<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 September 30, 2000
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, 2000:
Common Stock, $1.50 par value - 122,960,787 shares outstanding
<PAGE> 2
DELTA AIR LINES, INC.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION> SEPTEMBER 30 JUNE 30
2000 2000
------------ --------
ASSETS
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,387 $ 1,252
Short-term investments 478 493
Accounts receivable, net of allowance for uncollectible accounts
of $35 at September 30, 2000 and $34 at June 30, 2000 700 739
Deferred income taxes 355 356
Fuel hedge contracts, at market value 502 --
Prepaid expenses and other 516 612
-------- --------
Total current assets 3,938 3,452
-------- --------
PROPERTY AND EQUIPMENT:
Flight equipment 16,402 15,625
Less: Accumulated depreciation 5,029 4,930
-------- --------
11,373 10,695
-------- --------
Flight equipment under capital leases 529 506
Less: Accumulated amortization 315 303
-------- --------
214 203
-------- --------
Ground property and equipment 4,272 4,212
Less: Accumulated depreciation 2,306 2,250
-------- --------
1,966 1,962
-------- --------
Advance payments for equipment 464 525
-------- --------
Total property and equipment 14,017 13,385
-------- --------
OTHER ASSETS:
Investments in equity securities 316 396
Investments in associated companies 219 242
Cost in excess of net assets acquired, net 2,167 2,183
Leasehold and operating rights, net 101 104
Other 1,047 804
-------- --------
Total other assets 3,850 3,729
-------- --------
Total assets $ 21,805 $ 20,566
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE> 3
DELTA AIR LINES, INC.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30 JUNE 30
LIABILITIES AND SHAREOWNERS' EQUITY 2000 2000
------------ --------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt $ 526 $ 526
Current obligations under capital leases 44 43
Accounts payable and miscellaneous accrued liabilities 2,548 2,318
Air traffic liability 1,875 1,920
Accrued salaries and related benefits 944 920
Accrued rent 197 213
-------- --------
Total current liabilities 6,134 5,940
-------- --------
NONCURRENT LIABILITIES:
Long-term debt 4,448 4,378
Postretirement benefits 2,020 2,008
Accrued rent 731 742
Capital leases 154 147
Deferred income taxes 1,236 869
Other 441 458
-------- --------
Total noncurrent liabilities 9,030 8,602
-------- --------
DEFERRED CREDITS:
Deferred gain on sale and leaseback transactions 581 592
Manufacturers' and other credits 354 345
-------- --------
Total deferred credits 935 937
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTES 5 AND 9)
EMPLOYEE STOCK OWNERSHIP PLAN
PREFERRED STOCK:
Series B ESOP Convertible Preferred Stock (issued and outstanding 6,415,582
shares at September 30, 2000 and 6,455,372 shares at
June 30, 2000) 462 465
Unearned compensation under employee stock ownership plan (231) (251)
-------- --------
231 214
-------- --------
SHAREOWNERS' EQUITY:
Common stock at par (total shares issued: 180,703,301 shares at
September 30, 2000 and 180,356,181 shares at June 30, 2000) 272 271
Additional paid-in capital 3,260 3,245
Accumulated other comprehensive income 503 40
Retained earnings 4,168 4,043
Treasury stock at cost (57,751,090 shares at September 30, 2000
and 57,716,615 shares at June 30, 2000) (2,728) (2,726)
-------- --------
Total shareowners' equity 5,475 4,873
-------- --------
Total liabilities and shareowners' equity $ 21,805 $ 20,566
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 4
DELTA AIR LINES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30
--------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
OPERATING REVENUES:
Passenger $ 4,050 $ 3,593
Cargo 141 140
Other, net 154 96
-------------- --------------
Total operating revenues 4,345 3,829
OPERATING EXPENSES:
Salaries and related costs 1,514 1,306
Aircraft fuel 533 367
Depreciation and amortization 281 263
Other selling expenses 190 160
Passenger commissions 164 203
Contracted services 239 213
Landing fees and other rents 199 180
Aircraft rent 183 154
Aircraft maintenance materials and outside repairs 184 166
Passenger service 134 133
Asset writedowns and other special charges 22 149
Other 192 199
-------------- --------------
Total operating expenses 3,835 3,493
-------------- --------------
OPERATING INCOME 510 336
-------------- --------------
OTHER INCOME (EXPENSE):
Interest expense, net (64) (33)
Gains from the sale of investments -- 252
Miscellaneous income, net 12 14
Fair value adjustments of SFAS 133 derivatives (66) --
-------------- --------------
(118) 233
-------------- --------------
INCOME BEFORE INCOME TAXES 392 569
INCOME TAXES PROVIDED, NET (159) (225)
-------------- --------------
NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE 233 344
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF TAX (100) (66)
-------------- --------------
NET INCOME 133 278
PREFERRED STOCK DIVIDENDS (4) (3)
-------------- --------------
NET INCOME AVAILABLE TO COMMON SHAREOWNERS $ 129 $ 275
============== ==============
BASIC EARNINGS PER SHARE BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $ 1.86 $ 2.47
============== ==============
BASIC EARNINGS PER SHARE $ 1.05 $ 1.99
============== ==============
DILUTED EARNINGS PER SHARE BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $ 1.77 $ 2.33
============== ==============
DILUTED EARNINGS PER SHARE $ 1.01 $ 1.88
============== ==============
WEIGHTED AVERAGE SHARES USED IN
PER SHARE COMPUTATION:
Basic 122,925,632 138,300,991
Diluted 130,531,655 147,360,186
DIVIDENDS PER COMMON SHARE $ 0.025 $ 0.025
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
DELTA AIR LINES, INC.
