<PAGE> 1
EXCERPTS FROM DELTA'S 2000 ANNUAL REPORT Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DELTA AIR LINES, INC.
RESULTS OF OPERATIONS
FISCAL 2000 COMPARED TO FISCAL 1999
NET INCOME AND EARNINGS PER SHARE (EPS)
For the year ended June 30, 2000, we reported record net income of $1.3
billion, an 18% increase over our previous record of $1.1 billion for fiscal
1999. Basic EPS was $9.92 in fiscal 2000, a 30% increase over fiscal 1999 basic
EPS of $7.63. Diluted EPS was $9.42 for fiscal 2000, a 31% increase over fiscal
1999 diluted EPS of $7.20. Excluding the nonrecurring items described below, net
income for fiscal 2000 totaled $1.0 billion, basic EPS was $7.73 and diluted EPS
was $7.36.
<TABLE>
<CAPTION>
1998 1999 2000
----- ----- -----
(In Dollars)
<S> <C> <C> <C>
DILUTED EPS(*) $6.34 $7.09 $7.36
</TABLE>
(*)Excludes nonrecurring items
NONRECURRING ITEMS
Our fiscal 2000 results of operations include the following
nonrecurring items: gains from the sale of investments; asset writedowns and
other special charges; the effects of a change in accounting principle; and a
loss on the voluntary prepayment of debt. These items, as described below, are
collectively referred to in this report as "nonrecurring items."
We recorded pretax gains from the sale of investments totaling $1.2
billion ($733 million after tax, or $5.63 basic and $5.32 diluted EPS) in fiscal
2000. This includes pretax cash gains of (1) $784 million from the sale of 12.3
million shares of priceline.com Incorporated (priceline) common stock; (2) $137
million from the sale of our equity interest in Singapore Airlines Limited
(Singapore Airlines); (3) $29 million from the sale of our equity interest in
SAirGroup; and (4) $24 million from the sale of a portion of our equity
investment in Equant, N.V., an international data network services company. It
also includes a pretax non-cash gain of $228 million from the exchange of six
million shares of priceline common stock for priceline preferred stock. (See
Note 2 of the Notes to the Consolidated Financial Statements.)
During fiscal 2000, we recorded pretax asset writedowns and other
special charges totaling $555 million ($339 million after tax, or $2.60 basic
and $2.45 diluted EPS). This includes pretax charges of (1) $320 million for an
asset writedown resulting from the decision to retire certain aircraft earlier
than previously planned; (2) $149 million for asset impairment losses and costs
incurred to streamline certain operations; and (3) $86 million for our early
retirement medical option program. (See Note 6 of the Notes to the Consolidated
Financial Statements.)
Delta changed its method of accounting for the sale of frequent flyer
mileage credits to participating partners to comply with SEC Staff Accounting
Bulletin (SAB) 101, "Revenue Recognition in Financial Statements." Under the new
accounting method, a portion of the revenue from the sale of mileage credits is
deferred and recognized when the credits are redeemed for travel. We
retroactively adopted SAB 101 as of July 1, 1999, which resulted in a cumulative
effect charge of $66 million after tax ($.51 basic and $.48 diluted EPS). The
adoption of SAB 101 also decreased fiscal 2000 operating income by $34 million
($21 million after tax, or $.16 basic and $.15 diluted EPS). (See Note 18 of the
Notes to the Consolidated Financial Statements.)
Also during fiscal 2000, we recorded a $40 million charge ($24 million
after tax, or $.19 basic and $.18 diluted EPS) for the voluntary prepayment of
certain long-term debt obligations.
In fiscal 1999, we recorded a pretax gain of $26 million ($16 million
after tax, or $.11 basic and $.10 diluted EPS) from the sale of a portion of our
equity investment in Equant.
ACQUISITION OF ASA HOLDINGS, INC. AND COMAIR HOLDINGS, INC.
Delta strengthened its competitive position by acquiring ASA Holdings,
Inc. (ASA Holdings) in fiscal 1999 and Comair Holdings, Inc. (Comair Holdings)
in fiscal 2000. ASA Holdings and Comair Holdings are the parent companies of
regional jet carriers Atlantic Southeast Airlines, Inc. (ASA) and Comair, Inc.
(Comair), respectively. Our consolidated results of operations for fiscal 2000
include the results of operations of ASA Holdings for the entire fiscal year and
of Comair Holdings from November 22, 1999 through June 30, 2000. Our
consolidated results of operations for fiscal 1999 include the results of
operations of ASA Holdings from April 1, 1999 through June 30, 1999. (See Note
17 of the Notes to the Consolidated Financial Statements.)
26
<PAGE> 2
<TABLE>
<CAPTION>
1998 1999 2000
------- ------- -------
(In Millions of Dollars)
<S> <C> <C> <C>
OPERATING REVENUES $14,057 $14,597 $15,888
</TABLE>
OPERATING REVENUES
Operating revenues were $15.9 billion for fiscal 2000, increasing 9%
from $14.6 billion in fiscal 1999. Passenger revenue grew 9%, reflecting a 6%
increase in RPMs on 5% capacity growth and a 3% increase in passenger mile
yield.
North American Passenger Revenues-North American passenger revenues grew 10% to
$12.5 billion. RPMs increased 5% on capacity growth of 6%, while passenger mile
yield rose 5%. The increase in RPMs primarily reflects favorable economic
conditions, the inclusion of ASA and Comair in our results of operations and the
expansion of our fleet. The increase in passenger mile yield is largely due to
the inclusion of ASA and Comair, partially offset by increased low-fare
competition and capacity increases by competitors.
International Passenger Revenues-International passenger revenues increased 2%
to $2.4 billion during fiscal 2000. RPMs increased 7% on capacity growth of 2%,
while passenger mile yield declined 4%. The increase in RPMs primarily reflects
our continued expansion in Latin America, which resulted in 21% traffic growth
in that region. The decline in passenger mile yield is primarily attributable to
increased pricing pressures resulting from industry-wide capacity growth in the
Atlantic market.
Cargo and Other Revenues-Cargo revenues increased 4% to $579 million, reflecting
a 7% increase in cargo ton miles and a 3% decrease in ton mile yield. The
increase in cargo ton miles is primarily due to capacity increases and higher
mail volume from the growth in e-commerce activity. The decrease in ton mile
yield is due to pricing pressure resulting from industry-wide capacity growth in
international markets. Other revenues increased 22% to $433 million, mainly a
result of higher revenues from codeshare activity and frequent flyer
partner-ship programs.
<TABLE>
<CAPTION>
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
CASM(*) 8.88(cents) 8.84(cents) 9.25(cents)
</TABLE>
(*) Excludes nonrecurring items
OPERATING EXPENSES
Operating expenses totaled $14.6 billion for fiscal 2000, increasing
15% from $12.7 billion in fiscal 1999. Operating capacity rose 5% to 152 billion
ASMs. CASM increased 9% to 9.61(cents), while non-fuel CASM grew 8% to
8.53(cents). Excluding nonrecurring items, CASM increased 5% to 9.25(cents).
Salaries and related costs increased 12% during fiscal 2000. The number of
full-time equivalent employees increased 9%, largely from the inclusion of ASA
and Comair. The increase in salaries and related costs also reflects salary
increases for most domestic employees of 2% on January 1, 1999, and 3% on
April 1, 2000.
Aircraft fuel expense increased 21% in fiscal 2000, with the average
fuel price per gallon rising 15% to 57.23(cents). Total gallons consumed
increased 5% due to increased operations on a 5% rise in capacity. Delta's fuel
cost per gallon is net of gains of $442 million on fuel hedging contracts, which
hedged approximately 75% of our aircraft fuel requirements during fiscal 2000.
Depreciation and amortization expense rose 19% due to the acquisition of
additional aircraft and ground equipment, as well as the inclusion of ASA and
Comair. Other selling expenses increased less than 1.0%.
Passenger commissions expense declined 17%, 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 total tickets flown in fiscal 2000 compared to 3% in fiscal
1999. Contracted services expense increased 16% due to the inclusion of ASA and
Comair, as well as higher costs related to customer service and technology
initiatives.
Landing fees and other rents increased 5%, aircraft rental expense
increased 18%, and aircraft maintenance materials and outside repair expense
grew 21%, primarily due to the inclusion of ASA and
27
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Comair. Passenger service expense declined 6% due to process improvements which
streamlined our catering operations. Other costs increased 4% due to higher
expenses associated with fuel-related taxes and supplies, as well as the
inclusion of ASA and Comair.
<TABLE>
<CAPTION>
1998 1999 2000
------ ------ ------
(In Millions of Dollars)
<S> <C> <C> <C>
OPERATING INCOME(*) $1,694 $1,870 $1,877
</TABLE>
(*) Excludes nonrecurring items
OPERATING INCOME AND OPERATING MARGIN
Operating income was $1.3 billion for fiscal 2000, compared to
$1.9 billion in fiscal 1999. Excluding non-recurring items, operating income
totaled $1.9 billion in fiscal 2000.
Operating margin declined to 8.1% during fiscal 2000 from 12.8% in
fiscal 1999. Excluding nonrecurring items, operating margin was 11.8% in fiscal
2000.
OTHER INCOME
Other income was $995 million during fiscal 2000 compared to other
expense of $44 million in fiscal 1999. The increase is primarily a result of
pretax gains from the sale of investments totaling $1.2 billion. (See Note 2 of
the Notes to the Consolidated Financial Statements.) Interest expense, net
increased to $197 million in fiscal 2000 from $101 million in fiscal 1999
primarily from increased levels of debt outstanding and higher interest rates,
partially offset by higher levels of cash invested. Miscellaneous expense was
$10 million during fiscal 2000 compared to miscellaneous income of $31 million
during fiscal 1999 due to a $40 million loss on the voluntary prepayment of
certain long-term debt obligations.
FISCAL 1999 COMPARED TO FISCAL 1998
NET INCOME AND EARNINGS PER SHARE
Net income grew 10% to $1.1 billion during fiscal 1999, from $1.0
billion in fiscal 1998. Our fiscal 1999 results include the results of
operations for ASA Holdings from April 1, 1999 through June 30, 1999. (See
Note 17 of the Notes to the Consolidated Financial Statements.) Basic EPS was
$7.63 in fiscal 1999, compared to $6.64 in fiscal 1998, a 15% increase. Diluted
EPS was $7.20 for fiscal 1999, a 14% increase from fiscal 1998 diluted EPS of
$6.34. Fiscal 1998 EPS has been restated to reflect our two-for-one common stock
split which became effective in November 1998. (See Note 1 of the Notes to the
Consolidated Financial Statements.)
OPERATING REVENUES
Operating revenues were $14.6 billion for fiscal 1999, increasing 4%
from $14.1 billion in fiscal 1998. Passenger revenue growth of 4% reflects a 3%
increase in RPMs on 3% capacity growth. Passenger mile yield increased less than
1% to 13.09(cents).
North American Passenger Revenues-North American passenger revenues grew 5% to
$11.4 billion, driven by a 3% increase in RPMs on capacity growth of 2%. The
increase in RPMs was a result of favorable economic conditions and increased
traffic (including the effects of pilot labor actions at two of our
competitors), as well as our reallocation of aircraft to higher-demand
markets. Passenger mile yield rose 2% due to the full-year effect of a domestic
fare increase in September 1997 and improved asset utilization, partially offset
by increased low-fare competition and matching sale fares implemented by a
competitor after its pilot strike.
International Passenger Revenues-International passenger revenues remained flat
at $2.3 billion during fiscal 1999. A 5% increase in RPMs on capacity growth of
7% was offset by a 6% decline in passenger mile yield. The increase in RPMs pri-
marily reflects the addition of new Atlantic routes and continued expansion into
Latin America. The decline in passenger mile yield is a result of increased
competitive pressures due to industry-wide capacity growth in the Atlantic and
Latin American markets.
Cargo and Other Revenues-Cargo revenues declined 4% during fiscal 1999,
reflecting a 3% decrease in cargo ton miles and a 1% decrease in ton mile yield.
Other revenues increased 20%, mainly a result of higher revenues from codeshare
programs.
OPERATING EXPENSES
In fiscal 1999, operating expenses totaled $12.7 billion, increasing 3%
from $12.4 billion in fiscal 1998. Operating capacity rose 3% to 144 billion
ASMs. CASM remained flat year over year while non-fuel CASM grew 2% to
7.89(cents). The increase in operating expenses primarily resulted from higher
salaries and related costs due to headcount growth and a general salary
increase; higher depreciation and amortization expense due to the acquisition of
additional aircraft and ground equipment; an increase in other selling expenses
resulting from increased advertising and promotional activities, as well as
28
<PAGE> 4
increased credit card charges due to higher passenger volume; and increased
contracted services expense due to expanded operations into new and existing
markets and contract rate increases. Aircraft fuel expense decreased 10%,
with the average fuel price per gallon falling 12%. Passenger commission expense
fell 12% due to lower effective commission rates and increased utilization of
lower cost distribution channels.
OPERATING INCOME AND OPERATING MARGIN
During fiscal 1999, operating income totaled $1.9 billion, which
represented an increase of 10% over fiscal 1998. Operating margin increased to
12.8% in fiscal 1999 from 12.1% in fiscal 1998.
OTHER EXPENSE
Other expense decreased 4% to $44 million during fiscal 1999 due to
higher interest expense, net, offset by a $26 million gain from the sale of a
portion of our equity investment in Equant and an increase in miscellaneous
income.
FINANCIAL CONDITION AND LIQUIDITY
FISCAL YEAR 2000
Cash and cash equivalents and short-term investments totaled $1.7
billion at June 30, 2000, compared to $1.1 billion at June 30, 1999. Our
principal sources and uses of cash during fiscal 2000 are summarized below.
SOURCES
- Generated $2.4 billion of cash from operations.
- Generated $256 million from the sale of flight equipment.
- Issued $2.1 billion, net, of unsecured long-term notes to pay the $1.8
billion purchase price of Comair Holdings and for general corporate
purposes. (See Note 5 of the Notes to the Consolidated Financial
Statements.)
- Borrowed $301 million from the Development Authority of Clayton County
to refund bonds that had been issued to finance certain Delta
facilities at Hartsfield Atlanta International Airport. (See Note 5 of
the Notes to the Consolidated Financial Statements.)
- Issued 0.6 million shares of common stock for $32 million (including an
income tax benefit of $4 million for stock options exercised). These
shares were primarily issued under our broad-based employee stock
option plans. (See Note 10 of the Notes to the Consolidated Financial
Statements.)
