SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 10-Q
For the quarterly period ended September 30, 2001
or
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 bySection 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 October 31, 2001:
Common Stock, $1.50 par value — 123,244,087 shares outstanding
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS
Statements in this Report on Form 10-Q (or otherwise made by Delta or on Delta’s behalf) which are not historical facts, including statements about Delta’s estimates, expectations, beliefs, intentions, projections or strategies for the future, may be “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or Delta’s present expectations. Factors that could cause these differences include, but are not limited to:
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Caution should be taken not to place undue reliance on Delta’s forward-looking statements, which represent Delta’s views only as of November 14, 2001, and which Delta has no current intention to update.
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 September 30, 2001 (unaudited) and December 31, 2000, unaudited Consolidated Statements of Operations for the three months and nine months ended September 30, 2001 and 2000, and unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 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 Statements of Operations(Unaudited)(In Millions, Except Share Data)
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DELTA AIR LINES, INC.Condensed Consolidated Statements of Cash Flows(Unaudited)(In Millions)
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DELTA AIR LINES, INC.Statistical Summary(Unaudited)
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DELTA AIR LINES, INC.Notes to Consolidated Financial StatementsSeptember 30, 2001(Unaudited)
1. ACCOUNTING AND REPORTING POLICIES
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2. SEPTEMBER 11, 2001 EVENTS
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3. SALE OF RECEIVABLES
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4. MARKETABLE AND OTHER EQUITY SECURITIES
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5. INVESTMENTS IN ASSOCIATED COMPANIES
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6. DERIVATIVE INSTRUMENTS
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7. AIRCRAFT FLEET AND PURCHASE COMMITMENTS
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8. DEBT INSTRUMENTS
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9. COMPREHENSIVE INCOME (LOSS)
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10. SHAREOWNERS’ EQUITY
11. GEOGRAPHIC INFORMATION
12. EARNINGS (LOSS) PER SHARE
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13. 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 months ended September 30, 2001 were materially affected by the terrorist attacks on the United States on September 11, 2001, the slowing U.S. and world economies, and the effects of the Comair pilot strike. These factors, along with pilot labor issues at Delta, materially impacted our financial performance for the nine months ended September 30, 2001.
September 11, 2001 terrorist attacks. On September 11, 2001, four commercial aircraft were hijacked by terrorists and crashed into The World Trade Center in New York City, the Pentagon in northern Virginia and into a field in Pennsylvania. These attacks resulted in an overwhelming loss of human lives and extensive property damage.
In response to the terrorist attacks, the Federal Aviation Administration (FAA) closed U.S. airspace, prohibiting all flights to, from and within the United States. Airports reopened on September 13, 2001, except for Ronald Reagan National Airport in Washington, D.C., which partially reopened on October 4, 2001. During the period when airports were closed, we earned no revenues but continued to incur many of our normal operating costs. For several days after airports were reopened, we were able to operate only a portion of our scheduled flights.
When flights were permitted to resume, our passenger traffic and yields were significantly lower than before the attacks. In addition, new security directives increased our costs and negatively impacted our ability to operate a normal schedule. We estimate that the September 11 terrorist attacks negatively impacted our revenues by approximately $400 million in the September 2001 quarter. This is in addition to revenues that were already adversely affected by the slowing U.S. and world economies and the effects of the Comair pilot strike.
Due to the significant reduction in traffic, we reduced our capacity by 16% compared to the previously planned level, effective November 1, 2001. In making these capacity reductions, our goals were to keep our route network intact and to minimize the impact on our customers, while achieving significant cost reductions. Accordingly, we focused on reducing service on high-frequency routes with reasonable potential for recapturing traffic; temporarily suspending winter service in underperforming and seasonal markets; and backfilling Delta mainline reductions with regional jets to maintain presence and to preserve connecting traffic.
As a result of the capacity reductions, we also announced plans to reduce staffing by up to 13,000 employee positions across all major work groups. Approximately 11,000 Delta employees elected to participate in one of Delta’s voluntary programs, which include leaves of absence, severance and a special early retirement package. Accordingly, we now expect that involuntary
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reductions will affect about 2,000 employees — up to 1,700 pilots and 300 employees from other work groups.