STATISTICAL SUMMARY*
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30
----------------------------------
STATISTICAL SUMMARY: 2000 1999
--------------- ---------------
<S> <C> <C>
Revenue Passenger Miles (millions) 29,243 28,296
Available Seat Miles (millions) 38,090 37,732
Passenger Mile Yield 12.53c. 12.26c.
Operating Revenue Per Available Seat Mile 10.37c. 9.82c.
Operating Cost Per Available Seat Mile 9.14c. 8.61c.
Passenger Load Factor 76.78% 74.99%
Breakeven Passenger Load Factor 66.96% 65.18%
Passengers Enplaned (thousands) 27,351 27,183
Revenue Ton Miles (millions) 3,369 3,268
Cargo Ton Miles (millions) 444 437
Cargo Ton Mile Yield 31.23c. 31.93c.
Fuel Gallons Consumed (millions) 705 713
Average Price Per Fuel Gallon, net of hedging gains 68.71c. 50.23c.
Number of Aircraft in Fleet at End of Period 602 586
Average Full-Time Equivalent Employees 74,200 72,300
</TABLE>
* This summary excludes the statistics of Atlantic Southeast Airlines,
Inc. and Comair, Inc., as well as the impact of unusual items, which are
described under "Unusual Items" on page 14 of this Form 10-Q.
5
<PAGE> 6
DELTA AIR LINES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30
-----------------------------
2000 1999
--------- ---------
<S> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES:
Net Income $ 133 $ 278
Adjustments to reconcile net income to cash
provided by operating activities, net 596 430
Changes in certain assets and liabilities, net 279 (337)
--------- ---------
Net cash provided by operating activities 1,008 371
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions:
Flight equipment, including advance payments (986) (480)
Ground property and equipment (107) (103)
Decrease (increase) in short-term investments, net 15 (74)
Proceeds from sale of investments -- 115
Proceeds from sale of flight equipment 203 95
--------- ---------
Net cash used in investing activities (875) (447)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 14 10
Repurchase of common stock (2) (45)
Payments on long-term debt and capital lease obligations (15) (69)
Payments on notes payable (58) (42)
Issuance of long-term obligations 66 571
Issuance of notes payable -- 42
Cash dividends (3) (4)
--------- ---------
Net cash provided by financing activities 2 463
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 135 387
Cash and cash equivalents at beginning of period 1,252 1,124
--------- ---------
Cash and cash equivalents at end of period $ 1,387 $ 1,511
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 98 $ 65
Income taxes $ 27 $ 55
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
<PAGE> 7
DELTA AIR LINES, INC.
Notes to Consolidated Financial Statements
September 30, 2000
(Unaudited)
1. ACCOUNTING AND REPORTING POLICIES
Delta's accounting and reporting policies are summarized in
Note 1 of the Notes to the Consolidated Financial Statements (pages
38-39) in our 2000 Annual Report to Shareowners and in Note 7 of this
Form 10-Q. These interim financial statements should be read in
conjunction with the consolidated financial statements and the
accompanying notes in our 2000 Annual Report to Shareowners. Management
believes that the accompanying unaudited condensed consolidated
financial statements reflect all adjustments, consisting of normal
recurring items, necessary for a fair statement of results for the
interim periods presented. Due to seasonal variations in the demand for
air travel, operating results for an interim period are not necessarily
indicative of operating results for the entire year. We have
reclassified certain amounts in the prior period to be consistent with
the presentation of our current period financial statements.
2. SHAREOWNERS' EQUITY
During the September 2000 quarter, we issued a total of
347,120 shares of common stock under our broad-based employee stock
option plans, 1989 Stock Incentive Plan, Dividend Reinvestment and
Stock Purchase Plan, and Non-Employee Directors' Stock Plan.
3. GEOGRAPHIC INFORMATION
Delta is managed as a single business unit that provides air
transportation for passengers and cargo. Our operating revenues by
geographic region are summarized in the following table:
<TABLE>
<CAPTION>
For the Three Months Ended:
-------------------------------------------
(In Millions) September 30, 2000 September 30, 1999
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
North America $ 3,499 $ 3,128
Atlantic 639 519
Latin America 114 87
Pacific 93 95
--------- ---------
Total $ 4,345 $ 3,829
========= =========
</TABLE>
7
<PAGE> 8
4. AIRCRAFT PURCHASE COMMITMENTS
Our total aircraft fleet, options and rolling options at
September 30, 2000 are summarized in the following table. Options have
scheduled delivery slots. Rolling options replace options and are
assigned delivery slots as options expire or are exercised.
