Form 10-K
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2006
or
o
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
Commission
file number 1-5424
|
|
DELTA AIR LINES, INC.
|
(Exact
name of registrant as specified in its
charter)
|
Delaware
|
|
|
58-0218548
|
(State
or other jurisdiction of incorporation or organization)
|
|
|
(I.R.S.
Employer Identification No.)
|
Post
Office Box 20706
Atlanta, Georgia
|
|
|
30320-6001
|
(Address
of principal executive offices)
|
|
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: (404) 715-2600
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class
|
|
Name
of each exchange on which
registered
|
None
|
|
|
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, par value $0.01 per share
8
1/8%
Notes Due July 1, 2039
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Yes
o No
þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.
Yes
o No
þ
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
þ
No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form
10-K. þ
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 non-accelerated filer” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o
|
Accelerated
filer
x
|
Non-accelerated
filer o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o No
þ
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of June 30, 2006 was approximately $148
million.
On
January 31, 2007, there were outstanding 197,335,938
shares
of the registrant’s common stock.
This
document is also available on our website at
http://investor.delta.com/edgar.cfm.
Documents Incorporated By Reference
Part
III
of this Form 10-K will be filed with the Securities and Exchange Commission
as
an amendment to this Form 10-K in accordance with General Instruction
G(3).
Statements
in this Form 10-K (or otherwise made by us or on our behalf) which are not
historical facts, including statements about our estimates, expectations,
beliefs, intentions, projections or strategies for the future, may be
“forward-looking statements” as defined in the Private Securities Litigation
Reform Act of 1995. Forward-looking statements involve risks and uncertainties
that could cause actual results to differ materially from historical experience
or our present expectations. For examples of such risks and uncertainties,
please see the cautionary statements contained in “Risk Factors Relating to
Delta” and “Risk Factors Relating to the Airline Industry” in “Item 1A. Risk
Factors” of this Form 10-K. 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.
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”). On December 19,
2006, we filed a Plan of Reorganization (the “Plan”), which, after amendment, is
being submitted to a vote of creditors and is subject to confirmation by the
Bankruptcy Court. Under the Plan, current holders of our equity securities
would
not receive any distributions, and the equity securities would be cancelled
upon
the effective date of the Plan. Accordingly, we urge that caution be exercised
with respect to existing and future investments in our equity securities and
any
of our liabilities or other securities. Additional information about our Chapter
11 filing is available on the Internet at www.delta.com/restructure.
Bankruptcy Court filings, claims information and our proposed Plan are available
at www.deltadocket.com.
Information contained on these websites is not part of, and is not incorporated
by reference in, this Form 10-K.
Unless
otherwise indicated, the terms “Delta,” the “Company,” “we,” “us,” and “our”
refer to Delta Air Lines, Inc. and its subsidiaries.
We
are a
major
air
carrier that provides scheduled air transportation for passengers and cargo
throughout the United States and around the world. We offer customers service
to
more destinations than any other global airline, with Delta and Delta Connection
carrier service to 308 destinations in 52 countries. With more than 60
new international routes added
since 2005,
we are
increasing our international service significantly. We are a leader across
the
Atlantic with flights to 31 trans-Atlantic destinations. We also
offer more
than 600
weekly
flights to 58 destinations in Latin America and the Caribbean. We are a founding
member of the SkyTeam international alliance, a global airline alliance that
provides customers with extensive worldwide destinations, flights and services.
Including our SkyTeam and worldwide codeshare partners, we offer flights
to 462 worldwide destinations in 99 countries.
For
the
years
ended
December 31, 2006, 2005 and 2004, passenger revenues accounted for 91%,
90%
and 91% of our consolidated operating revenues, respectively, and cargo revenues
and other sources accounted for 9%,
10%
and 9% of our consolidated operating revenues, respectively. In 2006, our
operations in North America, the Atlantic, Latin America and the Pacific
accounted for 75%,
18%,
6%
and
1%,
respectively, of our consolidated operating revenues. In 2005, our operations
in
North America, the Atlantic, Latin America and the Pacific accounted for 80%,
14%, 5% and 1%, respectively, of our consolidated operating revenues. In 2004,
our operations in North America, the Atlantic, Latin America and the Pacific
accounted for 81%, 14%, 4% and 1%, respectively, of our consolidated operating
revenues.
We
are
incorporated under the laws of the State of Delaware. Our principal executive
offices are located at Hartsfield-Jackson Atlanta International Airport in
Atlanta, Georgia (the “Atlanta Airport”). Our telephone number is
(404) 715-2600, and our Internet address is www.delta.com.
Information contained on this website is not part of, and is not incorporated
by
reference in, this Form 10-K.
See
“Risk
Factors
Relating to Delta” and “Risk Factors Relating to the Airline Industry” in Item
1A and “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” in Item 7 for additional discussion of trends and factors
affecting us and our industry.
Our
route
network
is
centered around the hub system we operate at airports in Atlanta, Cincinnati,
New York (John F. Kennedy International Airport (“JFK”)) and
Salt Lake City. Each of these hub operations includes Delta flights that
gather and distribute traffic from markets in the geographic region surrounding
the hub to domestic and international cities and to other Delta hubs. Our hub
system also provides passengers with access to our principal international
gateways in Atlanta and JFK.
As
briefly discussed below, other key characteristics of our route network include
our alliances with foreign airlines; the Delta Connection program; the Delta
Shuttle; and our domestic marketing alliances, including with Continental
Airlines, Inc. (“Continental”) and Northwest Airlines, Inc.
(“Northwest”).
International
Alliances
We
have
formed
bilateral and multilateral marketing alliances with foreign airlines to improve
our access to international markets. These arrangements can include codesharing,
reciprocal frequent flyer program benefits, shared or reciprocal access to
passenger lounges, joint promotions, common use of airport gates and ticket
counters, ticket office co-location and other marketing agreements. These
alliances often present opportunities in other areas, such as airport ground
handling arrangements and aircraft maintenance insourcing.
Our
international codesharing
agreements enable us to market and sell seats to an expanded number of
international destinations. Under international codesharing arrangements, we
and
a foreign carrier each publish our respective airline designator codes on a
single flight operation, thereby allowing us and the foreign carrier to offer
joint service with one aircraft, rather than operating separate services with
two aircraft. These arrangements typically allow us to sell seats on a foreign
carrier’s aircraft that are marketed under our “DL” designator code and permit
the foreign airline to sell seats on our aircraft that are marketed under the
foreign carrier’s two-letter designator code. We have international codeshare
arrangements in effect with Aeromexico, Air France, Air Jamaica (currently
expected to terminate on April 30, 2007), Alitalia, Avianca, China Airlines,
China Southern, CSA Czech Airlines, El Al Israel Airlines, KLM Royal Dutch
Airlines, Korean Air and Royal Air Maroc (and some affiliated carriers operating
in conjunction with these airlines).
In
addition to our agreements with individual foreign airlines, we are a member
of
the SkyTeam international airline alliance. The other full members of SkyTeam
are Aeroflot, Aeromexico, Air France, Alitalia, Continental, CSA Czech Airlines,
KLM Royal Dutch Airlines, Korean Air and Northwest. One goal of SkyTeam is
to
link the route networks of the member airlines, providing opportunities for
increased connecting traffic while offering enhanced customer service through
mutual codesharing arrangements, reciprocal frequent flyer and lounge programs
and coordinated cargo operations.
In
2002,
we, Air France, Alitalia,
CSA
Czech Airlines and Korean Air received limited antitrust immunity from the
U.S.
Department of Transportation (the “DOT”) that enables us and our immunized
partners to offer a more integrated route network and develop common sales,
marketing and discount programs for customers.
Delta Connection Program
The
Delta
Connection program is our regional carrier service, which feeds traffic to
our
route system through contracts with regional air carriers that operate flights
serving passengers primarily in small- and medium-sized cities. The program
enables us to increase the number of flights we have in certain locations,
to
better match capacity with demand and to preserve our presence in smaller
markets. The Delta Connection program operates the largest number of regional
jets in the United States.
Through
the Delta Connection program, we have contractual arrangements with seven
regional carriers to operate regional jet and, in certain cases, turbo-prop
aircraft using our “DL” designator code. Our wholly-owned subsidiary, Comair,
operates all of its flights under our code. Atlantic Southeast Airlines, Inc.,
which we sold to SkyWest, Inc. (“SkyWest”) in September 2005, continues to
operate all of its flights under our code. In addition, we have agreements
with
the following regional carriers that operate some of their flights using our
code: SkyWest Airlines, Inc., a subsidiary of SkyWest; Chautauqua Airlines,
Inc., a subsidiary of Republic Airways Holdings, Inc. (“Republic Holdings”);
Shuttle America Corporation, a subsidiary of Republic Holdings; Freedom
Airlines, Inc., a subsidiary of Mesa Air Group, Inc.; and American Eagle
Airlines, Inc.
We
generally pay the regional carriers, including Comair, amounts defined in their
respective contract carrier agreements, which are based on a determination
of
the carriers’ respective cost of operating those flights and other factors
intended to approximate market rates for those services. These agreements
are long-term agreements, usually with initial terms of at least ten years,
that
grant us the option to extend the initial term and provide us the right to
terminate the agreement for convenience at certain future dates. Our arrangement
with Eagle, which is limited to certain flights operated to and from the Los
Angeles International Airport, as well as a portion of the flights operated
by
SkyWest Airlines, are structured as revenue proration agreements. These
proration agreements establish a fixed dollar or percentage division of revenues
for tickets sold to passengers traveling on connecting flight itineraries.
For
additional information regarding our contract carrier agreements, see
Note 8 of the Notes to the Consolidated Financial Statements.
Delta Shuttle
We
operate a high frequency service targeted to northeast business travelers known
as the Delta Shuttle. The Delta Shuttle provides nonstop, hourly service on
business days between New York - LaGuardia Airport (“LaGuardia”) and both Boston
- Logan International Airport and Washington, D.C. - Ronald Reagan National
Airport (“Reagan”).
Domestic Alliances
We
have
entered into marketing alliances with (1) Continental and Northwest (including
regional carriers affiliated with each) and (2) Alaska Airlines and Horizon
Air
Industries, both of which include mutual codesharing and reciprocal frequent
flyer and airport lounge access arrangements. These marketing relationships
are
designed to permit the carriers to retain their separate identities and route
networks while increasing the number of domestic and international connecting
passengers using the carriers’ route networks.
Our
results of operations are significantly impacted by changes in the price and
availability of aircraft fuel. The following table shows our aircraft fuel
consumption and costs for 2004 through 2006.
|
|
Gallons
|
|
|
|
Average
|
|
Percentage
of
|
|
|
Consumed
|
|
Cost (1)
|
|
Price
Per
|
|
Total
Operating
|
Year
|
|
(Millions)
|
|
(Millions)
|
|
Gallon (1)
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
2006
|
|
2,111
|
|
$4,319
|
|
$2.04
|
|
25%
|
2005
|
|
2,492
|
|
4,271
|
|
1.71
|
|
23%
|
2004
|
|
2,527
|
|
2,924
|
|
1.16
|
|
16%
|
(1) |
Net
of fuel hedge (losses) gains under our fuel hedging program of ($108)
million and $105 million for 2006 and 2004, respectively. We had
no fuel
hedge contracts in 2005.
|
Our
aircraft fuel purchase contracts do not provide material protection against
price increases or assure the availability of our fuel supplies. We purchase
most of our aircraft fuel under contracts that establish the price based on
various market indices. We also purchase aircraft fuel on the spot market,
from
off-shore sources and under contracts that permit the refiners to set the price.
We
periodically use derivative instruments designated as cash flow hedges, which
are comprised of heating oil and jet fuel swap and collar contracts, to manage
our exposure to changes in fuel prices. Information regarding our fuel hedging
program is set forth under “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Market Risks Associated with
Financial Instruments — Aircraft Fuel Price Risk” in Item 7 and in
Note 4 of the Notes to the Consolidated Financial Statements.
We
are currently able to obtain adequate supplies of aircraft fuel, but it is
impossible to predict the future availability or price of aircraft fuel.
Weather-related events, natural disasters, political disruptions or wars
involving oil-producing countries, changes in government policy concerning
aircraft fuel production, transportation or marketing, changes in aircraft
fuel
production capacity, environmental concerns, and other unpredictable events
may
result in fuel supply shortages and fuel price increases in the future.
We
face
significant competition with respect to routes, services and fares. Our domestic
routes are subject to competition from both new and existing carriers, some
of
which have lower costs than we do and provide service at low fares to
destinations served by us. In particular, we face significant competition at
our
hub airports in Atlanta and JFK from other carriers. In addition, our operations
at our hub airports also compete with operations at the hubs of other airlines
that are located in close proximity to our hubs. We also face increasing
competition in smaller to medium-sized markets from rapidly expanding regional
jet operators. Our ability to compete effectively depends, in significant part,
on our ability to maintain a cost structure that is competitive with other
carriers.
In
addition, we compete with foreign carriers, both on interior U.S. routes, due
to
marketing and codesharing arrangements, and in international markets.
International marketing alliances formed by domestic and foreign carriers,
including the Star Alliance (among United Airlines, Lufthansa German Airlines
and others) and the oneworld Alliance (among American Airlines, British Airways
and others) have significantly increased competition in international markets.
Through marketing and codesharing arrangements with U.S. carriers, foreign
carriers have obtained access to interior U.S. passenger traffic.
Similarly, U.S. carriers have increased their ability to sell international
transportation, such as transatlantic services to and beyond European cities,
through alliances with international carriers.
We
have a
frequent flyer program, the SkyMiles®
program,
which offers incentives to customers to increase travel on Delta. This program
allows program members to earn mileage for travel awards by flying on Delta,
Delta Connection carriers and participating airlines. Mileage credit may also
be
earned by using certain services offered by program participants, such as credit
card companies, hotels, car rental agencies, telecommunication services and
internet services. In addition, individuals and companies may purchase mileage
credits. We reserve the right to terminate the program with six months’ advance
notice, and to change the program’s terms and conditions at any time without
notice.
Mileage
credits can be redeemed for free or upgraded air travel on Delta and
participating airlines, for membership in our Crown Room Club and for other
program participant awards. Travel awards are subject to certain transfer
restrictions and capacity-controlled seating. In some cases, blackout dates
may
apply. Program accounts with no activity for 12 consecutive months after
enrollment are deleted. Miles will not expire so long as, at least once every
two years, the participant (1) takes a qualifying flight on Delta or a
Delta Connection carrier, (2) earns miles through one of our program
participants, (3) buys miles from Delta or (4) redeems miles for any
program award.
The
DOT
and the Federal Aviation Administration (“FAA”) exercise regulatory authority
over air transportation in the United States. The DOT has authority to issue
certificates of public convenience and necessity required for airlines to
provide domestic air transportation. An air carrier that the DOT finds fit
to
operate is given unrestricted authority to operate domestic air transportation
(including the carriage of passengers and cargo). Except for constraints imposed
by regulations regarding “Essential Air Services,” which are applicable to
certain small communities, airlines may terminate service to a city without
restriction.
The
DOT
has jurisdiction over certain economic and consumer protection matters, such
as
unfair or deceptive practices and methods of competition, advertising, denied
boarding compensation, baggage liability and disabled passenger transportation.
The DOT also has authority to review certain joint venture agreements between
major carriers. The FAA has primary responsibility for matters relating to
air
carrier flight operations, including airline operating certificates, control
of
navigable air space, flight personnel, aircraft certification and maintenance
and other matters affecting air safety.
Authority
to operate international routes and international codesharing arrangements
is
regulated by the DOT and by the governments of the foreign countries involved.
International route awards are also subject to the approval of the President
of
the United States for conformance with national defense and foreign policy
objectives.
The
Transportation Security Administration and the United States Customs and
Border Protection, each a division of the Department of Homeland Security,
are
responsible for certain civil aviation security matters, including passenger
and
baggage screening at U.S. airports and international passenger prescreening
prior to entry into or departure from the United States.
Airlines
are also subject to various other federal, state, local and foreign laws and
regulations. For example, the United States Department of Justice has
jurisdiction over airline competition matters. The United States Postal
Service has authority over certain aspects of the transportation of mail. Labor
relations in the airline industry, as discussed below, are generally governed
by
the Railway Labor Act. Environmental matters are regulated by various federal,
state, local and foreign governmental entities. Privacy of passenger and
employee data is regulated by domestic and foreign laws and
regulations.
Fares
and Rates
Airlines
set ticket prices in most domestic and international city pairs without
governmental regulation, and the industry is characterized by significant price
competition. Certain international fares and rates are subject to the
jurisdiction of the DOT and the governments of the foreign countries involved.
Many of our tickets are sold by travel agents, and fares are subject to
commissions, overrides and discounts paid to travel agents, brokers and
wholesalers.
Route
Authority
Our
flight operations are authorized by certificates of public convenience and
necessity and, to a limited extent, by exemptions issued by the DOT. The
requisite approvals of other governments for international operations are
controlled by bilateral agreements with, or permits or approvals issued by,
foreign countries. Because international air transportation is governed by
bilateral or other agreements between the United States and the foreign country
or countries involved, changes in United States or foreign government aviation
policies could result in the alteration or termination of such agreements,
diminish the value of our international route authorities or otherwise affect
our international operations. Bilateral agreements between the United States
and
various foreign countries served by us are subject to renegotiation from time
to
time.
Certain
of our international route and codesharing authorities are subject to periodic
renewal requirements. We request extension of these authorities when and as
appropriate. While the DOT usually renews temporary authorities on routes where
the authorized carrier is providing a reasonable level of service, there is
no
assurance this practice will continue in general or with respect to a specific
renewal. Dormant route authority may not be renewed in some cases, especially
where another U.S. carrier indicates a willingness to provide
service.
Airport
Access
Operations
at three major domestic airports and certain foreign airports served by us
are regulated by governmental entities through allocations of “slots” or similar
regulatory mechanisms which limit the rights of carriers to conduct operations
at those airports. Each slot represents the authorization to land at or take
off
from the particular airport during a specified time period.
In
the
United States, the FAA currently regulates slot allocations at Reagan in
Washington, D.C., and has imposed analogous regulatory mechanisms which
restrict operations at O’Hare International Airport in Chicago, and LaGuardia in
New York. Our operations at these airports generally require the allocation
of
slots or analogous regulatory authorities. We currently have sufficient slots
or
analogous authorizations to operate our existing flights, and we have generally
been able to obtain the rights to expand our operations and to change our
schedules. There is no assurance, however, that we will be able to do so in
the
future because, among other reasons, such allocations are subject to changes
in
governmental policies.
Environmental
Matters
The
Airport Noise and Capacity Act of 1990 recognizes the rights of operators of
airports with noise problems to implement local noise abatement programs so
long
as such programs do not interfere unreasonably with interstate or foreign
commerce or the national air transportation system. This statute generally
provides that local noise restrictions on Stage 3 aircraft first effective
after October 1, 1990, require FAA approval. While we have had sufficient
scheduling flexibility to accommodate local noise restrictions in the past,
our
operations could be adversely impacted if locally-imposed regulations become
more restrictive or widespread.
The
FAA
issued a final rule, effective August 4, 2005, adopting the International Civil
Aviation Organization’s (“ICAO”) Chapter 4 noise standard, which is known
as the Stage 4 standard in the United States. This standard requires that
all new commercial jet aircraft designs certificated on or after January 1,
2006 be at least ten decibels quieter than the existing Stage 3 noise
standard requires. This new standard does not apply to existing aircraft or
to
the continued production of aircraft types already certificated. All new
aircraft that we have on order will meet the proposed Stage 4 standard.
Accordingly, the rule is not expected to have any significant impact on
us.
The
U.S. Environmental Protection Agency (the “EPA”) is authorized to regulate
aircraft emissions. Our aircraft comply with the applicable EPA standards.
On
November 17, 2005, the EPA issued a final rule adopting emissions control
standards for aircraft engines previously adopted by the ICAO. These standards
apply to newly designed engines certified after December 31, 2003 and align
the U.S. aircraft engine emission standards with existing international
standards. The rule, as adopted, is not expected to have a material impact
on
us. However, a group of state and local air regulators has filed a petition
for
review in the Court of Appeals for the District of Columbia Circuit challenging
the rule on a number of grounds. We are monitoring these
proceedings.
In
December 2004, Miami-Dade County filed a lawsuit in Florida Circuit Court
against us, seeking injunctive relief and alleging responsibility for past
and
future environmental cleanup costs and civil penalties for environmental
conditions at Miami International Airport. This lawsuit is related to several
other actions filed by the County against other parties to recover environmental
remediation costs incurred at the airport. This lawsuit is currently stayed
as a
result of our Chapter 11 proceedings, and we anticipate settling this lawsuit
through the bankruptcy process. Although the ultimate outcome of this matter
cannot be predicted with certainty, management believes that the resolution
of
this matter will not have a material adverse effect on our Consolidated
Financial Statements.
We
have
been identified by the EPA as a potentially responsible party (a “PRP”) with
respect to certain Superfund Sites, and have entered into consent decrees
regarding some of these sites. Our alleged disposal volume at each of these
sites is small when compared to the total contributions of all PRPs at each
site. We are aware of soil and/or ground water contamination present on our
current or former leaseholds at several domestic airports. To address this
contamination, we have a program in place to investigate and, if appropriate,
remediate these sites. We anticipate that many of the environmental liabilities
at Superfund Sites and former leaseholds will be resolved through the bankruptcy
proceedings. Although the ultimate outcome of these matters cannot be predicted
with certainty, management believes that the resolution of these matters will
not have a material adverse effect on our Consolidated Financial
Statements.
Civil
Reserve Air Fleet Program
We
participate in the Civil Reserve Air Fleet program (the “CRAF Program”), which
permits the United States military to use the aircraft and crew resources
of participating U.S. airlines during airlift emergencies, national
emergencies or times of war. We have agreed to make available under the CRAF
Program a portion of our international range aircraft from October 1, 2006
until September 30, 2007. As of October 1, 2006, the following numbers of
our international range aircraft are available for CRAF activation:
Stage
|
|
Description
of
Event
Leading to
Activation
|
|
International
Passenger
Aircraft
Allocated
|
|
Number
of
Aeromedical
Aircraft
Allocated
|
|
Total
Aircraft by
Stage
|
|
|
|
|
|
|
|
|
|
I
|
|
Minor
Crisis
|
|
7
|
|
N/A
|
|
7
|
|
|
|
|
|
|
|
|
|
II
|
|
Major
Theater Conflict
|
|
13
|
|
13
|
|
26
|
|
|
|
|
|
|
|
|
|
III
|
|
Total
National Mobilization
|
|
43
|
|
44
|
|
87
|
The
CRAF
Program has only been activated twice, both times at the Stage I level,
since it was created in 1951.
Regulatory
and Legislative Proposals
A
number
of Congressional bills and proposed DOT regulations have been considered in
recent years to address airline competition and other issues. Some of these
proposals would require large airlines with major operations at certain airports
to divest or make available to other airlines slots, gates, facilities and
other
assets at those airports. Other measures would limit the service or pricing
responses of major carriers that appear to target new entrant airlines. In
addition, concerns about airport congestion issues have caused the DOT and
FAA
to consider various proposals for access to certain airports, including
“congestion-based” landing fees and programs that would withdraw slots from
existing carriers and reallocate those slots (either by lottery or auction
to
the highest bidder) to carriers with little or no current presence at such
airports. These proposals, if enacted, could negatively impact our existing
services and our ability to respond to competitive actions by other airlines.
Furthermore, recent events related to extreme weather delays may cause the
DOT
to consider proposals related to airlines’ handling of lengthy flight delays
during extreme weather conditions.
Railway Labor Act
Our
relations with labor unions in the United States are governed by the Railway
Labor Act. Under the Railway Labor Act, a labor union seeking to represent
an
unrepresented craft or class of employees is required to file with the National
Mediation Board (the “NMB”) an application alleging a representation dispute,
along with authorization cards signed by at least 35% of the employees in that
craft or class. The NMB then investigates the dispute and, if it finds the
labor
union has obtained a sufficient number of authorization cards, conducts an
election to determine whether to certify the labor union as the collective
bargaining representative of that craft or class. Under the NMB’s usual rules, a
labor union will be certified as the representative of the employees in a craft
or class only if more than 50% of those employees vote for union representation.
