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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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[X]
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2004 |
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or |
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[ ]
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 1-5424
DELTA AIR LINES, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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58-0218548 |
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(State or other jurisdiction of incorporation or |
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(I.R.S. Employer Identification |
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organization) |
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No.) |
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Post Office Box 20706 |
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Atlanta, Georgia |
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30320-6001 |
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(Address of principal executive offices) |
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(Zip Code) |
Registrant’s telephone number, including area
code: (404) 715-2600
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Name of each exchange on which registered |
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Common Stock, par value $1.50 per share
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New York Stock Exchange |
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Preferred Stock Purchase Rights
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New York Stock Exchange |
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81/8% Notes Due
July 1, 2039
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Act).
Yes X No
The aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant as of
June 30, 2004 was approximately $894 million.
On February 28, 2005, there were outstanding
141,229,031 shares of the registrant’s common stock.
This document is also available on our website at
http://investor.delta.com/edgar.cfm.
Documents Incorporated By Reference
Part III of this Form 10-K incorporates by reference
certain information from the registrant’s definitive Proxy
Statement for its Annual Meeting of Shareowners to be held on
May 19, 2005 to be filed with the Securities and Exchange
Commission.
TABLE OF CONTENTS
i
ii
Forward-Looking Information
Statements in this Form 10-K (or otherwise made by us or on
our behalf) which are not historical facts, including statements
about our estimates, expectations, beliefs, intentions,
projections or strategies for the future, may be
“forward-looking statements” as defined in the Private
Securities Litigation Reform Act of 1995. Forward-looking
statements involve risks and uncertainties that could cause
actual results to differ materially from historical experience
or our present expectations. For examples of such risks and
uncertainties, please see the cautionary statements contained in
Item 1. “Business — Risk Factors Relating to
Delta” and “Business — Risk Factors Relating
to the Airline Industry.” We undertake no obligation to
publicly update or revise any forward-looking statements to
reflect events or circumstances that may arise after the date of
this report.
Unless otherwise indicated, the terms “Delta,” the
“Company,” “we,” “us,” and
“our” refer to Delta Air Lines, Inc. and its
subsidiaries.
PART I
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, Atlantic Southeast
Airlines, Inc. (“ASA”) and Comair, Inc.
(“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 each of the years ended December 31, 2004, 2003 and
2002, passenger revenues accounted for 92% of our consolidated
operating revenues, and cargo revenues and other sources
accounted for 8% of our consolidated operating revenues. In
2004, 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 2003,
our operations in North America, the Atlantic, Latin America and
the Pacific accounted for 83%, 12%, 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 82%, 13%, 4% and 1%, 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 Relating to Delta” and
“— Risk Factors Relating to the Airline
Industry” in this Item 1 and “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations — Business Environment” in Item 7
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,
1
our low-fare service; and our domestic marketing alliances,
including with Continental Airlines, Inc.
(“Continental”) and Northwest Airlines, Inc.
(“Northwest”).
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
carrier’s aircraft that are marketed under our
“DL” designator code and permit the foreign airline to
sell seats on our aircraft that are marketed under the foreign
carrier’s two-letter designator code. We have international
codeshare arrangements in effect with Aerolitoral, Aeromexico,
Air France (and certain of Air France’s affiliated carriers
operating flights beyond Paris), Air Jamaica, Alitalia, Avianca,
China Airlines, China Southern, CSA Czech Airlines, El Al
Israel Airlines, flybe british european, Korean Air, Royal Air
Maroc and South African Airways.
Delta, Aeromexico, Air France, Alitalia, Continental, CSA Czech
Airlines, KLM Royal Dutch Airlines (“KLM”), Korean Air
and Northwest are members of the SkyTeam international airline
alliance. One goal of SkyTeam is to link 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, which is pending before the DOT, for six-way
transatlantic antitrust immunity in order to add Northwest and
KLM to the antitrust immunity we have with Air France, Alitalia,
and CSA Czech Airlines.
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 Airlines,
Inc. (“SkyWest”), Chautauqua Airlines, Inc.
(“Chautauqua”) and American Eagle Airlines, Inc.
(“Eagle”), which operate some of their flights using
our code. We pay SkyWest and Chautauqua amounts, as defined in
the applicable agreement, which are based on an annual
determination of their respective 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 Airline, Inc. (“Republic
Airline”), an affiliate of Chautauqua, under which Republic
Airline 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 8 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.
2
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”).
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 Song service 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 operated by
low-cost carriers, high frequency flights, advanced in-flight
entertainment technology and innovative product offerings.
We have entered into marketing alliances with
(1) Continental and Northwest and (2) Alaska Airlines
and Horizon Air Industries, both of which include mutual
codesharing and reciprocal frequent flyer and airport lounge
access arrangements. These marketing relationships are 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 carriers’
route networks. Currently, Delta, Continental and Northwest are
allowed to codeshare on a combined 5,200 flights.
Regulatory Matters
The DOT and the Federal Aviation Administration
(“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 is 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, a division of the
Department of Homeland Security, 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 and regulations.
3
Fares and Rates
Airlines 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
SimpliFarestm
initiative throughout the 48 contiguous United States. An
important part of our transformation plan, SimpliFares is a
fundamental change in our domestic pricing structure which is
intended to better meet customer needs; to simplify our
business; and to help 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.
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 controlled 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, many of which have substantially
lower costs than we do and provide service at low 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,
AirTran and JetBlue, in the United States places significant
competitive pressures on us and other network carriers. In
addition, other hub-and-spoke carriers such as United Airlines,
US Airways and ATA Airlines have sought to reorganize
under Chapter 11 of the U.S. Bankruptcy Code. In their
respective proceedings, these airlines have reduced or are
seeking to reduce their operating costs by reducing labor costs,
including through renegotiating collective bargaining
agreements, terminating pension plans, and restructuring lease
and debt obligations. Additionally, American Airlines
restructured certain labor costs and lowered its operating cost
base. These reorganizations and restructurings have enabled
these competitors to lower their operating costs significantly.
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,
Lufthansa German Airlines and others) and the oneworld alliance
(among American Airlines, 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.
4
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 are intended to achieve the cost
savings and other benefits that we believe are necessary to
effect an out-of-court restructuring. The initiatives that we
announced are part of our overall strategic reassessment. See
“Management’s Discussion and Analysis of Financial
Condition and Results of Operation — Business
Environment — Our Transformation Plan” in
Item 7 for additional information about our transformation
plan.
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 are significantly impacted by changes
in the price and availability of aircraft fuel. The following
table shows our aircraft fuel consumption and costs for
2002-2004.
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Gallons |
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Average |
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Percentage of |
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Consumed |
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Cost (1) |
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Price Per |
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Total Operating |
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(Millions) |
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(Millions) |
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Gallon (1) |
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Expenses |
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2004
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2,527 |
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$ |
2,924 |
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115.70¢ |
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16 % |
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2003
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2,370 |
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1,938 |
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81.78 |
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13 |
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2002
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2,514 |
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1,683 |
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66.94 |
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11 |
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Net of fuel hedge gains under our fuel hedging program. |
Aircraft fuel expense increased 51% in 2004 compared to 2003.
Total gallons consumed increased 7% in 2004 mainly due to the
restoration of capacity that we reduced in 2003 due to 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
5
shown net of fuel hedge gains of $105 million for 2004,
$152 million for 2003 and $136 million for 2002.
Approximately 8%, 65% and 56% of our aircraft fuel requirements
were hedged during 2004, 2003 and 2002, respectively. In
February 2004, we settled all of our fuel hedge contracts prior
to their scheduled settlement dates. For more information
concerning the settlement of our fuel hedge contracts, see
Note 4 of the Notes to the Consolidated Financial
Statements.
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 “Management’s Discussion and Analysis of
Financial Condition and Results of Operations — Market
Risks Associated with Financial Instruments — Aircraft
Fuel Price Risk” in Item 7 and in Notes 3 and 4
of the Notes to the Consolidated Financial Statements.
For more information about the impact of jet fuel prices on our
liquidity needs, see “Risk Factors 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, if at
all.”
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
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 NMB’s 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.
6
At December 31, 2004, we had a total of approximately
69,150 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.
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Approximate |
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Amendable Date of |
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Number of |
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Collective |
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Employees |
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Bargaining |
| Employee Group |
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Represented |
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Union |
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Agreement |
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Delta Pilots
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6,590 |
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Air Line Pilots Association, International |
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December 31, 2009 |
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Delta Flight Superintendents
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185 |
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Professional Airline Flight Control Association |
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January 1, 2010 |
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ASA Pilots
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1,515 |
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Air Line Pilots Association, International |
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September 15, 2002 |
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ASA Flight Attendants
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885 |
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Association of Flight Attendants |
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September 26, 2003 |
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ASA Flight Dispatchers
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50 |
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Professional Airline Flight Control Association |
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April 18, 2006 |
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Comair Pilots
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1,790 |
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Air Line Pilots Association, International |
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May 21,
2006(1) |
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Comair Maintenance Employees
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485 |
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International Association of Machinists and Aerospace Workers |
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May 31, 2004 |
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Comair Flight Attendants
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1,040 |
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International Brotherhood of Teamsters |
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July 19, 2007 |
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Pursuant to an amendment to the existing agreement that is
scheduled to become effective on June 22, 2005, the
amendable date of the agreement will be extended to May 21,
2007. The effectiveness of the amendment is subject to
conditions, including Comair satisfying requirements to begin
taking delivery of additional aircraft by June 21, 2005. |
ASA is in collective bargaining negotiations with the Air Line
Pilots Association, International (“ALPA”), which
represents ASA’s pilots, and with the Association of Flight
Attendants (“AFA”), which represents ASA’s flight
attendants. The outcome of these collective bargaining
negotiations cannot presently be determined.
In March 2005, Comair’s pilots ratified a tentative
agreement that Comair had reached with ALPA, which represents
Comair’s pilots, to amend their existing agreement. The
agreement extends the amendable date of the existing agreement
between Comair and ALPA from May 21, 2006 to May 21,
2007, includes a freeze of current pay rates and modifies the
existing agreement in certain other respects. The amendments to
the existing agreement are conditioned upon Comair’s
satisfying requirements to begin taking delivery of additional
aircraft by June 21, 2005, and to place into service a
specified number of aircraft over a defined period of time.
Comair is also in collective bargaining negotiations with the
International Association of Machinists and Aerospace Workers,
which represents Comair’s maintenance employees. The
maintenance employees rejected a tentative agreement to amend
their existing agreement that became amendable in May 2004,
which Comair had reached with the union’s negotiating
committee, but Comair expects negotiations to continue. In
addition, Comair is negotiating with the International
Brotherhood of Teamsters, which represents Comair’s flight
attendants, to modify their existing collective bargaining
agreement, which becomes amendable in July 2007. 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
7
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 Organization’s (“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 designs certified on or after
January 1, 2006 be at least ten decibels quieter than the
existing Stage 3 noise standard requires. This new standard
would not apply to existing aircraft or to the continued
production of aircraft types already certified. Comments on the
NPRM were filed by various parties on March 1, 2004. All
new aircraft that we have on order will meet the proposed
Stage 4 standard. Accordingly, the proposed rule is not
expected to have any significant impact on us, and we and the
U.S. airline industry generally supported the adoption of
the NPRM. The FAA has not yet taken final action.
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 of this matter 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 program’s 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
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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 expected to
earn a travel award. We do not record a liability for the
expected redemption of miles for non-travel awards since the
cost of these awards to us is negligible.
We estimated the potential number of round-trip travel awards
outstanding under our frequent flyer program to be
15 million, 14 million and 14 million at
December 31, 2004, 2003 and 2002, respectively. Of these
travel awards, we expected that approximately 6 million,
10 million, and 10 million, respectively, would be
redeemed. At December 31, 2004, 2003 and 2002, we had
recorded a liability for these awards of $211 million,
$229 million and $228 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 2.9 million,
2.8 million and 2.8 million award round-trips on Delta
in 2004, 2003 and 2002, respectively. These round-trips
accounted for approximately 8%, 9% and 9% of the total passenger
miles flown for 2004, 2003 and 2002, 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:
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International |
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Passenger |
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Description of Event |
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Aeromedical |
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Aircraft |
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Leading to Activation |
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Allocated |
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Aircraft Allocated |
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by Stage |
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Minor Crisis |
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5 |
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Not Applicable |
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5 |
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II
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Major Theater Conflict |
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9 |
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12 |
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21 |
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III
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Total National Mobilization |
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21 |
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36 |
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57 |
The CRAF program has only been activated twice, both times at
the Stage I level, since it was created in 1951.
Executive Officers
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Chief Executive Officer since January 2004; joined Delta’s
Board of Directors in 1987; non-executive Chairman of the Board
of Agilent Technologies, Inc. (1999-2002); non-executive
Chairman of Delta’s 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) |
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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 Air Lines,
Inc. (1983-1984); Assistant Treasurer at Pan American World
Airways (1977-1983) |
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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 |
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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) |
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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) |
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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) |
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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) |
Risks Factors Relating to Delta
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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, $773 million
and $1.3 billion for the years ended December 31,
2004, 2003 and 2002, respectively. We expect our revenue and
cost challenges to continue. In addition, Deloitte &
Touche LLP, our independent registered public accounting firm,
issued a Report of Independent Registered Public Accounting Firm
related to our Consolidated Financial Statements that contains
an explanatory paragraph that 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 the December
2004 quarter, 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 the end of 2006 and other benefits
of at least $1.7 billion annually by the end of 2006 (in
addition to the approximately $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.
10
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 completed in the December 2004 quarter as a part
of our out-of-court restructuring.
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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 expense 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 and short-term investments, 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”), which occurred on March 1, 2005.
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 and
short-term investments 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:
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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 jet fuel costs below market
prices.
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The other assumptions underlying
our business plan prove to be incorrect in any material adverse
respect. Many of these assumptions, such as yields, competition,
pension funding obligations and our access to financing, are not
within our control.
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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.
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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.
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If the assumptions underlying our business plan prove 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 and short-term investments otherwise
declines to an unacceptably low level, then we would need to
seek to restructure under Chapter 11 of the
U.S. Bankruptcy Code.
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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 “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Financial
Condition and Liquidity — Covenants” in
Item 7.
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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 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 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 received from
Amex on 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 in
the December 2004 quarter.
Our substantial indebtedness and other obligations have, and in
the future could continue to, negatively impact our operations
by:
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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;
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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
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placing us at a competitive
disadvantage to our competitors that have relatively less debt
than we have.
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12
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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 depends on the level of early retirements by
pilots.
We estimate that our funding obligations under our defined
benefit and defined contribution pension plans for 2005 will be
approximately $450 million. This estimate may vary
depending on, among other things, the assumptions used to
determine the amount. 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. Our anticipated funding obligations under our pension
plans for 2006 and thereafter vary materially depending on the
assumptions used to determine these funding obligations,
including potential legislative changes regarding pension
funding obligations. Absent the enactment of new federal
legislation that reduces our pension funding obligations during
the next several years, our annual pension funding obligations
for each of the years 2006 through 2009 will be significantly
higher than in 2005, and could have a material adverse impact on
our liquidity.
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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 (“Pilots Retirement
Plan”), 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 Pilots
Retirement Plan 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 1,800
of our 6,400 pilots are currently at or over age 50 and
thus are eligible to retire.
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Our business is dependent on the price and availability of
aircraft fuel. Continued periods of historically high fuel costs
or significant disruptions in the supply of aircraft fuel 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% and 11% of our operating expenses in 2004, 2003 and 2002,
respectively. Due to the competitive nature of the airline
industry, we generally have not been able to increase our fares
when fuel prices have risen in the past and we may not be able
to do so in the future.
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,
13
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.
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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
Moody’s Investors Service, Inc., CC by Standard &
Poor’s Rating Services and C by Fitch Ratings. Moody’s
and Fitch have stated that their ratings outlook for our senior
unsecured debt is negative while we are on positive watch with
Standard & Poor’s. 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.
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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.
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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
has led and may continue to lead to departures of our officers
and key employees. If we were to continue 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.
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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
14
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.
ASA is in collective bargaining negotiations with ALPA, which
represents ASA’s pilots, and with the Association of Flight
Attendants, which represents ASA’s flight attendants, to
amend their existing collective bargaining agreements that
became amendable in September 2002 and September 2003,
respectively. Comair is also in collective bargaining
negotiations with the International Association of Machinists
and Aerospace Workers, which represents Comair’s
maintenance employees. The maintenance employees rejected a
tentative agreement to amend their existing agreement that
became amendable in May 2004, which Comair had reached with the
union’s negotiating committee, but Comair expects
negotiations to continue. In addition, Comair is negotiating
with the International Brotherhood of Teamsters, which
represents Comair’s flight attendants, to modify their
existing collective bargaining agreement, which becomes
amendable in July 2007. The outcome of ASA and Comair’s
collective bargaining negotiations cannot presently be
determined. In addition to the ASA and Comair 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.
|
|
|
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 Logan, 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 insurer’s 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 is operated by 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 $7.5 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
15
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.
Risks Factors Relating to the Airline Industry
|
|
|
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. In their
respective proceedings, United and US Airways have reduced or
are seeking to reduce their operating costs by reducing labor
costs, including through renegotiating collective bargaining
agreements, terminating pension plans, and restructuring lease
and debt obligations. 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 in 2002 to among the highest in 2004, 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 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.
|
|
|
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 low
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 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 FAA’s
regulations.
16
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 airport security procedures and imposes additional
security requirements on airports and airlines, most of which
are funded by a per ticket tax on passengers and a tax on
airlines. The federal government has recently proposed a
significant increase in the per ticket tax. Due to the weak
revenue environment, the existing tax has negatively impacted
our revenues because we have not been able to increase our fares
to pass these fees on to our customers. Similarly, the proposed
ticket tax increase, if implemented, could negatively impact our
revenues.
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. Since September 24, 2001, the U.S. government
has been 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 currently 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.
Additional Information
General information about us, including our Corporate Governance
Principles and the charters for the Audit, Personnel &
Compensation, and Corporate Governance committees of our Board
of Directors, can be found at
www.delta.com/inside/investors/corp_info/corp_governance/index.jsp.
Our Board of Directors has adopted a “Code of Ethics and
Business Conduct,” which applies to all of our employees.
Our Board of Directors has also adopted a separate “Code of
Ethics and Business Conduct for the Board of Directors.” We
will disclose amendments to and any waivers granted to officers
or members of the Board of Directors under these codes promptly
on our website. Copies of these codes can also be found at
www.delta.com/inside/investors/corp_info/corp_governance/index.jsp.
We will provide print copies of these materials to any
shareowner upon written request to Corporate Secretary, Delta
Air Lines, Inc., Department 981, P.O. Box 20574,
Atlanta, GA 30320-2574.
We also make available free of charge on our website our Annual
Report on Form 10-K, our Quarterly Reports on
Form 10-Q, our Current Reports on Form 8-K and
amendments to those reports as soon as reasonably practicable
after these reports are filed with or furnished to the
Securities and Exchange Commission. Information on our website
is not incorporated into this Form 10-K or our other
securities filings and is not a part of those filings.
17
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 |
|
|
|
|
|
|
|
|
| |
• |
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 |
| |
|
|
| |
|
|
|
After |
|
|
| |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2008 |
|
Total |
| Aircraft on Firm Order |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 8 of the Notes to the
Consolidated Financial Statements. |
| (2) |
In February 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 deliveries of these regional jet aircraft.
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. |
18
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Delivery in Calendar Year Ending |
| |
|
|
| |
|
|
|
After |
|
|
|
Rolling |
| |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2008 |
|
Total |
|
Options |
| Aircraft on Option(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 plan is to reduce Mainline aircraft fleet complexity by up
to four fleet types over approximately the next four years. We
believe fleet simplification will improve reliability and
produce long-term cost savings. During 2005, we expect to retire
24 Mainline aircraft: 21 B-737-300 and B-737-200 aircraft, and
three B-767-200 aircraft. These retirements will not have a
material impact on our 2005 Consolidated Financial Statements.
Due to weak traffic, we temporarily grounded the entire MD-11
fleet by the end of January 2004 and sold eight owned MD-11
aircraft in October 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.
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 other facilities;
landing fees under these agreements normally are based on the
number of landings and weight of aircraft. We also lease
aircraft maintenance facilities at certain airports; these
leases generally require us to pay the cost of providing,
operating and maintaining such facilities. In addition to our
Atlanta maintenance base, our other major aircraft maintenance
facilities are located at Cincinnati/Northern Kentucky
International Airport, Tampa International Airport and Salt Lake
City International Airport. We lease marketing, ticket and
reservations offices in certain locations; these leases are
generally for shorter terms than the airport leases. Additional
information relating to our leases of our ground facilities is
set forth in Note 7 of the Notes to the Consolidated
Financial Statements.
19
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 our support and the support of 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 in March 2005. Project costs are being 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.
20
|
|
| ITEM 3. |
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 and Northwest.
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’ motion for class action
certification and denied the airlines’ motions for summary
judgment in May 2002. On May 4, 2004, the District Court
issued a supplemental order defining various plaintiff
subclasses. The subclasses pertinent to us include: (1) for
the purpose of the Section 1 claim, a subclass of persons
or entities who purchased from a defendant or its agent a full
fare, unrestricted ticket for travel on any of certain
designated city pairs originating or terminating at our Atlanta
or Cincinnati hubs, Northwest’s hubs at Minneapolis,
Detroit or Memphis, or US Airways’ hubs at Pittsburgh or
Charlotte, during the period from June 11, 1995 to date;
(2) for the purpose of the Section 2 claim as it
relates to our Atlanta hub, a subclass of persons or entities
who purchased from us or our agent a full fare, unrestricted
ticket for travel on any of certain designated city pairs
originating or terminating at our Atlanta hub during the same
period; and (3) for the purpose of the Section 2 claim
as it relates to our Cincinnati hub, a subclass of persons or
entities who purchased from us or our agent a full fare,
unrestricted ticket for travel on any of certain designated city
pairs originating or terminating at our Cincinnati hub during
the same period. The District Court has not scheduled the trial
of these lawsuits.
|
|
|
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
plaintiff’s 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 Court’s judgment. On
January 4, 2005, the Court of Appeals denied the
plaintiffs’ motion for rehearing en banc. The plaintiffs
have agreed not to file a petition for a writ of certiorari to
the United States Supreme Court. Accordingly, this case is now
over.
|
|
|
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
21
January 6, 2005, the U.S. Court of Appeals for the
Ninth Circuit affirmed the District Court’s judgment. The
time for plaintiffs to file a petition for a writ of certiorari
to the United States Supreme Court has not expired.
|
|
|
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.
|
|
|
Multidistrict Pilot Retirement Plan Litigation |
During the June 2001 quarter, the Pilots 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 Pilots 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 motions 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, 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.
|
|
|
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 Delta’s 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 Plan’s 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.
* * *
As discussed above, Hall, et al. v. United Airlines, et al.
is now over. In each of the other 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
22
these matters cannot be predicted with certainty and could have
a material adverse effect on our Consolidated Financial
Statements, 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” in
Item 1.
|
|
| ITEM 4. |
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
No matters were submitted to a vote of security holders of the
company during the fourth quarter of the fiscal year covered by
this report.
PART II
|
|
| ITEM 5. |
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
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 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 |
|
|
|
— |
|
As of December 31, 2004, there were approximately 22,148
holders of record of our common stock. On February 28,
2005, the last reported sale price of our common stock on the
New York Stock Exchange was $4.64.
On July 24, 2003, our Board of Directors announced that we
would immediately discontinue the payment of quarterly common
stock cash dividends due to the financial challenges facing us.
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 ESOP Convertible
Preferred Stock (“ESOP Preferred Stock”) due to
applicable restrictions under Delaware General Corporation Law
(“Delaware Law”). To comply with Delaware Law, our
Board of Directors also changed the form of payment we will use
to redeem shares of ESOP 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 ESOP Preferred Stock when redemptions are required under
the Savings Plan.
Our dividend policy is reviewed from time to time by the Board
of Directors. The payment of dividends is restricted by our
financing agreements with GE Commercial Finance and Amex. Future
common stock dividend decisions will take into account our then
current business results, cash requirements and financial
condition.
23
|
|
| ITEM 6. |
SELECTED FINANCIAL DATA |
Consolidated Summary of Operations
For the years ended December 31, 2004-2000
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (in millions, except share data) |
|
2004(1) |
|
2003(2) |
|
2002(3) |
|
2001(4) |
|
2000(5) |
| |
|
Operating revenues
|
|
$ |
15,002 |
|
|
$ |
14,087 |
|
|
$ |
13,866 |
|
|
$ |
13,879 |
|
|
$ |
16,741 |
|
|
Operating expenses
|
|
|
18,310 |
|
|
|
14,872 |
|
|
|
15,175 |
|
|
|
15,481 |
|
|
|
15,104 |
|
| |
|
Operating income (loss)
|
|
|
(3,308 |
) |
|
|
(785 |
) |
|
|
(1,309 |
) |
|
|
(1,602 |
) |
|
|
1,637 |
|
|
Interest expense,
net(6)
|
|
|
(787 |
) |
|
|
(721 |
) |
|
|
(629 |
) |
|
|
(410 |
) |
|
|
(257 |
) |
|
Miscellaneous income,
net(7)
|
|
|
125 |
|
|
|
326 |
|
|
|
17 |
|
|
|
80 |
|
|
|
328 |
|
|
Gain (loss) on extinguishment of debt, net
|
|
|
9 |
|
|
|
— |
|
|
|
(42 |
) |
|
|
— |
|
|
|
— |
|
|
Fair value adjustments of SFAS 133 derivatives
|
|
|
(31 |
) |
|
|
(9 |
) |
|
|
(39 |
) |
|
|
68 |
|
|
|
(159 |
) |
| |
|
Income (loss) before income taxes and cumulative effect of
change in accounting principle
|
|
|
(3,992 |
) |
|
|
(1,189 |
) |
|
|
(2,002 |
) |
|
|
(1,864 |
) |
|
|
1,549 |
|
|
Income tax (provision) benefit
|
|
|
(1,206 |
) |
|
|
416 |
|
|
|
730 |
|
|
|
648 |
|
|
|
(621 |
) |
| |
|
Net income (loss) before cumulative effect of change in
accounting principle
|
|
|
(5,198 |
) |
|
|
(773 |
) |
|
|
(1,272 |
) |
|
|
(1,216 |
) |
|
|
928 |
|
| |
|
Net income (loss) after cumulative effect of change in
accounting principle
|
|
|
(5,198 |
) |
|
|
(773 |
) |
|
|
(1,272 |
) |
|
|
(1,216 |
) |
|
|
828 |
|
|
Preferred stock dividends
|
|
|
(19 |
) |
|
|
(17 |
) |
|
|
(15 |
) |
|
|
(14 |
) |
|
|
(13 |
) |
| |
|
Net income (loss) attributable to common shareowners
|
|
$ |
(5,217 |
) |
|
$ |
(790 |
) |
|
$ |
(1,287 |
) |
|
$ |
(1,230 |
) |
|
$ |
815 |
|
| |
| |
|
Earnings (loss) per share before cumulative effect of change in
accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
(41.07 |
) |
|
$ |
(6.40 |
) |
|
$ |
(10.44 |
) |
|
$ |
(9.99 |
) |
|
$ |
7.39 |
|
| |
Diluted
|
|
$ |
(41.07 |
) |
|
$ |
(6.40 |
) |
|
$ |
(10.44 |
) |
|
$ |
(9.99 |
) |
|
$ |
7.05 |
|
| |
|
Earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
(41.07 |
) |
|
$ |
(6.40 |
) |
|
$ |
(10.44 |
) |
|
$ |
(9.99 |
) |
|
$ |
6.58 |
|
| |
Diluted
|
|
$ |
(41.07 |
) |
|
$ |
(6.40 |
) |
|
$ |
(10.44 |
) |
|
$ |
(9.99 |
) |
|
$ |
6.28 |
|
| |
|
Dividends declared per common share
|
|
$ |
— |
|
|
$ |
0.05 |
|
|
$ |
0.10 |
|
|
$ |
0.10 |
|
|
$ |
0.10 |
|
| |
Other Financial and Statistical Data
For the years ended December 31, 2004-2000
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004(1) |
|
2003(2) |
|
2002(3) |
|
2001(4) |
|
2000(5) |
| |
|
Total assets (millions)
|
|
$ |
21,801 |
|
|
$ |
25,939 |
|
|
$ |
24,303 |
|
|
$ |
23,605 |
|
|
$ |
21,931 |
|
|
Long-term debt and capital leases (excluding current maturities)
(millions)
|
|
$ |
13,005 |
|
|
$ |
11,538 |
|
|
$ |
10,174 |
|
|
$ |
8,347 |
|
|
$ |
5,896 |
|
|
Shareowners’ (deficit) equity (millions)
|
|
$ |
(5,796 |
) |
|
$ |
(659 |
) |
|
$ |
893 |
|
|
$ |
3,769 |
|
|
$ |
5,343 |
|
|
Shares of common stock outstanding at year end
|
|
|
139,830,443 |
|
|
|
123,544,945 |
|
|
|
123,359,205 |
|
|
|
123,245,666 |
|
|
|
123,013,372 |
|
|
Revenue passengers enplaned (thousands)
|
|
|
110,000 |
|
|
|
104,452 |
|
|
|
107,048 |
|
|
|
104,943 |
|
|
|
119,930 |
|
|
Available seat miles (millions)
|
|
|
151,679 |
|
|
|
139,505 |
|
|
|
145,232 |
|
|
|
147,837 |
|
|
|
154,974 |
|
|
Revenue passenger miles (millions)
|
|
|
113,311 |
|
|
|
102,301 |
|
|
|
104,422 |
|
|
|
101,717 |
|
|
|
112,998 |
|
|
Operating revenue per available seat mile
|
|
|
9.89 |
¢ |
|
|
10.10 |
¢ |
|
|
9.55 |
¢ |
|
|
9.39 |
¢ |
|
|
10.80 |
¢ |
|
Passenger mile yield
|
|
|
12.17 |
¢ |
|
|
12.73 |
¢ |
|
|
12.26 |
¢ |
|
|
12.74 |
¢ |
|
|
13.86 |
¢ |
|
Operating cost per available seat mile
|
|
|
12.07 |
¢ |
|
|
10.66 |
¢ |
|
|
10.45 |
¢ |
|
|
10.47 |
¢ |
|
|
9.75 |
¢ |
|
Passenger load factor
|
|
|
74.70 |
% |
|
|
73.33 |
% |
|
|
71.90 |
% |
|
|
68.80 |
% |
|
|
72.91 |
% |
|
Breakeven passenger load factor
|
|
|
92.62 |
% |
|
|
77.75 |
% |
|
|
79.25 |
% |
|
|
77.31 |
% |
|
|
65.29 |
% |
|
Fuel gallons consumed (millions)
|
|
|
2,527 |
|
|
|
2,370 |
|
|
|
2,514 |
|
|
|
2,649 |
|
|
|
2,922 |
|
|
Average price per fuel gallon, net of hedging gains
|
|
|
115.70 |
¢ |
|
|
81.78 |
¢ |
|
|
66.94 |
¢ |
|
|
68.60 |
¢ |
|
|
67.38 |
¢ |
| |
| |
|
|
| (1) |
Includes a $1.9 billion charge ($14.76 diluted EPS) related
to the impairment of intangible assets; a $1.2 billion
charge ($9.51 diluted EPS) for an income tax provision to
reserve substantially all of our net deferred tax assets; a
$123 million gain ($0.97 diluted EPS) from the sale of
investments; and a $41 million gain ($0.33 diluted EPS)
from restructuring, asset writedowns, pension settlements and
related items, net (see “Management’s Discussion and
Analysis” in Item 7). |
| (2) |
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 |
24
|
|
|
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 “Management’s Discussion and Analysis” in
Item 7).
|
| (3) |
Includes a $439 million charge
($277 million net of tax, or $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
“Management’s Discussion and Analysis” in
Item 7).
|
| (4) |
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.
|
| (5) |
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 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.
|
| (6) |
Includes interest income.
|
| (7) |
Includes gains (losses) from the
sale of investments.
|
25
|
|
| ITEM 7. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS |
Business Environment
Our financial performance continued to deteriorate during 2004,
the fourth consecutive year we reported substantial losses. Our
consolidated net loss of $5.2 billion in 2004 reflects a
net charge of $2.9 billion, which is discussed elsewhere in
this Form 10-K (see Notes 5, 9, 14 and 16 of the Notes
to the Consolidated Financial Statements), a significant decline
in passenger mile yield, historically high aircraft fuel prices
and other cost pressures. Our unrestricted cash and cash
equivalents and short-term investments were $1.8 billion at
December 31, 2004, down from $2.7 billion at
December 31, 2003. These results underscore the urgent need
to make fundamental changes in the way we do business.
Our financial performance for 2004 was materially adversely
affected by a decrease in passenger mile yield. While Revenue
Passenger Miles (“RPMs”), or traffic, rose 11% during
2004 compared to the prior year, passenger revenue increased
only 6%, reflecting a 4% decrease in the passenger mile yield on
a year-over-year basis. We believe the decrease in passenger
mile yield reflects permanent changes in the airline industry
revenue environment which have occurred primarily due to 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.
|
Aircraft fuel prices also had a significant negative impact on
our financial results in 2004. These prices reached historically
high levels, as our average fuel price per gallon increased 42%
to $1.16 (net of hedging gains) for 2004 compared to the prior
year. Aircraft fuel expense rose 51%, or $986 million, in
2004 compared to 2003, with approximately $820 million of
the increase resulting from higher fuel prices.
In light of our significant losses and the decline in our cash
and cash equivalents and short-term investments, we are making
permanent structural changes that 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.
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 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
26
cost reduction targets and the actions we should take to seek to
achieve these targets. Key elements of our transformation plan
include:
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• |
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.
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| |
| |
• |
Dehubbing our
Dallas/Ft. Worth operations 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.
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| |
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• |
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.
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• |
Reducing fleet complexity by
retiring up to four aircraft types in approximately four years
and increasing overall fleet utilization and efficiency.
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• |
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 effective January 1, 2005.
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• |
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.
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• |
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.
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• |
Updating and upgrading customer
products and services, including aircraft interiors and website
functionality, and continuing two-class service in Mainline
operations.
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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:
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|
| (in millions) |
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2005 |
|
2006 |
| |
|
Non-pilot operational improvements
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|
$ |
1,075 |
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|
$ |
1,600 |
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|
Pilot cost reductions
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|
900 |
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|
|
1,000 |
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|
Other benefits
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|
|
135 |
|
|
|
125 |
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| |
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Total
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$ |
2,110 |
|
|
$ |
2,725 |
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| |
| |
27
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:
| |
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|
|
|
|
|
|
|
| (in millions) |
|
2005 |
|
2006 |
| |
|
Incremental profit improvement initiatives
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|
$ |
600 |
|
|
$ |
1,000 |
|
|
Non-pilot pay and benefit savings
|
|
|
350 |
|
|
|
350 |
|
|
Dehubbing of Dallas/ Ft. Worth operations
|
|
|
75 |
|
|
|
100 |
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Continuous hub redesign
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|
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 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
non-pilot employees who retire after January 1, 2006; and
(4) reduced vacation time.
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 primarily due
to greater utilization from the redeployment of these aircraft.
In January 2005, we also redesigned our Atlanta operation from a
banked to a continuous hub. Although we will incur incremental
costs under this initiative, we believe the related incremental
revenue will more than offset these costs. We expect the net
benefit to increase as we expand this initiative to our other
hubs.
