Exhibit 13
AIRCRAFT FLEET
At the heart of the Company's operations is Delta's aircraft fleet. To maintain
a young and technologically advanced fleet, Delta has entered into a long-term
aircraft purchase agreement with The Boeing Company (Boeing). The agreement
covers firm orders, options and rolling options for certain aircraft through
calendar year 2017, and supports the Company's plan for disciplined growth,
aircraft rationalization and fleet replacement.
The agreement with Boeing provides Delta with long-term price controls, risk
sharing and the flexibility to adjust scheduled aircraft deliveries or
substitute between aircraft models and aircraft types, subject to certain
conditions.
The majority of the aircraft under firm order will be used to replace older
aircraft. Delta's long-term plan is to reduce aircraft family types from six to
three. A move to a more standardized fleet is expected to improve reliability
and result in long-term cost savings. As previously announced, the Company plans
to retire its remaining L-1011 aircraft by August 2001, replaced primarily by
B-767 aircraft. Delta also has announced a three-year acceleration of the
planned retirement of the B-727 aircraft fleet which it now plans to retire by
the end of fiscal 2005. The B-727 aircraft will be replaced primarily by new
generation B-737 aircraft.
Delta accepted delivery of 15 new aircraft and acquired 10 aircraft from
other carriers during fiscal 1998, composed of two B-727-200 aircraft, six
B-737-300 aircraft, four B-757-200 aircraft, 12 B-767-300ER aircraft and one
MD-11 aircraft. In addition, Delta purchased four 727-200 aircraft that it
previously leased. The Company expects to take delivery of seven aircraft from
other carriers in fiscal 1999, five of which have been delivered. Delta retired
nine L-1011 aircraft from the fleet in fiscal 1998.
AIRCRAFT FLEET AT JUNE 30, 1998
Leased
Average ------------------
Aircraft Type Age Owned Capital Operating Total
- -------------------------------------------------------------
B-727-200 21.2 121 - 10 131
B-737-200 13.6 1 45 8 54
B-737-300 11.6 - 3 16 19
B-757-200 9.1 54 - 41 95
B-767-200 15.1 15 - - 15
B-767-300 9.1 2 - 24 26
B-767-300ER 4.2 31 - 8 39
L-1011-1 19.8 18 - - 18
L-1011-250 15.7 6 - - 6
L-1011-500 17.3 15 - - 15
MD-11 4.4 8 - 7 15
MD-88 8.0 63 - 57 120
MD-90 2.6 16 - - 16
- -------------------------------------------------------------
Total 12.3 350 48 171 569
---------------------------
---------------------------
AIRCRAFT DELIVERY SCHEDULES AT AUGUST 14, 1998
Delivery in Year Ending June 30:
--------------------------------
After
Aircraft on Firm Order 1999 2000 2001 2002 2002 Total
- --------------------------------------------------------------------
B-737-600/700/800 7 12 5 9 54 87
B-757-200 5 7 - - - 12
B-767-300/300ER 14 - - - - 14
B-767-400 - 2 19 - - 21
B-777-200 2 10 2 - - 14
- --------------------------------------------------------------------
Total 28 31 26 9 54 148
- --------------------------------------------------------------------
- --------------------------------------------------------------------
Delivery in Year Ending June 30:
--------------------------------
After Rolling
Aircraft on Option* 1999 2000 2001 2002 2002 Total Options
- ----------------------------------------------------------------
B-737-600/700/800 - 5 12 7 36 60 275
B-757-200 - 4 3 8 5 20 85
B-767-300/300ER - 1 4 2 4 11 19
B-767-400 - - - 12 12 24 25
B-777-200 - - 1 5 14 20 30
- ----------------------------------------------------------------
Total - 10 20 34 71 135 434
- ----------------------------------------------------------------
- ----------------------------------------------------------------
*Aircraft options have scheduled delivery slots, while rolling options replace
options and are assigned delivery slots as options expire or are exercised.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DELTA AIR LINES, INC.
RESULTS OF OPERATIONS
SUMMARY OF RESULTS
For fiscal 1998, Delta recorded operating income of $1.7 billion and net income
of $1.0 billion ($13.28 basic and $12.68 diluted income per common share). These
results represent the strongest financial performance ever reported by Delta for
a fiscal year. In fiscal 1997, Delta recorded operating income of $1.5 billion
and net income of $854 million ($11.39 basic and $11.03 diluted income per
common share).
Financial Results Summary
(In Millions, Except Share Amounts) 1998 1997 Change
- ------------------------------------------------------------------------------
Operating Revenues $14,138 $13,594 4%
Operating Expenses 12,445 12,063 3
- -----------------------------------------------------------------
Operating Income 1,693 1,531 11
Other Expense, Net 45 116 (61)
- -----------------------------------------------------------------
Income Before Income Taxes 1,648 1,415 16
Income Taxes Provided 647 561 15
- -----------------------------------------------------------------
Net Income 1,001 854 17
Preferred Stock Dividends 11 9 22
- -----------------------------------------------------------------
Net Income Available to
Common Shareowners $ 990 $ 845 17%
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Income per common share:
Basic $ 13.28 $ 11.39 17%
Diluted $ 12.68 $ 11.03 15%
Number of Shares Used
to Compute Income
Per Common Share:
Basic 74,567,059 74,233,606
Diluted 78,630,519 76,964,892
Fiscal 1997 results include pretax restructuring and other non-recurring
charges of $52 million ($32 million after-tax or $0.43 basic and $0.42 diluted
income per common share) related to the realignment of the Company's
transatlantic and European operations.
FISCAL 1998 COMPARED WITH FISCAL 1997
OPERATING REVENUES
Operating Revenue Detail
(In Millions) 1998 1997 Change
- -----------------------------------------------------------
Passenger $12,976 $12,505 4%
Cargo 582 554 5
Other, Net 580 535 8
- ------------------------------------------------
Total $14,138 $13,594 4%
- ------------------------------------------------
- ------------------------------------------------
Operating revenues for fiscal 1998 were $14.1 billion, up 4% from $13.6
billion in fiscal 1997. Passenger revenue increased 4%, which reflects a 3%
increase in revenue passenger miles on capacity growth of 2%. The passenger mile
yield was 12.83 cents, virtually unchanged from fiscal 1997. During fiscal 1998,
Delta benefited from continued favorable economic conditions, increased demand
for air travel and the strategic reallocation of certain aircraft.
Domestic passenger revenue increased 4%, to $10.7 billion, driven by a 3%
increase in domestic revenue passenger miles on a 2% increase in domestic
capacity. The increase in domestic revenue passenger miles is primarily due to
favorable economic conditions and improved asset utilization. Domestic passenger
mile yield increased 1% due to a domestic fare increase implemented during the
September 1997 quarter, largely offset by the full-year impact of the U.S.
transportation excise tax and increased low-fare competition.
Consistent with the Company's strategy to expand its global reach,
international passenger revenue increased 3%, to $2.3 billion, reflecting a 6%
increase in international revenue passenger miles on a 5% increase in
international capacity. The increase in international revenue passenger miles is
primarily due to the addition of new routes, improved asset utilization, and
continued strong demand in the Atlantic market, as well as the Company's recent
expansion into Latin America. The international passenger mile yield decreased
3% year over year, mainly due to overall capacity growth in the Atlantic market.
Cargo revenues increased 5% to $582 million, reflecting a 14% increase in
cargo ton miles and an 8% decrease in cargo ton mile yield. All other revenues
increased 8% to $580 million, mainly due to higher administrative service charge
revenues.
Revenue-Related Statistics
1998 1997 Change
- -------------------------------------------------------------------------------
Revenue Passengers
Enplaned (Thousands) 104,148 101,147 3%
Revenue Passenger
Miles (Millions) 101,136 97,758 3%
Passenger Load Factor 72.2% 71.4% 0.8 pts.
Passenger Mile Yield 12.83 cents 12.79 cents -
Cargo Ton Miles (Millions) 1,745 1,532 14%
Cargo Ton Mile Yield 33.35 cents 36.14 cents (8)%
Operating Revenue
Per Available Seat Mile 10.09 cents 9.94 cents 2%
- --------------------------------------------------------------------------------
25
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued
DELTA AIR LINES, INC.
OPERATING EXPENSES
Operating expenses in fiscal 1998 totaled $12.4 billion, up 3% from $12.1
billion in fiscal 1997. Operating cost per available seat mile increased 1% to
8.88 cents.
Operating Expense Detail
(In Millions) 1998 1997 Change
- -----------------------------------------------------------
Salaries and Related Costs $ 4,850 $ 4,534 7%
Aircraft Fuel 1,507 1,722 (12)
Passenger Commissions 980 1,017 (4)
Depreciation and Amortization 861 710 21
Contracted Services 694 630 10
Other Selling Expenses 681 677 1
Landing Fees and Other Rents 649 649 -
Aircraft Rent 552 547 1
Aircraft Maintenance Materials
and Outside Repairs 495 434 14
Passenger Service 450 389 16
Restructuring and
Other Non-recurring Charges - 52 -
Other 726 702 3
- -----------------------------------------------------------
Total $12,445 $12,063 3%
- -----------------------------------------------------------
- -----------------------------------------------------------
Salaries and related costs increased 7% due to an 8% increase in full-time
equivalent employees, primarily in customer service areas, and compensation and
benefit enhancements for non-contract domestic employees, which became effective
July 1, 1997. Aircraft fuel expense decreased 12% as the average fuel price per
gallon declined 15% to 56.54(cent). Passenger commissions expense decreased 4%
due to the implementation of a lower commission rate structure in the September
1997 quarter and increased utilization of lower cost distribution channels,
partially offset by higher total commissions resulting from increased passenger
revenue. Depreciation and amortization expense increased 21% due to the
acquisition of additional aircraft and ground equipment, as well as increased
investment in information systems. Contracted services expense rose 10% due to
higher information technology costs and increased airport contract expenses
associated with customer service initiatives and higher passenger volume.
Aircraft maintenance materials and outside repairs expense increased 14% largely
due to increased scheduled maintenance visits. Passenger service expense
increased 16% due to onboard service enhancements and increased passenger
traffic.
Operating Statistics
1998 1997 Change
- ---------------------------------------------------------------------------
Available Seat Miles (Millions) 140,149 136,821 2%
Operating Margin 12.0% 11.3% 0.7 pts.
Fuel Gallons Consumed (Millions) 2,664 2,599 3%
Average Fuel Price Per Gallon 56.54 cents 66.23 cents (15)%
Breakeven Passenger Load Factor 62.7% 62.7% -
Operating Cost Per Available
Seat Mile 8.88 cents 8.82 cents 1%
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Other expense for fiscal 1998 decreased $71 million to $45 million, primarily
due to lower interest expense resulting from lower average levels of debt
outstanding and higher interest income resulting from higher cash balances. In
addition, fiscal 1997 other expense included a $20 million payment to settle
certain class action antitrust lawsuits filed by travel agents.
FISCAL 1997 COMPARED WITH FISCAL 1996
For fiscal 1997, Delta recorded operating income of $1.5 billion and net income
of $854 million ($11.39 basic and $11.03 diluted income per common share). In
fiscal 1996, Delta recorded operating income of $463 million and net income of
$156 million ($1.43 basic and diluted income per common share).
As discussed previously, fiscal 1997 results include pretax restructuring
and other non-recurring charges of $52 million. Fiscal 1996 results include
pretax restructuring and other non-recurring charges totaling $829 million ($506
million after-tax or $9.77 per common share) related to the write-down of
Delta's L-1011 fleet and certain cost reduction initiatives.
OPERATING REVENUES
Operating revenues for fiscal 1997 were $13.6 billion, up 9% from $12.5 billion
in fiscal 1996. Passenger revenue increased 8%, the result of 10% growth in
revenue passenger miles partially offset by a 2% decline in the passenger mile
yield.
26
Domestic passenger revenue increased 9%, to $10.3 billion, reflecting a
13% increase in domestic revenue passenger miles on a 6% increase in domestic
capacity, and a 3% decline in the domestic passenger mile yield. Domestic
traffic growth was primarily due to the Company's realignment of domestic
routes which increased Delta's operations at its Atlanta and Cincinnati hubs;
reduced operations by a competitor; and favorable economic conditions. The
decrease in the domestic passenger mile yield was due to the use of more
competitive pricing strategies and the reimposition of the U.S.
transportation excise tax on March 7, 1997.
International passenger revenue rose 1%, to $2.2 billion, due to a 3%
increase in international revenue passenger miles which was largely offset by a
2% decline in the international passenger mile yield. The increase in
international revenue passenger miles was primarily due to improved asset
utilization and favorable economic conditions. The decrease in the international
passenger mile yield was due to the Company's use of more competitive pricing
strategies.
Cargo revenues increased 6% to $554 million, reflecting a 12% increase in
cargo ton miles and a 5% decline in cargo ton mile yield. Other revenues were up
68% to $535 million, mainly due to increased revenues from expanded joint
marketing programs and improved results from code-sharing arrangements.
OPERATING EXPENSES
Operating expenses in fiscal 1997 totaled $12.1 billion, up 1% from $12.0
billion in fiscal 1996. Operating capacity increased 5% to 136.8 billion
available seat miles, and operating cost per available seat mile decreased 4% to
8.82(cent). Excluding restructuring and other non-recurring charges, operating
expenses were up 8%, and operating cost per available seat mile increased 3%.
