Form 10-Q
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
R QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For
the quarterly period ended September 30, 2006
Or
£ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
Commission
File Number 1-5424
DELTA
AIR LINES, INC.
State
of
Incorporation: Delaware
IRS
Employer Identification No.: 58-0218548
P.O.
Box
20706, Atlanta, Georgia 30320-6001
Telephone:
(404) 715-2600
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (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
R
No
£
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer £
Accelerated filer R
Non-accelerated filer £
Indicate
by check mark whether the registrant is a shell company (as defined
in
Rule
12b-2 of the Exchange Act).
Yes
£
No
R
Number
of
shares outstanding by each class of common stock, as of October 31,
2006:
Common
Stock, $0.01 par value - 197,335,938 shares outstanding
This
document is also available on our website at
http://investor.delta.com/edgar.cfm.
FORWARD-LOOKING
STATEMENTS
Statements
in this Form 10-Q (or otherwise made by us or on our behalf) that are not
historical facts, including statements regarding 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 1A. Risk Factors” of our
Annual Report on Form 10-K for the fiscal year ended December 31, 2005 (“Form
10-K”) and “Item 1A. Risk Factors” in Part II of this Form 10-Q. 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.
OTHER
INFORMATION
On
September 14, 2005 (the “Petition Date”), we and substantially all of our
subsidiaries filed voluntary petitions for reorganization under Chapter 11
of
the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States
Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”).
No assurance can be given as to what values, if any, will be ascribed in our
bankruptcy proceedings to our various pre-petition liabilities, common stock
and
other securities. We believe that our currently outstanding common stock will
have no value and will be canceled under any plan of reorganization we propose
and that the value of our various pre-petition liabilities and other securities
is highly speculative. Accordingly, we urge that caution be exercised with
respect to existing and future investments in any of these liabilities or
securities. In addition, trading of our common stock on the New York Stock
Exchange was suspended on October 13, 2005, and our common stock was delisted
from the New York Stock Exchange on November 30, 2005. Additional information
about our Chapter 11 filing is available on the Internet at www.delta.com/restructure.
Bankruptcy Court filings and claims information are available at www.deltadocket.com.
Unless
otherwise indicated, the terms “Delta,” the “Company,” “we,” “us,” and “our”
refer to Delta Air Lines, Inc. and its subsidiaries.
PART
I. FINANCIAL INFORMATION
|
|
|
|
|
|
|
|
|
|
Item
1. Financial Statements
|
|
|
|
|
DELTA
AIR LINES, INC.
|
Debtor
and Debtor-In-Possession
|
Consolidated
Balance Sheets
|
|
|
|
|
|
|
ASSETS
|
|
September
30,
|
|
December
31,
|
|
(in
millions)
|
|
2006
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,283
|
|
$
|
2,008
|
|
Short-term
investments
|
|
|
525
|
|
|
-
|
|
Restricted
cash
|
|
|
1,021
|
|
|
870
|
|
Accounts
receivable, net of an allowance for uncollectible accounts
|
|
|
|
|
|
|
|
of
$38 at September 30, 2006 and $41 at December 31, 2005
|
|
|
999
|
|
|
819
|
|
Expendable
parts and supplies inventories, net of an allowance for
|
|
|
|
|
|
|
|
obsolescence
of $176 at September 30, 2006 and $201 at December 31,
2005
|
|
|
178
|
|
|
172
|
|
Prepaid
expenses and other
|
|
|
875
|
|
|
611
|
|
Total
current assets
|
|
|
5,881
|
|
|
4,480
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT:
|
|
|
|
|
|
|
|
Flight
equipment
|
|
|
17,819
|
|
|
18,591
|
|
Accumulated
depreciation
|
|
|
(6,608
|
)
|
|
(6,621
|
)
|
Flight
equipment, net
|
|
|
11,211
|
|
|
11,970
|
|
|
|
|
|
|
|
|
|
Ground
property and equipment
|
|
|
4,666
|
|
|
4,791
|
|
Accumulated
depreciation
|
|
|
(2,898
|
)
|
|
(2,847
|
)
|
Ground
property and equipment, net
|
|
|
1,768
|
|
|
1,944
|
|
|
|
|
|
|
|
|
|
Flight
and ground equipment under capital leases
|
|
|
466
|
|
|
535
|
|
Accumulated
amortization
|
|
|
(130
|
)
|
|
(213
|
)
|
Flight
and ground equipment under capital leases, net
|
|
|
336
|
|
|
322
|
|
|
|
|
|
|
|
|
|
Advance
payments for equipment
|
|
|
56
|
|
|
44
|
|
|
|
|
|
|
|
|
|
Total
property and equipment, net
|
|
|
13,371
|
|
|
14,280
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS:
|
|
|
|
|
|
|
|
Goodwill
|
|
|
227
|
|
|
227
|
|
Operating
rights and other intangibles, net of accumulated
amortization
|
|
|
|
|
|
|
|
of
$193 at September 30, 2006 and $189 at December 31, 2005
|
|
|
70
|
|
|
74
|
|
Other
noncurrent assets
|
|
|
1,132
|
|
|
978
|
|
Total
other assets
|
|
|
1,429
|
|
|
1,279
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
20,681
|
|
$
|
20,039
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
|
|
|
|
|
|
|
|
DELTA
AIR LINES, INC.
|
Debtor
and Debtor-In-Possession
|
Consolidated
Balance Sheets
|
|
|
|
|
|
|
LIABILITIES
AND SHAREOWNERS' DEFICIT
|
|
September
30,
|
|
December
31,
|
|
(in
millions, except share data)
|
|
2006
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
Current
maturities of long-term debt and capital leases
|
|
$
|
1,359
|
|
$
|
1,186
|
|
Accounts
payable, deferred credits and other accrued liabilities
|
|
|
1,756
|
|
|
1,407
|
|
Air
traffic liability
|
|
|
2,053
|
|
|
1,712
|
|
Taxes
payable
|
|
|
537
|
|
|
525
|
|
Accrued
salaries and related benefits
|
|
|
408
|
|
|
435
|
|
Total
current liabilities
|
|
|
6,113
|
|
|
5,265
|
|
|
|
|
|
|
|
|
|
NONCURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
Long-term
debt and capital leases
|
|
|
6,422
|
|
|
6,557
|
|
Deferred
revenue and credits
|
|
|
326
|
|
|
186
|
|
Other
|
|
|
748
|
|
|
299
|
|
Total
noncurrent liabilities
|
|
|
7,496
|
|
|
7,042
|
|
|
|
|
|
|
|
|
|
LIABILITIES
SUBJECT TO COMPROMISE (Note 1)
|
|
|
20,943
|
|
|
17,380
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES (Notes 1, 4, 5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMPLOYEE
STOCK OWNERSHIP PLAN PREFERRED STOCK:
|
|
|
|
|
|
|
|
Series
B ESOP Convertible Preferred Stock:
|
|
|
|
|
|
|
|
$1.00
par value, $72.00 stated and liquidation value, no shares
|
|
|
|
|
|
|
|
issued
and outstanding at September 30, 2006; and 4,667,568 shares issued
|
|
|
|
|
|
|
|
and
outstanding at December 31, 2005
|
|
|
-
|
|
|
336
|
|
Unearned
compensation under employee stock ownership plan
|
|
|
-
|
|
|
(89
|
)
|
Total
Employee Stock Ownership Plan Preferred Stock
|
|
|
-
|
|
|
247
|
|
|
|
|
|
|
|
|
|
SHAREOWNERS'
DEFICIT:
|
|
|
|
|
|
|
|
Common
stock:
|
|
|
|
|
|
|
|
$0.01
par value, 900,000,000 shares authorized, 202,081,648 shares issued
|
|
|
|
|
|
|
|
at
September 30, 2006 and December 31, 2005
|
|
|
2
|
|
|
2
|
|
Additional
paid-in capital
|
|
|
1,561
|
|
|
1,635
|
|
Accumulated
deficit
|
|
|
(12,433
|
)
|
|
(8,209
|
)
|
Accumulated
other comprehensive loss
|
|
|
(2,777
|
)
|
|
(2,722
|
)
|
Treasury
stock at cost, 4,745,710 shares at September 30, 2006 and
|
|
|
|
|
|
|
|
12,738,630
shares at December 31, 2005
|
|
|
(224
|
)
|
|
(601
|
)
|
Total
shareowners' deficit
|
|
|
(13,871
|
)
|
|
(9,895
|
)
|
|
|
|
|
|
|
|
|
Total
liabilities and shareowners' deficit
|
|
$
|
20,681
|
|
$
|
20,039
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DELTA
AIR LINES, INC.
|
Debtor
and Debtor-In-Possession
|
Consolidated
Statements of Operations
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
(in
millions, except per share data)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
REVENUE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline
|
|
$
|
3,227
|
|
$
|
3,041
|
|
$
|
8,992
|
|
$
|
8,735
|
|
Regional
affiliates
|
|
|
1,016
|
|
|
850
|
|
|
2,909
|
|
|
2,370
|
|
Cargo
|
|
|
121
|
|
|
128
|
|
|
372
|
|
|
387
|
|
Other,
net
|
|
|
295
|
|
|
289
|
|
|
760
|
|
|
771
|
|
Total
operating revenue
|
|
|
4,659
|
|
|
4,308
|
|
|
13,033
|
|
|
12,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft
fuel
|
|
|
1,242
|
|
|
1,203
|
|
|
3,282
|
|
|
3,141
|
|
Salaries
and related costs
|
|
|
1,008
|
|
|
1,235
|
|
|
3,188
|
|
|
3,944
|
|
Contract
carrier arrangements
|
|
|
724
|
|
|
313
|
|
|
1,993
|
|
|
728
|
|
Depreciation
and amortization
|
|
|
293
|
|
|
317
|
|
|
912
|
|
|
956
|
|
Contracted
services
|
|
|
273
|
|
|
275
|
|
|
791
|
|
|
817
|
|
Landing
fees and other rents
|
|
|
197
|
|
|
216
|
|
|
680
|
|
|
658
|
|
Passenger
commissions and other selling expenses
|
|
|
233
|
|
|
244
|
|
|
679
|
|
|
745
|
|
Aircraft
maintenance materials and outside repairs
|
|
|
183
|
|
|
215
|
|
|
566
|
|
|
598
|
|
Passenger
service
|
|
|
95
|
|
|
90
|
|
|
247
|
|
|
269
|
|
Aircraft
rent
|
|
|
70
|
|
|
141
|
|
|
238
|
|
|
435
|
|
Restructuring,
asset writedowns, pension settlements and related items,
net
|
|
|
(2
|
)
|
|
85
|
|
|
17
|
|
|
712
|
|
Other
|
|
|
175
|
|
|
214
|
|
|
388
|
|
|
586
|
|
Total
operating expenses
|
|
|
4,491
|
|
|
4,548
|
|
|
12,981
|
|
|
13,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
INCOME (LOSS)
|
|
|
168
|
|
|
(240
|
)
|
|
52
|
|
|
(1,326
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
(EXPENSE) INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense (contractual interest expense totaled $299 and $914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
the three and nine months ended September 30, 2006, respectively,
and $298
and $859 for the three and nine months ended September 30, 2005,
respectively)
|
|
|
(222
|
)
|
|
(277
|
)
|
|
(663
|
)
|
|
(833
|
)
|
Interest
income
|
|
|
16
|
|
|
17
|
|
|
46
|
|
|
45
|
|
Miscellaneous,
net
|
|
|
(31
|
)
|
|
-
|
|
|
(12
|
)
|
|
(1
|
)
|
Total
other expense, net
|
|
|
(237
|
)
|
|
(260
|
)
|
|
(629
|
)
|
|
(789
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
BEFORE REORGANIZATION ITEMS, NET
|
|
|
(69
|
)
|
|
(500
|
)
|
|
(577
|
)
|
|
(2,115
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REORGANIZATION
ITEMS, NET (Note 1)
|
|
|
98
|
|
|
(607
|
)
|
|
(3,685
|
)
|
|
(607
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) BEFORE INCOME TAXES
|
|
|
29
|
|
|
(1,107
|
)
|
|
(4,262
|
)
|
|
(2,722
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
TAX BENEFIT (PROVISION)
|
|
|
23
|
|
|
(23
|
)
|
|
40
|
|
|
139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
|
52
|
|
|
(1,130
|
)
|
|
(4,222
|
)
|
|
(2,583
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PREFERRED
STOCK DIVIDENDS
|
|
|
-
|
|
|
(4
|
)
|
|
(2
|
)
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREOWNERS
|
|
$
|
52
|
|
$
|
(1,134
|
)
|
$
|
(4,224
|
)
|
$
|
(2,598
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
EARNINGS (LOSS) PER SHARE
|
|
$
|
0.26
|
|
$
|
(6.73
|
)
|
$
|
(21.53
|
)
|
$
|
(17.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
EARNINGS (LOSS) PER SHARE
|
|
$
|
0.22
|
|
$
|
(6.73
|
)
|
$
|
(21.53
|
)
|
$
|
(17.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DELTA
AIR LINES, INC.
|
Debtor
and Debtor-In-Possession
|
Condensed
Consolidated Statements of Cash Flows
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
(in
millions)
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
NET
CASH PROVIDED BY OPERATING ACTIVITIES
|
|
$
|
1,044
|
|
$
|
163
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Property
and equipment additions:
|
|
|
|
|
|
|
|
Flight
equipment, including advance payments
|
|
|
(171
|
)
|
|
(535
|
)
|
Ground
property and equipment
|
|
|
(88
|
)
|
|
(196
|
)
|
Proceeds
from sale of flight equipment
|
|
|
34
|
|
|
425
|
|
Proceeds
from sale of wholly owned subsidiary, net of
|
|
|
|
|
|
|
|
cash
remaining with subsidiary
|
|
|
-
|
|
|
297
|
|
Increase
in restricted cash
|
|
|
(145
|
)
|
|
(891
|
)
|
Other,
net
|
|
|
4
|
|
|
81
|
|
Net
cash used in investing activities
|
|
|
(366
|
)
|
|
(819
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Payments
on long-term debt and capital lease obligations
|
|
|
(398
|
)
|
|
(1,443
|
)
|
Proceeds
from borrowings under long-term obligations
|
|
|
-
|
|
|
2,045
|
|
Other,
net
|
|
|
(5
|
)
|
|
(48
|
)
|
Net
cash (used in) provided by financing activities
|
|
|
(403
|
)
|
|
554
|
|
|
|
|
|
|
|
|
|
Net
Increase (Decrease) in Cash and Cash Equivalents
|
|
|
275
|
|
|
(102
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
2,008
|
|
|
1,463
|
|
Cash
and cash equivalents at end of period
|
|
$
|
2,283
|
|
$
|
1,361
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH PAID (RECEIVED) FOR:
|
|
|
|
|
|
|
|
Interest
paid (net of amounts capitalized)
|
|
$
|
548
|
|
$
|
596
|
|
Professional
fee disbursements due to bankruptcy
|
|
|
73
|
|
|
-
|
|
Interest
received due to bankruptcy
|
|
|
(79
|
)
|
|
(1
|
)
|
Cash
received from aircraft renegotiation
|
|
|
(10
|
)
|
|
-
|
|
Income
taxes, net
|
|
|
(1
|
)
|
|
3
|
|
|
|
|
|
|
|
|
|
NON-CASH
TRANSACTIONS:
|
|
|
|
|
|
|
|
Aircraft
delivered under seller-financing
|
|
$
|
-
|
|
$
|
251
|
|
Flight
equipment under capital leases
|
|
|
140
|
|
|
-
|
|
Current
maturities of long-term debt exchanged for shares of common
stock
|
|
|
-
|
|
|
45
|
|
Debt
extinguishment from aircraft renegotiation
|
|
|
171
|
|
|
-
|
|
Dividends
on Series B ESOP Convertible Preferred Stock
|
|
|
2
|
|
|
10
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
|
|
|
|
|
|
|
|
DELTA
AIR LINES, INC.
Debtor
and Debtor-In-Possession
Notes
to the Condensed Consolidated Financial Statements
September
30, 2006
(Unaudited)
1.
CHAPTER 11 PROCEEDINGS
General
Information
Delta
Air
Lines, Inc., a Delaware corporation, is a major air carrier that provides
air
transportation for passengers and cargo throughout the United States (“U.S.”)
and around the world. Our Condensed Consolidated Financial Statements include
the accounts of Delta Air Lines, Inc. and our wholly owned subsidiaries,
including Comair, Inc. (“Comair”), which are collectively referred to as
Delta.
On
September 14, 2005 (the “Petition Date”), we and substantially all of our
subsidiaries (collectively, the “Debtors”) filed voluntary petitions for
reorganization under Chapter 11 of the United States Bankruptcy Code (the
“Bankruptcy Code”), in the United States Bankruptcy Court for the Southern
District of New York (the “Bankruptcy Court”). The reorganization cases are
being jointly administered under the caption “In re Delta Air Lines, Inc., et
al., Case No. 05-17923-ASH.”
The
Debtors are operating as “debtors-in-possession” under the jurisdiction of the
Bankruptcy Court and in accordance with the applicable provisions of the
Bankruptcy Code. In general, as debtors-in-possession, the Debtors are
authorized under Chapter 11 to continue to operate as an ongoing business,
but
may not engage in transactions outside the ordinary course of business without
the prior approval of the Bankruptcy Court.
Our
business plan is intended to make Delta a simpler, more efficient and customer
focused airline with an improved financial condition. As part of our Chapter
11
reorganization, we are seeking $3 billion in annual financial benefits (revenue
enhancements and cost reductions) by the end of 2007 from revenue and network
improvements, savings to be achieved through the Chapter 11 restructuring
process, and reduced Mainline employee cost. This amount is in addition to
the
implementation of initiatives to achieve $5 billion in annual financial
benefits by the end of 2006, as compared to 2002, under the transformation
plan we announced in 2004.
Notices
to Creditors; Effect of Automatic Stay.
Shortly
after the Petition Date, the Debtors began notifying all known current or
potential creditors of the Chapter 11 filing. Subject to certain exceptions
under the Bankruptcy Code, the Debtors’ Chapter 11 filing automatically
enjoined, or stayed, the continuation of any judicial or administrative
proceedings or other actions against the Debtors or their property to recover
on, collect or secure a claim arising prior to the Petition Date. Thus, for
example, most creditor actions to obtain possession of property from the
Debtors, or to create, perfect or enforce any lien against the property of
the
Debtors, or to collect on monies owed or otherwise exercise rights or remedies
with respect to a pre-petition claim, are enjoined unless and until the
Bankruptcy Court lifts the automatic stay. Vendors are being paid for goods
furnished and services provided after the Petition Date in the ordinary course
of business.
Appointment
of Creditors Committee.
As
required by the Bankruptcy Code, the United States Trustee for the Southern
District of New York appointed an official committee of unsecured creditors
(the
“Creditors Committee”). The Creditors Committee and its legal representatives
have a right to be heard on all matters that come before the Bankruptcy Court
with respect to the Debtors. The Creditors Committee has been generally
supportive of the Debtors’ positions on various matters; however, there can be
no assurance that the Creditors Committee will support the Debtors’ positions on
matters to be presented to the Bankruptcy Court in the future or on the Debtors’
plan of reorganization, once proposed. Disagreements between the Debtors
and the
Creditors Committee could protract the Chapter 11 proceedings, negatively
impact
the Debtors’ ability to operate and delay the Debtors’ emergence from the
Chapter 11 proceedings.
Rejection
of Executory Contracts.