A certified labor union then enters into negotiations toward a collective
bargaining agreement with the employer.
Under
the
Railway Labor Act, a collective bargaining agreement between an airline and
a
labor union does not expire, but instead becomes amendable as of a stated date.
Either party may request that the NMB appoint a federal mediator to participate
in the negotiations for a new or amended agreement. If no agreement is reached
in mediation, the NMB may determine, at any time, that an impasse exists and
offer binding arbitration. If either party rejects binding arbitration, a 30-day
“cooling off” period begins. At the end of this 30-day period, the parties may
engage in “self help,” unless the President of the United States appoints a
Presidential Emergency Board (“PEB”) to investigate and report on the dispute.
The appointment of a PEB maintains the “status quo” for an additional
60 days. If the parties do not reach agreement during this period, the
parties may then engage in “self help.” “Self help” includes, among other
things, a strike by the union or the imposition of proposed changes to the
collective bargaining agreement by the airline. Congress and the President
have
the authority to prevent “self help” by enacting legislation that, among other
things, imposes a settlement on the parties.
Collective
Bargaining
As
of
December 31, 2006, we had a total of approximately 51,300 full-time
equivalent employees. Approximately 17% of these employees are represented
by
unions. The following table presents certain information concerning the union
representation of our active domestic employees.
Employee
Group
|
|
Approximate
Number
of
Employees
Represented
|
|
Union
|
|
Date
on which Collective
Bargaining
Agreement
Becomes
Amendable
|
|
|
|
|
|
|
|
Delta
Pilots
|
|
5,810
|
|
ALPA
|
|
December
31, 2009
|
|
|
|
|
|
|
|
Delta
Flight Superintendents
|
|
170
|
|
PAFCA
|
|
January
1, 2010
|
|
|
|
|
|
|
|
Comair
Pilots
|
|
1,345
|
|
ALPA
|
|
May
21, 2007(1)
|
|
|
|
|
|
|
|
Comair
Maintenance Employees
|
|
535
|
|
IAM
|
|
December
31, 2010
|
|
|
|
|
|
|
|
Comair
Flight Attendants
|
|
880
|
|
IBT
|
|
December
31, 2010
|
|
(1)
|
On
February 12, 2007, Comair and ALPA reached a tentative agreement
to reduce
Comair’s pilot labor costs. The agreement is subject to ratification by
Comair pilots and Bankruptcy Court approval. If ratified and approved,
the
agreement would become effective March 2, 2007 and become
amendable on
March 2, 2011.
|
Labor
unions periodically engage in organizing efforts to represent various groups
of
employees of Delta and Comair that are not represented for collective bargaining
purposes. The timing and outcome of these organizing efforts cannot presently
be
determined.
For
additional information about our collective bargaining agreements, see Note
1 of
the Notes to the Consolidated Financial Statements.
We
make available free of charge on our website our Annual Report on
Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on
Form 8-K and amendments to those reports as soon as reasonably practicable
after these reports are filed with or furnished to the Securities and Exchange
Commission. Information on our website is not incorporated into this
Form 10-K or our other securities filings and is not a part of those
filings.
Risk
Factors
Relating to Delta
We
filed for reorganization under Chapter 11 of the Bankruptcy Code on
September 14, 2005 and are subject to the risks and uncertainties
associated with Chapter 11 proceedings.
For
the duration of our Chapter 11 proceedings, our operations, including our
ability to execute our business plan, are subject to the risks and uncertainties
associated with bankruptcy. Risks and uncertainties associated with our
Chapter 11 proceedings include the following:
|
· |
our
ability to prosecute, confirm and consummate our proposed
Plan;
|
|
· |
the
actions and decisions of our creditors and other third parties who
have
interests in our Chapter 11 proceedings that may be inconsistent with
our plans;
|
|
· |
our
ability to obtain court approval with respect to motions in the
Chapter 11 proceedings prosecuted from time to time;
|
|
· |
our
ability to obtain and maintain normal terms with vendors and service
providers;
|
|
· |
our
ability to maintain contracts that are critical to our operations;
and
|
|
· |
risks
associated with third parties seeking and obtaining court approval
to
terminate or shorten the exclusivity period for us to confirm our
proposed
Plan, to appoint a Chapter 11 trustee or to convert the cases to
Chapter 7
cases.
|
These
risks and uncertainties could affect our business and operations in various
ways. For example, negative events or publicity associated with our
Chapter 11 proceedings could adversely affect our sales of tickets and the
relationship with our customers, as well as with vendors and employees, which
in
turn could adversely affect our operations and financial condition, particularly
if the Chapter 11 proceedings are unexpectedly protracted. Also,
transactions outside the ordinary course of business are subject to the prior
approval of the Bankruptcy Court, which may limit our ability to respond timely
to certain events or take advantage of certain opportunities.
Because
of the risks and uncertainties associated with our Chapter 11 proceedings,
the ultimate impact that events that occur during these proceedings will have
on
our business, financial condition and results of operations cannot be accurately
predicted or quantified.
Our
business is dependent on the price and availability of aircraft fuel. Continued
periods of historically high fuel costs will continue to materially adversely
affect our operating results. Likewise, significant disruptions in the supply
of
aircraft fuel would materially adversely affect our operations and operating
results.
Our
operating results are significantly impacted by changes in the price and
availability of aircraft fuel. Fuel prices increased substantially in 2004,
2005
and 2006. In 2006, our average fuel price per gallon rose 19% to $2.04 as
compared to an average price of $1.71 in 2005, which was 47% higher than our
average price of $1.16 in 2004. In 2003, our average fuel price per gallon
was
81.78¢. The fuel costs represented 25%, 23%, and 16% of our operating expenses
in 2006, 2005 and 2004, respectively. These increasing costs have had a
significant negative effect on our results of operations and financial
condition.
Our
ability to pass along the increased costs of fuel to our customers is limited
by
the competitive nature of the airline industry. We often have not been able
to
increase our fares to fully offset the effect of increased fuel costs in the
past and we may not be able to do so in the future.
In
addition, our aircraft fuel purchase contracts do not provide material
protection against price increases or assure the availability of our fuel
supplies. We purchase most of our aircraft fuel under contracts that establish
the price based on various market indices. We also purchase aircraft fuel on
the
spot market, from offshore sources and under contracts that permit the refiners
to set the price. To attempt to manage our exposure to changes in fuel prices,
we periodically use
derivative instruments designated as cash flow hedges, which are comprised
of
heating oil and jet fuel swap and collar contracts,
though
we may not be able to successfully manage this exposure. Depending on the type
of hedging instrument used, our ability to benefit from declines in fuel prices
may be limited.
We
are
currently able to obtain adequate supplies of aircraft fuel, but it is
impossible to predict the future availability or price of aircraft fuel.
Weather-related events, natural disasters, political disruptions or wars
involving oil-producing countries, changes in governmental policy concerning
aircraft fuel production, transportation or marketing, changes in aircraft
fuel
production capacity, environmental concerns and other unpredictable events
may
result in additional fuel supply shortages and fuel price increases in the
future. Additional increases in fuel costs or disruptions in fuel supplies
could
have additional negative effects on us.
Our
substantial indebtedness may limit our financial and operating activities and
may adversely affect our ability to incur additional debt to fund future
needs.
We
will
have substantial indebtedness even if our Plan is consummated. Our substantial
indebtedness could have important consequences. For example, our substantial
indebtedness could:
|
· |
require
us
to dedicate a substantial portion of cash flow from operations to
the
payment of principal, and interest on, indebtedness, thereby reducing
the
funds available for other purposes;
|
|
· |
make
us
more vulnerable to economic downturns, adverse industry conditions
or
catastrophic external events;
|
|
· |
limit
our ability to withstand competitive
pressures;
|
|
· |
reduce
our flexibility in planning for or responding to changing business
and
economic conditions; and/or
|
|
· |
place
us
at a competitive disadvantage to competitors that have relatively
less
debt than we have.
|
In
addition,
a
substantial level of indebtedness could limit our ability to obtain additional
financing on acceptable terms or at all for working capital, capital
expenditures and general corporate purposes. We have historically had
substantial liquidity needs in the operation of our business. These liquidity
needs could vary significantly and may be affected by general economic
conditions, industry trends, performance and many other factors not within
our
control. Substantial indebtedness, along with other factors, will limit our
ability to obtain financing to meet such liquidity needs.
Our
exit financing credit facility will include financial and other covenants that
will impose restrictions on our financial and business
operations.
As
part
of the Plan, we expect to enter into an exit financing credit facility with
various lenders from whom we have received commitments. This credit facility
will contain financial covenants that will require us to maintain a minimum
fixed charge ratio, minimum unrestricted cash reserves and minimum collateral
coverage ratios. In addition, our exit financing credit facility will restrict
our ability to, among other things, incur additional secured indebtedness,
make
investments, sell assets if not in compliance with coverage ratio tests, pay
dividends or repurchase stock. These covenants may have a material impact on
our
operations. In addition, if we fail to comply with the covenants in the exit
financing credit facility and are unable to obtain a waiver or amendment, an
event of default would result under the exit financing credit
facility.
The
exit
financing credit facility is also expected to contain other events of default
customary for financings of this type, including cross defaults to certain
other
indebtedness and certain change of control events. If an event of default were
to occur, the lenders could declare outstanding borrowings under these
agreements immediately due and payable. We cannot provide assurance that we
would have sufficient liquidity to repay or refinance borrowings under the
exit
financing credit facility if accelerated upon an event of default. In addition,
an event of default or declaration of acceleration under the exit financing
credit facility could also result in an event of default under other
indebtedness.
The
closing and funding of the exit financing credit facility is subject to the
completion of definitive documentation and other conditions.
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 unionized employees may adversely affect
our
ability to conduct 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.
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, they 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 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.
Interruptions
or disruptions in service at one of our hub airports could have a material
adverse impact on our operations.
Our
business is heavily dependent on our operations at the Atlanta Airport and
at
our other hub airports in Cincinnati, JFK and Salt Lake City. Each of these
hub
operations includes flights that gather and distribute traffic from markets
in
the geographic region surrounding the hub to other major cities and to other
Delta hubs. A significant interruption or disruption in service at the Atlanta
airport or at one of the company’s other hubs could have a serious impact on our
business, financial condition and results of operations.
We
are increasingly dependent on technology in our operations, and if our
technology fails or we are unable to continue to invest in new technology,
our
business may be adversely affected.
We
have
become increasingly dependent on technology initiatives to reduce costs and
to
enhance customer service in order to compete in the current business
environment. For example, we have made significant investments in delta.com,
check-in kiosks, “Delta Direct” phone banks and related initiatives. The
performance and reliability of the technology are critical to our ability to
attract and retain customers and our ability to compete effectively. These
initiatives will continue to require significant capital investments in our
technology infrastructure to deliver these expected benefits. If we are unable
to make these investments, our business and operations could be negatively
affected.
In
addition, any internal technology error or failure or large scale external
interruption in technology infrastructure we depend on, such as power,
telecommunications or the internet, may disrupt our technology network. Any
individual, sustained or repeated failure of technology could impact our
customer service and result in increased costs. Like all companies, our
technology systems and related data may be vulnerable to a variety of sources
of
interruption due to events beyond our control, including natural disasters,
terrorist attacks, telecommunications failures, computer viruses, hackers and
other security issues. While we have in place, and continue to invest in,
technology security initiatives and disaster recovery plans, these measures
may
not be adequate or implemented properly to prevent a business disruption and
its
adverse financial consequences to our business.
If
we experience further losses of senior management and other key employees,
our
operating results could be adversely affected, and we may not be able to attract
and retain additional qualified management personnel.
We
are
dependent on the experience and industry knowledge of our officers and other
key
employees to execute our business plans. Our financial performance, along with
our Chapter 11 proceedings, created uncertainty that led to a significant
increase in unwanted attrition. Although unwanted attrition has slowed, we
remain at risk of losing additional management talent critical to the successful
transformation and ongoing operation of our business. If we experience a
substantial turnover in our leadership and other key employees, our performance
could be materially adversely impacted. Furthermore, we may be unable to attract
and retain additional qualified executives as needed in the future.
We
are facing significant litigation and if any such significant litigation is
concluded in a manner adverse to us, our financial condition and operating
results could be materially adversely affected.
We
are at risk of losses and adverse publicity stemming from any accident involving
our aircraft.
An
aircraft crash or other accident could expose us to significant tort liability.
The insurance we carry to cover damages arising from any future accidents may
be
inadequate. In the event that the insurance is not adequate, we may
be
forced to bear substantial losses from an accident. In addition, any accident
involving an aircraft that we operate or an aircraft that is operated by an
airline that is one of our codeshare partners could create a public perception
that our aircraft are not safe or reliable, which could harm our reputation,
result in air travelers being reluctant to fly on our aircraft and harm our
business. For a description of the Comair flight 5191 accident, see “Legal
Proceedings - Comair Flight 5191” in Item 3.
Any
“ownership change” could limit our ability to utilize our net operating losses
carryforwards.
Under
the
Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), a
corporation is generally allowed a deduction in any taxable year for net
operating losses carried over from prior years. As of December 31, 2006, we
had
approximately $7.8 billion of federal and state net operating loss
carryforwards.
A
corporation’s use of its net operating loss carryforwards is generally limited
under section 382 of the Internal Revenue Code if a corporation undergoes an
“ownership change.” When an “ownership change” occurs pursuant to the
implementation of a plan of reorganization under the Bankruptcy Code, the
general limitation under section 382 of the Internal Revenue Code may not apply
if certain requirements are satisfied under either section 382(l)(5) or section
382(l)(6) of the Internal Revenue Code. We will experience an “ownership change”
in connection with the Plan, but we have not yet determined whether we will
be eligible for or rely on the special rule under section 382(l)(5) or the
special rule under section 382(l)(6). Assuming we rely on section 382(l)(5)
of
the Internal Revenue Code, a second “ownership change” within two years from the
effective date of the Plan would eliminate completely our ability to
utilize our net operating loss carryovers. Regardless of whether we rely on
section 382(l)(5) of the Internal Revenue Code, an “ownership change” after the
effective date of the Plan could significantly limit our ability to utilize
our net operating loss carryforwards for taxable years including or following
such “ownership change.”
Transfer
restrictions on our stock issued in connection with the Plan may limit the
liquidity of our stock.
To
reduce
the risk of a potential adverse effect on our ability to utilize our net
operating loss carryovers, our new certificate of incorporation will contain
certain restrictions on the transfer of our stock issued in connection
with the Plan. These transfer restrictions will be effective for two years
following the effective date of the Plan, subject to extension for an additional
three years. These transfer restrictions may adversely affect the ability of
certain holders of our stock to dispose of or acquire shares of our stock during
the period the restrictions are in place. Furthermore, while the purpose of
these transfer restrictions is to prevent an “ownership change” from occurring
within the meaning of section 382 of the Internal Revenue Code, no assurance
can
be given that such an ownership change will not occur.
Risk
Factors
Relating to the Airline
Industry
The
airline industry is highly competitive and, if we cannot successfully compete
in
the marketplace, our business, financial condition and operating results will
be
materially adversely affected.
We
face
significant competition with respect to routes, services and fares. Our domestic
routes are subject to competition from both new and established carriers, some
of which have lower costs than we do and provide service at low fares to
destinations served by us. In particular, we face significant competition at
our
hub airports in Atlanta and JFK from other carriers. In addition, our operations
at our hub airports also compete with operations at the hubs of other airlines
that are located in close proximity to our hubs. For example, our hubs in
Atlanta, JFK, Cincinnati and Salt Lake City compete with, among others, U.S.
Airways’ hubs in Charlotte, Philadelphia, Pittsburgh, and Phoenix, respectively.
We also face increasing competition in smaller to medium-sized markets from
rapidly expanding regional jet operators. In addition, we compete with foreign
carriers, both on interior U.S. routes, due to marketing and codesharing
arrangements, and in international markets.
The
continuing growth of low-cost carriers, including Southwest, AirTran and
JetBlue, in the United States has placed significant competitive pressure on
us
and other network carriers. In addition, other hub-and-spoke carriers such
as US
Airways and United Airlines reduced their costs through Chapter 11
reorganizations. Our ability to compete effectively with low-cost carriers,
restructured carriers and other airlines depends, in part, on our ability to
maintain a cost structure that is competitive with those carriers. If we cannot
maintain our costs at a competitive level, then our business, financial
condition and operating results could be materially adversely
affected.
The
airline industry has changed fundamentally since the terrorist attacks on
September 11, 2001, and our business, financial condition and operating results
have been materially adversely affected.
Since
the
terrorist attacks of September 11, 2001, the airline industry has experienced
fundamental and permanent changes, including substantial revenue declines and
cost increases, which have resulted in industry-wide liquidity issues. The
terrorist attacks significantly reduced the demand for air travel, and
additional terrorist activity involving the airline industry could have an
equal
or greater impact. Additional terrorist attacks or fear of such attacks, even
if
not made directly on the airline industry, negatively affect us and the airline
industry. Although global economic conditions have improved from their depressed
levels after September 11, 2001, the airline industry in the United States
experienced a prolonged reduction in business travel and increased price
sensitivity in customers’ purchasing behavior. In addition, aircraft fuel prices
have increased significantly during the last several years, were at historically
high levels for an extended period during 2005 and remained at or near those
levels during 2006. Industry capacity has remained high despite these
conditions. We expect that all of these conditions will persist.
The
airline industry is subject to extensive government regulation, and new
regulations may increase our operating costs.
Airlines
are subject to extensive regulatory and legal compliance requirements that
result in significant costs. For instance, the FAA from time to time issues
directives and other regulations relating to the maintenance and operation
of
aircraft that necessitate significant expenditures. We expect to continue
incurring expenses to comply with the FAA’s regulations.
Other
laws, regulations, taxes and airport rates and charges have also been imposed
from time to time that significantly increase the cost of airline operations
or
reduce revenues. For example, the Aviation and Transportation Security Act,
which became law in November 2001, mandates the federalization of certain
airport security procedures and imposes additional security requirements on
airports and airlines, most of which are funded by a per ticket tax on
passengers and a tax on airlines. The federal government has on several
occasions proposed a significant increase in the per ticket tax. Due to the
weak
revenue environment, the existing tax has negatively impacted our revenues
because we have generally not been able to increase our fares to pass these
fees
on to our customers. Similarly, the proposed ticket tax increase, if
implemented, could negatively impact our revenues.
Furthermore,
we and other U.S. carriers are subject to domestic and foreign laws regarding
privacy of passenger and employee data that are not consistent in all countries
in which we operate. In addition to the heightened level of concern regarding
privacy of passenger data in the United States, certain European government
agencies are initiating inquiries into airline privacy practices. Compliance
with these regulatory regimes is expected to result in additional operating
costs and could impact our operations and any future expansion.
Our
insurance costs have increased substantially as a result of the September 11
terrorist attacks, and further increases in insurance costs or reductions in
coverage could have a material adverse impact on our business and operating
results.
As
a
result of the terrorist attacks on September 11, 2001, aviation insurers
significantly reduced the maximum amount of insurance coverage available to
commercial air carriers for liability to persons (other than employees or
passengers) for claims resulting from acts of terrorism, war or similar events.
At the same time, aviation insurers significantly increased the premiums for
such coverage and for aviation insurance in general. Since September 24, 2001,
the U.S. government has been providing U.S. airlines with war-risk insurance
to
cover losses, including those resulting from terrorism, to passengers, third
parties (ground damage) and the aircraft hull. The coverage currently extends
through August 31, 2007. 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 that 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
1B.
UNRESOLVED STAFF COMMENTS
None.
Our
active aircraft fleet at December 31, 2006 is summarized in the following table.
|
|
Current
Fleet
|
|
Aircraft
Type
|
|
Owned
|
|
Capital
Lease
|
|
Operating
Lease
|
|
Total
|
Average
Age
|
B-737-800
|
|
71
|
|
—
|
|
—
|
|
71
|
6.2
|
B-757-200
|
|
68
|
|
32
|
|
21
|
|
121
|
15.3
|
B-767-300
|
|
4
|
|
1
|
|
19
|
|
24
|
16.4
|
B-767-300ER
|
|
50
|
|
—
|
|
9
|
|
59
|
10.9
|
B-767-400ER
|
|
21
|
|
—
|
|
—
|
|
21
|
5.8
|
B-777-200ER
|
|
8
|
|
—
|
|
—
|
|
8
|
6.9
|
MD-88
|
|
63
|
|
32
|
|
25
|
|
120
|
16.5
|
MD-90
|
|
16
|
|
—
|
|
—
|
|
16
|
11.1
|
CRJ-100
|
|
20
|
|
—
|
|
83
|
|
103
|
9.3
|
CRJ-200
|
|
21
|
|
—
|
|
9
|
|
30
|
4.2
|
CRJ-700
|
|
27
|
|
—
|
|
—
|
|
27
|
3.4
|
Total
|
|
369
|
|
65
|
|
166
|
|
600
|
11.4
|
Our
purchase commitments (firm orders) for aircraft as well as options to purchase
additional aircraft, as of December 31, 2006, are shown in the tables below.
|
Delivery
in Calendar Years Ending
|
|
Aircraft
on Firm Order
|
2007
|
2008
|
2009
|
2010
|
Total
|
|
B-737-700
|
—
|
7
|
3
|
—
|
10
|
|
B-737-800
|
10
|
7
|
14
|
19
|
50
|
(1) |
B-777-200LR
|
—
|
2
|
3
|
—
|
5
|
|
Total(2)
|
10
|
16
|
20
|
19
|
65
|
|
(1) |
We
have definitive agreements, which were approved by the Bankruptcy
Court,
with third parties to sell 48 B-737-800 aircraft immediately after
those
aircraft are delivered to us by the manufacturer starting in 2007.
These
aircraft are included in the above table because we continue to have
a
contractual obligation to purchase these aircraft from the
manufacturer.
|
(2) |
See
Note 8 of the Notes to the Consolidated Financial Statements for
information about (a) an agreement we entered into in January 2007
to
purchase 30 CRJ-900 aircraft, with options to acquire an additional
30 CRJ-900 aircraft, and (b) letters of intent we have entered into
to
lease 13 B-757-200ER aircraft from third
parties.
|
|
|
Delivery
in Calendar Years Ending
|
|
Aircraft
on Option(1)
|
|
2008
|
|
2009
|
|
2010
|
|
After
2010
|
|
Total
|
|
Rolling
Options
|
|
B-737-800
|
|
|
—
|
|
|
—
|
|
|
14
|
|
|
46
|
|
|
60
|
|
|
120
|
|
B-767-300/300ER
|
|
|
1
|
|
|
2
|
|
|
2
|
|
|
5
|
|
|
10
|
|
|
2
|
|
B-767-400
|
|
|
1
|
|
|
2
|
|
|
2
|
|
|
13
|
|
|
18
|
|
|
—
|
|
B-777-200LR
|
|
|
1
|
|
|
—
|
|
|
2
|
|
|
8
|
|
|
11
|
|
|
13
|
|
CRJ-200
|
|
|
13
|
|
|
15
|
|
|
5
|
|
|
—
|
|
|
33
|
|
|
—
|
|
CRJ-700
|
|
|
11
|
|
|
19
|
|
|
5
|
|
|
—
|
|
|
35
|
|
|
—
|
|
Total
|
|
|
27
|
|
|
38
|
|
|
30
|
|
|
72
|
|
|
167
|
|
|
135
|
|
(1) |
Aircraft
options have scheduled delivery slots, while rolling options replace
options and are assigned delivery slots as options expire or are
exercised. See Note 8 of the Notes to the Consolidated Financial
Statements for information about an agreement we entered into in
January
2007 to purchase 30 CRJ-900 aircraft, with options to acquire an
additional 30 aircraft.
|
We
lease
most of the land and buildings that we occupy. Our largest aircraft maintenance
base, various computer, cargo, flight kitchen and training facilities and most
of our principal offices are located at or near the Atlanta Airport, on land
leased from the City of Atlanta generally under long-term leases. We own a
portion of our principal offices, our Atlanta reservations center and other
real
property in Atlanta.
