SECURITIES AND EXCHANGE COMMISSION
Pre-Effective Amendment No. 1
Delta Air Lines, Inc.
Delaware | 4512 | 58-0218548 | ||
(State or Other Jurisdiction of Incorporation or Organization) |
(Primary Standard Industrial Classification Code Number) |
(I.R.S. Employer Identification Number) |
Hartsfield-Jackson Atlanta International Airport
Gregory L. Riggs, Esq.
copy to:
Approximate date of commencement of proposed sale to the public: From time to time after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. x
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. o
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The information in this
prospectus is not complete and may be changed. We may not sell
these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus
is not an offer to sell these securities and we are not
soliciting offers to buy these securities in any state where the
offer or sale is not permitted. |
SUBJECT TO COMPLETION, DATED FEBRUARY 10, 2005
PROSPECTUS
Interest payable semiannually on June 15 and December 15
We issued $135,202,000 aggregate principal amount of the 8.00% Senior Notes due 2007 and 9,842,778 shares of our common stock in private placements in November 2004. This prospectus will be used by selling securityholders to resell their notes and the common stock. We will not receive any of the proceeds from the resale of these securities.
The notes will mature on December 15, 2007. We may not redeem the notes prior to the maturity date.
The notes are our senior unsecured obligations and rank equal in right of payment to all of our other existing and future senior unsecured indebtedness. The notes are effectively subordinated to all of our existing and future secured indebtedness to the extent of the assets securing that indebtedness. The notes are structurally subordinated to all liabilities of our subsidiaries.
Our common stock is listed on the New York Stock Exchange under the symbol DAL. The last reported price of our common stock on February 9 was $5.62 per share.
Investing in the notes and the common stock involves certain risks. See Risk Factors beginning on page 7.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
You should rely only on the information contained in this prospectus. We and the selling securityholders have not authorized anyone to provide you with different information. We are not, and the selling securityholders are not, making an offer of these securities in any state where the offer is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus or of the applicable document, respectively.
TABLE OF CONTENTS
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F-1 |
In this prospectus, Delta, the company, we, us and our refer to Delta Air Lines, Inc. You should rely only on the information contained in this prospectus. This prospectus is part of a registration statement that we filed with the SEC using a shelf registration or continuous offering process. Under this shelf process, selling securityholders may from time to time sell the securities described in this prospectus in one or more offerings.
This prospectus provides you with a general description of the securities that the selling securityholders may offer. Each time a selling securityholder sells securities, the selling securityholders are required to provide you with a prospectus containing specific information about the selling securityholder and the terms of the securities being offered. You should read this prospectus together with the additional information described under the heading Where You Can Find More Information.
The registration statement containing this prospectus, including the exhibits to the registration statement, provides additional information about us and the securities offered under this prospectus. The registration statement, including the exhibits, can be read on the SEC web site or at the SEC offices mentioned under the heading Where You Can Find More Information.
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In making an investment decision, prospective investors must rely on their own examination of us and the terms of the offering, including the merits and risks involved. Prospective investors should not construe anything in this prospectus as legal, business or tax advice. Each prospective investor should consult its own advisors as needed to make its investment decision and to determine whether it is legally permitted to purchase the securities under applicable legal investment or similar laws or regulations. As a prospective investor, you should be aware that you may be required to bear the financial risks of this investment for an indefinite period of time.
This prospectus contains summaries believed to be accurate with respect to certain documents, but reference is made to the actual documents for complete information. All such summaries are qualified in their entirety by such reference. Copies of documents referred to herein will be made available to prospective investors upon request to us.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), which represent our expectations or beliefs concerning future events. When used in this prospectus, the words expects, plans, anticipates, and similar expressions are intended to identify forward-looking statements. All forward-looking statements in this prospectus are based upon information available to us on the date of this prospectus. We undertake no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future events or otherwise. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or our expectations. For examples of such risks and uncertainties, please see Risk Factors in this prospectus. Additional information concerning these and other factors is contained in our SEC filings, including but not limited to our Forms 10-K, 10-Q and 8-K.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other information with the SEC. Any document that we file is available at the public reference rooms of the SEC at 450 Fifth Street, NW, Washington, D.C. 20549. Information on the operation of the public reference rooms may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site at http://www.sec.gov, from which our filings are accessible.
Any party to whom this prospectus is delivered may request a copy of these filings (other than any exhibits unless specifically incorporated by reference into this prospectus), at no cost, by writing or telephoning Delta at Delta Air Lines, Inc., Investor Relations, Dept. No. 829, P.O. Box 20706, Atlanta, GA 30320, telephone no. (404) 715-2343.
The registration statement, including the exhibits and schedules thereto, is also available for reading and copying at the offices of the New York Stock Exchange at 20 Broad Street, New York, New York 10005.
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus. This summary may not contain all of the information that you should consider before deciding to invest in the notes or our common stock. You should read this entire prospectus carefully, including the Risk Factors section and the consolidated financial statements and the notes to the consolidated financial statements. All amounts presented in this summary and elsewhere in this prospectus related to our results of operations, financial position, and cash flows as of and for the year ended December 31, 2004 are unaudited.
Delta
We are a major air carrier that provides scheduled air transportation for passengers and cargo throughout the United States and around the world. Based on calendar year 2004 data, we are the second-largest carrier in terms of passengers carried and the third-largest airline as measured by operating revenues and revenue passenger miles flown. We are a leading U.S. transatlantic airline, serving the largest number of nonstop markets and offering the most daily flight departures. Among U.S. airlines, we have the second-most transatlantic passengers. We operate hubs in Atlanta, Cincinnati and Salt Lake City. We also operate international gateways in Atlanta and at New Yorks John F. Kennedy International Airport.
Our principal executive offices are located at Hartsfield-Jackson Atlanta International Airport, Atlanta, Georgia 30320-6001 and our telephone number is (404) 715-2600.
Industry Overview
Since the terrorist attacks on September 11, 2001, the airline industry has experienced a severely depressed revenue environment and significant cost pressures. These factors have resulted in industry-wide liquidity issues, including the restructuring of certain hub and spoke airlines due to bankruptcy or near bankruptcy.
The continuing impact of the September 11, 2001 terrorist attacks and other events have resulted in fundamental, and what we believe will be permanent, changes in the airline industry. The revenue environment continues to be severely impacted by the following factors:
| the continuing growth of low-cost carriers with which we compete in most of our domestic markets; | |
| high industry capacity, resulting in significant fare discounting to stimulate traffic; and | |
| increased price sensitivity by our customers, enhanced by the availability of airline fare information on the Internet. | |
Business Environment
We recorded a substantial net loss in each of the years ended December 31, 2003, 2002 and 2001. During 2004, our financial performance continued to deteriorate. In light of our significant losses and the decline in our cash and cash equivalents, we are making permanent structural changes which are intended to appropriately align our cost structure with the revenue we can generate in this business environment and to enable us to compete with low-cost carriers.
At the end of 2003, we began a strategic reassessment of our business. Our transformation plan is intended to deliver approximately $5 billion in annual benefits by the end of 2006 (as compared to 2002) while also improving the service we provide to our customers. Key elements of the plan include redesigning our Atlanta hub operations, dehubbing our Dallas/ Ft. Worth operation, growing Song, reducing fleet complexity, eliminating 6,000 to 7,000 non-pilot jobs, reducing our pilot cost structure significantly, creating incentive programs for U.S.-based employees, and updating and upgrading customer products and services. By the end of 2004, we achieved approximately $2.3 billion of the $5 billion in targeted benefits under our profit improvement program. We have identified, and begun implementation of, initiatives to obtain the remaining $2.7 billion in targeted benefits, which we believe we are on track to achieve by the end of 2006.
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Recent Transactions
As a part of our out-of-court restructuring efforts, we entered into the following transactions in late 2004:
| Agreements with American Express Travel Related Services Company, Inc. (Amex) and GE Commercial Finance to provide us with up to $1.13 billion of financing; | |
| Exchange of $237 million aggregate principal amount of our 7.78% Series 2000-1C Pass Through Certificates due 2005 and 7.30% Series 2001-1C Pass Through Certificates due 2006 for $235 million aggregate principal amount of 9.50% Senior Secured Notes due 2008; and | |
| Exchange of approximately $135 million aggregate principal amount of our unsecured 7.70% Notes due 2005 for a like principal amount of 8.00% Senior Notes due 2007 offered under this prospectus and 5,488,054 shares of our common stock. |
For a discussion of our remaining liquidity needs and the factors that could cause our liquidity needs to be substantially higher than we expect, see Risk Factors Risks Relating to Delta We have substantial liquidity needs, and there is no assurance that we will be able to obtain the necessary financing to meet those needs on acceptable terms or at all.
In addition, we completed restructuring transactions with aircraft lessors, creditors and other vendors in the December 2004 quarter. Specifically, in November 2004, we entered into definitive agreements with aircraft lessors and lenders under which we expect to receive average annual concessions of approximately $57 million between 2005 and 2009; we issued an aggregate of 4,354,724 shares of our common stock to the aircraft lessors and lenders in exchange for these concessions. Separately, as a result of agreements with about 115 suppliers, we expect to realize average annual benefits of approximately $46 million during 2005, 2006 and 2007. We also completed agreements with other aircraft lenders to defer $112 million in debt obligations from 2004 through 2006 to later years.
Recent Financial Results
During the December 2004 quarter, our financial performance continued to deteriorate, primarily due to a significant decline in the domestic passenger mile yield compared to 2003, and historically high fuel prices. For the year ended December 31, 2004, we reported an unaudited net loss of $5.2 billion, or $41.07 loss per share, as compared to a loss of $773 million, or $6.40 loss per share, in 2003. Our unrestricted cash balance was $1.8 billion at December 31, 2004, compared to $1.4 billion at September 30, 2004 and $2.7 billion at December 31, 2003.
Our 2004 unaudited net loss includes (1) a $1.9 billion impairment charge related to intangible assets; (2) a $1.2 billion income tax provision related to reserves for our deferred income tax assets; (3) $251 million in settlement charges related to our defined benefit pension plan for pilots; (4) a $194 million charge related to voluntary and involuntary workforce reduction programs; and (5) a $40 million asset impairment charge associated with our agreement to sell eight MD-11 aircraft. During 2004, we also recorded (1) a $527 million gain related to elimination of our healthcare coverage subsidy for employees who retire after January 1, 2006 and (2) a $123 million gain related to the sale of our equity investment in Orbitz, Inc. Additionally, we no longer recognize income tax benefits associated with current period losses. This change will continue for the foreseeable future until such time we determine that it is more likely than not that we will generate sufficient taxable income to realize our deferred tax assets.
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The Offering
The Notes Offering
Notes offered by the selling securityholders |
$135,202,000 aggregate principal amount of 8.00% Senior Notes due 2007. | |
Maturity | December 15, 2007. | |
Interest payment dates | Interest will be payable in cash on June 15 and December 15 of each year, beginning June 15, 2005. | |
Ranking | The notes are our senior unsecured obligations and rank equally with all of our other existing and future senior unsecured indebtedness. The notes are effectively subordinated to all of our existing and future secured indebtedness to the extent of the assets securing that indebtedness. The notes are structurally subordinated to all liabilities of our subsidiaries. As of December 31, 2004, we had approximately $6.6 billion of secured indebtedness (excluding secured indebtedness of our subsidiaries); and approximately $2.3 billion of subsidiary indebtedness. | |
Redemption | None | |
Use of proceeds | Delta will not receive any proceeds from the sale of notes in the offering. | |
The Common Stock Offering
Common stock offered by the selling stockholders |
9,842,778 shares | |
Common stock outstanding | 139,830,443 shares as of December 31, 2004 | |
Voting rights | One vote per share | |
Use of proceeds | Delta will not receive any proceeds from the sale of common stock in the offering. | |
New York Stock Exchange symbol | DAL |
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SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
The summary consolidated financial data for each of the fiscal years in the five-year period ended December 31, 2003 have been derived from our audited consolidated financial statements. Such information is contained in and should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and accompanying notes included elsewhere in this prospectus (the Consolidated Financial Statements). The summary consolidated financial data for the nine-month periods ended September 30, 2004 and 2003 and the consolidated balance sheet as of September 30, 2004 are derived from our unaudited condensed consolidated financial statements (the Condensed Consolidated Financial Statements) and reflect, in the opinion of management, all adjustments as are necessary to fairly present the results for such periods. Operating results for the nine months ended September 30, 2004 are not necessarily indicative of the results that may be expected for the full fiscal year ending December 31, 2004.
Consolidated Summary of Operations
Nine Months Ended | |||||||||||||||||||||||||||||
Year Ended December 31, | September 30, | ||||||||||||||||||||||||||||
2003(1) | 2002(2) | 2001(3) | 2000(4) | 1999(5) | 2004(6) | 2003(7) | |||||||||||||||||||||||
(In millions, except per share data) | |||||||||||||||||||||||||||||
Operating revenues(8)
|
$ | 14,087 | $ | 13,866 | $ | 13,879 | $ | 16,741 | $ | 14,883 | $ | 11,361 | $ | 10,477 | |||||||||||||||
Operating expenses(8)
|
14,872 | 15,175 | 15,481 | 15,104 | 13,565 | 12,413 | 10,897 | ||||||||||||||||||||||
Operating income (loss)
|
(785 | ) | (1,309 | ) | (1,602 | ) | 1,637 | 1,318 | (1,052 | ) | (420 | ) | |||||||||||||||||
Interest expense, net(9)
|
(721 | ) | (629 | ) | (410 | ) | (257 | ) | (126 | ) | (574 | ) | (532 | ) | |||||||||||||||
Miscellaneous income (expense), net(10)
|
326 | 17 | 80 | 328 | 901 | (10 | ) | 291 | |||||||||||||||||||||
Gain (loss) on extinguishment of debt, net
|
| (42 | ) | | | | 1 | | |||||||||||||||||||||
Fair value adjustments of SFAS 133
derivatives
|
(9 | ) | (39 | ) | 68 | (159 | ) | | (44 | ) | (16 | ) | |||||||||||||||||
Income (loss) before income taxes and cumulative
effect of change in accounting principle
|
(1,189 | ) | (2,002 | ) | (1,864 | ) | 1,549 | 2,093 | (1,679 | ) | (677 | ) | |||||||||||||||||
Income tax benefit (provision)
|
416 | 730 | 648 | (621 | ) | (831 | ) | (1,313 | ) | 231 | |||||||||||||||||||
Net income (loss) before cumulative effect of
change in accounting principle
|
(773 | ) | (1,272 | ) | (1,216 | ) | 928 | 1,262 | (2,992 | ) | (446 | ) | |||||||||||||||||
Net income (loss) after cumulative effect of
change in accounting principle
|
(773 | ) | (1,272 | ) | (1,216 | ) | 828 | 1,208 | (2,992 | ) | (446 | ) | |||||||||||||||||
Preferred stock dividends
|
(17 | ) | (15 | ) | (14 | ) | (13 | ) | (12 | ) | (14 | ) | (12 | ) | |||||||||||||||
Net income (loss) attributable to common
shareowners
|
$ | (790 | ) | $ | (1,287 | ) | $ | (1,230 | ) | $ | 815 | $ | 1,196 | $ | (3,006 | ) | $ | (458 | ) | ||||||||||
Earnings (loss) per share before cumulative
effect of change in accounting principle
|
|||||||||||||||||||||||||||||
Basic
|
$ | (6.40 | ) | $ | (10.44 | ) | $ | (9.99 | ) | $ | 7.39 | $ | 9.05 | $ | (24.06 | ) | $ | (3.71 | ) | ||||||||||
Diluted
|
$ | (6.40 | ) | $ | (10.44 | ) | $ | (9.99 | ) | $ | 7.05 | $ | 8.52 | $ | (24.06 | ) | $ | (3.71 | ) | ||||||||||
Earnings (loss) per share
|
|||||||||||||||||||||||||||||
Basic
|
$ | (6.40 | ) | $ | (10.44 | ) | $ | (9.99 | ) | $ | 6.58 | $ | 8.66 | $ | (24.06 | ) | $ | (3.71 | ) | ||||||||||
Diluted
|
$ | (6.40 | ) | $ | (10.44 | ) | $ | (9.99 | ) | $ | 6.28 | $ | 8.15 | $ | (24.06 | ) | $ | (3.71 | ) | ||||||||||
Dividends declared per common share
|
$ | 0.05 | $ | 0.10 | $ | 0.10 | $ | 0.10 | $ | 0.10 | $ | | $ | 0.05 | |||||||||||||||
Ratio of earnings (loss) to fixed charges(11)
|
0.19 | x | (0.51 | x) | (0.51 | x) | 2.37 | x | 3.55 | x | (0.51 | x) | 0.39 | x |
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Other Financial and Statistical Data
Nine Months | ||||||||||||||||||||||||
Year Ended December 31, | Ended | |||||||||||||||||||||||
September 30, | ||||||||||||||||||||||||
2003(1) | 2002(2) | 2001(3) | 2000(4) | 1999(5) | 2004(6) | |||||||||||||||||||
Total assets (millions)
|
$ | 25,939 | $ | 24,303 | $ | 23,605 | $ | 21,931 | $ | 19,942 | $ | 23,526 | ||||||||||||
Long-term debt and capital leases (excluding
current maturities) (millions)
|
$ | 11,538 | $ | 10,174 | $ | 8,347 | $ | 5,896 | $ | 4,303 | $ | 11,716 | ||||||||||||
Shareowners (deficit) equity
(millions)
|
$ | (659 | ) | $ | 893 | $ | 3,769 | $ | 5,343 | $ | 4,908 | $ | (3,577 | ) | ||||||||||
Shares of common stock outstanding
|
123,544,945 | 123,359,205 | 123,245,666 | 123,013,372 | 132,893,470 | 127,504,135 | ||||||||||||||||||
Revenue passengers enplaned (thousands)
|
104,452 | 107,048 | 104,943 | 119,930 | 110,083 | 82,206 | ||||||||||||||||||
Available seat miles (millions)(8)
|
139,505 | 145,232 | 147,837 | 154,974 | 147,073 | 113,536 | ||||||||||||||||||
Revenue passenger miles (millions)(8)
|
102,301 | 104,422 | 101,717 | 112,998 | 106,165 | 85,201 | ||||||||||||||||||
Operating revenue per available seat mile(8)
|
10.10¢ | 9.55¢ | 9.39¢ | 10.80¢ | 10.12¢ | 10.01¢ | ||||||||||||||||||
Passenger mile yield(8)
|
12.73¢ | 12.26¢ | 12.74¢ | 13.86¢ | 13.14¢ | 12.28¢ | ||||||||||||||||||
Operating cost per available seat mile(8)
|
10.66¢ | 10.45¢ | 10.47¢ | 9.75¢ | 9.22¢ | 10.93¢ | ||||||||||||||||||
Passenger load factor(8)
|
73.33 | % | 71.90 | % | 68.80 | % | 72.91 | % | 72.18 | % | 75.04 | % | ||||||||||||
Breakeven passenger load factor(8)
|
77.75 | % | 79.25 | % | 77.31 | % | 65.29 | % | 65.37 | % | 82.59 | % | ||||||||||||
Fuel gallons consumed (millions)
|
2,370 | 2,514 | 2,649 | 2,922 | 2,779 | 1,896 | ||||||||||||||||||
Average price per fuel gallon, net of hedging
gains
|
81.78¢ | 66.94¢ | 68.60¢ | 67.38¢ | 51.13¢ | $ | 1.07 |
(1) | Includes a $268 million charge ($169 million net of tax, or $1.37 diluted EPS) for restructuring, asset writedowns, pension settlements and related items, net; a $398 million gain ($251 million net of tax, or $2.03 diluted EPS) for Appropriations Act compensation; and a $304 million gain ($191 million net of tax, or $1.55 diluted EPS) for certain other income and expense items (see Managements Discussion and Analysis of Financial Condition and Results of Operations). |
(2) | Includes a $439 million charge ($169 million net of tax, of $2.25 diluted EPS) for restructuring, asset writedowns, and related items, net; a $34 million gain ($22 million net of tax, or $0.17 diluted EPS) for Stabilization Act compensation; and a $94 million charge ($59 million net of tax, or $0.47 diluted EPS) for certain other income and expense items (see Managements Discussion and Analysis of Financial Condition and Results of Operations). |
(3) | Includes a $1.1 billion charge ($695 million net of tax, or $5.63 diluted EPS) for restructuring, asset writedowns, and related items, net; a $634 million gain ($392 million net of tax, or $3.18 diluted EPS) for Stabilization Act compensation; and a $186 million gain ($114 million net of tax, or $0.92 diluted EPS) for certain other income and expense items (see Managements Discussion and Analysis of Financial Condition and Results of Operations). |
(4) | Includes a $108 million charge ($66 million net of tax, or $0.50 diluted EPS) for restructuring, asset writedowns, and related items, net; a $151 million gain ($93 million net of tax, or $0.70 diluted EPS) for certain other income and expense items; and a $164 million cumulative effect, non-cash charge ($100 million net of tax, or $0.77 diluted EPS), resulting from our adoption of SFAS 133 on July 1, 2000. |
(5) | Includes a $469 million charge ($286 million net of tax, or $1.94 diluted EPS) for asset writedowns; $927 million gain ($565 million net of tax, or $3.83 diluted EPS) from the sale of certain investments; an $89 million non-cash charge ($54 million net of tax, or $0.37 diluted EPS) from the cumulative effect of a change in accounting principle resulting from our adoption on January 1, 1999 of SAB 101; and a $40 million charge ($24 million net of tax, or $0.16 diluted EPS) for the early extinguishment of certain debt obligations. |
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(6) | Includes charges totaling $131 million ($1.05 diluted EPS) for pension settlements and a $40 million asset impairment charge ($0.32 diluted EPS) associated with our agreement to sell eight MD-11 aircraft. |
(7) | Includes a $43 million charge ($27 million net of tax, or $0.22 diluted EPS) for pension benefits for workforce reductions; a $398 million gain ($251 million net of tax, or $2.03 diluted EPS) for Appropriations Act compensation and a $263 million gain ($165 million net of tax, or $1.35 diluted EPS) for certain other income and expense items. |
(8) | Reflects the reclassifications discussed in Note 1 of the notes to the Consolidated Financial Statements related to our contract carrier arrangements. |
(9) | Includes interest income. |
(10) | Includes gains (losses) from the sale of investments. |
(11) | The ratio of earnings (loss) to fixed charges represents the number of times that fixed charges are covered by earnings. Earnings (loss) represents income (loss) before income taxes, excluding the cumulative effect of a change in accounting principle, plus fixed charges and distributed income of equity investees less capitalized interest and income (loss) from equity investees. Fixed charges include interest, whether expensed or capitalized; one-half of rental expense, which Delta believes is representative of the interest factor in those periods; amortization of debt costs; and preference security dividends. Fixed charges exceeded adjusted earnings (loss) by $1.2 billion, $2.0 billion and $1.8 billion for the years ended December 31, 2003, 2002 and 2001, respectively, and $1.7 billion and $660 million for the nine months ended September 30, 2004 and 2003, respectively. |
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RISK FACTORS
You should carefully consider the following risks and all of the other information set forth in this prospectus before deciding to invest in the notes or our common stock. If any of the following risks actually occurs, our business, financial condition or results of operations would likely suffer. In such case, the market price of the notes or our common stock could decline due to any of these risks, and you may lose all or part of your investment.
Risks Relating to Delta
If we are unsuccessful in further reducing our operating expenses and continue to experience significant losses, we will need to seek to restructure our costs under Chapter 11 of the U.S. Bankruptcy Code. |
We reported a net loss of $5.2 billion (unaudited), $773 million, $1.3 billion and $1.2 billion for the years ended December 31, 2004, 2003, 2002 and 2001, respectively. We expect our revenue and cost challenges to continue. In addition, Deloitte & Touche LLP, our independent registered public accounting firm, issued on September 14, 2004, a new Report of Independent Registered Public Accounting Firm that contains an explanatory paragraph which makes reference to uncertainty about our ability to continue as a going concern. Future reports may continue to contain this explanatory paragraph.
In connection with our restructuring efforts in 2004, we determined that there are anticipated annual benefits from our transformation plan sufficient for us to achieve financial viability by way of an out-of-court restructuring, including reduction of pilot costs of at least $1 billion annually by 2006 and other benefits of at least $1.7 billion annually by 2006 (in addition to the $2.3 billion of annual benefits (compared to 2002) achieved by the end of 2004 through previously implemented profit improvement initiatives). This determination, however, was based on a number of material assumptions, including, without limitation, assumptions about fuel prices, yields, competition and our access to additional sources of financing on acceptable terms. Any number of these assumptions, many of which, such as fuel prices, are not within our control, could prove to be incorrect.
Even if we achieve all of the approximately $5 billion in targeted annual benefits from our transformation plan, we may need even greater cost savings because our industry has been subject to progressively increasing competitive pressure. We cannot assure you that these anticipated benefits will be achieved or that if they are achieved that they will be adequate for us to maintain financial viability.
In addition, our transformation plan involves significant changes to our business. We cannot assure you that we will be successful in implementing the plan or that key elements, such as employee job reductions, will not have an adverse impact on our business and results of operations, particularly in the near term. Although we have assumed that incremental revenues from our transformation plan will more than offset related costs, in light of the competitive pressures we face, we cannot assure you that we will be successful in realizing any of such incremental revenues.
If we are not successful in further reducing our operating expenses and continue to experience significant losses, we would need to seek to restructure our costs under Chapter 11 of the U.S. Bankruptcy Code. A restructuring under Chapter 11 of the U.S. Bankruptcy Code may be particularly difficult because we pledged substantially all of our remaining unencumbered collateral in connection with transactions we have recently completed as a part of our out-of-court restructuring.
We have substantial liquidity needs, and there is no assurance that we will be able to obtain the necessary financing to meet those needs on acceptable terms, if at all. |
Even if we are successful in achieving all of the approximately $5 billion in targeted benefits under our transformation plan, we do not expect to achieve the full $5 billion until the end of 2006. As we transition to a lower cost structure, we continue to face significant challenges due to low passenger mile yields, historically high fuel prices and other cost pressures related to interest and pension and related expense. Accordingly, we believe that we will record a substantial net loss in 2005, and that our cash flows from operations will not be sufficient to meet all of our liquidity needs for that period.
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We currently expect to meet our liquidity needs for 2005 from cash flows from operations, our available cash and cash equivalents, commitments from a third party to finance on a long-term secured basis our purchase of 32 regional jet aircraft to be delivered to us in 2005, and the final $250 million borrowing under our financing agreement with American Express Travel Related Services Company, Inc. (Amex). Because substantially all of our assets are encumbered and our credit ratings have been substantially lowered, we do not expect to be able to obtain any material amount of additional debt financing. Unless we are able to sell assets or access the capital markets by issuing equity or convertible debt securities, we expect that our cash and cash equivalents will be substantially lower at December 31, 2005 than at the end of 2004.
Our liquidity needs will be substantially higher than we expect if:
| Oil prices do not decline significantly. Crude oil is a component of jet fuel. Crude oil prices are volatile and may increase or decrease significantly. Our business plan assumes that the average jet fuel price per gallon in 2005 will be approximately $1.22 (with each 1¢ increase in the average annual jet fuel price per gallon increasing our liquidity needs by approximately $25 million per year, unless we are successful in offsetting some or all of this increase through fare increases or additional cost reduction initiatives). The forward curve for crude oil currently implies substantially higher jet fuel prices for 2005 than our business plan. We have no hedges or contractual arrangements that would reduce our costs below market prices. | |
| Any of the other assumptions underlying our business plan proves to be incorrect. Many of these assumptions, such as yields, competition, pension funding obligations and our access to financing, are not within our control. | |
| We are unsuccessful in achieving any of the approximately $5 billion of targeted benefits (compared to 2002) of our transformation plan. Many of the benefits of our transformation plan, such as incremental revenues, are not within our control. | |
| Our Visa/ MasterCard processor requires a significant holdback. Our current Visa/ MasterCard processing contract expires in August 2005. If our renewal or replacement contract requires a significant holdback, it will increase our liquidity needs. |
If any of the assumptions underlying our business plan proves to be incorrect in any material adverse respect and we are unable to sell assets or access the capital markets, or if our level of cash and cash equivalents declines to an unacceptably low level, then we would need to seek to restructure under Chapter 11 of the U.S. Bankruptcy Code.
Our financing agreements with GE Commercial Finance and Amex include financial covenants that impose substantial restrictions on our financial and business operations and include financial tests that we must meet in order to continue to borrow under such facilities. |
The terms of our financing agreements with GE Commercial Finance and Amex restrict our ability to, among other things, incur additional indebtedness, pay dividends or make other payments on investments, consummate asset sales or similar transactions, create liens, merge or consolidate with any other person, or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of our assets. The terms also contain covenants that require us to meet financial tests in order to continue to borrow under the facility and to avoid a default that might lead to an early termination of the facility. If we were not able to comply with these covenants, our outstanding obligations under these facilities could be accelerated and become due and payable immediately. The terms of the credit facilities, including these covenants, are generally described in Managements Discussion and Analysis of Financial Condition and Results of Operations Financial Condition and Liquidity Recent Transactions.
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Our indebtedness and other obligations are substantial and materially adversely affect our business and our ability to incur additional debt to fund future needs. |
We have now and will continue to have a significant amount of indebtedness and other obligations, as well as substantial pension funding obligations. As of December 31, 2004, we had approximately $13.9 billion (unaudited) of total consolidated indebtedness, including capital leases. We also have minimum rental commitments with a present value of approximately $6.4 billion under noncancelable operating leases with initial or remaining terms in excess of one year. On December 1, 2004, we received an aggregate of $830 million in financing pursuant to separate financing agreements with GE Commercial Finance and Amex. Except for commitments to finance our purchases of regional jet aircraft and the additional $250 million prepayment that we can request from Amex on or after March 1, 2005, we have no available lines of credit. Additionally, we believe that our access to additional financing on acceptable terms is limited, at least in the near term. If we cannot achieve a competitive cost structure and regain sustained profitability, we would need to seek to restructure our costs under Chapter 11 of the U.S. Bankruptcy Code. A restructuring under Chapter 11 of the U.S. Bankruptcy Code may be particularly difficult because we pledged substantially all of our unencumbered collateral in connection with our out-of-court restructuring.
Our substantial indebtedness and other obligations have, and in the future could continue to, negatively impact our operations by:
| requiring us to dedicate a substantial portion of our cash flow from operations to the payment of principal of, and interest on, our indebtedness, thereby reducing the funds available to us for other purposes; | |
| making us more vulnerable to economic downturns, adverse industry conditions or catastrophic external events, limiting our ability to withstand competitive pressures and reducing our flexibility in planning for, or responding to, changing business and economic conditions; and | |
| placing us at a competitive disadvantage to our competitors that have relatively less debt than we have. |
Our pension plan funding obligations are significant and are affected by factors beyond our control. |
We sponsor qualified defined benefit pension plans for eligible employees and retirees. Our funding obligations under these plans are governed by the Employee Retirement Income Security Act of 1974 (ERISA). We met our required funding obligations for these plans under ERISA in 2004.
Estimates of the amount and timing of our future funding obligations for the pension plans are based on various assumptions. These include assumptions concerning, among other things, the actual and projected market performance of the pension plan assets; future long-term corporate bond yields; statutory requirements; and demographic data for pension plan participants. The amount and timing of our future funding obligations also depend on (1) whether we elect to make contributions to the pension plans in excess of those required under ERISA (such voluntary contributions may reduce or defer the funding obligations we would have absent those contributions) and (2) the level of early retirements by pilots.
We currently estimate that our funding obligations under our defined benefit and defined contribution pension plans for 2005 will be approximately $400 million to $450 million. This estimate may vary depending on, among other things, the assumptions used to determine the amount and whether we make contributions in excess of those required. This estimate reflects the projected impact of the election we made in 2004 to utilize the alternative deficit reduction contribution relief provided by the Pension Funding Equity Act of 2004. That legislation permits us to defer payment of a portion of the otherwise required funding. We cannot provide a reasonably accurate estimate of our anticipated funding obligations under our pension plans for 2006 and thereafter at this time because these estimates may vary materially depending on applicable law, the assumptions used to determine the estimates and whether we make contributions in excess of those required. Nevertheless, we presently expect that our funding obligations
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If our pilots retire prior to their normal retirement at age 60 at greater than historical levels, this could disrupt our operations, negatively impact our revenue and increase our pension funding obligations. |
Under the Delta Pilots Retirement Plan (DPRP), Delta pilots who retire can elect to receive 50% of their accrued pension benefit in a lump sum in connection with their retirement and the remaining 50% as an annuity after retirement. During certain recent months, our pilots have taken early retirement at greater than historical levels apparently due to (1) a perceived risk of rising interest rates, which could reduce the amount of their lump sum pension benefit; and/or (2) concerns about their ability to receive a lump sum pension benefit if (a) we were to seek to restructure our costs under Chapter 11 of the U.S. Bankruptcy Code and (b) a notice of intent to terminate the DPRP is issued. If early retirements by pilots occur at greater than historical levels in the future, this could, depending on the number of pilots who retire early, the aircraft types these pilots operate and other factors, disrupt our operations, negatively impact our revenues and increase our pension funding obligations significantly. Approximately 2,000 of our 6,600 pilots are currently at or over age 50 and thus are eligible to retire.
Our business is dependent on the availability and price of aircraft fuel. Significant disruptions in the supply of aircraft fuel or continued periods of historically high fuel costs will materially adversely affect our operating results. |
Our operating results are significantly impacted by changes in the availability or price of aircraft fuel. Fuel prices increased substantially in 2004, when our average fuel price per gallon rose 42% to approximately $1.16 as compared to an average price of 81.78¢ in 2003. Our fuel costs represented 16%, 13%, 11% and 12% of our operating expenses in 2004, 2003, 2002 and 2001, respectively. Due to the competitive nature of the airline industry, we do not expect to be able to pass on any increases in fuel prices to our customers by increasing our fares.
Our aircraft fuel purchase contracts do not provide material protection against price increases or assure the availability of our fuel supplies. We purchase most of our aircraft fuel from petroleum refiners under contracts that establish the price based on various market indices. We also purchase aircraft fuel on the spot market, from offshore sources and under contracts that permit the refiners to set the price. None of our aircraft fuel requirements are currently hedged.
Although we are currently able to obtain adequate supplies of aircraft fuel, it is impossible to predict the future availability or price of aircraft fuel. Political disruptions or wars involving oil-producing countries, changes in government policy concerning aircraft fuel production, transportation or marketing, changes in aircraft fuel production capacity, environmental concerns and other unpredictable events may result in fuel supply shortages and additional fuel price increases in the future.
Our credit ratings have been substantially lowered and, unless we achieve significant reductions in our cost structure, we will be unable to access the capital markets for new borrowings on acceptable terms, which could hinder our ability to operate our business. |
Our business is highly dependent on our ability to access the capital markets. Since September 11, 2001, our senior unsecured long-term debt ratings have been lowered to Ca by Moodys Investors Service, Inc., CC by Standard & Poors Rating Services and C by Fitch Ratings. Moodys and Fitch have stated that their ratings outlook for our senior unsecured debt is negative while we are on positive watch with Standard & Poors. Our credit ratings may be lowered further or withdrawn. We do not have debt obligations that accelerate as a result of a credit ratings downgrade. We believe that our access to the capital markets for new borrowings is limited, at least in the near term.
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Interruptions or disruptions in service at one of our hub airports could have a material adverse impact on our operations. |
Our business is heavily dependent on our operations at the Atlanta Airport and at our other hub airports in Cincinnati and Salt Lake City. Each of these hub operations includes flights that gather and distribute traffic from markets in the geographic region surrounding the hub to other major cities and to other Delta hubs. A significant interruption or disruption in service at the Atlanta Airport or at one of our other hubs could have a serious impact on our business, financial condition and operating results.
We are increasingly dependent on technology in our operations, and if our technology fails or we are unable to continue to invest in new technology, our business may be adversely affected. |
We are increasingly dependent on technology initiatives to reduce costs and to enhance customer service in order to compete in the current business environment. For example, we have made significant investments in check-in kiosks, Delta Direct phone banks and related initiatives across the system. The performance and reliability of our technology are critical to our ability to attract and retain customers and our ability to compete effectively. In this challenging business environment, we may not be able to continue to make sufficient capital investments in our technology infrastructure to deliver these expected benefits.