We recorded significant gains and charges in 2004 in connection
with some of our non-pilot operational initiatives. These gains
and charges include (1) a $527 million gain related to
the elimination of the healthcare coverage subsidy for non-pilot
employees who retire after January 1, 2006, and (2) a
$194 million charge related to voluntary and involuntary
workforce reduction programs. For additional information about
these subjects, see Note 14 in the Notes to the
Consolidated Financial Statements.
We will record additional charges relating to our non-pilot
operational initiatives and pilot cost reductions, including
charges related to certain facility closures and employee items,
but we are not able to reasonably estimate the amount or timing
of any such charges, including the amounts of such charges that
may result in future cash expenditures, at this time. The
targeted benefits under our transformation plan do not reflect
any gains or charges described in this or the preceding
paragraph.
Pilot Cost Reductions. 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 cash savings of
approximately $57 million between 2005 and 2009, which will
also result in some cost reductions. We also reached agreements
with about
28
115 suppliers under which we expect to realize average annual
benefits of approximately $46 million during 2005, 2006 and
2007.
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 in
achieving 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 quarter under our financing
agreements with GE Commercial Finance and Amex. These new
financing agreements are essential elements of our ongoing
restructuring efforts. Our borrowings under these agreements are
secured by substantially all of our assets that were
unencumbered immediately prior to the consummation of those
agreements. During 2004, we also deferred to later years certain
debt obligations that were due in 2004, 2005 and 2006. For
additional information about our financing agreements with GE
Commercial Finance and Amex, as well as our deferrals of debt
during 2004, see Note 6 of the Notes to the Consolidated
Financial Statements.
At December 31, 2004, we had cash and cash equivalents and
short-term investments totaling $1.8 billion. In March
2005, we borrowed the final installment of $250 million
under our financing agreement with Amex. 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) $835 million in debt
maturities, approximately $630 million of which we expect
will be cash payments (for additional information about this
amount, see Note 6 of the Notes to the Consolidated
Financial Statements); and (4) $450 million of
estimated funding for our defined benefit pension and defined
contribution plans. Absent the enactment of new federal
legislation which reduces our pension funding obligations during
the next several years, our annual pension funding obligations
for each of 2006 through 2009 will be significantly higher than
in 2005 and could have a material adverse impact on our
liquidity. For additional information about our contractual
commitments, see “Financial Position —
Contractual Obligations” in this Item 7.
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 expense 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 and short-term investments, 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 are low, 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
29
securities, we expect that our cash and cash equivalents and
short-term investments 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. For additional information about
these financing agreements, see Note 6 of the Notes to the
Consolidated Financial Statements.
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 achieved in that year and
(2) the average annual jet fuel price per gallon in 2005 is
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). Our
business plan also includes significant assumptions about
passenger mile yield (which we expect to be lower in 2005 as
compared to 2004), interest rates, our ability to generate
incremental revenues, our pension funding obligations and credit
card processor holdbacks (our current Visa/Mastercard processing
contract expires in August 2005). See “Risk Factors Related
to Delta” concerning risks associated with sensitivities in
our assumptions.
If the assumptions underlying our business plan prove 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 and short-term investments otherwise
declines to an unacceptably low level, we would need to seek to
restructure under Chapter 11 of the U.S. Bankruptcy
Code.
Basis of Presentation of Consolidated Financial Statements
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 in accordance with accounting
principles generally accepted in the United States of America
(“GAAP”) 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.
Results of Operations — 2004 Compared to 2003
|
|
|
Net Loss and Loss per Share |
We recorded a consolidated net loss of $5.2 billion ($41.07
diluted loss per share) in 2004, compared to a consolidated net
loss of $773 million ($6.40 diluted loss per share) in 2003.
Operating revenues totaled $15.0 billion in 2004, a 6%
increase from 2003. Passenger revenue increased 6% on a 9%
increase in capacity. The increase in passenger revenue reflects
an 11% rise in 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, high industry
capacity and increased price sensitivity by our customers,
enhanced by the availability of airline fare information on the
Internet.
30
Passenger Revenue per ASM (“Passenger RASM”) decreased
3% to 9.09¢. Load factor increased 1.4 points to
74.7%. For additional information about factors impacting our
passenger revenues for 2004, see the “Business
Environment” section above.
North American Passenger Revenues. North American
passenger revenues increased 4% to $11.1 billion for 2004
on a capacity increase of 7%. RPMs increased 9%, while passenger
mile yield fell 4%. Passenger RASM decreased 3% to 9.28¢.
Load factor increased by 1.1 points to 73.7%.
International Passenger Revenues. International passenger
revenues increased 18% to $2.6 billion during 2004 on a
capacity increase of 15%. RPMs increased 19%, while passenger
mile yield remained unchanged. Passenger RASM increased 3% to
8.16¢, and load factor rose 2.2 points to 78.9%. All of
these increases are primarily due to the depressed levels in the
prior year from the war in Iraq.
Cargo and Other Revenues. Cargo revenues increased 7% to
$500 million in 2004 primarily due to a 13% increase from
higher international freight volume and yield, which was
partially offset by a 5% decrease due to lower mail volume and
yield. Cargo ton miles increased 6%, while cargo ton mile yield
remained relatively flat. Other revenues increased 19% to
$712 million, primarily reflecting a 6% increase due to
revenue from new airport handling contracts and other
miscellaneous contracts, a 5% rise due to increased
administrative service charges, and a 3% increase due to higher
codeshare revenue from capacity increases. We expect revenues
from administrative service charges to decrease in 2005 due to a
reduction in ticket change fees we implemented in conjunction
with the expansion of SimpliFares in January 2005. Increased
volume in administrative service charges may offset some of this
anticipated decrease.
Operating expenses were $18.3 billion for 2004, a 23%, or
$3.4 billion, increase over 2003. As discussed below, the
increase in operating expenses was primarily due to (1) a
$1.9 billion goodwill impairment charge recorded in 2004;
(2) significantly higher fuel prices in 2004 than in 2003;
and (3) $398 million in reimbursements we received
under the Emergency Wartime Supplemental Appropriations Act
(“Appropriations Act”) in 2003 which were recorded as
an offset to operating expenses in that year. Operating capacity
increased 9% to 152 billion ASMs primarily due to the
restoration of capacity that we reduced in 2003 due to the war
in Iraq. Operating Cost per Available Seat Mile
(“CASM”) increased 13% to 12.07¢.
Salaries and related costs were relatively flat at
$6.3 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 (1) a 3% increase due to higher pension and
related expense; (2) a 1% increase due to a 4.5% salary
rate increase in May 2004 for our pilots under their collective
bargaining agreement which was partially offset by their rate
decrease effective December 1, 2004; and (3) a 1%
increase due to growth in operations.
Aircraft fuel expense increased 51%, or $986 million, to
$2.9 billion, with approximately $820 million of the
increase resulting from higher fuel prices which remain at
historically high levels. The average fuel price per gallon
increased 42% to $1.16, and total gallons consumed increased 7%.
Approximately 8% and 65% of our aircraft fuel requirements were
hedged during 2004 and 2003, respectively. As discussed in
Note 4 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 that we recognized during
2004. In 2004, our fuel expense is shown net of fuel hedge gains
of $105 million, which included the gain related to the
early settlement. Our fuel expense for 2003 is shown net of fuel
hedge gains of $152 million.
Contracted services expense increased 13%, primarily reflecting
a 4% increase from new contracts to provide airport handling and
other miscellaneous services, a 2% increase due to technology
projects, a 2% increase due to the suspension of the
Transportation Security Administration (“TSA”)
security fee from June 1, 2003 to September 30, 2003
and subsequent reimbursements and a 2% increase resulting from
higher capacity.
Expenses from our contract carrier arrangements increased 19% to
$932 million, largely reflecting an 8% increase from higher
fuel costs, a 7% increase due to growth under certain contract
carrier arrangements and a 3% increase from higher maintenance
expense.
31
Aircraft maintenance materials and outside repairs increased 8%,
primarily due to increased materials volume and higher costs
from scheduled maintenance events. Other selling expenses
increased 5%, primarily reflecting a 3% rise from increased
credit card charges due to higher traffic and a 1% increase from
advertising and promotions. Passenger service expense increased
7%, primarily due to increased traffic.
During December 2004, we recorded a $1.9 billion impairment
charge, primarily related to goodwill, in accordance with
Statement of Financial Accounting Standards (“SFAS”)
No. 142, “Goodwill and Other Intangible Assets”
(“SFAS 142”). For additional information about
the impairment charge, see Note 5 of the Notes to the
Consolidated Financial Statements.
Restructuring, asset writedowns, pension settlements and related
items, net totaled a $41 million net gain for 2004 compared
to a $268 million net charge for 2003. The 2004 amount
includes (1) a $527 million gain related to the
elimination of the healthcare coverage subsidy for non-pilot
employees who retire after January 1, 2006;
(2) settlement charges totaling $257 million primarily
related to our defined benefit pension plan for pilots
(“Pilot Plan”); (3) a $194 million charge
related to voluntary and involuntary workforce reduction
programs; and (4) a $40 million aircraft impairment
charge related to our agreement, entered into in the September
2004 quarter, to sell eight owned MD-11 aircraft. The charge for
2003 consists of (1) $212 million related to
settlements under the Pilot Plan; (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 B737-800 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. For additional
information about these restructuring, asset writedowns, pension
settlements and related items, net, see Note 14 of the
Notes to the Consolidated Financial Statements.
Reimbursements under the Appropriations Act 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 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 18 of the Notes to the
Consolidated Financial Statements.
Other operating expenses increased 20%. This primarily reflects
a 7% increase from higher professional fees mainly from our
restructuring and contingency planning efforts, a 4% increase
due to a loss on certain aircraft transactions, a 4% increase
from a rise in the navigation charges due to increased
international capacity and a 4% increase due to higher fuel
taxes.
Operating Loss and Operating
Margin
We incurred an operating loss of $3.3 billion for 2004,
compared to an operating loss of $785 million for 2003.
Operating margin, which is the ratio of operating income (loss)
to operating revenues, was (22%) and (6%) for 2004 and 2003,
respectively.
Other Income
(Expense)
Other expense, net for 2004 was $684 million, compared to
other expense, net of $404 million for 2003. This change is
primarily attributable to the following:
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• |
Interest expense increased
$67 million for 2004 compared to 2003 primarily due to
higher levels of debt outstanding and higher interest rates on
variable debt.
|
| |
| |
• |
Gain (loss) from sale of
investments, net was $123 million for 2004 compared to
$321 million for 2003. In 2004, we sold our remaining
equity interest in Orbitz, Inc. (“Orbitz”),
recognizing a gain of $123 million. The gain in 2003 was
primarily related to a $279 million gain from the sale of
our equity investment in WORLDSPAN, L.P. (“Worldspan”)
and a $28 million gain from the sale of a portion of our
equity interest in Orbitz. For additional information about
these investments, see Note 16 of the Notes to the
Consolidated Financial Statements.
|
| |
| |
• |
Fair value adjustments of
derivatives accounted for under Statement of Financial
Accounting Standards No. 133, “Accounting for
Derivative Instruments and Hedging Activities”
(“SFAS 133”) resulted in a $31 million
charge for 2004 compared to a $9 million charge for
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32
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|
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 4 of the Notes to
the Consolidated Financial Statements. |
| |
| |
• |
Gain (loss) on extinguishment of debt, net was $9 million
for 2004 compared to zero in 2003. During 2004, we recorded a
gain due to the exchange of certain of our unsecured
7.7% Notes due 2005 for newly issued unsecured
8.0% Senior Notes due in December 2007. During 2003, we
recorded a $15 million loss from our purchase of a portion
of the Delta Family-Care Savings Plan’s Series C
Guaranteed Serial ESOP Notes (“ESOP Notes”), offset by
a $15 million gain related to a debt exchange. For
additional information about these transactions, see Note 6
of the Notes to the Consolidated Financial Statements. |
|
|
|
Income Tax Provision (Benefit) |
During 2004, we recorded an additional valuation allowance
against our net deferred income tax assets, which resulted in a
$1.2 billion non-cash charge to income tax expense on our
Consolidated Statement of Operations. For additional information
about the income tax valuation allowance, see Note 9 of the
Notes to the Consolidated Financial Statements.
Results of Operations — 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 increased 2% to $14.1 billion in 2003
compared to 2002. Passenger revenues increased 2% to
$13.0 billion. 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. During 2003, the revenue environment was also negatively
impacted by the military action in Iraq.
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 in 2003. 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
partnership arrangements as well as a decline in codeshare
revenue. These decreases were partially offset by an increase in
various miscellaneous revenues.
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. We
restored most of this capacity when passenger demand improved
after the end of major military combat in Iraq in May 2003. 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.
33
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 June 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 10 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 18 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.
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 B737-300 leased aircraft to
service during 2003. For additional information related to this
decision, see Note 14 of the Notes to Consolidated
Financial Statements.
Other selling expenses fell 11%. This decline primarily reflects
a 9% decrease related to lower booking fees 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 low-fare service. Passenger
commission expense declined 34%, primarily reflecting a 22%
decrease from the change in our commission rate structure in
2002, which resulted in the elimination of travel agent base
commissions for tickets sold in the U.S. and Canada. The
decrease in passenger commissions also reflects the cancellation
or renegotiation of certain travel agent contracts and a lower
volume of base and incentive commissions. Passenger service
expense decreased 13%, primarily reflecting a 10% decline from
decreased traffic and capacity, and a 7% decrease due to certain
meal service-related cost savings initiatives.
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
Pilot Plan; (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 B737-800 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
34
for future lease payments related to nine B737-300 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 14 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. 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 18 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 18 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.
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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 expense, net totaled $404 million during 2003,
compared to other expense, net of $693 million in 2002.
Included in these results are the following:
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• |
A $92 million increase in
interest expense in 2003 compared to 2002 primarily due to
higher levels of outstanding debt in 2003.
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• |
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 equity interest in Orbitz. For additional
information about these investments, see Note 16 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, which resulted from our purchase of a portion of the
outstanding ESOP Notes. During 2003, we recorded a
$15 million loss from our purchase of a portion of the
outstanding ESOP Notes, offset by a $15 million gain
related to a debt exchange. For additional information about our
purchase of ESOP Notes in 2003 and 2002 and our debt exchange in
2003, see Note 6 of the Notes to the Consolidated Financial
Statements.
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• |
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.
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• |
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.
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35
Financial Condition and Liquidity
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Sources and Uses of Cash — 2004 |
Cash and cash equivalents and short-term investments totaled
$1.8 billion at December 31, 2004, compared to
$2.7 billion at December 31, 2003. For 2004, net cash
used in operating activities totaled $1.1 billion, which
includes the following items:
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• |
A $5.2 billion net loss for
2004. This net loss reflects a $1.9 billion impairment
charge related to goodwill and intangible assets,
$1.2 billion of depreciation and amortization, and a
$1.2 billion income tax provision related to a valuation
allowance against our net deferred income tax assets, all of
which are non-cash items.
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• |
A $455 million funding of our
qualified defined benefit pension plans.
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• |
A $141 million increase in
total restricted cash, primarily to support certain projected
insurance obligations related to workers’ compensation.
|
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). During 2004, capital
expenditures were approximately $920 million, which
included the acquisition of 23 CRJ-700 aircraft. We acquired 17
of these regional jet aircraft through seller-financing
arrangements for $314 million.
Debt and capital lease obligations, including current maturities
and short-term obligations, totaled $13.9 billion at
December 31, 2004, compared to $12.6 billion at
December 31, 2003. During 2004, we engaged in the following
financing transactions:
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• |
We entered into secured financing
arrangements under which we borrowed approximately
$920 million, which is due in installments through June
2020. We used approximately $500 million of this amount to
repay interim financing for 18 CRJ-200 and 12 CRJ-700 aircraft.
|
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• |
In February 2004, we issued
$325 million principal amount of
27/8% Convertible
Senior Notes due 2024
(“27/8% Convertible
Senior Notes”).
|
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• |
In February 2004, we entered into
an agreement to purchase 32 CRJ-200 aircraft to be
delivered in 2005. In connection with this agreement, we
received a commitment from a third party to finance, on a
secured basis at the time of acquisition, our purchase of these
regional jet aircraft.
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• |
In July 2004 we amended three of
our existing secured loan agreements with General Electric
Capital Corporation (“GECC”). As a result of these
amendments, we received $152 million of incremental
liquidity.
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• |
In November 2004, we exchanged
(1) $237 million aggregate principal amount of our
enhanced equipment trust certificates due in 2005 and 2006 for
$235 million principal amount of newly issued
9.5% Senior Secured Notes due 2008; and
(2) approximately $135 million principal amount of our
unsecured 7.7% Notes due 2005 for a like principal amount
of newly issued unsecured 8.0% Senior Notes due 2007 and
5,488,054 shares of our common stock.
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• |
In November 2004, we entered into
financing agreements with GE Commercial Finance and Amex to
borrow approximately $1.1 billion.
|
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• |
We completed agreements with other
aircraft lenders to defer $112 million in debt obligations
due in 2004 through 2006 to later years.
|
During the December 2004 quarter, we entered into agreements
with aircraft lessors and lenders under which we expect to
receive average annual cash savings of approximately
$57 million between 2005 and 2009, which will also result
in some cost reductions. We issued an aggregate of
4,354,724 shares of our common stock to the aircraft
lessors and lenders in these transactions. Separately, as a
result of agreements with approximately 115 suppliers, we expect
to realize average annual benefits of approximately
$46 million during 2005, 2006 and 2007.
36
In October 2004, we sold eight owned MD-11 aircraft and related
inventory for $227 million. We recorded a $41 million
impairment charge related to the sale of the aircraft. For
additional information about this charge, see Note 14 of
the Notes to the Consolidated Financial Statements.
During November 2004, we sold our remaining equity investment in
Orbitz for approximately $143 million. We recorded a
$123 million gain related to this transaction. For
additional information about our investment in Orbitz, see
Note 16 of the Notes to the Consolidated Financial
Statements.
In March 2005, we exchanged $176 million principal amount
of enhanced equipment trust certificates due in 2005 for a like
aggregate principal amount of enhanced equipment trust
certificates due in 2006 and 2008. For additional information
about this transaction, see Note 20 of the Notes to the
Consolidated Financial Statements.
For additional information about financing and other
transactions affecting liquidity, see Note 6 of the Notes
to the Consolidated Financial Statements. For additional
information about our liquidity position, see the “Business
Environment” section above.
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Future Aircraft Order Commitments |
To preserve liquidity, we have taken the following actions
regarding our orders for Mainline aircraft:
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| |
• |
During 2003, we entered into a
definitive agreement to sell 11 B737-800 aircraft to a third
party immediately after those aircraft are delivered to us by
the manufacturer in 2005.
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| |
• |
During 2004, we deferred the
delivery of the following aircraft on firm order: deferred seven
B737-800 aircraft from 2005 to 2007; deferred five B737-800
aircraft from 2006 to 2007; deferred four B737-800 aircraft from
2006 to 2008; deferred two B777-200 aircraft from 2005 to 2008;
and deferred three B777-200 aircraft from 2006 to 2009.
|
Our long-term plan is to reduce our Mainline aircraft fleet by
up to four fleet types over approximately the next four years.
During 2005, we expect to retire 24 Mainline aircraft:
21 B737-300 and B737-200 aircraft, and three B767-200
aircraft. These retirements will not have a material impact on
our 2005 Consolidated Financial Statements.
We have additional aircraft commitments that are discussed below
in “Contractual Obligations”. For additional
information about our aircraft order commitments, see
Note 8 of the Notes to the Consolidated Financial
Statements.
Shareowners’ deficit was $5.8 billion at
December 31, 2004 and $659 million at
December 31, 2003. The increase in our shareowners’
deficit is primarily due to our $5.2 billion net loss in
2004, which includes a $1.9 billion goodwill impairment
charge and a $1.2 billion income tax provision to reserve
substantially all of our net deferred tax assets. For additional
information about the goodwill impairment and valuation
allowance, see Notes 5 and 9, respectively, of the
Notes to the Consolidated Financial Statements.
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 company’s 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.”
Because we expected to have, and did in fact have, a negative
“surplus” at December 31, 2003, our Board of
Directors took the following actions, effective in December
2003, related to our ESOP Preferred Stock to comply with
Delaware Law:
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• |
Suspended indefinitely the payment
of dividends on our ESOP Preferred Stock. Unpaid dividends on
the ESOP Preferred Stock will accrue without interest, until
paid, at a rate of $4.32 per share per year. The ESOP
Preferred Stock is held by Fidelity Management
Trust Company in its
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37
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capacity as trustee for the Delta Family-Care Savings Plan, a
broad-based employee benefit plan (“Savings Plan”). |
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• |
Changed the form of payment we use to redeem shares of ESOP
Preferred Stock when redemptions are required under the Savings
Plan. For the indefinite future, we will pay the redemption
price of the ESOP Preferred Stock in shares of our common stock
rather than in cash. |
At December 31, 2004, approximately 5 million shares
of ESOP Preferred Stock were held by the Savings Plan. About
4 million shares of ESOP Preferred Stock are currently
allocated to the accounts of Savings Plan participants; the
remainder of the shares is available for allocation in the
future.
We are generally required to redeem shares of ESOP 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 ESOP
Preferred Stock are redeemable at a price
(“Redemption 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 ESOP
Preferred Stock to be redeemed, plus, in either case, accrued
but unpaid dividends on the shares of ESOP Preferred Stock to be
redeemed. Each share of ESOP Convertible Preferred Stock is
convertible into 1.7155 shares of our common stock, subject
to adjustment in certain circumstances.
Under the terms of the ESOP Preferred Stock, we may pay the
Redemption Price in cash, shares of our common stock
(valued at fair value) or in a combination thereof. As discussed
above, since December 2003, we have been using shares of our
common stock to pay the Redemption Price when we are
required to redeem ESOP Preferred Stock. During 2004, we issued
6,330,551 shares of our common stock to redeem
approximately 422,000 shares of ESOP Preferred Stock under
the Savings Plan. We cannot reasonably estimate future issuances
of common stock for this purpose due to the various factors that
would affect such an estimate, including the duration of the
period during which we may not redeem ESOP Preferred Stock for
cash under Delaware Law; the fair value of Delta common stock
when ESOP Preferred Stock is redeemed; and the number of shares
of ESOP 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 ESOP Preferred Stock, see
Note 11 of the Notes to the Consolidated Financial
Statements.
As of December 31, 2004, we had negative working capital of
$2.3 billion, compared to negative working capital of
$1.6 billion at December 31, 2003. This change in our
negative working capital balance is primarily due to the
decrease in our cash and cash equivalents, which is discussed
above in “Sources and Uses of Cash.”
Our senior unsecured long-term debt is rated Ca by Moody’s
Investors Service, Inc., CC by Standard and Poor’s Rating
Services and C by Fitch Ratings. Moody’s and Fitch have
stated that their ratings outlook for our senior unsecured debt
is negative while Standard & Poor’s has stated its
outlook is positive watch. Our credit ratings may be lowered
further or withdrawn. 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 unsecured
debt, renew outstanding letters of credit that back certain of
our obligations and obtain certain financial instruments that we
use in our fuel hedging program. Our credit ratings have also
increased the cost of our financing transactions and the amount
of collateral required for certain financial instruments,
insurance coverage and vendor agreements. To the extent we are
unable to access the capital markets, or our financing costs
continue to increase, including as a result of further credit
ratings downgrades, our business, financial position and results
of operations would be materially adversely impacted. Subsequent
to December 31, 2004, our collateral requirements related
to our workers’ compensation insurance increased by
approximately $35 million.
38
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 Amex Facilities also contain
affirmative, negative and financial covenants substantially the
same as those found in the GE Commercial Finance Facility.
The financial covenants require us to:
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• |
maintain unrestricted funds 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”).
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• |
maintain accounts pledged for the
benefit of the lenders with funds 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. The cash and cash equivalents in those
accounts can be used for purposes of determining compliance with
the Liquidity Covenant.
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• |
not exceed specified levels of
capital expenditures during each fiscal quarter.
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• |
achieve specified levels of
EBITDAR, as defined, for designated rolling periods (generally
monthly tests for successive trailing 12-month periods) through
November 2007. During 2005, we are required to achieve
increasing levels of EBITDAR, including EBITDAR of
$1.590 billion for the 12-month period ending
December 31, 2005. Thereafter, the minimum EBITDAR level
for successive trailing 12-month periods continues to increase,
including $2.763 billion for the 12-month period ending
December 31, 2006 and $3.136 billion for the 12-month
period ending November 30, 2007. The EBITDAR covenant
effectively provides that if our cash on hand exceeds the
minimum cash on hand that we are required to maintain pursuant
to the Liquidity Covenant by at least $100 million, then
the EBITDAR level that we are required to achieve will be
reduced by a specified amount.
|
At December 31, 2004, we were in compliance with our
financial covenants. Although under our business plan we expect
to be in compliance with these covenants in 2005, we do not
expect to exceed by a significant margin the requirements that
we (1) maintain specified levels of cash and cash
equivalents or (2) achieve certain levels of EBITDAR. If we
are unable to comply with these covenants, the outstanding
borrowings under our financing agreements with GE Commercial
Finance and Amex could become immediately due and payable. For
additional information concerning our covenants, see the GE
Commercial Finance Facility, incorporated as Exhibit 10.5
to this Form 10-K.
Our Reimbursement Agreement with GECC includes a Collateral
Value Test, which is not applicable until May 2006. For
additional information about this test and our financing
agreements, see Note 6 of the Notes to the Consolidated
Financial Statements.
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, 2004 and
2003. For additional information about our war-risk insurance
currently provided by the U.S. government, see Note 8
of the Notes to the Consolidated Financial Statements.
For additional information on our liquidity, see the Business
Environment section of Management’s Discussion and Analysis
in this Form 10-K.
Prior Years
2003
Cash and cash equivalents and short-term investments totaled
$2.7 billion at December 31, 2003. Net cash provided
by operations totaled $142 million during 2003, including
net tax refunds totaling $402 million. Capital
expenditures, including aircraft acquisitions under
seller-financing arrangements, were $1.5 billion during
2003; this included the acquisition of 31 CRJ-200 and 20 CRJ-700
aircraft. Debt and capital lease obligations,
39
including current maturities and short-term obligations, totaled
$12.6 billion at December 31, 2003. We issued
$1.9 billion of secured long-term debt during 2003.
2002
Cash and cash equivalents and short-term investments totaled
$2.0 billion at December 31, 2002. Net cash provided
by operations totaled $225 million during 2002, including
receipt of (1) a $472 million tax refund due to a new
tax law and (2) $112 million in compensation under the
Stabilization Act. Capital expenditures, including aircraft
acquisitions made under seller-financing arrangements, were
$2.0 billion during 2002; this included the acquisition of
four B737-800, three B767-400, one B777-200, 34 CRJ-200 and 15
CRJ-700 aircraft. Debt and capital lease obligations, including
current maturities and short-term obligations, totaled
$10.9 billion at December 31, 2002. We issued
$2.6 billion of secured long-term debt during 2002.
Financial Position
December 31, 2004
Compared to December 31, 2003
This section discusses certain changes in our Consolidated
Balance Sheets which are not otherwise discussed in this
Form 10-K.
Prepaid expenses and other current assets increased by 10%, or
$49 million, primarily reflecting an increase in prepaid
aircraft fuel from higher fuel costs and increased prepayment
requirements. Flight and ground equipment under capital leases,
net of accumulated amortization, increased $243 million
primarily due to the renegotiation of certain operating leases
that are now classified as capital leases in accordance with
SFAS 13, “Accounting for Leases,” due to the
amendment of certain lease terms (see Note 7 of the Notes
to the Consolidated Financial Statements). Restricted
investments for our Boston airport terminal project decreased
56%, or $159 million, due primarily to the reimbursement of
project expenditures during 2004.
Accounts payable, deferred credits and other accrued liabilities
decreased 9%, or $149 million, primarily reflecting a
decrease in trade accounts payable from increased prepayment
requirements in 2004. Air traffic liability increased 20% from
2003 primarily due to (1) stronger advance sales from
increased capacity and (2) growth in codeshare operations.
Accrued salaries and related benefits decreased 10% due
primarily to (1) a lower vacation accrual at the end of
2004 due to changes in our salary rates as part of our
transformation plan and (2) salary rate decreases that
occurred in the December 2004 quarter primarily related to our
new pilot collective bargaining agreement that was effective
December 1, 2004.
Contractual
Obligations
The following table summarizes our contractual obligations as of
December 31, 2004 related to debt; operating leases;
aircraft order commitments; capital leases; contract carrier
obligations; interest and related payments; other material,
noncancelable purchase obligations; and other liabilities. The
table excludes commitments that are contingent based on events
or other factors that are uncertain or unknown at this time.
Some of these excluded commitments are discussed in
footnote 9 to this table and in the text immediately
following that footnote.
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Contractual Payments Due By Period |
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After |
| (in millions) |
|
Total |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2009 |
| |
|
Debt(1)
|
|
$ |
13,450 |
|
|
$ |
835 |
|
|
$ |
913 |
|
|
$ |
1,374 |
|
|
$ |
1,549 |
|
|
$ |
1,324 |
|
|
$ |
7,455 |
|
|
Operating lease
payments(2)
|
|
|
9,662 |
|
|
|
1,091 |
|
|
|
1,017 |
|
|
|
915 |
|
|
|
980 |
|
|
|
836 |
|
|
|
4,823 |
|
|
Aircraft order
commitments(3)
|
|
|
4,161 |
|
|
|
1,002 |
|
|
|
598 |
|
|
|
1,645 |
|
|
|
510 |
|
|
|
406 |
|
|
|
— |
|
|
Capital lease
obligations(4)
|
|
|
1,122 |
|
|
|
158 |
|
|
|
162 |
|
|
|
134 |
|
|
|
112 |
|
|
|
146 |
|
|
|
410 |
|
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Contract carrier
obligations(5)
|
|
|
317 |
|
|
|
79 |
|
|
|
79 |
|
|
|
79 |
|
|
|
80 |
|
|
|
— |
|
|
|
— |
|
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Interest and related
payments(6)
|
|
|
7,514 |
|
|
|
837 |
|
|
|
737 |
|
|
|
684 |
|
|
|
592 |
|
|
|
506 |
|
|
|
4,158 |
|
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Other purchase
obligations(7)
|
|
|
342 |
|
|
|
257 |
|
|
|
17 |
|
|
|
12 |
|
|
|
12 |
|
|
|
11 |
|
|
|
33 |
|
|
Other
liabilities(8)
|
|
|
69 |
|
|
|
69 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
Total(9)
|
|
$ |
36,637 |
|
|
$ |
4,328 |
|
|
$ |
3,523 |
|
|
$ |
4,843 |
|
|
$ |
3,835 |
|
|
$ |
3,229 |
|
|
$ |
16,879 |
|
| |
| |
40
|
|
| (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, 2004. Additionally,
included in these amounts is approximately
(1) $75 million and $180 million due in 2005 and
2006, respectively, under interim financing arrangements which
we used to purchase regional jet aircraft that we may elect to
refinance using long-term, secured financing commitments
available to us from a third party and
(2) $130 million in 2005 debt maturities which we do
not expect to be required to repay in 2005 or which we expect to
repay and then re-borrow during 2005. 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 discussed 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, 2004. For additional
information about these letters of credit, see Note 6 of
the Notes to the Consolidated Financial Statements. |
| (3) |
Our capital expenditures in 2005 include approximately
(1) $520 million related to our agreement to
purchase 32 CRJ-200 aircraft, for which financing is
available to us on a long-term secured basis when we acquire
these aircraft and (2) $415 million related to our
commitment to purchase 11 B737-800 aircraft, for which we have
entered into a definitive agreement to sell to a third party
immediately following delivery of these aircraft to us by the
manufacturer in 2005. For additional information about these
matters, see Notes 6 and 8 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) |
This amount represents our minimum fixed obligation under our
contract carrier agreement with Chautauqua. Under the Chautauqua
agreement, we are obligated to pay certain minimum fixed
obligations. Due to an amendment to the Chautauqua agreement in
March 2004, we are now able to calculate the amount of the
minimum fixed obligation. Payments due after 2008 are not
included in the table as minimum rates have not been
contractually agreed upon. For additional information regarding
our contract carrier agreements, see “Contract
Carriers” below. |
| (6) |
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
2005 related to variable rate debt are based on the specified
margin and the base rate, such as LIBOR, in effect at
December 31, 2004. The base rates typically reset every one
to six months depending on the financing agreement. Payments for
variable rate debt in late 2005 and thereafter do not consider
any amount for the base rate component of the interest
calculation since the rate is unknown at December 31, 2004;
these payments were calculated based only on the specified
margin. At December 31, 2004, by way of context, the base
rate component of the interest calculation on our
$5 billion of variable rate debt is approximately 2.5%. The
related payments represent credit enhancements required in
conjunction with certain financing agreements. |
| (7) |
Includes purchase obligations pursuant to which we are required
to make minimum payments for goods and services, including but
not limited to communications and reservations systems,
technology, insurance, fuel, flight operations, and other third
party services and products. For additional information about
other commitments and contingencies, see Note 8 of the
Notes to the Consolidated Financial Statements. |
| (8) |
Represents other liabilities on our Consolidated Balance Sheets
for which we are obligated to make future payments related to
postretirement medical benefit costs incurred but not yet paid
and payments required under the pilot collective bargaining
agreement for unused vacation time. These liabilities are not
included in any other line item on this table. |
| (9) |
In addition to the contractual obligations included in the
table, we have significant cash obligations that are not
included in the table. For example, we will pay wages required
under collective bargaining agreements; fund pension plans (as
discussed below); purchase capacity under contract carrier
arrangements (as discussed below); and pay credit card
processing fees and fees for other goods and services, including
those related to fuel, maintenance and commissions. While we are
parties to legally binding contracts regarding these goods and
services, the actual commitment is contingent on certain factors
such as volume and/or variable rates that are uncertain or
unknown at this time. Therefore, these items are not included in
the table. In addition, purchase orders made in the ordinary
course of business are excluded from the table and any amounts
which we are liable for under the purchase orders are included
in current liabilities on our Consolidated Balance Sheets. |
The following items are not included in the table above:
Pension Funding. Estimates of the amount and timing of
future funding obligations under our pension plans 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.
We estimate that our pension plan funding will be approximately
$450 million for 2005. Our anticipated funding obligations
under our pension plans for 2006 and thereafter vary materially
depending on the assumptions used to determine these funding
obligations, including potential legislative changes regarding
these obligations. Absent the enactment of new federal
legislation which reduces our pension funding obligations
41
during the next several years, our annual pension funding
obligations for each of 2006 through 2009 will be significantly
higher than in 2005 and could have a material adverse impact on
our liquidity.
Contract Carriers. We have long-term contract carrier
agreements with three regional air carriers, SkyWest, Chautauqua
and Republic Airline. Under these agreements, SkyWest and
Chautauqua operate certain of their aircraft using our flight
code, and we schedule those aircraft, sell the seats on those
flights and retain the related revenues. We pay those airlines
an amount, as defined in the applicable agreement, which is
based on an annual determination of their cost of operating
those flights and other factors intended to approximate market
rates for those services. Republic Airline will begin operating
certain of their aircraft using our flight code in July 2005.