We
lease
ticket counter and other terminal space, operating areas and air cargo
facilities in most of the airports that we serve. At most airports that we
serve, we have entered into use agreements which provide for the non-exclusive
use of runways, taxiways, and other improvements and facilities; landing fees
under these agreements normally are based on the number of landings and weight
of aircraft. These leases and use agreements generally run for periods of less
than one year to thirty years or more, and often contain provisions for periodic
adjustments of lease rates, landing fees and other charges applicable under
that
type of agreement. Examples of major leases and use agreements at Delta hub
or
other significant airports that will expire in the next several years include,
among others: (1) Atlanta central passenger terminal lease and the airport
use
agreement, which expire in 2010; (2) Salt Lake City airport use and lease
agreement, which expires in 2008; and (3) LaGuardia terminal lease, which
expires in 2008. We also lease aircraft maintenance facilities and air cargo
facilities at certain airports, including, among others, our main Atlanta
maintenance base, Atlanta air cargo facilities and hangar and air cargo
facilities at the Cincinnati/Northern Kentucky International Airport and Salt
Lake City International Airport. Our aircraft maintenance facility leases
generally require us to pay the cost of providing, operating and maintaining
such facilities, including, in some cases, amounts necessary to pay debt service
on special facility bonds issued to finance their construction. We also lease
marketing, ticket and reservations offices in certain locations for varying
terms. Additional information relating to our leases of our ground facilities
is
set forth in Note 7 of the Notes to the Consolidated Financial Statements.
In
recent
years, some airports have increased or sought to increase the rates charged
to
airlines to levels that we believe are unreasonable. The extent to which such
charges are limited by statute or regulation and the ability of airlines to
contest such charges has been subject to litigation and to administrative
proceedings before the DOT. If the limitations on such charges are relaxed,
or
the ability of airlines to challenge such proposed rate increases is restricted,
the rates charged by airports to airlines may increase substantially.
The
City
of Atlanta, with our support and the support of other airlines, is currently
implementing portions of a ten year capital improvement program (the “CIP”) at
the Atlanta Airport. Implementation of the CIP should increase the number of
flights that may operate at the airport and reduce flight delays. The CIP
includes, among other things, a new approximately 9,000 foot full-service runway
that opened in May 2006, related airfield improvements, additional terminal
and
gate capacity, new cargo and other support facilities and roadway and other
infrastructure improvements. If fully implemented, the CIP is currently
estimated by the City of Atlanta to cost approximately $6.8 billion, which
exceeds the $5.4 billion CIP approved by the airlines in 1999. The CIP runs
through 2010, with individual projects scheduled to be constructed at different
times. A combination of federal grants, passenger facility charge revenues,
increased user rentals and fees, and other airport funds are expected to be
used
to pay CIP costs directly and through the payment of debt service on bonds.
Certain elements of the CIP have been delayed, and there is no assurance that
the CIP will be fully implemented. Failure to implement certain portions of
the
CIP in a timely manner could adversely impact our operations at the Atlanta
Airport.
ITEM
3.
LEGAL
PROCEEDINGS
Chapter 11
Proceedings
As
discussed above, 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, then pending
litigation against the Debtors was generally stayed, and absent further order
of
the Bankruptcy Court, most parties may not take any action to recover on
pre-petition claims against the Debtors.
Delta
Family-Care Savings Plan Litigation
On
March 16, 2005, a retired Delta employee filed an amended class action
complaint in the U.S. District Court for the Northern District of Georgia
against Delta, certain current and former Delta officers and certain current
and
former Delta directors on behalf of himself and other participants in the Delta
Family-Care Savings Plan (“Savings Plan”). The amended complaint alleges that
the defendants were fiduciaries of the Savings Plan and, as such, breached
their
fiduciary duties under ERISA to the plaintiff class by (1) allowing class
members to direct their contributions under the Savings Plan to a fund invested
in Delta common stock; and (2) continuing to hold Delta’s contributions to
the Savings Plan in Delta’s common and preferred stock. The amended complaint
seeks damages unspecified in amount, but equal to the total loss of value in
the
participants’ accounts from September 2000 through September 2005 from
the investment in Delta stock. Defendants deny that there was any breach of
fiduciary duty, and have moved to dismiss the complaint. The District Court
stayed the action against Delta due to the bankruptcy filing and granted the
motion to dismiss filed by the individual defendants. The plaintiffs appealed
to
the United States Court of Appeals for the Eleventh Circuit the District Court’s
decision to dismiss the complaint against the individual defendants but
voluntarily dismissed this appeal, pending resolution of the automatic stay
of
their claim against Delta.
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. Lawsuits arising out of this accident have been filed against Comair
on behalf of at least 36 passengers, including a number of lawsuits that also
name Delta as a defendant. 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 four 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,
one lawsuit has been filed in state court in Broward County, Florida, and two
lawsuits have been filed in the U.S. District Court for the District of Kansas.
The federal court in New York has ordered the case filed there to be transferred
to the federal court in Kentucky. Our motion is currently pending in federal
court in Florida to transfer the case filed in Florida to the federal court
in
Kentucky. We are also seeking to transfer the lawsuits filed in Kansas to the
federal court in Kentucky. 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 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, seeking to apportion potential liability for damages arising from
this accident among all responsible parties.
We
carry
aviation risk liability insurance and believe that this insurance is sufficient
to cover any liability likely to arise from this accident.
***
For
a
discussion of certain environmental matters, see
“Business — Environmental Matters” in Item 1.
ITEM 4.
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
No
matters were submitted to a vote of our security holders during the fourth
quarter of the fiscal year covered by this report.
ITEM
5. |
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY
SECURITIES
|
Until
October 13, 2005, our common stock was traded on the New York Stock
Exchange (“NYSE”) under the symbol “DAL”. As the result of our bankruptcy
proceedings, our common stock was suspended from trading by the NYSE on
October 13, 2005 and thereafter delisted by the NYSE. Our common stock
is being quoted and, has been quoted since its suspension from the NYSE, on
the
Pink Sheets Electronic Quotation Service (“Pink Sheets”) maintained by Pink
Sheets LLC for the National Quotation Bureau, Inc. The tickler symbol “DALRQ”
has been assigned to our common stock for over-the-counter
quotations.
The
following table sets forth for the periods indicated, the highest and lowest
sales price for our common stock, as reported on the NYSE for the period through
October 13, 2005 and the quarterly high and low bid quotations for our
common stock as reported on the Pink Sheets for the period beginning
October 13, 2005. The quotations from the Pink Sheets reflect
inter-dealer prices, without retail markup, markdown or commissions, and may
not
represent actual transactions.
|
|
High
|
|
Low
|
|
Fiscal
2005
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
7.78
|
|
$
|
3.80
|
|
Second
Quarter
|
|
|
4.39
|
|
|
2.46
|
|
Third
Quarter
|
|
|
4.10
|
|
|
0.68
|
|
Fourth
Quarter (through October 13, 2005)
|
|
|
0.87
|
|
|
0.58
|
|
Fourth
Quarter (from October 13, 2005)
|
|
|
0.89
|
|
|
0.50
|
|
Fiscal
2006
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
0.88
|
|
$
|
0.30
|
|
Second
Quarter
|
|
|
0.81
|
|
|
0.50
|
|
Third
Quarter
|
|
|
1.78
|
|
|
0.63
|
|
Fourth
Quarter
|
|
|
1.77
|
|
|
0.96
|
|
As
of January 31, 2007, there were approximately 25,270 holders of record of our
common stock.
We
suspended the payment of dividends on our common stock in 2003. We expect to
retain any future earnings to fund our operations and meet our cash and
liquidity needs. Therefore, we do not anticipate paying any dividends on our
common stock for the foreseeable future.
Current
holders of Delta’s common stock and other equity interests will not receive any
distributions under the Debtors’ proposed Plan. These equity interests would be
cancelled upon the effectiveness of the proposed Plan. Accordingly, we urge
that
caution be exercised with respect to existing and future investments in Delta’s
equity securities and any of Delta’s liabilities or other
securities.
ITEM
6. SELECTED
FINANCIAL DATA
Consolidated
Summary of Operations(1)
For
the years ended December 31,
(in
millions, except share data)
|
|
2006
(2)
|
|
2005
(3)
|
|
2004
(4)
|
|
2003
(5)
|
|
2002
(6)
|
|
Operating
revenues
|
|
$
|
17,171
|
|
$
|
16,191
|
|
$
|
15,235
|
|
$
|
14,308
|
|
$
|
13,866
|
|
Operating
expenses
|
|
|
17,113
|
|
|
18,192
|
|
|
18,543
|
|
|
15,093
|
|
|
15,175
|
|
Operating
income (loss)
|
|
|
58
|
|
|
(2,001
|
)
|
|
(3,308
|
)
|
|
(785
|
)
|
|
(1,309
|
)
|
Interest
expense, net(7)
|
|
|
(801
|
)
|
|
(973
|
)
|
|
(787
|
)
|
|
(721
|
)
|
|
(629
|
)
|
Miscellaneous
income, net(8)
|
|
|
(19
|
)
|
|
(1
|
)
|
|
94
|
|
|
317
|
|
|
(22
|
)
|
Gain
(loss) on extinguishment of debt, net
|
|
|
—
|
|
|
—
|
|
|
9
|
|
|
—
|
|
|
(42
|
)
|
Loss
before reorganization items, net
|
|
|
(762
|
)
|
|
(2,975
|
)
|
|
(3,992
|
)
|
|
(1,189
|
)
|
|
(2,002
|
)
|
Reorganization
items, net
|
|
|
(6,206
|
)
|
|
(884
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Loss
before income taxes
|
|
|
(6,968
|
)
|
|
(3,859
|
)
|
|
(3,992
|
)
|
|
(1,189
|
)
|
|
(2,002
|
)
|
Income
tax benefit (provision)
|
|
|
765
|
|
|
41
|
|
|
(1,206
|
)
|
|
416
|
|
|
730
|
|
Net
loss
|
|
|
(6,203
|
)
|
|
(3,818
|
)
|
|
(5,198
|
)
|
|
(773
|
)
|
|
(1,272
|
)
|
Preferred
stock dividends
|
|
|
(2
|
)
|
|
(18
|
)
|
|
(19
|
)
|
|
(17
|
)
|
|
(15
|
)
|
Net
loss attributable to common shareowners
|
|
$
|
(6,205
|
)
|
$
|
(3,836
|
)
|
$
|
(5,217
|
)
|
$
|
(790
|
)
|
$
|
(1,287
|
)
|
Basic
and diluted loss per share
|
|
$
|
(31.58
|
)
|
$
|
(23.75
|
)
|
$
|
(41.07
|
)
|
$
|
(6.40
|
)
|
$
|
(10.44
|
)
|
Dividends
declared per common share
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
0.05
|
|
$
|
0.10
|
|
Other
Financial and Statistical Data(1)
For
the years ended December 31,
|
|
2006
(2)
|
|
2005
(3)
|
|
2004
(4)
|
|
2003
(5)
|
|
2002
(6)
|
|
Total
assets (millions)
|
|
$ |
19,622
|
|
$ |
20,039 |
|
$ |
21,801 |
|
$ |
25,939 |
|
$ |
24,720 |
|
Long-term
debt and capital leases (excluding current maturities) (millions)
|
|
$
|
6,509
|
|
$
|
6,557
|
|
$
|
13,005
|
|
$
|
11,538
|
|
$
|
10,174
|
|
Shareowners’
(deficit) equity (millions)
|
|
$
|
(13,593
|
)
|
$
|
(9,895
|
)
|
$
|
(5,796
|
)
|
$
|
(659
|
)
|
$
|
893
|
|
Weighted
average shares outstanding
|
|
|
196,496,349
|
|
|
161,532,291
|
|
|
127,033,234
|
|
|
123,397,129
|
|
|
123,292,670
|
|
Revenue
passengers enplaned (thousands)
|
|
|
106,649
|
|
|
118,853
|
|
|
110,000
|
|
|
104,452
|
|
|
107,048
|
|
Available
seat miles (millions)
|
|
|
147,995
|
|
|
156,793
|
|
|
151,679
|
|
|
139,505
|
|
|
145,232
|
|
Revenue
passenger miles (millions)
|
|
|
116,133
|
|
|
119,954
|
|
|
113,311
|
|
|
102,301
|
|
|
104,422
|
|
Operating
revenue per available seat mile
|
|
|
11.60
|
¢
|
|
10.33
|
¢
|
|
10.04
|
¢
|
|
10.26
|
¢
|
|
9.55
|
¢
|
Passenger
revenue per available seat mile
|
|
|
10.56
|
¢
|
|
9.33
|
¢
|
|
9.09
|
¢
|
|
9.17
|
¢
|
|
8.69
|
¢
|
Passenger
mile yield
|
|
|
13.46
|
¢
|
|
12.19
|
¢
|
|
12.17
|
¢
|
|
12.73
|
¢
|
|
12.26
|
¢
|
Operating
cost per available seat mile
|
|
|
11.56
|
¢
|
|
11.60
|
¢
|
|
12.23
|
¢
|
|
10.82
|
¢
|
|
10.45
|
¢
|
Passenger
load factor
|
|
|
78.5
|
%
|
|
76.5
|
%
|
|
74.7
|
%
|
|
73.3
|
%
|
|
71.9
|
%
|
Breakeven
passenger load factor
|
|
|
78.2
|
%
|
|
87.0
|
%
|
|
92.6
|
%
|
|
77.8
|
%
|
|
79.3
|
%
|
Fuel
gallons consumed (millions)
|
|
|
2,111
|
|
|
2,492
|
|
|
2,527
|
|
|
2,370
|
|
|
2,514
|
|
Average
price per fuel gallon, net of
hedging
activity
|
|
$
|
2.04
|
|
$
|
1.71
|
|
$
|
1.16
|
|
$
|
0.82
|
|
$
|
0.67
|
|
Full-time
equivalent employees, end of period
|
|
|
51,300
|
|
|
55,600
|
|
|
69,150
|
|
|
70,600
|
|
|
75,100
|
|
(1) |
Includes
the operations under contract carrier agreements with unaffiliated
regional air carriers:
|
|
- |
Chautauqua
Airlines, Inc. and SkyWest Airlines, Inc. for all periods
presented,
|
|
- |
Shuttle
America Corporation for the year ended December 31, 2006 and
from
September 1 through December 31,
2005,
|
|
-
|
Atlantic
Southeast Airlines for the year ended December 31, 2006 and from
September
8 through December 31,
2005,
|
|
-
|
Freedom
Airlines, Inc. for the year ended December 31, 2006 and from
October 1,
2005 through December 31, 2005,
and
|
|
-
|
Flyi,
Inc (formerly Atlantic Coast Airlines) from January 1, 2002 through
November 1, 2004.
|
(2) |
Includes
a $6.2 billion charge or $31.58 diluted EPS for reorganization costs;
$310
million of noncash charges or $1.58 diluted EPS associated with certain
accounting adjustments; and a $765 million income tax benefit or
$3.89
diluted EPS (see Item 7).
|
(3) |
Includes
an $888 million charge or $5.49 diluted EPS for restructuring, asset
writedowns, pension settlements and related items, net and an $884
million
charge or $5.47 diluted EPS for reorganization costs (see Item
7).
|
(4) |
Includes
a $1.9 billion charge or $14.76 diluted EPS related to the impairment
of
intangible assets; a $1.2 billion charge or $9.51 diluted EPS for
deferred
income tax valuation; a $123 million gain, or $0.97 diluted EPS from
the
sale of investments; and a $41 million gain or $0.33 diluted EPS
from
restructuring, asset writedowns, pension settlements and related
items,
net (see Item 7).
|
(5) |
Includes
a $268 million charge ($169 million net of tax, or $1.37 diluted
EPS) for
restructuring, asset writedowns, pension settlements and related
items,
net; a $398 million gain ($251 million net of tax, or $2.03 diluted
EPS)
for reimbursements received under the Emergency Wartime Supplemental
Appropriations Act; compensation; and a $304 million gain ($191 million
net of tax, or $1.55 diluted EPS) for certain other income and expense
items.
|
(6) |
Includes
a $439 million charge ($277 million net of tax, or $2.25 diluted
EPS) for
restructuring, asset writedowns, and related items, net; a $34 million
gain ($22 million net of tax, or $0.17 diluted EPS) for compensation
under
the Air Transportation Safety and System Stabilization Act; and a
$94
million charge ($59 million net of tax, or $0.47 diluted EPS) for
certain
other income and expense items.
|
(7) |
Includes
interest income.
|
(8) |
Includes
(losses) gains from the sale of investments and fuel hedging
activity.
|
ITEM
7. |
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
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.
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 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-K, 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 the Bankruptcy Code.
On
December 19, 2006, we filed with the Bankruptcy Court our Plan of Reorganization
and a related Disclosure Statement, which contemplate that Delta will emerge
from Chapter 11 as an independent airline. The Plan of Reorganization, as
amended (the “Plan”), addresses various subjects with respect to the
Debtors, including the resolution of pre-petition obligations, as well
as the capital structure and corporate governance after exit from Chapter
11.
The
Plan
provides that most holders of allowed unsecured claims against the
Debtors will receive common stock of reorganized Delta in satisfaction of
their claims. Some holders of allowed unsecured claims against the Debtors
would
have the right to request cash proceeds of sales of common stock of reorganized
Delta in lieu of such stock, and certain others would receive cash in
satisfaction of their claims. Current holders of Delta’s equity interests would
not receive any distributions, and their equity interests would be cancelled
once the Plan becomes effective.
On
February 7, 2007, the Bankruptcy Court approved the amended Disclosure
Statement, and authorized the Debtors to begin soliciting votes from creditors
to approve the Plan. The official committee of unsecured creditors (the
“Creditors Committee”) and the two official retiree committees appointed in the
Debtors’ Chapter 11 proceedings each support the Plan. To be accepted by holders
of claims against the Debtors, the Plan must be approved by at least one-half
in
number and two-thirds in dollar amount of claims actually voting in each
impaired class.
April
9,
2007 is the deadline for creditors to vote on the Plan. The Bankruptcy Court
has
scheduled a confirmation hearing on April 25, 2007 to consider approval of
the
Plan. If the Plan is approved by the creditors and confirmed by the Bankruptcy
Court, the Debtors are planning to emerge from Chapter 11 shortly
thereafter.
For
additional information regarding the Debtors’ Chapter 11 proceedings, see
Note 1 of the Notes to the Consolidated Financial Statements.
In
2006,
we recorded a net loss of $6.2 billion, which is primarily attributable to
a
$6.2 billion charge to reorganization items, net. Our 2006 financial results
also include a $765 million income tax benefit associated with the reversal
of
certain income tax valuation allowances and a $310 million noncash charge
associated with certain accounting adjustments. For additional information
about
these matters, see “Results of Operations - 2006 Compared to 2005” and “Basis of
Presentation of Consolidated Financial Statements - Accounting Adjustments”
below.
From
an
operational perspective, we reported operating income of $58 million in 2006,
a
$2.1 billion improvement in operating results compared to 2005 and our first
annual operating profit since 2000. This improvement is due in large part to
revenue increases and cost reductions we have achieved during our Chapter 11
reorganization from revenue and network productivity improvements, in-court
restructuring initiatives and labor cost reductions.
During
2006, we also strengthened our liquidity. Cash and cash equivalents and
short-term investments totaled $2.6 billion at December 31, 2006, compared
to
$2.0 billion at December 31, 2005.
Our
reorganization in Chapter 11 has involved a fundamental transformation of our
business. Shortly after the Petition Date, we outlined a business plan intended
to make Delta a simpler, more efficient and more customer focused airline with
an improved financial condition.
Restructuring
Business Plan
As
part
of the Chapter 11 reorganization process, we were seeking $3.0 billion in annual
financial improvements by the end of 2007. As of December 31, 2006, we reached
that goal and these improvements are reflected in our Consolidated Financial
Statements for 2006. We expect we will achieve additional financial
improvements in 2007. The $3.0 billion in annual financial improvements under
our restructuring business plan is a result of (1) revenue and network
productivity improvements, (2) in-court restructuring initiatives and (3) labor
cost reductions. Some of our accomplishments in these areas are described
below.
Revenue
and Network Productivity Improvements. Key
initiatives accomplished by the end of 2006 in the area of revenue and network
productivity improvements include:
|
· |
simplifying
our fleet, including retiring four aircraft
types;
|
|
· |
right-sizing
capacity to better meet customer demand, including utilizing smaller
aircraft in domestic operations, which reduced domestic mainline
capacity
by 16% in 2006 compared to 2005;
|
|
· |
growing
our international presence by shifting wide-body aircraft from domestic
to
international operations, which increased international capacity
by 21% in
2006 compared to 2005; and
|
|
· |
increasing
point-to-point flying and right-sizing and simplifying our domestic
hubs
to achieve a greater local traffic
mix.
|
We
strengthened our domestic hubs and are continuing to increase international
service. For example, in 2006, we added more than 50 new daily flights to 20
cities in 18 countries in Europe and other countries such as India and Israel,
capitalizing on our international gateways at Hartsfield-Jackson Atlanta
International Airport, which is the world’s largest hub, and John F. Kennedy
International Airport in New York. In addition, we offer more than 600
weekly flights to 58 destinations in Latin America and the Caribbean.
In-Court
Restructuring Initiatives. Our
business plan includes annual cost reductions through in-court initiatives
such as debt restructurings, lease and facility restructurings, aircraft lease
renegotiations and rejections, vendor contract renegotiations and retiree
healthcare benefit modifications. Some of our accomplishments through the end
of
2006 include:
|
· |
restructuring
our fleet by rejecting, returning or selling approximately 188 aircraft;
and
|
|
· |
making
cost-saving progress on many facility agreements, including a review
of
approximately 55 locations.
We
have rejected or restructured leases at various airports, including
Dallas, Orlando and Tampa.
|
Labor
Cost Reductions. Our
business plan includes annual benefits through reduced employment costs. During
our Chapter 11 proceedings, by the end of 2006, we had:
|
· |
reached
an agreement with the Air Line Pilots Association, International
(“ALPA”)
under which we expect to receive approximately $280 million in average
annual pilot labor cost savings between June 1, 2006 and December
31, 2009
from changes in pilot pay rates, benefits and work rules. This excludes
savings we will achieve from the termination of the primary qualified
defined benefit pension plan for pilots (“Pilot Plan”) and the related
non-qualified plans;
|
|
· |
implemented
plans designed to achieve more than $600 million per year in non-pilot
employment cost reductions. These cost reductions included charges
to pay
and benefits for non-pilot employees and staffing
reductions;
|
|
· |
reached
agreements with committees representing our retired pilots and retired
non-pilot employees that provide us with approximately $50 million
in
annual savings from changes to retiree healthcare benefit
coverage;
|
|
· |
advocated
successfully for pension reform legislation, culminating in the Pension
Protection Act. As a result, we intend to preserve our defined benefit
pension plan for active and retired non-pilot
employees;
|
|
· |
reached
agreement with the Pension Benefit Guaranty Corporation (the “PBGC”)
regarding the termination of the Pilot Plan;
and
|
|
· |
implemented
an enhanced profit-sharing plan that will allow employees to share
in our
future success.
|
Emergence
Business Plan
As
a result of our reorganization, we expect to emerge from bankruptcy as a
competitive, standalone airline with a global network. We intend
to
be the
airline of choice for customers by continuing to improve the customer experience
on the ground and in the air. Our business strategy touches all facets of our
operations - the destinations we will serve, the way we will serve our
customers, and the fleet we will operate - in order to earn customer preference
and continue to improve revenue performance. At the same time, we intend to
remain focused on maintaining the competitive cost structure we have obtained
from our reorganization to improve our financial position and pursue long-term
stability as a standalone carrier.
Important
aspects of our emergence business strategy include the following:
|
· |
Leveraging
Network Strength to Provide Expanded International Service.
We
will continue to focus on international growth. With our
geographically-balanced hubs, we believe we are well-positioned
for international growth from the U.S. to Europe and Latin America.
