1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended September 30, 1995 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 October 31, 1995: Common Stock, $3.00 par value - 51,156,963 shares outstanding
2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements DELTA AIR LINES, INC. Consolidated Balance Sheets (Unaudited) (In Millions) <TABLE> <CAPTION> September 30 June 30 ASSETS 1995 1995 - ------------------------------------------------------------------------- <S> <C> <C> CURRENT ASSETS: Cash and cash equivalents $ 1,129 $ 1,233 Short-term investments 503 529 Accounts and notes receivable, net 1,015 755 Maintenance and operating supplies 66 68 Deferred income taxes 247 234 Prepaid expenses and other 181 195 ---------- ---------- Total current assets 3,141 3,014 ---------- ---------- PROPERTY AND EQUIPMENT: Flight equipment owned 9,516 9,288 Less: Accumulated depreciation 4,288 4,209 ---------- ---------- 5,228 5,079 ---------- ---------- Flight equipment under capital leases 537 537 Less: Accumulated amortization 111 99 ---------- ---------- 426 438 ---------- ---------- Ground property and equipment 2,484 2,442 Less: Accumulated depreciation 1,401 1,354 ---------- ---------- 1,083 1,088 ---------- ---------- Advance payments for equipment 290 331 ---------- ---------- 7,027 6,936 ---------- ---------- OTHER ASSETS: Deferred income taxes 422 506 Marketable equity securities 399 398 Postemployment benefits 300 294 Cost in excess of net assets acquired, net 272 274 Non-operating property, net 148 155 Investments in associated companies 273 265 Leasehold and operating rights, net 172 177 Other 135 124 ---------- ---------- 2,121 2,193 ---------- ---------- $ 12,289 $ 12,143 ========== ========== </TABLE> The accompanying notes are an integral part of these consolidated balance sheets. 2
3 DELTA AIR LINES, INC. Consolidated Balance Sheets (Unaudited) (In Millions except Share Amounts) <TABLE> <CAPTION> September 30 June 30 LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1995 - ------------------------------------------------------------------------------------------------ <S> <C> <C> CURRENT LIABILITIES: Current maturities of long-term debt $ 150 $ 151 Current obligations under capital leases 56 61 Accounts payable and accrued liabilities 1,742 1,621 Air traffic liability 1,153 1,143 Accrued vacation pay 185 167 Accrued rent 234 235 Income taxes payable 55 63 ---------- ---------- Total current liabilities 3,575 3,441 ---------- ---------- NONCURRENT LIABILITIES: Long-term debt 2,624 2,683 Postretirement benefits 1,731 1,714 Accrued rent 557 556 Capital leases 424 438 Other 267 395 ---------- ---------- 5,603 5,786 ---------- ---------- DEFERRED CREDITS: Deferred gain on sale and leaseback transactions 845 860 Manufacturers and other credits 110 109 ---------- ---------- 955 969 ---------- ---------- COMMITMENTS AND CONTINGENCIES (Notes 5 and 7) 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 6,776,220 shares at September 30, 1995 and 6,876,632 shares at June 30, 1995 488 489 Less: Unearned compensation under employee stock ownership plan 356 369 ---------- ---------- 132 120 ---------- ---------- STOCKHOLDERS' EQUITY: Series C Convertible Preferred Stock, $1.00 par value, $50,000 liquidation preference; Issued and outstanding 22,998 shares at September 30, 1995 and 23,000 shares at June 30, 1995 - - Common stock, $3.00 par value; Authorized, 150,000,000 shares; Issued 54,825,776 shares at September 30, 1995 and 54,537,103 shares at June 30, 1995 164 164 Additional paid-in capital 2,033 2,016 Net unrealized gain on marketable equity securities 84 83 Accumulated deficit (8) (184) Less: Treasury stock at cost, 3,669,838 shares at September 30, 1995, and 3,721,093 shares at June 30, 1995 249 252 ---------- ---------- 2,024 1,827 ---------- ---------- $ 12,289 $ 12,143 ========== ========== </TABLE> The accompanying notes are an integral part of these consolidated balance sheets. 3
4 DELTA AIR LINES, INC. Consolidated Statements of Operations (Unaudited) (In Millions, except Share Data) <TABLE> <CAPTION> Three Months Ended September 30 ----------- ----------- 1995 1994 ----------- ----------- <S> <C> <C> OPERATING REVENUES: Passenger $ 2,973 $ 2,933 Cargo 129 138 Other, net 86 86 ----------- ----------- Total operating revenues 3,188 3,157 ----------- ----------- OPERATING EXPENSES: Salaries and related costs 1,037 1,138 Aircraft fuel 348 362 Passenger commissions 278 322 Contracted services 172 118 Depreciation and amortization 161 164 Other selling expenses 145 150 Aircraft rent 140 172 Facilities and other rent 113 102 Aircraft maintenance materials and outside repairs 109 111 Passenger service 