We expect to incur expenses of approximately $1.0 billion
in 2005 under our contract carrier agreements, which includes
$79 million in the table above under our contract carrier
agreement with Chautauqua. Under the Chautauqua agreement, we
are obligated to pay certain minimum fixed obligations. The
remaining estimated expenses are not included in the table above
because these expenses are contingent based on the costs
associated with the operation of contract carrier flights by
those air carriers as well as rates that are unknown at this
time. We cannot reasonably estimate at this time our expenses
under the contract carrier agreements in 2006 and thereafter,
except for the minimum obligations under the Chautauqua
agreement included in the table above.
In April 2004, we notified FLYi, Inc. (“Flyi”),
another regional air carrier that previously operated certain of
their aircraft using our flight code, of our election to
terminate its contract carrier agreement due to Flyi’s
decision to operate a new low-fare airline using jet aircraft
with more than 70 seats. Flyi ceased operating Delta
Connection flights in November 2004. Flyi exercised its
right to require us to assume the leases on the
30 Fairchild Dornier FRJ-328 regional jet aircraft
that it operated for us. We are currently conducting inspections
of these aircraft. After we complete the inspections, we expect
to assume these leases. We estimate that the total remaining
lease payments on these 30 aircraft leases will be
approximately $275 million. These lease payments will be
made over the remaining terms of the aircraft leases, which are
approximately 13 years. We are evaluating our options for
utilizing these 30 aircraft, including having another air
carrier operate these aircraft for us under the Delta Connection
carrier program. There are no residual value guarantees related
to these leases.
If we assume the leases for the 30 FRJ-328 aircraft as
currently in effect, a Flyi bankruptcy or insolvency or, with
respect to certain of the leases, a Flyi default under various
contracts, including leases, loans and purchase contracts having
a value or amount in excess of $15 million, would
constitute an event of default. If an event of default were to
occur, the financing parties could exercise one or more
remedies, including the right to require us to purchase the
aircraft at a purchase price stipulated in the applicable lease.
At March 1, 2005, the purchase price for each aircraft was
approximately $9 million, which we estimate exceeds the
current market value of each aircraft by approximately
$3 million. Our estimate of the current market value of
these aircraft is based on published industry data. We cannot
determine the likelihood of the occurrence of an event relating
to Flyi that would constitute an event of default under the
leases or the likelihood of the financing parties seeking to
exercise certain remedies against us if such an event of default
were to occur.
Flyi has stated that as part of its restructuring effort, it has
secured commitments from certain of the financing parties that,
upon our assumption of the leases, such parties will effectively
release Flyi from its future obligations to such financing
parties under the leases. We are in discussions with the
financing parties to restructure these leases so that events
relating to Flyi would not constitute an event of default after
we assume the leases.
We may terminate certain of our contract carrier agreements
without cause, which may require us to assume the leases or
purchase the aircraft the contract carrier operates for us. For
additional information regarding our contract carrier
agreements, including our obligations if we elect to terminate
certain agreements without cause, see Note 8 of the Notes
to the Consolidated Financial Statements.
GECC Aircraft. In November 2004, as a condition to
availability of the GE Commercial Finance Facility, we granted
GECC the right, exercisable until 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 then leased to another airline. Subsequent to
December 31, 2004, GECC exercised this right with respect
to eight CRJ-200 aircraft. The lease terms for these eight
aircraft begin throughout 2005 and have terms of 138 to
168 months. We estimate that our
42
total lease payments for these eight aircraft will be
approximately $130 million during the next 14 years.
Additionally, the lease rates we will pay for these aircraft
approximate current market rates. We expect to use these
aircraft in our operations.
Redemptions of ESOP Preferred Stock. As discussed above,
we changed the form of payment we will use to redeem shares of
ESOP Preferred Stock when redemptions are required under the
Savings Plan. For the indefinite future, we will pay the
redemption price of the ESOP Preferred Stock in shares of our
common stock rather than in cash. For additional information
about our ESOP Preferred Stock, see Note 11 of the Notes to
the Consolidated Financial Statements.
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 these matters cannot be
predicted with certainty and could have a material adverse
effect on our Consolidated Financial Statements, management
believes that the resolution of these actions will not have a
material adverse effect on our Consolidated Financial Statements.
Other Contingent Obligations under Contracts. 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.
Subsequent to December 31, 2004, we entered into an
agreement to outsource certain human resources services. Under
this agreement, we expect to pay a total of approximately
$120 million over the next seven years on a declining
scale, with our largest annual obligation totaling approximately
$20 million to be paid in 2005. This agreement is subject
to certain termination provisions.
For additional information about other contingencies not
discussed above as well as discussions related to general
indemnifications, see Note 8 of the Notes to the
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 and assumptions, which
are based on historical experience, changes in the business
environment and other factors that management believes to be
reasonable under the circumstances. Actual results may differ
materially from these estimates.
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 proposed 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: 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 projected future cash flows. In applying this
methodology, we (1) make assumptions about each reporting
unit’s future cash flows based on capacity, passenger
yield, traffic, operating costs and other relevant factors and
(2) discount those cash flows based on each reporting
unit’s weighted average cost of capital. Changes in these
assumptions may have a material impact on our Consolidated
43
Financial Statements. The annual impairment test date for our
goodwill and indefinite-lived intangible assets is
December 31. We performed our annual goodwill impairment
test as of December 31, 2004 with the assistance of an
independent valuation firm to determine the fair value of our
three reporting units. As a result of our 2004 annual goodwill
impairment tests, we recorded a $1.9 billion charge to
write off all goodwill related to the ASA and Comair reporting
units. This charge is recorded in impairment of intangible
assets on our 2004 Consolidated Statement of Operations. For
additional information about our accounting policy related to
goodwill and other intangibles and the impairment charge we
recorded in 2004, see Notes 1 and 5 in 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.
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 four years; our industry’s
historically cyclical periods of earnings and losses; and our
outlook for future years.
During 2004, we recorded an additional valuation allowance
against our deferred income tax assets, which resulted in a
$1.2 billion charge 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 about income taxes, see Notes 1 and 9 of the
Notes to the 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, 2004 and 2003 and for the years ended
December 31, 2004, 2003, and 2002 is presented in
Note 10 of the Notes to the Consolidated Financial
Statements. We currently estimate that our defined benefit
pension expense in 2005 will be approximately $440 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.
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 (6.00% at
September 30, 2004) by 0.5% would change our accrued
pension cost by approximately $750 million at
December 31, 2004 and change our estimated pension expense
in 2005 by approximately $40 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 (-1.28%
at September 30, 2004) by 0.5% would not significantly
change our estimated pension expense in 2005 due primarily to
recent employee pay reductions.
44
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,
2004) by 0.5% would change our estimated pension expense in 2005
by approximately $35 million. For additional information
about our pension plans, see Note 10 of the Notes to the
Consolidated Financial Statements.
Recently Issued Accounting
Pronouncements
In December 2004, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards
(“SFAS”) No. 123 (revised 2004),
“Share-Based Payment” (“SFAS 123R”).
This standard replaces SFAS No. 123, “Accounting
for Stock-Based Compensation” and supersedes Accounting
Principles Board Opinion No. 25, “Accounting for Stock
Issued to Employees.” It requires that the compensation
cost of share-based payment transactions be recognized in
financial statements based on the fair value of the equity or
liability instruments issued. This statement is effective for us
beginning July 1, 2005. We are evaluating the impact of
SFAS 123R, including the transition options for adoption of
this standard on our 2005 Consolidated Financial Statements.
This impact may be material as we issued approximately
71 million stock options in 2004, primarily under our new
broad-based employee stock option plans (see Note 11 of the
Notes to the Consolidated Financial Statements).
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
Note 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.
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, 2004, we had no hedges or contractual
arrangements that would reduce our fuel costs below market
prices.
As discussed above in this Item 7, our aircraft fuel
expense rose 51%, or $986 million, in 2004 compared to
2003, with approximately $820 million of the increase
resulting from higher fuel prices. During 2004, aircraft fuel
accounted for 16% of our total operating expenses. Our business
plan assumes that in 2005 our aircraft fuel consumption will be
approximately 2.7 billion gallons and that our average
annual jet fuel price per gallon will be approximately $1.22.
Based on these assumptions, a 10% rise in our assumed average
annual jet fuel price would increase our aircraft fuel expense
by approximately $325 million in 2005.
For additional information regarding our aircraft fuel price
risk management program, see Note 3 of the Notes to the
Consolidated Financial Statements.
Interest Rate Risk
Our exposure to market risk due to changes in interest rates
primarily relates to our long-term debt obligations.
Market risk associated with our fixed-rate 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
45
fair value of our long-term debt by $1.6 billion at
December 31, 2004 and $682 million at
December 31, 2003. A 10% increase in average annual
interest rates would not have had a material impact on our
interest expense in 2005. At December 31, 2004, we had no
interest rate swaps or contractual arrangements that would
reduce our interest expense. For additional information on our
long-term debt agreements, see Note 6 of the Notes to the
Consolidated Financial Statements.
Glossary of Defined Terms
ASM — Available Seat Mile. A measure of
capacity. ASMs equal the total number of seats available for
transporting passengers during a reporting period multiplied by
the total number of miles flown during that period.
Cargo Ton Miles — The total number of tons of
cargo transported during a reporting period, multiplied by the
total number of miles cargo is flown during that period.
Cargo Ton Mile Yield — The amount of cargo
revenue earned per cargo ton mile during a reporting period.
CASM — (Operating) Cost per Available Seat
Mile. The amount of operating cost incurred per available seat
mile during a reporting period. Also referred to as “unit
cost.”
Passenger Load Factor — A measure of utilized
available seating capacity calculated by dividing RPMs by ASMs
for a reporting period.
Passenger Mile Yield — The amount of passenger
revenue earned per revenue passenger mile during a reporting
period.
RASM — (Operating or Passenger) Revenue per
Available Seat Mile. The amount of operating or passenger
revenue earned per available seat mile during a reporting
period. Passenger RASM is also referred to as “unit
revenue.”
RPM — Revenue Passenger Mile. One
revenue-paying passenger transported one mile. RPMs equal the
number of revenue passengers during a reporting period
multiplied by the number of miles flown by those passengers
during that period. Also referred to as traffic.
46
|
|
| ITEM 7A. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Information required by this item is set forth in
Item 7 — “Management’s Discussion and
Analysis of Financial Condition and Results of
Operations — Financial Position — Market
Risks Associated With Financial Instruments” and in
Notes 1 through 4 of the Notes to the Consolidated
Financial Statements in this Form 10-K.
|
|
| ITEM 8. |
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Reference is made to the Index on page F-1 of the Consolidated
Financial Statements and the Notes thereto contained in this
Form 10-K.
|
|
| ITEM 9. |
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE |
None
|
|
| ITEM 9A. |
CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and Chief
Financial Officer, performed an evaluation of our disclosure
controls and procedures, which have been designed to permit us
to effectively identify and timely disclose important
information. Our management, including our Chief Executive
Officer and Chief Financial Officer, concluded that the controls
and procedures were effective as of December 31, 2004 to
ensure that material information was accumulated and
communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.
Changes In Internal Control
During the three months ended December 31, 2004, we made no
change in our internal control over financial reporting that has
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
Management’s Annual Report on Internal Control Over
Financial Reporting
Management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934. Our internal control over
financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the
United States of America.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of
compliance with the policies may deteriorate.
Management conducted an evaluation of the effectiveness of our
internal control over financial reporting as of
December 31, 2004 using the criteria issued by the
Committee of Sponsoring Organizations of the Treadway Commission
in Internal Control — Integrated Framework.
Based on that evaluation, management believes that our internal
control over financial reporting was effective as of
December 31, 2004.
Management’s assessment of the effectiveness of our
internal control over financial reporting as of
December 31, 2004 has been audited by Deloitte &
Touche LLP, an independent registered public accounting firm,
which also audited our Consolidated Financial Statements.
Deloitte & Touche LLP’s attestation report on
management’s assessment of internal control over financial
reporting is set forth below.
47
Report of Independent Registered Public Accounting Firm
|
|
| |
To the Board of Directors and Shareowners of Delta Air Lines,
Inc.: |
| |
Atlanta, Georgia |
We have audited management’s assessment, included in the
accompanying Management’s Annual Report on Internal Control
over Financial Reporting, that Delta Air Lines, Inc. and
subsidiaries (the “Company”) maintained effective
internal control over financial reporting as of
December 31, 2004, based on criteria established in
Internal Control — Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. The Company’s management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an
opinion on management’s assessment and an opinion on the
effectiveness of the Company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
management’s assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinions.
A company’s internal control over financial reporting is a
process designed by, or under the supervision of, the
company’s principal executive and principal financial
officers, or persons performing similar functions, and effected
by the company’s board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, management’s assessment that the Company
maintained effective internal control over financial reporting
as of December 31, 2004, is fairly stated, in all material
respects, based on the criteria established in Internal
Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2004, based on the criteria
established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements of the Company as of and for
the year ended December 31, 2004, and our report dated
March 9, 2005 expressed an unqualified opinion on those
consolidated financial statements and included an explanatory
paragraph concerning matters that raise substantial doubt about
the Company’s ability to continue as a going concern.
/s/ Deloitte & Touche
LLP
Atlanta, Georgia
March 9, 2005
|
|
| ITEM 9B. |
OTHER INFORMATION |
None
48
PART III
|
|
| ITEM 10. |
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT |
Information required by this item is set forth under the
headings “Corporate Governance Matters,” “Certain
Information About Nominees” and “Section 16
Beneficial Ownership Reporting Compliance” in our Proxy
Statement to be filed with the Commission related to our Annual
Meeting of Shareowners on May 19, 2005 (“Proxy
Statement”), and is incorporated by reference. Pursuant to
instruction 3 to paragraph (b) of Item 401
of Regulation S-K, certain information regarding executive
officers is contained in Part I of this Form 10-K.
|
|
| ITEM 11. |
EXECUTIVE COMPENSATION |
Information required by this item is set forth under the
headings “Director Compensation,” “Corporate
Governance Matters — Compensation Committee Interlocks
and Insider Participation” and “Executive
Compensation” in our Proxy Statement and is incorporated by
reference.
|
|
| ITEM 12. |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Information required by this item is set forth under the
headings “Beneficial Ownership of Securities” and
under “Equity Compensation Plan Information” in our
Proxy Statement and is incorporated by reference.
|
|
| ITEM 13. |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS |
Not applicable.
|
|
| ITEM 14. |
PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Information required by this item is set forth under the heading
“Fees of Independent Auditors for 2004 and 2003” in
our Proxy Statement and is incorporated by reference.
PART IV
|
|
| ITEM 15. |
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a) (1), (2). The financial
statements required by this item are listed in the Index to
Consolidated Financial Statements in this Form 10-K.
(3). The exhibits required by this item are listed in the
Exhibit Index to this Form 10-K. The management
contracts and compensatory plans or arrangements required to be
filed as an exhibit to this Form 10-K are listed as
Exhibits 10.6 through 10.15 in the Exhibit Index.
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on the 9th day of March, 2005.
|
|
| |
|
| |
Gerald Grinstein |
| |
Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below on the 9th day of March,
2005 by the following persons on behalf of the registrant and in
the capacities indicated.
| |
|
|
|
|
| Signature |
|
Title |
| |
|
|
| |
/s/ Gerald Grinstein
Gerald
Grinstein |
|
Chief Executive Officer and Director (Principal
Executive Officer) |
| |
/s/ Michael J. Palumbo
Michael
J. Palumbo |
|
Executive Vice President and Chief Financial Officer (Principal
Financial Officer and Principal Accounting Officer) |
| |
*
Edward
H. Budd |
|
Director |
| |
*
David
R. Goode |
|
Director |
| |
*
Karl
J. Krapek |
|
Director |
| |
*
Paula
Rosput Reynolds |
|
Director |
| |
*
John
F. Smith, Jr. |
|
Chairman of the Board |
| |
*
Joan E.
Spero |
|
Director |
| |
*
Larry
D. Thompson |
|
Director |
| |
*
Kenneth
B. Woodrow |
|
Director |
| |
|
*By: |
|
/s/ Michael J. Palumbo
Michael
J. Palumbo,
as Attorney-in-Fact |
|
|
50
EXHIBIT INDEX
| |
|
|
|
3.1
|
|
Delta’s Certificate of Incorporation (Filed as
Exhibit 3.1 to Delta’s Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998).* |
|
3.2
|
|
Delta’s By-Laws (Filed as Exhibit 3 to Delta’s
Current Report on Form 8-K as filed on January 27,
2005).* |
|
4.1
|
|
Rights Agreement dated as of October 24, 1996, between
Delta and First Chicago Trust Company of New York, as Rights
Agent, as amended by Amendment No. 1 thereto dated as of
July 22, 1999 (Filed as Exhibit 1 to Delta’s Form
8-A/ A Registration Statement dated November 4, 1996, and
Exhibit 3 to Delta’s Amendment No. 1 to Form 8-A/
A Registration Statement dated July 30, 1999).* |
|
4.2
|
|
Certificate of Designations, Preferences and Rights of
Series B Convertible Preferred Stock and Series D
Junior Participating Preferred Stock (Filed as part of
Exhibit 3.1 to Delta’s Annual Report on Form 10-K for
the year ended December 31, 2003).* |
|
4.3
|
|
Indenture dated as of March 1, 1983, between Delta and The
Citizens and Southern National Bank, as trustee, as supplemented
by the First and Second Supplemental Indentures thereto dated as
of January 27, 1986 and May 26, 1989, respectively
(Filed as Exhibit 4 to Delta’s Registration Statement
on Form S-3 (Registration No. 2-82412),
Exhibit 4(b) to Delta’s Registration Statement on
Form S-3 (Registration No. 33-2972), and
Exhibit 4.5 to Delta’s Annual Report on Form 10-K for
the year ended June 30, 1989).* |
|
4.4
|
|
Third Supplemental Indenture dated as of August 10, 1998,
between Delta and The Bank of New York, as successor trustee, to
the Indenture dated as of March 1, 1983, as supplemented,
between Delta and The Citizens and Southern National Bank of
Florida, as predecessor trustee (Filed as Exhibit 4.5 to
Delta’s Annual Report on Form 10-K for the year ended
June 30, 1998).* |
|
4.5
|
|
Indenture dated as of April 30, 1990, between Delta and The
Citizens and Southern National Bank of Florida, as trustee
(Filed as Exhibit 4(a) to Amendment No. 1 to
Delta’s Registration Statement on Form S-3
(Registration No. 33-34523)).* |
|
4.6
|
|
First Supplemental Indenture dated as of August 10, 1998,
between Delta and The Bank of New York, as successor trustee, to
the Indenture dated as of April 30, 1990, between Delta and
The Citizens and Southern National Bank of Florida, as
predecessor trustee (Filed as Exhibit 4.7 to Delta’s
Annual Report on Form 10-K for the year ended June 30,
1998).* |
|
4.7
|
|
Indenture dated as of May 1, 1991, between Delta and The
Citizens and Southern National Bank of Florida, as Trustee
(Filed as Exhibit 4 to Delta’s Registration Statement
on Form S-3 (Registration No. 33-40190)).* |
|
4.8
|
|
Indenture dated as of December 14, 1999, between Delta and
The Bank of New York, as Trustee, relating to $500 million
of 7.70% Notes due 2005, $500 million of 7.90% Notes due
2009 and $1 billion of 8.30% Notes due 2029 (Filed as
Exhibit 4.2 to Delta’s Registration Statement on
Form S-4 (Registration No. 333-94991)).* |
|
4.9
|
|
Indenture dated as of June 2, 2003, between Delta and The
Bank of New York Trust Company of Florida, N.A., as Trustee,
relating to $350 million principal amount of 8.00%
Convertible Senior Notes due 2023 (Filed as Exhibit 4.2 to
Delta’s Registration Statement on Form S-3
(Registration No. 333-108176)).* |
|
4.10
|
|
Indenture dated as of February 6, 2004, between Delta and
The Bank of New York Trust Company, N.A., as Trustee, relating
to $325 million principal amount of
27/8%
Convertible Senior Notes due 2024 (Filed as Exhibit 4.2 to
Delta’s Registration Statement on Form S-3
(Registration No. 333-115206)).* |
Delta is not filing any other instruments evidencing any
indebtedness because the total amount of securities authorized
under any single such instrument does not exceed 10% of the
total assets of Delta and its subsidiaries
51
on a consolidated basis. Copies of such instruments will be
furnished to the Securities and Exchange Commission upon request.
| |
|
|
|
10.1
|
|
Purchase Agreement No. 2022 between Boeing and Delta
relating to Boeing Model 737-632/-732/-832 Aircraft (Filed as
Exhibit 10.3 to Delta’s Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998).*/** |
|
10.2
|
|
Purchase Agreement No. 2025 between Boeing and Delta
relating to Boeing Model 767-432ER Aircraft (Filed as
Exhibit 10.4 to Delta’s Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998).*/** |
|
10.3
|
|
Letter Agreements related to Purchase Agreements No. 2022
and/or No. 2025 between Boeing and Delta (Filed as
Exhibit 10.5 to Delta’s Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998).*/** |
|
10.4
|
|
Aircraft General Terms Agreement between Boeing and Delta (Filed
as Exhibit 10.6 to Delta’s Quarterly Report on Form
10-Q for the quarter ended March 31, 1998).*/** |
|
10.5
|
|
Credit Agreement dated as of November 30, 2004 among Delta
Air Lines, Inc., the Other Credit Parties Signatory thereto,
General Electric Capital Corporation and GECC Capital Markets
Group, Inc. (Filed as Exhibit 99.1 to Delta’s Current
Report on Form 8-K as filed on December 6, 2004).* |
|
10.6(a)
|
|
Delta 2000 Performance Compensation Plan (Filed as Appendix A to
Delta’s Proxy Statement dated September 15, 2000).* |
|
10.6(b)
|
|
First Amendment to Delta 2000 Performance Compensation Plan,
effective April 25, 2003 (Filed as Exhibit 10.3 to
Delta’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003).* |
|
10.6(c)
|
|
Description of Annual Cash Incentive Program for 2005 (Filed
under Item 1.01 on Delta’s Current Report on
Form 8-K as filed on March 4, 2005).* |
|
10.7
|
|
Forms of Executive Retention Protection Agreements for Executive
Officers and Senior Vice Presidents (Filed as Exhibit 10.16
of Delta’s Annual Report on Form 10-K for the year ended
June 30, 1997).* |
|
10.8(a)
|
|
Agreement dated May 6, 2003, between Delta and the United
States of America under Title IV of the Emergency Wartime
Supplemental Appropriations Act (Filed as Exhibit 10.2 to
Delta’s Form 10-Q for the quarter ended March 31,
2003).* |
|
10.8(b)
|
|
Form of Waiver of compensation in connection with Delta’s
Agreement with the United States of America under Title IV
of the Emergency Wartime Supplemental Appropriations Act of
2003, dated as of July 24, 2003, executed by Leo F. Mullin
and Frederick W. Reid (under cover of an executive summary)
(Filed as Exhibit 10.5 of Delta’s Form 10-Q for
the quarter ended September 30, 2003).* |
|
10.9(a)
|
|
2002 Delta Excess Benefit Plan (Filed as Exhibit 10.1 to
Delta’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2002).* |
|
10.9(b)
|
|
2002 Delta Supplemental Excess Benefit Plan (Filed as
Exhibit 10.2 to Delta’s Quarterly Report on Form 10-Q
for the quarter ended March 31, 2002).* |
|
10.9(c)
|
|
Form of Excess Benefit Agreement between Delta and its officers
(Filed as Exhibit 10.3 to Delta’s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002).* |
|
10.9(d)
|
|
Form of Non-Qualified Benefit Agreement between Delta and its
officers (Filed as Exhibit 10.19 to Delta’s Annual
Report on Form 10-K for the year ended December 31,
2003).* |
|
10.10(a)
|
|
Delta’s 2002 Retention Program (Filed as Exhibit 10.1
to Delta’s Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002).* |
|
10.10(b)
|
|
First Amendment to Delta’s 2002 Retention Program between
Delta and Vicki B. Escarra (Filed as Exhibit 10.21 to
Delta’s Annual Report on Form 10-K for the year ended
December 31, 2003).* |
|
10.11
|
|
Form of Executive Life Insurance Assignment Agreement (under
cover of an executive summary) (Filed as Exhibit 10.4 to
Delta’s Quarterly Report on Form 10-Q for the quarter
ended September 30, 2003).* |
|
10.12
|
|
Directors’ Deferred Compensation Plan, as amended (Filed as
Exhibit 10.1 to Delta’s Quarterly Report on Form 10-Q
for the quarter ended March 31, 2003).* |
|
10.13
|
|
Directors’ Charitable Award Program (Filed as
Exhibit 10 to Delta’s Current Report on Form 8-K as
filed on January 27, 2005).* |
|
10.14
|
|
Delta’s Non-Employee Directors’ Stock Plan (Filed as
Exhibit 4.5 to Delta’s Registration Statement on
Form S-8 (Registration No. 33-65391)).* |
|
10.15
|
|
Delta’s Non-Employee Directors’ Stock Option Plan, as
amended (Filed as Exhibit 10.2 to Delta’s Quarterly
Report on Form 10-Q for the quarter ended March 31, 2001).* |
52
| |
|
|
|
12.1
|
|
Statement regarding computation of ratio of earnings to fixed
charges for each fiscal year in the five-year period ended
December 31, 2004. |
|
21.1
|
|
Subsidiaries of the Registrant. |
|
23.1
|
|
Consent of Deloitte & Touche LLP |
|
24.1
|
|
Powers of Attorney |
|
31.1
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer. |
|
31.2
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer. |
|
32.1
|
|
Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
2002. |
*Incorporated by reference.
**Portions of this exhibit have been omitted and filed
separately with the Securities and Exchange Commission pursuant
to Delta’s request for confidential treatment.
53
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| |
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
F-2 |
|
|
Consolidated Balance Sheets — December 31, 2004
and 2003
|
|
|
F-3 |
|
|
Consolidated Statements of Operations for the years ended
December 31, 2004, 2003 and 2002
|
|
|
F-5 |
|
|
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002
|
|
|
F-6 |
|
|
Consolidated Statements of Shareowners’ (Deficit) Equity
for the years ended December 31, 2004, 2003 and 2002
|
|
|
F-7 |
|
|
Notes to the Consolidated Financial Statements
|
|
|
F-8 |
|
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareowners of Delta Air Lines,
Inc.
Atlanta, Georgia
We have audited the accompanying consolidated balance sheets of
Delta Air Lines, Inc. and subsidiaries (the “Company”)
as of December 31, 2004 and 2003, and the related
consolidated statements of operations, cash flows and
shareowners’ (deficit) equity for each of the three years
in the period ended December 31, 2004. These financial
statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of the Company as of December 31, 2004 and 2003,
and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2004, in
conformity with accounting principles generally accepted in the
United States of America.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note 1 to the consolidated
financial statements, the Company has had recurring losses from
operations, faces significant liquidity issues, and may need to
seek protection under Chapter 11 of the
U.S. Bankruptcy Code. Such matters raise substantial doubt
about the Company’s ability to continue as a going concern.
Management’s plans concerning these matters are also
described in Note 1. The consolidated financial statements
do not include any adjustments that might result from the
outcome of this uncertainty.
