 2002 2001
------- -------
Funded status $(4,907) $(2,353)
Unrecognized net actuarial loss 4,092 1,584
Unrecognized transition obligation 41 49
Unrecognized prior service cost 292 308
Contributions made between the measurement date and year end 10 12
Special termination benefits recognized between the measurement date and year end (7) --
Intangible asset (333) (7)
Accumulated other comprehensive loss (2,558) (12)
------- -------
Accrued pension cost recognized on the Consolidated Balance Sheets $(3,370) $ (419)
======= =======
Net periodic pension cost for the years ended December 31, 2002, 2001 and 2000
included the following components:
(in millions) 2002 2001 2000
----- ------- -----
Service cost $ 282 $ 246 $ 250
Interest cost 825 763 686
Expected return on plan assets (984) (1,040) (924)
Amortization of prior service cost 24 5 4
Recognized net actuarial gain (8) (51) (22)
Amortization of net transition obligation 8 4 2
Settlement costs 1 -- --
Special termination benefits 7 -- --
----- ------- -----
Net periodic pension cost $ 155 $ (73) $ (4)
===== ======= =====
We used the following actuarial assumptions to account for our defined benefit
pension plans:
September 30, 2002 September 30, 2001 September 30, 2000
------------------ ------------------ ------------------
Weighted average discount rate 6.75% 7.75% 8.25%
Rate of increase in future compensation levels 2.67% 4.67% 5.35%
Expected long-term rate of return on plan assets 9.00% 10.00% 10.00%
---- ----- -----
At December 31, 2002, we recorded a non-cash charge to accumulated other
comprehensive income (loss) to recognize a portion of our additional minimum
pension liability in accordance with SFAS No. 87, "Employers' Accounting for
Pensions" (SFAS 87). SFAS 87 requires that this liability be recognized at year
end in an amount equal to the amount by which the accumulated benefit obligation
(ABO) exceeds the fair value of the defined benefit pension plan assets. The
additional minimum pension liability was recorded by recognizing an intangible
asset to the extent of any unrecognized prior service costs and transition
52
obligation, which totaled $333 million at December 31, 2002. The remaining
portion of the additional minimum pension liability totaling $1.6 billion, net
of tax, was recorded in accumulated other comprehensive income (loss) on our
Consolidated Balance Sheets (see Note 14).
The ABO and the fair value of plan assets for the plans with an ABO in excess of
plan assets were $10.1 billion and $6.8 billion, respectively, as of September
30, 2002, and $303 million and zero, respectively, as of September 30, 2001.
DEFINED CONTRIBUTION PENSION PLANS
DELTA PILOTS MONEY PURCHASE PENSION PLAN (MPPP)
We contribute 5% of covered pay to the MPPP for each eligible Delta pilot. The
MPPP is related to the Delta Pilots Retirement Plan. The defined benefit pension
payable to a pilot is reduced by the actuarial equivalent of the accumulated
account balance in the MPPP. During the years ended December 31, 2002, 2001 and
2000, we recognized expense of $71 million, $69 million and $63 million,
respectively, for this plan.
DELTA FAMILY-CARE SAVINGS PLAN
Our Savings Plan includes an employee stock ownership plan (ESOP) feature.
Eligible employees may contribute a portion of their covered pay to the Savings
Plan.
Prior to July 1, 2001, we matched 50% of employee contributions with a maximum
employer contribution of 2% of a participant's covered pay for all participants.
Effective July 1, 2001, the Savings Plan was amended to provide all eligible
Delta pilots with an employer contribution of 3% of their covered pay to replace
their former matching contribution. We make our contributions for non-pilots and
pilots by allocating Series B ESOP Convertible Preferred Stock (ESOP Preferred
Stock), common stock or cash to the Savings Plan. Our contributions, which are
recorded as salaries and related costs in the accompanying Consolidated
Statements of Operations, totaled $85 million, $83 million and $69 million for
the years ended December 31, 2002, 2001 and 2000, respectively.
When we adopted the ESOP in 1989, we sold 6,944,450 shares of ESOP Preferred
Stock to the Savings Plan for $500 million. We have recorded unearned
compensation equal to the value of the shares of preferred stock not yet
allocated to participants' accounts. We reduce the unearned compensation as
shares of preferred stock are allocated to participants' accounts. Dividends on
unallocated shares of preferred stock are used for debt service on the Savings
Plan's ESOP Notes and are not considered dividends for financial reporting
purposes. Dividends on allocated shares of preferred stock are credited to
participants' accounts and are considered dividends for financial reporting
purposes. Only allocated shares of preferred stock are considered outstanding
when we compute diluted earnings per share. At December 31, 2002, 3,666,639
shares of ESOP Preferred Stock were allocated to participants' accounts and
2,398,850 shares were held by the ESOP for future allocations.
OTHER PLANS
ASA, Comair and DAL Global Services, Inc., three of our wholly owned
subsidiaries, sponsor defined contribution retirement plans for eligible
employees. These plans did not have a material impact on our Consolidated
Financial Statements in 2002, 2001 and 2000.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Our medical plans provide medical and dental benefits to substantially all Delta
retirees and their eligible dependents. Benefits are funded from our general
assets on a current basis. Plan benefits are subject to copayments, deductibles
and other limits as described in the plans.
53
The following table shows the change in our accumulated postretirement benefit
obligation (APBO) for the years ended December 31, 2002 and 2001 (as measured at
September 30, 2002 and 2001):
(in millions) 2002 2001
------ ------
APBO at beginning of period $2,100 $1,780
Service cost 30 37
Interest cost 160 146
Benefits paid (154) (102)
Actuarial loss 234 163
Plan amendments -- (176)
Curtailment loss -- 49
Special termination benefits -- 203
------ ------
APBO at end of period $2,370 $2,100
====== ======
The special termination benefits and curtailment loss reflected in the table
above relate to the workforce reduction programs offered to certain of our
employees during 2001. In December 2002, we recorded a $44 million pretax charge
for special termination benefits related to the 2002 workforce reduction
programs. During the March 2003 quarter, we will recorded a $4 million pretax
gain for the associated cost of curtailing the future obligations for the
participants in these programs. See Note 16 for additional information about
our 2002 and 2001 workforce reduction program.
A 1% change in the healthcare cost trend rate used in measuring the APBO at
September 30, 2002, would have the following effects:
(in millions) 1% Increase 1% Decrease
----------- -----------
Increase (decrease) in total service and interest cost $ 12 $ (11)
Increase (decrease) in the APBO $108 $(106)
---- -----
The following table shows the calculation of the accrued postretirement benefit
cost recognized on our Consolidated Balance Sheets at December 31, 2002 and 2001
(as measured at September 30, 2002 and 2001):
(in millions) 2002 2001
------- -------
Funded status $(2,370) $(2,100)
Unrecognized net actuarial loss 299 100
Unrecognized prior service cost (353) (421)
Special termination benefits recognized between the measurement date and year end (44) --
Contributions made between the measurement date and year end 45 29
------- -------
Accrued postretirement benefit cost recognized on the Consolidated Balance Sheets $(2,423) $(2,392)
======= =======
Our net periodic postretirement benefit cost for the years ended December 31,
2002, 2001 and 2000, included the following components:
(in millions) 2002 2001 2000
---- ---- ----
Service cost $ 30 $ 37 $ 37
Interest cost 160 146 129
Amortization of prior service cost (50) (39) (40)
Recognized actuarial loss 2 -- --
Special termination benefits 44 -- --
---- ---- ----
Net periodic postretirement benefit cost $186 $144 $126
==== ==== ====
54
We used the following actuarial assumptions to account for our postretirement
benefit plans:
September 30, 2002 September 30, 2001 September 30, 2000
------------------ ------------------ ------------------
Weighted average discount rate 6.75% 7.75% 8.25%
Assumed healthcare cost trend rate(1) 10.00% 6.25% 7.00%
----- ---- ----
(1) The assumed healthcare cost trend rate is assumed to decline gradually
to 5.25% by 2007 for noncapped plans and to zero between 2005 and 2007
for capped plans, and remain level thereafter.