In addition, any internal technology error or failure, or large scale external interruption in technology infrastructure we depend on, such as power, telecommunications or the internet, may disrupt our technology network. Any individual, sustained or repeated failure of our technology could impact our customer service and result in increased costs. Like all companies, our technology systems may be vulnerable to a variety of sources of interruption due to events beyond our control, including natural disasters, terrorist attacks, telecommunications failures, computer viruses, hackers and other security issues. While we have in place, and continue to invest in, technology security initiatives and disaster recovery plans, these measures may not be adequate or implemented properly to prevent a business disruption and its adverse financial consequences to our business.
If we experience further losses of our senior management and other key employees, our operating results could be adversely affected, and we may not be able to attract and retain additional qualified management personnel. |
We are dependent on the experience and industry knowledge of our officers and other key employees to execute our business plans. Our deteriorating financial performance creates uncertainty that may lead to departures of our officers and key employees. If we were to experience a substantial turnover in our leadership, our performance could be materially adversely impacted. Additionally, we may be unable to attract and retain additional qualified executives as needed in the future.
Employee strikes and other labor-related disruptions may adversely affect our operations. |
Our business is labor intensive, requiring large numbers of pilots, flight attendants, mechanics and other personnel. Approximately 18% of our workforce is unionized. Strikes or labor disputes with our and our affiliates unionized employees may adversely affect our ability to conduct our business. Relations between air carriers and labor unions in the United States are governed by the Railway Labor Act, which provides that a collective bargaining agreement between an airline and a labor union does not expire, but instead becomes amendable as of a stated date. Our collective bargaining agreement with ALPA, which represents our pilots, becomes amendable on December 31, 2009. Our wholly-owned subsidiary, Atlantic Southeast Airlines, Inc. (ASA), is in collective bargaining negotiations with ALPA, which represents ASAs pilots, and with the Association of Flight Attendants, which represents ASAs flight attendants. The outcome of these collective bargaining negotiations cannot presently be determined. In addition to the ASA negotiations, if we or our affiliates are unable to reach agreement with any of our unionized work groups on future negotiations regarding the terms of their collective bargaining agreements, or if additional segments of our workforce become unionized, we may be subject to work interruptions or stoppages.
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We are facing significant litigation, including litigation arising from the terrorist attacks on September 11, 2001, and if any such significant litigation is concluded in a manner adverse to us, our financial condition and operating results could be materially adversely affected. |
We are involved in legal proceedings relating to antitrust matters, employment practices, environmental issues and other matters concerning our business. We are also a defendant in numerous lawsuits arising out of the terrorist attacks of September 11, 2001. It appears that the plaintiffs in these September 11 actions are alleging that we and many other air carriers are jointly liable for damages resulting from the terrorist attacks based on a theory of shared responsibility for passenger security screening at Boston Logan International Airport, Washington Dulles International Airport and Newark Liberty International Airport. These lawsuits, which are in preliminary stages, generally seek unspecified damages, including punitive damages. Although federal law limits the financial liability of any air carrier for compensatory and punitive damages arising out of the September 11 terrorist attacks to no more than the limits of liability insurance coverage maintained by the air carrier, it is possible that we may be required to pay damages in the event of our insurers insolvency or otherwise.
While we cannot reasonably estimate the potential loss for certain of our legal proceedings because, for example, the litigation is in its early stages or the plaintiff does not specify damages being sought, if the outcome of any significant litigation is adverse to us, our financial condition and operating results could be materially adversely impacted.
We are at risk of losses and adverse publicity stemming from any accident involving our aircraft. |
If one of our aircraft were to crash or be involved in an accident, we could be exposed to significant tort liability. The insurance we carry to cover damages arising from any future accidents may be inadequate. In the event that our insurance is not adequate, we may be forced to bear substantial losses from an accident. In addition, any accident involving an aircraft that we operate or an airline that is one of our codeshare partners could create a public perception that our aircraft are not safe or reliable, which could harm our reputation, result in air travelers being reluctant to fly on our aircraft and harm our business.
Issuances of equity in connection with our restructuring increase the likelihood that in the future our ability to utilize our federal income tax net operating loss carryforwards may be limited. |
Under federal income tax law, a corporation is generally permitted to deduct from taxable income in any year net operating losses carried forward from prior years. We have net operating loss carryforwards of approximately $7.1 billion as of December 31, 2004. Our ability to deduct net operating loss carryforwards could be subject to a significant limitation if we were to seek to restructure our costs under Chapter 11 of the U.S. Bankruptcy Code and undergo an ownership change for purposes of Section 382 of the Internal Revenue Code of 1986, as amended (an Ownership Change). Even outside of a Chapter 11 restructuring, there can be no assurances that future actions by us or third party will not trigger an Ownership Change resulting in a limitation on our ability to deduct net operating loss carryforwards.
Arthur Andersen LLP audited certain financial information contained in this prospectus. In the event such financial information is later determined to contain false statements, you may be unable to recover damages from Arthur Andersen LLP. |
Our consolidated statements of operations, cash flows and shareowners equity for the year ended December 31, 2001 were audited by Arthur Andersen LLP. Arthur Andersen LLP has ceased operations in the United States. As a result, you will be limited in your ability to recover damages from Arthur Andersen LLP under the Securities Act if it is later determined that there are false statements included in this prospectus that have been prepared in reliance on financial statements audited by Arthur Andersen LLP.
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Risks Relating to the Airline Industry
The airline industry has changed fundamentally since the terrorist attacks on September 11, 2001, and our business, financial condition and operating results have been materially adversely affected. |
Since the terrorist attacks of September 11, 2001, the airline industry has experienced fundamental and permanent changes, including substantial revenue declines and cost increases, which have resulted in industry-wide liquidity issues. The terrorist attacks significantly reduced the demand for air travel, and additional terrorist activity involving the airline industry could have an equal or greater impact. Although global economic conditions have improved from their depressed levels after September 11, 2001, the airline industry has continued to experience a reduction in high-yield business travel and increased price sensitivity in customers purchasing behavior. In addition, aircraft fuel prices have recently been at historically high levels. The airline industry has continued to add or restore capacity despite these conditions. We expect all of these conditions will continue and may adversely impact our operations and profitability.
Bankruptcies and other restructuring efforts by our competitors have put us at a competitive disadvantage. |
Since September 11, 2001, several air carriers have sought to reorganize under Chapter 11 of the U.S. Bankruptcy Code, including United Airlines, the second-largest U.S. air carrier, US Airways, the seventh largest U.S. air carrier, ATA Airlines, the tenth-largest U.S. air carrier, and several smaller competitors. Since filing for Chapter 11 on August 11, 2002, US Airways emerged from bankruptcy, but announced on September 12, 2004 that it is again seeking to reorganize under Chapter 11 of the U.S. Bankruptcy Code. Additionally, American Airlines restructured certain labor costs and lowered its operating cost base. These reorganizations and restructurings have enabled these competitors to significantly lower their operating costs. Our unit costs went from being among the lowest of the hub-and-spoke carriers to among the highest, a result that placed us at a serious competitive disadvantage. While we believe that the $5 billion in targeted annual benefits (compared to 2002) from our transformation plan, including $1 billion in long-term annual cost savings achieved through the new collective bargaining agreement with our pilots, will contribute to a reduction of our unit costs, our cost structure will still be higher than that of low cost carriers.
The airline industry is highly competitive, and if we cannot successfully compete in the marketplace, our business, financial condition and operating results will be materially adversely affected. |
We face significant competition with respect to routes, services and fares. Our domestic routes are subject to competition from both new and established carriers, some of which have substantially lower costs than we do and provide service at lower fares to destinations served by us. Our revenues continue to be materially adversely impacted by the growth of low-cost carriers, with which we compete in most of our markets. Significant expansion by low-cost carriers to our hub airports could have an adverse impact on our business. We also face increasing competition in smaller to medium-sized markets from rapidly expanding regional jet operators. In addition, we compete with foreign carriers, both on interior U.S. routes, due to marketing and codesharing arrangements, and in international markets.
The airline industry is subject to extensive government regulation, and new regulations may increase our operating costs. |
Airlines are subject to extensive regulatory and legal compliance requirements that result in significant costs. For instance, the Federal Aviation Administration (FAA) from time to time issues directives and other regulations relating to the maintenance and operation of aircraft that necessitate significant expenditures. We expect to continue incurring expenses to comply with the FAAs regulations.
Other laws, regulations, taxes and airport rates and charges have also been imposed from time to time that significantly increase the cost of airline operations or reduce revenues. For example, the Aviation and Transportation Security Act, which became law in November 2001, mandates the federalization of certain
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Furthermore, we and other U.S. carriers are subject to domestic and foreign laws regarding privacy of passenger and employee data that are not consistent in all countries in which we operate. In addition to the heightened level of concern regarding privacy of passenger data in the United States, certain European government agencies are initiating inquiries into airline privacy practices. Compliance with these regulatory regimes is expected to result in additional operating costs and could impact our operations and any future expansion.
Our insurance costs have increased substantially as a result of the September 11 terrorist attacks, and further increases in insurance costs or reductions in coverage could have a material adverse impact on our business and operating results. |
As a result of the terrorist attacks on September 11, 2001, aviation insurers significantly reduced the maximum amount of insurance coverage available to commercial air carriers for liability to persons (other than employees or passengers) for claims resulting from acts of terrorism, war or similar events. At the same time, aviation insurers significantly increased the premiums for such coverage and for aviation insurance in general. The U.S. government is currently providing U.S. airlines with war-risk insurance to cover losses, including those resulting from terrorism, to passengers, third parties (ground damage) and the aircraft hull. The coverage extends through August 31, 2005 (with a possible extension to December 31, 2005 at the discretion of the Secretary of Transportation). The withdrawal of government support of airline war-risk insurance would require us to obtain war-risk insurance coverage commercially. Such commercial insurance could have substantially less desirable coverage than currently provided by the US government, may not be adequate to protect our risk of loss from future acts of terrorism, may result in a material increase to our operating expenses and may result in an interruption to our operations.
Risks Relating to the Notes
The notes rank below our secured debt and the liabilities of our subsidiaries. |
The notes are our senior unsecured obligations and rank equal in right of payment to all of our other existing and future senior unsecured indebtedness. The notes are effectively subordinated to all of our existing and future secured indebtedness to the extent of the assets securing that indebtedness. The notes are also structurally subordinated to all liabilities of our subsidiaries.
A substantial portion of our debt is secured by our assets, substantially all of which are subject to liens. As a result, holders of our secured debt will have a claim to those assets prior to any claim that you may have to those assets. Further, the indenture governing the notes does not limit our ability to create additional indebtedness or to secure any such indebtedness with additional assets. If we incur additional indebtedness and secure such indebtedness with our assets, your rights to receive payments under the notes will effectively be junior to the rights of the holders of such future secured indebtedness.
The notes are obligations exclusively of Delta. Our subsidiaries are separate and distinct legal entities, and have no obligation to pay any amounts due on the notes or to provide us with funds for our payment obligations. Our right to receive any assets of any of our subsidiaries upon their liquidation or reorganization, and therefore the right of the holders of the notes to participate in those assets, are expressly subordinated to the claims of that subsidiarys creditors. The indenture governing the notes does not restrict the ability of our subsidiaries to incur additional indebtedness. Furthermore, our claim against any of our subsidiaries with respect to intercompany loans that we have made to that subsidiary is expressly subordinated to that subsidiarys obligations, if any, as guarantor of our credit facilities with GE Commercial Finance and Amex.
As of December 31, 2004, we had approximately $13.9 billion (unaudited) of total consolidated indebtedness, including capital leases. As of December 31, 2004, we had approximately $6.6 billion of
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An active trading market may not develop for the notes and holders of the notes may not be able to resell the notes. |
The notes are new securities and no market exists where holders of the notes can resell them. No assurance can be given as to:
| the liquidity of any such market that may develop; | |
| the ability of holders of the notes to sell their notes; or | |
| the price at which the holders of the notes would be able to sell their notes. |
As a result, the ability of the holders of the notes to resell the notes may be limited. We do not intend to apply for listing of the notes on any securities exchange or for quotation through the NASDAQ National Market.
Changes in our credit rating or the credit markets could adversely affect the price of the notes. |
The price for the notes depends on many factors, including:
| our credit rating with major credit rating agencies; | |
| the prevailing interest rates being paid by other companies similar to us; | |
| the market price of our common stock; | |
| our financial condition, financial performance and future prospects; and | |
| the overall condition of the financial markets. |
The conditions of the credit markets and prevailing interest rates have fluctuated in the past and are likely to fluctuate in the future. Such fluctuations could have an adverse effect on the price of the notes.
In addition, credit rating agencies continually review their ratings for the companies that they follow, including us. The credit rating agencies also evaluate the airline industry as a whole and may change their credit rating for us based on their overall view of our industry. We cannot be sure that credit rating agencies will maintain their credit ratings on the notes. A negative change in our credit rating could have an adverse effect on the price of the notes.
Risk Relating to the Common Stock
Our common stock price may be volatile. |
The market price of our common stock has been and could in the future be subject to significant fluctuations in response to:
| our ability to achieve our cost reduction targets; | |
| our ability to meet our liquidity needs; | |
| our ability to meet the transformation plan; | |
| variations in our quarterly operating results or those of other companies in our industry; | |
| developments in the airline industry; | |
| general economic conditions; and | |
| changes in securities analysts recommendations regarding us or our securities. |
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In addition, the stock market in recent years has experienced significant price and volume fluctuations which have affected the market price of shares of common stock of airlines and which have often been unrelated to or disproportionately affected by the operating performance of such companies. These broad market fluctuations may adversely affect the market price of the shares of our common stock.
Common shares eligible for future sale may cause the market price for our common stock to drop significantly, regardless of how our business performs. |
If our existing shareholders sell our common stock in the market, or if there is a perception that significant sales may occur, the market price of our common stock could drop significantly. In connection with our out-of-court restructuring we issued an aggregate of 9,842,778 shares of our common stock to holders of our some of our debt and aircraft lenders and lessors, all of which are covered by the registration statement of which this prospectus is a part. Also in connection with our out-of-court restructuring, we granted options to purchase approximately 62.2 million shares of our common stock to employees under broad-based employee stock option plans. These options become exercisable in three equal installments on the first, second and third anniversaries of the grant date.
Additional issuances of common stock would dilute the ownership percentage of existing shareholders and may dilute the earnings per share of our common stock. As of December 31, 2004, 139,830,443 shares of our common stock were issued and outstanding. Assuming (1) all of our 8.00% convertible senior notes (conversion rate of 35.7143 shares of common stock per $1,000 principal amount of 8.00% Notes, subject to adjustment in certain circumstances, which is equivalent to a conversion price of approximately $28.00 per share of common stock), 2 7/8% convertible senior notes (conversion rate of 73.6106 shares of common stock per $1,000 principal amount of 2 7/8% Notes, subject to adjustment in certain circumstances, which is equivalent to a conversion price of approximately $13.59 per share of common stock) and the Series B Convertible Preferred Stock (conversion rate of approximately 1.7155 shares of common stock per share of preferred stock, subject to adjustment in certain circumstances, which is equivalent to a conversion price of $41.97 per share of common stock) outstanding as of December 31, 2004 are converted into common stock at the applicable conversion rates and (2) all shares reserved under our broad-based employee stock option plans, our 2000 Performance Compensation Plan, our Non-Employee Directors Stock Option Plan and our Non-Employee Directors Stock Plan were issued, the number of shares of our common stock outstanding would increase by approximately 149,962,951 shares to approximately 289,793,394 shares. In addition, subject to rules adopted by the New York Stock Exchange, our board of directors has the authority to issue additional shares of our authorized but unissued common stock without the approval of our shareholders.
Under Delaware General Corporation Law (Delaware law), a company may pay dividends on its stock only (1) out of its surplus, as defined, or (2) from its net profits for the fiscal year in which the dividend is paid or from its net profits for the preceding fiscal year. Delaware law also prohibits a company from redeeming or purchasing its stock for cash or other property, unless the company has sufficient surplus. Our Board of Directors took the following actions, effective during December 2003, related to our Series B Preferred Stock to comply with Delaware law:
| Suspended indefinitely the payment of dividends on our Series B Preferred Stock. Unpaid dividends on the Series B Preferred Stock will accrue without interest, until paid, at a rate of $4.32 per share per year. The Series B Preferred Stock is held by Fidelity Management Trust Company in its capacity as trustee for the Delta Family-Care Savings Plan (the Savings Plan), a broad-based employee benefit plan. | |
| Changed the form of payment we use to redeem shares of Series B Preferred Stock when redemptions are required under the Savings Plan. For the indefinite future, we will pay the redemption price of the Series B Preferred Stock in shares of our common stock rather than in cash. |
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We are generally required to redeem shares of Series B Preferred Stock (1) to provide for distributions of the accounts of Savings Plan participants who terminate employment with us and request a distribution and (2) to implement annual diversification elections by Savings Plan participants who are at least 55 and have participated in the Savings Plan for at least ten years. In these circumstances, shares of Series B Preferred Stock are redeemable at a price equal to the greater of (1) $72.00 per share or (2) the fair value of the shares of our common stock issuable upon conversion of the Series B Preferred Stock to be redeemed, plus, in either case, accrued but unpaid dividends on such shares of Series B Preferred Stock. Under the terms of the Series B Preferred Stock, we may pay the redemption price in cash, shares of our common stock (valued at fair value), or in a combination thereof.
During the twelve months ended December 31, 2004, we issued 6,330,551 shares of common stock under the Savings Plan to redeem 421,979 shares of Series B Preferred Stock. The number of shares of our common stock necessary to redeem Series B Preferred Stock in the future will depend on various factors, including the duration of the period during which we may not redeem Series B Preferred Stock for cash under Delaware Law; the fair value of Delta common stock when Series B Preferred Stock is redeemed; and the number of shares of Series B Preferred Stock redeemed by Savings Plan participants who terminate their employment with us or elect to diversify their Savings Plan accounts.
At December 31, 2004, 5,417,735 shares of Series B Preferred Stock were issued and outstanding. At December 31, 2004, 3,817,235 shares of Series B Preferred Stock were allocated to the accounts of Savings Plan participants; the remaining shares are available for allocation in the future.
The independent fiduciary of the Savings Plan recently sold certain of the shares of common stock held by the Savings Plan. Sales of our common stock by the Savings Plan may adversely affect the market price of our common stock.
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USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the notes or the common stock by any selling securityholder.
COMMON STOCK AND DIVIDEND DATA
Our common stock is listed on the New York Stock Exchange under the symbol DAL. The following table sets forth, for the periods indicated, the highest and lowest sale prices for our common stock, as reported on the New York Stock Exchange, as well as cash dividends paid per common share.
Cash Dividends | |||||||||||||
per Common | |||||||||||||
High | Low | Share | |||||||||||
Fiscal 2002
|
|||||||||||||
First Quarter
|
$ | 38.69 | $ | 28.52 | $ | 0.025 | |||||||
Second Quarter
|
32.65 | 18.30 | 0.025 | ||||||||||
Third Quarter
|
20.12 | 8.30 | 0.025 | ||||||||||
Fourth Quarter
|
14.09 | 6.10 | 0.025 | ||||||||||
Fiscal 2003
|
|||||||||||||
First Quarter
|
$ | 14.00 | $ | 6.56 | $ | 0.025 | |||||||
Second Quarter
|
16.05 | 8.76 | 0.025 | ||||||||||
Third Quarter
|
15.47 | 10.26 | | ||||||||||
Fourth Quarter
|
15.28 | 10.45 | | ||||||||||
Fiscal 2004
|
|||||||||||||
First Quarter
|
$ | 13.20 | $ | 7.00 | | ||||||||
Second Quarter
|
8.59 | 4.53 | | ||||||||||
Third Quarter
|
7.25 | 2.78 | | ||||||||||
Fourth Quarter
|
8.17 | 2.75 | | ||||||||||
Fiscal 2005
|
|||||||||||||
First Quarter (through February 9)
|
$ | 7.78 | $ | 4.39 | |
As of December 31, 2004, there were approximately 22,148 holders of record of our common stock. On February 9, 2005, the last reported sale price of our common stock on the New York Stock Exchange was $5.62.
We paid a regular quarterly cash dividend of $0.025 per share of common stock for each quarter of fiscal years 2001 and 2002, and the first two quarters of 2003. On July 24, 2003, our board of directors announced that we would immediately discontinue the payment of quarterly common stock cash dividends. On November 12, 2003, our board of directors announced that we would suspend indefinitely the payment of semi-annual dividend payments on our Series B Preferred Stock due to applicable restrictions under Delaware law. To comply with Delaware Law, our board of directors also changed the form of payment we will use to redeem shares of Series B Preferred Stock when redemptions are required under our Savings Plan. As of December 1, 2003, we began using shares of our common stock rather than cash to redeem Series B Preferred Stock when redemptions are required under the Savings Plan. See Description of Capital Stock Series B Preferred Stock General.
Our dividend policy is reviewed from time to time by the board of directors. Future common stock dividend decisions will take into account our then current business results, cash requirements and financial condition. The payment of dividends is also restricted by our credit facilities with GE Commercial Finance and Amex (each as described in Managements Discussion and Analysis of Financial Condition and Results of Operations Recent Transactions below).
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SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of Delta should be read in conjunction with, and are qualified by reference to, Managements Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes to the consolidated financial statements included elsewhere in this prospectus (the Consolidated Financial Statements). The consolidated summary of operations data for each of the fiscal years in the five-year period ended December 31, 2003 are derived from our audited Consolidated Financial Statements. The consolidated summary of operations data should be read in conjunction with, and are qualified by reference to, the Consolidated Financial Statements included elsewhere in this prospectus. The consolidated statement of operations data for the nine-month periods ended September 30, 2004 and 2003 and the consolidated balance sheet data as of September 30, 2004 are derived from Deltas unaudited consolidated financial statements (the Condensed Consolidated Financial Statements) which, in our opinion, have been prepared on the same basis as the Consolidated Financial Statements and reflect all adjustments necessary for a fair presentation of Deltas results of operations and financial position. Results for the nine months ended September 30, 2004 are not necessarily indicative of results that may be expected for the full fiscal year ending December 31, 2004.
Consolidated Summary of Operations
Nine Months | |||||||||||||||||||||||||||||
Ended | |||||||||||||||||||||||||||||
Year Ended December 31, | September 30, | ||||||||||||||||||||||||||||
2003(1) | 2002(2) | 2001(3) | 2000(4) | 1999(5) | 2004(6) | 2003(7) | |||||||||||||||||||||||
(In millions, except per share data) | |||||||||||||||||||||||||||||
Operating revenues(8)
|
$ | 14,087 | $ | 13,866 | $ | 13,879 | $ | 16,741 | $ | 14,883 | $ | 11,361 | $ | 10,477 | |||||||||||||||
Operating expenses(8)
|
14,872 | 15,175 | 15,481 | 15,104 | 13,565 | 12,413 | 10,897 | ||||||||||||||||||||||
Operating income (loss)
|
(785 | ) | (1,309 | ) | (1,602 | ) | 1,637 | 1,318 | (1,052 | ) | (420 | ) | |||||||||||||||||
Interest expense, net(9)
|
(721 | ) | (629 | ) | (410 | ) | (257 | ) | (126 | ) | (574 | ) | (532 | ) | |||||||||||||||
Miscellaneous income (expense), net(10)
|
326 | 17 | 80 | 328 | 901 | (10 | ) | 291 | |||||||||||||||||||||
Gain (loss) on extinguishment of debt, net
|
| (42 | ) | | | | 1 | | |||||||||||||||||||||
Fair value adjustments of SFAS 133
derivatives
|
(9 | ) | (39 | ) | 68 | (159 | ) | | (44 | ) | (16 | ) | |||||||||||||||||
Income (loss) before income taxes and cumulative
effect of change in accounting principle
|
(1,189 | ) | (2,002 | ) | (1,864 | ) | 1,549 | 2,093 | (1,679 | ) | (677 | ) | |||||||||||||||||
Income tax benefit (provision)
|
416 | 730 | 648 | (621 | ) | (831 | ) | (1,313 | ) | 231 | |||||||||||||||||||
Net income (loss) before cumulative effect of
change in accounting principle
|
(773 | ) | (1,272 | ) | (1,216 | ) | 928 | 1,262 | (2,992 | ) | (446 | ) | |||||||||||||||||
Net income (loss) after cumulative effect of
change in accounting principle
|
(773 | ) | (1,272 | ) | (1,216 | ) | 828 | 1,208 | (2,992 | ) | (446 | ) | |||||||||||||||||
Preferred stock dividends
|
(17 | ) | (15 | ) | (14 | ) | (13 | ) | (12 | ) | (14 | ) | (12 | ) | |||||||||||||||
Net income (loss) attributable to common
shareowners
|
$ | (790 | ) | $ | (1,287 | ) | $ | (1,230 | ) | $ | 815 | $ | 1,196 | $ | (3,006 | ) | $ | (458 | ) | ||||||||||
Earnings (loss) per share before cumulative
effect of change in accounting principle
|
|||||||||||||||||||||||||||||
Basic
|
$ | (6.40 | ) | $ | (10.44 | ) | $ | (9.99 | ) | $ | 7.39 | $ | 9.05 | $ | (24.06 | ) | $ | (3.71 | ) | ||||||||||
Diluted
|
$ | (6.40 | ) | $ | (10.44 | ) | $ | (9.99 | ) | $ | 7.05 | $ | 8.52 | $ | (24.06 | ) | $ | (3.71 | ) | ||||||||||
Earnings (loss) per share
|
|||||||||||||||||||||||||||||
Basic
|
$ | (6.40 | ) | $ | (10.44 | ) | $ | (9.99 | ) | $ | 6.58 | $ | 8.66 | $ | (24.06 | ) | $ | (3.71 | ) | ||||||||||
Diluted
|
$ | (6.40 | ) | $ | (10.44 | ) | $ | (9.99 | ) | $ | 6.28 | $ | 8.15 | $ | (24.06 | ) | $ | (3.71 | ) | ||||||||||
Dividends declared per common share
|
$ | 0.05 | $ | 0.10 | $ | 0.10 | $ | 0.10 | $ | 0.10 | $ | | $ | 0.05 | |||||||||||||||
Ratio of earnings (loss) to fixed charges(11)
|
0.19 | x | (0.51x | ) | (0.51x | ) | 2.37 | x | 3.55 | x | (0.51x | ) | (0.39x | ) |
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Other Financial and Statistical Data
Nine Months | ||||||||||||||||||||||||
Year Ended December 31, | Ended | |||||||||||||||||||||||
September 30, | ||||||||||||||||||||||||
2003(1) | 2002(2) | 2001(3) | 2000(4) | 1999(5) | 2004(6) | |||||||||||||||||||
Total assets (millions)
|
$ | 25,939 | $ | 24,303 | $ | 23,605 | $ | 21,931 | $ | 19,942 | $ | 23,526 | ||||||||||||
Long-term debt and capital leases (excluding
current maturities) (millions)
|
$ | 11,538 | $ | 10,174 | $ | 8,347 | $ | 5,896 | $ | 4,303 | $ | 11,716 | ||||||||||||
Shareowners (deficit) equity
(millions)
|
$ | (659 | ) | $ | 893 | $ | 3,769 | $ | 5,343 | $ | 4,908 | $ | (3,577 | ) | ||||||||||
Shares of common stock outstanding
|
123,544,945 | 123,359,205 | 123,245,666 | 123,013,372 | 132,893,470 | 127,504,135 | ||||||||||||||||||
Revenue passengers enplaned (thousands)
|
104,452 | 107,048 | 104,943 | 119,930 | 110,083 | 82,206 | ||||||||||||||||||
Available seat miles (millions)(8)
|
139,505 | 145,232 | 147,837 | 154,974 | 147,073 | 113,536 | ||||||||||||||||||
Revenue passenger miles (millions)(8)
|
102,301 | 104,422 | 101,717 | 112,998 | 106,165 | 85,201 | ||||||||||||||||||
Operating revenue per available seat mile(8)
|
10.10 | ¢ | 9.55 | ¢ | 9.39 | ¢ | 10.80 | ¢ | 10.12 | ¢ | 10.01 | ¢ | ||||||||||||
Passenger mile yield(8)
|
12.73 | ¢ | 12.26 | ¢ | 12.74 | ¢ | 13.86 | ¢ | 13.14 | ¢ | 12.28 | ¢ | ||||||||||||
Operating cost per available seat mile(8)
|
10.66 | ¢ | 10.45 | ¢ | 10.47 | ¢ | 9.75 | ¢ | 9.22 | ¢ | 10.93 | ¢ | ||||||||||||
Passenger load factor(8)
|
73.33 | % | 71.90 | % | 68.80 | % | 72.91 | % | 72.18 | % | 75.04 | % | ||||||||||||
Breakeven passenger load factor(8)
|
77.75 | % | 79.25 | % | 77.31 | % | 65.29 | % | 65.37 | % | 82.59 | % | ||||||||||||
Fuel gallons consumed (millions)
|
2,370 | 2,514 | 2,649 | 2,922 | 2,779 | 1,896 | ||||||||||||||||||
Average price per fuel gallon, net of hedging
gains
|
81.78 | ¢ | 66.94 | ¢ | 68.60 | ¢ | 67.38 | ¢ | 51.13 | ¢ | $ | 1.07 |
(1) | Includes a $268 million charge ($169 million net of tax, or $1.37 diluted EPS) for restructuring, asset writedowns, pension settlements and related items, net; a $398 million gain ($251 million net of tax, or $2.03 diluted EPS) for Appropriations Act compensation; and a $304 million gain ($191 million net of tax, or $1.55 diluted EPS) for certain other income and expense items (see Managements Discussion and Analysis of Financial Condition and Results of Operations). |
(2) | Includes a $439 million charge ($169 million net of tax, of $2.25 diluted EPS) for restructuring, asset writedowns, and related items, net; a $34 million gain ($22 million net of tax, or $0.17 diluted EPS) for Stabilization Act compensation; and a $94 million charge ($59 million net of tax, or $0.47 diluted EPS) for certain other income and expense items (see Managements Discussion and Analysis of Financial Condition and Results of Operations). |
(3) | Includes a $1.1 billion charge ($695 million net of tax, or $5.63 diluted EPS) for restructuring, asset writedowns, and related items, net; a $634 million gain ($392 million net of tax, or $3.18 diluted EPS) for Stabilization Act compensation; and a $186 million gain ($114 million net of tax, or $0.92 diluted EPS) for certain other income and expense items (see Managements Discussion and Analysis of Financial Condition and Results of Operations). |
(4) | Includes a $108 million charge ($66 million net of tax, or $0.50 diluted EPS) for restructuring, asset writedowns, and related items, net; a $151 million gain ($93 million net of tax, or $0.70 diluted EPS) for certain other income and expense items; and a $164 million cumulative effect, non-cash charge ($100 million net of tax, or $0.77 diluted EPS), resulting from our adoption of SFAS 133 on July 1, 2000. |
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(5) | Includes a $469 million charge ($286 million net of tax, or $1.94 diluted EPS) for asset writedowns; $927 million gain ($565 million net of tax, or $3.83 diluted EPS) from the sale of certain investments; an $89 million non-cash charge ($54 million net of tax, or $0.37 diluted EPS) from the cumulative effect of a change in accounting principle resulting from our adoption on January 1, 1999 of SAB 101; and a $40 million charge ($24 million net of tax, or $0.16 diluted EPS) for the early extinguishment of certain debt obligations. |
(6) | Includes charges totaling $131 million ($1.05 diluted EPS) for pension settlements and a $40 million asset impairment charge ($0.32 diluted EPS) associated with our agreement to sell eight MD-11 aircraft. |
(7) | Includes a $43 million charge ($27 million net of tax, or $0.22 diluted EPS) for pension benefits for workforce reduction; a $398 million gain ($251 million net of tax, or $2.03 diluted EPS) for Appropriations Act compensation and a $263 million gain ($165 million net of tax, or $1.35 diluted EPS) for certain other income and expense items. |
(8) | Reflects the reclassifications discussed in Note 1 of the notes to the Consolidated Financial Statements related to our contract carrier arrangements. |
(9) | Includes interest income. |
(10) | Includes gains (losses) from the sale of investments. |
(11) | The ratio of earnings (loss) to fixed charges represents the number of times that fixed charges are covered by earnings. Earnings (loss) represents income (loss) before income taxes, excluding the cumulative effect of a change in accounting principle, plus fixed charges and distributed income of equity investees less capitalized interest and income (loss) from equity investees. Fixed charges include interest, whether expensed or capitalized; one-half of rental expense, which Delta believes is representative of the interest factor in those periods; amortization of debt costs; and preference security dividends. Fixed charges exceeded adjusted earnings (loss) by $1.2 billion, $2.0 billion and $1.8 billion for the years ended December 31, 2003, 2002 and 2001, respectively, and $1.7 billion and $660 million for the nine months ended September 30, 2004 and 2003, respectively. |
21
MANAGEMENTS DISCUSSION AND ANALYSIS
Business Environment
Since the terrorist attacks on September 11, 2001, the airline industry has experienced a severely depressed revenue environment and significant cost pressures. These factors have resulted in industry-wide liquidity issues, including the restructuring of certain hub and spoke airlines due to bankruptcy or near bankruptcy.
The continuing impact of the September 11, 2001 terrorist attacks and other events have resulted in fundamental, and what we believe will be permanent, changes in the airline industry. The revenue environment continues to be severely impacted by the following factors:
| the continuing growth of low-cost carriers with which we compete in most of our domestic markets; | |
| high industry capacity, resulting in significant fare discounting to stimulate traffic; and | |
| increased price sensitivity by our customers, enhanced by the availability of airline fare information on the Internet. | |
We recorded a substantial net loss in each of the years ended December 31, 2003, 2002 and 2001. During 2004, our financial performance continued to deteriorate. In light of our significant losses and the decline in our cash and cash equivalents, we are making permanent structural changes which are intended to appropriately align our cost structure with the revenue we can generate in this business environment and to enable us to compete with low-cost carriers.
Our Transformation Plan
In 2002, we began our profit improvement program, which had a goal of reducing our unit costs and increasing our revenues. We made significant progress under this program, but increases in aircraft fuel prices and pension and related expense, and declining domestic passenger mile yields, have historically offset a large portion of these benefits. Accordingly, we will need substantial further reductions in our cost structure to achieve viability.
At the end of 2003, we began a strategic reassessment of our business. The goal of this project was to develop and implement a comprehensive and competitive business strategy that addresses the airline industry environment and positions us to achieve long-term success. As part of this project, we evaluated the appropriate cost reduction targets and the actions we should take to seek to achieve these targets. Key elements of our transformation plan include:
| Redesigning our Atlanta operation from a banked to a continuous hub to increase capacity with the same number of aircraft, to improve reliability and to reduce congestion. We implemented this initiative in January 2005. | |
| Dehubbing our Dallas/ Ft. Worth operation and redeploying aircraft used in that market to grow our hub operations in Atlanta, Cincinnati and Salt Lake City, as well as offering new destinations and expanded frequencies in key focus cities such as New York City and Orlando. We implemented this initiative in January 2005. | |
| Growing Song, our low-fare operation, to 48 aircraft by converting 12 Mainline aircraft to Song service. In January 2005, we announced plans for Song to begin nonstop service from New York-JFK to Los Angeles, San Francisco, Seattle, San Juan and Aruba. | |
| Reducing fleet complexity by retiring up to four aircraft types in approximately four years and increasing overall fleet utilization and efficiency. | |
22
| Eliminating 6,000 to 7,000 non-pilot jobs by December 2005, lowering management overhead costs by approximately 15% and reducing pay and benefits, including an across-the-board 10% pay reduction for non-pilot employees. | |
| Reducing significantly our pilot cost structure. In November 2004, we entered into an agreement with our pilots that will provide us with $1 billion in long-term, annual cost savings. | |
| Creating incentive programs for U.S.-based employees (excluding officers and director-level employees), which include (1) stock options; (2) profit sharing if our annual pre-tax income exceeds specified thresholds; and (3) monthly payments of up to $100 per employee based on our customer satisfaction and operational performance ratings. In November 2004, we granted stock options to purchase a total of 62 million shares of our common stock to approximately 60,000 employees, including pilots. | |
| Updating and upgrading customer products and services, including aircraft interiors and website functionality, and continuing two-class service in mainline operations. | |
Our transformation plan is intended to deliver approximately $5 billion in annual benefits by the end of 2006 (as compared to 2002) while also improving the service we provide to our customers. By the end of 2004, we achieved approximately $2.3 billion of the $5 billion in targeted benefits under our profit improvement program. We have identified, and begun implementation of, the following key initiatives to obtain the remaining $2.7 billion in targeted benefits, which we believe we are on track to achieve by the end of 2006:
2005 | 2006 | |||||||
(In millions) | ||||||||
Non-pilot operational improvements
|
$ | 1,075 | $ | 1,600 | ||||
Pilot cost reduction
|
900 | 1,000 | ||||||
Other benefits
|
135 | 125 | ||||||
Total
|
$ | 2,110 | $ | 2,725 | ||||
Non-Pilot Operational Improvements. The targeted $1.6 billion of non-pilot operational improvements by the end of 2006 includes the following, which are discussed further below:
2005 | 2006 | |||||||
(In millions) | ||||||||
Incremental profit improvement initiatives
|
$ | 600 | $ | 1,000 | ||||
Non-pilot pay and benefit savings
|
350 | 350 | ||||||
Dehubbing of Dallas/ Ft. Worth operations
|
75 | 100 | ||||||
Continuous hub redesign
|
50 | 150 | ||||||
Total non-pilot operational improvements
|
$ | 1,075 | $ | 1,600 | ||||
Incremental profit improvement initiatives consist of cost savings and revenue enhancements. These include technology and productivity enhancements, including improvements in airport processes, maintenance and distribution efficiency; and overhead reductions, including the elimination of 6,000 to 7,000 non-pilot jobs. Approximately 3,400 employees have already elected to participate in voluntary workforce reduction programs.