On September 22, 2001, President Bush signed into law the Air Transportation Safety and System Stabilization Act (Stabilization Act), which is intended to preserve the viability of the U.S. air transportation system. Among other things, the Stabilization Act (1) provides for payments from the U.S. Government totaling $5 billion to compensate U.S. air carriers for losses incurred from September 11, 2001 through December 31, 2001 as a result of the September 11 terrorist attacks; and (2) authorizes, subject to certain conditions, the issuance of federal loan guarantees totaling up to $10 billion to U.S. air carriers for which credit is not reasonably available. Delta is entitled to receive approximately $690 million in compensation under the Stabilization Act, $346 million of which we received in the September 2001 quarter. Delta believes its total losses from September 11, 2001 through December 31, 2001 due to the September 11 terrorist attacks will be substantially greater than $690 million. For additional information about the Stabilization Act and the compensation payments to Delta thereunder, see Note 2 of the Notes to Consolidated Financial Statements in this Form 10-Q.
As a result of the September 11 terrorist attacks, our insurance providers issued notice to cancel our war and terrorism risk coverage on September 17, but offered, effective September 25, 2001, reinstatement under new terms and prices. Liability coverage limits for parties other than passengers and employees (which remains unchanged), such as persons and property on the ground, have been significantly reduced. In addition, our overall war risk insurance premiums will increase by approximately $17 million for the December 2001 quarter. However, provisions under the Stabilization Act provide for excess war risk coverage above $50 million, provided by the FAA, for liabilities in excess of limits instituted by commercial insurance providers. This coverage is in force until January 11th and is renewable at the FAA’s option in 30 day increments up to 180 days from the enactment of the Stabilization Act. The Stabilization Act also provides for reimbursement of certain premium increases, at the option of the Secretary of Transportation. The FAA has agreed to reimburse airlines for increased costs of war risk insurance for a period of 30 days; additional future reimbursement is dependent upon the release of funds to the FAA by the Office of Management and Budget. Any reimbursement of insurance premiums is expected to be at least 30 days in arrears from the time filed.
U.S. and World Economies. Prior to September 11, 2001, the slowing economy reduced the demand for air travel among both business and leisure passengers. This decline in demand negatively impacted our passenger traffic and yield for the three and nine months ended September 30, 2001. Prior to September 11, 2001, we took various actions intended to lessen the negative impact of the slowing economy on our future financial performance including: (1) adjusting fleet capacity and improving fleet efficiency by the early phase out of 19 aircraft from scheduled service beginning in September 2001 through 2002; (2) instituting a hiring freeze; (3) announcing plans to reallocate aircraft to reduce low yield flying; and (4) reducing advertising, consulting and contractor costs. As a result of the September 11 terrorist attacks, the economic outlook significantly worsened.
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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 relating to the then ongoing collective bargaining negotiations caused some customers to make reservations and travel with airlines other than Delta during the 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. On March 26, 2001, Comair pilots began a strike, which continued until June 22, 2001 when Comair pilots ratified a new collective bargaining agreement. As a result of this 89-day strike, Comair suspended its operations between March 26, 2001 and July 1, 2001. Comair resumed partial service on July 2, 2001, and was operating at 50% of its pre-strike capacity at the end of July and at 82% of its pre-strike capacity in early September. We expect Comair to operate at 100% of its pre-strike capacity in the first quarter of 2002. The negative impact of the Comair strike includes lost revenue during the period Comair was not operating or was operating at less than full capacity; offering sale fares to attract customers; retraining Comair pilots; and rebuilding the Comair workforce.
Outlook
Results of Operations. We believe the impact of the September 11 terrorist attacks will cause us to incur substantial losses in the December 2001 and March 2002 quarters. The events of September 11 are continuing to materially affect Delta’s revenues. Since the attack, demand as well as yield remain depressed. While traffic has been gradually increasing, revenue is not keeping pace. For the period from September 15 through September 30, 2001, Delta’s mainline North American revenue was down 53%, traffic was down 41% and yield declined 21% compared to the corresponding period in the prior year. The magnitude of the impact of these events on Delta’s future financial condition and results of operations will depend on several factors, including the following: (1) the magnitude and duration of the adverse impact of the terrorist attacks on the demand for air travel; (2) the increased costs and reduced operations by airlines associated with new security directives; (3) the availability and cost of war risk and other insurance for Delta and for other critical participants in the air travel industry; (4) the ability for Delta to obtain additional financing to support its operations; (5) the extent to which Delta receives financial assistance under the Stabilization Act; and (6) the number of employees that may be called to serve the country in the armed forces.