Under
Section 365 and other relevant sections of the Bankruptcy Code, the Debtors
may
assume, assume and assign, or reject certain executory contracts and unexpired
leases, including, without limitation, leases of real property, aircraft
and
aircraft engines, subject to the approval of the Bankruptcy Court and certain
other conditions. By order of the Bankruptcy Court, our Section 365 rights
to
assume, assume and assign, or reject unexpired leases of non-residential
real
estate expire on April 16, 2007 (subject to further extension by the Bankruptcy
Court). In general, rejection of an executory contract or unexpired lease
is
treated as a pre-petition breach of the executory contract or unexpired lease
in
question and, subject to certain exceptions, relieves the Debtors of performing
their future obligations under such executory contract or unexpired lease
but
entitles the contract counterparty or lessor to a pre-petition general unsecured
claim for damages caused by such deemed breach. Counterparties to such rejected
contracts or leases can file claims against the Debtors’ estate for such
damages. Generally, the assumption of an executory contract or unexpired
lease
requires the Debtors to cure existing defaults under such executory contract
or
unexpired lease.
Any
description of an executory contract or unexpired lease elsewhere in these
Notes, including where applicable our express termination rights or a
quantification of our obligations, must be read in conjunction with, and
is
qualified by, any overriding rejection rights we have under Section 365 of
the
Bankruptcy Code.
We
expect
that liabilities subject to compromise and resolution in the Chapter 11
proceedings will arise in the future as a result of damage claims created
by the
Debtors’ rejection of various executory contracts and unexpired leases. Due to
the uncertain nature of many of the potential rejection claims, the magnitude
of
such claims is not reasonably estimable at this time. Such claims may be
material (see “Liabilities Subject to Compromise” below).
Special
Protection Applicable to Leases and Secured Financing of Aircraft and
Aircraft Equipment.
Notwithstanding the general discussion above of the impact of the automatic
stay, under Section 1110 of the Bankruptcy Code (“Section 1110”), certain
secured parties, lessors and conditional sales vendors may take possession
of
certain qualifying aircraft, aircraft engines and other aircraft-related
equipment that are leased or subject to a security interest or conditional
sale
contract pursuant to their agreement with the Debtors. Section 1110 provides
that, unless the Debtors agree to perform under the agreement and cure all
defaults within 60 days after the Petition Date, such financing party can
take
possession of such equipment.
Section
1110 effectively shortens the automatic stay period to 60 days with respect
to
Section 1110 eligible aircraft, engines and related equipment, subject to
the
following two conditions. First, with court approval, the debtor may extend
the
60-day period by agreement of the relevant financing party. Alternatively,
the
debtor may elect, with court approval, to perform all of the obligations
under
the applicable financing and cure any defaults thereunder as required by
the
Bankruptcy Code (which does not preclude later rejecting any related lease).
In
the absence of either such arrangement, the financing party may take possession
of the property and enforce any of its contractual rights or remedies to
sell,
lease or otherwise retain or dispose of such equipment.
The
60-day period under Section 1110 expired on November 14, 2005. We have entered
into agreements to extend the automatic stay or elected to perform under
the
applicable financing with respect to a substantial number of the aircraft
in our
fleet. While we have reached agreement with respect to certain of our aircraft
obligations and are negotiating with respect to many of our other aircraft
obligations, the ultimate outcome of these negotiations cannot be predicted
with
certainty. To the extent we are unable to reach definitive agreements with
aircraft financing parties, those parties may seek to repossess aircraft.
The
loss of a significant number of aircraft could result in a material adverse
effect on our financial and operating performance.
Request
for Adequate Protection.
Certain
aircraft financing parties have filed motions with the Bankruptcy Court seeking
adequate protection against the risk that their aircraft collateral could
lose
value while in the possession of or while being used by the Debtors. The
Bankruptcy Court could determine that such parties are not adequately protected
and that the Debtors must pay certain amounts, which could be material, in
order
to continue using the equipment.
Collective
Bargaining Agreements.
Section
1113 of the Bankruptcy Code permits a debtor to reject its collective bargaining
agreements (“CBAs”) with its unions if the debtor first satisfies several
statutorily prescribed substantive and procedural prerequisites and obtains
the
Bankruptcy Court’s approval of the rejection. The debtor must make a proposal to
modify its existing CBAs based on the most complete and reliable information
available at the time, must bargain in good faith and must share relevant
information with its unions. The proposed modifications must be necessary
to
permit the reorganization of the debtor and must ensure that all affected
parties are treated fairly and equitably relative to the creditors and the
debtor. Rejection is appropriate if the unions refuse to agree to the debtors’
necessary proposals “without good cause” and the balance of the equities favors
rejection.
The
Air
Line Pilots Association, International (“ALPA”) is the collective bargaining
representative of Delta’s approximately 6,800 pilots. Because we were not able
to reach a consensual agreement with ALPA during negotiations in the fall
of
2005 to amend our collective bargaining agreement with ALPA to reduce our
pilot
labor costs, on November 1, 2005, we filed a motion with the Bankruptcy Court
under Section 1113 of the Bankruptcy Code to reject the collective bargaining
agreement. We continued to negotiate with ALPA after the filing of this motion
and, as described below, reached a comprehensive agreement that was ratified
by
Delta pilots and approved by the Bankruptcy Court. The comprehensive agreement
became effective June 1, 2006 and will become amendable on December 31,
2009.
The
comprehensive agreement with ALPA provides us with approximately $280 million
in
average annual pilot labor cost savings between June 1, 2006 and December
31,
2009 due to changes in pay rates, benefits and work rules. It provides, among
other things, that:
|
· |
the
14% hourly pilot wage rate reduction, and other pilot pay and cost
reductions equivalent to an approximately additional 1% hourly
wage rate
reduction, which became effective on December 15, 2005 under an
interim
agreement between Delta and ALPA, will remain in effect, and annual
pay
rate increases will begin in January
2007;
|
|
· |
ALPA
will not oppose termination of the defined benefit pension plan
for pilots
(the “Pilot Plan”);
|
|
· |
ALPA
will have an allowed general, unsecured pre-petition claim in our
bankruptcy proceedings in the amount of $2.1 billion in connection
with a
plan of reorganization;
|
|
· |
if
the Pilot Plan is terminated, we will issue for the benefit of
pilots, on
a date that is no later than 120 days following our emergence from
bankruptcy, senior unsecured notes (“Pilot Notes”) with an aggregate
principal amount equal to $650 million and a term of up to 15 years
from
the issuance date; the full principal amount of the Pilot Notes
will be
due at maturity and the Pilot Notes will bear interest at an annual
rate
established at issuance so that the Pilot Notes trade at par on
the
issuance date (the Pilot Notes are prepayable without penalty at
any time
and, at our option, we may replace all or a portion of the principal
amount of Pilot Notes with cash prior to their
issuance);
|
|
· |
pilots
will participate in a company-wide profit-sharing plan that will
provide
an aggregate payout of 15% of our annual pre-tax income (as defined)
up to
$1.5 billion and 20% of annual pre-tax income over $1.5 billion;
and
|
|
· |
we
will not seek relief under Section 1113 during these Chapter 11
proceedings with respect to the pilot collective bargaining agreement
unless we are in imminent risk of our post-petition financing (as
described in Note 4) being accelerated on account of an imminent
breach of
the financial covenants in such financing, we have used our best
efforts
to seek a waiver of such breach but have not been able to secure
such a
waiver, and we would be unable to remedy such a breach without
labor cost
reductions.
|
On
June
2, 2006, the Pension Benefit Guaranty Corporation (the “PBGC”) appealed to the
U.S. District Court for the Southern District of New York the Bankruptcy
Court’s
order authorizing us to enter into the comprehensive agreement with ALPA.
We
cannot predict the outcome of this appeal.
Comair
has been in negotiations with the International Brotherhood of Teamsters
(“IBT”), which represents Comair’s flight attendants, to reduce Comair’s flight
attendant labor costs. Because Comair was not able to reach a consensual
agreement with the IBT, on February 22, 2006, Comair filed a motion with
the
Bankruptcy Court to reject Comair’s collective bargaining agreement with the
IBT. The Bankruptcy Court denied Comair’s motion on April 26, 2006. Comair
subsequently reduced the level of flight attendant labor cost reductions
it was
seeking, but was still not able to reach an agreement with the IBT. On June
26,
2006, Comair filed a renewed Section 1113 motion to reject its collective
bargaining agreement with the IBT; on July 21, 2006, the Bankruptcy Court
granted the renewed motion. On
August 3, 2006, the IBT appealed the Bankruptcy Court’s ruling to the U.S.
District Court for the Southern District of New York. After additional
negotiations did not result in a consensual agreement between Comair and
the
IBT, on
October 9, 2006, Comair notified the IBT that Comair would implement, on
November 15, 2006, the changes to the flight attendant collective bargaining
agreement that were authorized by the Bankruptcy Court’s granting of the renewed
motion. Comair also filed with the Bankruptcy Court on October 10, 2006 a
motion
to enjoin a strike or other job action by the IBT. Comair subsequently reached
a
tentative agreement with the IBT, which is subject to ratification by
Comair’s flight attendants by November 14, 2006 and approval by the Bankruptcy
Court.
Earlier
this year, Comair had reached agreements with the International Association
of
Machinists and Aerospace Workers (“IAM”), which represents Comair’s maintenance
employees, and with ALPA, which represents Comair’s pilots, to reduce the labor
cost of both of these employee groups. These agreements were, however,
conditioned on Comair’s obtaining certain labor cost reductions under its
collective bargaining agreement with the IBT. Because Comair reduced the
amount
of flight attendant cost reductions it sought and received from the IBT to
a
level below that required by the conditions in the agreements with the IAM
and
ALPA, Comair has been renegotiating the cost reduction agreements with the
IAM
and ALPA.
On
October 18, 2006, Comair reached an agreement with the IAM that is not
conditioned on Comair’s reaching agreements with either the IBT or ALPA. Because
Comair was not able to reach a consensual agreement with ALPA, on November
2,
2006, Comair filed a motion with the Bankruptcy Court under Section 1113
of the
Bankruptcy Code to reject Comair’s collective bargaining agreement with ALPA.
This motion is scheduled for hearing in the Bankruptcy Court on November
27,
2006. We cannot predict the outcome of this matter.
Payment
of Insurance Benefits to Retired Employees.
Section
1114 of the Bankruptcy Code addresses a debtor’s ability to modify certain
retiree disability, medical and death benefits (“Covered Benefits”). To modify
Covered Benefits, the debtor must satisfy certain statutorily prescribed
procedural and substantive prerequisites and obtain either (1) the Bankruptcy
Court’s approval or (2) the consent of an authorized representative of retirees.
To obtain relief under Section 1114, the debtor must make a proposal to modify
the Covered Benefits based on the most complete and reliable information
available at the time, must bargain in good faith and must share relevant
information with the retiree representative. In addition, the proposed
modifications must be necessary to permit the reorganization of the debtor
and
must ensure that all affected parties are treated fairly and equitably relative
to the creditors and the debtor.
The
Bankruptcy Court directed the appointment of two separate retiree committees
under Section 1114, one to serve as the authorized representative of nonpilot
retirees, and the other to serve as the authorized representative of pilot
retirees. On October 19, 2006, the Bankruptcy Court approved agreements that
we
reached with these committees regarding healthcare benefits for current
retirees. These consensual agreements become effective January 1, 2007 and
are
expected to provide us with approximately $50 million in annual cash savings
by
increasing the current retirees’ share of healthcare costs.
Magnitude
of Potential Claims
The
Debtors have filed with the Bankruptcy Court schedules and statements of
financial affairs setting forth, among other things, the assets and liabilities
of the Debtors, subject to the assumptions filed in connection therewith.
All of
the schedules are subject to further amendment or modification.
Bankruptcy
Rule 3003(c)(3) requires the Bankruptcy Court to set the time within which
proofs of claim must be filed in a Chapter 11 case. The Bankruptcy Court
established August 21, 2006 at 5:00 p.m. (the “Bar Date”) as the last date and
time for each person or entity to file a proof of claim against the Debtors.
Subject to certain exceptions, the Bar Date applies to all claims against
the
Debtors that arose prior to the Petition Date.
As
of
October 31, 2006, approximately 7,800 claims totaling about $84 billion have
been filed with the Bankruptcy Court against the Debtors, and we expect new
and
amended claims to be filed in the future, including claims amended to assign
values to claims originally filed with no designated value. Through the claims
resolution process we have identified, and we expect to continue to identify
many claims that we believe should be disallowed by the Bankruptcy Court
because
they are duplicative, have been later amended or superseded, are without
merit,
are overstated or for other reasons. We have filed objections with the
Bankruptcy Court for approximately 880 claims totaling about $905 million,
and we expect to file more objections in the future. The Bankruptcy Court
has
not yet ruled on any objections.
Through
the claims resolution process, differences in amounts scheduled by the Debtors
and claims filed by creditors will be investigated and resolved, including
through the filing of objections with the Bankruptcy Court where appropriate.
In
light of the substantial number and amount of claims filed, the claims
resolution process may take considerable time to complete, and we expect
that it
will continue after our emergence from Chapter 11. Accordingly, the ultimate
number and amount of allowed claims is not presently known, nor can the ultimate
recovery with respect to allowed claims be presently ascertained.
Costs
of Reorganization.
We have
incurred and will continue to incur significant costs associated with our
reorganization. The amount of these costs, which are being expensed as incurred,
are expected to significantly affect our results of operations. For additional
information, see “Reorganization Items, net” in this Note.
Effect
of Filing on Creditors and Shareowners.
Under
the priority scheme established by the Bankruptcy Code, unless creditors
agree
otherwise, pre-petition liabilities and post-petition liabilities must be
satisfied in full before shareowners are entitled to receive any distribution
or
retain any property under a plan of reorganization. The ultimate recovery
to
creditors and/or shareowners, if any, will not be determined until confirmation
of a plan or plans of reorganization. No assurance can be given as to what
values, if any, will be ascribed in the Chapter 11 proceedings to each of
these
constituencies or what types or amounts of distributions, if any, they would
receive. A plan of reorganization could result in holders of our liabilities
and/or securities, including our common stock, receiving no distribution
on
account of their interests and cancellation of their holdings. We believe
that
our currently outstanding common stock will have no value and will be canceled
under any plan of reorganization we propose. As discussed below, if the
requirements of Section 1129(b) of the Bankruptcy Code are met, a plan of
reorganization can be confirmed notwithstanding its rejection by the holders
of
our common stock and notwithstanding the fact that such holders do not receive
or retain any property on account of their equity interests under the plan.
Because of such possibilities, the value of our liabilities and securities,
including our common stock, is highly speculative. We urge that appropriate
caution be exercised with respect to existing and future investments in any
of
the liabilities and/or securities of the Debtors.
Notice
and Hearing Procedures for Trading in Claims and Equity
Securities.
The
Bankruptcy Court issued a final order to assist us in preserving our net
operating losses (the “NOL Order”). The NOL Order provides for certain notice
and hearing procedures regarding trading in our common stock. It also provides
a
mechanism by which certain holders of claims may be required to sell some
of
their holdings in connection with implementation of a plan of
reorganization.
Under
the
NOL Order, any person or entity that (1) is a Substantial Equityholder (as
defined below) and intends to purchase or sell or otherwise acquire or dispose
of Tax Ownership (as defined in the NOL Order) of any shares of our common
stock, or (2) may become a Substantial Equityholder as a result of the purchase
or other acquisition of Tax Ownership of shares of our common stock, must
provide advance notice of the proposed transaction to the Bankruptcy Court,
to
us and to the Creditors Committee. A “Substantial Equityholder” is any person or
entity that has Tax Ownership of at least nine million shares of our common
stock. The proposed transaction may not be consummated unless written approval
is received from us within the 15 day period following our receipt of the
notice. A transaction entered into in violation of these procedures will
be void
as a violation of the automatic stay under Section 362 of the Bankruptcy
Code
and may subject the participant to other sanctions. The NOL Order also requires
that each Substantial Equityholder file with the Bankruptcy Court and serve
on
us a notice identifying itself. Failure to comply with this requirement also
may
result in the imposition of sanctions.
Under
the
NOL Order, any person or entity that (1) is a Substantial Claimholder (as
defined below) and intends to purchase or otherwise acquire Tax Ownership
of
certain additional claims against us, or (2) may become a Substantial
Claimholder as a result of the purchase or other acquisition of Tax Ownership
of
claims against us, must serve on the Creditors Committee a notice in which
such
claimholder consents to the procedures set forth in the NOL Order. A
“Substantial Claimholder” is any person or entity that has Tax Ownership of
claims against us equal to or exceeding $200 million (an amount that could
be
increased in the future). Under the NOL Order, Substantial Claimholders may
be
required to sell certain claims against us if the Bankruptcy Court so orders
in
connection with our filing of a plan of reorganization. Other restrictions
on
trading in claims may also apply following our filing of a plan of
reorganization.
Process
for Plan of Reorganization.
In order
to successfully exit bankruptcy, the Debtors will need to propose, and obtain
confirmation by the Bankruptcy Court of, a plan (or plans) of reorganization
that satisfies the requirements of the Bankruptcy Code. A plan of reorganization
would, among other things, resolve the Debtors’ pre-petition obligations, set
forth the revised capital structure of the newly reorganized entity and provide
for corporate governance subsequent to exit from bankruptcy.
The
Debtors have the exclusive right for 120 days after the Petition Date to
file a
plan of reorganization and, if we do so, 60 additional days to obtain necessary
acceptances of our plan. The Bankruptcy Court has extended these periods
until
February 15, 2007 and April 16, 2007, respectively, and these periods may
be
extended further by the Bankruptcy Court for cause. If the Debtors’ exclusivity
period lapses, any party in interest may file a plan of reorganization for
any
of the Debtors. In addition to being voted on by holders of impaired claims
and
equity interests, a plan of reorganization must satisfy certain requirements
of
the Bankruptcy Code and must be approved, or confirmed, by the Bankruptcy
Court
in order to become effective. A plan of reorganization will have been accepted
by holders of claims against and equity interests in the Debtors if (1) at
least
one-half in number and two-thirds in dollar amount of claims actually voting
in
each impaired class of claims have voted to accept the plan and (2) at least
two-thirds in amount of equity interests actually voting in each impaired
class
of equity interests has voted to accept the plan.
Under
certain circumstances set forth in Section 1129(b) of the Bankruptcy Code,
the
Bankruptcy Court may confirm a plan even if such plan has not been accepted
by
all impaired classes of claims and equity interests. A class of claims or
equity
interests that does not receive or retain any property under the plan on
account
of such claims or interests is deemed to have voted to reject the plan. The
precise requirements and evidentiary showing for confirming a plan
notwithstanding its rejection by one or more impaired classes of claims or
equity interests depends upon a number of factors, including the status and
seniority of the claims or equity interests in the rejecting class (i.e.,
secured claims or unsecured claims, subordinated or senior claims, preferred
or
common stock). Generally, with respect to common stock interests, a plan
may be
“crammed down” even if the shareowners receive no recovery if the proponent of
the plan demonstrates that (1) no class junior to the common stock is receiving
or retaining property under the plan and (2) no class of claims or interests
senior to the common stock is being paid more than in full.
The
timing of filing a plan of reorganization by us will depend on the timing
and
outcome of numerous other ongoing matters in our Chapter 11 proceedings.
Although we expect to file a plan of reorganization that provides for our
emergence from bankruptcy as a going concern, there can be no assurance at
this
time that a plan of reorganization will be confirmed by the Bankruptcy Court,
or
that any such plan will be implemented successfully.
Liabilities
Subject to Compromise
The
following table summarizes the components of liabilities subject to compromise
included on our Consolidated Balance Sheets as of September 30, 2006 and
December 31, 2005:
(in
millions)
|
|
September
30,
2006
|
|
December 31,
2005
|
|
Pension,
postretirement and other benefits
|
|
$
|
11,177
|
|
$
|
8,652
|
|
Debt
and accrued interest
|
|
|
5,516
|
|
|
5,843
|
|
Aircraft
lease related obligations
|
|
|
2,977
|
|
|
1,740
|
|
Accounts
payable and other accrued liabilities
|
|
|
1,273
|
|
|
1,145
|
|
Total
liabilities subject to compromise
|
|
$
|
20,943
|
|
$
|
17,380
|
|
Liabilities
subject to compromise refers to pre-petition obligations that may be impacted
by
the Chapter 11 reorganization process. The amounts represent our current
estimate of known or potential obligations to be resolved in connection with
our
Chapter 11 proceedings.