Non-pilot pay and benefit savings are attributable to salary and benefit reductions. The $350 million of estimated savings includes: (1) an across-the-board, 10% pay reduction for executives and supervisory, administrative, and frontline employees that was effective January 1, 2005; (2) increases to the shared cost of healthcare coverage; (3) the elimination of a healthcare coverage subsidy for employees who retire after January 1, 2006; and (4) reduced vacation time.
23
In January 2005, we dehubbed our Dallas/ Ft. Worth operations and redeployed aircraft from that market to grow our hub operations in Atlanta, Cincinnati and Salt Lake City. We expect to benefit from this initiative through incremental revenue from the redeployment of these aircraft.
In January 2005, we also redesigned our Atlanta operation from a banked to a continuous hub. Although we expect to incur incremental costs under this initiative, we expect the related incremental revenue will more than offset these costs. We expect the net benefit to increase as we expand this initiative outside of Atlanta.
We have recorded significant adjustments in 2004 in connection with some of our non-pilot operational initiatives. These adjustments include (1) a $527 million gain related to the elimination of the healthcare coverage subsidy for employees who retire after January 1, 2006, and (2) a $194 million charge related to voluntary and involuntary workforce reduction programs.
It is likely we will record additional adjustments relating to our non-pilot operational initiatives, including charges related to certain facility closures, but we are not able to reasonably estimate at this time the amount or timing of any such adjustments. The targeted benefits in the table above have not been increased or decreased by any gains or charges described in this or the preceding paragraph.
Pilot Cost Reduction. Our pilot cost structure was significantly higher than that of our competitors and needed to be reduced in order for us to compete effectively. On November 11, 2004, we and our pilots union entered into an agreement that will provide us with $1 billion in long-term, annual cost savings through a combination of changes in wages, pension and other benefits and work rules. The agreement (1) includes a 32.5% reduction to base pay rates on December 1, 2004; (2) does not include any scheduled increases in base pay rates; and (3) includes benefit changes such as a 16% reduction in vacation pay, increased cost sharing for active pilot and retiree medical benefits, the amendment of the defined benefit pension plan to stop service accrual as of December 31, 2004, and the establishment of a defined contribution pension plan as of January 1, 2005. The agreement also states certain limitations on our ability to seek to modify it if we file for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The agreement becomes amendable on December 31, 2009.
Other Benefits. Our transformation plan also targets other benefits through concessions from aircraft lessors, creditors and other vendors. During the December 2004 quarter, we entered into agreements with aircraft lessors and lenders under which we expect to receive average annual concessions of approximately $57 million between 2005 and 2009; we issued an aggregate of 4,354,724 shares of our common stock to the aircraft lessors and lenders in these transactions. We also reached agreements with about 115 suppliers under which we expect to realize average annual benefits of approximately $46 million over the next three years.
SimpliFarestm
In January 2005, we announced the expansion of our SimpliFares initiative within the 48 contiguous United States. An important part of our transformation plan, SimpliFares is a fundamental change in our pricing structure which is intended to better meet customer needs; to simplify our business; and to assist us achieve a lower cost structure. Under SimpliFares, we lowered unrestricted fares on some routes by as much as 50%; reduced the number of fare categories; implemented a fare cap; and eliminated the Saturday-night stay requirement that existed for certain fares. While SimpliFares is expected to have a negative impact on our operating results for some period, we believe it will provide net benefits to us over the longer term by stimulating traffic; improving productivity by simplifying our product; and increasing customer usage of delta.com, our lowest cost distribution channel.
Liquidity
Due to the difficult revenue environment, historically high fuel prices and other cost pressures, we borrowed $2.4 billion in 2004 to fund daily operations and capital requirements, repay debt obligations and increase our liquidity. These borrowings included $830 million that we obtained during the December 2004
24
At December 31, 2004, we had cash and cash equivalents totaling $1.8 billion. We expect to borrow in March 2005 the final installment of $250 million under our financing agreement with Amex. In addition, we have commitments from a third party to finance on a long-term secured basis our purchase of 32 regional jet aircraft to be delivered to us in 2005 (Regional Jet Credit Facility). We have no other undrawn lines of credit.
We have significant obligations due in 2005 and thereafter. Our obligations due in 2005 include approximately (1) $1.1 billion in operating lease payments; (2) $1.0 billion in interest payments, which may vary as interest rates change on our $5 billion principal amount of variable rate debt; (3) $400 million to $450 million of estimated funding for our defined benefit pension and defined contribution plans; and (4) $630 million in debt maturities. We continue to seek to defer debt with maturities in 2005 and 2006. For additional information about our contractual commitments as of December 31, 2003, see Financial Condition and Liquidity Contractual Obligations.
During 2005, we expect capital expenditures to be approximately $1.0 billion. This covers approximately $540 million for aircraft expenditures, which includes $520 million to purchase 32 regional jets which we intend to finance under the Regional Jet Credit Facility. Our anticipated capital expenditures for 2005 also include approximately $215 million for aircraft parts and modifications, and approximately $285 million for non-fleet capital expenditures.
As discussed above, we do not expect to achieve the full $5 billion in targeted benefits under our transformation plan until the end of 2006. As we transition to a lower cost structure, we continue to face significant challenges due to low passenger mile yields, historically high fuel prices and other cost pressures related to interest and pension and related expense. Accordingly, we believe that we will record a substantial net loss in 2005, and that our cash flows from operations will not be sufficient to meet all of our liquidity needs for that period.
We currently expect to meet our liquidity needs for 2005 from cash flows from operations, our available cash and cash equivalents, the Regional Jet Credit Facility, and the final $250 million borrowing under our financing agreement with Amex. Because substantially all of our assets are encumbered and our credit ratings have been substantially lowered, we do not expect to be able to obtain any material amount of additional debt financing. Unless we are able to sell assets or access the capital markets by issuing equity or convertible debt securities, we expect that our cash and cash equivalents will be substantially lower at December 31, 2005 than at the end of 2004.
Our financing agreements with GE Commercial Finance and Amex include covenants that impose substantial restrictions on our financial and business operations, including covenants that require us (1) to maintain specified levels of cash and cash equivalents and (2) to achieve certain levels of EBITDAR (earnings before interest, taxes, depreciation, amortization and aircraft rent, as defined). Although under our business plan we expect to be in compliance with these covenants in 2005, we do not expect to exceed either of the required levels by a significant margin. Accordingly, if any of the assumptions underlying our business plan proves to be incorrect, we might not be in compliance with these covenants, which could result in the outstanding borrowings under these agreements becoming immediately due and payable (unless the lenders waive these covenant violations). If this were to occur, we would need to seek to restructure under Chapter 11 of the U.S. Bankruptcy Code.
Many of the material assumptions underlying our business plan are not within our control. These assumptions include that (1) we achieve in 2005 all the benefits of our transformation plan targeted to be
25
If any of the assumptions underlying our business plan proves to be incorrect in any material adverse respect and we are unable to sell assets or access the capital markets, or if our level of cash and cash equivalents declines to an unacceptably low level, then we would need to seek to restructure under Chapter 11 of the U.S. Bankruptcy Code.
For additional information about the business environment and the risks we face, see Risk Factors Risks Relating to Delta and Risk Factors Risks Relating to the Airline Industry.
Results of Operations Nine Months Ended September 30, 2004 Compared to 2003
The matters discussed above under Business Environment raise substantial doubt about our ability to continue as a going concern. Our Consolidated Financial Statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Accordingly, our Consolidated Financial Statements do not include any adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should we be unable to continue as a going concern.
Net Loss and Loss per Share |
Our unaudited consolidated net loss was $3.0 billion for the nine months ended September 30, 2004 ($24.06 diluted loss per share), compared to a net loss of $446 million ($3.71 diluted loss per share) for the nine months ended September 30, 2003. The loss for the nine months ended September 30, 2004 includes non-cash charges totaling $1.7 billion related to our (1) deferred income tax assets, (2) defined benefit pension plan for pilots and (3) agreement to sell our eight owned MD-11 aircraft. For additional information on these non-cash charges, see Notes 6, 7 and 8 of the Notes to the Condensed Consolidated Financial Statements.
Operating Revenues |
Operating revenues totaled $11.4 billion for the nine months ended September 30, 2004, an 8% increase compared to the depressed level recorded for the nine months ended September 30, 2003, particularly in international markets, due to the threatened and actual war in Iraq and the difficult revenue environment.
Passenger revenue increased 8% on a 10% increase in capacity. The increase in passenger revenue reflects a 12% rise in Revenue Passenger Miles (RPMs) RPMs and a 4% decline in passenger mile yield. The increase in capacity was primarily driven by the restoration of flights that we reduced in 2003 due to the war in Iraq. The decline in the passenger mile yield reflects our lack of pricing power due to the continuing growth of low-cost carriers with which we compete in most of our domestic markets as well as increased price sensitivity by our customers, reflecting in part the availability of airline fare information on the Internet. Passenger revenue per available seat mile (Passenger RASM) decreased 2% to 9.21¢. Load factor increased 1.5 points to 75.0%. For additional information about factors impacting our passenger revenues for the nine months ended September 30, 2004, see the Business Environment section above.
26
North American Passenger Revenues. North American passenger revenues increased 6% to $8.4 billion for the nine months ended September 30, 2004 on a capacity increase of 8%. RPMs increased 10%, while passenger mile yield fell 3%. Passenger RASM decreased 2% to 9.39¢. Load factor increased by 1.0 point to 74.0%.
International Passenger Revenues. International passenger revenues increased 21% to $2.0 billion for the nine months ended September 30, 2004 on a capacity increase of 15%. RPMs increased 20%, while passenger mile yield increased 1%. Passenger RASM increased 5% to 8.33¢. Load factor increased by 3.2 points to 79.7%. The increases in passenger revenues, RPMs, yield and load factor are primarily due to the depressed levels in the prior year resulting from the threatened and actual war in Iraq.
Cargo and Other Revenues. Cargo revenues increased 6% to $364 million for the nine months ended September 30, 2004. This reflects a 12% increase from our freight business due primarily to yield improvement and increased volume, which were depressed in the prior year period due to the war in Iraq. This increase was partially offset by a 6% decline due to lower mail yield. Cargo ton miles increased 8%, while cargo ton mile yield decreased 1%. Other revenues increased 19% to $536 million. The rise in other revenues reflects a 5% increase due to higher administrative service charges, a 5% increase due to miscellaneous contract revenues, a 4% increase related to codeshare relationships and a 3% increase due to higher revenue from certain mileage partnership arrangements.
Operating Expenses |
Operating expenses were $12.4 billion for the nine months ended September 30, 2004, a 14% increase over the nine months ended September 30, 2003. The increase in operating expenses was primarily due to (1) higher fuel prices in the nine months ended September 30, 2004 than in the nine months ended September 30, 2003 and (2) $398 million in government reimbursements under the Appropriations Act that were recorded as an offset to operating expenses in the September 2003 quarter. Operating capacity increased 10% to 114 billion available seat miles (ASMs) primarily due to the restoration of capacity that we reduced due to the war in Iraq. Operating cost per available seat mile (CASM) decreased 4% to 10.93¢.
Salaries and related costs remained flat at $4.8 billion. This reflects a 3% decline due to a decrease in benefit expenses from our cost savings initiatives and a 2% decline due to lower Mainline headcount. These decreases were offset by a 2% increase due to higher pension and related expense, a 2% rise from salary rate increases primarily for our pilots under their collective bargaining agreement and a 1% increase due to growth in our wholly owned regional jet operations.
Aircraft fuel expense increased 42%, or $601 million, to $2.0 billion, with approximately $500 million of the increase resulting from higher fuel prices, which were at historically high levels. The average fuel price per gallon increased 32% to $1.07 and total gallons consumed increased 7%.
Approximately 11% and 72% of our aircraft fuel requirements were hedged during the nine months ended September 30, 2004 and 2003, respectively. As discussed in Note 22 of the Notes to the Consolidated Financial Statements, in February 2004, we settled all of our fuel hedge contracts prior to their scheduled settlement dates, resulting in a deferred gain of $82 million. In the nine months ended September 30, 2004, we recognized a reduction in fuel expense of $87 million, of which $67 million represents a portion of this deferred gain. The remaining $15 million of the deferred gain will be recognized during the quarter ending December 31, 2004 when the related fuel purchases that were being hedged are consumed. Our fuel expense for the nine months ended September 30, 2003 is shown net of fuel hedge gains of $131 million.
Contracted services expense increased 12%, primarily due to a 3% increase from new contracts, a 2% increase due to technology projects, a 2% increase from the suspension of the TSA security fee in the September 2003 quarter and a 2% increase due to higher traffic.
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Expenses from our contract carrier arrangements increased 24% to $708 million, largely reflecting a 9% increase due to higher capacity under certain of these arrangements, a 6% increase from higher fuel costs and a 4% increase from higher maintenance expense.
Aircraft maintenance materials and outside repairs increased 11%, primarily due to increased materials volume and higher costs from scheduled maintenance events.
Other selling expenses increased 8%, primarily due to an increase in advertising costs. Passenger commissions increased 5% largely from higher incentive commissions due to higher passenger volume. Passenger service expense increased 7%, primarily due to increased traffic which was partially offset by lower expenses from our cost savings initiatives.
Pension settlements, asset writedowns and related items, net totaled $171 million ($1.37 diluted loss per share) for the nine months ended September 30, 2004 compared to $36 million ($23 million net of tax, or $0.18 diluted loss per share) for the nine months ended September 30, 2003. Our charges for the nine months ended September 30, 2004 include two non-cash settlement charges totaling $131 million related to our defined benefit pension plan for pilots (the Pilot Plan) and a $40 million non-cash aircraft impairment charge related to our agreement, entered into in the September 2004 quarter, to sell eight owned MD-11 aircraft. Our net charge for the nine months ended September 2003 reflects a $43 million non-cash charge for the cost of pension and postretirement obligations for participants in our 2002 workforce reduction programs, offset by a $7 million reduction to operating expenses from revised estimates of remaining costs for certain prior year restructuring reserves. For additional information about these charges, see Notes 6, 8 and 12 of the Notes to the Condensed Consolidated Financial Statements and Note 15 of the Notes to the Consolidated Financial Statements.
During the nine months ended September 2003, Appropriations Act reimbursements totaled $398 million ($251 million net of tax, $2.03 diluted earnings per share). These reimbursements from the U.S. government were recorded as an offset to operating expenses. For additional information about the Appropriations Act, see Note 19 of the Notes to the Consolidated Financial Statements.
Other operating expenses increased 2%. This primarily reflects a 3% increase from higher capacity, a 3% increase related to miscellaneous contracts, a 2% increase from higher fuel taxes and a 1% increase from higher professional fees, which were partially offset by a 4% decline from lower insurance rates, a 4% decline due to lower frequent flyer program expenses and a 2% decline due to lower supplies, utilities and communications costs.
Operating Loss and Operating Margin |
We incurred an operating loss of $1.1 billion for the nine months ended September 30, 2004, compared to an operating loss of $420 million for the nine months ended September 30, 2003. Operating margin, which is the ratio of operating loss to operating revenues, was (9%) and (4%) for the nine months ended September 30, 2004 and 2003, respectively.
Other Income (Expense) |
Other expense, net for the nine months ended September 30, 2004 was $627 million, compared to other expense, net of $257 million for the nine months ended September 30, 2003. This change is primarily attributable to the following:
| Interest expense increased $43 million for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003 primarily due to higher levels of debt outstanding. | |
| Gain from sale of investments was $0 for the nine months ended September 30, 2004 compared to $284 million for the nine months ended September 30, 2003. During the September 2003 quarter, we sold our equity investment in Worldspan, recognizing a $279 million gain ($176 million net of tax, $1.42 diluted earnings per share) on that transaction. |
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| Fair value adjustments of derivatives accounted for under Statement of Financial Accounting Standards (SFAS) No. 133 Accounting for Derivative Instruments and Hedging Activities (SFAS 133) resulted in a $44 million charge for the nine months ended September 30, 2004 compared to a $16 million charge for the nine months ended September 30, 2003. These adjustments related to our equity warrants and other similar rights in certain companies and to derivative instruments used in our fuel hedging program. For additional information about SFAS 133, see Note 3 of the Notes to the Condensed Consolidated Financial Statements. | |
| Miscellaneous expense, net was $10 million for the nine months ended September 30, 2004 compared to miscellaneous income, net of $7 million for the nine months ended September 30, 2003. This change is primarily due to (1) less favorable foreign currency exchange rates during the nine months ended September 30, 2004 and (2) a decrease in earnings from our equity investment in Worldspan due to our sale of that investment during the June 2003 quarter. |
Income Taxes |
We account for our deferred income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. This standard requires us to periodically assess whether it is more likely than not that we will generate sufficient taxable income to realize our deferred income tax assets.
During the June 2004 quarter, we recorded an additional valuation allowance against our deferred income tax assets, which resulted in a $1.5 billion non-cash charge ($12.30 loss per share) to income tax expense on our Consolidated Statement of Operations. We recorded this additional valuation allowance because we determined that it is unclear as to the timing of when we will generate sufficient taxable income to realize our deferred income tax assets. In addition, we will no longer recognize the tax benefit of current period losses for the foreseeable future. For additional information regarding our income taxes, see Note 7 of the Notes to the Condensed Consolidated Financial Statements.
Results of Operations Year Ended December 31, 2003 Compared to 2002
Net Loss and Loss per Share |
We recorded a consolidated net loss of $773 million ($6.40 diluted loss per share) in 2003, compared to a consolidated net loss of $1.3 billion ($10.44 diluted loss per share) in 2002.
Operating Revenues |
Operating revenues increased 2% to $14.1 billion in 2003 compared to 2002. Passenger revenues increased 2% to $13.0 billion in 2003 compared to 2002. RPMs decreased 2% on a capacity decline of 4%, while passenger mile yield increased 4% to 12.73¢. For information about the factors negatively impacting the revenue environment, see the Business Environment section above.
North American Passenger Revenues. North American passenger revenues increased 2% to $10.7 billion in 2003. RPMs increased 1% on a capacity decrease of 2%, while passenger mile yield increased 1%. Load factors increased by 1.6 points.
International Passenger Revenues. International passenger revenues decreased 4% to $2.2 billion in 2003. RPMs fell 12% on a capacity decline of 14%, while passenger mile yield increased 9%. The decline in international revenue passenger miles, particularly in the Atlantic region, is due to the reduction in traffic in the period leading up to and during the military action in Iraq. The increase in passenger mile yield primarily relates to the reduction of capacity in certain markets and favorable foreign currency exchange rates.
Cargo and Other Revenues. Cargo revenues increased 2% to $467 million in 2003. Cargo ton miles decreased 6% due to reductions in capacity, while cargo ton mile yield increased 8%. Other revenues decreased 2% to $598 million, primarily reflecting decreases due to lower revenue from certain mileage
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Operating Expenses |
Operating expenses totaled $14.9 billion for 2003, decreasing 2% from 2002. Operating capacity decreased 4% to 140 billion ASMs primarily due to capacity reductions implemented as a result of the military action in Iraq. Because there has been some improvement in passenger demand since the end of major military combat in Iraq in May 2003, we have now restored most of this capacity. CASM rose 2% to 10.66¢. Operating expenses and CASM reflect (1) Appropriations Act reimbursements received during 2003; (2) restructuring, asset writedowns, pension settlements and related items, net recorded during 2003 and 2002; and (3) Stabilization Act compensation recorded in 2002. These items are discussed below.
Salaries and related costs totaled $6.3 billion in 2003, a 3% increase from 2002. This 3% increase primarily reflects (1) a 5% increase from higher pension and related expense of approximately $290 million; (2) a 2% increase due to salary rate increases primarily for pilots in the June 2003 and 2002 quarters under their collective bargaining agreement, and for mechanics in the June 2002 quarter; and (3) a 2% increase due to growth in our wholly-owned subsidiaries regional jet operations. These increases were partially offset by a 6% decrease due to our 2002 workforce reduction programs. The increase in pension expense mainly reflects the impact of declining interest rates, a decrease in the fair value of pension plan assets and scheduled pilot salary increases, partially offset by approximately $120 million in expense reductions from the transition of our non-pilot defined benefit pension plan to a cash balance plan. For additional information related to this transition, see Note 11 of the Notes to the Consolidated Financial Statements.
Aircraft fuel expense totaled $1.9 billion during 2003, a 15% increase from 2002. This increase is primarily due to higher fuel prices, partially offset by capacity reductions. The average fuel price per gallon rose 22% to 81.78¢, while total gallons consumed decreased 6%. Our fuel cost is shown net of fuel hedge gains of $152 million for 2003 and $136 million for 2002. Approximately 65% and 56% of our aircraft fuel requirements were hedged during 2003 and 2002, respectively. For additional information about our fuel hedge contracts, see Note 4 of the Notes to the Consolidated Financial Statements.
Depreciation and amortization expense rose 6% in 2003, primarily due to the acquisition of regional jet aircraft and an increase in software amortization associated with completed technology projects.
Contracted services expense declined 12% primarily due to reduced traffic and capacity, the suspension of the air carrier security fees under the Appropriations Act between June 1, 2003 and September 30, 2003, and a decrease in contracted services across certain workgroups. For additional information about the Appropriations Act, see Note 19 of the Notes to the Consolidated Financial Statements.
Expenses from our contract carrier arrangements increased 40% to $784 million primarily due to growth under our agreement with Chautauqua Airlines Inc. (Chautauqua).
Landing fees and other rents rose 3%, primarily due to higher landing fees, adopted by airports seeking to recover lost revenue due to decreased traffic, and increased facility rates. Aircraft maintenance materials and outside repairs expense fell 11%, primarily from reduced maintenance volume and materials consumption as a result of process improvement initiatives, lower capacity and our fleet simplification program. Aircraft rent expense increased 3% mainly due to our decision in the December 2002 quarter to return our B-737-300 leased aircraft to service during 2003. For additional information related to this decision, see Note 15 of the Notes to Consolidated Financial Statements.
Other selling expenses fell 11%. This increase primarily reflects a 9% decrease related to lower booking fees resulting from decreased traffic and a 3% decline from higher sales of mileage credits under our SkyMiles program because a portion of this revenue is recorded as an offset to other selling expenses. These decreases were partially offset by an increase in advertising expenses due to the launch of Song, our new low-fare service. Passenger commission expense declined 34%, primarily reflecting a 22% decrease
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Restructuring, asset writedowns, pension settlements and related items, net totaled $268 million in 2003 compared to $439 million in 2002. Our 2003 charge consists of (1) $212 million related to settlements under the pilots defined benefit pension plans; (2) $43 million related to a net curtailment loss for the cost of pension and postretirement obligations for participants under our 2002 workforce reduction programs; and (3) $41 million associated with the planned sale of 11 B-737-800 aircraft. This charge was partially offset by a $28 million reduction to operating expenses from revised estimates of remaining costs associated with our restructuring activities. Our 2002 charge consists of (1) $251 million in asset writedowns; (2) $127 million related to our 2002 workforce reduction programs; (3) $93 million for the temporary carrying cost of surplus pilots and grounded aircraft; (4) $30 million due to the deferred delivery of certain Boeing aircraft; (5) $14 million for the closure of certain leased facilities; and (6) $3 million related to other items. This charge was partially offset by (1) the reversal of a $56 million reserve for future lease payments related to nine B-737-300 leased aircraft as a result of a decision in 2002 to return these aircraft to service and (2) a $23 million adjustment of certain prior year restructuring reserves based on revised estimates of remaining costs. For additional information on these restructuring, asset writedowns, pension settlements and related items, net, see Note 15 of the Notes to the Consolidated Financial Statements.
Appropriations Act reimbursements totaled $398 million in 2003, representing reimbursements from the U.S. government to air carriers for certain passenger and air carrier security fees paid to the Transportation Security Administration (TSA). We recorded these amounts as a reduction to operating expenses in our Consolidated Statement of Operations. For additional information about the Appropriations Act, see Note 19 of the Notes to the Consolidated Financial Statements.
Stabilization Act compensation totaled $34 million in 2002, representing amounts we recognized as compensation in the applicable period under the Air Transportation Safety and System Stabilization Act (Stabilization Act). We recorded these amounts as a reduction to operating expenses in our Consolidated Statement of Operations. For additional information about the Stabilization Act, see Note 19 of the Notes to the Consolidated Financial Statements.
Other operating expenses fell 16%, primarily reflecting a 9% decrease due to lower insurance rates under U.S. government-provided insurance policies and lower volume-related insurance premiums due to decreased capacity and traffic, as well as a 3% decline due to lower communication and supplies expenses.
Operating Loss and Operating Margin |
We incurred an operating loss of $785 million in 2003, compared to an operating loss of $1.3 billion in 2002. Operating margin was (6%) and (9%) for 2003 and 2002, respectively.
Other Income (Expense) |
Other expense, net totaled $404 million during 2003, compared to other expense, net of $693 million in 2002. Included in these results are the following:
| A $92 million increase in interest expense in 2003 compared to 2002 primarily due to higher levels of outstanding debt in 2003. | |
| A $321 million gain in 2003 from the sale of certain investments. This primarily relates to a $279 million gain from the sale of our equity investment in Worldspan and a $28 million gain from the sale of a portion of our Orbitz shares. For additional information about these investments, see Note 17 of the Notes to the Consolidated Financial Statements. |
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| Gain (loss) on extinguishment of debt, net was zero for 2003 compared to a $42 million loss in 2002. During 2003, we recorded a $15 million loss resulting from our repurchase of a portion of outstanding Employee Stock Ownership Plan (ESOP) Notes, offset by a $15 million gain related to our debt exchange offer. For additional information about our repurchase of ESOP Notes in 2003 and 2002 and our debt exchange offer in 2003, see Note 6 of the Notes to the Consolidated Financial Statements. | |
| A $9 million charge in 2003 compared to a $39 million charge in 2002 for fair value adjustments of financial instruments accounted for under SFAS 133. This relates to derivative instruments we use in our fuel hedging program and to our equity warrants and other similar rights in certain companies. | |
| Miscellaneous income, net was $5 million in 2003 compared to $20 million in 2002 due primarily to a decrease in earnings from our equity investment in Worldspan, which we sold in June 2003. |
Results of Operations Year Ended December 31, 2002 Compared to 2001
Net Loss and Loss per Share |
We recorded a consolidated net loss of $1.3 billion ($10.44 diluted loss per share) in 2002, compared to a consolidated net loss of $1.2 billion ($9.99 diluted loss per share) in 2001.
Operating Revenues |
Operating revenues remained unchanged at $13.9 billion in 2002. Passenger revenues fell 1% to $12.8 billion. RPMs increased 3% on a capacity decline of 2%, while passenger mile yield decreased 4% to 12.26¢. The decreases in passenger revenues and passenger mile yield from the depressed 2001 levels reflect the continuing effects of the September 11 terrorist attacks on our business, the challenging revenue environment discussed above and the weakness of the U.S. and world economies.
North American Passenger Revenues. North American passenger revenues fell 1% to $10.4 billion in 2002. RPMs increased 4%, while capacity remained unchanged. Passenger mile yield decreased 5%. The decline in passenger mile yield reflects the challenging revenue environment, including significant fare discounting as well as a substantial reduction in high-yield business traffic reflecting the continuing effects of the September 11 terrorist attacks on our business.
International Passenger Revenues. International passenger revenues decreased 2% to $2.3 billion in 2002. RPMs fell 2% on a capacity decline of 7%, while passenger mile yield increased 1%. The decline in our international capacity was primarily driven by reductions in our Pacific operations due to weak passenger demand.
Cargo and Other Revenues. Cargo revenues decreased 9% to $458 million in 2002. This reflects a 7% decline due to Federal Aviation Administration security measures, adopted after the September 11 terrorist attacks, that prohibit passenger airlines from transporting mail weighing more than 16 ounces; such mail had represented approximately 50% of our mail business. The decline in cargo revenues also reflects a 2% decrease due to lower domestic freight volumes and yields. Cargo ton miles decreased 6% and cargo ton mile yield decreased 4%. Other revenues increased 49% to $610 million, primarily reflecting a 12% increase due to higher administrative service fees, a 12% increase due to higher codeshare revenues, an 11% increase due to certain mileage partnership arrangements and a 10% increase due to our contract carrier arrangements.
Operating Expenses |
Operating expenses totaled $15.2 billion for 2002, decreasing 2% from 2001. Operating capacity decreased 2% to 145 billion ASMs. CASM remained unchanged and was 10.45¢ for 2002. Operating expenses and CASM reflect in 2002 and 2001 (1) restructuring, asset writedowns, pension settlements and related items, net and (2) Stabilization Act compensation. These items are discussed below.
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Salaries and related costs totaled $6.2 billion in 2002, a 1% increase from 2001. This reflects a 6% increase from higher pension expense and a 5% increase due to salary and benefit rate increases for pilots and mechanics in the June 2002 quarter. These increases were largely offset by decreases due to workforce reductions implemented after we reduced capacity following September 11, 2001.
Aircraft fuel expense totaled $1.7 billion during 2002, a 7% decrease from 2001. Total gallons consumed decreased 5% mainly due to capacity reductions. The average fuel price per gallon fell 2% to 66.94¢. Our fuel cost is shown net of fuel hedge gains of $136 million for 2002 and $299 million for 2001. Approximately 56% and 58% of our aircraft fuel requirements were hedged during 2002 and 2001, respectively. For additional information about our fuel hedge contracts, see Note 4 of the Notes to the Consolidated Financial Statements.
Depreciation and amortization expense fell 9% in 2002, reflecting a 6% decrease due to a change in our asset base and a 5% decrease due to our adoption on January 1, 2002, of SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 142 requires that goodwill and certain other intangible assets no longer be amortized (see Note 5 of the Notes to the Consolidated Financial Statements).
Contracted services expense declined 1% primarily due to a 4% decrease from fewer contract workers, partially offset by a 3% increase due to higher security costs.
Expenses from our contract carrier arrangements totaled $561 million for 2002. These expenses were included as part of other revenue, net in 2001 and were not material.
Landing fees and other rents rose 7%, of which 3% was related to an increase in landing fee rates and 2% was due to lower costs in 2001 resulting from reduced operations by Comair, Inc. (Comair). Due to a strike by its pilots, Comair suspended operations between March 26, 2001 and July 1, 2001, and gradually returned to service after the strike.
Aircraft maintenance materials and outside repairs expense fell 11%, primarily reflecting a reduction in maintenance volume and materials consumption due to the timing of maintenance events. Aircraft rent expense decreased 4%, primarily due to a reduction in the number of leased aircraft during 2002 from our fleet simplification efforts. Other selling expenses fell 13%, of which 6% was due to lower costs associated with our mileage partnership programs and 4% was due to reduced advertising and promotion spending.
Passenger commission expense declined 40%, primarily due to a change in our commission rate structure. On March 14, 2002, we eliminated travel agent base commissions for tickets sold in the U.S. and Canada. Passenger service expense decreased 20%, primarily due to meal service reductions.
Restructuring, asset writedowns, pension settlements and related items, net totaled $439 million in 2002 compared to $1.1 billion in 2001. Our 2002 charge is discussed above. Our 2001 charge consists of (1) $566 million related to our 2001 workforce reduction programs; (2) $363 million from a decrease in value of certain aircraft and other fleet related charges; (3) $160 million related primarily to discontinued contracts, facilities and information technology projects; and (4) $30 million for the temporary carrying cost of surplus pilots and grounded aircraft. For additional information on restructuring, asset writedowns, pension settlements and related items, net, see Note 15 of the Notes to the Consolidated Financial Statements.
Stabilization Act compensation totaled $34 million in 2002 compared to $634 million in 2001, representing amounts we recognized as compensation in the applicable period under the Stabilization Act. For additional information about the Stabilization Act, see Note 19 of the Notes to the Consolidated Financial Statements.
Other operating expenses decreased 13%, primarily due to declines in miscellaneous expenses such as supplies, utilities, interrupted operations expenses and professional fees, which were partially offset by a 19% increase in expenses due to a rise in war-risk insurance rates.
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Operating Loss and Operating Margin |
We incurred an operating loss of $1.3 billion in 2002, compared to an operating loss of $1.6 billion in 2001. Operating margin was (9%) and (12%) for 2002 and 2001, respectively.
Other Income (Expense) |
Other expense totaled $693 million during 2002, compared to other expense of $262 million in 2001. Included in these results are the following:
| A $166 million increase in interest expense in 2002 compared to 2001 primarily due to higher levels of outstanding debt in 2002. | |
| A $53 million decrease in interest income in 2002 compared to 2001 due to lower interest rates and a lower average cash balance in 2002. | |
| A $127 million net gain in 2001 on the sale of certain investments. This primarily relates to a $111 million gain on the sale of our equity interest in SkyWest, Inc., the parent company of SkyWest Airlines, and an $11 million gain from the sale of our equity interest in Equant, N.V., an international data network services company. | |
| A $39 million charge in 2002 compared to a $68 million gain in 2001 for fair value adjustments of financial instruments accounted for under SFAS 133. This relates to derivative instruments we use in our fuel hedging program and to our equity warrants and other similar rights in certain companies. | |
| A $42 million loss on extinguishment of debt in 2002, which resulted from our repurchase of a portion of outstanding ESOP Notes. | |
| Miscellaneous income, net was $20 million in 2002 compared to miscellaneous expense, net of $47 million in 2001 due primarily to increased earnings from our equity investment in Worldspan in 2002. |
Financial Condition and Liquidity
Sources and Uses of Cash Nine Months Ended September 30, 2004 |
Cash and cash equivalents totaled $1.4 billion at September 30, 2004, compared to $2.7 billion at December 31, 2003. For the nine months ended September 30, 2004, net cash used in operating activities totaled $685 million, which includes the following significant items:
| Our $3.0 billion net loss for the nine months ended September 30, 2004. This net loss reflects a $1.3 billion non-cash provision related to our deferred income tax assets, two non-cash settlement charges totaling $131 million for our Pilot Plan and $929 million of depreciation and amortization. | |
| A $447 million increase in our air traffic liability from December 31, 2003 to September 30, 2004 due to increased codeshare sales and higher bookings for the upcoming holiday travel season. | |
| Our $410 million funding of our qualified defined benefit pension plans. |
Capital expenditures include (1) cash used for flight equipment, including advance payments; (2) cash used for ground property and equipment (including expenditures, net of reimbursements, related to our Boston airport terminal project); and (3) aircraft delivered under seller-financing arrangements (which is a non-cash item). For the nine months ended September 30, 2004, capital expenditures were approximately $750 million. For the quarter ending December 31, 2004, we expect capital expenditures to be approximately $300 million, including $135 million related to the acquisition of regional jet aircraft which we expect will be delivered under seller-financing arrangements.