As discussed in Note 1 to the consolidated financial
statements, effective, January 1, 2002, the Company changed
its method of accounting for goodwill and other intangible
assets to conform to Statement of Financial Accounting Standards
No. 142.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Company’s internal control over
financial reporting as of December 31, 2004, based on the
criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated
March 9, 2005 expressed an unqualified opinion on
management’s assessment of the effectiveness of the
Company’s internal control over financial reporting and an
unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
/s/ Deloitte & Touche
LLP
Atlanta, Georgia
March 9, 2005
F-2
Consolidated Balance Sheets
December 31, 2004 and 2003
| |
|
|
|
|
|
|
|
|
|
|
| ASSETS |
|
|
|
|
| (in millions) |
|
2004 |
|
2003 |
| |
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents
|
|
$ |
1,463 |
|
|
$ |
2,170 |
|
| |
Short-term investments
|
|
|
336 |
|
|
|
540 |
|
| |
Restricted cash
|
|
|
348 |
|
|
|
207 |
|
| |
Accounts receivable, net of an allowance for uncollectible
accounts of $38 at December 31, 2004 and 2003
|
|
|
696 |
|
|
|
662 |
|
| |
Expendable parts and supplies inventories, net of an allowance
for obsolescence of $184 at December 31, 2004 and $183 at
December 31, 2003
|
|
|
203 |
|
|
|
202 |
|
| |
Deferred income taxes, net
|
|
|
35 |
|
|
|
293 |
|
| |
Prepaid expenses and other
|
|
|
525 |
|
|
|
476 |
|
| |
|
|
| |
|
Total current assets
|
|
|
3,606 |
|
|
|
4,550 |
|
| |
|
|
|
PROPERTY AND EQUIPMENT:
|
|
|
|
|
|
|
|
|
| |
Flight equipment
|
|
|
20,627 |
|
|
|
21,008 |
|
| |
Accumulated depreciation
|
|
|
(6,612 |
) |
|
|
(6,497 |
) |
| |
|
|
| |
|
Flight equipment, net
|
|
|
14,015 |
|
|
|
14,511 |
|
| |
|
|
| |
Flight and ground equipment under capital leases
|
|
|
717 |
|
|
|
463 |
|
| |
Accumulated amortization
|
|
|
(364 |
) |
|
|
(353 |
) |
| |
|
|
| |
|
Flight and ground equipment under capital leases, net
|
|
|
353 |
|
|
|
110 |
|
| |
|
|
| |
Ground property and equipment
|
|
|
4,805 |
|
|
|
4,477 |
|
| |
Accumulated depreciation
|
|
|
(2,706 |
) |
|
|
(2,408 |
) |
| |
|
|
| |
|
Ground property and equipment, net
|
|
|
2,099 |
|
|
|
2,069 |
|
| |
|
|
| |
Advance payments for equipment
|
|
|
89 |
|
|
|
62 |
|
| |
|
|
| |
|
Total property and equipment, net
|
|
|
16,556 |
|
|
|
16,752 |
|
| |
|
|
|
OTHER ASSETS:
|
|
|
|
|
|
|
|
|
| |
Goodwill
|
|
|
227 |
|
|
|
2,092 |
|
| |
Operating rights and other intangibles, net of accumulated
amortization of $185 at December 31, 2004, and $179 at
December 31, 2003
|
|
|
79 |
|
|
|
95 |
|
| |
Restricted investments for Boston airport terminal project
|
|
|
127 |
|
|
|
286 |
|
| |
Deferred income taxes, net
|
|
|
— |
|
|
|
869 |
|
| |
Other noncurrent assets
|
|
|
1,206 |
|
|
|
1,295 |
|
| |
|
|
| |
|
Total other assets
|
|
|
1,639 |
|
|
|
4,637 |
|
| |
|
|
| |
Total assets
|
|
$ |
21,801 |
|
|
$ |
25,939 |
|
| |
|
|
| |
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
F-3
Consolidated Balance Sheets
December 31, 2004 and 2003
| |
|
|
|
|
|
|
|
|
|
|
| LIABILITIES AND SHAREOWNERS’ DEFICIT |
|
|
|
|
| (in millions, except share data) |
|
2004 |
|
2003 |
| |
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
| |
Current maturities of long-term debt and capital leases
|
|
$ |
893 |
|
|
$ |
1,021 |
|
| |
Accounts payable, deferred credits and other accrued liabilities
|
|
|
1,560 |
|
|
|
1,709 |
|
| |
Air traffic liability
|
|
|
1,567 |
|
|
|
1,308 |
|
| |
Taxes payable
|
|
|
499 |
|
|
|
498 |
|
| |
Accrued salaries and related benefits
|
|
|
1,151 |
|
|
|
1,285 |
|
| |
Accrued rent
|
|
|
271 |
|
|
|
336 |
|
| |
|
|
| |
|
Total current liabilities
|
|
|
5,941 |
|
|
|
6,157 |
|
| |
|
|
|
NONCURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
| |
Long-term debt and capital leases
|
|
|
12,507 |
|
|
|
11,040 |
|
| |
Long-term debt issued by Massachusetts Port Authority
|
|
|
498 |
|
|
|
498 |
|
| |
Postretirement benefits
|
|
|
1,771 |
|
|
|
2,253 |
|
| |
Accrued rent
|
|
|
633 |
|
|
|
701 |
|
| |
Pension and related benefits
|
|
|
5,099 |
|
|
|
4,886 |
|
| |
Other
|
|
|
340 |
|
|
|
204 |
|
| |
|
|
| |
|
Total noncurrent liabilities
|
|
|
20,848 |
|
|
|
19,582 |
|
| |
|
|
|
DEFERRED CREDITS:
|
|
|
|
|
|
|
|
|
| |
Deferred gains on sale and leaseback transactions
|
|
|
376 |
|
|
|
426 |
|
| |
Deferred revenue and other credits
|
|
|
155 |
|
|
|
158 |
|
| |
|
|
| |
|
Total deferred credits
|
|
|
531 |
|
|
|
584 |
|
| |
|
|
|
COMMITMENTS AND CONTINGENCIES (Notes 3, 4,
6, 7 and 8)
|
|
|
|
|
|
|
|
|
| |
|
EMPLOYEE STOCK OWNERSHIP PLAN
|
|
|
|
|
|
|
|
|
| |
PREFERRED STOCK:
|
|
|
|
|
|
|
|
|
| |
Series B ESOP Convertible Preferred Stock, $1.00 par
value, $72.00 stated and liquidation value;
5,417,735 shares issued and outstanding at
December 31, 2004, and 5,839,708 shares issued and
outstanding at December 31, 2003
|
|
|
390 |
|
|
|
420 |
|
| |
Unearned compensation under employee stock ownership plan
|
|
|
(113 |
) |
|
|
(145 |
) |
| |
|
|
| |
|
Total Employee Stock Ownership Plan Preferred Stock
|
|
|
277 |
|
|
|
275 |
|
| |
|
|
|
SHAREOWNERS’ DEFICIT:
|
|
|
|
|
|
|
|
|
|
Common stock, $1.50 par value; 450,000,000 authorized;
190,745,445 shares issued at December 31, 2004, and
180,915,087 shares issued at December 31, 2003
|
|
|
286 |
|
|
|
271 |
|
| |
Additional paid-in capital
|
|
|
3,052 |
|
|
|
3,272 |
|
| |
(Accumulated deficit) retained earnings
|
|
|
(4,373 |
) |
|
|
844 |
|
| |
Accumulated other comprehensive loss
|
|
|
(2,358 |
) |
|
|
(2,338 |
) |
| |
Treasury stock at cost, 50,915,002 shares at
December 31, 2004, and 57,370,142 shares at
December 31, 2003
|
|
|
(2,403 |
) |
|
|
(2,708 |
) |
| |
|
|
| |
|
Total shareowners’ deficit
|
|
|
(5,796 |
) |
|
|
(659 |
) |
| |
|
|
|
Total liabilities and shareowners’ deficit
|
|
$ |
21,801 |
|
|
$ |
25,939 |
|
| |
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
F-4
Consolidated Statements of Operations
For the years ended December 31, 2004, 2003 and 2002
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (in millions, except per share data) |
|
2004 |
|
2003 |
|
2002 |
| |
|
OPERATING REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Passenger:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Mainline
|
|
$ |
10,880 |
|
|
$ |
10,393 |
|
|
$ |
10,749 |
|
| |
|
Regional affiliates
|
|
|
2,910 |
|
|
|
2,629 |
|
|
|
2,049 |
|
| |
Cargo
|
|
|
500 |
|
|
|
467 |
|
|
|
458 |
|
| |
Other, net
|
|
|
712 |
|
|
|
598 |
|
|
|
610 |
|
| |
|
|
| |
|
Total operating revenues
|
|
|
15,002 |
|
|
|
14,087 |
|
|
|
13,866 |
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Salaries and related costs
|
|
|
6,338 |
|
|
|
6,342 |
|
|
|
6,165 |
|
| |
Aircraft fuel
|
|
|
2,924 |
|
|
|
1,938 |
|
|
|
1,683 |
|
| |
Depreciation and amortization
|
|
|
1,244 |
|
|
|
1,230 |
|
|
|
1,164 |
|
| |
Contracted services
|
|
|
999 |
|
|
|
886 |
|
|
|
1,003 |
|
| |
Contract carrier arrangements
|
|
|
932 |
|
|
|
784 |
|
|
|
561 |
|
| |
Landing fees and other rents
|
|
|
875 |
|
|
|
858 |
|
|
|
834 |
|
| |
Aircraft maintenance materials and outside repairs
|
|
|
681 |
|
|
|
630 |
|
|
|
711 |
|
| |
Aircraft rent
|
|
|
716 |
|
|
|
727 |
|
|
|
709 |
|
| |
Other selling expenses
|
|
|
502 |
|
|
|
479 |
|
|
|
539 |
|
| |
Passenger commissions
|
|
|
204 |
|
|
|
211 |
|
|
|
322 |
|
| |
Passenger service
|
|
|
349 |
|
|
|
325 |
|
|
|
372 |
|
| |
Impairment of intangible assets
|
|
|
1,875 |
|
|
|
— |
|
|
|
— |
|
| |
Restructuring, asset writedowns, pension settlements and related
items, net
|
|
|
(41 |
) |
|
|
268 |
|
|
|
439 |
|
| |
Appropriations Act reimbursements
|
|
|
— |
|
|
|
(398 |
) |
|
|
— |
|
| |
Stabilization Act compensation
|
|
|
— |
|
|
|
— |
|
|
|
(34 |
) |
| |
Other
|
|
|
712 |
|
|
|
592 |
|
|
|
707 |
|
| |
|
|
| |
|
Total operating expenses
|
|
|
18,310 |
|
|
|
14,872 |
|
|
|
15,175 |
|
| |
|
|
|
OPERATING LOSS
|
|
|
(3,308 |
) |
|
|
(785 |
) |
|
|
(1,309 |
) |
| |
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Interest expense
|
|
|
(824 |
) |
|
|
(757 |
) |
|
|
(665 |
) |
| |
Interest income
|
|
|
37 |
|
|
|
36 |
|
|
|
36 |
|
| |
Gain (loss) from sale of investments, net
|
|
|
123 |
|
|
|
321 |
|
|
|
(3 |
) |
| |
Gain (loss) on extinguishment of debt, net
|
|
|
9 |
|
|
|
— |
|
|
|
(42 |
) |
| |
Fair value adjustments of SFAS 133 derivatives
|
|
|
(31 |
) |
|
|
(9 |
) |
|
|
(39 |
) |
| |
Miscellaneous income, net
|
|
|
2 |
|
|
|
5 |
|
|
|
20 |
|
| |
|
|
| |
|
Total other expense, net
|
|
|
(684 |
) |
|
|
(404 |
) |
|
|
(693 |
) |
| |
|
|
|
LOSS BEFORE INCOME TAXES
|
|
|
(3,992 |
) |
|
|
(1,189 |
) |
|
|
(2,002 |
) |
|
INCOME TAX (PROVISION) BENEFIT
|
|
|
(1,206 |
) |
|
|
416 |
|
|
|
730 |
|
| |
|
|
|
NET LOSS
|
|
|
(5,198 |
) |
|
|
(773 |
) |
|
|
(1,272 |
) |
|
PREFERRED STOCK DIVIDENDS
|
|
|
(19 |
) |
|
|
(17 |
) |
|
|
(15 |
) |
| |
|
|
|
NET LOSS ATTRIBUTABLE TO COMMON SHAREOWNERS
|
|
$ |
(5,217 |
) |
|
$ |
(790 |
) |
|
$ |
(1,287 |
) |
| |
|
|
|
BASIC AND DILUTED LOSS PER SHARE
|
|
$ |
(41.07 |
) |
|
$ |
(6.40 |
) |
|
$ |
(10.44 |
) |
| |
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
F-5
Consolidated Statements of Cash Flows
For the years ended December 31, 2004, 2003 and 2002
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (in millions) |
|
2004 |
|
2003 |
|
2002 |
| |
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net loss
|
|
$ |
(5,198 |
) |
|
$ |
(773 |
) |
|
$ |
(1,272 |
) |
| |
Adjustments to reconcile net loss to net cash (used in) provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Asset and other writedowns
|
|
|
1,915 |
|
|
|
47 |
|
|
|
287 |
|
| |
|
Depreciation and amortization
|
|
|
1,244 |
|
|
|
1,230 |
|
|
|
1,181 |
|
| |
|
Deferred income taxes
|
|
|
1,206 |
|
|
|
(416 |
) |
|
|
(411 |
) |
| |
|
Fair value adjustments of SFAS 133 derivatives
|
|
|
31 |
|
|
|
9 |
|
|
|
39 |
|
| |
|
Pension, postretirement and postemployment expense (less than)
in excess of payments
|
|
|
(121 |
) |
|
|
532 |
|
|
|
177 |
|
| |
|
(Gain) loss on extinguishment of debt, net
|
|
|
(9 |
) |
|
|
— |
|
|
|
42 |
|
| |
|
Dividends in excess of (less than) income from equity method
investments
|
|
|
— |
|
|
|
30 |
|
|
|
(3 |
) |
| |
|
(Gain) loss from sale of investments, net
|
|
|
(123 |
) |
|
|
(321 |
) |
|
|
3 |
|
| |
Changes in certain current assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Decrease (increase) in short-term investments, net
|
|
|
204 |
|
|
|
(311 |
) |
|
|
(60 |
) |
| |
|
(Increase) decrease in receivables
|
|
|
(27 |
) |
|
|
317 |
|
|
|
(243 |
) |
| |
|
Increase in current restricted cash
|
|
|
(141 |
) |
|
|
(73 |
) |
|
|
(134 |
) |
| |
|
Increase in prepaid expenses and other current assets
|
|
|
(151 |
) |
|
|
(90 |
) |
|
|
(35 |
) |
| |
|
Increase in air traffic liability
|
|
|
259 |
|
|
|
38 |
|
|
|
46 |
|
| |
|
(Decrease) increase in other payables, deferred credits and
accrued liabilities
|
|
|
(233 |
) |
|
|
(276 |
) |
|
|
600 |
|
| |
Other, net
|
|
|
21 |
|
|
|
199 |
|
|
|
8 |
|
| |
|
|
| |
|
|
Net cash (used in) provided by operating activities
|
|
|
(1,123 |
) |
|
|
142 |
|
|
|
225 |
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Property and equipment additions:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Flight equipment, including advance payments
|
|
|
(373 |
) |
|
|
(382 |
) |
|
|
(922 |
) |
| |
|
Ground property and equipment, including technology
|
|
|
(387 |
) |
|
|
(362 |
) |
|
|
(364 |
) |
| |
Decrease in restricted investments related to the Boston airport
terminal project
|
|
|
159 |
|
|
|
131 |
|
|
|
58 |
|
| |
Proceeds from sales of flight equipment
|
|
|
234 |
|
|
|
15 |
|
|
|
100 |
|
| |
Proceeds from sales of investments
|
|
|
146 |
|
|
|
325 |
|
|
|
24 |
|
| |
Other, net
|
|
|
1 |
|
|
|
13 |
|
|
|
(5 |
) |
| |
|
|
| |
|
|
Net cash used in investing activities
|
|
|
(220 |
) |
|
|
(260 |
) |
|
|
(1,109 |
) |
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Payments on long-term debt and capital lease obligations
|
|
|
(1,452 |
) |
|
|
(802 |
) |
|
|
(1,113 |
) |
| |
Issuance of long-term obligations
|
|
|
2,123 |
|
|
|
1,774 |
|
|
|
2,554 |
|
| |
Payments on notes payable
|
|
|
— |
|
|
|
— |
|
|
|
(765 |
) |
| |
Make-whole payments on extinguishment of ESOP Notes
|
|
|
— |
|
|
|
(15 |
) |
|
|
(42 |
) |
| |
Payment on termination of accounts receivable securitization
|
|
|
— |
|
|
|
(250 |
) |
|
|
— |
|
| |
Cash dividends
|
|
|
— |
|
|
|
(19 |
) |
|
|
(39 |
) |
| |
Other, net
|
|
|
(35 |
) |
|
|
(140 |
) |
|
|
(12 |
) |
| |
|
|
| |
|
|
Net cash provided by financing activities
|
|
|
636 |
|
|
|
548 |
|
|
|
583 |
|
|
Net (Decrease) Increase In Cash and Cash Equivalents
|
|
|
(707 |
) |
|
|
430 |
|
|
|
(301 |
) |
|
Cash and cash equivalents at beginning of year
|
|
|
2,170 |
|
|
|
1,740 |
|
|
|
2,041 |
|
| |
|
|
|
Cash and cash equivalents at end of year
|
|
$ |
1,463 |
|
|
$ |
2,170 |
|
|
$ |
1,740 |
|
| |
|
|
|
Supplemental disclosure of cash paid (refunded) for:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Interest, net of amounts capitalized
|
|
$ |
768 |
|
|
$ |
715 |
|
|
$ |
569 |
|
| |
Income taxes
|
|
$ |
— |
|
|
$ |
(402 |
) |
|
$ |
(649 |
) |
|
Non-cash transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Aircraft delivered under seller-financing
|
|
$ |
314 |
|
|
$ |
718 |
|
|
$ |
705 |
|
| |
Dividends payable on ESOP preferred stock
|
|
$ |
22 |
|
|
$ |
13 |
|
|
$ |
— |
|
| |
Aircraft capital leases from sale and leaseback transactions
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
52 |
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
F-6
Consolidated Statements of Shareowners’ (Deficit)
Equity
For the years ended December 31, 2004, 2003 and 2002
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Retained |
|
Accumulated |
|
|
|
|
| |
|
|
|
Additional |
|
Earnings |
|
Other |
|
|
|
|
| |
|
Common |
|
Paid-In |
|
(Accumulated |
|
Comprehensive |
|
Treasury |
|
|
| (in millions, except share data) |
|
Stock |
|
Capital |
|
Deficit) |
|
Income (Loss) |
|
Stock |
|
Total |
| |
|
Balance at December 31, 2001
|
|
$ |
271 |
|
|
$ |
3,267 |
|
|
$ |
2,930 |
|
|
$ |
25 |
|
|
$ |
(2,724 |
) |
|
$ |
3,769 |
|
| |
| |
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
(1,272 |
) |
|
|
— |
|
|
|
— |
|
|
|
(1,272 |
) |
| |
|
Other comprehensive loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,587 |
) |
|
|
— |
|
|
|
(1,587 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total comprehensive loss (See Note 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,859 |
) |
| |
Dividends on common stock ($0.10 per share)
|
|
|
— |
|
|
|
— |
|
|
|
(12 |
) |
|
|
— |
|
|
|
— |
|
|
|
(12 |
) |
| |
Dividends on Series B ESOP Convertible Preferred Stock
allocated shares
|
|
|
— |
|
|
|
— |
|
|
|
(15 |
) |
|
|
— |
|
|
|
— |
|
|
|
(15 |
) |
| |
Issuance of 13,017 shares of common stock under equity
plans and stock options ($15.70 per share
(1))
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Forfeitures of 82,878 shares of common to Treasury under
stock incentive plan ($27.31 per
share(1))
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2 |
) |
|
|
(2 |
) |
| |
Transfer of 183,400 shares of common from Treasury under
stock incentive plan ($47.11 per
share(1))
|
|
|
— |
|
|
|
(5 |
) |
|
|
— |
|
|
|
— |
|
|
|
8 |
|
|
|
3 |
|
| |
Other
|
|
|
— |
|
|
|
1 |
|
|
|
8 |
|
|
|
— |
|
|
|
— |
|
|
|
9 |
|
| |
|
Balance at December 31, 2002
|
|
|
271 |
|
|
|
3,263 |
|
|
|
1,639 |
|
|
|
(1,562 |
) |
|
|
(2,718 |
) |
|
|
893 |
|
| |
| |
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
(773 |
) |
|
|
— |
|
|
|
— |
|
|
|
(773 |
) |
| |
|
Other comprehensive loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(776 |
) |
|
|
— |
|
|
|
(776 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total comprehensive loss (See Note 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,549 |
) |
| |
SAB 51 gain related to Orbitz, net of tax (See Note 16)
|
|
|
— |
|
|
|
18 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
18 |
|
| |
Dividends on common stock ($0.05 per share)
|
|
|
— |
|
|
|
— |
|
|
|
(5 |
) |
|
|
— |
|
|
|
— |
|
|
|
(5 |
) |
| |
Dividends on Series B ESOP Convertible Preferred Stock
allocated shares
|
|
|
— |
|
|
|
— |
|
|
|
(17 |
) |
|
|
— |
|
|
|
— |
|
|
|
(17 |
) |
| |
Issuance of 11,715 shares of common stock under equity
plans ($30.64 per
share(1))
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Forfeitures of 44,100 shares of common to Treasury under
stock incentive plan ($11.97 per
share(1))
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Transfer of 144,874 shares of common from Treasury under
stock incentive plan and other equity plans ($47.22 per
share(1))
|
|
|
— |
|
|
|
(6 |
) |
|
|
— |
|
|
|
— |
|
|
|
7 |
|
|
|
1 |
|
| |
Transfer of 73,252 shares of common from Treasury under
ESOP ($47.20 per
share(1))
|
|
|
— |
|
|
|
(3 |
) |
|
|
— |
|
|
|
— |
|
|
|
3 |
|
|
|
— |
|
| |
|
Balance at December 31, 2003
|
|
|
271 |
|
|
|
3,272 |
|
|
|
844 |
|
|
|
(2,338 |
) |
|
|
(2,708 |
) |
|
|
(659 |
) |
| |
| |
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
(5,198 |
) |
|
|
— |
|
|
|
— |
|
|
|
(5,198 |
) |
| |
|
Other comprehensive loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(20 |
) |
|
|
— |
|
|
|
(20 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total comprehensive loss (See Note 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,218 |
) |
| |
Dividends on Series B ESOP Convertible Preferred Stock
allocated shares
|
|
|
— |
|
|
|
— |
|
|
|
(19 |
) |
|
|
— |
|
|
|
— |
|
|
|
(19 |
) |
| |
Forfeitures of 4,125 shares of common to Treasury under
stock incentive plan ($4.59 per
share(1))
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Transfer of 113,672 shares of common from Treasury under
stock incentive and other equity plans ($47.20 per share)
|
|
|
— |
|
|
|
(5 |
) |
|
|
— |
|
|
|
— |
|
|
|
5 |
|
|
|
— |
|
| |
Transfer of 6,330,551 shares of common from Treasury under
ESOP ($47.20 per
share(1))
|
|
|
— |
|
|
|
(266 |
) |
|
|
— |
|
|
|
— |
|
|
|
299 |
|
|
|
33 |
|
| |
Issuance of 9,842,778 shares of common stock related to
Delta’s transformation plan ($6.98 per share) (see
Notes 1, 6 and 7)
|
|
|
15 |
|
|
|
53 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
68 |
|
| |
Other
|
|
|
— |
|
|
|
(2 |
) |
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
(1 |
) |
| |
|
Balance at December 31, 2004
|
|
$ |
286 |
|
|
$ |
3,052 |
|
|
$ |
(4,373 |
) |
|
$ |
(2,358 |
) |
|
$ |
(2,403 |
) |
|
$ |
(5,796 |
) |
| |
|
|
| (1) |
Average price per share |
The accompanying notes are an integral part of these
Consolidated Financial Statements.
F-7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
| Note 1. |
Summary of Significant Accounting Policies |
Delta Air Lines, Inc. (a Delaware corporation) is a major air
carrier that provides air transportation for passengers and
cargo throughout the U.S. and around the world. Our Consolidated
Financial Statements include the accounts of Delta Air Lines,
Inc. and our wholly owned subsidiaries, including Atlantic
Southeast Airlines, Inc. (“ASA”) and Comair, Inc.
(“Comair”), collectively referred to as Delta. We have
eliminated all material intercompany transactions in our
Consolidated Financial Statements.
We do not consolidate the financial statements of any company in
which we have an ownership interest of 50% or less unless we
control that company. During 2004, 2003 and 2002, we did not
control any company in which we had an ownership interest of 50%
or less.
These Consolidated Financial Statements have been prepared in
accordance with accounting principles generally accepted in the
United States of America (“GAAP”) on a going concern
basis.
Effective December 31, 2004, we reclassified our
investments in auction rate securities from cash and cash
equivalents to short-term investments on our Consolidated
Balance Sheets for all periods presented. The cash flows related
to these investments are presented as operating activities in
our Consolidated Statements of Cash Flows for all periods
presented. For additional information about our short-term
investments, see “Short-Term Investments” in this Note.
We have reclassified certain other prior period amounts in our
Consolidated Financial Statements to be consistent with the
current period presentation. The effect of these
reclassifications is not material.
Our financial performance continued to deteriorate during 2004,
the fourth consecutive year we reported substantial losses. Our
consolidated net loss of $5.2 billion in 2004 reflects a
net charge of $2.9 billion (which is discussed in
Notes 5, 9, 14 and 16), a significant decline in
passenger mile yield, historically high aircraft fuel prices and
other cost pressures. Our unrestricted cash and cash equivalents
and short-term investments were $1.8 billion at
December 31, 2004, down from $2.7 billion at
December 31, 2003. These results underscore the urgent need
to make fundamental changes in the way we do business.
In light of our significant losses and the decline in our cash
and cash equivalents and short-term investments, 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.
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 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.
In September 2004, we outlined key elements of our
transformation plan, which are 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. Elements of the transformation plan include
(1) non-pilot operational improvements, (2) pilot cost
reductions and (3) other benefits. By the end of 2004, we
achieved approximately
F-8
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
$2.3 billion of the $5 billion in targeted benefits
under our profit improvement program. We have identified, and
begun implementation of, 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.
|
|
|
Non-Pilot Operational Improvements |
Non-pilot operational improvements are targeted to achieve
approximately $1.6 billion in benefits by the end of 2006.
These initiatives consist of (1) technology and
productivity enhancements, including the elimination of 6,000 to
7,000 non-pilot jobs; (2) non-pilot pay and benefit
savings, including an across-the-board 10% pay reduction for
executives and supervisory, administrative, and frontline
employees that was effective January 1, 2005, increases to
the shared cost of healthcare coverage, the elimination of a
healthcare coverage subsidy for non-pilot employees who retire
after January 1, 2006 and reduced vacation time;
(3) dehubbing of our Dallas/ Ft. Worth operations and
redeploying aircraft from that market to grow our hub operations
in Atlanta, Cincinnati and Salt Lake City; and
(4) redesigning our primary hub at Atlanta’s
Hartsfield-Jackson International Airport from a banked to a
continuous hub and then expanding this concept to our other hubs.
We recorded significant gains and charges in 2004 in connection
with some of our non-pilot operational initiatives. These gains
and charges include (1) a $527 million gain related to
the elimination of the healthcare coverage subsidy for non-pilot
employees who retire after January 1, 2006, and (2) a
$194 million charge related to voluntary and involuntary
workforce reduction programs. See Note 14 for additional
information about these gains and charges.
We will record additional charges relating to our non-pilot
operational initiatives and pilot cost reductions, including
charges related to certain facility closures and employee items,
but we are not able to reasonably estimate the amount or timing
of any such charges, including the amounts of such charges that
may result in future cash expenditures, at this time. The
targeted benefits under our transformation plan do not reflect
any gains or charges described in this or the preceding
paragraph.
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.
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 cash savings of approximately
$57 million between 2005 and 2009, which will also result
in some cost reductions. We also reached agreements with
approximately 115 suppliers under which we expect to realize
average annual benefits of approximately $46 million during
2005, 2006 and 2007.
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 in achieving
F-9
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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.
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 quarter under our financing agreements with GE Commercial
Finance and American Express Travel Related Services Company,
Inc. (“Amex”). These new financing agreements are
essential elements of our ongoing restructuring efforts. Our
borrowings under these agreements are secured by substantially
all of our assets that were unencumbered immediately prior to
the consummation of those agreements. During 2004, we also
deferred to later years certain debt obligations that were due
in 2004, 2005 and 2006. See Note 6 for additional
information about our financing agreements with GE Commercial
Finance and Amex, as well as our deferrals of debt during 2004.
At December 31, 2004, we had cash and cash equivalents, and
short-term investments totaling $1.8 billion. In March
2005, we borrowed the final installment of $250 million
under our financing agreement with Amex. 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”) (see
Note 6). We have no other undrawn lines of credit.
We have significant obligations and commitments 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) $835 million in debt
maturities, approximately $630 million of which we expect
will be cash payments (see Note 6); and
(4) $450 million of estimated funding for our defined
benefit pension and defined contribution plans. Absent the
enactment of new federal legislation which reduces our pension
funding obligations during the next several years, our annual
pension funding obligations for each of 2006 through 2009 will
be significantly higher than in 2005 and could have a material
adverse impact on our liquidity.
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 expense 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 and short-term investments, 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 are low, 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 and
short-term investments will be substantially lower at
December 31, 2005 than at the end of 2004.
F-10
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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. See Note 6 for additional
information about our financing transactions.
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 achieved in that year and
(2) the average annual jet fuel price per gallon in 2005 is
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). Our
business plan also includes significant assumptions about
passenger mile yield (which we expect to be lower in 2005 as
compared to 2004), interest rates, our ability to generate
incremental revenues, our pension funding obligations and credit
card processor holdbacks (our current Visa/Mastercard processing
contract expires in August 2005).
If the assumptions underlying our business plan prove 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 and short-term investments otherwise
declines to an unacceptably low level, we would need to seek to
restructure under Chapter 11 of the U.S. Bankruptcy
Code.
The matters discussed under “Business Environment” in
this Note raise substantial doubt about our ability to continue
as a going concern. Our Consolidated Financial Statements have
been prepared in accordance with GAAP 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.
We are required to make estimates and assumptions when preparing
our Consolidated Financial Statements in accordance with GAAP.
These estimates and assumptions affect the amounts reported in
our financial statements and the accompanying notes. Actual
results could differ materially from those estimates.
In December 2004, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting
Standards (“SFAS”) No. 123 (revised 2004),
“Share-Based Payment” (“SFAS 123R”).
This standard replaces SFAS No. 123, “Accounting
for Stock-Based Compensation” (“SFAS 123”)
and supersedes Accounting Principles Board (“APB”)
Opinion No. 25, “Accounting for Stock Issued to
Employees” (“APB 25”). It requires that the
compensation cost of share-based payment transactions be
recognized in financial statements based on the fair value of
the equity or liability instruments issued. This statement is
effective for us beginning July 1, 2005. We are evaluating
the impact of SFAS 123R, including the transition options
for adoption of this standard, on our 2005 Consolidated
Financial Statements. This impact may be material as we issued
approximately 71 million stock options in 2004, primarily
under our new broad-based employee stock option plans (see
Note 11).
In January 2004, the FASB issued FASB Staff Position
(“FSP”) SFAS No. 106-1, “Accounting and
Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003” (“FSP
106-1”). Beginning in 2006, the Medicare Prescription Drug,
Improvement and Modernization Act
F-11
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
of 2003 (“Medicare Act”) introduces a federal subsidy
to sponsors of healthcare benefit plans in certain circumstances
and a prescription drug benefit to eligible participants under
Medicare. We have determined that the federal subsidy to be
provided under the Medicare Act will not have an impact on our
postretirement benefit plans. We believe, however, that the new
prescription drug benefit that will be provided under Medicare
will reduce our future claims costs under our postretirement
benefit plans. See Note 10 for additional information about
the impact of FSP 106-1.
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. See Note 17 for additional
information about the impact of EITF 04-08 on our
Consolidated Financial Statements.
During 2003, we adopted the following accounting standards:
|
|
|
| |
• |
SFAS No. 132 (revised
2003), “Employers’ Disclosures about Pensions and
Other Postretirement Benefits, an amendment of FASB Statements
No. 87, 88, and 106” (“SFAS 132R”) (see
Note 10 for disclosures required under SFAS 132R).
|
| |
| |
• |
EITF Issue 01-08,
“Determining Whether an Arrangement Contains a Lease”.
|
| |
| |
• |
SFAS No. 143,
“Accounting for Asset Retirement Obligations;”
SFAS No. 149, “Amendment of Statement 133 on
Derivative Instruments and Hedging Activities;”
SFAS No. 150, “Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity;” and FASB Interpretation No. (“FIN”) 46,
“Consolidation of Variable Interest Entities.”
|
Our adoption of these standards did not have a material impact
on our Consolidated Financial Statements.
During 2002, we adopted the following accounting standards:
|
|
|
| |
• |
SFAS No. 142,
“Goodwill and Other Intangible Assets”
(“SFAS 142”) (see our goodwill and other
intangible assets policy and related information in this Note
and in Note 5, respectively).
|
| |
| |
• |
SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived
Assets” (“SFAS 144”) (see our long-lived
assets policy in this Note).
|
| |
| |
• |
SFAS No. 145,
“Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13 and Technical
Corrections” (see Note 6 for additional information).
|
| |
| |
• |
SFAS No. 146,
“Accounting for Costs Associated with Exit or Disposal
Activities” (“SFAS 146”). SFAS 146
impacts the timing of the recognition of liabilities related to
future exit or disposal activities.
|
| |
| |
• |
SFAS No. 148,
“Accounting for Stock-Based Compensation —
Transition and Disclosure — an Amendment to FASB
Statement No. 123” (“SFAS 148”) (see
our stock-based compensation policy in this Note).
|
| |
| |
• |
FIN 45,
“Guarantor’s Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others” (“FIN 45”) (see Note 8 for our
disclosures required under FIN 45).
|
|
|
|
Cash and Cash Equivalents |
We classify short-term, highly liquid investments with
maturities of three months or less when purchased as cash and
cash equivalents. These investments are recorded at cost, which
approximates fair value.
F-12
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Under our cash management system, we utilize controlled
disbursement accounts that are funded daily. Checks we issue
which have not been presented for payment are recorded in
accounts payable, deferred credits and other accrued liabilities
on our Consolidated Balance Sheets. These amounts totaled
$63 million and $129 million at December 31, 2004
and 2003, respectively.
Our short-term investments at December 31, 2004 and 2003
were auction rate securities. In accordance with
SFAS No. 115, “Accounting for Certain Investments
in Debt and Equity Securities” (“SFAS 115”),
we account for these investments as trading securities. For
additional information about trading securities, see
“Investments in Debt and Equity Securities” in this
Note.
We have restricted cash, which primarily relates to cash held as
collateral to support certain projected insurance obligations.
Restricted cash included in current assets on our Consolidated
Balance Sheets totaled $348 million and $207 million
at December 31, 2004 and 2003, respectively. Restricted
cash recorded in other noncurrent assets on our Consolidated
Balance Sheet totaled $2 million and $28 million at
December 31, 2004 and 2003, respectively.
We have restricted investments for the redevelopment and
expansion of Terminal A at Boston’s Logan International
Airport (see Note 6 for additional information about this
project). Restricted investments included in other assets on our
Consolidated Balance Sheets totaled $127 million and
$286 million at December 31, 2004 and 2003,
respectively.
|
|
|
Derivative Financial Instruments |
We account for derivative financial instruments in accordance
with SFAS 133, “Accounting for Derivative Instruments
and Hedging Activities” (“SFAS 133”). These
derivative instruments include fuel hedge contracts, interest
rate swap agreements and equity warrants and other similar
rights in certain companies (see Note 4).
Our fuel hedge contracts qualified for hedge accounting as cash
flow hedges under SFAS 133. For these types of hedges, we
record the fair value of our fuel hedge contracts on our
Consolidated Balance Sheets and regularly adjust the balances to
reflect changes in the fair values of those contracts.
Effective gains or losses related to the fair value adjustments
of fuel hedge contracts are recorded in shareowners’
(deficit) equity as a component of accumulated other
comprehensive income (loss). These gains or losses are
recognized in aircraft fuel expense when the related aircraft
fuel purchases being hedged are consumed. However, to the extent
that the change in fair value of a fuel hedge contract does not
perfectly offset the change in the value of the aircraft fuel
being hedged, the ineffective portion of the hedge is
immediately recognized as a fair value adjustment of
SFAS 133 derivatives in other income (expense) on our
Consolidated Statements of Operations. In calculating the
ineffective portion of a fuel hedge contract, we include all
changes in the fair value attributable to the time value
component and recognize the amount in other income (expense)
during the life of the contract.
|
|
|
Interest Rate Swap Agreements |
We record interest rate swap agreements that qualify as fair
value hedges under SFAS 133 at their fair value on our
Consolidated Balance Sheets and adjust these amounts and the
related debt to reflect changes in their fair values. We record
net periodic interest rate swap settlements as adjustments to
interest expense in other income (expense) on our Consolidated
Statements of Operations.
F-13
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
Equity Warrants and Other Similar Rights |
We record our equity warrants and other similar rights in
certain companies at fair value at the date of acquisition in
other noncurrent assets on our Consolidated Balance Sheets. In
accordance with SFAS 133, we regularly adjust our
Consolidated Balance Sheets to reflect the changes in the fair
values of the equity warrants and other similar rights, and
recognize the related gains or losses as fair value adjustments
of SFAS 133 derivatives in other income (expense) on our
Consolidated Statements of Operations.
We record sales of passenger tickets as air traffic liability on
our Consolidated Balance Sheets. Passenger revenues are
recognized when we provide the transportation, reducing the
related air traffic liability. We periodically evaluate the
estimated air traffic liability and record any resulting
adjustments in our Consolidated Statements of Operations in the
period in which the evaluations are completed.
We sell mileage credits in the SkyMiles® frequent flyer
program to participating partners such as credit card companies,
hotels and car rental agencies. A portion of the revenue from
the sale of mileage credits is deferred until the credits are
redeemed for travel. We amortize the deferred revenue on a
straight-line basis over a 30-month period. The majority of the
revenue from the sale of mileage credits, including the
amortization of deferred revenue, is recorded in passenger
revenue on our Consolidated Statements of Operations; the
remaining portion is recorded as an offset to other selling
expenses.
Cargo revenues are recognized in our Consolidated Statements of
Operations when we provide the transportation.
Other, net revenue includes revenue from codeshare agreements
with certain other airlines. Under these agreements, we sell
seats on these airlines’ flights and they sell seats on our
flights, with each airline separately marketing its respective
seats. The revenue from our sale of codeshare seats on other
airlines, and the direct costs incurred in marketing those
seats, are recorded in other, net in operating revenues on our
Consolidated Statements of Operations. Our revenue from other
airlines’ sale of codeshare seats on our flights is
recorded in passenger revenue on our Consolidated Statements of
Operations.
We record our property and equipment at cost and depreciate or
amortize these assets on a straight-line basis to their
estimated residual values over their respective estimated useful
lives. Residual values for flight equipment range from 5%-40% of
cost. We also capitalize certain internal and external costs
incurred to develop internal-use software; these assets are
included in ground property and equipment, net on our
Consolidated Balance Sheets. The estimated useful lives for
major asset classifications are as follows:
| |
|
|
|
|
| |
|
Estimated |
| Asset Classification |
|
Useful Life |
| |
|
Owned flight equipment
|
|
|
15-25 years |
|
|
Flight and ground equipment under capital lease
|
|
|
Lease Term |
|
|
Ground property and equipment
|
|
|
3-10 years |
|
| |
In accordance with SFAS 144, we record impairment losses on
long-lived assets used in operations when events and
circumstances indicate the assets may be impaired and the
undiscounted cash flows estimated to be generated by those
assets are less than their carrying amounts. For long-lived
assets held for sale, we record
F-14
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
impairment losses when the carrying amount is greater than the
fair value less the cost to sell. We discontinue depreciation of
long-lived assets once they are classified as held for sale.
To determine impairments for aircraft used in operations, 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 projections of passenger yield, fuel costs, labor
costs and other relevant factors in the markets in which these
aircraft operate. If an impairment occurs, the amount of the
impairment loss recognized is the amount by which the carrying
amount of the aircraft exceeds the estimated fair value.
Aircraft fair values are estimated by management using published
sources, appraisals and bids received from third parties, as
available. See Note 14 for additional information about
asset impairments.
|
|
|
Goodwill and Intangible Assets |
In accordance with SFAS 142, we apply a fair value-based
impairment test to the net book value of goodwill and
indefinite-lived intangible assets on an annual basis and, if
certain events or circumstances indicate that an impairment loss
may have been incurred, on an interim basis. The annual
impairment test date for our goodwill and indefinite-lived
intangible assets is December 31. Intangible assets with
determinable useful lives are amortized on a straight-line basis
over their estimated useful lives. Our leasehold and operating
rights have definite useful lives and are amortized over their
respective lease terms, which range from nine to 19 years.
In evaluating goodwill for impairment, we first compare the fair
value to the carrying value of each of our three reporting units
which have assigned goodwill: Mainline, ASA and Comair. We
estimate the fair value of each reporting unit primarily by
considering its projected future cash flows. If a reporting
unit’s fair value exceeds its carrying value, no further
testing is required. If, however, a reporting unit’s
carrying value exceeds its fair value, we then determine the
amount of the impairment charge, if any. We recognize an
impairment charge if the carrying value of a reporting
unit’s goodwill exceeds its implied fair value.
We perform the impairment test for our indefinite-lived
intangible assets by comparing the asset’s fair value to
its carrying value. Fair value is estimated based on projected
discounted future cash flows. We recognize an impairment charge
if the asset’s carrying value exceeds its estimated fair
value.
See Note 5 for additional information about the goodwill
and intangible assets impairment charges recorded during 2004.
We capitalize interest on advance payments for the acquisition
of new aircraft and on construction of ground facilities as an
additional cost of the related assets. Interest is capitalized
at our weighted average interest rate on long-term debt or, if
applicable, the interest rate related to specific asset
financings. Interest capitalization ends when the equipment or
facility is ready for service or its intended use. Capitalized
interest totaled $10 million, $12 million and
$15 million for the years ended December 31, 2004,
2003 and 2002, respectively.
|
|
|
Equity Method Investments |
We use the equity method to account for our investment in a
company when we have significant influence but not control over
the company’s operations. Under the equity method, we
initially record our investment at cost and then adjust the
carrying value of the investment to recognize our proportional
share of the company’s net income (loss). In addition,
dividends received from the company reduce the carrying value of
our investment.
In accordance with Securities and Exchange Commission Staff
Accounting Bulletin (“SAB”) 51, “Accounting for
Sales of Stock by a Subsidiary” (“SAB 51”),
we record SAB 51 gains (losses) as a component of
shareowners’ deficit on our Consolidated Balance Sheets
(see Note 16).
In accordance with SFAS No. 109, “Accounting for
Income Taxes” (“SFAS 109”), we account for
deferred income taxes under the liability method. Under this
method, we recognize deferred tax assets and
F-15
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
liabilities based on the tax effects of temporary differences
between the financial statement and tax bases of assets and
liabilities, as measured by current enacted tax rates. A
valuation allowance is recorded to reduce deferred tax assets
when necessary. Deferred tax assets and liabilities are recorded
net as current and noncurrent deferred income taxes on our
Consolidated Balance Sheets (see Note 9).