POSTEMPLOYMENT BENEFITS
We provide certain other welfare benefits to eligible former or inactive
employees after employment but before retirement, primarily as part of the
disability and survivorship plans.
Postemployment benefit (expense) income was $(62) million, $23 million and $51
million for the years ended December 31, 2002, 2001 and 2000, respectively. We
include the amount funded in excess of the liability in other noncurrent assets
on our Consolidated Balance Sheets. Future period expenses will vary based on
actual claims experience and the return on plan assets. Gains and losses occur
because actual experience differs from assumed experience. These gains and
losses are amortized over the average future service period of employees. We
also amortize differences in prior service costs resulting from amendments
affecting the benefits of retired and inactive employees.
We regularly evaluate ways to better manage employee benefits and control costs.
Any changes to the plans or assumptions used to estimate future benefits could
have a significant effect on the amount of the reported obligation and future
annual expense. During the December 2002 quarter, we announced the
implementation of and migration to a cash balance pension plan for non-pilot
employees. As a result of the changes to our pension plans and 2002 workforce
reductions (see Note 16), we were required to remeasure our pension plan
obligations, which will impact our pension expense in 2003.
Note 12. Common and Preferred Stock
STOCK OPTION AND OTHER STOCK-BASED AWARD PLANS
To more closely align the interests of directors, officers and other employees
with the interests of our shareowners, we maintain certain plans which provide
for the issuance of common stock in connection with the exercise of stock
options and for other stock-based awards. Stock options awarded under these
plans (1) have an exercise price equal to the fair value of the common stock on
the grant date; (2) become exercisable one to five years after the grant date;
and (3) generally expire 10 years after the grant date. The following table
includes additional information about these plans as of December 31, 2002:
Shares
Total Shares Non-Qualified Reserved
Authorized for Stock Options for Future
Plan Issuance Granted Grant
-------------- ------------- ----------
Broad-based employee stock option plans(1) 49,400,000 49,400,000 --
Delta 2000 Performance Compensation Plan(2) 16,000,000 10,802,850 4,963,183
Non-Employee Directors' Stock Option Plan(3) 250,000 119,245 132,755
Non-Employee Directors' Stock Plan(4) 500,000 -- 457,272
---------- ---------- ---------
(1) In 1996, shareowners approved broad-based pilot and non-pilot stock
option plans. Under these two plans, we granted eligible employees
non-qualified stock options to purchase a total of 49.4 million shares
of common stock in three approximately equal installments on October
30, 1996, 1997 and 1998.
(2) On October 25, 2000, shareowners approved this plan, which authorizes
the grant of stock options and a limited number of other stock awards.
The plan amends and restates a prior plan which was also approved by
shareowners. No awards have been, or will be, granted under the prior
plan on or after October 25, 2000. At December 31, 2002, there were
11.0 million shares of common stock reserved for awards (primarily
non-qualified stock options) that were outstanding under the prior
plan. The current plan provides that shares reserved for awards under
the plans that are forfeited, settled in cash rather than stock or
withheld, plus shares tendered to Delta in connection with such
awards, may be added back to the shares available for future grants. At
December 31, 2002, 1.5 million shares had been added back pursuant to
that provision.
(3) On October 22, 1998, the Board of Directors approved this plan. Each
non-employee director receives an annual grant of non-qualified stock
options. This plan provides that shares reserved for awards that are
forfeited may be added back to the shares available for future grants.
(4) In 1995, shareowners approved this plan, which provides that a portion
of each non-employee director's compensation for serving as a director
will be paid in shares of common stock. It also permits non-employee
directors to elect to receive all or a portion of their cash
compensation for service as a director in shares of common stock at
current market prices.
55
The following table summarizes all stock option and stock appreciation rights
(SAR) activity for the years ended December 31, 2002, 2001 and 2000:
2002 2001 2000
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
(shares in thousands) Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
Outstanding at the beginning of the year 51,537 $48 50,365 $48 47,859 $48
Granted 8,478 21 2,358 46 3,914 52
Exercised (9) 27 (76) 34 (725) 41
Forfeited (1,200) 48 (1,110) 53 (683) 53
------ --- ------ --- ------ ---
Outstanding at the end of the year 58,806 44 51,537 48 50,365 48
------ --- ------ --- ------ ---
Exercisable at the end of the year 45,996 $48 44,751 $48 46,309 $48
====== === ====== === ====== ===
The following table summarizes information about stock options outstanding and
exercisable at December 31, 2002:
Stock Options Outstanding Stock Options Exercisable
---------------------------------------- ---------------------------
Weighted Weighted Weighted
Number Average Average Number Average
Outstanding Remaining Exercise Exercisable Exercise
Stock Options (000) Life (years) Price (000) Price
------------ ------------ -------- ----------- ---------
$9-$20 4,573 10 $11 -- $--
$21-$35 10,756 5 $33 6,960 $34
$36-$50 36,101 5 $49 33,743 $49
$51-$69 7,376 7 $56 5,293 $56
------ -- --- ------ ---
ESOP PREFERRED STOCK
Each outstanding share of ESOP Preferred Stock pays a cumulative cash dividend
of 6% per year, is convertible into 1.7155 shares of common stock at a
conversion price of $41.97 per share and has a liquidation price of $72.00, plus
accrued and unpaid dividends. The ESOP Preferred Stock generally votes together
as a single class with the common stock and has two votes per share. It is
redeemable at our option at $72.00 per share plus accrued and unpaid dividends,
payable in cash or common stock. We cannot pay cash dividends on common stock
until all cumulative dividends on the ESOP Preferred Stock have been paid. The
conversion rate, conversion price and voting rights of the ESOP Preferred Stock
are subject to adjustment in certain circumstances.
All shares of ESOP Preferred Stock are held of record by the trustee of the
Delta Family-Care Savings Plan (see Note 11). At December 31, 2002, 10,405,346
shares of common stock were reserved for issuance for the conversion of the ESOP
Preferred Stock.
SHAREOWNER RIGHTS PLAN
The Shareowner Rights Plan is designed to protect shareowners against attempts
to acquire Delta that do not offer an adequate purchase price to all
shareowners, or are otherwise not in the best interest of Delta and our
shareowners. Under the plan, each outstanding share of common stock is
accompanied by one-half of a preferred stock purchase right. Each whole right
entitles the holder to purchase 1/100 of a share of Series D Junior
Participating Preferred Stock at an exercise price of $300, subject to
adjustment.
The rights become exercisable only after a person acquires, or makes a tender or
exchange offer that would result in the person acquiring, beneficial ownership
of 15% or more of our common stock. If a person acquires beneficial ownership of
15% or more of our common stock, each right will entitle its holder (other than
the acquiring person) to exercise his rights to purchase our common stock having
a market value of twice the exercise price.
56
If a person acquires beneficial interest of 15% or more of our common stock and
(1) we are involved in a merger or other business combination in which we are
not the surviving corporation, or (2) we sell more than 50% of our assets or
earning power, then each right will entitle its holder (other than the acquiring
person) to exercise their rights to purchase common stock of the acquiring
company having a market value of twice the exercise price.