In
addition, we expect our hubs will help us increase service to Africa
and
Asia.
|
|
· |
Maintaining
Focus on Improving the Customer Experience. Our
focus on safety will
remain our top priority. We are also committed to continuous improvement
throughout our operations to earn our customers’ preference. We have
renewed our focus on improving our product and customer service through
aircraft cabin and airport
improvements.
|
|
· |
Maximizing
a Streamlined and Upgraded Fleet. We
are supporting the ongoing changes to our network by bolstering our
internationally-capable mainline fleet. We plan to pursue additional
strategic improvements to our fleet by adding high-performance aircraft
that will enable us to serve new destinations with appropriate capacity.
We have announced plans to add 28 internationally capable aircraft
scheduled for delivery in 2007 through
2009.
|
|
· |
Capturing
the Benefit of Competitive Cost Structure. Through
initiatives undertaken during the Chapter 11 proceedings and previous
productivity initiatives, we currently have one of the lowest mainline
unit cost structures of any full service carrier. These efforts have
resulted in reduced costs throughout our organization, including
reductions in employment costs, retiree pension
and healthcare costs and aircraft fleet costs. We recognize that,
to
succeed, we must maintain the competitive unit cost structure that
we
developed through our restructuring efforts.
|
|
· |
Generating
Cash Flow from Operations Necessary to Fund Capital Expenditures
and
Reduce Debt.
Over an extended period following emergence from Chapter 11, we intend
to
balance long-term operating growth with overall credit improvement.
At
emergence from bankruptcy, we expect
to
have significantly reduced our total debt from pre-petition levels.
Ongoing improvements to our financial condition are, however, necessary
for us to withstand industry and economic volatility and to have
favorable, consistent access to capital markets.
|
On
November 15, 2006, US Airways Group, Inc. (“US Airways”) publicly announced an
unsolicited proposal to engage in a merger transaction with us (the “US Airways
Proposal”).
Under
the
original US Airways Proposal, the holders of unsecured claims in our bankruptcy
cases would have received $4.0 billion in cash and 78.5 million shares of US
Airways common stock. In addition, US Airways contemplated that our
debtor-in-possession financing agreements and all other allowed secured claims
and administrative claims in our bankruptcy cases would be assumed or paid
in
full. The US Airways Proposal was conditioned on satisfactory completion of
a
due diligence investigation on us, the Bankruptcy Court’s approval of a mutually
agreeable plan of reorganization predicated upon a merger, regulatory approvals
and approval by the shareholders of US Airways.
On
December 15, 2006, our Board of Directors unanimously determined that the US
Airways Proposal was inadequate, presented unacceptably high risk that it could
not be consummated in the manner suggested by US Airways, was not in our best
interests or in the best interests of our creditors, as well as our other
stakeholders, and rejected the US Airways Proposal. The Board of Directors
also
determined that our interest and that of our creditors would be best served
if
we proceeded with filing the Plan, together with the Disclosure Statement,
with
the Bankruptcy Court. This decision by our Board of Directors was made after
careful consideration and extensive review and consultation with its legal
and
financial advisors.
On
January 10, 2007, US Airways increased its offer to merge with us and set forth
a revised proposal (the “Revised US Airways Proposal”) under which the holders
of our unsecured claims would have received $5.0 billion in cash and 89.5
million shares of US Airways common stock. US Airways said that the Revised
US
Airways Proposal would expire on February 1, 2007 unless, prior to that date,
there was affirmative creditor support for the commencement of due diligence,
the required filings under the Hart-Scott-Rodino Antitrust Improvements Act
had
been made and the hearing on the Disclosure Statement scheduled for February
7,
2007 had been adjourned.
On
January 31, 2007, the Creditors Committee announced support for our standalone
Plan of Reorganization. The Creditors Committee said that it had considered
various factors, including the risks associated with, and the likelihood of
a
successful consummation of, the Revised US Airways Proposal and the Plan in
reaching its conclusion in favor of the standalone Plan of Reorganization.
Following this announcement, US Airways withdrew its proposal.
Basis
of
Presentation of Consolidated Financial
Statements
Our
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”), 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”). This contemplates the realization of
assets and satisfaction of liabilities in the ordinary course of business.
Accordingly, our Consolidated Financial Statements do not include any
adjustments relating to the recoverability of assets and classification of
liabilities that might be necessary should we be unable to continue as a going
concern.
Due
to
our Chapter 11 proceedings, the realization of assets and satisfaction of
liabilities, without substantial adjustments and/or changes in ownership, are
subject to uncertainty. Accordingly,
there is substantial doubt about the current financial reporting entity’s
ability to continue as a going concern. Upon emergence from bankruptcy, we
expect to adopt fresh start reporting in accordance with SOP 90-7 which will
result in our becoming a new entity for financial reporting
purposes. The adoption of fresh start reporting may have a material
impact on the consolidated financial statements of the new financial
reporting entity.
The
accompanying Consolidated Financial Statements do not reflect or provide for
the
consequences of the Chapter 11 proceedings. In particular, the financial
statements do not 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
their status and priority; (3) as to shareowners’ equity accounts, the effect of
any changes that may be made in our capitalization; or (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. See Note 11 of the Notes to the
Consolidated Financial Statement for additional information on the sale of
ASA.
Accounting
Adjustments
During
2006, we recorded certain out-of-period adjustments (“Accounting Adjustments”)
in our Consolidated Financial Statements that are reflected in our results
for
the year ended December 31, 2006. These adjustments resulted in an aggregate
net
noncash charge approximating $310 million to our Consolidated Statement of
Operations, consisting primarily of:
|
· |
A
$112 million charge in landing fees and other rents. This adjustment
is
associated primarily with our airport facility leases at John F.
Kennedy
International Airport in New York. 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 Standards (“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 years ended December 31, 2006, 2005 and 2004. In making this assessment,
we
considered qualitative and quantitative factors, including the substantial
net
loss in each of these three years, the noncash nature of the Accounting
Adjustments, our substantial shareowners’ deficit at the end of each of these
three years and our status as a debtor-in-possession under Chapter 11 of the
Bankruptcy Code.
Results
of
Operations — 2006 Compared to
2005
Net
Loss
Our
consolidated net loss was $6.2 billion in 2006 and $3.8 billion in 2005. The
net
loss for 2006 includes (1) a $6.2 billion charge to reorganization items, net
(see “Reorganization Items, Net” below”), (2) $310 million of noncash charges
associated with certain accounting adjustments (see “Accounting Adjustments”
above) and (3) a $765 million income tax benefit (see “Income Tax Benefit”
below). As discussed below, the net loss for 2005 includes an $888 million
charge to restructuring, asset writedowns, pension settlements and related
items, net and an $884 million charge to reorganization items, net.
Operating
Revenue
|
|
Year
Ended
December
31,
|
|
Increase
(Decrease)
|
|
%
Increase
(Decrease)
|
|
(in
millions)
|
|
2006
|
|
2005
|
|
|
|
Operating
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline
|
|
$
|
11,773
|
|
$
|
11,399
|
|
$
|
374
|
|
|
3
|
%
|
Regional
affiliates
|
|
|
3,853
|
|
|
3,225
|
|
|
628
|
|
|
19
|
%
|
Total
passenger revenue
|
|
|
15,626
|
|
|
14,624
|
|
|
1,002
|
|
|
7
|
%
|
Cargo
|
|
|
498
|
|
|
524
|
|
|
(26
|
)
|
|
(5)
|
%
|
Other,
net
|
|
|
1,047
|
|
|
1,043
|
|
|
4
|
|
|
0
|
%
|
Total
operating revenue
|
|
$
|
17,171
|
|
$
|
16,191
|
|
$
|
980
|
|
|
6
|
%
|
Operating
revenue totaled $17.2 billion for the year ended December 31, 2006, a $980
million, or 6%, increase compared to the year ended December 31, 2005. Passenger
revenue increased 7% while capacity decreased 6%. The increase in passenger
revenue is due to a rise of 10% and 13% in passenger mile yield and passenger
revenue per available seat mile (“Passenger RASM”), respectively, from fare
increases that reflect strong passenger demand as well as actions we have taken
since our Chapter 11 filing to achieve revenue and network productivity
improvements. Passenger revenue and other, net revenue were negatively impacted
by certain Accounting Adjustments discussed above. Passenger revenue of regional
affiliates increased due to (1) a change in how we classify ASA’s revenues as a
result of its sale to SkyWest and (2) new contract carrier agreements with
Shuttle America Corporation (“Shuttle America”) and Freedom Airlines, Inc.
(“Freedom”), effective September 1, 2005 and October 1, 2005, respectively.
|
|
Year
Ended
|
|
Increase
(Decrease)
|
|
|
December
31, 2006
|
Year
Ended December 31, 2006 vs. 2005
|
|
|
|
Passenger
|
|
Passenger
|
|
|
|
|
|
Passenger
|
|
Load
|
|
(in
millions)
|
|
Revenue
|
|
Revenue
|
|
RPMs
|
|
Yield
|
|
RASM
|
|
Factor
|
|
Passenger
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
American passenger revenue
|
|
$
|
11,787
|
|
|
2%
|
|
|
(10)
|
%
|
|
14%
|
|
|
18%
|
|
|
2.8
|
|
International
passenger revenue
|
|
|
3,719
|
|
|
24%
|
|
|
20
|
%
|
|
3%
|
|
|
2%
|
|
|
(0.6
|
)
|
Charter
revenue
|
|
|
120
|
|
|
2%
|
|
|
(21)
|
%
|
|
28%
|
|
|
12%
|
|
|
(5.3
|
)
|
Total
passenger revenue
|
|
$
|
15,626
|
|
|
7%
|
|
|
(3)
|
%
|
|
10%
|
|
|
13%
|
|
|
2.0
|
|
North
American Passenger Revenue. North
American passenger revenue increased 2%, driven by a 14% increase in passenger
mile yield and a 2.8 point increase in load factor which were partially offset
by a 13% decline in capacity. Passenger RASM increased 18%. The decline in
capacity, partially offset by the increase in load factor, resulted in a 10%
decline in revenue passenger miles (“RPMs”), or traffic. The increases in
passenger revenue, 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 right-sizing
capacity to better meet customer demand and increasing point-to-point flying
and
simplifying our domestic hubs to achieve a greater local traffic mix.
International
Passenger Revenue. International
passenger revenue increased 24%, generated by a 20% increase in RPMs from a
21%
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 Atlantic and Latin America markets,
from the restructuring of our route network.
Operating
Expense
|
|
|
|
Increase
|
|
%
Increase
|
|
(in
millions)
|
|
2006
|
|
2005
|
|
(Decrease)
|
|
(Decrease)
|
|
Operating
Expense:
|
|
|
|
|
|
|
|
|
|
Aircraft
fuel
|
|
$
|
4,319
|
|
$
|
4,271
|
|
$
|
48
|
|
|
1
|
%
|
Salaries
and related costs
|
|
|
4,128
|
|
|
5,058
|
|
|
(930
|
)
|
|
(18
|
)%
|
Contract
carrier arrangements
|
|
|
2,656
|
|
|
1,318
|
|
|
1,338
|
|
|
102
|
%
|
Depreciation
and amortization
|
|
|
1,276
|
|
|
1,273
|
|
|
3
|
|
|
0
|
%
|
Contracted
services
|
|
|
1,083
|
|
|
1,096
|
|
|
(13
|
)
|
|
(1
|
)%
|
Passenger
commissions and other selling expenses
|
|
|
888
|
|
|
948
|
|
|
(60
|
)
|
|
(6
|
)%
|
Landing
fees and other rents
|
|
|
865
|
|
|
863
|
|
|
2
|
|
|
0
|
%
|
Aircraft
maintenance materials and outside repairs
|
|
|
735
|
|
|
776
|
|
|
(41
|
)
|
|
(5
|
)%
|
Passenger
service
|
|
|
328
|
|
|
345
|
|
|
(17
|
)
|
|
(5
|
)%
|
Aircraft
rent
|
|
|
316
|
|
|
541
|
|
|
(225
|
)
|
|
(42
|
)%
|
Restructuring,
asset writedowns, pension settlements and related items,
net
|
|
|
13
|
|
|
888
|
|
|
(875
|
)
|
|
(99
|
)%
|
Other
|
|
|
506
|
|
|
815
|
|
|
(309
|
)
|
|
(38
|
)%
|
Total
operating expense
|
|
$
|
17,113
|
|
$
|
18,192
|
|
$
|
(1,079
|
)
|
|
(6
|
)%
|
Operating
expense was $17.1 billion for the year ended December 31, 2006, a $1.1 billion,
or 6%, decrease compared to the year ended December 31, 2005. As discussed
below, the decrease in operating expense was primarily due to a decrease in
2006
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 expenses. These decreases were partially 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, (2) certain
Accounting Adjustments discussed above and (3) an increase in aircraft fuel
prices.
Operating
capacity decreased 6% to 148 billion available seat miles primarily due to
the
reduction of our aircraft fleet as part of our business plan initiatives.
Operating cost per available seat mile decreased less than 1% to 11.56¢, because
the decrease in total operating expense discussed above was offset by the
reduction in operating capacity.
Aircraft
fuel.
Aircraft
fuel expense increased due to higher fuel prices despite reduced consumption.
Our average fuel price per gallon increased 19% to $2.04. Fuel gallons consumed
decreased 15% 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 part of our fuel gallons
consumed. Aircraft fuel expense includes fuel hedge losses of $108 million
in
2006.
Salaries
and related costs.
The
decrease in salaries and related costs primarily reflects a 12% decline due
to
lower Mainline headcount and our sale of ASA, and a 9% decrease from salary
rate
and benefit cost reductions for our pilot and non-pilot employees, partially
offset by certain Accounting Adjustments discussed above.
Contract
carrier arrangements.
Contract
carrier arrangements expense increased primarily due to (1) a 73% increase
from
the change in how we classify ASA’s expenses as a result of its sale to SkyWest
and (2) an 18% increase from new contract carrier agreements with Shuttle
America and Freedom.
Landing
fees and other rents.
Landing
fees and other rents remained relatively constant because (1) a 4% decrease
from
the change in how we classify ASA’s expenses as a result of its sale to SkyWest
and (2) a net 4% decrease due to our shifting of capacity from domestic to
international, were offset by certain Accounting Adjustments discussed
above.
Aircraft
rent.
The
decline in aircraft rent expense is primarily due to a 29% decrease from the
renegotiation and rejection of certain leases in connection with our
restructuring efforts and an 8% 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.
For
2006, restructuring, asset writedowns, pension settlements and related items,
net totaled a $13 million charge, primarily due to the following:
|
· |
Workforce
Reduction.
A
$29 million charge related to our decision in 2005 to reduce staffing
by
approximately 7,000 to 9,000 jobs by December
2007, which has been substantially completed. This charge was partially
offset by a $21 million reduction in accruals associated with prior
year
workforce reduction programs.
|
For
2005,
restructuring, asset writedowns, pension settlements and related items, net
totaled an $888 million charge consisting of the following:
|
· |
Pension
curtailment charge.
A
$447 million curtailment
charge related to the Pilot and Non-pilot Plans. This charge relates
to
the freeze of service accruals under the Pilot Plan effective December
31,
2004, and the impact of the planned reduction of 6,000 to 7,000 jobs
announced in November 2004 on the Non-pilot Plan (see Note 10 of
the Notes
to the Consolidated Financial
Statements).
|
|
· |
Pension
settlements.
$388 million in settlement charges primarily
related to the Pilot Plan due to a significant increase in pilot
retirements and lump sum distributions from plan assets (see Note
10 of
the Notes to the Consolidated Financial
Statements).
|
|
· |
Workforce
reduction.
A
$46 million charge related to our decision in 2005 to reduce staffing
by
approximately 7,000 to 9,000 jobs by December 2007,
which has been substantially completed. This charge was offset by
a net $3
million reduction in accruals associated with prior year workforce
reduction programs.
|
|
· |
Asset
charges.
A
$10 million charge related to
the removal from service of six B-737-200 aircraft prior to their
lease
expiration dates.
|
Other.
The
decrease in other operating expense primarily reflects (1) a 12% decrease due
to
an adjustment related to certain nonincome tax reserves, (2) a 10% decrease
from
certain Accounting Adjustments discussed above and (3) an 8% 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 $58 million for the year ended December 31, 2006,
compared to an operating loss of $2.0 billion for the year ended December 31,
2005. Operating margin, which is the ratio of operating income (loss) to
operating revenues, was less than 1% and (12%) for 2006 and 2005,
respectively.
Other
(Expense) Income
Other
expense, net for 2006 was $820 million, compared to $974 million for 2005.
This
change is substantially attributable to a 16%, or $162 million, decrease in
interest expense which was partially offset by a $19 million increase in
miscellaneous, net expense primarily associated with our fuel hedge positions.
The
reduction in interest expense is primarily attributable to a $206 million
decrease due to the accounting treatment of certain interest charges under
our
Chapter 11 proceedings in accordance with SOP 90-7 (see Note 2 of the Notes
to
the Consolidated Financial Statements). The decrease in interest expense was
partially offset by a $97 million increase from a higher level of debt
outstanding and higher interest rates.
The
increase in miscellaneous, net expense is primarily due to charges related
to
the ineffective portion of our fuel hedge positions accounted for in accordance
with SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities.” For additional information about our fuel hedge positions, see Note
2 of the Notes to the Consolidated Financial Statements.
Reorganization
Items, Net
Reorganization
items, net totaled a $6.2 billion charge for 2006, primarily consisting of
the
following:
|
· |
Pilot
pension termination.
$2.2 billion and $801 million allowed general, unsecured pre-petition
claims in connection with our settlement agreements with the PBGC
and a
group representing retired pilots, respectively. Charges for these
claims
were offset by $1.3 billion in settlement gains associated with the
derecognition of previously recorded Pilot Plan and pilot non-qualified
plan obligations upon each plan’s termination. For additional information
regarding these settlement agreements and the termination of these
plans,
see Note 10 of the Notes to the Consolidated Financial Statements.
|
|
· |
Pilot
collective bargaining agreement.
A
$2.1 billion allowed general, unsecured pre-petition claim in connection
with our comprehensive agreement with ALPA reducing our pilot labor
costs.
For additional information regarding this agreement, see Note 1 of
the
Notes to the Consolidated Financial
Statements.
|
|
· |
Aircraft
financing renegotiations and rejections.
$1.7 billion of estimated claims associated with restructuring the
financing arrangements for 188 aircraft and the rejection
of
16 aircraft leases.
|
|
· |
Retiree
healthcare benefit claims.
$539 million of allowed general, unsecured pre-petition claims in
connection with agreements that we reached with committees representing
both pilot and non-pilot retired employees reducing their postretirement
healthcare benefits. For additional information regarding these
agreements, see Note 10 of the Notes to the Consolidated Financial
Statements.
|
Reorganization
items, net totaled an $884 million charge for 2005, primarily consisting of
the
following:
|
· |
Aircraft
financing renegotiations, rejections and repossessions.
A
$611 million charge for estimated claims associated with restructuring
the
financing arrangements for seven
aircraft, the rejection of 50 aircraft leases and the repossession
of 15
aircraft.
|
|
· |
Debt
issuance and discount costs.
A
$163 million charge associated with the write-off of certain debt
issuance
costs and discounts in conjunction with the valuation of our
unsecured and undersecured debt.
|
|
· |
Facility
leases.
An
$88 million charge for estimated claims in connection with the rejection
of certain unexpired facility leases and the related bond
obligations.
|
Income
Tax Benefit
For
2006,
we recorded an income tax benefit totaling $765 million. The amount primarily
reflects a decrease to our deferred tax asset valuation allowances from the
reversal of accrued pension liabilities associated with the derecognition of
previously recorded Pilot Plan and pilot non-qualified plan obligations upon
each plan’s termination.
For
2005,
we recorded an income tax benefit totaling $41 million. The amount is primarily
the result of a $1.6 billion adjustment to our deferred tax asset valuation
allowance due to increases in the deferred tax asset related to our additional
minimum pension liability and net operating loss carryforwards.
For
additional information about the income tax valuation allowance, see Note 9
of
the Notes to the Consolidated Financial Statements.
Results
of
Operations — 2005 Compared to
2004
Net
Loss
Our
consolidated net loss was $3.8 billion in 2005 and $5.2 billion in 2004. The
net
loss for 2005 includes an $888 million charge to restructuring, asset
writedowns, pension settlements and related items, net (see “Restructuring,
asset writedowns, pension settlements and related items, net” below) and an $884
million charge to reorganization items, net (see “Reorganization Items, Net”
above). As discussed below, the net loss for 2004 includes a $1.9 billion
impairment of intangible assets related to the write-off of goodwill associated
with ASA and Comair and a $1.2 billion income tax provision primarily related
to
recording a valuation allowance for our deferred income tax assets.
Operating
Revenue
|
|
Year
Ended
December
31,
|
|
Increase
|
|
%
Increase
|
|
(in
millions)
|
|
2005
|
|
2004
|
|
(Decrease)
|
|
(Decrease)
|
|
Operating
Revenue:
|
|
|
|
|
|
|
|
|
|
Passenger:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline
|
|
$
|
11,399
|
|
$
|
10,880
|
|
$
|
519
|
|
|
5
|
%
|
Regional
affiliates
|
|
|
3,225
|
|
|
2,910
|
|
|
315
|
|
|
11
|
%
|
Total
passenger revenue
|
|
|
14,624
|
|
|
13,790
|
|
|
834
|
|
|
6
|
%
|
Cargo
|
|
|
524
|
|
|
500
|
|
|
24
|
|
|
5
|
%
|
Other,
net
|
|
|
1,043
|
|
|
945
|
|
|
98
|
|
|
10
|
%
|
Total
operating revenue
|
|
$
|
16,191
|
|
$
|
15,235
|
|
$
|
956
|
|
|
6
|
%
|
Operating
revenue totaled $16.2 billion for the year ended December 31, 2005, a $956
million, or 6%, increase compared to the year ended December 31, 2004. Passenger
revenue increased 6% on a 3% increase in capacity. The increase in passenger
revenue reflects a 6% rise in RPMs and a flat passenger mile yield. The
relatively constant passenger mile yield reflects our lack of pricing power
due
to the continuing growth of low-cost carriers with which we compete in most
of
our domestic markets, high industry capacity and price sensitivity by our
customers, enhanced by the availability of airline fare information on the
Internet. During the fourth quarter of 2005, passenger mile yield increased
8%
compared to the fourth quarter of 2004, which reflects a general improvement
in
the overall business environment and the structural changes we made to
strengthen our route network since our Chapter 11 filing.
|
Year
Ended December 31, 2005
|
Increase
(Decrease)
Year
Ended December 31, 2005 vs.
2004
|
|
|
|
Passenger
|
|
Passenger
|
|
|
|
|
|
Passenger
|
|
Load
|
|
(in
millions)
|
|
Revenue
|
|
Revenue
|
|
RPMs
|
|
Yield
|
|
RASM
|
|
Factor
|
|
Passenger
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
American passenger revenue
|
|
$
|
11,503
|
|
|
4
|
%
|
|
4
|
%
|
|
—
|
|
|
3
|
%
|
|
2.2
|
|
International
passenger revenue
|
|
|
3,003
|
|
|
17
|
%
|
|
13
|
%
|
|
4
|
%
|
|
4
|
%
|
|
—
|
|
Charter
revenue
|
|
|
118
|
|
|
(2)
|
%
|
|
(25)
|
%
|
|
30
|
%
|
|
20
|
%
|
|
(3.6
|
)
|
Total
passenger revenue
|
|
$
|
14,624
|
|
|
6
|
%
|
|
6
|
%
|
|
—
|
|
|
3
|
%
|
|
1.8
|
|
North
American Passenger Revenue. North
American passenger revenue increased 4% due to increased traffic in 2005. In
the
first half of 2005 yields averaged 5% below the first half of 2004, while in
the
second half of 2005 yields averaged 5% higher than the second half of
2004.
International
Passenger Revenue. Higher
international passenger revenue reflects a capacity increase of 13%. RPMs also
increased 13%, while passenger mile yield increased 4%. Passenger RASM increased
4% to 8.45¢ and load factor remained consistent with the prior year. These
increases reflect increases in service to international destinations, primarily
in transatlantic markets.