Debt and capital lease obligations, including current maturities, were $12.8 billion at September 30, 2004 and $12.6 billion at December 31, 2003. During the nine months ended September 30, 2004, we
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| We entered into secured financing arrangements under which we borrowed $566 million, which is due in installments through June 2020. The proceeds from these borrowings were used to (1) repay $498 million of outstanding interim financing for 18 CRJ-200 and 12 CRJ-700 aircraft and (2) finance our purchase of six CRJ-700 aircraft delivered during the nine months ended September 30, 2004. | |
| In February 2004, we issued $325 million principal amount of 2 7/8% Convertible Senior Notes (2 7/8% Convertible Senior Notes) due 2024. | |
| On February 27, 2004, we entered into an agreement to purchase 32 CRJ-200 aircraft to be delivered in 2005. In conjunction with this agreement, we have available to us long-term, secured financing at the time of acquisition for these aircraft. | |
| On July 7, 2004 we amended three of our existing secured loan agreements with General Electric Capital Corporation. As a result of these amendments, we received $152 million of incremental liquidity. (Certain of these agreements were further amended on November 30, 2004. See Recent Transactions GE Commercial Finance Facility.) |
During the nine months ended September 30, 2004, we made approximately $575 million in debt repayments, including $236 million in principal repayments of unsecured notes that matured on March 15, 2004. As of September 30, 2004, our scheduled debt maturities were $129 million for the quarter ending December 31, 2004 and approximately $1.3 billion for 2005. This information does not reflect the impact of the recent transactions discussed below that we have recently closed as part of our out-of-court restructuring. For additional information about our debt maturities, see the Business Environment section above, the Contractual Obligations table below and Note 4 in the Notes to the Condensed Consolidated Financial Statements.
Recent Transactions |
On November 30, 2004, we entered into three agreements to provide us with financing of up to $1.13 billion. Additionally, in November 2004, we entered into several other transactions as part of our out-of-court restructuring that affect our liquidity.
GE Commercial Finance Facility. The first agreement (GE Commercial Finance Facility) consists of a $330 million senior secured term loan (the Term Loan) and a $300 million senior secured revolving credit facility (the Revolver) with a syndicate of financial institutions for which General Electric Capital Corporation acts as Agent (the Agent).
The total committed amount of our Revolver is $300 million, subject to reserves set by the Agent from time to time (currently $50 million). Up to $150 million of the Revolver is available for the issuance of letters of credit. On December 1, 2004, we borrowed $250 million under the Revolver of which $231 million was outstanding as of December 31, 2004. Availability under the Revolver is subject to a Revolver borrowing base, defined as the sum of (i) up to 80% of the book value of eligible billed accounts receivable, (ii) up to 50% of the book value of eligible unbilled accounts receivable and (iii) up to the lesser of 50% of the book value of eligible refundable tickets and $30 million, in each case less reserves established from time to time by the Agent. If the outstanding Revolver at any time exceeds the Revolver borrowing base, we must immediately repay an amount equal to the excess. The Revolver matures on December 1, 2007. Revolver loans bear interest at LIBOR or an index rate, at our option, plus a margin of 4.00% over LIBOR and 3.25% over the index rate. The unused portion of the Revolver is subject to a fee of 0.50% or 0.75% per annum, depending upon the amount used.
The total amount of our Term Loan is $330 million, which we borrowed in full on December 1, 2004. The Term Loan is subject to a Term Loan borrowing base, defined as the sum of (i) the lesser of 50% of the fair market value of eligible real estate and $100 million, (ii) the lesser of 50% of the net orderly
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Our obligations under the GE Commercial Finance Facility are guaranteed by substantially all of our domestic subsidiaries (the Guarantors), other than ASA Holdings, Inc. (ASA Holdings) and Comair Holdings, LLC (Comair Holdings), and their respective subsidiaries. We will be required to make certain mandatory repayments of the Term Loan and the Revolver (or reduce the Revolver availability) in the event we sell certain assets (including ASA and Comair), subject to certain exceptions. We may not voluntarily repay the Revolver other than in connection with an equal permanent reduction in its availability.
The Revolver is secured by (i) a first priority lien on all of our and the Guarantors accounts receivable, excluding certain accounts receivable subject to a first priority lien securing the Amex Facilities (as defined below), and (ii) a second priority lien on all assets securing the Term Loan. Subject to certain exceptions, the Term Loan is secured by a first priority lien on substantially all of our and the Guarantors other remaining unencumbered assets, including a pledge of the stock of ASA Holdings, Comair Holdings and certain of our other domestic subsidiaries, other investments, certain aircraft, real property, spare parts, flight simulators, ground equipment, landing slots and international routes. The Term Loan is also secured by a second priority lien on all assets securing the Revolver. The Revolver and the Term Loan are also secured by a junior lien on assets securing the Amex Facilities (as defined below). Our obligations and the obligations of the Guarantors under any intercompany loan are expressly subordinated to our obligations and the obligations of our Guarantors under the Revolver and the Term Loan.
The GE Commercial Finance Facility includes affirmative, negative and financial covenants that impose substantial restrictions on our financial and business operations, including our ability to, among other things, incur or secure other debt, make investments, sell assets, pay dividends or repurchase stock and make capital expenditures.
The financial covenants require us to:
| maintain unrestricted cash and cash equivalents on hand of not less than $900 million at all times until February 28, 2005, $1 billion at all times from March 1, 2005 through October 31, 2005 and $750 million at all times thereafter (the Liquidity Covenant); | |
| maintain cash and cash equivalents in accounts pledged to the Agent for the benefit of the Term Loan and Revolver lenders in an amount of not less than $650 million at all times until October 31, 2005, $550 million at all times from November 1, 2005 through February 28, 2006 and $650 million at all times thereafter, which amount can be used for purposes of determining compliance with the Liquidity Covenant; | |
| not exceed specified levels of capital expenditures during each fiscal quarter; and | |
| achieve certain levels of EBITDAR (earnings before interest, taxes, depreciation and amortization and aircraft rentals, adjusted for certain non-cash and other items). During the 2005 fiscal year, we | |
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are required to achieve increasing levels of EBITDAR for successive trailing 12-month periods as follows: |
12 Months Ending | Minimum EBITDAR | |||
(In millions) | ||||
January 2005
|
$ | (191 | ) | |
February 2005
|
$ | (130 | ) | |
March 2005
|
$ | 88 | ||
April 2005
|
$ | 238 | ||
May 2005
|
$ | 378 | ||
June 2005
|
$ | 581 | ||
July 2005
|
$ | 788 | ||
August 2005
|
$ | 986 | ||
September 2005
|
$ | 1,060 | ||
October 2005
|
$ | 1,210 | ||
November 2005
|
$ | 1,401 | ||
December 2005
|
$ | 1,590 |
Thereafter the minimum EBITDAR level for successive 12-month periods continues to increase, from $1.697 billion for the 12 months ending January 2006 to $3.136 billion for the 12 months ending November 2007. The EBITDAR covenant effectively provides that if, at the end of any 12-month period, our cash on hand exceeds the minimum cash on hand that we are required to maintain pursuant to the Liquidity Covenant (such excess, the Excess Aggregate Cash on Hand) by at least $100 million, then the EBITDAR level that we are required to achieve for that 12-month period will be reduced. The amount of that reduction will be the lesser of (i) 50% of the Excess Aggregate Cash on Hand and (ii) (x) $150 million until February 28, 2005, (y) $175 million for the period from March 1, 2005 through October 31, 2005 and (z) $150 million thereafter. |
The GE Commercial Finance Facility contains customary events of default, including cross defaults to the Amex Facilities and our other debt and certain change of control events. Upon the occurrence of an event of default, the outstanding obligations under the Term Loan and the Revolver may be accelerated and become due and payable immediately.
This description of the GE Commercial Finance Facility is subject in all respects to the actual provisions of the GE Commercial Finance Facility, a copy of which was filed as Exhibit 99.1 to our Form 8-K filed on December 6, 2004.
As a condition to availability of the GE Commercial Finance Facility, we also entered into two separate arrangements with General Electric Capital Corporation (GECC).
First, we granted GECC the right, exercisable to November 2, 2005, to lease to us (or, at our option subject to certain conditions, certain Delta Connection carriers) up to 12 CRJ-200 aircraft currently leased to other airlines for the remainder of the existing lease terms for specified rent amounts. We have received notice that three of these aircraft will be leased to us beginning in May, 2005.
Second, we amended three of our existing secured financing agreements with GECC (the Spare Engines Loan, the Spare Parts Loan and the Reimbursement Agreement). GECC agreed that the minimum collateral value test we must meet under the Reimbursement Agreement in March 2006 would be changed, to be satisfied if the amount of GECC Aggregate Exposure (as defined therein) does not exceed 60% (as opposed to 50% previously) of the appraised market value of the nine B-767-400 and three B-777-200 aircraft that comprise part of the collateral for our obligations under the Reimbursement Agreement. We agreed that (i) the maximum amount of certain other existing debt and aircraft lease obligations to GECC and its affiliates secured, on a subordinated basis, by certain of the collateral securing
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Amex Facilities. The other two agreements (the Amex Facilities) consist of substantially identical supplements to the two existing agreements under which Amex purchases SkyMiles from us, the Membership Rewards Agreement and the Co-Branded Credit Card Program Agreement (SkyMiles Agreements). Pursuant to the terms of the Amex Facilities, Amex agreed to make advances to us, as prepayment for purchases of SkyMiles under the SkyMiles Agreements, in two installments of $250 million each. The initial installment was paid on December 1, 2004 and the final installment is payable on a date specified by us, no sooner than March 1, 2005, and subject to satisfaction of certain conditions precedent. The prepayment amount will be credited, in equal monthly installments, towards Amexs actual purchases of SkyMiles during the 24-month period commencing in December 2005. Any unused prepayment credit will carry over to the next succeeding month with a final repayment date for any then outstanding advances no later than December 1, 2007. The outstanding advances will bear a fee, equivalent to interest, at a rate of LIBOR plus a margin of 7.75% over LIBOR, subject to a LIBOR floor of 3%.
Our obligations under the Amex Facilities are guaranteed by the same Guarantors as for the GE Commercial Finance Facility. We will be required to make certain mandatory repayments of advances in the event we sell ASA and Comair.
Our obligations under the Amex Facilities are secured by (i) a first priority lien on our right to payment from Amex for purchased SkyMiles and our interest in the SkyMiles Agreements and related assets and in the Card Services Agreement pursuant to which Amex processes travel and other purchases made from us using Amex credit cards (Card Services Agreement) and (ii) a junior lien on the collateral securing the GE Commercial Finance Facility. Our obligations under the Card Services Agreement are also secured by the collateral securing the Amex Facilities. Furthermore, our claim against any of our subsidiaries with respect to intercompany loans that we have made to that subsidiary is expressly subordinated to that subsidiarys obligations, if any, as guarantor of the GE Commercial Finance Facility and the Amex Facilities.
The Amex Facilities contain affirmative, negative and financial covenants substantially the same as those found in the GE Commercial Finance Facility.
The Amex Facilities contain customary events of default, including cross defaults to our obligations under the GE Commercial Finance Facility and our other debt and certain change of control events. Upon the occurrence of an event of default, the outstanding advances under the Amex Facilities may be accelerated and become due and payable immediately.
The GE Commercial Finance Facility and the Amex Facilities are subject to an intercreditor agreement that generally regulates the respective rights and priorities of the lenders under each Facility with respect to collateral and certain other matters.
Orbitz. Additionally, during November 2004, we completed the sale of our investment in Orbitz, Inc. for $143 million. This transaction will result in the recognition of a pre-tax gain totaling $123 million during the December 2004 quarter.
Other Transactions. In addition, we completed restructuring transactions with aircraft lessors, creditors and other vendors in the December 2004 quarter. Specifically, on November 24, 2004, we entered into definitive agreements with aircraft lessors and lenders under which we expect to receive average annual concessions of approximately $57 million between 2005 and 2009; we issued an aggregate of 4,354,724 shares of our common stock to the aircraft lessors and lenders in exchange for these concessions. Separately, as a result of agreements with about 115 suppliers, we expect to realize average annual benefits
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Worldspan. In January 2005, we sold a promissory note for $36 million that we had previously received in conjunction with the June 2003 sale of our equity investment in Worldspan.
For additional information about financing and other transactions affecting our liquidity subsequent to September 30, 2004, see Notes 6 and 14 of the Notes to the Condensed Consolidated Financial Statements.
Sources and Uses of Cash Year Ended December 31, 2003 |
Cash and cash equivalents totaled $2.7 billion at December 31, 2003, compared to $2.0 billion at December 31, 2002. For 2003, net cash provided by operating activities totaled $453 million, which includes the following items:
| Net tax refunds totaling $402 million. | |
| Our net loss of $773 million. | |
| Our $76 million payment to fund a defined benefit pension plan. | |
| A $102 million increase in total restricted cash, primarily to support certain projected insurance obligations. For additional information about our restricted cash, see Note 1 of the Notes to the Consolidated Financial Statements. |
During 2003, capital expenditures were $1.5 billion, which included the acquisition of 31 CRJ-200 and 20 CRJ-700 aircraft. Of these regional jet aircraft, 43 were acquired through seller financing arrangements for $718 million.
On June 30, 2003, we sold our 40% equity investment in Worldspan. In consideration for this sale, we received (1) $285 million in cash and (2) a $45 million subordinated promissory note, which bears interest at 10% per annum and matures in 2012. We will also receive credits totaling approximately $125 million, which will be recognized ratably as a reduction of costs through 2012, for future Worldspan-provided services. At December 31, 2003, the carrying and fair value of the subordinated promissory note was $38 million. For additional information about the sale of our equity investment in Worldspan, see Note 17 of the Notes to the Consolidated Financial Statements.
Debt and capital lease obligations, including current maturities and short-term obligations, totaled $12.6 billion at December 31, 2003, compared to $10.9 billion at December 31, 2002. During 2003, we engaged in the following financing transactions (for additional information about these transactions, see Note 6 of the Notes to the Consolidated Financial Statements):
| We issued $1.9 billion principal amount of debt under secured financing arrangements, due in installments through 2021. | |
| We issued $350 million principal amount of 8% Convertible Senior Notes due 2023. | |
| GECC issued $404 million of irrevocable, direct-pay letters of credit to support our obligations related to $397 million principal amount of outstanding municipal bonds. This transaction replaced letters of credit issued by a third party that were due to expire in June 2003. | |
| We completed a debt exchange offer in which $262 million principal amount of previously outstanding unsecured notes due in 2004 and 2005 were exchanged for a total of $47 million in cash and $211 million principal amount of unsecured new notes, net of a discount, due in 2008. |
Sources and Uses of Cash Year Ended December 31, 2002 |
Cash and cash equivalents totaled $2.0 billion at December 31, 2002. Net cash provided by operations totaled $285 million during 2002, including receipt of (1) a $472 million tax refund due to a new tax law
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Sources and Uses of Cash Year Ended December 31, 2001 |
Cash and cash equivalents totaled $2.2 billion at December 31, 2001. Net cash provided by operations totaled $236 million during 2001, including $556 million of compensation received under the Stabilization Act. Capital expenditures, including aircraft acquisitions made under seller financing arrangements, were $2.9 billion during 2001; this included the acquisition of 27 B-737-800, three B-757-200, two B-767-300ER, six B-767-400, 23 CRJ-200 and four CRJ-100 aircraft. Debt and capital lease obligations, including current maturities and short-term obligations, totaled $9.4 billion at December 31, 2001. We issued $2.3 billion of secured long-term debt during 2001.
Pension Plans |
We sponsor qualified defined benefit pension plans for eligible employees and retirees. Our funding in 2004 totaled $455 million, which included (1) a voluntary contribution of $325 million to our non-pilot pension plan, which we made in the March 2004 quarter, and (2) required contributions totaling $130 million to our pilot pension plans, of which we contributed $85 million during the nine months ended September 30, 2004 and $45 million in October 2004. These contributions satisfy our funding requirements for 2004.
We currently estimate that our funding obligations under our defined benefit and defined contribution pension plans for 2005 will be approximately $400 million to $450 million. This estimate may vary materially depending on, among other things, applicable law, the assumptions used to determine the amount of contribution and whether we make contributions in excess of those required. It reflects the projected impact of the election we made in 2004 to utilize the alternative deficit reduction contribution relief provided by the Pension Funding Equity Act of 2004. This legislation allows us to defer payment of a portion of the otherwise required funding.
Additionally, we presently expect that our funding obligations under our pension plans during each of the years 2006 through 2009 will be significant. We cannot provide reasonably accurate estimates of our obligations at this time because estimates of the amount and timing of our future funding obligations under our defined benefit pension plans are based on various assumptions. These include assumptions concerning, among other things, the actual and projected market performance of the plan assets, future long-term corporate bond yields, statutory requirements and demographic data for pension plan participants. The amount and timing of our future funding obligations also depend on, among other things, whether we elect to make contributions to the pension plans in excess of those required under ERISA (such voluntary contributions may reduce or defer the funding obligations we would have absent those contributions).
For additional information about our defined benefit pension plans, see Note 11 of the Notes to the Consolidated Financial Statements and Note 8 of the Notes to the Condensed Consolidated Financial Statements.
Credit Ratings and Covenants |
During the September 2004 quarter, certain of our credit ratings were lowered. As of January 31, 2005, our senior unsecured long-term debt is rated Ca by Moodys Investors Service, Inc., CC by Standard and Poors Rating Services and C by Fitch Ratings. Moodys and Fitch have stated that their ratings outlook for our senior unsecured debt is negative while we are on positive watch with Standard & Poors. Our credit ratings may be lowered further. While we do not have debt obligations that accelerate as a result of a credit ratings downgrade, our credit ratings have negatively impacted our ability to issue
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Our financing agreements with GE Commercial Finance and Amex contain certain financial covenants that require us to maintain specific levels of unrestricted cash and cash equivalents and specified levels of cash and cash equivalents in accounts pledged to GECC for the benefit of the Term Loan and Revolver lenders (and, on a junior basis, for the benefit of Amex), to achieve certain levels of EBITDAR (earnings before interest, taxes, depreciation and amortization and aircraft rent) and not to exceed specified levels of capital expenditures. If we are unable to comply with our financial covenants, the outstanding obligations under the Term Loan and the Revolver may be accelerated and become due and payable immediately. Our Reimbursement Agreement with GECC includes a Collateral Value Test. For additional information about this test and certain of the financial covenants contained in our financing agreements with GE Commercial Finance and Amex, see the discussion above under Recent Transactions.
As is customary in the airline industry, our aircraft lease and financing agreements require that we maintain certain levels of insurance coverage, including war-risk insurance. We were in compliance with these requirements at December 31, 2003 and 2002. For additional information about our war-risk insurance currently provided by the U.S. government under the Stabilization Act, see Note 19 on the Notes to the Consolidated Financial Statements and Risks Relating to the Airline Industry Our insurance costs have increased substantially as a result of the September 11 terrorist attacks and further increases in insurance costs or reductions in coverage could have a material adverse impact on our business and operating results.
Future Aircraft Order Commitments |
To preserve liquidity, we have taken the following actions regarding our orders for mainline aircraft:
| In October 2003, we entered into a definitive agreement to sell 11 B-737-800 aircraft to a third party immediately after those aircraft are delivered to us by the manufacturer in 2005. We also granted the third party an option to purchase up to 10 additional B-737-800 aircraft scheduled for delivery to us in 2006. As of December 1, 2004, four of these options have expired. | |
| During 2004, Delta and Boeing reached agreement on revised dates of delivery of the B-737-800 and B-777-200 aircraft scheduled for delivery in 2005 through 2009. As a result, we made the following adjustments to the timing of delivery of these aircraft on firm order: deferred seven B-737-800 aircraft from 2005 to 2007; accelerated one B-737-800 aircraft from 2008 to 2007; deferred five B-737-800 aircraft from 2006 to 2007; deferred four B-737-800 aircraft from 2006 to 2008; deferred two B-777-200 aircraft from 2005 to 2008; and deferred three B-777-200 aircraft from 2006 to 2009. | |
For additional information about our aircraft order commitments, see Note 9 of the Notes to the Consolidated Financial Statements and Note 5 of the Notes to the Condensed Consolidated Financial Statements.
Shareowners Equity (Deficit) |
Shareowners deficit was $3.6 billion at September 30, 2004 and $659 million at December 31, 2003. The change in shareowners deficit is primarily due to our net loss for the nine months ended September 30, 2004. Shareowners equity (deficit) was $(659) million at December 31, 2003 and $893 million at December 31, 2002. The decrease in our shareowners equity (deficit) is primarily due to our $773 million net loss in 2003 and the $786 million, net of tax, non-cash adjustment to our additional
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Series B Preferred Stock |
Delaware law provides that a company may pay dividends on its stock only (1) out of its surplus, which is generally defined as the excess of a companys net assets over the aggregate par value of its issued stock, or (2) from its net profits for the fiscal year in which the dividend is paid or from its net profits for the preceding fiscal year. Delaware law also prohibits a company from redeeming or purchasing its stock for cash or other property, unless the company has sufficient surplus.
Our Board of Directors took the following actions, effective in December 2003, related to our Series B Preferred Stock to comply with Delaware law:
| Suspended indefinitely the payment of dividends on our Series B Preferred Stock. Unpaid dividends on the Series B Preferred Stock will accrue without interest, until paid, at a rate of $4.32 per share per year. The Series B Preferred Stock is held by Fidelity Management Trust Company in its capacity as trustee for the Savings Plan. | |
| Changed the form of payment we use to redeem shares of Series B Preferred Stock when redemptions are required under the Savings Plan. For the indefinite future, we will pay the redemption price of the Series B Preferred Stock in shares of our common stock rather than in cash. |
At December 31, 2003, approximately 5.8 million shares of Series B Preferred Stock were held by the Savings Plan. About 3.8 million shares of Series B Preferred Stock were allocated to the accounts of Savings Plan participants; the remainder of the shares was available for allocation in the future.
We are generally required to redeem shares of Series B Preferred Stock (1) to provide for distributions of the accounts of Savings Plan participants who terminate employment with us and request a distribution and (2) to implement annual diversification elections by Savings Plan participants who are at least age 55 and have participated in the Savings Plan for at least ten years. In these circumstances, shares of Series B Preferred Stock are redeemable at a price equal to the greater of (1) $72.00 per share or (2) the fair value of the shares of our common stock issuable upon conversion of the Series B Preferred Stock to be redeemed, plus, in either case, accrued but unpaid dividends on such shares of Series B Preferred Stock. Under the terms of the Series B Preferred Stock, we may pay the redemption price in cash, shares of our common stock (valued at fair value), or in a combination thereof. Each share of Series B Convertible Preferred Stock is convertible into 1.7155 shares of our common stock, subject to adjustment in certain circumstances.
During 2003, an average of approximately 20,000 shares of Series B Preferred Stock was redeemed each month under the Savings Plan, resulting in an average aggregate monthly redemption price of $1.4 million plus accrued and unpaid dividends. During the twelve months ended December 31, 2004, approximately 422,000 shares of Series B Preferred Stock had been redeemed, resulting in an aggregate monthly redemption price of $2.7 million plus accrued and unpaid dividends. We issued approximately 6.3 million shares of our common stock to redeem Series B Preferred Stock during that twelve-month period. At this rate, and assuming a common stock price of $7.00 per share, we estimate that we will issue approximately 4.8 million shares of our common stock during 2005 to redeem Series B Preferred Stock. The actual number of shares of our common stock issued may differ materially from this estimate because the actual number of shares will depend on various factors, including the duration of the period during which we may not redeem Series B Preferred Stock for cash under Delaware Law; the fair value of our common stock when Series B Preferred Stock is redeemed; and the number of shares of Series B Preferred Stock redeemed by Savings Plan participants who terminate their employment with us or elect to diversify their Savings Plan accounts.
For additional information about our Series B Preferred Stock, see Notes 11 and 12 of the Notes to the Consolidated Financial Statements.
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Working Capital Position |
As of September 30, 2004, we had negative working capital of $2.6 billion, compared to negative working capital of $1.7 billion and $2.6 billion at December 31, 2003 and 2002, respectively. These changes in our negative working capital balance are primarily due to changes in our cash and cash equivalents, which is discussed in the Sources and Uses of Cash section above.
Financial Position December 31, 2003 Compared to December 31, 2002 |
This section discusses certain changes in our Consolidated Balance Sheets included in the Consolidated Financial Statements that are not otherwise discussed in this prospectus.
Prepaid expenses and other current assets increased by 34%, or $120 million, primarily due to an increase in prepaid aircraft fuel as well as an increase in the fair value of our fuel hedge derivative contracts. Restricted investments for our Boston airport terminal project decreased 31%, or $131 million, due to the capitalization of project expenditures and interest paid. Other noncurrent assets increased 42%, or $634 million, due to an increase in our deferred tax assets which was partially offset by a decrease in the intangible asset recorded in conjunction with our additional minimum pension liability.
Accounts payable, deferred credits and other accrued liabilities decreased 8%, or $162 million, primarily due to payments related to our restructuring reserves and to the Delta Employees Credit Union (see Note 16 and Note 20, respectively, of the Notes to the Consolidated Financial Statements). Pension and related benefits increased 51%, or $1.6 billion, primarily due to our non-cash adjustments to our additional minimum pension liability recorded during 2003. For additional information on our employee benefit plans, see Note 11 of the Notes to the Consolidated Financial Statements.
Contractual Obligations |
The following table provides a summary of our contractual obligations as of December 31, 2003 related to debt; operating leases; aircraft order commitments; capital leases; interest and related payments; other material, noncancelable purchase obligations; and other liabilities. The table excludes commitments that are contingent based on certain events or other factors that were uncertain or unknown as of December 31, 2003.
Contractual Payments Due By Period | |||||||||||||||||||||||||||||
After | |||||||||||||||||||||||||||||
Total | 2004 | 2005 | 2006 | 2007 | 2008 | 2008 | |||||||||||||||||||||||
(In millions) | |||||||||||||||||||||||||||||
Debt(1)
|
$ | 12,462 | $ | 1,002 | $ | 1,164 | $ | 781 | $ | 463 | $ | 1,272 | $ | 7,780 | |||||||||||||||
Operating lease payments(2)
|
11,854 | 1,271 | 1,237 | 1,173 | 1,112 | 1,147 | 5,914 | ||||||||||||||||||||||
Aircraft order commitments(3)
|
4,014 | 675 | 1,171 | 1,285 | 840 | 43 | | ||||||||||||||||||||||
Capital lease obligations(4)
|
129 | 29 | 22 | 18 | 15 | 13 | 32 | ||||||||||||||||||||||
Interest and related payments(5)
|
7,392 | 725 | 671 | 597 | 559 | 523 | 4,317 | ||||||||||||||||||||||
Other purchase obligations(6)
|
318 | 280 | 19 | 14 | 4 | | 1 | ||||||||||||||||||||||
Other liabilities(7)
|
56 | 56 | | | | | | ||||||||||||||||||||||
Total
|
$ | 36,225 | $ | 4,038 | $ | 4,284 | $ | 3,868 | $ | 2,993 | $ | 2,998 | $ | 18,044 | |||||||||||||||
(1) | These amounts are included on our Consolidated Balance Sheets. A portion of this debt is backed by letters of credit totaling $300 million at December 31, 2003. For additional information about our debt and related matters, see Note 6 of the Notes to the Consolidated Financial Statements. |
(2) | Our operating lease obligations are described in Note 7 of the Notes to the Consolidated Financial Statements. A portion of these obligations is backed by letters of credit totaling $104 million at December 31, 2003. For additional information about these letters of credit, see Note 6 of the Notes to the Consolidated Financial Statements. |
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(3) | Includes capital expenditures related to our purchase of seven B-737-800 aircraft in 2005. We intend to exercise our right to defer the delivery of these aircraft to 2008. This action will defer the related capital expenditures from 2004 and 2005 to later years. |
Includes capital expenditures to purchase from the manufacturer 11 B-737-800 aircraft for which we have entered into a definitive agreement to sell to a third party immediately following delivery of those aircraft to us in 2005. For additional information about our intention to exercise our right to defer the delivery of seven B-737-800 aircraft from 2005 to 2008, and our definitive agreement to sell 11 B-737-800 aircraft immediately after those aircraft are delivered to us by the manufacturer in 2005, see Note 9 of the Notes to the Consolidated Financial Statements. |
(4) | Interest payments related to capital lease obligations are included in the table. The present value of these obligations, excluding interest, is included on our Consolidated Balance Sheets. For additional information about our capital lease obligations, see Note 7 of the Notes to the Consolidated Financial Statements. |
(5) | These amounts represent future interest payments related to our debt obligations based on the fixed and variable interest rates specified in the associated debt agreements. Payments in early 2004 related to variable rate debt are based on the specified margin and the base rate, such as LIBOR, in effect at December 31, 2003. The base rates typically reset every one to six months depending on the debt agreement. Payments in late 2004 and other years for variable rate debt do not consider any amount for the base rate component of the interest calculation since the rate is unknown at December 31, 2003; these payments were calculated based only on the specified margin. At December 31, 2003, by way of context, the base rate component of the interest calculation on our $4.2 billion of variable rate debt is approximately 1%. The related payments represent credit enhancements required in conjunction with certain debt agreements. |
(6) | Includes purchase obligations pursuant to which we are required to make minimum payments for goods and services. For additional information about other commitments and contingencies, see Note 9 of the Notes to the Consolidated Financial Statements. |
(7) | Represents other liabilities on our Consolidated Balance Sheets for which we are obligated to make future payments primarily related to postretirement medical benefit costs incurred but not yet paid and payments required under certain collective bargaining agreements for unused vacation time. These liabilities are not included in any other line item on this table. |
The table above does not include amounts related to our future funding obligations under our defined benefit pension plans. Estimates of the amount and timing of these future funding obligations are based on various assumptions. These include assumptions concerning, among other things, the actual and projected market performance of the plan assets, 30-year U.S. Treasury bond yields, statutory requirements and demographic data for pension plan participants. The amount and timing of our future funding obligations also depend on whether we elect to make contributions to the pension plans in excess of those required under ERISA; such voluntary contributions may reduce or defer the funding obligations we would have absent those contributions. For additional information about our pension plan funding, see Financial Condition and Liquidity Pension Plans above.
In addition to the contractual obligations discussed above, we have certain contracts for goods and services that require us to pay a penalty, acquire inventory specific to us or purchase contract specific equipment, as defined by each respective contract, if we terminate the contract without cause prior to its expiration date. These obligations are contingent upon whether we terminate the contract without cause prior to its expiration date; therefore, no obligation would exist unless such a termination were to occur.
We have long-term contract carrier agreements with two regional air carriers, Skywest Airlines, Inc. (SkyWest) and Chautauqua. Under these agreements, SkyWest and Chautauqua operate certain of their aircraft using our flight code; we schedule those aircraft and sell the seats on those flights; and we keep the related revenues. We pay those airlines an amount, as defined in the applicable agreement, which is
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We also have a similar agreement with Flyi, Inc. (Flyi) (formerly Atlantic Coast Airlines). In April 2004, we notified Flyi that we were terminating our contract carrier agreement with them due to their plans to change their business model by operating a new low-fare airline including operating large capacity aircraft. As of November 1, 2004, Flyi ceased operating their aircraft using our flight code. In July 2004, Flyi exercised its right to require us to assume the leases on the 30 leased Fairchild Dornier FRJ-328 regional aircraft that it operated for us under their contract carrier agreement. We estimate that the total remaining operating lease payments on these 30 aircraft leases, when we are required to assume the leases, will be approximately $300 million. These operating lease payments will be made over the remaining terms of the aircraft leases, which are approximately 13 years. We expect that these 30 aircraft will remain in the Delta Connection carrier program, but will be operated for us by another carrier.
We expect to incur expenses of approximately $890 million in 2004 related to our contract carrier agreements with Flyi, SkyWest and Chautauqua. These expenses are not included in the table above because they are contingent based on the costs associated with the operation of contract carrier flights by those air carriers. We cannot reasonably estimate at this time our expenses under the contract carrier agreements in 2005 and thereafter. For additional information regarding our contract carrier agreements, see Note 9 of the Notes to the Consolidated Financial Statements and Note 5 to the Condensed Consolidated Financial Statements.
As discussed above, we changed the form of payment we will use to redeem shares of Series B Preferred Stock when redemptions are required under the Savings Plan. For the indefinite future, we will pay the redemption price of the Series B Preferred Stock in shares of our common stock rather than in cash. For additional information about our Series B Preferred Stock, see Notes 11 and 12 of the Notes to the Consolidated Financial Statements.
For additional information about other contingencies, see Note 9 of the Notes to the Consolidated Financial Statements.
Off-Balance Sheet Arrangements
Sale of Receivables. We were party to an agreement, as amended, under which we sold a defined pool of our accounts receivable, on a revolving basis, through a special-purpose, wholly-owned subsidiary to a third party. In accordance with accounting principles generally accepted in the United States of America (GAAP), we did not consolidate this subsidiary in our Consolidated Financial Statements. This agreement terminated on its scheduled expiration date of March 31, 2003. As a result, on April 2, 2003, we paid $250 million, which represented the total amount owed to the third party by the subsidiary, and subsequently collected the related receivables. For additional information about this agreement, see Note 8 of the Notes to the Consolidated Financial Statements.
Other
Legal Contingencies. We are involved in legal proceedings relating to antitrust matters, employment practices, environmental issues and other matters concerning our business. We are also a defendant in numerous lawsuits arising out of the terrorist attacks of September 11, 2001. We cannot reasonably estimate the potential loss for certain legal proceedings because, for example, the litigation is in its early stages or the plaintiff does not specify the damages being sought. Although the ultimate outcome of our legal proceedings cannot be predicted with certainty, we believe that the resolution of these actions will not have a material adverse effect on our Consolidated Financial Statements.
Application of Critical Accounting Policies
Critical Accounting Estimates. The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions. We periodically evaluate these estimates
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Rules proposed by the Securities and Exchange Commission would require disclosures related to accounting estimates management makes in applying accounting policies and the initial adoption of an accounting policy that has a material impact on its financial statements. These rules define critical accounting estimates as those accounting estimates which (1) require management to make assumptions about matters that are highly uncertain at the time the estimate is made and (2) would have resulted in material changes to our Consolidated Financial Statements if different estimates, which we reasonably could have used, were made. Our critical accounting estimates are briefly described below.
Goodwill. SFAS 142 addresses financial accounting and reporting for goodwill and other intangible assets, including when and how to perform impairment tests of recorded balances. We have three reporting units that have assigned goodwill: Delta-Mainline, ASA and Comair. Quoted stock market prices are not available for these individual reporting units. Accordingly, consistent with SFAS 142, our methodology for estimating the fair value of each reporting unit primarily considers discounted future cash flows. In applying this methodology, we (1) make assumptions about each reporting units future cash flows based on capacity, yield, traffic, operating costs and other relevant factors and (2) discount those cash flows based on each reporting units weighted average cost of capital. Changes in these assumptions may have a material impact on our Consolidated Financial Statements. For additional information about our accounting policy related to goodwill and other intangibles, see Notes 1 and 5 in the Notes to the Consolidated Financial Statements.
Income Tax Valuation Allowance. In accordance with SFAS No. 109, Accounting for Income Taxes (SFAS 109), deferred tax assets should be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. The future realization of our net deferred tax assets depends on the availability of sufficient future taxable income. In making this determination, we consider all available positive and negative evidence and make certain assumptions. We consider, among other things, the overall business environment; our historical earnings, including our significant pretax losses incurred during the last three years; our industrys historically cyclical periods of earnings and losses; and our outlook for future years.
In the June 2004 quarter, we determined that it was unclear as to the timing of when we will generate sufficient taxable income to realize our deferred income tax assets. This was primarily due to higher than expected fuel costs and lower than anticipated domestic passenger mile yields, which caused our actual and anticipated financial performance for 2004 to be significantly worse than we originally projected. Accordingly, at June 30, 2004, we recorded an additional valuation allowance against our deferred income tax assets, which resulted in a $1.5 billion non-cash charge to income tax expense on our Consolidated Statement of Operations for the three months ended June 30, 2004. In addition, we discontinued recording income tax benefits in our Consolidated Statement of Operations until we determine that it is more likely than not that we will generate sufficient taxable income to realize our deferred income tax assets. For additional information about income taxes, see Note 10 of the Notes to the Consolidated Financial Statements and Note 7 of the Notes to the Condensed Consolidated Financial Statements.