<TABLE>
<CAPTION>
Current Fleet
----------------------------------
Rolling
Aircraft Type Owned Leased Total Orders Options Options
------------- ----- ------ ----- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
B-727-200 85 10 95 -- -- --
B-737-200 1 53 54 -- -- --
B-737-300 -- 26 26 -- -- --
B-737-800 31 -- 31 101 60 253
B-757-200 74 41 115 6 20 75
B-767-200 15 -- 15 -- -- --
B-767-300 4 24 28 -- -- --
B-767-300ER 49 8 57 1 11 13
B-767-400 5 -- 5 16 24 15
B-777-200 7 -- 7 6 20 26
L-1011-1 6 -- 6 -- -- --
L-1011-250 5 -- 5 -- -- --
L-1011-500 7 -- 7 -- -- --
MD-11 8 7 15 -- -- --
MD-88 63 57 120 -- -- --
MD-90 16 -- 16 -- -- --
ATR-72 4 15 19 -- -- --
EMB-120 49 13 62 -- -- --
CRJ-200 21 117 138 103 231 --
CRJ-700 -- -- -- 57 165 --
--- --- --- --- --- ---
Total 450 371 821 290 531 382
=== === === === === ===
</TABLE>
During the September 2000 quarter, we accepted delivery of seven
new B-737-800 aircraft, four new B-757-200 aircraft, and five new
B-767-400 aircraft. We sold and leased back seven CRJ-200 aircraft. We
also sold one B-767-300ER aircraft, five B-727-200 aircraft, and two
EMB-120 aircraft. We retired one L-1011-1 aircraft and one EMB-120
aircraft.
Subsequent to September 30, 2000, we accepted delivery of the
following new aircraft: one B-767-400 aircraft, three B-737-800 aircraft,
two B-757-200 aircraft and three CRJ-200 aircraft.
8
<PAGE> 9
Future expenditures for aircraft and engines on order at October
31, 2000 are estimated to be $8.9 billion, as follows:
<TABLE>
<CAPTION>
Amount
Year Ending June 30 (In Millions)
------------------- -------------
<S> <C>
Remainder of 2001 $1,870
2002 2,400
2003 1,370
2004 1,130
2005 1,400
After 2006 740
------
Total $8,910
======
</TABLE>
5. COMPREHENSIVE INCOME
Comprehensive income includes unrealized gains and losses on
marketable equity securities and changes in the fair value of certain
derivative financial instruments which qualify for hedge accounting.
Comprehensive income totaled $596 million and $230 million for the three
months ended September 30, 2000 and 1999, respectively. The difference
between net income and comprehensive income for the quarters ended
September 30, 2000 and 1999 is detailed in the following table:
<TABLE>
<CAPTION>
For the Three Months Ended:
------------------------------------------
(In Millions) September 30, 2000 September 30, 1999
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 133 $ 278
-------- --------
Unrealized gain (loss) on marketable
equity securities, net of deferred taxes 25 (47)
Unrealized gain (loss) on derivative
instruments, net of deferred taxes 437 --
Other 1 (1)
-------- --------
Total other comprehensive income 463 (48)
Comprehensive income $ 596 $ 230
======== ========
</TABLE>
As of September 30, 2000, we had recorded $413 million as
unrealized gains on open fuel hedge contracts in accordance with
Statement of Financial Accounting Standard (SFAS) No. 133. This amount
is included in unrealized gains on derivative instruments in the table
above. We anticipate that $281 million of unrealized fuel hedge gains
will become realized over the next 12 months. Upon the adoption of SFAS
133 on July 1, 2000, we recorded unrealized fuel hedge gains of $416
million. We anticipate $289 million of that total to be realized over
the 12 months following July 1, 2000. For additional information on the
adoption of SFAS 133, see Note 7 of the Notes to the Consolidated
Financial Statements in this Form 10-Q.
9
<PAGE> 10
6. SALE OF RECEIVABLES
During fiscal 1999, we sold a defined pool of our accounts
receivable, on a revolving basis, through a wholly owned subsidiary to
a third party. We initially sold receivables with a fair value of $547
million to the subsidiary. In exchange for the receivables sold, we
received cash and a subordinated promissory note. The balance of the
subordinated promissory note was $175 million at September 30, 2000,
and is included in accounts receivable on our Consolidated Balance
Sheets.
As part of the agreement, the subsidiary is required to pay
fees to a third party based upon the amounts invested by the third
party. This expense is included in miscellaneous income, net in our
Consolidated Statements of Income.
