Delta Air Lines - 10-Q quarterly report FY

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2001

or

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-5424

DELTA AIR LINES, INC.

State of Incorporation: Delaware

IRS Employer Identification No.: 58-0218548

Hartsfield Atlanta International Airport, Atlanta, Georgia 30320

Telephone: (404) 715-2600

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [   ]

Number of shares outstanding by each class of common stock,
as of July 31, 2001:

Common Stock, $1.50 par value — 123,071,622 shares outstanding

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FORWARD-LOOKING INFORMATION

     Statements in this Form 10-Q which are not purely historical facts, including statements about our estimates, expectations, beliefs, intentions or strategies for the future, may be “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or our present expectations.

     Factors that could cause these differences include, but are not limited to, general economic conditions, including the extent of the current weakening in the U.S. economy and the related decline in business travel; competitive factors in our industry, including mergers and acquisitions; outcomes of negotiations on collective bargaining agreements and other labor matters; changes in aircraft fuel prices; disruptions to operations due to adverse weather conditions or air traffic control-related constraints; fluctuations in foreign currency exchange rates; governmental actions; the willingness of customers to travel generally and with us specifically; and the outcome of our litigation.

     Caution should be taken not to place undue reliance on our forward-looking statements, which are current only as of the date of this Form 10-Q. More detailed information about risks and uncertainties as of other dates can be read in Delta’s past and future Forms 10-K and 10-Q and certain Forms 8-K filed with the Securities and Exchange Commission.

CHANGE IN YEAR END

     Effective December 31, 2000, Delta changed its year end from June 30 to December 31. This Form 10-Q includes Consolidated Balance Sheets as of June 30, 2001 (unaudited) and December 31, 2000, unaudited Consolidated Statements of Operations for the three months and six months ended June 30, 2001 and 2000, and unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2001 and 2000.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

DELTA AIR LINES, INC.
Consolidated Balance Sheets
(In Millions, Except Share Data)

The accompanying notes are an integral part of these consolidated financial statements.

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DELTA AIR LINES, INC.
Consolidated Balance Sheets
(In Millions, Except Share Data)

The accompanying notes are an integral part of these consolidated financial statements.

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DELTA AIR LINES, INC.
Consolidated Statements of Operations
(Unaudited)
(In Millions, Except Share Data)

The accompanying notes are an integral part of these consolidated financial statements.

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DELTA AIR LINES, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In Millions)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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DELTA AIR LINES, INC.
Statistical Summary
(Unaudited)

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DELTA AIR LINES, INC.
Notes to Consolidated Financial Statements
June 30, 2001
(Unaudited)

1. ACCOUNTING AND REPORTING POLICIES

2. SALE OF RECEIVABLES

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3. MARKETABLE AND OTHER EQUITY SECURITIES

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4. DERIVATIVE INSTRUMENTS

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5. AIRCRAFT FLEET AND PURCHASE COMMITMENTS

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6. DEBT INSTRUMENTS

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7. COMPREHENSIVE INCOME (LOSS)

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8. SHAREOWNERS’ EQUITY

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9. GEOGRAPHIC INFORMATION

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10. EARNINGS (LOSS) PER SHARE

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11. SUBSEQUENT EVENTS

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

RESULTS OF OPERATIONS

Business Environment

     Our financial results for the three and six months ended June 30, 2001 were materially affected by the slowing U.S. economy and pilot labor issues at both Delta and Comair.

     Economy. The slowing U.S. economy has reduced the demand for air travel among both business travelers and leisure passengers. This decline in demand has negatively impacted our passenger mile yield and traffic for the three and six months ended June 30, 2001. Based on current economic indicators, we believe these revenue pressures will continue at least through the end of calendar 2001.

     Delta Pilot Labor Issues. In December 2000, we canceled a substantial number of flights due to a job action by some Delta pilots which significantly reduced pilot availability for overtime (or additional) flying. To provide more reliable service to our customers, we lowered the need for overtime flying by reducing Delta’s mainline flight schedule from the previously planned levels by 2.7% for the March 2001 quarter and 2.4% for the June 2001 quarter.

     Public concern over a possible strike by Delta pilots caused some customers to make reservations and travel with airlines other than Delta during the three and six months ended June 30, 2001. On June 20, 2001, Delta pilots ratified a new collective bargaining agreement, avoiding a possible strike.