Our income tax provisions are based on calculations and
assumptions that will be subject to examination by the Internal
Revenue Service and other tax authorities. We do not record tax
benefits for any positions unless we believe they are probable
of being sustained under such examinations. We regularly assess
the potential outcomes of these examinations, which we believe
will not have a material effect on our Consolidated Financial
Statements, in determining the adequacy of our accruals for
income taxes. Should the actual results differ from our
estimates, we would adjust the income tax provision in the
period in which the facts that give rise to the revision become
known. Tax law and rate changes are reflected in the income tax
provision in the period in which such changes are enacted.
|
|
|
Investments in Debt and Equity Securities |
In accordance with SFAS 115, we record our investments
classified as available-for-sale securities at fair value in
other noncurrent assets on our Consolidated Balance Sheets. Any
change in the fair value of these securities is recorded in
accumulated other comprehensive income (loss), unless such
change is a decline in value that is deemed to be other than
temporary (see Note 2).
We record our investments classified as trading securities at
fair value in current assets on our Consolidated Balance Sheets
and recognize changes in the fair value of these securities in
other income (expense) on our Consolidated Statements of
Operations (see Note 16).
We record an estimated liability for the incremental cost
associated with providing free transportation under our SkyMiles
frequent flyer program when a free travel award is earned. The
liability is recorded in accounts payable, deferred credits and
other accrued liabilities on our Consolidated Balance Sheets. We
periodically record adjustments to this liability in other
operating expenses on our Consolidated Statements of Operations
based on awards earned, awards redeemed, changes in the SkyMiles
program and changes in estimated incremental costs.
|
|
|
Deferred Gains on Sale and Leaseback Transactions |
We amortize deferred gains on the sale and leaseback of property
and equipment under operating leases over the lives of these
leases. The amortization of these gains is recorded as a
reduction in rent expense. Gains on the sale and leaseback of
property and equipment under capital leases reduce the carrying
value of the related assets.
We periodically receive credits in connection with the
acquisition of aircraft and engines. These credits are deferred
until the aircraft and engines are delivered, then applied on a
pro rata basis as a reduction to the cost of the related
equipment.
We record maintenance costs in operating expenses as they are
incurred.
Inventories of expendable parts related to flight equipment are
carried at moving average cost and charged to operations as
consumed. An allowance for obsolescence for the cost of these
parts is provided over the remaining useful life of the related
fleet.
F-16
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
We expense advertising costs as other selling expenses in the
year incurred. Advertising expense was $148 million,
$135 million and $130 million for the years ended
December 31, 2004, 2003 and 2002, respectively.
We record passenger commissions in prepaid expenses and other on
our Consolidated Balance Sheets when the related passenger
tickets are sold. Passenger commissions are recognized in
operating expenses on our Consolidated Statements of Operations
when the transportation is provided and the related revenue is
recognized.
|
|
|
Foreign Currency Remeasurement |
We remeasure assets and liabilities denominated in foreign
currencies using exchange rates in effect on the balance sheet
date. Fixed assets and the related depreciation or amortization
charges are recorded at the exchange rates in effect on the date
we acquired the assets. Revenues and expenses denominated in
foreign currencies are measured using average exchange rates for
each of the periods presented. We recognize the resulting
foreign exchange gains (losses) as a component of miscellaneous
income (expense) on our Consolidated Statements of
Operations. These gains (losses) are immaterial for all periods
presented.
We account for our stock-based compensation plans under the
intrinsic value method in accordance with APB 25 and
related interpretations (see Note 11 for additional
information about our stock-based compensation plans). No stock
option compensation expense is recognized in our Consolidated
Statements of Operations because all stock options granted had
an exercise price equal to the fair value of the underlying
common stock on the grant date.
The estimated fair values of stock options granted during the
years ended December 31, 2004, 2003 and 2002 were derived
using the Black-Scholes model. The following table includes the
assumptions used in estimating fair values and the resulting
weighted average fair value of a stock option granted in the
periods presented:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Stock Options Granted |
| |
|
|
| Assumption |
|
2004 |
|
2003 |
|
2002 |
| |
|
Risk-free interest rate
|
|
|
3.1 |
% |
|
|
2.2 |
% |
|
|
4.4 |
% |
|
Average expected life of stock options (in years)
|
|
|
3.2 |
|
|
|
2.9 |
|
|
|
6.7 |
|
|
Expected volatility of common stock
|
|
|
68.8 |
% |
|
|
66.4 |
% |
|
|
38.9 |
% |
|
Expected annual dividends on common stock
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
0.10 |
|
|
Weighted average fair value of a stock option granted
|
|
$ |
3 |
|
|
$ |
5 |
|
|
$ |
9 |
|
| |
F-17
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table shows what our net loss and loss per share
would have been for the years ended December 31, 2004, 2003
and 2002 had we accounted for our stock-based compensation plans
under the fair value method of SFAS 123, as amended by
SFAS 148, using the assumptions in the table above:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (in millions, except per share data) |
|
2004 |
|
2003 |
|
2002 |
| |
|
Net loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
(5,198 |
) |
|
$ |
(773 |
) |
|
$ |
(1,272 |
) |
|
Deduct: total stock option compensation expense determined under
the fair value based method, net of
tax(1)
|
|
|
(38 |
) |
|
|
(33 |
) |
|
|
(47 |
) |
| |
|
As adjusted for the fair value method under SFAS 123
|
|
$ |
(5,236 |
) |
|
$ |
(806 |
) |
|
$ |
(1,319 |
) |
| |
| |
|
Basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
(41.07 |
) |
|
$ |
(6.40 |
) |
|
$ |
(10.44 |
) |
|
As adjusted for the fair value method under SFAS 123
|
|
$ |
(41.36 |
) |
|
$ |
(6.66 |
) |
|
$ |
(10.82 |
) |
| |
| |
|
|
|
| |
(1) |
These amounts are shown net of tax for 2003 and 2002. There is
no tax effect in 2004 because we discontinued recording tax
benefits for losses in 2004. |
In accordance with SFAS 123R, beginning July 1, 2005,
we will recognize compensation expense for all stock-based
compensation, including stock options. We are evaluating the
impact, which may be material, of SFAS 123R on our 2005
Consolidated Financial Statements. For additional information
about SFAS 123R, see “New Accounting Standards”
in this Note.
|
|
|
Fair Value of Financial Instruments |
We record our cash equivalents and short-term investments at
cost, which we believe approximates their fair values. The
estimated fair values of other financial instruments, including
debt and derivative instruments, have been determined using
available market information and valuation methodologies,
primarily discounted cash flow analyses and the Black-Scholes
model.
|
|
| Note 2. |
Marketable and Other Equity Securities |
|
|
|
Republic Airways Holdings, Inc. and Affiliates
(“Republic Holdings”) |
We have contract carrier agreements with Chautauqua Airlines,
Inc. (“Chautauqua”) and Republic Airline, Inc.
(“Republic Airline”), regional air carriers that are
subsidiaries of Republic Holdings (see Note 8). As part of
these agreements, we received warrants to purchase Republic
Holdings common stock.
At December 31, 2004 and 2003, our investment in Republic
Holdings consisted of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Number of |
|
|
|
|
| |
|
|
|
|
|
Underlying |
|
|
| |
|
|
|
|
|
Common Shares |
|
Carrying Values |
| |
|
Expiration |
|
Exercise Price Per |
|
|
|
|
| (in millions)(1)(2) |
|
Date |
|
Common Share |
|
2004 |
|
2003 |
|
2004 |
|
2003 |
| |
|
2002 Warrant
|
|
|
June 2012 |
|
|
$ |
12.50 |
|
|
|
0.8 |
|
|
|
1.5 |
|
|
$ |
6 |
|
|
$ |
10 |
|
|
2003 Warrant (February)
|
|
|
February 2013 |
|
|
$ |
13.00 |
|
|
|
0.4 |
|
|
|
0.7 |
|
|
|
3 |
|
|
|
5 |
|
|
2003 Warrant (October)
|
|
|
October 2013 |
|
|
$ |
12.35 |
|
|
|
0.2 |
|
|
|
0.3 |
|
|
|
1 |
|
|
|
3 |
|
|
2004 Warrant (March)
|
|
|
March 2014 |
|
|
$ |
12.35 |
|
|
|
0.3 |
|
|
|
— |
|
|
|
2 |
|
|
|
— |
|
|
2004 Warrant (December)
|
|
|
December 2014 |
|
|
$ |
11.60 |
|
|
|
1.0 |
|
|
|
— |
|
|
|
8 |
|
|
|
— |
|
|
IPO Warrant
|
|
|
May 2014 |
|
|
$ |
12.35 |
|
|
|
0.8 |
|
|
|
— |
|
|
|
6 |
|
|
|
— |
|
| |
|
Total
|
|
|
|
|
|
|
|
|
|
|
3.5 |
|
|
|
2.5 |
|
|
$ |
26 |
|
|
$ |
18 |
|
| |
| |
|
|
| (1) |
Except per share data. |
F-18
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
| (2) |
These warrants and the underlying shares of Republic Holdings
common stock are not registered under the Securities Act of
1933; however, we have certain demand and piggyback registration
rights relating to the underlying shares of common stock. |
These warrants are recorded at fair value in other noncurrent
assets on our Consolidated Balance Sheets. In accordance with
SFAS 133, any changes in fair value are recorded in other
income (expense) on our Consolidated Statement of
Operations.
These warrants were recorded at their fair values on the date
received and the fair values are primarily being recognized on a
straight-line basis over an approximately five year period in
our Consolidated Statement of Operations. For the years ended
December 31, 2004, 2003 and 2002, the gains (losses)
recorded from our investment in Republic Holdings were not
material to our Consolidated Statements of Operations.
In December 2004, we and Republic Holdings amended our contract
carrier agreement with Chautauqua and the agreements covering
the 2002 Warrant, the 2003 Warrants, the 2004 Warrant (March)
and the IPO Warrant (“Pre-existing Warrants”)
(1) to remove seven aircraft that Chautauqua would have
operated for us beginning in 2005; (2) to extend the term
of and to reduce our cost under the contract carrier agreement;
and (3) to relinquish our right to purchase 45% of the
shares of Republic Holdings common stock underlying each of the
Pre-existing Warrants.
In January 2005, we also entered into a new contract carrier
agreement with Republic Airline under which that carrier will
operate 16 aircraft for us beginning in July 2005. In
December 2004, we received the 2004 Warrant (December) in
anticipation of, and conditioned upon, entering into this
agreement.
See Note 8 for additional information about our contract
carrier contracts with Chautauqua and Republic Airline.
|
|
|
priceline.com Incorporated (“priceline”) |
We are party to an agreement with priceline under which we
(1) provide ticket inventory that may be sold through
priceline’s Internet-based e-commerce system and
(2) received certain equity interests in priceline. We are
required to provide priceline access to unpublished fares.
At December 31, 2004 and 2003, our investment in priceline
consisted of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Number of Shares(2) |
|
Carrying Values |
| |
|
|
|
|
| (in millions)(1) |
|
2004 |
|
2003 |
|
2004 |
|
2003 |
| |
|
Series B Preferred
Stock(3)
|
|
|
13,469 |
|
|
|
13,469 |
|
|
$ |
13 |
|
|
$ |
13 |
|
|
2001
Warrant(4)
|
|
|
0.8 |
|
|
|
0.8 |
|
|
|
10 |
|
|
|
7 |
|
|
1999
Warrant(5)
|
|
|
— |
|
|
|
0.8 |
|
|
|
— |
|
|
|
3 |
|
| |
|
Total
|
|
|
|
|
|
|
|
|
|
$ |
23 |
|
|
$ |
23 |
|
| |
| |
|
|
|
| |
(1) |
Except shares of Series B Preferred Stock. |
| |
(2) |
We have certain registration rights relating to shares of
priceline common stock we receive as dividends on the
Series B Preferred Stock, or acquire from the exercise of
the 1999 Warrant or the 2001 Warrant. |
| |
(3) |
The Series B Preferred Stock is classified as an
available-for-sale security under SFAS 115 and is recorded
at face value, which approximates fair value, in other
noncurrent assets on our Consolidated Balance Sheets. The
Series B Preferred Stock, among other things,
(1) bears an annual dividend per share of approximately six
shares of priceline common stock and (2) is subject to
mandatory redemption in February 2007 at $1,000 per share
plus any dividends accrued or accumulated but not yet paid. |
| |
(4) |
The 2001 Warrant is recorded at fair value in other noncurrent
assets on our Consolidated Balance Sheets. In accordance with
SFAS 133, any changes in fair value are recorded in other
income (expense) on our Consolidated Statements of
Operations. This warrant expires in February 2007 and has an
exercise price of $17.81. |
| |
(5) |
The 1999 Warrant is recorded at fair value in other noncurrent
assets on our 2003 Consolidated Balance Sheet. In accordance
with SFAS 133, any changes in fair value were recorded in
other income (expense) on our Consolidated Statements of
Operations in accordance with SFAS 133. This warrant
expired in November 2004. |
F-19
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
For the years ended December 31, 2004, 2003 and 2002, the
gains (losses) recorded from our investment in priceline were
not material to our Consolidated Statements of Operations.
See Note 1 for additional information about our accounting
policy for investments in equity securities and derivative
financial instruments.
Our results of operations can be significantly impacted by
changes in the price of aircraft fuel. To manage this risk, we
periodically purchase options and other similar derivative
instruments and enter into forward contracts for the purchase of
fuel. These contracts may have maturities of up to
36 months. We may hedge up to 80% of our expected fuel
requirements on a 12-month rolling basis. We do not enter into
fuel hedge contracts for speculative purposes. See Note 4
for additional information about our fuel hedge contracts. We
did not have any fuel hedge contracts at December 31, 2004.
Our exposure to market risk due to changes in interest rates
primarily relates to our long-term debt obligations, cash
portfolio, workers’ compensation obligations and pension,
postemployment and postretirement benefits.
Market risk associated with our long-term debt relates to the
potential change in fair value of our fixed rate debt from a
change in interest rates as well as the potential increase in
interest expense on variable rate debt. At December 31,
2004 and 2003, approximately 39% and 34%, respectively, of our
total debt had a variable interest rate.
Market risk associated with our cash portfolio relates to the
potential change in interest income from a decrease in interest
rates. Workers’ compensation obligation risk relates to the
potential changes in our future obligations and expenses from a
change in interest rates. Pension, postemployment and
postretirement benefits risk relates to the potential changes in
our benefit obligations, funding and expenses from a change in
interest rates (see Note 10).
From time to time, we may enter into interest rate swap
agreements, provided that the notional amount of these
transactions does not exceed 50% of our long-term debt. We do
not enter into interest rate swap agreements for speculative
purposes. We did not have any interest rate swap agreements at
December 31, 2004 and 2003.
|
|
|
Foreign Currency Exchange Risk |
We are subject to foreign currency exchange risk because we have
revenues and expenses denominated in foreign currencies,
primarily the euro, the British pound and the Canadian dollar.
To manage exchange rate risk, we attempt to execute both our
international revenue and expense transactions in the same
foreign currency, to the extent practicable. From time to time,
we may also enter into foreign currency options and forward
contracts with maturities of up to 12 months. We do not
enter into foreign currency hedge contracts for speculative
purposes. We did not have any foreign currency hedge contracts
at December 31, 2004 and 2003.
To manage credit risk associated with our aircraft fuel price,
interest rate and foreign currency exchange risk management
programs, we select counterparties based on their credit ratings
and limit our exposure to any one counterparty under defined
guidelines. We also monitor the market position of these
programs and our relative market position with each
counterparty. The credit exposure related to these programs was
not significant at December 31, 2004 and 2003.
Our accounts receivable are generated largely from the sale of
passenger airline tickets and cargo transportation services. The
majority of these sales are processed through major credit card
companies, resulting in accounts receivable which are generally
short-term in duration. We also have receivables from the sale
of mileage credits to partners, such as credit card companies,
hotels and car rental agencies, that participate in our
F-20
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
SkyMiles program. We believe that the credit risk associated
with these receivables is minimal and that the allowance for
uncollectible accounts that we have provided is appropriate.
We self-insure a portion of our losses from claims related to
workers’ compensation, environmental issues, property
damage, medical insurance for employees and general liability.
Losses are accrued based on an estimate of the ultimate
aggregate liability for claims incurred, using independent
actuarial reviews based on standard industry practices and our
actual experience. A portion of our projected workers’
compensation liability is secured with restricted cash
collateral (see Note 1).
|
|
| Note 4. |
Derivative Instruments |
SFAS 133, as amended, requires us to record all derivative
instruments on our Consolidated Balance Sheets at fair value and
to recognize certain changes in these fair values in our
Consolidated Statements of Operations. SFAS 133 impacts the
accounting for our fuel hedging program and our holdings of
equity warrants and other similar rights in certain companies.
The impact of SFAS 133 on our Consolidated Statements of
Operations is summarized as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Income (Expense) |
| |
|
|
| |
|
For the Years Ended |
| |
|
December 31, |
| |
|
|
| (in millions) |
|
2004 |
|
2003 |
|
2002 |
| |
|
Change in time value of fuel hedge contracts
|
|
$ |
(18 |
) |
|
$ |
(75 |
) |
|
$ |
(23 |
) |
|
Ineffective portion of fuel hedge contracts
|
|
|
(10 |
) |
|
|
58 |
|
|
|
13 |
|
|
Fair value adjustment of equity rights
|
|
|
(3 |
) |
|
|
8 |
|
|
|
(29 |
) |
| |
|
Fair value adjustments of SFAS 133
derivatives(1)
|
|
$ |
(31 |
) |
|
$ |
(9 |
) |
|
$ |
(39 |
) |
| |
| |
|
|
|
| |
(1) |
Fair value adjustments of SFAS 133 derivatives, net of tax,
for 2003 and 2002 were $(6) million and $(25) million,
respectively. There is no tax effect in 2004 because we
discontinued recording tax benefits for losses in 2004. |
Because there is not a readily available market for derivatives
in aircraft fuel, we periodically use heating and crude oil
derivative contracts to manage our exposure to changes in
aircraft fuel prices. Changes in the fair value of these
contracts (fuel hedge contracts) are highly effective at
offsetting changes in aircraft fuel prices.
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 proceeds of $83 million,
which represented the fair value of these contracts at the date
of settlement. In accordance with SFAS 133, we recorded
effective gains of $82 million in accumulated other
comprehensive loss when the related fuel purchases which were
being hedged were consumed during 2004. The time value component
of these contracts and the ineffective portion of the hedges at
the date of settlement resulted in an approximately
$10 million charge, net of tax. This charge was recorded in
fair value adjustments of SFAS 133 derivatives on our
Consolidated Statements of Operations.
At December 31, 2003, our fuel hedge contracts had a fair
value of $97 million, which was recorded in prepaid
expenses and other, with unrealized effective gains of
$34 million, net of tax, recorded in accumulated other
comprehensive loss on our Consolidated Balance Sheet. We did not
have any fuel hedge contracts at December 31, 2004. See
Note 1 for information about our accounting policy for fuel
hedge contracts.
|
|
|
Equity Warrants and Other Similar Rights |
We own equity warrants and other similar rights in certain
companies, primarily Republic Holdings and priceline. The fair
value of these rights was $37 million and $30 million
at December 31, 2004 and 2003, respectively. See
Notes 1 and 2 for information about our accounting policy
for and ownership of these rights, respectively.
F-21
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
| Note 5. |
Goodwill and Other Intangible Assets |
The following table includes the components of goodwill at
December 31, 2004, 2003 and 2002, and the activity during
2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Reporting Unit |
| |
|
|
| (in millions) |
|
Mainline |
|
ASA |
|
Comair |
|
Total |
| |
|
Balance at December 31, 2003, 2002 and 2001
|
|
$ |
227 |
|
|
$ |
498 |
|
|
$ |
1,367 |
|
|
$ |
2,092 |
|
| |
Impairment charge
|
|
|
— |
|
|
|
(498 |
) |
|
|
(1,367 |
) |
|
|
(1,865 |
) |
| |
|
Balance at December 31, 2004
|
|
$ |
227 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
227 |
|
| |
| |
We performed our annual goodwill impairment test as of
December 31, 2004. As a result of this test, we recorded a
charge totaling $1.9 billion in impairment of intangible
assets on our 2004 Consolidated Statement of Operations.
During the December 2004 quarter, we re-evaluated the
estimated fair values of our reporting units in light of the
implementation of initiatives as a result of our strategic
reassessment and the completion of our new long-range cash flow
plans. These initiatives and plans reflect, among other things,
(1) the strategic role of ASA and Comair in our business;
(2) the projected impact of Simplifares on the revenues of
each of our reporting units; and (3) an expectation of the
continuation of historically high fuel prices. These factors had
a substantial negative impact on the impairment test results for
ASA and Comair. Our goodwill impairment test for Mainline as of
December 31, 2004 resulted in no impairment because
(1) our $5 billion in targeted benefits under our
transformation plan provides significant benefits to Mainline;
(2) we achieved substantial cost reductions, which are
included in the $5 billion in targeted benefits, under our
new Mainline pilot contract which was ratified in
November 2004; and (3) Mainline has a low carrying
value. Our previous impairment tests of goodwill for all
reporting units resulted in no impairment.
The following table presents information about our intangible
assets, other than goodwill, at December 31:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 |
|
2003 |
| |
|
|
|
|
| |
|
Gross |
|
|
|
Gross |
|
|
| |
|
Carrying |
|
Accumulated |
|
Carrying |
|
Accumulated |
| (in millions) |
|
Amount |
|
Amortization |
|
Amount |
|
Amortization |
| |
|
Definite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Leasehold and operating rights
|
|
$ |
125 |
|
|
$ |
(99 |
) |
|
$ |
125 |
|
|
$ |
(92 |
) |
| |
Other
|
|
|
3 |
|
|
|
(2 |
) |
|
|
3 |
|
|
|
(2 |
) |
| |
| |
Total
|
|
$ |
128 |
|
|
$ |
(101 |
) |
|
$ |
128 |
|
|
$ |
(94 |
) |
| |
| |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Net |
|
|
|
Net |
| |
|
|
|
Carrying |
|
|
|
Carrying |
| (in millions) |
|
|
|
Amount |
|
|
|
Amount |
| |
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
International routes
|
|
|
|
|
|
$ |
51 |
|
|
|
|
|
|
$ |
60 |
|
| |
Other
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
| |
| |
Total
|
|
|
|
|
|
$ |
52 |
|
|
|
|
|
|
$ |
61 |
|
| |
| |
We recorded an impairment charge totaling approximately
$9 million for certain of our international routes at
December 31, 2004 as a result of a decision not to utilize
these routes for the foreseeable future. This charge is recorded
in impairment of intangible assets on our 2004 Consolidated
Statement of Operations. Our previous impairment tests of
indefinite-lived intangible assets resulted in no impairment.
See Note 1 for additional information about our accounting
policy for goodwill and other intangible assets.
F-22
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table summarizes our debt at December 31,
2004 and 2003:
| |
|
|
|
|
|
|
|
|
|
| (dollars in millions) |
|
2004 |
|
2003 |
| |
|
Secured(1)
|
|
|
|
|
|
|
|
|
|
Series 2000-1 Enhanced Equipment
Trust Certificates
|
|
|
|
|
|
|
|
|
| |
7.38% Class A-1 due in installments from 2005 to
May 18, 2010
|
|
$ |
208 |
|
|
$ |
241 |
|
| |
7.57% Class A-2 due November 18, 2010
|
|
|
738 |
|
|
|
738 |
|
| |
7.92% Class B due November 18, 2010
|
|
|
182 |
|
|
|
182 |
|
| |
7.78% Class C due November 18, 2005
|
|
|
74 |
|
|
|
239 |
|
| |
9.11% Class D due November 18,
2005(12)
|
|
|
176 |
|
|
|
176 |
|
| |
| |
|
|
1,378 |
|
|
|
1,576 |
|
| |
|
Series 2001-1 Enhanced Equipment
Trust Certificates
|
|
|
|
|
|
|
|
|
| |
6.62% Class A-1 due in installments from 2005 to
March 18, 2011
|
|
|
187 |
|
|
|
225 |
|
| |
7.11% Class A-2 due September 18, 2011
|
|
|
571 |
|
|
|
571 |
|
| |
7.71% Class B due September 18, 2011
|
|
|
207 |
|
|
|
207 |
|
| |
7.30% Class C due September 18,
2006(7)
|
|
|
19 |
|
|
|
170 |
|
| |
6.95% Class D due September 18,
2006(7)
|
|
|
— |
|
|
|
150 |
|
| |
| |
|
|
984 |
|
|
|
1,323 |
|
| |
|
Series 2001-2 Enhanced Equipment
Trust Certificates
|
|
|
|
|
|
|
|
|
| |
4.21% Class A due in installments from 2005 to
December 18,
2011(2)
|
|
|
369 |
|
|
|
396 |
|
| |
5.41% Class B due in installments from 2005 to
December 18,
2011(2)
|
|
|
199 |
|
|
|
227 |
|
| |
6.76% Class C due in installments from 2005 to
December 18,
2011(2)
|
|
|
80 |
|
|
|
80 |
|
| |
| |
|
|
648 |
|
|
|
703 |
|
| |
|
Series 2002-1 Enhanced Equipment
Trust Certificates
|
|
|
|
|
|
|
|
|
| |
6.72% Class G-1 due in installments from 2005 to
January 2, 2023
|
|
|
521 |
|
|
|
554 |
|
| |
6.42% Class G-2 due July 2, 2012
|
|
|
370 |
|
|
|
370 |
|
| |
7.78% Class C due in installments from 2005 to
January 2, 2012
|
|
|
141 |
|
|
|
156 |
|
| |
| |
|
|
1,032 |
|
|
|
1,080 |
|
| |
|
Series 2003-1 Enhanced Equipment
Trust Certificates
|
|
|
|
|
|
|
|
|
| |
2.85% Class G due in installments from 2005 to
January 25,
2008(2)
|
|
|
346 |
|
|
|
374 |
|
| |
| |
|
|
346 |
|
|
|
374 |
|
| |
|
General Electric Capital Corporation (“GECC”)
(3)(7)(8)
|
|
|
|
|
|
|
|
|
| |
6.54% Notes due in installments from 2005 to July 7,
2011 (“Spare Engines
Loan”)(2)(4)
|
|
|
225 |
|
|
|
127 |
|
| |
6.54% Notes due in installments from 2005 to July 7,
2011 (“Aircraft
Loan”)(2)(5)
|
|
|
147 |
|
|
|
114 |
|
| |
6.54% Notes due in installments from 2005 to July 7,
2011 (“Spare Parts
Loan”)(2)(6)
|
|
|
307 |
|
|
|
91 |
|
| |
| |
|
|
679 |
|
|
|
332 |
|
| |
|
Other secured debt
|
|
|
|
|
|
|
|
|
| |
9.00% GE Term Loan due in installments during
2007(2)
|
|
|
330 |
|
|
|
— |
|
| |
10.75% Amex Facility Notes due in installments from 2005 to
December 1,
2007(2)(11)
|
|
|
250 |
|
|
|
— |
|
| |
9.50% Senior Secured Notes due in installments from 2006 to
November 18, 2008
|
|
|
235 |
|
|
|
— |
|
| |
6.33%-6.42% GE Senior Secured Revolving Credit Facility due
December 1,
2007(2)
|
|
|
231 |
|
|
|
— |
|
| |
| |
|
|
1,046 |
|
|
|
— |
|
| |
|
2.18% to 15.46% Other secured financings due in installments
from 2005 to May 9,
2021(2)(9)
|
|
|
2,773 |
|
|
|
2,534 |
|
| |
| |
Total secured debt
|
|
$ |
8,886 |
|
|
$ |
7,922 |
|
| |
F-23
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
|
| Unsecured |
|
|
|
|
|
Massachusetts Port Authority Special Facilities Revenue
Bonds
|
|
|
|
|
|
|
|
|
| |
5.0-5.5% Series 2001A due in installments from 2012 to
January 1, 2027
|
|
$ |
338 |
|
|
$ |
338 |
|
| |
1.95% Series 2001B due in installments from 2027 to
January 1,
2031(2)
|
|
|
80 |
|
|
|
80 |
|
| |
2.02% Series 2001C due in installments from 2027 to
January 1,
2031(2)
|
|
|
80 |
|
|
|
80 |
|
|
8.10% Series C Guaranteed Serial ESOP Notes, due in
installments to 2009
|
|
|
— |
|
|
|
18 |
|
|
6.65% Series C Medium-Term Notes, due March 15, 2004
|
|
|
— |
|
|
|
236 |
|
|
7.7% Notes due December 15, 2005
|
|
|
167 |
|
|
|
302 |
|
|
7.9% Notes due December 15, 2009
|
|
|
499 |
|
|
|
499 |
|
|
9.75% Debentures due May 15, 2021
|
|
|
106 |
|
|
|
106 |
|
|
Development Authority of Clayton County, loan agreement
|
|
|
|
|
|
|
|
|
| |
2.0% Series 2000A due June 1,
2029(2)
|
|
|
65 |
|
|
|
65 |
|
| |
2.05% Series 2000B due May 1,
2035(2)
|
|
|
110 |
|
|
|
110 |
|
| |
2.05% Series 2000C due May 1,
2035(2)
|
|
|
120 |
|
|
|
120 |
|
|
8.3% Notes due December 15, 2029
|
|
|
925 |
|
|
|
925 |
|
|
8.125% Notes due July 1,
2039(10)
|
|
|
538 |
|
|
|
538 |
|
|
10.0% Senior Notes due August 15, 2008
|
|
|
248 |
|
|
|
248 |
|
|
8.0% Convertible Senior Notes due June 3, 2023
|
|
|
350 |
|
|
|
350 |
|
|
27/8% Convertible
Senior Notes due February 18, 2024
|
|
|
325 |
|
|
|
— |
|
|
3.01% to 10.375% Other unsecured debt due in installments from
2005 to May 1, 2033
|
|
|
707 |
|
|
|
587 |
|
| |
| |
Total unsecured debt
|
|
|
4,658 |
|
|
|
4,602 |
|
| |
|
Total secured and unsecured debt
|
|
|
13,544 |
|
|
|
12,524 |
|
| |
|
Less: unamortized discounts, net
|
|
|
(94 |
) |
|
|
(62 |
) |
| |
|
Total debt
|
|
|
13,450 |
|
|
|
12,462 |
|
| |
|
Less: current maturities
|
|
|
835 |
|
|
|
1,002 |
|
| |
| |
Total long-term debt
|
|
$ |
12,615 |
|
|
$ |
11,460 |
|
| |
| |
|
|
|
| |
(1) |
Our secured debt is collateralized by first liens, and in many
cases second and junior liens, on substantially all our assets,
including but not limited to accounts receivable, owned
aircraft, spare engines, spare parts, flight simulators, ground
equipment, landing slots, international routes, equity interests
in certain of our domestic subsidiaries, intellectual property
and real property. These encumbered assets, excluding cash and
cash equivalents and short term investments, had an aggregate
net book value of approximately $17 billion at
December 31, 2004. At December 31, 2004, approximately
$1.5 billion of our cash and cash equivalents and
short-term investments also served as collateral for our secured
debt. |
| |
(2) |
Our variable interest rate long-term debt is shown using
interest rates which represent LIBOR or Commercial Paper plus a
specified margin, as provided for in the related agreements. The
rates shown were in effect at December 31, 2004. |
| |
(3) |
In connection with these financings, as amended, GECC issued
irrevocable, direct-pay letters of credit, which totaled
$404 million at December 31, 2004, to back our
obligations with respect to $397 million principal amount
of tax exempt municipal bonds. We are required to reimburse GECC
for drawings under the letters of credit. Our reimbursement
obligation is secured by (1) nine B767-400 and three
B777-200 aircraft (“LOC Aircraft Collateral”);
(2) 93 spare Mainline aircraft engines (“Engine
Collateral”); and (3) certain other assets (see
footnote 8 to this table). For additional information about
the letters of credit and our reimbursement obligation to GECC,
see “Letter of Credit Enhanced Municipal Bonds” in
this Note. |
| |
(4) |
This debt, as amended (“Spare Engines Loan”), is
secured by (1) the Engine Collateral; (2) so long as
the letters of credit discussed in footnote 3 to this table
are outstanding, the LOC Aircraft Collateral; and
(3) certain other assets (see footnote 8 to this
table). The Spare Engines Loan is not repayable at our election
prior to maturity. The Engine Collateral also secures, on a
subordinated basis, up to $160 million of certain of our
other existing debt and aircraft lease obligations to GECC and
its affiliates. At December 31, 2004, the outstanding
amount of these obligations is substantially in excess of
$160 million. |
| |
(5) |
This debt, as amended (“Aircraft Loan”), is secured by
(1) five B767-400 aircraft (“Other Aircraft
Collateral”); (2) the Engine Collateral; and
(3) substantially all of the Mainline aircraft spare parts
owned by us (“Spare Parts |
F-24
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
| |
|
Collateral”).
The Aircraft Loan is repayable at our election at any time,
subject to certain prepayment fees on any prepayment.
|
|
|
|
| |
(6) |
This debt, as amended (“Spare Parts Loan”), is secured
by (1) the Other Aircraft Collateral; (2) the Engine
Collateral; and (3) the Spare Parts Collateral. Our
borrowings under the Spare Parts Loan may not exceed specified
percentages of the then current market value of either the spare
parts or rotables we have pledged thereunder (“Collateral
Percentage Tests”). In the event we exceed either
Collateral Percentage Test, we must promptly comply with that
test by (1) pledging additional spare parts or rotables, as
applicable; (2) posting cash collateral; or
(3) prepaying borrowings under the Spare Parts Loan. |
| |
(7) |
In accordance with the amendments to the GECC agreements in July
2004, we used $228 million of additional borrowings to
purchase from GECC $228 million principal amount of our
Series 2001-1 Enhanced Equipment Trust Certificates, which
were due in 2006. |
| |
(8) |
The Spare Parts Collateral also secures up to approximately
$75 million of (1) our reimbursement obligations under
the letters of credit discussed in footnote 3 to this
table; (2) the Spare Engines Loan; and (3) our
obligations under the CRJ-200 aircraft leases discussed under
“Financing Agreement with GE” in this Note. It is also
added to the collateral that secures, on a subordinated basis,
up to $160 million of certain of our other existing debt
and lease obligations to GECC and its affiliates. |
| |
(9) |
The 15.46% interest rate applies to $79 million principal
amount of debt due in installments through June 2011. The
maximum interest rate on the remaining secured debt is 7.0% at
December 31, 2004. |
| |
(10) |
The 8.125% Notes due 2039 are redeemable by us, in whole or
in part at par. |
| |
(11) |
For additional information about the repayment terms related to
these debt maturities, see “Financing Agreement with
Amex” in this Note. |
| |
(12) |
See Note 20 for additional information about a transaction
that occurred subsequent to December 31, 2004 impacting
these debt maturities. |
The fair value of our total secured and unsecured debt was
$11.9 billion at December 31, 2004 and 2003.