This increase was primarily due to higher salaries and related costs, aircraft
fuel expense and certain traffic-related costs.
OTHER INCOME (EXPENSE)
Other expense for fiscal 1997 decreased $71 million, to $116 million, primarily
due to lower interest expense and higher equity income from associated
companies. Other expense for fiscal 1997 included Delta's $20 million payment to
settle certain class action antitrust lawsuits filed by travel agents.
LIQUIDITY AND CAPITAL RESOURCES
FISCAL YEAR 1998
During fiscal 1998, strong operating results enabled the Company to continue to
strengthen its financial position. Cash and cash equivalents and short-term
investments totaled $1.6 billion at June 30, 1998, compared to $1.2 billion at
June 30, 1997. The principal sources of funds during fiscal 1998 were $2.9
billion of cash from operations, $402 million (including an income tax benefit
of $84 million related to the exercise of stock options) from the issuance of
Common Stock, primarily under the Company's broad-based employee stock option
plans, and $125 million from the issuance of long-term obligations.
During fiscal 1998, Delta invested $1.8 billion in flight equipment and
$531 million in ground property and equipment. The Company also made payments of
$307 million on long-term debt and capital lease obligations; paid $354 million
to repurchase Common Stock; and paid cash dividends of $28 million on its Series
B ESOP Convertible Preferred Stock, and $15 million on its Common Stock. The
Company may repurchase additional long-term debt and Common Stock from time to
time.
As of June 30, 1998 and 1997, the Company had negative working capital of
$1.2 billion. A negative working capital position is normal for Delta and does
not indicate a lack of liquidity. The Company expects to meet its current and
long-term obligations as they become due through available cash, short-term
investments and internally generated funds, supplemented as necessary by debt
financing and proceeds from sale and leaseback transactions. At August 14, 1998,
the Company had $1.25 billion of credit available under its 1997 Bank Credit
Agreement. See Note 6 of Notes to Consolidated Financial Statements.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued
DELTA AIR LINES, INC.
Long-term debt and capital lease obligations, including current maturities,
totaled $1.9 billion at June 30, 1998, compared to $2.1 billion at June 30,
1997. Shareowners' equity was $4.0 billion at June 30, 1998, compared to $3.0
billion at June 30, 1997. The Company's debt-to-equity position, including
current maturities, was 32% debt and 68% equity at June 30, 1998, compared to
41% debt and 59% equity at June 30, 1997.
At August 14, 1998, there was outstanding $290 million principal amount of
the Delta Family-Care Savings Plan's Series C Guaranteed Serial ESOP Notes
(Series C ESOP Notes), which are guaranteed by Delta. Delta is required to
purchase the Series C ESOP Notes in certain circumstances. See Note 6 of Notes
to Consolidated Financial Statements.
FISCAL YEAR 1997
During fiscal 1997, the principal source of funds was $2.0 billion of cash from
operations. Delta invested $1.6 billion in flight equipment and $350 million in
ground property and equipment. The Company also made payments of $196 million on
long-term debt and capital lease obligations; paid $379 million to repurchase
Common Stock; and paid cash dividends of $29 million on its Series B ESOP
Convertible Preferred Stock and $15 million on its Common Stock.
FISCAL YEAR 1996
In fiscal 1996, the principal source of funds was $1.4 billion of cash from
operations. During fiscal 1996, Delta invested $639 million in flight equipment,
and $297 million in ground property and equipment. The Company made payments of
$440 million on long-term debt and capital lease obligations; paid cash
dividends of $80 million on its Series C Convertible Preferred Stock, $30
million on its Series B ESOP Convertible Preferred Stock and $10 million on its
Common Stock; and paid $66 million to repurchase Common Stock.
COMMITMENTS
Future expenditures for aircraft, engines and engine hush-kits on firm order as
of August 14, 1998, are estimated to be $6.9 billion. The Company has also
authorized fiscal 1999 capital expenditures of approximately $550 million for
improvement of airport and office facilities, ground equipment and other assets.
See Notes 7 and 8 of Notes to Consolidated Financial Statements for additional
information on the Company's lease obligations and commitments.
YEAR 2000 ISSUE
Background
Many computer systems in use today were designed and developed using two digits,
rather than four, to specify the year. As a result, such systems will recognize
the year 2000 as "00." This could cause many computer applications to fail
completely or to create erroneous results unless corrective measures are taken.
Delta's Year 2000 Program
The Company's flight operations, flight support units and other business support
units depend on internal and external computer systems and equipment that will
be affected by the Year 2000 issue. Accordingly, achieving Year 2000 readiness
is a top priority of the Company. Delta has implemented a Year 2000 program for
its internal systems and equipment which has four phases: (1) identification;
(2) assessment (including prioritization); (3) remediation (including
modification, upgrading and replacement); and (4) testing. The Company is also
reviewing the Year 2000 readiness of third parties who provide goods or services
which are essential to Delta's operations. In addition, Delta is revising its
existing business interruption contingency plans to address issues specific to
the Year 2000 problem. The Company's senior management and the Board of
Directors receive regular updates on the status of the Company's Year 2000
program.
28
Safety-of-Flight Systems
The Company has completed its review of the impact of Year 2000 issues on its
aircraft fleet and onboard flight support systems and has determined that there
are no safety-of-flight issues with such equipment or systems. The Company has
completed the assessment phase for its onboard flight management systems, which
maximize operating efficiency but are not essential to the safe operation of
flights, and expects to complete the remediation and testing phases for these
systems by June 1999.
The Company also uses ground-based, safety-related computer systems and
equipment which are vital to the maintenance of aircraft and the control of
flight operations. The identification and assessment phases are complete with
respect to such systems and equipment and the Company expects to complete the
remediation and testing phases by June 1999.
Critical Internal Business Systems
The Company's critical internal business systems and equipment include computer
hardware, software and related equipment which are essential for customer
reservations, ticketing, flight scheduling and seat inventory management;
airport customer services; finance systems, such as revenue management, revenue
accounting and payroll; and other functions, such as internal voice and data
communications, aircraft ground handling, baggage handling, facility management
and security.
The identification and assessment phases for all of the Company's critical
internal business systems and equipment are complete. The remediation phase is
complete for Delta's internal customer reservations, ticketing, flight
scheduling and seat inventory management systems and the Company expects to
complete the testing phase for these systems by June 1999. These are the
internal business systems which are the most critical for Delta to continue its
operations without interruption. The Company expects to complete the remediation
and testing phases for all other critical internal business systems and
equipment by December 1998 and June 1999, respectively, except for customer
service hardware installed at the Company's airport facilities, which will be
replaced with upgraded, Year 2000-compliant hardware. The Company will begin
installing this new hardware in September 1998 and expects to complete all
installations by the end of the December 1999 quarter.
Interfaces with Third Parties
The Company is reviewing, and has initiated formal communications with, third
parties which provide goods or services which are essential to Delta's
operations in order to: (1) determine the extent to which the Company is
vulnerable to any failure by such material third parties to remediate their
respective Year 2000 problems; and (2) resolve such problems to the extent
practicable. These entities include the suppliers of infrastructure critical to
the airline industry, such as the air traffic control and related systems of the
U.S. Federal Aviation Administration and international aviation authorities, the
U.S. Department of Transportation and local airport authorities. Other critical
third parties on which Delta relies include airlines and the suppliers of
aircraft fuel, utilities, external computer reservations services, and
communication services. As part of this review, the Company is actively involved
in airline industry Year 2000 review efforts led by the Air Transport
Association and the International Air Transport Association (IATA).
Estimated Year 2000 Costs
The Company estimates that the total cost of achieving Year 2000 readiness for
its internal systems and equipment is approximately $160 million to $175
million, of which $40 million has been recognized as expense in the Company's
Consolidated Statements of Operations through June 30, 1998. The Company
believes a majority of the estimated total Year 2000 compliance cost will be
funded by reallocating existing resources rather than incurring incremental
costs.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued
DELTA AIR LINES, INC.
Contingency Planning
The Company is revising its existing business interruption contingency plans to
address internal and external issues specific to the Year 2000 problem, to the
extent practicable. Such revisions are expected to be completed by July 1999.
These plans, which are intended to enable the Company to continue to operate to
the extent that it can do so safely, include performing certain processes
manually; repairing or obtaining replacement systems; changing suppliers; and
reducing or suspending operations. The Company believes, however, that due to
the widespread nature of potential Year 2000 issues, the contingency planning
process is an ongoing one which will require further modifications as the
Company obtains additional information regarding (1) the Company's internal
systems and equipment during the remediation and testing phases of its Year 2000
program; and (2) the status of third party Year 2000 readiness.
Possible Consequences of Year 2000 Problems
Delta believes that completed and planned modifications and conversions of its
internal systems and equipment will allow it to be Year 2000 compliant in a
timely manner. There can be no assurance, however, that the Company's internal
systems or equipment or those of third parties on which Delta relies will be
Year 2000 compliant in a timely manner or that the Company's or third parties'
contingency plans will mitigate the effects of any noncompliance. The failure of
the systems or equipment of Delta or third parties (which Delta believes is the
most reasonably likely worst case scenario) could result in the reduction or
suspension of the Company's operations and could have a material adverse effect
on the Company's business or consolidated financial statements.
Forward-Looking Statements
The preceding "Year 2000 Issue" discussion contains various forward-looking
statements which represent the Company's beliefs or expectations regarding
future events. When used in the "Year 2000 Issue" discussion, the words
"believes," "expects," "estimates" and similar expressions are intended to
identify forward-looking statements. Forward-looking statements include, without
limitation, the Company's expectations as to when it will complete the
remediation and testing phases of its Year 2000 program as well as its Year 2000
contingency plans; its estimated cost of achieving Year 2000 readiness; and the
Company's belief that its internal systems and equipment will be Year 2000
compliant in a timely manner. All forward-looking statements involve a number of
risks and uncertainties that could cause the actual results to differ materially
from the projected results. Factors that may cause these differences include,
but are not limited to, the availability of qualified personnel and other
information technology resources; the ability to identify and remediate all date
sensitive lines of computer code or to replace embedded computer chips in
affected systems or equipment; and the actions of governmental agencies or other
third parties with respect to Year 2000 problems.
Euro Currency Issue
On January 1, 1999, eleven of the fifteen countries which are members of the
European Union are scheduled to introduce a new currency unit called the "euro."
Prior to the full implementation of the new currency for the participating
countries on January 1, 2002, there will be a transition period during which
parties may use either the existing currencies or the euro. However, all
exchanges between currencies of the participating countries are required to be
converted first into the euro and then into the other country's currency.
Delta's internal customer reservations systems and business support
systems and processes are currently being modified to operate effectively in
the euro environment. The Company expects these modifications to be completed
by the end of the December 1998 quarter. Delta also depends on third party
financial institutions, computer reservation systems and IATA programs to
process most of its international ticket payment and refund transactions and
therefore is reviewing their respective euro-related conversion plans. Delta
does not expect the implementation of the euro currency to have a material
adverse impact on the Company's business or consolidated financial statements.
30
Delta's expectations regarding the euro currency issue are forward-looking
statements that involve a number of risks and uncertainties that could cause the
actual results to differ materially from the projected results. Factors that may
cause these differences include, but are not limited to, the ability or
willingness of third parties to convert affected systems in a timely manner; the
ability of the Company to modify its systems and processes in a timely manner;
and the actions of governmental agencies or other third parties with respect to
euro currency issues.
OTHER MATTERS
Stock Split
In July 1998, Delta's Board of Directors approved a two-for-one Common Stock
split, subject to shareowner approval of an amendment to the Company's
Certificate of Incorporation to increase the number of shares of Common Stock
the Company is authorized to issue and to effect the proposed split. If the
amendment is approved by shareowners at Delta's October 22, 1998 annual meeting,
the split would be effective for common shareowners of record at 5 p.m., eastern
standard time, on November 2, 1998.
Common Stock Repurchase Programs
For information regarding the Company's Common Stock repurchase programs, see
Note 14 of Notes to Consolidated Financial Statements.
Broad-Based Employee Stock Option Plans
During fiscal 1997, the Company's shareowners approved two plans providing for
the issuance of non-qualified stock options to substantially all of Delta's
non-officer personnel. For additional information regarding these plans, see
Note 13 of Notes to Consolidated Financial Statements.
Change in Estimate
As a result of a review of its aircraft fleet plan and comparable industry
practices, the Company increased the depreciable life of certain new generation
aircraft types from 20 to 25 years. The change in estimate is effective July 1,
1998.
Alliance Agreement
On April 29, 1998, Delta and United Air Lines, Inc. (United) entered into a
marketing alliance agreement (Agreement) pursuant to which the two airlines
would engage in code-sharing arrangements, reciprocal frequent flyer programs
and other areas of marketing cooperation.
The implementation of the code-sharing aspects of the Agreement is subject
to the approval of both companies' pilot unions. In August 1998, Delta's Board
of Directors (Board) decided not to grant the request of the Delta pilot union
for a voting seat on the Board. Following this decision, the Delta pilot union
said it would no longer consider the approval of the code-sharing aspects of the
Agreement. As a result, Delta has discontinued consideration of code-sharing
arrangements with United.