     Comair Pilot Labor Issues. Comair pilots ratified a new collective bargaining agreement on June 22, 2001, ending an 89-day strike. As a result of the strike, Comair suspended its operations between March 26 and July 1. We estimate that the Comair strike reduced our consolidated net income by approximately $195 million for the three months ended June 30, 2001.

     Comair resumed partial service on July 2, 2001 and was operating at about 50% of pre-strike capacity by the end of July. We expect Comair to operate at approximately 80% of pre-strike capacity by September 30, 2001 and at about 90% of pre-strike capacity by December 31, 2001.

     We believe the costs associated with restoring Comair’s operations to pre-strike levels will negatively impact our financial performance during the remaining six months of calendar 2001. These costs include retraining pilots, rebuilding the Comair workforce and offering fare sales to attract customers.

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Outlook for September 2001 Quarter

     Delta has taken various actions which are intended to lessen the negative impact of the slowing U.S. economy on our future financial performance. These include adjusting fleet capacity and improving fleet efficiency by the early phase out of 19 aircraft from scheduled service beginning in September 2001 through 2002; instituting a hiring freeze; announcing plans to reallocate aircraft to reduce low yield flying; and reducing advertising, consulting and contractor costs. Notwithstanding these initiatives, we believe that the current economic environment and the costs associated with restoring Comair’s operations to pre-strike levels will likely result in a reported loss for the September 2001 quarter.

Three Months Ended June 30, 2001 and 2000

Net Income (Loss) and Earnings (Loss) per Share

     Our unaudited consolidated net loss was $90 million for the June 2001 quarter ($0.76 diluted loss per share), compared to net income of $460 million ($3.51 diluted earnings per share) in the June 2000 quarter.

     Excluding the unusual items described below, our net loss was $123 million in the June 2001 quarter ($1.03 diluted loss per share), compared to net income of $374 million ($2.85 diluted earnings per share) in the June 2000 quarter.

Unusual Items

     Our results of operations for the June 2001 and June 2000 quarters include the following items, which are collectively referred to as “unusual items” in this discussion of the three months ended June 30, 2001 and 2000.

June 2001 Quarter

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June 2000 Quarter

Operating Revenues

     Our operating revenues totaled $3.8 billion in the June 2001 quarter, a 16% decrease from $4.5 billion in the June 2000 quarter. Passenger revenue decreased 16% to $3.5 billion, reflecting an 8% decrease in revenue passenger miles and an 8% decrease in passenger mile yield. These decreases were primarily the result of the slowing U.S. economy and pilot labor issues at both Delta and Comair.

North American Passenger Revenues — North American passenger revenues fell 19% to $2.9 billion for the June 2001 quarter. Revenue passenger miles decreased 11% on a capacity decrease of 5%, while passenger mile yield decreased 10%. The decline in North American passenger revenues and the passenger mile yield were the result of the slowing U.S. economy and pilot labor issues at both Delta and Comair.

International Passenger Revenues — International passenger revenues increased 3% to $675 million during the June 2001 quarter. Revenue passenger miles remained flat while capacity increased 9%, reflecting our continued international expansion, particularly in Latin American markets. Passenger mile yield rose 3%.

Cargo and Other Revenues — Cargo revenues fell $14 million, or 10%, in the June 2001 quarter primarily due to the slowing U.S. and Asian economies. Cargo ton miles decreased 13%, and the cargo ton mile yield increased 4%. Other revenues decreased $26 million, or 19%, primarily due to lower codeshare revenue, which is commensurate with the slowing economy.

Operating Expenses

     Operating expenses for the June 2001 quarter totaled $3.9 billion, which were flat compared to the June 2000 quarter. Operating capacity decreased 2% to 38 billion available seat miles. Excluding unusual items, cost per available seat mile (CASM) increased 3.6% to 10.02¢, while non-fuel CASM grew 3.8% to 8.81¢. The increase in CASM is primarily related to a reduction in capacity from planned levels due to pilot labor issues at Delta and Comair, as well as an increase in salaries and related costs, during the June 2001 quarter.

     Salaries and related costs totaled $1.6 billion in the June 2001 quarter, a 4% increase from $1.5 billion recorded in the June 2000 quarter. The increase in salaries and related costs was

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driven primarily by higher pilot costs and an increase in aircraft maintenance technician headcount. These increases were partially offset by lower salaries at Comair due to the pilot strike and the related employee lay-offs.