104 135 Landing fees 69 73 Other 126 156 ----------- ----------- Total operating expenses 2,802 3,003 ----------- ----------- OPERATING INCOME 386 154 ----------- ----------- OTHER INCOME (EXPENSE): Interest expense (75) (76) Interest capitalized 7 7 Interest income 23 22 Gain on disposition of flight equipment 1 1 Miscellaneous, net (5) 13 ----------- ----------- (49) (33) ----------- ----------- INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 337 121 INCOME TAXES PROVIDED, NET (136) (49) ----------- ----------- NET INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 201 72 CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX - 114 ----------- ----------- NET INCOME 201 186 PREFERRED STOCK DIVIDENDS (22) (22) ----------- ----------- NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 179 $ 164 =========== =========== PRIMARY INCOME PER COMMON SHARE: Before cumulative effect of accounting change $ 3.47 $ 1.00 Cumulative effect of accounting change - 2.25 ----------- ----------- $ 3.47 $ 3.25 =========== =========== FULLY DILUTED INCOME PER COMMON SHARE: Before cumulative effect of accounting change $ 2.57 $ 0.99 Cumulative effect of accounting change - 1.43 ----------- ----------- $ 2.57 $ 2.42 =========== =========== WEIGHTED AVERAGE SHARES USED IN PER SHARE COMPUTATION: Primary 51,445,077 50,558,882 Fully Diluted 80,513,991 79,680,800 DIVIDENDS PER COMMON SHARE $ 0.05 $ 0.05 =========== =========== </TABLE> The accompanying notes are an integral part of these consolidated statements. 4
5 DELTA AIR LINES, INC. STATISTICAL SUMMARY (Unaudited) <TABLE> <CAPTION> Three Months Ended September 30 ---------- ---------- 1995 1994 ---------- ---------- <S> <C> <C> STATISTICAL SUMMARY: Revenue Passengers Enplaned 22,104,209 23,490,082 Revenue Passenger Miles (000) 22,745,151 23,652,376 Available Seat Miles (000) 33,368,027 33,563,888 Passenger Mile Yield 13.07 c. 12.40 c. Operating Revenue Per Available Seat Mile 9.55 c. 9.41 c. Operating Cost Per Available Seat Mile 8.40 c. 8.95 c. Passenger Load Factor 68.16 % 70.47 % Breakeven Passenger Load Factor 59.33 % 66.77 % Revenue Ton Miles (000) 2,614,611 2,727,032 Cargo Ton Miles (000) 338,762 360,012 Cargo Ton Mile Yield 38.10 c. 38.42 c. Fuel Gallons Consumed (000) 640,942 659,688 Average Price Per Fuel Gallon 54.32 c. 54.80 c. Number of Aircraft in Fleet at End of Period 542 544 Full-Time Equivalent Employees at End of Period 58,007 65,133 </TABLE> 5
6 DELTA AIR LINES, INC. Consolidated Statements of Cash Flows (Unaudited) (In Millions) <TABLE> <CAPTION> Three Months Ended September 30 ------------------------ 1995 1994 ------------------------ <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 201 $ 186 Adjustments to reconcile net income to cash provided by operating activities: Cumulative effect of accounting change - (114) Depreciation and amortization 161 164 Deferred income taxes 70 37 Amortization of deferred gain on sale and leaseback transactions (15) (14) Gain on disposition of flight equipment (1) (1) Rental expense less than payments - (7) Postemployment benefits expense less than payments (43) - Pension expense less than payments (13) (18) Compensation under ESOP 12 12 Postretirement benefits expense in excess of payments 17 20 Changes in certain assets and liabilities: Decrease (increase) in receivables (260) 3 Decrease in other current assets 16 7 Increase (decrease) in air traffic liability 10 (97) Increase in accounts payable and accrued liabilities 121 42 Increase in other payables 10 22 Decrease in other noncurrent liabilities (38) (17) Other, net (49) 13 ---------- ----------- Net cash provided by operating activities 199 238 ---------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Property and equipment additions: Flight equipment, including advance payments (191) (49) Ground property and equipment (51) (37) Decrease (increase) in short-term investments, net 26 (503) Proceeds from sale of flight equipment 6 68 ---------- ----------- Net cash used in investing activities (210) (521) ---------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock 14 - Payments on long-term debt and capital lease obligations (85) (215) Cash dividends (22) (22) ---------- ----------- Net cash used in financing activities (93) (237) ---------- ----------- NET DECREASE IN CASH AND CASH EQUIVALENTS (104) (520) Cash and cash equivalents at beginning of period 1,233 1,302 ---------- ----------- Cash and cash equivalents at end of period $ 1,129 $ 782 ========== =========== </TABLE> The accompanying notes are an integral part of these consolidated statements. 6