The following table summarizes the maturities of our debt,
including current maturities, at December 31, 2004:
| |
|
|
|
|
| Years Ending December 31, |
|
Principal |
| (in millions) |
|
Amount |
| |
|
2005
|
|
$ |
835 |
|
|
2006
|
|
|
913 |
|
|
2007
|
|
|
1,374 |
|
|
2008
|
|
|
1,549 |
|
|
2009
|
|
|
1,324 |
|
|
After 2009
|
|
|
7,455 |
|
| |
|
Total
|
|
$ |
13,450 |
|
| |
| |
The table above includes the following maturities of debt for
the year ending December 31, 2005 which we expect will not
require cash payments in 2005 of approximately:
|
|
|
| |
• |
$75 million due in 2005 under
interim financing arrangements which we used to purchase
regional jet aircraft. We may elect to refinance these
maturities, as well as approximately $180 million due in
2006, using long-term, secured financing commitments available
to us from a third party. Borrowings under these commitments
would bear interest at a rate determined by reference to
ten-year U.S. Treasury Notes plus a margin, and would have
various repayment dates.
|
| |
| |
• |
$80 million principal amount
of tax-exempt bonds issued by the Development Authority of
Clayton County (“Clayton Authority”) which are
classified as current maturities. These bonds have scheduled
maturities in 2029 and 2035, but may be tendered for purchase by
their holders on seven days notice. Accordingly, we have
classified these bonds in accordance with our reimbursement
obligations under the agreement between us and GECC
(“Reimbursement
|
F-25
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
| |
|
Agreement”). For additional information about these bonds
and the Reimbursement Agreement, see “Letter of Credit
Enhanced Municipal Bonds” in this Note. |
| |
| |
• |
$50 million of our outstanding borrowings under our
financing agreement with GE Commercial Finance (“GE
Commercial Finance Facility”). We believe we will be
required to repay approximately $50 million in 2005 due to
borrowing base limitations in the GE Commercial Finance
Facility, but that we will be able to re-borrow that amount
later in 2005 under that facility. For additional information
regarding the GE Commercial Finance Facility, see
“Financing Agreement with GE” in this Note. |
|
|
|
Boston Airport Terminal Project |
During 2001, we entered into lease and financing agreements with
the Massachusetts Port Authority (“Massport”) for the
redevelopment and expansion of Terminal A at Boston’s Logan
International Airport. 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 expected to be completed in March 2005. Project
costs are being 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. For additional information about these bonds, see the
debt table above. Because we have issued a guarantee of the debt
service on the bonds, we have included the bonds, as well as the
related bond proceeds, on our Consolidated Balance Sheets. The
bonds are reflected in noncurrent liabilities and the related
remaining proceeds, which are held in a trust, are reflected as
restricted investments in other assets on our Consolidated
Balance Sheets.
|
|
|
Letter of Credit Enhanced Municipal Bonds |
At December 31, 2004, there were outstanding
$397 million aggregate principal amount of tax-exempt
municipal bonds (“Bonds”) enhanced by letters of
credit, including:
|
|
|
| |
• |
$295 million principal amount
of bonds issued by the Clayton Authority to refinance the
construction cost of certain facilities leased to us at
Hartsfield-Jackson Atlanta International Airport. We pay debt
service on these bonds pursuant to loan agreements between us
and the Clayton Authority.
|
| |
| |
• |
$102 million principal amount
of bonds issued by other municipalities to refinance the
construction cost of certain facilities leased to us at
Cincinnati/ Northern Kentucky International Airport, Salt Lake
City International Airport and Tampa International Airport. We
pay debt service on these bonds pursuant to long-term lease
agreements (see Note 7).
|
The Bonds (1) have scheduled maturities between 2029 and
2035; (2) currently bear interest at a variable rate that
is determined weekly; and (3) may be tendered for purchase
by their holders on seven days notice. Tendered Bonds are
remarketed at prevailing interest rates.
Principal and interest on the Bonds are currently paid through
drawings on irrevocable, direct-pay letters of credit totaling
$404 million issued by GECC pursuant to the Reimbursement
Agreement. In addition, the purchase price of tendered Bonds
that cannot be remarketed are paid by drawings on these letters
of credit. The GECC letters of credit expire on May 20,
2008.
Pursuant to the Reimbursement Agreement, we are required to
reimburse GECC for drawings on the letters of credit. Our
reimbursement obligation to GECC is secured by (1) nine
B767-400 and three B777-200 aircraft (“LOC Aircraft
Collateral”); (2) 93 spare Mainline aircraft engines;
and (3) certain other assets (see footnote 8 to the
table above in this Note). This collateral also secures other
obligations we have to GECC, as discussed in the footnotes to
the table above in this Note.
If a drawing under a letter of credit is made to pay the
purchase price of Bonds tendered for purchase and not
remarketed, our resulting reimbursement obligation to GECC will
bear interest at a base rate or three-month
F-26
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
LIBOR plus a margin. The principal amount of any outstanding
reimbursement obligation will be repaid quarterly through
May 20, 2008.
GECC has the right to cause a mandatory tender for purchase of
all Bonds and terminate the letters of credit if an event of
default occurs or if a minimum collateral value test
(“Collateral Value Test”) is not satisfied on
May 19, 2006, in which case the principal amount of all
reimbursement obligations (including for any Bonds tendered and
not remarketed) would be due and payable immediately. We will
not satisfy the Collateral Value Test, as amended, if
(1) the aggregate amount of the outstanding letters of
credit plus any other amounts payable by us under the
Reimbursement Agreement (“Aggregate Obligations”) on
March 20, 2006 is more than 60% of the appraised market
value of the LOC Aircraft Collateral plus the fair market value
of permitted investments held as part of the collateral and
(2) within 60 days thereafter, we have not either
provided additional collateral to GECC in the form of cash or
aircraft or caused a reduction in the Aggregate Obligations such
that the Collateral Value Test is satisfied.
Unless the GECC letters of credit are extended in a timely
manner, we will be required to purchase the Bonds on
May 15, 2008, five days prior to the expiration of the
letters of credit. In this circumstance, we could seek, but
there is no assurance that we would be able (1) to sell the
Bonds without credit enhancement at then-prevailing fixed
interest rates or (2) to replace the expiring letters of
credit with new letters of credit from an alternate credit
provider and remarket the Bonds.
We may terminate the GECC letters of credit, and repay any
outstanding obligations under the Reimbursement Agreement, at
our election prior to maturity, subject to certain prepayment
fees if such action occurs before May 20, 2005.
|
|
|
8.00% Convertible Senior Notes Due 2023
(“8.00% Notes”) |
In June 2003, we issued $350 million principal amount of
8.00% Notes due 2023. Holders may convert their
8.00% Notes into shares of our common stock at a 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, if:
|
|
|
| |
• |
during any calendar quarter after
June 30, 2003, the last reported sale price of our common
stock for at least 20 trading days during the period of 30
consecutive trading days ending on the last trading day of the
immediately preceding calendar quarter is greater than or equal
to 130% of the conversion price per share of our common stock;
|
| |
| |
• |
the trading price of the
8.00% Notes falls below a specified threshold;
|
| |
| |
• |
we call the 8.00% Notes for
redemption; or
|
| |
| |
• |
specified corporate transactions
occur.
|
We may redeem all or some of the 8.00% Notes for cash at
any time after June 5, 2008, at a redemption price equal to
the principal amount of the 8.00% Notes to be redeemed plus
any accrued and unpaid interest.
Holders may require us to repurchase their 8.00% Notes for
cash on June 3, 2008, 2013 and 2018, or in other specified
circumstances involving the exchange, conversion or acquisition
of all or substantially all of our common stock, at a purchase
price equal to the principal amount of the 8.00% Notes to
be purchased plus any accrued and unpaid interest. At
December 31, 2004, 12.5 million shares of common stock
were reserved for issuance for the conversion of the
8.00% Notes.
|
|
|
27/8% Convertible
Senior Notes due 2024
(“27/8% Notes”) |
In February 2004, we issued $325 million principal amount
of
27/8% Notes
due 2024. Holders may convert their
27/8% Notes
into shares of our common stock at a conversion rate of
73.6106 shares of common stock per
F-27
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
$1,000 principal amount of
27/8% Notes,
subject to adjustment in certain circumstances, which is
equivalent to a conversion price of approximately
$13.59 per share of common stock, if:
|
|
|
| |
• |
during any calendar quarter after
March 31, 2004, the last reported sale price of our common
stock for at least 20 trading days during the period of 30
consecutive trading days ending on the last trading day of the
immediately preceding calendar quarter is greater than or equal
to 130% of the conversion price per share of our common stock;
|
| |
| |
• |
the trading price of the
27/8% Notes
falls below a specified threshold;
|
| |
| |
• |
we call the
27/8% Notes
for redemption; or
|
| |
| |
• |
specified corporate transactions
occur.
|
We may redeem all or some of the
27/8% Notes
for cash at any time after February 21, 2009, at a
redemption price equal to the principal amount of the
27/8% Notes
to be redeemed plus any accrued and unpaid interest.
Holders may require us to repurchase their
27/8% Notes
for cash on February 18, 2009, 2014 and 2019, or in other
specified circumstances involving the exchange, conversion or
acquisition of all or substantially all of our common stock, at
a purchase price equal to the principal amount of the
27/8% Notes
to be purchased plus any accrued and unpaid interest. At
December 31, 2004, 23.9 million shares of common stock
were reserved for issuance for the conversion of the
27/8% Notes.
|
|
|
Debt Exchanges and Purchases |
During 2004 and 2003, we completed the following debt exchanges
and purchases:
|
|
|
| |
• |
In November 2004, we exchanged
approximately $135 million aggregate principal amount of
our unsecured 7.7% Notes due 2005 for a like principal
amount of newly issued unsecured 8.0% Senior Notes due
2007, net of a discount totaling $46 million, and
5,488,054 shares of our common stock with a fair value of
$38 million. As a result of this transaction, we recorded
an $8 million gain on extinguishment of debt in other
income (expense) on our 2004 Consolidated Statement of
Operations.
|
| |
| |
• |
In November 2004, we exchanged
$237 million aggregate principal amount of our 7.78%
Series 2000-1C Enhanced Equipment Trust Certificates due
2005 and 7.30% Series 2001-1C Enhanced Equipment Trust
Certificates due 2006 for $235 million principal amount of
newly issued 9.5% Senior Secured Notes due 2008.
|
| |
| |
• |
In September 2003, we exchanged
$262 million aggregate principal amount of our 6.65%
Series C Medium-Term Notes due 2004 and 7.70% Senior
Notes due 2005 for a total of $47 million in cash
(including $5 million in accrued interest) and
$211 million principal amount of newly issued unsecured
10% Notes due 2008, net of a discount. As a result of this
transaction, we recorded a $15 million gain on
extinguishment of debt in other income (expense) on our
2003 Consolidated Statement of Operations.
|
| |
| |
• |
During the three years ended
December 31, 2004, we purchased approximately
$260 million aggregate principal amount of the
Series C Guaranteed Serial ESOP Notes issued by the Delta
Family-Care Savings Plan. As a result of these purchases, we
recognized a $1 million gain, a $15 million loss and a
$42 million loss due to the extinguishment of debt for the
years ended December 31, 2004, 2003 and 2002, respectively,
in other income (expense) on our Consolidated Statements of
Operations.
|
During the December 2004 quarter, we also completed agreements
with certain other aircraft lenders to defer $112 million
in debt obligations from 2004 through 2006 to later years.
F-28
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
Financing Agreement with GE |
During the December 2004 quarter, we entered into the GE
Commercial Finance Facility to borrow up to $630 million
from a syndicate of financial institutions for which General
Electric Capital Corporation acts as agent (“Agent”).
As discussed below, the GE Commercial Finance Facility consists
of a $330 million senior secured term loan (“Term
Loan”) and a $300 million senior secured revolving
credit facility (“Revolver”).
The total committed amount of the 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 at
December 31, 2004. Availability under the Revolver is
subject to a Revolver borrowing base, defined as the sum of
(1) up to 80% of the book value of eligible billed accounts
receivable, (2) up to 50% of the book value of eligible
unbilled accounts receivable, and (3) 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
(1) the lesser of 50% of the fair market value of eligible
real estate and $100 million, (2) the lesser of 50% of
the net orderly liquidation value (“NOLV”) of eligible
aircraft and $215 million, (3) the lesser of 50% of
the NOLV of eligible flight simulators and $25 million,
(4) the lesser of 25% of the NOLV of eligible spare parts
and $7 million, (5) the lesser of 25% of the NOLV of
eligible ground service equipment and $25 million,
(6) the lesser of 25% of the NOLV of certain other eligible
equipment and $25 million, and (7) the amount of cash
held in cash collateral accounts pledged to the Term Loan
lenders, in each case less reserves established from time to
time by the Agent. If the outstanding Term Loan at any time
exceeds the Term Loan borrowing base, we must immediately repay
an amount equal to the excess. The Term Loan is repayable in 12
equal monthly installments commencing on January 1, 2007,
with the final installment due December 1, 2007. The Term
Loan bears interest at LIBOR or an index rate, at our option,
plus a margin of 6.00% over LIBOR and 5.25% over the index rate,
subject to a LIBOR floor of 3%.
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 Holdings and
subsidiaries and Comair Holdings and subsidiaries), 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 (1) 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 (2) 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. 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,
F-29
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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 funds 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 accounts pledged for the
benefit of the lenders with funds 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. The cash and cash equivalents in those
accounts can be used for purposes of determining compliance with
the Liquidity Covenant.
|
| |
| |
• |
not exceed specified levels of
capital expenditures during each fiscal quarter.
|
| |
| |
• |
achieve specified levels of
EBITDAR, as defined, for designated rolling periods (generally
monthly tests for successive trailing 12-month periods) through
November 2007. During 2005, we are required to achieve
increasing levels of EBITDAR, including EBITDAR of
$1.590 billion for the 12-month period ending
December 31, 2005. Thereafter, the minimum EBITDAR level
for successive trailing 12-month periods continues to increase,
including $2.763 billion for the 12-month period ending
December 31, 2006 and $3.136 billion for the 12-month
period ending November 30, 2007. The EBITDAR covenant
effectively provides that if our cash on hand exceeds the
minimum cash on hand that we are required to maintain pursuant
to the Liquidity Covenant by at least $100 million, then
the EBITDAR level that we are required to achieve will be
reduced by a specific amount.
|
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 (unless the lenders waive the
event of default).
In November 2004, as a condition to availability of the GE
Commercial Finance Facility, 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 then leased to another
airline. See Note 8 for additional information about this
right and the related leases.
|
|
|
Financing Agreement with Amex |
During the December 2004 quarter, we entered into two agreements
(“Amex Facilities”) to borrow $500 million from
Amex. As discussed below, 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 was paid on
March 1, 2005. The prepayment amount will be credited, in
equal monthly installments, towards Amex’s 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 Holdings and subsidiaries and
Comair Holdings and subsidiaries.
F-30
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Our obligations under the Amex Facilities are secured by
(1) 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 (2) 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 subsidiary’s 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.
|
|
|
Other Financing Arrangements |
During 2004, we entered into an agreement to purchase 32
CRJ-200 aircraft to be delivered in 2005. In connection with
this agreement, we received a commitment from a third party to
finance, on a secured basis at the time of acquisition, the
future deliveries of these regional jet aircraft. Borrowings
under this commitment (1) will be due in installments for
15 years after the date of borrowing and (2) bear
interest at LIBOR plus a margin. See Note 8 for additional
information about these commitments.
As discussed above, the GE Commercial Finance Facility, the Amex
Facilities and the Reimbursement Agreement include certain
covenants. In addition, 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. Failure to maintain these coverages may
result in an interruption to our operations. See Note 8 for
additional information about our war-risk insurance currently
provided by the U.S. government.
We were in compliance with all covenant requirements at
December 31, 2004 and 2003.
|
|
| Note 7. |
Lease Obligations |
We lease aircraft, airport terminal and maintenance facilities,
ticket offices and other property and equipment from third
parties. Rental expense for operating leases, which is recorded
on a straight-line basis over the life of the lease, totaled
$1.3 billion for each year ended December 31, 2004,
2003 and 2002. Amounts due under capital leases are recorded as
liabilities on our Consolidated Balance Sheets. Our interest in
assets acquired under capital leases is recorded as property and
equipment on our Consolidated Balance Sheets. Amortization of
assets recorded under capital leases is included in depreciation
and amortization expense on our Consolidated Statements of
Operations. Our leases do not include residual value guarantees.
F-31
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table summarizes, as of December 31, 2004,
our minimum rental commitments under capital leases and
noncancelable operating leases with initial terms in excess of
one year:
| |
|
|
|
|
|
|
|
|
| Years Ending December 31, |
|
Capital |
|
Operating |
| (in millions) |
|
Leases |
|
Leases |
| |
|
2005
|
|
$ |
158 |
|
|
$ |
1,091 |
|
|
2006
|
|
|
162 |
|
|
|
1,017 |
|
|
2007
|
|
|
134 |
|
|
|
915 |
|
|
2008
|
|
|
112 |
|
|
|
980 |
|
|
2009
|
|
|
146 |
|
|
|
836 |
|
|
After 2009
|
|
|
410 |
|
|
|
4,823 |
|
| |
|
Total minimum lease payments
|
|
|
1,122 |
|
|
$ |
9,662 |
|
| |
|
|
|
|
|
|
|
|
|
Less: lease payments that represent interest
|
|
|
674 |
|
|
|
|
|
| |
|
|
|
|
|
Present value of future minimum capital lease payments
|
|
|
448 |
|
|
|
|
|
|
Less: current obligations under capital leases
|
|
|
58 |
|
|
|
|
|
| |
|
|
|
|
|
Long-term capital lease obligations
|
|
$ |
390 |
|
|
|
|
|
| |
|
|
|
|
| |
|
|
|
|
We expect to receive approximately $120 million under
noncancelable sublease agreements. This expected sublease income
is not reflected as a reduction in the total minimum rental
commitments under operating leases in the table above.
At December 31, 2004, we operated 297 aircraft under
operating leases and 48 aircraft under capital leases. These
leases have remaining terms ranging from three months to
13 years. During the December 2004 quarter, we renegotiated
99 aircraft lease agreements (95 operating leases and four
capital leases) as part of our transformation plan (see
Note 1). As a result of changes in certain lease terms, 33
of the operating leases were reclassified as capital leases when
their new terms were evaluated in accordance with
SFAS No. 13 “Accounting for Leases”
(“SFAS 13”). These reclassifications increased
our capital lease obligations by approximately $375 million
and our flight and ground equipment under capital leases by
approximately $240 million at December 31, 2004.
As part of our aircraft lease and debt renegotiations, we
entered into agreements with aircraft lessors and lenders under
which we expect to receive average annual cash savings of
approximately $57 million between 2005 and 2009, which will
also result in some cost reductions. We issued a total of
4,354,724 shares of common stock in these transactions.
Substantially all of these shares were issued under the aircraft
lease renegotiations. The fair value of the shares issued to
lessors approximated $30 million and, in accordance with
SFAS 13, was considered a component of minimum lease
payments.
Certain municipalities have issued special facilities revenue
bonds to build or improve airport and maintenance facilities
leased to us. The facility lease agreements require us to make
rental payments sufficient to pay principal and interest on the
bonds. The above table includes $1.7 billion of operating
lease rental commitments for these payments.
See Note 8 for additional lease commitments occurring
subsequent to December 31, 2004. See Note 6 for
additional information about the Reimbursement Agreement which
covers certain of our lease obligations in the table above.
F-32
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
| Note 8. |
Purchase Commitments and Contingencies |
|
|
|
Aircraft Order Commitments |
Future commitments for aircraft on firm order as of
December 31, 2004 are estimated to be $4.2 billion.
The following table shows the timing of these commitments:
| |
|
|
|
|
| Year Ending December 31, |
|
|
| (in millions) |
|
Amount |
| |
|
2005
|
|
$ |
1,002 |
|
|
2006
|
|
|
598 |
|
|
2007
|
|
|
1,645 |
|
|
2008
|
|
|
510 |
|
|
2009
|
|
|
406 |
|
| |
|
Total
|
|
$ |
4,161 |
|
| |
| |
Our aircraft order commitments for the year ending
December 31, 2005 include approximately
(1) $520 million related to our agreement to
purchase 32 CRJ-200 aircraft, for which financing is
available to us on a long-term secured basis when we acquire
these aircraft (see Note 6) and (2) $415 million
related to our commitment to purchase 11 B737-800 aircraft,
for which we have entered into a definitive agreement to sell to
a third party immediately following delivery of these aircraft
to us by the manufacturer in 2005. For additional information
about our agreement to sell these B737-800 aircraft, see
“Other Contingencies — Planned Sale of
Aircraft” in this Note.
|
|
|
Contract Carrier Agreements |
During the three years ended December 31, 2004, we had
contract carrier agreements with three regional air carriers,
FLYi, Inc. (formerly Atlantic Coast Airlines)
(“Flyi”), SkyWest Airlines, Inc. (“SkyWest”)
and Chautauqua. Under these agreements, the regional air
carriers operate certain of their aircraft using our flight
code, and we schedule those aircraft, sell the seats on those
flights and retain the related revenues. We pay those airlines
an amount, as defined in the applicable agreement, which is
based on an annual determination of their cost of operating
those flights and other factors intended to approximate market
rates for those services. Our contract carrier agreement with
SkyWest expires in 2010 and our agreement with Chautauqua
expires in 2016.
In April 2004, we notified Flyi of our election to terminate its
contract carrier agreement due to Flyi’s decision to
operate a new low-fare airline using jet aircraft with more than
70 seats. Flyi ceased operating Delta Connection flights in
November 2004. Flyi exercised its right to require us to assume
the leases on the 30 Fairchild Dornier FRJ-328 regional jet
aircraft that it operated for us. We are currently conducting
inspections of these aircraft. After we complete the
inspections, we expect to assume these leases. We estimate that
the total remaining lease payments on these 30 aircraft leases
will be approximately $275 million. These lease payments
will be made over the remaining terms of the aircraft leases,
which are approximately 13 years. We are evaluating our
options for utilizing these 30 aircraft, including having
another air carrier operate these aircraft for us under the
Delta Connection carrier program. Obligations related to these
leases are not included in the table in Note 7 since we are
still conducting the inspections of these aircraft and have not
assumed the leases. There are no residual value guarantees
related to these leases.
If we assume the leases for the 30 FRJ-328 aircraft as currently
in effect, a Flyi bankruptcy or insolvency or, with respect to
certain of the leases, a Flyi default under various contracts,
including leases, loans and purchase contracts having a value or
amount in excess of $15 million, would constitute an event
of default. If an event of default were to occur, the financing
parties could exercise one or more remedies, including the right
to require us to purchase the aircraft at a purchase price
stipulated in the applicable lease. At March 1, 2005, the
purchase price for each aircraft was approximately
$9 million, which we estimate exceeds the current market
value of each aircraft by approximately $3 million. Our
estimate of the current market value of these aircraft is based
on published industry data. We cannot determine the likelihood
of the occurrence of an event relating to
F-33
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Flyi that would constitute an event of default under the leases
or the likelihood of the financing parties seeking to exercise
certain remedies against us if such an event of default were to
occur.
Flyi has stated that as part of its restructuring effort, it has
secured commitments from certain of the financing parties that,
upon our assumption of the leases, such parties will effectively
release Flyi from its future obligations to such financing
parties under the leases. We are in discussions with the
financing parties to restructure these leases so that events
relating to Flyi would not constitute an event of default after
we assume the leases.
The following unaudited table shows the available seat miles
(“ASMs”), revenue passenger miles (“RPMs”)
and number of aircraft operated for us by Flyi, SkyWest and
Chautauqua under the contract carrier agreements, for the years
ended December 31, 2004, 2003 and 2002:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (in millions, except aircraft) |
|
2004 |
|
2003 |
|
2002 |
| |
|
ASMs
|
|
|
5,535 |
|
|
|
5,121 |
|
|
|
3,513 |
|
| |
|
RPMs
|
|
|
3,991 |
|
|
|
3,627 |
|
|
|
2,392 |
|
| |
|
Number of aircraft operated, end of
period(1)
|
|
|
128 |
|
|
|
123 |
|
|
|
100 |
|
| |
|
|
|
| |
(1) |
The 128 aircraft operated for us at December 31, 2004
include 30 aircraft previously operated by Flyi, 59 aircraft
operated by SkyWest and 39 aircraft operated by Chautauqua. Our
contract carrier agreements with SkyWest and Chautauqua do not
include any scheduled changes in these numbers during the
remaining term of those agreements. |
In January 2005, we entered into a contract carrier agreement
with Republic Airline under which that carrier will operate 16
ERJ-170 regional jet aircraft for us on substantially the same
terms as Chautauqua. These aircraft will be placed into service
between July 2005 and August 2006. Our agreement with Republic
Airline expires in 2018.
We may terminate the SkyWest agreement without cause at any time
by giving the airline certain advance notice. If we terminate
the SkyWest agreement without cause, SkyWest has the right to
assign to us leased regional jet aircraft which it operates for
us, provided we are able to continue the leases on the same
terms SkyWest had prior to the assignment.
We may terminate the Chautauqua and Republic Airline agreements
without cause effective at any time after November 2009 and
December 2012, respectively, by providing certain advance
notice. If we terminate either the Chautauqua or Republic
Airline agreements without cause, Chautauqua or Republic
Airline, respectively, has the right to (1) assign to us
leased aircraft that the airline operates for us, provided we
are able to continue the leases on the same terms the airline
had prior to the assignment and (2) require us to purchase
or sublease any of the aircraft that the airline owns and
operates for us at the time of the termination. If we are
required to purchase aircraft owned by Chautauqua or Republic
Airline, the purchase price would be equal to the amount
necessary to (1) reimburse Chautauqua or Republic Airline
for the equity it provided to purchase the aircraft and
(2) repay in full any debt outstanding at such time that is
not being assumed in connection with such purchase. If we are
required to sublease aircraft owned by Chautauqua or Republic
Airline, the sublease would have (1) a rate equal to the
debt payments of Chautauqua or Republic Airline for the debt
financing of the aircraft calculated as if 90% of the aircraft
was debt financed by Chautauqua or Republic Airline and
(2) specified other terms and conditions.
We estimate that the total fair value, at December 31,
2004, of the aircraft that SkyWest or Chautauqua could assign to
us or require that we purchase if we terminate without cause our
contract carrier agreements with those airlines is approximately
$600 million and $500 million, respectively. The
actual amount that we may be required to pay in these
circumstances may be materially different from these estimates.
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
F-34
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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 these matters cannot be
predicted with certainty and could have a material adverse
effect on our Consolidated Financial Statements, management
believes that the resolution of these actions will not have a
material adverse effect on our Consolidated Financial Statements.
|
|
|
Regional Airports Improvement Corporation
(“RAIC”) |
We are obligated under a facilities sublease with the RAIC to
pay the bond trustee rent in an amount sufficient to pay the
debt service on $47 million in Facilities Sublease Revenue
Bonds. These bonds were issued in 1985 to finance the
construction of certain airport and terminal facilities we lease
at Los Angeles International Airport. We also provide a
guarantee to the bond trustee covering payment of the debt
service.
We are the lessee under many real estate leases. It is common in
these commercial lease transactions for us, as the lessee, to
agree to indemnify the lessor and other related third parties
for tort, environmental and other liabilities that arise out of
or relate to our use or occupancy of the leased premises. This
type of indemnity would typically make us responsible to
indemnified parties for liabilities arising out of the conduct
of, among others, contractors, licensees and invitees at or in
connection with the use or occupancy of the leased premises.
This indemnity often extends to related liabilities arising from
the negligence of the indemnified parties, but usually excludes
any liabilities caused by either their sole or gross negligence
and their willful misconduct.
Our aircraft and other equipment lease and financing agreements
typically contain provisions requiring us, as the lessee or
obligor, to indemnify the other parties to those agreements,
including certain related parties, against virtually any
liabilities that might arise from the condition, use or
operation of the aircraft or such other equipment.
We believe that our insurance would cover most of our exposure
to such liabilities and related indemnities associated with the
types of lease and financing agreements described above,
including real estate leases.
Certain of our aircraft and other financing transactions include
provisions which require us to make payments to preserve an
expected economic return to the lenders if that economic return
is diminished due to certain changes in law or regulations. In
certain of these financing transactions, we also bear the risk
of certain changes in tax laws that would subject payments to
non-U.S. lenders to withholding taxes.
We cannot reasonably estimate our potential future payments
under the indemnities and related provisions described above
because we cannot predict when and under what circumstances
these provisions may be triggered.
|
|
|
Employees Under Collective Bargaining Agreements |
At December 31, 2004, we had a total of approximately
69,150 full-time equivalent employees. Approximately 18% of
these employees, including all of our pilots, are represented by
labor unions.
ASA is in collective bargaining negotiations with the Air Line
Pilots Association, International (“ALPA”) and the
Association of Flight Attendants (“AFA”), which
represent ASA’s approximately 1,515 pilots and 885 flight
attendants, respectively. ASA’s collective bargaining
agreements with ALPA and AFA became amendable in September 2002
and September 2003, respectively.
Comair is in collective bargaining negotiations with the
International Association of Machinists and Aerospace Workers,
which represents Comair’s approximately
485 maintenance employees. The maintenance employees
rejected a tentative agreement to amend their existing agreement
that became amendable in May 2004, which Comair had reached with
the union’s negotiating committee, but Comair expects
negotiations to continue. In addition, Comair is negotiating
with the International Brotherhood of Teamsters, which represents
F-35
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Comair’s approximately 1,040 flight attendants, to
modify their existing collective bargaining agreement, which
becomes amendable in July 2007.
The outcome of ASA’s and Comair’s negotiations with
the unions representing their employees cannot presently be
determined.
In connection with our agreement to sell 11 B737-800 aircraft to
a third party immediately after those aircraft are delivered to
us by the manufacturer in 2005, we agreed to pay the third
party, for a designated period with respect to each of the 11
B737-800 aircraft, an amount equal to the excess, if any, of a
specified rate over the rate at which the third party leases the
aircraft to another party. The maximum undiscounted amount we
could be required to pay for all 11 aircraft totals
approximately $70 million. While we cannot predict with
certainty whether we will be required to make a payment under
this provision, we believe that the possibility of this event is
not likely due to the current and estimated future marketability
of these aircraft.
Subsequent to December 31, 2004, we sold four of these
aircraft to the third party, which leased those aircraft to
another party at a rate that did not require us to make any
payments under the provision discussed in the preceding
paragraph. As a result, we believe that the maximum undiscounted
amount we could be required to pay under that provision
decreased from approximately $70 million to
$45 million.
In November 2004, as a condition to availability of the GE
Commercial Finance Facility, we granted GECC the right,
exercisable until 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 then leased to
another airline. Subsequent to December 31, 2004, GECC
exercised this right with respect to eight CRJ-200 aircraft. The
leases for these eight aircraft begin throughout 2005 and have
terms of 138 to 168 months. We estimate that our total
lease payments for these eight aircraft will be approximately
$130 million over the terms mentioned above. Obligations
related to these aircraft are not included in the table of lease
commitments in Note 7 since GECC exercised its right
subsequent to December 31, 2004. Additionally, the lease
rates we will pay for these aircraft approximate current market
rates. We expect to use these aircraft in our operations.
|
|
|
War-Risk Insurance Contingency |
As a result of the terrorist attacks on September 11, 2001,
aviation insurers (1) 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 and (2) significantly increased the premiums
for such coverage and for aviation insurance in general. Since
September 24, 2001, the U.S. government has been
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 currently 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 U.S. 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.
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.
F-36
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and income tax
purposes (see Note 1 for information about our accounting
policy for income taxes). The following table shows significant
components of our deferred tax assets and liabilities at
December 31, 2004 and 2003:
| |
|
|
|
|
|
|
|
|
| (in millions) |
|
2004 |
|
2003 |
| |
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$ |
2,848 |
|
|
$ |
1,908 |
|
|
Additional minimum pension liability (see Note 10)
|
|
|
1,427 |
|
|
|
1,454 |
|
|
Postretirement benefits
|
|
|
734 |
|
|
|
917 |
|
|
Other employee benefits
|
|
|
568 |
|
|
|
571 |
|
|
AMT credit carryforward
|
|
|
346 |
|
|
|
346 |
|
|
Rent expense
|
|
|
255 |
|
|
|
178 |
|
|
Other
|
|
|
703 |
|
|
|
662 |
|
|
Valuation allowance
|
|
|
(2,400 |
) |
|
|
(25 |
) |
| |
|
Total deferred tax assets
|
|
$ |
4,481 |
|
|
$ |
6,011 |
|
| |
| |
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$ |
3,890 |
|
|
$ |
4,042 |
|
|
Other
|
|
|
672 |
|
|
|
807 |
|
| |
|
Total deferred tax liabilities
|
|
$ |
4,562 |
|
|
$ |
4,849 |
|
| |
| |
The following table shows the current and noncurrent deferred
tax (liabilities) assets, net recorded on our Consolidated
Balance Sheets at December 31, 2004 and 2003:
| |
|
|
|
|
|
|
|
|
| (in millions) |
|
2004 |
|
2003 |
| |
|
Current deferred tax assets, net
|
|
$ |
35 |
|
|
$ |
293 |
|
|
Noncurrent deferred tax (liabilities) assets, net
|
|
|
(116 |
) |
|
|
869 |
|
| |
|
Total deferred tax (liabilities) assets, net
|
|
$ |
(81 |
) |
|
$ |
1,162 |
|
| |
| |
In accordance with SFAS 109, the current and noncurrent
components of our deferred tax balances are generally based on
the balance sheet classification of the asset or liability
creating the temporary difference. If the deferred tax asset or
liability is not related to a component of our balance sheet,
such as our net operating loss carryforwards, the classification
is presented based on the expected reversal date of the
temporary difference. Our valuation allowance has been
classified as current or noncurrent based on the percentages of
current and noncurrent deferred tax assets to total deferred tax
assets.
At December 31, 2004, we had $346 million of federal
alternative minimum tax (“AMT”) credit carryforwards,
which do not expire. We also had federal and state net operating
loss carryforwards totaling approximately $7.5 billion at
December 31, 2004, substantially all of which will not
begin to expire until 2022. However, in the event we seek to
restructure our costs under Chapter 11 of the
U.S. Bankruptcy Code, our ability to utilize our net
operating loss carryforwards may be significantly limited. This
could result in the need for an additional valuation allowance,
which may be material.
SFAS 109 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. In making this
determination, we consider all available positive and negative
evidence and make certain assumptions. We consider, among other
things, our deferred tax liabilities; the overall business
environment; our historical earnings and losses; our
industry’s 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 tax assets. This was primarily due to
higher than expected fuel
F-37
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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, during the year ended December 31, 2004, we
recorded an additional valuation allowance against our deferred
income tax assets, which resulted in a $1.2 billion income
tax provision on our 2004 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, income tax benefits associated with current
period losses will be fully reserved.