On September 1, 1998, Delta and United began reciprocal frequent flyer
program participation.
Personnel Matters
On May 1, 1996, the Company and the Air Line Pilots Association, International
(ALPA) entered into a new collective bargaining agreement covering the rates of
pay, rules and working conditions of the Company's approximately 8,800 pilots.
The contract, which becomes amendable on May 2, 2000, provides in part (1) that
if the Company operates an aircraft type (New Equipment) for which the rates of
pay, rules and working conditions (collectively, Pay Rates) are not set forth in
the collective bargaining agreement, the Company and ALPA will negotiate the Pay
Rates applicable to the New Equipment; (2) that pilots will fly the New
Equipment whether or not Pay Rates for the equipment have been agreed upon; but
(3) that the pilots' obligation to fly the New Equipment will end if Pay Rates
have not been agreed upon within six months after the Company places the New
Equipment into operation.
The Company has placed orders to purchase the following aircraft types,
each of which constitutes New Equipment under the collective bargaining
agreement: B-737-600/700/800 aircraft; B-777-200 aircraft; and B-767-400
aircraft. Delta plans to place these aircraft types in service shortly after
their delivery, which is expected to begin in October 1998,
31
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued
DELTA AIR LINES, INC.
March 1999, and May 2000, respectively. In addition, the Company is leasing from
a third party eight B-737-300 aircraft and has agreed, subject to certain
conditions, to lease one additional B-737-300 aircraft which also constitutes
New Equipment under the collective bargaining agreement. The Company placed the
first of these leased aircraft in service in July 1998.
In October 1997, the Company and ALPA began discussions on the Pay Rates
applicable to B-737-600/700/800 aircraft and the nine B-737-300 aircraft
discussed above. ALPA has announced plans to request pilots not to fly these
aircraft types subsequent to the six-month period after such aircraft are
initially placed in service unless and until Pay Rates for these aircraft are
agreed upon. Additionally, in January 1998, the Company's pilots voted to
authorize ALPA to assess pilots 1% of their gross pay for up to nine months to
finance a contingency fund for pilots who would have flown these aircraft.
On June 23, 1998, the Company and ALPA reached an agreement regarding Pay
Rates applicable to the B-737 aircraft discussed above (B-737 Agreement). The
B-737 Agreement is subject to the approval of Delta's pilots. ALPA is planning
to distribute ballots to pilots beginning in September to vote on the B-737
Agreement, and to announce the results of the voting in October. The outcome of
this matter cannot presently be determined.
Governmental Matters
On April 6, 1998, the U.S. Department of Transportation (DOT) published a
proposed statement of enforcement policy to address DOT concerns that major
carriers are taking actions designed to exclude new entrants in certain airline
markets, particularly at hub airports. The proposed DOT guidelines focus on
unreasonable price cuts and/or capacity increases by major carriers in response
to entry by new carriers at hub airports, and whether the major carrier could
have pursued a more reasonable alternative strategy for competing with the new
entrant. The proposed policy, if adopted, could adversely affect Delta's ability
to respond to competitive challenges by new entrant carriers.
Competitive Environment
Delta expects that low-fare competition will continue in domestic and
international markets. If price reductions are not offset by increases in
traffic or changes in the mix of traffic that improve the passenger mile yield,
Delta's operating results will be adversely affected.
Environmental and Legal Contingencies
The Company is a defendant in certain legal actions relating to alleged
employment discrimination practices, antitrust matters, environmental issues
and other matters concerning the Company's business. Although the ultimate
outcome of these matters cannot be predicted with certainty, management
believes that the resolution of these actions is not likely to have a
material adverse effect on Delta's consolidated financial statements.
Forward-Looking Information
Delta and its representatives may make forward-looking statements, within the
meaning of the Private Securities Litigation Reform Act of 1995, about the
Company and its business from time to time, either orally or in writing. These
forward-looking statements involve a number of risks and uncertainties that
could cause the actual results to differ materially from the projected results.
It is not possible to list all of the many factors and events that could cause
the actual results to differ materially from the projected results. Such factors
and events may include, but are not limited to: (1) competitive factors such as
the airline pricing environment and the capacity decisions of other airlines;
(2) general economic conditions; (3) changes in aircraft fuel prices; (4)
fluctuations in foreign currency exchange rates; (5) actions by the United
States and foreign governments; and (6) the willingness of customers to travel.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS 130), and Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (SFAS
131). SFAS 130 establishes standards
32
for the reporting and presentation of comprehensive income and its components.
SFAS 131 establishes standards for reporting information about operating
segments. Delta is required to adopt both SFAS 130 and SFAS 131 in fiscal 1999.
The adoption of SFAS 130 and SFAS 131 will not have a material effect on the
Company's financial statements.
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position 98-1, "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use" (SOP 98-1), which defines the
type of costs related to such activities that should be capitalized versus
expensed as incurred.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities" (SOP 98-5), which requires all costs incurred
in the start-up of a new business or business segment to be expensed as
incurred.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
133), which establishes accounting and reporting standards for derivatives and
hedging activities.
Delta is required to adopt SOP 98-1, SOP 98-5 and SFAS 133 in fiscal 2000.
The adoption of these statements is not expected to have a material impact on
the Company's financial statements.
MARKET RISKS ASSOCIATED WITH
FINANCIAL INSTRUMENTS
Commodity Price Risk
The Company's results of operations are significantly impacted by changes in the
price of aircraft fuel. During fiscal 1998, aircraft fuel accounted for 12% of
the Company's operating expenses. Based on the Company's fiscal 1999 projected
aircraft fuel consumption of 2.7 billion gallons, a one-cent change in the
average annual price per gallon of aircraft fuel would impact Delta's annual
aircraft fuel expense by approximately $27 million. The Company uses fuel swap
and option contracts to manage aircraft fuel price risk. At June 30, 1998, the
Company had entered into hedge agreements for 2.1 billion gallons of its
projected fiscal 1999 aircraft fuel requirements. (See Note 4 of Notes to
Consolidated Financial Statements.)
Equity Price Risk
At June 30, 1998, the quoted fair value of Delta's equity investments in ASA
Holdings, Inc., Comair Holdings, Inc., Singapore Airlines Limited, SAirGroup and
SkyWest, Inc. was approximately $1.3 billion.
The aggregate unrealized gain from these investments was $785 million at
June 30, 1998. The market risk associated with these equity investments is the
potential loss in fair value resulting from a decrease in market prices. In
addition, Delta has exposure to foreign currency exchange rate risk relating to
its investments in Singapore Airlines and SAirGroup. See Notes 2 and 3 of Notes
to Consolidated Financial Statements.
Interest Rate Risk
The Company's exposure to market risk for changes in interest rates relates to
its long-term debt obligations and cash investment portfolio.
At June 30, 1998, the fair value of the Company's long-term fixed-rate debt
was estimated at approximately $1.9 billion using quoted market prices where
available, or discounted cash flow analyses. Market risk associated with the
Company's long-term debt is the potential increase in fair value resulting from
a decrease in interest rates. A 10% decrease in assumed interest rates would
increase the fair value of Delta's long-term debt by approximately $117 million.
Based on the Company's average balance of cash equivalents and short-term
investments during fiscal 1998, a 10% decrease in the average interest rate
experienced in fiscal 1998 would not materially impact Delta's annual interest
income.
Foreign Currency Exchange Rate Risk
Delta is exposed to foreign currency exchange rate fluctuations on the U.S.
dollar value of foreign currency denominated transactions. Based on the
Company's average net currency positions in fiscal 1998, the potential loss due
to a 10% adverse change in foreign currency exchange rates is immaterial. The
Company enters into certain foreign exchange forward contracts, generally with
maturities of less than two months, to manage its foreign currency exchange rate
risk. The principal amount of such contracts was approximately $26 million at
June 30, 1998.
33
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND 1997
DELTA AIR LINES, INC.
ASSETS 1998 1997
- ------------------------------------------------------------------------------------------------------
(In Millions)
Current Assets:
Cash and cash equivalents $ 1,077 $ 662
Short-term investments 557 508
Accounts receivable, net of allowance for uncollectible accounts of
$36 at June 30, 1998 and $48 at June 30, 1997 938 943
Deferred income taxes 464 413
Prepaid expenses and other 326 341
- ------------------------------------------------------------------------------------------------------
Total current assets 3,362 2,867
- ------------------------------------------------------------------------------------------------------
Property and Equipment:
Flight equipment 11,180 9,619
Less: Accumulated depreciation 3,895 3,510
- ------------------------------------------------------------------------------------------------------
7,285 6,109
- ------------------------------------------------------------------------------------------------------
Flight equipment under capital leases 515 523
Less: Accumulated amortization 216 176
- ------------------------------------------------------------------------------------------------------
299 347
- ------------------------------------------------------------------------------------------------------
Ground property and equipment 3,285 3,032
Less: Accumulated depreciation 1,854 1,758
- ------------------------------------------------------------------------------------------------------
1,431 1,274
- ------------------------------------------------------------------------------------------------------
Advance payments for equipment 306 312
- ------------------------------------------------------------------------------------------------------
Total property and equipment 9,321 8,042
- ------------------------------------------------------------------------------------------------------
Other Assets:
Marketable equity securities 424 432
Deferred income taxes -- 103
Investments in associated companies 326 299
Cost in excess of net assets acquired, net of accumulated amortization of
$112 at June 30, 1998 and $102 at June 30, 1997 265 275
Leasehold and operating rights, net of accumulated amortization of
$209 at June 30, 1998 and $199 at June 30, 1997 124 134
Other 781 589
- ------------------------------------------------------------------------------------------------------
Total other assets 1,920 1,832
- ------------------------------------------------------------------------------------------------------
Total assets $14,603 $12,741
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
34
LIABILITIES AND SHAREOWNERS' EQUITY 1998 1997
- -------------------------------------------------------------------------------------------------------------
(In Millions, Except Share Data)
Current Liabilities:
Current maturities of long-term debt $ 67 $ 236
Current obligations under capital leases 63 62
Accounts payable and miscellaneous accrued liabilities 2,025 1,691
Air traffic liability 1,667 1,418
Accrued rent 202 213
Accrued salaries and vacation pay 553 463
- -------------------------------------------------------------------------------------------------------------
Total current liabilities 4,577 4,083
- -------------------------------------------------------------------------------------------------------------
Noncurrent Liabilities:
Long-term debt 1,533 1,475
Postretirement benefits 1,873 1,839
Accrued rent 651 602
Capital leases 249 322
Deferred income taxes 262 --
Other 511 406
- -------------------------------------------------------------------------------------------------------------
Total noncurrent liabilities 5,079 4,644
- -------------------------------------------------------------------------------------------------------------
Deferred Credits:
Deferred gain on sale and leaseback transactions 694 746
Manufacturers' and other credits 55 105
- -------------------------------------------------------------------------------------------------------------
749 851
- -------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Notes 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; issued and outstanding 6,603,429 shares at June 30, 1998
and 6,668,248 shares at June 30, 1997 475 480
Unearned compensation under employee stock ownership plan (300) (324)
- -------------------------------------------------------------------------------------------------------------
175 156
- -------------------------------------------------------------------------------------------------------------
Shareowners' Equity:
Common stock, $3.00 par value; authorized 150,000,000 shares; issued
88,283,089 shares at June 30, 1998 and 83,645,047 shares at June 30, 1997 265 251
Additional paid-in capital 3,034 2,645
Retained earnings 1,687 711
Net unrealized gain on marketable equity securities 89 101
Treasury stock at cost, 13,057,892 shares at June 30, 1998 and
9,949,060 shares at June 30, 1997 (1,052) (701)
- -------------------------------------------------------------------------------------------------------------
Total shareowners' equity 4,023 3,007
- -------------------------------------------------------------------------------------------------------------
Total liabilities and shareowners' equity $ 14,603 $ 12,741
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these Consolidated Balance
Sheets.
35
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
DELTA AIR LINES, INC.
(In Millions, Except Per Share Data) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
Operating Revenues:
Passenger $ 12,976 $ 12,505 $ 11,616
Cargo 582 554 521
Other, net 580 535 318
- ------------------------------------------------------------------------------------------------------
Total operating revenues 14,138 13,594 12,455
- ------------------------------------------------------------------------------------------------------
Operating Expenses:
Salaries and related costs 4,850 4,534 4,206
Aircraft fuel 1,507 1,722 1,464
Passenger commissions 980 1,017 1,042
Depreciation and amortization 861 710 634
Contracted services 694 630 704
Other selling expenses 681 677 594
Landing fees and other rents 649 649 627
Aircraft rent 552 547 555
Aircraft maintenance materials and outside repairs 495 434 376
Passenger service 450 389 368
Restructuring and other non-recurring charges -- 52 829
Other 726 702 593
- ------------------------------------------------------------------------------------------------------
Total operating expenses 12,445 12,063 11,992
- ------------------------------------------------------------------------------------------------------
Operating Income 1,693 1,531 463
Other Income (Expense):
Interest expense (186) (207) (269)
Interest capitalized 38 33 26
Interest income 79 63 86
Miscellaneous income (expense), net 24 (5) (30)
- ------------------------------------------------------------------------------------------------------
(45) (116) (187)
- ------------------------------------------------------------------------------------------------------
Income Before Income Taxes 1,648 1,415 276
Income Taxes Provided (647) (561) (120)
- ------------------------------------------------------------------------------------------------------
Net Income 1,001 854 156
Preferred Stock Dividends (11) (9) (82)
- ------------------------------------------------------------------------------------------------------
Net Income Available to Common Shareowners $ 990 $ 845 $ 74
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Basic Income Per Common Share $ 13.28 $ 11.39 $ 1.43
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Diluted Income Per Common Share $ 12.68 $ 11.03 $ 1.43
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements.