- Generated $1.2 billion from the sale of investments. (These sales
resulted in pretax cash gains of $974 million. See Note 2 of the Notes
to the Consolidated Financial Statements.)
USES
- Invested $2.7 billion in flight equipment and $556 million in ground
property and equipment.
- Paid $790 million to repurchase 16.5 million shares of common stock.
(See Note 11 of the Notes to the Consolidated Financial Statements.)
- Paid $1.8 billion to acquire Comair Holdings. (See Note 17 of the Notes
to the Consolidated Financial Statements.)
- Paid $42 million in cash dividends on preferred and common stock.
Cash flows from operations for fiscal 2000 totaled $2.4 billion. We
invested in future growth opportunities during fiscal 2000 by purchasing Comair
Holdings, upgrading airport and administrative technology, investing in
customer service improvements and acquiring new aircraft.
<TABLE>
<CAPTION>
1998 1999 2000
------ ------ ------
(In Millions of Dollars)
<S> <C> <C> <C>
CASH REINVESTED IN
THE BUSINESS $2,324 $2,765 $3,902
</TABLE>
We have increased the amount of cash used in investing activities over
the past three fiscal years, highlighting our emphasis on business reinvestment
and growth opportunities.
As of June 30, 2000, we had a negative working capital position of $2.6
billion, compared to negative working capital of $2.7 billion at June 30, 1999.
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 debt
financings and proceeds from sale and leaseback transactions. At June 30, 2000,
we had $1.25 billion of credit available under our 1997 Bank Credit Agreement.
(See Note 5 of the Notes to the Consolidated Financial Statements.)
Long-term debt and capital lease obligations, including current
maturities, totaled $5.1 billion at June 30, 2000, compared to $2.7 billion at
June 30, 1999. The increase in debt is primarily the result of borrowings to
finance our acquisition of Comair Holdings. Shareowners' equity was $4.9 billion
at June 30, 2000, compared to $4.5 billion at June 30, 1999. Our net
debt-to-capital position,
29
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DELTA AIR LINES, INC.
including current maturities, was 71% at June 30, 2000, compared to 68% at June
30, 1999.
For additional information regarding Delta's credit agreements and
long-term debt, see Note 5 of the Notes to the Consolidated Financial
Statements.
PRIOR YEARS
FISCAL 1999
In fiscal 1999, our principal source of funds was $2.9 billion of cash
from operations and $1.1 billion from the issuance of debt. We invested
$2.3 billion in flight equipment and $561 million in ground property and
equipment. We made payments of $431 million on debt and capital lease
obligations, and paid $700 million to acquire ASA Holdings. In addition, we
repurchased $885 million of common stock and paid $43 million in cash dividends
on preferred and common stock.
FISCAL 1998
During fiscal 1998, our principal source of funds was $3.0 billion of
cash from operations. We invested $1.8 billion in flight equipment and
$531 million in ground property and equipment, and made payments of $307 million
on long-term debt and capital lease obligations. We also repurchased $354
million of common stock and paid $43 million in cash dividends on preferred and
common stock.
COMMITMENTS
Estimated future expenditures for aircraft and engines on firm order as
of August 11, 2000 totaled $9.5 billion. In addition, we have planned capital
expenditures of $986 million for the twelve months ending June 30, 2001 for
airport and office facility improvements, aircraft modifications and the pur-
chase of ground equipment and other assets. (See Notes 7 and 8 of the Notes to
the Consolidated Financial Statements for additional information regarding our
lease obligations and purchase commitments.)
OTHER MATTERS
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 requires us to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not designated as part of a hedging relationship must be adjusted to fair
value through income. If the derivative is a hedge, depending on the nature of
the hedge, the effective portion of the hedge's change in fair value is either
(1) offset against the change in fair value of the hedged asset, liability or
firm commitment through income or (2) held in equity until the hedged item is
recognized in income. The ineffective portion of a hedge's change in fair value
is immediately recognized in income. We will adopt SFAS 133, as amended, on July
1, 2000.
The adoption of SFAS 133 will result in a $100 million charge, net of
tax, from a cumulative effect of a change in accounting principle, and a $440
million increase, net of tax, in shareowners' equity in our financial statements
for the quarter ending September 30, 2000.
FISCAL YEAR CHANGE
On June 29, 2000, our Board of Directors approved a change of Delta's
fiscal year end from June 30 to December 31, effective December 31, 2000. We
plan to file a transition report on Form 10-K covering the transition period
from July 1, 2000 through December 31, 2000. This filing will include audited
financial statements for the twelve months ended December 31, 2000, 1999 and
1998.
COLLECTIVE BARGAINING MATTERS
Approximately 16% of the 81,000 total employees of Delta, ASA and
Comair are represented by unions.
In September 1999, Delta began negotiations with the Air Line Pilots
Association, International (ALPA), on a new collective bargaining agreement to
replace the existing contract for Delta's approximately 9,000 pilots that
became amendable in May 2000. Delta is also in negotiations on an initial
collective bargaining agreement with the Transport Workers Union of America
(TWU), which became the representative of Delta's approximately 110 pilot
ground training instructors in October 1999.
In March 2000, Delta's approximately 11,000 ramp and cargo employees
rejected representation by the TWU, with 17% of the employees voting in favor of
union representation. The National Mediation Board (NMB) recently ordered a
rerun election. The NMB plans to mail ballots to employees on September 1, 2000,
and to announce the results of the voting on October 2, 2000.
ASA is in negotiations with the TWU on an initial collective bargaining
agreement for ASA's approximately 30 flight dispatchers. The TWU became the
representative of this employee group in November 1998.
Comair is in negotiations with ALPA on a new collective bargaining
agreement for Comair's approximately 1,300 pilots, and with the International
Brotherhood of Teamsters (IBT) on an initial contract for Comair's approximately
550 flight attendants.
30
<PAGE> 6
Comair's existing collective bargaining agreement with ALPA became
amendable in June 1998. The IBT became the representative of Comair's flight
attendants in September 1998.
Unions are currently engaged in organizing efforts to represent various
groups of employees of Delta, ASA and Comair. The outcome of these union
organizing efforts, as well as the TWU rerun election and the collective
bargaining negotiations outlined above, cannot presently be determined.
COMPETITIVE ENVIRONMENT AND SEASONALITY
The airline industry is highly competitive and is characterized by
substantial price competition. If price reductions are not offset by increases
in traffic or changes in the mix of traffic that improve our passenger mile
yield, our operating results will be adversely affected.
Two of our competitors, UAL Corporation and USAirways Group, Inc.,
recently entered into a definitive merger agreement. If that merger were
to occur, conditions and competition in the airline industry could be
significantly altered.
There are seasonal variations in the demand for air travel. Therefore,
operating results for an interim period do not necessarily indicate results for
an entire year. In general, demand for air travel is higher in the June and
September quarters, particularly in international markets, because there is
more vacation travel during these periods than during the remainder of the year.
Demand is also affected by factors such as economic conditions and fare levels.
ENVIRONMENTAL AND LEGAL CONTINGENCIES
Delta is a defendant in legal actions relating to antitrust matters,
employment practices, environmental issues and other matters concerning our
business. Although the ultimate outcome of these matters cannot be predicted
with certainty, we believe that the resolution of these actions is not likely to
have a material adverse effect on our consolidated financial statements.
MARKET RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS
Delta has market risk exposure related to aircraft fuel prices, stock
prices, interest rates and foreign currency exchange rates. The market risk is
the potential negative impact of adverse changes in thee prices or rates on our
consolidated financial statements. To manage the volatility relating to these
exposures, we periodically enter into derivative transactions pursuant to
stated policies. (See Note 4 of the Notes to the Consolidated Financial
Statements for further discussion of our policies for managing such exposures.)
The following sensitivity analyses do not consider the effects that an
adverse change would have on demand for air travel, the economy as a whole, or
additional actions by management to mitigate our exposure to a particular risk.
For these and other reasons, the actual results of changes in these prices
or rates may differ materially from the following hypothetical results.
AIRCRAFT FUEL PRICE RISK
Our results of operations could be significantly impacted by changes in
the price and availability of aircraft fuel. During fiscal 2000, aircraft fuel
accounted for 11% of our operating expenses. Based on our projected aircraft
fuel consumption of 3.0 billion gallons for the twelve months ending June 30,
2001, a 10% rise in our projected jet fuel prices would increase our aircraft
fuel expense by approximately $99 million for that period. This analysis
includes the effects of fuel hedging instruments in place at June 30, 2000.
Based on our fiscal 2000 aircraft fuel consumption of 2.9 billion gallons, a
10% rise in our jet fuel prices would have increased our aircraft fuel expense
by approximately $40 million in fiscal 2000. This analysis includes the effects
of fuel hedging instruments in place at June 30, 1999.
For additional information regarding our aircraft fuel price risk
management program, see Note 4 of the Notes to the Consolidated Financial
Statements.
EQUITY SECURITIES RISK
At June 30, 2000, our ownership interest in SkyWest, Inc. was our only
readily marketable equity investment. The estimated fair value and aggregate
unrealized gain from this investment was $115 million and $101 million,
respectively, at June 30, 2000. The market risk associated with this investment
is the potential loss in fair value resulting from a decrease in SkyWest's
common stock price.
At June 30, 1999, the estimated fair value of all our equity
investments totaled $962 million, with an aggregate unrealized gain of
$568 million. The decrease in fair value of our equity investments at
June 30, 2000 compared to June 30, 1999 is due to the sale of our equity
interests in Singapore Airlines Limited and SAirGroup during fiscal 2000, and
the fact that our equity investments at June 30, 1999 included our minority
ownership interest in Comair Holdings. During fiscal 2000, we acquired a
100% ownership interest in Comair Holdings. As a result of that acquisition,
at June 30, 2000, Delta and Comair Holdings are consolidated for financial
reporting purposes. (See Note 17 of the Notes to the Consolidated Financial
Statements.)
31
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DELTA AIR LINES, INC.
We own depository certificates that are convertible, subject to
certain restrictions, into the common stock of Equant. The market risk relating
to this investment is the potential reduction in value resulting from a
decrease in Equant's common stock price. (See Note 2 of the Notes to the
Consolidated Financial Statements.)
At June 30, 2000, we had warrants to purchase 5.5 million shares of
priceline common stock. Our market risk associated with these warrants is the
potential loss of gain based on decreases in the price of priceline common
stock. (See Note 2 of the Notes to the Consolidated Financial Statements.)
INTEREST RATE RISK
Our exposure to market risk due to changes in interest rates relates to
our long-term debt obligations and cash investment portfolio.
Market risk associated with our long-term debt is the potential change
in fair value resulting from a change in interest rates. An assumed 10% decrease
in interest rates would increase the estimated fair value of our long-term debt
by $270 million and $100 million at June 30, 2000 and June 30, 1999,
respectively. A 10% increase in average annual interest rates would not have
had a material impact on our interest expense for fiscal 2000 or fiscal 1999.
Based on our average balance of cash and cash equivalents and
short-term investments during fiscal 2000 and fiscal 1999, a 10% decrease in
average annual interest rates would not have had a material impact on our
interest income.
We may use non-leveraged, over-the-counter financial instruments to
manage our interest rate risk.
FOREIGN CURRENCY EXCHANGE RATE RISK
Delta is subject to foreign currency exchange rate fluctuations in the
U.S. dollar value of foreign currency-denominated transactions. Based on our
average annual net currency positions in fiscal 2000 and 1999, a 10% adverse
change in average annual foreign currency exchange rates would not have been
material to our consolidated financial statements for the years ended June 30,
2000 or 1999.
We may use foreign currency options and forward contracts with maturities
of up to 12 months to manage our foreign currency exchange rate risk.
FORWARD-LOOKING INFORMATION
Statements in this Annual Report which are not purely historical facts,
including statements regarding our beliefs, expectations, intentions, or
strategies for the future, may be "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995.
Any forward-looking statements involve a number of risks and
uncertainties that could cause actual results to differ materially from the
plans, intentions and expectations reflected in or suggested by the
forward-looking statements. Factors and events that could cause these
differences include, but are not limited to:
- general economic conditions, both in the United States and in our
markets outside the United States;
- competitive factors, such as the airline pricing environment,
international alliances, codesharing programs and capacity decisions by
competitors;
- outcomes of negotiations on collective bargaining agreements;
- changes in aircraft fuel prices;
- fluctuations in foreign currency exchange rates;
- actions by the United States and foreign governments;
- the willingness of customers to travel generally and with us
specifically, which could be affected by factors such as our on-time
performance, our baggage handling performance, how well we respond to
customer complaints and our and the industry's safety record; and
- the outcome of our litigation.
Forward-looking statements made by us are based on our knowledge of our
business and the environment in which we operate. Due to the factors listed
above, as well as other factors beyond our control, actual results may differ
materially from those anticipated in the forward-looking statements.
All forward-looking statements attributable to us or persons acting on
our behalf are expressly qualified in their entirety by these cautionary
statements. We assume no obligation to update these forward-looking statements
even though our situation will change in the future.
32
<PAGE> 8
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998 DELTA AIR LINES, INC.
<TABLE>
<CAPTION>
2000 1999 1998
(In Millions, Except Per Share Data)
<S> <C> <C> <C>
OPERATING REVENUES:
Passenger $ 14,876 $ 13,685 $ 13,180
Cargo 579 557 582
Other, net 433 355 295
-------- -------- --------
Total operating revenues 15,888 14,597 14,057
-------- -------- --------
OPERATING EXPENSES:
Salaries and related costs 5,597 4,993 4,850
Aircraft fuel 1,646 1,360 1,507
Depreciation and amortization 1,146 961 860
Other selling expenses 644 641 600
Passenger commissions 722 867 980
Contracted services 893 772 694
Landing fees and other rents 742 707 649
Aircraft rent 694 590 552
Aircraft maintenance materials and outside repairs 681 561 495
Passenger service 471 500 450
Asset writedowns and other special charges 555 -- --
Other 809 775 726
-------- -------- --------
Total operating expenses 14,600 12,727 12,363
-------- -------- --------
OPERATING INCOME 1,288 1,870 1,694
-------- -------- --------
OTHER INCOME (EXPENSE):
Interest income (expense), net (197) (101) (69)
Gains from the sale of investments 1,202 26 --
Miscellaneous income (expense), net (10) 31 23
-------- -------- --------
Total other income (expense) 995 (44) (46)
-------- -------- --------
INCOME BEFORE INCOME TAXES 2,283 1,826 1,648
INCOME TAXES PROVIDED (914) (725) (647)
-------- -------- --------
NET INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE, NET OF TAX 1,369 1,101 1,001
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF TAX (66) -- --
-------- -------- --------
NET INCOME 1,303 1,101 1,001
PREFERRED STOCK DIVIDENDS (12) (11) (11)
-------- -------- --------
NET INCOME AVAILABLE TO COMMON SHAREOWNERS $ 1,291 $ 1,090 $ 990
======== ======== ========
BASIC EARNINGS PER SHARE BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE $ 10.42 $ 7.63 $ 6.64
======== ======== ========
BASIC EARNINGS PER SHARE $ 9.92 $ 7.63 $ 6.64
======== ======== ========
DILUTED EARNINGS PER SHARE BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE $ 9.90 $ 7.20 $ 6.34
======== ======== ========
DILUTED EARNINGS PER SHARE $ 9.42 $ 7.20 $ 6.34
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
33
<PAGE> 9
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND 1999 DELTA AIR LINES, INC.