The rights expire on November 4, 2006. We may redeem the rights for $0.01 per
right at any time before a person becomes the beneficial owner of 15% or more of
our common stock. At December 31, 2002, 2,250,000 shares of preferred stock were
reserved for issuance under the Shareowner Rights Plan.
PAYMENT OF DIVIDENDS
The determination to pay cash dividends on our ESOP Preferred Stock and our
common stock is at the discretion of our Board of Directors, and is also subject
to the provisions of Delaware General Corporation Law, which authorizes the
payment of dividends from (1) surplus, defined as the excess of net assets
(total assets minus total liabilities) over the amount determined to be capital,
or (2) if there is no surplus, out of net profits for the current fiscal year or
the previous fiscal year. The terms of the ESOP Preferred Stock discussed above
provide for cumulative dividends and also limit our ability to pay cash
dividends to our common shareowners in certain circumstances. Our debt
agreements do not limit the payment of dividends on our capital stock.
Note 13. Common Stock Repurchases
We repurchased 10.6 million shares of common stock for $502 million in 2000.
These repurchases were made under certain now-completed stock buyback programs,
and the ongoing common stock repurchase authorization described below.
In 1996, our Board of Directors authorized us to repurchase up to 49.4 million
shares of common stock issued under our broad-based employee stock option plans
(see Note 12). As of December 31, 2002, we had repurchased a total of 21.6
million shares of common stock under this authorization. We are authorized to
repurchase the remaining shares as employees exercise their stock options under
those plans. Repurchases are subject to market conditions and may be made in the
open market or privately negotiated transactions.
Note 14. Comprehensive Income (Loss)
Comprehensive income (loss) includes (1) reported net income (loss); (2) the
additional minimum pension liability; and (3) unrealized gains and losses on
marketable equity securities and fuel derivative instruments that qualify for
hedge accounting. The following table shows our comprehensive income (loss)
for the years ended December 31, 2002, 2001 and 2000:
{in millions) 2002 2001 2000
- ------------- --------- ------- ----
Net income $ (1,272) $(1,216) $828
Other comprehensive income (loss) (1,587) (335) 94
--------- ------- ----
Comprehensive income (loss) $ (2,859) $(1,551) $922
========= ======= ====
57
The following table shows the components of accumulated other comprehensive
income (loss) at December 31, 2002, 2001 and 2000, and the activity for the
years then ended:
Additional
Minimum Fuel Marketable
Pension Derivative Equity
(in millions) Liability Instruments Securities Other Total
- ------------- ---------- ----------- ---------- ----- --------
Balance at December 31, 1999 $ -- $ -- $ 266 $ -- $ 266
-------- ------ ------ ---- --------
Unrealized gain (loss) -- 814 16 -- 830
Realized (gain) loss -- (375) (301) -- (676)
Tax effect -- (171) 111 -- (60)
-------- ------ ------ ---- --------
Net of tax -- 268 (174) -- 94
-------- ------ ------ ---- --------
Balance at December 31, 2000 -- 268 92 -- 360
-------- ------ ------ ---- --------
Unrealized gain (loss) -- (100) (84) 2 (182)
Realized (gain) loss -- (299) (73) -- (372)
Tax effect -- 156 64 (1) 219
-------- ------ ------ ---- --------
Net of tax -- (243) (93) 1 (335)
-------- ------ ------ ---- --------
Balance at December 31, 2001 -- 25 (1) 1 25
-------- ------ ------ ---- --------
Additional minimum pension liability adjustment (2,558) -- -- -- (2,558)
Unrealized gain (loss) -- 143 (9) (2) 132
Realized (gain) loss -- (136) 4 -- (132)
Tax effect 972 (3) 1 1 971
-------- ------ ------ ---- --------
Net of tax (1,586) 4 (4) (1) (1,587)
-------- ------ ------ ---- --------
BALANCE AT DECEMBER 31, 2002 $ (1,586) $ 29 $ (5) $ -- $ (1,562)
======== ====== ====== ==== ========
We anticipate that gains of $29 million, net of tax, will be realized during
2003 as (1) fuel hedge contracts settle and (2) the related aircraft fuel
purchases being hedged are consumed and recognized in expense. For additional
information regarding our fuel hedge contracts, see Note 4.
See Note 11 for further information related to the additional minimum pension
liability.
Note 15. Geographic Information
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131), requires us to disclose certain information about our
operating segments. Operating segments are defined as components of an
enterprise with separate financial information which is evaluated regularly by
the chief operating decision-maker and is used in resource allocation and
performance assessments.
We are managed as a single business unit that provides air transportation for
passengers and cargo. This allows us to benefit from an integrated revenue
pricing and route network that includes Delta-mainline, ASA and Comair. The
flight equipment of all three carriers is combined to form one fleet which is
deployed through a single route scheduling system. When making resource
allocation decisions, our chief operating decision-maker evaluates flight
profitability data, which considers aircraft type and route economics, but gives
no weight to the financial impact of the resource allocation decision on an
individual carrier basis. Their objective in making resource allocation
decisions is to maximize our consolidated financial results, not the individual
results of Delta-mainline, ASA and Comair.
58
Operating revenues are assigned to a specific geographic region based on the
origin, flight path and destination of each flight segment. Our operating
revenues by geographic region for the years ended December 31, 2002, 2001 and
2000, are summarized in the following table:
(in millions) 2002 2001 2000
- ------------- --------- --------- ---------
North America $ 10,778 $ 11,288 $ 14,004
Atlantic 1,860 1,823 1,988
Pacific 127 222 297
Latin America 540 546 452
--------- --------- ---------
Total $ 13,305 $ 13,879 $ 16,741
========= ========= =========
Our tangible assets consist primarily of flight equipment which is mobile across
geographic markets. Accordingly, assets are not allocated to specific geographic
regions.
Note 16. Asset Writedowns, Restructuring and Related Items, Net
2002
In 2002, we recorded net charges totaling $439 million ($277 million net of tax,
or $2.25 diluted earnings per share) in asset writedowns, restructuring and
related items, net on our Consolidated Statements of Operations, as follows:
- - FLEET CHANGES
During 2002, we made significant changes in our fleet plan (1) to
reduce costs through fleet simplification and capacity reductions and
(2) to decrease capital expenditures through aircraft deferrals. These
actions resulted in $225 million in net asset impairments and other
charges, which are discussed below.
During the September 2002 quarter, we recorded an impairment charge,
shown in the table below, related to 59 owned B-727 aircraft. The
impairment of 23 B-727 aircraft used in operations resulted from a
further reduction in their estimated future cash flows and fair values
since our impairment review in 2001. The impairment of 36 B-727
aircraft held for sale resulted from a further decline in their fair
values less the cost to sell since our impairment review in 2001. The
aircraft held for sale will be disposed of as part of our fleet
simplification plan and are expected to be sold by December 31, 2003,
under an existing agreement. The net book value of these aircraft held
for sale is included in other noncurrent assets on our Consolidated
Balance Sheets at December 31, 2002, and is not material; these
aircraft are not included in the aircraft fleet table on page 70
because they have been removed from service.
During the September 2002 quarter, we also decided to temporarily
remove our MD-11 aircraft from service beginning in early 2003. As a
result of this decision, we recorded an impairment charge, shown in the
table below, related to our eight owned MD-11 aircraft. This charge
reflects the further reduction in estimated future cash flows and fair
values of these aircraft since our impairment review in 2001. The MD-11
aircraft will be replaced on international routes by B-767-300ER
aircraft that are currently used in the domestic system. We will use
smaller mainline aircraft to replace the B-767 aircraft on domestic
routes, thereby reducing our domestic capacity.