Special Items. We expect to record a special charge during the December 2001 quarter of approximately $425-450 million related to the early retirement program offered to employees as part of our initiative to reduce employee costs. We are currently evaluating the impact on our Consolidated Financial Statements of the costs related to the permanent closure of certain facilities; the accelerated retirement and potential impairment of certain aircraft; and the discontinuance of certain capital projects. In addition to these special charges, we also expect to
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recognize the remainder of our Stabilization Act compensation (see Note 2 of the Notes to Consolidated Financial Statements in this Form 10-Q). We will also record a $111 million pretax gain from the sale of our investment in SkyWest, Inc. that occurred during the December 2001 quarter.
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Three Months Ended September 30, 2001 and 2000
Net Income (Loss) and Earnings (Loss) per Share
Our unaudited consolidated net loss was $259 million for the September 2001 quarter ($2.13 diluted loss per share), compared to net income of $133 million ($1.01 diluted earnings per share) in the September 2000 quarter.
Excluding the unusual items described below, our net loss was $295 million in the September 2001 quarter ($2.43 diluted loss per share), compared to net income of $273 million ($2.08 diluted earnings per share) in the September 2000 quarter.
Unusual Items
Our results of operations for the September 2001 and September 2000 quarters include the following items, which are collectively referred to as “unusual items” in this discussion of the three months ended September 30, 2001 and 2000.
September 2001 Quarter
Gains:
Charges:
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September 2000 Quarter
Operating Revenues
Operating revenues totaled $3.4 billion in the September 2001 quarter, a 22% decrease from $4.3 billion in the September 2000 quarter. Passenger revenues decreased 21% to $3.2 billion, reflecting a 12% decrease in revenue passenger miles and a 10% decrease in passenger mile yield. These decreases were primarily the result of the terrorist attacks on September 11, 2001, the slowing U.S. and world economies and the continuing effects of the Comair pilot strike.
North American Passenger Revenues - North American passenger revenues fell 24% to $2.5 billion for the September 2001 quarter. Revenue passenger miles decreased 13% on a capacity decrease of 7%, while passenger mile yield decreased 12%. These decreases resulted from the terrorist attacks on September 11, the slowing U.S. economy and the continuing effects of the Comair pilot strike.
International Passenger Revenues - International passenger revenues decreased 11% to $673 million during the September 2001 quarter. Revenue passenger miles decreased 9% on a capacity decrease of 3%, while passenger mile yield fell 2%. These decreases were a result of the terrorist attacks on September 11 and the slowing U.S. and world economies.
Cargo and Other Revenues - Cargo revenues fell $25 million, or 18%, in the September 2001 quarter primarily due to the terrorist attacks on September 11 and the slowing U.S. and world economies. Cargo ton miles decreased 17%, and the cargo ton mile yield decreased 1%. Other revenues decreased $62 million, or 40%, primarily due to lower codeshare revenue.
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Operating Expenses
Operating expenses for the September 2001 quarter totaled $3.6 billion, a 5% decrease from $3.8 billion in the September 2000 quarter. Operating capacity decreased 6% to 38 billion available seat miles. Excluding unusual items, cost per available seat mile (CASM) increased 4.5% to 9.94¢, while non-fuel CASM grew 6.4% to 8.69¢. The increase in CASM is primarily related to a reduction in capacity from planned levels due to the terrorist attacks on September 11 and the continuing effects of the Comair pilot strike.
Salaries and related costs totaled $1.5 billion in the September 2001 quarter, a 2% increase from the September 2000 quarter. The increase in salaries and related costs was driven primarily by higher pilot costs associated with the new pilot contract.
Aircraft fuel expense totaled $472 million during the September 2001 quarter, an 11% decrease from $533 million in the September 2000 quarter. The average fuel price per gallon fell 1% to 69.63¢. Total gallons consumed decreased 10% due to the decrease in flight operations resulting from the September 11 terrorist attacks and the ramp up of operations at Comair. Our fuel cost is shown net of fuel hedge gains of $69 million in the September 2001 quarter and $160 million in the September 2000 quarter. Approximately 45% and 61% of our aircraft fuel requirements were hedged during the September 2001 and 2000 quarters, respectively.