<TABLE>
<CAPTION>
ASSETS
(In Millions)
2000 1999
------- -------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,252 $ 1,124
Short-term investments 493 19
Accounts receivable, net of allowance for
uncollectible accounts of $34 at June 30, 2000
and $30 at June 30, 1999 739 602
Deferred income taxes 356 403
Prepaid expenses and other 506 524
------- -------
Total current assets 3,346 2,672
------- -------
PROPERTY AND EQUIPMENT:
Flight equipment 15,838 13,595
Less: Accumulated depreciation 5,037 4,405
------- -------
10,801 9,190
------- -------
Flight equipment under capital leases 506 515
Less: Accumulated amortization 303 264
------- -------
203 251
------- -------
Ground property and equipment 4,212 3,862
Less: Accumulated depreciation 2,250 2,123
------- -------
1,962 1,739
------- -------
Advance payments for equipment 525 493
------- -------
Total property and equipment 13,491 11,673
------- -------
OTHER ASSETS:
Marketable equity securities 396 523
Investments in associated companies 242 300
Cost in excess of net assets acquired, net of
accumulated amortization of $166 at
June 30, 2000 and $121 at June 30, 1999 2,183 782
Leasehold and operating rights, net of accumulated
amortization of $231 at June 30, 2000 and
$220 at June 30, 1999 104 113
Other noncurrent assets 804 687
------- -------
Total other assets 3,729 2,405
------- -------
Total assets $20,566 $16,750
======= =======
</TABLE>
34
<PAGE> 10
<TABLE>
<CAPTION>
LIABILITIES AND SHAREOWNERS' EQUITY 2000 1999
--------------------------------------------------------------------------------- --------
(In Millions, Except Share Data)
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt $ 526 $ 660
Current obligations under capital leases 43 39
Accounts payable and miscellaneous accrued liabilities 2,738 2,209
Air traffic liability 1,920 1,819
Accrued salaries and vacation pay 500 470
Accrued rent 213 195
--------------------------------------------------------------------------------- --------
Total current liabilities 5,940 5,392
--------------------------------------------------------------------------------- --------
NONCURRENT LIABILITIES:
Long-term debt 4,378 1,756
Capital leases 147 196
Postretirement benefits 2,008 1,894
Accrued rent 742 720
Deferred income taxes 869 755
Other 458 470
--------------------------------------------------------------------------------- --------
Total noncurrent liabilities 8,602 5,791
--------------------------------------------------------------------------------- --------
DEFERRED CREDITS:
Deferred gains on sale and leaseback transactions 592 642
Manufacturers' and other credits 345 282
--------------------------------------------------------------------------------- --------
Total deferred credits 937 924
--------------------------------------------------------------------------------- --------
COMMITMENTS AND CONTINGENCIES (NOTES 4, 5, 7 AND 8)
EMPLOYEE STOCK OWNERSHIP PLAN PREFERRED STOCK:
Series B ESOP Convertible Preferred Stock,
$1.00 par value, $72.00 stated and liquidation value;
issued and outstanding 6,455,372 shares at
June 30, 2000 and 6,547,495 shares at June 30, 1999 465 471
Unearned compensation under employee stock ownership plan (251) (276)
--------------------------------------------------------------------------------- --------
Total Employee Stock Ownership Plan Preferred Stock 214 195
--------------------------------------------------------------------------------- --------
SHAREOWNERS' EQUITY:
Common stock, $1.50 par value;
450,000,000 shares authorized; 180,356,181 shares issued at
June 30, 2000 and 179,763,547 shares at June 30, 1999 271 270
Additional paid-in capital 3,245 3,208
Retained earnings 4,043 2,756
Accumulated other comprehensive income 40 149
Treasury stock at cost, 57,716,615 shares at
June 30, 2000 and 41,209,828 shares at June 30, 1999 (2,726) (1,935)
--------------------------------------------------------------------------------- --------
Total shareowners' equity 4,873 4,448
--------------------------------------------------------------------------------- --------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $ 20,566 $ 16,750
--------------------------------------------------------------------------------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
35
<PAGE> 11
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended June 30, 2000, 1999 and 1998 DELTA AIR LINES, INC.
<TABLE>
<CAPTION>
2000 1999 1998
------------------------------------------------------------------------------ ------- -------
(In Millions)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,303 $ 1,101 $ 1,001
Adjustments to reconcile net income to cash
provided by operating activities:
Cumulative effect of change in accounting principle 66 -- --
Asset writedowns and other special charges 555 -- --
Depreciation and amortization 1,146 961 860
Deferred income taxes 250 353 294
Pension, postretirement and post employment expense
in excess of payments 36 34 179
Dividends in excess of (less than) equity income 52 (53) (51)
Gains from the sale of investments (1,202) (26) --
Income tax benefit from exercise of stock options 4 34 84
Changes in certain current assets and liabilities:
(Increase) decrease in accounts receivable (189) 339 5
Decrease (increase) in prepaid expenses and
other current assets 58 (176) 15
Increase in air traffic liability 89 152 249
Increase in other payables and accrued expenses 14 77 330
Other, net 196 141 34
------------------------------------------------------------------------------ ------- -------
Net cash provided by operating activities 2,378 2,937 3,000
------------------------------------------------------------------------------ ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions:
Flight equipment, including advance payments (2,733) (2,258) (1,760)
Ground property and equipment (556) (561) (531)
(Increase) decrease in short-term investments, net (310) 568 (43)
Proceeds from sale of flight equipment 256 30 10
Proceeds from sale of investments 1,240 26 --
Prepayment of long-term lease obligations (215) -- --
Acquisition, net of cash acquired (1,584) (570) --
------------------------------------------------------------------------------ ------- -------
Net cash used in investing activities (3,902) (2,765) (2,324)
------------------------------------------------------------------------------ ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt and capital
lease obligations (2,099) (154) (307)
Payments on notes payable -- (277) --
Cash dividends (42) (43) (43)
Issuance of long-term obligations 4,472 324 125
Issuance of short-term obligations 83 779 --
Issuance of common stock 28 131 318
Repurchase of common stock (790) (885) (354)
------------------------------------------------------------------------------ ------- -------
Net cash provided by (used in) financing activities 1,652 (125) (261)
------------------------------------------------------------------------------ ------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 128 47 415
Cash and cash equivalents at beginning of year 1,124 1,077 662
------------------------------------------------------------------------------ ------- -------
Cash and cash equivalents at end of year $ 1,252 $ 1,124 $ 1,077
------------------------------------------------------------------------------ ------- -------
SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR:
Interest, net of amounts capitalized 320 130 152
Income taxes 332 242 244
------------------------------------------------------------------------------ ------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
36
<PAGE> 12
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
For the years ended June 30, 2000, 1999 and 1998 DELTA AIR LINES, INC.
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-In Retained Comprehensive Treasury
(In Millions, Except Share Data) Stock Capital Earnings Income Stock Total
-------------------------------------------------------------- ---------- --------- ------------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1997 $251 $2,645 $ 711 $ 101 $ (701) $3,007
------------------------------------------------------------- ------ ------- ----- ------- ------
Fiscal Year 1998:
Net income -- -- 1,001 -- -- 1,001
Dividends on common stock ($0.10 per share) -- -- (15) -- -- (15)
Dividends on Series B ESOP Convertible
Preferred Stock allocated shares -- -- (11) -- -- (11)
Issuance of 9,276,084 shares of common stock
under dividend reinvestment and stock purchase
plan and stock options ($34.28 per share*) 14 304 -- -- -- 318
Repurchase of 6,316,746 common shares
($56.04 per share*) -- -- -- -- (354) (354)
Income tax benefit from exercise of stock options -- 84 -- -- -- 84
Transfer of 99,082 shares of common stock from
treasury under stock incentive plan
($38.59 per share*) -- -- -- -- 3 3
Accumulated other comprehensive income -- -- -- (12) -- (12)
Other -- 1 1 -- -- 2
------------------------------------------------------------- ------ ------- ----- ------- ------
BALANCE AT JUNE 30, 1998 265 3,034 1,687 89 (1,052) 4,023
------------------------------------------------------------- ------ ------- ----- ------- ------
Fiscal Year 1999:
Net income -- -- 1,101 -- -- 1,101
Dividends on common stock ($0.10 per share) -- -- (14) -- -- (14)
Dividends on Series B ESOP Convertible
Preferred Stock allocated shares -- -- (11) -- -- (11)
Issuance of 3,197,369 shares of common stock
under dividend reinvestment and stock purchase
plan and stock options ($41.01 per share*) 5 126 -- -- -- 131
Repurchase of 15,149,658 common shares
($58.45 per share*) -- -- -- -- (885) (885)
Income tax benefit from exercise of stock options -- 34 -- -- -- 34
Transfer of 55,614 shares of common stock from
treasury under stock incentive plan
($36.54 per share*) -- -- -- -- 2 2
Accumulated other comprehensive income -- -- -- 60 -- 60
Other -- 14 (7) -- -- 7
------------------------------------------------------------- ------ ------- ----- ------- ------
BALANCE AT JUNE 30, 1999 270 3,208 2,756 149 (1,935) 4,448
------------------------------------------------------------- ------ ------- ----- ------- ------
Fiscal Year 2000:
Net income -- -- 1,303 -- -- 1,303
Dividends on common stock ($0.10 per share) -- -- (13) -- -- (13)
Dividends on Series B ESOP Convertible
Preferred Stock allocated shares -- -- (12) -- -- (12)
Issuance of 592,634 shares of common stock
under dividend reinvestment and stock purchase
plan and stock options ($47.83 per share*) 1 27 -- -- -- 28
Repurchase of 16,480,400 common shares
($47.93 per share*) -- -- -- -- (790) (790)
Income tax benefit from exercise of stock options -- 4 -- -- -- 4
Transfers and forfeitures of 28,967 shares of
common stock under stock incentive plan
($56.48 per share*) -- -- -- -- (1) (1)
Accumulated other comprehensive income -- -- -- (109) -- (109)
Other -- 6 9 -- -- 15
------------------------------------------------------------- ------ ------- ----- ------- ------
BALANCE AT JUNE 30, 2000 $271 $3,245 $ 4,043 $ 40 $(2,726) $4,873
------------------------------------------------------------- ------ ------- ----- ------- ------
</TABLE>
(*) Average price per share.
The accompanying notes are an integral part of these consolidated financial
statements.
37
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000, 1999 and 1998 DELTA AIR LINES, INC.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - Delta Air Lines, Inc. (a Delaware corporation) is a
major air carrier that provides air transportation for passengers and freight
throughout the United States and around the world. Our consolidated financial
statements include the accounts of Delta Air Lines, Inc. and our majority-owned
subsidiaries (Delta). We have eliminated all significant inter-company
transactions. Purchased companies are included from the date of acquisition. We
have reclassified certain amounts from prior years to be consistent with the
presentation in our fiscal 2000 financial statements. (See Note 18 of the Notes
to the Consolidated Financial Statements.)
Use of Estimates - We are required to make estimates and assumptions when
preparing our financial statements in conformity with generally accepted
accounting principles. These estimates and assumptions affect the amounts
reported in our financial statements and the accompanying notes. Actual results
could differ from those estimates.
Cash and Cash Equivalents - We classify short-term, highly liquid investments
with original maturities of three months or less as cash and cash equivalents.
These investments are stated at cost, which approximates fair value.
Passenger and Cargo Revenues - We record sales of passenger tickets and cargo
services as air traffic liability on our Consolidated Balance Sheets. Passenger
and cargo revenues are recognized and the related air traffic liability is
reduced when we provide the transportation. We periodically evaluate the
estimated air traffic liability. Any resulting adjustments, which can be
significant, are included in the Consolidated Statements of Income in the
period that the evaluations are completed.
Property and Equipment - Property and equipment is recorded at cost and
depreciated on a straight-line basis to estimated residual values over their
estimated useful lives. The estimated useful lives for major asset
classifications are as follows:
<TABLE>
<CAPTION>
Estimated
Asset Classification Useful Life
-----------------------------------------------------------------
<S> <C>
Owned flight equipment 15-25 years
Flight equipment under capital lease Lease Term
Ground property and equipment 3-30 years
Leasehold rights and landing slots Lease Term
-----------------------------------------------------------------
</TABLE>
Residual values for flight equipment range from 5%-25% of cost.
Purchased international route authorities are amortized over the lives of the
authorities as determined by their expiration dates. Permanent route
authorities with no stated expiration dates are amortized over 40 years. Our
cost in excess of net assets acquired (goodwill) is amortized over 40 years and
is primarily related to our acquisitions of Comair Holdings, Inc. (Comair
Holdings) in November 1999, ASA Holdings, Inc. (ASA Holdings) in March 1999,
and Western Air Lines, Inc. in December 1986. Comair Holdings is the parent of
Comair, Inc. (Comair) and ASA Holdings is the parent of Atlantic Southeast
Airlines, Inc. (ASA). Comair and ASA are participants in the Delta Connection
program.
Interest Capitalized - Interest paid on advance payments used to acquire new
aircraft and to construct ground facilities is capitalized as an additional
cost of the related assets. We capitalize interest at our weighted average
interest rate on long-term debt or, if applicable, the interest rate related to
specific borrowings. Interest capitalization ends when the property or
equipment is ready for service or its intended use.
Measurement of Impairment - In accordance with Statement of Financial
Accounting Standards (SFAS) 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," we record impairment
losses on long-lived assets used in operations, goodwill and other intangible
assets when events and circumstances indicate the assets may be impaired and
the undiscounted cash flows estimated to be generated by those assets are less
than their carrying amounts. If an impairment has occurred, the amount of the
impairment recognized is determined by estimating the fair value of the assets
and recording a provision for loss if the carrying value is greater than the
fair value.