During the December 2002 quarter, we decided to return to service,
beginning in 2003, nine leased B-737-300 aircraft to replace the B-767
aircraft on domestic routes. This decision was based on (1) capacity
and operating cost considerations and (2) our inability to sublease the
B-737-300 aircraft due to the difficult business environment facing the
airline industry after September 11, 2001. As discussed below, during
the June 2001 quarter, we decided to remove the B-737-300 aircraft from
service and recorded a reserve for future lease payments less estimated
sublease income. Due to our decision to return these aircraft to
service, we reversed the remaining $56 million reserve related to these
B-737-300 aircraft.
During the December 2002 quarter, we entered into an agreement with
Boeing to defer 31 mainline aircraft previously scheduled for delivery
in 2003 and 2004. As a result of these deferrals, we have no mainline
aircraft scheduled for delivery during 2003 or 2004. We incurred a $30
million charge related to these deferrals.
59
During the December 2002 quarter, we decided to accelerate the
retirement of 37 owned EMB-120 aircraft to achieve costs savings and
operating efficiencies. We plan to remove these aircraft from service
beginning in 2003. The accelerated retirement of these aircraft as well
as a reduction in their estimated future cash flows and fair values
resulted in an impairment charge.
During 2002, we recorded the following impairment charges for our owned
B-727, MD-11 and EMB-120 aircraft:
Used in Operations Held for Sale
-------------------------- -----------------------
No. of No. of Spare
(dollars in millions) Writedown(1) Aircraft Writedown Aircraft Subtotal Parts(2) Total
- --------------------- ------------ -------- --------- -------- -------- -------- -----
B-727 $ 24 23 $ 37 36 $ 61 $ -- $ 61
MD-11 141 8 -- -- 141 18 159
EMB-120 27 37 -- -- 27 4 31
----- ---- ----- ---- -----
Total $ 192 $ 37 $ 229 $ 22 $ 251
===== ==== ===== ==== =====
(1) The fair value of aircraft used in operations was determined using
third-party appraisals.
(2) Charges related to the writedown of the related spare parts inventory
to their net realizable value.
- - WORKFORCE REDUCTIONS
We recorded a $127 million charge related to our decision in October
2002 to reduce staffing by up to approximately 8,000 jobs across all
work groups, excluding pilots, to further reduce operating costs. We
offered eligible non-pilot employees several programs, including
voluntary severance, leaves of absence and early retirement.
Approximately 3,900 employees elected to participate in one of these
programs. Involuntary reductions will affect up to approximately 4,000
employees and are expected to be completed by May 2003.
The total charge includes (1) $51 million for costs associated with the
voluntary programs that were recorded as special termination benefits
under our pension and postretirement medical benefit obligations (see
Note 11) and (2) $76 million for severance and related costs.
- - SURPLUS PILOTS AND GROUNDED AIRCRAFT
We recorded $93 million in expenses for the temporary carrying cost of
surplus pilots and grounded aircraft related to our capacity reductions
which became effective on November 1, 2001. This cost also includes
related requalification training and relocation costs for certain
pilots.
- - OTHER
We also recorded (1) a $23 million gain related to the adjustment of
certain prior year restructuring reserves based on revised estimates of
remaining costs; (2) a $14 million charge associated with our decision
to close certain leased facilities; and (3) a $3 million charge related
to other items.
2001
In 2001, we recorded charges totaling $1.1 billion ($695 million net of tax,
or $5.63 diluted earnings per share) in asset write-downs, restructuring and
related items, net on our Consolidated Statements of Operations, as follows:
- - WORKFORCE REDUCTIONS
We recorded a $566 million charge relating to our decision in 2001 to
reduce staffing across all workgroups due to the capacity reductions we
implemented as a result of the September 11 terrorist attacks. We
offered eligible employees several programs, including voluntary
severance, leaves of absence and early retirement. Approximately 10,000
employees elected to participate in one of the voluntary programs.
Involuntary reductions were expected to affect up to approximately
1,700 employees - up to 1,400 pilots and 300 employees from other
workgroups.
The total charge includes $475 million for costs associated with the
early retirement and certain voluntary leave of absence programs which
are recorded as special termination benefits under our pension and
postretirement medical benefit obligations (see Note 11). The remaining
$91 million relates to severance and related costs.
60
- - FLEET CHANGES
As a result of the effects of the September 11 terrorist attacks on our
business and the related decline in aircraft values, we recorded $286
million in asset writedowns. These writedowns include (1) the
impairment of 16 MD-90 and eight MD-11 owned aircraft, which reflects
further reductions in the estimated future cash flows and fair values
of these aircraft since our impairment review in 1999, as well as a
revised schedule for retiring these aircraft; (2) charges related to
the accelerated retirement of 40 owned B-727 aircraft by 2003; and (3)
the writedown to fair value of 18 owned L-1011 aircraft. These charges
are summarized in the table below:
Used in Operations Held for Sale
------------------------ ----------------------
No. of No. of
(dollars in millions) Writedown(1) Aircraft Writedown Aircraft Total
- --------------------- ------------ -------- --------- -------- -----
MD-90 $ 98 16 $ -- -- $ 98
MD-11 93 8 -- -- 93
B-727-200 81 36 2 4 83
L-1011 -- -- 12 18 12
----- ---- -----
Total $ 272 $ 14 $ 286
===== ==== =====
(1) The fair value of aircraft used in operations was determined using
third-party appraisals.
The net book value of the aircraft held for sale is included in other
noncurrent assets on our Consolidated Balance Sheets at December 31,
2001, and is not material.
In addition, we recorded a $71 million reserve related to our decision
to remove nine leased B-737-300 aircraft from service to more closely
align capacity and demand, and to improve scheduling and operating
efficiency. The reserve consisted of future lease payments for these
aircraft less estimated sublease income. We also recorded an additional
$6 million charge for the writedown to net realizable value of related
aircraft spare parts.
- - SURPLUS PILOTS AND GROUNDED AIRCRAFT
We recorded $30 million in expenses for the temporary carrying cost of
surplus pilots and grounded aircraft related to our capacity reductions
which became effective on November 1, 2001. This cost also includes
related requalification training and relocation costs for certain
pilots.
- - OTHER
We recorded $160 million in charges that include (1) an $81 million
charge related to the write-off of previously capitalized amounts that
would provide no future economic benefit due to our decision to cancel
or delay certain airport and technology projects following September
11, 2001; (2) a $63 million charge related to contract termination
costs; (3) a $9 million charge related to the write-off of certain
receivables, primarily those of foreign air carriers and other related
businesses, that we believe became uncollectible as a result of those
businesses' weakened financial condition after September 11, 2001; and
(4) a $7 million charge related to our decision to close certain
facilities.
2000
In 2000, we recorded charges totaling $108 million ($66 million net of tax, or
$0.53 basic and $0.50 diluted earnings per share) in asset writedowns,
restructuring and related items, net on our Consolidated Statements of
Operations, as follows:
- - WORKFORCE REDUCTIONS
We recorded an $86 million charge relating to our decision to offer an
early retirement medical option program to enable eligible employees to
retire with continued medical coverage without paying certain early
retirement medical premiums. Approximately 2,500 employees participated
in this program.
- - OTHER
We recorded a $22 million restructuring charge relating to our decision
to close our Pacific gateway in Portland, Oregon.