36
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
DELTA AIR LINES, INC.
(In Millions) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income $ 1,001 $ 854 $ 156
Adjustments to reconcile net income to cash provided
by operating activities:
Restructuring and other non-recurring charges -- 52 829
Depreciation and amortization 861 710 634
Deferred income taxes 294 240 (57)
Rental expense less than rent payments (17) (58) (32)
Pension, postretirement and postemployment expense in excess
of (less than) payments 179 92 (67)
Changes in certain current assets and liabilities:
Decrease (increase) in accounts receivable 5 25 (213)
Decrease (increase) in prepaid expenses and other
current assets 15 (31) (47)
Increase in air traffic liability 249 4 271
Increase (decrease) in other payables and accrued expenses 330 186 (91)
Other, net (1) (35) 8
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,916 2,039 1,391
- ----------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Property and equipment additions:
Flight equipment, including advance payments (1,760) (1,598) (639)
Ground property and equipment (531) (350) (297)
Decrease (increase) in short-term investments, net (43) (1) 22
Proceeds from sale of flight equipment 10 8 26
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,324) (1,941) (888)
- ----------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Payments on long-term debt and capital lease obligations (307) (196) (440)
Cash dividends (43) (44) (120)
Issuance of long-term obligations 125 -- --
Issuance of Common Stock 318 38 35
Income tax benefit from exercise of stock options 84 -- --
Repurchase of Common Stock (354) (379) (66)
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (177) (581) (591)
- ----------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 415 (483) (88)
Cash and cash equivalents at beginning of fiscal year 662 1,145 1,233
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of fiscal year $ 1,077 $ 662 $ 1,145
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements.
37
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
DELTA AIR LINES, INC.
Unrealized
Additional Retained Gain (Loss)
Common Paid-In Earnings on Equity Treasury
(In Millions, Except Share Data) Stock Capital (Deficit) Securities Stock Total
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1995 $ 164 $ 2,016 $ (184) $ 83 $ (252) $ 1,827
Fiscal Year 1996:
Net income -- -- 156 -- -- 156
Dividends on Series C Convertible Preferred Stock -- -- (74) -- -- (74)
Dividends on Common Stock ($0.20 per share) -- -- (10) -- -- (10)
Dividends on Series B ESOP Convertible
Preferred Stock allocated shares -- -- (8) -- -- (8)
Issuance of 719,562 shares of Common Stock under
dividend reinvestment and stock purchase plan
and stock options ($58.15 per share) 2 40 -- -- (5) 37
Issuance of 6,861,377 shares of Common Stock on
conversions of Series C Preferred Stock ($64.37 per share) 21 (21) -- -- -- --
Issuance of 10,147,952 shares of Common Stock
on conversions of 3.23% Convertible
Subordinated Notes ($61.17 per share) 30 592 -- -- -- 622
Transfer of 176,794 shares of Common Stock
from treasury under ESOP and stock
incentive plan ($67.77 per share) -- -- 1 -- 12 13
Repurchase of 821,300 common shares ($80.00 per share) -- -- -- -- (66) (66)
Net unrealized gain on marketable equity securities and other -- -- -- 43 -- 43
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1996 217 2,627 (119) 126 (311) 2,540
- ---------------------------------------------------------------------------------------------------------------------------------
Fiscal Year 1997:
Net income -- -- 854 -- -- 854
Dividends on Common Stock ($0.20 per share) -- -- (15) -- -- (15)
Dividends on Series B ESOP Convertible
Preferred Stock allocated shares -- -- (9) -- -- (9)
Issuance of 748,492 shares of Common Stock under
dividend reinvestment and stock purchase plan
and stock options ($65.22 per share) 2 47 -- -- (7) 42
Issuance of 10,629,465 shares of Common Stock on
conversions of Series C Preferred Stock ($64.38 per share) 32 (32) -- -- -- --
Repurchase of 5,378,700 common shares ($70.53 per share) -- -- -- -- (379) (379)
Net unrealized loss on marketable equity securities and other -- 3 -- (25) (4) (26)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 251 2,645 711 101 (701) 3,007
- ---------------------------------------------------------------------------------------------------------------------------------
Fiscal Year 1998:
Net income -- -- 1,001 -- -- 1,001
Dividends on Common Stock ($0.20 per share) -- -- (15) -- -- (15)
Dividends on Series B ESOP Convertible
Preferred Stock allocated shares -- -- (11) -- -- (11)
Issuance of 4,638,042 shares of Common Stock under
dividend reinvestment and stock purchase plan
and stock options ($68.56 per share) 14 304 -- -- -- 318
Repurchase of 3,158,373 common shares
($112.08 per share) -- -- -- -- (354) (354)
Income Tax Benefit from exercise of stock options -- 84 -- -- -- 84
Transfer of 49,541 shares of Common Stock from treasury
under stock incentive plan ($77.17 per share) -- -- -- -- 3 3
Net unrealized loss on marketable equity securities and other -- 1 1 (12) -- (10)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 $ 265 $ 3,034 $ 1,687 $ 89 $(1,052) $ 4,023
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
DELTA AIR LINES, INC.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - Delta Air Lines, Inc. (a Delaware corporation) is a major
air carrier providing scheduled air transportation for passengers, freight and
mail over a network of routes throughout the United States and abroad. At August
1, 1998, Delta served 148 domestic cities in 42 states, the District of
Columbia, Puerto Rico and the U.S. Virgin Islands, as well as 46 cities in 31
foreign countries.
Basis of Presentation - The consolidated financial statements include the
accounts of Delta Air Lines, Inc. and its wholly owned subsidiaries (Delta or
the Company). All significant intercompany account balances and transactions
have been eliminated. Certain prior year amounts have been reclassified to
conform with the current year financial statement presentation.
Use of Estimates - The Company follows generally accepted accounting principles
(GAAP). The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.
Accounting Changes - During fiscal 1998, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share" (SFAS 128),
and SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" (SFAS 132). (See Notes 11 and 10, respectively.) During
fiscal 1997, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). (See Note 13.)
Cash and Cash Equivalents - Investments with an original maturity of three
months or less are classified as cash and cash equivalents. These investments
are stated at cost, which approximates fair value.
Short-Term Investments - Cash in excess of operating requirements is invested in
short-term, highly liquid investments. These investments are classified as
available-for-sale under SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (SFAS 115), and are stated at fair value. (See Note
2.)
Depreciation and Amortization - Effective July 1, 1998, the Company increased
the depreciable life of certain new generation aircraft types from 20 to 25
years. Owned flight equipment is depreciated on a straight-line basis to a
residual value equal to 5% of cost. Flight equipment under capital leases is
amortized on a straight-line basis over the original terms of the respective
leases, which generally range from 4 to 11 years. Ground property and equipment
are depreciated on a straight-line basis over their estimated service lives,
which range from 3 to 30 years. Costs assigned to the purchase of leasehold
rights and landing slots are amortized over the lives of the respective leases
at the associated airports. Purchased international route authorities are
amortized over the lives of the authorities as determined by their expiration
dates. Permanent route authorities with no stated expiration dates are amortized
over 40 years.
Interest Capitalized - Interest attributable to funds used to finance the
acquisition of new aircraft and construction of major ground facilities is
capitalized as an additional cost of the related asset. Interest is capitalized
at the Company's weighted average interest rate on long-term debt or, where
applicable, the interest rate related to specific borrowings. Capitalization of
interest ceases when the property or equipment is placed in service.
Investments in Associated Companies - The Company's investments in the following
companies are accounted for under the equity method: WORLDSPAN, L.P.
(WORLDSPAN), a computer reservations system partnership; ASA Holdings, Inc.
(ASA), the parent of Atlantic Southeast Airlines, Inc.; Comair Holdings, Inc.
(Comair), the parent of Comair, Inc.; and Empresa de Transporte Aereo del Peru,
S.A., Aeroperu (Aeroperu). Effective July 1997, the Company began accounting for
its investment in SkyWest, Inc. (SkyWest), the parent of SkyWest Airlines, Inc.,
under the cost method. (See Note 2.) Atlantic Southeast Airlines, Inc., Comair,
Inc., and SkyWest Airlines, Inc. are participants in the Delta Connection
program.
Cost in Excess of Net Assets Acquired - The cost in excess of net assets
acquired (goodwill), which is being amortized over 40 years, is primarily
related to the Company's acquisition of Western Air Lines, Inc. in December
1986.
Frequent Flyer Program - The Company accrues the estimated incremental cost of
providing free travel awards earned under its SkyMiles(R) frequent flyer program
when free travel
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
JUNE 30, 1998, 1997 AND 1996
DELTA AIR LINES, INC.
award levels are achieved. The accrued incremental cost is included in
accounts payable and miscellaneous accrued liabilities in the Company's
Consolidated Balance Sheets. The Company also sells mileage credits to
participating partners in the SkyMiles-Registered Trademark- program such as
hotels, car rental agencies and credit card companies. The resulting revenue
is recorded as other operating revenue in the Company's Consolidated
Statements of Operations during the period in which the credits are sold.
Passenger and Cargo Revenues - Passenger ticket sales are recorded as air
traffic liability in the Company's Consolidated Balance Sheets. Passenger and
cargo revenues are recognized when the transportation is provided, reducing the
air traffic liability, as applicable.
Deferred Gains on Sale and Leaseback Transactions - Gains on the sale and
leaseback of property and equipment under operating leases are deferred and
amortized over the lives of the respective leases as a reduction in rent
expense. Gains on the sale and leaseback of property under capital leases are
credited directly to the carrying value of the related asset.
Manufacturers' Credits - In connection with the acquisition of certain aircraft
and engines, the Company receives certain credits. These credits are deferred
until the aircraft and engines are delivered, at which time the credits are
applied on a pro rata basis as a reduction of the acquisition cost of the
related equipment.
Advertising Costs - Advertising costs are expensed when incurred and are
included as a component of other selling expense. Advertising expense for fiscal
1998, 1997 and 1996 was $105 million, $121 million and $109 million,
respectively.
Foreign Currency Remeasurement - Assets and liabilities denominated in foreign
currencies are remeasured generally at exchange rates in effect at the balance
sheet date, except fixed assets are recorded at exchange rates in effect when
the assets were acquired. The resulting foreign exchange gains and losses are
recognized as a component of miscellaneous income (expense). Revenues and
expenses from foreign operations are recorded using applicable average monthly
exchange rates prevailing during the year, except depreciation and amortization
charges are recorded at the exchange rate in effect when the related assets were
acquired.
Stock-Based Compensation - The Company accounts for its stock-based compensation
plans in accordance with Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25). Under APB 25, no compensation expense
is recognized for a stock option grant if the exercise price of the stock option
at the measurement date is equal to or greater than the fair market value of the
Common Stock on the date of grant. (See Note 13.)
2. FINANCIAL INSTRUMENTS
All financial instruments, except long-term debt, are carried at fair value or
have a carrying value which approximates fair value.
Long-Term Debt - The fair values and carrying values of long-term debt,
including current maturities, at June 30, 1998 and 1997, were as follows:
(In Billions) 1998 1997
- -------------------------------------------------------------
Fair value $1.9 $1.8
Carrying value 1.6 1.7
- -------------------------------------------------------------
These values are based on quoted market prices, where available, or
discounted cash flow analyses.
Marketable Equity Securities - Effective July 1, 1997, the Company began
accounting for its investment in SkyWest under the cost method due to dilution
in the Company's equity ownership in SkyWest. The Company's investments in
Singapore Airlines Limited (Singapore Airlines), SAirGroup (formerly Swissair,
Swiss Air Transport Company Ltd.) and SkyWest are classified as
available-for-sale under SFAS 115 and are recorded at fair value. The following
table summarizes the Company's investments in Singapore Airlines, SAirGroup and
SkyWest:
Quoted Cost Unrealized
(In Millions) Fair Value Basis Gain (Loss)
- -----------------------------------------------------------
June 30, June 30,
1998 1997 1998 1997
- -----------------------------------------------------------
Singapore Airlines $165 $315 $181 $(16) $134
SAirGroup $172 $117 $ 85 $ 87 $ 32
SkyWest $ 87 N/A* $ 14 $ 73 N/A*
- -----------------------------------------------------------
* Prior to fiscal 1998, the Company accounted for its investment in SkyWest
under the equity method. (See Note 3.)
40
The aggregate unrealized gains, net of the related deferred tax provision, of
these investments at June 30, 1998 and 1997 are reflected in shareowners'
equity. Delta's right to vote, to transfer or to acquire additional shares of
the stock of Singapore Airlines and SAirGroup is subject to certain
restrictions.