Investments in Associated Companies - We use the equity method to account for
our 40% ownership interest in WORLDSPAN, L.P., a computer reservations system
partnership. Our equity earnings from this investment totaled $48 million in
fiscal 2000, $22 million in fiscal 1999, and $14 million in fiscal 1998. We
accounted for our investments in Comair Holdings and ASA Holdings under the
equity method until November 22, 1999 and March 22, 1999, the respective dates
of acquisition.
Frequent Flyer Program - Delta records an estimated liability for the
incremental cost associated with providing free transportation under its
SkyMiles(R) frequent flyer program when a free travel award is
38
<PAGE> 14
earned. The liability is included in accounts payable and miscellaneous accrued
liabilities, and is adjusted periodically based on awards earned, awards
redeemed and changes in the SkyMiles(R) program.
Deferred Gains on Sale and Leaseback Transactions - Deferred gains on the sale
and leaseback of property and equipment under operating leases are amortized
over the lives of these leases. The gains are reflected as a reduction in rent
expense. Gains on the sale and leaseback of property and equipment under
capital leases reduce the carrying value of the related assets.
Manufacturers' Credits - We periodically receive credits in connection with the
acquisition of aircraft and engines. These credits are deferred until the
aircraft and engines are delivered, then applied on a pro rata basis as a
reduction to the cost of the related equipment.
Advertising Costs - We expense advertising costs as other selling expenses in
the fiscal year incurred. Advertising expense for fiscal 2000, 1999 and 1998
totaled $134 million, $136 million and $105 million, respectively.
Foreign Currency Remeasurement - Assets and liabilities denominated in foreign
currencies are generally remeasured using exchange rates in effect on the
balance sheet date. Revenues and expenses denominated in foreign currencies are
generally remeasured using average exchange rates for the periods presented. We
recognize the resulting foreign exchange gains and losses as a component of
miscellaneous income (expense). Fixed assets and the related depreciation or
amortization charges are recorded at the exchange rates in effect on the date
we acquired the assets.
Stock-Based Compensation - Stock-based compensation is accounted for in
accordance with Accounting Principles Board Opinion (APB) 25, "Accounting for
Stock Issued to Employees." Under APB 25, we do not recognize compensation
expense for a stock option grant if the exercise price at the measurement date
is equal to or greater than the fair market value of our common stock on the
grant date (see Note 15).
Stock Split - On November 2, 1998, our two-for-one common stock split became
effective. All references in this annual report to the number of shares of
common stock (including references to our broad-based employee stock option
programs and our common stock repurchase programs), our earnings per share and
our per share common stock prices have been restated to reflect the stock
split.
Derivatives and Hedging Activities - In June 1998, the FASB issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
requires us to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not designated as part of a hedging relationship must be
adjusted to fair value through income. If the derivative is a hedge, depending
on the nature of the hedge, the effective portion of the hedge's change in fair
value is either (1) offset against the change in fair value of the hedged
asset, liability or firm commitment through income or (2) held in equity until
the hedged item is recognized in income. The ineffective portion of a hedge's
change in fair value is immediately recognized in income. We will adopt SFAS
133, as amended, on July 1, 2000.
New Accounting Standards - During fiscal 2000, we adopted Staff Accounting
Bulletin (SAB) 101, "Revenue Recognition in Financial Statements" (see Note 18).
We also adopted Statement of Position (SOP) 98-1, "Accounting for Costs of
Computer Software Developed or Obtained for Internal Use." The adoption of SOP
98-1 did not have a material impact on our consolidated financial statements.
During fiscal 1999, we adopted SFAS 130, "Reporting Comprehensive Income" (see
Note 12), and SFAS 131, "Disclosures about Segments of an Enterprise and Related
Information" (see Note 13). During fiscal 1998, we adopted SFAS 128, "Earnings
Per Share" (see Note 14), and SFAS 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits" (see Note 9).
2. FINANCIAL INSTRUMENTS
Our financial instruments, except long-term debt and our investment in
Worldspan, are carried at fair value or have a carrying value which
approximates fair value.
SHORT-TERM INVESTMENTS
Delta invests cash in excess of operating requirements in short-term,
highly liquid investments. These investments are classified as
available-for-sale
39
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000, 1999 and 1998 DELTA AIR LINES, INC.
securities and are stated at fair value. The aggregate fair value of short-term
investments totaled $493 million and $19 million at June 30, 2000 and 1999,
respectively. Accumulated other comprehensive income includes unrealized gains
and losses from these investments, net of related deferred taxes. The
unrealized gains and losses from our short-term investments were not material
at June 30, 2000 and 1999.
MARKETABLE EQUITY SECURITIES
We sold our equity investments in Singapore Airlines and SAirGroup
during fiscal 2000, and recognized pretax gains of $137 million and $29
million, respectively. Our investment in SkyWest, Inc. is classified as an
available-for-sale security under SFAS 115, "Accounting for Certain Investments
in Debt and Equity Securities," and is recorded at fair value. The following
table summarizes these investments at June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Quoted Cost Unrealized
(In Millions) Fair Value Basis Gain
-------------------------------------- ----- --------------
June 30, June 30,
2000 1999 2000 1999
---------------------------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Singapore Airlines $ -- $335 $ -- $ -- $154
SAirGroup $ -- $110 $ -- $ -- $ 25
SkyWest $115 $ 78 $ 14 $101 $ 64
---------------------------- ---- ---- ---- ----
</TABLE>
Accumulated other comprehensive income includes the aggregate
unrealized gains from our outstanding investments, net of the related deferred
tax provision, at June 30, 2000 and 1999.
CONVERTIBLE SECURITIES
priceline.com, Inc. - During fiscal 1999, we entered into an agreement with
priceline.com (priceline) under which ticket inventory provided by Delta may be
sold through priceline's Internet-based e-commerce system. As part of this
agreement, we received a warrant to purchase up to 18.6 million shares of
priceline common stock for $0.93 per share. We did not recognize the value of
the warrant in fiscal 1999 because its estimated fair value was not material.
The warrant became fully exercisable on July 25, 1999.
We partially exercised the warrant on August 17, 1999, and exercised
the remainder of the warrant on November 17, 1999. As a result of these
exercises, we acquired 18.3 million shares of priceline common stock. We sold
12.3 million of these shares during fiscal 2000, and recognized a pretax cash
gain of $784 million.
On November 17, 1999, priceline and Delta amended their original
agreement. As a result of the amendment, Delta received (1) the right to
exchange (exchange right) 6 million shares of priceline common stock for 6
million shares of priceline convertible preferred stock; and (2) a new warrant
(new warrant) to acquire 5.5 million shares of priceline common stock for
$56.625 per share. The new warrant may become exercisable in phases prior to
December 31, 2000 if certain conditions are met. To the extent the conditions
are met and the warrant becomes exercisable, it will expire on November 17,
2004. To the extent the conditions are not met, the new warrant will become
exercisable on November 17, 2004 for a period of six months.
On June 30, 2000, we exercised our exchange right in full, receiving
six million shares of priceline convertible preferred stock. These shares (1)
have a stated value of $59.93 per share; (2) are convertible into shares of
priceline common stock on a one-for-one basis; (3) bear a dividend of 8% per
year, payable in shares of priceline common stock; (4) may be redeemed by
priceline after April 1, 2003 for $59.93 per share plus accrued and unpaid
dividends; and (5) are subject to mandatory redemption on April 1, 2010. As a
result of the exchange, we recognized a pretax non-cash gain of $228 million.
The convertible preferred stock, the new warrant, and the shares of
priceline common stock underlying these securities are not registered under the
Securities Act of 1933, but we have certain demand and piggyback registration
rights relating to the underlying shares of priceline common stock.
Based on an independent third party appraisal, the total fair value of
the new warrant on the date received was determined to be $61 million. This
amount will be recognized in income ratably over a three year period. The new
warrant is reflected at its current estimated fair value in marketable equity
securities on our Consolidated Balance Sheet as of June 30, 2000. Under our
agreement with priceline, we are required to provide priceline access to
unpublished fares.
Equant, N.V. - During fiscal 2000 and fiscal 1999, we sold a portion of our
equity interest in Equant, realizing pretax gains of $24 million and $26
million, respectively. At June 30, 2000, we owned 540,852
40
<PAGE> 16
depository certificates convertible, subject to certain conditions, into common
stock of Equant. Our equity interest is not recorded on our Consolidated
Balance Sheets at June 30, 2000. The shares of Equant common stock underlying
these certificates had an estimated fair market value of $23 million at June
30, 2000.
LONG-TERM DEBT
The following table shows the estimated fair value and carrying value
of our long-term debt, including current maturities, at June 30, 2000 and 1999:
<TABLE>
<CAPTION>
(In Billions) 2000 1999
------------------------------------------------ ----
<S> <C> <C>
Fair value $4.7 $2.6
Carrying value $4.9 $2.4
------------------------------------------------ ----
</TABLE>
Fair values are estimated based on quoted market prices, where
available, or on discounted cash flow analyses. Changes in assumptions or
estimation methods may significantly affect these fair value estimates.
3. INCOME TAXES
Deferred income taxes reflect the net tax effect of timing differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and for income tax purposes. The table below shows significant
components of our deferred tax assets and liabilities at June 30, 2000 and
1999:
<TABLE>
<CAPTION>
(In Millions) 2000 1999
---------------------------------------------------- ------
<S> <C> <C>
DEFERRED TAX ASSETS:
Postretirement benefits $ 810 $ 766
Other employee benefits 340 335
Gains on sale and
leaseback transactions (net) 216 296
Rent expense 218 206
Spare parts repair expense 159 151
Alternative minimum
tax credit carryforwards -- 27
Other 271 171
---------------------------------------------------- ------
Total deferred tax assets $2,014 $1,952
---------------------------------------------------- ------
DEFERRED TAX LIABILITIES:
Depreciation and amortization $2,158 $1,960
Other 369 344
---------------------------------------------------- ------
Total deferred tax liabilities $2,527 $2,304
---------------------------------------------------- ------
</TABLE>
Income taxes provided in fiscal 2000, 1999 and 1998 consisted of:
<TABLE>
<CAPTION>
(In Millions) 2000 1999 1998
------------------------------------------- ----- -----
<S> <C> <C> <C>
Current taxes $(665) $(372) $(353)
Deferred taxes (254) (358) (298)
Tax benefit of dividends
on allocated Series B
ESOP Convertible
Preferred Stock 5 5 4
------------------------------------------- ----- -----
Income taxes provided $(914) $(725) $(647)
------------------------------------------- ----- -----
</TABLE>
The following table presents the principal reasons for the difference
between the effective tax rate and the United States federal statutory income
tax rate for fiscal 2000, 1999 and 1998:
<TABLE>
<CAPTION>
2000 1999 1998
------------------------------------------- ---- ----
<S> <C> <C> <C>
U.S. federal statutory
income tax rate 35% 35% 35%
State taxes, net of federal
income tax effect 3.6% 3.6% 3.3%
Meals and entertainment .8% .8% .8%
Amortization .6% .2% .2%
Other, net --% .1% --%
------------------------------------------- ---- ----
Effective income tax rate 40.0% 39.7% 39.3%
------------------------------------------- ---- ----
</TABLE>
4. RISK MANAGEMENT
FUEL PRICE RISK MANAGEMENT
We use options and other non-leveraged, over-the-counter instruments,
which have maturities of up to 36 months, to manage the risk associated with
changes in aircraft fuel prices. The changes in the market value of our hedging
contracts have a high correlation to changes in aircraft fuel prices. Gains and
losses from fuel hedging contracts are recognized as part of fuel expense when
we use the underlying fuel being hedged. Premiums paid to enter into hedging
contracts are recorded as prepaid expenses and amortized on a straight-line
basis to fuel expense over the contract settlement period. We do not enter into
fuel hedging contracts for speculative purposes.
At June 30, 2000, we had outstanding hedge agreements for a total of
2.8 billion gallons of our projected aircraft fuel requirements for the period
July 1, 2000 through June 30, 2003, including approximately 51% of our
projected aircraft fuel requirements for the year ending June 30, 2001. At June
30, 2000, our fuel hedging contracts had an estimated fair value of $704
million, with unrealized gains of $555 million.
41
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000, 1999 and 1998 DELTA AIR LINES, INC.
FOREIGN CURRENCY EXCHANGE RISK MANAGEMENT
From time to time, Delta enters into foreign currency option and
forward contracts to manage the risk associated with foreign
currency-denominated transactions. Contracts are denominated in the same
currency in which the projected foreign cash flows are expected to occur and
have maturities of up to twelve months. The estimated fair value of our foreign
currency contracts was not material at June 30, 2000 and 1999. We do not enter
into foreign currency hedging contracts for speculative purposes.
We recognize the gains and losses from foreign currency exchange
contracts as a component of miscellaneous income (expense) as we recognize the
underlying transaction. These gains and losses were not material for any period
presented in our consolidated financial statements.
CREDIT RISK MANAGEMENT
To manage credit risk associated with our fuel price and foreign
currency exchange risk management programs, we select counterparties based on
their credit ratings and limit our exposure to any one counterparty under
defined guidelines. We also monitor the market position of these programs and
our relative market position with each counterparty. The credit exposure
related to these programs was not significant at June 30, 2000.
Our accounts receivable are generated largely from the sale of
passenger airline tickets and cargo transportation services to customers who
are economically and geographically dispersed. In addition, our accounts
receivable are generally short-term in duration. Therefore, we believe we have
no significant concentration of credit risk.
5. LONG-TERM DEBT
The following table summarizes our long-term debt, including current
maturities, at June 30, 2000 and 1999:
<TABLE>
<CAPTION>
(In Millions) 2000 1999
-------------------------------------------------------------------------------------------------------- ------
<S> <C> <C>
8.3% Notes, unsecured, due December 15, 2029 $1,000 $ --
8.125% Notes, unsecured, due July 1, 2039 538 --
1999 Bank Credit Agreement, unsecured, 5.92% interest, due March 22, 2001 500 500
7.7% Notes, unsecured, due December 15, 2005 500 --
7.9% Notes, unsecured, due December 15, 2009 500 --
Development Authority of Clayton County 2000, unsecured loan agreement, Series
2000A $65 million due June 1, 2029, 4.7% interest; Series 2000B $116 million due
May 1, 2035, 4.8% interest; and Series 2000C $120 million due May 1, 2035, 4.9% interest 301 --
6.65% Medium-Term Notes, Series C, unsecured, due March 15, 2004 300 300
8.1% Series C Guaranteed Serial ESOP Notes, unsecured,
due in installments between 2002 and 2009 290 290
9.75% Debentures, unsecured, due May 15, 2021 158 250
Other unsecured debt due 2000 to 2022; Interest rates of 5.3% to 10.375% 817 1,076
-------------------------------------------------------------------------------------------------------- ------
Total 4,904 2,416
Less: Current maturities 526 660
-------------------------------------------------------------------------------------------------------- ------
Total long-term debt $4,378 $1,756
</TABLE>
Our variable interest rate long-term debt is shown using interest
rates in effect at June 30, 2000.