Differences
between liabilities we have estimated and the claims filed, or to be filed,
will
be investigated and resolved in connection with the claims resolution process.
We will continue to evaluate these liabilities throughout the Chapter 11
process
and adjust amounts as necessary. Such adjustments may be material.
Reorganization
Items, net
The
following table summarizes the components included in reorganization items,
net
on our Consolidated Statements of Operations for the three and nine months
ended
September 30, 2006:
(in
millions)
|
|
Three
Months
Ended
September
30,
2006
|
|
Nine
months
Ended
September
30,
2006
|
|
Pilot
collective bargaining agreement(1)
|
|
$
|
—
|
|
$
|
2,100
|
|
Aircraft
financing renegotiations and rejections(2)
|
|
|
(100
|
)
|
|
1,490
|
|
Professional
fees
|
|
|
34
|
|
|
87
|
|
Compensation
expense(3)
|
|
|
—
|
|
|
55
|
|
Facility
leases
|
|
|
1
|
|
|
25
|
|
Debt
issuance costs
|
|
|
—
|
|
|
13
|
|
Interest
income
|
|
|
(32
|
)
|
|
(79
|
)
|
Vendor
waived pre-petition debt
|
|
|
(15
|
)
|
|
(20
|
)
|
Other
items
|
|
|
14
|
|
|
14
|
|
Total
reorganization items, net
|
|
$
|
(98
|
)
|
$
|
3,685
|
|
(1) |
Allowed
general, unsecured pre-petition claim in connection with our comprehensive
agreement with ALPA. See “Collective Bargaining Agreements” in this note
for additional information regarding the comprehensive
agreement.
|
(2) |
The
credit during the September 2006 quarter is due to adjustments
to prior
claims estimates partially offset by estimated claims related to the
restructuring of the financing arrangements of 26 aircraft.
Estimated claims for the nine months ended September 30, 2006 relate
to the restructuring of the financing arrangements of 169 aircraft
and the rejection of 16 aircraft leases. Many of these transactions
are subject to Bankruptcy Court approval.
|
(3) |
Reflects
a charge for rejecting substantially all of our stock options in
conjunction with our Chapter 11 proceedings. See Note 2 for additional
information.
|
2.
ACCOUNTING AND REPORTING POLICIES
Basis
of Presentation
The
accompanying unaudited Condensed Consolidated Financial Statements have been
prepared on a going concern basis in accordance with accounting principles
generally accepted in the United States of America (“GAAP”) for interim
financial information, the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, this Form 10-Q does not include all the information
required by GAAP for complete financial statements. As a result, this Form
10-Q
should be read in conjunction with the Consolidated Financial Statements
and
accompanying Notes in our Annual Report on Form 10-K for the fiscal year
ended
December 31, 2005 (“Form 10-K”).
As
a
result of sustained losses, labor issues and our Chapter 11 proceedings,
the
realization of assets and satisfaction of liabilities, without substantial
adjustments and/or changes in ownership, are subject to uncertainty. Given
this
uncertainty, there is substantial doubt about our ability to continue as
a going
concern.
The
accompanying Condensed Consolidated Financial Statements do not purport to
reflect or provide for the consequences of our Chapter 11 proceedings. In
particular, the financial statements do not purport to show (1) as to assets,
their realizable value on a liquidation basis or their availability to satisfy
liabilities; (2) as to pre-petition liabilities, the amounts that may be
allowed
for claims or contingencies, or the status and priority thereof; (3) as to
shareowners’ equity accounts, the effect of any changes that may be made in our
capitalization; and (4) as to operations, the effect of any changes that
may be
made to our business.
We
have
eliminated all material intercompany transactions in our Condensed 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 the nine months ended September 30, 2006 and 2005, we
did
not control any company in which we had an ownership interest of 50% or
less.
In
accordance with GAAP, we have applied American Institute of Certified Public
Accountants’ (“AICPA”) Statement of Position 90-7, “Financial Reporting by
Entities in Reorganization under the Bankruptcy Code” (“SOP 90-7”), in preparing
our Condensed Consolidated Financial Statements. SOP 90-7 requires that the
financial statements, for periods subsequent to the Chapter 11 filing,
distinguish transactions and events that are directly associated with the
reorganization from the ongoing operations of the business. Accordingly,
certain
revenues, expenses, realized gains and losses and provisions for losses that
are
realized or incurred in the bankruptcy proceedings are recorded in
reorganization items, net in the accompanying Consolidated Statements of
Operations. In addition, pre-petition obligations that may be impacted by
the
bankruptcy reorganization process have been classified on our Consolidated
Balance Sheets at September 30, 2006 and December 31, 2005 in liabilities
subject to compromise. These liabilities are reported at the amounts expected
to
be allowed by the Bankruptcy Court, even if they may be settled for lesser
amounts (see Note 1).
While
operating as debtors-in-possession under Chapter 11 of the Bankruptcy Code,
the
Debtors may sell or otherwise dispose of or liquidate assets or settle
liabilities, subject to the approval of the Bankruptcy Court or otherwise
as
permitted in the ordinary course of business, in amounts other than those
reflected in our Condensed Consolidated Financial Statements. Further, a
plan of
reorganization could materially change the amounts and classifications in
our
historical Condensed Consolidated Financial Statements.
Management
believes that the accompanying unaudited Condensed Consolidated Financial
Statements reflect all adjustments, including normal recurring items,
restructuring and related items, and reorganization items, considered necessary
for a fair statement of results for the interim periods presented.
Due
to
the impact of our Chapter 11 proceedings, seasonal variations in the demand
for
air travel, the volatility of aircraft fuel prices and other factors, operating
results for the three and nine months ended September 30, 2006 are not
necessarily indicative of operating results for the entire year.
Accounting
Adjustments
During
the March 2006 quarter, we recorded certain adjustments (“Accounting
Adjustments”) in our Condensed Consolidated Financial Statements that are
reflected in our results for the nine months ended September 30, 2006. These
adjustments resulted in an aggregate net noncash charge of $310 million to
our
Consolidated Statement of Operations as follows:
|
· |
A
$112 million charge in landing fees and other rents. This adjustment
is
associated primarily with our airport facility leases at New York
- John
F. Kennedy International Airport. It resulted from historical differences
associated with recording escalating rent expense based on actual
rent
payments instead of on a straight-line basis over the lease term
as
required by Statement of Financial Accounting Standard (“SFAS”) No. 13,
“Accounting for Leases” (“SFAS
13”).
|
|
· |
A
$108 million net charge related to the sale of mileage credits
under our
SkyMiles frequent flyer program. This includes an $83 million decrease
in
passenger revenues, a $106 million decrease in other, net operating
revenues, and an $81 million decrease in other operating expenses.
This
net charge primarily resulted from the reconsideration of our position
with respect to the timing of recognizing revenue associated with
the sale
of mileage credits that we expect will never be redeemed for
travel.
|
|
· |
A
$90 million charge in salaries and related costs to adjust our
accrual for
postemployment healthcare benefits. This adjustment is due to healthcare
payments applied to this accrual over several years, which should
have
been expensed as incurred.
|
We
believe the Accounting Adjustments, considered individually and in the
aggregate, are not material to our Consolidated Financial Statements for
each of
the three years in the period ended December 31, 2005 (the “Prior Years”) and
will not be material to our Consolidated Financial Statements as of and for
the
year ending December 31, 2006. In making this assessment, we considered
qualitative and quantitative factors, including the substantial net loss
we
reported in each of the Prior Years and expect to report for the current
year,
the noncash nature of the Accounting Adjustments, our substantial shareowners’
deficit at the end of each of the Prior Years and our status as a
debtor-in-possession under Chapter 11 of the Bankruptcy Code.
Reclassifications
We
sell
mileage credits in our SkyMiles frequent flyer program to participating
partners, such as credit card companies, hotels and car rental agencies.
The
portion of the revenue from the sale of mileage credits that approximates
the
fair value of travel to be provided is deferred. We amortize the deferred
revenue on a straight-line basis over the period when transportation is expected
to be provided. For the three and nine months ended September 30, 2006, the
majority of the revenue from the sale of mileage credits, including the
amortization of deferred revenue, is recorded in passenger revenue in our
Consolidated Statements of Operations; the remaining portion is recorded
as
other revenue. Prior to December 31, 2005, the remaining portion was classified
as an offset to selling expenses. We have reclassified the amounts for the
three
and nine months ended September 30, 2005 to be consistent with the current
period presentation. These reclassifications resulted in an increase of $92
million and $215 million for the three and nine months ended September 30,
2005,
respectively, to other, net revenues as well as to passenger commissions
and
other selling expenses; it did not change our operating and net loss for
those
periods. We believe these reclassifications enhance the comparability of
other,
net revenues, as well as passenger commissions and other selling expenses,
in
our Consolidated Statements of Operations.
We
have
reclassified certain other prior period amounts in our Condensed Consolidated
Financial Statements to be consistent with our current period presentation.
The
effect of these reclassifications is not material.
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. Cash and cash equivalents
as of
September 30, 2006 and December 31, 2005 include $128 million and $155 million,
respectively, to be used for payment of certain operational taxes and fees
to
various governmental authorities.
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 $66 million at September
30, 2006 and December 31, 2005.
Short-Term
Investments
At
September 30, 2006, our short-term investments were comprised of 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, which are carried at fair value on our Consolidated Balance
Sheets. For additional information about our accounting for trading securities,
see “Investments in Debt and Equity Securities” in Note 2 of the Notes to our
Consolidated Financial Statements in our Form 10-K.
Restricted
Cash
We
have
restricted cash, which primarily relates to cash held as collateral by credit
card processors and interline clearinghouses as well as for certain projected
insurance obligations. Restricted cash included in current assets on our
Consolidated Balance Sheets totaled $1 billion and $870 million at September
30,
2006 and December 31, 2005, respectively. Restricted cash recorded in other
noncurrent assets on our Consolidated Balance Sheets totaled $51 million
and $58
million at September 30, 2006 and December 31, 2005, respectively.
Interest
Expense
In
accordance with SOP 90-7, we record interest expense only to the extent (1)
interest will be paid during our Chapter 11 proceeding or (2) it is probable
interest will be an allowed priority, secured or unsecured claim. Interest
expense recorded on our Consolidated Statements of Operations totaled $222
million and $663 million for the three and nine months ended September 30,
2006,
respectively. Contractual interest expense (including interest expense that
is
associated with obligations in liabilities subject to compromise) totaled
$299
million and $914 million for the three and nine months ended September 30,
2006,
respectively. Contractual interest expense totaled $298 million and $859
million
for the three and nine months ended September 30, 2005, respectively.
Stock-Based
Compensation
Effective
January 1, 2006, we adopted the fair value provisions of SFAS No. 123 (revised
2004), “Share-Based Payment” (“SFAS 123R”). This standard requires companies to
measure the cost of employee services in exchange for an award of equity
instruments (typically stock options) based on the grant-date fair value
of the
award. The fair value is estimated using option-pricing models. The resulting
cost is recognized over the period during which an employee is required to
provide service in exchange for the awards, usually the vesting period. Prior
to
the adoption of SFAS 123R, this accounting treatment was optional with pro
forma
disclosure required.
SFAS
123R
is effective for any stock options we grant after December 31, 2005. For
stock
options we granted prior to January 1, 2006, but for which vesting was not
complete on that date, we applied the modified prospective transition method
in
accordance with SFAS 123R. Under this method, we account for such awards
on a
prospective basis, with expense being recognized in our Consolidated Statement
of Operations beginning in the March 2006 quarter using the grant-date fair
values previously calculated for our pro forma disclosures. Due to the
application of the modified prospective transition method, comparable prior
periods have not been retroactively adjusted to include share-based
compensation.
We
did
not grant any stock options during the three and nine months ended September
30,
2006. The estimated fair values of stock options granted during the three
and
nine months ended September 30, 2005 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 stock options granted in the
periods presented:
|
|
Stock
Options Granted
|
|
|
|
Three
Months Ended
September
30,
|
|
Nine
months Ended
September
30,
|
|
Assumption
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Risk-free
interest rate
|
|
|
—
|
|
|
4.1
|
%
|
|
—
|
|
|
3.8
|
%
|
Average
expected life of stock options (in years)
|
|
|
—
|
|
|
3.0
|
|
|
—
|
|
|
3.0
|
|
Expected
volatility of common stock
|
|
|
—
|
|
|
72.2
|
%
|
|
—
|
|
|
73.6
|
%
|
Weighted
average fair value of a stock option granted
|
|
$
|
—
|
|
$
|
2
|
|
$
|
—
|
|
$
|
2
|
|
The
following table reflects (1) for the three and nine months ended September
30,
2005, the pro forma impact related to net income (loss) and basic and diluted
earnings (loss) per share had we accounted for our stock-based compensation
plans under the fair value method in accordance with SFAS No. 123, “Accounting
for Stock-Based Compensation,” as amended; and (2) for the three and nine months
ended September 30, 2006, the amounts presented upon the adoption of SFAS
123R.
|
|
Three
Months Ended
September
30,
|
|
Nine
months Ended
September
30,
|
|
(in
millions, except per share data)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Net
income
(loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
52
|
|
$
|
(1,130
|
)
|
$
|
(4,222
|
)
|
$
|
(2,583
|
)
|
Stock
option compensation expense determined under the fair value
method
|
|
|
—
|
|
|
(25
|
)
|
|
—
|
|
|
(82
|
)
|
As
adjusted for the fair value method under SFAS 123R
|
|
$
|
52
|
|
$
|
(1,155
|
)
|
$
|
(4,222
|
)
|
$
|
(2,665
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
as reported
|
|
$
|
0.26
|
|
$
|
(6.73
|
)
|
$
|
(21.53
|
)
|
$
|
(17.07
|
)
|
Diluted
as reported
|
|
|
0.22
|
|
|
(6.73
|
)
|
|
(21.53
|
)
|
|
(17.07
|
)
|
Basic
as adjusted for the fair value method under SFAS 123R
|
|
|
0.26
|
|
|
(6.88
|
)
|
|
(21.53
|
)
|
|
(17.61
|
)
|
Diluted
as adjusted for the fair value method under SFAS 123R
|
|
|
0.22
|
|
|
(6.88
|
)
|
|
(21.53
|
)
|
|
(17.61
|
)
|
On
March
20, 2006, we filed with the Bankruptcy Court a motion to reject our then
outstanding stock options to avoid the administrative and other costs associated
with these awards. The Bankruptcy Court granted our motion, which resulted
in
substantially all of our stock options being rejected effective March 31,
2006.
In the March 2006 quarter, we recorded in our Consolidated Statement of
Operations (1) $8 million of compensation expense in conjunction with the
adoption of SFAS 123R, which is recorded in salaries and related costs, and
(2)
$55 million of compensation expense associated with the rejection of stock
options, which is classified in reorganization items, net and represents
the
unamortized fair value of previously granted stock options when we rejected
these stock options. During the September 2006 quarter, we did not record
any
compensation expense related to equity awards, including stock
options.
New
Accounting Standards
In
July
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an
interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the
accounting and disclosure for uncertainty in tax positions, as defined. FIN
48
seeks to reduce the diversity in practice associated with certain aspects
of the
recognition and measurement related to accounting for income taxes. This
interpretation is effective for fiscal years beginning after December 15,
2006.
We have not yet determined the impact of the adoption of FIN 48 on our
results of operations or financial position.
In
September 2006, the FASB issued SFAS No. 158, “Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements
No. 87, 88, 106 and 132(R)” (“SFAS 158”). This statement, among other things,
requires that we recognize the funded status of our defined benefit plans
in our
2006 year-end balance sheet, with changes in the funded status recognized
through comprehensive income (loss) in the year in which such changes occur.
We
have not yet determined the impact of the adoption of SFAS 158 on our
results of operations or financial position.
3.
DERIVATIVE INSTRUMENTS
Fuel
Hedging Program
Under
our
Chapter 11 proceedings, we are authorized to hedge up to 50% of our estimated
2006 aggregate fuel consumption, with no single month exceeding 80% of our
estimated fuel consumption. We are also authorized to hedge up to 50% of
our
estimated fuel consumption for each of the first three months of 2007. We
currently cannot enter into any fuel hedge contract that extends beyond March
31, 2007 without approval from the Bankruptcy Court or the Creditors
Committee.
We
periodically use derivative positions based in heating oil and jet fuel swap
and
collar contracts to manage our exposure to changes in aircraft fuel prices.
In
accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities” (“SFAS 133”), we record the fair value of our fuel hedge contracts
on our Consolidated Balance Sheets and recognize certain changes in these
fair
market values on our Consolidated Statement of Operations.
Changes
in the fair value of fuel hedge contracts that qualify for hedge accounting
are
recorded in shareowners’ deficit as a component of accumulated other
comprehensive loss. These gains or losses are generally recognized in aircraft
fuel expense when the related aircraft fuel purchases being hedged are consumed.
To the extent that the change in the fair value of a fuel hedge contract
does
not offset the change in the value of the aircraft fuel being hedged, the
ineffective portion of the hedge is immediately recognized in other income
(expense) on our Consolidated Statements of Operations.
We
had no fuel hedge contracts in 2005. Charges recorded on our Consolidated
Statements of Operations for the three and nine months ended September
30, 2006
for our fuel hedge contracts are as follows:
|
|
Three
Months Ended September 30, 2006
|
|
Nine
Months Ended September 30, 2006
|
|
|
|
Aircraft
fuel
|
|
|
|
|
|
|
|
(in
millions)
|
|
expense
|
|
expense
|
|
expense
|
|
expense
|
|
Open
fuel hedge contracts
|
|
$
|
-
|
|
$
|
11
|
|
$
|
-
|
|
$
|
3
|
|
Settled
fuel hedge contracts
|
|
|
26
|
|
|
20
|
|
|
22
|
|
|
20
|
|
Total
|
|
$
|
26
|
|
$
|
31
|
|
$
|
22
|
|
$
|
23
|
|
Our
open fuel hedge contracts as of September 30, 2006 had an estimated fair
market
value loss of $58 million, which we recorded in accounts payable, deferred
credits, and other accrued liabilities on our Consolidated Balance
Sheet.
For
additional information about SFAS 133 and our fuel hedging program, see Notes
2,
5 and 6 of the Notes to our Consolidated Financial Statements in our Form
10-K.
4.
DEBT
DIP
Credit Facility
On
September 16, 2005, we entered into a Secured Super-Priority
Debtor-In-Possession Credit Agreement (the “DIP Credit Facility”) to borrow up
to $1.7 billion from a syndicate of lenders arranged by General Electric
Capital
Corporation (“GECC”) and Morgan Stanley Senior Funding, Inc., for which GECC
acted as administrative agent. On October 7, 2005, we entered into an amendment
to the DIP Credit Facility, resulting in borrowings of $1.9 billion under
the
DIP Credit Facility, as amended.
On
March
27, 2006, we executed an amended and restated credit agreement (the “Amended and
Restated DIP Credit Facility”) with a syndicate of lenders, which replaced the
DIP Credit Facility in its entirety. The aggregate amounts available to be
borrowed under the DIP Credit Facility are not changed by the Amended and
Restated DIP Credit Facility. However, under the Amended and Restated DIP
Credit
Facility, the interest rates on borrowings have been reduced: the $600 million
Term Loan A bears interest, at our option, at LIBOR plus 2.75% or an index
rate
plus 2.00%; the $700 million Term Loan B bears interest, at our option, at
LIBOR
plus 4.75% or an index rate plus 4.00%; and the $600 million Term Loan C
bears
interest, at our option, at LIBOR plus 7.50% or an index rate plus
6.75%.
The
Amended and Restated DIP Credit Facility is otherwise substantially the same
as
the DIP Credit Facility, including financial covenants, collateral, guarantees,
maturity date and events of default, which are described in our Form 10-K.