For additional information regarding Delta's sale of a defined
pool of our accounts receivable, see Note 16 of the Notes to the
Consolidated Financial Statements (page 51) in our 2000 Annual Report
to Shareowners.
7. ADOPTION OF NEW ACCOUNTING STANDARD
On July 1, 2000, we adopted SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended. SFAS 133
requires us to recognize all derivative instruments on the balance
sheet at fair value. The adoption of SFAS 133 impacts the accounting
for our fuel hedging program and our holdings of equity warrants and
other similar rights.
FUEL HEDGING
Our results of operations can be significantly impacted by
changes in the price and availability of aircraft fuel. To manage the
risks associated with changes in aircraft fuel prices, we use options,
forwards and other similar derivative instruments, which have
maturities of up to 36 months. Because there is not a readily available
market for derivatives in aircraft fuel, we use heating oil contracts
to reduce our risk exposure to the movement of aircraft fuel prices.
The changes in the market value of our heating oil contracts (also
referred to as "fuel hedge contracts") have a high correlation to
changes in aircraft fuel prices and, therefore, qualify as cash flow
hedges under SFAS 133.
Upon adoption of SFAS 133, we recorded the fair market value
of our fuel hedge contracts on our Consolidated Balance Sheet. On an
ongoing basis, we will adjust our balance sheet to reflect the current
fair market value of our fuel hedge contracts. The related gains or
losses on these contracts are deferred in shareowners' equity (as a
component of comprehensive income). These deferred gains and losses are
recognized in income in the period in which the related aircraft fuel
purchases being hedged are consumed and recognized in expense. However,
to the extent that the change in value of a fuel hedge contract does
not perfectly offset the change in the value of the aircraft fuel
purchase being hedged, that ineffective portion of the hedge is
immediately recognized in income. In calculating the ineffective
portion of our hedge performance under SFAS 133, we exclude
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<PAGE> 11
the time value component related to any option premiums paid and
recognize the amount in income during the life of the contract. The
ineffective portion of the hedge returns, including those related to
time value, are included in our Consolidated Statement of Income as
fair value adjustments of SFAS 133 derivatives.
EQUITY WARRANTS AND OTHER SIMILAR RIGHTS
In addition to derivatives used in the fuel hedging program,
we own equity warrants and other similar rights in certain companies,
primarily priceline.com (priceline). For additional information
regarding our equity interests in priceline, see Note 2 of the Notes to
the Consolidated Financial Statements (page 40) in our 2000 Annual
Report to Shareowners. At September 30, 2000, our equity warrants and
other similar rights in priceline consisted of the following: (1) a
warrant which, subject to certain conditions, gives us the right to
purchase up to 5.5 million shares of priceline common stock; and (2)
six million shares of priceline's preferred stock which are convertible
at our option into priceline common stock on a one-for-one basis. SFAS
133 requires us to separate the value of the preferred stock's
convertible feature and account for it as a standalone equity right.
These equity rights will now be accounted for as derivative instruments
under SFAS 133, and these changes in fair value are required to be
reflected in current period earnings.
At June 30, 2000, the book value of our holdings in priceline
preferred stock was $245 million. At the date of adoption of SFAS 133,
the conversion feature embedded in our priceline preferred stock had an
estimated fair value of $130 million. The remaining value of the
priceline preferred stock is accounted for as an available-for-sale
debt security and recorded at amortized cost in investments in equity
securities on our Consolidated Balance Sheet in accordance with SFAS
115.
The change in market value of our priceline warrant, our
warrants in other companies and the conversion feature of our priceline
preferred stock is recorded in our Consolidated Statements of Income as
fair value adjustments of SFAS 133 derivatives.
The impact of adopting SFAS 133 on our Consolidated
Statement of Income is as follows (in millions):
<TABLE>
<CAPTION>
Income (Expense)
---------------
For the
Cumulative Quarter Ended
Effect at July 1, September 30,
2000 2000 Total
----------------- --------------- ------------
<S> <C> <C> <C>
Write-off of fuel hedge contract premiums $ (143) $ (25) $ (168)
"Ineffective" portion of fuel hedge contracts 16 86 102
Fair value adjustment of equity rights (37) (127) (164)
------------ ------------ ------------
Total pre-tax $ (164) $ (66) $ (230)
============ ============ ============
Total after-tax $ (100) $ (41) $ (141)
============ ============ ============
</TABLE>
11
<PAGE> 12
8. EARNINGS PER SHARE
We calculate basic earnings per share by dividing the income
available to common shareowners by the weighted average number of
common shares outstanding. Diluted earnings per share includes the
dilutive effects of stock options and convertible securities. The
following table shows our computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------
September 30 September 30
2000 1999
------------ ------------
(In millions, except per share data)
<S> <C> <C>
BASIC:
Net income $ 133 $ 278
Dividends on allocated Series B ESOP
Convertible Preferred Stock (4) (3)
------------ ------------
Income available to common shareowners $ 129 $ 275
============ ============
Weighted average shares outstanding 122.9 138.3
============ ============
Basic earnings per share $ 1.05 $ 1.99
============ ============
DILUTED:
Net income $ 133 $ 278
Adjustment to net income assuming conversion
of allocated Series B ESOP Convertible Preferred Stock (1) (1)
------------ ------------
Income available to common shareowners $ 132 $ 277
============ ============
Weighted average shares outstanding 122.9 138.3
Additional shares assuming:
Conversion of allocated Series B ESOP
Convertible Preferred Stock 5.5 5.1
Exercise of stock options 1.9 3.8
Conversion of performance-based stock units 0.2 0.2
------------ ------------
Weighted average shares outstanding as adjusted 130.5 147.4
============ ============
Diluted earnings per share $ 1.01 $ 1.88
============ ============
</TABLE>
12
<PAGE> 13
9. SUBSEQUENT EVENT
On October 18, 2000, Delta announced plans for a $1.6 billion
terminal expansion and redevelopment project at New York's John F.