FISCAL 2000 FINANCINGS
In July 1999, we issued $538 million of 8.125% unsecured notes in a
public offering for general corporate purposes. The notes mature on July 1,
2039, but we may redeem the notes, in whole or in part, at par on or after
July 1, 2004.
In November 1999, we borrowed $1.6 billion under a new term loan
facility to finance our acquisition of Comair Holdings (see Note 17). In
December 1999, we issued $2.0 billion aggregate principal amount of senior
unsecured notes in a private placement, consisting of $500 million of 7.7%
notes due 2005, $500 million of 7.9% notes due 2009, and $1 billion of 8.3%
notes due 2029. The net proceeds from this offering were used to repay the $1.6
billion outstanding under the term loan facility described above; to fund the
$200 million balance of the purchase price of our acquisition of Comair
Holdings; and for general corporate purposes. In March 2000, we completed an
exchange offer under which the notes issued in December 1999 (Old Notes) were
exchanged for new notes (New Notes). The New Notes are substantially similar to
the related series
42
<PAGE> 18
of Old Notes, except the New Notes are registered under the Securities Act of
1933.
In June 2000, the Development Authority of Clayton County (Development
Authority) issued $301 million aggregate principal amount of bonds in three
series with scheduled maturities between 2029 and 2035. The proceeds of this
sale were loaned to us to refund bonds that had been issued to finance certain
Delta facilities at Hartsfield Atlanta International Airport.
The Development Authority bonds currently bear interest at a variable
rate which is determined weekly. The bonds may be tendered for purchase by
their holders on seven days notice. Subject to certain conditions, tendered
bonds will be remarketed at then prevailing interest rates.
Principal and interest on the bonds, and the payment of the purchase
price of bonds tendered for purchase, are presently paid under three
unconditional, direct-pay letters of credit totaling $305 million issued by a
bank under a Reimbursement Agreement between Delta and a group of banks
(Reimbursement Agreement). The Reimbursement Agreement generally provides that,
if there is a drawing under the letters of credit to purchase bonds that have
been tendered for purchase, Delta may convert its repayment obligation to a
loan that becomes due and payable on the earlier of (1) the date the bonds are
remarketed; or (2) the June 8, 2003 expiration date of the related letters of
credit. Unless the existing letters of credit are extended, a mandatory tender
of the bonds for purchase will occur on the fifth day prior to the expiration
of such letters of credit. Among other options, Delta could seek to replace the
expiring letters of credit with new letters of credit from an alternate credit
provider and remarket the bonds.
1997 BANK CREDIT AGREEMENT
Under our 1997 Bank Credit Agreement with a group of banks, we may
borrow up to $1.25 billion on an unsecured and revolving basis until May 1,
2002, subject to our compliance with certain conditions. We may use up to $700
million of this facility for the issuance of letters of credit. The interest
rate under this facility is, at our option, LIBOR or the prime rate, plus a
margin that is dependent on Delta's long-term senior unsecured debt ratings. We
can also obtain loans through a competitive bid procedure.
The 1997 Bank Credit Agreement contains negative covenants that place
certain limits on our ability to secure our property or assets; to incur or
guarantee debt; and to enter into flight equipment leases. It also provides
that, upon the occurrence of a change in control of Delta, (1) the banks'
obligation to extend credit terminates; (2) any amounts outstanding under the
1997 Bank Credit Agreement become due and payable; and (3) Delta must deposit
cash collateral with the banks in an amount equal to all letters of credit
outstanding under that agreement. At June 30, 2000, there were no borrowings or
letters of credit outstanding under the 1997 Bank Credit Agreement.
1999 BANK CREDIT AGREEMENT
During fiscal 1999, we entered into a $500 million credit agreement
with a group of banks to finance a portion of our acquisition of ASA Holdings
(see Note 17). The interest rate is, at our option, LIBOR or the prime rate,
plus a margin that is dependent on Delta's long-term senior unsecured debt
ratings. This agreement expires on March 22, 2001, and we may prepay the
outstanding borrowings at any time. At June 30, 2000, $500 million was
outstanding under this agreement.
SERIES C ESOP NOTES
At June 30, 2000, there were outstanding $290 million principal amount
of the Delta Family-Care Savings Plan's Series C Guaranteed Series ESOP Notes
(Series C ESOP Notes). The notes, which are payable in installments between
2002 and 2009, are guaranteed by Delta. We are required to purchase the Series
C ESOP Notes at the option of the noteholders in certain circumstances if the
notes are not rated at least A3 by Moody's and A- by Standard & Poor's
(required ratings). Our purchase price would be equal to the principal amount
of the Series C ESOP Notes being purchased plus accrued interest and, if
applicable, a make whole premium amount.
The holders of the Series C ESOP Notes are presently entitled to the
benefits of an unconditional, direct-pay letter of credit issued by Bayerische
Hypo-Und Vereinsbank AG under a credit agreement between Delta and a group of
banks (the Letter of Credit Facility). Required payments of principal, interest
and make whole premium amount on the Series C ESOP Notes are paid under the
letter of credit. At
43
<PAGE> 19
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000, 1999 and 1998
DELTA AIR LINES, INC.
June 30, 2000, the letter of credit totaled $421 million, covering the $290
million outstanding principal amount of the Series C ESOP Notes, approximately
one year of interest on the notes and $98 million of make whole premium amount.
The Letter of Credit Facility and the related letter of credit expire
on May 19, 2003. The Letter of Credit Facility provides that, if there is a
drawing under the letter of credit, Delta must immediately repay the amount
drawn or convert its repayment obligation to a short-term loan.
Due to the existence of the letter of credit, the Series C ESOP Notes
currently have the required ratings. However, these ratings are subject to
change at any time. The Series C ESOP Notes are not likely to receive the
required ratings without a credit enhancement such as the letter of credit,
unless Delta's long-term senior unsecured debt is rated at least A3 by Moody's
and A- by Standard & Poor's. At June 30, 2000, our long-term senior unsecured
debt was rated Baa3 and BBB-, respectively.
COVENANTS AND CHANGE IN CONTROL PROVISIONS
The Reimbursement Agreement, the 1999 Bank Credit Agreement and the
Letter of Credit Facility contain negative covenants and a change in control
provision that are similar to or less restrictive than the corresponding
provisions in our 1997 Bank Credit Agreement. The 1999 Bank Credit Agreement
also requires us to maintain a specified coverage ratio as of the last day of
each fiscal quarter if our senior unsecured debt is rated below investment
grade.
Our debt agreements do not limit the payment of dividends on our
capital stock. The terms of the Series B ESOP Convertible Preferred Stock limit
our ability to pay cash dividends to our common shareowners in certain
circumstances (see Note 10).
ASA's credit agreements contain negative covenants that apply only to
the financial position of ASA. The covenants, among other things, limit ASA's
ability to transfer funds in the form of cash dividends, loans or advances. At
June 30, 2000, approximately $300 million of ASA's net assets were subject to
these restrictions and approximately $60 million of net assets were available
for distribution by ASA to Delta under the most restrictive of these provisions.
FUTURE MATURITIES
At June 30, 2000, the scheduled maturities of our long-term debt during
the next five fiscal years were as follows:
<TABLE>
<CAPTION>
Year Ending June 30, Principal
(In Millions) Amount
------------------------------------------------------------------
<S> <C>
2001 $ 526
2002 90
2003 61
2004 356
2005 569
After 2005 3,302
------------------------------------------------------------------
</TABLE>
Capitalized interest totaled $49 million, $46 million and $38 million
in fiscal 2000, 1999 and 1998, respectively.
6. ASSET WRITEDOWNS AND OTHER SPECIAL CHARGES
In fiscal 2000, we recorded pretax charges totaling $555 million for
the following:
- Management decided to accelerate the planned retirement of our 16 MD-90
aircraft and 8 owned MD-11 aircraft as part of our fleet simplification
strategy. As a result, we reviewed these fleet types for impairment,
determining that the estimated future cash flows generated by these
aircraft are less than their carrying values. The estimated future cash
flows were based on projections of passenger yield, fuel costs, labor
costs and other relevant factors in the markets in which these aircraft
will operate. These aircraft were written down to their fair values, as
estimated by management using published sources and bids received from
third parties. Due to this impairment analysis, we recorded a pre-tax
asset writedown of $320 million in the quarter ended December 31, 1999.
- We changed our business practice regarding the disposal of surplus
aircraft parts and entered into an agreement to sell all of our
existing surplus aircraft parts inventory to a third party.
Accordingly, we wrote down surplus aircraft parts and obsolete flight
equipment and parts to their estimated fair values. We determined the
estimated fair value of inventory using the negotiated purchase price.
44
<PAGE> 20
This resulted in a pretax charge of $107 million in the quarter ended
September 30, 1999. As of June 30, 2000, substantially all of the
equipment and parts under this agreement had been sold and transferred.
- We offered an early retirement medical option to allow eligible Delta
employees to retire with continued medical coverage without paying
certain early retirement medical premiums. Approximately 2,500
employees elected to participate in the program. We recorded a pretax
charge of $86 million ($53 million after tax, or $.40 basic and $.38
diluted EPS) as a result of this program in the quarter ended June 30,
2000.
- Delta implemented certain technology initiatives which resulted in an
abandonment of certain legacy hardware and software assets. We also
decided to streamline certain administrative processes. Accordingly, we
recorded a pretax charge of $42 million in the quarter ended September
30, 1999. We also remeasured the useful lives of certain technology
assets that are still in use but that will be replaced earlier than
originally planned. The effect on depreciation expense was immaterial.
7. LEASE OBLIGATIONS
Delta leases aircraft, airport terminal and maintenance facilities,
ticket offices, and other property and equipment. We record rent expense on a
straight-line basis over the life of the lease. Rental expense for operating
leases totaled $1.2 billion, $1.1 billion and $0.9 billion in fiscal 2000, 1999
and 1998, respectively. Amounts due under capital leases are recorded as
liabilities. Our interest in assets acquired under capital leases is shown as
assets on our Consolidated Balance Sheets. Amortization of assets recorded under
capital leases is included in depreciation expense in our Consolidated
Statements of Income.
The following table summarizes, as of June 30, 2000, our minimum rental
commitments under capital leases and operating leases with initial or remaining
terms of more than one year:
<TABLE>
<CAPTION>
Years Ending June 30, Capital Operating
(In Millions) Leases Leases
---------------------------------------------- ----------
<S> <C> <C>
2001 $ 57 $ 1,200
2002 57 1,200
2003 48 1,170
2004 32 1,120
2005 17 1,110
After 2005 23 9,060
---------------------------------------------- ----------
Total minimum lease payments 234 $14,860
Less: Amounts of lease payments
which represent interest 44
----------------------------------------------
Present value of future minimum
capital lease payments 190
Less: Current obligations under
capital leases 43
----------------------------------------------
Long-term capital lease obligations $147
==============================================
</TABLE>
As of June 30, 2000, we operated 317 aircraft under operating leases
and 48 aircraft under capital leases. These leases have remaining terms ranging
from five months to 18 years.
Certain municipalities have issued special facility revenue bonds to
build or improve airport and maintenance facilities leased to Delta. The
facility lease agreements require Delta to make rental payments sufficient to
pay principal and interest on the bonds. The above table includes $2.1 billion
of rental commitments for such payments.
8. PURCHASE COMMITMENTS AND CONTINGENCIES
Future expenditures for aircraft and engines on firm order as of August
11, 2000 are estimated to be $9.5 billion. The following table shows the timing
of these commitments:
<TABLE>
<CAPTION>
Years Ending June 30,
(In Millions) Amount
--------------------------------------------------------------
<S> <C>
2001 $2,700
2002 2,300
2003 1,350
2004 1,110
2005 1,360
After 2005 710
--------------------------------------------------------------
Total $9,530
==============================================================
</TABLE>
45
<PAGE> 21
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000, 1999 and 1998
DELTA AIR LINES, INC.
We have entered into a joint marketing and Delta Connection carrier
agreement with Atlantic Coast Airlines Holdings, Inc. (ACA) and its newly formed
operating affiliate, Atlantic Coast Jet, Inc. (ACJet). Under this agreement,
Delta schedules certain regional jets operated by ACJet, and sells the seats on
and retains the revenue from those flights. We pay ACJet an amount that is based
on its costs to operate those flights and a specified margin. We estimate these
payments will be $73 million for the twelve months ending June 30, 2001. This
agreement expires on March 31, 2010, but may be terminated by Delta at an
earlier date in certain circumstances.
Delta is a defendant in legal actions relating to antitrust matters,
employment practices, environmental issues, and other matters concerning our
business. Although the ultimate outcome of these matters cannot be predicted
with certainty, we believe that the resolution of these actions is not likely to
have a material adverse effect on our consolidated financial statements.
Delta self-insures a portion of its losses from claims related to
workers' compensation, environmental, physical damage and general liability.
Losses are accrued based on an estimate of the ultimate aggregate liability for
claims incurred, using certain actuarial assumptions followed in the insurance
industry and based on Delta's experience.
Approximately 16% of our employees are covered by collective bargaining
agreements. See "Collective Bargaining Matters" on page 30 of Management's
Discussion and Analysis for additional information on this subject.
9. EMPLOYEE BENEFIT PLANS
Delta sponsors defined benefit and defined contribution pension plans,
healthcare plans, and disability and survivorship plans for eligible employees,
their eligible family members and retirees. We reserve the right to modify or
terminate these plans as to all participants and beneficiaries at any time,
except as restricted by the Internal Revenue Code or ERISA.
DEFINED BENEFIT PENSION PLANS
Our qualified defined benefit pension plans currently meet or exceed
ERISA's minimum funding requirements.