The
Amended and Restated DIP Credit Facility allows the execution of amendments
to
(1) certain other credit facilities previously entered into by us with GECC;
and
(2) a reimbursement agreement between us and GECC (the “Reimbursement
Agreement”) related to letters of credit totaling $403 million issued on our
behalf by GECC, which support our obligations with respect to $397 million
aggregate principal amount of tax-exempt special facility bonds issued to
refinance the construction cost of certain airport facilities leased to us.
See
below for additional information about the amendments to the credit facilities
and the Reimbursement Agreement.
On
August
31, 2006, we entered into an amendment to the Amended and Restated DIP Credit
Facility that authorized us to consummate a fuel inventory supply agreement
(as
described in Note 5).
Financing
Agreement with Amex
On
September 16, 2005, we entered into an agreement (the “Modification Agreement”)
with American Express Travel Related Services Company, Inc. (“Amex”) and
American Express Bank, F.S.B. pursuant to which we modified certain existing
agreements with Amex, including two agreements (collectively, the “Amex
Pre-Petition Facility”) under which we had borrowed $500 million from
Amex.
As
required by the Modification Agreement, on September 16, 2005, we used a
portion
of the proceeds of our initial borrowing under the DIP Credit Facility to
repay
the principal amount of $500 million, together with interest thereon, that
we
had previously borrowed from Amex under the Amex Pre-Petition Facility.
Simultaneously, we borrowed $350 million from Amex pursuant to the terms
of the
Amex Pre-Petition Facility as modified by the Modification Agreement (the
“Amex
Post-Petition Facility”). On October 7, 2005, pursuant to Amendment No. 1 to the
Modification Agreement (the “Amendment to the Modification Agreement”), Amex
consented to the above-described increased principal amount of the DIP Credit
Facility in return for a prepayment of $50 million under the Amex Post-Petition
Facility.
In
connection with the Amended and Restated DIP Credit Facility, we executed
a
conforming amendment and restatement of the Amex Post-Petition Facility.
The
financial covenants, collateral, guarantees, maturity dates and events of
default are not changed by the amendment and restatement and are described
in
our Form 10-K. As of the date of effectiveness of the Amended and Restated
DIP
Credit Facility, to which Amex consented, the fee on outstanding advances
under
the Amex Post-Petition Facility decreased to a rate of LIBOR plus a margin
of
8.75%.
On
August
31, 2006, we entered into an amendment to the Amex Post-Petition Facility
that
authorized us to consummate a fuel inventory supply agreement (as described
in
Note 5).
The
Amended and Restated DIP Credit Facility and the Amex Post-Petition Facility
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
GECC Agreements
On
March
31, 2006, we entered into amendments (the “Amendments”) to certain credit
facilities with GECC (other than the Amended and Restated DIP Credit Facility)
and the Reimbursement Agreement. These credit facilities are referred to
as the
Spare Engines Loan, the Aircraft Loan and the Spare Parts Loan in footnotes
6, 7
and 8, respectively, to the debt table in Note 8 of the Notes to our
Consolidated Financial Statements in our Form 10-K.
The
credit facilities and the Reimbursement Agreement are secured by specific
aircraft, Mainline aircraft engines and substantially all of the Mainline
aircraft spare parts owned by us (the “Collateral Pool”). As a result of the
Amendments, the Collateral Pool secures (1) each of the credit facilities
with
GECC (other than the Amended and Restated Credit Facility), (2) 12 leases
for
CRJ-200 aircraft we previously entered into with GECC, (3) leases of up to
an
additional 15 CRJ-200 aircraft pursuant to the put rights described below
and
(4) the Reimbursement Agreement. In addition, the expiration date of the
letters
of credit issued in connection with the Reimbursement Agreement was extended
from 2008 to 2011, and the minimum collateral value test in the Reimbursement
Agreement was eliminated.
As
a
condition to the Amendments, we granted GECC the right, exercisable until
March
30, 2007, to lease to us up to an additional 15 CRJ-200 aircraft (“put rights”).
GECC may exercise the put rights only after providing us with prior written
notice, and no more than three such aircraft may be scheduled for delivery
in
the same month. The leases will have terms ranging between 108 months and
172
months, as determined by GECC, and lease rates will be based on the date
of
manufacture of the aircraft. We believe that the lease payments for these
15
aircraft will aggregate $215 million over the maximum 172 month term and
that
the lease payments approximate current market rates. To date, GECC has leased
seven of these aircraft to us and has exercised put rights with respect to
an
additional two aircraft. We have certain rights to sublease all of these
aircraft.
Letter
of Credit Facility Related to Visa/MasterCard Credit Card Processing
Agreement
In
January 2006, with the authorization from the Bankruptcy Court, we entered
into
a letter of credit facility with Merrill Lynch. Under the Letter of Credit
Reimbursement Agreement, Merrill Lynch issued a $300 million irrevocable
standby
letter of credit for the benefit of our Visa/MasterCard credit card processor
(“Processor”), which we substituted for a portion of the cash reserve that the
Processor maintains. In July 2006, with the approval of the Bankruptcy Court,
we
amended the letter of credit facility to, among other matters, extend the
expiration date of the letter of credit to September 14, 2008 and to reduce
the
fees payable by us. For further information about the letter of credit and
the
reserve maintained by the Processor, see Note 8 of the Notes to our Consolidated
Financial Statements in our Form 10-K.
Refinancing
of Senior Secured Notes
In
October 2006, we refinanced our 9.5% Senior Secured Notes due 2008 (“Senior
Notes”). In connection with the refinancing, we repaid $39 million principal
amount of Senior Notes. We refinanced the remaining $196 million principal
amount of Senior Notes by issuing $196 million principal amount of new notes
(“New Notes”). The New Notes are due in installments through September 2012 and
bear interest at a floating rate based on LIBOR plus a margin. The New Notes
are
secured by the same 32 aircraft as the Senior Notes.
Other
As
discussed above, the Amended and Restated DIP Credit Facility and the Amex
Post-Petition Facility contain certain affirmative, negative and financial
covenants, which are described in our Form 10-K. 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.
For additional information about our war-risk insurance currently provided
by
the U.S. Government, see Note 5.
We
were
in compliance with these covenant requirements at September 30, 2006.
5.
PURCHASE COMMITMENTS AND CONTINGENCIES
Aircraft
Order Commitments
Future
commitments for aircraft on firm order as of September 30, 2006 are estimated
to
be approximately $2.9 billion. The following table shows the timing of these
commitments:
Year
Ending December 31,
(in
millions)
|
|
Amount
|
|
Three
months ending December 31, 2006(1)
|
|
$
|
26
|
|
2007
|
|
|
504
|
|
2008
|
|
|
811
|
|
2009
|
|
|
529
|
|
2010
|
|
|
1,041
|
|
Total
|
|
|
2,911
|
|
(1) |
Represents
advance deposits on certain aircraft on firm order for delivery
after
December 31, 2006.
|
Our
aircraft order commitments as of September 30, 2006 consist of firm orders
to
purchase five B777-200 aircraft and 50 B737-800 aircraft. This includes 10
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 2007. These sales will reduce our future commitments by
approximately $370 million during the period October 1, 2006 through December
31, 2007.
Contract
Carrier Agreements
Delta
Connection Carriers
We
have
contract carrier agreements with seven regional air carriers, including our
wholly owned subsidiary, Comair, and six unaffiliated carriers. Except for
the
agreement with American Eagle Airlines, Inc. (“Eagle”) discussed below, the
regional air carriers operate some or all 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 a determination of their cost of
operating those flights and other factors intended to approximate market
rates
for those services.
During
the nine months ended September 30, 2006, the following five carriers operated
as contract carriers (in addition to Comair) pursuant to agreements under
which
we pay amounts based on a determination of the costs of operating these flights
and other factors:
Carrier
(1)
|
|
Maximum
Number
of
Aircraft
to
be
Operated
Under
Agreement
(1)(2)
|
|
Expiration
Date
of
Agreement
|
|
ASA(2)(3)
|
|
|
179
|
|
|
2020
|
|
SkyWest
Airlines(2)
|
|
|
56
|
|
|
2020
|
|
Chautauqua
|
|
|
39
|
|
|
2016
|
|
Freedom(4)
|
|
|
42
|
|
|
2017
|
|
Shuttle
America
|
|
|
16
|
|
|
2019
|
|
(1) |
The
table does not include information with respect to Eagle because
our
agreement with Eagle is structured as a revenue proration arrangement,
which establishes a fixed dollar or percentage division of revenues
for
tickets sold to passengers traveling on connecting flight
itineraries.
|
(2) |
In
our Chapter 11 proceedings, we assumed our obligations under the
contract
carrier agreements with ASA and SkyWest Airlines. Accordingly,
these
agreements are not subject to rejection pursuant to section 365
of the
Bankruptcy Code.
|
(3) |
The
number of ASA aircraft in the chart reflects 167 regional jet aircraft
and
12 turbo-prop aircraft. The turbo-prop aircraft are scheduled to
be
removed from Delta Connection service by the end of 2007.
|
(4) |
The
number of Freedom aircraft in the chart reflects 30 regional jet
aircraft
and 12 turbo-prop aircraft. The agreement with respect to the turbo-prop
aircraft expires in 2009.
|
The
following table shows the available seat miles (“ASMs”) and revenue passenger
miles (“RPMs”) operated for us under contract carrier agreements with
unaffiliated regional air carriers:
|
· |
SkyWest
Airlines, Inc. (“SkyWest”) and Chautauqua Airlines, Inc. (“Chautauqua”)
for all periods presented,
|
|
· |
Shuttle
America Corporation (“Shuttle America”) for the three and nine months
ended September 30, 2006 and from September 1 through September
30, 2005,
|
|
· |
Atlantic
Southeast Airlines, Inc. (“ASA”) for the three and nine months ended
September 30, 2006 and from September 8 through September 30, 2005,
and
|
|
· |
Freedom
Airlines, Inc. (“Freedom”) for the three and nine months ended September
30, 2006.
|
|
|
Three
Months Ended
September
30,
|
|
Nine
months Ended
September
30,
|
|
(in
millions)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
ASMs
|
|
4,033
|
|
1,923
|
|
11,310
|
|
4,659
|
|
RPMs
|
|
3,107
|
|
1,376
|
|
8,820
|
|
3,359
|
|
Number
of aircraft operated, end of period
|
|
324
|
|
251
|
|
324
|
|
251
|
|
The
table
above was not subject to review procedures of our Independent Registered
Public
Accounting Firm.
Contingencies
Related to Termination of Contract Carrier Agreements
We
may
terminate the Chautauqua and Shuttle America agreements without cause at
any
time after May 2010 and January 2013, respectively, by providing certain
advance
notice. If we terminate either the Chautauqua or Shuttle America agreements
without cause, Chautauqua or Shuttle America, 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 lease 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 Shuttle America, the
purchase price would be equal to the amount necessary to (1) reimburse
Chautauqua or Shuttle America 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 lease
aircraft owned by Chautauqua or Shuttle America, the lease would have (1)
a rate
equal to the debt payments of Chautauqua or Shuttle America for the debt
financing of the aircraft calculated as if 90% of the aircraft was debt financed
by Chautauqua or Shuttle America and (2) other specified terms and
conditions.
We
estimate that the total fair values, determined as of September 30, 2006,
of the
aircraft that Chautauqua or Shuttle America could assign to us or require
that
we purchase if we terminate without cause our contract carrier agreements
with
those airlines are $502 million and $379 million, respectively. The actual
amount that we may be required to pay in these circumstances may be materially
different from these estimates.
Legal
Contingencies
We
are
involved in various legal proceedings relating to antitrust matters, employment
practices, environmental issues and other matters concerning our business.
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. As a result of our Chapter 11
proceedings, virtually all pre-petition pending litigation against us is
stayed
and related amounts accrued have been classified in liabilities subject to
compromise on our Consolidated Balance Sheets at September 30, 2006 and December
31, 2005.
On
August
27, 2006, Comair Flight 5191 crashed shortly after take-off in a field near
the
Blue Grass Airport in Lexington, Kentucky. All 47 passengers and two members
of
the flight crew died in the accident. The third crew member survived with
severe
injuries. Numerous lawsuits arising out of this accident have been filed
against
our subsidiary, Comair, including four lawsuits which also name Delta as a
defendant, and additional lawsuits are anticipated. These lawsuits, which
are in
preliminary stages, generally assert claims for wrongful death and related
personal injuries, and seek unspecified damages, including punitive damages
in
most cases. All but two of the lawsuits filed to date have been filed
either in the U.S. District Court for the Eastern District of Kentucky, or
in
state court in Fayette County, Kentucky. The cases filed in state court in
Kentucky have been or are expected to be removed to federal court. One
lawsuit has been filed in the U.S. District Court for the Northern District
of
New York, and another lawsuit has been filed in State Court in Broward
County, Florida. Those matters pending in the Eastern District of Kentucky
have
been consolidated as “In Re
Air Crash at
Lexington, Kentucky, August 27, 2006, Master File No. 5:06-CV-316”.
In
addition, Comair has filed an action for declaratory judgment in the United
States District Court for the Eastern District of Kentucky against
the United States (based on the actions of the Federal Aviation
Administration (“FAA”)), the Lexington Airport Board and certain other Lexington
airport defendants. In this action, Comair seeks a declaration that the FAA
and
the airport parties share responsibility for the accident and will be
responsible to share in the cost of any financial settlements that Comair
enters
into with the passenger families.
During
the September 2006 quarter, we recorded a long term liability with a
corresponding long term receivable in other noncurrent liabilities and assets
on
our Condensed Consolidated Balance Sheet. These
estimates may be revised as additional information becomes available.
We
carry
aviation risk liability insurance and believe this insurance is sufficient
to
cover any liability likely to arise from this accident.
Other Contingencies
Regional
Airports Improvement Corporation (“RAIC”)
We
have
obligations under a facilities agreement with the RAIC to pay the bond trustee
amounts sufficient to pay the debt service on $47 million in Facilities Sublease
Refunding Revenue Bonds. These bonds were issued in 1996 to refinance bonds
that
financed the construction of certain airport and terminal facilities we use
at
Los Angeles International Airport. We also provide a guarantee to the bond
trustee covering payment of the debt service.
General
Indemnifications
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. However, our insurance
does not typically cover environmental liabilities, although we have certain
policies in place to meet the requirements of applicable environmental
laws.
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 (1) when and
under
what circumstances these provisions may be triggered and (2) the amount that
would be payable if the provisions were triggered because the amounts would
be
based on facts and circumstances existing at such time. We also cannot predict
the impact, if any, that our Chapter 11 proceedings might have on these
obligations.
Employees
Under Collective Bargaining Agreements
At
September 30, 2006, we had a total of 51,000 full-time equivalent employees.
Approximately 18% of these employees, including all of our pilots, are
represented by labor unions.
See
Note
1 for additional information related to our collective bargaining
agreements.
War-Risk
Insurance Contingency
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 to December 31, 2006. The
U.S. House of Representatives has passed and the U.S. Senate is considering
an
additional extension of coverage through August 31, 2007, but it is uncertain
whether this extension will be enacted into law. The withdrawal of
government support of airline war-risk insurance would require us to obtain
war-risk insurance coverage commercially, if available. 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 or may not be obtainable at all, resulting in
an interruption to our operations.
Fuel
Inventory Supply Agreement
On
August
31, 2006, we entered into an agreement with J. Aron & Company (“Aron”), an
affiliate of Goldman Sachs & Co., pursuant to which Aron became the
exclusive jet fuel supplier for our operations at the Atlanta airport, the
Cincinnati airport and the three major airports in the New York City area.
At
the outset of the relationship on September 6, 2006, we sold to Aron, at
current
market prices, (1) all jet fuel inventory that we were then holding in storage
at facilities that support our operations at the airports in Atlanta and
Cincinnati and (2) all inventory that was in transit to these airports as
well
as to the New York City area airports. We received approximately $102 million
from this sale. In addition, for the duration of the agreement, we (1) assigned
to Aron certain existing supply agreements with our third party suppliers
for
jet fuel for these locations, (2) transferred to Aron the right to use our
storage facilities in Atlanta and Cincinnati and (3) transferred to Aron
allocations in pipeline systems through which jet fuel is delivered to storage
facilities for Atlanta, Cincinnati and the three New York City area airports.
The initial sale of our jet fuel inventory did not have a material impact
on
our Consolidated Statement of Operations for the September 2006
quarter. The agreement with Aron has six-month terms that automatically renew
unless terminated by either party thirty days prior to the end of any six-month
period, and the agreement will terminate on its third anniversary. Upon
termination of the agreement, we will be required to purchase, at market
prices
at the time of termination, all fuel inventory that Aron is holding in the
storage facilities that support our operations at the Atlanta and Cincinnati
airports and all inventory that is in transit to these airports as well as
to
the New York City area airports.
Other
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. Because these obligations are contingent upon
whether we terminate the contract without cause prior to its expiration date,
no
obligation would exist unless such a termination was to occur. We also cannot
predict the impact, if any, that our Chapter 11 proceedings might have on
these
obligations.
6.
FLEET INFORMATION
Our
active aircraft fleet, orders, options and rolling options at September 30,
2006, are summarized in the following table. Options have scheduled delivery
slots. Rolling options replace options and are assigned delivery slots as
options expire or are exercised.
|
|
Current
Fleet
|
|
|
|
|
|
|
|
|
|
Aircraft
Type
|
|
Owned
|
|
Capital
Lease
|
|
Operating
Lease
|
|
Total
|
|
Average
Age
|
|
Orders
|
|
Options
|
|
Rolling
Options
|
|
B-737-800
|
|
|
71
|
|
|
—
|
|
|
—
|
|
|
71
|
|
|
5.9
|
|
|
50
|
|
|
60
|
|
|
168
|
|
B-757-200
|
|
|
68
|
|
|
33
|
|
|
20
|
|
|
121
|
|
|
15.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
B-767-300
|
|
|
4
|
|
|
1
|
|
|
19
|
|
|
24
|
|
|
16.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
B-767-300ER
|
|
|
50
|
|
|
—
|
|
|
9
|
|
|
59
|
|
|
10.6
|
|
|
—
|
|
|
10
|
|
|
2
|
|
B-767-400ER
|
|
|
21
|
|
|
—
|
|
|
—
|
|
|
21
|
|
|
5.6
|
|
|
—
|
|
|
18
|
|
|
—
|
|
B-777-200ER
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
8
|
|
|
6.7
|
|
|
3
|
|
|
20
|
|
|
5
|
|
B-777-200LR
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
MD-88
|
|
|
63
|
|
|
32
|
|
|
25
|
|
|
120
|
|
|
16.3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
MD-90
|
|
|
16
|
|
|
—
|
|
|
—
|
|
|
16
|
|
|
10.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
CRJ-100/200
|
|
|
57
|
|
|
—
|
|
|
83
|
|
|
140
|
|
|
7.7
|
|
|
—
|
|
|
37
|
|
|
—
|
|
CRJ-700
|
|
|
27
|
|
|
—
|
|
|
—
|
|
|
27
|
|
|
3.1
|
|
|
—
|
|
|
38
|
|
|
—
|
|
Total
|
|
|
385
|
|
|
66
|
|
|
156
|
|
|
607
|
|
|
11.1
|
|
|
55
|
|
|
183
|
|
|
175
|
|
The
table
above was not subject to the review procedures of our Independent Registered
Public Accounting Firm.
7.