Short-Term Investments - The Company invests its cash in excess of operating
requirements in short-term, highly-liquid investments. These investments are
classified as available-for-sale securities, have an average stated maturity of
eight months, and are recorded as short-term investments in the Company's
Consolidated Balance Sheets. The aggregate fair value of these investments was
$557 million and $508 million at June 30, 1998 and 1997, respectively.
Unrealized gains and losses from these investments, net of deferred taxes, are
reflected in shareowners' equity. Such amounts were immaterial at June 30, 1998
and 1997.
3. INVESTMENTS IN ASSOCIATED COMPANIES
The Company's percentage ownership and quoted fair value (where applicable)
of its investment in associated companies at June 30, 1998, and equity
earnings (losses) for fiscal 1998, 1997 and 1996, were as follows:
Quoted
Percentage Fair
Investment Ownership Value 1998 1997 1996
- ----------------------------------------------------------
(In Millions)
WORLDSPAN 38% N/A 14 $23 $(5)
ASA 27 $397 17 15 13
Comair 21 434 25 16 13
Aeroperu 35 N/A - - -
SkyWest 13 87 N/A 2 1
- ----------------------------------------------------------
4. RISK MANAGEMENT
Fuel Price Risk Management -- Delta enters into fuel swap and option contracts
up to one year in duration to manage risk associated with changes in aircraft
fuel prices. Under these contracts, Delta receives or makes payments based on
differences between fixed and variable prices for certain fuel commodities.
Gains and losses from fuel swap and option contracts are deferred and recognized
as a component of fuel expense when the underlying fuel being hedged is used.
Premiums paid to enter into hedging contracts are recorded as a prepaid expense
and amortized to fuel expense over the respective contract period. At June 30,
1998, the Company had entered into hedge agreements for 2.1 billion gallons of
its projected fiscal 1999 aircraft fuel requirements. At June 30, 1998,
unrealized gains and losses from these contracts were immaterial.
Foreign Exchange Risk Management - Delta enters into foreign exchange forward
contracts, generally with maturities of less than two months, to manage risk
associated with its net foreign currency denominated positions. The principal
amount, which approximates fair value, of outstanding foreign exchange forward
contracts was approximately $26 million at June 30, 1998. Gains and losses
resulting from foreign exchange forward contracts are recognized as a component
of miscellaneous income (expense).
Credit Risks - To manage credit risk associated with its fuel price risk and
foreign exchange risk management programs, the Company selects counterparties
based on their credit ratings, limits its exposure to any one counterparty under
defined guidelines, and monitors the market position of the program and its
relative market position with each counterparty.
Concentration of Credit Risk - Delta's accounts receivable are generated
primarily from airline ticket and cargo service sales to individuals and various
commercial enterprises that are economically and geographically dispersed, and
the accounts receivable are generally short-term in duration. Accordingly, Delta
does not believe it is subject to any significant concentration of credit risk.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
JUNE 30, 1998, 1997 AND 1996
DELTA AIR LINES, INC.
5. 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 for income tax purposes. Significant components of the Company's
deferred tax assets and liabilities as of June 30, 1998 and 1997 are a result of
temporary differences related to the items described below:
(In Millions) 1998 1997
- ---------------------------------------------------------
Deferred Tax Assets:
Postretirement benefits $ 756 $ 741
Other employee benefits 405 328
Gains on sale and leaseback
transactions (net) 257 302
Rent expense 200 212
Spare parts repair expense 139 122
Alternative minimum tax
credit carryforwards 107 216
Other 159 212
- ---------------------------------------------------------
Total Deferred Tax Assets $2,023 $2,133
- ---------------------------------------------------------
Deferred Tax Liabilities:
Depreciation and amortization $1,446 $1,239
Other 375 378
- ---------------------------------------------------------
Total Deferred Tax Liabilities $1,821 $1,617
- ---------------------------------------------------------
- ---------------------------------------------------------
Income taxes provided in fiscal 1998, 1997 and 1996 consisted of:
(In Millions) 1998 1997 1996
- ----------------------------------------------------------
Current taxes $(353) $(321) $(177)
Deferred taxes (298) (244) 54
Tax benefit of dividends on
allocated Series B ESOP
Convertible Preferred Stock 4 4 3
- ----------------------------------------------------------
Income taxes provided $(647) $(561) $(120)
- ----------------------------------------------------------
- ----------------------------------------------------------
The income tax provisions generated for fiscal 1998, 1997 and 1996 differ
from amounts which would result from applying the federal statutory tax rate to
pretax income, as follows:
(In Millions) 1998 1997 1996
- ---------------------------------------------------------------
Income before income taxes $1,648 $1,415 $ 276
Items not deductible for
tax purposes:
Meals and entertainment 42 39 36
Amortization 9 9 9
Other, net (27) (17) (8)
- ---------------------------------------------------------------
Adjusted pretax income 1,672 1,446 313
Federal statutory tax rate 35% 35% 35%
- ---------------------------------------------------------------
Income tax provision at
statutory rate (585) (506) (110)
State and other income taxes, net
of federal income tax provision (62) (55) (10)
- ---------------------------------------------------------------
Income taxes provided $ (647) $ (561) $(120)
- ---------------------------------------------------------------
- ---------------------------------------------------------------
The Company made income tax payments, net of income tax refunds, of $244
million in fiscal 1998, $336 million in fiscal 1997 and $192 million in fiscal
1996.
42
6. LONG-TERM DEBT
At June 30, 1998 and 1997, the Company's long-term debt (including current
maturities) was as follows:
(In Millions) 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
9 7/8% Notes, unsecured, due January 1, 1998 $ -- $ 207
Medium-Term Notes, Series A and B, unsecured, interest rates from
7.79% to 9.15%; maturities ranging from 1998 to 2007 128 157
9 7/8% Notes, unsecured, due May 15, 2000 142 142
8 1/2% Notes, unsecured, due March 15, 2002 71 71
8.10% Series C Guaranteed Serial ESOP Notes, unsecured, due in installments between 2002 and 2009 290 290
Development Authority of Fulton County, unsecured loan agreement, due $10 million on November 1, 2007
and $20 million on November 1, 2012. Interest rates from 6.85% to 6.95% 30 30
10 1/8% Debentures, unsecured, due May 15, 2010 113 113
10 3/8% Debentures, unsecured, due February 1, 2011 175 175
Development Authority of Fulton County, unsecured loan agreement, due $19 million on May 1, 2013,
$85 million on May 1, 2023, and $21 million on May 1, 2033. Interest rates from 5.30% to 5.50% 125 -
9% Debentures, unsecured, due May 15, 2016 101 101
7 5/8% Development Authority of Clayton County, unsecured loan agreement, due on January 1, 2020 45 45
9 3/4% Debentures, unsecured, due May 15, 2021 250 250
9 1/4% Debentures, unsecured, due March 15, 2022 64 64
10 3/8% Debentures, unsecured, due December 15, 2022 66 66
- -----------------------------------------------------------------------------------------------------------------------
Total 1,600 1,711
Less: Current maturities 67 236
- -----------------------------------------------------------------------------------------------------------------------
Total long-term debt $1,533 $ 1,475
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Under its 1997 Bank Credit Agreement with a group of banks, the Company may
borrow up to $1.25 billion on an unsecured and revolving basis until May 1,
2002, subject to compliance with certain conditions. Up to $700 million of this
facility may be used for the issuance of letters of credit. The interest rate
under this facility is, at the Company's option, the London Interbank Offered
Rate or the prime rate, in each case plus a margin which is subject to
adjustment based on certain changes in the credit ratings of the Company's
long-term senior unsecured debt. The Company also has the option to obtain loans
through a competitive bid procedure. The 1997 Bank Credit Agreement contains
certain covenants that restrict the Company's ability to grant liens, to incur
or guarantee debt and to enter into flight equipment leases. It also provides
that if there is a change of control (as defined) of the Company, the banks'
obligation to extend credit terminates, any amounts outstanding become
immediately due and payable and the Company will immediately deposit cash
collateral with the banks in an amount equal to all outstanding letters of
credit. At August 14, 1998, no borrowings or letters of credit were outstanding
under the 1997 Bank Credit Agreement.
At June 30, 1998, there were outstanding $290 million principal amount of
the Delta Family-Care Savings Plan's Series C Guaranteed Serial ESOP Notes
(Series C ESOP Notes), which are guaranteed by Delta and are payable in
installments between July 1, 2002 and January 1, 2009. The Series C ESOP Notes
were issued under note purchase agreements (1) which require Delta to purchase
the Series C ESOP Notes at the option of the holders thereof (Noteholders) if
the credit rating of Delta's long-term senior unsecured debt falls below Baa3 by
Moody's and BBB- by Standard & Poor's (Purchase Event); but (2) which provide
that Delta has no obligation to purchase the Series C ESOP Notes under the note
purchase agreements so long as Delta obtains, within 127 days of a Purchase
Event, certain credit enhancements (Approved Credit Enhancement) that result in
the Series C ESOP Notes being rated A3 or higher by Moody's and A- or higher by
Standard & Poor's (Required Ratings). If Delta is required to purchase the
Series C ESOP Notes because of the occurrence of a Purchase Event, such purchase
would be made at a price (Purchase Price) equal to the outstanding principal
amount of the Series C ESOP Notes being purchased, together
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
JUNE 30, 1998, 1997 AND 1996
DELTA AIR LINES, INC.
with accrued interest and a Make Whole Premium Amount. The Make Whole Premium
Amount is based on, among other factors, the yield to maturity of U.S. Treasury
notes having maturities equal to the remaining average life to maturity of the
Series C ESOP Notes as of the date Delta purchases the Series C ESOP Notes.
On May 11, 1993, a Purchase Event occurred, and Delta became obligated to
purchase on September 15, 1993 any Series C ESOP Notes tendered to it. Prior to
September 15, 1993, Delta obtained an Approved Credit Enhancement in the form of
a letter of credit to credit enhance the Series C ESOP Notes. This letter of
credit was issued in favor of Wilmington Trust Company, as trustee (Trustee),
under Delta's then-existing bank credit agreement. Due to the issuance of this
letter of credit, the Series C ESOP Notes received the Required Ratings, and
Delta no longer had an obligation to purchase the Series C ESOP Notes as a
result of the Purchase Event that occurred on May 11, 1993.
On June 6, 1996, the Company entered into a credit agreement with ABN AMRO
Bank, N.V. and a group of banks (Letter of Credit Facility) which, as amended,
provides for the issuance of letters of credit for up to $500 million in stated
amount to credit enhance the Series C ESOP Notes. The Letter of Credit Facility
contains negative covenants and a change of control provision that are
substantially similar to those contained in the 1997 Bank Credit Agreement. In
the event of any drawing under the Letter of Credit Facility, Delta is required,
at its election, (1) to immediately repay the amount drawn; or (2) to convert
its reimbursement obligation to a loan for a period not to exceed one year at
varying rates of interest. On June 6, 1996, Delta obtained a letter of credit
under the Letter of Credit Facility to replace the letter of credit issued under
its then-existing bank credit agreement to credit enhance the Series C ESOP
Notes. The Letter of Credit Facility expires June 6, 2000.
At August 14, 1998, the face amount of the letter of credit issued under
the Letter of Credit Facility was $445 million. It covers the $290 million
outstanding principal amount of the Series C ESOP Notes, up to $123 million of
Make Whole Premium Amount and approximately one year of interest on the Series C
ESOP Notes.
An Indenture of Trust, dated August 1, 1993 (Indenture), among Delta, the
Trustee, and Fidelity Management Trust Company, as ESOP trustee, contains
certain terms and conditions relating to any letter of credit used to credit
enhance the Series C ESOP Notes. The Indenture requires the Trustee to draw
under the letter of credit to make regularly scheduled payments of principal and
interest on the Series C ESOP Notes. The Indenture also requires the Trustee to
draw under the letter of credit to purchase the Series C ESOP Notes in certain
circumstances in which Delta would not be required to purchase the Series C ESOP
Notes under the note purchase agreements. Subject to certain conditions, the
Indenture requires the Trustee to purchase the Series C ESOP Notes at the
Purchase Price at the option of the Noteholders in the event that (1) the
Required Ratings on the Notes are not maintained; (2) the letter of credit is
not extended 20 days before its scheduled expiration date; (3) Delta elects to
terminate the letter of credit; or (4) the Trustee receives notice that there
has occurred an event of default under the credit agreement relating to the
letter of credit; unless, generally within 10 days of any such event, the Series
C ESOP Notes receive the Required Ratings due to Delta's obtaining a substitute
credit enhancement or otherwise.
The Required Ratings on the Series C ESOP Notes are subject to
reconsideration at any time, and to annual confirmation, by Moody's and Standard
& Poor's. Circumstances that might cause either rating agency to lower or fail
to confirm its rating include, without limitation, a downgrading of the deposits
of the letter of credit issuer below A3 by Moody's or A- by Standard & Poor's,
or a determination that the Make Whole Premium Amount covered by the letter of
credit is insufficient.
Subject to certain conditions, the Indenture does not permit the Trustee to
purchase the Series C ESOP Notes at the option of the Noteholders if the Series
C ESOP Notes receive the Required Ratings without the benefit of a credit
enhancement. The Series C ESOP Notes are not likely to receive the Required
Ratings absent a credit enhancement unless Delta's long-term senior unsecured
debt is rated at least A3 by Moody's and A- by Standard & Poor's. On August 14,
1998, Delta's long-term senior unsecured debt was rated Baa3 by Moody's and
BBB- by Standard & Poor's.