The following table shows the change in projected benefit obligation
for our defined benefit pension plans for the plan years ended June 30, 2000 and
1999:
<TABLE>
<CAPTION>
(In Millions) 2000 1999
------------------------------------------------------ -------
<S> <C> <C>
Projected benefit obligation at
beginning of year $8,872 $8,342
------------------------------------------------------ -------
Service cost 251 240
Interest cost 644 585
Actuarial (gain) loss (402) 158
Benefits paid (491) (456)
Plan amendments 27 3
------------------------------------------------------ -------
Projected benefit obligation at end of year $8,901 $8,872
</TABLE>
The following table shows the change in the fair value of our defined
benefit pension plan assets for the plan years ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
(In Millions) 2000 1999
------------------------------------------------------ -------
<S> <C> <C>
Fair value of plan assets at
beginning of year $ 9,020 $9,121
------------------------------------------------------ -------
Actual return on plan assets 2,144 310
Employer contributions 48 45
Benefits paid (491) (456)
------------------------------------------------------ -------
Fair value of plan assets at end of year $10,721 $9,020
</TABLE>
The accrued pension cost recognized for these plans on our Consolidated
Balance Sheets at June 30, 2000 and 1999 is computed as follows:
<TABLE>
<CAPTION>
(In Millions) 2000 1999
----------------------------------------------------- -------
<S> <C> <C>
Funded status $ 1,820 $ 148
Unrecognized net actuarial gain (2,301) (607)
Unrecognized transition obligation 58 60
Unrecognized prior service cost 57 37
Contributions made between
April 1 and June 30 14 12
Intangible asset (9) (13)
Other comprehensive income (1) (2)
----------------------------------------------------- -------
Accrued pension cost recognized
in the Consolidated Balance Sheets $ (362) $(365)
</TABLE>
Net periodic pension cost for fiscal 2000, 1999 and 1998 included the
following components:
<TABLE>
<CAPTION>
(In Millions) 2000 1999 1998
--------------------------------------------- -------- --------
<S> <C> <C> <C>
Service cost $ 251 $240 $209
Interest cost 644 585 575
Expected return on
plan assets (852) (776) (685)
Amortization of prior
service cost 4 5 3
Recognized net actuarial
(gain) loss -- -- (4)
Amortization of
net transition obligation 2 2 2
--------------------------------------------- -------- --------
Net periodic
pension cost $ 49 $ 56 $100
</TABLE>
46
<PAGE> 22
We used the following actuarial assumptions to determine the actuarial
present value of our projected benefit obligation:
<TABLE>
<CAPTION>
March 31: 2000 1999
----------------------------------------------------- ------
<S> <C> <C>
Weighted average discount rate 8.25% 7.25%
Rate of increase in
future compensation levels 4.93% 4.43%
Expected long-term rate of
return on plan assets 10.00% 10.00%
</TABLE>
Delta also sponsors non-qualified pension plans which are funded from
current assets. The accumulated benefit obligation of these plans totaled
$337 million at March 31, 2000, and $301 million at March 31, 1999.
Defined Contribution Pension Plans
Delta Pilots Money Purchase Pension Plan (MPPP)--We contribute 5% of
covered pay to the MPPP for each eligible Delta pilot. The MPPP is related to
the Delta Pilots Retirement Plan. The defined benefit pension payable to a pilot
is reduced by the actuarial equivalent of the accumulated account balance in the
MPPP. During fiscal 2000, 1999 and 1998, we recognized expense of $57 million,
$53 million and $54 million, respectively, for this plan.
Delta Family-Care Savings Plan-Our Savings Plan--includes an employee stock
ownership plan (ESOP) feature. Eligible personnel may contribute a portion of
their earnings to the Savings Plan. Delta matches 50% of those contributions
with a maximum employer contribution of 2% of a participant's earnings. We make
quarterly employer contributions by allocating Series B ESOP Convertible
Preferred Stock, common stock or cash to the plan. These contributions, which
are recorded as salaries and related costs in our Consolidated Statements of
Income, totaled $58 million, $52 million and $49 million in fiscal 2000, 1999
and 1998, respectively.
When we adopted the ESOP in 1989, we sold 6,944,450 shares of Series B
ESOP Convertible Preferred Stock to the Savings Plan for $500 million. We have
recorded unearned compensation equal to the value of the shares of preferred
stock not yet allocated to participants' accounts. We reduce the unearned
compensation as shares of preferred stock are allocated to participants'
accounts. Dividends on unallocated shares of preferred stock are used for
debt service on the Savings Plan's Series C ESOP Notes and are not considered
dividends for financial reporting purposes. Dividends on allocated shares of
preferred stock are credited to participants' accounts and are considered
dividends for financial reporting purposes. Only allocated shares of preferred
stock are considered outstanding when we compute diluted earnings per share. At
June 30, 2000, 2,971,790 shares of Series B ESOP Convertible Preferred Stock
were allocated to participants' accounts.
Delta Connection Carrier Savings Plans-ASA and Comair sponsor defined
contribution retirement plans for eligible employees. Eligible personnel may
contribute a portion of their earnings to the plans through payroll deduction.
Neither plan had a material impact on our consolidated financial statements for
the year ended June 30, 2000.
Postretirement Benefits Other Than Pensions
Our medical plans provide medical and dental benefits to substantially
all Delta retirees and their eligible dependents. Benefits are funded from our
general assets on a current basis. Plan benefits are subject to copayments,
deductibles and other limits as described in the plans. Benefits are reduced
when a retiree is eligible for Medicare.
The following table shows the change in our accumulated postretirement
benefit obligation (APBO) for the plan years ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
(In Millions) 2000 1999
----------------------------------------------------- -------
<S> <C> <C>
APBO at beginning of year $1,612 $1,627
----------------------------------------------------- -------
Service cost 38 37
Interest cost 117 112
Benefits paid (80) (71)
Actuarial gain (52) (65)
Substantive plan change 28 (28)
Special termination benefits 86 --
----------------------------------------------------- -------
APBO at end of year $1,749 $1,612
===================================================== =======
</TABLE>
The special termination benefits reflected in the above table relate to
the early retirement medical option offered to certain Delta employees (see
Note 6).
The following table shows the calculation of the accrued postretirement
benefit cost recognized on
47
<PAGE> 23
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000, 1999 and 1998
our Consolidated Balance Sheets at June 30, 2000
and 1999:
<TABLE>
<CAPTION>
(In Millions) 2000 1999
--------------------------------------------------------------- --------
<S> <C> <C>
Funded status $(1,749) $(1,612)
Unrecognized net (gain) loss (51) 1
Unrecognized prior service cost (302) (371)
Contributions made between
April 1 and June 30 20 17
--------------------------------------------------------------- --------
Accrued postretirement benefit cost recognized
in the Consolidated Balance Sheets $(2,082) $(1,965)
</TABLE>
Our net periodic postretirement benefit cost for fiscal 2000, 1999 and
1998 included the following components:
<TABLE>
<CAPTION>
(In Millions) 2000 1999 1998
------------------------------------------------------- ------- -------
<S> <C> <C> <C>
Service cost $ 38 $ 37 $ 33
Interest cost 117 112 110
Amortization of prior
service cost (41) (40) (38)
Recognized net actuarial
(gain) loss -- -- (2)
Other -- (10) --
------------------------------------------------------- ------- -------
Net periodic postretirement
benefit cost $114 $ 99 $103
</TABLE>
We used the following actuarial assumptions to determine the actuarial
present value of our APBO:
March 31: 2000 1999
--------------------------------------------------------------- --------
Weighted average discount rate 8.25% 7.25%
Assumed health care cost trend rate(*) 7.00% 5.50%
--------------------------------------------------------------- --------
(*) The assumed healthcare cost trend rate is assumed to decline gradually
to 5.25% in 2003 and remain level thereafter.
A 1% change in the health care cost rate used in measuring the APBO at
March 31, 2000 would have the following effects:
<TABLE>
<CAPTION>
(In Millions) 1% Increase 1% Decrease
----------------------------------------------------- -----------
<S> <C> <C>
Increase (decrease) in
total service and interest cost $ 14 $ (16)
Increase (decrease) in the APBO $176 $(149)
----------------------------------------------------- -----------
</TABLE>
Postemployment Benefits-Delta provides certain other welfare benefits to
eligible former or inactive employees after employment but before retirement,
primarily as part of the disability and survivorship plans.
Postemployment benefit expense (income) was $11 million in fiscal 2000,
$(13) million in fiscal 1999, and $74 million in fiscal 1998. We include the
amount funded in excess of the liability in other non-current assets on our
Consolidated Balance Sheets. Future period expenses will vary based on actual
claims experience and the return on plan assets. Gains and losses occur because
actual experience differs from assumed experience. These gains and losses are
amortized over the average future service period of employees. We also amortize
differences in prior service costs resulting from amendments affecting the
benefits of retired and inactive employees.
We continually evaluate ways to better manage employee benefits and
control costs. Any changes to the plans or assumptions used to estimate future
benefits could have a significant effect on the amount of the reported
obligation and future annual expense.
10. COMMON AND PREFERRED STOCK
In fiscal 2000, we issued 376,412 shares of common stock under our
broad-based employee stock option plans, and a total of 216,222 shares of common
stock under our 1989 Stock Incentive Plan, Dividend Reinvestment and Stock
Purchase Plan, and Non-Employee Directors' Stock Plan. During fiscal 2000, we
repurchased 16.5 million shares of common stock as part of our share repurchase
programs described in Note 11.
At June 30, 2000, 66.6 million shares of our common stock were reserved
for issuance, including 38.2 million common shares under our broad-based
employee stock option plans, and 11.1 million common shares for conversion of
the Series B ESOP Convertible Preferred Stock.
The Series B ESOP Convertible Preferred Stock pays a cumulative cash
dividend of 6% per year per share; is convertible into 1.7155 shares of common
stock at a conversion price of $41.97 per share; and has a liquidation price of
$72 per share, plus accrued and unpaid dividends. The preferred stock generally
votes together as a single class with the common stock and has two votes per
share. It is redeemable at our option at $72 per share, payable in cash or
common stock. We cannot pay cash dividends on common stock until all cumulative
dividends on the preferred stock have been paid. The conversion rate, conversion
price and voting rights of the preferred stock are subject to adjustment in
certain circumstances.
The Shareowner Rights Plan is designed to protect shareowners against
attempts to acquire Delta
48
<PAGE> 24
that do not offer an adequate purchase price to all shareowners, or are
otherwise not in the best interest of Delta and our shareowners. Under the plan,
each outstanding share of common stock is accompanied by one-half of a preferred
stock purchase right. Each whole right entitles the holder to purchase 1/100 of
a share of Series D Junior Participating Preferred Stock at an exercise price of
$300, subject to adjustment.
The rights become exercisable only after a person acquires, or makes a
tender or exchange offer that would result in the person acquiring, beneficial
ownership of 15% or more of our common stock. If a person acquires beneficial
ownership of 15% or more of our common stock, each right will entitle its holder
(other than the acquiring person) to exercise his rights to purchase our common
stock having a market value of twice the exercise price.
If a person acquires beneficial ownership of 15% or more of our common
stock and (1) we are involved in a merger or other business combination in which
Delta is not the surviving corporation, or (2) we sell more than 50% of our
assets or earning power, then each right will entitle its holder (other than the
acquiring person) to exercise his rights to purchase common stock of the
acquiring company having a market value of twice the exercise price.
The rights expire on November 4, 2006. Delta may redeem the rights
for $0.01 per right at any time before a person becomes the beneficial owner
of 15% or more of our common stock.
11. COMMON STOCK REPURCHASES
Our Board of Directors has authorized various repurchases of our common
stock. In fiscal 2000, we repurchased 16.5 million shares of common stock for
$790 million. This included five million shares held by Singapore Airlines. In
fiscal 1999, we repurchased 15.0 million shares of common stock for $878
million.
We are also authorized to repurchase the 49.4 million shares of common
stock that may be issued under our broad-based employee stock option plans (See
Note 15). As of June 30, 2000, we had repurchased 21.4 million shares for
$962 million under this authorization. We are authorized to repurchase the
remaining shares as employees exercise their stock options under those plans.
Repurchases are subject to market conditions, and may be made on the open market
or in privately negotiated transactions.
12. COMPREHENSIVE INCOME
Comprehensive income for the fiscal years ended June 30, 2000, 1999 and
1998 included the following components:
<TABLE>
<CAPTION>
(In Millions) 2000 1999 1998
------------------------------------------------------ ------- -------
<S> <C> <C> <C>
Net income $1,303 $1,101 $1,001
Realization of gain from
Singapore and Swissair (179) -- --
Unrealized gain (loss) on
marketable equity
securities 4 99 (22)
Other (3) -- 1
------------------------------------------------------ ------- -------
Total other
comprehensive income (178) 99 (21)
Income tax effect on other
comprehensive income 69 (39) 9
------------------------------------------------------ ------- -------
Total other comprehensive
income, net of
income taxes (109) 60 (12)
------------------------------------------------------ ------- -------
Comprehensive income,
net of income taxes $1,194 $1,161 $ 989
====================================================== ======= =======
</TABLE>
13. Geographic Information
SFAS 131 requires us to disclose certain information about our
operating segments. Operating segments are defined as components of an
enterprise with separate financial information which is evaluated regularly by
the chief operating decision maker and is used in resource allocation and
performance assessments. We are managed as a single business unit that provides
air transportation of passengers and cargo. Our operating revenues by geographic
region for fiscal 2000, 1999 and 1998 are summarized in the following table:
<TABLE>
<CAPTION>
(In Millions) 2000 1999 1998
--------------------------------------- -------- --------
<S> <C> <C> <C>
North America $13,211 $11,956 $11,416
Atlantic 1,960 1,973 2,092
Pacific 302 326 304
Latin America 415 342 245
--------------------------------------- -------- --------
Total $15,888 $14,597 $14,057
======================================= ======== ========
</TABLE>
Operating revenues are assigned to a specific geographic region based
on the origin and destination of each flight segment. Our tangible assets
consist primarily of flight equipment, which is mobile across geographic
markets. Accordingly, assets are not allocated to specific geographic regions.
14. Earnings Per Share
We calculate basic EPS by dividing the income available to common
shareowners by the weighted average number of common shares outstanding.
49
<PAGE> 25
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000, 1999 and 1998
DELTA AIR LINES, INC.