61
Notes to the Consolidated Financial Statements
Note 17. Restructuring and Other Reserves
The following table shows changes in our restructuring and other reserve
balances as of December 31, 2002, 2001 and 2000, and the associated activity for
the years then ended:
Restructuring and Other Charges
-------------------------------------------
Severance and Related Costs
--------------------------
2002 2001
Workforce Workforce
Leased Facilities Reduction Reduction
(in millions) Aircraft and Other Programs Programs
- ------------- -------- ---------- --------- ---------
Balance at December 31, 1999 $ -- $ 41 $ -- $ --
Additional costs and expenses -- 22 -- --
Payments -- (7) -- --
------ ------ ----- ------
Balance at December 31, 2000 -- 56 -- --
------ ------ ----- ------
Additional costs and expenses 71 24 -- 91
Payments (1) (6) -- (44)
------ ------ ----- ------
Balance at December 31, 2001 70 74 -- 47
------ ------ ----- ------
Additional costs and expenses -- 14 76 --
Payments (14) (9) (5) (35)
Adjustments (56) (14) -- (9)
------ ------ ----- ------
BALANCE AT DECEMBER 31, 2002 $ -- $ 65 $ 71 $ 3
====== ====== ===== ======
At December 31, 2002, the facilities and other reserve represents costs related
primarily to (1) future lease payments for facilities closures and (2) contract
termination fees. During 2002, we recorded a $14 million charge related to our
decision in 2002 to close certain facilities and a $14 million adjustment to
prior year reserves based on revised estimates of remaining costs.
The leased aircraft reserve represents future lease payments for B-737 aircraft
previously removed from service prior to the lease expiration date, less
estimated sublease income. Due to changes in our fleet plan during the December
2002 quarter, these aircraft will be returned to service in 2003. Therefore, we
reversed the remaining $56 million balance of this reserve.
The severance and related costs reserve represents future payments associated
with our 2002 and 2001 voluntary and involuntary workforce reduction programs.
At December 31, 2002, the remaining $71 million balance related to the 2002
workforce reduction programs represents severance and medical benefits for
employees who received severance or are participating in certain leave of
absence programs; this amount will be paid during 2003. At December 31, 2002,
the remaining $3 million balance related to the 2001 workforce reduction
programs primarily consists of severance for international employees that will
be paid during early 2003 in accordance with local country laws and regulations.
During 2002, we also recorded a $9 million adjustment to the 2001 reserve based
on revised estimates of the remaining costs, including (1) the adjustment of
medical benefits for certain employees participating in the leave of absence
programs who returned to the workforce earlier than originally scheduled and (2)
the change in the number of pilot furloughs from up to 1,400 to approximately
1,100.
See Note 16 for additional information related to the charges discussed above.
62
Note 18. Earnings (Loss) per Share
We calculate basic earnings (loss) per share by dividing the income (loss)
available to common shareowners by the weighted average number of common shares
outstanding. Diluted earnings (loss) per share includes the dilutive effects of
stock options and convertible securities. To the extent stock options and
convertible securities are anti-dilutive, they are excluded from the calculation
of diluted earnings (loss) per share. The following table shows our computation
of basic and diluted earnings (loss) per share:
Years Ended December 31,
(in millions, except per share data) 2002 2001 2000
- ------------------------------------ -------- -------- ------
BASIC:
Net income (loss) excluding cumulative effect of change in
accounting principle $ (1,272) $ (1,216) $ 928
Dividends on allocated Series B ESOP
Convertible Preferred Stock (15) (14) (13)
-------- -------- ------
Net income (loss) available to common shareowners, excluding
cumulative effect of change in accounting principle $ (1,287) $ (1,230) $ 915
Weighted average shares outstanding 123.3 123.1 123.8
-------- -------- ------
Basic earnings (loss) per share excluding cumulative
effect of change in accounting principle $ (10.44) $ (9.99) $ 7.39
======== ======== ======
DILUTED:
Net income (loss) available to common shareowners, excluding
cumulative effect of change in accounting principle $ (1,287) $ (1,230) $ 915
Income tax effect assuming conversion of allocated Series B ESOP
Convertible Preferred Stock -- -- 8
-------- -------- ------
Income (loss) available to common shareowners including
assumed conversion $ (1,287) $ (1,230) $ 923
Weighted average shares outstanding 123.3 123.1 123.8
Additional shares assuming:
Exercise of stock options -- -- 1.6
Conversion of allocated Series B ESOP Convertible Preferred Stock -- -- 5.4
Conversion of performance-based stock units -- -- 0.2
-------- -------- ------
Weighted average shares outstanding, as adjusted 123.3 123.1 131.0
-------- -------- ------
Diluted earnings (loss) per share excluding cumulative
effect of change in accounting principle $ (10.44) $ (9.99) $ 7.05
======== ======== ======
For the years ended December 31, 2002, 2001 and 2000, we excluded from the
diluted earnings (loss) per share computation (1) 54.5 million, 44.3 million and
23.4 million stock options, respectively, because the exercise price of the
options was greater than the average price of common stock and (2) 6.9 million,
6.5 million and zero additional shares, respectively, because their effect on
earnings (loss) per share was anti-dilutive.
Note 19. Stabilization Act
On September 22, 2001, the Air Transportation Safety and System Stabilization
Act (Stabilization Act) became effective. The Stabilization Act is intended to
preserve the viability of the U.S. air transportation system following the
terrorist attacks on September 11, 2001 by, among other things, (1) providing
for payments from the U.S. Government totaling $5 billion to compensate U.S. air
carriers for losses incurred from September 11, 2001 through December 31, 2001
as a result of the September 11 terrorist attacks and (2) permitting the
Secretary of Transportation to sell insurance to U.S. air carriers.
Our allocated portion of compensation under the Stabilization Act was $668
million. Due to uncertainties regarding the U.S. government's calculation of
compensation, we recognized $634 million of this amount in our 2001 Consolidated
Statement of Operations. We recognized the remaining $34 million of compensation
in our 2002 Consolidated Statement of Operations. We received $112 million and
$556 million in cash for the years ended December 31, 2002 and 2001,
respectively, under the Stabilization Act.
63
Notes to the Consolidated Financial Statements
Subsequent to September 11, 2001, our insurance providers reduced our coverage
and significantly increased our premium rates for war and terrorism risk
insurance. Under the provisions of the Stabilization Act, the Federal Aviation
Administration (FAA) has been selling U.S. airlines excess war and terrorism
risk insurance coverage since the September 11 terrorist attacks. Effective
January 24, 2003, under the Homeland Security Act, the FAA is required to sell
passenger, third-party (ground damage) and aircraft hull war and terrorism risk
insurance to U.S. airlines through August 31, 2003.
Note 20. Related Party Transaction
The Delta Employees Credit Union (DECU) is an independent entity that is
chartered to provide banking and financial services to our employees, former
employees and certain relatives of these persons. At December 31, 2002, we had a
$71 million liability to DECU recorded in accounts payable, deferred credits and
other accrued liabilities on our Consolidated Balance Sheet. The liability
results from a timing difference in funding a portion of our 2002 year end
payroll and is reflected as a non-cash transaction on our Consolidated Statement
of Cash Flows for the year ended December 31, 2002. We paid the liability on
January 2, 2003.
Note 21. Valuation and Qualifying Accounts
The following table shows the valuation and qualifying accounts as of December
31, 2002, 2001 and 2000, and the associated activity for the years then ended:
Allowance for:
------------------------------
Obsolescence
Restructuring Uncollectible of Expendable
Leased and Other Accounts Parts & Supplies
(in millions) Aircraft(1) Charges(1) Receivable(2) Inventory(3)
- ------------- ----------- ------------- -------------- ----------------
Balance at December 31, 1999 $ -- $ 41 $ 39 $ 104
Additional costs and expenses -- 22 15 22
Payments and deductions -- (7) (23) (2)
----- ------ ------ ------
Balance at December 31, 2000 -- 56 31 124
----- ------ ------ ------
Additional costs and expenses 71 115 18 38
Payments and deductions (1) (50) (6) (23)
----- ------ ------ ------
Balance at December 31, 2001 70 121 43 139
----- ------ ------ ------
Additional costs and expenses -- 90 21 51
Payments and deductions (70) (72) (31) (7)
----- ------ ------ ------
BALANCE AT DECEMBER 31, 2002 $ -- $ 139 $ 33 $ 183
===== ====== ====== ======
(1) See Note 17 for additional information related to leased aircraft and
restructuring and other charges.