7 DELTA AIR LINES, INC. Notes to Consolidated Financial Statements September 30, 1995 (Unaudited) 1. ACCOUNTING AND REPORTING POLICIES: The Company's accounting and reporting policies are summarized in Note 1 (page 27) of the Notes to Consolidated Financial Statements in Delta's 1995 Annual Report to Stockholders. These interim financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's 1995 Annual Report to Stockholders. In the opinion of management, the accompanying unaudited financial statements reflect all adjustments, consisting of normal recurring accruals, necessary for a fair statement of results for the interim periods. 2. INVESTMENTS IN DEBT AND EQUITY SECURITIES: At September 30, 1995, the gross unrealized gain on the Company's investment in Singapore Airlines Limited was $145 million and the gross unrealized loss on the Company's investment in Swissair, Swiss Air Transport Company Ltd. was $12 million. The $84 million net unrealized gain, net of the related $49 million deferred tax provision, on these investments is reflected in stockholders' equity. Delta's other investments in available-for-sale securities are recorded as short-term investments in the Company's Consolidated Balance Sheets. The proceeds from sales of these securities during the September 1995 quarter totaled $150 million, which resulted in realized losses, computed on a specific identification basis, of less than $1 million. The amount of net unrealized losses on short-term investments reflected in stockholders' equity at September 30, 1995, was less than $1 million, net of the related tax benefit. 3. SALE OF RECEIVABLES: During fiscal 1995, Delta elected to discontinue selling new receivables under a revolving accounts receivable facility, and the Senior Certificate related to this facility, which was in the principal amount of $229 million at June 30, 1995, was reduced to $0 on August 14, 1995. This transaction was recorded as a reduction of cash from operating activities in the Company's Consolidated Statements of Cash Flows for the three months ended September 30, 1995, and an increase in accounts receivable on the Company's Consolidated Balance Sheets at September 30, 1995. For additional information regarding the sale of receivables, see Note 5 (page 30) of the Notes to Consolidated Financial Statements in Delta's 1995 Annual Report to Stockholders. 7
8 4. LONG-TERM DEBT: During the September 1995 quarter, the Company voluntarily repurchased and retired $65 million principal amount of its long-term debt. As a result of these transactions, the Company recognized a net pretax loss of $5 million during the quarter ended September 30, 1995; this amount is included in miscellaneous income (expense) in the Company's Consolidated Statements of Operations. On September 27, 1995, the Company entered into the 1995 Bank Credit Agreement, an amendment and restatement of the 1992 Bank Credit Agreement, which provides for unsecured borrowings by the Company of up to $1.25 billion on a revolving basis until September 26, 2000. 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 LIBOR 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 1995 Bank Credit Agreement contains certain negative covenants that restrict the Company's ability to grant liens, incur or guarantee debt, and 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 September 30, 1995, no borrowings were outstanding under the 1995 Bank Credit Agreement, but there is currently outstanding a letter of credit in the amount of $470 million to credit enhance the Delta Family-Care Savings Plan's 1990 Series C Guaranteed Serial ESOP Notes. The letter of credit, which is utilizing $470 million of the available commitment under the 1995 Bank Credit Agreement, covers the $290 million outstanding principal amount of the 1990 Series C Guaranteed Serial ESOP Notes, up to $148 million of Make Whole Premium Amount and approximately one year of interest on the 1990 Series C Guaranteed Serial ESOP Notes. For additional information regarding Delta's long-term debt, including the 1990 Series C Guaranteed Serial ESOP Notes, see Note 7 (page 30) of the Notes to Consolidated Financial Statements in Delta's 1995 Annual Report to Stockholders. During the three months ended September 30, 1995 and 1994, Delta made cash interest payments, net of interest capitalized, of $43 million and $44 million, respectively. 8
9 5. AIRCRAFT PURCHASE AND SALE COMMITMENTS: At September 30, 1995, the Company's aircraft fleet, purchase commitments and options were: <TABLE> <CAPTION> CURRENT FLEET AIRCRAFT TYPE OWNED LEASED TOTAL ORDERS OPTIONS ------------- ----- ------ ----- ------ ------- <S> <C> <C> <C> <C> <C> A310-300 - 3 3 - - B-727-200 106 28 134 - - B-737-200 1 53 54 - - B-737-300 - 13 13 52 56 B-757-200 45 41 86 4 36 B-767-200 15 - 15 - - B-767-300 2 24 26 - - B-767-300ER 9 7 16 5 9 L-1011-1 32 - 32 - - L-1011-200 1 - 1 - - L-1011-250 6 - 6 - - L-1011-500 17 - 17 - - MD-11 4 7 11 4 22 MD-88 63 57 120 - 30 MD-90 8 - 8 36 50 --- --- --- --- --- 309 233 542 101 203 === === === === === </TABLE> The aircraft orders include 22 B-737-300 aircraft and 13 MD-90 aircraft scheduled for delivery after fiscal 2001 and fiscal 1996 respectively, that are subject to reconfirmation by Delta. The MD-88 aircraft options may be converted to MD-90 aircraft orders, the B-737-300 aircraft orders and options may be converted to B-737-400 or B-737-500 aircraft orders, and the B-767-300ER aircraft options may be converted to B-767-300 aircraft orders, all at Delta's election. During the September 1995 quarter, Delta accepted delivery of three MD-90 aircraft, one B-767-300ER aircraft and one B-757-200 aircraft. Additionally, Delta returned six A310-300 aircraft to their lessor. 9
10 Future expenditures for aircraft, engines and engine hushkits on firm order at September 30, 1995, are estimated to be $2.7 billion, excluding aircraft orders subject to reconfirmation by Delta, as follows: <TABLE> <CAPTION> AMOUNT YEARS ENDING JUNE 30 (IN MILLIONS) -------------------- ------------- <S> <C> Nine months ending June 30, 1996 $ 330 1997 940 1998 720 1999 320 2000 190 After 2000 220 ------ Total $2,720 ====== </TABLE> 6. POSTEMPLOYMENT BENEFITS: The Company provides certain benefits to its former or inactive employees after employment but before retirement. Such benefits primarily include those related to disability and survivorship plans. Effective July 1, 1994, Delta adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" (SFAS 112), which requires recognition of the liability for postemployment benefits during the period of employment. Adoption of SFAS 112 resulted in a cumulative after-tax transition benefit of $114 million for the quarter ended September 30, 1994, primarily due to the net overfunded status of the Company's disability and survivorship plans. Future period expenses will vary based on actual claims experience and the return on plan assets. 7. 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 and could have a material adverse effect on Delta's consolidated financial condition, results of operations or liquidity, management presently believes that the resolution of these actions is not likely to have a material adverse effect on Delta's consolidated financial condition, results of operations or liquidity. 8. STOCKHOLDERS' EQUITY: During the September 1995 quarter, the Company issued 284,858 common shares, at an average price of $58.91 per share, under the 1989 Stock Incentive Plan, and 1,325 common shares, at an average price of $74.97 per share, under the Dividend Reinvestment and Stock 10
11 Purchase Plan. The Company also issued 1,274 common shares upon the conversion of 1,675 depositary shares (each of which represents 1/1,000th of a share of Series C Convertible Preferred Stock), and 1,216 common shares upon the conversion of less than $1 million principal amount of the 3.23% Convertible Subordinated Notes due 2003. Additionally, during the September 1995 quarter, the Company transferred from its treasury, at an average cost of $67.75 per share, 75,011 common shares to the Delta Family-Care Savings Plan and 42 common shares under the 1989 Stock Incentive Plan. At September 30, 1995, 5,541,375 common shares were reserved for issuance under the 1989 Stock Incentive Plan; 5,812,642 common shares were reserved for conversion of the Series B ESOP Convertible Preferred Stock; 17,489,031 common shares were reserved for conversion of the Series C Convertible Preferred Stock; and 10,147,855 common shares were reserved for conversion of the 3.23% Convertible Subordinated Notes due 2003. 9. INCOME TAXES: Income taxes are provided at the estimated annual effective tax rate, which differs from the federal statutory rate of 35%, primarily due to state income taxes and the effect of certain expenses that are not deductible for income tax purposes. The Company made tax payments in excess of refunds received of $75 million and less than $1 million during the three months ended September 30, 1995 and 1994, respectively. 11
12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations FINANCIAL CONDITION During the three months ended September 30, 1995, Delta invested $191 million in flight equipment and $51 million in ground property and equipment; made payments of $85 million on long-term debt and capital lease obligations, which included Delta's voluntary repurchase and retirement of $65 million principal amount of long-term debt; and paid $22 million in cash dividends. The principal sources of these funds were $199 million from operations, net of $229 million used to reduce to $0 the Senior Certificate related to the sale of receivables (see Note 3 of Notes to Consolidated Financial Statements); $130 million from cash reserves; $14 million from the issuance of common stock; and $6 million from the sale of flight equipment. Cash and cash equivalents and short-term investments totaled $1.6 billion at September 30, 1995, compared to $1.8 billion at June 30, 1995. The Company may repurchase additional long-term debt from time to time. As of September 30, 1995, the Company had negative working capital of $434 million, compared to negative working capital of $427 million at June 30, 1995. A negative working capital position is normal for Delta and does not indicate a lack of liquidity. The Company expects to meet its current obligations as they become due through available cash, short-term investments and internally generated funds, supplemented as necessary by debt financings and proceeds from sale and leaseback transactions. At September 30, 1995, the Company had $780 million of credit available under its 1995 Bank Credit Agreement, subject to compliance with certain conditions. For additional information, see Note 4 of the Notes to Consolidated Financial Statements. Long-term debt and capital lease obligations, including current maturities, totaled $3.3 billion at September 30, 1995 and June 30, 1995. Stockholders' equity was $2.0 billion at September 30, 1995, compared to $1.8 billion at June 30, 1995. The Company's debt-to-equity position, including current maturities was 62% debt and 38% equity at September 30, 1995, compared to 65% debt and 35% equity at June 30, 1995. At September 30, 1995, 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. The Series C ESOP Notes currently have the benefit of a credit enhancement in the form of a letter of credit in the amount of $470 million under Delta's 1995 Bank Credit Agreement. Delta is required to purchase the Series C ESOP Notes in certain circumstances. For additional information regarding the Series C ESOP Notes, see Note 7 (page 30) of the Notes to Consolidated Financial Statements in Delta's 1995 Annual Report to Stockholders. At its meeting on October 26, 1995, Delta's Board of Directors declared cash dividends of five cents per common share and $875.00 per share of Series C Convertible Preferred Stock ($0.875 per depositary share), both payable December 1, 1995, to stockholders of record on November 9, 1995. 12
13 See Part II, Item 5 of this Form 10-Q for information regarding Delta's collective bargaining negotiations with the Air Line Pilots Association and the Professional Airline Flight Control Association. 13
14 RESULTS OF OPERATIONS Three Months Ended September 30, 1995 and 1994 For the quarter ended September 30, 1995, Delta recorded unaudited net income of $179 million ($3.47 primary and $2.57 fully diluted income per common share after preferred stock dividend requirements) and operating income of $386 million. For the quarter ended September 30, 1994, the Company recorded net income of $164 million ($3.25 primary and $2.42 fully diluted income per common share after preferred stock dividend requirements) and operating income of $154 million. Net income for the September 1994 quarter includes a one-time $114 million after-tax benefit ($2.25 primary and $1.43 fully diluted benefit per common share) related to the adoption, effective July 1, 1994, of SFAS 112, "Employers' Accounting for Postemployment Benefits" (see Note 6 of Notes to Consolidated Financial Statements). The improvement in operating results for the September 1995 quarter compared to the September 1994 quarter reflects a 7% decrease in operating expenses primarily due to initiatives under the Company's Leadership 7.5 program and a 1% increase in operating revenues. Operating revenues in the September 1995 quarter totaled $3.19 billion, an increase of 1% from $3.16 billion in the September 1994 quarter. Passenger revenue increased 1% to $2.97 billion, as a 5% passenger mile yield improvement more than offset a 4% decline in revenue passenger miles. The increase in the passenger mile yield and reduction in passenger traffic are primarily due to higher average fare levels in domestic and certain international markets, an increase in full-fare traffic in certain international markets, and a 6% reduction in transatlantic operating capacity. Cargo revenue decreased 6% to $129 million, as cargo ton miles declined 6% and the ton mile yield fell less than 1%. The decrease in the cargo ton miles is due to lower cargo bin capacity related to the retirement of certain aircraft and reduced operating capacity of other aircraft. The ton mile yield decline is primarily the result of lower average domestic freight rates and a decrease in international mail contract rates. All other revenue was unchanged at $86 million. Operating expenses for the September 1995 quarter totaled $2.80 billion, down 7% from the September 1994 quarter. Operating capacity decreased less than 1% to 33.37 billion available seat miles, and operating cost per available seat mile declined 6% to 8.40 cents. Salaries and related costs decreased 9%, due to an 11% reduction in full-time equivalent employees and lower employee benefit costs. The decrease in employees was primarily due to workforce reductions under the Company's Leadership 7.5 program. Aircraft fuel expense declined 4%, as fuel gallons consumed decreased 3% and the average price per fuel gallon declined 1% to 54.32 cents, Delta's lowest average fuel price per gallon in a September quarter since 1988. Passenger commissions declined 14%, mainly due to the implementation of a maximum commission payment on domestic tickets and reductions in commission rates for certain international fares. Contracted services expense rose 46%, the result of increased outsourcing of information technologies services and certain airport functions. Aircraft rent expense decreased 19% due to the return of certain aircraft to lessors and the extension of leases on 40 B-737-200 aircraft in the June 1995 quarter which, for accounting purposes, resulted in these leases being reclassified from operating leases to capital leases. Depreciation and amortization expense decreased 2%, the result of the transfer of certain ground equipment to associated companies and certain international routes becoming fully amortized, partially offset by increased aircraft depreciation and amortization due to the extension 14
15 and reclassification of the B-737-200 aircraft leases discussed above. Other selling expenses decreased 3%, primarily due to lower advertising and promotion expense, partially offset by increased credit card service charges. Facilities and other rent increased 11%, primarily due to expanded passenger terminal facilities in certain locations. Aircraft maintenance materials and outside repairs expense declined 2%, mainly due to certain credits received and the retirement of certain engines, offset by increased engine and airframe maintenance activity. Passenger service expense decreased 23%, the result of ongoing cost control programs. Landing fees decreased 5%, mainly reflecting rate adjustments at certain airports. All other operating expenses decreased 19%, primarily reflecting lower professional and technical fees and increased revenues from services provided to outside parties during the September 1995 quarter. Nonoperating expense in the September 1995 quarter totaled $49 million, compared to nonoperating expense of $33 million in the September 1994 quarter. Interest expense decreased 1% to $75 million, due to a lower average level of long-term debt, partly offset by an increase in interest expense related to the extension and reclassification of the B-737-200 aircraft leases previously discussed. Interest income increased 5% to $23 million, primarily due to a higher level of short-term investments. Miscellaneous expense increased $18 million in the September 1995 quarter, due to foreign exchange losses and costs associated with the voluntary repurchase and retirement of long-term debt, partially offset by equity income from associated companies. Pretax income of $337 million for the September 1995 quarter resulted in an income tax provision of $136 million. After a $22 million provision for preferred stock dividends, net income available to common stockholders was $179 million. 15
16 ARTHUR ANDERSEN LLP REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and the Board of Directors of 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, 1995, and the related consolidated statements of operations and cash flows for the three month periods ended September 30, 1995 and 1994. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Delta Air Lines, Inc. and Subsidiaries as of June 30, 1995 (not presented herein), and in our report dated August 18, 1995, we expressed an unqualified opinion on that balance sheet. In our opinion, the information set forth in the accompanying consolidated balance sheet as of June 30, 1995 is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. Arthur Andersen LLP Atlanta, Georgia November 10, 1995 16