Operating
Expense
|
|
December
31,
|
|
Increase
|
|
%
Increase
|
|
(in
millions)
|
|
2005
|
|
2004
|
|
(Decrease)
|
|
(Decrease)
|
|
Operating
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related costs
|
|
$
|
5,058
|
|
$
|
6,338
|
|
$
|
(1,280
|
)
|
|
(20)
|
%
|
Aircraft
fuel
|
|
|
4,271
|
|
|
2,924
|
|
|
1,347
|
|
|
46
|
%
|
Depreciation
and amortization
|
|
|
1,273
|
|
|
1,244
|
|
|
29
|
|
|
2
|
%
|
Contracted
services
|
|
|
1,096
|
|
|
999
|
|
|
97
|
|
|
10
|
%
|
Contract
carrier arrangements
|
|
|
1,318
|
|
|
932
|
|
|
386
|
|
|
41
|
%
|
Landing
fees and other rents
|
|
|
863
|
|
|
875
|
|
|
(12
|
)
|
|
(1)
|
%
|
Aircraft
maintenance materials and outside repairs
|
|
|
776
|
|
|
681
|
|
|
95
|
|
|
14
|
%
|
Aircraft
rent
|
|
|
541
|
|
|
716
|
|
|
(175
|
)
|
|
(24)
|
%
|
Passenger
commissions and other selling expenses
|
|
|
948
|
|
|
939
|
|
|
9
|
|
|
1
|
%
|
Passenger
service
|
|
|
345
|
|
|
349
|
|
|
(4
|
)
|
|
(1)
|
%
|
Impairment
of intangible assets
|
|
|
—
|
|
|
1,875
|
|
|
(1,875
|
)
|
|
NM
|
|
Restructuring,
asset writedowns, pension settlements and related items,
net
|
|
|
888
|
|
|
(41
|
)
|
|
929
|
|
|
NM
|
|
Other
|
|
|
815
|
|
|
712
|
|
|
103
|
|
|
14
|
%
|
Total
operating expense
|
|
$
|
18,192
|
|
$
|
18,543
|
|
$
|
(351
|
)
|
|
(2)
|
%
|
Operating
expense for 2005 was $18.2 billion, which includes an $888 million charge for
restructuring, asset writedowns, pension settlements and related items, net.
Operating expense for 2004 totaled $18.5 billion, which includes a $1.9 billion
impairment of intangible assets related to the write-off of goodwill associated
with ASA and Comair. For additional information about this charge, see Note
5 of
the Notes to the Consolidated Financial Statements.
Operating
capacity for 2005 increased 3% to 157 billion available seat miles, primarily
due to operational efficiencies from the redesign of our Atlanta hub from a
banked to a continuous hub, which allowed us to increase system-wide capacity
with no additional Mainline aircraft. Operating cost per available seat mile
decreased 5% to 11.60¢.
Salaries
and related costs.
The
decrease in salaries and related costs includes a 17% decrease from salary
rate
reductions for our pilot and non-pilot employees and a 7% decline due to lower
headcount.
Aircraft
fuel.
Aircraft
fuel expense increased $1.3 billion, or 46%, driven by higher fuel prices,
which
were slightly offset by a reduction in total gallons consumed due to our sale
of
ASA to SkyWest on September 7, 2005. Our average fuel price per gallon increased
47% to $1.71 while total gallons consumed decreased 1%. Fare increases
implemented during 2005 in response to rising aircraft fuel prices offset only
a
small portion of those cost increases. During 2005, we had no significant hedges
or contractual arrangements to reduce our fuel costs below market levels. Our
fuel expense is shown net of fuel hedge gains of $105 million in
2004.
Contract
carrier arrangements.
Contract
carrier arrangements expense increased primarily due to (1) a change in how
we
account for ASA’s expenses as a result of its sale to SkyWest and (2) new
contract carrier agreements with Shuttle America and Freedom. These increases
were partially offset by the termination of our contract carrier arrangement
with Flyi, Inc. in 2004.
Aircraft
rent.
The
decrease in aircraft rent expense largely reflects a 21% decrease due to our
lease restructuring in the December 2004 quarter, which resulted in the
reclassification of certain aircraft leases from operating to capital. As
discussed below, this reclassification increased our interest expense. The
reduction in aircraft rent expense also reflects our rejection of the leases
for
50 aircraft, the renegotiation of the leases for seven aircraft and the
repossession of 15 aircraft in connection with our Chapter 11 proceedings during
2005.
Restructuring,
asset writedowns, pension settlements and related items, net.
For
2005, restructuring, asset writedowns, pension settlements and related items,
net totaled an $888 million charge consisting of the following:
|
· |
Pension
Curtailment Charge.
A
$447 million curtailment charge related to our Pilot Plan and Non-pilot
Plan. This charge relates to the freeze of service accruals under
the
Pilot Plan effective December 31, 2004 and the impact of the planned
reduction of 6,000 to
7,000 jobs announced in November 2004 on the Non-pilot Plan (see
Note 10
of the Notes to the Consolidated Financial
Statements).
|
|
· |
Pension
Settlements.
$388 million in settlement charges
primarily related to the Pilot Plan due to a significant increase
in pilot
retirements and lump sum distributions from plan assets (see Note
10 of
the Notes to the Consolidated Financial
Statements).
|
|
· |
Workforce
Reduction.
A
$46 million charge related
to
our decision in 2005 to reduce staffing by approximately 7,000 to
9,000
jobs by December 2007, which has been substantially completed. This
charge
was offset by a net $3 million reduction in accruals associated with
prior
year workforce reduction programs.
|
|
· |
Asset
Charges.
A
$10 million charge related
to
the removal from service of six B-737-200 aircraft prior to their
lease
expiration dates.
|
For
2004,
restructuring, asset writedowns, pension settlements and related items, net
totaled a $41 million gain consisting of the following:
|
· |
Elimination
of Retiree Healthcare Subsidy.
A
$527 million gain related to our decision to eliminate the company
provided healthcare coverage subsidy for employees
who retire after January 1, 2006 (see Note 10 of the Notes to the
Consolidated Financial Statements).
|
|
· |
Pension
Settlements.
$251 million in settlement charges related to the Pilot Plan due
to a
significant increase in pilot retirements and lump sum distribution
from
plan assets (see Note 10 of the Notes to the Consolidated Financial
Statements).
|
|
· |
Workforce
Reduction.
A
$194 million charge related to our decision to reduce staffing by
approximately 6,000 to 7,000 jobs by December 2005. This charge
included
charges of $152 million related to special termination benefits and
$42
million related to employee severance (see Note 10 of the Notes to
the
Consolidated Financial Statements).
|
|
· |
Asset
Charges.
A
$41 million aircraft impairment charge related to our agreement to
sell
eight owned MD-11 aircraft. In October 2004, we sold these aircraft
and
related inventory to a third party for $227
million.
|
Other.
The
increase in other operating expense primarily reflects a 13% rise due to the
increase of incremental costs associated with our SkyMiles frequent flyer
program and a 5% increase from higher fuel taxes. These increases were partially
offset by the impact of our sale of ASA. For additional information regarding
our SkyMiles frequent flyer program, see Note 2 of the Notes to the Consolidated
Financial Statements.
Other
(Expense) Income
Other
expenses, net for 2005 increased 42% to $974 million, compared to $684 million
for 2004. This change is substantially attributable to a 25%, or $208 million,
increase in interest expense in 2005 and a gain from sale of investments which
we recognized in 2004.
Interest
expense increased primarily due to a 31% increase from higher levels of debt
outstanding and higher interest rates as well as a 10% rise due to additional
interest related to the reclassification of certain aircraft leases from
operating leases to capital leases as a result of renegotiations during the
December 2004 quarter (see discussion of aircraft rent expense above). These
increases were offset by a 15% decrease due to the accounting treatment of
certain interest charges under our Chapter 11 proceedings in accordance with
SOP
90-7.
Gain
from
sale of investments was $123 million for 2004 primarily due to the sale of
our
remaining equity interest in Orbitz, Inc. For additional information about
this
sale, see Note 2 of the Notes to the Consolidated Financial
Statements.
Reorganization
Items, Net
Reorganization
items, net totaled an $884 million charge for 2005. See “Results of
Operations - 2006 Compared to 2005” for additional information on these
items.
Income
Tax Benefit (Provision)
In
2004,
we recorded a valuation allowance on our net deferred tax assets because we
determined it was more likely than not that we would not be able to realize
the
benefit of those tax assets. In 2005, we increased our valuation allowance
by
approximately $1.6 billion. For additional information about the income tax
valuation allowance, see Note 9 of the Notes to the Consolidated Financial
Statements.
During
our Chapter 11 proceedings, we entered into a number of agreements related
to
financing arrangements and settlements of pre-petition claims. For a description
of the arrangements that had an effect on our liquidity, see Notes 6 and 8
of
the Notes to the Consolidated Financial Statements.
On
January 30, 2007, we secured commitments for a $2.5 billion exit financing
facility (“Exit Facility”) to be used in connection with our plan to exit
bankruptcy in the second quarter of 2007. For further information about the
Exit
Facility, see Note 6 of the Notes to the Consolidated Financial Statements.
We
have
obligations under our agreement with ALPA and the PBGC Settlement Agreement
to
issue an aggregate of $875 million of new unsecured notes. For further
information about our agreement with ALPA and the PBGC Settlement Agreement,
see
Notes 1 and 10 of the Notes to the Consolidated Financial
Statements.
Our
Amended and Restated DIP Credit Facility and the Amex Post-Petition Facility
include certain affirmative, negative and financial covenants. We were in
compliance with these covenant requirements at December 31, 2006 and 2005.
Sources
and Uses of Cash
We
expect
to meet our cash needs for 2007 from cash flows from operations, cash and cash
equivalents and short-term investments and financing arrangements. As discussed
in Note 6 of the Notes to the Consolidated Financial Statements, we have
obtained commitments for a $2.5 billion Exit Facility in connection with our
plan to exit bankruptcy in the second quarter of 2007.
Our
cash
and cash equivalents and short-term investments were $2.6 billion at December
31, 2006, compared to $2.0 billion at December 31, 2005. Restricted cash totaled
$802 million and $928 million at December 31, 2006 and 2005, respectively.
Cash
and cash equivalents at December 31, 2006 and 2005 include $156 million and
$155
million, respectively, which is set aside for the payment of certain operational
taxes and fees to various governmental authorities.
Cash
flows from operating activities
Cash
provided by operating activities was $993 million for the year ended December
31, 2006, an increase of $1.3 billion and $2.0 billion compared to the
years ended December 31, 2005 and 2004, respectively. Cash provided by operating
activities in 2006 reflects an increase of $401 million and $2.0 billion in
working capital compared to 2005 and 2004, respectively. These increases are
primarily a result of revenue and network productivity
improvements, in-court restructuring initiatives and labor cost reductions
implemented in connection with our restructuring business plan during our
Chapter 11 proceedings and an improved revenue environment. For additional
information regarding our restructuring business plan and operational
performance, see “Our Business Plan,” “Results of Operations - 2006
Compared to 2005,” and “Results of Operations
— 2005
Compared to 2004,”
respectively.
Our
2006
cash flows from operating activities also includes a $116 million decrease
in
our restricted cash balance primarily due to a release of cash from
restricted to operating as a result of agreements we reached with certain
vendors. In 2005, our restricted cash balance increased significantly
primarily due to cash holdbacks associated with our Visa/MasterCard credit
card
processing agreement. For the year ended December 31, 2006, we classified
changes to our restricted cash balances primarily associated with credit card
holdbacks to cash flows from operating activities to better reflect the nature
of restricted cash activities. Prior to 2006, we presented such
changes as an investing activity. For additional information regarding
this reclassification, see Note 2 of the Notes to the
Consolidated Financial Statements.
Cash
flows from investing activities
Cash
used
in investing activities totaled $361 million for the year ended December
31, 2006, compared to cash provided by investing activities of $22 million
for the year ended December 31, 2005. This change reflects a $401
million decrease in cash used for the purchase of flight and ground equipment
in
2006. Our 2005 cash flows from investing activities also includes
$842 million in proceeds from our sale of ASA and certain flight
equipment.
Cash provided
by investing activities totaled $22 million for the year ended December 31,
2005, compared to cash used in investing activities of $320 million for
the year ended December 31, 2004. This change reflects $570 million of
flight equipment additions in 2005, including $417 million we paid to
purchase 11 B-737-800 aircraft that we sold to a third party immediately after
these aircraft were delivered to us by the manufacturer. Our 2005 cash flows
from investing activities also include $842 million in proceeds from our sale
of
ASA and certain flight equipment discussed above.
Cash
flows from financing activities
Cash
used
in financing activities totaled $606 million for the year ended December 31,
2006, compared to cash provided by financing activities of $830 million for
the
year ended December 31, 2005. This change is primarily due to the net proceeds
we received under our Secured Super-Priority Debtor-In-Possession Credit
Agreement (the “DIP Credit Facility”) shortly after our Chapter 11 filing in
2005. As a result of our Chapter 11 filing, we ceased making payments on our
unsecured debt. For additional information regarding our Chapter 11 proceedings
and long-term debt, see Notes 1 and 6, respectively, of the Notes to the
Consolidated Financial Statements.
Cash
provided by financing activities totaled $830 million and $636 million for
the
years ended December 31, 2005 and 2004, respectively. This change is primarily
attributable to the net proceeds we received under our DIP Credit Facility
as
discussed above compared to the net proceeds we received in 2004 in connection
with newly entered or amended financing arrangements in the aggregate amount
of
$1.8 billion and the issuance of 2⅞%
Convertible Senior Notes due 2024 in the amount of $325 million. As discussed
above, after filing for bankruptcy, we ceased making payments on our unsecured
debt.
Contractual
Obligations
The
following table summarizes our contractual obligations as of December 31, 2006
that relate to debt; operating leases; aircraft order commitments; capital
leases; contract carrier obligations; other material, noncancelable purchase
obligations; and other liabilities. We are in the process of evaluating our
executory contracts in order to determine which contracts will be assumed in
our
Chapter 11 proceedings. Therefore, obligations as currently quantified in the
table below and in the text immediately following the footnotes to the table
will continue to change. The table below does not include contracts that we
have
successfully rejected through our Chapter 11 proceedings. The table also does
not include commitments that are contingent on events or other factors that
are
uncertain or unknown at this time, some of which are discussed in footnotes
to
this table and in the text immediately following the footnotes.
|
|
Contractual
Obligations by Year
|
|
(in
millions)
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
After
2011
|
|
Total
|
|
Long-term
debt, not including liabilities subject to compromise(1)(2)
|
|
$
|
1,466
|
|
$
|
2,152
|
|
$
|
392
|
|
$
|
1,300
|
|
$
|
1,307
|
|
$
|
1,071
|
|
$
|
7,688
|
|
Long-term
debt classified as liabilities subject to compromise(1)
|
|
|
453
|
|
|
640
|
|
|
868
|
|
|
177
|
|
|
103
|
|
|
2,704
|
|
|
4,945
|
|
Operating
lease payments(3)(4)
|
|
|
1,257
|
|
|
1,182
|
|
|
977
|
|
|
915
|
|
|
792
|
|
|
4,915
|
|
|
10,038
|
|
Aircraft
order commitments(5)
|
|
|
523
|
|
|
823
|
|
|
960
|
|
|
712
|
|
|
—
|
|
|
—
|
|
|
3,018
|
|
Capital
lease obligations not subject to compromise(3)(6)
|
|
|
104
|
|
|
100
|
|
|
99
|
|
|
99
|
|
|
94
|
|
|
94
|
|
|
590
|
|
Capital
lease obligations subject to compromise(3)(6)
|
|
|
6
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9
|
|
Contract
carrier obligations(7)
|
|
|
2,167
|
|
|
2,272
|
|
|
2,344
|
|
|
2,281
|
|
|
2,242
|
|
|
17,930
|
|
|
29,236
|
|
Other
purchase obligations(8)
|
|
|
212
|
|
|
51
|
|
|
46
|
|
|
28
|
|
|
25
|
|
|
5
|
|
|
367
|
|
Other
liabilities(9)
|
|
|
45
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
45
|
|
Total(10)
|
|
$
|
6,233
|
|
$
|
7,223
|
|
$
|
5,686
|
|
$
|
5,512
|
|
$
|
4,563
|
|
$
|
26,719
|
|
$
|
55,936
|
|
(1) |
These
amounts are included in our Consolidated Balance Sheets. Interest
on
long-term debt is not included in the table above. For additional
information about our debt and related matters, see Note 6 of the
Notes to
the Consolidated Financial
Statements.
|
(2) |
Under
our comprehensive agreement with ALPA reducing our pilot labor costs,
we
are required to issue for the benefit of pilots, no later than 120
days
following our emergence from bankruptcy, senior unsecured notes (“Pilot
Notes”) with an aggregate principal amount of $650 million, a term of up
to 15 years and an annual interest rate calculated to ensure the
Pilot
Notes trade at par on the issuance date. The Pilot Notes are
pre-payable at any time at our option, and we may replace all or a
portion of the principal amount of the Pilot Notes with cash prior
to
their issuance.
|
Under
our
settlement agreement with the PBGC relating to the termination of the Pilot
Plan, we are required to issue to the PBGC, no later than seven business days
after our emergence from bankruptcy, senior unsecured notes (“PBGC Notes”) with
an aggregate principal amount of $225 million, a term of up to 15 years and
an
annual interest rate calculated to ensure the PBGC Notes trade at par on the
issuance date. We may replace all or a portion of the principal amount of the
PBGC Notes with cash prior to their issuance, which we are required to do under
certain circumstances.
The
Pilot
Notes and the PBGC Notes are not included in the table above.
(3) |
Although
we are not generally permitted to make any payments on pre-petition
obligations as a result of our Chapter 11 proceedings, we have reached
agreements with certain aircraft financing parties under Section
1110 of
the Bankruptcy Code and received approval from the Bankruptcy Court
to
continue to make payments on certain aircraft debt and lease obligations.
The amounts included remain subject to change until a plan of
reorganization is approved and we emerge from Chapter
11.
|
(4) |
This
amount includes our noncancelable operating leases and our lease
payments
related to aircraft under our contract carrier agreements with ASA,
SkyWest Airlines, Freedom and Shuttle America. Emerging Issues Task
Force
01-08, “Determining Whether an Arrangement Contains a Lease”, provides
guidance on whether an arrangement contains a lease within the scope
of
SFAS 13 and is applicable to agreements entered into or modified
after
June 30, 2003. Because we entered into our contract carrier agreement
with
Chautauqua prior to June 30, 2003, payments totaling $183 million
related
to Chautauqua aircraft are not included in the table. See Note 7
of the
Notes to the Consolidated Financial Statements for further information.
|
We
have
signed a letter of intent with a third party to lease 10 B-757-200ER aircraft.
These aircraft will be delivered from July 2007 through November 2007 and will
be leased for seven years and three months each. We have also signed a letter
of
intent with a separate third party to lease three B-757-200ER aircraft which
would be delivered to us in the first quarter of 2008, or such earlier dates
as
the parties may agree and will be leased for five years. These aircraft leases
are not included in the table above.
(5) |
Our
aircraft order commitments as of December 31, 2006 consist of firm
orders
to purchase five B-777-200LR aircraft, 10 B-737-700 aircraft and
50
B-737-800 aircraft, including 48 B-737-800 aircraft, which we have
entered
into definitive agreements to sell to third parties immediately following
delivery of these aircraft to us by the manufacturer starting in
2007. The
impact of these sales on the future commitments above would be a
total
reduction of approximately $2.0 billion during the period 2007 through
2010.
|
On
January
31, 2007, we entered into an agreement to acquire 30 CRJ-900 aircraft from
Bombardier Inc., with options to acquire an additional 30 CRJ-900 aircraft.
The
aircraft will be delivered in two-class, 76 seat configuration between September
2007 and February 2010. We expect these aircraft will be operated by regional
air carriers under contract carrier agreements, and the purchase agreement
permits assignment of the aircraft and related support provisions to other
carriers. We have available to us long-term, secured financing commitments
to
fund a substantial portion of the aircraft purchase price for the 30 firm
orders. These aircraft order commitments are not included in the table
above.
(6) |
Interest
payments related to capital lease obligations are included in the
table.
The present value of these obligations, excluding interest, is included
on
our Consolidated Balance Sheets. For additional information about
our
capital lease obligations, see Note 7 of the Notes to the Consolidated
Financial Statements.
|
(7) |
This
amount represents our minimum fixed obligation under our contract
carrier
agreements with Chautauqua, Shuttle America, ASA, SkyWest Airlines,
and
Freedom (excluding contract carrier lease payments accounted for
as
operating leases, (see footnote (4) above)). For additional information
regarding our contract carrier agreements, see Note 8 of the Notes
to the
Consolidated Financial Statements.
|
(8) |
Includes
purchase obligations pursuant to which we are required to make minimum
payments for goods and services, including but not limited to insurance,
outsourced human resource services, marketing, maintenance, obligations
related to Comair, technology, and other third party services and
products. For additional information about other commitments and
contingencies, see Note 8 of the Notes to the Consolidated Financial
Statements.
|
(9) |
Represents
other liabilities on our Consolidated Balance Sheets for which we
are
obligated to make future payments related to medical benefit costs
incurred but not yet paid. These liabilities are not included in
any other
line item on this table.
|
(10) |
In
addition to the contractual obligations included in the table, we
have
significant cash obligations that are not included in the table.
For
example, we will pay wages required under collective bargaining
agreements; fund pension plans (as discussed below); purchase capacity
under contract carrier arrangements (as discussed below); and pay
credit
card processing fees and fees for other goods and services, including
those related to fuel, maintenance and commissions. While we are
parties
to legally binding contracts regarding these goods and services,
the
actual commitment is contingent on certain factors such as volume
and/or
variable rates that are uncertain or unknown at this time. Therefore,
these items are not included in the table. In addition, purchase
orders
made in the ordinary course of business are excluded from the table
and
any amounts which we are liable for under the purchase orders are
included
in current liabilities on our Consolidated Balance
Sheets.
|
The
following items are not included in the table above:
Pension
Plans.
We
sponsor qualified defined contribution and defined benefit pension plans for
eligible employees and retirees. Our funding obligations for these plans are
governed by the Employee Retirement Income Security Act of 1974 (“ERISA”).
Estimates of pension plan funding requirements can vary materially from actual
funding requirements because the estimates are based on various assumptions,
including those described below.
Defined
Contribution Pension Plans (“DC Plans”). During
the year ended December 31, 2006, we contributed approximately $110 million
to
our DC Plans. Estimates of future funding requirements under our DC Plans are
not reasonably estimable at this time. Under our comprehensive agreement
with ALPA reducing our pilot labor costs, ALPA received, among other things,
a
$2.1 billion allowed general, unsecured pre-petition claim in our bankruptcy
proceedings. The proceeds of this claim will be distributed to pilot accounts
under the Delta Family-Care Savings Plan to the extent permitted by the Internal
Revenue Code, thereby reducing the amount we can contribute under the Internal
Revenue Code to the DC Plan for pilots in 2007. In addition, we intend to
implement changes to our DC Plan for non-pilot employees following our exit
from
bankruptcy but the design of these plan changes has not yet been
finalized.
Defined
Benefit Pension Plans (“DB Plans”).
During
the year ended December 31, 2006, we contributed approximately $4 million to
our
DB Plans. Under our settlement agreement with the PBGC, the Pilot Plan was
terminated effective September 2, 2006, and we agreed to initiate, prior to
our
emergence from Chapter 11, a standard termination of a separate frozen qualified
defined benefit pension plan for certain pilots formerly employed by Western
Air
Lines. In addition, our non-qualified defined benefit pension plans for pilots
were terminated effective September 2, 2006.
Effective
December 31, 2005, future pay and service accruals under the Non-pilot Plan
were
frozen. The Pension Preservation Act of 2006 allows us to reduce the funding
obligations for the Non-pilot Plan over the next several years. As a result
of
this legislation, we intend to maintain the Non-pilot Plan. While this
legislation makes our funding obligations for the Non-pilot Plan more
predictable, factors outside our control will continue to have an impact on
the
funding requirements for that plan.