(2) The payments and deductions related to the allowance for uncollectible
accounts receivable represent the write-off of accounts considered to
be uncollectible, less recoveries.
(3) These additional costs and expenses in 2001 and 2002 include the
charges related to the writedown of certain aircraft spare parts
inventory to their net realizable value (see Note 16).
Note 22. Subsequent Events (Unaudited)
ENHANCED EQUIPMENT TRUST CERTIFICATES
On January 30, 2003, we issued, in a private placement, $392 million aggregate
principal amount of insured Pass Through Certificates, Series 2003-1 G
(Certificates). The certificates bear interest at floating rates based on LIBOR
+ 0.75% and require principal payments from 2003 to 2008. This financing is
secured by two B-737-800 and 10 B-767-300ER aircraft owned by us. The net
proceeds of this financing were made available for general corporate purposes.
CONTRACT CARRIER AGREEMENT
During February 2003, we amended our contract carrier agreement with Chautauqua
to increase from 22 to 34 the number of aircraft Chautauqua will operate for us.
All of these aircraft are scheduled to be in service under the Delta Connection
program by the end of 2003. We estimate that the total fair value of these
additional aircraft that Chautauqua could assign to us or require that we
purchase if we were to terminate this agreement without cause is approximately
$200 million (see Note 9).
64
As part of this amended agreement, we received a warrant to purchase up to an
additional 720,000 shares of Republic common stock for (1) $12.50 per share, if
the warrant is exercised prior to the completion of Republic's initial public
offering of common stock (IPO) or (2) the price per share at which Republic
common stock is sold in the IPO, if the warrant is exercised after or in
connection with the IPO. The warrant is exercisable in whole or in part at any
time until February 7, 2013. The fair value of this warrant on the date received
was not material.
Note 23. Quarterly Financial Data (Unaudited)
The following table summarizes our unaudited quarterly results of operations
for 2002 and 2001:
Three Months Ended
2002 ---------------------------------------------------------------
(in millions, except per share data) March 31 June 30 September 30 December 31
- ------------------------------------ -------- ------- ------------ -----------
Operating revenues $ 3,103 $ 3,474 $ 3,420 $ 3,308
Operating loss $ (435) $ (127) $ (385) $ (362)
Net loss $ (397) $ (186) $ (326) $ (363)
Basic and diluted loss per share(1) $ (3.25) $ (1.54) $ (2.67) $ (2.98)
------- ------- ------- ---------
Three Months Ended
2001 ---------------------------------------------------------------
(in millions, except per share data) March 31 June 30 September 30 December 31
- ------------------------------------ -------- ------- ------------ -----------
Operating revenues $ 3,842 $ 3,776 $ 3,398 $ 2,863
Operating loss $ (115) $ (114) $ (251) $ (1,122)
Net loss $ (133) $ (90) $ (259) $ (734)
Basic and diluted loss per share(1) $ (1.11) $ (0.76) $ (2.13) $ (5.98)
------- ------- ------- ---------
(1) The sum of the quarterly earnings per share does not equal the annual
earnings per share due to changes in average shares outstanding.
Our financial results for the years ended December 31, 2002 and 2001 were
materially impacted by certain events, as discussed below:
- - During the six months ended June 30, 2001, public concern over a
possible strike by Delta pilots relating to then ongoing collective
bargaining negotiations caused some customers to make reservations and
travel with airlines other than Delta. On June 20, 2001, Delta pilots
ratified a new collective bargaining agreement, avoiding a possible
strike.
- - On March 26, 2001, Comair pilots began a strike, which continued until
June 22, 2001 when they ratified a new collective bargaining agreement.
As a result of this 89-day strike, Comair suspended its operations
between March 26, 2001 and July 1, 2001. Comair resumed partial service
on July 2, 2001, and gradually began restoring service during the
remainder of the year. Service was fully restored to pre-strike levels
during January 2002.
- - Prior to September 11, 2001, the slowing U.S. and world economies
reduced the demand for air travel among both business and leisure
passengers. This decline in demand negatively impacted our passenger
traffic and yield in 2001 and 2002.
- - The business environment significantly worsened as a result of the
September 11 terrorist attacks. See Note 16 for information regarding
certain charges and costs we recorded in 2001 as a result of these
attacks.
- - During 2002, we made significant changes in our fleet plan to simplify
our aircraft fleet to reduce capacity and to decrease capital
expenditures through aircraft deferrals. See Note 16 for information
related to charges and other costs associated with these fleet changes.
65
Independent's Auditors' Report
To the Board of Directors and Shareowners' of Delta Air Lines, Inc.:
We have audited the accompanying consolidated balance sheet of Delta Air Lines,
Inc. (a Delaware corporation) and subsidiaries (the "Company) as of December 31,
2002, and the related consolidated statements of operations, cash flows and
shareowners' equity for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit. The consolidated
financial statements of Delta Air Lines, Inc. as of December 31, 2001, and for
each of the two years in the period ended December 31, 2001, before the
revisions discussed below to Notes 5, 9, 17 and 21 to the consolidated financial
statements, were audited by other auditors who have ceased operations. Those
auditors expressed an unqualified opinion on those financial statements in their
report dated January 23, 2002. Their report contained an explanatory paragraph
related to the Company's change in its method of accounting for derivative
instruments and hedging activities effective July 1, 2000 as discussed in Note 4
to the consolidated financial statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such 2002 consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
2002 and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 5 to the consolidated financial statements, effective
January 1, 2002, the Company changed its method of accounting for goodwill and
other intangible assets to conform to Statement of Financial Accounting
Standards No. 142 ("SFAS 142").
As discussed above, the financial statements of the Company as of December 31,
2001, and for each of the two years in the period ended December 31, 2001, were
audited by other auditors who have ceased operations. These consolidated
financial statements have been revised as follows:
- - As described in Note 5, the Company adopted the provisions of SFAS 142
as of January 1, 2002. These consolidated financial statements have
been revised to include the disclosures required by SFAS 142.
- - In Note 9, the Company has disclosed the amount of expenses incurred
related to contract carrier agreements. These consolidated financial
statements have been revised to include such disclosures for 2001 and
2000.
- - In Note 17, the Company has disclosed the amounts of the additional
costs and expenses and payments related to restructuring and other
reserves for leased aircraft and facilities and other items. These
consolidated financial statements have been revised to include such
disclosures for 2001 and 2000.
- - In Note 21, the Company has disclosed the amounts of additional costs
and expenses and deductions related to the allowance for obsolescence
of expendable parts and supplies inventories. These consolidated
financial statements have been revised to include such disclosures for
2001 and 2000.
We audited the disclosures in Notes 5, 9, 17 and 21 that were included to revise
the 2001 and 2000 consolidated financial statements. In our opinion, such
disclosures are appropriate. However, we were not engaged to audit, review, or
apply any procedures to the 2001 and 2000 consolidated financial statements of
the Company other than with respect to such disclosures and, accordingly, we do
not express an opinion or any other form of assurance on the 2001 and 2000
consolidated financial statements taken as a whole.