Kennedy International Airport. For information on this subject, see
"Airport Facilities Project at John F. Kennedy International Airport"
on page 2 of Delta's Current Report on Form 8-K dated November 7, 2000.
On November 7, 2000, Delta agreed to sell in a public offering
$1.5 billion aggregate principal amount of Pass Through Certificates,
Series 2000-1 (Certificates), consisting of $341 million of 7.38% Class
A-1 Certificates, $738 million of 7.57% Class A-2 Certificates, $183
million of 7.92% Class B Certificates, and $238 million of 7.78% Class
C Certificates. Each class of Certificates represents an undivided
interest in a pass through trust which will be formed by Delta and
which will purchase equipment notes (Equipment Notes) issued by Delta
and having the same interest rates and maturities as the related
Certificates. Principal payments on the Equipment Notes related to the
Class A-1 Certificates are amortizing with a final payment date of May
18, 2010; principal payments on the Equipment Notes related to the
Class A-2, Class B and Class C Certificates are bullet maturities due
November 18, 2010, November 18, 2010 and November 18, 2005,
respectively. The Equipment Notes are full recourse obligations of
Delta secured separately by a security interest in certain aircraft
owned by Delta, consisting of 20 Boeing 737-832 aircraft, 18 Boeing
757-232 aircraft and 6 Boeing 767-332ER aircraft. The Certificates do
not represent interests in or obligations of Delta. The closing of the
sale of the Certificates is scheduled for November 16, 2000. Delta
plans to use the net proceeds of this offering for general corporate
purposes, including the repayment of the $500 million credit facility
that Delta obtained to finance its purchase of ASA Holdings, Inc. in
1999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
NET INCOME AND EARNINGS PER SHARE
For the quarter ended September 30, 2000, Delta reported unaudited
consolidated operating income of $510 million and net income of $133 million.
Operating margin, which is the ratio of operating income to operating revenues,
was 12%. For the quarter ended September 30, 1999, we recorded operating income
of $336 million, net income of $278 million, and an operating margin of 9%.
Excluding unusual items (as described below), net income was $273 million in the
September 2000 quarter and $282 million in the September 1999 quarter.
Basic earnings per share totaled $1.05 for the September 2000 quarter
compared to $1.99 for the September 1999 quarter. Diluted earnings per share
totaled $1.01 in the September 2000
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<PAGE> 14
quarter compared to $1.88 in the September 1999 quarter. Excluding unusual
items, diluted earnings per share was $2.08 for the September 2000 quarter
compared to $1.91 for the September 1999 quarter.
UNUSUAL ITEMS
During the September 2000 quarter, we recorded a $144 million charge,
net of tax, as a result of the following unusual items:
- a $141 million non-cash charge, net of tax, due to our
adoption of SFAS 133. For additional information on this
subject, see Note 7 of the Notes to Consolidated Financial
Statements on pages 10-11 of this Form 10-Q.
- a $13 million restructuring charge, net of tax, as a result of
our decision to discontinue our Pacific gateway in Portland,
Oregon.
- a one-time $10 million non-cash gain, net of tax, related to
our equity investment in WORLDSPAN, L.P.
During the September 1999 quarter, we recorded a $3 million charge, net
of tax, as a result of the following unusual items:
- a $154 million gain, net of tax, from the sale of our equity
interest in Singapore Airlines Limited and a portion of our
equity investment in priceline.
- a $91 million non-cash charge, net of tax, for asset
writedowns and other special charges.
- a $66 million cumulative effect charge, net of tax, for the
adoption of Staff Accounting Bulletin 101, "Revenue
Recognition in Financial Statements."
For additional information on these matters, see Notes 2, 6 and 18,
respectively, of the Notes to the Consolidated Financial Statements in our 2000
Annual Report to Shareowners.
ACQUISITION OF ASA HOLDINGS, INC. AND COMAIR HOLDINGS, INC.