Our income tax (provision) benefit for the years ended
December 31, 2004, 2003 and 2002 consisted of:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (in millions) |
|
2004 |
|
2003 |
|
2002 |
| |
|
Current tax benefit
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
319 |
|
|
Deferred tax benefit (exclusive of the other components listed
below)
|
|
|
1,139 |
|
|
|
420 |
|
|
|
407 |
|
|
Increase in valuation allowance
|
|
|
(2,345 |
) |
|
|
(9 |
) |
|
|
— |
|
|
Tax benefit of dividends on allocated Series B ESOP
Convertible Preferred Stock
|
|
|
— |
|
|
|
5 |
|
|
|
4 |
|
| |
|
Income tax (provision) benefit
|
|
$ |
(1,206 |
) |
|
$ |
416 |
|
|
$ |
730 |
|
| |
| |
The following table presents the principal reasons for the
difference between our effective income tax rate and the
U.S. federal statutory income tax rate for the years ended
December 31, 2004, 2003 and 2002:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 |
|
2003 |
|
2002 |
| |
|
U.S. federal statutory income tax rate
|
|
|
(35.0 |
)% |
|
|
(35.0 |
)% |
|
|
(35.0 |
)% |
|
State taxes, net of federal income tax effect
|
|
|
(1.5 |
) |
|
|
(2.1 |
) |
|
|
(2.4 |
) |
|
Meals and entertainment
|
|
|
0.3 |
|
|
|
1.1 |
|
|
|
0.7 |
|
|
Goodwill impairment
|
|
|
7.5 |
|
|
|
— |
|
|
|
— |
|
|
Increase in valuation allowance
|
|
|
58.8 |
|
|
|
0.8 |
|
|
|
— |
|
|
Other, net
|
|
|
0.1 |
|
|
|
0.2 |
|
|
|
0.2 |
|
| |
|
Effective income tax rate
|
|
|
30.2 |
% |
|
|
(35.0 |
)% |
|
|
(36.5 |
)% |
| |
| |
|
|
| Note 10. |
Employee Benefit Plans |
We sponsor qualified and non-qualified defined benefit pension
plans, defined contribution pension plans, healthcare plans, and
disability and survivorship plans for eligible employees and
retirees, and their eligible family members. We reserve the
right to modify or terminate these plans as to all participants
and beneficiaries at any time, except as restricted by the
Internal Revenue Code, the Employee Retirement Income Security
Act (“ERISA”) and our collective bargaining agreements.
Our qualified defined benefit pension plans meet or exceed
ERISA’s minimum funding requirements as of
December 31, 2004. Our non-qualified plans are funded
primarily with current assets.
We regularly evaluate ways to better manage employee benefits
and control costs. Any changes to the plans or assumptions used
to estimate future benefits could have a significant effect on
the amount of the reported obligation and future annual expense.
|
|
|
Pension and Other Postretirement Benefit Plans |
We sponsor both funded and nonfunded noncontributory defined
benefit pension plans that cover substantially all of our
employees. We use a September 30 measurement date for all
our benefit plans.
Effective July 1, 2003, the existing pension plan for
employees not covered by a collective bargaining agreement
(“non-contract employees”) was converted from a
benefit based on years of service and final average salary to a
cash balance benefit with a seven year transition period. During
the transition period, eligible non-contract employees receive
the greater of the old final average salary benefit or the new
cash balance benefit. Generally, the cash balance benefit
formula provides for an annual pay credit of 6% of eligible pay
plus accrued
F-38
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
interest. Participants in the plan on July 1, 2003 may be
eligible for additional annual pay credits of 2% or 2.75%,
depending on their age and service as of that date. Non-contract
employees hired on or after July 1, 2003 are covered by the
cash balance benefit only. Effective July 1, 2010, all
covered employees earn the cash balance benefit only.
Our defined benefit pension plan for pilots (“Pilot
Plan”) generally provides benefits based on years of
service and final average salary. Effective December 31,
2004, the Pilot Plan was amended to freeze service accruals.
Future employee earnings will continue to be used in the
calculation of pilots’ pension benefits. This amendment is
not reflected in the tables below because the new collective
bargaining agreement between Delta and ALPA which amended the
Pilot Plan was ratified after the September 30, 2004
measurement date.
We also sponsor healthcare plans that provide benefits to
substantially all Delta retirees and their eligible dependents.
Benefits are funded from our current assets. Plan benefits are
subject to copayments, deductibles and other limits as described
in the plans. Non-contract employees hired on or after
January 1, 2003 are not eligible for company provided post
retirement healthcare coverage, although they may purchase such
coverage at full cost. In addition, the healthcare plan covering
non-contract employees was amended effective September 30,
2004 to eliminate company provided post-age 65 retiree
healthcare coverage for non-contract employees retiring after
January 1, 2006, regardless of their date of hire. We will
provide post-age 65 retiree healthcare coverage for
non-contract employees at full cost to employees who retire
after this date. Additionally, pilots hired after
November 11, 2004 will not be eligible for company provided
post-age 65 healthcare coverage, although they may purchase
such coverage at full cost.
During 2004, we amended our pilot benefit plans in connection
with the new collective bargaining agreement we entered into
with ALPA as discussed above. Also in 2004, we offered an early
retirement window, the Alternative Early Retirement Option
(“AERO”), to certain non-contract employees, and we
announced other components of our transformation plan (see
Note 1). As a result of these events, we remeasured a large
portion of our benefit obligations on November 30, 2004.
See below for details of the costs related to the special
termination benefits offered in connection with AERO and the
transformation plan.
The Medicare Act (see Note 1) introduces new prescription
drug benefits to retirees. In accordance with
SFAS No. 106, “Employers’ Accounting for
Postretirement Benefits Other Than Pensions,” we remeasured
our accumulated postretirement benefits obligation
(“APBO”) as of December 31, 2003 to reflect the
effects of the new prescription drug benefit. The remeasurement
resulted in a $356 million reduction in our APBO. This
reduction is primarily due to (1) lower expected per capita
claims cost from Medicare’s assumption of a larger portion
of prescription drug costs and (2) lower anticipated
participation rates in our plans that provide postretirement
benefits.
F-39
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Obligations and funded status (measured at September 30):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Other |
| |
|
Pension |
|
Postretirement |
| |
|
Benefits |
|
Benefits |
| |
|
|
| (in millions) |
|
2004 |
|
2003 |
|
2004 |
|
2003 |
| |
|
Benefit obligation at beginning of year
|
|
$ |
12,477 |
|
|
$ |
11,682 |
|
|
$ |
2,260 |
|
|
$ |
2,370 |
|
|
Service cost
|
|
|
233 |
|
|
|
238 |
|
|
|
28 |
|
|
|
33 |
|
|
Interest cost
|
|
|
757 |
|
|
|
768 |
|
|
|
121 |
|
|
|
161 |
|
|
Actuarial (gain) loss
|
|
|
(35 |
) |
|
|
1,014 |
|
|
|
71 |
|
|
|
131 |
|
|
Benefits paid, including lump sums and annuities
|
|
|
(1,292 |
) |
|
|
(1,092 |
) |
|
|
(178 |
) |
|
|
(178 |
) |
|
Participant contributions
|
|
|
— |
|
|
|
— |
|
|
|
20 |
|
|
|
16 |
|
|
Special termination benefits
|
|
|
— |
|
|
|
7 |
|
|
|
— |
|
|
|
44 |
|
|
Curtailment loss (gain)
|
|
|
— |
|
|
|
25 |
|
|
|
— |
|
|
|
(4 |
) |
|
Plan amendments
|
|
|
— |
|
|
|
(165 |
) |
|
|
(487 |
) |
|
|
(313 |
) |
| |
|
Benefit obligation at end of year
|
|
$ |
12,140 |
|
|
$ |
12,477 |
|
|
$ |
1,835 |
|
|
$ |
2,260 |
|
| |
| |
| |
|
Fair value of plan assets at beginning of period
|
|
$ |
6,818 |
|
|
$ |
6,775 |
|
|
|
|
|
|
|
|
|
|
Actual gain on plan assets
|
|
|
821 |
|
|
|
991 |
|
|
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
495 |
|
|
|
144 |
|
|
|
|
|
|
|
|
|
|
Benefits paid, including lump sums and annuities
|
|
|
(1,292 |
) |
|
|
(1,092 |
) |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of period
|
|
$ |
6,842 |
|
|
$ |
6,818 |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Other |
| |
|
Pension |
|
Postretirement |
| |
|
Benefits |
|
Benefits |
| |
|
|
| (in millions) |
|
2004 |
|
2003 |
|
2004 |
|
2003 |
| |
|
Funded status
|
|
$ |
(5,298 |
) |
|
$ |
(5,659 |
) |
|
$ |
(1,835 |
) |
|
$ |
(2,260 |
) |
|
Unrecognized net actuarial loss
|
|
|
3,989 |
|
|
|
4,728 |
|
|
|
489 |
|
|
|
412 |
|
|
Unrecognized transition obligation
|
|
|
22 |
|
|
|
29 |
|
|
|
— |
|
|
|
— |
|
|
Unrecognized prior service cost (benefit)
|
|
|
107 |
|
|
|
122 |
|
|
|
(1,013 |
) |
|
|
(605 |
) |
|
Contributions (net) made between the measurement date and year
end
|
|
|
69 |
|
|
|
16 |
|
|
|
38 |
|
|
|
41 |
|
|
Special termination benefits recognized between the measurement
date and year end
|
|
|
(10 |
) |
|
|
— |
|
|
|
(142 |
) |
|
|
— |
|
|
Settlement/Curtailment (charge) gain recognized between the
measurement date and year end
|
|
|
(126 |
) |
|
|
(212 |
) |
|
|
527 |
|
|
|
— |
|
| |
|
Net amount recognized on the Consolidated Balance Sheets
|
|
$ |
(1,247 |
) |
|
$ |
(976 |
) |
|
$ |
(1,936 |
) |
|
$ |
(2,412 |
) |
| |
| |
F-40
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Amounts recognized in the Consolidated Balance Sheets consist of:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Other |
| |
|
Pension |
|
Postretirement |
| |
|
Benefits |
|
Benefits |
| |
|
|
| (in millions) |
|
2004 |
|
2003 |
|
2004 |
|
2003 |
| |
|
Prepaid benefit cost
|
|
$ |
19 |
|
|
$ |
202 |
|
|
$ |
— |
|
|
$ |
— |
|
|
Accrued benefit cost
|
|
|
(1,266 |
) |
|
|
(1,179 |
) |
|
|
(1,936 |
) |
|
|
(2,412 |
) |
|
Intangible assets
|
|
|
178 |
|
|
|
227 |
|
|
|
— |
|
|
|
— |
|
|
Additional minimum liability
|
|
|
(3,933 |
) |
|
|
(4,052 |
) |
|
|
— |
|
|
|
— |
|
|
Accumulated other comprehensive loss, pretax
|
|
|
3,755 |
|
|
|
3,826 |
|
|
|
— |
|
|
|
— |
|
| |
|
Net amount recognized
|
|
$ |
(1,247 |
) |
|
$ |
(976 |
) |
|
$ |
(1,936 |
) |
|
$ |
(2,412 |
) |
| |
| |
The 2004 curtailment gain and special termination benefits
relate to changes to our retiree medical coverage for
non-contract employees who retire after January 1, 2006 as
discussed above, pension credit being given to certain employees
furloughed under our transformation plan and benefits provided
under AERO.
| |
|
|
|
|
|
|
|
|
| |
|
Special Termination |
|
Curtailment |
| (in millions) |
|
Benefits |
|
Gain |
| |
|
AERO enhanced medical benefits
|
|
$ |
142 |
|
|
|
— |
|
| |
| |
|
Pension service credit
|
|
$ |
10 |
|
|
|
— |
|
| |
| |
|
Postretirement healthcare plan amendment
|
|
|
— |
|
|
$ |
527 |
|
| |
| |
The 2003 special termination benefits and curtailment loss
(gain) relate to the workforce reduction programs offered to
certain of our employees in 2002. We will record additional
charges relating to our non-pilot operational initiatives and
pilot cost reductions under our transformation plan associated
with certain benefit changes and programs. We are evaluating
these items and are not able to reasonably estimate the amount
or timing of any such charges at this time.
At December 31, 2004 and 2003, we recorded adjustments to
accumulated other comprehensive loss to recognize a portion of
our additional minimum pension liability in accordance with
SFAS No. 87, “Employers’ Accounting for
Pensions” (“SFAS 87”). SFAS 87 requires
that this liability be recognized at year end in an amount equal
to the amount by which the accumulated benefit obligation
(“ABO”) exceeds the fair value of the defined benefit
pension plan assets. The additional minimum pension liability
was recorded by recognizing an intangible asset to the extent of
any unrecognized prior service cost and transition obligation,
which totaled $178 million and $227 million at
December 31, 2004 and 2003, respectively. The additional
minimum pension liability adjustments totaling
($14) million and $786 million, net of tax, were
recorded in accumulated other comprehensive loss on our
Consolidated Balance Sheets at December 31, 2004 and 2003,
respectively (see Note 12).
The accumulated benefit obligation for all our defined benefit
pension plans was $12.1 billion and $11.9 billion at
December 31, 2004 and 2003, respectively. The following
table contains information about our pension plans with an
accumulated benefit obligation in excess of plan assets
(measured at September 30):
| |
|
|
|
|
|
|
|
|
| (in millions) |
|
2004 |
|
2003 |
| |
|
Projected benefit obligation
|
|
$ |
12,140 |
|
|
$ |
12,477 |
|
|
Accumulated benefit obligation
|
|
|
12,081 |
|
|
|
11,863 |
|
|
Fair value of plan assets
|
|
|
6,842 |
|
|
|
6,818 |
|
| |
| |
F-41
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Net periodic benefit cost for the years ended December 31,
2004, 2003 and 2002, included the following components:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Other |
| |
|
Pension |
|
Postretirement |
| |
|
Benefits |
|
Benefits |
| |
|
|
| (in millions) |
|
2004 |
|
2003 |
|
2002 |
|
2004 |
|
2003 |
|
2002 |
| |
|
Service cost
|
|
$ |
233 |
|
|
$ |
238 |
|
|
$ |
282 |
|
|
$ |
28 |
|
|
$ |
33 |
|
|
$ |
30 |
|
|
Interest cost
|
|
|
757 |
|
|
|
768 |
|
|
|
825 |
|
|
|
121 |
|
|
|
161 |
|
|
|
160 |
|
|
Expected return on plan assets
|
|
|
(657 |
) |
|
|
(753 |
) |
|
|
(984 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Amortization of prior service cost
|
|
|
15 |
|
|
|
13 |
|
|
|
24 |
|
|
|
(79 |
) |
|
|
(47 |
) |
|
|
(50 |
) |
|
Recognized net actuarial loss (gain)
|
|
|
194 |
|
|
|
97 |
|
|
|
(8 |
) |
|
|
6 |
|
|
|
7 |
|
|
|
2 |
|
|
Amortization of net transition obligation
|
|
|
7 |
|
|
|
7 |
|
|
|
8 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Settlement charge
|
|
|
257 |
|
|
|
219 |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Curtailment loss (gain)
|
|
|
— |
|
|
|
47 |
|
|
|
— |
|
|
|
(527 |
) |
|
|
(4 |
) |
|
|
— |
|
|
Special termination benefits
|
|
|
10 |
|
|
|
— |
|
|
|
7 |
|
|
|
142 |
|
|
|
— |
|
|
|
44 |
|
| |
|
Net periodic benefit cost
|
|
$ |
816 |
|
|
$ |
636 |
|
|
$ |
155 |
|
|
$ |
(309 |
) |
|
$ |
150 |
|
|
$ |
186 |
|
| |
| |
During 2004 and 2003, we recorded non-cash settlement charges
totaling $257 million and $219 million, respectively,
in our Consolidated Statements of Operations. These charges
primarily relate to the Pilot Plan and result from lump sum
distributions to pilots who retired. We recorded these charges
in accordance with SFAS No. 88, “Employers’
Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits”
(“SFAS 88”). SFAS 88 requires settlement
accounting if the cost of all settlements, including lump sum
retirement benefits paid, in a year exceeds, or is expected to
exceed, the total of the service and interest cost components of
pension expense for the same period.
Additionally, in the December 2004 quarter we recorded a
$527 million curtailment gain related to the elimination of
company subsidized retiree medical benefits for eligible
employees who retire after January 1, 2006.
We used the following actuarial assumptions to determine our
benefit obligations at September 30, 2004 and 2003, and our
net periodic benefit cost for the years ended December 31,
2004, 2003 and 2002, as measured at September 30:
| |
|
|
|
|
|
|
|
|
| Benefit Obligations |
|
2004 |
|
2003 |
| |
|
Weighted average discount rate
|
|
|
6.00 |
% |
|
|
6.125 |
% |
|
Rate of increase in future compensation levels
|
|
|
(1.28 |
)% |
|
|
1.89 |
% |
|
Assumed healthcare cost trend
rate(1)
|
|
|
9.50 |
% |
|
|
9.00 |
% |
| |
| |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Net Periodic Benefit Cost |
|
2004(2) |
|
2003(2) |
|
2002 |
| |
|
Weighted average discount rate — pension benefits
|
|
|
6.09 |
% |
|
|
6.83 |
% |
|
|
7.75 |
% |
|
Weighted average discount rate — other benefits
|
|
|
6.05 |
% |
|
|
6.91 |
% |
|
|
7.75 |
% |
|
Rate of increase in future compensation levels
|
|
|
1.89 |
% |
|
|
2.47 |
% |
|
|
4.67 |
% |
|
Expected long-term rate of return on plan assets
|
|
|
9.00 |
% |
|
|
9.00 |
% |
|
|
10.00 |
% |
|
Assumed healthcare cost trend
rate(1)
|
|
|
9.00 |
% |
|
|
10.00 |
% |
|
|
6.25 |
% |
| |
| |
|
|
|
| |
(1) |
We have implemented a limit on the amount we will pay for
postretirement medical benefits for employees eligible for such
benefits who retire after November 1, 1993. The assumed
healthcare cost trend rate is assumed to decline gradually to
5.00% by 2010 for health plan costs not subject to this limit
and to zero by 2007 for health plan costs subject to the limit
(2008 for participants covered under the collectively-bargained
healthcare plan), and remain level thereafter. |
F-42
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
| |
(2) |
Our 2004 assumptions reflect our quarterly remeasurements
(December 31, 2003, March 31, 2004, and June 30,
2004) of certain portions of our obligations and represent the
weighted average of the assumptions used for each measurement.
Our 2003 assumptions reflect our October 31, 2002
remeasurement of a portion of our obligations and represent the
weighted average of the September 30, 2002 and
October 31, 2002 assumptions. |
The expected long-term rate of return on our plan assets was
based on plan-specific asset/liability investment studies
performed by outside consultants who used historical market
return and volatility data with forward looking estimates based
on existing financial market conditions and forecasts. Modest
excess return expectations versus some market indices were
incorporated into the return projections based on the actively
managed structure of our investment program and its record of
achieving such returns historically.
Assumed healthcare cost trend rates have an effect on the
amounts reported for the other postretirement benefit plans. A
1% change in the healthcare cost trend rate used in measuring
the APBO for these plans at September 30, 2004, would have
the following effects:
| |
|
|
|
|
|
|
|
|
| (in millions) |
|
1% Increase |
|
1% Decrease |
| |
|
Increase (decrease) in total service and interest cost
|
|
$ |
2 |
|
|
$ |
(2 |
) |
|
Increase (decrease) in the APBO
|
|
$ |
33 |
|
|
$ |
(30 |
) |
| |
| |
The weighted-average asset allocation for our pension plans at
September 30, 2004 and 2003 is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
2004 |
|
2003 |
| |
|
U.S. equity securities
|
|
|
35% |
|
|
|
35% |
|
|
Non-U.S. equity securities
|
|
|
15% |
|
|
|
15% |
|
|
High quality bonds
|
|
|
18% |
|
|
|
17% |
|
|
Convertible and high yield bonds
|
|
|
10% |
|
|
|
8% |
|
|
Private equity
|
|
|
13% |
|
|
|
14% |
|
|
Real estate
|
|
|
9% |
|
|
|
11% |
|
| |
|
Total
|
|
|
100% |
|
|
|
100% |
|
| |
| |
The investment strategy for pension plan assets is to utilize a
diversified mix of global public and private equity portfolios,
public and private fixed income portfolios, and private real
estate and natural resource investments to earn a long-term
investment return that meets or exceeds a 9% annualized return
target. The overall asset mix of the portfolio is more heavily
weighted in equity-like investments, including portions of the
bond portfolio which consist of convertible and high yield
securities. Active management strategies are utilized throughout
the program in an effort to realize investment returns in excess
of market indices. Also, option and currency overlay strategies
are used in an effort to generate modest amounts of additional
income, and a bond duration extension program utilizing fixed
income derivatives is employed in an effort to better align the
market value movements of a portion of the pension plan assets
to the related pension plan liabilities.
Target investment allocations for the pension plan assets are as
follows:
| |
|
|
|
|
|
|
|
|
| |
|
U.S. equity securities
|
|
|
27-41 |
% |
|
|
|
|
|
Non-U.S. equity securities
|
|
|
12-18 |
% |
|
|
|
|
|
High quality bonds
|
|
|
15-21 |
% |
|
|
|
|
|
Convertible and high yield bonds
|
|
|
5-11 |
% |
|
|
|
|
|
Private equity
|
|
|
15 |
% |
|
|
|
|
|
Real estate
|
|
|
10 |
% |
|
|
|
|
| |
| |
F-43
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
We expect to contribute approximately $275 million to our
qualified defined benefit pension plans in 2005. Benefit
payments relating to our non-qualified pension plans are
expected to be approximately $65 million in 2005 and are
funded primarily from current assets. We also expect to
contribute approximately $110 million to our defined
contribution pension plans in 2005.
Our other postretirement benefit plans are funded from current
assets. We expect to make benefit payments of approximately
$190 million in relation to our other postretirement
benefit plans in 2005.
Benefit payments are made from both funded benefit plan trusts
and from current assets. Benefit payments, which reflect
expected future service, as appropriate, are expected to be paid
as follows for the years ending December 31:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
Other |
| |
|
Pension |
|
Postretirement |
| (in millions) |
|
Benefits |
|
Benefits |
| |
|
2005
|
|
$ |
792 |
|
|
$ |
188 |
|
|
2006
|
|
|
766 |
|
|
|
189 |
|
|
2007
|
|
|
797 |
|
|
|
191 |
|
|
2008
|
|
|
812 |
|
|
|
171 |
|
|
2009
|
|
|
876 |
|
|
|
163 |
|
|
2010 – 2014
|
|
|
4,519 |
|
|
|
669 |
|
| |
| |
These estimates are based on assumptions about future events.
Actual benefit payments may vary significantly from these
estimates.
We also sponsor defined benefit pension plans for eligible Delta
employees in certain foreign countries. These plans did not have
a material impact on our Consolidated Financial Statements in
2004, 2003 and 2002.
|
|
|
Defined Contribution Pension Plans |
|
|
|
Delta Pilots Money Purchase Pension Plan
(“MPPP”) |
We contributed 5% of covered pay to the MPPP for each eligible
Delta pilot through December 31, 2004. The MPPP is related
to the Delta Pilots Retirement Plan. The defined benefit pension
payable to a pilot is reduced by the actuarial equivalent of the
accumulated account balance in the MPPP. During the years ended
December 31, 2004, 2003, and 2002, we recognized expense of
$65 million, $66 million, and $71 million,
respectively, for this plan. Although contributions to the MPPP
ceased effective December 31, 2004, individual accounts
will continue to be credited with investment gains/losses and
the actuarial equivalent of the accumulated account balance at
retirement will continue to offset the participants defined
benefit pension benefit.
|
|
|
Delta Family-Care Savings Plan (“Savings Plan”) |
Our Savings Plan includes an employee stock ownership plan
(“ESOP”) feature. Eligible employees may contribute a
portion of their covered pay to the Savings Plan.
Generally, we match 50% of non-pilot employee contributions with
a maximum employer contribution of 2% of a participant’s
covered pay and provide all eligible Delta pilots with an
employer contribution of 3% of their covered pay. Effective
January 1, 2005, the employer contribution for eligible
Delta pilots was reduced to 2% of their covered pay. Generally,
we make our contributions for non-pilots and pilots by
allocating Series B ESOP Convertible Preferred Stock
(“ESOP Preferred Stock”), common stock or cash to the
Savings Plan. Our
F-44
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
contributions, which are recorded as salaries and related costs
in our Consolidated Statements of Operations, totaled
$85 million, $81 million, and $85 million for the
years ended December 31, 2004, 2003 and 2002, respectively.
When we adopted the ESOP in 1989, we sold 6,944,450 shares
of ESOP Preferred Stock to the Savings Plan for
$500 million. We have recorded unearned compensation equal
to the value of the shares of ESOP Preferred Stock not yet
allocated to participants’ accounts. We reduce the unearned
compensation as shares of ESOP Preferred Stock are allocated to
participants’ accounts. Dividends on unallocated shares of
ESOP Preferred Stock are used for debt service on the Savings
Plan’s ESOP Notes and are not considered dividends for
financial reporting purposes. Dividends on allocated shares of
ESOP Preferred Stock are credited to participants’ accounts
and are considered dividends for financial reporting purposes.
Only allocated shares of ESOP Preferred Stock are considered
outstanding when we compute diluted earnings per share. At
December 31, 2004, 3,839,951 shares of ESOP Preferred
Stock were allocated to participants’ accounts, and
1,577,784 shares were held by the ESOP for future
allocations. See Note 11 for information about changes to
our ESOP Preferred Stock dividend and redemption policies.
|
|
|
Pilot Defined Contribution Plan |
We have established a new defined contribution plan for Delta
pilots effective January 1, 2005. Eligible pilots will
receive a contribution ranging from 0% to 19.2% of covered pay.
The amount we will contribute for each pilot is based on the
pilot’s age and years of service on January 1, 2005.
Pilots hired on or after January 1, 2005 will receive a
contribution of 10% of covered pay.
ASA, Comair and DAL Global Services, Inc., three of our wholly
owned subsidiaries, sponsor defined contribution retirement
plans for eligible employees. These plans did not have a
material impact on our Consolidated Financial Statements in
2004, 2003 and 2002.
We provide certain other welfare benefits to eligible former or
inactive employees after employment but before retirement,
primarily as part of the disability and survivorship plans.
Postemployment benefit expense was $105 million,
$131 million and $62 million for the years ended
December 31, 2004, 2003 and 2002, respectively. We include
the amount funded in excess of the liability in other noncurrent
assets on our Consolidated Balance Sheets. Future period
expenses will vary based on actual claims experience and the
return on plan assets. Gains and losses occur because actual
experience differs from assumed experience. Gains and losses and
prior service costs related to our disability and survivorship
plans are amortized over the average future service period of
employees covered by these plans.
|
|
| Note 11. |
Common and Preferred Stock |
|
|
|
Stock Option and Other Stock-Based Award Plans |
To more closely align the interests of directors, officers and
other employees with the interests of our shareowners, we
maintain certain plans which provide for the issuance of common
stock in connection with the exercise of stock options and for
other stock-based awards. Stock options awarded under these
plans (1) have an exercise price equal to the fair value of
the common stock on the grant date; (2) become exercisable
one to five years after the grant date; and (3) expire up
to 10 years after the grant date.
F-45
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table includes additional information about these
plans as of December 31, 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Shares |
| |
|
Total Shares |
|
Non-Qualified |
|
Reserved |
| |
|
Authorized for |
|
Stock Options |
|
for Future |
| Plan |
|
Issuance |
|
Granted |
|
Grant |
| |
|
2004 broad-based employee stock option plans
(1)
|
|
|
62,340,000 |
|
|
|
62,216,100 |
|
|
|
124,500 |
|
|
1996 broad-based employee stock option plans
(2)
|
|
|
49,400,000 |
|
|
|
49,400,000 |
|
|
|
— |
|
|
Delta 2000 Performance Compensation
Plan(3)
|
|
|
16,000,000 |
|
|
|
13,495,361 |
|
|
|
6,600,784 |
|
|
Non-Employee Directors’ Stock Option Plan
(4)
|
|
|
250,000 |
|
|
|
119,245 |
|
|
|
143,615 |
|
|
Non-Employee Directors’ Stock
Plan(5)
|
|
|
500,000 |
|
|
|
— |
|
|
|
400,319 |
|
| |
| |
|
|
|
|
| |
(1) |
During the December 2004 quarter, we adopted these pilot and
non-pilot plans due to the substantial contributions made by
employees to our out-of-court restructuring efforts. We did not
seek shareowner approval to adopt these plans because the Audit
Committee of our Board of Directors determined that the delay
necessary in obtaining such approval would seriously jeopardize
our financial viability. The New York Stock Exchange accepted
our reliance on this exception to its shareowner approval
policy. The plans provide that shares reserved for awards that
are forfeited are available for future stock option grants. |
|
| |
(2) |
In 1996, shareowners approved broad-based pilot and non-pilot
stock option plans. Under these two plans, we granted eligible
employees non-qualified stock options to purchase a total of
49.4 million shares of common stock in three approximately
equal installments on October 30, 1996, 1997 and 1998. |
|
| |
(3) |
On October 25, 2000, shareowners approved this plan, which
authorizes the grant of stock options and a limited number of
other stock awards. The plan amends and restates a prior plan
which was also approved by shareowners. No awards have been, or
will be, granted under the prior plan on or after
October 25, 2000. At December 31, 2004, there were
2.2 million shares of common stock reserved for awards
(primarily non-qualified stock options) that were outstanding
under the prior plan. The current plan provides that shares
reserved for awards under the current or prior plans that are
forfeited, settled in cash rather than stock or withheld, plus
shares tendered to us in connection with such awards, may be
added back to the shares available for future grants under the
current plan. At December 31, 2004, 17.9 million
shares had been added back pursuant to that provision, including
11.0 million shares canceled under the stock option
exchange program discussed below. |
|
| |
(4) |
On October 22, 1998, the Board of Directors approved this
plan under which each non-employee director may receive an
annual grant of non-qualified stock options. This plan provides
that shares reserved for awards that are forfeited may be added
back to the shares available for future stock option grants. |
|
| |
(5) |
In 1995, shareowners approved this plan, which provides that a
portion of each non-employee director’s compensation for
serving as a director will be paid in shares of common stock. It
also permits non-employee directors to elect to receive all or a
portion of their cash compensation for service as a director in
shares of common stock at current market prices. |
|
On May 28, 2003, we commenced, with shareowner approval, a
stock option exchange program (“Exchange Program”) for
eligible employees in our 1996 broad-based stock option plans
and the Delta 2000 Performance Compensation Plan. Approximately
45,000 eligible employees could elect to exchange their
outstanding stock options with an exercise price of $25 per
share or more for a designated fewer number of replacement
options with an exercise price equal to the fair market value of
the common stock on the grant date of the replacement options.
In accordance with the terms of the Exchange Program, we
canceled approximately 32 million outstanding stock options
on June 25, 2003 and issued, in exchange for the canceled
options, approximately 12 million replacement options on
December 26, 2003. The exercise price of the replacement
options is $11.60, the closing price of our common stock on the
grant date. Members of our Board of Directors, including our
Chief Executive Officer, were not eligible to participate in the
Exchange Program.
F-46
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table summarizes all stock option activity for the
years ended December 31, 2004, 2003 and 2002:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 |
|
2003 |
|
2002 |
| |
|
|
| |
|
|
|
Weighted |
|
|
|
Weighted |
|
|
|
Weighted |
| |
|
|
|
Average |
|
|
|
Average |
|
|
|
Average |
| |
|
|
|
Exercise |
|
|
|
Exercise |
|
|
|
Exercise |
| (shares in thousands) |
|
Shares |
|
Price |
|
Shares |
|
Price |
|
Shares |
|
Price |
| |
|
Outstanding at the beginning of the year
|
|
|
37,893 |
|
|
$ |
31 |
|
|
|
58,806 |
|
|
$ |
44 |
|
|
|
51,537 |
|
|
$ |
48 |
|
|
Granted
|
|
|
70,763 |
|
|
|
6 |
|
|
|
11,894 |
|
|
|
12 |
|
|
|
8,478 |
|
|
|
21 |
|
|
Exercised
|
|
|
(3 |
) |
|
|
11 |
|
|
|
(38 |
) |
|
|
11 |
|
|
|
(9 |
) |
|
|
27 |
|
|
Forfeited
|
|
|
(2,720 |
) |
|
|
38 |
|
|
|
(32,769 |
) |
|
|
47 |
|
|
|
(1,200 |
) |
|
|
48 |
|
| |
|
Outstanding at the end of the year
|
|
|
105,933 |
|
|
|
15 |
|
|
|
37,893 |
|
|
|
31 |
|
|
|
58,806 |
|
|
|
44 |
|
| |
|
Exercisable at the end of the year
|
|
|
33,337 |
|
|
$ |
33 |
|
|
|
22,846 |
|
|
$ |
44 |
|
|
|
45,996 |
|
|
$ |
48 |
|
| |
| |
The following table summarizes information about stock options
outstanding and exercisable at December 31, 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Stock Options |
| |
|
Stock Options Outstanding |
|
Exercisable |
| |
|
|
|
|
| |
|
|
|
Weighted |
|
Weighted |
|
|
|
Weighted |
| |
|
Number |
|
Average |
|
Average |
|
Number |
|
Average |
| |
|
Outstanding |
|
Remaining |
|
Exercise |
|
Exercisable |
|
Exercise |
| Stock Options |
|
(000) |
|
Life (years) |
|
Price |
|
(000) |
|
Price |
| |
|
$4-$20
|
|
|
85,846 |
|
|
|
10 |
|
|
$ |
7 |
|
|
|
13,279 |
|
|
$ |
11 |
|
|
$21-$35
|
|
|
3,997 |
|
|
|
3 |
|
|
$ |
34 |
|
|
|
3,991 |
|
|
$ |
34 |
|
|
$36-$50
|
|
|
15,008 |
|
|
|
3 |
|
|
$ |
49 |
|
|
|
14,985 |
|
|
$ |
49 |
|
|
$51-$70
|
|
|
1,082 |
|
|
|
5 |
|
|
$ |
55 |
|
|
|
1,082 |
|
|
$ |
55 |
|
| |
| |
The determination to pay cash dividends on our ESOP Preferred
Stock and our common stock is at the discretion of our Board of
Directors, and is also subject to the provisions of Delaware
General Corporation Law (“Delaware Law”). 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 the company’s 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.
In July 2003, our Board of Directors discontinued the payment of
quarterly cash dividends on our common stock due to the
financial challenges facing Delta. We had previously paid a
quarterly dividend of $0.025 per common share.
Effective December 2003, our Board of Directors suspended
indefinitely the payment of dividends on our ESOP Preferred
Stock to comply with Delaware Law. At December 31, 2004 and
2003, we had a negative “surplus” (as defined above)
and we did not have net profits in any of the years ended
December 31, 2004, 2003 and 2002. The terms of the ESOP
Preferred Stock provide for cumulative dividends on that stock
and prohibit the payment of dividends on our common stock until
all cumulative dividends on the ESOP Preferred Stock have been
paid. Unpaid dividends on the ESOP Preferred Stock will accrue
without interest, until paid, at a rate of $4.32 per share
per year. At December 31, 2004 and 2003, accumulated but
unpaid dividends on the
F-47
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
ESOP Preferred Stock totaled $35 million and
$13 million, respectively, and are recorded in accounts
payable, deferred credits and other accrued liabilities on our
Consolidated Balance Sheet.
The GE Commercial Finance Facility and the Amex Facilities
include negative covenants that restrict our ability to pay
dividends or repurchase stock.
Each outstanding share of ESOP Preferred Stock bears a
cumulative cash dividend of 6% per year of its stated value
of $72.00; is convertible into 1.7155 shares of common
stock, which is equivalent to a conversion price of
$41.97 per share; and has a liquidation preference of
$72.00, plus accrued and unpaid dividends. The ESOP Preferred
Stock generally votes together as a single class with the common
stock and has two votes per share. The conversion rate,
conversion price and voting rights of the ESOP Preferred Stock
are subject to adjustment in certain circumstances.
All shares of ESOP Preferred Stock are held of record by the
trustee of the Delta Family-Care Savings Plan (see
Note 10). At December 31, 2004, 9,294,124 shares
of common stock were reserved for the conversion of the ESOP
Preferred Stock.