/s/ Deloitte & Touche LLP
Atlanta, Georgia
January 31, 2003
66
Report of Independent Public Accountants
THE FOLLOWING IS A COPY OF THE AUDIT REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN
LLP IN CONNECTION WITH DELTA'S ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31,
2001. THIS AUDIT REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP.
To Delta Air Lines, Inc.:
We have audited the accompanying consolidated balance sheets of Delta Air Lines,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 2001 and 2000,
and the related consolidated statements of operations, cash flows and
shareowners' equity for each of the three years in the period ended December 31,
2001. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Delta Air Lines,
Inc. and subsidiaries as of December 31, 2001 and 2000, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.
As discussed in Note 4 to the consolidated financial statements, effective July
1, 2000, Delta Air Lines, Inc. changed its method of accounting for derivative
instruments and hedging activities.
/s/ Arthur Andersen LLP
Atlanta, Georgia
January 23, 2002
67
Consolidated Summary of Operations
For the years ended December 31, 2002-1998
(in millions, except per share data) 2002(1) 2001(2) 2000(3) 1999(4) 1998
- ----------------------------------- -------- -------- -------- -------- --------
Operating revenues $ 13,305 $ 13,879 $ 16,741 $ 14,883 $ 14,312
-------- -------- -------- -------- --------
Operating expenses 14,614 15,481 15,104 13,565 12,509
-------- -------- -------- -------- --------
Operating income (loss) (1,309) (1,602) 1,637 1,318 1,803
Interest income (expense), net(5) (610) (410) (257) (126) (66)
Miscellaneous income (expense), net(6) (2) 80 328 901 39
Loss on extinguishment of ESOP Notes (42) -- -- -- --
Fair value adjustments of SFAS 133 derivatives (39) 68 (159) -- --
-------- -------- -------- -------- --------
Income (loss) before income taxes and cumulative
effect of change in accounting principle (2,002) (1,864) 1,549 2,093 1,776
Income tax benefit (provision) 730 648 (621) (831) (698)
-------- -------- -------- -------- --------
Net income (loss) before cumulative effect
of change in accounting principle (1,272) (1,216) 928 1,262 1,078
-------- -------- -------- -------- --------
Net income (loss) after cumulative effect
of change in accounting principle (1,272) (1,216) 828 1,208 1,078
Preferred stock dividends (15) (14) (13) (12) (11)
-------- -------- -------- -------- --------
Net income (loss) attributable to
common shareowners $ (1,287) $ (1,230) $ 815 $ 1,196 $ 1,067
-------- -------- -------- -------- --------
Earnings (loss) per share before cumulative
effect of change in
accounting principle(7)
Basic $ (10.44) $ (9.99) $ 7.39 $ 9.05 $ 7.22
Diluted $ (10.44) $ (9.99) $ 7.05 $ 8.52 $ 6.87
-------- -------- -------- -------- --------
Earnings (loss) per share(7)
Basic $ (10.44) $ (9.99) $ 6.58 $ 8.66 $ 7.22
Diluted $ (10.44) (9.99) $ 6.28 $ 8.15 $ 6.87
-------- -------- -------- -------- --------
Dividends declared per common share $ 0.10 $ 0.10 $ 0.10 $ 0.10 $ 0.10
======== ======== ======== ======== ========
Other Financial and Statistical Data
For the years ended December 31, 2002-1998 2002(1) 2001(2) 2000(3) 1999(4) 1998
- ------------------------------------------- ------------ ------------ ------------ ------------ ------------
Total assets (millions) $ 24,720 $ 23,605 $ 21,931 $ 19,942 $ 14,727
Long-term debt and capital leases
(excluding current maturities) (millions) $ 10,174 $ 8,347 $ 5,896 $ 4,303 $ 1,720
Shareowners' equity (millions) $ 893 $ 3,769 $ 5,343 $ 4,908 $ 4,077
Shares of common stock outstanding
at year end(7) 123,359,205 123,245,666 123,013,372 132,893,470 141,514,262
Revenue passengers enplaned (thousands) 107,048 104,943 119,930 110,083 105,304
Available seat miles (millions) 141,719 147,837 154,974 147,073 142,154
Revenue passenger miles (millions) 102,029 101,717 112,998 106,165 103,342
Operating revenue per available seat mile 9.39(cents) 9.39(cents) 10.80(cents) 10.12(cents) 10.07(cents)
Passenger mile yield 12.08(cents) 12.74(cents) 13.86(cents) 13.14(cents) 12.99(cents)
Operating cost per available seat mile 10.31(cents) 10.47(cents) 9.75(cents) 9.22(cents) 8.80(cents)
Passenger load factor 71.99% 68.80% 72.91% 72.18% 72.70%
Breakeven passenger load factor 79.64% 77.31% 65.29% 65.37% 62.94%
Available ton miles (millions) 21,548 22,282 22,925 21,245 20,312
Revenue ton miles (millions) 11,698 11,752 13,058 12,227 12,052
Operating cost per available ton miles 67.82(cents) 69.48(cents) 65.88(cents) 63.85(cents) 61.58(cents)
============ ============ ============ ============ =============
(1) Includes a $439 million charge ($277 million net of tax, or $2.25
diluted EPS) for asset writedowns, restructuring and related items,
net; a $34 million gain ($22 million net of tax, or $0.17 diluted EPS)
for Stabilization Act compensation; and a $94 million charge ($59
million net of tax, or $0.47 diluted EPS) for other income and expense
items (seepages 16-17 of Management's Discussion and Analysis).
(2) Includes a $1.1 billion charge ($695 million net of tax, or $5.63
diluted EPS) for asset writedowns, restructuring and related items,
net; a $634 million gain ($392 million net of tax, or $3.18 diluted
EPS) for Stabilization Act compensation; and a $186 million gain ($114
million net of tax, or $0.92 diluted EPS) for other income and expense
items (see pages 16-17 of Management's Discussion and Analysis).
(3) Includes a $108 million charge ($66 million net of tax, or $0.50
diluted EPS) for asset writedowns, restructuring and related items,
net; a $151 million gain ($93 million net of tax, or $0.70 diluted EPS)
for other income and expense items; and a $164 million cumulative
effect, non-cash charge ($100 million net of tax, or $0.77 diluted
EPS), resulting from our adoption of SFAS 133 on July 1, 2000 (see
pages 18-19 of Management's Discussion and Analysis).
(4) Includes a $469 million charge ($286 million net of tax, or $1.94
diluted EPS) for asset writedowns; $927 million gain ($565 million net
of tax, or $3.83 diluted EPS) from the sale of certain investments; an
$89 million non-cash charge ($54 million net of tax, or $0.37 diluted
EPS) from the cumulative effect of a change in accounting principle
resulting from our adoption on January 1, 1999 of SAB 101; and a $40
million charge ($24 million net of tax, or $0.16 diluted EPS) for the
early extinguishment of certain debt obligations.
(5) Includes interest income.
(6) Includes gains (losses) from the sale of investments.
(7) All earnings per share amounts for 1998 have been restated to reflect
the two-for-one common stock split that became effective on November 2,
1998.