Estimates
of future funding requirements for the Non-pilot Plan are based on various
assumptions, including legislative changes regarding these obligations. These
assumptions also include, among other things, the actual and projected market
performance of assets of the Non-pilot Plan; statutory requirements; the terms
of the Non-pilot Plan; and demographic data for participants in the Non-pilot
Plan, including the number of participants and the rate of participant
attrition.
Assuming
current funding rules and current plan design, we estimate that the funding
requirements under the Non-pilot Plan for 2007, 2008 and 2009 will aggregate
approximately $300 million.
Contract
Carriers.
We have
long-term contract carrier agreements with the following five regional air
carriers (in addition to Comair): Chautauqua, Shuttle America, ASA, SkyWest
Airlines, and Freedom. Under these agreements, the 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.
Under
these long-term contract carrier agreements, we are obligated to pay certain
minimum fixed obligations, which are included in the table above. The remaining
estimated expenses are not included in the table because these expenses are
contingent based on the costs associated with the operation of contract carrier
flights by those air carriers as well as rates that are unknown at this time.
We
cannot reasonably estimate at this time our expenses under the contract carrier
agreements in 2007 and thereafter.
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 December 31, 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 (the “Put Right”)
are $483 million
and $367 million, respectively. The actual amount that we may be required to
pay
in these circumstances may be materially different from these
estimates. If the Chautaqua or Shuttle America Put Right is
exercised, we must also pay to the exercising carrier 10% interest (compounded
monthly) on the equity the carrier provided when it purchased the put
aircraft. These equity amounts for Chautauqua and Shuttle America total
$56 million and $34 million, respectively.
For
additional information on contract carrier agreements see Note 8 of the Notes
to
the Consolidated Financial Statements.
Interest
and Related Payments.
Estimated amounts for future interest and related payments in connection with
our long-term debt obligations are based on the fixed and variable interest
rates specified in the associated debt agreements. We expect to pay $643 million
related to interest on our fixed and variable rate long-term debt not
subject to compromise in 2007. Estimates on variable rate interest were
calculated using implied short-term LIBOR based on LIBOR at December 31, 2006.
The related payments represent credit enhancements required in conjunction
with
certain financing agreements. As a result of our Chapter 11 filing, actual
interest expense in 2007 is expected to be less than the contractual interest
expense. See Note 2 of the Notes to the Consolidated Financial Statements for
information about our policy relating to interest expense.
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 the Consolidated Balance Sheet at December 31, 2006 and
2005.
Other
Contingent Obligations under Contracts.
In
addition to the contractual obligations discussed above, we have certain
contracts for goods and services that require us to pay a penalty, acquire
inventory specific to us or purchase contract specific equipment, as defined
by
each respective contract, if we terminate the contract without cause prior
to
its expiration date. Because these obligations are contingent on our termination
of the contract without cause prior to its expiration date, no obligation would
exist unless such a termination occurs. We also cannot predict the impact,
if
any, that our Chapter 11 proceedings might have on these
obligations.
For
additional information about other contingencies not discussed above as well
as
discussions related to general indemnifications, see Note 8 of the Notes to
the
Consolidated Financial Statements.
Critical
Accounting Estimates
The
preparation of financial statements in conformity with GAAP requires management
to make certain estimates and assumptions. We periodically evaluate these
estimates and assumptions, which are based on historical experience, changes
in
the business environment and other factors that management believes to be
reasonable under the circumstances. Actual results may differ materially from
these estimates.
Claims
Resolution Process.
As of
February 7, 2007, claims totaling about $87.0 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. 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. As of
February 7, 2007, the Bankruptcy Court has disallowed approximately $1.2 billion
of claims and has not yet ruled on our other objections to claims, the disputed
portions of which aggregate to an additional $2.8 billion. We expect to continue
to file objections in the future. Because the process of analyzing and objecting
to claims is ongoing, the amount of disallowed claims may increase significantly
in the future.
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 is the exact
recovery with respect to allowed claims presently known.
Passenger
Revenue.
We
record sales of passenger tickets as air traffic liabilities on our Consolidated
Balance Sheets. Passenger revenue is recognized when we provide transportation
or when the ticket expires unused, reducing the related air traffic liability.
We periodically evaluate the estimated air traffic liability and record any
resulting adjustments in our Consolidated Statements of Operations in the period
in which the evaluations are completed. These adjustments relate primarily
to
refunds, exchanges, transactions with other airlines and other items for which
final settlement occurs in periods subsequent to the sale of the related tickets
at amounts other than the original sales price.
Frequent
Flyer Program.
We have
a frequent flyer program, the SkyMiles Program, offering incentives to increase
travel on Delta. This program allows participants to earn mileage for travel
awards by flying on Delta, Delta Connection carriers and participating airlines,
as well as through participating companies such as credit card companies, hotels
and car rental agencies. Mileage credits can be redeemed for free or upgraded
air travel on Delta and participating airlines, for membership in our Crown
Room
Club and for other program awards.
For
SkyMiles accounts with sufficient mileage credits to qualify for a free travel
award, we record a liability for the estimated incremental cost of flight awards
that are earned and expected to be redeemed for travel on Delta or other
airlines. Our incremental costs include our system average cost per passenger
for fuel, food and other direct passenger costs for awards to be redeemed on
Delta. These estimates are generally updated based on our 12-month historical
average for such costs. We also accrue a frequent flyer liability for the
mileage credits that are expected to be used for travel on participating
airlines based on historical usage patterns and contractual rates. We
periodically record adjustments to this liability in other operating expenses
on
our Consolidated Statements of Operations based on awards earned, awards
redeemed, changes in our estimated incremental costs and changes to the SkyMiles
program. Changes in these estimates could have a material impact on the
liability in the year in which the change occurs and in future years. The
liability is recorded in other accrued liabilities on our Consolidated Balance
Sheets.
At
December 31, 2006 and 2005, we estimated that approximately eight million and
seven million free travel awards, respectively, were expected to be redeemed
for
free travel on Delta or other airlines. This estimate excludes mileage credits
in SkyMiles accounts which (1) do not have sufficient mileage credits to qualify
for a free travel award or (2) have sufficient mileage credits to qualify for
a
free travel award but which are not expected to be redeemed for such an
award.
We
sell
mileage credits in our SkyMiles frequent flyer program to participating
companies 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 and recognized as passenger
revenue over the period when transportation is expected to be provided. Amounts
received in excess of the transportation’s fair value are recognized in income
currently and classified as other revenue. A change in assumptions as to the
period over which the mileage credits are expected to be used (currently 15
to
41 months), the actual redemption activity for mileage credits or our estimate
of the fair value of transportation expected to be provided could have a
material impact on our revenue in the year in which the change occurs and in
future years.
Our
total
liability for future SkyMiles award redemptions for free travel on us or
participating airlines as well as unrecognized revenue from selling SkyMiles
mileage credits was approximately $887 million and $607 million at December
31,
2006 and 2005, respectively. These amounts were recorded as components of other
accrued liabilities on our Consolidated Balance Sheets.
Long-Lived
Assets.
Our
flight equipment and other long-lived assets have a recorded value of $13.0
billion on our Consolidated Balance Sheet at December 31, 2006. This value
is
based on various factors, including the assets’ estimated useful lives and their
estimated salvage values. In accordance with SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), we record impairment
losses on long-lived assets used in operations when events and circumstances
indicate the assets might be impaired and the estimated future cash flows
generated by those assets are less than their carrying amounts. The impairment
loss recognized is the amount by which the asset’s carrying amount exceeds its
estimated fair value.
In
order
to evaluate potential impairment as required by SFAS 144, we group assets at
the
fleet type level (the lowest level for which there are identifiable cash flows)
and then estimate future cash flows based on projections of passenger yield,
fuel costs, labor costs and other relevant factors. We estimate aircraft fair
values using published sources, appraisals and bids received from third parties,
as available. For additional information about our accounting policy for the
impairment of long-lived assets, see Notes 2 and 5 of the Notes to the
Consolidated Financial Statements.
Income
Tax Valuation Allowance and Contingencies.
In
accordance with SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”),
deferred tax assets should be reduced by a valuation allowance if it is more
likely than not that some portion or all of the deferred tax assets will not
be
realized. The future realization of our net deferred tax assets depends on
the
availability of sufficient future taxable income. In making this determination,
we consider all available positive and negative evidence and make certain
assumptions. We consider, among other things, our deferred tax liabilities;
the
overall business environment; our historical earnings and losses; our industry’s
historically cyclical periods of earnings and losses; and our outlook for future
years.
Our
income tax provisions are based on calculations and assumptions that are subject
to examination by the Internal Revenue Service and other tax authorities.
Although we believe that the positions taken on previously filed tax returns
are
reasonable, we have established tax and interest reserves in recognition that
various taxing authorities may challenge the positions we have taken, which
could result in additional liabilities for taxes and interest. We review the
reserves as circumstances warrant and adjust the reserves as events occur that
affect our potential liability, such as lapsing of applicable statutes of
limitations, conclusion of tax audits, a change in exposure based on current
calculations, identification of new issues, release of administrative guidance,
or the rendering of a court decision affecting a particular issue. We adjust
the
income tax provision in the period in which the facts that give rise to the
revision become known.
For
additional information about income taxes, see Notes 2 and 9 of the Notes to
the
Consolidated Financial Statements.
Pension
Plans. We
sponsor DB Plans for our eligible employees and retirees. The impact of these
DB
Plans on our Consolidated Financial Statements as of December 31, 2006 and
2005
and for the years ended December 31, 2006, 2005, and 2004 is presented in Note
10 of the Notes to the Consolidated Financial Statements. Assuming current
plan
design, we currently estimate that our defined benefit pension plan expense
in
2007 will be approximately $100 million. The effect of our DB Plans on our
Consolidated Financial Statements is subject to many assumptions. We believe
the
most critical assumptions are (1) the weighted average discount rate and (2)
the
expected long-term rate of return on the assets of our DB Plans. The Pilot
Plan
and pilot non-qualified defined benefit pension plans were terminated during
2006. For additional information regarding these terminations, see Note 10
of
the Notes to the Consolidated Financial Statements.
We
determine our weighted average discount rate on our measurement date primarily
by reference to annualized rates earned on high quality fixed income investments
and yield-to-maturity analysis specific to our estimated future benefit
payments. We used a weighted average discount rate of 5.88% and 5.69% at
September 30, 2006 and 2005, respectively. Additionally, our weighted average
discount rate for net periodic benefit cost in each of the past three years
has
varied from the rate selected on our measurement date, ranging from 6.09% in
2004 to 5.67% in 2006, due to remeasurements throughout the year. The impact
of
a 0.50% change in our weighted average discount rate is shown in the table
below.
The
expected long-term rate of return on the assets of our DB Plans is based
primarily on specific asset investment studies for our DB Plans performed by
outside consultants who used historical returns on our DB Plans’ assets. The
investment strategy for pension plan assets is to utilize a diversified mix
of
global public and private equity portfolios, public and private fixed income
portfolios, and private real estate and natural resource investments to earn
a
long-term investment return that meets or exceeds a 9% annualized return target.
Our historical annualized ten-year rate of return on plan assets is
approximately 9% as of December 31, 2006. The impact of a 0.50% change in our
expected long-term rate of return is shown in the table below.
Change
in Assumption
|
Effect
on 2007
Pension
Expense
|
Effect
on Accrued
Pension
Liability at
December
31, 2006
|
0.50%
decrease in discount rate
|
+$15
million
|
+$475
million
|
0.50%
increase in discount rate
|
-$15
million
|
-$475
million
|
0.50%
decrease in expected return on assets
|
+$20
million
|
—
|
0.50%
increase in expected return on assets
|
-$20
million
|
—
|
Our
rate
of change in future compensation levels is based primarily on labor contracts
with our employees under collective bargaining agreements and expected future
pay rate changes for other employees. Due to the freeze of benefit accruals
effective December 31, 2005 in our Non-pilot Plan, adjusting the rate of change
in future compensation levels does not have an impact on 2007 pension expense
or
on the accrued pension liability at December 31, 2006.
For
additional information about our pension plans, see Note 10 of the Notes to
the
Consolidated Financial Statements.
Recently
Issued Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 158, “Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans, an amendment of SFAS Nos. 87, 88, 106 and 132(R)” (“SFAS
158”). This statement, among other things, requires that we recognize the funded
status of our defined benefit pension and other postretirement plans in our
Consolidated Balance Sheet as of December 31, 2006, with changes in the funded
status recognized through comprehensive loss in the year in which such changes
occur. Application of this standard resulted in (1) a $685 million net decrease
in accrued pension and other postretirement and postemployment liabilities,
(2)
a $248 million decrease in the intangible pension asset in other noncurrent
assets and (3) a $437 million decrease in shareowners’ deficit. The
adoption of SFAS 158 had no effect on our Consolidated Statement of Operations
for any period presented. For additional information related to the adoption
of
SFAS 158, see Note 10 of the Notes to the Consolidated Financial
Statements.
In
July
2006, the 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 is intended 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. The cumulative effect of applying this interpretation must
be
reported as an adjustment to the opening balance of shareowners’ deficit in
2007. We are currently evaluating the impact of FIN 48 on our Consolidated
Financial Statements and anticipate the adjustment to shareowners’ deficit will
not be material.
In
December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based
Payment” (“SFAS 123R”), which requires an entity to recognize compensation
expense in an amount equal to the fair value of its share based payments, such
as stock options granted to employees. This standard replaces SFAS No. 123,
“Accounting for Stock-Based Compensation” (“SFAS 123”), and supersedes APB
Opinion No. 25, “Accounting for Stock Issued to Employees.” We adopted SFAS 123R
on January 1, 2006. For additional information regarding SFAS 123R, see Note
2
in the Notes to the Consolidated Financial Statement.
Market
Risks
Associated with Financial
Instruments
We
have
significant market risk exposure related to aircraft fuel prices and interest
rates. Market risk is the potential negative impact of adverse changes in these
prices or rates on our Consolidated Financial Statements. To manage the
volatility relating to these exposures, we periodically enter into derivative
transactions pursuant to stated policies (see Note 4 of the Notes to the
Consolidated Financial Statements). We expect adjustments to the fair value
of
financial instruments accounted for under SFAS 133 to result in ongoing
volatility in earnings and shareowners’ deficit.
The
following sensitivity analyses do not consider the effects of a change in demand
for air travel, the economy as a whole, or actions we may take to seek to
mitigate our exposure to a particular risk. For these and other reasons, the
actual results of changes in these prices or rates may differ materially from
the following hypothetical results.
Aircraft
Fuel Price Risk
Our
results of operations may be materially impacted by changes in the price of
aircraft fuel. To manage this risk, we periodically enter into derivative
contracts comprised of heating oil and jet fuel swap and collar contracts,
to
hedge a portion of our projected aircraft fuel requirements. We do not
enter into fuel hedge contracts for speculative purposes.
In
2006,
aircraft fuel expense accounted for 25% of our total operating expenses.
Aircraft fuel expense for 2006 increased 1% compared to 2005 due to higher
fuel
prices, despite reduced consumption. Our average fuel price per gallon increased
19% to $2.04, while total gallons consumed decreased 15%, due to a reduction
in
Mainline capacity and our sale of ASA.
As
of
December 31, 2006, we had hedged 36% of our projected fuel requirements for
the
March 2007 quarter using heating oil and jet fuel zero-cost collar contracts
with a weighted average contract cap and floor price of $1.93 and $1.82,
respectively. We recognized a $17 million loss from the settlement of certain
of
these contracts at January 31, 2007. During January 2007, we hedged
approximately 24% of our projected fuel requirements for the nine months ending
September 30, 2007 using heating oil and jet fuel zero-cost collar and swap
contracts. The swap contracts have a weighted average contract price of $1.58
and the zero-cost collar contracts have a weighted average contract cap and
floor price of $1.83 and $1.67, respectively. As of January 31, 2007, our open
fuel hedge contracts had an estimated fair market value gain of $2 million.
We
have not entered into any hedges for the December 2007 quarter. We estimate
that
a 10% rise in the price per gallon of heating oil and jet fuel would change
the
estimated fair market value associated with our outstanding contracts at
settlement to a $41 million gain.
We
project that our aircraft fuel consumption will be 2.6 billion gallons in
2007. Based on a projected average jet fuel price of $2.00 per gallon for 2007,
a 10% rise in jet fuel prices would increase our aircraft fuel expense by $487
million, inclusive of the impact of effective hedge instruments that have
settled or are outstanding as of January 31, 2007.
We
did
not have any fuel hedge contracts outstanding as of December 31,
2005.
For
additional information regarding derivative contracts and other exposures to
market risks, see Note 4 of the Notes to the Consolidated Financial Statements.
Interest
Rate Risk
Our
exposure to market risk from volatility in interest rates is primarily
associated with our long-term debt obligations. Market risk associated with
our
fixed and variable rate long-term debt relates to the potential reduction in
fair value and negative impact to future earnings, respectively, from an
increase in interest rates. The following sensitivity analysis for long-term
debt at December 31, 2006 and 2005 excludes long-term debt subject to
compromise due to our status as a debtor-in-possession under Chapter 11. At
December 31, 2006 and 2005, a 10% increase in average annual interest rates
would have decreased the estimated fair value of our long-term debt not
subject to compromise by $114 million and $78 million, respectively, and
increase interest expense by $24 million and $19 million, respectively. At
December 31, 2006 and 2005, we did not have any interest rate swaps or
contractual arrangements that would reduce our interest expense. For additional
information on our long-term debt agreements, see Note 6 of the Notes to the
Consolidated Financial Statements.
While
operating as a debtor-in-possession, 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 $870 million for 2006. Contractual interest
expense (including interest expense that is associated with obligations
classified as liabilities subject to compromise) totaled $1.2 billion for
2006.
ASM—
Available Seat Mile. A measure of capacity. ASMs equal the total number of
seats
available for transporting passengers during a reporting period multiplied
by
the total number of miles flown during that period.
Cargo
Ton Miles—
The
total number of tons of cargo transported during a reporting period, multiplied
by the total number of miles cargo is flown during that period.
Cargo
Ton Mile Yield—
The
amount of cargo revenue earned per cargo ton mile during a reporting
period.
CASM—
(Operating) Cost per Available Seat Mile. The amount of operating cost incurred
per ASM during a reporting period, also referred to as “unit cost”.
Passenger
Load Factor—
A
measure of utilized available seating capacity calculated by dividing RPMs
by
ASMs for a reporting period.
Passenger
Mile Yield—
The
amount of passenger revenue earned per RPM during a reporting
period.
RASM—
(Operating or Passenger) Revenue per ASM. The amount of operating or passenger
revenue earned per ASM during a reporting period. Passenger RASM is also
referred to as “unit revenue.”
RPM—
Revenue
Passenger Mile. One revenue-paying passenger transported one mile. RPMs equal
the number of revenue passengers during a reporting period multiplied by the
number of miles flown by those passengers during that period, RPMs are also
referred to as “traffic”.
ITEM
7A. |
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Information
required by this item is set forth in Item 7 - “Management’s Discussion and
Analysis of Financial Condition and Results of Operations — Market Risks
Associated With Financial Instruments” and in Note 4 of the Notes to the
Consolidated Financial Statements.
ITEM
8. |
FINANCIAL
STATEMENTS AND SUPPLEMENTARY
DATA
|
Reference
is made to the Index on page F-1 of the Consolidated Financial Statements and
the Notes thereto contained in this Form 10-K.
ITEM
9. |
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
For
information about our change in independent registered public accounting firms
from Deloitte & Touche LLP, our auditors for the fiscal year ended December
31, 2005, to Ernst & Young LLP for the fiscal year ending December 31, 2006,
please refer to our Form 8-K filed with the SEC on February 3,
2006.
ITEM
9A. |
CONTROLS
AND PROCEDURES
|
Disclosure
Controls and Procedures
Our
management, including our Chief Executive Officer and Chief Financial Officer,
performed an evaluation of our disclosure controls and
procedures, which have been designed to permit us to effectively identify and
timely disclose important information. Our management, including our Chief
Executive Officer and Chief Financial Officer, concluded that the controls
and
procedures were effective as of December 31, 2006 to ensure that material
information was accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.
Changes
In Internal Control
During
the three months ended December 31, 2006, we did not make any changes in our
internal control over financial reporting that have materially affected, or
are
reasonably likely to materially affect, our internal control over financial
reporting.
Management’s
Annual Report on Internal Control Over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934. Our internal control over
financial reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with accounting principles generally
accepted in the United States of America.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies may deteriorate.
Management
conducted an evaluation of the effectiveness of our internal control over
financial reporting as of December 31, 2006 using the criteria issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control—Integrated Framework. Based on that evaluation, management
believes that our internal control over financial reporting was effective as
of
December 31, 2006.
Management's
assessment of the effectiveness of our internal control over financial reporting
as of December 31, 2006 has been audited by Ernst & Young LLP, an
independent registered public accounting firm, which also audited our
Consolidated Financial Statements for the year ended December 31, 2006. Ernst
& Young LLP’s report on management’s assessment of internal control over
financial reporting is set forth below.
Report
of Independent Registered Public Accounting Firm
To
the
Board of Directors and Shareowners of
Delta
Air
Lines, Inc. (Debtor-in-Possession)
We
have
audited management’s assessment, included in the accompanying Management’s
Annual Report on Internal Control Over Financial Reporting, that Delta Air
Lines, Inc. (Debtor-in-Possession) (the “Company”) maintained effective internal
control over financial reporting as of December 31, 2006, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO criteria). The
Company’s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion
on
management’s assessment and an opinion on the effectiveness of the Company’s
internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, management’s assessment that Delta
Air
Lines, Inc. (Debtor-in-Possession)
maintained effective internal control over financial reporting as of December
31, 2006, is fairly stated, in all material respects, based on the COSO
criteria. Also, in our opinion, Delta
Air
Lines, Inc. (Debtor-in-Possession)
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2006, based on the
COSO
criteria.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of Delta
Air
Lines, Inc. (Debtor-in-Possession) as of December 31, 2006, and the related
consolidated statements of operations, shareowners’ deficit, and cash flows in
the year ended December 31, 2006. Our
report
dated March 1, 2007 expressed
an unqualified opinion thereon and included explanatory
paragraphs related to (i) the Company’s ability to continue as a going concern
and (ii) changes in accounting for postretirement benefit plans and share-based
compensation.
/s/
Ernst & Young LLP
Atlanta,
Georgia
March
1,
2007
ITEM
9B. |
OTHER
INFORMATION.
|
None.
ITEM
10. |
DIRECTORS
AND EXECUTIVE OFFICERS OF THE
REGISTRANT
|
The
information required by this Item will be filed with the Securities and Exchange
Commission as an amendment to this Form 10-K in accordance with General
Instruction G(3).
The
information required by this Item will be filed with the Securities and Exchange
Commission as an amendment to this Form 10-K in accordance with General
Instruction G(3).
The
information required by this Item will be filed with the Securities and Exchange
Commission as an amendment to this Form 10-K in accordance with General
Instruction G(3).
The
information required by this Item will be filed with the Securities and Exchange
Commission as an amendment to this Form 10-K in accordance with General
Instruction G(3).
The
information required by this Item will be filed with the Securities and Exchange
Commission as an amendment to this Form 10-K in accordance with General
Instruction G(3).
ITEM
15. |
EXHIBITS
AND FINANCIAL STATEMENT
SCHEDULES.
|
(a) (1),
(2).
The financial statements required by this item are listed in the Index to
Consolidated Financial Statements in this Form 10-K. The schedule required
by
this item is included in the Notes to the Consolidated Financial Statements.
All
other financial statement schedules are not required or are inapplicable and
therefore have been omitted.
(3).
The
exhibits required by this item are listed in the Exhibit Index to this Form
10-K. The management contracts and compensatory plans or arrangements required
to be filed as an exhibit to this Form 10-K are listed as Exhibits 10.6 through
10.14 in the Exhibit Index.