We are generally required to redeem shares of ESOP 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 10 years. In these circumstances, shares of
ESOP Preferred Stock are redeemable at a price (“Redemption
Plan”) equal to the greater of (1) $72.00 per
share or (2) the fair value of the shares of common stock
issuable upon conversion of the ESOP Preferred Stock to be
redeemed, plus, in either case, accrued and unpaid dividends on
the shares of ESOP Preferred Stock to be redeemed. Under the
terms of the ESOP Preferred Stock, we may pay the
Redemption Price in cash, shares of common stock (valued at
fair market value), or in a combination thereof.
Delaware Law, however, prohibits a company from redeeming or
purchasing its stock for cash or other property, unless the
company has sufficient “surplus”. As discussed above,
at December 31, 2003, we had a negative
“surplus”. Effective December 2003, our Board of
Directors changed the form of payment we use to redeem shares of
the ESOP Preferred Stock when redemptions are required under our
Delta Family-Care Savings Plan. For the indefinite future, we
will pay the Redemption Price in shares of our common stock
rather than in cash.
The Shareowner Rights Plan is designed to protect shareowners
against attempts to acquire Delta that do not offer an adequate
purchase price to all shareowners, or are otherwise not in the
best interest of Delta and our shareowners. Under the plan, each
outstanding share of common stock is accompanied by one-half of
a preferred stock purchase right. Each whole right entitles the
holder to purchase 1/100 of a share of Series D Junior
Participating Preferred Stock at an exercise price of $300,
subject to adjustment.
The rights become exercisable only after a person acquires, or
makes a tender or exchange offer that would result in the person
acquiring, beneficial ownership of 15% or more of our common
stock. If a person acquires beneficial ownership of 15% or more
of our common stock, each right will entitle its holder (other
than the acquiring person) to exercise his rights to purchase
our common stock having a market value of twice the exercise
price.
If a person acquires beneficial interest of 15% or more of our
common stock and (1) we are involved in a merger or other
business combination in which we are 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 their rights to purchase
common stock of the acquiring company having a market value of
twice the exercise price.
F-48
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The rights expire on November 4, 2006. We 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.
We may 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.
|
|
| Note 12. |
Comprehensive Income (Loss) |
Comprehensive income (loss) includes (1) reported net
income (loss); (2) the additional minimum pension
liability; (3) effective unrealized gains and losses on
fuel derivative instruments that qualify for hedge accounting;
and (4) unrealized gains and losses on marketable equity
securities. The following table shows our comprehensive loss for
the years ended December 31, 2004, 2003 and 2002:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (in millions) |
|
2004 |
|
2003 |
|
2002 |
| |
|
Net loss
|
|
$ |
(5,198 |
) |
|
$ |
(773 |
) |
|
$ |
(1,272 |
) |
|
Other comprehensive loss
|
|
|
(20 |
) |
|
|
(776 |
) |
|
|
(1,587 |
) |
| |
|
Comprehensive loss
|
|
$ |
(5,218 |
) |
|
$ |
(1,549 |
) |
|
$ |
(2,859 |
) |
| |
| |
The following table shows the components of accumulated other
comprehensive income (loss) at December 31, 2004, 2003 and
2002, and the activity for the years then ended:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Additional |
|
|
|
|
|
|
|
|
| |
|
Minimum |
|
Fuel |
|
Marketable |
|
|
|
|
| |
|
Pension |
|
Derivative |
|
Equity |
|
|
|
|
| (in millions) |
|
Liability |
|
Instruments |
|
Securities |
|
Other |
|
Total |
| |
|
Balance at December 31, 2001
|
|
$ |
— |
|
|
$ |
25 |
|
|
$ |
(1 |
) |
|
$ |
1 |
|
|
$ |
25 |
|
| |
| |
Additional minimum pension liability adjustment
|
|
|
(2,558 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,558 |
) |
| |
Unrealized gain (loss)
|
|
|
— |
|
|
|
143 |
|
|
|
(9 |
) |
|
|
(2 |
) |
|
|
132 |
|
| |
Realized (gain) loss
|
|
|
— |
|
|
|
(136 |
) |
|
|
4 |
|
|
|
— |
|
|
|
(132 |
) |
| |
Tax effect
|
|
|
972 |
|
|
|
(3 |
) |
|
|
1 |
|
|
|
1 |
|
|
|
971 |
|
| |
|
|
| |
Net of tax
|
|
|
(1,586 |
) |
|
|
4 |
|
|
|
(4 |
) |
|
|
(1 |
) |
|
|
(1,587 |
) |
| |
|
Balance at December 31, 2002
|
|
|
(1,586 |
) |
|
|
29 |
|
|
|
(5 |
) |
|
|
— |
|
|
|
(1,562 |
) |
| |
| |
Additional minimum pension liability adjustments
|
|
|
(1,268 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,268 |
) |
| |
Unrealized gain
|
|
|
— |
|
|
|
159 |
|
|
|
6 |
|
|
|
— |
|
|
|
165 |
|
| |
Realized gain
|
|
|
— |
|
|
|
(152 |
) |
|
|
(5 |
) |
|
|
— |
|
|
|
(157 |
) |
| |
Impairment
|
|
|
— |
|
|
|
— |
|
|
|
8 |
|
|
|
— |
|
|
|
8 |
|
| |
Tax effect
|
|
|
482 |
|
|
|
(2 |
) |
|
|
(4 |
) |
|
|
— |
|
|
|
476 |
|
| |
|
|
| |
Net of tax
|
|
|
(786 |
) |
|
|
5 |
|
|
|
5 |
|
|
|
— |
|
|
|
(776 |
) |
| |
|
Balance at December 31, 2003
|
|
|
(2,372 |
) |
|
|
34 |
|
|
|
— |
|
|
|
— |
|
|
|
(2,338 |
) |
| |
| |
Additional minimum pension liability adjustments
|
|
|
71 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
71 |
|
| |
Unrealized gain
|
|
|
— |
|
|
|
50 |
|
|
|
— |
|
|
|
— |
|
|
|
50 |
|
| |
Realized gain
|
|
|
— |
|
|
|
(105 |
) |
|
|
— |
|
|
|
— |
|
|
|
(105 |
) |
| |
Tax effect
|
|
|
(57 |
)(1) |
|
|
21 |
|
|
|
— |
|
|
|
— |
|
|
|
(36 |
) |
| |
|
|
| |
Net of tax
|
|
|
14 |
|
|
|
(34 |
) |
|
|
— |
|
|
|
— |
|
|
|
(20 |
) |
| |
|
Balance at December 31, 2004
|
|
$ |
(2,358 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(2,358 |
) |
| |
| |
|
|
|
| |
(1) |
Includes approximately $30 million of valuation allowance
against our deferred tax assets. |
F-49
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
We did not have any fuel hedge contracts at December 31,
2004. See Notes 4 and 10 for additional information related
to our fuel hedge contracts and our additional minimum pension
liability, respectively.
|
|
| Note 13. |
Geographic Information |
SFAS No. 131, “Disclosures about Segments of an
Enterprise and Related Information”
(“SFAS 131”), requires us to disclose certain
information about our operating segments. Operating segments are
defined as components of an enterprise with separate financial
information which is evaluated regularly by the chief operating
decision-maker and is used in resource allocation and
performance assessments.
We are managed as a single business unit that provides air
transportation for passengers and cargo. This allows us to
benefit from an integrated revenue pricing and route network
that includes Mainline (including Song) and our regional
affiliates. The flight equipment of all three carriers is
combined to form one fleet which is deployed through a single
route scheduling system. When making resource allocation
decisions, our chief operating decision maker evaluates flight
profitability data, which considers aircraft type and route
economics, but gives no weight to the financial impact of the
resource allocation decision on an individual carrier basis. Our
objective in making resource allocation decisions is to optimize
our consolidated financial results, not the individual results
of Mainline (including Song) and our regional affiliates.
Operating revenues are assigned to a specific geographic region
based on the origin, flight path and destination of each flight
segment. Our operating revenues by geographic region for the
years ended December 31, 2004, 2003, and 2002 are
summarized in the following table:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (in millions) |
|
2004 |
|
2003 |
|
2002 |
| |
|
North America
|
|
$ |
12,192 |
|
|
$ |
11,672 |
|
|
$ |
11,339 |
|
|
Atlantic
|
|
|
2,054 |
|
|
|
1,770 |
|
|
|
1,860 |
|
|
Pacific
|
|
|
141 |
|
|
|
107 |
|
|
|
127 |
|
|
Latin America
|
|
|
615 |
|
|
|
538 |
|
|
|
540 |
|
| |
|
Total
|
|
$ |
15,002 |
|
|
$ |
14,087 |
|
|
$ |
13,866 |
|
| |
Our tangible assets consist primarily of flight equipment which
is mobile across geographic markets. Accordingly, assets are not
allocated to specific geographic regions.
|
|
| Note 14. |
Restructuring, Asset Writedowns, Pension Settlements and
Related Items, Net |
In 2004, we recorded a $41 million net gain in
restructuring, asset writedowns, pension settlements and related
items, net on our Consolidated Statement of Operations, as
follows:
|
|
|
| |
• |
Elimination of Retiree
Healthcare Subsidy.
During the December 2004 quarter, we recorded a
$527 million gain related to our decision to eliminate the
company provided healthcare coverage subsidy for employees who
retire after January 1, 2006 (see Note 10).
|
| |
| |
• |
Pension
Settlements. During
2004, we recorded $251 million in settlement charges
related to our pilots’ defined benefit pension plan due to
a significant increase in pilot retirements (see Note 10).
|
| |
| |
• |
Workforce
Reductions. During the
December 2004 quarter, we recorded a $194 million
charge related to our decision to reduce staffing by
approximately 6,000 to 7,000 jobs across all workgroups,
excluding pilots, by December 2005. This charge included
$152 million related to special termination benefits (see
Note 10) and $42 million related to employee severance
charges. We offered eligible non-pilot employees several
voluntary programs, including a travel option and early
retirement program. Approximately 3,400 employees elected to
participate in one of these programs.
|
F-50
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
| |
• |
Asset Impairment
Charge. During the
September 2004 quarter, we recorded a $41 million
non-cash aircraft impairment charge related to our agreement to
sell eight owned MD-11 aircraft. In October 2004, we sold
these aircraft and related inventory to a third party for
$227 million.
|
In 2003, we recorded $268 million in net charges
($169 million net of tax) in restructuring, asset
writedowns, pension settlements and related items, net on our
Consolidated Statement of Operations, as follows:
|
|
|
| |
• |
Pension
Settlement. During the
December 2003 quarter, we recorded a $212 million
non-cash charge related to our pilots’ defined benefit
pension plan due to a significant increase in pilot retirements
(see Note 10).
|
| |
| |
• |
Pension and Postretirement
Curtailment. During the
March 2003 quarter, we recorded a $43 million net
charge for costs associated with the 2002 workforce reduction
program. This charge relates to a net curtailment loss under
certain of our pension and postretirement medical benefit plans
(see Note 10). See below for additional information about
our 2002 workforce reduction programs.
|
| |
| |
• |
Planned Sale of
Aircraft. During the
December 2003 quarter, we recorded a $41 million
charge as a result of a definitive agreement to sell
11 B737-800 aircraft to a third party immediately after
those aircraft are delivered to us by the manufacturer in 2005
(see Note 8).
|
| |
| |
• |
Other.
During 2003, we recorded a $28 million reduction to
operating expenses based primarily on revised estimates of
remaining costs associated with prior year restructuring
reserves (see Note 15).
|
In 2002, we recorded $439 million in net charges
($277 million net of tax) in restructuring, asset
writedowns, pension settlements and related items, net on our
Consolidated Statement of Operations, as follows:
|
|
|
| |
• |
Fleet
Changes. We recorded
$225 million in net asset impairments and other charges due
to significant changes we made to our fleet plan in 2002
(1) to reduce costs through fleet simplification and
capacity reductions and (2) to decrease capital
expenditures through aircraft deferrals. These actions are
discussed below.
|
|
|
|
| |
|
During the September 2002
quarter, we recorded an impairment charge, shown in the table
below, related to 59 owned B727 aircraft. This
included the impairment of (1) 23 B727 aircraft used in
operations due to a further reduction in their estimated future
cash flows and fair values since our impairment review in 2001
and (2) 36 B727 aircraft held for sale due to a
further decline in their fair values less the cost to sell since
our impairment review in 2001. The aircraft held for sale were
sold as part of our fleet simplification plan during 2003; the
net book value of these aircraft was included in other
noncurrent assets on our Consolidated Balance Sheet at
December 31, 2002, and was not material.
|
| |
| |
|
During the September 2002
quarter, we decided to temporarily remove from service our
MD-11 aircraft, beginning in early 2003. As a result of
this decision, we recorded an impairment charge, shown in the
table below, related to our eight owned MD-11 aircraft to
reflect the further reduction in estimated future cash flows and
fair values of these aircraft since our impairment review in
2001. The MD-11 aircraft were replaced on international
routes by B767-300ER aircraft that had been used in our domestic
system. We used smaller Mainline aircraft to replace the
B767-300ER aircraft on domestic routes, thereby reducing our
domestic capacity.
|
| |
| |
|
During the December 2002
quarter, we decided to return to service, beginning in 2003,
nine leased B737-300 aircraft which we had removed from
operations. This decision was based on (1) capacity and
operating cost considerations and (2) our inability to
sublease the B737-300
|
F-51
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
| |
|
aircraft due to the difficult business environment facing the
airline industry after September 11, 2001. During the
June 2001 quarter, we decided to remove from service the
B737-300 aircraft and recorded a reserve for future lease
payments less estimated sublease income. Due to our decision to
return these aircraft to service, we reversed the remaining
$56 million reserve related to these B737-300 aircraft. |
| |
| |
|
During the December 2002 quarter, we entered into an
agreement with Boeing to defer 31 mainline aircraft
previously scheduled for delivery in 2003 and 2004. As a result
of these deferrals, we had no Mainline aircraft deliveries in
2003 and 2004. We incurred a $30 million charge related to
these deferrals. |
| |
| |
|
During the December 2002 quarter, we decided to accelerate the
retirement of 37 owned EMB-120 aircraft to achieve costs
savings and operating efficiencies. We removed these aircraft
from service during 2003. The accelerated retirement of these
aircraft as well as a reduction in their estimated future cash
flows and fair values resulted in an impairment charge. |
| |
| |
|
During 2002, we recorded the following impairment charges for
our owned B727, MD-11 and EMB-120 aircraft: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Used in Operations(1) |
|
Held for Sale |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
No. of |
|
|
|
No. of |
|
|
|
Spare |
|
|
| (dollars in millions) |
|
Writedown(2) |
|
Aircraft |
|
Writedown |
|
Aircraft |
|
Subtotal |
|
Parts(3) |
|
Total |
| |
|
|
|
B727
|
|
$ |
24 |
|
|
|
23 |
|
|
$ |
37 |
|
|
|
36 |
|
|
$ |
61 |
|
|
$ |
— |
|
|
$ |
61 |
|
|
MD-11
|
|
|
141 |
|
|
|
8 |
|
|
|
— |
|
|
|
— |
|
|
|
141 |
|
|
|
18 |
|
|
|
159 |
|
|
EMB-120
|
|
|
27 |
|
|
|
37 |
|
|
|
— |
|
|
|
— |
|
|
|
27 |
|
|
|
4 |
|
|
|
31 |
|
| |
|
Total
|
|
$ |
192 |
|
|
|
|
|
|
$ |
37 |
|
|
|
|
|
|
$ |
229 |
|
|
$ |
22 |
|
|
$ |
251 |
|
| |
| |
|
|
|
| |
(1) |
Reflects the classification of these aircraft at the time of the
2002 impairment analysis, which may differ from the
classification at December 31, 2004. |
| |
(2) |
The fair value of aircraft used in operations was determined
using third party appraisals. |
| |
(3) |
Charges related to the writedown of the related spare parts
inventory to their net realizable value. |
|
|
|
| |
• |
Workforce
Reductions. We recorded
a $127 million charge related to our decision in
October 2002 to reduce staffing by up to approximately
8,000 jobs across all workgroups, excluding pilots. We offered
eligible non-pilot employees several programs, including
voluntary severance, leaves of absence and early retirement.
Approximately 3,900 employees elected to participate in one of
these programs. Involuntary reductions were expected to affect
approximately 4,000 employees (see Note 15).
|
|
|
|
| |
|
The total charge includes
(1) $51 million for costs associated with the
voluntary programs that were recorded as special termination
benefits under our pension and postretirement medical benefit
obligations (see Note 10) and (2) $76 million for
severance and related costs.
|
|
|
|
| |
• |
Surplus Pilots and Grounded
Aircraft. We recorded
$93 million in expenses for the temporary carrying cost of
surplus pilots and grounded aircraft related to our capacity
reductions which became effective on November 1, 2001. This
cost also included related requalification training and
relocation costs for certain pilots.
|
| |
| |
• |
Other.
We recorded (1) a $23 million gain related to the
adjustment of certain prior year restructuring reserves based on
revised estimates of remaining costs; (2) a
$14 million charge associated with our decision to close
certain leased facilities; and (3) a $3 million charge
related to other items (see Note 15).
|
F-52
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
| Note 15. |
Restructuring and Other Reserves |
The following table shows changes in our restructuring and other
reserve balances as of December 31, 2004, 2003, and 2002,
and the associated activity for the years then ended:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Restructuring and Other Charges |
| |
|
|
| |
|
|
|
Severance and Related Costs |
| |
|
|
|
|
| |
|
|
|
Facilities |
|
Workforce Reduction Programs |
| |
|
Leased |
|
and |
|
|
| (in millions) |
|
Aircraft |
|
Other |
|
2004 |
|
2002 |
|
2001 |
| |
|
Balance at December 31, 2001
|
|
$ |
70 |
|
|
$ |
74 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
47 |
|
| |
|
Additional costs and expenses
|
|
|
— |
|
|
|
14 |
|
|
|
— |
|
|
|
76 |
|
|
|
— |
|
|
Payments
|
|
|
(14 |
) |
|
|
(9 |
) |
|
|
— |
|
|
|
(5 |
) |
|
|
(35 |
) |
|
Adjustments
|
|
|
(56 |
) |
|
|
(14 |
) |
|
|
— |
|
|
|
— |
|
|
|
(9 |
) |
| |
|
Balance at December 31, 2002
|
|
|
— |
|
|
|
65 |
|
|
|
— |
|
|
|
71 |
|
|
|
3 |
|
| |
|
Payments
|
|
|
— |
|
|
|
(9 |
) |
|
|
— |
|
|
|
(45 |
) |
|
|
(2 |
) |
|
Adjustments
|
|
|
— |
|
|
|
(9 |
) |
|
|
— |
|
|
|
(21 |
) |
|
|
— |
|
| |
|
Balance at December 31, 2003
|
|
|
— |
|
|
|
47 |
|
|
|
— |
|
|
|
5 |
|
|
|
1 |
|
| |
|
Additional costs and expenses
|
|
|
— |
|
|
|
— |
|
|
|
42 |
|
|
|
— |
|
|
|
— |
|
|
Payments
|
|
|
— |
|
|
|
(8 |
) |
|
|
— |
|
|
|
(2 |
) |
|
|
(1 |
) |
|
Adjustments
|
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
|
|
(3 |
) |
|
|
— |
|
| |
|
Balance at December 31, 2004
|
|
$ |
— |
|
|
$ |
38 |
|
|
$ |
42 |
|
|
$ |
— |
|
|
$ |
— |
|
| |
| |
The leased aircraft reserve represented future lease payments
under operating leases for nine B737-300 aircraft previously
removed from service prior to the lease expiration date, less
estimated sublease income. Due to changes in our fleet plan
during the December 2002 quarter, we (1) reversed the
remaining $56 million balance of this reserve and
(2) returned these aircraft to service in 2003.
The facilities and other reserve represents costs related
primarily to (1) future lease payments for facility
closures and (2) contract termination fees. During 2003, we
recorded a $9 million adjustment to prior year reserves
based on revised estimates of remaining costs primarily due to
changes in certain facility lease terms. During 2002, we
recorded a $14 million adjustment to prior year reserves
based on revised estimates of remaining costs.
The severance and related costs reserve represents future
payments associated with our 2004, 2002 and 2001 voluntary and
involuntary workforce reduction programs. At December 31,
2004, the $42 million balance related to the 2004 workforce
reduction programs represents severance and medical benefits for
employees who qualified for the programs; this amount will be
paid during 2005. During 2003, we recorded a $21 million
adjustment to prior year reserves based on revised estimates of
remaining costs primarily due to fewer employee reductions under
our 2002 involuntary workforce reduction program than originally
anticipated because of higher than expected reductions from
attrition and retirements.
During 2002, we recorded a $9 million adjustment to the
2001 severance and related costs reserve based on revised
estimates of the remaining costs, including (1) the
adjustment of medical benefits for certain employees
participating in the leave of absence programs who returned to
the workforce earlier than originally scheduled and (2) the
change in the number of pilot furloughs from up to 1,400 to
approximately 1,100.
See Note 14 for additional information about the charges
discussed above.
F-53
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
| Note 16. |
Equity Investments |
|
|
|
WORLDSPAN, L.P. (“Worldspan”) |
On June 30, 2003, we sold our 40% equity investment in
Worldspan, which operates and markets a computer reservation
system for the travel industry. In exchange for the sale of our
equity interest, 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.
As a result of this transaction, we recorded a gain of
$279 million ($176 million net of tax) in other income
(expense) on our 2003 Consolidated Statement of Operations.
In addition, we will receive credits totaling approximately
$125 million, which will be recognized ratably as a
reduction of costs through 2012, for future Worldspan-provided
services (“Worldspan Credits”). The carrying and fair
value of the subordinated promissory note was $36 million
and $38 million at December 31, 2004 and 2003,
respectively, which reflects a writedown resulting from a
decrease in its fair value. This note was classified as a
trading security under SFAS 115 (see Note 1).
On January 10, 2005, Worldspan redeemed the subordinated
promissory note for $36 million, which represented the
carrying value of the note as of December 31, 2004. As part
of this transaction, we agreed that Worldspan may elect to
prepay all of the remaining Worldspan Credits at any time on or
before December 31, 2005. The prepayment amounts range from
approximately $64 million to approximately $72 million
depending on when the election is made.
Our equity earnings from this investment totaled
$18 million and $43 million for the years ended
December 31, 2003 and 2002, respectively. We also received
cash dividends from Worldspan of $44 million and
$40 million for the years ended December 31, 2003 and
2002, respectively. At December 31, 2002, our Worldspan
investment of $57 million was recorded in other noncurrent
assets on our Consolidated Balance Sheet.
Worldspan provides us with computer reservation and related
services for which we paid approximately $90 million for
the six-months ended June 30, 2003 and approximately
$180 million for the year ended December 31, 2002. As
discussed above, we sold our equity interest in Worldspan on
June 30, 2003.
During November 2004, we sold our remaining ownership and voting
interest in Orbitz for approximately $143 million. We
recognized an approximately $123 million gain on this
transaction.
During December 2003, Orbitz completed its initial public
offering and the founding airlines of Orbitz, including us, sold
a portion of their Orbitz shares. We received $33 million
from our sale of Orbitz shares. Additionally, we recorded
(1) a SAB 51 gain of $18 million, net of tax, in
additional paid-in capital on our Consolidated Balance Sheet
(see Note 1 for our SAB 51 accounting policy);
(2) a $28 million gain ($17 million net of tax)
in other income (expense) on our Consolidated Statement of
Operations from our sale of Orbitz shares; and (3) a
$4 million loss ($2 million net of tax) in other
income (expense) on our Consolidated Statement of
Operations from previously unrecognized Orbitz losses since our
recorded investment in Orbitz was zero prior to its initial
public offering.
As a result of our sale of a portion of our Orbitz shares in
December 2003, we had a 13% ownership interest and an 18% voting
interest in Orbitz. Prior to that transaction, we had an 18%
ownership and voting interest in Orbitz. We accounted for our
investment in Orbitz under the equity method because we had the
ability to exercise significant influence, but not control, over
that company’s financial and operating policies. This
ability was evidenced by, among other things, our right to
appoint at least one of our senior officers to the Board of
Directors of Orbitz.
For the years ended December 31, 2004, 2003 and 2002, the
gains (losses) recorded from our investment in Orbitz were not
material to our Consolidated Statements of Operations.
F-54
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
| Note 17. |
Earnings (Loss) per Share (“EPS”) |
We calculate basic earnings (loss) per share by dividing the net
income (loss) available to common shareowners by the weighted
average number of common shares outstanding. Diluted earnings
(loss) per share includes the dilutive effects of stock options
and convertible securities. To the extent stock options and
convertible securities are anti-dilutive, they are excluded from
the calculation of diluted earnings (loss) per share.
The following table shows our computation of basic and diluted
loss per share:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Years Ended December 31, |
|
|
|
|
|
|
| (in millions, except per share data) |
|
2004 |
|
2003 |
|
2002 |
| |
|
Basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(5,198 |
) |
|
$ |
(773 |
) |
|
$ |
(1,272 |
) |
|
Dividends on allocated Series B ESOP Convertible Preferred
Stock
|
|
|
(19 |
) |
|
|
(17 |
) |
|
|
(15 |
) |
| |
|
Net loss available to common shareowners
|
|
$ |
(5,217 |
) |
|
$ |
(790 |
) |
|
$ |
(1,287 |
) |
|
Weighted average shares outstanding
|
|
|
127.0 |
|
|
|
123.4 |
|
|
|
123.3 |
|
| |
|
Basic and diluted loss per share
|
|
$ |
(41.07 |
) |
|
$ |
(6.40 |
) |
|
$ |
(10.44 |
) |
| |
| |
For the years ended December 31, 2004, 2003 and 2002, we
excluded from our loss per share calculations all common stock
equivalents, which primarily include stock options, our ESOP
Preferred Stock and shares of common stock issuable upon
conversion of our 8.0% Notes and our
27/8% Notes
(as applicable), because their effect on loss per share was
anti-dilutive. The common stock equivalents totaled
78.8 million, 51.9 million and 61.5 million for
the years ended December 31, 2004, 2003 and 2002,
respectively.
During 2004, we adopted EITF 04-08, which is effective for
reporting periods ending after December 15, 2004, and
requires the restatement of prior period diluted earnings per
share amounts for contingently convertible securities. We have
outstanding two classes of contingently convertible debt
securities: (1) 8.0% Notes, which we issued in June
2003, and
(2) 27/8% Notes,
which we issued in February 2004. See Note 6 for additional
information about these convertible notes.
Due to the adoption of EITF 04-08 as of December 31,
2004, we restated 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 the 8.0% Notes. All other quarterly and
annual diluted EPS calculations for periods ending before
December 31, 2004 were not impacted by our adoption of
EITF 04-08 due to the anti-dilutive nature of these
securities. Additionally, we will include the shares of common
stock issuable upon conversion of the 8.0% Notes and
27/8% Notes
in our future diluted earnings per share calculations, unless
the inclusion of these shares is anti-dilutive.
|
|
| Note 18. |
Government Compensation and Reimbursements |
|
|
|
Appropriations Act Reimbursements |
On April 16, 2003, President Bush signed into law the
Emergency Wartime Supplemental Appropriations Act
(“Appropriations Act”), which provides for, among
other things:
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Payments for Certain Security
Fees. Payments totaling
$2.3 billion from the U.S. government to U.S. air
carriers for the reimbursement of certain passenger and air
carrier security fees.
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Executive Compensation
Limits. A requirement
that certain airlines which receive the security fee payments
described above enter into a contract with the Transportation
Security Administration (“TSA”) agreeing that the air
carrier will not provide total cash compensation (as defined in
the Appropriations Act) during the 12-month period beginning
April 1, 2003 to certain executive officers during its
fiscal year 2002 in an amount greater than the annual salary
paid to that officer with respect to the air carrier’s
fiscal year 2002. An air carrier that violates this
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F-55
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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agreement is required to repay its security fee payments
described above. We are subject to this requirement and have
entered into the required contract with the TSA. |
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Compensation for Strengthening Flight Deck Doors.
Payments totaling $100 million from the
U.S. government to compensate air carriers for the direct
costs associated with the strengthening of flight deck doors and
locks on aircraft. |
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Suspension of Passenger and Air Carrier Security Fees.
The suspension of the TSA’s collection of passenger and air
carrier security fees during the period beginning June 1,
2003 and ending September 30, 2003. |
During 2003, we received payments under the Appropriations Act
totaling (1) $398 million as reimbursement for
passenger and air carrier security fees, which was recorded as a
reduction of operating expenses in our 2003 Consolidated
Statement of Operations and (2) $13 million related to
the strengthening of flight deck doors, which was recorded as a
reduction to previously capitalized costs.
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Stabilization Act Compensation |
On September 22, 2001, the Air Transportation Safety and
System Stabilization Act (“Stabilization Act”) became
effective. The Stabilization Act was intended to preserve the
viability of the U.S. air transportation system following
the terrorist attacks on September 11, 2001 by, among other
things, (1) providing for payments from the
U.S. Government totaling $5 billion to compensate
U.S. air carriers for losses incurred from
September 11, 2001 through December 31, 2001 as a
result of the September 11 terrorist attacks and
(2) permitting the Secretary of Transportation to sell
insurance to U.S. air carriers. See Note 8 for
additional information about war-risk insurance.
We received $668 million as compensation under the
Stabilization Act, including $112 million in the year ended
December 31, 2002. Due to uncertainties regarding the
U.S. government’s calculation of compensation, we
recognized $634 million of this amount in our 2001
Consolidated Statement of Operations. We recognized the
remaining $34 million of this compensation in our 2002
Consolidated Statement of Operations.
F-56
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Note 19. Valuation and
Qualifying Accounts
The following table shows our valuation and qualifying accounts
as of December 31, 2004, 2003 and 2002, and the associated
activity for the years then ended:
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Allowance for: |
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Obsolescence |
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of Expendable |
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Restructuring |
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Uncollectible |
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Parts & |
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Leased |
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and Other |
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Accounts |
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Supplies |
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Deferred Tax |
| (in millions) |
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Aircraft(1) |
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Charges(1) |
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Receivable(2) |
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Inventory(3) |
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Assets |
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Balance at December 31, 2001
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$ |
70 |
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$ |
121 |
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$ |
43 |
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$ |
139 |
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$ |
16 |
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Additional costs and expenses
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— |
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90 |
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21 |
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51 |
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— |
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Payments and deductions
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(70 |
) |
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(72 |
) |
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(31 |
) |
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(7 |
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— |
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Balance at December 31, 2002
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— |
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139 |
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33 |
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183 |
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16 |
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Additional costs and expenses
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— |
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— |
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34 |
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11 |
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9 |
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Payments and deductions
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— |
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(86 |
) |
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(29 |
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(11 |
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— |
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Balance at December 31, 2003
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— |
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53 |
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38 |
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183 |
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25 |
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Additional costs and expenses
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— |
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42 |
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32 |
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15 |
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2,508 |
(4) |
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Payments and deductions
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— |
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(15 |
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(32 |
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(14 |
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(133 |
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Balance at December 31, 2004
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$ |
— |
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$ |
80 |
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$ |
38 |
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$ |
184 |
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$ |
2,400 |
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| (1) |
See Notes 14 and 15 for additional information related to
leased aircraft and restructuring and other charges. |
| (2) |
The payments and deductions related to the allowance for
uncollectible accounts receivable represent the write-off of
accounts considered to be uncollectible, less recoveries. |
| (3) |
These additional costs and expenses in 2002 include the charges
related to the writedown of certain aircraft spare parts
inventory to their net realizable value (see Note 14). |
| (4) |
Approximately $30 million of this amount was recorded in
accumulated other comprehensive loss on our 2004 Consolidated
Balance Sheet (see Note 12). |
Note 20. Subsequent
Events
On March 4, 2005, we exchanged $176 million principal
amount of enhanced equipment trust certificates due in November
2005 (“Exchanged Certificates”) for a like aggregate
principal amount of enhanced equipment trust certificates due in
September 2006 and January 2008 (“Replacement
Certificates”). The interest rate on the Exchanged and
Replacement Certificates is 9.11%.
Due to the completion of this transaction, the $176 million
principal amount of debt maturities is recorded in the tables in
Note 6 in accordance with the maturity dates of the
Replacement Certificates.
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| Note 21. |
Quarterly Financial Data (Unaudited) |
The following table summarizes our unaudited quarterly results
of operations for 2004 and 2003:
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Three Months Ended |
| 2004 |
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| (in millions, except per share data) |
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March 31 |
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June 30 |
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September 30 |
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December 31 |
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Operating revenues
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$ |
3,529 |
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$ |
3,961 |
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$ |
3,871 |
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$ |
3,641 |
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Operating loss
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$ |
(388 |
) |
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$ |
(241 |
) |
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$ |
(423 |
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$ |
(2,256 |
) |
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Net loss
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$ |
(383 |
) |
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$ |
(1,963 |
) |
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$ |
(646 |
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$ |
(2,206 |
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Basic loss per share
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$ |
(3.12 |
) |
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$ |
(15.79 |
) |
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$ |
(5.16 |
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$ |
(16.58 |
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Diluted loss per share
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$ |
(3.12 |
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$ |
(15.79 |
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$ |
(5.16 |
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$ |
(16.58 |
) |
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F-57
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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Three Months Ended |
| 2003 |
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| (in millions, except per share data) |
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March 31 |
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June 30(3) |
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September 30 |
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December 31 |
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Operating revenues
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$ |
3,324 |
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$ |
3,496 |
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$ |
3,657 |
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$ |
3,610 |
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Operating income (loss)
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$ |
(535 |
) |
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$ |
196 |
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$ |
(81 |
) |
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$ |
(365 |
) |
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Net income (loss)
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$ |
(466 |
) |
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$ |
184 |
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$ |
(164 |
) |
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$ |
(327 |
) |
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Basic income (loss) per
share(1)
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$ |
(3.81 |
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$ |
1.46 |
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$ |
(1.36 |
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$ |
(2.69 |
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Diluted earnings (loss) per
share(1)
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$ |
(3.81 |
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$ |
1.37 |
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$ |
(1.36 |
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$ |
(2.69 |
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| (1) |
The sum of the quarterly earnings (loss) per share does not
equal the annual loss per share due to changes in average shares
outstanding. |
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| (2) |
Diluted earnings per share for the June 2003 quarter reflects
the changes from the adoption of EITF 04-08 (see
Note 17 for additional information about this guidance as
well as the change in the earnings per share calculation). Due
to the adoption of EITF 04-08, our diluted earnings per
share decreased by $0.03 per share during that quarter. |
The comparability of our financial results during 2004 and 2003
was materially impacted by certain events, as discussed below:
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During 2004, primarily in the June
2004 quarter, we recorded a valuation allowance against
substantially all of our net deferred tax assets. See
Note 9 for additional information about this charge.
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In December 2004, we recorded
impairment charges related to goodwill and indefinite-lived
intangible assets. See Note 5 for additional information
about these charges.
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During 2004, we recorded a gain as
well as charges related to restructuring, asset writedowns,
pension settlements and related items, net. See Note 14 for
additional information about these items.
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During the March 2003 and December
2003 quarters, we recorded certain pension and postretirement
related charges. See Note 10 for additional information
about these charges.
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In June 2003, we received
Appropriations Act reimbursements from the U.S. government
for certain passenger and air carrier security fees. See
Note 18 for additional information about this matter.
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In 2004, we sold our investment in
Orbitz, recognizing a gain in the December 2004 quarter. During
2003, we recorded gains on the sale of certain investments.
These gains primarily related to (1) the sale of our
investment in Worldspan in June 2003 and (2) our sale of a
portion of our investment in Orbitz in December 2003. See
Note 16 for additional information about these sales.
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F-58