Pension Plans. We sponsor defined benefit pension plans (Plans) for eligible employees and retirees. The impact of the Plans on our Consolidated Financial Statements as of December 31, 2003 and 2002 and for the years ended December 31, 2003, 2002 and 2001 is presented in Note 11 of the Notes to the Consolidated Financial Statements. We currently estimate that our defined benefit pension expense in 2004 will be approximately $525 million. The effect of our Plans on our Consolidated Financial Statements is subject to many assumptions. We believe the most critical assumptions are (1) the weighted average discount rate; (2) the rate of increase in future compensation levels; and (3) the expected long-term rate of return on Plan assets.
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We determine our weighted average discount rate on our measurement date primarily by reference to annualized rates earned on high quality fixed income investments and yield-to-maturity analysis specific to our estimated future benefit payments. Adjusting our discount rate (6.125% at September 30, 2003) by 0.5% would change our accrued pension cost by approximately $780 million at December 31, 2003 and change our estimated pension expense in 2004 by approximately $60 million.
Our rate of increase in future compensation levels is based primarily on labor contracts currently in effect with our employees under collective bargaining agreements and expected future pay rate increases for other employees. Adjusting our estimated rate of increase in future compensation levels (1.89% at September 30, 2003) by 0.5% would change our estimated pension expense in 2004 by approximately $20 million.
The expected long-term rate of return on our Plan assets is based primarily on Plan-specific asset/liability investment studies performed by outside consultants and recent and historical returns on our Plans assets. Adjusting our expected long-term rate of return (9.00% at September 30, 2003) by 0.5% would change our estimated pension expense in 2004 by approximately $40 million. For additional information about our pension plans, see Note 11 of the Notes to the Consolidated Financial Statements.
Impairment of Long-Lived Assets. We record impairment losses on long-lived assets used in operations when events and circumstances indicate the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts. The amount of impairment loss recognized is the amount by which the carrying amounts of the assets exceed the estimated fair values.
In order to evaluate potential impairment as required by SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), we group assets at the fleet type level (the lowest level for which there are identifiable cash flows) and then estimate future cash flows based on assumptions involving projections of passenger yield, fuel costs, labor costs and other relevant factors in the markets in which these aircraft operate. Aircraft fair values are estimated by management using published sources, appraisals and bids received from third parties, as available. Changes in these assumptions may have a material impact on our Consolidated Financial Statements. For additional information about our accounting policy for the impairment of long-lived assets, see Note 1 of the Notes to the Consolidated Financial Statements.
Recently Issued Accounting Pronouncements. The FASB issued FASB Staff Position 129-1, Disclosure Requirements under FASB Statement No. 129, Disclosure of Information about Capital Structure, Relating to Contingently Convertible Securities, (FSP 129-1), in April 2004. FSP 129-1 provides guidance on the disclosure requirements for contingently convertible securities and their potentially dilutive effects on earnings per share. This guidance is effective immediately and applies to all existing and newly created securities. For our disclosures required under FSP 129-1, see Notes 4 and 13 of the Notes to the Condensed Consolidated Financial Statements.
In September 2004, the Emerging Issues Task Force (EITF) reached a consensus on EITF Issue 04-08, The Effect of Contingently Convertible Debt on Diluted Earnings per Share (EITF 04-08). This EITF requires shares of common stock issuable upon conversion of contingently convertible debt instruments to be included in the calculation of diluted earnings per share whether or not the contingent conditions for conversion have been met, unless the inclusion of these shares is anti-dilutive. Previously, shares of common stock issuable upon conversion of contingently convertible debt securities were excluded from the calculation of diluted earnings per share.
EITF 04-08 is effective for reporting periods ending after December 15, 2004. If applicable, EITF 04-08 will require the restatement of prior period diluted earnings per share amounts. We have outstanding two classes of contingently convertible debt securities: (1) our 8.0% Convertible Senior Notes due 2023, which we issued in June 2003; and (2) our 2 7/8% Convertible Senior Notes due 2024, which we issued in February 2004. These debt securities are contingently convertible into 12.5 million and 23.9 million shares of our common stock, respectively, subject to adjustment in certain circumstances.
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When we adopt EITF 04-08 as of December 31, 2004, we will restate our diluted earnings per share for the three months ended June 30, 2003 to include the dilutive impact of the 12.5 million shares of common stock issuable upon conversion of our 8.0% Convertible Senior Notes. All other quarterly and annual diluted EPS calculations for periods ending before December 31, 2004 are unaffected by our adoption of EITF 04-08. Additionally, we will include the shares of common stock issuable upon conversion of our 8.0% Convertible Senior Notes and our 2 7/8% Convertible Senior Notes in our future diluted earnings per share calculations, unless the inclusion of these shares would be anti-dilutive.
Market Risks Associated with Financial Instruments
We have significant market risk exposure related to aircraft fuel prices and interest rates. Market risk is the potential negative impact of adverse changes in these 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 Notes 3 and 4 of the Notes to the Consolidated Financial Statements). Management expects adjustments to the fair value of financial instruments accounted for under SFAS 133 to result in ongoing volatility in earnings and shareowners (deficit) equity.
The following sensitivity analyses do not consider the effects of a change in 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 may be significantly impacted by changes in the price of aircraft fuel. To manage this risk, we periodically enter into heating and crude oil derivative contracts to hedge a portion of our projected annual aircraft fuel requirements. Heating and crude oil prices have a highly correlated relationship to fuel prices, making these derivatives effective in offsetting changes in the cost of aircraft fuel. We do not enter into fuel hedge contracts for speculative purposes.
At December 31, 2003, we had hedged 32% of our projected aircraft fuel requirements for 2004 at an average hedge price per gallon of 76.46¢, and none of our projected aircraft fuel requirements for 2005 or thereafter. The fair values of our heating and crude oil derivative instruments were $97 million at December 31, 2003 and $73 million at December 31, 2002. A 10% decrease in the average annual price of heating and crude oil would have decreased the fair values of these instruments by $65 million at December 31, 2003.
In February 2004, we settled all of our fuel hedge contracts prior to their scheduled settlement dates. As a result of these transactions, we received $83 million in cash, which represented the fair value of these contracts at the date of settlement. In accordance with SFAS 133, effective gains of $82 million will be recorded in accumulated other comprehensive loss until the related fuel purchases, which were being hedged, are consumed and recognized in expense during 2004. These gains will be recorded as a reduction in fuel expense on our Consolidated Statement of Operations in 2004. We may enter into fuel hedge contracts in the future depending on certain conditions.
For the nine months ended September 30, 2004, aircraft fuel expense accounted for 16% of our total operating expenses, as compared to 14% during the same period in 2003. We project our annual fuel expense to be $950 million greater in 2004 as compared to 2003. This projection assumes an average fuel price per gallon in 2004 of $1.15 (net of hedging gains) and aircraft fuel consumption of approximately 2.5 billion gallons.
Interest Rate Risk. Our exposure to market risk due to changes in interest rates primarily relates to our long-term debt obligations.
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Market risk associated with our long-term debt is the potential change in fair value resulting from a change in interest rates. A 10% decrease in average annual interest rates would have increased the estimated fair value of our long-term debt by $682 million at December 31, 2003 and $395 million at December 31, 2002. A 10% increase in average annual interest rates would not have had a material impact on our interest expense in 2003. For additional information on our long-term debt agreements, see Notes 4 and 6 of the Notes to the Consolidated Financial Statements.
For additional information regarding our aircraft fuel price risk management program and other exposures to market risks, see Notes 2, 3, and 4 of the Notes to the Consolidated Financial Statements.
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BUSINESS
General Description
We are a major air carrier that provides scheduled air transportation for passengers and cargo throughout the United States and around the world. As of December 31, 2004, we (including our wholly-owned subsidiaries, ASA and Comair) served 176 domestic cities in 43 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands, as well as 51 cities in 33 countries. With our domestic and international codeshare partners, our route network covers 224 domestic cities in 49 states, and 223 cities in 89 countries. We are managed as a single business unit.
Based on calendar year 2004 data, we are the second-largest airline in terms of passengers carried, and the third-largest airline measured by operating revenues and revenue passenger miles flown. We are a leading U.S. transatlantic airline, serving the largest number of nonstop markets and offering the most daily flight departures. Among U.S. airlines, we have the second-most transatlantic passengers.
For the years ended December 31, 2003, 2002 and 2001, passenger revenues accounted for 93% of our consolidated operating revenues, and cargo revenues and other sources accounted for 7% of our consolidated operating revenues. In 2003, our operations in North America, the Atlantic, Latin America and the Pacific accounted for 82%, 13%, 4% and 1%, respectively, of our consolidated operating revenues. In 2002, our operations in North America, the Atlantic, Latin America and the Pacific accounted for 81%, 14%, 4% and 1%, respectively, of our consolidated operating revenues. In 2001, our operations in North America, the Atlantic, Latin America and the Pacific accounted for 81%, 13%, 4% and 2%, respectively, of our consolidated operating revenues.
We are incorporated under the laws of the State of Delaware. Our principal executive offices are located at Hartsfield-Jackson Atlanta International Airport in Atlanta, Georgia (the Atlanta Airport). Our telephone number is (404) 715-2600, and our Internet address is www.delta.com.
See Risk Factors Risks Relating to Delta, Risk Factors Risks Relating to the Airline Industry and Managements Discussion and Analysis of Financial Condition and Results of Operations Business Environment for additional discussion of trends and factors affecting us and our industry.
Airline Operations
An important characteristic of our route network is our hub airports in Atlanta, Cincinnati and Salt Lake City. Each of these hub operations includes Delta flights that gather and distribute traffic from markets in the geographic region surrounding the hub to other major cities and to other Delta hubs. Our hub and spoke system also provides passengers with access to our principal international gateways in Atlanta and New York John F. Kennedy International Airport (JFK). As briefly discussed below, other key characteristics of our route network include our alliances with foreign airlines; the Delta Connection Program; the Delta Shuttle; SongTM, our low-fare service; and our marketing alliance with Continental Airlines, Inc. (Continental) and Northwest Airlines, Inc. (Northwest).
International Alliances |
We have formed bilateral and multilateral marketing alliances with foreign airlines to improve our access to international markets. These arrangements can include codesharing, frequent flyer benefits, shared or reciprocal access to passenger lounges, joint promotions and other marketing agreements.
Our international codesharing agreements enable us to market and sell seats to an expanded number of international destinations. Under international codesharing arrangements, we and the foreign carriers publish our respective airline designator codes on a single flight operation, thereby allowing us and the foreign carrier to offer joint service with one aircraft rather than operating separate services with two aircraft. These arrangements typically allow us to sell seats on the foreign carriers aircraft that are marketed under our DL designator code and permit the foreign airline to sell seats on our aircraft that
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Delta, Aeromexico, Air France, Alitalia, Continental Airlines, CSA Czech Airlines, KLM Royal Dutch Airlines (KLM), Korean Air and Northwest Airlines are members of the SkyTeam international airline alliance. SkyTeam links the route networks of the member airlines, providing opportunities for increased connecting traffic while offering enhanced customer service through mutual codesharing arrangements, reciprocal frequent flyer and lounge programs and coordinated cargo operations. In 2002, we, our European SkyTeam partners and Korean Air received limited antitrust immunity from the U.S. Department of Transportation (DOT). The grant of antitrust immunity enables us and our immunized partners to offer a more integrated route network, and develop common sales, marketing and discount programs for customers. In September 2004, we filed an application for a six-way transatlantic antitrust immunity relationship with Air France, Alitalia, CSA Czech Airlines, KLM and Northwest.
Delta Connection Program |
The Delta Connection program is our regional carrier service, which feeds traffic to our route system through contracts with regional air carriers that operate flights serving passengers primarily in small and medium-sized cities. The program enables us to increase the number of flights in certain locations, to better match capacity with demand and to preserve our presence in smaller markets. Our Delta Connection network operates the largest number of regional jets in the United States.
We have contractual arrangements with five regional carriers to operate regional jet and turboprop aircraft using our DL designator code. ASA and Comair are our wholly-owned subsidiaries, which operate all of their flights under our code. We also have agreements with SkyWest, Chautauqua and American Eagle Airlines, Inc. (Eagle), which operate some of their flights using our code. We pay SkyWest and Chautauqua an amount, as defined in the applicable agreement, which is based on an annual redetermination of their cost of operating those flights and other factors intended to approximate market rates for those services. We have recently entered into a comparable agreement with Republic Airlines, Inc., an affiliate of Chautauqua, under which Republic Airlines is scheduled to begin operating some of their flights under our code in July 2005. For additional information regarding our agreements with SkyWest and Chautauqua, see Note 9 of the Notes to the Consolidated Financial Statements.
Our contract with Eagle, which is limited to certain flights operated to and from the Los Angeles International Airport, as well as a portion of our SkyWest agreement, are structured as revenue proration agreements. These prorate arrangements establish a fixed dollar or percentage division of revenues for tickets sold to passengers traveling on connecting flight itineraries.
Delta Shuttle |
The Delta Shuttle is our high frequency service targeted to Northeast business travelers. It provides nonstop, hourly service between New York LaGuardia Airport (LaGuardia) (Marine Air Terminal) and both Boston Logan International Airport (Logan) and Washington, D.C. Ronald Reagan National Airport (National).
Song |
On April 15, 2003, we introduced a new low-fare operation, Song, that primarily offers flights between cities in the Northeastern United States, Los Angeles, Las Vegas and Florida leisure destinations. As of December 31, 2004, Song offered 142 daily flights using a fleet of 36 B-757 aircraft. In September 2004, we announced plans to convert 12 mainline aircraft to Songs fleet in 2005, which will enable Song to expand its service to additional markets during 2005. Song is intended to assist us in competing more effectively with low-cost carriers in leisure markets through a combination of larger aircraft than those
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Delta-Continental-Northwest Marketing Alliance |
We have entered into a marketing alliance with Continental and Northwest which includes mutual codesharing and reciprocal frequent flyer and airport lounge access arrangements. Our marketing relationship with Continental and Northwest is designed to permit the carriers to retain their separate identities and route networks while increasing the number of domestic and international connecting passengers using the three carriers route networks. Currently, the carriers are allowed to codeshare on a combined 5,200 flights. In addition, Continental, Northwest and KLM joined SkyTeam on September 15, 2004.
Regulatory Matters
The DOT and the FAA exercise regulatory authority over air transportation in the United States. The DOT has authority to issue certificates of public convenience and necessity required for airlines to provide domestic air transportation. An air carrier that the DOT finds fit to operate is given unrestricted authority to operate domestic air transportation (including the carriage of passengers and cargo). Except for constraints imposed by Essential Air Service regulations, which are applicable to certain small communities, airlines may terminate service to a city without restriction.
The DOT has jurisdiction over certain economic and consumer protection matters such as unfair or deceptive practices or methods of competition, advertising, denied boarding compensation, baggage liability and disabled passenger transportation. The DOT also has authority to review certain joint venture agreements between major carriers. The FAA has primary responsibility for matters relating to air carrier flight operations, including airline operating certificates, control of navigable air space, flight personnel, aircraft certification and maintenance, and other matters affecting air safety.
Authority to operate international routes and international codesharing arrangements are regulated by the DOT and by the foreign governments involved. International route awards are also subject to the approval of the President of the United States for conformance with national defense and foreign policy objectives.
The Transportation Security Administration, which became a division of the Department of Homeland Security on March 1, 2003, is responsible for certain civil aviation security matters, including passenger and baggage screening at U.S. airports.
Airlines are also subject to various other federal, state, local and foreign laws and regulations. The Department of Justice (DOJ) has jurisdiction over airline competition matters. The U.S. Postal Service has authority over certain aspects of the transportation of mail. Labor relations in the airline industry are generally governed by the Railway Labor Act. Environmental matters are regulated by various federal, state, local and foreign governmental entities. Privacy of passenger and employee data is regulated by domestic and foreign laws.
Fares and Rates
Airlines are permitted to set ticket prices in most domestic and international city pairs without governmental regulation, and the industry is characterized by significant price competition. Certain international fares and rates are subject to the jurisdiction of the DOT and the governments of the foreign countries involved. Most of our tickets are sold by travel agents, and fares are subject to commissions, overrides and discounts paid to travel agents, brokers and wholesalers.
In January 2005, we announced the expansion of our SimpliFares initiative within the 48 contiguous United States. An important part of our transformation plan, SimpliFares is a fundamental change in our pricing structure which is intended to better meet customer needs; to simplify our business; and to assist us achieve a lower cost structure. Under SimpliFares, we lowered unrestricted fares on some routes by as
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Route Authority
Our flight operations are authorized by certificates of public convenience and necessity and, to a limited extent, by exemptions issued by the DOT. The requisite approvals of other governments for international operations are provided by bilateral agreements with, or permits or approvals issued by, foreign countries. Because international air transportation is governed by bilateral or other agreements between the United States and the foreign country or countries involved, changes in United States or foreign government aviation policies could result in the alteration or termination of such agreements, diminish the value of our international route authorities or otherwise affect our international operations. Bilateral agreements between the United States and various foreign countries served by us are subject to renegotiation from time to time.
Certain of our international route and codesharing authorities are subject to periodic renewal requirements. We request extension of these authorities when and as appropriate. While the DOT usually renews temporary authorities on routes where the authorized carrier is providing a reasonable level of service, there is no assurance of this result. Dormant route authority may not be renewed in some cases, especially where another U.S. carrier indicates a willingness to provide service.
Competition
We face significant competition with respect to routes, services and fares. Our domestic routes are subject to competition from both new and existing carriers, some of which have substantially lower costs than we do and provide service at lower fares to destinations served by us. We also compete with all-cargo carriers, charter airlines, regional jet operators and, particularly on our shorter routes, surface transportation.
The continuing growth of low-cost carriers, including Southwest Airlines Co. (Southwest), AirTran Airways, Inc. (AirTran) and JetBlue Airways Corporation (JetBlue), in the United States places significant competitive pressures on us and other network carriers. Our ability to compete effectively with low-cost carriers and other airlines depends, in part, on our ability to achieve operating costs per available seat mile (unit costs) that are competitive with those carriers.
International marketing alliances formed by domestic and foreign carriers, including the Star Alliance (among United Airlines, Inc. (United), Lufthansa German Airlines and others) and the oneworld alliance (among AMR Corporation (American), British Airways and others), have significantly increased competition in international markets. Through marketing and codesharing arrangements with U.S. carriers, foreign carriers have obtained access to interior U.S. passenger traffic. Similarly, U.S. carriers have increased their ability to sell international transportation such as transatlantic services to and beyond European cities through alliances with international carriers.
We regularly monitor competitive developments in the airline industry and evaluate our strategic alternatives. These strategic alternatives include, among other things, internal growth, codesharing arrangements, marketing alliances, joint ventures, and mergers and acquisitions. Our evaluations involve internal analysis and, where appropriate, discussions with third parties. At the end of 2003, we began a strategic reassessment of our business. The goal of this project was to develop and implement a comprehensive and competitive business strategy that addresses the airline industry environment and positions us to achieve long-term sustained success. As part of this project, we evaluated the appropriate cost reduction targets and the actions we should take to seek to achieve these targets. On September 8, 2004, we outlined key elements of our transformation plan, which is intended to achieve the cost savings and other benefits that we believe are necessary to effect an out-of-court restructuring. The initiatives that
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Airport Access
Operations at three major U.S. airports and certain foreign airports served by us are regulated by governmental entities through slot allocations. Each slot represents the authorization to land at, or take off from, the particular airport during a specified time period.
In the United States, the FAA currently regulates slot allocations at JFK and LaGuardia in New York and National in Washington, D.C. Our operations at those three airports generally require slot allocations. Under legislation enacted by Congress, slot rules will be phased out at JFK and LaGuardia by 2007.
We currently have sufficient slot authorizations to operate our existing flights, and have generally been able to obtain slots to expand our operations and to change our schedules. There is no assurance, however, that we will be able to obtain slots for these purposes in the future because, among other reasons, slot allocations are subject to changes in governmental policies.
Possible Legislation or DOT Regulation
A number of Congressional bills and proposed DOT regulations have been considered in recent years to address airline competition issues. Some of these proposals would require large airlines with major operations at certain airports to divest or make available to other airlines slots, gates, facilities and other assets at those airports. Other measures would limit the service or pricing responses of major carriers that appear to target new entrant airlines. In addition, concerns about airport congestion issues have caused the DOT and FAA to consider various proposals for access to certain airports, including congestion-based landing fees and programs that would withdraw slots from existing carriers and reallocate those slots (either by lottery or auction) to the highest bidder or to carriers with little or no current presence at such airports. These proposals, if enacted, could negatively impact our existing services and our ability to respond to competitive actions by other airlines.
Fuel
Our results of operations can be significantly impacted by changes in the price and availability of aircraft fuel. The following table shows our aircraft fuel consumption and costs for 2001-2004.
Gallons | Average | Percentage of | ||||||||||||||
Consumed | Cost(1) | Price Per | Total Operating | |||||||||||||
Year | (Millions) | (Millions) | Gallon(1) | Expenses | ||||||||||||
2001
|
2,649 | $ | 1,817 | 68.60 | ¢ | 12 | % | |||||||||
2002
|
2,514 | 1,683 | 66.94 | 11 | ||||||||||||
2003
|
2,370 | 1,938 | 81.78 | 13 | ||||||||||||
2004
|
2,527 | 2,924 | 115.70 | 16 |
|
(1) | Net of fuel hedge gains under our fuel hedging program. |
Aircraft fuel expense increased 51% in 2004 compared to 2003 and 15% in 2003 compared to 2002. Total gallons consumed increased 7% in 2004 mainly due to the restoration of capacity following the war in Iraq. The average fuel price per gallon in 2004 rose 42% to $1.16 as compared to an average price of 81.78¢ in 2003. Our fuel cost is shown net of fuel hedge gains of $105 million for 2004, $152 million for 2003, $136 million for 2002 and $299 million for 2001. Approximately 8%, 65%, 56% and 58% of our aircraft fuel requirements were hedged during 2004, 2003, 2002 and 2001, respectively. In February 2004, we settled all of our fuel hedge contracts prior to their scheduled settlement dates. For more information
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Our aircraft fuel purchase contracts do not provide material protection against price increases or assure the availability of our fuel supplies. We purchase most of our aircraft fuel from petroleum refiners under contracts that establish the price based on various market indices. We also purchase aircraft fuel on the spot market, from off-shore sources and under contracts that permit the refiners to set the price.
While we currently have no fuel hedge contracts, we may periodically enter into heating and crude oil derivative contracts to attempt to reduce our exposure to changes in fuel prices. Information regarding our fuel hedging program is set forth under Managements Discussion and Analysis of Financial Condition and Results of Operations Market Risks Associated with Financial Instruments Aircraft Fuel Price Risk and in Notes 3 and 4 of the Notes to the Consolidated Financial Statements.
Although we are currently able to obtain adequate supplies of aircraft fuel, it is impossible to predict the future availability or price of aircraft fuel. Political disruptions or wars involving oil-producing countries, changes in government policy concerning aircraft fuel production, transportation or marketing, changes in aircraft fuel production capacity, environmental concerns and other unpredictable events may result in fuel supply shortages and fuel price increases in the future.
Employee Matters
Railway Labor Act |
Our relations with labor unions in the United States are governed by the Railway Labor Act. Under the Railway Labor Act, a labor union seeking to represent an unrepresented craft or class of employees is required to file with the National Mediation Board (NMB) an application alleging a representation dispute, along with authorization cards signed by at least 35% of the employees in that craft or class. The NMB then investigates the dispute and, if it finds the labor union has obtained a sufficient number of authorization cards, conducts an election to determine whether to certify the labor union as the collective bargaining representative of that craft or class. Under the NMBs usual rules, a labor union will be certified as the representative of the employees in a craft or class only if more than 50% of those employees vote for union representation.
Under the Railway Labor Act, a collective bargaining agreement between an airline and a labor union does not expire, but instead becomes amendable as of a stated date. Either party may request the NMB to appoint a federal mediator to participate in the negotiations for a new or amended agreement. If no agreement is reached in mediation, the NMB may determine, at any time, that an impasse exists and offer binding arbitration. If either party rejects binding arbitration, a 30-day cooling off period begins. At the end of this 30-day period, the parties may engage in self help, unless the President of the United States appoints a Presidential Emergency Board (PEB) to investigate and report on the dispute. The appointment of a PEB maintains the status quo for an additional 60 days. If the parties do not reach agreement during this period, the parties may then engage in self help. Self help includes, among other things, a strike by the union or the imposition of proposed changes to the collective bargaining agreement by the airline. Congress and the President have the authority to prevent self help by enacting legislation which, among other things, imposes a settlement on the parties.
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Collective Bargaining |
At December 31, 2004, we had a total of approximately 69,000 full-time equivalent employees. Approximately 18% of these employees are represented by unions. The following table presents certain information concerning the union representation of our domestic employees.
Approximate | ||||||||
Number of | Amendable Date of | |||||||
Employees | Collective Bargaining | |||||||
Employee Group | Represented | Union | Agreement | |||||
Delta Pilots
|
6,590 | Air Line Pilots Association, International | December 31, 2009 | |||||
Delta Flight Superintendents
|
185 | Professional Airline Flight Control Association | January 1, 2010 | |||||
ASA Pilots
|
1,515 | Air Line Pilots Association, International | September 15, 2002 | |||||
ASA Flight Attendants
|
885 | Association of Flight Attendants | September 26, 2003 | |||||
ASA Flight Dispatchers
|
50 | Professional Airline Flight Control Association | April 18, 2006 | |||||
Comair Pilots
|
1,790 | Air Line Pilots Association, International | May 21, 2006 | |||||
Comair Maintenance Employees
|
485 | International Association of Machinists and Aerospace Workers | May 31, 2004 | |||||
Comair Flight Attendants
|
1,040 | International Brotherhood of Teamsters | July 19, 2007 |
ASA is in collective bargaining negotiations with ALPA, which represents ASAs pilots, and with the Association of Flight Attendants (AFA), which represents ASAs flight attendants. The outcome of these collective bargaining negotiations cannot presently be determined.
Comair has recently reached a tentative agreement with the International Association of Machinists and Aerospace Workers, which represents Comairs maintenance employees. The agreement is subject to ratification by the Comair maintenance employees. The tentative agreement would become amendable as of May 31, 2009. In addition, Comair is negotiating with ALPA, which represents Comairs pilots, and the International Brotherhood of Teamsters, which represents Comairs flight attendants, to obtain modifications to their respective collective bargaining agreements. The outcome of these negotiations cannot presently be determined.
Labor unions are engaged in organizing efforts to represent various groups of employees of us, ASA and Comair who are not represented for collective bargaining purposes. The outcome of these organizing efforts cannot presently be determined.
Environmental Matters
The Airport Noise and Capacity Act of 1990 recognizes the rights of operators of airports with noise problems to implement local noise abatement programs so long as such programs do not interfere unreasonably with interstate or foreign commerce or the national air transportation system. It generally provides that local noise restrictions on Stage 3 aircraft first effective after October 1, 1990, require FAA approval. While we have had sufficient scheduling flexibility to accommodate local noise restrictions in the past, our operations could be adversely impacted if locally-imposed regulations become more restrictive or widespread.
On December 1, 2003, the FAA published a Notice of Proposed Rulemaking (NPRM) to adopt the International Civil Aviation Organizations (ICAO) Chapter 4 noise standard, which is known as the Stage 4 standard in the United States. This standard would require that all new commercial jet aircraft
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The United States Environmental Protection Agency (the EPA) is authorized to regulate aircraft emissions. Our aircraft comply with the applicable EPA standards. The EPA has issued a notice of proposed rulemaking to adopt the emissions control standards for aircraft engines previously adopted by the ICAO. These standards would apply to newly designed engines certified after December 31, 2003 and would align the U.S. aircraft engine emission standards with existing international standards. The rule, as proposed, is not expected to have a material impact on us.
In December 2004, Miami-Dade County filed a lawsuit in Florida Circuit Court against us, seeking injunctive relief and alleging responsibility for past and future environmental cleanup costs and civil penalties for environmental conditions at Miami International Airport. This lawsuit is related to several other actions filed by the County to recover environmental remediation costs incurred at the airport. We are vigorously defending this lawsuit. An adverse decision in this case could result in substantial damages against us. Although the ultimate outcome of this matter cannot be predicted with certainty, management believes that the resolution will not have a material adverse effect on our Consolidated Financial Statements.
We have been identified by the EPA as a potentially responsible party (a PRP) with respect to certain Superfund Sites, and have entered into consent decrees regarding some of these sites. Our alleged disposal volume at each of these sites is small when compared to the total contributions of all PRPs at each site. We are aware of soil and/or ground water contamination present on our current or former leaseholds at several domestic airports. To address this contamination, we have a program in place to investigate and, if appropriate, remediate these sites. Although the ultimate outcome of these matters cannot be predicted with certainty, management believes that the resolution of these matters will not have a material adverse effect on our Consolidated Financial Statements.
Frequent Flyer Program
We have a frequent flyer program, the SkyMiles® program, offering incentives to increase travel on Delta. This program allows participants to earn mileage for travel awards by flying on Delta, Delta Connection carriers and participating airlines. Mileage credit may also be earned by using certain services offered by program partners such as credit card companies, hotels, car rental agencies, telecommunication services and internet services. In addition, we have programs under which individuals and companies may purchase mileage credits. We reserve the right to terminate the program with six months advance notice, and to change the programs terms and conditions at any time without notice.
Mileage credits can be redeemed for free or upgraded air travel on Delta and participating airline partners, for membership in our Crown Room Club and for other program partner awards. Travel awards are subject to certain transfer restrictions and capacity-controlled seating. In some cases, blackout dates may apply. Miles earned prior to May 1, 1995 do not expire so long as we have a frequent flyer program. Miles earned or purchased on or after May 1, 1995 will not expire as long as, at least once every three years, the participant (1) takes a qualifying flight on Delta or a Delta Connection carrier; (2) earns miles through one of our program partners; or (3) redeems miles for any program award.
We account for our frequent flyer program obligations by recording a liability for the estimated incremental cost of travel awards we expect to be redeemed. The estimated incremental cost associated with a travel award does not include any contribution to overhead or profit. Such incremental cost is based on our system average cost per passenger for fuel, food and other direct passenger costs. We do not record a liability for mileage earned by participants who have not reached the level to become eligible for a free travel award. We believe this is appropriate because the large majority of these participants are not
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We estimated the potential number of round-trip travel awards outstanding under our frequent flyer program to be 14.3 million, 13.7 million and 13.1 million at December 31, 2003, 2002 and 2001, respectively. Of these travel awards, we expected that approximately 10.4 million, 10.0 million and 9.6 million, respectively, would be redeemed. At December 31, 2003, 2002 and 2001, we had recorded a liability for these awards of $229 million, $228 million and $226 million, respectively. The difference between the round-trip awards outstanding and the awards expected to be redeemed is the estimate, based on historical data, of awards which will (1) never be redeemed; or (2) be redeemed for something other than award travel.
Frequent flyer program participants flew 2.8 million, 2.8 million and 2.4 million award round-trips on Delta in 2003, 2002 and 2001, respectively. These round-trips accounted for approximately 9%, 9% and 8% of the total passenger miles flown for 2003, 2002 and 2001, respectively. We believe that the relatively low percentage of passenger miles flown by SkyMiles members traveling on program awards and the restrictions applied to travel awards minimize the displacement of revenue passengers.
Civil Reserve Air Fleet Program
We participate in the Civil Reserve Air Fleet (CRAF) program, which permits the U.S. military to use the aircraft and crew resources of participating U.S. airlines during airlift emergencies, national emergencies or times of war. We have agreed to make available under the CRAF program, during the period October 1, 2004 through September 30, 2005, a portion of our international range aircraft. As of December 31, 2004, the following numbers of our aircraft are available for CRAF activation:
Number of | ||||||||||||
International | ||||||||||||
Passenger | Number of | Total | ||||||||||
Description of Event | Aircraft | Aeromedical | Aircraft | |||||||||
Stage | Leading to Activation | Allocated | Aircraft Allocated | by Stage | ||||||||
I
|
Minor Crisis | 5 | Not Applicable | 5 | ||||||||
II
|
Major Theater Conflict | 9 | 12 | 21 | ||||||||
III
|
Total National Mobilization | 21 | 36 | 57 |
The CRAF program has only been activated twice, both times at the Stage I level, since it was created in 1951.
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Properties
Flight Equipment |
The table set forth below shows our aircraft fleet at December 31, 2004.
Current Fleet(1) | ||||||||||||||||||||
Capital | Operating | Average | ||||||||||||||||||
Aircraft Type | Owned | Lease | Lease | Total | Age | |||||||||||||||
B-737-200
|
6 | 12 | 34 | 52 | 19.8 | |||||||||||||||
B-737-300
|
| | 26 | 26 | 18.1 | |||||||||||||||
B-737-800
|
71 | | | 71 | 4.2 | |||||||||||||||
B-757-200
|
77 | 10 | 34 | 121 | 13.3 | |||||||||||||||
B-767-200
|
15 | | | 15 | 21.6 | |||||||||||||||
B-767-300
|
4 | 10 | 14 | 28 | 14.9 | |||||||||||||||
B-767-300ER
|
50 | | 9 | 59 | 8.9 | |||||||||||||||
B-767-400
|
21 | | | 21 | 3.8 | |||||||||||||||
B-777-200
|
8 | | | 8 | 4.9 | |||||||||||||||
MD-11
|
1 | | 3 | 4 | 11.9 | |||||||||||||||
MD-88
|
63 | 16 | 41 | 120 | 14.5 | |||||||||||||||
MD-90
|
16 | | | 16 | 9.1 | |||||||||||||||
ATR-72
|
4 | | 13 | 17 | 10.7 | |||||||||||||||
CRJ-100/200
|
106 | | 123 | 229 | 5.2 | |||||||||||||||
CRJ-700
|
58 | | | 58 | 1.3 | |||||||||||||||
Total
|
500 | 48 | 297 | 845 | ||||||||||||||||
(1) | The table above: |
| reflects our sale of eight owned MD-11 aircraft pursuant to an agreement we entered into with a third party during the September 2004 quarter (see Note 6 of the Notes to the Condensed Consolidated Financial Statements for additional information on this subject); | |
| includes four B-737-200 and four MD-11 aircraft which are temporarily grounded; and | |
| does not include three MD-11 aircraft we have subleased to World Airways. | |
Our purchase commitments (firm orders) for aircraft, as well as options to purchase additional aircraft, as of December 31, 2004, are shown below.
Delivery in Calendar Year Ending | ||||||||||||||||||||||||
Aircraft on Firm Order | 2005 | 2006 | 2007 | 2008 | After 2008 | Total | ||||||||||||||||||
B-737-800
|
11 | (1) | 10 | 36 | 4 | | 61 | |||||||||||||||||
B-777-200
|
| | | 2 | 3 | 5 | ||||||||||||||||||
CRJ-200
|
32 | (2) | | | | | 32 | |||||||||||||||||
Total
|
43 | 10 | 36 | 6 | 3 | 98 | ||||||||||||||||||
(1) | In October 2003, we entered into a definitive agreement with a third party to sell 11 B-737-800 aircraft immediately after those aircraft are delivered to us by the manufacturer in 2005. These 11 B-737-800 aircraft are included in the above table because we continue to have a contractual obligation to purchase these aircraft from the manufacturer. For additional information about our sale agreement, see Note 9 of the Notes to the Consolidated Financial Statements. |
(2) | On February 27, 2004, we entered into an agreement to purchase 32 CRJ-200 aircraft to be delivered in 2005. In conjunction with this agreement, we entered into a facility with a third party to finance, on a secured basis at the time of acquisition, the future deliveries of these regional jet aircraft. |
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Borrowings under this facility (1) will be due in installments for 15 years after the date of borrowing and (2) bear interest at LIBOR plus a margin. |
Delivery in Calendar Year Ending | ||||||||||||||||||||||||||||
Aircraft on Option(1) | 2005 | 2006 | 2007 | 2008 | After 2008 | Total | Rolling Options | |||||||||||||||||||||
B-737-800
|
| | | 12 | 48 | 60 | 168 | |||||||||||||||||||||
B-767-300/300ER
|
| 1 | 2 | 2 | 5 | 10 | 6 | |||||||||||||||||||||
B-767-400
|
| 1 | 2 | 2 | 17 | 22 | | |||||||||||||||||||||
B-777-200
|
| | | 1 | 19 | 20 | 5 | |||||||||||||||||||||
CRJ-200
|
| 52 | 33 | 21 | 20 | 126 | | |||||||||||||||||||||
CRJ-700(2)
|
| 22 | 31 | 31 | 40 | 124 | | |||||||||||||||||||||
Total
|
| 76 | 68 | 69 | 149 | 362 | 179 | |||||||||||||||||||||
(1) | Aircraft options have scheduled delivery slots, while rolling options replace options and are assigned delivery slots as options expire or are exercised. |
(2) | Our collective bargaining agreement with ALPA limits the number of jet aircraft certificated for operation with between 51 and 70 seats that may be operated by other U.S. carriers (including ASA and Comair) using the Delta flight code. This limit is currently 82 aircraft, increasing to 106 aircraft in 2006, and 125 aircraft in 2007 and thereafter. These limits may increase in the future depending on the scheduled block hours flown by Delta pilots. |
Our long-term agreement with The Boeing Company (Boeing) covers firm orders, options and rolling options for certain aircraft through calendar year 2017. This agreement supports our plan for disciplined growth, aircraft rationalization and fleet replacement. It also gives us certain flexibility to adjust scheduled aircraft deliveries and to substitute between aircraft models and aircraft types. The majority of the aircraft under firm order from Boeing will be used to replace older aircraft.