68
Shareowner Information
TRANSFER AGENT, REGISTRAR, AND DIVIDEND PAYING AGENT FOR COMMON STOCK
Registered shareowner inquiries related to stock transfers, address changes,
lost stock certificates, dividend payments or account consolidations should be
directed to:
Wells Fargo Shareowner Services
P.O. Box 64854
St. Paul, MN 55164-0854
Telephone (800) 259-2345 or (651) 450-4064
www.wellsfargo.com/shareownerservices
SHAREOWNER SERVICE PLUS PLAN(SM)
Investors may purchase Delta common stock under this program, which is sponsored
and administered by Wells Fargo Shareowner Services. All correspondence and
inquiries concerning the program should be directed to:
Delta Air Lines, Inc.
c/o Wells Fargo Shareowner Services
P.O. Box 64863
St. Paul, MN 55164-0863
Telephone (800) 259-2345 or (651) 450-4064
FORM 10-K AND OTHER FINANCIAL INFORMATION
A copy of the Form 10-K for the year ended December 31, 2002 and other financial
reports filed by Delta with the SEC is available on Delta's Web site at
www.delta.com or the SEC's Web site at www.sec.gov, or may be obtained without
charge by calling (866) 240-0597 or by writing to:
Delta Air Lines, Inc.
Investor Relations, Department 829
P.O. Box 20706
Atlanta, Georgia 30320-6001
A copy of this Annual Report can be found on Delta's Web site, www.delta.com.
Registered shareowners and participants in the Delta Family-Care Savings Plan
may elect to receive future annual meeting materials electronically by signing
up at www.delta.com/inside/investors/index.jsp
AVAILABILITY OF ANNUAL REPORT ON COMMUNITY AFFAIRS AND ANNUAL REPORT ON GLOBAL
DIVERSITY
Copies of these reports are available online at www.delta.com.
INVESTOR RELATIONS
Telephone inquiries related to financial information, other than requests for
financial documents, may be directed to Delta Investor Relations at (866)
715-2170.
INDEPENDENT AUDITORS
Deloitte & Touche LLP
191 Peachtree Street, N.E., Suite 1500
Atlanta, GA 30303-1924
COMMON STOCK
Delta's Common Stock is traded on the New York Stock Exchange under the ticker
symbol DAL. As of December 31, 2002, there were 22,390 registered owners of
common stock.
MARKET PRICES AND DIVIDENDS
PRICE OF CASH DIVIDENDS
YEAR 2002 COMMON STOCK PER COMMON SHARE
- --------- ----------------------------- ----------------
QUARTER ENDED: HIGH LOW
March 31 $ 38.69 $ 28.52 $ 0.025
June 30 32.65 18.30 0.025
September 30 20.12 8.30 0.025
December 31 14.09 6.10 0.025
======= ======= =======
Price of Cash Dividends
Year 2001 Common Stock per Common Share
- --------- ----------------------------- ----------------
Quarter Ended: High Low
March 31 $ 52.94 $ 37.51 $ 0.025
June 30 48.05 37.80 0.025
September 30 46.56 20.00 0.025
December 31 31.15 22.20 0.025
======= ======= =======
AVAILABILITY OF EQUAL EMPLOYMENT OPPORTUNITY REPORT
A copy of Delta's Equal Employment Opportunity Report is available without
charge upon written request to:
Delta Air Lines, Inc.
Equal Opportunity, Department 955
P.O. Box 20706
Atlanta, Georgia 30320-6001
69
Delta's Aircraft Fleet
MAINLINE AIRCRAFT FLEET
Our mainline fleet strategy is designed to achieve operational and cost
efficiencies through fleet modernization. Our long-term agreement with The
Boeing Company (Boeing) covers firm orders, options and rolling options for
certain aircraft through calendar year 2017. This agreement supports our plan
for disciplined growth, aircraft rationalization and fleet replacement. It also
gives us certain flexibility to adjust scheduled aircraft deliveries and to
substitute between aircraft models and aircraft types. The majority of the
aircraft under firm order from Boeing will be used to replace older aircraft.
During 2002, we deferred delivery of 31 mainline aircraft. As a result of these
deferrals, we have no mainline aircraft deliveries scheduled in 2003 or 2004.
Our long-term plan is to reduce our mainline aircraft fleet to three family
types. We believe fleet standardization will improve reliability and produce
long-term cost savings. Consistent with this plan, we will retire our last B-727
aircraft in April 2003. Due to the weak demand environment, we will temporarily
ground the entire MD-11 fleet by March 31, 2004. As a result of these actions,
by early 2004, we will operate a mainline fleet composed entirely of two-pilot,
two-engine aircraft.
Our fleet at December 31, 2002, includes the following 25 aircraft that have
been temporarily grounded: 14 B-737-200, eight B-737-300 and three B-767-200
aircraft. These aircraft are included in the table to the right.
REGIONAL JET AIRCRAFT FLEET
Our regional jet program offers service to small and medium-sized cities and
enables us to supplement mainline frequencies and service to larger cities. In
2000, ASA and Comair entered into agreements with Bombardier, Inc. to purchase a
total of 94 Canadair Regional Jet (CRJ) aircraft, including 69 CRJ-200 aircraft
with a mix of 40 and 50 seats, and 25 CRJ-700 aircraft with 70 seats. ASA and
Comair also received options to purchase 406 CRJ aircraft through 2010. In 2002,
ASA and Comair each took delivery of their first CRJ-700 aircraft. Additionally,
Comair now operates an all-jet fleet, having retired its last EMB-120 turbo prop
aircraft in August 2002.
AIRCRAFT FLEET AT DECEMBER 31, 2002
Current Fleet
----------------------------------------------
Capital Operating Average
Aircraft Type Owned Lease Lease Total Age
- ------------- ----- ------- --------- ----- -------
B-727-200 18 -- 3 21 23.5
B-737-200 -- 42 10 52 17.8
B-737-300 -- -- 26 26 16.1
B-737-800 71 -- -- 71 2.2
B-757-200 77 3 41 121 11.3
B-767-200 15 -- -- 15 19.6
B-767-300 4 -- 24 28 12.9
B-767-300ER 51 -- 8 59 6.9
B-767-400 21 -- -- 21 1.8
B-777-200 8 -- -- 8 2.9
MD-11 8 -- 7 15 8.9
MD-88 63 -- 57 120 12.5
MD-90 16 -- -- 16 7.1
EMB-120 29 -- -- 29 11.8
ATR-72 4 -- 15 19 8.5
CRJ-100/200 73 -- 122 195 3.7
CRJ-700 15 -- -- 15 0.3
---- --- ---- ----
Total 473 45 313 831 9.0
==== === ==== ====
AIRCRAFT DELIVERY SCHEDULE AT DECEMBER 31, 2002
Delivery Calendar Year Ending
-------------------------------------------
After
Aircraft on Firm Order 2003 2004 2005 2006 2006 Total
- ---------------------- ---- ---- ---- ----- ---- -----
B-737-800 -- -- 19 19 23 61
B-777-200 -- -- 2 3 -- 5
CRJ-100/200 31 -- -- -- -- 31
CRJ-700 20 23 -- -- -- 43
--- --- --- --- --- ----
Total 51 23 21 22 23 140
=== === === === === ====
AIRCRAFT ON OPTION AT DECEMBER 31, 2002
Delivery in Calendar year Ending
---------------------------------------------------------
After Rolling
Aircraft on Option(1) 2003 2004 2005 2006 2006 Total Options
- --------------------- ---- ---- ---- ---- ----- ----- -------
B-737-800 -- 4 8 10 38 60 231
B-757-200 -- 3 6 6 5 20 43
B-767-300/300ER -- -- 2 2 6 10 9
B-767-400 -- 2 2 2 18 24 3
B-777-200 -- 2 5 1 12 20 14
CRJ-100/200 -- 27 38 33 99 197 --
CRJ-700 -- 5 30 30 100 165 --
---- ---- ---- ---- ----- ----- ----
Total -- 43 91 84 278 496 300
==== ==== ==== ==== ===== ===== ====
(1) Aircraft options have scheduled delivery slots, while rolling options
replace options and are assigned delivery slots as options expire or
are exercised.
70