EMPLOYEE BENEFIT PLANS
Net
Periodic Benefit Costs
Net
periodic benefit cost for the three months ended September 30, 2006 and 2005
included the following components:
|
|
Pension
Benefits
|
|
Other
Postretirement
Benefits
|
|
(in
millions)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Service
cost
|
|
$
|
-
|
|
$
|
32
|
|
$
|
4
|
|
$
|
4
|
|
Interest
cost
|
|
|
178
|
|
|
178
|
|
|
24
|
|
|
29
|
|
Expected
return on plan assets
|
|
|
(130
|
)
|
|
(148
|
)
|
|
-
|
|
|
-
|
|
Amortization
of prior service benefit
|
|
|
-
|
|
|
-
|
|
|
(11
|
)
|
|
(10
|
)
|
Recognized
net actuarial loss
|
|
|
57
|
|
|
42
|
|
|
2
|
|
|
3
|
|
Amortization
of net transition obligation
|
|
|
-
|
|
|
2
|
|
|
-
|
|
|
-
|
|
Settlement
charge
|
|
|
-
|
|
|
86
|
|
|
-
|
|
|
-
|
|
Net
periodic benefit cost
|
|
$
|
105
|
|
$
|
192
|
|
$
|
19
|
|
$
|
26
|
|
Net
periodic benefit cost for the nine months ended September 30, 2006 and 2005
included the following components:
|
|
Pension
Benefits
|
|
Other
Postretirement
Benefits
|
|
(in
millions)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Service
cost
|
|
$
|
35
|
|
$
|
124
|
|
$
|
14
|
|
$
|
13
|
|
Interest
cost
|
|
|
534
|
|
|
539
|
|
|
73
|
|
|
85
|
|
Expected
return on plan assets
|
|
|
(390
|
)
|
|
(454
|
)
|
|
—
|
|
|
—
|
|
Amortization
of prior service cost (benefit)
|
|
|
1
|
|
|
3
|
|
|
(32
|
)
|
|
(30
|
)
|
Recognized
net actuarial loss
|
|
|
171
|
|
|
127
|
|
|
6
|
|
|
9
|
|
Amortization
of net transition obligation
|
|
|
—
|
|
|
6
|
|
|
—
|
|
|
—
|
|
Curtailment
charge
|
|
|
—
|
|
|
447
|
|
|
—
|
|
|
—
|
|
Settlement
charge
|
|
|
—
|
|
|
258
|
|
|
—
|
|
|
—
|
|
Net
periodic benefit cost
|
|
$
|
351
|
|
$
|
1,050
|
|
$
|
61
|
|
$
|
77
|
|
During
the three and nine months ended September 30, 2005, we recorded settlement
charges totaling $86 million and $258 million, respectively, in our Consolidated
Statement of Operations. These charges result from lump sum distributions
made
under the Pilot Plan 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
net periodic pension cost for the same period.
During
the March 2005 quarter, we recorded a curtailment charge of $447 million
in our
Consolidated Statement of Operations related to our defined benefit pension
plans for ground and flight attendant employees (the “Nonpilot Plan”) and the
Pilot Plan. This charge reflected the impact of the planned reduction of
6,000 -
7,000 nonpilot jobs announced in November 2004 and the freeze of service
accruals under the Pilot Plan effective December 31, 2004. We recorded this
charge in accordance with SFAS No. 88, which requires curtailment accounting
when an event occurs that significantly reduces the expected years of future
service of current employees or that eliminates future benefit accruals for
a
significant number of employees.
In
the
nine months ended September 30, 2006, we contributed $4 million to our defined
benefit pension plans for benefits accrued after the Petition Date and $80
million to our defined contribution pension plans.
Pension
Benefits
On
June
19, 2006, a Notice Of Intent to Terminate the Pilot Plan was filed. On August
4,
2006, we filed a motion with the Bankruptcy Court to seek a determination
that
we satisfy the financial requirements for a distress termination of the Pilot
Plan. On September 5, 2006, the Bankruptcy Court made a determination that
the
financial requirements for a distress termination of the Pilot Plan have
been
met. A group of retired pilots has appealed this ruling to the U.S. District
Court for the Southern District of New York. We are continuing our discussions
with the PBGC regarding termination of the Pilot Plan.
In
August
2006, the U.S. Congress passed legislation that was signed by the President,
which allows us to reduce our short-term funding obligations for the Nonpilot
Plan. As a result of this legislation, we currently have no intent to terminate
the Nonpilot Plan.
For
additional information about our benefit plans, see Note 12 of the Notes
to our
Consolidated Financial Statements in our Form 10-K.
8.
INCOME TAXES
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. The following table shows significant components of
our
deferred tax assets and liabilities at September 30, 2006 and December 31,
2005:
(in
millions)
|
|
September
30,
2006
|
|
December
31,
2005
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
3,075
|
|
$
|
3,246
|
|
Additional
minimum pension liability
|
|
|
1,565
|
|
|
1,565
|
|
AMT
credit carryforwards
|
|
|
346
|
|
|
346
|
|
Other
temporary differences (primarily employee related
benefits)
|
|
|
4,489
|
|
|
2,863
|
|
Valuation
Allowance
|
|
|
(5,670
|
)
|
|
(3,954
|
)
|
Total
deferred tax assets
|
|
$
|
3,805
|
|
$
|
4,066
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
Temporary
differences (primarily depreciation and amortization)
|
|
$
|
3,817
|
|
$
|
4,099
|
|
Total
deferred tax liabilities
|
|
$
|
3,817
|
|
$
|
4,099
|
|
The
following table shows the current and noncurrent deferred tax asset (liability)
recorded on our Consolidated Balance Sheets as of September 30, 2006 and
December 31, 2005:
(in
millions)
|
|
September
30,
2006
|
|
December
31,
2005
|
|
Current
deferred tax assets, net (1)
|
|
$
|
370
|
|
$
|
99
|
|
Noncurrent
deferred tax liabilities, net (2)
|
|
|
(382
|
)
|
|
(132
|
)
|
Net
deferred tax liabilities
|
|
$
|
(12
|
)
|
$
|
(33
|
)
|
(1) |
Current
deferred tax assets, net are recorded in prepaid expenses and other
on our
Consolidated Balance Sheets.
|
(2) |
Noncurrent
deferred tax liabilities, net are recorded in other noncurrent
liabilities
on our Consolidated Balance
Sheets.
|
In
accordance with SFAS No. 109, “Accounting for Income Taxes” (“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 based
on a
component of our balance sheet, such as our net operating loss (“NOL”)
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
September 30, 2006, we had $346 million of federal alternative minimum tax
(“AMT”) credit carryforwards, which do not expire. We also had federal and state
pretax NOL carryforwards of approximately $8 billion at September 30, 2006,
substantially all of which will not begin to expire until 2022. Our ability
to
utilize AMT and NOL carryforwards will be subject to significant limitation
if
as a result of our Chapter 11 filings, we undergo an ownership change for
purposes of Section 382 of the Internal Revenue Code of 1986, as amended.
This
could result in the need for an additional valuation allowance.
During
the three and nine months ended September 30, 2006, we recorded income tax
benefits totaling $23 million and $40 million, respectively. These amounts
reflect adjustments to our income tax reserve and estimated required valuation
allowance at December 31, 2006.
9.
SHAREOWNERS’ DEFICIT
During
the March 2006 quarter, all remaining unallocated shares of Series B ESOP
Convertible Preferred Stock (“ESOP Preferred Stock”) in the Delta Family-Care
Savings Plan were allocated to participants in that plan. The ESOP Preferred
Stock was then converted, in accordance with its terms, into approximately
eight
million shares of common stock from treasury stock at cost. The allocation
and
conversion of the ESOP Preferred Stock resulted in a $144 million decrease
in
additional paid-in capital and a $367 million decrease from treasury stock
at
cost. For additional information about the ESOP Preferred Stock and the Delta
Family-Care Savings Plan, see Notes 12 and 13 of the Notes to our Consolidated
Financial Statements in our Form 10-K.
The
Bankruptcy Court granted our motion to reject substantially all of our then
outstanding stock options effective March 31, 2006. As a result, we recognized
a
$55 million charge, which represented the unamortized fair value of our
outstanding stock options when they were rejected, with a corresponding increase
in additional paid-in capital. This charge is classified in reorganization
items, net in our Consolidated Statement of Operations. See Note 2 for
additional information related to stock-based compensation.
10.
COMPREHENSIVE LOSS
Comprehensive
loss primarily includes (1) our reported net income (loss), (2) changes in
our
additional minimum pension liability, (3) changes in our deferred tax asset
valuation allowance related to additional minimum pension liability and (4)
changes in the effective portion of our open fuel hedge contracts, which
qualify
for hedge accounting. The following table shows our comprehensive loss for
the
three and nine months ended September 30, 2006 and 2005:
|
|
Three
Months Ended
September
30,
|
|
Nine
months Ended
September
30,
|
|
(in
millions)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Net
income (loss), as reported
|
|
$
|
52
|
|
$
|
(1,130
|
)
|
$
|
(4,222
|
)
|
$
|
(2,583
|
)
|
Other
comprehensive loss
|
|
|
(57
|
)
|
|
(381
|
)
|
|
(55
|
)
|
|
(171
|
)
|
Comprehensive
loss
|
|
$
|
(5
|
)
|
$
|
(1,511
|
)
|
$
|
(4,277
|
)
|
$
|
(2,754
|
)
|
11.
RESTRUCTURING
Restructuring
and Other Reserves
The
following table shows our restructuring and other reserve balances as of
September 30, 2006, and the activity for the nine months then ended related
to
(1) facility closures and other costs and (2) severance and related costs
under
our 2005 and 2004 workforce reduction programs. Substantially all of our
restructuring and other reserves have been classified as liabilities subject
to
compromise on our Consolidated Balance Sheets as of September 30, 2006 and
December 31, 2005.
|
|
Restructuring
and Other Charges
|
|
|
|
|
|
Severance
and
Related
Costs
|
|
|
|
Facilities
and
Other
|
|
Workforce
Reduction
Programs
|
|
(in
millions)
|
|
|
2005
|
|
2004
|
|
Balance
at December 31, 2005
|
|
$
|
36
|
|
$
|
46
|
|
$
|
2
|
|
Additional
costs and expenses
|
|
|
3
|
|
|
29
|
|
|
—
|
|
Payments
|
|
|
(7
|
)
|
|
(42
|
)
|
|
(2
|
)
|
Adjustments
|
|
|
(26
|
)
|
|
(14
|
)
|
|
—
|
|
Balance
at September 30, 2006
|
|
$
|
6
|
|
$
|
19
|
|
$
|
—
|
|
The
facilities and other reserve balance includes costs related primarily to
(1)
future lease payments on closed facilities, (2) contract termination fees
and
(3) future lease payments associated with the early retirement of leased
aircraft. During the nine months ended September 30, 2006, we reduced the
facilities and other reserve balance by $26 million primarily due to the
rejection of certain facility leases and updated estimates concerning future
lease payments. As a result, the restructuring accrual related to these rejected
facilities was reclassified within liabilities subject to compromise to separate
estimated pre-petition claims associated with our Chapter 11
proceedings.
During
the nine months ended September 30, 2006, we recorded an additional accrual
of
$29 million for costs associated with our 2005 voluntary and involuntary
workforce reduction program. We also reduced the severance and related reserve
associated with this program by $14 million due primarily to higher employee
attrition than previously assumed.
12.
EARNINGS (LOSS) PER SHARE
We
calculate basic earnings (loss) per share by dividing net income (loss)
attributable 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 earnings (loss) per share:
|
|
Three
Months
Ended
September
30,
|
|
Nine
months
Ended
September
30,
|
|
(in
millions, except per share data)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
52
|
|
$
|
(1,130
|
)
|
$
|
(4,222
|
)
|
$
|
(2,583
|
)
|
Dividends
on allocated Series B ESOP Convertible Preferred Stock
|
|
|
—
|
|
|
(4
|
)
|
|
(2
|
)
|
|
(15
|
)
|
Net
income (loss) attributable to common shareowners
|
|
$
|
52
|
|
$
|
(1,134
|
)
|
$
|
(4,224
|
)
|
$
|
(2,598
|
)
|
Basic
weighted average shares outstanding
|
|
|
197.3
|
|
|
168.4
|
|
|
196.2
|
|
|
152.2
|
|
Basic
earnings (loss) per share
|
|
$
|
0.26
|
|
$
|
(6.73
|
)
|
$
|
(21.53
|
)
|
$
|
(17.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
Net
income (loss) attributable to common shareowners
|
|
$
|
52
|
|
$
|
(1,134
|
)
|
$
|
(4,224
|
)
|
$
|
(2,598
|
)
|
Basic
weighted average shares outstanding
|
|
|
197.3
|
|
|
168.4
|
|
|
196.2
|
|
|
152.2
|
|
Additional
shares assuming:
Exercise
of convertible debt
|
|
|
36.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Weighted
average shares outstanding, as adjusted
|
|
|
233.8
|
|
|
168.4
|
|
|
196.2
|
|
|
152.2
|
|
Diluted
earnings (loss) per share
|
|
$
|
0.22
|
|
$
|
(6.73
|
)
|
$
|
(21.53
|
)
|
$
|
(17.07
|
)
|
For
the
three and nine months ended September 30, 2005 and the nine months ended
September 30, 2006, we excluded from our loss per share calculations all
common
stock equivalents because their effect on loss per share was
anti-dilutive. These common stock equivalents primarily include
(1) stock options and our ESOP Preferred Stock through the dates of their
cancellation and conversion, respectively, during the March 2006 quarter
(see
notes 2 and 9 for additional information) and (2) shares of common stock
issuable upon conversion of our 8.0% Convertible Senior Notes due 2023 and
our
27/8%
Convertible Senior Notes due 2024. The common stock equivalents totaled 36.4
million shares for the three and nine months ended September 30, 2006, and
141
million shares and 145 million shares for the three and nine months ended
September 30, 2005, respectively.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Overview
On
September 14, 2005 (the “Petition Date”), we and substantially all of our
subsidiaries (collectively, the “Debtors”) filed voluntary petitions for
reorganization under Chapter 11 of the United States Bankruptcy Code (the
“Bankruptcy Code”), in the United States Bankruptcy Court for the Southern
District of New York (the “Bankruptcy Court”). The reorganization cases are
being jointly administered under the caption, “In re Delta Air Lines, Inc., et
al., Case No. 05-17923-ASH.”
For
the
nine months ended September 30, 2006, we recorded a consolidated net loss
of
$4.2 billion. These results include $3.7 billion of charges to
reorganization items, net, primarily from (1) a $2.1 billion allowed general,
unsecured pre-petition claim that we agreed to in our comprehensive agreement
with the Air Line Pilots Association, International (“ALPA”) to reduce our pilot
labor costs and (2) $1.5 billion of estimated claims primarily associated
with
restructuring the financing arrangements for 169 of our aircraft. See Note
1 of
the Notes to our Condensed Consolidated Financial Statements for additional
information about these charges. Our results for the nine months ended September
30, 2006 also include a net aggregate noncash charge of $310 million associated
with certain accounting adjustments recorded in the March 2006 quarter. See
“Basis of Presentation-Accounting Adjustments” below for additional information
regarding these accounting adjustments. Our cash and cash equivalents and
short
term investments were $2.8 billion at September 30, 2006, compared to $2.0
billion at December 31, 2005.
As
part
of our Chapter 11 reorganization, we are on schedule to achieve $3 billion
in
annual financial benefits (revenue enhancements and cost reductions) by the
end
of 2007 from revenue and network improvements, savings to be achieved through
the Chapter 11 restructuring process and reduced Mainline employee costs.
This
amount is in addition to the implementation of initiatives to achieve $5
billion
in annual financial benefits by the end of 2006, as compared to 2002, announced
in the transformation plan in 2004.
Our
results of operations continue to be negatively impacted by factors outside
our
control, including historically high fuel prices. Our average fuel price
per
gallon increased 27% to $2.05 for the nine months ended September 30, 2006
compared to the corresponding 2005 period. We were also negatively affected
during the September 2006 quarter by heightened security measures adopted
by the
Transportation Security Administration and foreign authorities upon the
discovery of a security threat in London, England against other airlines
in
August 2006.
Chapter
11 Proceedings
The
Debtors are operating as “debtors-in-possession” under the jurisdiction of the
Bankruptcy Court and in accordance with the applicable provisions of the
Bankruptcy Code. In general, as debtors-in possession, the Debtors are
authorized under Chapter 11 to continue to operate as an ongoing business,
but
may not engage in transactions outside the ordinary course of business without
the prior approval of the Bankruptcy Court.
As
required by the Bankruptcy Code, the United States Trustee for the Southern
District of New York appointed an official committee of unsecured creditors
(the
“Creditors Committee”). The Creditors Committee and its legal representatives
have a right to be heard on all matters that come before the Bankruptcy Court
with respect to the Debtors. The Creditors Committee has been generally
supportive of the Debtors’ positions on various matters; however, there can be
no assurance that the Creditors Committee will support the Debtors’ positions on
matters to be presented to the Bankruptcy Court in the future or on the Debtors’
plan of reorganization, once proposed. Disagreements between the Debtors
and the
Creditors Committee could protract the Chapter 11 proceedings, negatively
impact
the Debtors’ ability to operate and delay the Debtors’ emergence from the
Chapter 11 proceedings.
Under
Section 365 and other relevant sections of the Bankruptcy Code, we may assume,
assume and assign, or reject certain executory contracts and unexpired leases,
including, without limitation, leases of real property, aircraft and aircraft
engines, subject to the approval of the Bankruptcy Court and certain other
conditions. Any description of an executory contract or unexpired lease in
this
Form 10-Q, including where applicable our express termination rights or a
quantification of our obligations, must be read in conjunction with, and
is
qualified by, any overriding rejection rights we have under Section 365 of
the
Bankruptcy Code.
In
order
to successfully exit bankruptcy, the Debtors will need to propose, and obtain
confirmation by the Bankruptcy Court of, a plan (or plans) of reorganization
that satisfies the requirements of the Bankruptcy Code. A plan of reorganization
would, among other things, resolve the Debtors’ pre-petition obligations, set
forth the revised capital structure of the newly reorganized entity and provide
for corporate governance subsequent to exit from bankruptcy.
The
Debtors have the exclusive right for 120 days after the Petition Date to
file a
plan of reorganization and, if we do so, 60 additional days to obtain necessary
acceptances of our plan. The Bankruptcy Court has extended these periods
until
February 15, 2007 and April 16, 2007, respectively, and these periods may
be
extended further by the Bankruptcy Court for cause. If the Debtors’ exclusivity
period lapses, any party in interest may file a plan of reorganization for
any
of the Debtors. In addition to being voted on by holders of impaired claims
and
equity interests, a plan of reorganization must satisfy certain requirements
of
the Bankruptcy Code and must be approved, or confirmed, by the Bankruptcy
Court
in order to become effective. A plan of reorganization will have been accepted
by holders of claims against and equity interests in the Debtors if (1) at
least
one-half in number and two-thirds in dollar amount of claims actually voting
in
each impaired class of claims have voted to accept the plan and (2) at least
two-thirds in amount of equity interests actually voting in each impaired
class
of equity interests has voted to accept the plan.
Under
certain circumstances set forth in Section 1129(b) of the Bankruptcy Code,
the
Bankruptcy Court may confirm a plan even if such plan has not been accepted
by
all impaired classes of claims and equity interests. A class of claims or
equity
interests that does not receive or retain any property under the plan on
account
of such claims or interests is deemed to have voted to reject the plan. The
precise requirements and evidentiary showing for confirming a plan
notwithstanding its rejection by one or more impaired classes of claims or
equity interests depends upon a number of factors, including the status and
seniority of the claims or equity interests in the rejecting class (i.e.,
secured claims or unsecured claims, subordinated or senior claims, preferred
or
common stock). Generally, with respect to common stock interests, a plan
may be
“crammed down” even if the shareowners receive no recovery if the proponent of
the plan demonstrates that (1) no class junior to the common stock is receiving
or retaining property under the plan and (2) no class of claims or interests
senior to the common stock is being paid more than in full.
The
timing of filing a plan of reorganization by us will depend on the timing
and
outcome of numerous other ongoing matters in the Chapter 11 proceedings.