     Aircraft fuel expense during the June 2001 quarter remained flat compared to the June 2000 quarter. The average fuel price per gallon rose 9% to 67.95¢ and total gallons consumed decreased 8% due to the pilot strike at Comair and benefits from our fleet renewal efforts. Our fuel cost is shown net of fuel hedge gains of $102 million in the June 2001 quarter and $133 million in the June 2000 quarter. Prior to the adoption of SFAS 133 on July 1, 2000, the fuel hedge gains that were netted against fuel expense included the total fuel-related hedge premiums. Upon adoption of SFAS 133, we began including all changes in the time value component related to any fuel hedge premiums in the calculation of the ineffective portion of our hedge performance. These amounts are recorded in fair value adjustments of SFAS 133 derivatives in our Consolidated Statement of Operations. Approximately 60% and 79% of our aircraft fuel requirements were hedged during the June 2001 and 2000 quarters, respectively.

     Depreciation and amortization expense rose 10% due to the acquisition of 79 new aircraft since June 30, 2000. Contracted services expense increased 8%, primarily a result of previously negotiated rate increases for ramp handling, cabin cleaning and security services. Landing fees and other rents and aircraft rental expense remained flat, and aircraft maintenance materials and outside repairs expense decreased 1%. Other selling expenses decreased 5% due primarily to the Comair strike.

     Passenger commissions expense declined 18%, primarily as a result of lower passenger revenues combined with our customers’ increased use of lower cost distribution channels such as the Internet. Internet sales accounted for approximately 13% of passenger revenues in the June 2001 quarter (approximately half of which relates to revenues from delta.com) compared to 9% in the June 2000 quarter. Passenger service expense increased 12% as a result of higher food costs. Other operating expenses decreased 10%, primarily the result of lower fuel-related taxes and lower professional fees.

Operating Income and Operating Margin

     We incurred an operating loss of $114 million for the June 2001 quarter, compared to operating income of $606 million in the June 2000 quarter. Operating margin, which is the ratio of operating income (loss) to operating revenues, was (3%) and 14% for the June 2001 and June 2000 quarters, respectively.

Other Income (Expense)

     Other income in the June 2001 quarter was $15 million, compared to other income of $169 million in the June 2000 quarter. Interest expense, net increased $24 million, or 36%, primarily due to higher levels of debt outstanding. As discussed previously, the June 2001 quarter includes a $112 million non-cash gain for fair market value adjustments related to SFAS 133 and a $7 million gain on the sale of priceline common stock (see Notes 4 and 3, respectively, of the Notes

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to Consolidated Financial Statements in this Form 10-Q). The June 2000 quarter includes a $228 million non-cash gain from the exchange of priceline common stock for preferred stock.

Six Months Ended June 30, 2001 and 2000

Net Income (Loss) and Earnings (Loss) per Share

     Our unaudited consolidated net loss was $223 million for the six months ended June 30, 2001 ($1.87 diluted loss per share), compared to net income of $677 million ($5.11 diluted earnings per share) for the six months ended June 30, 2000.

     Excluding the unusual items described below, our net loss was $246 million for the six months ended June 30, 2001 ($2.05 diluted loss per share), compared to net income of $546 million ($4.11 diluted earnings per share) for the six months ended June 30, 2000.

Unusual Items

     Our results of operations for the six months ended June 30, 2001 and 2000 include the following items, which are collectively referred to as “unusual items” in this discussion of the six months ended June 30, 2001 and 2000.

Six Months Ended June 30, 2001

Six Months Ended June 30, 2000

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Operating Revenues

     Our operating revenues totaled $7.6 billion for the six months ended June 30, 2001, a 9% decrease from $8.4 billion during the six months ended June 30, 2000. Passenger revenue decreased 9% to $7.1 billion, reflecting a 5% decrease in revenue passenger miles and a 5% decrease in passenger mile yield. These decreases were primarily the result of the slowing U.S. economy and pilot labor issues at both Delta and Comair.

North American Passenger Revenues — North American passenger revenues fell 12% to $5.9 billion for the six months ended June 30, 2001. Revenue passenger miles decreased 8% on a capacity decrease of 4%, while passenger mile yield decreased 5%. The decline in North American passenger revenues and passenger mile yield were the result of the slowing U.S. economy and pilot labor issues at both Delta and Comair.

International Passenger Revenues — International passenger revenues increased 10% to $1.2 billion during the six months ended June 30, 2001. Revenue passenger miles increased 4% on a capacity increase of 12%, reflecting our continuing international expansion, particularly in Latin American markets. Passenger mile yield rose 5%.