Depreciation and amortization expense rose 13% due to the acquisition of 54 new aircraft since September 30, 2000. Contracted services expense increased 4%, primarily a result of our entrance into new markets and higher software maintenance costs. Landing fees and other rents increased 2% to $203 million. Aircraft maintenance materials and outside repairs expense increased 17% primarily due to an increase in the volume of outside repairs. Aircraft rent expense remained flat. Other selling expenses decreased 19% due primarily to a lower volume of credit card charges resulting from the impact of the September 11 terrorist attacks and the slowing U.S. and world economies.
Passenger commissions expense declined 16%, primarily as a result of lower passenger revenues. Passenger service expense decreased 7% due to a decline in the number of passengers. Other operating expenses decreased 19%.
Operating Income and Operating Margin
We incurred an operating loss of $251 million for the September 2001 quarter, compared to operating income of $510 million in the September 2000 quarter. Operating margin, which is the ratio of operating income (loss) to operating revenues, was (7%) and 12% for the September 2001 and September 2000 quarters, respectively.
Other Income (Expense)
Other expense in the September 2001 quarter was $157 million, compared to other expense of $118 million in the September 2000 quarter. Interest expense, net, increased $47 million as a
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result of higher levels of debt outstanding. The September 2001 quarter includes a $51 million non-cash charge for fair value adjustments under SFAS 133, and an $11 million gain on the sale of our equity interest in Equant. The September 2000 quarter includes a $66 million non-cash charge for fair value adjustments under SFAS 133.
Nine Months Ended September 30, 2001 and 2000
Our unaudited consolidated net loss was $482 million for the nine months ended September 30, 2001 ($4.00 diluted loss per share), compared to net income of $810 million ($6.14 diluted earnings per share) for the nine months ended September 30, 2000.
Excluding the unusual items described below, our net loss was $541 million for the nine months ended September 30, 2001 ($4.48 diluted loss per share), compared to net income of $819 million ($6.20 diluted earnings per share) for the nine months ended September 30, 2000.
Our results of operations for the nine months ended September 30, 2001 and 2000 include the following items, which are collectively referred to as “unusual items” in this discussion of the nine months ended September 30, 2001 and 2000.
Nine Months Ended September 30, 2001
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Nine Months Ended September 30, 2000
Operating revenues totaled $11.0 billion for the nine months ended September 30, 2001, a 13% decrease from $12.7 billion during the nine months ended September 30, 2000. Passenger revenues decreased 13% to $10.3 billion, reflecting a 7% decrease in revenue passenger miles and a 6% decrease in passenger mile yield. These decreases were primarily the result of the terrorist
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attacks on September 11, 2001, the slowing U.S. and world economies, and pilot labor issues at both Delta and Comair.
North American Passenger Revenues - North American passenger revenues fell 16% to $8.4 billion for the nine months ended September 30, 2001. Revenue passenger miles decreased 10% on a capacity decrease of 5%, while passenger mile yield decreased 7%. The decline in North American passenger revenues and passenger mile yield were the result of the terrorist attacks on September 11, the slowing U.S. economy, and pilot labor issues at both Delta and Comair.
International Passenger Revenues - International passenger revenues increased 2% to $1.9 billion during the nine months ended September 30, 2001. Revenue passenger miles decreased 1% primarily due to the effects of the terrorist attacks on September 11, 2001 and the slowing U.S. and world economies. Capacity increased 6%, reflecting our continuing international expansion, particularly in Latin American markets, while passenger mile yield rose 2%.
Cargo and Other Revenues - Cargo revenues fell $40 million, or 9%, for the nine months ended September 30, 2001 primarily due to the terrorist attacks on September 11 and the slowing U.S. and world economies. Cargo ton miles decreased 10%, and cargo ton mile yield increased 1%. Other revenues decreased $88 million, or 22%, primarily due to lower codeshare revenues in both the June and September 2001 quarters, which is a result of the terrorist attacks on September 11 and the slowing U.S. and world economies.
Operating expenses for the nine months ended September 30, 2001 totaled $11.5 billion, increasing 2% from the nine months ended September 30, 2000. Operating capacity decreased 2% to 114 billion available seat miles. Excluding unusual items, CASM increased 5.8% to 10.15¢, while non-fuel CASM grew 6.2% to 8.87¢. The increase in CASM is primarily related to a reduction in capacity from planned levels due to the terrorist attacks on September 11 and pilot labor issues at Delta and Comair, as well as an increase in salaries and related costs.