Although we expect to file a plan of reorganization that provides for our
emergence from bankruptcy as a going concern, there can be no assurance at
this
time that a plan of reorganization will be confirmed by the Bankruptcy Court,
or
that any such plan will be implemented successfully.
Basis
of Presentation
Our
Condensed Consolidated Financial Statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
(“GAAP”), including the provisions of American Institute of Certified Public
Accountants’ Statement of Position 90-7, “Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code” (“SOP 90-7”), on a going concern
basis. This contemplates the realization of assets and satisfaction of
liabilities in the ordinary course of business. Accordingly, our Condensed
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.
As
a
result of sustained losses, labor issues and our Chapter 11 proceedings,
the
realization of assets and satisfaction of liabilities, without substantial
adjustments and/or changes in ownership, are subject to uncertainty. Given
this
uncertainty, there is substantial doubt about our ability to continue as
a going
concern.
The
accompanying Condensed Consolidated Financial Statements do not purport to
reflect or provide for the consequences of the Chapter 11 proceedings. In
particular, the financial statements do not purport to show (1) as to assets,
their realizable value on a liquidation basis or their availability to satisfy
liabilities; (2) as to pre-petition liabilities, the amounts that may be
allowed
for claims or contingencies, or the status and priority thereof; (3) as to
shareowners’ equity accounts, the effect of any changes that may be made in our
capitalization; and (4) as to operations, the effect of any changes that
may be
made in our business.
Sale
of ASA
On
September 7, 2005, we sold Atlantic Southeast Airlines, Inc. (“ASA”), our wholly
owned subsidiary, to SkyWest, Inc. (“SkyWest”). After the sale, the revenue and
expenses related to our contract carrier agreement with ASA are reported
as
regional affiliates passenger revenues and contract carrier arrangements,
respectively, in our Consolidated Statements of Operations. Prior to the
sale,
expenses related to ASA were reported in the applicable expense line item
in our
Consolidated Statements of Operations rather than as contract carrier
arrangements.
Accounting
Adjustments
During
the March 2006 quarter we recorded certain adjustments (“Accounting
Adjustments”) in our Condensed Consolidated Financial Statements that are
reflected in our results for the nine months ending September 30, 2006. These
adjustments resulted in an aggregate net noncash charge of $310 million to
our
Consolidated Statement of Operations, as follows:
|
·
|
A
$112 million charge in landing fees and other rents. This adjustment
is
associated primarily with our airport facility leases at New York
- John
F. Kennedy International Airport. It resulted from historical differences
associated with recording escalating rent expense based on actual
rent
payments instead of on a straight-line basis over the lease term
as
required by Statement of Financial Accounting Standard No. 13,
“Accounting
for Leases.”
|
|
·
|
A
$108 million net charge related to the sale of mileage credits
under our
SkyMiles frequent flyer program. This includes an $83 million decrease
in
passenger revenues, a $106 million decrease in other, net operating
revenues, and an $81 million decrease in other operating expenses.
This
net charge primarily resulted from the reconsideration of our position
with respect to the timing of recognizing revenue associated with
the sale
of mileage credits that we expect will never be redeemed for
travel.
|
|
· |
A
$90 million charge in salaries and related costs to adjust our
accrual for
postemployment healthcare benefits. This adjustment is due to healthcare
payments applied to this accrual over several years, which should
have
been expensed as incurred.
|
We
believe the Accounting Adjustments, considered individually and in the
aggregate, are not material to our Consolidated Financial Statements for
each of
the three years in the period ended December 31, 2005 (the “Prior Years”) and
will not be material to our Consolidated Financial Statements as of and for
the
year ended December 31, 2006. In making this assessment, we considered
qualitative and quantitative factors, including the substantial net loss
we
reported in each of the Prior Years and expect to report for the current
year,
the noncash nature of the Accounting Adjustments, our substantial shareowners’
deficit at the end of each of the Prior Years and our status as a
debtor-in-possession under Chapter 11 of the Bankruptcy Code.
Results
of Operations - Three Months Ended September 30, 2006 and
2005
Net
Income (Loss)
Our
consolidated net income was $52 million for the September 2006 quarter, compared
to a net loss of $1.1 billion for the September 2005 quarter. The net income
for
the September 2006 quarter includes a $98 million credit in Reorganization
items, net primarily due to adjustments to prior claims estimates for aircraft
financing renegotiations and rejections that we expect to settle upon our
emergence from bankruptcy.
Operating
Revenue
|
|
Three
Months Ended
September
30,
|
|
Increase/
(Decrease)
|
|
%
Increase/
(Decrease)
|
|
(in
millions)
|
|
2006
|
|
2005
|
|
|
|
Operating
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline
|
|
$
|
3,227
|
|
$
|
3,041
|
|
$
|
186
|
|
6
|
%
|
Regional
affiliates
|
|
|
1,016
|
|
|
850
|
|
|
166
|
|
20
|
%
|
Total
passenger revenue
|
|
|
4,243
|
|
|
3,891
|
|
|
352
|
|
9
|
%
|
Cargo
|
|
|
121
|
|
|
128
|
|
|
(7
|
)
|
(5
|
)%
|
Other,
net
|
|
|
295
|
|
|
289
|
|
|
6
|
|
2
|
%
|
Total
operating revenue
|
|
$
|
4,659
|
|
$
|
4,308
|
|
$
|
351
|
|
8
|
%
|
Operating
revenue totaled $4.7 billion in the September 2006 quarter, an 8% increase
compared to the September 2005 quarter. Passenger revenue increased 9% while
capacity decreased 3%. The increase in passenger revenue reflects a rise
of 12%
and 13% in passenger mile yield and passenger revenue per available seat
mile
(“Passenger RASM”), respectively, due to fare increases that reflect strong
passenger demand and capacity reductions in the airline industry, as well
as the
structural changes we have made to strengthen our route network since our
Chapter 11 filing. These positive influences were partially offset by the
negative impact of increased security measures implemented upon the discovery
of
a security threat in London, England against other airlines in August 2006.
Passenger revenue of regional affiliates increased due to contract carrier
agreements with Shuttle America Corporation (“Shuttle America”) and Freedom
Airlines, Inc. (“Freedom”), effective September 1, 2005 and October 1, 2005,
respectively.
|
|
Three
Months
Ended
September
30, 2006
|
|
%
Increase/(Decrease)
Three
Months Ended September 30, 2006 vs. 2005
|
(in
millions)
|
|
|
Passenger
Revenue
|
|
|
Passenger
Revenue
|
|
|
RPMs
|
|
|
Yield
|
|
|
Passenger
RASM
|
|
|
Load
Factor
|
|
Passenger
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
American passenger revenue
|
|
$
|
3,063
|
|
|
3
|
%
|
|
(12
|
)%
|
|
16
|
%
|
|
18
|
%
|
|
1.4
|
|
International
passenger revenue
|
|
|
1,152
|
|
|
31
|
%
|
|
27
|
%
|
|
4
|
%
|
|
3
|
%
|
|
(0.4
|
)
|
Charter
revenue
|
|
|
28
|
|
|
(7
|
)%
|
|
(5
|
)%
|
|
(2
|
)%
|
|
4
|
%
|
|
(1.7
|
)
|
Total
passenger revenue
|
|
$
|
4,243
|
|
|
9
|
%
|
|
(2
|
)%
|
|
12
|
%
|
|
13
|
%
|
|
1.0
|
|
North
American Passenger Revenue.
North
American passenger revenue increased 3%, driven by a 16% increase in passenger
mile yield and a 1.4 point increase in load factor on a 13% decline in capacity.
Passenger RASM increased 18%. The decline in capacity, partially offset by
the
increase in load factor, resulted in a 12% decline in RPMs, or traffic. The
increases in passenger revenue, the passenger mile yield and Passenger RASM
reflect (1) fare increases implemented as part of the improved industry revenue
environment and (2) the positive impact of our strategic initiatives, including
the restructuring of our route network to reduce less productive short haul
domestic flights and reallocate widebody aircraft to international
routes.
International
Passenger Revenue.
International passenger revenue increased 31%, generated by a 27% increase
in
RPMs that resulted from a 27% increase in capacity. The passenger mile yield
and
Passenger RASM increased 4% and 3%, respectively. These results reflect
increases in service to international destinations, primarily in the Atlanta
and
Latin America markets, from the restructuring of our route
network.
Operating
Expenses
|
|
Three
Months Ended
September
30,
|
|
Increase/
(Decrease)
|
|
%
Increase/
(Decrease)
|
|
(in
millions)
|
|
2006
|
|
2005
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft
fuel
|
|
$
|
1,242
|
|
$
|
1,203
|
|
$
|
39
|
|
3
|
%
|
Salaries
and related costs
|
|
|
1,008
|
|
|
1,235
|
|
|
(227
|
)
|
(18
|
)%
|
Contract
carrier arrangements
|
|
|
724
|
|
|
313
|
|
|
411
|
|
131
|
%
|
Depreciation
and amortization
|
|
|
293
|
|
|
317
|
|
|
(24
|
)
|
(8
|
)%
|
Contracted
services
|
|
|
273
|
|
|
275
|
|
|
(2
|
)
|
(1
|
)%
|
Landing
fees and other rents
|
|
|
197
|
|
|
216
|
|
|
(19
|
)
|
(9
|
)%
|
Passenger
commissions and other selling expenses
|
|
|
233
|
|
|
244
|
|
|
(11
|
)
|
(5
|
)%
|
Aircraft
maintenance materials and outside repairs
|
|
|
183
|
|
|
215
|
|
|
(32
|
)
|
(15
|
)%
|
Passenger
service
|
|
|
95
|
|
|
90
|
|
|
5
|
|
6
|
%
|
Aircraft
rent
|
|
|
70
|
|
|
141
|
|
|
(71
|
)
|
(50
|
)%
|
Restructuring,
asset writedowns, pension settlements and related items,
net
|
|
|
(2
|
)
|
|
85
|
|
|
(87
|
)
|
(102
|
)%
|
Other
|
|
|
175
|
|
|
214
|
|
|
(39
|
)
|
(18
|
)%
|
Total
operating expenses
|
|
$
|
4,491
|
|
$
|
4,548
|
|
$
|
(57
|
)
|
(1
|
)%
|
Operating
expenses were $4.5 billion for the September 2006 and 2005 quarters. As
discussed below, a decrease in (1) salaries and related costs,
(2) charges related to restructuring, asset writedowns, pension settlements
and related items, net, (3) aircraft rent and (4) other
miscellaneous items was offset by (1) higher contract carrier arrangements
expense primarily due to a change in how we classify ASA expense as a
result of our sale of ASA on September 7, 2005 and (2) an increase in aircraft
fuel prices.
Operating
capacity decreased 3% to 39.6 billion available seat miles (“ASMs”) primarily
due to the simplification and reduction of our aircraft fleet as part of
our
business plan initiatives. Operating cost per available seat mile (“CASM”)
increased 2% to 11.33¢ primarily as a result of (1) the decrease in
operating capacity for the three months ended September 30, 2006, (2) an
increase in contract carrier arrangements expense, and (3) an increase in
aircraft fuel prices.
Aircraft
fuel.
Aircraft fuel expense increased primarily due to higher fuel prices despite
reduced consumption. Our average fuel price per gallon increased 20% to $2.19.
Fuel gallons consumed decreased 14% due to a reduction in Mainline capacity
and
our sale of ASA. As a result of this sale, ASA’s fuel gallons are no longer
considered part of our fuel gallons consumed for financial reporting purposes.
See “Sale of ASA” above.
Salaries
and related costs.
The
decrease in salaries and related costs primarily reflects a 12% decline to
lower
mainline headcount and our sale of ASA and a 6% decrease from salary rate
and
benefits cost reductions for our pilot and nonpilot employees.
Contract
carrier arrangements.
Contract carrier arrangements expense increased primarily due to (1) an 83%
increase from the change in how we classify ASA’s expenses as a result of its
sale to SkyWest and (2) a 34% increase due to new contract carrier agreements
with Shuttle America (effective on September 1, 2005) and Freedom (effective
on
October 1, 2005). After the sale of ASA to SkyWest, expenses related to ASA
are
shown as contract carrier arrangements expense. Prior to the sale,
expenses related to ASA as our wholly owned subsidiary were reported in the
applicable expense line item.
Aircraft
maintenance materials and outside repairs. Aircraft
maintenance materials and outside repairs decreased primarily due to (1)
a 9%
decrease from the change in how we classify ASA’s expenses as a result of its
sale to SkyWest and (2) a 4% decrease in flight equipment materials
cost.
Aircraft
rent.
The
decline in aircraft rent expense is primarily due to a 35% decrease from
the
renegotiation and rejection of certain leases in connection with our
restructuring efforts and a 7% decrease from the change in how we classify
ASA’s
expenses as a result of its sale to SkyWest.
Restructuring,
asset writedowns, pension settlements and related
items, net.
During
the September 2006 quarter, restructuring, asset writedowns, pension settlements
and related items, net totaled a gain of $2 million. During the September
2005
quarter, we recorded an $85 million settlement charge related to lump sum
distributions under the defined benefit pension plan for pilots (the “Pilot
Plan”).
Other.
The
decrease in other operating expenses primarily reflects (1) a 19% decrease
due
to change in estimate related to certain tax reserves and (2) a 6%
decrease related to the change in how we classify ASA’s expenses as a result of
its sale to SkyWest.
Operating
Income (Loss) and Operating Margin
We
reported operating income of $168 million in the September 2006 quarter,
compared to an operating loss of $240 million in the September 2005 quarter.
Operating margin, which is the ratio of operating income or loss to operating
revenues, was 4% and (6%) for the September 2006 and September 2005 quarters,
respectively.
Other
(Expense) Income
Other
expense, net for the September 2006 quarter was $237 million, compared to
$260
million for the September 2005 quarter. This change is substantially
attributable to a 20%, or $55 million, decrease in interest expense partially
offset by a $31 million increase in miscellaneous, net expense primarily
associated with our fuel hedge positions.
The
decrease in interest expense is primarily attributable to (1) a $58 million
decrease due to the required accounting treatment of certain interest charges
under our Chapter 11 proceedings in accordance with SOP 90-7 and (2) a $15
million reduction in interest associated with debt that was assumed by SkyWest
in our sale of ASA. These decreases were partially offset by a $27 million
increase from a higher level of debt outstanding, primarily associated with
our
Secured Super-Priority Debtor-In-Possession Credit Agreement (the “DIP Credit
Facility”), and higher interest rates.
The
increase in miscellaneous, net expense is primarily due to charges related
to
our fuel hedge positions accounted for in accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments
and Hedging Activities” (“SFAS 133”). For additional information about SFAS 133,
see Note 3 of the Notes to our Condensed Consolidated Financial Statements.
Reorganization
Items, net
Reorganization
items, net totaled a gain of $98 million in the September 2006 quarter. This
net
gain primarily reflects a $100 million credit due to adjustments to prior
claims
estimates partially offset by estimated allowed claims related to the
restructuring of the financing arrangements of 26 aircraft that we
expect to settle upon our emergence from bankruptcy. Reorganization items,
net
totaled a $607 million charge in the September 2005 quarter. This net charge
primarily relates to the valuation of pre-petition debt obligations and the
rejection of leased aircraft. For additional information about our
reorganization items, see Note 1 of the Notes to our Condensed Consolidated
Financial Statements.
Income
Taxes
During
the September 2006 quarter, we recorded an income tax benefit totaling $23
million. The amount primarily reflects adjustments to our income tax
reserve and to our estimated required valuation allowance at December 31,
2006.
Results
of Operations - Nine months Ended September 30, 2006 and
2005
Net
Loss
Our
consolidated net loss was $4.2 billion for the nine months ended September
30,
2006, compared to a net loss of $2.6 billion for the nine months ended September
30, 2005. The net loss for the nine months ended September 30, 2006
includes $3.7 billion of charges to reorganization items, net, primarily
from
(1) a $2.1 billion allowed general, unsecured pre-petition claim that we
agreed
to in our comprehensive agreement with ALPA to reduce our pilot labor costs
and
(2) $1.5 billion of estimated claims primarily associated with restructuring
the
financing arrangements for 169 of our aircraft.
Operating
Revenue
|
|
Nine
months Ended
September
30,
|
|
Increase/
(Decrease)
|
|
%
Increase/
(Decrease)
|
|
(in
millions)
|
|
2006
|
|
2005
|
|
|
|
Operating
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline
|
|
$
|
8,992
|
|
$
|
8,735
|
|
$
|
257
|
|
3
|
%
|
Regional
affiliates
|
|
|
2,909
|
|
|
2,370
|
|
|
539
|
|
23
|
%
|
Total
passenger revenue
|
|
|
11,901
|
|
|
11,105
|
|
|
796
|
|
7
|
%
|
Cargo
|
|
|
372
|
|
|
387
|
|
|
(15
|
)
|
(4
|
)%
|
Other,
net
|
|
|
760
|
|
|
771
|
|
|
(11
|
)
|
(1
|
)%
|
Total
operating revenue
|
|
$
|
13,033
|
|
$
|
12,263
|
|
$
|
770
|
|
6
|
%
|
Operating
revenue totaled $13.0 billion for the nine months ended September 30, 2006,
a 6%
increase compared to the nine months ended September 30, 2005. Passenger
revenue
increased 7% while capacity decreased by 6%. The increase in passenger revenue
reflects a rise of 12% and 14% in passenger mile yield and Passenger RASM,
respectively, due to fare increases that reflect strong passenger demand
and capacity reductions in the airline industry, as well as the structural
changes we have made to strengthen our route network since our Chapter 11
filing. Passenger revenue and other, net revenue were negatively impacted
by
certain Accounting Adjustments discussed above. Passenger revenue of regional
affiliates increased due to contract carrier agreements with Shuttle America
and
Freedom, effective September 1, 2005 and October 1, 2005,
respectively.
|
|
Nine
months
Ended
September
30, 2006
|
|
%
Increase/(Decrease)
|
|
|
|
|
Nine
months Ended September 30, 2006 vs. 2005
|
|
(in
millions)
|
|
Passenger
Revenue
|
|
Passenger
Revenue
|
|
RPMs
|
|
Yield
|
|
Passenger
RASM
|
|
Load
Factor
|
|
Passenger
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
American passenger revenue
|
|
$
|
8,989
|
|
3
|
%
|
(12
|
)%
|
17
|
%
|
20
|
%
|
2.1
|
|
International
passenger revenue
|
|
|
2,826
|
|
23
|
%
|
19
|
%
|
3
|
%
|
2
|
%
|
(.9
|
)
|
Charter
revenue
|
|
|
86
|
|
6
|
%
|
(8
|
)%
|
15
|
%
|
3
|
%
|
(4.1
|
)
|
Total
passenger revenue
|
|
$
|
11,901
|
|
7
|
%
|
(4
|
)%
|
12
|
%
|
14
|
%
|
1.4
|
|
North
American Passenger Revenue.
North
American passenger revenue increased 3%, driven by a 17% increase in passenger
mile yield and a 2.1 point increase in load factor on a 14% decline in capacity.
Passenger RASM increased 20%. The decline in capacity, partially offset by
the
increase in load factor, resulted in a 12% decline in RPMs, or traffic. The
increases in passenger revenue, the passenger mile yield and Passenger RASM
reflect (1) fare increases implemented as part of the improved industry revenue
environment and (2) the positive impact of our strategic initiatives, including
the restructuring of our route network to reduce less productive short haul
domestic flights and reallocate widebody aircraft to international routes.
International
Passenger Revenue.
International passenger revenue increased 23%, generated by a 19% increase
in
RPMs that resulted from a 20% increase in capacity. The passenger mile yield
and
Passenger RASM increased 3% and 2%, respectively. These results reflect
increases in service to international destinations, primarily in the Atlanta
and
Latin America markets, from the restructuring of our route network.