We acquired ASA Holdings, Inc. (ASA) and Comair Holdings, Inc. (Comair)
in fiscal 1999 and fiscal 2000, respectively. Our Consolidated Statement of
Income for the September 2000 quarter includes the results of operations of ASA
and Comair for that period. Our Consolidated Statement of Income for the
September 1999 quarter includes the results of operations of ASA for that
period. For additional information regarding our acquisition of ASA and Comair,
see Note 17 of the Notes to the Consolidated Financial Statements in our 2000
Annual Report to Shareowners.
14
<PAGE> 15
OPERATING REVENUES
Our operating revenues totaled $4.3 billion in the September 2000
quarter, a 13% increase from $3.8 billion in the September 1999 quarter.
Passenger revenue increased 13% to $4.1 billion, reflecting a 7% increase in
revenue passenger miles and a 5% increase in passenger mile yield. These
increases are due in part to the inclusion of Comair in our results of
operations for the September 2000 quarter.
NORTH AMERICAN PASSENGER REVENUES - North American passenger revenues rose 14%
to $3.3 billion for the September 2000 quarter. Revenue passenger miles
increased 8% on a capacity increase of 6%, while passenger mile yield increased
5%. These increases are primarily due to the inclusion of Comair, improved
revenue management systems and a favorable U.S. economy. During the September
1999 quarter, our operations were adversely affected by flight cancellations
related to Hurricane Floyd.
INTERNATIONAL PASSENGER REVENUES - International passenger revenues increased 9%
to $755 million during the September 2000 quarter. Revenue passenger miles
increased 3% on a capacity increase of less than 1%, and passenger mile yield
rose 6%. The increase in revenue passenger miles reflects Delta's continued
international expansion, particularly in Latin American markets. The increase in
passenger mile yield is primarily a result of stronger demand in the Atlantic
market.
CARGO REVENUES AND OTHER REVENUES - Cargo revenue rose less than 1% in the
September 2000 quarter. Cargo ton miles increased 4%, while the cargo ton mile
yield decreased 3%. The increase in cargo ton miles is attributable to higher
mail and package volume from the growth in e-commerce. The decrease in cargo ton
mile yield is due to increased competition, particularly in the European market.
Other revenues increased 60% to $154 million, largely due to the inclusion of
Comair and increases in revenue from codeshare and partner agreements.
OPERATING EXPENSES
Operating expenses for the September 2000 quarter totaled $3.8 billion,
rising 10% from the September 1999 quarter. Operating capacity increased 5% to
40.2 billion available seat miles. Cost per available seat mile (CASM) increased
5% to 9.55 cents, while non-fuel CASM grew 1% to 8.22 cents. Excluding unusual
items, operating expenses increased 14% from the September 1999 quarter and CASM
increased 9% to 9.51 cents.
Salaries and related costs grew 16%, reflecting a 14% increase in
average full-time equivalent employees largely from the inclusion of Comair
employees. The increase in salaries and related costs also reflects salary
increases of 3% for pilots on January 1, 2000, and 3% for most domestic
non-union employees on April 1, 2000. In addition, overtime costs increased due
to heavier traffic, challenging weather and air traffic control issues.
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Aircraft fuel expense increased 45% during the September 2000 quarter,
with the average fuel price per gallon rising 40% to 70.36 cents. Total gallons
consumed increased 4% due to increased operations on a 5% rise in capacity.
Delta's fuel cost per gallon is net of gains of approximately $160 million on
fuel hedging contracts, which hedged approximately 61% of our aircraft fuel
requirements during the September 2000 quarter. Depreciation and amortization
expense rose 7% due to the acquisition of new flight and ground equipment as
well as the inclusion of Comair.
Other selling expenses increased 19% due to higher advertising costs
related to our new branding and our SkyTeam relationship, as well as the
inclusion of Comair. Passenger commissions expense declined 19%, reflecting
changes to the travel agent commission rate structure and our customers'
increased use of lower cost distribution channels such as the Internet. Internet
sales accounted for approximately 10% of passenger revenue in the September 2000
quarter compared to 5% in the September 1999 quarter. Contracted services
expense increased 12% primarily due to the inclusion of Comair.
Landing fees and other rents rose 11%, aircraft rental expense
increased 19%, and aircraft maintenance materials and outside repair expense
grew 11%, primarily due to the inclusion of Comair. The 4% reduction in other
costs was primarily attributable to certain non-payroll tax initiatives and a
reduction in discretionary spending.
OTHER INCOME (EXPENSE)
Nonoperating expense in the September 2000 quarter was $118 million,
compared to nonoperating income of $233 million in the September 1999 quarter.
This change is primarily a result of $252 million in pretax gains from the sale
of investments in the September 1999 quarter. Interest expense, net increased
94% due to higher levels of debt outstanding. In addition, we recorded a $66
million pretax charge related to the adoption of SFAS 133. This reflects losses
recognized on equity warrants and options of $127 million offset by fuel
hedge ineffectiveness gains of $61 million (see Note 7).