Our long-term plan is to reduce our mainline aircraft fleet by up to four family types over the approximately next four years. We believe fleet standardization will improve reliability and produce long-term cost savings. Due to weak traffic, we temporarily grounded the entire MD-11 fleet by the end of January 2004 and sold our owned MD-11 aircraft in September 2004. As a result of these actions, in 2004 we operated a mainline fleet composed entirely of two-pilot, two-engine aircraft.
Our regional jet operations offer service to small and medium-sized cities and enable us to supplement mainline frequencies and service to larger cities. In 2000, our wholly-owned subsidiaries, ASA and Comair, entered into 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 and 50 seats, and 25 CRJ-700 aircraft with 70 seats. ASA and Comair also received options to purchase 406 CRJ aircraft through 2010.
ASA retired its last EMB-120 turbo prop aircraft in August 2003. As of December 31, 2004, ASA had returned two ATR-72 turbo prop aircraft to the lessor upon lease expiration. ASA continues to operate the remaining ATR-72 turbo prop aircraft, while Comair operates an all-jet fleet.
Ground Facilities |
We lease most of the land and buildings that we occupy. Our largest aircraft maintenance base, various computer, cargo, flight kitchen and training facilities and most of our principal offices are located at or near the Atlanta Airport, on land leased from the City of Atlanta generally under long-term leases. We own a portion of our principal offices, our Atlanta reservations center and other real property in Atlanta.
We lease ticket counter and other terminal space, operating areas and air cargo facilities in most of the airports that we serve. These leases generally run for periods of less than one year to thirty years or more, and often contain provisions for periodic adjustments of lease rates. At most airports that we serve, we have entered into use agreements which provide for the non-exclusive use of runways, taxiways, and
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In recent years, some airports have increased or sought to increase the rates charged to airlines to levels that we believe are unreasonable. The extent to which such charges are limited by statute or regulation and the ability of airlines to contest such charges has been subject to litigation and to administrative proceedings before the DOT. If the limitations on such charges are relaxed, or the ability of airlines to challenge such charges is restricted, the rates charged by airports to airlines may increase substantially.
The City of Atlanta, with the support of us and other airlines, has begun a ten year capital improvement program (the CIP) at the Atlanta Airport. Implementation of the CIP should increase the number of flights that may operate at the airport and reduce flight delays. The CIP includes, among other things, a new approximately 9,000 foot full-service runway (targeted for completion in May 2006), related airfield improvements, additional terminal and gate capacity, new cargo and other support facilities and roadway and other infrastructure improvements. If fully implemented, the CIP is currently estimated by the City of Atlanta to cost approximately $6.8 billion, which exceeds the $5.4 billion CIP approved by the airlines in 1999. The CIP runs through 2010, with individual projects scheduled to be constructed at different times. A combination of federal grants, passenger facility charge revenues, increased user rentals and fees, and other airport funds are expected to be used to pay CIP costs directly and through the payment of debt service on bonds. Certain elements of the CIP have been delayed, and there is no assurance that the CIP will be fully implemented. Failure to implement certain portions of the CIP in a timely manner could adversely impact our operations at the Atlanta Airport.
During 2001, we entered into lease and financing agreements with the Massachusetts Port Authority (Massport) for the redevelopment and expansion of Terminal A at Logan. The completion of this project will enable us to consolidate all of our domestic operations at that airport into one location. Construction began in the June 2002 quarter and is scheduled to be completed during 2005. Project costs will be funded with $498 million in proceeds from Special Facilities Revenue Bonds issued by Massport on August 16, 2001. We agreed to pay the debt service on the bonds under a long-term lease agreement with Massport and issued a guarantee to the bond trustee covering the payment of the debt service on the bonds. Additional information about these bonds is set forth in Note 6 of the Notes to the Consolidated Financial Statements.
Legal Proceedings
In Re Northwest Airlines, et al. Antitrust Litigation |
In June 1999, two purported class action antitrust lawsuits were filed in the U.S. District Court for the Eastern District of Michigan against us, U.S. Airways, Northwest and the Airlines Reporting Corporation, an airline-owned company that operates a centralized clearinghouse for travel agents to report and account for airline ticket sales.
In these cases, plaintiffs allege, among other things: (1) that the defendants and certain other airlines conspired in violation of Section 1 of the Sherman Act to restrain competition in the sale of air passenger service by enforcing rules prohibiting certain ticketing practices; and (2) that the defendants violated Section 2 of the Sherman Act by prohibiting these ticketing practices.
Plaintiffs have requested a jury trial. They seek injunctive relief; costs and attorneys fees; and unspecified damages, to be trebled under the antitrust laws. The District Court granted the plaintiffs
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Hall, et al. v. United Airlines, et al |
In January 2002, a travel agent in North Carolina filed a class action lawsuit against numerous airlines, including us, in the U.S. District Court for the Eastern District of North Carolina on behalf of all travel agents in the United States which sold tickets from September 1, 1997 to the present on any of the defendant airlines. The lawsuit alleges that we and the other airline defendants conspired to fix travel agent commissions in violation of Section 1 of the Sherman Act. The plaintiff, who has requested a jury trial, is seeking in its complaint injunctive relief; costs and attorneys fees; and unspecified damages, to be trebled under the antitrust laws.
In September 2002, the District Court granted the plaintiffs motion for class action certification, certifying a class consisting of all travel agents in the United States, Puerto Rico and the U.S. Virgin Islands which sold tickets on the defendant airlines between 1997 and 2002.
On October 30, 2003, the District Court granted summary judgment against the plaintiff class, dismissing all claims asserted against us and most other defendants. On December 9, 2004, the U.S. Court of Appeals for the Fourth Circuit affirmed the District Courts judgment. On January 4, 2005, the Court of Appeals denied the plaintiffs motion for rehearing en banc.
All Direct Travel, Inc., et al. v. Delta Air Lines, et al. |
Two travel agencies have filed a purported class action lawsuit against us in the U.S. District Court for the Central District of California on behalf of all travel agencies from which we have demanded payment for breach of the agencies contractual and fiduciary duties to us in connection with Delta ticket sale transactions during the period from September 20, 1997 to the present. The lawsuit alleges that our conduct (1) violates the Racketeer Influenced and Corrupt Organizations Act of 1970; and (2) creates liability for unjust enrichment. The plaintiffs, who have requested a jury trial, are seeking in their complaint injunctive and declaratory relief; costs and attorneys fees; and unspecified treble damages. In January 2003, the District Court denied the plaintiffs motion for class action certification and in April 2003 granted our motion for summary judgment on all claims. On January 6, 2005, the U.S. Court of Appeals for the Ninth Circuit affirmed the District Courts judgment.
Power Travel International, Inc., et al. v. American Airlines, et al. |
In August 2002, a travel agency filed a purported class action lawsuit in New York state court against us, American, Continental, Northwest, United and JetBlue, on behalf of an alleged nationwide class of U.S. travel agents. JetBlue has been dismissed from the case, and the remaining defendants removed the action to the U.S. District Court for the Southern District of New York. The lawsuit alleges that the defendants breached their contracts with and their duties of good faith and fair dealing to U.S. travel agencies when these airlines discontinued the payment of published base commissions to U.S. travel agencies at various times beginning in March 2002. The plaintiffs amended complaint seeks unspecified damages, as well as declaratory and injunctive relief.
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Multidistrict Pilot Retirement Plan Litigation |
During the June 2001 quarter, the Delta Pilots Retirement Plan (Retirement Plan) and related non-qualified pilot retirement plans sponsored and funded by us were named as defendants in five purported class action lawsuits filed in federal district courts in California, Massachusetts, Ohio, New Mexico and New York. The complaints (1) seek to assert claims on behalf of a class consisting of certain groups of retired and active Delta pilots; (2) allege that the calculation of the retirement benefits of the plaintiffs and the class violated the Retirement Plan and the Internal Revenue Code; and (3) seek unspecified damages. In October 2001, the Judicial Panel on Multidistrict Litigation granted our motion to transfer these cases to the U.S. District Court for the Northern District of Georgia for coordinated pretrial proceedings. Our motion to dismiss the non-qualified plans was granted and both sides have filed for summary judgment on all remaining claims.
Litigation Re September 11 Terrorist Attacks |
We are a defendant in numerous lawsuits arising out of the terrorist attacks of September 11, 2001. It appears that the plaintiffs in these actions are alleging that we and many other air carriers are jointly liable for damages resulting from the terrorist attacks based on a theory of shared responsibility for passenger security screening at Logan, Dulles and Newark. These lawsuits, which are in preliminary stages, generally seek unspecified damages, including punitive damages. Although federal law limits the financial liability of any air carrier for compensatory and punitive damages arising out of the September 11 terrorist attacks to no more than the limits of liability insurance coverage maintained by the air carrier, it is possible that we may be required to pay damages in the event of our insurers insolvency or otherwise.
Delta Family-Care Savings Plan Litigation |
On September 3, 2004, a former Delta employee filed a lawsuit on behalf of himself and all other participants in the Savings Plan against Delta and certain past and present members of Deltas Board of Directors alleging violations of ERISA. The complaint alleges that the defendants breached their fiduciary obligations under ERISA during the period from November 2000 through August 2004 with respect to Savings Plan investments in our stock, both in our common stock fund into which participants may direct their own contributions and the Savings Plans employee stock ownership plan component into which Delta directs its contributions. Subsequent to the filing of the complaint, an identical action was filed by a second former employee, and a third similar action was filed by a different former employee. The third suit contains additional claims, and names all current members of the Board of Directors and several past directors as defendants. Attorneys for the plaintiffs have agreed to proceed with one consolidated complaint naming one plaintiff. The complaints seek unspecified damages and have been filed in U.S. District Court in the Northern District of Georgia.
* * *
In each of the foregoing cases, we believe the plaintiffs claims are without merit, and we are vigorously defending the lawsuits. An adverse decision in any of these cases could result in substantial damages against us. Although the ultimate outcome of these matters cannot be predicted with certainty, management believes that the resolution of these actions will not have a material adverse effect on our Consolidated Financial Statements.
For a discussion of certain environmental matters, see Business Environmental Matters.
63
MANAGEMENT
Executive Officers and Directors
The following table sets forth information regarding the executive officers and directors of Delta, as of December 31, 2004:
Name | Age | Position | ||||
Gerald Grinstein
|
72 | Chief Executive Officer and Director | ||||
Michael J. Palumbo
|
57 | Executive Vice President and Chief Financial Officer | ||||
Joseph C. Kolshak
|
47 | Senior Vice President and Chief of Operations | ||||
Lee A. Macenczak
|
43 | Senior Vice President and Chief Customer Service Officer | ||||
Paul G. Matsen
|
47 | Senior Vice President and Chief Marketing Officer | ||||
Gregory L. Riggs
|
56 | Senior Vice President, General Counsel and Chief Corporate Affairs Officer | ||||
James Whitehurst
|
37 | Senior Vice President and Chief Network and Planning Officer | ||||
Edward H. Budd
|
71 | Director | ||||
David R. Goode
|
64 | Director | ||||
Karl J. Krapek
|
56 | Director | ||||
Paula Rosput Reynolds
|
48 | Director | ||||
John F. Smith, Jr.
|
67 | Chairman of the Board of Directors | ||||
Joan E. Spero
|
60 | Director | ||||
Larry D. Thompson
|
59 | Director | ||||
Kenneth B. Woodrow
|
60 | Director |
Executive Officers
Gerald Grinstein |
Chief Executive Officer since January 2004; joined Deltas board in 1987; non-executive Chairman of the Board of Agilent Technologies, Inc. (1999-2002); non-executive Chairman of Deltas Board of Directors (1997-1999); Retired Chairman of Burlington Northern Santa Fe Corporation (successor to Burlington Northern Inc.) since December 1995; executive officer of Burlington Northern Inc. and certain affiliated companies (1987-1995); Chief Executive Officer of Western Air Lines, Inc. (1985-1987) |
Committees: | ||
None | ||
Directorships: | ||
PACCAR Inc.; The Brinks Company | ||
Affiliations: | Trustee, Henry M. Jackson Foundation; Trustee, University of Washington Foundation |
Michael J. Palumbo |
Executive Vice President and Chief Financial Officer since May 2004; consultant with Airline Financial Services (2001-2004); Executive Vice President and Chief Financial Officer at Trans World Airlines (1994-2001); Partner at HPF Associates, Inc., a financial consulting firm (1993-1994); Senior Vice President and transportation group head at E.F. Hutton (1984-1988); Senior Vice President, Finance, and Treasurer at Western Airlines (1983-1984); Assistant Treasurer at Pan American World Airways (1977-1983) |
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Joseph C. Kolshak |
Senior Vice President and Chief of Operations since June 2004; Senior Vice President Flight Operations (2002-2004); Vice President Flight Operations (2001-2002); Director, Investor Relations (1998-2001); General Manager Flight Operations (1996-1998); Flight Operations Manager and Assistant Chief Pilot (1994-1996); Flight Operations Coordinator Atlanta (1993-1994); Special Assignment Supervisor to the Vice President of Flight Operations (1991-1993). Additionally, Mr. Kolshak is a 757/767 Captain |
Lee A. Macenczak |
Senior Vice President and Chief Customer Service Officer since October 2004; Senior Vice President & Chief Human Resources Officer (June 2004-October 2004); Senior Vice President Sales and Distribution (2000-2004); Vice President Customer Service (1999-2000); Vice President Reservation Sales (1998-1999); Vice President Reservation Sales & Distribution Planning (1996-1998) |
Paul G. Matsen |
Senior Vice President and Chief Marketing Officer since June 2004; Senior Vice President International & Alliances (2000-2004); Senior Vice President Alliances (1999-2000); Senior Vice President Alliance Strategy & Development (1998-1999); Senior Vice President Corporate Planning & Information Technologies (1997-1998); Senior Vice President Corporate Planning (1996-1997);Vice President Corporate Planning (1996); Vice President Advertising and Consumer Marketing (1994-1996) |
Gregory L. Riggs |
Senior Vice President, General Counsel and Chief Corporate Affairs Officer since June 2004; Senior Vice President General Counsel (2003-2004); Vice President Deputy General Counsel (1998-2003); Associate General Counsel (1997-1998); Director Airport Customer Service Administration (1996-1997); Associate General Counsel (1994-1996); Assistant General Counsel (1992-1994) |
James Whitehurst |
Senior Vice President and Chief Network and Planning Officer since June 2004; Senior Vice President Finance, Treasury & Business Development (2002-2004); Vice President and Director, Boston Consulting Group (1997-2001) |
Directors
Edward H. Budd |
Joined Deltas Board, 1985. Chairman of the Board and Chief Executive Officer of The Travelers Corporation (1982 until his retirement in 1993); held other executive officer positions in that company (1974-1982) |
Committees: | Audit (Chair); Finance; Personnel & Compensation | |
Affiliations: | Member of the American Academy of Actuaries and The Business Council; Trustee of Tufts University |
David R. Goode |
Joined Deltas Board, 1999. Chairman of the Board and Chief Executive Officer of Norfolk Southern Corporation since 1992; executive officer of that company since 1985 |
Committees: | Personnel & Compensation (Chair); Finance | |
Directorships: | Caterpillar, Inc.; Georgia-Pacific Corporation; Norfolk Southern Corporation; Norfolk Southern Railway Company; Texas Instruments, Incorporated | |
Affiliations: | Member of The Business Council and The Business Roundtable |
65
Karl J. Krapek |
Joined Deltas Board, 2004. President and Chief Operating Officer of United Technologies Corporation (1999 until his retirement in 2002); also held other management positions in that company (1982-1999) |
Committees: | Corporate Governance; Finance | |
Directorships: | Lucent Technologies Inc.; Prudential Financial, Inc.; The Connecticut Bank and Trust Company; Visteon Corporation | |
Affiliations: | Vice Chairman, Board of Trustees of Connecticut State University; Director, St. Francis Care, Inc. |
Paula Rosput Reynolds |
Joined Deltas Board, 2004. Chairman of the Board of AGL Resources, Inc. since 2002; President and Chief Executive Officer of that company since 2000; Chairman of Atlanta Gas Light Company, a wholly-owned subsidiary of AGL Resources, Inc., (2000-2003); President and Chief Operating Officer of Atlanta Gas Light Company (1998-2000); President and Chief Executive Officer of Duke Energy Power Services, LLC, a subsidiary of Duke Energy Corporation (1997-1998) |
Committees: | Corporate Governance; Personnel & Compensation | |
Directorships: | AGL Resources, Inc.; Coca-Cola Enterprises Inc. | |
John F. Smith, Jr. |
Joined Deltas Board, 2000. Chairman of the Board of General Motors Corporation (1996 until his retirement in 2003); also served as that companys Chief Executive Officer (1992-2000), President (1992-1998) and Chief Operating Officer (1992) |
Committees: | Corporate Governance; Audit; Finance (Chair) | |
Directorships: | Swiss Reinsurance Company; The Procter & Gamble Company | |
Affiliations: | Member of the Board of The Nature Conservancy; Chairman of the Advisory Board of AlixPartners LLC/ Questor Partners Funds; Member of The Business Council |
Joan E. Spero |
Joined Deltas Board, 2002. President of the Doris Duke Charitable Foundation since 1997; U.S. Undersecretary of State for Economic, Business & Agricultural Affairs (1993-1996); executive of American Express Company (1981-1993) |
Committees: | Audit; Corporate Governance (Chair) | |
Directorships: | First Data Corporation; International Business Machines Corporation | |
Affiliations: | Trustee of Columbia University, the Council on Foreign Relations and the Wisconsin Alumni Research Foundation |
Larry D. Thompson |
Joined Deltas Board, 2003. Senior Vice President Government Affairs, General Counsel and Secretary, of Pepsico, Inc. since October 2004; Senior Fellow of the Brookings Institution (August 2003-September 2004); Visiting Professor of Law, University of Georgia School of Law (Spring Semester 2004); Deputy Attorney General of the United States (2001-2003); Partner, King & Spalding LLP (1987-2001); U.S. Attorney for the Northern District of Georgia (1982-1986) |
Affiliations: | Board of Directors, Drug Enforcement Administration Museum Foundation; Committee of Visitors, University of Michigan Law School; Fellow, American Board of Criminal Lawyers |
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Kenneth B. Woodrow |
Joined Deltas Board, 2004. Vice Chairman of Target Corporation (1999 until his retirement in 2000); also served as that companys President (1994-1999); and held other management positions in that company (1971-1994) |
Committees: | Audit; Personnel & Compensation | |
Directorships: | EZ Gard Industries, Inc.; Visteon Corporation |
Board Committees
The Board of Directors has established the following committees to assist it in discharging its responsibilities:
Committee | Key Functions | |
Audit
|
Appoints (subject to shareowner ratification) our independent auditors | |
Represents and assists the Board in its oversight of: | ||
the integrity of our financial statements; | ||
our compliance with legal and regulatory requirements; | ||
our independent auditors qualifications and independence; and | ||
the performance of our internal audit department and independent auditors | ||
Discusses the adequacy and effectiveness of our internal control over financial reporting | ||
Oversees our compliance with procedures and processes pertaining to corporate ethics and standards of business conduct | ||
Considers complaints concerning accounting, auditing, internal control and financial reporting matters | ||
Corporate Governance
|
Identifies and recommends qualified individuals to the Board for nomination as directors and considers shareowner nominations of candidates for election as directors | |
Considers, develops and makes recommendations to the Board regarding matters related to corporate governance, including: | ||
qualifications and eligibility requirements for Board members, including director independence standards; | ||
the Boards size, composition, organization and processes; | ||
the type, function, size and membership of Board committees; | ||
evaluation of the Board; and | ||
Board compensation | ||
Finance
|
Reviews our financial planning and financial structure, funding requirements and borrowing and dividend policies | |
Personnel & Compensation
|
Establishes our general compensation philosophy and oversees the development and implementation of compensation programs |
|
Performs an annual performance evaluation of our CEO and determines and approves the CEOs compensation level | ||
Reviews and approves compensation programs applicable to our executives | ||
Considers periodically our management succession planning | ||
Makes recommendations to the Board regarding election of officers |
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Independence of Audit, Corporate Governance and Personnel & Compensation Committee Members. |
The Audit, Corporate Governance and Personnel & Compensation Committees consist entirely of non-employee directors who are independent, as defined in the NYSE listing standards and Deltas director independence standards. The members of the Audit Committee also satisfy the additional independence requirements set forth in rules under the Securities Exchange Act of 1934.
Audit Committee Financial Experts |
The Board of Directors has designated Messrs. Budd, Smith and Woodrow as Audit Committee Financial Experts. It has also determined that each is independent, as described above.
Compensation Committee Interlocks and Insider Participation |
The members of the Personnel & Compensation Committee are Mr. Goode, who serves as Chair, Ms. Reynolds and Messrs. Budd and Woodrow, each of whom is independent under the NYSE listing standards and Deltas director independence standards. None of the members of the Personnel & Compensation Committee is a former or current officer or employee of Delta or has any interlocking relationships as set forth in applicable SEC rules.
Director Compensation
Annual Retainer, Meeting Fees and Transportation Privileges |
Each non-employee director receives an annual retainer of $25,000, of which $5,000 is paid in shares of Common Stock; $1,000 for each Board and committee meeting attended; reimbursement for expenses in attending meetings; and complimentary transportation privileges on Delta for the director and his or her spouse and dependent children. The Presiding Director and the Chair of each committee also receive an annual retainer of $7,500. During 2004, the non-executive Chairman of the Board received an annual retainer of $200,000, which was reduced to $150,000 effective January 1, 2005 at the request of Mr. Smith, who serves as the non-executive Chairman of the Board. Directors who are employees of Delta are not separately compensated for their service as directors.
Non-employee directors may elect to receive all or a portion of their cash compensation earned as a director in shares of our common stock. Prior to 2005, non-employee directors could also elect to defer their cash compensation, and choose an investment return on the deferred amount from among the investment return choices available under the Delta Family-Care Savings Plan (the Savings Plan). The Savings Plan is a broad-based 401(k) plan that allows eligible employees to contribute a portion of their pay to various investment funds, including a fund invested primarily in our common stock (the Common Stock Fund).
Annual Stock Option Grant |
In some prior years, non-employee directors received an annual grant of non-qualified stock options with a Black-Scholes value of $40,000 on the grant date. In 2003 and 2004, however, the Board did not grant stock options to non-employee directors.
Other Compensation |
Non-employee directors who first join the Board after January 1, 2003 receive $10,000 of common stock when they are initially elected.
Non-employee directors who first join the Board after October 24, 1996 receive a deferred payment of $6,300 during each year in which they serve as a director. The deferred amount earns an investment return equivalent to the investment return on the Common Stock Fund and is paid to directors after they complete their Board service.
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Directors who first joined the Board on or before October 24, 1996, may be elected advisory directors after their retirement for a term based on their years of service as a director and age at retirement. Advisory directors receive an annual retainer equal to the annual retainer paid to non-employee directors at the time of their retirement. On October 24, 1996, the Board discontinued the advisory director program for all future directors who were not members of the Board on that date.
Non-employee directors who retire from the Board at or after age 68 with at least five years of service as a director, directors who serve until their mandatory retirement date, and lifetime advisory directors, receive during their lives complimentary transportation privileges on Delta for the director and his or her spouse.
Charitable Contribution Program |
Directors who were members of the Board on July 28, 1994 may participate in Deltas charitable contribution program. Under the program, eligible directors may recommend up to five tax-exempt organizations to receive donations totaling $1 million after the directors death. Donations are made by a charitable foundation funded by Delta. Recommended beneficiaries are subject to the approval of the Corporate Governance Committee. On July 28, 1994, the Board discontinued this program for all future directors who were not members of the Board on that date.
Executive Compensation
This section contains information about the compensation of Mr. Grinstein, who served as our Chief Executive Officer during 2004, and our four most highly compensated executive officers, other than Mr. Grinstein, who were serving as executive officers at December 31, 2004 (Current Executive Officers). It also includes information about Ms. Escarra, who would have been one of our four most highly compensated executive officers at December 31, 2004 had she not retired during 2004.
Summary Compensation Table |
Long Term Compensation | |||||||||||||||||||||||||||||||
Awards | |||||||||||||||||||||||||||||||
Annual Compensation | Payouts | ||||||||||||||||||||||||||||||
Restricted | Securities | All Other | |||||||||||||||||||||||||||||
Other Annual | Stock | Underlying | LTIP | Compen- | |||||||||||||||||||||||||||
Name and | Salary | Bonus | Compensation | Awards | Options/SARs | Payouts | sation | ||||||||||||||||||||||||
Principal Position(1) | Year | ($)(2) | ($)(3) | ($)(4) | ($)(5) | (#)(6) | ($)(7) | ($)(8) | |||||||||||||||||||||||
Gerald Grinstein
|
Year ended 12/31/04 | 250,000 | 0 | 40,837 | 0 | 0 | 0 | 91,370 | |||||||||||||||||||||||
Chief Executive Officer
|
|||||||||||||||||||||||||||||||
James M. Whitehurst
|
Year ended 12/31/04 | 420,000 | 0 | 4,511 | 0 | 296,700 | 0 | 3,581 | |||||||||||||||||||||||
Sr. Vice President and Chief Network and Planning
Officer
|
|||||||||||||||||||||||||||||||
Paul G. Matsen
|
Year ended 12/31/04 | 382,125 | 0 | 2,300 | 0 | 313,400 | 0 | 5,477 | |||||||||||||||||||||||
Sr. Vice President and Chief Marketing Officer
|
|||||||||||||||||||||||||||||||
Joseph C. Kolshak
|
Year ended 12/31/04 | 367,917 | 0 | 6,738 | 0 | 313,400 | 0 | 7,797 | |||||||||||||||||||||||
Sr. Vice President and Chief of Operations
|
|||||||||||||||||||||||||||||||
Gregory L. Riggs
|
Year ended 12/31/04 | 362,500 | 0 | 4,780 | 0 | 313,400 | 0 | 8,312 | |||||||||||||||||||||||
Sr. Vice President, General Counsel and Chief
Corporate Affairs Officer
|
|||||||||||||||||||||||||||||||
Vicki B. Escarra
|
Year ended 12/31/04 | 372,600 | 0 | 5,759 | 0 | 0 | 450,000 | 2,792 | |||||||||||||||||||||||
Executive Vice President and
|
Year ended 12/31/03 | 504,000 | 0 | 9,540 | 0 | 357,258 | 84,564 | 735 | |||||||||||||||||||||||
Chief Customer Service Officer
|
Year ended 12/31/02 | 540,000 | 761,400 | 11,373 | 0 | 172,900 | 138,574 | 54,880 | |||||||||||||||||||||||
(retired effective October 1, 2004)
|
(1) | Messrs. Grinstein, Whitehurst, Matsen, Kolshak and Riggs each became an executive officer of Delta during 2004. Accordingly, consistent with rules adopted by the Securities and Exchange Commission, information regarding their compensation for the years ended December 31, 2003 and 2002 is not included in this table. |
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(2) | The following table shows the annual salary rate for each Current Executive Officer after becoming an executive officer of Delta in 2004 (Former Annual Salary) and after a 10% salary reduction which became effective on January 1, 2005 (Current Annual Salary). |
Name | Former Annual Salary ($) | Current Annual Salary ($) | ||||||
Mr. Grinstein
|
500,000 | 450,000 | ||||||
Mr. Whitehurst
|
426,000 | 383,400 | ||||||
Mr. Matsen
|
450,000 | 405,000 | ||||||
Mr. Kolshak
|
450,000 | 405,000 | ||||||
Mr. Riggs
|
450,000 | 405,000 |
Mr. Grinstein voluntarily relinquished his salary for the quarter ended March 31, 2004, to facilitate Deltas compliance with the executive compensation limits under the Emergency Wartime Supplemental Appropriations Act. He also declined to accept any salary for the quarter ended December 31, 2004, in keeping with companywide efforts to reduce Deltas cost structure. |
(3) | Represents the incentive compensation award, if any, for the specified period. |
(4) | Amounts for 2004 for the persons named in the Summary Compensation Table other than Mr. Grinstein include tax reimbursements related to: (a) flight benefits and (b) life insurance arrangements. The amount for Mr. Grinstein for 2004 includes tax reimbursements related to: (a) flight benefits and (b) Deltas payment of relocation expenses. No person named in the Summary Compensation Table received compensation in the form of personal benefits in excess of the lesser of $50,000 or 10% of the total of his or her annual salary and bonus in 2004. |
(5) | At December 31, 2004, Mr. Whitehurst held 7,574 shares of restricted stock valued at $56,654, based on the $7.48 closing price of the Common Stock on the New York Stock Exchange (NYSE) on that date. These shares were granted to Mr. Whitehurst on January 1, 2002, in connection with his joining Delta. One half of these shares vested on January 1, 2005, and the remainder will vest on January 1, 2006, if Mr. Whitehurst remains employed by Delta on that date. |
At December 31, 2004, Mr. Grinstein had the right to receive a total of 23,387 deferred shares of Common Stock that the Board of Directors granted to him between 1997 and 1999 in recognition of his special service to the Board and Delta as a director. Mr. Grinstein may not vote or dispose of these shares until they are issued to him after he completes his service on the Board of Directors. These deferred shares were valued at $174,935 based on the $7.48 closing price of the Common Stock on the NYSE on December 31, 2004. | |
No other person named in the Summary Compensation Table held restricted stock, deferred shares or restricted stock units at December 31, 2004. | |
(6) | Represents the number of shares of Common Stock subject to stock options or stock appreciation rights granted during the period. The number of shares shown for 2003 for Ms. Escarra includes replacement stock options granted on December 26, 2003 under Deltas stock option exchange program, which was approved by shareowners at the 2003 annual meeting of shareowners. |
(7) | No payments will be made for the long-term incentive award opportunities granted in July 2002 for the performance period that began July 1, 2002 and ended December 31, 2004. |
The payment to Ms. Escarra in 2004 represents the amount earned by her under the special retention program adopted in January 2002. During 2003, Ms. Escarra agreed to amend her award opportunity to vest in three equal annual installments on April 2, 2004, 2005 and 2006, contingent on her remaining employed by Delta on each of those dates. Absent this amendment, Ms. Escarras award opportunity of $1,350,000 would have been payable in full in January 2004. Under the terms of her amended retention award opportunity, Ms. Escarra received one-third of her award opportunity because she remained employed by Delta from January 1, 2002 through April 2, 2004. As a result of her subsequent retirement, Ms. Escarra forfeited the remaining two-thirds of her award opportunity. |
(8) | For 2004, this column consists of the following items: |
Term Life | ||||||||||||
Insurance | ||||||||||||
Coverage | Savings Plan | Relocation | ||||||||||
Name | Premiums ($) | Contributions ($) | Expenses ($) | |||||||||
Mr. Grinstein
|
0 | 0 | 91,370 | |||||||||
Mr. Whitehurst
|
861 | 2,720 | 0 | |||||||||
Mr. Matsen
|
1,377 | 4,100 | 0 | |||||||||
Mr. Kolshak
|
1,647 | 6,150 | 0 | |||||||||
Mr. Riggs
|
4,212 | 4,100 | 0 | |||||||||
Ms. Escarra
|
2,792 | 0 | 0 |
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Option Grants in Last Fiscal Year |
The following table sets forth certain information regarding non-qualified stock options granted during 2004 to the persons named in the Summary Compensation Table. None of these grants included stock appreciation rights.
Grant Date | ||||||||||||||||||||||||
Individual Grants | Value | |||||||||||||||||||||||
Number of | ||||||||||||||||||||||||
Securities | % of Total | |||||||||||||||||||||||
Underlying | Options Granted | Exercise or | Grant Date | |||||||||||||||||||||
Options | to Employees in | Base Price | Expiration | Present | ||||||||||||||||||||
Name | Grant Date | Granted (#) | Fiscal Year | ($/Sh)(1) | Date | Value ($)(2) | ||||||||||||||||||
Gerald Grinstein
|
N/A | 0 | 0 | % | N/A | N/A | N/A | |||||||||||||||||
James M. Whitehurst
|
11/17/2004 | 296,700 | 0.4 | % | $ | 7.01 | 11/17/2010 | $ | 1,155,921 | |||||||||||||||
Paul G. Matsen
|
11/17/2004 | 313,400 | 0.4 | % | $ | 7.01 | 11/17/2010 | $ | 1,220,983 | |||||||||||||||
Joseph C. Kolshak
|
11/17/2004 | 313,400 | 0.4 | % | $ | 7.01 | 11/17/2010 | $ | 1,220,983 | |||||||||||||||
Gregory L. Riggs
|
11/17/2004 | 313,400 | 0.4 | % | $ | 7.01 | 11/17/2010 | $ | 1,220,983 | |||||||||||||||
Vicki B. Escarra
|
N/A | 0 | 0 | % | N/A | N/A | N/A |
(1) | The exercise price is the closing price of the Common Stock on the New York Stock Exchange on the grant date. Subject to certain exceptions, the stock options become exercisable in three equal installments on the first, second and third anniversaries of the grant date. |
(2) | The hypothetical grant date present value was determined using the Black-Scholes option pricing model and, consistent with Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, includes the following assumptions: |
Volatility | ||||||||||||||||
Expected | Interest Rate | Rate | Dividend | |||||||||||||
Date Options Granted 11/17/2004 Become Exercisable | Option Term | (%)(a) | (%)(b) | Yield (%)(c) | ||||||||||||
11/17/2005
|
4 years | 3.24 | % | 68 | % | 0 | % | |||||||||
11/17/2006
|
5 years | 3.49 | % | 62 | % | 0 | % | |||||||||
11/17/2007
|
6 years | 3.70 | % | 58 | % | 0 | % |
|
(a) | The interest rate represents the interest rate on a U.S. Treasury security on the grant date with a maturity date corresponding to the expected option term. | |
(b) | The volatility rate is calculated using monthly Common Stock closing price and dividend information for the period equal to the expected option term that ended on the grant date. | |
(c) | Delta is not currently paying dividends on the Common Stock, and does not expect to resume paying dividends in the near future. Thus, the dividend yield is 0%. | |
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values |
The following table sets forth certain information regarding the number and value of unexercised stock options and stock appreciation rights held at December 31, 2004 by the persons named in the Summary Compensation Table. None of the persons named in the Summary Compensation Table exercised any stock options or stock appreciation rights during 2004.