Diluted EPS includes the dilutive effects of stock options and convertible
securities. The following table shows our computation of basic and diluted EPS:
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
(In Millions, except per share data) 2000 1999 1998
------------------------------------------------- -------- --------
<S> <C> <C> <C>
Basic:
Net income $ 1,303 $1,101 $1,001
Dividends on allocated
Series B ESOP
Convertible Preferred Stock (12) (11) (11)
------------------------------------------------- ------- -------
Income available to
common shareowners $1,291 $1,090 $ 990
Weighted average
shares outstanding 130.2 142.9 149.2
------------------------------------------------- ------- -------
Basic earnings per share $ 9.92 $ .63 $ 6.64
Diluted:
Net income $ 1,303 $1,101 $1,001
Adjustment to net income
assuming conversion of
allocated Series B ESOP
Convertible Preferred Stock (5) (4) (4)
------------------------------------------------- ------- -------
Income available to
common shareowners $1,298 $1,097 $ 997
Weighted average
shares outstanding 130.2 142.9 149.2
Additional shares assuming:
Exercise of stock options 5.1 4.7 3.8
Conversion of allocated
Series B ESOP Convertible
Preferred Stock 2.4 4.7 4.2
Conversion of
performance-based
stock units .2 -- --
------------------------------------------------- ------- -------
Weighted average shares
outstanding as adjusted 137.9 152.3 157.2
------------------------------------------------- ------- -------
Diluted earnings per share $ 9.42 $ 7.20 $ 6.34
------------------------------------------------- ------- -------
</TABLE>
15. Stock Options and Awards
Under our 1989 Stock Incentive Plan, we granted various stock based
awards including non-qualified stock options and tandem stock appreciation
rights (SARs) to officers and other key employees. The exercise price for all
stock options, and the base measuring price of the SARs, is the fair market
value of our common stock on the grant date.
In fiscal 1997, our shareowners approved two broad-based employee stock
option plans for nonpilot personnel and pilots. On October 30, 1996, 1997
and 1998, Delta granted eligible employees non-qualified stock options to
purchase a total of 49.4 million shares of common stock at an exercise price
equal to the fair market value of the common stock on the grant date. The stock
options are generally exercisable during the period beginning one year, and
ending ten years, after the grant date, and are not transferable for any reason
other than the death of the employee. The following table summarizes grant
activity under the broad-based plans (including 200,000 options which were
regranted after earlier forfeitures):
<TABLE>
<CAPTION>
Options Granted Exercise Price
Grant Date (In Millions) (Per Share)
-------------------------------------------- ----------------
<S> <C> <C>
October 30, 1996 16.4 $34.50
October 30, 1997 16.6 $49.00
October 30, 1998 16.6 $50.59
</TABLE>
During fiscal 2000, all options were granted under the 1989 Stock Incentive
Plan.
The following table summarizes all stock option and SAR activity during fiscal
2000, 1999 and 1998:
<TABLE>
<CAPTION>
2000 1999 1998
----------------------- ------------------------ --------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
Stock Options (000) Price (000) Price (000) Price
------------------------------------------------------------ ---------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of fiscal year 46,144 $48 30,006 $45 19,802 $35
Granted 3,039 57 19,639 51 19,698 50
Exercised (587) 43 (3,256) 41 (9,318) 35
Forfeited (851) 50 (245) 51 (176) 46
------- ---- -------- ---- ------- ----
Outstanding at end of fiscal year 47,745 52 46,144 48 30,006 45
------- ---- -------- ---- ------- ----
Stock options exercisable at fiscal year end 44,833 $47 26,640 $45 10,422 $35
------- ---- -------- ---- ------- ----
</TABLE>
The following table summarizes information about stock options outstanding and
exercisable at June 30, 2000:
<TABLE>
<CAPTION>
Stock Options Outstanding Stock Options Exercisable
--------------------------------------------------------------------- ---------------------------------
Weighted
Range of Number Average Weighted Number Weighted
Exercise Outstanding Remaining Life Average Exercisable Average
Prices (000) (Years) Exercise Price (000) Exercise Price
--------- --------------- ------------------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$26-$34 216 4 $26 216 $26
$35-$41 7,929 4 35 7,929 35
$42-$63 39,600 5 51 36,688 50
</TABLE>
50
<PAGE> 26
The estimated fair values of stock options granted in fiscal 2000, 1999
and 1998 were derived using the Black-Scholes stock option pricing model. The
following table shows our assumptions and the weighted average fair values of
stock options:
<TABLE>
<CAPTION>
Stock Options Granted in Fiscal Year
Assumption 2000 1999 1998
-------------------------------------------------------- -------- --------
<S> <C> <C> <C>
Risk-free interest rate 6.0% 4.3% 5.8%
Average expected life of
stock options (in years) 7.9 5.1 3.3
Expected volatility of
common stock 26.8% 26.3% 25.3%
Expected annual dividends on
common stock $0.10 $0.10 $0.10
Weighted average fair value
of stock options $ 26 $ 16 $ 13
-------------------------------------------------------- -------- -------
</TABLE>
The following table shows our net income and earnings per share for
fiscal 2000, 1999 and 1998 as if we accounted for our stock option plans under
the fair value method of SFAS 123:
<TABLE>
<CAPTION>
2000 1999 1998
------------------------------------------------------ -------- --------
<S> <C> <C> <C>
Net income (in millions):
As reported $1,303 $1,101 $1,001
Fair value method
under SFAS 123 1,186 935 875
Basic earnings per share:
As reported $ 9.92 $ 7.63 $ 6.64
Fair value method
under SFAS 123 9.01 6.47 5.80
Diluted earnings per share:
As reported $ 9.42 $ 7.20 $ 6.34
Fair value method
under SFAS 123 8.53 6.11 5.54
------------------------------------------------------ -------- --------
</TABLE>
Under SFAS 123, we are not required to include stock options granted
before fiscal 1996 as compensation in determining pro forma net income.
Therefore, the pro forma effects of SFAS 123 on net income and earnings per
share for the periods presented may not be representative of the pro forma
effects of SFAS 123 in future years.
Subsequent to June 30, 2000, we granted stock options covering a total
of 3.1 million shares of common stock under the 1989 Stock Incentive Plan, with
exercise prices ranging from $52.75 to $55.81 per share.
16. SALE OF RECEIVABLES
During June 1999, we entered into an agreement under which 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 (1) $325 million in cash from the subsidiary's sale of an undivided
interest in the pool of receivables to a third party and (2) a $222 million
subordinated promissory note from the subsidiary. The amount of the promissory
note fluctuates because it represents the portion of the purchase price payable
for the volume of receivables sold. We retained servicing and record-keeping
responsibilities for the receivables sold. This agreement was renewed on June
15, 2000, and will expire on June 15, 2001.
As part of the agreement, the subsidiary is obligated to pay fees to a
third party based on the amounts invested by the third party. For fiscal 2000
and 1999, these fees were $20 million and $2 million, respectively. The fees are
included in other income (expense) under miscellaneous income (expense), net in
our Consolidated Statements of Income. The principal amount of the promissory
note was $122 million and $175 million at June 30, 2000 and 1999, respectively,
and is included as accounts receivable on our Consolidated Balance Sheets.
17. BUSINESS ACQUISITIONS
COMAIR HOLDINGS, INC.
In fiscal 2000, we acquired all the remaining outstanding common stock
of Comair Holdings for $1.8 billion. Comair Holdings is a holding company whose
principal asset is its 100% ownership of Comair, a regional jet carrier. Prior
to this acquisition, we owned 22% of Comair Holdings' outstanding common stock.
We used the purchase method of accounting to record the acquisition of
Comair Holdings. The purchase price of the shares acquired was allocated to the
assets acquired and the liabilities assumed based on the preliminary estimated
fair values at the acquisition date. Based on the allocation as of June 30,
2000, the total cost of the acquisition exceeded the estimated fair value of the
underlying net assets by $1.4 billion, which is being amortized on a
straight-line basis over a 40 year period. Our consolidated financial statements
as of June 30, 2000 include Comair Holdings' balance sheet as of June 30, 2000
and results of operations from November 22, 1999.
ASA HOLDINGS, INC.
In fiscal 1999, we acquired all the remaining outstanding common stock
of ASA Holdings for $700 million. ASA Holdings is a holding company whose
principal asset is its 100% ownership of ASA, a regional air carrier. Prior to
this acquisition, we owned 28% of ASA Holdings' outstanding common stock.
51
<PAGE> 27
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000, 1999 and 1998
DELTA AIR LINES, INC.
We used the purchase method of accounting to record the acquisition of
ASA Holdings. The purchase price of the shares acquired was allocated to the
assets acquired and the liabilities assumed based on the estimated fair values
at the acquisition date. The total cost of the acquisition exceeded the
estimated fair value of the underlying net assets by $519 million, which is
being amortized on a straight-line basis over a 40 year period. Our consolidated
financial statements as of June 30, 1999 include ASA Holdings' balance sheet as
of June 30, 1999, as well as its results of operations from April 1, 1999.
18. CHANGE IN ACCOUNTING PRINCIPLE
Delta sells mileage credits in the SkyMiles(R) program to participating
partners such as credit card companies, hotels, and car rental agencies. During
fiscal 2000, in accordance with SAB 101, we changed our method of accounting for
the sale of these mileage credits. Under the new accounting method, a portion of
the revenue from the sale of mileage credits is deferred until earned, and is
recognized when the credits are redeemed for travel. The majority of the revenue
from the sale of mileage credits is recorded in passenger revenue, and the
remaining portion is recorded as an offset to expense. Previously, the revenue
from the sale of mileage credits was recorded in other revenue in the period in
which the credits were sold. All prior year amounts have been reclassified to
conform with the current year presentation.
We retroactively adopted this change in accounting principle as of July
1, 1999. It resulted in a cumulative effect charge of $66 million ($108 million
before income taxes), and decreased net income for fiscal 2000 by $21 million (a
$34 million decrease before income taxes).
Unaudited pro forma results assuming retroactive application of the
change in accounting principle for fiscal 2000, 1999 and 1998 are shown below:
(In millions, except for per share data):
<TABLE>
<CAPTION>
2000 1999 1998
------------------------------------- -------- --------
<S> <C> <C> <C>
Net income before
cumulative effect
of change
in accounting
principle $1,369 $1,083 $ 991
Basic EPS $10.42 $ 7.50 $6.57
Diluted EPS $ 9.90 $ 7.08 $6.28
----------------------------------- ------ -----
</TABLE>
For comparative purposes, our results excluding implementation of the
change in accounting principle for fiscal 2000, 1999 and 1998 are shown below:
(In millions, except for per share data):
<TABLE>
<CAPTION>
2000 1999 1998
------------------------------------ -------- --------
<S> <C> <C> <C>
Net income before
cumulative effect
of change
in accounting
principle $1,390 $1,101 $1,001
Basic EPS $10.58 $ 7.63 $ 6.64
Diluted EPS $10.04 $ 7.20 $ 6.34
------------------------------------ -------- --------
</TABLE>
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes our unaudited quarterly results of
operations for fiscal 2000 and 1999 (in millions, except per share data):
<TABLE>
<CAPTION>
Three Months Ended
Fiscal 2000 Sept. 30 Dec. 31 Mar. 31 June 30
----------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C> <C>
Operating revenues $3,829 $3,678 $3,911 $4,470
Operating income $ 336 $ 2 $ 343 $ 607
Net income $ 344 $ 348 $ 217 $ 460
Basic earnings per share(*) $ 1.99 $ 2.60 $ 1.68 $ 3.73
Diluted earnings per share(*) $ 1.88 $ 2.48 $ 1.61 $ 3.51
----------------------------------------------------------------- --------- --------- ---------
<CAPTION>
Three Months Ended
Fiscal 1999 Sept. 30 Dec. 31 Mar. 31 June 30
----------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C> <C>
Operating revenues $3,777 $3,424 $3,476 $3,920
Operating income $ 552 $ 320 $ 356 $ 642
Net income $ 327 $ 194 $ 216 $ 364
Basic earnings per share(*) $ 2.19 $ 1.34 $ 1.51 $ 2.59
Diluted earnings per share(*) $ 2.08 $ 1.29 $ 1.42 $ 2.40
----------------------------------------------------------------- --------- --------- ---------
</TABLE>
(*) The sum of the quarterly earnings per share does not equal the fiscal
earnings per share due to changes in average shares outstanding.
52
<PAGE> 28
REPORT OF MANAGEMENT
DELTA AIR LINES, INC.
The integrity and objectivity of the information presented in this
Annual Report are the responsibility of Delta management. The financial
statements contained in this report have been audited by Arthur Andersen LLP,
independent public accountants, whose report appears below.
Delta maintains a system of internal financial controls which are
independently assessed on an ongoing basis through a program of internal audits.
These controls include the selection and training of Delta's managers,
organizational arrangements that provide a division of responsibilities, and
communication programs explaining our policies and standards. We believe that
this system provides reasonable assurance that transactions are executed
in accordance with management's authorization; that transactions are
appropriately recorded to permit preparation of financial statements that, in
all material respects, are presented in conformity with accounting principles
generally accepted in the United States; and that assets are properly accounted
for and safeguarded against loss from unauthorized use.
The Board of Directors pursues its responsibilities for these financial
statements through its Audit Committee, which consists solely of directors who
are neither officers nor employees of Delta. The Audit Committee meets
periodically with the independent public accountants, the internal auditors and
representatives of management to discuss internal control, accounting, auditing
and financial reporting matters.
/s/ M. MICHELE BURNS /s/ LEO F. MULLIN
---------------------------- --------------------------
M. Michele Burns Leo F. Mullin
Executive Vice President and Chairman and
Chief Financial Officer Chief Executive Officer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
DELTA AIR LINES, INC.
TO DELTA AIR LINES, INC.:
We have audited the accompanying consolidated balance sheets of Delta
Air Lines, Inc. (a Delaware corporation) and subsidiaries as of June 30, 2000
and 1999, and the related consolidated statements of income, cash flows and
shareowners' equity for each of the three years in the period ended June 30,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Delta
Air Lines, Inc. and subsidiaries as of June 30, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 2000, in conformity with accounting
principles generally accepted in the United States.
As discussed in Note 18 to the consolidated financial statements,
effective July 1, 1999, the Company changed its method of accounting for the
sale of mileage credits to participating partners in its frequent flyer program.
/s/ ARTHUR ANDERSEN LLP
-----------------------------
Atlanta, Georgia
August 11, 2000
53
<PAGE> 29
CONSOLIDATED SUMMARY OF OPERATIONS
DELTA AIR LINES, INC.