FINANCIAL CONDITION
Cash and cash equivalents and short-term investments totaled $1.9
billion at September 30, 2000, compared to $1.7 billion at June 30, 2000. Our
principal sources and uses of cash during the three months ended September 30,
2000 are detailed below:
SOURCES:
- Generated $1.0 billion of cash from operations.
- Issued $66 million in long-term debt for aircraft financing.
- Generated $203 million from the sale and leaseback of seven CRJ-200
aircraft and the sale of five B-727-200 aircraft, two EMB-120 aircraft,
and one B-767-300ER aircraft.
- Issued 347,120 shares of common stock for $14 million.
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USES:
- Invested $986 million in flight equipment and $107 million in ground
property and equipment.
- Made principal payments of $73 million on long-term debt, capital lease
obligations and notes payable.
- Paid $3 million in cash dividends on our common stock.
Delta may prepay its long-term debt and repurchase common stock from
time to time. For information regarding our common stock repurchase
authorization, see Note 11 of the Notes to the Consolidated Financial Statements
(page 49) in our 2000 Annual Report to Shareowners.
As of September 30, 2000, we had a negative working capital position of
$2.2 billion, compared to negative working capital of $2.5 billion at June 30,
2000. A negative working capital position is normal for us, primarily due to our
air traffic liability, and does not indicate a lack of liquidity. We expect to
meet our obligations as they become due through available cash, short-term
investments and internally generated funds, supplemented as necessary by
borrowings and proceeds from sale and leaseback transactions. At September 30,
2000, we had $1.25 billion of credit available under our 1997 Bank Credit
Agreement.
Long-term debt and capital lease obligations (including current
maturities) totaled $5.2 billion at September 30, 2000, compared to $5.1 billion
at June 30, 2000. Shareowners' equity was $5.5 billion at September 30, 2000 and
$4.9 billion at June 30, 2000. Our net debt-to-capital position (including
current maturities) was 70% at September 30, 2000, and 71% at June 30, 2000.
For additional information regarding our credit agreements and
long-term debt, see Note 5 of the Notes to the Consolidated Financial Statements
(pages 42-44) in our 2000 Annual Report to Shareowners. In addition, on November
7, 2000, we agreed to sell in a public offering $1.5 billion aggregate
principal amount of Pass Through Certificates (see Note 9 of the Notes to the
Consolidated Financial Statements in this Form 10-Q).
At its meeting on October 25, 2000, our Board of Directors declared a
cash dividend of 2.5 cents per common share, payable December 1, 2000, to
shareowners of record on November 8, 2000.
RECENTLY ADOPTED ACCOUNTING STANDARDS
Effective July 1, 2000, we adopted SFAS 133, as amended. In accordance
with SFAS 133, we changed our method of accounting for derivative instruments.
All derivatives are now reflected on our balance sheet at fair market value. For
additional information on our adoption of SFAS 133, see Note 7 of the Notes to
the Consolidated Financial Statements in this Form 10-Q.
Effective July 1, 1999, we adopted SEC Staff Accounting Bulletin (SAB)
No. 101, "Revenue Recognition in Financial Statements." The adoption of SAB 101
resulted in a cumulative effect charge of $66 million, net of tax, and decreased
net income for fiscal 2000 by $21 million, net of
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tax. For additional information, see Note 18 (page 52) of the Notes to the
Consolidated Financial Statements in our 2000 Annual Report to Shareowners.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding our investment in Equant, N.V. and our
investment in priceline, see Note 2 of the Notes to the Consolidated Financial
Statements (pages 39-41) in our 2000 Annual Report to Shareowners. For
additional information regarding Delta's exposure to market risks, see "Market
Risks Associated With Financial Instruments" (pages 31-32), as well as Notes 2
and 4 (pages 39-42) of the Notes to the Consolidated Financial Statements, in
our 2000 Annual Report to Shareowners.
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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,
2000, and the related consolidated statements of income and the condensed
consolidated statements of cash flows for the three-month periods ended
September 30, 2000 and 1999. 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, Georgia
November 9, 2000
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
Under the Delta Air Lines, Inc. Directors' Deferred Compensation 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 Savings Plan is the Delta Common Stock Fund,
a fund invested primarily in Delta's common stock. During the quarter ended
September 30, 2000, participants in the Plan deferred $59,000 in the Delta
Common Stock Fund investment return choice, which is equivalent to approximately
1,330 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our Annual Meeting of Shareowners held on October 25, 2000, the
owners of our 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 our Board of Directors by the
following vote:
<TABLE>
<CAPTION>
FOR WITHHELD
<S> <C> <C>
Edwin L. Artzt 104,279,844 20,576,048
James L. Broadhead 121,385,923 3,469,969
Edward H. Budd 121,551,548 3,304,344
R. Eugene Cartledge 121,486,221 3,369,671
Mary Johnston Evans 121,438,472 3,417,420
George M.C. Fisher 121,611,423 3,244,469
David R. Goode 121,537,559 3,318,333
Gerald Grinstein 121,479,592 3,376,300
Leo F. Mullin 121,500,735 3,355,157
John F. Smith, Jr. 121,569,450 3,286,442
Andrew J. Young 120,968,192 3,887,700
</TABLE>
There were no broker non-votes on this matter.