Salaries and related costs totaled $4.7 billion for the nine months ended September 30, 2001, a 6% increase from $4.5 billion recorded for the nine months ended September 30, 2000. The increase in salaries and related costs primarily relates to increased pilot costs associated with the new pilot contract, a salary increase of 3% for most domestic non-union employees on April 1, 2000, and a 2% increase in average headcount.
Aircraft fuel expense increased 1% during the nine months ended September 30, 2001. The average fuel price per gallon rose 9% to 70.49¢. Total gallons consumed decreased 7% due to the decrease in flight operations resulting from the September 11 terrorist attacks, the Comair pilot strike and benefits from our fleet renewal efforts. Our fuel cost is shown net of fuel hedge gains of $277 million for the nine months ended September 30, 2001 and $439 million for the nine months ended September 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
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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 56% and 69% of our aircraft fuel requirements were hedged during the nine months ended September 30, 2001 and 2000, respectively.
Depreciation and amortization expense rose 11% due to the acquisition of 54 new aircraft since September 30, 2000. Contracted services expense increased 8%, primarily as a result of previously negotiated rate increases for ramp handling, cabin cleaning and security services as well as our entrance into new markets and higher software maintenance and technology costs. Landing fees and other rents rose 3%. Aircraft maintenance materials and outside repairs expense grew 8% primarily due to an increase in the volume of outside repairs. Aircraft rent expense increased 1%. Other selling expenses decreased 5% due to a lower volume of credit card charges resulting from the impact of September 11 terrorist attacks, the slowing U.S. and world economies and the Comair pilot strike.
Passenger commissions expense declined 17%, primarily as a result of lower passenger revenues. Passenger service expense increased 5% as a result of higher food costs. Other operating expenses decreased 5% primarily as a result of lower fuel-related taxes and professional fees, partially offset by higher interrupted trip expense as well as the rollout of our new uniforms.
We incurred an operating loss of $480 million for the nine months ended September 30, 2001, compared to operating income of $1.5 billion for the nine months ended September 30, 2000. Operating margin, which is the ratio of operating income (loss) to operating revenues, was (4%) and 11% for the nine months ended September 30, 2001 and 2000, respectively.
Other expense for the nine months ended September 30, 2001 was $249 million, compared to other income of $72 million for the nine months ended September 30, 2000. Interest expense, net increased $88 million, or 45%, primarily due to higher levels of debt outstanding. The nine months ended September 30, 2001 includes a $44 million non-cash gain related to fair value adjustments under SFAS 133, a $7 million gain on the sale of priceline common stock and an $11 million gain on the sale of our equity interest in Equant. The nine months ended September 30, 2000 includes a $66 million non-cash charge for fair value adjustments under SFAS 133, a $73 million gain from our sale of priceline common stock and a $228 million non-cash gain from the exchange of priceline common stock for priceline preferred stock.
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FINANCIAL CONDITION AND LIQUIDITY
Cash, cash equivalents and short-term investments totaled $2.8 billion at September 30, 2001, compared to $1.6 billion at December 31, 2000. Our principal sources and uses of cash during the nine months ended September 30, 2001 are summarized below:
Sources:
Uses:
Debt and capital lease obligations (including current maturities) totaled $9.1 billion at September 30, 2001, compared to $6.0 billion at December 31, 2000. Shareowners’ equity was $4.6 billion at September 30, 2001 and $5.3 billion at December 31, 2000. Our net debt-to-capital position, which includes implied debt from operating leases, was 76% at September 30, 2001 and 71% at December 31, 2000.
Working Capital Position
As of September 30, 2001, we had a negative working capital position of $2.9 billion, compared to negative working capital of $2.0 billion at December 31, 2000. The change in our working capital position during the nine months ended September 30, 2001 was primarily the result of our $1.7 billion investment in capital assets and the negative impact on our business of
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the slowing U.S. and world economies, pilot labor issues at Delta and Comair and the September 11 terrorist attacks. In addition, we borrowed $1.25 billion under our 1997 Bank Credit Agreement, and those borrowings are included in current liabilities in our Consolidated Balance Sheets. A negative working capital position is normal for us, primarily due to our air traffic liability, and does not indicate a lack of liquidity.