At June 30, 1998, the annual scheduled maturities of long-term debt during
the next five fiscal years were as follows:
Years Ending June 30
(In Millions) Amount
- ------------------------------------------------
1999 $ 67
2000 142
2001 -
2002 75
2003 43
- ------------------------------------------------
44
The Company's debt agreements contain certain restrictive covenants, but do
not limit the payment of dividends on the Company's capital stock. The terms
of the Series B ESOP Convertible Preferred Stock limit the Company's ability
to pay cash dividends on the Company's Common Stock (Common Stock) in certain
circumstances. (See Note 12.)
Cash payments for interest, net of interest capitalized, totaled $152
million in fiscal 1998; $171 million in fiscal 1997; and $232 million in fiscal
1996.
7. LEASE OBLIGATIONS
The Company leases certain aircraft, airport terminal and maintenance
facilities, ticket offices and other property and equipment. Rent expense is
generally recorded on a straight-line basis over the lease term. Amounts charged
to rental expense for operating leases were $0.9 billion in fiscal 1998, 1997
and 1996.
At June 30, 1998, the Company's minimum rental commitments under capital
leases (primarily aircraft) and noncancelable operating leases with initial or
remaining terms of more than one year were as follows:
Years Ending June 30 Capital Operating
(In Millions) Leases Leases
- --------------------------------------------------------------------
1999 $ 100 $ 950
2000 67 950
2001 57 940
2002 57 960
2003 48 960
After 2003 71 10,360
- --------------------------------------------------------------------
Total minimum lease payments $ 400 $15,120
--------
--------
Less: Amounts representing interest 88
- ----------------------------------------------------------
Present value of future minimum
capital lease payments 312
Less: Current obligations under capital leases 63
- ----------------------------------------------------------
Long-term capital lease obligations $ 249
- ----------------------------------------------------------
- ----------------------------------------------------------
As of June 30, 1998, Delta leased 219 aircraft. These leases have remaining
terms ranging from 18 months to 19 years and expiration dates ranging from 1999
to 2017. Of these leases, 48 are accounted for as capital leases.
Certain municipalities and airport authorities have issued special facility
revenue bonds to build or improve airport terminal and maintenance facilities
that Delta leases under operating leases. Under these lease agreements, the
Company is required to make rental payments sufficient to pay principal and
interest on the bonds as they become due.
8. PURCHASE COMMITMENTS
Future expenditures for aircraft, engines and engine hush-kits on firm order as
of August 14, 1998 are estimated to be $6.9 billion, as follows:
Years Ending June 30
(In Millions) Amount
- -------------------------------------------------
1999 $1,580
2000 1,610
2001 1,570
2002 300
2003 370
After 2003 1,460
- -------------------------------------------------
Total $6,890
- -------------------------------------------------
- -------------------------------------------------
The Company has authorized capital expenditures of approximately $550
million for fiscal 1999 for improvement of airport and office facilities, ground
equipment and other assets.
The Company expects to finance its aircraft, engine and engine hushkit
commitments, as well as other authorized capital expenditures, using available
cash, short-term investments and internally generated funds, supplemented as
necessary by debt financings and proceeds from sale and leaseback transactions.
The Company has entered into code-sharing agreements under which it has
agreed to purchase seats at established prices from specific airlines, subject
to certain conditions. None of these agreements has material noncancelable terms
in excess of one year.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
JUNE 30, 1998, 1997 AND 1996
DELTA AIR LINES, INC.
9. CONTINGENCIES
The Company is a defendant in certain legal actions relating to alleged
employment discrimination practices, antitrust matters, environmental issues and
other matters concerning the Company's business. Although the ultimate outcome
of these matters cannot be predicted with certainty, management believes that
the resolution of these actions is not likely to have a material adverse effect
on Delta's consolidated financial statements.
Delta's approximately 8,800 pilots are represented by the Air Line Pilots
Association, International (ALPA). The collective bargaining agreement between
the Company and ALPA becomes amendable on May 2, 2000. The Company and ALPA are
currently in negotiations to establish pay rates for certain aircraft equipment
types. See "Personnel Matters" on page 31 of Management's Discussion and
Analysis for additional information on this subject.
10. EMPLOYEE BENEFIT PLANS
The Company sponsors various pension plans, medical plans and disability and
survivorship plans for employees who meet certain service and other
requirements. In addition, the Company sponsors the Delta Family-Care Savings
Plan (Savings Plan) in which employees who meet certain service and other
requirements may elect to participate.
During fiscal 1997, the Company changed the annual measurement date for its
employee benefit plan assets and liabilities from June 30 to March 31. This
change in measurement date has been accounted for as a change in accounting
principle. The change in measurement date had no material cumulative effect on
employee benefit expense for prior years.
Defined Benefit Pension Plans - The Company's primary retirement plans consist
of defined benefit pension plans. The Company has reserved the right to modify
these plans to the extent permitted by the Internal Revenue Code and the
Employee Retirement Income Security Act of 1974 (ERISA). The qualified defined
benefit plans are funded, on a current basis, to meet the minimum funding
requirements of ERISA.
The following table sets forth the defined benefit pension plans' change in
projected benefit obligation for the plan years ended June 30, 1998 and 1997:
(In Millions) 1998 1997
- ---------------------------------------------------------
Projected benefit obligation at
beginning of year $7,572 $7,430
- ---------------------------------------------------------
- ---------------------------------------------------------
Service cost 207 188
Interest cost 574 568
Actuarial (gain) loss 605 (46)
Benefits paid (648) (568)
- ---------------------------------------------------------
Projected benefit obligation
at end of year $8,310 $7,572
- ---------------------------------------------------------
- ---------------------------------------------------------
The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligations in the above table was 7.0% and 4.3%,
respectively, at March 31, 1998, and 7.75% and 4.7%, respectively, at March 31,
1997. The expected long-term rate of return on assets was 10.0% at March 31,
1998 and 1997.
The following table sets forth the defined benefit pension plans' change in
the fair value of plan assets for the plan years ended June 30, 1998 and 1997:
(In Millions) 1998 1997
- ---------------------------------------------------------
Fair value of plan assets
at beginning of year $7,512 $7,233
- ---------------------------------------------------------
- ---------------------------------------------------------
Actual return on plan assets 2,203 744
Employer contributions 54 103
Benefits paid (648) (568)
- ---------------------------------------------------------
Fair value of plan assets at end of year $9,121 $7,512
- ---------------------------------------------------------
The accrued pension cost recognized in the Consolidated Balance Sheets is
computed as follows:
(In Millions) 1998 1997
- ----------------------------------------------------------
Funded status $ 811 $ (60)
Unrecognized net actuarial gain (1,239) (331)
Unrecognized transition obligation 61 63
Unrecognized prior service cost 27 29
Contributions made between
April 1 and June 30 11 18
- ----------------------------------------------------------
Accrued pension cost recognized in
the Consolidated Balance Sheets $ (329) $(281)
- ----------------------------------------------------------
- ----------------------------------------------------------
46
Net periodic defined benefit pension cost for fiscal 1998, 1997 and 1996
included the following components:
(In Millions) 1998 1997 1996
- --------------------------------------------------------------
Service cost $ 207 $ 188 $ 225
Interest cost 574 568 526
Expected return on plan assets (685) (653) (591)
Amortization of prior service cost 2 2 1
Recognized net actuarial (gain) loss (4) 3 8
Amortization of net
transition obligation 2 2 --
- --------------------------------------------------------------
Net periodic pension cost $ 96 $ 110 $ 169
- --------------------------------------------------------------
- --------------------------------------------------------------
Delta also sponsors several non-qualified pension plans which are funded
from current assets. The accumulated benefit obligation of these plans totaled
$259 million at March 31, 1998.
Defined Contribution Pension Plans:
Delta Pilots Money Purchase Pension Plan - The Company sponsors the Delta Pilots
Money Purchase Pension Plan (MPPP) to which the Company contributes 5% of
covered pay for each eligible pilot. The MPPP is a continuation of the Delta
Pilots Target Benefit Plan and is related to the Delta Pilots Retirement Plan
through a floor-offset arrangement whereby the defined benefit pension payable
to a pilot is subject to reduction by the actuarial equivalent of the
accumulated account balance in the MPPP. During fiscal 1998, 1997 and 1996, the
Company recognized expense of $54 million, $49 million and $2 million,
respectively, for these plans.
Employee Stock Ownership Plan -- The Company sponsors the Savings Plan, a
qualified defined contribution pension plan under which eligible Delta personnel
may contribute a portion of their earnings. The Savings Plan includes an
employee stock ownership plan (ESOP) feature. Subject to certain conditions, the
Company matches 50% of a participant's contributions to the Savings Plan, up to
a maximum employer contribution of 2% of a participant's earnings. The Company's
contributions are made quarterly through the allocation of Series B ESOP
Convertible Preferred Stock (ESOP Preferred Stock), Common Stock or cash, and
are recorded as salaries and related costs in the Company's Consolidated
Statements of Operations. Delta's contributions to the Savings Plan were $49
million in fiscal 1998 and $45 million in fiscal 1997 and fiscal 1996.
In connection with the adoption of the ESOP in 1989, the Company sold
6,944,450 shares of ESOP Preferred Stock to the Savings Plan for approximately
$500 million. The Company has recorded unearned compensation to reflect the
value of ESOP Preferred Stock sold to the Savings Plan but not yet allocated to
participants' accounts. As shares of the ESOP Preferred Stock are allocated to
participants' accounts, unearned compensation is reduced. Dividends on
unallocated shares of ESOP Preferred Stock are used by the ESOP for debt service
on the Series C ESOP Notes and are not considered dividends for financial
reporting purposes. Dividends on allocated shares of ESOP Preferred Stock are
credited to participants and considered dividends for financial reporting
purposes. For purposes of computing basic and diluted income per common share,
allocated shares of ESOP Preferred Stock are considered outstanding, but
unallocated shares of ESOP Preferred Stock are not considered outstanding.
Postretirement Benefits Other Than Pensions - Delta's medical plans provide
medical and dental benefits to substantially all retirees and their eligible
dependents. Benefits are funded from general assets on a current basis. Plan
benefits are subject to co-payments, deductibles and certain other limits
described in the plans and are reduced once a retiree is eligible for Medicare.
The Company has reserved the right to modify or terminate the medical plans for
both current and future retirees.
The following table sets forth the postretirement benefit plans' change in
accumulated postretirement benefit obligation (APBO) for the plan years ended
June 30, 1998 and 1997:
(In Millions) 1998 1997
- ---------------------------------------------------------
APBO at beginning of year $1,565 $1,505
- ---------------------------------------------------------
- ---------------------------------------------------------
Service cost 33 25
Interest cost 110 115
Actuarial gain (17) (35)
Benefits paid (64) (45)
- ---------------------------------------------------------
APBO at end of year $1,627 $1,565
- ---------------------------------------------------------
- ---------------------------------------------------------
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
JUNE 30, 1998, 1997 AND 1996
DELTA AIR LINES, INC.
The accrued postretirement benefit cost recognized in the Consolidated
Balance Sheets is computed as follows:
(In Millions) 1998 1997
- ----------------------------------------------------------
Funded status $(1,627) $(1,565)
Unrecognized net loss 61 76
Unrecognized prior service cost (388) (426)
Contributions made between April 1
and June 30 16 14
- ----------------------------------------------------------
Accrued postretirement benefit cost
in the Consolidated Balance Sheets $(1,938) $(1,901)
- ----------------------------------------------------------
- ----------------------------------------------------------
Net periodic postretirement benefit cost for fiscal 1998, 1997 and 1996
included the following components:
(In Millions) 1998 1997 1996
- ---------------------------------------------------------------------------
Service cost $ 33 $ 25 $ 32
Interest cost 110 115 118
Amortization of prior service cost (38) (38) (31)
Recognized net actuarial (gain) loss (2) 1 4
- ---------------------------------------------------------------------------
Net periodic postretirement
benefit cost $103 $103 $123
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
The weighted average discount rate used to estimate the APBO was 7.0% at
March 31, 1998 and 7.75% at March 31, 1997. The assumed health care cost trend
rate used in measuring the APBO was 6.0% in fiscal 1998 and 8.0% in fiscal 1997,
declining gradually to 4.25% by March 31, 2000, and remaining level thereafter.
A one-percentage-point change in the health care cost rate used in measuring the
APBO at March 31, 1998 would have the following effects:
One-Percentage- One-Percentage-
(In Millions) Point Increase Point Decrease
- ----------------------------------------------------------------
Increase (decrease) in the total
service and interest cost $ 14 $ (13)
Increase (decrease) in the APBO 130 (117)
- ----------------------------------------------------------------
- ----------------------------------------------------------------
Postemployment Benefits - The Company provides certain welfare benefits to its
former or inactive employees after employment but before retirement. Such
benefits primarily include those related to disability and survivorship plans.
The Company has reserved the right to modify or terminate these plans at any
time for all participants.