2. Ratified the appointment of Arthur Andersen LLP as our independent
auditors for the calendar year ending December 31, 2000 by a vote of
123,517,819 FOR; 766,169 AGAINST; and 571,904 ABSTENTIONS. There were
no broker non-votes on this matter.
3. Approved the adoption of the Delta 2000 Performance Compensation Plan
by a vote of 79,123,856 FOR; 32,906,291 AGAINST; and 1,142,359
ABSTENTIONS. There were 11,683,386 broker non-votes on this matter.
4. Defeated a shareowner proposal relating to cumulative voting for
directors by a vote of 13,957,851 FOR; 86,632,427 AGAINST; and
12,582,228 ABSTENTIONS. There were 11,683,386 broker non-votes on this
matter.
5. Defeated a shareowner proposal linking executive compensation to
employee satisfaction by a vote of 12,861,664 FOR; 99,325,244 AGAINST;
and 985,598 ABSTENTIONS. There were 11,683,386 broker non-votes on this
matter.
6. Defeated a shareowner proposal relating to executive severance
agreements by a vote of 34,871,403 FOR; 76,379,825 AGAINST; and
1,921,278 ABSTENTIONS. There were 11,683,386 broker non-votes on this
matter.
7. Defeated a shareowner proposal relating to executive stock option
grants by a vote of 26,940,194 FOR; 84,278,998 AGAINST; and 1,953,314
ABSTENTIONS. There were 11,683,386 broker non-votes on this matter.
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ITEM 5. OTHER INFORMATION
BROAD-BASED STOCK OPTION PLANS
For information regarding our broad-based employee stock option plans,
see Note 15 of our 2000 Annual Report to Shareowners (pages 50-51) and Note 2 of
the Notes to the Consolidated Financial Statements in this Form 10-Q.
RE-PRICING OF PRICELINE.COM WARRANTS
On September 30, 2000, Delta held a warrant which, subject to certain
conditions, gave Delta the right to purchase up to 5.5 million shares of common
stock of priceline for $56.625 per share. On November 2, 2000, Delta and
priceline amended their warrant agreement (1) to reduce the 5.5 million shares
underlying the warrant to 4.7 million shares; (2) to reduce Delta's per share
purchase price for those shares to $4.7188; and (3) to provide that Delta may
not sell or otherwise transfer more than 50% of the warrant or the underlying
shares until November 2, 2001. In the opinion of management, the re-pricing of
the warrant did not have a material impact on the Consolidated Financial
Statements.
PERSONNEL MATTERS
In October 2000, Delta's approximately 11,000 ramp and cargo employees
rejected representation by the Transport Workers Union of America, with 19% of
the employees voting for union representation.
The National Mediation Board (NMB) has authorized an election to
determine whether to certify the International Association of Machinists and
Aerospace Workers (IAM) as the collective bargaining representative of ASA's
approximately 300 mechanics and related employees. The NMB will mail ballots to
covered employees on November 15, 2000, and plans to announce the results of the
vote on December 15, 2000. For the IAM to be certified as the representative of
these employees, more than 50% of the employees must vote for union
representation.
For additional information regarding collective bargaining matters at
Delta, ASA and Comair, see "Collective Bargaining Matters" in our 2000 Annual
Report to Shareowners (pages 30-31), and "Personnel" in our Annual Report on
Form 10-K (page 7) for the fiscal year ended June 30, 2000 (2000 Form 10-K).
LEGAL PROCEEDINGS
On October 20, 2000, the Superior Court of Fulton County, Georgia
approved the settlement of the ASA shareowner litigation described in Delta's
2000 Form 10-K (pages 11-12). The time for appealing the Superior Court's order
has not yet expired.
On September 25, 2000, the Circuit Court of Boone County, Kentucky
approved the settlement of the Comair shareowner litigation described in Delta's
2000 Form 10-K (page 12). The time for appealing the Circuit Court's order has
now expired.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
12. 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, 2000, Delta filed a Current
Report on Form 8-K dated July 13, 2000, reporting that Delta's Board of
Directors had approved a change of Delta's fiscal year end from June 30
to December 31, effective December 31, 2000.
Subsequent to September 30, 2000, Delta filed a Current Report on Form
8-K dated November 7, 2000, regarding, among other things, its plans
for a terminal expansion and redevelopment project at New York's John
F. Kennedy International Airport.
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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.
Delta Air Lines, Inc.
---------------------
(Registrant)
By: /s/ M. Michele Burns
---------------------
M. Michele Burns
Executive Vice President
and Chief Financial Officer
November 14, 2000
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