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized, on the 2nd day of March,
2007.
|
|
|
|
DELTA
AIR LINES,
INC |
|
|
|
|
By: |
/s/ Gerald
Grinstein |
|
Gerald
Grinstein
|
|
Chief
Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below on the 2nd day of March, 2007 by the following persons on
behalf of the registrant and in the capacities indicated.
Signature
|
Title
|
/s/
Gerald
Grinstein
Gerald
Grinstein
|
Chief
Executive Officer and Director (Principal Executive
Officer)
|
/s/
Edward H. Bastian
Edward
H. Bastian
|
Executive
Vice President and Chief Financial Officer
(Principal
Financial Officer and Principal Accounting Officer)
|
/s/
Edward H. Budd
Edward
H. Budd
|
Director
|
/s/
Dominico De Sole
Dominico
De Sole
|
Director
|
/s/
David R. Goode
David
R. Goode
|
Director
|
Patricia
L. Higgins
|
Director
|
Signature
|
Title
|
/s/
Arthur E. Johnson
Arthur
E. Johnson
|
Director
|
/s/
Karl J. Krapek
Karl
J. Krapek
|
Director
|
Paula
Rosput Reynolds
|
Director
|
John
F. Smith, Jr.
|
Chairman
of the Board
|
/s/
Kenneth B. Woodrow
Kenneth
B. Woodrow
|
Director
|
3.1
|
Delta’s
Certificate of Incorporation (Filed
as Exhibit 3.1 to Delta’s Current Report on Form 8-K as filed on
May 23, 2005).*
|
3.2
|
Delta’s
By-Laws (Filed as Exhibit 3.2 to Delta’s Current Report on
Form 8-K as filed on May 23, 2005).*
|
4.1
|
Indenture
dated as of March 1, 1983, between Delta and The Citizens and
Southern National Bank, as trustee, as supplemented by the First
and
Second Supplemental Indentures thereto dated as of January 27, 1986
and May 26, 1989, respectively (Filed as Exhibit 4 to Delta’s
Registration Statement on Form S-3 (Registration No. 2-82412),
Exhibit 4(b) to Delta’s Registration Statement on Form S-3
(Registration No. 33-2972), and Exhibit 4.5 to Delta’s Annual
Report on Form 10-K for the year ended June 30, 1989).*
|
4.2
|
Third
Supplemental Indenture dated as of August 10, 1998, between Delta and
The Bank of New York, as successor trustee, to the Indenture dated
as of
March 1, 1983, as supplemented, between Delta and The Citizens and
Southern National Bank of Florida, as predecessor trustee (Filed
as
Exhibit 4.5 to Delta’s Annual Report on Form 10-K for the year
ended June 30, 1998).*
|
4.3
|
Indenture
dated as of April 30, 1990, between Delta and The Citizens and
Southern National Bank of Florida, as trustee (Filed as Exhibit 4(a)
to Amendment No. 1 to Delta’s Registration Statement on Form S-3
(Registration No. 33-34523)).*
|
4.4
|
First
Supplemental Indenture dated as of August 10, 1998, between Delta and
The Bank of New York, as successor trustee, to the Indenture dated
as of
April 30, 1990, between Delta and The Citizens and Southern National
Bank of Florida, as predecessor trustee (Filed as Exhibit 4.7 to
Delta’s Annual Report on Form 10-K for the year ended June 30,
1998).*
|
4.5
|
Indenture
dated as of May 1, 1991, between Delta and The Citizens and Southern
National Bank of Florida, as Trustee (Filed as Exhibit 4 to Delta’s
Registration Statement on Form S-3 (Registration
No. 33-40190)).*
|
Delta
is
not filing any other instruments evidencing any indebtedness because the total
amount of securities authorized under any single such instrument does not exceed
10% of the total assets of Delta and its subsidiaries on a consolidated basis.
Copies of such instruments will be furnished to the Securities and Exchange
Commission upon request.
10.1
|
Purchase
Agreement No. 2022 between Boeing and Delta relating to Boeing Model
737-632/-732/-832 Aircraft (Filed as Exhibit 10.3 to Delta’s
Quarterly Report on Form 10-Q for the quarter ended March 31,
1998).*/**
|
10.2
|
Purchase
Agreement No. 2025 between Boeing and Delta relating to Boeing Model
767-432ER Aircraft (Filed as Exhibit 10.4 to Delta’s Quarterly Report
on Form 10-Q for the quarter ended March 31, 1998).*/**
|
10.3
|
Letter
Agreements related to Purchase Agreements No. 2022 and/or
No. 2025 between Boeing and Delta (Filed as Exhibit 10.5 to
Delta’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998).*/**
|
10.4
|
Aircraft
General Terms Agreement between Boeing and Delta (Filed as
Exhibit 10.6 to Delta’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998).*/**
|
10.5(a)
|
Amended
and Restated Secured Super-Priority Debtor in Possession Credit Agreement
dated as of March 27, 2006 among Delta Air Lines, Inc., a Debtor
and Debtor in Possession, as Borrower, the other Credit Parties signatory
thereto, each a Debtor and Debtor in Possession, as Credit Parties,
the
Lenders signatory thereto from time to time, as Lenders, and General
Electric Capital Corporation, as Administrative Agent and Lender
(“Amended
and Restated Secured Super-Priority Debtor-in-Possession Credit
Agreement”).
|
10.5(b)
|
Amendment
No. 1 to Amended and Restated Secured Super-Priority
Debtor-in-Possession Credit Agreement dated as of August 31,
2006.
|
10.6
|
Delta
2000 Performance Compensation Plan (Filed as Appendix A to Delta’s
Proxy Statement dated September 15, 2000).*
|
10.7
|
First
Amendment to Delta 2000 Performance Compensation Plan, effective
April 25, 2003 (Filed as Exhibit 10.3 to Delta’s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2003).*
|
10.8
|
2002
Delta Excess Benefit Plan (Filed as Exhibit 10.1 to Delta’s Quarterly
Report on Form 10-Q for the quarter ended March 31, 2002).*
|
10.9
|
2002
Delta Supplemental Excess Benefit Plan (Filed as Exhibit 10.2 to
Delta’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2002).*
|
10.10
|
Form
of Excess Benefit Agreement between Delta and its officers (Filed
as
Exhibit 10.3 to Delta’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2002).*
|
10.11
|
Form
of Non-Qualified Benefit Agreement (Filed as Exhibit 10.19 to Delta’s
Annual Report on Form 10-K for the year ended December 31,
2003).*
|
10.12
|
Directors’
Deferred Compensation Plan, as amended (Filed as Exhibit 10.1 to
Delta’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2003).*
|
10.13(a)
|
Delta
Air Lines, Inc. Director and Officer Severance Plan (Filed as Exhibit
10.1
to Delta’s Current Report on Form 8-K filed on February 23,
2006).*
|
10.13(b)
|
Form
of Agreement Related to Relinquishment of Certain Prior Severance
Benefits
(Non-pilot). (Filed as Exhibit 10.15(b) to Delta’s Annual Report on
Form 10-K for the year ended December 31,
2005).*
|
10.13(c)
|
Form
of Agreement Related to Relinquishment of Certain Prior Severance
Benefits
(Pilot). (Filed as Exhibit 10.15(c) to Delta’s Annual Report on
Form 10-K for the year ended December 31,
2005).*
|
10.13(d)
|
Form
of Acknowledgement of Ineligibility for Severance Benefits Under
Any Delta
Plan or Program, as executed by Messrs. Grinstein and Whitehurst.
(Filed
as Exhibit 10.15(d) to Delta’s Annual Report on Form 10-K for
the year ended December 31, 2005).*
|
10.13(e)
|
Form
of Separation Agreement and General Release Applicable to Executive
Officers. (Filed as Exhibit 10.15(e) to Delta’s Annual Report on
Form 10-K/A for the year ended December 31,
2005).*
|
10.14
|
Description
of Certain Benefits of Executive Officers (Filed as Exhibit 10.16 to
Delta’s Annual Report on Form 10-K/A for the year ended
December 31, 2005).*
|
21.1
|
Subsidiaries
of the Registrant.
|
23.1
|
Consent
of Ernst & Young LLP.
|
23.2
|
Consent
of Deloitte & Touche LLP.
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Executive
Officer.
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Financial
Officer.
|
32
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act 2002.
|
___________________________
*Incorporated
by reference.
**Portions
of this exhibit have been omitted and filed separately with the Securities
and
Exchange Commission pursuant to Delta’s request for confidential
treatment.
INDEX
TO
CONSOLIDATED FINANCIAL STATEMENTS
Report
of Independent Registered Public Accounting Firm (Ernst & Young
LLP)
|
F-2
|
Report
of Independent Registered Accounting Firm (Deloitte & Touche
LLP)
|
F-3
|
Consolidated
Balance Sheets — December 31, 2006 and 2005
|
F-4
|
Consolidated
Statements of Operations for the years ended December 31, 2006, 2005
and 2004
|
F-6
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2006, 2005
and 2004
|
F-7
|
Consolidated
Statements of Shareowners’ Deficit for the years ended
December 31, 2006, 2005 and 2004
|
F-8
|
Notes
to the Consolidated Financial Statements
|
F-9
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Shareowners of
Delta
Air
Lines, Inc. (Debtor-in-Possession)
We
have
audited the accompanying consolidated balance sheet of Delta Air Lines, Inc.
(Debtor-in-Possession) (the “Company”) as of December 31, 2006, and the related
consolidated statements of operations, shareowners’ deficit, and cash flows for
the year then ended. These financial statements are the responsibility of
the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Delta Air Lines,
Inc.
(Debtor-in-Possession) at December 31, 2006, and the consolidated results
of its
operations and its cash flows for the year then ended, in conformity with
U.S.
generally accepted accounting principles.
The
accompanying consolidated financial statements have been prepared assuming
that
Delta Air Lines, Inc. (Debtor-in-Possession) will continue as a going concern.
As discussed in Note 1 to the consolidated financial statements, the Company
filed a voluntary petition for reorganization under Chapter 11 of the United
States Bankruptcy Code on September 14, 2005 which raises substantial doubt
about the Company’s ability to continue as a going concern. Management’s plans
in regard to this matter are also described in Note 1. The consolidated
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the
amounts
and classification of liabilities that may result from the outcome of this
uncertainty.
As
discussed in Note 2 to the consolidated financial statements, in 2006 the
Company changed its methods of accounting for postretirement benefit plans
and
share-based compensation.
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Delta Air Lines, Inc.’s
(Debtor-in-Possession) internal control over financial reporting as of December
31, 2006, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 1, 2007 expressed
an unqualified opinion thereon.
/s/
Ernst
& Young LLP
Atlanta,
Georgia
March
1,
2007
REPORT
OF INDEPENDENT REGISTERED ACCOUNTING FIRM
To
the Board of Directors and Shareowners of Delta Air Lines, Inc.
Atlanta,
Georgia
We
have audited the accompanying consolidated balance sheet of Delta Air Lines,
Inc. (Debtor and Debtor-in -Possession) and subsidiaries (the “Company”) as of
December 31, 2005, and the related consolidated statements of operations,
cash flows, and shareowners’ deficit for each of the two years in the period
ended December 31, 2005. These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above
present
fairly, in all material respects, the financial position of Delta Air Lines,
Inc. (Debtor and Debtor-in -Possession) and subsidiaries at December 31,
2005, and the results of their operations and their cash flows for each of
the
two years in the period ended December 31, 2005, in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Notes 1 and 2, the Company has filed for
reorganization under Chapter 11 of the United States Bankruptcy Code. The
accompanying financial statements do not purport to reflect or provide for
the
consequences of the bankruptcy proceedings. In particular, such financial
statements do not purport to show (a) as to assets, their realizable value
on a liquidation basis or their availability to satisfy liabilities; (b) as
to prepetition liabilities, the amounts that may be allowed for claims or
contingencies, or the status and priority thereof; (c) as to shareowner
accounts, the effect of any changes that may be made in the capitalization
of
the Company; or (d) as to operations, the effect of any changes that may be
made in its business.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2
to the consolidated financial statements, the Company’s recurring losses, labor
issues and its bankruptcy filing result in uncertainty regarding the realization
of assets and satisfaction of liabilities, without substantial adjustments
and/or changes in ownership, and raise substantial doubt about the Company’s
ability to continue as a going concern. Management’s plans concerning these
matters are described in Note 1. The consolidated financial statements do
not include adjustments that might result from the outcome of this uncertainty.
/s/
Deloitte & Touche LLP
Atlanta,
Georgia
March 27,
2006
Delta
Air Lines, Inc.
|
Debtor
and Debtor-In-Possession
|
Consolidated
Balance Sheets
|
December
31, 2006 and 2005
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
(in
millions)
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,034
|
|
$
|
2,008
|
|
Short-term
investments
|
|
|
614
|
|
|
-
|
|
Restricted
cash
|
|
|
750
|
|
|
870
|
|
Accounts
receivable, net of an allowance for uncollectible accounts of
$21 and $41 at
December 31, 2006 and 2005, respectively
|
|
|
915
|
|
|
819
|
|
Expendable
parts and supplies inventories, net of an allowance for obsolescence
of $161 and $201 at December 31, 2006 and 2005,
respectively
|
|
|
181
|
|
|
172
|
|
Deferred
income taxes, net
|
|
|
402
|
|
|
99
|
|
Prepaid
expenses and other
|
|
|
489
|
|
|
512
|
|
Total
current assets
|
|
|
5,385
|
|
|
4,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT:
|
|
|
|
|
|
|
|
Flight
equipment
|
|
|
17,641
|
|
|
18,591
|
|
Accumulated
depreciation
|
|
|
(6,800
|
)
|
|
(6,621
|
)
|
Flight
equipment, net
|
|
|
10,841
|
|
|
11,970
|
|
|
|
|
|
|
|
|
|
Ground
property and equipment
|
|
|
4,575
|
|
|
4,791
|
|
Accumulated
depreciation
|
|
|
(2,838
|
)
|
|
(2,847
|
)
|
Ground
property and equipment, net
|
|
|
1,737
|
|
|
1,944
|
|
|
|
|
|
|
|
|
|
Flight
and ground equipment under capital leases
|
|
|
474
|
|
|
535
|
|
Accumulated
amortization
|
|
|
(136
|
)
|
|
(213
|
)
|
Flight
and ground equipment under capital leases, net
|
|
|
338
|
|
|
322
|
|
|
|
|
|
|
|
|
|
Advance
payments for equipment
|
|
|
57
|
|
|
44
|
|
|
|
|
|
|
|
|
|
Total
property and equipment, net
|
|
|
12,973
|
|
|
14,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS:
|
|
|
|
|
|
|
|
Goodwill
|
|
|
227
|
|
|
227
|
|
Operating
rights and other intangibles, net of accumulated amortization
of $190
and $189 at December 31, 2006 and 2005, respectively
|
|
|
89
|
|
|
74
|
|
Other
noncurrent assets
|
|
|
948
|
|
|
978
|
|
Total
other assets
|
|
|
1,264
|
|
|
1,279
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
19,622
|
|
$
|
20,039
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these Consolidated Financial
Statements.
|
|
Delta
Air Lines, Inc.
|
Debtor
and Debtor-In-Possession
|
Consolidated
Balance Sheets
|
December
31, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREOWNERS' DEFICIT
|
|
|
|
|
|
(in
millions, except share data)
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
Current
maturities of long-term debt and capital leases
|
|
$
|
1,503
|
|
$
|
1,186
|
|
Air
traffic liability
|
|
|
1,797
|
|
|
1,712
|
|
Accounts
payable
|
|
|
936
|
|
|
934
|
|
Taxes
payable
|
|
|
500
|
|
|
525
|
|
Deferred
revenue
|
|
|
363
|
|
|
182
|
|
Accrued
salaries and related benefits
|
|
|
405
|
|
|
435
|
|
Other
accrued liabilities
|
|
|
265
|
|
|
291
|
|
Total
current liabilities
|
|
|
5,769
|
|
|
5,265
|
|
|
|
|
|
|
|
|
|
NONCURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
Long-term
debt and capital leases
|
|
|
6,509
|
|
|
6,557
|
|
Deferred
income taxes, net
|
|
|
406
|
|
|
132
|
|
Deferred
revenue and credits
|
|
|
346
|
|
|
186
|
|
Other
|
|
|
368
|
|
|
167
|
|
Total
noncurrent liabilities
|
|
|
7,629
|
|
|
7,042
|
|
|
|
|
|
|
|
|
|
LIABILITIES
SUBJECT TO COMPROMISE
|
|
|
19,817
|
|
|
17,380
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMPLOYEE
STOCK OWNERSHIP PLAN
|
|
|
|
|
|
|
|
PREFERRED
STOCK:
|
|
|
|
|
|
|
|
Series
B ESOP Convertible Preferred Stock, $1.00 par value,
|
|
|
|
|
|
|
|
$72.00
stated and liquidation value; zero and 4,667,568 shares issued
|
|
|
|
|
|
|
|
and
outstanding at December 31, 2006 and 2005, respectively
|
|
|
-
|
|
|
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 December 31, 2006 and 2005
|
|
|
2
|
|
|
2
|
|
Additional
paid-in capital
|
|
|
1,561
|
|
|
1,635
|
|
Accumulated
deficit
|
|
|
(14,414
|
)
|
|
(8,209
|
)
|
Accumulated
other comprehensive loss
|
|
|
(518
|
)
|
|
(2,722
|
)
|
Treasury
stock at cost, 4,745,710 shares at December 31, 2006,
|
|
|
|
|
|
|
|
and
12,738,630 shares at December 31, 2005
|
|
|
(224
|
)
|
|
(601
|
)
|
Total
shareowners' deficit
|
|
|
(13,593
|
)
|
|
(9,895
|
)
|
|
|
|
|
|
|
|
|
Total
liabilities and shareowners' deficit
|
|
$
|
19,622
|
|
$
|
20,039
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these Consolidated Financial
Statements.
|
|
|
Delta
Air Lines, Inc.
|
Debtor
and Debtor-In-Possession
|
Consolidated
Statements of Operations
|
For
the years ended December 31, 2006, 2005 and
2004
|
|
|
|
|
|
|
|
|
(in
millions, except per share data)
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
REVENUE:
|
|
|
|
|
|
|
|
Passenger:
|
|
|
|
|
|
|
|
|
|
|
Mainline
|
|
$
|
11,773
|
|
$
|
11,399
|
|
$
|
10,880
|
|
Regional
affiliates
|
|
|
3,853
|
|
|
3,225
|
|
|
2,910
|
|
Cargo
|
|
|
498
|
|
|
524
|
|
|
500
|
|
Other,
net
|
|
|
1,047
|
|
|
1,043
|
|
|
945
|
|
Total
operating revenue
|
|
|
17,171
|
|
|
16,191
|
|
|
15,235
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSE:
|
|
|
|
|
|
|
|
|
|
|
Aircraft
fuel
|
|
|
4,319
|
|
|
4,271
|
|
|
2,924
|
|
Salaries
and related costs
|
|
|
4,128
|
|
|
5,058
|
|
|
6,338
|
|
Contract
carrier arrangements
|
|
|
2,656
|
|
|
1,318
|
|
|
932
|
|
Depreciation
and amortization
|
|
|
1,276
|
|
|
1,273
|
|
|
1,244
|
|
Contracted
services
|
|
|
1,083
|
|
|
1,096
|
|
|
999
|
|
Passenger
commissions and other selling expenses
|
|
|
888
|
|
|
948
|
|
|
939
|
|
Landing
fees and other rents
|
|
|
865
|
|
|
863
|
|
|
875
|
|
Aircraft
maintenance materials and outside repairs
|
|
|
735
|
|
|
776
|
|
|
681
|
|
Passenger
service
|
|
|
328
|
|
|
345
|
|
|
349
|
|
Aircraft
rent
|
|
|
316
|
|
|
541
|
|
|
716
|
|
Restructuring,
asset writedowns, pension settlements and related items,
net
|
|
|
13
|
|
|
888
|
|
|
(41
|
)
|
Impairment
of intangible assets
|
|
|
-
|
|
|
-
|
|
|
1,875
|
|
Other
|
|
|
506
|
|
|
815
|
|
|
712
|
|
Total
operating expense
|
|
|
17,113
|
|
|
18,192
|
|
|
18,543
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
INCOME (LOSS)
|
|
|
58
|
|
|
(2,001
|
)
|
|
(3,308
|
)
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
(EXPENSE) INCOME:
|
|
|
|
|
|
|
|
|
|
|
Interest
expense (contractual interest expense equals $1,200 and $1,169
|
|
|
|
|
|
|
|
|
|
|
for
the years ended December 31, 2006 and 2005, respectively)
|
|
|
(870
|
)
|
|
(1,032
|
)
|
|
(824
|
)
|
Interest
income
|
|
|
69
|
|
|
59
|
|
|
37
|
|
(Loss)
gain from sale of investments, net
|
|
|
-
|
|
|
(1
|
)
|
|
123
|
|
Miscellaneous,
net
|
|
|
(19
|
)
|
|
-
|
|
|
(20
|
)
|
Total
other expense, net
|
|
|
(820
|
)
|
|
(974
|
)
|
|
(684
|
)
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
BEFORE REORGANIZATION ITEMS
|
|
|
(762
|
)
|
|
(2,975
|
)
|
|
(3,992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
REORGANIZATION
ITEMS, NET
|
|
|
(6,206
|
)
|
|
(884
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
BEFORE INCOME TAXES
|
|
|
(6,968
|
)
|
|
(3,859
|
)
|
|
(3,992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
TAX BENEFIT (PROVISION)
|
|
|
765
|
|
|
41
|
|
|
(1,206
|
)
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
|
(6,203
|
)
|
|
(3,818
|
)
|
|
(5,198
|
)
|
|
|
|
|
|
|
|
|
|
|
|
PREFERRED
STOCK DIVIDENDS
|
|
|
(2
|
)
|
|
(18
|
)
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS ATTRIBUTABLE TO COMMON
|
|
|
|
|
|
|
|
|
|
|
SHAREOWNERS
|
|
$
|
(6,205
|
)
|
$
|
(3,836
|
)
|
$
|
(5,217
|
)
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
AND DILUTED LOSS PER SHARE
|
|
$
|
(31.58
|
)
|
$
|
(23.75
|
)
|
$
|
(41.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these Consolidated Financial
Statements.
|
Delta
Air Lines, Inc.