Cargo and Other Revenues — Cargo revenues fell $15 million, or 5%, for the six months ended June 30, 2001 primarily due to the slowing U.S. and Asian economies. Cargo ton miles decreased 7%, and the cargo ton mile yield increased 2%. Other revenues decreased $26 million, or 11%, primarily due to lower codeshare revenues in the June 2001 quarter, which is commensurate with the slowing economy.

Operating Expenses

     Operating expenses for the six months ended June 30, 2001 totaled $7.8 billion, rising 6% from the six months ended June 30, 2000. Operating capacity remained flat at 76 billion available seat miles. Excluding unusual items, CASM increased 6.4% to 10.25¢, while non-fuel CASM grew 6.0% to 8.96¢. The increase in CASM is primarily related to a reduction in capacity from planned levels due to pilot labor issues at Delta and Comair, as well as an increase in salaries and related costs, during the six months ended June 30, 2001.

     Salaries and related costs totaled $3.2 billion for the six months ended June 30, 2001, an 8% increase from $2.9 billion recorded for the six months ended June 30, 2000. The increase in salaries and related costs primarily relates to increased pilot costs, a salary increase of 3% for most domestic non-union employees on April 1, 2000, and a 3% increase in average headcount.

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     Aircraft fuel expense increased 9% during the six months ended June 30, 2001. The average fuel price per gallon rose 14% to 70.91¢ and total gallons consumed decreased 5% due to the pilot strike at Comair and benefits from our fleet renewal efforts. Our fuel cost is shown net of fuel hedge gains of $208 million for the six months ended June 30, 2001 and $279 million for the six months ended June 30, 2000. Prior to the adoption of SFAS 133 on July 1, 2000, the fuel hedge gains that were netted against fuel expense included the total fuel-related hedge premiums. Upon adoption of SFAS 133, we began including all changes in the time value component related to any fuel hedge premiums in the calculation of the ineffective portion of our hedge performance. These amounts are recorded in fair value adjustments of SFAS 133 derivatives in our Consolidated Statement of Operations. Approximately 59% and 81% of our aircraft fuel requirements were hedged during the six months ended June 30, 2001 and 2000, respectively.

     Depreciation and amortization expense rose 9% due to the acquisition of 79 new aircraft since June 30, 2000. Contracted services expense increased 10%, primarily as a result of previously negotiated rate increases for ramp handling, cabin cleaning and security services as well as higher maintenance and technology costs. Landing fees and other rents rose 4%, aircraft rent expense increased 1%, and aircraft maintenance materials and outside repairs expense grew 4%. Other selling expenses increased 3% due to higher advertising costs related to new service promotions and our sponsorship of the 2002 Winter Olympics, partially offset by the Comair strike.

     Passenger commissions expense declined 17%, primarily as a result of lower passenger revenues combined with our customers’ increased use of lower cost distribution channels such as the Internet. Internet sales accounted for approximately 12% of passenger revenues for the six months ended June 30, 2001 compared to 8% for the six months ended June 30, 2000. Passenger service expense increased 13% as a result of higher food costs. Other operating expenses increased 2% primarily as a result of higher interrupted trip expense as well as the rollout of our new uniforms, partially offset by lower fuel-related taxes.

Operating Income and Operating Margin

     We incurred an operating loss of $229 million for the six months ended June 30, 2001, compared to operating income of $949 million for the six months ended June 30, 2000. Operating margin, which is the ratio of operating income (loss) to operating revenues, was (3%) and 11% for the six months ended June 30, 2001 and 2000, respectively.

Other Income (Expense)

     Other expense for the six months ended June 30, 2001 was $92 million, compared to other income of $190 million for the six months ended June 30, 2000. Interest expense, net increased $41 million, or 30%, primarily due to higher levels of debt outstanding. As discussed previously, the six months ended June 30, 2001 includes a $95 million non-cash gain for fair market value adjustments related to SFAS 133 and a $7 million gain on the sale of priceline common stock (see Notes 4 and 3, respectively, of the Notes to Consolidated Financial Statements in this Form 10-Q). The six months ended June 30, 2000 includes a $73 million gain from our sale of priceline

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common stock and a $228 million non-cash gain from the exchange of priceline common stock for preferred stock.

FINANCIAL CONDITION AND LIQUIDITY

     Cash, cash equivalents and short-term investments totaled $1.5 billion at June 30, 2001, compared to $1.6 billion at December 31, 2000. Our principal sources and uses of cash during the six months ended June 30, 2001 are summarized below:

Sources: