<PAGE> 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 March 31, 1998
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 April 30, 1998:
Common Stock, $3.00 par value - 75,746,250 shares outstanding
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DELTA AIR LINES, INC.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
March 31 June 30
ASSETS 1998 1997
- --------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 986 $ 662
Short-term investments 504 508
Accounts receivable, net of allowance for uncollectible accounts
of $50 at March 31, 1998 and $48 at June 30, 1997 970 943
Maintenance and operating supplies, at average cost 92 93
Deferred income taxes 478 413
Prepaid expenses and other 221 248
------- -------
Total current assets 3,251 2,867
------- -------
PROPERTY AND EQUIPMENT:
Flight equipment 10,650 9,619
Less: Accumulated depreciation 3,791 3,510
------- -------
6,859 6,109
------- -------
Flight equipment under capital leases 515 523
Less: Accumulated amortization 204 176
------- -------
311 347
------- -------
Ground property and equipment 3,265 3,032
Less: Accumulated depreciation 1,948 1,758
------- -------
1,317 1,274
------- -------
Advance payments for equipment 363 312
------- -------
Total property and equipment 8,850 8,042
------- -------
OTHER ASSETS:
Marketable equity securities 454 432
Deferred income taxes -- 103
Investments in associated companies 324 317
Cost in excess of net assets acquired, net 250 257
Leasehold and operating rights, net 126 134
Other 615 589
------- -------
Total other assets 1,769 1,832
------- -------
Total assets $13,870 $12,741
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
2
<PAGE> 3
DELTA AIR LINES, INC.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
March 31 June 30
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
- -------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt $ 85 $ 236
Current obligations under capital leases 67 62
Accounts payable and miscellaneous accrued liabilities 2,102 1,691
Air traffic liability 1,540 1,418
Accrued salaries and vacation pay 514 463
Accrued rent 169 213
-------- --------
Total current liabilities 4,477 4,083
-------- --------
NONCURRENT LIABILITIES:
Long-term debt 1,408 1,475
Postretirement benefits 1,875 1,839
Accrued rent 636 602
Capital leases 263 322
Deferred income taxes 121 --
Other 463 406
-------- --------
Total noncurrent liabilities 4,766 4,644
-------- --------
DEFERRED CREDITS:
Deferred gain on sale and leaseback transactions 707 746
Manufacturers' and other credits 58 105
-------- --------
Total deferred credits 765 851
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 3 and 4)
EMPLOYEE STOCK OWNERSHIP PLAN
PREFERRED STOCK:
Series B ESOP Convertible Preferred Stock (issued and outstanding
6,618,345 shares at March 31, 1998 and 6,668,248 shares at
June 30, 1997) 476 480
Unearned compensation under
employee stock ownership plan (300) (324)
-------- --------
176 156
-------- --------
SHAREHOLDERS' EQUITY:
Common Stock at par (total shares issued: 87,658,395 shares at
March 31, 1998 and 83,645,047 shares at June 30, 1997) 263 251
Additional paid-in capital 2,945 2,645
Net unrealized gain on noncurrent marketable equity securities 107 101
Retained earnings 1,327 711
Treasury stock at cost (12,236,543 shares at March 31, 1998
and 9,949,060 shares at June 30, 1997) (956) (701)
-------- --------
Total shareholders' equity 3,686 3,007
-------- --------
Total liabilities and shareholders' equity $ 13,870 $ 12,741
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
3
<PAGE> 4
DELTA AIR LINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31 MARCH 31
----------------------------- ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Passenger $ 3,118 $ 3,160 $ 9,504 $ 9,255
Cargo 138 142 441 411
Other, net 133 118 429 383
------------ ------------ ------------ ------------
Total operating revenues 3,389 3,420 10,374 10,049
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Salaries and related costs 1,179 1,118 3,532 3,317
Aircraft fuel 342 444 1,160 1,326
Passenger commissions 229 250 729 765
Depreciation and amortization 218 180 627 520
Contracted services 212 179 629 560
Other selling expenses 172 172 506 500
Aircraft rent 137 136 411 410
Aircraft maintenance materials and outside repairs 126 106 376 317
Passenger service 107 92 324 291
Facilities and other rent 99 99 298 290
Landing fees 58 63 177 189
Restructuring and other non-recurring charges -- 52 -- 52
Other 174 183 506 501
------------ ------------ ------------ ------------
Total operating expenses 3,053 3,074 9,275 9,038
------------ ------------ ------------ ------------
OPERATING INCOME 336 346 1,099 1,011
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (44) (52) (143) (158)
Interest capitalized 10 9 29 25
Interest income 17 12 56 47
Miscellaneous income (expense), net 3 2 12 (5)
------------ ------------ ------------ ------------
(14) (29) (46) (91)
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 322 317 1,053 920
INCOME TAXES PROVIDED (127) (128) (414) (368)
------------ ------------ ------------ ------------
NET INCOME 195 189 639 552
PREFERRED STOCK DIVIDENDS (2) (2) (8) (6)
------------ ------------ ------------ ------------
NET INCOME AVAILABLE TO COMMON
SHAREHOLDERS $ 193 $ 187 $ 631 $ 546
============ ============ ============ ============
BASIC INCOME PER COMMON SHARE $ 2.57 $ 2.56 $ 8.49 $ 7.34
============ ============ ============ ============
DILUTED INCOME PER COMMON SHARE $ 2.45 $ 2.47 $ 8.12 $ 7.12
============ ============ ============ ============
WEIGHTED AVERAGE SHARES USED IN
PER SHARE COMPUTATION:
Basic 74,997,024 73,215,279 74,314,110 74,454,566
Diluted 79,545,776 76,050,341 78,295,354 77,101,551
DIVIDENDS PER COMMON SHARE $ 0.05 $ 0.05 $ 0.15 $ 0.15
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE> 5
DELTA AIR LINES, INC.
STATISTICAL SUMMARY
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31 MARCH 31
-------------------------------- -----------------------------------
STATISTICAL SUMMARY: 1998 1997 1998 1997
-------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenue Passengers Enplaned (thousands) 24,593 24,599 76,586 74,506
Revenue Passenger Miles (millions) 23,376 23,199 74,104 71,998
Available Seat Miles (millions) 34,041 33,688 104,632 102,269
Operating Margin 9.9% 10.1% 10.6% 10.1%
Operating Margin - Excluding Restructuring and
Other Non-Recurring Charges 9.9% 11.6% 10.6% 10.6%
Passenger Mile Yield 13.34(cent) 13.62(cent) 12.83(cent) 12.85(cent)
Operating Revenue Per Available Seat Mile 9.96(cent) 10.15(cent) 9.91(cent) 9.83(cent)
Operating Cost Per Available Seat Mile 8.97(cent) 9.12(cent) 8.86(cent) 8.84(cent)
Operating Cost Per Available Seat Mile - Excluding
Restructuring and Other Non-Recurring Charges 8.97(cent) 8.97(cent) 8.86(cent) 8.79(cent)
Passenger Load Factor 68.67% 68.86% 70.82% 70.40%
Breakeven Passenger Load Factor 61.28% 61.32% 62.64% 62.71%
Breakeven Passenger Load Factor - Excluding
Restructuring and Other Non-Recurring Charges 61.28% 60.19% 62.64% 62.32%
Revenue Ton Miles (millions) 2,764 2,706 8,721 8,326
Cargo Ton Miles (millions) 427 386 1,311 1,126
Cargo Ton Mile Yield 32.34(cent) 36.84(cent) 33.62(cent) 36.49(cent)
Fuel Gallons Consumed (millions) 644 636 1,985 1,943
Average Price Per Fuel Gallon 53.16(cent) 69.93(cent) 58.41(cent) 68.27(cent)
Number of Aircraft in Fleet at End of Period 561 549 561 549
Full-Time Equivalent Employees at End of Period 66,762 62,141 66,762 62,141
</TABLE>
5
<PAGE> 6
DELTA AIR LINES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
Nine Months Ended
March 31
1998 1997
------- -------
<S> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES:
Net Income 639 552
Adjustments to reconcile net income to cash
provided by operating activities, net 884 511
Restructuring and other non-recurring charges -- 52
Changes in certain assets and liabilities, net 528 204
------- -------
Net cash provided by operating activities 2,051 1,319
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions:
Flight equipment, including advance payments (1,234) (1,154)
Ground property and equipment (229) (211)
Decrease in short-term investments, net 9 105
Proceeds from sale of flight equipment 8 6
------- -------
Net cash used in investing activities (1,446) (1,254)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 276 17
Repurchase of common stock (258) (379)
Payments on long-term debt and capital lease obligations (273) (140)
Cash dividends (26) (26)
------- -------
Net cash used in financing activities (281) (528)
------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 324 (463)
Cash and cash equivalents at beginning of period 662 1,145
------- -------
Cash and cash equivalents at end of period 986 682
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 117 $ 135
Income taxes $ 180 $ 221
Non-cash activities:
Capital lease obligations incurred $ -- $ 6
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
6
<PAGE> 7
DELTA AIR LINES, INC.
Notes to Consolidated Financial Statements
March 31, 1998
(Unaudited)
1. ACCOUNTING AND REPORTING POLICIES:
The Company's accounting and reporting policies are summarized in Note
1 (page 33) of the Notes to Consolidated Financial Statements in
Delta's 1997 Annual Report to Shareholders. These interim financial
statements should be read in conjunction with the financial statements
and the notes thereto included in the Company's 1997 Annual Report to
Shareholders. In the opinion of management, the accompanying unaudited
financial statements reflect all adjustments, consisting of normal
recurring adjustments, necessary for a fair statement of results for
the interim periods. Certain prior year amounts have been reclassified
to conform with the current financial statement presentation.
2. LONG-TERM DEBT:
The 1997 Bank Credit Agreement provides for unsecured borrowings by the
Company of up to $1.25 billion on a revolving basis until May 1, 2002,
subject to certain conditions. Up to $700 million of this facility may
be used for the issuance of letters of credit. The interest rate under
this facility is, at the Company's option, the LIBOR or the prime rate,
in each case plus a margin which is subject to adjustment based on
certain changes in the credit ratings of the Company's long-term senior
unsecured debt. The Company also has the option to obtain loans through
a competitive bid procedure. The 1997 Bank Credit Agreement contains
certain negative covenants that limit 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 March 31, 1998, no
borrowings or letters of credit were outstanding under the 1997 Bank
Credit Agreement.
The Company's credit agreement with ABN AMRO Bank, N.V. and a group of
banks (Letter of Credit Facility) provides for the issuance of letters
of credit for up to $500 million in stated amount to credit enhance the
Delta Family-Care Savings Plan's Series C Guaranteed Serial ESOP Notes
(Series C ESOP Notes), which are guaranteed by Delta. At March 31,
1998, the face amount of the letter of credit under the Letter of
Credit Facility was $450 million, which covers $290 million outstanding
principal amount of the Series C ESOP Notes, up to $128 million of Make
Whole Premium Amount and approximately one year of interest on the
Series C ESOP Notes. For additional information regarding Delta's
long-term debt, including the Series C ESOP Notes, see Note 7 (page 38)
of the Notes to Consolidated Financial Statements in Delta's 1997
Annual Report to Shareholders.
7
<PAGE> 8
3. AIRCRAFT PURCHASE COMMITMENTS:
At March 31, 1998, the Company's aircraft fleet, purchase commitments,
options (which have scheduled delivery slots), and rolling options (which
replace options and are assigned delivery slots as options expire or are
exercised) were:
<TABLE>
<CAPTION>
Current Fleet
-----------------------------------------
Rolling
Aircraft Type Owned Leased Total Orders Options Options
------------------------ ----------- ------------ ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
B-727-200 121 10 131 - - -
B-737-200 1 53 54 - - -
B-737-300 - 16 16 - - -
B-737-600/700/800 - - - 70 60 280
B-757-200 50 41 91 11 20 88
B-767-200 15 - 15 - - -
B-767-300 2 24 26 2 - -
B-767-300ER 28 7 35 12 10 19
B-767-400 - - - 21 24 25
B-777-200 - - - 12 20 30
L-1011-1 21 - 21 - - -
L-1011-250 6 - 6 - - -
L-1011-500 15 - 15 - - -
MD-11 8 7 15 - - -
MD-88 63 57 120 - - -
MD-90 16 - 16 - - -
=========== ============ ============ =========== ========== ===========
Total 346 215 561 128 134 442
=========== ============ ============ =========== ========== ===========
</TABLE>
During the March 1998 quarter, Delta purchased three B-727-200 aircraft
which it had been operating under leases, acquired under operating lease
agreements three B-737-300 aircraft, and took delivery of two new
B-767-300ER aircraft and one new MD-11 aircraft. The Company retired two
L-1011-1 aircraft and two L-1011-500 aircraft during the March 1998
quarter.
Also during the March 1998 quarter, Delta exercised options to purchase
two 757-200 aircraft, entered into an agreement with Boeing to purchase
two additional B-777-200 aircraft, and exercised options to purchase
seven shipsets of Stage 3 heavyweight hushkits for B-737-200 aircraft.
Subsequent to March 31, 1998, Delta took delivery of two new B-767-300ER
aircraft and one new B-757-200 aircraft.
8
<PAGE> 9
Future expenditures for aircraft, engines and engine hushkits on firm
order at March 31, 1998 are estimated to be $5.91 billion, as follows:
<TABLE>
<CAPTION>
Amounts
Years Ending June 30 (In Millions)
--------------------- ------------
<S> <C>
Remainder of fiscal year 1998 $ 360
1999 1,270
2000 890
2001 1,600
2002 300
After 2002 1,490
------------
Total $ 5,910
============
</TABLE>
4. CONTINGENCIES:
Delta is a defendant in certain legal actions relating to alleged
employment discrimination practices, antitrust matters, environmental
issues and other matters concerning Delta's business. Although the
ultimate outcome of these matters cannot be predicted with certainty,
management presently believes that the resolution of these actions is
not likely to have a material adverse effect on Delta's consolidated
financial condition or results of operations.
5. SHAREHOLDERS' EQUITY:
During the nine months ended March 31, 1998, the Company issued
3,593,602 common shares under its broad-based employee stock option
plans, and a total of 419,746 common shares under its 1989 Stock
Incentive and Dividend Reinvestment and Stock Purchase Plans. In
addition, the Company distributed a total of 46,529 common shares from
treasury under its 1989 Stock Incentive Plan. During the nine months
ended March 31, 1998, the Company repurchased 2,334,012 common shares.
For additional information regarding Delta's common stock repurchase
program, see Note 15 (page 46) of the Notes to Consolidated Financial
Statements in Delta's 1997 Annual Report to Shareholders.
At March 31, 1998, 21,106,398 common shares were reserved for issuance
under the Company's broad-based employee stock option plans; 7,723,474
common shares were reserved for issuance under the 1989 Stock Incentive
Plan; 5,677,216 common shares were reserved for conversion of the Series
B ESOP Convertible Preferred Stock; and 248,344 common shares were
reserved for issuance under the Non-Employee Directors' Stock Plan.
6. 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. Deferred income taxes reflect the
net effect of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts
used for income tax purposes.
9
<PAGE> 10
7. RESTRUCTURING AND OTHER NON-RECURRING CHARGES:
The following table reflects the activity in the restructuring accruals
during the three months ended March 31, 1998 related to restructuring
charges recorded in prior fiscal years (see Note 16 on page 46 of the
Notes to Consolidated Financial Statements in the Company's 1997 Annual
Report to Shareholders). All reductions in reserves represent payments
of liabilities.
<TABLE>
<CAPTION>
Balance at Balance at
December 31, 1997 Reductions March 31, 1998
---------------------- --------------------- --------------------------
(In Millions)
<S> <C> <C> <C>
Leadership 7.5
Workforce Reductions $ 4 $ 1 $ 3
Abandoned Facilities 36 1 35
Transatlantic and
European Realignment
Abandoned Facilities 2 1 1
Other 1 1 -
---- --- ----
Totals $ 43 $ 4 $ 39
==== === ====
</TABLE>
10
<PAGE> 11
8. INCOME PER SHARE:
The following table shows a reconciliation of the numerator (net income)
and the denominator (average shares outstanding) used in computing basic
and diluted income per share for the three and nine months ended March
31, 1998 and March 31, 1997 (restated in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share" - SFAS
128), respectively. Application of SFAS 128 did not have a material
effect on previously reported income per share amounts for the three and
nine month periods ended March 31, 1997.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31 March 31
-------------------- --------------------
1998 1997 1998 1997
------- ------- ------- -------
(In Millions, except per share data)
BASIC:
<S> <C> <C> <C> <C>
Net income $ 195 $ 189 $ 639 $ 552
Dividends on Series B ESOP
convertible preferred stock (2) (2) (8) (6)
------- ------- ------- -------
Income available to common
shareholders $ 193 $ 187 $ 631 $ 546
Weighted average shares outstanding 75.0 73.2 74.3 74.5
Basic income per common share $ 2.57 $ 2.56 $ 8.49 $ 7.34
======= ======= ======= =======
DILUTED:
Net income $ 195 $ 189 $ 639 $ 552
Adjustment to net income
assuming conversion of Series B ESOP
convertible preferred stock (1) (1) (3) (4)
------- ------- ------- -------
Income available to common
shareholders $ 194 $ 188 $ 636 $ 548
Weighted average shares outstanding 75.0 73.2 74.3 74.5
Additional shares assuming:
Conversion of Series C convertible
preferred stock -- -- -- 0.3
Conversion of Series B ESOP
convertible preferred stock 2.1 1.9 2.1 1.9
Exercise of stock options 2.4 1.0 1.9 0.4
------- ------- ------- -------
Average shares outstanding as adjusted 79.5 76.1 78.3 77.1
Diluted income per common share $ 2.45 $ 2.47 $ 8.12 $ 7.12
======= ======= ======= =======
</TABLE>
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
Cash and cash equivalents and short-term investments totaled $1.49 billion at
March 31, 1998, compared to $1.17 billion at June 30, 1997. During the nine
months ended March 31, 1998, the principal sources of funds were $2.05 billion
of cash from operations and $276 million from the issuance of 4,013,348 common
shares, primarily under the Company's broad-based employee stock option plans.
During the nine months ended March 31, 1998, the Company invested $1.23 billion
in flight equipment and $229 million in ground property and equipment; made
payments of $273 million on long-term debt and capital lease obligations; paid
$258 million to repurchase 2,334,012 common shares; and paid $26 million in cash
dividends. Future expenditures for aircraft, engines and engine hushkits on firm
order at March 31, 1998 are estimated to be $5.91 billion. The Company may
repurchase its long-term debt and common stock from time to time. For additional
information regarding Delta's common stock repurchase program, see Note 15 (page
46) of the Notes to Consolidated Financial Statements in Delta's 1997 Annual
Report to Shareholders.
As of March 31, 1998, the Company had negative working capital of $1.23 billion,
compared to negative working capital of $1.22 billion at June 30, 1997. 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 or equity financing and
proceeds from sale and leaseback transactions.
At March 31, 1998, long-term debt and capital lease obligations, including
current maturities, totaled $1.82 billion, compared to $2.10 billion at June 30,
1997. Shareholders' equity was $3.69 billion at March 31, 1998 and $3.01 billion
at June 30, 1997. The Company's debt-to-equity position, including current
maturities, was 33% debt and 67% equity at March 31, 1998, compared to 41% debt
and 59% equity at June 30, 1997.
At March 31, 1998, there was outstanding $290 million principal amount of the
Delta Family-Care Savings Plan's Series C Guaranteed Serial ESOP Notes (Series C
ESOP Notes), which are guaranteed by Delta. 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 $450 million under Delta's Credit Agreement with ABN AMRO Bank and
a group of banks (Letter of Credit Facility). Delta is required to purchase the
Series C ESOP Notes in certain circumstances. For additional information
regarding the Series C ESOP Notes and the Letter of Credit Facility, see Note 7
(page 38) of the Notes to Consolidated Financial Statements in Delta's 1997
Annual Report to Shareholders.
At March 31, 1998, the Company had $1.25 billion of credit available on a
revolving basis under its 1997 Bank Credit Agreement, subject to certain
conditions. Up to $700 million of this facility may be used for the issuance of
letters of credit. At March 31, 1998, no borrowings or letters of credit were
outstanding under the 1997 Bank Credit Agreement. See Note 2 of the Notes to
Consolidated Financial Statements in this Form 10-Q for additional information
regarding the 1997 Bank Credit Agreement.
12
<PAGE> 13
At its meeting on April 23, 1998, Delta's Board of Directors declared a cash
dividend of five cents per common share, payable June 1, 1998, to shareholders
of record on May 13, 1998.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 and 1997
For the quarter ended March 31, 1998, Delta recorded unaudited operating income
of $336 million and net income of $195 million. For the quarter ended March 31,
1997, Delta recorded operating income of $346 million and net income of $189
million. The Company's operating margin (operating income divided by operating
revenue) for the quarter ended March 31, 1998 was 9.9% compared to 10.1% for the
quarter ended March 31, 1997. The results for the March 1997 quarter include
pre-tax restructuring and other non-recurring charges of $52 million related to
the realignment of Delta's transatlantic and European operations. Excluding the
restructuring and other non-recurring charges, the Company recorded operating
income of $398 million, net income of $221 million, and an operating margin of
11.6% for the quarter ended March 31, 1997.
Operating revenues in the March 1998 quarter totaled $3.39 billion, a decrease
of 1% from $3.42 billion in the March 1997 quarter. Passenger revenue decreased
1% to $3.12 billion, the result of a 2% decline in passenger mile yield
partially offset by a 1% increase in revenue passenger miles. These results
reflect the benefits received by the Company during the March 1997 quarter from
the temporary expiration of the U.S. transportation excise tax and the
threatened pilot strike at American Airlines, as well as the increased presence
during the March 1998 quarter of low-cost, low-fare carriers in domestic markets
served by Delta. A domestic fare increase implemented during the September 1997
quarter and favorable economic conditions mitigated the passenger mile yield
decline. The increase in revenue passenger miles is due to a 1% increase in
capacity, favorable economic conditions and improved asset utilization.
Cargo revenue decreased 3% to $138 million. Cargo ton miles increased 11%, while
cargo ton mile yield decreased 12%. The increase in cargo ton miles is mainly
due to increased European imports and an increase in the average stage length
related to freight shipments, partially offset by reduced mail volume as a
result of the U.S. Postal Service's shifting of certain business from major air
carriers to ground service and dedicated air-freight carriers. The decrease in
cargo ton mile yield is primarily due to an increase in the average stage length
related to freight shipments. All other revenue, net, increased 13% to $133
million, largely due to increased administrative service charge revenues.
Operating expenses for the March 1998 quarter totaled $3.05 billion, a decrease
of 1% from the March 1997 quarter. Excluding restructuring and other
non-recurring charges in the March 1997 quarter, operating expenses increased
1%. Operating capacity increased 1% to 34.04 billion available seat miles.
Salaries and related costs increased 5%, largely due to a 7% increase in
full-time equivalent employees and compensation and benefit enhancements for
non-contract domestic employees, which became effective July 1, 1997. Aircraft
fuel expense decreased 23% as the average fuel price per gallon decreased 24% to
53.16 cents, partially offset by a 1% increase in fuel gallons consumed.
Passenger commissions decreased 8%, due to a lower commission rate structure
implemented during the September 1997 quarter. Depreciation and amortization
expense
13
<PAGE> 14
rose 21% due to the acquisition of additional flight equipment and increased
amortization of software development costs. Contracted services expense rose
18%, primarily due to higher information technology costs, as well as increased
building and equipment maintenance costs. Aircraft maintenance materials and
outside repairs increased 19% due to the timing of scheduled maintenance visits,
costs associated with interior modifications and service initiatives, and other
costs associated with the maturation of the fleet. Passenger service expense
increased 16%, largely due to on-board service enhancements. Landing fees
decreased 8% due to landing fee credits and the realignment of certain
international routes. Other operating expenses decreased 5%, primarily due to
lower insurance costs.
Nonoperating expense in the March 1998 quarter totaled $14 million, compared to
nonoperating expense of $29 million in the March 1997 quarter. The reduction in
nonoperating expense is primarily due to reduced interest expense resulting from
lower levels of debt outstanding and an increase in interest income due to
higher average levels of short-term investments.
Pretax income of $322 million for the March 1998 quarter resulted in an income
tax provision of $127 million. After a $2 million provision for preferred stock
dividends, net income available to common shareholders was $193 million.
Nine Months Ended March 31, 1998 and 1997
For the nine months ended March 31, 1998, Delta recorded unaudited operating
income of $1.10 billion and net income of $639 million. For the nine months
ended March 31, 1997, Delta recorded operating income of $1.01 billion and net
income of $552 million. Operating margin for the nine months ended March 31,
1998 was 10.6%, compared to 10.1% for the nine months ended March 31, 1997.
Excluding restructuring and other non-recurring charges of $52 million in the
nine months ended March 31, 1997, the Company recorded operating income of $1.06
billion, net income of $584 million, and an operating margin of 10.6% for that
period.
Operating revenue for the nine months ended March 31, 1998 totaled $10.37
billion, an increase of 3% from $10.05 billion for the nine months ended March
31, 1997. Passenger revenue increased 3% to $9.50 billion for the nine months
ended March 31, 1998, reflecting a 3% increase in revenue passenger miles,
partially offset by a less than one percent decline in passenger mile yield. The
increase in revenue passenger miles is mainly due to a 2% increase in capacity,
favorable economic conditions, and improved asset utilization. The decrease in
passenger mile yield reflects the benefits received by the Company during the
March 1997 quarter from the temporary expiration of the U.S. transportation
excise tax and the increased presence during the nine months ended March 31,
1998 of low-cost, low-fare carriers in domestic markets served by Delta, mostly
offset by a domestic fare increase implemented during the September 1997 quarter
and favorable economic conditions.
Cargo revenue increased 7% to $441 million. Cargo ton miles increased 16%, while
cargo ton mile yield decreased 8%. The increase in cargo ton miles is mainly due
to increased European imports and an increase in the average stage length
related to freight shipments, partially offset by reduced mail volume as a
result of the U.S. Postal Service's shifting of certain business from
14
<PAGE> 15
major air carriers to ground service and dedicated air-freight carriers. The
decrease in cargo ton mile yield is primarily due to an increase in the average
stage length related to freight shipments. All other revenue, net increased 12%
to $429 million, primarily due to increased administrative service charge
revenues.
Operating expenses for the nine months ended March 31, 1998 totaled $9.28
billion, an increase of 3% compared to the nine months ended March 31, 1997.
Operating capacity increased 2% to 104.63 billion available seat miles. Salaries
and related costs increased 6%, due to a 7% increase in full-time equivalent
employees and compensation and benefit enhancements for non-contract domestic
employees, which became effective July 1, 1997. Aircraft fuel expense decreased
13% as the average fuel price per gallon decreased 14% to 58.41 cents. Passenger
commissions decreased 5%, largely due to a lower commission rate structure
implemented during the September 1997 quarter. Depreciation and amortization
increased 21% due to the acquisition of additional flight equipment and
increased amortization of software development costs. Contract services expense
increased 12%, largely due to higher information technology costs as well as
building and equipment maintenance costs. Aircraft maintenance materials and
outside repairs increased 19%, due to the timing of scheduled maintenance
visits, costs associated with interior modifications and service initiatives,
and other costs associated with the maturation of the fleet. Passenger service
expense rose 11% due to on-board service enhancements and increased passenger
traffic. Landing fees decreased 6% due to landing fee credits and the
realignment of certain international routes. Other operating expenses increased
1% due to increased professional fees and supplies, mostly offset by lower
insurance costs.
Nonoperating expense for the nine months ended March 31, 1998 totaled $46
million compared to nonoperating expense of $91 million for the nine months
ended March 31, 1997. The decrease in nonoperating expense is largely due to the
inclusion in the nine month period ended March 31, 1997 of a $20 million payment
to settle certain class action antitrust lawsuits filed by travel agents and $8
million in losses related to the voluntary repurchase and retirement of certain
long-term debt. Higher interest income and lower interest expense also
contributed to the decrease in non-operating expense.
Pretax income of $1.05 billion for the nine months ended March 31, 1998 resulted
in an income tax provision of $414 million. Net income available to common
shareholders was $631 million after an $8 million provision for preferred stock
dividends.
OUTLOOK
Year 2000 Computer Issue
Many computer systems in use today were designed and developed using two digits,
rather than four, to specify the year. As a result, such systems will recognize
the year 2000 as the year 1900. This could cause many computer applications to
fail completely or create erroneous results unless corrective measures are
taken.
The Company utilizes software and related computer technologies essential to its
business that will be affected by the Year 2000 issue. Delta has implemented a
Year 2000 program to identify and remediate its internal information technology
and other operating systems and equipment affected by a two digit date field.
This program consists of four phases: (1) identification, (2) assessment
(including prioritization), (3) remediation and (4) testing.
15
<PAGE> 16
The Company has completed the identification and assessment stages for certain
of its internal information technology systems, and estimates that the total
cost of achieving Year 2000 readiness for those systems is between
approximately $110 million to $125 million. This estimate, however, does not
include the cost of the Year 2000 program for the Company's other internal
operating systems and equipment such as aircraft avionics, flight simulators
and certain airport operating systems because the Company is currently in the
assessment phase relating to these systems and equipment. Accordingly, the
cost of the Year 2000 program for these items cannot presently be determined.
The Company expects to complete the assessment of these other operating systems
and equipment in June 1998. Delta expects that a significant, though as yet
undetermined, amount of the total cost of the Year 2000 program will be
accomplished by redeploying existing resources. Delta expects that its Year
2000 program will be completed in a timely manner.
The Company is also assessing Year 2000 issues concerning its relationships with
third parties on which Delta relies, including key business partners, the
Federal Aviation Administration, the U.S. Department of Transportation, airport
authorities, and suppliers. As a part of this assessment, the Company is
involved in industry Year 2000 review efforts led by the Airline Transport
Association and the International Air Transport Association. There can be no
assurance that the systems of third parties on which Delta relies will be Year
2000 ready in a timely manner. The failure of third parties to remediate their
respective systems could have a material adverse effect on Delta's business,
financial condition, results of operations and liquidity.
Delta's expectations regarding its Year 2000 program are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. These forward-looking statements involve significant risks and
uncertainties that could cause the actual results to differ materially from
Delta's expectations. Factors that may cause such differences include, but are
not limited to, the ability to utilize existing resources, the availability of
qualified personnel and the ability to identify and remediate all affected
systems.
Alliance Agreement
On April 29, 1998, Delta and United Air Lines, Inc. (United) entered into a
marketing alliance agreement (Agreement). Under the terms of the Agreement, the
two airlines plan to engage in code-sharing arrangements, reciprocal frequent
flyer programs and other areas of marketing cooperation. The implementation of
the code-sharing aspects of the Agreement is subject to the approval of both
companies' pilot unions.
The Agreement provides that the marketing alliance will be implemented first in
the United States and then, subject to the concurrence of Delta's and United's
foreign airline partners in the affected region and applicable governmental
approvals, in international markets. Code-sharing service to Europe is not
contemplated at this time due to governmental and foreign airline alliance
issues.
Delta estimates that the two carriers would realize a total of approximately
$600 million in annual gross revenue benefits when the alliance is fully
implemented. These revenue benefits, which Delta estimates would accrue
approximately equally to each carrier, assume that no other major U.S. domestic
alliances are formed.
16
<PAGE> 17
Delta anticipates that it and United will begin reciprocal frequent flyer
programs later in 1998, and code-sharing on their U.S. networks in early 1999.
The marketing alliance does not require formal approval by the U.S. government.
Delta has received a request from the U.S. Department of Transportation for
information regarding the alliance, and expects to receive information
requests from other governmental entities.
The Agreement has a seven-year term but may be terminated by either party
earlier under certain circumstances.
The above description of the Agreement contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include Delta's estimates with respect to the
revenue benefits that will result from the marketing alliance between Delta and
United. These forward-looking statements involve significant risks and
uncertainties that could cause the actual results to differ materially from the
expected results. Factors that may cause such differences include, but are not
limited to, the possibility that the estimated revenue benefits will not be
realized, or will not be realized within the expected time period, due to, among
other things, (1) the airline pricing environment; (2) competitive actions taken
by other airlines; (3) general economic conditions; (4) changes in jet fuel
prices; (5) actions taken by the United States and foreign governments; (6) the
willingness of customers to travel; and (7) the outcome of discussions with both
carriers' pilot unions, international partners and commuter carriers regarding
implementation of various aspects of the Delta-United marketing alliance.
Personnel Matters
On May 1, 1996, the Company and the Air Line Pilots Association, International
(ALPA) entered into a new collective bargaining agreement covering the rates of
pay, rules and working conditions of the Company's approximately 8,600 pilots.
The contract, which becomes amendable on May 2, 2000, provides in part (1) that
if the Company operates an aircraft type (New Equipment) for which the rates of
pay, rules and working conditions (collectively, the Pay Rates) are not set
forth in the collective bargaining agreement, the Company and ALPA will
negotiate the Pay Rates applicable to such New Equipment; (2) that pilots will
fly such New Equipment whether or not Pay Rates for such equipment have been
agreed upon; but (3) that the pilots' obligation to fly such New Equipment will
not continue if Pay Rates have not been agreed upon within six months after the
Company places such New Equipment in operation.
The Company has placed orders to purchase the following aircraft types, each of
which constitutes New Equipment under the collective bargaining agreement:
B-737-600/700/800 aircraft; B-767-400 aircraft; and B-777-200 aircraft. Delta
plans to place these aircraft types in service shortly after their delivery,
which is expected to begin in September 1998, May 2000 and March 1999,
respectively. In addition, the Company is leasing from a third party three
B-737-300 aircraft and has agreed, subject to certain conditions, to lease an
additional six B-737-300 aircraft; these aircraft, which would also constitute
New Equipment under the collective bargaining agreement, are scheduled to be
placed in service beginning in June 1998.
In October 1997, the Company and ALPA began discussions on the Pay Rates
applicable to B-737-600/700/800 aircraft and the nine B-737-300 aircraft noted
above. ALPA has announced
17
<PAGE> 18
plans to request pilots not to fly these aircraft types subsequent to the six
month period after such aircraft are initially placed in service unless and
until Pay Rates for these aircraft types have been agreed upon. Additionally,
the Company's pilots have voted to authorize ALPA to assess pilots 1% of their
gross pay for up to nine months to finance a contingency fund for pilots who
would have flown these aircraft. Discussions between the Company and ALPA are
continuing. The outcome of these matters cannot presently be determined.
Governmental
On April 6, 1998, the U.S. Department of Transportation (DOT) published a draft
statement of enforcement policy to address DOT concerns that major carriers are
taking actions designed to exclude new entrants in certain airline markets,
particularly at hub airports. The draft DOT guidelines focus on unreasonable
price cuts, and/or capacity increases by major carriers in response to entry by
new carriers at hub airports, and whether the major carrier could have pursued a
more reasonable alternative strategy for competing with the new entrant. The DOT
is soliciting comments on the draft guidelines which, if adopted, would apply
prospectively.
Latin America Expansion
As part of its plan to increase its presence in Latin America, Delta recently
inaugurated service between Atlanta and Caracas, Guatemala City, Panama City,
San Jose and San Salvador; began a code-share arrangement with Aeropostal, which
allows the two carriers to provide code-share service between the U.S. and
Venezuela; and entered into marketing agreements with Aeromexico and with
Aeroperu. Delta also purchased a 35% equity interest in Aeroperu.
New Accounting Regulations
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for Costs of Computer Software Developed
or Obtained for Internal Use" (SOP 98-1), which defines the type of costs
related to such activities that should be capitalized versus expensed as
incurred. SOP 98-1 is effective for fiscal years beginning after December 31,
1998.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on the Costs of Start-up Activities" (SOP
98-5), which requires that start-up costs be expensed as incurred. SOP 98-5 is
effective for fiscal years begining after December 31, 1998 and requires that
initial application be reported as a cumulative effect of a change in accounting
principle.
The adoption of SOP 98-1 and SOP 98-5 is not expected to have a material effect
on the Company's consolidated financial condition or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding the Company's exposure to certain market risks, see
"Market Risks Associated With Financial Instruments" (page 25) in Management's
Discussion and Analysis of Financial Condition and Results of Operations, and
Note 4 (page 36) of the Notes to Consolidated Financial Statements in Delta's
1997 Annual Report to Shareholders.
18
<PAGE> 19
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 March 31, 1998 and the
related consolidated statements of operations for the three-month and nine-month
periods ended March 31, 1998 and 1997 and the condensed consolidated statements
of cash flows for the nine-month periods ended March 31, 1998 and 1997. 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.
Arthur Andersen LLP
Atlanta, Georgia
April 24, 1998
19
<PAGE> 20
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
Under the Delta Air Lines, Inc. Directors' Deferred Compensation Plan (Plan),
members of the Company's 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 among
certain of 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 that a participating director may select is a fund invested
primarily in Delta's Common Stock (Delta Common Stock Fund). During the quarter
ended March 31, 1998, a participant in the Plan deferred a total of $3,000 in
the Delta Common Stock Fund investment return choice (equivalent to
approximately 26 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 such Act.
ITEM 5. OTHER INFORMATION
Management
The Board of Directors elected Warren C. Jenson to serve as Delta's Executive
Vice President and Chief Financial Officer, effective April 20, 1998. Prior to
joining Delta, Mr. Jenson served as Senior Vice President - Finance and Chief
Financial Officer of the National Broadcasting Company, Inc. since July 1992.
Effective May 1, 1998, Robert W. Coggin, Executive Vice President - Marketing,
and Robert G. Adams, Senior Vice President - Personnel, retired from the
Company. A search is currently in progress to identify and recruit successors.
20
<PAGE> 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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 March 31, 1998, Delta did not file any Current
Reports on Form 8-K. On April 30, 1998, Delta filed a Current Report on
Form 8-K regarding its marketing alliance agreement with United Air
Lines, Inc.
21
<PAGE> 22
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/ Warren C. Jenson
---------------------------------
Warren C. Jenson
Executive Vice President and
Chief Financial Officer
May 13, 1998
22
<PAGE> 1
EXHIBIT 12
DELTA AIR LINES, INC.
STATEMENT REGARDING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In Millions, except ratios)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Nine Months Nine Months
Ended Ended
March 31, March 31,
1998 1997
------------ ------------
<S> <C> <C>
Earnings:
Earnings before income taxes $ 1,053 $ 920
Add (deduct):
Fixed charges 498 391
Interest capitalized (29) (25)
-------- ------
Earnings as adjusted $ 1,522 $1,286
======== ======
Fixed charges:
Interest expense $ 143 $ 158
Portion of rental expense representative
of the interest factor 355 233
-------- ------
Total fixed charges $ 498 $ 391
======== ======
Ratio of earnings to fixed charges 3.06 3.29
</TABLE>
- --------------------------------------------------------
<PAGE> 1
[LETTERHEAD OF ARTHUR ANDERSEN LLP]
EXHIBIT 15
To Delta Air Lines, Inc.:
We are aware that Delta Air Lines, Inc. has incorporated by reference in its
Registration Statement Nos. 2-94541, 33-30454, 33-50175, 33-65391, 333-16471 and
333-49553 its Form 10-Q for the quarter ended March 31, 1998, which includes our
report dated April 24, 1998 covering the unaudited interim financial information
contained therein. Pursuant to Regulation C of the Securities Act of 1933 (the
"Act"), that report is not considered a part of the Registration Statements
prepared or certified by our firm or a report prepared or certified by our firm
within the meaning of Sections 7 and 11 of the Act.
Arthur Andersen LLP
Atlanta, Georgia
April 24, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DELTA AIR
LINES, INC. FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE RELATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 986
<SECURITIES> 504
<RECEIVABLES> 1,020
<ALLOWANCES> 50
<INVENTORY> 92
<CURRENT-ASSETS> 3,251
<PP&E> 14,793
<DEPRECIATION> 5,943
<TOTAL-ASSETS> 13,870
<CURRENT-LIABILITIES> 4,477
<BONDS> 1,823
0
0
<COMMON> 263
<OTHER-SE> 3,423
<TOTAL-LIABILITY-AND-EQUITY> 13,870
<SALES> 0
<TOTAL-REVENUES> 10,374
<CGS> 0
<TOTAL-COSTS> 9,275
<OTHER-EXPENSES> (97)
<LOSS-PROVISION> 17
<INTEREST-EXPENSE> 143
<INCOME-PRETAX> 1,053
<INCOME-TAX> 414
<INCOME-CONTINUING> 639
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 639
<EPS-PRIMARY> 8.49
<EPS-DILUTED> 8.12
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