<TABLE>
<CAPTION>
For the fiscal years ended June 30, 2000(1) 1999 1998 1997(2)
--------------------------------------------------------------------- -------- -------- --------
(In Millions, Except Per Share Data)
<S> <C> <C> <C> <C>
Operating revenues $15,888 $14,597 $14,057 $13,517
Operating expenses 14,600 12,727 12,363 11,986
--------------------------------------------------------------------- -------- -------- --------
Operating income (loss) 1,288 1,870 1,694 1,531
Interest expense, net (305) (153) (148) (174)
Miscellaneous income, net(7) 1,300 109 102 58
--------------------------------------------------------------------- -------- -------- --------
Income (loss) before income taxes 2,283 1,826 1,648 1,415
Income tax (provision) benefit (914) (725) (647) (561)
Amortization of investment tax credits -- -- -- --
--------------------------------------------------------------------- -------- -------- --------
Net income (loss) before cumulative effect of
change in accounting principle 1,369 1,101 1,001 854
Net income (loss) after cumulative effect of
change in accounting principle 1,303 1,101 1,001 854
Preferred stock dividends (12) (11) (11) (9)
--------------------------------------------------------------------- -------- -------- --------
Net income (loss) attributable to common shareowners $ 1,291 $ 1,090 $ 990 $ 845
Earnings (loss) per share before cumulative
effect of change in accounting principle
Basic $ 10.42 $ 7.63 $ 6.64 $ 5.70
Diluted $ 9.90 $ 7.20 $ 6.34 $ 5.52
Earnings (loss) per share(8)
Basic $ 9.92 $ 7.63 $ 6.64 $ 5.70
Diluted $ 9.42 $ 7.20 $ 6.34 $ 5.52
Dividends declared on Common Stock $ 13 $ 14 $ 15 $ 15
Dividends declared per common share(8) $ 0.10 $ 0.10 $ 0.10 $ 0.10
--------------------------------------------------------------------- -------- -------- --------
</TABLE>
OTHER FINANCIAL AND STATISTICAL DATA
DELTA AIR LINES, INC.
<TABLE>
<CAPTION>
For the fiscal years ended June 30, 2000(1) 1999 1998 1997(2)
------------------------------------------------------------------------ ---------------- ----------------- -----------------
(Financial Data In Millions)
<S> <C> <C> <C> <C>
Total assets $20,566 $16,750 $14,603 $12,741
Long-term debt and capital leases
(excluding current maturities) $ 4,525 $ 1,952 $ 1,782 $ 1,797
Shareowners' equity $ 4,873 $ 4,448 $ 4,023 $ 3,007
Shares of Common Stock outstanding at year end(8) 122,639,566 138,553,719 150,450,394 147,391,974
Revenue passengers enplaned (Thousands) 116,595 106,902 104,148 101,147
Available seat miles (Millions) 151,913 144,003 140,149 136,821
Revenue passenger miles (Millions) 110,347 104,575 101,136 97,758
Operating revenue per available seat mile 10.46(cent) 10.14(cent) 10.03(cent) 9.88(cent)
Passenger mile yield 13.48(cent) 13.09(cent) 13.03(cent) 12.98(cent)
Operating cost per available seat mile 9.61(cent) 8.84(cent) 8.82(cent) 8.76(cent)
Passenger load factor 72.6% 72.6% 72.2% 71.4%
Breakeven passenger load factor 66.4% 62.7% 62.9% 62.8%
Available ton miles (Millions) 22,068 20,627 19,890 18,984
Revenue ton miles (Millions) 12,504 12,115 11,859 11,308
Operating cost per available ton mile 66.16(cent) 61.70(cent) 62.16(cent) 63.14(cent)
------------------------------------------------------------------------ ---------------- ----------------- -----------------
</TABLE>
(1) Summary of operations and other financial and statistical data include
pretax income of $574 million, net from nonrecurring items ($2.69 basic
and $2.54 diluted after-tax earnings per share), excluding the
cumulative effect of a change in accounting principle.
(2) Summary of operations and other financial and statistical data include
$52 million in pretax restructuring and other nonrecurring charges
($0.22 basic and $0.21 diluted after-tax earnings per share).
(3) Summary of operations and other financial and statistical data include
$829 million in pretax restructuring and other nonrecurring charges
($4.88 after-tax earnings per share).
(4) Summary of operations and other financial and statistical data exclude
$114 million after-tax cumulative effect of change in accounting
principles ($1.13 primary and $0.71 fully diluted earnings per share).
(5) Summary of operations and other financial and statistical data include
$526 million in pretax restructuring charges ($3.30 after-tax per
share).
(6) Summary of operations and other financial and statistical data include
$82 million pretax restructuring charges ($0.53 after-tax per share).
Summary of operations exclude $587 million after-tax cumulative effect
of changes in accounting principles ($5.89 after-tax per share).
(7) Includes interest income.
(8) All share and earnings per share amounts for fiscal years prior to 1999
have been restated to reflect the two-for-one common stock split that
became effective on November 2, 1998.
54
<PAGE> 30
<TABLE>
<CAPTION>
1996(3) 1995(4) 1994(5) 1993(6) 1992 1991 1990
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
$12,418 $12,162 $12,058 $11,657 $10,837 $ 9,171 $8,583
11,953 11,501 12,503 12,167 11,477 9,604 8,145
------- ------- ------- ------- ------- ------- ------
465 661 (445) (510) (640) (433) 438
(243) (262) (271) (177) (151) (97) (27)
54 95 56 36 5 30 57
------- ------- ------- ------- ------- ------- ------
276 494 (660) (651) (786) (500) 468
(120) (200) 250 233 271 163 (187)
-- -- 1 3 9 13 22
------- ------- ------- ------- ------- ------- ------
156 294 (409) (415) (506) (324) 303
156 294 (409) (415) (506) (324) 303
(82) (88) (110) (110) (19) (19) (18)
------- ------- ------- ------- ------- ------- ------
$ 74 $ 206 $ (519) $ (525) $ (525) $ (343) $ 285
======= ======= ======= ======= ======= ======= ======
$ 0.72 $ 2.04 $ (5.16) $ (5.27) $ (5.30) $ (3.87) $ 2.90
======= ======= ======= ======= ======= ======= ======
$ 0.72 $ 2.01 $ (5.16) $ (5.27) $ (5.30) $ (3.87) $ 2.64
======= ======= ======= ======= ======= ======= ======
$ 0.72 $ 2.04 $ (5.16) $ (5.27) $ (5.30) $ (3.87) $ 2.90
======= ======= ======= ======= ======= ======= ======
$ 0.72 $ 2.01 $ (5.16) $ (5.27) $ (5.30) $ (3.87) $ 2.64
======= ======= ======= ======= ======= ======= ======
$ 10 $ 10 $ 10 $ 35 $ 59 $ 54 $ 85
$ 0.10 $ 0.10 $ 0.10 $ 0.35 $ 0.60 $ 0.60 $ 0.85
------- ------- ------- ------- ------- ------- ------
</TABLE>
<TABLE>
<CAPTION>
1996(3) 1995(4) 1994(5) 1993(6) 1992 1991 1990
----------------- ------------------ ----------------- ----------------- --------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
$ 12,226 $ 12,143 $ 11,896 $ 11,871 $ 10,162 $ 8,411 $ 7,227
$ 2,175 $ 3,121 $ 3,228 $ 3,716 $ 2,833 $ 2,059 $ 1,315
$ 2,540 $ 1,827 $ 1,467 $ 1,913 $ 1,894 $ 2,457 $ 2,596
135,556,212 101,632,020 100,906,544 100,127,682 99,398,196 98,803,558 92,172,220
91,341 88,893 87,399 85,085 77,038 69,127 67,240
130,751 130,645 131,906 132,282 123,102 104,328 96,463
88,673 86,417 85,268 82,406 72,693 62,086 58,987
9.50(cent) 9.31(cent) 9.14(cent) 8.81(cent) 8.80(cent) 8.79(cent) 8.90(cent)
13.19(cent) 13.18(cent) 13.27(cent) 13.23(cent) 13.91(cent) 13.80(cent) 13.63(cent)
9.14(cent) 8.80(cent) 9.48(cent) 9.20(cent) 9.32(cent) 9.21(cent) 8.44(cent)
67.8% 66.2% 64.6% 62.3% 59.1% 59.5% 61.2%
65.1% 62.3% 67.2% 65.6% 63.0% 62.6% 58.0%
18,084 18,150 18,302 18,182 16,625 13,825 12,500
10,235 10,142 9,911 9,503 8,361 7,104 6,694
66.10(cent) 63.37(cent) 68.32(cent) 66.92(cent) 69.03(cent) 69.47(cent) 65.16(cent)
</TABLE>
55
<PAGE> 31
SHAREOWNER INFORMATION
DELTA AIR LINES, INC.
COMMON STOCK
Listed on the New York Stock Exchange under the ticker symbol DAL.
NUMBER OF SHAREOWNERS
As of June 30, 2000, there were 21,435 registered owners of common stock.
MARKET PRICES AND DIVIDENDS
<TABLE>
<CAPTION>
Cash Dividends
Closing Price of per
FISCAL YEAR 2000 Common Stock on Common Share
------------------------------------------ --------------
<S> <C> <C> <C>
Quarter Ended: High Low
September 30 $ 63 1/8 $ 46 3/16 $ 0.025
December 31 54 7/16 47 9/16 0.025
March 31 54 3/4 43 5/8 0.025
June 30 57 1/16 49 0.025
------------------------------ --------- --------------
</TABLE>
<TABLE>
<CAPTION>
Cash Dividends
Closing Price of per
Fiscal Year 1999 Common Stock on Common Share
------------------------------------------- --------------
<S> <C> <C> <C>
Quarter Ended: High Low
September 30 $ 71 3/32 $ 46 13/16 $ 0.025
December 31 57 9/16 41 11/32 0.025
March 31 70 15/16 49 0.025
June 30 71 9/16 55 7/16 0.025
------------------------------ ---------- --------------
</TABLE>
56
<PAGE> 32
DELTA'S AIRCRAFT FLEET
DELTA AIR LINES, INC.
MAINLINE AIRCRAFT FLEET
Delta's modern and efficient aircraft fleet is at the center of our operations.
Delta has entered into a long-term aircraft purchase agreement with The Boeing
Company (Boeing), which covers firm orders, options and rolling options for
certain aircraft through calendar year 2017. This agreement supports Delta's
plan for disciplined growth, aircraft rationalization and fleet replacement. It
also provides Delta flexibility to adjust scheduled aircraft deliveries or
substitute between aircraft models and aircraft types. The majority of the
aircraft under firm order from Boeing will be used to replace older aircraft.
Delta's long-term plan is to reduce aircraft family types from seven to
three. We believe fleet standardization will improve reliability and produce
long-term cost savings. We plan to retire (1) our remaining L-1011 aircraft by
August 2001; (2) our B-727 fleet by the end of 2005; and (3) our MD-90 fleet and
owned MD-11 aircraft over the next seven to nine years. In fiscal 1999, we
entered into an agreement to sell our B-727 fleet, with deliveries occurring
through 2005.
REGIONAL JET AIRCRAFT
In July 2000, ASA and Comair entered into purchase agreements with Bombardier,
Inc. to purchase a total of 94 Canadair Regional Jet (CRJ) aircraft, including
69 CRJ-200 aircraft with a mix of 40, 44 and 50 seats, and 25 CRJ-700 aircraft
with 70 seats. ASA and Comair also received options to purchase an additional
406 CRJ aircraft through 2010.
AIRCRAFT FLEET AT JUNE 30, 2000
<TABLE>
<CAPTION>
Leased
--------------------- Average
Aircraft Type Owned Capital Operating Total Age
--------------------------------- ------- --------- ----- -------
<S> <C> <C> <C> <C> <C>
B-727-200 90 -- 10 100 22.3
B-737-200 1 45 8 54 15.6
B-737-300 -- 3 23 26 13.6
B-737-800 24 -- -- 24 0.8
B-757-200 70 -- 41 111 9.6
B-767-200 15 -- -- 15 17.1
B-767-300 4 -- 24 28 10.4
B-767-300ER 50 -- 8 58 4.5
B-777-200 7 -- -- 7 0.8
L-1011-1 7 -- -- 7 19.2
L-1011-250 5 -- -- 5 17.6
L-1011-500 7 -- -- 7 19.6
MD-11 8 -- 7 15 6.4
MD-88 63 -- 57 120 10.0
MD-90 16 -- -- 16 4.6
EMB-120 51 -- 14 65 10.1
ATR-72 4 -- 15 19 6.0
CRJ-100/200 22 -- 110 132 2.8
--------------------------------- ------- --------- ----- -------
TOTAL 444 48 317 809 10.1
================================= ======= ========= ===== =======
</TABLE>
AIRCRAFT DELIVERY SCHEDULE AT JUNE 30, 2000(*)
<TABLE>
<CAPTION>
Delivery in Calendar Year Ending
---------------------------------------------
Remainder After
Aircraft on Firm Order of 2000 2001 2002 2003 2003 Total
-------------------------------------- ---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C>
B-737-600/700/800 16 27 18 10 37 108
B-757-200 7 3 -- -- -- 10
B-767-300/300ER -- 1 -- -- -- 1
B-767-400 12 4 5 -- -- 21
B-777-200 -- -- 1 1 4 6
CRJ-100/200 16 34 29 22 2 103
CRJ-700 -- 2 20 12 23 57
-------------------------------------- ---- ---- ---- ----- -----
TOTAL 51 71 73 45 66 306
====================================== ==== ==== ==== ===== =====
</TABLE>
AIRCRAFT ON OPTION AT JUNE 30, 2000*
<TABLE>
<CAPTION>
Delivery in Calendar Year Ending
----------------------------------------------
Remainder After Rolling
Aircraft on Option(**) of 2000 2001 2002 2003 2003 Total Options
---------------------------------------- ---- ---- ---- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
B-737-600/700/800 -- 3 5 7 45 60 256
B-757-200 -- -- 9 11 -- 20 74
B-767-300/300ER -- -- 2 2 7 11 14
B-767-400 -- -- 5 5 14 24 16
B-777-200 -- -- 5 5 10 20 27
CRJ-100/200 -- -- 12 28 191 231 --
CRJ-700 -- -- -- -- 165 165 --
---------------------------------------- ---- ---- ---- ----- ----- -------
Total -- 3 38 58 432 531 387
======================================== ==== ==== ==== ===== ===== ========
</TABLE>
(*) Includes regional jet orders and options under purchase agreements
entered into in July 2000.
(**) Aircraft options have scheduled delivery slots, while rolling options
replace options and are assigned delivery slots as options expire or
are exercised.
[Inside Back Cover]