Number of Securities | ||||||||||||||||||||||||
Underlying Unexercised | Value of Unexercised | |||||||||||||||||||||||
Options/SARs | In-the-Money Options/ | |||||||||||||||||||||||
at FY-End (#) | SARs at FY-End($)(1) | |||||||||||||||||||||||
Shares Acquired | Value | |||||||||||||||||||||||
Name | on Exercise (#) | Realized ($) | Exercisable | Unexercisable | Exercisable | Unexercisable | ||||||||||||||||||
Gerald Grinstein(2)
|
0 | $ | 0 | 10,345 | 2,515 | $ | 0 | $ | 0 | |||||||||||||||
James M. Whitehurst
|
0 | $ | 0 | 67,634 | 340,134 | $ | 0 | $ | 139,449 | |||||||||||||||
Paul G. Matsen
|
0 | $ | 0 | 59,566 | 356,169 | $ | 0 | $ | 147,298 | |||||||||||||||
Joseph C. Kolshak
|
0 | $ | 0 | 38,735 | 330,267 | $ | 0 | $ | 147,298 | |||||||||||||||
Gregory L. Riggs
|
0 | $ | 0 | 35,850 | 338,952 | $ | 0 | $ | 147,298 | |||||||||||||||
Vicki B. Escarra
|
0 | $ | 0 | 444,058 | 0 | $ | 0 | N/A |
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(1) | The value of unexercised in-the-money stock options and stock appreciation rights at December 31, 2004, is based on the excess, if any, of the $7.48 closing price of the Common Stock on the NYSE on December 31, 2004, over the option/ SAR exercise price. |
(2) | The stock options shown for Mr. Grinstein were granted to him between 1998 and 2002 for serving as a non-employee member of Deltas Board of Directors. All non-employee members of the Board of Directors during this period received identical stock option awards. |
Long-Term Incentive Plans Awards in Last Fiscal Year |
During 2004, none of the persons named in the Summary Compensation Table were granted any long-term incentive award opportunities other than the stock options reported under Option Grants in Last Fiscal Year.
Retirement Plans and Other Agreements
The persons named in the Summary Compensation Table (other than Mr. Kolshak, who is eligible to participate under the plans for pilot employees described below) participate in the Delta Retirement Plan (Pension Plan), a non-contributory qualified defined benefit plan, which is the broad-based retirement plan for Deltas non-pilot employees. Retirement benefits for the persons named in the Summary Compensation Table (other than Mr. Kolshak) are based on the same benefit formula as for all other plan participants. Delta also maintains non-qualified pension plans (described below) to provide benefits to employees (including the persons named in the Summary Compensation Table) whose full retirement benefits cannot be paid from the Pension Plan due to Internal Revenue Code limitations applicable to qualified plans.
Until July 1, 2003, retirement benefits under the Pension Plan were calculated using a final average earnings formula, which based the benefit on an employees final average earnings, years of service, age at retirement and primary Social Security benefit. Effective July 1, 2003, Delta amended the Pension Plan to transition to a cash balance pension formula. For employees hired after that date, including Mr. Grinstein, who joined Delta on January 1, 2004, retirement benefits are based solely on the cash balance formula. Under the cash balance feature, each participant has an account, for recordkeeping purposes only, to which pay credits are allocated annually based on 6% of each participants salary and eligible annual incentive compensation awards. In addition, all balances in the accounts of participants earn an annual interest credit. The interest credit is based on the 30 year U. S. Treasury rate published by the Internal Revenue Service. At retirement or termination of employment, an amount equal to the then-vested balance of the cash balance account is payable to the participant in the form of an immediate or deferred lump sum or equivalent monthly annuity benefit. Under Federal laws, mandatory minimum distributions are required to be paid under the Pension Plan after a participant reaches age 70 1/2. Mr. Grinstein became eligible to participate in the Pension Plan on January 1, 2005; therefore, he had accrued no benefit as of December 31, 2004.
Employees covered by the Pension Plan on July 1, 2003 are eligible for transition benefits and will earn retirement benefits for a period of seven years after that date equal to the greater of the benefit determined under the Pension Plans (1) final average earnings formula or (2) cash balance formula. These employees will not earn a double benefit during this transition period, only the greater of the two benefits. In addition, employees with less than 30 years of service and who are at least 35 years of age as of July 1, 2003 are eligible to earn additional pay credits under the cash balance formula of 2% if they are less than 40 years of age as of July 1, 2003 and 2.75% if they are older than 40 years of age on that date. These transition pay credits continue until the participants retirement or termination of employment.
For years of service after June 30, 2010, employees covered by the Pension Plan will earn new retirement benefits under the cash balance formula only and no further retirement benefits will accrue under the final average earnings formula for any participant for periods worked after July 1, 2010, regardless of date of hire. Benefits earned under the Pension Plans final average earnings formula prior to
72
Pension Plan Table |
The following table shows the estimated annual pension payable under the final average earnings formula (before reduction for Social Security benefits and not accounting for Internal Revenue Code limitations, nor the payment of the non-qualified retirement benefit in a lump sum, as discussed below) to a non-pilot employee, including the persons named in the Summary Compensation Table (other than Messrs. Grinstein and Kolshak). The table assumes that retirement occurred at December 31, 2004 at the normal retirement age of 65 after specified years of service. The benefits in the table paid under the Pension Plan would be paid in the form of a joint and 50% survivor annuity, except to the extent discussed below under Non-qualified Non-Pilot Retirement Plans.
10 Years of | 15 Years of | 20 Years of | 25 Years of | 30 or More | ||||||||||||||||||
Final Average Earnings | Service | Service | Service | Service | Years of Service | |||||||||||||||||
$ | 400,000 | $ | 80,000 | $ | 120,000 | $ | 160,000 | $ | 200,000 | $ | 240,000 | |||||||||||
800,000 | 160,000 | 240,000 | 320,000 | 400,000 | 480,000 | |||||||||||||||||
1,200,000 | 240,000 | 360,000 | 480,000 | 600,000 | 720,000 | |||||||||||||||||
1,600,000 | 320,000 | 480,000 | 640,000 | 800,000 | 960,000 |
For purposes of the Pension Plan, final average earnings are the average of an employees annual earnings, based on the employees salary and eligible incentive compensation awards for the 36 consecutive months in the 120-month period immediately preceding retirement which produces the highest average earnings. Under the final average earnings formula, the annual pension benefit is determined by multiplying final average earnings by 60%, and then reducing that amount for service of less than 30 years and by 50% of the primary Social Security benefit payable to the employee. The 50% Social Security offset is reduced for service of less than 30 years with Delta. For purposes of pension benefits under the Pension Plan and the supplemental non-qualified retirement plans discussed below, the completed years of service at December 31, 2004, for the persons named in the Summary Compensation Table (other than Messrs. Grinstein and Kolshak) are as follows: Mr. Matsen 10 years, 10 months; Mr. Riggs 25 years, 7 months. Mr. Whitehurst, who has 3 years of service, will not be vested in his pension benefits until he completes five years of service. Ms. Escarra retired October 1, 2004, with 31 years of service.
Non-qualified Non-Pilot Retirement Plans |
Employees designated by the Personnel & Compensation Committee, including the persons named in the Summary Compensation Table other than Mr. Kolshak, are eligible to participate in non-qualified retirement plans that provide pension benefits not permitted to be paid under the Pension Plan due to limits on qualified plans under the Internal Revenue Code. Pension benefits under the non-qualified retirement plans are payable in a lump sum to an executive upon termination of employment with the assumptions regarding the calculation of the lump sum determined in accordance with an agreement approved by the Committee. The Committee also determined that, if a participant uses the lump sum payment of the non-qualified benefit to purchase (from a provider approved by Delta) an equivalent after-tax annuity, Delta would pay the difference (if any) between the cost of the annuity and the after-tax value of the non-qualified lump sum. The participant, however, remains responsible for any taxes on the additional payment required to purchase the annuity. Upon her retirement in October 2004, after 31 years of service to Delta, Ms. Escarra received a lump sum of $3,238,339, which represents the unfunded portion of her earned and vested benefit under this non-qualified plan.
Qualified and Non-Qualified Pilot Retirement Plans |
Mr. Kolshak is eligible for retirement benefits under non-contributory qualified and non-qualified retirement plans for pilot employees (the Pilot Plans) established by Delta pursuant to a collective bargaining agreement with its pilots. The estimated annual pension benefit payable to Mr. Kolshak under
73
Delta Family-Care Disability and Survivorship Plan |
The Delta Family-Care Disability and Survivorship Plan (D&S Plan) for eligible non-pilot personnel, including the executive officers other than Mr. Kolshak, provides monthly survivorship benefits based on a participants final average earnings and years of service and, until January 1, 2004, provided monthly long-term disability benefits based on a participants final average earnings. The D&S Plan also provides a lump sum death benefit of up to $50,000. In general, for purposes of the D&S Plan, final average earnings are (1) for purposes of determining benefits during the first six months of disability, the employees monthly earnings, based on the employees salary at the time of disability; and (2) for other purposes, the average of the employees monthly earnings, based on the employees salary and eligible annual incentive compensation awards over specified periods. Eligible survivors of employees who die on or after July 1, 2003 but before June 30, 2010, and survivors of retirees who retire after July 1, 2003 but on or before July 1, 2010, are eligible to receive up to 10 years of monthly survivorship benefits from the date of the employees or retirees death. No monthly survivor benefits from the D&S Plan will be paid on behalf of participants who die while employed on or after July 1, 2010, or who retire after July 1, 2010. Any benefits which may not be paid under the D&S Plan due to Internal Revenue Code limits are provided under a non-qualified plan for employees designated by the Personnel & Compensation Committee, including the executive officers. Effective January 1, 2004, employees may purchase insured long-term disability coverage; however for disabilities incurred after that date, Delta no longer provides such benefits for employees affected by the amendments to the D&S Plan.
Mr. Kolshak is eligible to receive disability and survivorship benefits under the Delta Pilots Disability and Survivorship Plan (Pilots D & S Plan). The Pilots D & S Plan provides monthly survivorship benefits to a participant based on a percentage of his final average earnings and years of service, and disability benefits based on a percentage of his final average earnings. The Pilots D & S Plan also provides a lump sum death benefit of up to $50,000. In general, for purposes of determining Mr. Kolshaks benefits under the Pilots D & S Plan, his final average earnings are based on the average of his monthly earnings, based on his salary and eligible annual incentive compensation awards, over specified periods. In the event Mr. Kolshak dies while employed by Delta, his eligible family members are eligible to receive an amount equal to 25%, 30% or 35% of his final average earnings (depending on whether he has one, two, or three or more eligible family members respectively, and his age at death), subject to reduction for service of less than 25 years with Delta if he dies after retirement, and for certain payments from the Pilots Retirement Plan and other sources.
Change in Control Agreements |
In 1997, the Board of Directors approved change in control agreements between Delta and certain employees. The agreements provide certain benefits to covered individuals that vary by participation level if there is a qualifying event during the term of the agreement. A qualifying event occurs if, within a specified period after a change in control of Delta (1) there is an involuntary termination of the individuals employment by Delta, other than for cause or due to the individuals death or disability; or (2) the individual voluntarily terminates his employment for good reason. A qualifying event also occurs if there is a change in control within one year after a termination under either circumstance described in the preceding sentence as a result of actions taken by Delta in anticipation of a change in control. Delta has not entered into change in control agreements with either Mr. Grinstein or Mr. Palumbo.
74
The benefits provided upon a qualifying event for covered executive officers include a lump sum payment of up to 200% of the sum of the individuals annual base salary rate and target incentive compensation award; the present value of the individuals non-qualified pension benefits (with certain additional age and service credits); certain retiree medical and monthly survivor coverage (or the present value equivalent, depending on the individuals age) and life insurance coverage; and certain flight benefits. In addition, upon a change in control, pro rata target incentive compensation awards will be paid, and all outstanding stock options, restricted stock and similar awards will immediately become nonforfeitable and exercisable. Moreover, if there is a change in control, each outstanding performance-based long-term incentive award opportunity will be paid in an amount equal to the greater of (1) the actual award payable to the participant for the applicable performance period, calculated as if the performance period had ended on the date of the change in control, and (2) the target award payable to the participant for that performance period, in each case prorated to reflect the portion of the performance period elapsed through the date of the change in control. The agreements also provide for reimbursement to the individual for taxes on certain welfare benefits as well as any excise taxes paid under Section 4999 of the Internal Revenue Code and related taxes thereon.
In 2003, the Board of Directors adopted a policy requiring shareowner approval for future severance arrangements for executive officers that provide benefits exceeding 2.99 times the executives salary and bonus.
The Personnel & Compensation Committee is planning to review the change in control agreements due to changes in the law and changes in Deltas organizational and benefits structure.
RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
75
BENEFICIAL OWNERSHIP OF SECURITIES
Directors and Executive Officers
The following table sets forth the number of shares of common stock and, if applicable, Series B Preferred Stock beneficially owned as of December 31, 2004, by each director and executive officer and all directors and executive officers as a group. Unless otherwise indicated by footnote, the owner exercises sole voting and investment power over the shares.
Amount and Nature | ||||||
of Beneficial | ||||||
Name of Beneficial Owner | Title of Class | Ownership(1)(2) | ||||
Gerald Grinstein
|
Common Stock | 15,210 | ||||
Series B Preferred Stock | 0 | |||||
Michael J. Palumbo
|
Common Stock | 0 | ||||
Series B Preferred Stock | 0 | |||||
Joseph C. Kolshak
|
Common Stock | 29,048 | ||||
Series B Preferred Stock | 227 | |||||
Lee A. Macenczak
|
Common Stock | 30,459 | ||||
Series B Preferred Stock | 176 | |||||
Paul G. Matsen
|
Common Stock | 44,267 | ||||
Series B Preferred Stock | 142 | |||||
Gregory L. Riggs
|
Common Stock | 28,748 | (3) | |||
Series B Preferred Stock | 290 | (4) | ||||
James Whitehurst
|
Common Stock | 59,543 | ||||
Series B Preferred Stock | 24 | |||||
Edward H. Budd
|
Common Stock | 23,346 | ||||
David R. Goode
|
Common Stock | 10,602 | ||||
Karl J. Krapek
|
Common Stock | 2,107 | ||||
Paula Rosput Reynolds
|
Common Stock | 4,200 | ||||
John F. Smith, Jr.
|
Common Stock | 32,347 | ||||
Joan E. Spero
|
Common Stock | 20,165 | ||||
Larry D. Thompson
|
Common Stock | 2,242 | ||||
Kenneth B. Woodrow
|
Common Stock | 2,107 | ||||
Directors and Executive Officers as a Group
(15 Persons)
|
Common Stock | 304,448 | ||||
Series B Preferred Stock | 855 |
(1) | The directors and executive officers as a group beneficially owned 2.0% of the outstanding shares of our common stock and less than 1% of the Series B Preferred Stock. No person listed in the table beneficially owned 1% or more of the outstanding shares of our common stock or Series B Preferred Stock. |
76
(2) | Includes the following number of shares of our common stock which the director or executive officer has the right to acquire upon the exercise of stock options that were exercisable as of November 30, 2004, or that will become exercisable within 60 days after that date: |
Number of | Number of | |||||||||
Name | Shares | Name | Shares | |||||||
Mr. Grinstein
|
10,345 | Mr. Goode | 8,345 | |||||||
Mr. Palumbo
|
0 | Mr. Krapek | 0 | |||||||
Mr. Kolshak
|
27,467 | Mrs. Reynolds | 0 | |||||||
Mr. Macenczak
|
29,118 | Mr. Smith | 6,345 | |||||||
Mr. Matsen
|
43,019 | Mrs. Spero | 1,678 | |||||||
Mr. Riggs
|
25,702 | Mr. Thompson | 0 | |||||||
Mr. Whitehurst
|
43,834 | Mr. Woodrow | 0 | |||||||
Mr. Budd
|
10,345 |
(3) | Includes 132 shares of our common stock attributable to the Savings Plan account of Mr. Riggs spouse. |
(4) | Includes 43 shares of Series B Preferred Stock attributable to the Savings Plan account of Mr. Riggs spouse. |
Beneficial Owners of More Than 5% of Voting Stock
The following table provides information about each entity known to Delta to be the beneficial owner of more than five percent of any class of Deltas outstanding voting securities.
Amount and Nature of | Percentage of Class on | ||||||||||||
Name and Address of Beneficial Owner | Title of Class | Beneficial Ownership | December 31, 2004 | ||||||||||
U.S. Trust Corporation, United States
Company of New York and U.S. Trust Company, N.A.
|
Common Stock | 17,320,213 | (1) | 12 | .4% | ||||||||
114 West 47th Street New York, NY 10036 |
|||||||||||||
FMR Corp.
|
Common Stock | 15,113,143 | (2) | 10 | .8% | ||||||||
82 Devonshire Street Boston, MA 02109 |
|||||||||||||
Brandes Investment Partners, LLC
|
Common Stock | 14,673,108 | (3) | 10 | .5% | ||||||||
11988 El Camino Real, Suite 500 San Diego, CA 90130 |
|||||||||||||
PRIMECAP Management Company
|
Common Stock | 13,981,041 | (4) | 10 | .0% | ||||||||
225 South Lake Ave., Suite 400 Pasadena, CA 91101 |
|||||||||||||
Capital Group International, Inc.
|
Common Stock | 13,270,390 | (5) | 9 | .5% | ||||||||
11100 Santa Monica Blvd. Los Angeles, CA 90025 |
|||||||||||||
Michael A. Roth and Brian J. Stark
|
Common Stock | 11,474,600 | (6) | 8 | .2% | ||||||||
3600 South Lake Drive St. Francis, WI 53235 |
|||||||||||||
Capital Guardian Trust Company
|
Common Stock | 10,361,190 | (7) | 7 | .4% | ||||||||
11100 Santa Monica Blvd. Los Angeles, CA 90025 |
|||||||||||||
Lord, Abbett & Co.
|
Common Stock | 10,054,663 | (8) | 7 | .2% | ||||||||
90 Hudson Street Jersey City, NJ 07302 |
77
Amount and Nature of | Percentage of Class on | ||||||||||||
Name and Address of Beneficial Owner | Title of Class | Beneficial Ownership | December 31, 2004 | ||||||||||
Capital Research and Management Company
|
Common Stock | 6,487,100 | (9) | 4 | .6% | ||||||||
333 South Hope Street Los Angeles, CA 90071 |
(1) | Based on Amendment No. 1 to Schedule 13G filed December 10, 2004, in which U.S. Trust Corporation, United States Trust Company of New York and U.S. Trust Company, N.A. reported that, as of November 30, 2004, it had sole voting power over 23,664 of these shares, shared voting power over none of these shares, sole dispositive power over 11,125,912 of these shares and shared dispositive power over 6,193,301 of these shares. U.S. Trust Company, N.A. serves as independent fiduciary and investment manager of the Delta Family-Care Savings Plans (i) Common Stock Fund and (ii) ESOP component, which holds our common stock and Series B Preferred Stock. Included are 19,345,519 shares of common stock held in the Delta Family-Care Savings Plan for which U.S. Trust acts as investment manager with sole or share dispositive power but no voting power and 5,627,844 shares of Series B Preferred Stock held by such Plan, which are currently convertible into 9,654,566 shares of common stock, for which U.S. Trust has sole dispositive power but no voting power. |
(2) | Based on an Amendment to Schedule 13G filed November 10, 2004, in which FMR Corp. reported that, as of October 31, 2004, it had sole voting power over 891,290 of these shares, shared voting power over none of these shares and sole voting power over all 15,113,143 of these shares. |
(3) | Based on an Amendment to Schedule 13G filed September 10, 2004, in which Brandes Investment Partners, LLC reported that, as of August 31, 2004, it had sole voting power over none of these shares, shared voting power over 11,804,356 of these shares and shared dispositive power over all 14,673,108 of these shares. Brandes Investment Partners, Inc., Brandes Worldwide Holdings, L.P., Charles H. Brandes, Glenn R. Carlson and Jeffrey A. Busby, as control persons of Brandes Investment Partners, LLC, disclaim beneficial ownership of all of these shares. |
(4) | Based on Amendment No. 14 to Schedule 13G filed December 16, 2004, in which PRIMECAP Management Company (PRIMECAP) reported that, as of December 14, 2004, it had sole voting power over 2,246,191 of these shares, shared voting power over none of these shares and sole dispositive power over all 13,981,041 of these shares. PRIMECAP has informed Delta that, at December 31, 2003, 8,150,000 of these shares were held by the Vanguard Chester Fund Vanguard PRIMECAP Fund, which is managed by PRIMECAP. In Amendment No. 6 to Schedule 13G filed February 4, 2004, the Vanguard Chester Funds Vanguard PRIMECAP Fund, 100 Vanguard Blvd., Malvern, PA 19355, reported that it had sole voting power over all 8,150,000 of these shares and neither sole nor shared dispositive power over any of these shares. |
(5) | Based on an Amendment to Schedule 13G filed May 10, 2004, in which Capital Group International, Inc. reported that, as of April 30, 2004, it had sole voting power over 9,056,800 of these shares, shared voting power over none of these shares and sole dispositive power over all 13,270,390 of these shares. Capital Group International, Inc. disclaims beneficial ownership of all of these shares. |
(6) | Based on an Amendment to Schedule 13G filed November 8, 2004, in which Michael A. Roth and Brian J. Stark, as joint filers, reported that, as of October 28, 2004, they had shared voting and shared dispositive power over all 11,474,600 of these shares. The shares are held by Shepherd Investments International, Ltd. (Shepherd), Shepherd Trading Limited (Shepherd Trading), Stark Trading, Stark International, Reliant Trading and SF Capital Partners Ltd. (SF Capital). The joint filers direct the management of Stark Offshore Management, LLC (Stark Offshore), which acts as the investment manager and has sole power to direct the management of Shepherd, Shepherd Trading and SF Capital, and Stark Onshore Management, LLC (Stark Onshore), which acts as the managing general partner and has sole power to direct the management of Stark Trading, Stark International and Reliant Trading. |
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(7) | Based on an Amendment to Schedule 13G filed May 10, 2004, in which Capital Guardian Trust Company reported that, as of April 30, 2004, it had sole voting power over 6,811,600 of these shares, shared voting power over none of these shares and sole dispositive power over all 10,361,190 of these shares. Capital Guardian Trust Company disclaims beneficial ownership of all of these shares. |
(8) | Based on Amendment No. 1 to Schedule 13G filed February 4, 2004, in which Lord, Abbett & Co. reported that, as of December 31, 2003, it had sole voting and dispositive power over all 10,054,663 of these shares. |
(9) | Based on Amendment No. 3 to Schedule 13G filed February 12, 2004, in which Capital Research and Management Company reported that, as of December 31, 2003, it had neither sole nor shared voting power over any of these shares and had sole dispositive power over all 6,487,100 of these shares. Capital Research and Management Company disclaims beneficial ownership of all of these shares. |
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SELLING SECURITYHOLDERS
We originally issued the securities in private placements in November 2004. The notes and shares of our common stock were sold to qualified institutional buyers within the meaning of Rule 144A under the Securities Act in transactions exempt from registration under the Securities Act. The notes and shares of our common stock that may be offered with this prospectus will be offered by the selling securityholders, which includes their transferees, pledgees or donees or their successors. The following table sets forth certain information concerning the principal amount of notes and shares of common stock beneficially owned by each selling securityholder that may be offered from time to time with this prospectus.
We have prepared the table below based on information given to us by the selling securityholders on or prior to the date of this prospectus. However, any or all of the notes or the shares of common stock listed below may be offered for sale with this prospectus by the selling securityholders from time to time. Accordingly, no estimate can be given as to the amount of notes or shares of common stock that will be held by the selling securityholders upon consummation of any sales. In addition, the selling securityholders listed in the table below may have acquired, sold or transferred, in transactions exempt from the registration requirements of the Securities Act, some or all of their securities since the date this information was last provided to us.
Information about the selling securityholders may change over time. Any changed information will be set forth in prospectus supplements or post-effective amendments. From time to time, however, the notes and shares of common stock may be owned by persons not named in the table below and of whom we are unaware.
Principal | ||||||||||||||||
Amount of | Percentage of | |||||||||||||||
Notes | Number of | Common Stock | ||||||||||||||
Beneficially | Percentage | Shares of | Outstanding on | |||||||||||||
Owned That | of Notes | Common Stock | December 31, | |||||||||||||
Name of Selling Securityholder | May Be Sold | Outstanding | That May Be Sold | 2004 | ||||||||||||
The Income Fund of America, Inc.
|
$ | 62,396,000 | 46.2 | % | 2,532,748 | 1.8 | % | |||||||||
Mellon HBV SPV LLC
|
$ | 30,086,000 | 22.3 | % | 1,221,236 | * | ||||||||||
American High Income Trust
|
$ | 18,875,000 | 14.0 | % | 766,165 | * | ||||||||||
The Bond Fund of America, Inc.
|
$ | 7,710,000 | 5.7 | % | 312,961 | * | ||||||||||
Shepherd Investments International,
Ltd.
|
$ | 4,250,000 | 3.1 | % | 172,514 | * | ||||||||||
Stark International
|
$ | 4,250,000 | 3.1 | % | 172,514 | * | ||||||||||
American Funds Insurance Series High-
Income Bond Fund
|
$ | 2,300,000 | 1.7 | % | 93,360 | * | ||||||||||
American Funds Insurance Series Bond Fund
|
$ | 1,500,000 | 1.1 | % | 60,887 | * | ||||||||||
American Funds Insurance Series Asset
Allocation Fund
|
$ | 1,185,000 | * | 48,101 | * | |||||||||||
Qualcomm Incorporated
|
$ | 1,125,000 | * | 45,666 | * | |||||||||||
Capital World Bond Fund, Inc.
|
$ | 850,000 | * | 34,503 | * | |||||||||||
Manufacturers Investment Trust Diversified
Bond Trust
|
$ | 250,000 | * | 10,148 | * | |||||||||||
Manufacturers Investment
Trust Income & Value Trust
|
$ | 150,000 | * | 6,089 | * | |||||||||||
Philip Morris Capital Corporation
|
| | 1,084,737 | * | ||||||||||||
Banc of America Leasing & Capital, LLC
|
| | 866,425 | * | ||||||||||||
Walt Disney Pictures and Television
|
| | 281,793 | * | ||||||||||||
AT&T Credit Holdings, Inc.
|
| | 160,206 | * | ||||||||||||
John Hancock Life Insurance Company
|
| | 150,527 | * |
80
Principal | ||||||||||||||||
Amount of | Percentage of | |||||||||||||||
Notes | Number of | Common Stock | ||||||||||||||
Beneficially | Percentage | Shares of | Outstanding on | |||||||||||||
Owned That | of Notes | Common Stock | December 31, | |||||||||||||
Name of Selling Securityholder | May Be Sold | Outstanding | That May Be Sold | 2004 | ||||||||||||
The Northwestern Mutual Life Insurance Company
|
| | 134,441 | * | ||||||||||||
DaimlerChrysler Services North America LLC
|
| | 128,908 | * | ||||||||||||
Westinghouse Aircraft Leasing Inc.
|
| | 123,697 | * | ||||||||||||
Ford Motor Credit Company
|
| | 105,150 | * | ||||||||||||
BNY Capital Resources Corporation
|
| | 102,541 | * | ||||||||||||
The Provident Bank
|
| | 68,277 | * | ||||||||||||
Diamond Lease (U.S.A.), Inc.
|
| | 67,256 | * | ||||||||||||
Credit Suisse Leasing 92A, L.P.
|
| | 66,272 | * | ||||||||||||
NCC Key Company
|
| | 64,949 | * | ||||||||||||
High Tech Services Risk Retention Group,
Inc.
|
| | 64,244 | * | ||||||||||||
Pacific Harbor Capital, Inc.
|
| | 56,757 | * | ||||||||||||
Bell Atlantic Tricon Leasing Corporation
|
| | 52,671 | * | ||||||||||||
AXA Equitable Life Insurance Company
|
| | 50,042 | * | ||||||||||||
NCC Golf Company
|
| | 48,416 | * | ||||||||||||
U.S. Bancorp Equipment Finance, Inc.
|
| | 48,169 | * | ||||||||||||
AmSouth Leasing Corporation
|
| | 37,546 | * | ||||||||||||
United of Omaha Life Insurance Company
|
| | 37,039 | * | ||||||||||||
Tohlease Corporation
|
| | 35,589 | * | ||||||||||||
NCC Charlie Company
|
| | 32,673 | * | ||||||||||||
Norddeutsche Landesbank Girozentrale
|
| | 32,612 | * | ||||||||||||
WM Aircraft Holdings LLC
|
| | 30,342 | * | ||||||||||||
BTM Capital Corporation
|
| | 29,153 | * | ||||||||||||
Aircraft Lease Finance III, Inc.
|
| | 28,610 | * | ||||||||||||
AXA Financial, Inc.
|
| | 27,412 | * | ||||||||||||
National City Commercial Capital Corporation
|
| | 25,845 | * | ||||||||||||
First Hawaiian Bank
|
| | 23,503 | * | ||||||||||||
Wells Fargo Bank National Association
|
| | 22,818 | * | ||||||||||||
Key Equipment Finance, a division of Key
Corporate Capital, Inc.
|
| | 19,368 | * | ||||||||||||
Uberior Investments plc
|
| | 16,304 | * | ||||||||||||
Arkia Leasing International Ltd.
|
| | 16,055 | * | ||||||||||||
Farm Bureau Life Insurance Company
|
| | 13,110 | * | ||||||||||||
Canada Life Insurance Company of America
|
| | 12,363 | * | ||||||||||||
Great-West Life & Annuity Insurance
Company
|
| | 12,363 | * | ||||||||||||
Sun Life Assurance Company of Canada
|
| | 11,508 | * | ||||||||||||
Sun Life Assurance Company of Canada (U.S.)
|
| | 11,195 | * |
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Principal | ||||||||||||||||
Amount of | Percentage of | |||||||||||||||
Notes | Number of | Common Stock | ||||||||||||||
Beneficially | Percentage | Shares of | Outstanding on | |||||||||||||
Owned That | of Notes | Common Stock | December 31, | |||||||||||||
Name of Selling Securityholder | May Be Sold | Outstanding | That May Be Sold | 2004 | ||||||||||||
Sumitomo Mitsui Banking Corporation
|
| | 10,000 | * | ||||||||||||
Monumental Life Insurance Company
|
| | 8,276 | * | ||||||||||||
American General Life Insurance Company
|
| | 8,192 | * | ||||||||||||
Nationwide Life Insurance Company
|
| | 7,500 | * | ||||||||||||
Principal Life Insurance Company
|
| | 5,000 | * | ||||||||||||
ABN Amro Bank N.V.
|
| | 2,500 | * | ||||||||||||
Cargill Financial Services International,
Inc.
|
| | 2,500 | * | ||||||||||||
Commerce Insurance Company
|
| | 2,500 | * | ||||||||||||
Coöperatieve Centrale
Raiffeisen-Boerenleenbank B.A.
|
| | 2,500 | * | ||||||||||||
Merrill Lynch Credit Products, LLC
|
| | 2,500 | * | ||||||||||||
The Ohio National Life Insurance Company
|
| | 2,500 | * | ||||||||||||
Sub Total
|
$ | 134,927,000 | 99.8 | % | 9,731,746 | 7.0 | % | |||||||||
All other holders of the notes or common stock to
be registered hereunder or future transferees, pledges, donees,
assignees or successors of any of those holders
|
$ | 275,000 | 0.2 | % | 111,032 | 0.1 | % | |||||||||
Total
|
$ | 135,202,000 | 100.0 | % | 9,842,778 | 7.1 | % | |||||||||
* Less than 1%
None of the selling securityholders has, or within the past three years has had, any position, office or other material relationship with us or any of our predecessors or affiliate.
Only selling securityholders identified above who beneficially own the securities set forth opposite each such selling securityholderss name in the foregoing table on the effective date of the registration statement of which this prospectus forms a part may sell such securities under the registration statement. Prior to any use of this prospectus in connection with an offering of the notes and/or the common stock by any holder not identified above, this prospectus will be supplemented or amended to set forth the name and other information about the selling securityholder intending to sell such notes and the common stock. The prospectus supplement or post-effective amendment will also disclose whether any selling securityholder selling in connection with such prospectus supplement or post-effective amendment has held any position or office with, been employed by or otherwise has had a material relationship with, us or any of our affiliates during the three years prior to the date of the prospectus supplement or post-effective amendment if such information has not been disclosed in this prospectus.
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DESCRIPTION OF NOTES
We issued the notes under an indenture dated November 24, 2004, between us and Bank of New York Trust Company, N.A., as trustee. A copy of the indenture and the registration rights agreement entered into with the initial purchasers is available upon request to us at the address indicated under Where You Can Find More Information. The following is a summary of certain provisions of the indenture and the registration rights agreement and does not purport to be complete. Reference should be made to all provisions of the indenture and the registration rights agreement, including the definitions of certain terms contained therein. As used in this section, the terms Delta, we, us and our refer to Delta Air Lines, Inc., but not any of our subsidiaries, unless the context requires otherwise.
General
The notes are our senior unsecured obligations and rank equal in right of payment to all of our other existing and future senior unsecured indebtedness. The notes are effectively subordinated to all of our existing and future secured indebtedness to the extent of the assets securing that indebtedness, and are structurally subordinated to all liabilities of our subsidiaries. See Risk Factors Risks Relating to the Notes The notes rank below our secured debt and the liabilities of our subsidiaries.
The notes will mature on December 15, 2007, and are limited to an aggregate principal amount of $135,202,000.
The notes were issued in denominations of $1,000 and integral multiples of $1,000 in fully registered form. The notes are exchangeable and transfers of the notes will be registrable without charge, but we may require payment of a sum sufficient to cover any tax or other governmental charge in connection with such exchanges or transfers.
The notes accrue interest at a rate of 8.00% per annum from November 24, 2004, or from the most recent interest payment date to which interest has been paid or duly provided for, and any accrued and unpaid interest and additional interest, will be payable semi-annually in arrears on June 15 and December 15 of each year, beginning June 15, 2004. Interest will be paid to the person in whose name a note is registered at the close of business on June 1 or December 1 (any of which we refer to as a record date) immediately preceding the relevant interest payment date.
We are not subject to any financial covenants under the indenture. In addition, we are not restricted under the indenture from paying dividends, incurring debt, securing our debt or issuing or repurchasing our securities.
You are not afforded protection in the event of a highly leveraged transaction, or a change of control of us under the indenture, except to the extent described below under the caption Consolidation, Merger, Conveyance, Transfer or Lease.
Principal, interest and additional interest, if applicable, on the notes will be payable at our office or agency in New York, New York maintained for such purpose and at any other office or agency maintained by us for such purpose. At our option, payment of interest may be made by check mailed to the address of the person entitled thereto as the address appearing in the security register.
If any interest payment date or the stated maturity date falls on a day that is not a business day at the place of payment, the required payment of principal or interest will be made on the next succeeding business day as if made on the date that the payment was due and no interest will accrue on that payment for the period from and after the interest payment date or maturity date, as the case may be, to the date of payment on the next succeeding business day. The term business day means, with respect to any note, any day other than a Saturday, a Sunday or a day on which banking institutions in The City of New York or in the city in which the trustee is located are authorized or required by law, regulation or executive order to close.
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Ranking
The notes are our senior unsecured obligations and rank equally with all of our other existing and future senior unsecured indebtedness. The notes are effectively subordinated to all of our existing and future secured indebtedness to the extent of the assets securing that indebtedness. The notes are structurally subordinated to all liabilities of our subsidiaries. As of December 31, 2004, we had approximately $13.9 billion (unaudited) of total consolidated indebtedness, including capital leases. As of December 31, 2004, we had approximately $6.6 billion of secured indebtedness (excluding secured indebtedness of our subsidiaries); and approximately $2.3 billion of subsidiary indebtedness. The indenture does not limit the amount of additional indebtedness that we can create, incur, assume or guarantee, or limit the amount of assets that we can use to secure our other indebtedness, nor does the indenture limit the amount of indebtedness and other liabilities that any subsidiary can create, incur, assume or guarantee.
Consolidation, Merger, Conveyance, Transfer or Lease
The indenture provides that we may not consolidate with or merge into or convey, transfer or lease our properties and assets substantially as an entirety to another corporation, person or entity, and we may not permit any other corporation, person or entity to consolidate with or merge into us or convey, transfer or lease its properties and assets substantially as an entirety to us, unless:
| either we are the continuing corporation, or any successor or purchaser is a corporation, partnership or trust organized under the laws of the United States, any state thereof or the District of Columbia and the successor or purchaser expressly assumes our obligations on the notes under a supplemental indenture in a form reasonably satisfactory to the trustee; | |
| in all cases, immediately after giving effect to the transaction, no default or event of default, and no event that, after notice or lapse of time or both, would become an event of default, will have occurred and be continuing; and | |
| we have delivered to the trustee an officers certificate and an opinion of counsel stating that the consolidation, merger, conveyance transfer or lease and, if a supplemental indenture is to be executed in connection with such transaction, such supplemental indenture complies with these provisions. |
Upon any such consolidation, merger, conveyance, lease or transfer in accordance with the foregoing, the successor person formed by such consolidation or share exchange or into which we are merged or to which such sale, assignment, conveyance, lease, transfer or other disposition is made will succeed to, and be substituted for, and may exercise our right and power, under the indenture with the same effect as if such successor had been named as us in the indenture, and thereafter (except in the case of a lease) the predecessor corporation will be relieved of all further obligations and covenants under the indenture and the notes.