The Company's postemployment benefit expense for fiscal years 1998, 1997
and 1996 was $74 million, $71 million and $78 million, respectively. The amount
funded in excess of the liability is included in other noncurrent assets in the
Company's Consolidated Balance Sheets. Future period expenses will vary based on
actual claims experience and the return on plan assets.
Gains and losses that occur because actual experience differs from that
assumed will be amortized over the average future service period of employees.
Amounts allocable to prior service for amendments to retiree and inactive
insurance plans are amortized in a similar manner.
The Company continues to evaluate ways to better manage employee benefits
and control costs. Any changes in the plans or revisions to assumptions that
affect the amount of expected future benefits may have a significant effect on
the amount of the reported obligation and future annual expense.
11. INCOME PER SHARE
During fiscal 1998, Delta adopted SFAS 128, which establishes new standards for
computing, presenting, and disclosing income per share data. All prior year
income per share data have been restated to conform with SFAS 128. Application
of SFAS 128 did not have a material impact on previously reported income per
share amounts for the fiscal years ended June 30, 1997 and 1996.
48
The following table shows a reconciliation of the numerator (net income)
and the denominator (average shares outstanding) used in computing basic and
diluted income per share:
Fiscal Year Ended June 30, 1998 1997 1996
(In Millions, except per share data)
- --------------------------------------------------------------------------------
Basic:
Net income $ 1,001 $ 854 $ 156
Dividends on allocated Series B ESOP
Convertible Preferred Stock (11) (9) (8)
Dividends on Series C
Convertible Preferred Stock - - (74)
- --------------------------------------------------------------------------------
Income available to common
shareowners $ 990 $ 845 $ 74
Weighted average shares outstanding 74.6 74.2 51.8
Basic income per common share $13.28 $11.39 $1.43
Diluted:
Net Income $1,001 $ 854 $ 156
Adjustment to net income assuming
conversion of allocated Series B ESOP
Convertible Preferred Stock (4) (5) (5)
Dividends on Series C
Convertible Preferred Stock - - (74)
- --------------------------------------------------------------------------------
Income available to common
shareowners $ 997 $ 849 $ 77
Weighted average shares outstanding 74.6 74.2 51.8
Additional shares assuming:
Exercise of stock options 1.9 .6 .3
Conversion of allocated Series B ESOP
Convertible Preferred Stock 2.1 1.9 1.6
Conversion of Series C
Convertible Preferred Stock - .3 -
- --------------------------------------------------------------------------------
Weighted average shares
outstanding as adjusted 78.6 77.0 53.7
- --------------------------------------------------------------------------------
Diluted income per common share $12.68 $11.03 $1.43
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Fiscal 1996 diluted income per common share calculation does not assume
conversion of the 3.23% Convertible Subordinated Notes due June 15, 2003 and the
Series C Convertible Preferred Stock, because to do so would have been
antidilutive.
12. COMMON AND PREFERRED STOCK
During fiscal 1998, the Company issued 4,160,501 shares of Common Stock under
its broad-based employee stock option plans, and a total of 477,541 shares of
Common Stock under its 1989 Stock Incentive and Dividend Reinvestment and Stock
Purchase Plans. In addition, the Company distributed a total of 49,541 shares of
Common Stock from treasury under its 1989 Stock Incentive Plan. Also during
fiscal 1998, the Company repurchased 3,158,373 shares of Common Stock.
At June 30, 1998, 20,539,449 shares of Common Stock were reserved for
issuance under the Company's broad-based employee stock option plans; 7,663,763
shares of Common Stock were reserved for issuance under the 1989 Stock Incentive
Plan; 5,664,421 shares of Common Stock were reserved for conversion of the ESOP
Preferred Stock; and 248,215 shares of Common Stock were reserved for issuance
under the Non-Employee Directors' Stock Plan. In addition, 1,500,000 shares of
preferred stock were reserved for issuance under the Shareowner Rights Plan.
The Shareowner Rights Plan is designed to enhance the ability of the Board
of Directors to protect shareowners against attempts to acquire Delta that do
not offer an adequate price to all shareowners, or that are otherwise not in the
best interest of the Company and its shareowners. Under this plan, each
outstanding share of Common Stock is accompanied by a preferred stock purchase
right which entitles the holder to purchase from the Company 1/100 of a share of
Series D Junior Participating Preferred Stock for $300, subject to adjustment in
certain circumstances (Purchase Price). The rights become exercisable only after
a person or group acquires beneficial ownership of 15% or more of the Common
Stock or commences a tender or exchange offer that would result in such person
or group beneficially owning 15% or more of the Common Stock. The rights expire
on November 4, 2006, and may be redeemed by Delta for $0.01 per right until 10
business days following the announcement that a person or group beneficially
owns 15% or more of the Common Stock. Subject to certain conditions, if a person
or group becomes the beneficial owner of 15% or more of the Common Stock, each
right will entitle its holder (other than certain acquiring persons) to
purchase, for the Purchase Price, Common Stock having a market value of twice
the Purchase Price. In addition, subject to certain conditions, if Delta is
involved in a merger or certain other business combination
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
JUNE 30, 1998, 1997 AND 1996
DELTA AIR LINES, INC.
transactions, or the Company sells or otherwise transfers more than 50% of its
assets or earning power, each right will entitle its holder to purchase, for the
Purchase Price, Common Stock of the other party having a market value of twice
the Purchase Price.
Each share of ESOP Preferred Stock has a stated value of $72; bears an
annual cumulative cash dividend of 6%, or $4.32; is convertible into 0.8578
share of Common Stock (a conversion price of $83.94), subject to adjustment in
certain circumstances; has a liquidation preference of $72, plus any accrued and
unpaid dividends; generally votes together as a single class with the Common
Stock on matters upon which the Common Stock is entitled to vote; and has one
vote, subject to adjustment in certain circumstances. The ESOP Preferred Stock
is redeemable at Delta's option at specified redemption prices payable, at
Delta's election, in cash or Common Stock. If full cumulative dividends on the
ESOP Preferred Stock have not been paid when due, Delta may not pay cash
dividends on the Common Stock.
13. STOCK OPTIONS AND AWARDS
Under its 1989 Stock Incentive Plan and a predecessor plan, the Company has
granted non-qualified stock options and, prior to fiscal 1993, tandem stock
appreciation rights (SARs) to officers and other key employees. The exercise
price for all stock options, and the base price upon which the SARs are
measured, is the fair market value of the Common Stock on the date of grant.
Awards exercised as SARs are payable in a combination of cash and Common Stock.
The Company recognized compensation expense (included in salary and related
costs) related to SARs in fiscal 1998, 1997 and 1996 of $8 million, $3 million
and $14 million, respectively. Stock options are generally exercisable beginning
one year, and ending ten years, after their grant date.
On October 24, 1996, the Company's shareowners approved two plans providing
for the issuance of non-qualified stock options to substantially all of Delta's
non-officer personnel to purchase a total of 24.7 million shares of Common
Stock. One plan is for eligible Delta personnel who are not pilots (Nonpilot
Plan); the other plan covers the Company's eligible pilots (Pilot Plan).
The Nonpilot and Pilot Plans involve non-qualified stock options to
purchase 14.7 million and 10 million shares of Common Stock, respectively. The
plans provide for grants in three annual installments at an exercise price equal
to the opening price of the Common Stock on the New York Stock Exchange on the
grant date. Stock options awarded under these plans are generally exercisable
beginning one year and ending ten years after their grant dates, and are not
transferable other than upon the death of the person granted the stock options.
On October 30, 1997 and 1996, Delta granted eligible personnel non-qualified
stock options to purchase 8.3 million and 8.2 million shares of Common Stock,
respectively, at exercise prices of $98 per share and $69 per share,
respectively. The third grant date under the Nonpilot and Pilot Plans is
scheduled to occur on October 30, 1998.
Transactions involving stock options and SARs during fiscal 1998, 1997 and
1996 were as follows:
Fiscal 1998 Fiscal 1997 Fiscal 1996
- ---------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Stock Options Shares Price Shares Price Shares Price
- ---------------------------------------------------------------------------------------------------------------------------
(000) (000) (000)
Outstanding at beginning of fiscal year 9,901 $ 69 2,332 $65 3,386 $63
Granted 9,849 100 8,932 70 644 71
Exercised (4,659) 69 (1,279) 67 (1,654) 63
Forfeited (88) 92 (84) 75 (44) 65
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding at end of fiscal year 15,003 89 9,901 69 2,332 65
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Stock options exercisable at fiscal year end 5,211 $ 70 1,049 $63 1,698 $63
50
The following table summarizes information about stock options outstanding at
June 30, 1998:
Stock Options Outstanding Stock Options Exercisable
- ---------------------------------------------------------------------------------------------------------------------------
Range of Number Weighted Weighted Number Weighted
Exercise Outstanding at Average Average Exercisable at Average
Prices June 30, 1998 Remaining Life Exercise Price June 30, 1998 Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------
(000) (Years) (000)
$52-$68 276 5 $ 56 276 $56
$69-$83 4,935 8 71 4,935 71
$84-$125 9,792 9 100 - -
- ---------------------------------------------------------------------------------------------------------------------------
SFAS 123 requires pro forma information regarding net income and income per
share, determined as if the Company accounted for its employee stock option
plans under the fair value method of SFAS 123. The fair value of stock options
granted in fiscal 1998, 1997 and 1996 was derived using the Black-Scholes stock
option pricing model. The assumptions and the weighted average fair values were
as follows:
- --------------------------------------------------------------------------------
Stock Options
Granted in Fiscal Year
Assumptions 1998 1997 1996
- -----------------------------------------------------------
Risk-free interest rate 5.8% 6.0% 5.4%
Average expected life of
stock options (Years) 3.3 2.7 5.1
Expected volatility of
Common Stock 25.3% 26.4% 26.5%
Expected annual dividends on
Common Stock $0.20 $0.20 $0.20
Weighted average fair value
of stock options $ 26 $ 17 $ 24
- -----------------------------------------------------------
Pro Forma Net Income and Income per Common Share:
Fiscal Year Ended June 30, June 30, June 30,
(In Millions): 1998 1997 1996
- -------------------------------------------------------------
Net income:
As reported $1,001 $ 854 $ 156
Pro forma 875 791 152
Basic income per common share:
As reported $13.28 $ 11.39 $ 1.43
Pro forma 11.59 10.53* 1.36*
Diluted income per common share:
As reported $12.68 $ 11.03 $ 1.43
Pro forma 11.07 10.21* 1.35*
- -------------------------------------------------------------
*Restated in accordance with SFAS 128. See Note 11.
Under SFAS 123, stock options granted prior to fiscal year 1996 are not
required to be included as compensation in determining pro forma net income.
Therefore, the pro forma effects on net income and income per common share for
fiscal 1998 may not be representative of the pro forma effects SFAS 123 may have
in future years.
14. STOCK REPURCHASE AUTHORIZATION
In April 1996, Delta's Board of Directors authorized the Company to repurchase
up to 24.7 million shares of Common Stock and Common Stock equivalents. Under
this authorization, the Company could repurchase up to 6.2 million of these
shares before October 30, 1997 - the date the initial stock option grants under
the broad-based employee stock option plans became exercisable - and may
purchase the remaining shares as Delta personnel exercise their stock options
under those plans. (See Note 13.) The Company repurchased 3,079,000, 5,378,700
and 821,300 shares of Common Stock for $345 million, $379 million and $66
million during fiscal 1998, 1997 and 1996, respectively, under this
authorization.
In July 1998, Delta's Board of Directors authorized
the Company to repurchase Common Stock and Common Stock equivalents for an
aggregate purchase price of up to $750 million from time to time through
December 31, 1999. This authorization is in addition to the Company's stock
repurchase plan discussed in the preceding paragraph.
Repurchases under both of the above authorizations are subject to market
conditions and may be made on the open market or in privately negotiated
transactions.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
JUNE 30, 1998, 1997 AND 1996
DELTA AIR LINES, INC.
15. RESTRUCTURING AND OTHER NON-RECURRING CHARGES
During fiscal 1997 and 1996, the Company recorded pretax restructuring and other
non-recurring charges of $52 million and $829 million, respectively. These
charges were due to the writedown of Delta's L-1011 fleet in accordance with
SFAS 121; employee early retirement programs; lease termination costs related to
abandoned facilities and discontinued routes; and costs related to the
realignment of the Company's transatlantic and European operations.
The Company made payments of $51 million related to these charges during
fiscal 1998. The remaining liability related to the charges was $36 million
as of June 30, 1998.
Actual costs incurred, realization on the sales of excess inventories, and
costs associated with lease terminations and abandoned facilities may vary from
current estimates. The appropriate accrued liability will be adjusted upon
completion of these activities.