Operating
Expenses
|
|
Nine
months Ended
September
30,
|
|
Increase/
(Decrease)
|
|
%
Increase/
(Decrease)
|
|
(in
millions)
|
|
2006
|
|
2005
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft
fuel
|
|
$
|
3,282
|
|
$
|
3,141
|
|
$
|
141
|
|
4
|
%
|
Salaries
and related costs
|
|
|
3,188
|
|
|
3,944
|
|
|
(756
|
)
|
(19
|
)%
|
Contract
carrier arrangements
|
|
|
1,993
|
|
|
728
|
|
|
1,265
|
|
174
|
%
|
Depreciation
and amortization
|
|
|
912
|
|
|
956
|
|
|
(44
|
)
|
(5
|
)%
|
Contracted
services
|
|
|
791
|
|
|
817
|
|
|
(26
|
)
|
(3
|
)%
|
Landing
fees and other rents
|
|
|
680
|
|
|
658
|
|
|
22
|
|
3
|
%
|
Passenger
commissions and other selling expenses
|
|
|
679
|
|
|
745
|
|
|
(66
|
)
|
(9
|
)%
|
Aircraft
maintenance materials and outside repairs
|
|
|
566
|
|
|
598
|
|
|
(32
|
)
|
(5
|
)%
|
Passenger
service
|
|
|
247
|
|
|
269
|
|
|
(22
|
)
|
(8
|
)%
|
Aircraft
rent
|
|
|
238
|
|
|
435
|
|
|
(197
|
)
|
(45
|
)%
|
Restructuring,
asset writedowns, pension settlements and related items,
net
|
|
|
17
|
|
|
712
|
|
|
(695
|
)
|
(98
|
)%
|
Other
|
|
|
388
|
|
|
586
|
|
|
(198
|
)
|
(34
|
)%
|
Total
operating expenses
|
|
$
|
12,981
|
|
$
|
13,589
|
|
$
|
(608
|
)
|
(4
|
)%
|
Operating
expenses were $13.0 billion for the nine months ended September 30, 2006,
compared to $13.6 billion for the nine months ended September 30, 2005. As
discussed below, the decrease in operating expenses was primarily due to
(1) a
decrease in salaries and related costs, (2) significantly lower charges related
to restructuring, asset writedowns, pension settlements and related items,
net,
(3) a decrease in aircraft rent and (4) a decrease in other expenses. This
decrease was partially offset by (1) higher contract carrier arrangements
expense for the nine months ended September 30, 2006, primarily due to a
change in how we classify ASA expense as a result of our sale of ASA on
September 7, 2005, (2) certain Accounting Adjustments discussed above and
(3) an
increase in aircraft fuel prices.
Operating
capacity decreased 6% to 112 billion ASMs primarily due to the simplification
and reduction of our aircraft fleet as part of our business plan initiatives.
CASM increased 2% to 11.59¢ primarily as a result of (1) the decrease in
operating capacity for
the
nine months ended September 30, 2006,
(2) an
increase in contract carrier arrangements expense and (3) an increase in
aircraft fuel prices.
Aircraft
fuel.
Aircraft fuel expense increased primarily due to higher fuel prices despite
reduced consumption. Our average fuel price per gallon increased 27% to $2.05.
Fuel gallons consumed decreased 18% due to a reduction in Mainline capacity
and
our sale of ASA. As a result of this sale, ASA’s fuel gallons are no longer
considered part of our fuel gallons consumed for financial reporting purposes.
See “Sale of ASA” above.
Salaries
and related costs.
The
decrease in salaries and related costs primarily reflects a 13% decline due
to
lower Mainline headcount and our sale of ASA, and an 8% decrease from salary
rate and benefits cost reductions for our pilot and nonpilot employees,
partially offset by certain Accounting Adjustments discussed above.
Contract
carrier arrangements.
Contract carrier arrangements expense increased primarily due to (1) a 131%
increase from the change in how we classify ASA’s expenses as a result of its
sale to SkyWest and (2) a 33% increase from new contract carrier agreements
with
Shuttle America (effective on September 1, 2005) and Freedom (effective on
October 1, 2005). After the sale of ASA to SkyWest, expenses related to ASA
are
shown as contract carrier arrangements expense. Prior to the sale,
expenses related to ASA as our wholly owned subsidiary were reported in the
applicable expense line item.
Aircraft
rent.
The
decline in aircraft rent expense is primarily due to a 30% decrease from
the
renegotiation and rejection of certain leases in connection with our
restructuring efforts and a 10% decrease from the change in how we classify
ASA’s expenses as a result of its sale to SkyWest.
Restructuring,
asset writedowns, pension settlements and related items, net.
During
the nine months ended September 30, 2006, restructuring, asset writedowns,
pension settlements and related items, net totaled $17 million. During the
nine
months ended September 30, 2005, restructuring, asset writedowns, pension
settlements and related items, net totaled $712 million. This included (1)
a
$447 million charge related to certain employee initiatives under our
transformation plan, (2) a $257 million settlement charge related to the
Pilot
Plan, (3) a $10 million charge related to the retirement of six B-737-200
aircraft in conjunction with our transformation plan and (4) a net $2 million
reduction in operating expenses related to the severance and related costs
of
the 2004 workforce reduction programs.
Other.
The
decrease in other operating expenses primarily reflects (1) a 14% decrease
from
certain Accounting Adjustments discussed above, (2) an 11% decrease related
to
the change in how we classify ASA’s expenses as a result of its sale to SkyWest
and (3) a 7% decrease due to a change in estimate related to certain tax
reserves.
Operating
Income (Loss) and Operating Margin
We
reported operating income of $52 million in the nine months ended September
30,
2006, compared to an operating loss of $1.3 billion in the nine months ended
September 30, 2005. Operating margin, which is the ratio of operating income
(loss) to operating revenues, was less than 1% and (11%) for the nine months
ended September 30, 2006 and 2005, respectively.
Other
(Expense) Income
Other
expense, net for the nine months ended September 30, 2006 was $629 million,
compared to $789 million for the nine months ended September 30, 2005. This
change is substantially attributable to a 20%, or $170 million, decrease
in
interest expense partially offset by a $12 million increase in miscellaneous,
net expense primarily associated with our fuel hedge positions.
The
decrease in interest expense is primarily attributable to (1) a $206 million
decrease due to the required accounting treatment of certain interest charges
under our Chapter 11 proceedings in accordance with SOP 90-7 and (2) a $42
million reduction in interest due to aircraft lease restructurings. These
decreases were partially offset by a $103 million increase from a higher
level
of debt outstanding, primarily associated with our DIP Credit Facility, and
higher interest rates.
The
increase in miscellaneous, net expense is primarily due to charges related
to
our fuel hedge positions accounted for in accordance with SFAS 133. For
additional information about SFAS 133, see Note 3 of the Notes to our Condensed
Consolidated Financial Statements.
Reorganization
Items, net
Reorganization
items, net totaled a charge of $3.7 billion for the nine months ended September
30, 2006. This net charge primarily relates to (1) a $2.1 billion allowed
general, unsecured pre-petition claim that we agreed to in our comprehensive
agreement with ALPA to reduce our pilot labor costs and (2) $1.5 billion
of
estimated claims primarily associated with restructuring the financing
arrangements for 169 of our aircraft. Reorganization items, net totaled a
$607 million charge for the nine months ended September 2005. This net charge
primarily relates to the valuation of pre-petition debt obligations and the
rejection of leased aircraft. For additional information about our
reorganization items, see Note 1 of the Notes to our Condensed Consolidated
Financial Statements.
Income
Taxes
During
the nine months ended September 30, 2006, we recorded an income tax benefit
totaling $40 million. The amount reflects adjustments to income tax reserves
and
to our estimated required valuation allowance at December 31, 2006. During
the
nine months ended September 30, 2005, we recorded an income tax benefit totaling
$139 million. The amount is primarily the result of (1) adjustments to our
deferred tax asset valuation allowance due to changes in the deferred tax
asset
related to our additional minimum pension liability and (2) the recognition
of
tax benefits for a portion of the period losses for the nine months ended
September 30, 2005 as a result of an analysis of our estimated required
valuation allowance at December 31, 2005.
Operating
Statistics
The
following table sets forth our operating statistics for the three and nine
months ended September 30, 2006 and 2005.
|
|
Three
Months Ended
September
30,
|
|
Nine
months Ended
September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Consolidated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Passenger Miles (millions) (1)
|
|
|
31,784
|
|
|
32,513
|
|
|
88,220
|
|
|
92,353
|
|
Available
Seat Miles (millions) (1)
|
|
|
39,643
|
|
|
41,045
|
|
|
111,963
|
|
|
119,397
|
|
Passenger
Mile Yield
(1)
|
|
|
13.35
|
¢
|
|
11.97
|
¢
|
|
13.49
|
¢
|
|
12.03
|
¢
|
Operating
Revenue Per Available Seat Mile
(1)
|
|
|
11.75
|
¢
|
|
10.50
|
¢
|
|
11.64
|
¢
|
|
10.27
|
¢
|
Passenger
Revenue Per Available Seat Mile
(1)
|
|
|
10.70
|
¢
|
|
9.48
|
¢
|
|
10.63
|
¢
|
|
9.30
|
¢
|
Operating
Cost Per Available Seat Mile (1)
|
|
|
11.33
|
¢
|
|
11.08
|
¢
|
|
11.59
|
¢
|
|
11.38
|
¢
|
Passenger
Load Factor (1)
|
|
|
80.2
|
%
|
|
79.2
|
%
|
|
78.8
|
%
|
|
77.4
|
%
|
Breakeven
Passenger Load Factor (1)
|
|
|
77.0
|
%
|
|
84.1
|
%
|
|
78.5
|
%
|
|
86.6
|
%
|
Passengers
Enplaned (thousands)
(1)
|
|
|
27,556
|
|
|
30,870
|
|
|
80,308
|
|
|
91,682
|
|
Fuel
Gallons Consumed (millions)
|
|
|
566
|
|
|
660
|
|
|
1,600
|
|
|
1,941
|
|
Average
Price Per Fuel Gallon, Net of Hedging
|
|
$
|
2.19
|
|
$
|
1.82
|
|
$
|
2.05
|
|
$
|
1.62
|
|
Number
of Aircraft in Fleet, End of Period
|
|
|
607
|
|
|
682
|
|
|
607
|
|
|
682
|
|
Full-Time
Equivalent Employees, End of Period
|
|
|
51,000
|
|
|
58,000
|
|
|
51,000
|
|
|
58,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Passenger Miles (millions)
|
|
|
27,220
|
|
|
28,292
|
|
|
75,359
|
|
|
80,274
|
|
Available
Seat Miles (millions)
|
|
|
33,679
|
|
|
35,148
|
|
|
95,208
|
|
|
102,307
|
|
Operating
Cost Per Available Seat Mile
|
|
|
10.15
|
¢
|
|
10.25
|
¢
|
|
10.47
|
¢
|
|
10.69
|
¢
|
Number
of Aircraft in Fleet, End of Period
|
|
|
440
|
|
|
508
|
|
|
440
|
|
|
508
|
|
(1) |
Includes
the operations under contract carrier agreements with unaffiliated
regional air carriers:
|
|
- |
Chautauqua
Airlines, Inc. and SkyWest for all periods presented,
|
|
- |
Shuttle
America for the three and nine months ended September 30, 2006
and from
September 1 through September 30,
2005,
|
|
- |
ASA
for the three and nine months ended September 30, 2006 and from
September
8 through September 30, 2005, and
|
|
- |
Freedom
for the three and nine months ended September 30,
2006.
|
For
additional information about our contract carrier agreements, see Note 5
of the
Notes to our Condensed Consolidated Financial Statements.
Financial
Condition and Liquidity
The
matters described herein, to the extent that they relate to future events
or
expectations, may be significantly affected by our Chapter 11 proceedings.
Those
proceedings will involve, or may result in, various restrictions on our
activities, limitations on financing, the need to obtain Bankruptcy Court
and
Creditors Committee approval for various matters and uncertainty as to
relationships with vendors, suppliers, customers and others with whom we
may
conduct or seek to conduct business.
Under
the
priority scheme established by the Bankruptcy Code, unless creditors agree
otherwise, pre-petition liabilities and post-petition liabilities must be
satisfied in full before shareowners are entitled to receive any distribution
or
retain any property under a plan of reorganization. The ultimate recovery
to
creditors and/or shareowners, if any, will not be determined until confirmation
of a plan or plans of reorganization. No assurance can be given as to what
values, if any, will be ascribed in the Chapter 11 proceedings cases to each
of
these constituencies or what types or amounts of distributions, if any, they
would receive. A plan of reorganization could result in holders of our
liabilities and/or securities, including our common stock, receiving no
distribution on account of their interests and cancellation of their holdings.
We believe that our currently outstanding common stock
will
have
no value and will be canceled under any plan of reorganization we propose.
If
the requirements of Section 1129(b) of the Bankruptcy Code are met, a plan
of
reorganization can be confirmed notwithstanding its rejection by the holders
of
our common stock and notwithstanding the fact that such holders do not receive
or retain any property on account of their equity interests under the plan.
Because of such possibilities, the value of our liabilities and securities,
including our common stock, is highly speculative. We urge that appropriate
caution be exercised with respect to existing and future investments in any
of
our liabilities and/or securities of the Debtors.
Liquidity
Events
Debtor-in-Possession
Financing
On
September 16, 2005, we entered into the DIP Credit Facility to borrow up
to $1.7
billion from a syndicate of lenders arranged by General Electric Capital
Corporation (“GECC”) and Morgan Stanley Senior Funding, Inc., for which GECC
acted as administrative agent. On October 7, 2005, we entered into an amendment
to the DIP Credit Facility, resulting in borrowings of $1.9 billion under
the
DIP Credit Facility, as amended.
On
March
27, 2006, we executed an amended and restated credit agreement (the “Amended and
Restated DIP Credit Facility”) with a syndicate of lenders, which replaced the
DIP Credit Facility in its entirety. The aggregate amounts available to be
borrowed under the DIP Credit Facility are not changed by the Amended and
Restated DIP Credit Facility. However, under the Amended and Restated DIP
Credit
Facility, the interest rates on borrowings have been reduced: the $600 million
Term Loan A bears interest, at our option, at LIBOR plus 2.75% or an index
rate
plus 2.00%; the $700 million Term Loan B bears interest, at our option, at
LIBOR
plus 4.75% or an index rate plus 4.00%; and the $600 million Term Loan C
bears
interest, at our option, at LIBOR plus 7.50% or an index rate plus
6.75%.
The
Amended and Restated DIP Credit Facility is otherwise substantially the same
as
the DIP Credit Facility, including financial covenants, collateral, guarantees,
maturity date and events of default, which are described in our Form 10-K.
The
Amended and Restated DIP Credit Facility allows the execution of amendments
to
(1) certain other credit facilities previously entered into by us with GECC;
and
(2) a reimbursement agreement between us and GECC (the “Reimbursement
Agreement”) related to letters of credit totaling $403 million issued on our
behalf by GECC, which support our obligations with respect to $397 million
aggregate principal amount of tax-exempt special facility bonds issued to
refinance the construction cost of certain airport facilities leased to us.
See
below for additional information about the amendments to the credit facilities
and the Reimbursement Agreement.
On
August
31, 2006, we entered into an amendment to the Amended and Restated DIP Credit
Facility that authorized us to consummate a fuel inventory supply agreement
(as
described in Note 5 of the Notes to our Condensed Consolidated Financial
Statements).
Financing
Agreement with Amex
On
September 16, 2005, we entered into an agreement (the “Modification Agreement”)
with American Express Travel Related Services Company, Inc. (“Amex”) and
American Express Bank, F.S.B. pursuant to which we modified certain existing
agreements with Amex, including two agreements (collectively, the “Amex
Pre-Petition Facility”) under which we had borrowed $500 million from
Amex.
As
required by the Modification Agreement, on September 16, 2005, we used a
portion
of the proceeds of our initial borrowing under the DIP Credit Facility to
repay
the principal amount of $500 million, together with interest hereon, that
we had
previously borrowed from Amex under the Amex Pre-Petition Facility.
Simultaneously, we borrowed $350 million from Amex pursuant to the terms
of the
Amex Pre-Petition Facility as modified by the Modification Agreement (the
“Amex
Post-Petition Facility”). On October 7, 2005, pursuant to Amendment No. 1 to the
Modification Agreement (the “Amendment to the Modification Agreement”), Amex
consented to the above-described increased principal amount of the DIP Credit
Facility in return for a prepayment of $50 million under the Amex Post-Petition
Facility.
In
connection with the Amended and Restated DIP Credit Facility, we executed
a
conforming amendment and restatement of the Amex Post-Petition Facility.
The
financial covenants, collateral, guarantees, maturity dates and events of
default are not changed by the amendment and restatement and are described
in
our Form 10-K. As of the date of effectiveness of the Amended and Restated
DIP
Credit Facility, to which Amex consented, the fee on outstanding advances
under
the Amex Post-Petition Facility decreased to a rate of LIBOR plus a margin
of
8.75%.
On
August
31, 2006, we entered into an amendment to the Amex Post-Petition Facility
that
authorized us to consummate a fuel inventory supply agreement (as described
in
Note 5 of the Notes to our Condensed Consolidated Financial
Statements).
The
Amended and Restated DIP Credit Facility and the Amex Post-Petition Facility
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
GECC Agreements
On
March
31, 2006, we entered into amendments (the “Amendments”) to certain credit
facilities with GECC (other than the Amended and Restated DIP Credit Facility)
and the Reimbursement Agreement. These credit facilities are referred to
as the
Spare Engines Loan, the Aircraft Loan and the Spare Parts Loan in footnotes
6, 7
and 8, respectively, to the debt table in Note 8 of the Notes to our
Consolidated Financial Statements in our Form 10-K.
The
credit facilities and the Reimbursement Agreement are secured by specific
aircraft, Mainline aircraft engines and substantially all of the Mainline
aircraft spare parts owned by us (the “Collateral Pool”). As a result of the
Amendments, the Collateral Pool secures (1) each of the credit facilities
with
GECC (other than the Amended and Restated Credit Facility), (2) 12 leases
for
CRJ-200 aircraft we previously entered into with GECC, (3) leases of up to
an
additional 15 CRJ-200 aircraft pursuant to the put rights described below
and
(4) the Reimbursement Agreement. In addition, the expiration date of the
letters
of credit issued in connection with the Reimbursement Agreement was extended
from 2008 to 2011, and the minimum collateral value test in the Reimbursement
Agreement was eliminated. For additional information about the minimum
collateral value test, see Item 7 -”Management’s Discussion and Analysis of
Financial Condition and Results of Operations - Covenants” in our Form
10-K.
As
a
condition to the Amendments, we granted GECC the right, exercisable until
March
30, 2007, to lease to us up to an additional 15 CRJ-200 aircraft (“put rights”).
GECC may exercise the put rights only after providing us with prior written
notice, and no more than three such aircraft may be scheduled for delivery
in
the same month. The leases will have terms ranging between 108 months and
172
months, as determined by GECC, and lease rates will be based on the date
of
manufacture of the aircraft. We believe that the lease payments for these
15
aircraft will aggregate $215 million over the maximum 172 month term and
that
the lease payments approximate current market rates. To date, GECC has leased
seven of these aircraft to us and has exercised put rights with respect to
an
additional two aircraft. We have certain rights to sublease all of these
aircraft.
Letter
of Credit Facility Related to Visa/MasterCard Credit Card
Processing Agreement
During
January 2006, with the authorization from the Bankruptcy Court, we entered
into
a letter of credit facility with Merrill Lynch. Under the Letter of Credit
Reimbursement Agreement, Merrill Lynch issued a $300 million irrevocable
standby
letter of credit for the benefit of our Visa/MasterCard credit card processor
(“Processor”), which we substituted for a portion of the cash reserve that the
Processor maintains. In July 2006, with the approval of the Bankruptcy Court,
we
amended the letter of credit facility to, among other matters, extend the
expiration date of the letter of credit to September 14, 2008 and to reduce
the
fees payable by us. For further information about the letter of credit and
the
reserve maintained by the Processor, see Note 8 of the Notes to our Consolidated
Financial Statements in our Form 10-K.