As a result of the September 11 terrorist attacks, we have taken, and are continuing to take, certain actions to strengthen our financial position. These include:
We expect to meet our obligations as they become due through available cash, short-term investments, internally generated funds and Stabilization Act compensation, supplemented as necessary by borrowings and proceeds from sale and leaseback transactions. Delta has a substantial number of unencumbered aircraft available for use for potential financing transactions. We have not decided whether to apply for federal loan guarantees under the Stabilization Act.
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Based on the Business Environment (see pages 23-26 of this Form 10-Q) and our lowered credit ratings, there is no assurance that any particular source of financing will be available on terms acceptable to us.
Credit Ratings
On September 18 and 21, 2001, respectively, Moody’s and Standard & Poor’s lowered Delta’s credit ratings. In their press releases announcing the downgrades, both rating agencies discussed the negative impacts of the September 11 terrorist attacks on Delta’s business. Moody’s reduced Delta’s Issuer Rating and unsecured debt rating to Ba2 from Baa3, and also lowered the ratings of various other Delta debt instruments. Standard & Poor’s reduced Delta’s corporate credit rating, its senior secured debt rating and its senior unsecured debt rating to BB+ from BBB-. Both agencies said that Delta’s credit ratings remain on review for possible further downgrade. On October 23, 2001, Standard & Poor’s also lowered the ratings of various other Delta debt instruments.
The lowering of Delta’s credit ratings could negatively impact our ability to issue debt and to obtain certain financial instruments that we use in our fuel hedging program. It will also increase the cost of these transactions. As discussed in Note 3 of the Notes to Consolidated Financial Statements in this Form 10-Q, we may be required to repurchase outstanding receivables that we sold to a third party if our senior unsecured long-term debt is rated below Ba2 by Moody’s and below BB by Standard & Poor’s.
Enhanced Equipment Trust Certificates (EETC) Financing
On September 17, 2001, Delta issued in a public offering $1.248 billion aggregate principal amount of Pass Through Certificates, Series 2001-1 (Certificates), commonly referred to as an EETC financing, and also issued, in a private placement, $150 million principal amount of Certificates to an affiliate of Delta. This financing is secured by 36 aircraft owned by Delta. The net proceeds of this financing are available for general corporate purposes. For additional information about this issuance, see Notes 8 and 13 of the Notes to Consolidated Financial Statements in this Form 10-Q.
1997 Bank Credit Agreement
Subject to our compliance with certain conditions, we may borrow up to a total of $1.25 billion under this facility on an unsecured and revolving basis until May 1, 2002. As of September 30, 2001, $1.25 billion of borrowings were outstanding under the 1997 Bank Credit Agreement, which includes a $450 million borrowing during the September 2001 quarter. For additional information about this facility, see Note 7 of the Notes to the Consolidated Financial Statements (pages 24-26) in our Annual Report as well as Note 8 of the Notes to Consolidated Financial Statements in this Form 10-Q.
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Termination of 2001 Bank Credit Agreement
On October 31, 2001, we terminated the 2001 Bank Credit Agreement. There were no borrowings outstanding under this Agreement. For additional information about this Agreement, see Note 13 of the Notes to Consolidated Financial Statements in this Form 10-Q.
Other Matters
At its meeting on October 25, 2001, our Board of Directors declared a cash dividend of 2.5 cents per common share, payable December 1, 2001, to shareowners of record on November 7, 2001.
Delta may repurchase its common stock from time to time pursuant to the authorization described in Note 14 of the Notes to the Consolidated Financial Statements (page 32) of our Annual Report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Delta holds equity interests, including warrants and other similar rights, in certain companies, primarily priceline. Changes in the fair market value of our equity holdings could have a material impact on our earnings. For a discussion of changes in our equity interests in priceline during the September 2001 quarter, see Note 4 in the Notes to Consolidated Financial Statements in this Form 10-Q.
At September 30, 2001, the fair market value of our priceline Series B Preferred Stock was $25 million, the fair market value of our priceline 2001 Warrant was $19 million and the fair market value of our priceline Amended 1999 Warrant was $6 million. The fair market value of the warrants are primarily related to the price of the underlying common stock (see “Equity Securities Risk” on page 11 in our Annual Report for our equity risk exposure at December 31, 2000). A 10% decline in the price of priceline common stock would have had a $3 million impact on the fair market value of the warrants, which would be reflected in our non-operating earnings.