Events of Default and Remedies
Event of Default |
An event of default is defined in the indenture as being:
(i) a default for 5 business days in payment of the principal of the notes at stated maturity; | |
(ii) a default for 30 days in payment of any installment of interest on or additional interest; | |
(iii) a failure to comply with or observe in any material respect any other covenant or warranty in respect of the notes contained in the indenture or the notes for 60 days after written notice to us by the trustee or to us and the trustee by holders of at least 25% in aggregate principal amount of the notes then outstanding; | |
(iv) a default under any bond, debenture, note or other evidence of indebtedness for money borrowed by us or any of our restricted subsidiaries or under any mortgage, indenture or instrument |
84
under which there may be issued or by which there may be secured or evidenced any indebtedness for money borrowed by us or any of our restricted subsidiaries, which default: |
| is caused by a failure to pay when due any principal on such indebtedness in an amount in excess of $75 million at the final stated maturity date of such indebtedness, which failure continues beyond any applicable grace period, or | |
| results in the acceleration of such indebtedness in an amount in excess of $75 million prior to its express maturity, without such acceleration being rescinded or annulled, |
and, in each case, without such indebtedness having been discharged, or such acceleration having been rescinded or annulled, within a period of 30 days after there shall have been given written notice to us by the trustee or to us and the trustee by holders of at least 25% in aggregate principal amount of the notes then outstanding; or |
(v) certain events involving our bankruptcy, insolvency or reorganization. |
Acceleration of Notes at Maturity upon an Event of Default, Rescission and Annulment |
If an Event of Default occurs and is continuing, then and in every such case the trustee or the holders of not less than 25% in principal amount of the outstanding notes may declare the principal of all the notes to be due and payable immediately, by a notice in writing to us (and to the trustee if given by holders of notes). Upon such declaration, such principal amount will become immediately due and payable, notwithstanding anything contained in the indenture or the notes to the contrary. At any time after such a declaration and prior to a judgment or decree for payment being obtained by the trustee, the holders of a majority in principal amount of the notes may rescind and annul the declaration by written notice if all events of default (other than non-payment of principal which has become due solely by the declaration of acceleration) have been cured or waived and we have deposited with the trustee a sum sufficient to pay all overdue interest (together with interest upon overdue interest at the rate borne by the notes, to the extent lawful), the principal and all sums paid or advanced by the trustee and the reasonable expenses of the trustee.
Holders of the notes may not enforce the indenture or the notes except as provided in the indenture. Subject to the provisions of the indenture relating to the duties of the trustee, the trustee is under no obligation to exercise any of its rights or powers under the indenture at the request, order or direction of any of the holders, unless such holders have offered to the trustee a security or an indemnity satisfactory to it against any cost, expense or liability. Subject to all provisions of the indenture and applicable law, the holders of a majority in aggregate principal amount of the notes then outstanding have the right to direct the time, method and place of conducting any proceeding for any remedy available to the trustee or exercising any trust or power conferred on the trustee. If a default or event of default occurs and is continuing and is known to the trustee, the indenture requires the trustee to give each holder notice of any default under the indenture and to the extent provided by the Trust Indenture Act; provided, however, that in the case of any default specified under clause (iii) above, no such notice shall be given to the holders until at least 30 days after the occurrence of such event of default. The holders of a majority in aggregate principal amount of the notes then outstanding by written notice to the trustee may rescind any acceleration of the notes and its consequences if all existing events of default (other than the nonpayment of principal of and interest and additional interest, if any, on the notes that have become due solely by virtue of such acceleration) have been cured or waived. No such rescission will affect any subsequent default or event of default or impair any right consequent thereto.
A holder of notes may pursue any remedy under the indenture only if:
| the holder gives the trustee written notice of a continuing event of default on the notes; | |
| the holders of at least 25% in aggregate principal amount of the notes then outstanding make a written request to the trustee to pursue the remedy in its own name as the trustee; | |
| the holder offers to the trustee indemnity reasonably satisfactory to the trustee; |
85
| the trustee fails to act for a period of 60 days after the receipt of notice and offer of indemnity; | |
| during that 60-day period, the holders of a majority in principal amount of the notes then outstanding do not give the trustee a direction inconsistent with the request; and | |
| the request of the holder to pursue remedies under the indenture will not disturb or prejudice the rights of any other holders, or obtain or seek to obtain priority or preference over any other holders or enforce any right under the indenture, except in the manner provided in the indenture and for the equal and ratable benefit of all the holders. |
This provision does not, however, affect the right of a holder of notes to sue for enforcement of the payment of the principal, interest or additional interest, if any, under the indenture.
The holders of no less than a majority in aggregate principal amount of the notes then outstanding may, on behalf of the holders of all the notes, waive any past default or event of default under the indenture and its consequences, except default in the payment of principal or interest or additional interest, if any, on the notes (other than the nonpayment of principal, interest or additional interest, if any, on the notes that have become due solely by virtue of an acceleration that has been duly rescinded as provided above) or in respect of a covenant or provision of the indenture that cannot be modified or amended without the consent of all holders of notes then outstanding.
We are required to deliver to the trustee, within 120 days after the end of each of our fiscal years, a statement regarding compliance with the indenture and we are required, upon becoming aware of any default or event of default, to deliver to the trustee a statement specifying such default or event of default.
Restricted subsidiary means any subsidiary (i) substantially all of the property of which is located, and substantially all of the operations of which are conducted, in the United States, and (ii) which owns a principal property, except a subsidiary which is primarily engaged in the business of a finance company.
Principal property means any aircraft, or any aircraft engine installed in any aircraft, that has 75 or more passenger seats, whether now owned or hereafter acquired by us or any restricted subsidiary.
Amendment, Supplement and Waiver
Except as provided in the next two succeeding paragraphs, the indenture may be amended or supplemented with the consent of the holders of at least a majority in aggregate principal amount of the notes then outstanding, and any existing default or compliance with any provision of the indenture or the notes may be waived with the consent of the holders of a majority in principal amount of the notes then outstanding.
Without the consent of each holder affected, an amendment or waiver may not (with respect to any notes held by a non-consenting holder):
| reduce the percentage in principal amount of notes whose holders must consent to an amendment, supplement or waiver; | |
| reduce the principal of or change the fixed maturity of any note; | |
| reduce the rate or amount of or change the time for or place of payment of the principal or interest thereon; | |
| waive a default or event of default in the payment of principal or interest on the notes (except a rescission of acceleration of the notes by the holders of at least a majority in aggregate principal amount of the notes then outstanding and a waiver of the payment default that resulted from such acceleration); | |
| make any note payable in money other than that stated in the indenture and the notes; or | |
| make any change in the provisions of the indenture relating to waivers of past defaults or the rights of holders of notes to receive payments of principal or interest on the notes. | |
86
Notwithstanding the foregoing, without the consent of any holder of notes, we and the trustee may amend or supplement the indenture or the notes to:
| evidence our successor and the assumption by any such successor of our covenants under the indenture and in the notes; | |
| add to our covenants for the benefit of the holders of the notes, or to surrender our rights or power; | |
| add any additional events of default; | |
| add to or change any of the provisions of the indenture as necessary to permit or facilitate the issuance of notes in bearer form, registrable or not registrable as to principal, and with or without interest coupons, or to permit or facilitate the issuance of notes in uncertificated form; | |
| secure the notes; | |
| comply with requirements of the SEC in order to effect or maintain the qualification of the indenture under the Trust Indenture Act of 1939; | |
| evidence and provide for the acceptance of the appointment under the indenture of a successor trustee; or | |
| cure any ambiguity, defect or inconsistency or make any other changes in the provisions of the indenture which we and the trustee may deem necessary or desirable, provided such amendment does not materially and adversely affect rights of the holders of the notes under the indenture. |
Discharge of the Indenture
We may satisfy and discharge our obligations under the indenture by delivering to the trustee for cancellation all outstanding notes or by depositing with the trustee or the paying agent, after the notes have become due and payable at stated maturity, cash sufficient to pay all of the outstanding notes, and paying all other sums payable under the indenture.
Governing Law
The indenture provides that the notes are governed by, and construed in accordance with, the laws of the State of New York.
Form, Exchange, Registration and Transfer
The notes were issued in registered form, without interest coupons and only in denominations of $1,000 and any integral multiple thereof. We will not charge a service fee for any registration of transfer or exchange of the notes. We may, however, require the payment of any tax or other governmental charge payable for that registration.
The notes will be exchangeable for other notes, for a like total principal amount and for the same terms but in different authorized denominations, in accordance with the indenture. Holders may present notes for registration of transfer at the office of the security registrar or any transfer agent we designate. The security registrar or transfer agent will effect the transfer or exchange when it is satisfied with the documents of title and identity of the person making the request.
We have appointed the trustee as security registrar for the notes. We may at any time rescind that designation or approve a change in the location through which any such security registrar acts. We are required to maintain an office or agency for transfer and exchanges in each place of payment. We may at any time designate additional registrars for the notes.
The registered holder of a note will be treated as the owner of it for all purposes.
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Book-Entry; Delivery and Form; Global Note
The Notes will be represented by a single, permanent global note in definitive, fully registered form without interest coupons. The global note will be deposited with the trustee as custodian for DTC and registered in the name of a nominee of DTC in New York, New York for the accounts of participants in DTC.
Except in the limited circumstances described below, holders of notes represented by interests in the global note will not be entitled to receive notes in definitive form.
DTC has advised us as follows: DTC is a limited purpose trust company organized under the laws of the State of New York and a clearing corporation within the meaning of the New York Uniform Commercial Code and a clearing agency registered pursuant to the provisions of Section 17A of the Exchange Act. DTC was created to hold securities of institutions that have accounts with DTC (which we refer to as participants) and to facilitate the clearance and settlement of securities transactions among its participants in such securities through electronic book-entry changes in accounts of the participants, thereby eliminating the need for physical movement of securities certificates. DTCs participants include securities brokers and dealers (which may include the initial purchaser), banks, trust companies, clearing corporations and certain other organizations. Access to DTCs book-entry system is also available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a participant, whether directly or indirectly.
Upon the issuance of the global note, DTC will credit, on its book-entry registration and transfer system, the respective principal amount of the individual beneficial interests represented by the global note to the accounts of participants. The accounts to be credited shall be designated by the initial purchaser of such beneficial interests. Ownership of beneficial interests in the global note will be limited to participants or persons that may hold interests through participants. Ownership of beneficial interests in the global note will be shown on, and the transfer of those ownership interests will be effected only through, records maintained by DTC (with respect to participants interests) and such participants (with respect to the owners of beneficial interests in the global note other than participants).
So long as DTC or its nominee is the registered holder and owner of the global note, DTC or such nominee, as the case may be, will be considered the sole legal owner of the notes represented by the global note for all purposes under the indenture and the notes. Except as set forth below, owners of beneficial interests in the global note will not be entitled to receive notes in definitive form and will not be considered to be the owners or holders of any notes under the global note. We understand that under existing industry practice, in the event an owner of a beneficial interest in the global note desires to take any actions that DTC, as the holder of the global note, is entitled to take, DTC would authorize the participants to take such action, and that participants would authorize beneficial owners owning through such participants to take such action or would otherwise act upon the instructions of beneficial owners owning through them. No beneficial owner of an interest in the global note will be able to transfer the interest except in accordance with DTCs applicable procedures, in addition to those provided for under the indenture.
Payments of the principal of and interest and additional interest, if any, on the notes represented by the global note registered in the name of and held by DTC or its nominee will be made to DTC or its nominee, as the case may be, as the registered owner and holder of the global note.
We expect that DTC or its nominee, upon receipt of any payment of principal or interest or additional interest, if any, in respect of the global note, will credit participants accounts with payments in amounts proportionate to their respective beneficial interests in the principal amount of the global note as shown on the records of DTC or its nominee. We also expect that payments by participants to owners of beneficial interests in the global note held through such participants will be governed by standing instructions and customary practices as is now the case with securities held for accounts of customers registered in the names of nominees for such customers. Such payments, however, will be the responsibility of such participants and indirect participants, and neither we, the trustee nor any paying agent will have any
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Unless and until it is exchanged in whole or in part for notes in definitive form, the global note may not be transferred except as a whole by DTC to a nominee of DTC or by a nominee of DTC to DTC or another nominee of DTC.
Transfers between participants in DTC will be effected in the ordinary way in accordance with DTC rules and will be settled in same-day funds. Transfers between participants in Euroclear and Clearstream will be effected in the ordinary way in accordance with their respective rules and operating procedures.
Cross-market transfers between DTC, on the one hand, and directly or indirectly through Euroclear or Clearstream participants, on the other, will be effected in DTC in accordance with DTC rules on behalf of Euroclear or Clearstream, as the case may be, by its respective depositary; however, such cross-market transactions will require delivery of instructions to Euroclear or Clearstream, as the case may be, by the counterparty in such system in accordance with its rules and procedures and within its established deadlines (Brussels time). Euroclear or Clearstream, as the case may be, will, if the transaction meets its settlement requirements, deliver instructions to its respective depositary to take action to effect final settlement on its behalf by delivering or receiving interests in the global note in DTC, and making or receiving payment in accordance with normal procedures for same-day funds settlement applicable to DTC. Euroclear participants and Clearstream participants may not deliver instructions directly to the depositaries for Euroclear or Clearstream.
Because of time zone differences, the securities account of a Euroclear or Clearstream participant purchasing an interest in the global note from a DTC participant will be credited during the securities settlement processing day (which must be a business day for Euroclear or Clearstream, as the case may be) immediately following the DTC settlement date, and such credit of any transaction interests in the global note settled during such processing day will be reported to the relevant Euroclear or Clearstream participant on such day. Cash received in Euroclear or Clearstream as a result of sales of interests in the global note by or through a Euroclear or Clearstream participant to a DTC participant will be received with value on the DTC settlement date, but will be available in the relevant Euroclear or Clearstream cash account only as of the business day following settlement in DTC.
We expect that DTC will take any action permitted to be taken by a holder of notes (including the presentation of notes for exchange as described below) only at the direction of one or more participants to whose account the DTC interests in the global note is credited and only in respect of such portion of the aggregate principal amount of the notes as to which such participant or participants has or have given such direction. However, if there is an event of default under the notes, DTC will exchange the global note for notes in definitive form, which it will distribute to its participants. These notes in definitive form will be subject to certain restrictions on registration of transfers under Notice to Investors, and will bear the legend set forth thereunder.
Although we expect that DTC, Euroclear and Clearstream will agree to the foregoing procedures in order to facilitate transfers of interests in the global note among participants of DTC, Euroclear, and Clearstream, DTC, Euroclear and Clearstream are under no obligation to perform or continue to perform such procedures, and such procedures may be discontinued at any time. Neither we, nor the trustee, registrar or paying agent will have any responsibility for the performance by DTC, Euroclear or Clearstream or their participants or indirect participants of their respective obligations under the rules and procedures governing their operations.
If DTC is at any time unwilling to continue as a depositary for the global note and a successor depositary is not appointed by us within 90 days, we will issue notes in fully registered, definitive form in exchange for the global note. Such notes in definitive form will be subject to certain restrictions on
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The Trustee
The Bank of New York Trust Company, N.A. is the trustee, security registrar, paying agent and conversion agent.
The indenture provides that, except during the continuance of an event of default, the trustee will perform only such duties as are specifically set forth in the indenture. In case an event of default shall occur (and shall not be cured) and holders of the notes have notified the trustee, the trustee will be required to exercise its powers with the degree of care and skill of a prudent person in the conduct of such persons own affairs. Subject to such provisions, the trustee is under no obligation to exercise any of its rights or powers under the indenture at the request of any of the holders of notes, unless they shall have offered to the trustee security and indemnity satisfactory to it.
The indenture contains certain limitations on the rights of the trustee, should it become our creditor, to obtain payment of claims in certain cases or to realize on certain property received in respect of any such claim as security or otherwise. The trustee is permitted to engage in other transactions; provided, however, that if it acquires any conflicting interest, it must eliminate such conflict or resign. The Bank of New York Trust Company may in the future engage in other commercial banking transactions with us. Pursuant to the Trust Indenture Act of 1939, upon the occurrence of a default with respect to the notes, The Bank of New York Trust Company may be deemed to have a conflicting interest by virtue of its lending and other business relationships with us. In that event, The Bank of New York Trust Company would be required to resign as trustee or eliminate the conflicting interest.
No Recourse Against Others
None of our directors, officers, employees, stockholders or affiliates, as such, shall have any liability or any obligations under the notes or the indenture or for any claim based on, in respect of or by reason of such obligations or the creation of such obligations. Each holder by accepting a note waives and releases all such liability. The waiver and release are part of the consideration for the notes.
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DESCRIPTION OF CAPITAL STOCK
The following statements relating to our capital stock do not purport to be complete, and are subject to, and are qualified in their entirety by reference to, the provisions of the following documents, which are filed, or incorporated by reference, as exhibits to our Annual Report on Form 10-K for the fiscal year ended December 31, 2003: (a) the Certificate of Incorporation (the Certificate) and By-Laws; (b) the Certificate of Designations, Preferences and Rights of the Series B Preferred Stock and the Certificate of Designations, Preferences and Rights of the Series D Junior Participating Preferred Stock (the Series D Preferred Stock); and (c) the Rights Agreement, dated as of October 23, 1996, as amended (the Rights Agreement), between Delta and Wells Fargo Minnesota Bank, N.A., as successor Rights Agent to First Chicago Trust Company of New York as Rights Agent.
General
The Certificate authorizes a total of 470,000,000 shares of capital stock, of which 450,000,000 may be shares of common stock and 20,000,000 may be shares of preferred stock.
The preferred stock may be issued from time to time in one or more series, without shareowner approval, with such voting powers (full or limited), designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions as shall be adopted by the board of directors. Thus, without shareowner approval, Delta could authorize the issuance of preferred stock with voting, conversion and other rights that could dilute the voting power and other rights of the holders of common stock.
As of December 31, 2004, 139,830,443 shares of common stock were outstanding; 50,915,002 shares of common stock were held in treasury; 5,417,735 shares of Series B Preferred Stock were outstanding and 9,294,125 shares of common stock were reserved for issuance upon the conversion of the Series B Preferred Stock; 2,250,000 shares of Series D Preferred Stock had been authorized and reserved for issuance in connection with the rights described below; 12,500,005 shares of common stock were reserved for issuance upon the conversion of 8.00% Convertible Senior Notes due 2023; 23,923,445 shares of common stock were reserved for issuance upon conversion of 2 7/8% Convertible Senior Notes due 2024; 85,604,064 shares of common stock were reserved for issuance under Deltas broad-based employee stock option plans; 15,811,677 shares of common stock were reserved for issuance under Deltas 2000 Performance Compensation Plan; 250,000 shares of common stock were reserved for issuance under Deltas Non-Employee Directors Stock Option Plan; and 400,319 shares of common stock were reserved for issuance under Deltas Non-Employee Directors Stock Plan.
Common Stock
Subject to the rights of the holders of any shares of preferred stock that may at the time be outstanding, record holders of common stock are entitled to such dividends as the board of directors may declare. Holders of common stock are entitled to one vote for each share held in their name on all matters submitted to a vote of stockholders and do not have preemptive rights or cumulative voting rights. Holders of the Series B Preferred Stock generally vote as a single class with the holders of common stock on matters upon which the common stock is entitled to vote and, subject to adjustment in certain circumstances, are entitled to two votes for each share of Series B Preferred Stock held in their name. Holders of common stock are not subject to further calls or assessments as a result of their holding shares of common stock. In July 2003, our board of directors suspended indefinitely the payment of quarterly cash dividends on the common stock. We are currently prohibited from paying dividends on our capital stock due to restrictions under Delaware law. See Series B Preferred Stock below.
If Delta is liquidated, the holders of shares of common stock are entitled to share ratably in the distribution remaining after payment of debts and expenses and of the amounts to be paid on liquidation to the holders of shares of preferred stock.
Wells Fargo Minnesota Bank, N.A., is the registrar and transfer agent for the common stock.
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Shareowner Rights Plan
The Shareowner Rights Plan is designed to protect stockholders against attempts to acquire Delta that do not offer an adequate purchase price to all stockholders, or are otherwise not in the best interest of Delta and our stockholders. 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. Delta may also amend the rights in any respect so long as the rights are redeemable. At December 31, 2004, 2,250,000 shares of preferred stock were reserved for issuance under the Shareowner Rights Plan.
The rights have certain anti-takeover effects. The rights could cause substantial dilution to a person or group that attempts to acquire Delta without conditioning the offer on redemption of the rights or on acquisition of substantially all of the rights. The rights should not, however, interfere with any merger or other business combination approved by the board of directors.
Certain Other Provisions of the Certificate
Delaware law permits a corporation to eliminate the personal liability of its directors to the corporation or to any of its stockholders for monetary damages for a breach of fiduciary duty as a director, except (i) for breach of the directors duty of loyalty, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for certain unlawful dividends and stock repurchases or (iv) for any transaction from which the director derived an improper personal benefit. The Certificate provides for such limitation of liability.
As permitted by Delaware law, the Certificate permits stockholder action by written consent only if such consent is unanimous. The affirmative vote of the holders of at least 75% of Deltas then outstanding voting stock is required to amend, alter or repeal this provision.
The Certificate also provides that any Business Combination involving Delta and a person (other than Delta or any subsidiary or employee benefit plan of Delta) who beneficially owns 10% or more of Deltas voting stock (a Related Person) must be approved by (i) the holders of at least 75% of the votes entitled to be cast by the holders of Deltas capital stock entitled to vote generally on the election of directors and (ii) a majority of the votes entitled to be cast by the holders of such voting stock, excluding stock beneficially owned by such Related Person (the Voting Requirement). The Voting Requirement does not apply if the Business Combination is approved by a majority of Continuing Directors (as defined), or complies with certain minimum price, form of consideration and other requirements. The Certificate defines Business Combination to include, among other things, (i) any merger or consolidation of Delta with, into or for the benefit of a Related Person; (ii) the sale by Delta of assets or securities to a Related Person, or any other arrangement with or for the benefit of a Related Person, which involves assets or securities valued at an amount equal to at least $15 million; (iii) the acquisition by Delta of assets or securities of a Related Person valued at an amount equal to at least $15 million: or (iv) the adoption of any plan for the liquidation or dissolution of Delta. Some of the Business Combinations to
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Series B Preferred Stock
General |
On July 10, 1989, Delta amended its Savings Plan, effective July 1, 1989, to add an employee stock ownership plan feature (the ESOP). In connection with the establishment of the ESOP, Delta sold 6,944,450 shares of Series B Preferred Stock to the trustee of the ESOP for $72 per share, or approximately $500 million.
In order to finance the purchase of the Series B Preferred Stock, the ESOP issued $481,400,400 principal amount of Guaranteed Serial ESOP Notes (the Guaranteed Serial ESOP Notes). The Guaranteed Serial ESOP Notes are guaranteed by Delta.
Delta is obligated to make payments to the ESOP in order for the ESOP to make payments due under the Guaranteed Serial ESOP Notes and to fund investment elections of participants. As payments on the Guaranteed Serial ESOP Notes are made, shares of Series B Preferred Stock are credited to the participants accounts. All shares of Series B Preferred Stock not so credited are treated as unallocated under the Savings Plan.
The shares of Series B Preferred Stock will be held in the name of the trustee (or its nominee) until redemption or conversion, and may not be sold by the trustee or distributed outside the Savings Plan except for resale to Delta. In the event of any transfer of shares of Series B Preferred Stock to any person other than the trustee, the shares so transferred, upon such transfer, shall be automatically converted into shares of common stock,
Each share of Series B Preferred Stock has a stated value of $72; bears an annual cumulative cash dividend of 6% or $4.32; is convertible into 1.7155 shares of common stock (a conversion price of $41.97), subject to adjustment in certain circumstances; has a liquidation preference of $72, plus any accrued and unpaid dividends; generally votes together as a single class with the common stock on matters upon which the common stock is entitled to vote; and has two votes, subject to adjustment in certain circumstances. If full cumulative dividends on the Series B Preferred Stock have not been declared, paid or set apart for payment when due, Delta (i) may pay only ratable dividends (in proportion to the accumulated and unpaid dividends) on the Series B Preferred Stock and any series of stock ranking on a parity with the Series B Preferred Stock, as to dividends and (ii) subject to certain exceptions, may not pay dividends on, or make any payment on account of the purchase, redemption or other retirement of, the common stock or any other class or series of stock ranking junior to the Series B Preferred Stock.
Effective December 2003, our board of directors suspended indefinitely the payment of dividends on our Series B Preferred Stock to comply with Delaware law. Delaware law provides that a company may pay dividends only (1) out of surplus, which is generally defined as the excess of the companys net assets over the aggregate par value of its issued stock; or (2) from its net profits for the fiscal year in which the dividend is paid or the preceding fiscal year. At December 31, 2003, we had a negative surplus and did not meet the net profits test.
Also, effective December 2003, our board of directors changed the form of payment we will use to redeem shares of the Series B Preferred Stock when redemptions are required under the Savings Plan. For the indefinite future, we will pay the Alternative Redemption Price (as defined below), plus accrued and unpaid dividends, in shares of our common stock rather than in cash. The Board took this action to comply with Delaware law, which generally provides that a company may not purchase or redeem shares of its capital stock for cash or other property unless it has sufficient surplus. During the year ended December 31, 2004, approximately 422,000 shares of Series B Preferred Stock were redeemed, resulting in an aggregate monthly redemption price of approximately $2.7 million including accrued and unpaid
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As of December 31, 2004, there were issued and outstanding 5,417,735 shares of Series B Preferred Stock.
Mandatory Redemption |
Delta is required to redeem shares of Series B Preferred Stock, at any time, at a redemption price (the Alternative Redemption Price) equal to the greater of (i) the liquidation value of the Series B Preferred Stock to be redeemed and (ii) the fair market value of the shares of common stock issuable upon conversion of the Series B Preferred Stock to be redeemed plus, in either case, accrued and unpaid dividends on such shares of Series B Preferred Stock, to enable the trustee to provide for distributions to participants or to satisfy investment elections by participants under the Savings Plan. Delta is also required to redeem all of the outstanding shares of Series B Preferred Stock, at the redemption prices described below in the first sentence under Optional Redemption if (i) the Savings Plan is terminated or (ii) the ESOP is terminated.
Delta may, at its option, pay the redemption price required upon any mandatory redemption of shares of Series B Preferred Stock in cash or shares of common stock (valued at fair market value), or in a combination thereof. See Series B Preferred Stock General for a description of certain limitations imposed by Delaware law.
Optional Redemption |
The Series B Preferred Stock is redeemable, in whole or in part, at $72.00 per share, plus, in each case, an amount equal to all accrued and unpaid dividends thereon to the date fixed for redemption.
Delta may redeem the Series B Preferred Stock, in whole or in part, at a redemption price equal to the liquidation preference of the Series B Preferred Stock to be redeemed, if a change in any law or regulation has the effect of limiting or making unavailable to Delta any of the tax deductions for amounts paid on the shares of Series B Preferred Stock when such amounts are used under Section 404(k)(2) of the Internal Revenue Code of 1986, as amended (the Code). Delta may also redeem any or all of the Series B Preferred Stock, at its option, at the Alternative Redemption Price if the Series B fails to qualify under Section 4975 of the Code. Upon the termination of a Savings Plan participants employment, Delta may elect to redeem any or all of the Series B Preferred Stock held for the account of such participant at the Alternative Redemption Price.
Delta may, at its option, pay the redemption price required upon any voluntary redemption of shares of Series B Preferred Stock in cash or in shares of common stock (valued at fair market value), or in a combination thereof. See Series B Preferred Stock General for a description of certain limitations imposed by Delaware law.
Voting |
The Savings Plan provides that shares of Series B Preferred Stock allocated to the account of a Savings Plan participant will be voted by the trustee in accordance with the participants confidential voting instructions or, if no voting instructions are received by the trustee, in the same proportion as the votes cast on allocated shares of Series B Preferred Stock and common stock in the ESOP pursuant to participants confidential voting instructions. The Savings Plan further provides that shares of Series B Preferred Stock not yet allocated to any participants account will be voted by the trustee in proportion to the votes cast with respect to allocated shares of Series B Preferred Stock and common stock in the ESOP for which voting instructions are received.
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Limitations on Directors Liability
Our Certificate of Incorporation eliminates the personal liability of a director to us and our stockholders for monetary damages for certain breaches of his or her fiduciary duty as a director to the fullest extent permitted under the General Corporation Law of the State of Delaware.
This provision offers persons who serve on our board of directors protection against awards of monetary damages resulting from certain breaches of their fiduciary duty, including grossly negligent business decisions made in connection with takeover proposals for us, and limits our ability or the ability of one of our stockholders to prosecute an action against a director for a breach of fiduciary duty.
Indemnification of Directors and Officers
Our Certificate provides that we will indemnify any of our directors, officers or employees to the fullest extent permitted by the General Corporation Law of the State of Delaware against all expenses, liability and loss incurred in connection with any action, suit or proceeding in which any such person may be involved by reason of the fact that he or she is or was our director, officer or employee. We carry insurance policies in standard form indemnifying our directors and officers against liabilities arising from certain acts performed by them in their capacities as our directors and officers. These policies also indemnify us for any sums we may be required or permitted to pay by law to our directors and officers as indemnification for expenses they may have incurred.
Exchange Listing
Our common stock is listed on the New York Stock Exchange under the symbol DAL.
Anti-Takeover Effects of Delaware Law
Delta is subject to the business combination provisions of Section 203 of Delaware law. In general, such provisions prohibit a publicly held Delaware corporation from engaging in various business combination transactions with any interested stockholder for a period of three years after the date of the transaction in which the person became an interested stockholder, unless
| prior to the date the interested stockholder obtained such status, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; | |
| upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced; or | |
| on or subsequent to such date, the business combination is approved by the board of directors of the corporation and authorized at an annual or special meeting of stockholders by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder. | |
A business combination is defined to include mergers, asset sales and other transactions resulting in financial benefit to an interested stockholder. In general, an interested stockholder is a person who, together with affiliates and associates, owns (or within three years, did own) 15% or more of a corporations voting stock. The statute could prohibit or delay mergers or other takeover or change in control attempts with respect to Delta and, accordingly, may discourage attempts to acquire Delta even though such a transaction may offer Deltas stockholders the opportunity to sell their stock at a price above the prevailing market price.
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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Davis Polk & Wardwell the following are the material United States federal income tax consequences of ownership and disposition of the notes and, in the case of Non-United States Holders (as defined below) common stock. This discussion only applies to notes and shares of common stock held as capital assets.
This discussion does not describe all of the tax consequences that may be relevant to holders in light of their particular circumstances or to holders subject to special rules, such as:
| certain financial institutions; | |
| insurance companies; | |
| dealers in securities or foreign currencies; | |
| persons holding notes as part of a hedge or other integrated transaction; | |
| United States Holders (as defined below) whose functional currency is not the U.S. dollar; | |
| persons owning, or who have owned, more than 5% of our common stock (actually or constructively); | |
| partnerships or other entities classified as partnerships for U.S. federal income tax purposes; or | |
| persons subject to the alternative minimum tax. |
This summary is based on the Internal Revenue Code of 1986, as amended to the date hereof, administrative pronouncements, judicial decisions and final, temporary and proposed Treasury Regulations, changes to any of which subsequent to the date of this Prospectus may affect the tax consequences described herein. Persons considering the purchase of notes or common stock are urged to consult their tax advisers with regard to the application of the United States federal income tax laws to their particular situations as well as any tax consequences arising under the laws of any state, local or foreign taxing jurisdiction.
Tax Consequences to United States Holders
As used herein, the term United States Holder means a beneficial owner of a note that is for United States federal income tax purposes:
| a citizen or resident of the United States; | |
| a corporation, or other entity taxable as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the United States or of any political subdivision thereof; or | |
| an estate or trust the income of which is subject to United States federal income taxation regardless of its source. |
The term United States Holder also includes certain former citizens and residents of the United States.
Issue Price. Under applicable Treasury regulations, the issue price of the notes would equal their fair market value at the time they were issued if the notes were considered publicly traded for U.S. federal income tax purposes. If the notes were not considered publicly traded under these rules, but the notes for which they were exchanged (the Old Notes) were considered publicly traded, the issue price of the notes would equal the fair market value, at the time of the exchange, of the Old Notes less the fair market value of our common stock issued in connection with such exchange. If neither the notes nor the Old Notes were considered publicly traded, the issue price of the notes would equal their stated principal amount.
The notes and the Old Notes would be considered publicly traded for these purposes if, at any time during the 60-day period ending 30 days after the notes issuance, the notes or Old Notes, as applicable, appear on a system of general circulation (including computer listings disseminated to subscribing brokers,
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Based on information currently available to us, it appears that the notes should not be considered publicly traded for U.S. federal income tax purposes, but that the Old Notes should be considered publicly traded. Accordingly, we currently intend to treat the issue price of the notes as equal to the fair market value of the Old Notes at the time of the exchange less the fair market value of our common stock issued in connection with such exchange.
Payments of Interest. Interest paid on a note will be taxable to a United States Holder as ordinary interest income at the time it accrues or is received in accordance with the Holders method of accounting for federal income tax purposes.
Original Issue Discount. The issue price of the notes is substantially less than their principal amount. As such, the notes are considered to have been issued at an original issue discount for U.S. federal income tax purposes. Subject to the rules relating to amortizable bond premium and acquisition premium discussed below, United States Holders of notes will be required to include original issue discount in income for federal income tax purposes as it accrues, in accordance with a constant yield method based on a compounding of interest, before the receipt of cash payments attributable to this income. Under this method, United States Holders of notes generally will be required to include in income increasingly greater amounts of original issue discount in successive accrual periods.
Constant Yield Election. A United States Holder may make an election to include in gross income all interest that accrues on the notes (including stated interest, original issue discount, market discount and de minimis market discount, as adjusted by any amortizable bond premium or acquisition premium) in accordance with a constant yield method based on the compounding of interest (a constant yield election).
Market Discount. If a United States Holders tax basis in a note is less than its adjusted issue price, the amount of the difference will be treated as market discount for federal income tax purposes, unless this difference is less than a specified de minimis amount. The adjusted issue price of a note will equal the sum of the issue price of the note (determined under the rules described above) and the aggregate amount of previously accrued original issue discount. A United States Holder will be required to treat principal payments on a note, or any gain on the sale, exchange, retirement or other disposition of a note, as ordinary income to the extent of the market discount accrued on the note at the time of the payment or disposition, unless this market discount has been previously included in income by the holder pursuant to an election by the holder to include market discount in income as it accrues, or pursuant to a constant yield election by the Holder as described above. If the note is disposed of in certain nontaxable transactions, accrued market discount will be includible as ordinary income to the Holder as if such Holder had sold the note in a taxable transaction at its then fair market value. In addition, the holder may be required to defer, until the maturity of the note or its earlier disposition (including certain nontaxable transactions), the deduction of all or a portion of the interest expense on any indebtedness incurred or maintained to purchase or carry such note.
Acquisition Premium. If a United States Holders tax basis in a note is greater than its issue price but less than or equal to the principal amount of the note, the holder will be considered to have acquired the note at an acquisition premium. Under the acquisition premium rules, the amount of original issue discount that the holder must include in its gross income with respect to the note for any taxable year will be reduced by the portion of acquisition premium properly allocable to that year.
Amortizable Bond Premium. If a United States Holders tax basis in a note is greater than the principal amount of the note, the holder will be considered to have purchased the note with amortizable bond premium equal to such excess. The United States Holder may elect to amortize this premium, using
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Sale, Exchange or Retirement of the Notes. Upon the sale, exchange or retirement of a note, a United States Holder will recognize taxable gain or loss equal to the difference between the amount realized on the sale, exchange or retirement and the Holders adjusted tax basis in the note. For these purposes, the amount realized does not include any amount attributable to accrued interest. Amounts attributable to accrued interest are treated as interest as described under Payments of Interest above.