Refinancing
of Senior Secured Notes
In
October 2006, we refinanced our 9.5% Senior Secured Notes due 2008 (“Senior
Notes”). In connection with the refinancing, we repaid $39 million principal
amount of Senior Notes. We refinanced the remaining $196 million principal
amount of Senior Notes by issuing $196 million principal amount of new notes
(“New Notes”). The New Notes are due in installments through September 2012 and
bear interest at a floating rate based on LIBOR plus a margin. The New Notes
are
secured by the same 32 aircraft as the Senior Notes.
Fuel
Inventory Supply Agreement
On
August
31, 2006, we entered into an agreement with J. Aron & Company (“Aron”), an
affiliate of Goldman Sachs & Co., pursuant to which Aron became the
exclusive jet fuel supplier for our operations at the Atlanta airport, the
Cincinnati airport and the three major airports in the New York City area.
At
the outset of the relationship on September 6, 2006, we sold to Aron, at
current
market prices, (1) all jet fuel inventory that we were then holding in storage
at facilities that support our operations at the airports in Atlanta and
Cincinnati and (2) all inventory that was in transit to these airports as
well
as to the New York City area airports. We received approximately $102 million
from this sale. In addition, for the duration of the agreement, we (1) assigned
to Aron certain existing supply agreements with our third party suppliers
for
jet fuel for these locations, (2) transferred to Aron the right to use our
storage facilities in Atlanta and Cincinnati and (3) transferred to Aron
allocations in pipeline systems through which jet fuel is delivered to storage
facilities for the Atlanta, Cincinnati and the three New York City area
airports. The initial sale of our jet fuel inventory did not have a material
impact on our Consolidated Statement of Operations for the September
2006 quarter. The agreement with Aron has six-month terms that automatically
renew unless terminated by either party thirty days prior to the end of any
six-month period, and the agreement will terminate on its third anniversary.
Upon termination of the agreement, we will be required to purchase, at market
prices at the time of termination, all fuel inventory that Aron is holding
in
the storage facilities that support our operations at the Atlanta and Cincinnati
airports and all inventory that is in transit to these airports as well as
to
the New York City area airports.
London
Route Agreement
In
August
2006, the Bankruptcy Court approved our purchase from United Air Lines, Inc.
of
its authority to operate direct transatlantic service between New York and
London (the “Route”). We agreed to purchase the Route for up to $21
million payable as follows: $13 million upon satisfaction of certain
closing conditions (namely approval of the route transfer by the U.S. Department
of Transportation and acceptance by the Government of the United Kingdom
of the
designation of Delta to operate service on the Route) and four payments of
$2
million payable on each of the first four anniversary dates of the initial
payment. If, however, the current bilateral agreement between the U.S. and
the United Kingdom is expanded at any time during that four-year period to
permit more than two U.S. carriers to operate service on the Route, then
our
obligation to make any remaining payments ceases. The closing conditions
for the purchase have been satisfied and the transaction was consummated
on
October 30, 2006.
Sources
and Uses of Cash
Our
cash
and cash equivalents and short-term investments were $2.8 billion at September
30, 2006, compared to $2.0 billion at December 31, 2005. Restricted cash
totaled
$1.1 billion at September 30, 2006, compared to $928 million at December
31,
2005. Cash and cash equivalents as of September 30, 2006 include $128 million,
which is set aside for payment of certain operational taxes and fees to various
governmental authorities.
Cash
flows from operating activities
For
the
nine months ended September 30, 2006, cash provided by operating activities
totaled $1.0 billion. This reflects our consolidated net loss of $4.2 billion,
which includes $102 million for sales proceeds related to our fuel inventory
supply agreement discussed above and $5.2 billion of noncash charges that
primarily consist of the following:
|
· |
$3.7
billion of reorganization items, net resulting from a $2.1 billion
allowed
general, unsecured pre-petition claim that we agreed to with
ALPA (see Note 1 of the Notes to our Condensed Consolidated Financial
Statements) and $1.5 billion of estimated claims primarily
associated with restructuring the financing arrangements for 169
of our aircraft.
|
|
· |
$912
million in depreciation and amortization
expense.
|
Additionally,
our air traffic liability increased $341 million due to higher bookings offset
by a $525 million increase in short term investments related to our auction
rate
securities.
Cash
flows from investing activities
For
the
nine months ended September 30, 2006, cash used in investing activities totaled
$366 million, which includes the following significant items:
|
· |
Cash
used for flight equipment additions totaled $171 million, including
$66
million in aircraft modifications.
|
|
· |
Restricted
cash increased by $145 million due to cash holdbacks associated
with our
Visa/MasterCard credit card processing
agreements.
|
|
· |
Cash
used for ground equipment additions totaled $88 million, which
primarily
includes technology updates relating to our software and hardware
infrastructure.
|
Cash
flows from financing activities
For
the
nine months ended September 30, 2006, cash used in financing activities totaled
$403 million, primarily due to principal payments on fully secured pre-petition
obligations.
Pension
Plans
In
the nine months ended September 30, 2006, we contributed $4 million to our
defined benefit pension plans for benefits accrued after the Petition Date
and
$80 million to our defined contribution pension plans.
On
June 19, 2006, a Notice of Intent to Terminate the Pilot Plan was filed. On
August 4, 2006, we filed a motion with the Bankruptcy Court to seek a
determination that we satisfy the financial requirements for a distress
termination of the Pilot Plan. On September 5, 2006, the Bankruptcy Court
made a
determination that the financial requirements for a distress termination
of the
Pilot Plan have been met. A group of retired pilots has appealed this ruling
to
the U.S. District Court for the Southern District of New York. We are continuing
our discussion with the Pension Benefit Guaranty Corporation (“PBGC”) regarding
termination of the Pilot Plan.
In
August
2006, the U.S. Congress passed legislation that was signed by the President,
which allows us to reduce our short-term funding obligations for the Nonpilot
Plan. As a result of this legislation, we currently do not intend to
terminate the Nonpilot Plan. Assuming we emerge from bankruptcy in the first
half of 2007, we currently estimate that the funding requirements for the
Nonpilot Plan will aggregate approximately $100 million in the 12-month period
following our emergence. While this legislation makes our funding obligations
for this plan more predictable, factors outside our control will continue
to
have an impact of the funding requirements of the plan.
Estimates
of the amount and timing of our future funding obligations for our Nonpilot
Plan
are based on various assumptions. These include assumptions concerning, among
other things, the actual and projected market performance of the plan assets,
statutory requirements and demographic data for pension plan participants.
For
additional information about our pension plans, see Note 12 of the Notes
to our
Consolidated Financial Statements in our Form 10-K and Note 7 of the Notes
to
our Condensed Consolidated Financial Statements.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
There
have been no material changes in market risk from the information provided
in
the “Market Risks Associated with Financial Instruments” section of “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations” in our Form 10-K other than those discussed below.
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 derivative
contracts to hedge a portion of our projected aircraft fuel requirements.
We do not enter into fuel hedge contracts for speculative purposes.
For
the
nine months ended September 30, 2006, aircraft fuel expense accounted for
25% of
our total operating expenses. Aircraft fuel expense for the nine months ended
September 30, 2006 increased 4% compared to the corresponding period in the
prior year primarily due to higher fuel prices despite reduced consumption.
Our
average fuel price per gallon increased 27% to $2.05 while total gallons
consumed decreased 18% due to a reduction in Mainline capacity and our sale
of
ASA. Fuel prices continue to be at historically high levels.
As
of
September 30, 2006, we hedged approximately 54% of our projected fuel
requirements for the December 2006 quarter using heating oil and jet fuel
swap
contracts with a weighted average contract price of $2.07. In
addition, as of September 30, 2006, we had hedged 11% of our projected
fuel requirements for the March 2007 quarter using heating oil option
contracts as cashless collars. These outstanding fuel hedge
contracts had an estimated fair market value loss of $58 million, which we
recorded as a liability in accounts payable, deferred credits and other accrued
liabilities on our Consolidated Balance Sheet. We estimate that a 10% rise
in the price per gallon of jet fuel would change our estimated fair market
value
loss associated with our outstanding contracts to a $4 million
gain.
We
project that our aircraft fuel consumption will be
522 million gallons for the three months ending December 31, 2006. Based
on an assumed average jet fuel price per gallon of $2.03 for the three months
ending December 31, 2006, a 10% rise in jet fuel prices would increase our
aircraft fuel expense by $101 million, inclusive of the impact of effective
hedge instruments outstanding at September 30, 2006.
For
additional information regarding our other exposures to market risks, see
“Market Risks Associated with Financial Instruments” in “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations” as
well as Notes 4, 5 and 6 of the Notes to the Consolidated Financial Statements
in our Form 10-K.
Item
4. Controls and Procedures
Our
management, including our Chief Executive Officer and Executive Vice President
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 Executive Vice President and Chief Financial Officer,
concluded that the controls and procedures were effective as of September
30,
2006 to ensure that material information was accumulated and communicated
to our
management, including our Chief Executive Officer and Executive Vice President
and Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure.
During
the three months ended September 30, 2006, except as set forth below, 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:
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During
the September 2006 quarter, our technology subsidiary entered into
an
agreement to outsource the supervision of all of our computer hardware
engineering and network monitoring. Our approach to implementing
new
business processes encompasses the design and implementation of
internal
control over financial reporting as it relates to this outsourcing
relationship.
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REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Shareowners of
Delta
Air
Lines, Inc.
We
have
reviewed the accompanying consolidated balance sheet of Delta Air Lines,
Inc.
(the Company) as of September 30, 2006, and the related consolidated statements
of operations for the three-month and nine-month periods then ended, and
the
condensed consolidated statement of cash flows for the nine months ended
September 30, 2006. These financial statements are the responsibility of
the
Company’s management. The consolidated statements of operations of the Company
for the three-month and nine-month periods ended September 30, 2005, and
condensed consolidated statement of cash flows for the nine months ended
September 30, 2005 were reviewed by other accountants whose report (dated
November 10, 2005) stated that they were not aware of any material modifications
that should be made to those statements for them to be in conformity with
U.S.
generally accepted accounting principles.
We
conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It
is
substantially less in scope than an audit conducted in accordance with standards
of the Public Company Accounting Oversight Board (United States), the objective
of which is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based
on
our review, we are not aware of any material modifications that should be
made
to the accompanying condensed consolidated financial statements at September
30,
2006, and for the three-month and nine-month periods then ended, for them
to be
in conformity with U.S. generally accepted accounting principles.
Atlanta,
Georgia
November
7, 2006
PART
II.
OTHER INFORMATION
Item
1. Legal Proceedings
Chapter
11 Proceedings
As
discussed elsewhere in this Form 10-Q, on September 14, 2005, we and certain
of
our subsidiaries filed voluntary petitions for reorganization under Chapter
11
of the Bankruptcy Code in the Bankruptcy Court. The reorganization cases
are
being jointly administered under the caption “In re Delta Air Lines, Inc., et
al., Case No. 05-17923-ASH.” The Debtors continue to operate their business as
“debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in
accordance with the applicable provisions of the Bankruptcy Code and orders
of
the Bankruptcy Court. As of the date of the Chapter 11 filing, virtually
all
pre-petition pending litigation (including actions described below) is stayed,
and absent further order of the Bankruptcy Court, no party, subject to certain
exceptions, may take any action, also subject to certain exceptions, to recover
on pre-petition claims against the Debtors. At this time it is not possible
to
predict the outcome of the Chapter 11 filings or their effect on our
business.
Comair
Flight 5191
On
August
27, 2006, Comair Flight 5191 crashed shortly after take-off in a field near
the
Blue Grass Airport in Lexington, Kentucky. All 47 passengers and two members
of
the flight crew died in the accident. The third crew member survived with
severe
injuries. Numerous lawsuits arising out of this accident have been filed
against
our subsidiary, Comair, including four lawsuits which also name Delta as a
defendant, and additional lawsuits are anticipated. These lawsuits, which
are in
preliminary stages, generally assert claims for wrongful death and related
personal injuries, and seek unspecified damages, including punitive damages
in
most cases. All but two of the lawsuits filed to date have been filed
either in the U.S. District Court for the Eastern District of Kentucky, or
in
state court in Fayette County, Kentucky. The cases filed in state court in
Kentucky have been or are expected to be removed to federal court. One
lawsuit has been filed in the U.S. District Court for the Northern District
of
New York, and another lawsuit has been filed in State Court in Broward
County, Florida. Those matters pending in the Eastern District of Kentucky
have
been consolidated as “In Re
Air Crash at
Lexington, Kentucky, August 27, 2006, Master File No. 5:06-CV-316”.
In
addition, Comair has filed an action for declaratory judgment in the U.S.
District Court for the Eastern District of Kentucky against the United
States (based on the actions of the FAA), the Lexington Airport Board and
certain other Lexington airport defendants. In this action, Comair seeks
a
declaration that the FAA and the airport parties share responsibility for
the
accident and will be responsible to share in the cost of any financial
settlements that Comair enters into with the passenger families.
We
carry
aviation risk liability insurance and believe this insurance is sufficient
to
cover any liability likely to arise from this accident.
*
*
*
For
additional information about other legal proceedings, including litigation
in
our Chapter 11 proceedings, see “Item 3. Legal Proceedings” in our Form 10-K and
“Part II, Item 1. Legal Proceedings” in our Form 10-Q for the quarterly period
ended June 30, 2006. For information about proceedings under Section 1113
of the
Bankruptcy Code, see “General Information - Rejection of Collective Bargaining
Agreements” in Note 1 of the Notes to our Condensed Consolidated Financial
Statements.
Item
1A. Risk Factors
“Item
1A.
Risk Factors,” of our Form 10-K includes a discussion of our risk factors.
Except as described below, there have been no material changes from the risk
factors described in our Form 10-K. The information below updates, and should
be
read in conjunction with, the risk factors and information disclosed in our
Form
10-K.
Employee
strikes and other labor-related disruptions may adversely affect
our operations.
Our
business is labor intensive, utilizing large numbers of pilots, flight
attendants and other personnel. Approximately 18% of our workforce is unionized.
Strikes or labor disputes with our and our affiliates’ unionized employees may
adversely affect our ability to conduct our business. Relations between air
carriers and labor unions in the United States are governed by the Railway
Labor
Act, which provides that a collective bargaining agreement between an airline
and a labor union does not expire, but instead becomes amendable as of a
stated
date. The Railway Labor Act generally prohibits strikes or other types of
self-help actions both before and after a collective bargaining agreement
becomes amendable, unless and until the collective bargaining processes required
by the Railway Labor Act have been exhausted.
We
have
reached a comprehensive agreement with ALPA to reduce our pilot labor costs.
The
agreement has been ratified by Delta pilots and approved by the Bankruptcy
Court. The agreement became effective on June 1, 2006 and becomes amendable
on December 31, 2009. On June 2, 2006, the PBGC appealed to the United States
District Court the Bankruptcy Court’s order authorizing us to enter into
the comprehensive agreement with ALPA. We cannot predict the outcome of this
appeal or the effect that it may have on our comprehensive agreement with
ALPA.
In
addition, 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, subject
to the requirements of the Railway Labor Act and the Bankruptcy Code. See
Note 1
of the Notes to the Condensed Consolidated Financial Statements for information
about Comair’s negotiations
with its work groups. Likewise, if third party regional carriers with whom
we have contract carrier agreements are unable to reach agreement with their
unionized work groups on current or future negotiations regarding the terms
of
their collective bargaining agreements, those carriers may be subject to
work
interruptions or stoppages, subject to the requirements of the Railway Labor
Act, which could have a negative impact on our operations.
If
we are unable to terminate the Pilot Plan and lump sum payments again become
payable from the Pilot Plan, we expect that a significant number of
pilots will retire prior to their normal retirement age of 60. We believe
that a significant number of pilot early retirements would result in, among
other things, significant operational disruptions that would have a material
adverse effect on our revenues and increased funding requirements to
the Pilot Plan that would have a material adverse effect on our ability to
emerge from Chapter 11.
The
Pilot
Plan provides that Delta pilots who retire can elect to receive 50% of the
present value of their accrued pension benefit in a lump sum in connection
with
their retirement and the remaining 50% of their accrued pension benefit as
an
annuity after retirement. In the last few years and until October 2005, a
large
number of our pilots retired prior to their normal retirement age of 60 at
greater than historical levels 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
Notice of Intent to Terminate the Pilot Plan were to be issued during a
restructuring under Chapter 11 of the Bankruptcy Code. In October 2005, the
Pilot Plan failed to meet a liquidity test under the Internal Revenue Code,
which temporarily prevented the payment of lump sums. On June 19, 2006, a
Notice of Intent to Terminate the Pilot Plan was filed. This Notice of
Intent to Terminate the Pilot Plan has the effect of continuing to prevent
payment of lump sums pending the distress termination of the Pilot
Plan.
If
the
Pilot Plan is ultimately not terminated and the expected large number of
pilot
early retirements occurs, we believe that significant disruptions to
our operation will occur, which would have a material adverse impact on our
revenues because there would not be enough pilots to operate certain aircraft
types for a significant period of time. Moreover, additional contributions,
likely exceeding $1 billion in the short-term, would be required to be made
to
the Pilot Plan, which would have a material adverse impact on our ability
to
emerge from Chapter 11. The significant operational disruption could
result in the breach of financial covenants under our Amended and Restated
DIP
Credit Facility and our Amex Post-Petition Facility.
Our
funding obligations for our Nonpilot Plan are significant and are affected
by
factors beyond our control.
Our
funding obligations for our primary defined benefit pension plan for flight
attendants and ground personnel, the Nonpilot Plan, are governed by the Employee
Retirement Income Security Act of 1974 (“ERISA”). The
Pension Protection Act of 2006, signed by the President in August 2006, allows
us to reduce the short-term funding obligations for the Nonpilot Plan. As
a
result of this legislation, we currently do not intend to terminate
the Nonpilot Plan. Assuming we emerge from bankruptcy in the first half of
2007,
we currently estimate that the funding requirements under the Nonpilot Plan
will
aggregate approximately $100 million in the 12-month period following our
emergence. While this legislation makes our funding obligations for this
plan
more predictable, factors outside our control will continue to have an impact
on
the funding requirements of the plan.
Estimates
of the amount and timing of future funding obligations for the Nonpilot Plan
are
based on various assumptions. These include assumptions concerning, among
other
things, the actual and projected market performance of the pension plan assets,
statutory requirements; and demographic data for pension plan
participants.
For
additional information about our pension plans, see Note 7 of the Notes to
our
Condensed Consolidated Financial Statements.
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 to December 31, 2006. The
U.S. House of Representatives has passed and the U.S. Senate is considering
an additional extension of coverage through August 31, 2007, but it is
uncertain whether this extension will be enacted into law. The
withdrawal of government support of airline war-risk insurance would require
us
to obtain war-risk insurance coverage commercially, if available. 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 or may not be obtainable at all, resulting in an
interruption to our operations.
Item
6. Exhibits
(a)
Exhibits
15
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Letter
from Ernst & Young LLP regarding unaudited interim financial
information
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31.1
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Certification
by Delta’s Chief Executive Officer with respect to Delta’s Quarterly
Report on Form 10-Q for the quarterly period ended September 30,
2006
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31.2
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Certification
by Delta’s Executive Vice President and Chief Financial Officer with
respect to Delta’s Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2006
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32
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Certification
pursuant to Section 1350 of Chapter 63 of Title 18 of the United
States
Code by Delta’s Chief Executive Officer and Executive Vice President and
Chief Financial Officer with respect to Delta’s Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2006
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SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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Delta
Air Lines, Inc.
(Registrant)
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By:
/s/
Edward H. Bastian
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Edward
H. Bastian
Executive
Vice President and
Chief
Financial Officer
(Principal
Financial and Accounting Officer)
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November
9, 2006
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49