Delta is subject to price risk associated with its jet fuel purchases. We manage this risk with our fuel hedging program. At September 30, 2001, Delta held fuel hedge contracts covering 67% of our projected aircraft fuel requirements for the three months ending December 31, 2001 with an average hedge price of 59.05 cents per gallon. We do not enter into fuel hedge contracts for speculative purposes. For additional information regarding our fuel hedging program, see Note 3 of the Notes to the Consolidated Financial Statements (pages 21-22) in the Annual Report.
For additional information regarding Delta’s other exposures to market risks, see “Market Risks Associated With Financial Instruments” (pages 10-12), as well as Notes 2, 3 and 4 (pages 20-23) of the Notes to the Consolidated Financial Statements, in our Annual Report.
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[LETTERHEAD OF ARTHUR ANDERSEN LLP]REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Delta Air Lines, Inc.:
We have reviewed the accompanying consolidated balance sheet of DELTA AIR LINES, INC. (a Delaware corporation) AND SUBSIDIARIES as of September 30, 2001 and the related consolidated statements of operations for the three-month and nine-month periods ended September 30, 2001 and 2000, and the condensed consolidated statements of cash flows for the nine-month periods ended September 30, 2001 and 2000. These financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Atlanta, GeorgiaNovember 9, 2001
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PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Under the Delta Air Lines, Inc. Directors’ Deferred Compensation Plan (Plan), members of our Board of Directors may defer, for a specified period, all or any part of their cash compensation earned as a director. A participating director may choose an investment return on the deferred amount from the investment return choices available under the Delta Family-Care Savings Plan, a qualified defined contribution pension plan for eligible Delta personnel. One of the investment return choices under the Delta Family-Care Savings Plan is the Delta Common Stock Fund, a fund invested primarily in Delta’s common stock. During the quarter ended September 30, 2001, participants in the Plan deferred $11,500 in the Delta Common Stock Fund investment return choice, which is equivalent to 437 shares of Delta common stock at prevailing market prices. These transactions were not registered under the Securities Act of 1933 as amended, in reliance on Section 4(2) of that Act.
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Item 5. Other Information
Legal Proceedings
Pilot Retirement Benefits Lawsuits. During the June 2001 quarter, Delta and the Delta Pilots Retirement Plan (Retirement Plan) were named as defendants in five purported class action lawsuits filed in federal district courts in California, Massachusetts, Ohio, New Mexico and New York. The Retirement Plan is sponsored and funded by Delta. These cases, which assert claims that are substantially similar to the claims set forth in the two pilot retirement benefits lawsuits discussed on page 14 of Delta’s Form 10-K for the transition period from July 1, 2000 to December 31, 2000 (Form 10-K), (1) seek to assert claims on behalf of a class consisting of certain groups of retired and active Delta pilots; (2) allege that the calculation of the retirement benefits of the class violated the Retirement Plan and the Internal Revenue Code; and (3) seek unspecified damages. On October 31, 2001, the Judicial Panel on Multidistrict Litigation granted Delta’s motion to transfer these cases to the U.S. District Court for the Northern District of Georgia for coordinated or consolidated pretrial proceedings. Delta intends to defend these matters vigorously.
Travel Voucher Lawsuit. As discussed on page 15 of Delta’s Form 10-K, there is pending against Delta in the Circuit Court of Jackson County, Missouri a class action lawsuit on behalf of all persons who relinquished their seats on an overbooked Delta flight in exchange for a travel voucher that may be redeemed for a round-trip, economy class Delta ticket. The complaint asserts claims for fraud, breach of contract and unjust enrichment. It alleges, among other things, that Delta failed to disclose that it limits the number of seats on each flight that may be obtained by redeeming travel vouchers. The plaintiff, who has requested a jury trial, is seeking unspecified damages. On September 26, 2001, the Circuit Court (1) granted the plaintiff’s motion for class action certification; and (2) denied Delta’s motion for summary judgment. Delta intends to defend this matter vigorously.