17 PART II. OTHER INFORMATION Item 1. Legal Proceedings Litigation Relating to Delta's Participation in Pan Am's Plan of Reorganization As reported on pages 12-13 of Delta's Annual Report on Form 10-K for the fiscal year ended June 30, 1995 (1995 Form 10-K), there were pending in the United States District Court for the Southern District of New York two separate lawsuits filed against Delta by former Pan Am employees who alleged, among other things, that they were intended third party beneficiaries of Delta's agreement with Pan Am to participate in Pan Am's proposed plan of reorganization. In October 1995, Delta, the plaintiffs and the third party defendants entered into a stipulation of settlement and dismissal with respect to each of these lawsuits. As a result, these actions were dismissed. Travel Agency Commission Antitrust Litigation As reported on page 16 of the 1995 Form 10-K, travel agents and a travel agency trade association have filed more than 30 class action antitrust lawsuits in various federal district courts against various airlines, including Delta, that implemented new travel agent commission cap programs. These cases have been consolidated for pretrial proceedings before the United States District Court in Minneapolis which, on September 27, 1995, denied a motion by the airline defendants to permit an immediate appeal of the District Court's ruling denying the airlines' motions for summary judgment. The jury trial of these actions has not yet been scheduled. 17
18 Item 4. Submission of Matters to a Vote of Security Holders At Delta's Annual Meeting of Stockholders held on October 26, 1995, the holders of Delta's Common Stock and Series B ESOP Convertible Preferred Stock, voting together as a single class, took the following actions: 1. Elected the persons named below to Delta's Board of Directors by the following vote: <TABLE> <CAPTION> FOR WITHHELD --- -------- <S> <C> <C> Ronald W. Allen 49,523,052 3,261,402 Edwin L. Artzt 50,910,338 1,874,116 Henry A. Biedenharn, III 50,922,082 1,862,372 James L. Broadhead 50,831,114 1,953,340 Edward H. Budd 50,928,257 1,856,197 George D. Busbee 50,796,028 1,988,426 R. Eugene Cartledge 50,882,962 1,901,492 Mary Johnston Evans 50,867,429 1,917,025 Gerald Grinstein 50,824,164 1,960,290 Jesse Hill, Jr. 50,883,356 1,901,098 Peter D. Sutherland 50,888,953 1,895,501 Andrew J. Young 50,482,182 2,302,272 </TABLE> There were no broker non-votes on this matter. 2. Ratified the appointment of Arthur Andersen LLP as independent auditors of Delta for fiscal year 1996 by a vote of 51,796,271 FOR; 789,333 AGAINST; and 198,850 ABSTENTIONS. There were no broker non-votes on this matter. 3. Approved the Delta Air Lines, Inc. Non-employee Directors' Stock Plan by a vote of 49,411,512 FOR; 2,955,512 AGAINST; and 417,430 ABSTENTIONS. There were no broker non-votes on this matter. 4. Defeated a stockholder proposal relating to political activities by the Company by a vote of 2,173,686 FOR; 44,624,004 AGAINST; and 2,392,131 ABSTENTIONS. There were 3,594,633 broker non-votes on this matter. 5. Defeated a stockholder proposal relating to Company employment matters by a vote of 2,196,630 FOR; 43,509,764 AGAINST; and 3,483,426 ABSTENTIONS. There were 3,594,634 broker non-votes on this matter. 18
19 Item 5. Other Information Personnel Delta's collective bargaining agreements with the Air Line Pilots Association ("ALPA") and the Professional Airline Flight Control Association ("PAFCA") became amendable on January 1, 1995, and formal negotiations with ALPA and PAFCA began in November 1994. ALPA and PAFCA represent approximately 8,100 pilots and 170 flight superintendents, respectively. The outcome of Delta's negotiations with ALPA and PAFCA cannot presently be determined. For additional information regarding these negotiations, see pages 7-8 of the 1995 Form 10-K. 19
20 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 4. Second Amended and Restated Credit Agreement dated as of September 27, 1995 by and among Delta, Certain Banks and NationsBank of Georgia, National Association, as Agent Bank. 11. Statement regarding computation of per share earnings. 12. Statement regarding computation of ratio of earnings to fixed charges. 15. Letter from Arthur Andersen LLP regarding unaudited interim financial information. 27. Financial Data Schedule. (for SEC use only) (b) Reports on Form 8-K: During the quarter ended September 30, 1995, Delta did not file any Current Reports on Form 8-K. 20
21 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Delta Air Lines, Inc. ------------------------------------ (Registrant) By: /s/ Thomas J. Roeck, Jr. --------------------------------- Thomas J. Roeck, Jr. Senior Vice President - Finance and Chief Financial Officer November 14, 1995 - ----------------- (Date) 21