16. INTERNATIONAL REVENUES
Delta provides scheduled air transportation for passengers, freight and mail
over a network of routes throughout the United States and abroad. Delta's
operating revenues by international region are as follows:
(In Millions) 1998 1997 1996
- ------------------------------------------------------------
Entity:
Atlantic 2,092 2,024 1,909
Pacific 304 325 342
Latin America 245 218 187
- ------------------------------------------------------------
2,641 2,567 2,438
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations for
fiscal 1998 and 1997 (in millions, except per share data):
Three Months Ended
- ---------------------------------------------------------------------------------------------------------------------------
Sept. 30 Dec. 31 Mar. 31 June 30
Fiscal 1998
Operating revenues $3,553 $3,434 $3,390 $3,761
Operating income $ 431 $ 332 $ 336 $ 594
Net income $ 254 $ 190 $ 195 $ 362
Basic income per common share $ 3.41* $ 2.52 $ 2.57 $ 4.77
Diluted income per common share $ 3.26* $ 2.40 $ 2.45 $ 4.52
- ---------------------------------------------------------------------------------------------------------------------------
Fiscal 1997
Operating revenues $3,433 $3,198 $3,421 $3,542
Operating income $ 439 $ 227 $ 346 $ 519
Net income $ 238 $ 125 $ 190 $ 301
Basic income per common share $ 3.10* $ 1.66* $ 2.56* $ 4.06*
Diluted income per common share $ 2.98* $ 1.63* $ 2.47* $ 3.90*
- ---------------------------------------------------------------------------------------------------------------------------
*Restated to conform with SFAS 128. See Note 11.
The sum of the quarterly income per common share does not equal the fiscal
income per common share due to changes in average share calculations.
Operating expenses for the March 1997 quarter include $52 million pretax
restructuring and other non-recurring charges related to the realignment of the
Company's transatlantic and European operations. (See Note 15.)
52
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
DELTA AIR LINES, INC.
To the Shareowners and
Board of Directors of Delta Air Lines, Inc.:
We have audited the accompanying consolidated balance sheets of Delta Air Lines,
Inc. (a Delaware corporation) and subsidiaries as of June 30, 1998 and 1997, and
the related consolidated statements of operations, cash flows and shareowners'
equity for each of the three years in the period ended June 30, 1998. 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 generally accepted auditing
standards. 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 June 30, 1998 and 1997, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1998, in conformity with generally accepted accounting
principles.
/s/Arthur Andersen LLP
----------------------
Arthur Andersen
Atlanta, Georgia
August 14, 1998
REPORT OF MANAGEMENT
DELTA AIR LINES, INC.
The integrity and objectivity of the information presented in this Annual Report
are the responsibility of Delta management. The financial statements contained
in this report have been audited by Arthur Andersen LLP, independent public
accountants, whose report appears on this page.
Delta maintains a system of internal financial controls which are
independently assessed on an ongoing basis through a program of internal audits.
These controls include the selection and training of the Company's managers,
organizational arrangements that provide a division of responsibilities, and
communication programs explaining the Company's policies and standards. We
believe that this system provides reasonable assurance that transactions are
executed in accordance with management's authorization; that transactions are
appropriately recorded to permit preparation of financial statements that, in
all material respects, are presented in conformity with generally accepted
accounting principles; and that assets are properly accounted for and
safeguarded against loss from unauthorized use.
The Board of Directors pursues its responsibilities for these financial
statements through its Audit Committee, which consists solely of directors who
are neither officers nor employees of the Company. The Audit Committee meets
periodically with the independent public accountants, the internal auditors and
representatives of management to discuss internal accounting control, auditing
and financial reporting matters.
/s/Warren C. Jenson /s/Leo F. Mullin
- --------------------------- -----------------------
Warren C. Jenson Leo F. Mullin
Executive Vice President President and
and Chief Financial Officer Chief Executive Officer
53
CONSOLIDATED SUMMARY OF OPERATIONS
DELTA AIR LINES, INC.
For the fiscal years ended June 30
- ---------------------------------------------------------------------------------------------------------------------------
(In Millions, Except Per Share Data) 1998 1997(1) 1996(2) 1995(3)
- ---------------------------------------------------------------------------------------------------------------------------
Operating revenues $14,138 $13,594 $12,455 $12,194
Operating expenses 12,445 12,063 11,992 11,533
- ---------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 1,693 1,531 463 661
Interest expense, net (148) (174) (243) (262)
Gain (loss) on disposition of flight equipment - - 2 -
Miscellaneous income, net(6) 103 58 54 95
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 1,648 1,415 276 494
Income tax benefit (provision) (647) (561) (120) (200)
Amortization of investment tax credits - - - -
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) 1,001 854 156 294
Preferred stock dividends (11) (9) (82) (88)
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) attributable to common shareowners $ 990 $ 845 $ 74 $ 206
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share:(7)
Basic $ 13.28 $ 11.39 $ 1.43 $ 4.07
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Diluted $ 12.68 $ 11.03 $ 1.43 $ 4.01
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Dividends declared on Common Stock $ 15 $ 15 $ 10 $ 10
Dividends declared per common share $ 0.20 $ 0.20 $ 0.20 $ 0.20
For the fiscal years ended June 30
- ---------------------------------------------------------------------------------------------------------------------------
(In Millions, Except Per Share Data) 1994(4) 1993(5) 1992 1991
- ---------------------------------------------------------------------------------------------------------------------------
Operating revenues $12,077 $11,657 $10,837 $9,171
Operating expenses 12,524 12,232 11,512 9,621
- ---------------------------------------------------------------------------------------------------------------------------
Operating income (loss) (447) (575) (675) (450)
Interest expense, net (271) (177) (151) (97)
Gain (loss) on disposition of flight equipment 2 65 35 17
Miscellaneous income, net(6) 56 36 5 30
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (660) (651) (786) (500)
Income tax benefit (provision) 250 233 271 163
Amortization of investment tax credits 1 3 9 13
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) (409) (415) (506) (324)
Preferred stock dividends (110) (110) (19) (19)
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) attributable to common shareowners $ (519) $ (525) $ (525) $ (343)
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share:(7)
Basic $(10.32) $(10.54) $(10.60) $(7.73)
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Diluted $(10.32) $(10.54) $(10.60) $(7.73)
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Dividends declared on Common Stock $ 10 $ 35 $ 59 $ 54
Dividends declared per common share $ 0.20 $ 0.70 $ 1.20 $ 1.20
For the fiscal years ended June 30
- -----------------------------------------------------------------------------------------------------
(In Millions, Except Per Share Data) 1990 1989 1988
- -----------------------------------------------------------------------------------------------------
Operating revenues $8,583 $8,089 $6,915
Operating expenses 8,163 7,411 6,418
- -----------------------------------------------------------------------------------------------------
Operating income (loss) 420 678 497
Interest expense, net (27) (39) (65)
Gain (loss) on disposition of flight equipment 18 17 (1)
Miscellaneous income, net(6) 57 55 25
- -----------------------------------------------------------------------------------------------------
Income (loss) before income taxes 468 711 456
Income tax benefit (provision) (187) (279) (181)
Amortization of investment tax credits 22 29 32
- -----------------------------------------------------------------------------------------------------
Net income (loss) 303 461 307
Preferred stock dividends (18) - -
- -----------------------------------------------------------------------------------------------------
Net income (loss) attributable to common shareowners $ 285 $ 461 $ 307
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Net income (loss) per common share:(7)
Basic $ 5.79 $ 9.37 $ 6.30
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Diluted $ 5.28 $ 9.37 $ 6.30
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Dividends declared on Common Stock $ 85 $ 59 $ 59
Dividends declared per common share $ 1.70 $ 1.20 $ 1.20
OTHER FINANCIAL AND STATISTICAL DATA
For the fiscal years ended June 30
- ------------------------------------------------------------------------------------------------------------------------------------
(Financial Data In Millions) 1998 1997(1) 1996(2) 1995(3)
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $14,603 $12,741 $12,226 $12,143
Long-term debt and capital leases (excluding current maturities) $ 1,783 $ 1,797 $ 2,175 $ 3,121
Shareowners' equity $ 4,023 $ 3,007 $ 2,540 $ 1,827
Shares of Common Stock outstanding at year end 75,225,197 73,695,987 67,778,106 50,816,010
Revenue passengers enplaned (Thousands) 104,148 101,147 91,341 88,893
Available seat miles (Millions) 140,149 136,821 130,751 130,645
Revenue passenger miles (Millions) 101,136 97,758 88,673 86,417
Operating revenue per available seat mile 10.09(cent) 9.94(cent) 9.53(cent) 9.33(cent)
Passenger mile yield 12.83(cent) 12.79(cent) 13.10(cent) 13.10(cent)
Operating cost per available seat mile 8.88(cent) 8.82(cent) 9.17(cent) 8.83(cent)
Passenger load factor 72.2% 71.4% 67.8% 66.2%
Breakeven passenger load factor 62.7% 62.7% 65.1% 62.3%
Available ton miles (Millions) 19,890 18,984 18,084 18,150
Revenue ton miles (Millions) 11,859 11,308 10,235 10,142
Operating cost per available ton mile 62.57(cent) 63.54(cent) 66.31(cent) 63.55(cent)
For the fiscal years ended June 30
- ------------------------------------------------------------------------------------------------------------------------------------
(Financial Data In Millions) 1994(4) 1993(5) 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 11,896 $11,871 $ 10,162 $8,411
Long-term debt and capital leases (excluding current maturities) $ 3,228 $ 3,716 $ 2,833 $2,059
Shareowners' equity $ 1,467 $ 1,913 $ 1,894 $2,457
Shares of Common Stock outstanding at year end 50,453,272 50,063,841 49,699,098 49,401,779
Revenue passengers enplaned (Thousands) 87,399 85,085 77,038 69,127
Available seat miles (Millions) 131,906 132,282 123,102 104,328
Revenue passenger miles (Millions) 85,268 82,406 72,693 62,086
Operating revenue per available seat mile 9.16(cent) 8.81(cent) 8.80(cent) 8.79(cent)
Passenger mile yield 13.23(cent) 13.23(cent) 13.91(cent) 13.80(cent)
Operating cost per available seat mile 9.49(cent) 9.25(cent) 9.35(cent) 9.22(cent)
Passenger load factor 64.6% 62.3% 59.1% 59.5%
Breakeven passenger load factor 67.2% 65.6% 63.0% 62.6%
Available ton miles (Millions) 18,302 18,182 16,625 13,825
Revenue ton miles (Millions) 9,911 9,503 8,361 7,104
Operating cost per available ton mile 68.43(cent) 67.27(cent) 69.24(cent) 69.59(cent)
For the fiscal years ended June 30
- ------------------------------------------------------------------------------------------------------------------------------------
(Financial Data In Millions) 1990 1989 1988
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $7,227 $6,484 $5,748
Long-term debt and capital leases (excluding current maturities) $1,315 $ 703 $ 729
Shareowners' equity $2,596 $2,620 $2,209
Shares of Common Stock outstanding at year end 46,086,110 49,265,884 49,101,271
Revenue passengers enplaned (Thousands) 67,240 64,242 58,565
Available seat miles (Millions) 96,463 90,742 85,834
Revenue passenger miles (Millions) 58,987 55,904 49,009
Operating revenue per available seat mile 8.90(cent) 8.91(cent) 8.06(cent)
Passenger mile yield 13.63(cent) 13.56(cent) 13.15(cent)
Operating cost per available seat mile 8.46(cent) 8.17(cent) 7.48(cent)
Passenger load factor 61.2% 61.6% 57.1%
Breakeven passenger load factor 58.0% 56.1% 52.7%
Available ton miles (Millions) 12,500 11,725 11,250
Revenue ton miles (Millions) 6,694 6,338 5,557
Operating cost per available ton mile 65.30(cent) 63.21(cent) 57.05(cent)
(1) Summary of operations and other financial and statistical data include $52
million in pretax restructuring and other non-recurring charges ($0.43
basic and $0.42 diluted after-tax income per common share).
(2) Summary of operations and other financial and statistical data include $829
million in pretax restructuring charges and other non-recurring charges
($9.77 after-tax per common share).
(3) Summary of operations and other financial and statistical data exclude $114
million after-tax cumulative effect of change in accounting standards
($2.25 basic and $1.43 diluted income per common share).
(4) Summary of operations and other financial and statistical data include $526
million in pretax restructuring charges ($6.59 after-tax per common share).
(5) Summary of operations and other financial and statistical data include $82
million pretax restructuring charge ($1.05 after-tax per common share).
Summary of operations exclude $587 million after-tax cumulative effect of
changes in accounting standards ($11.78 after-tax per common share).
(6) Includes interest income.
(7) Income per share data for fiscal years 1988-1997 have been restated in
accordance with SFAS 128. See Note 11 of Notes to Consolidated Financial
Statements.
54-55
COMMON STOCK
Listed on the New York Stock Exchange under the ticker symbol DAL.
NUMBER OF SHAREOWNERS
As of August 1, 1998, there were 21,672 registered owners of Common Stock.
MARKET PRICES AND DIVIDENDS
Closing Price of
Common Stock on Cash Dividends Per
Fiscal Year 1998 New York Stock Exchange Common Share
- ------------------------------------------------------------------------
Quarter Ended: High Low
- ------------------------------------------------------------------------
September 30 $107 1/8 $ 82 $0.05
December 31 120 3/8 94 5/8 0.05
March 31 123 1/8 110 1/8 0.05
June 30 129 3/8 110 2/4 0.05
Fiscal Year 1997
Quarter Ended: High Low
- ------------------------------------------------------------------------
September 30 $ 82 7/8 $ 66 7/8 $0.05
December 31 77 1/2 67 3/4 0.05
March 31 87 3/4 69 1/4 0.05
June 30 98 1/8 82 0.05
56