Personnel Matters
Railway Labor Act
Delta’s relations with labor unions in the United States are governed by the Railway Labor Act. Under the Railway Labor Act, a labor union seeking to represent a craft or class of employees is required to file with the National Mediation Board (NMB) an application alleging a representation dispute, along with authorization cards signed by at least 35% of the employees in that craft or class. The NMB then investigates the dispute and, if it finds the labor union has obtained a sufficient number of authorization cards, will conduct an election to determine whether to certify the labor union as the collective bargaining representative of that craft or class. Under the NMB’s usual rules, a labor union will be certified as the representative of the employees in a craft or class only if more than 50% of those employees vote for union representation.
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Under the Railway Labor Act, a collective bargaining agreement between an airline and a labor union does not expire, but instead becomes amendable as of a stated date. Either party may request the NMB to appoint a federal mediator to participate in the negotiations. If no agreement is reached in mediation, the NMB may determine, at any time, that an impasse exists and offer binding arbitration. If either party rejects binding arbitration, a 30-day “cooling off” period begins. At the end of this 30-day period, the parties may engage in “self help,” unless the President of the United States appoints a Presidential Emergency Board (PEB) to investigate and report on the dispute. The appointment of a PEB maintains the “status quo” for an additional 60 days. If the parties do not reach agreement during this period, the parties may then engage in “self help.” “Self help” includes, among other things, a strike by the union or the imposition of proposed changes to the collective bargaining agreement by the airline.
Union Organizing Activities
The NMB has authorized an election to determine whether to certify the Association of Flight Attendants (AFA) as the collective bargaining representative of Delta’s approximately 20,000 flight attendants. The NMB will mail ballots to eligible employees on December 7, 2001, and plans to announce the results of the vote on February 1, 2002.
Labor unions are engaged in organizing efforts to represent various groups of employees of Delta who are not represented for collective bargaining purposes. The outcome of these organizing efforts, as well as the AFA representation election, cannot presently be determined.
Collective Bargaining Matters
Delta is in collective bargaining negotiations with the Transport Workers Union of America (TWU), which represents Delta’s approximately 150 pilot ground training instructors. Comair is in negotiations with the International Brotherhood of Teamsters (IBT), which represents Comair’s approximately 700 flight attendants. The NMB appointed a mediator to participate in the Delta/TWU negotiations in January 2001 and the Comair/IBT negotiations in April 2000. The outcome of these collective bargaining negotiations cannot presently be determined.
Employee Reduction Programs
On September 26, 2001, Delta announced plans to reduce staffing by up to 13,000 employee positions across all major work groups. Approximately 11,000 Delta employees elected to participate in one of Delta’s voluntary programs, which include leaves of absence, severance and a special early retirement package. Accordingly, Delta now expects that involuntary reductions will affect about 2,000 employees – up to 1,700 pilots and 300 employees from other work groups.
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On November 1, 2001, the Air Line Pilots Association, International (“ALPA”), the union representing Delta pilots, filed a grievance asserting that Delta’s plan to furlough up to 1,700 pilots is not permitted under the collective bargaining agreement between Delta and ALPA. The collective bargaining agreement generally provides that no pilot on the seniority list as of July 1, 2001 will be placed on furlough, unless the furlough is caused by a circumstance beyond Delta’s control, as defined in that agreement. In accordance with the collective bargaining agreement, the grievance will be decided by a neutral arbitrator under an expedited timetable.
Delta believes that its planned pilot furloughs are caused by a circumstance beyond Delta’s control within the meaning of the collective bargaining agreement and, therefore, that the grievance is without merit. The outcome of the grievance cannot presently be determined.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(b) Reports on Form 8-K
On September 10, 2001, Delta filed a Current Report on Form 8-K reporting, under Item 5 — Other Events and Regulation FD Disclosure, certain labor-related information.
On September 14, 2001, Delta filed a Current Report on Form 8-K reporting, under Item 5 — Other Events and Regulation FD Disclosure, potential financial implications of the terrorist attacks that occurred on September 11, 2001, and under Item 7 — Financial Statements and Exhibits, the Form T-1 Statement of Eligibility related to Delta’s offering of Pass Through Certificates.
On September 17, 2001, Delta filed a Current Report on Form 8-K reporting, under Item 5 — Other Events and Regulation FD Disclosure, that a press release had been issued related to the then anticipated closing of its Enhanced Equipment Trust Certificates (EETC) financing.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
November 13, 2001
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