|
Debtor
and Debtor-In-Possession
|
Consolidated
Statements of Cash Flows
|
For
the years ended December 31, 2006, 2005 and
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
millions)
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(6,203
|
)
|
$
|
(3,818
|
)
|
$
|
(5,198
|
)
|
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Asset
and other writedowns
|
|
|
18
|
|
|
14
|
|
|
1,915
|
|
Depreciation
and amortization
|
|
|
1,276
|
|
|
1,273
|
|
|
1,244
|
|
Deferred
income taxes
|
|
|
(765
|
)
|
|
(41
|
)
|
|
1,206
|
|
Pension,
postretirement and postemployment expense in excess of (less
than) payments
|
|
|
489
|
|
|
896
|
|
|
(121
|
)
|
Reorganization
items, net
|
|
|
6,206
|
|
|
884
|
|
|
-
|
|
Gain
on extinguishment of debt, net
|
|
|
-
|
|
|
(9
|
)
|
|
(9
|
)
|
Loss
(gain) from sale of investments, net
|
|
|
-
|
|
|
1
|
|
|
(123
|
)
|
Changes
in certain current assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
(Increase)
decrease in short-term investments, net
|
|
|
(614
|
)
|
|
336
|
|
|
204
|
|
Increase
in receivables
|
|
|
(152
|
)
|
|
(122
|
)
|
|
(27
|
)
|
Decrease
(increase) in restricted cash
|
|
|
116 |
|
|
(482 |
) |
|
(15 |
)
|
Decrease
(increase) in prepaid expenses and other current assets
|
|
|
41
|
|
|
(67
|
)
|
|
(151
|
)
|
Increase
in air traffic liability
|
|
|
86
|
|
|
145
|
|
|
259
|
|
Increase
(decrease) in accounts payable and other accrued
liabilities
|
|
|
154
|
|
|
667
|
|
|
(233
|
)
|
Other,
net
|
|
|
341
|
|
|
16
|
|
|
26
|
|
Net
cash provided by (used in) operating activities
|
|
|
993
|
|
|
(307
|
) |
|
(1,023
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment additions:
|
|
|
|
|
|
|
|
|
|
|
Flight
equipment, including advance payments
|
|
|
(265
|
)
|
|
(570
|
)
|
|
(373
|
)
|
Ground
property and equipment, including technology
|
|
|
(148
|
)
|
|
(244
|
)
|
|
(387
|
)
|
(Increase)
decrease in restricted investments related to the Boston
airport terminal
project
|
|
|
(2
|
)
|
|
81
|
|
|
159
|
|
Proceeds
from sales of flight equipment
|
|
|
40
|
|
|
425
|
|
|
234
|
|
Proceeds
from sale of wholly owned subsidiary, net of cash
remaining with
subsidiary
|
|
|
-
|
|
|
417
|
|
|
-
|
|
Other,
net
|
|
|
14
|
|
|
(87
|
) |
|
47
|
|
Net
cash (used in) provided by investing activities
|
|
|
(361
|
)
|
|
22
|
|
|
(320
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
Payments
on long-term debt and capital lease obligations
|
|
|
(600
|
)
|
|
(1,615
|
)
|
|
(1,452
|
)
|
Proceeds
from long-term obligations
|
|
|
-
|
|
|
295
|
|
|
2,123
|
|
Proceeds
from DIP financing
|
|
|
-
|
|
|
2,250
|
|
|
-
|
|
Payments
on DIP financing
|
|
|
-
|
|
|
(50
|
)
|
|
-
|
|
Other,
net
|
|
|
(6
|
)
|
|
(50
|
)
|
|
(35
|
)
|
Net
cash (used in) provided by financing activities
|
|
|
(606
|
)
|
|
830
|
|
|
636
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Increase (Decrease) In Cash and Cash Equivalents
|
|
|
26
|
|
|
545
|
|
|
(707
|
)
|
Cash
and cash equivalents at beginning of year
|
|
|
2,008
|
|
|
1,463
|
|
|
2,170
|
|
Cash
and cash equivalents at end of year
|
|
$
|
2,034
|
|
$
|
2,008
|
|
$
|
1,463
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash paid (refunded) for:
|
|
|
|
|
|
|
|
|
|
|
Interest,
net of amounts capitalized
|
|
$
|
728
|
|
$
|
783
|
|
$
|
768
|
|
Professional
fee disbursements due to bankruptcy
|
|
|
101
|
|
|
6
|
|
|
-
|
|
Interest
received due to bankruptcy
|
|
|
(109
|
)
|
|
(15
|
)
|
|
-
|
|
Cash
received from aircraft renegotiation
|
|
|
(10
|
)
|
|
-
|
|
|
-
|
|
Income
taxes, net
|
|
|
(1
|
)
|
|
2
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
transactions:
|
|
|
|
|
|
|
|
|
|
|
Aircraft
delivered under seller-financing
|
|
$
|
-
|
|
$
|
251
|
|
$
|
314
|
|
Debt
extinguishment from aircraft renegotiation
|
|
|
171
|
|
|
-
|
|
|
-
|
|
Flight
equipment under capital leases
|
|
|
159
|
|
|
-
|
|
|
-
|
|
Dividends
on Series B ESOP Convertible Preferred Stock
|
|
|
2
|
|
|
15
|
|
|
22
|
|
Current
maturities of long-term debt exchanged for shares of common
stock
|
|
|
-
|
|
|
45
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these Consolidated Financial
Statements.
|
Delta
Air Lines, Inc.
|
Debtor
and Debtor-In-Possession
|
Consolidated
Statements of Shareowners' Deficit
|
For
the years ended December 31, 2006, 2005 and
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Additional
|
|
Retained
|
|
Other
|
|
|
|
|
|
|
|
Common
|
|
Paid-In
|
|
Earnings/
|
|
Comprehensive
|
|
Treasury
|
|
|
|
(in
millions, except share data)
|
|
Stock
|
|
Capital
|
|
(Deficit)
|
|
Loss
|
|
Stock
|
|
Total
|
|
Balance
at January 1, 2004
|
|
$
|
271
|
|
$
|
3,272
|
|
$
|
844
|
|
$
|
(2,338
|
)
|
$
|
(2,708
|
)
|
$
|
(659
|
)
|
Comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
(5,198
|
)
|
|
-
|
|
|
-
|
|
|
(5,198
|
)
|
Other
comprehensive loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(20
|
)
|
|
-
|
|
|
(20
|
)
|
Total
comprehensive loss (See Note 13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,218
|
)
|
Dividends
on Series B ESOP Convertible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock allocated shares
|
|
|
-
|
|
|
-
|
|
|
(19
|
)
|
|
-
|
|
|
-
|
|
|
(19
|
)
|
Transfer
of 113,672 shares of common from Treasury under
stock incentive plan and other equity plans ($47.20
per share(1))
|
|
|
-
|
|
|
(5
|
)
|
|
-
|
|
|
-
|
|
|
5
|
|
|
-
|
|
Transfer
of 6,330551 shares of common from Treasury under
ESOP ($47.20 per share(1))
|
|
|
-
|
|
|
(266
|
)
|
|
-
|
|
|
-
|
|
|
299
|
|
|
33
|
|
Issuance
of 9,842,778 shares of common stock related to
Delta's transformation plan ($6.98 per share)
|
|
|
15
|
|
|
53
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
68
|
|
Other
|
|
|
-
|
|
|
(2
|
)
|
|
-
|
|
|
-
|
|
|
1
|
|
|
(1
|
)
|
Balance
at December 31, 2004
|
|
|
286
|
|
|
3,052
|
|
|
(4,373
|
)
|
|
(2,358
|
)
|
|
(2,403
|
)
|
|
(5,796
|
)
|
Comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
(3,818
|
)
|
|
-
|
|
|
-
|
|
|
(3,818
|
)
|
Other
comprehensive loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(364
|
)
|
|
-
|
|
|
(364
|
)
|
Total
comprehensive loss (See Note 13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,182
|
)
|
Dividends
on Series B ESOP Convertible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock allocated shares
|
|
|
-
|
|
|
-
|
|
|
(18
|
)
|
|
-
|
|
|
-
|
|
|
(18
|
)
|
Transfer
of 34,378 shares of common from Treasury under
stock incentive and other equity plans ($47.20 per share(1))
|
|
|
-
|
|
|
(2
|
)
|
|
-
|
|
|
-
|
|
|
2
|
|
|
-
|
|
Transfer
of 38,140,673 shares of common from Treasury under
ESOP ($47.20 per share(1))
|
|
|
-
|
|
|
(1,738
|
)
|
|
-
|
|
|
-
|
|
|
1,800
|
|
|
62
|
|
Issuance
of 11,336,203 shares of common stock related to
Delta's transformation plan ($3.40 per share)
|
|
|
5
|
|
|
34
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
39
|
|
Amendment
to Certificate of Incorporation to increase number of authorized
shares of common stock from 450 million to 900 million and
to decrease par value from $1.50 per share to $.01 per
share
|
|
|
(289
|
)
|
|
289
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Balance
at December 31, 2005
|
|
|
2
|
|
|
1,635
|
|
|
(8,209
|
)
|
|
(2,722
|
)
|
|
(601
|
)
|
|
(9,895
|
)
|
Comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
(6,203
|
)
|
|
-
|
|
|
-
|
|
|
(6,203
|
)
|
Other
comprehensive income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,780
|
|
|
-
|
|
|
1,780
|
|
Total
comprehensive loss (See Note 13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,423
|
)
|
Adoption
of SFAS 158, net of tax
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
424
|
|
|
-
|
|
|
424
|
|
Dividends
on Series B ESOP Convertible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock allocated shares
|
|
|
-
|
|
|
-
|
|
|
(2
|
)
|
|
-
|
|
|
-
|
|
|
(2
|
)
|
Compensation
expense associated with vesting stock options
|
|
|
-
|
|
|
8
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
8
|
|
Compensation
expense associated with the rejection of
stock options
|
|
|
-
|
|
|
55
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
55
|
|
Transfer
of 7,996,125 shares of common from Treasury under
ESOP ($47.20 per share(1))
|
|
|
-
|
|
|
(137
|
)
|
|
-
|
|
|
-
|
|
|
377
|
|
|
240
|
|
Balance
at December 31, 2006
|
|
$
|
2
|
|
$
|
1,561
|
|
$
|
(14,414
|
)
|
$
|
(518
|
)
|
$
|
(224
|
)
|
$
|
(13,593
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Average price per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these Consolidated Financial
Statements.
|
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
..
Note
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 U.S. and around the
world. Our 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
reorganization in Chapter 11 has involved a fundamental transformation of our
business. Shortly after the Petition Date, we outlined a business plan intended
to make Delta a simpler, more efficient and more customer focused airline with
an improved financial condition. Under this plan, we were seeking $3.0 billion
in annual financial improvements by the end of 2007 through revenue increases
and cost reductions. As of December 31, 2006, we reached that goal and these
improvements are reflected in our Consolidated Financial Statements for
2006. We expect we will achieve additional financial improvements in 2007.
As
a result of our reorganization, we expect to emerge from bankruptcy as a
competitive, standalone airline with a global network. Our
business strategy touches all facets of our operations - the destinations we
will serve, the way we will serve our customers, and the fleet we will operate
-
in order to earn customer preference and continue to improve revenue
performance. At the same time, we intend to remain focused on maintaining the
competitive cost structure we have obtained from our reorganization to improve
our financial position and pursue long-term stability as a standalone
carrier.
Important
aspects of our emergence business strategy include the following:
|
·
|
Leveraging
Network Strength to Provide Expanded International Service.
We
will continue to focus on international growth. With our
geographically-balanced hubs, we believe we are well-positioned for
international growth from the U.S. to Europe and Latin America. In
addition, we expect our hubs will help us increase service to Africa
and
Asia.
|
|
·
|
Maintaining
Focus on Improving the Customer Experience. Our
focus on safety will remain our top priority. We are also committed
to
continuous improvement throughout our operations to earn our customers’
preference. We have renewed our focus on improving our product and
customer service through aircraft cabin and airport
improvements.
|
|
·
|
Maximizing
a Streamlined and Upgraded Fleet. We
are supporting the ongoing changes to our network by bolstering our
internationally-capable mainline fleet. We plan to pursue additional
strategic improvements to our fleet by adding high-performance aircraft
that will enable us to serve new destinations with appropriate capacity.
We have announced plans to add 28 internationally capable aircraft
scheduled for delivery in 2007 through
2009.
|
|
·
|
Capturing
the Benefit of Competitive Cost Structure. Through
initiatives undertaken during the Chapter 11 proceedings and previous
productivity initiatives, we currently have one of the lowest mainline
unit cost structures of any full service carrier. These efforts have
resulted in reduced costs throughout our organization, including
reductions in employment costs, retiree pension and healthcare costs
and
aircraft fleet costs. We recognize that, to succeed, we must maintain
the
competitive unit cost structure that we developed through our
restructuring efforts.
|
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
·
|
Generating
Cash Flow from Operations Necessary to Fund Capital Expenditures
and
Reduce Debt.
Over an extended period following emergence from Chapter 11, we intend
to
balance long-term operating growth with overall credit improvement.
At
emergence from bankruptcy, we expect to have significantly reduced
our
total debt levels from pre-petition levels. Ongoing improvements
to our
financial condition are, however, necessary for us to withstand industry
and economic volatility and to have favorable, consistent access
to
capital markets.
|
Filing
of Plan of Reorganization with the Bankruptcy Court. In
order
to successfully exit bankruptcy, the Debtors must propose and obtain
confirmation from the Bankruptcy Court of a plan (or plans) of reorganization
that satisfies the requirements of the Bankruptcy Code. The Debtors had the
exclusive right to file a plan of reorganization until February 15, 2007, and
have until April 16, 2007 to obtain the necessary acceptances to a plan. These
periods may be extended by the Bankruptcy Court for cause. If the Debtors’
exclusivity period were to lapse, any party in interest may file a plan of
reorganization for any of the Debtors.
On
December 19, 2006, we filed with the Bankruptcy Court our Plan of Reorganization
and a related Disclosure Statement, which contemplate that Delta will emerge
from Chapter 11 as an independent airline. The Plan of Reorganization, as
amended (the “Plan”), addresses various subjects with respect to the
Debtors, including the resolution of pre-petition obligations as well as the
capital structure and corporate governance after exit from Chapter
11.
The
Plan
provides that most holders of allowed unsecured claims against the Debtors
will
receive common stock of reorganized Delta in satisfaction of their claims.
Some
holders of allowed unsecured claims against the Debtors would have the right
to
request cash proceeds of sales of common stock of reorganized Delta in lieu
of
such stock, and certain others would receive cash in satisfaction of their
claims. Current holders of Delta’s equity interests would not receive any
distributions, and their equity interests would be cancelled once the Plan
becomes effective.
On
February 7, 2007, the Bankruptcy Court approved the amended Disclosure
Statement, and authorized the Debtors to begin soliciting votes from creditors
to approve the Plan. The official committee of unsecured creditors (the
“Creditors Committee”) and the two official retiree committees appointed in the
Debtors’ Chapter 11 proceedings each support the Plan. To be accepted by holders
of claims against the Debtors, the Plan must be approved by at least one-half
in
number and two-thirds in dollar amount of claims actually voting in each
impaired class.
April
9,
2007 is the deadline for creditors to vote on the Plan. The Bankruptcy Court
has
scheduled a confirmation hearing on April 25, 2007 to consider approval of
the
Plan. If the Plan is approved by the creditors and confirmed by the Bankruptcy
Court, the Debtors are planning to emerge from Chapter 11 shortly
thereafter.
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.
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.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Appointment
of Creditors Committee.
As
required by the Bankruptcy Code, the United States Trustee for the Southern
District of New York appointed 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,
including the Debtors’ Plan.
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 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 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’ 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 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. Such
claims may be material (see “Magnitude of Potential Claims” 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 calendar 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. The Debtors may elect, with Bankruptcy 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) (a “Section 1110(a) Election”).
Alternatively, the Debtors may extend the 60-day period by agreement of the
relevant financing party, with Bankruptcy Court approval (a “Section 1110(b)
Stipulation”). 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 made
Section 1110(a) Elections with respect to 204 aircraft.
We have also entered into, or reached agreements in principle to enter into,
Section 1110(b) Stipulations with respect to approximately 309 aircraft. As
to
the remainder of the aircraft subject to Section 1110, the automatic stay
terminated on November 15, 2005 and, as of such date, the related financing
parties were able to exercise their remedies and take enforcement actions at
their election.
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.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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.
The
Debtors have entered into stipulations with several aircraft financing parties
pursuant to which the aircraft financing parties agreed to defer the filing
of a
motion seeking adequate protection and the Debtors agreed that such delay would
not affect the right (if any) of these parties to adequate protection should
they later file a motion.
Collective
Bargaining Agreements.
Section
1113 of the Bankruptcy Code permits a debtor to reject its collective bargaining
agreements 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 collective bargaining agreements 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
debtor’s 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 5,810 pilots. Because we were unable to
reach an agreement with ALPA during negotiations in the fall of 2005 to reduce
our pilot labor costs, on November 1, 2005, we filed a motion with the
Bankruptcy Court to reject the collective bargaining agreement under Section
1113 of the Bankruptcy Code. We continued to negotiate with ALPA after filing
this motion and, as described below, reached a comprehensive agreement with
ALPA
that was ratified by Delta pilots and approved by the Bankruptcy Court.
The
comprehensive agreement with ALPA became effective June 1, 2006, and becomes
amendable December 31, 2009 (“Contract Period”). It provides for changes in
pilot pay rates, benefits and work rules. In addition, ALPA agreed not to oppose
termination of Delta’s primary qualified defined benefit pension plan for pilots
(“Pilot Plan”), which was terminated effective September 2, 2006 (see Note 10).
We expect to receive approximately $280 million in average annual pilot labor
cost savings during the Contract Period, excluding savings we will receive
from
the termination of the primary Pilot Plan and the related non-qualified
plans.
The
comprehensive agreement 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, remain in effect, with annual pay
rate
increases beginning in January
2007.
|
|
·
|
ALPA
has a $2.1 billion allowed general, unsecured pre-petition claim
in our
bankruptcy proceedings.
|
|
·
|
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,
a term of up to 15 years and an annual interest rate calculated to
ensure
that the Pilot Notes trade at par on the issuance date. The Pilot
Notes
are pre-payable at any time at our option, and we may replace all
or a
portion of the principal amount of Pilot Notes with cash prior to
their
issuance.
|
|
·
|
eligible
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.
|
|
·
|
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 6) 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.
|
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Throughout
the Chapter 11 proceedings, Comair has been in negotiations with the unions
that
represent its flight attendants, maintenance employees and pilots to reduce
the
labor costs of each of these employee groups. On October 13, 2006, Comair
reached a tentative agreement with the International Brotherhood of Teamsters
(“IBT”), which represents Comair’s approximately 880 flight attendants. The
tentative agreement was ratified by Comair’s flight attendants and approved by
the Bankruptcy Court. It became effective December 31, 2006, and becomes
amendable December 31, 2010.
Earlier
in 2006, Comair reached agreements with the International Association of
Machinists and Aerospace Workers (“IAM”) and ALPA, which represent Comair’s
approximately 535 maintenance employees and 1,345 pilots,
respectively. These agreements were, however, conditioned on Comair’s obtaining
certain labor cost reductions under its collective bargaining agreement with
the
IBT. Because the Bankruptcy Court denied in April 2006 Comair’s initial motion
to reject its collective bargaining agreement with the IBT, Comair reduced
the
amount of flight attendant labor 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. As a result, Comair was required to renegotiate its cost reduction
agreements with the IAM and ALPA.
On
October 18, 2006, Comair reached an agreement with the IAM that has been
approved by the Bankruptcy Court and is not conditioned on Comair’s reaching
agreements with the IBT or ALPA. This agreement became effective December 31,
2006, and becomes amendable December 31, 2010. Because Comair was not able
to
reach an agreement with ALPA on pilot labor cost reductions, on November 2,
2006, Comair filed a motion with the Bankruptcy Court under Section 1113 to
reject Comair’s collective bargaining agreement with ALPA. The Bankruptcy Court
granted this motion on December 21, 2006.
On
December 29, 2006, Comair and ALPA entered into an agreement whereby, among
other things, Comair agreed not to implement certain changes to the ALPA
collective bargaining agreement, and ALPA agreed not to call a strike of Comair
pilots, before February 2, 2007. The Bankruptcy Court extended this agreement
until February 9, 2007, and the parties subsequently extended it to February
12,
2007.
On
February 7, 2007, the Bankruptcy Court granted Comair’s motion to enjoin a
strike or other job action by ALPA and its members. ALPA has appealed the
Bankruptcy Court’s (1) Section 1113 ruling to the U.S. District Court for the
Southern District of New York and (2) ruling enjoining a strike to the U.S.
Court of Appeals for the Second Circuit. ALPA has agreed to withdraw these
appeals if the tentative agreement described in the next paragraph becomes
effective.
On
February 12, 2007, Comair and ALPA reached a tentative agreement to reduce
Comair’s pilot labor costs. The agreement is subject to ratification by Comair
pilots and Bankruptcy Court approval. If ratified and approved, the agreement
would become effective March 2, 2007, and become amendable on March 2, 2011.
We
cannot predict the outcome of this matter.
Settlement
Agreement with the PBGC.
On
December 4, 2006, we entered into a comprehensive settlement agreement with
the
Pension Benefit Guaranty Corporation (the “PBGC”) regarding the termination of
the Pilot Plan. For information regarding this agreement, see Note 10.
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.
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.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The
Bankruptcy Court directed the appointment of two separate retiree committees
under Section 1114, one to serve as the authorized representative of non-pilot
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 agreements became effective January 1, 2007. See Note 10 for
additional information on these agreements.
Magnitude
of Potential Claims.
The
Debtors 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 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
February 7, 2007, claims totaling about $87.0 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. 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. As of
February 7, 2007, the Bankruptcy Court has disallowed approximately $1.2 billion
of claims and has not yet ruled on our other objections to claims, the disputed
portions of which aggregate to an additional $2.8 billion. We expect to continue
to file objections in the future. Because the process of analyzing and objecting
to claims will be ongoing, the amount of disallowed claims may increase
significantly in the future.
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 is the exact
recovery with respect to allowed claims presently known.
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. Under the Plan, current
holders of our common stock would not retain or receive any property, and the
common stock, and other equity interests, would be cancelled upon the effective
date of the Plan. As discussed above (see “Filing of Plan of Reorganization with
the Bankruptcy Court”), 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.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 $400 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 the Plan. Other restrictions on trading in claims
may also become applicable pursuant to the NOL Order in connection with our
filing of the Plan.
Liabilities
Subject to Compromise
The
following table summarizes the components of liabilities subject to compromise
included on our Consolidated Balance Sheets as of December 31, 2006 and
2005:
(in
millions)
|
|
2006
|
|
2005
|
|
Pension,
postretirement and other benefits
|
|
$
|
10,329
|
|
$
|
8,652
|
|
Debt
and accrued interest
|
|
|
5,079
|
|
|
5,843
|
|
Aircraft
lease related obligations
|
|
|
3,115
|
|
|
1,740
|
|
Accounts
payable and other accrued liabilities
|
|
|
1,294
|
|
|
1,145
|
|
Total
liabilities subject to compromise
|
|
$
|
19,817
|
|
$
|
17,380
|
|
Liabilities
subject to compromise refers to pre-petition obligations that may be impacted
by
the Chapter 11 reorganization process. These 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.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Reorganization
Items, net
The
following table summarizes the components included in reorganization items,
net
on our Consolidated Statements of Operations for the years ended December 31,
2006 and 2005:
|
|
|
|
(in
millions)
|
|
2006
|
|
2005
|
|
Pilot
collective bargaining agreement(1)
|
|
$
|
2,100
|
|
$
|
—
|
|
Pilot
pension termination(2)
|
|
|
1,743
|
|
|
—
|
|
Aircraft
financing renegotiations, rejections and repossessions(3)
|
|
|
1,671
|
|
|
611
|
|
Retiree
healthcare claims(4)
|
|
|
539
|
|
|
—
|
|
Professional
fees
|
|
|
110
|
|
|
39
|
|
Rejection
of other executory contracts(5)
|
|
|
89
|
|
|
—
|
|
Compensation
expense(6)
|
|
|
55
|
|
|
—
|
|
Debt
issuance and discount costs
|
|
|
13
|
|
|
163
|
|
Facility
leases
|
|
|
8
|
|
|
88
|
|
Interest
income(7)
|
|
|
(109
|
)
|
|
(17
|
)
|
Vendor
waived pre-petition debt
|
|
|
(36
|
)
|
|
—
|
|
Other
|
|
|
23
|
|
|
—
|
|
Total
reorganization items, net
|
|
$
|
6,206
|
|
$
|
884
|
|
|
(1) |
Allowed
general, unsecured pre-petition claim in connection with our comprehensive
agreement with ALPA reducing our pilot labor costs. For additional
information regarding this agreement, see “Collective Bargaining
Agreements” in this Note.
|
|
(2) |
$2.2
billion and $801 million allowed general, unsecured pre-petition
claims in
connection with our settlement agreements with the PBGC and a group
representing retired pilots, respectively. Charges for these claims
were
offset by $1.3 billion in settlement gains associated with the
derecognition of previously recorded Pilot Plan and pilot non-qualified
plan obligations upon each plan’s termination. For additional information
regarding our settlement agreements and the termination of these
plans,
see Note 10.
|
|
(3) |
Estimated
claims for the year ended December 31, 2006 relate to the restructuring
of
the financing arrangements of 188 aircraft and the rejection of 16
aircraft leases. Estimated claims for the year ended December 31,
2005
relate to the restructuring of the arrangements of seven aircraft,
the
rejection of 50 aircraft leases and the repossession of 15
aircraft.
|
|
(4) |
Allowed
general, unsecured pre-petition claims in connection with agreements
reached with committees representing both pilot and non-pilot retired
employees reducing their postretirement healthcare benefits. For
additional information regarding these agreements, see Note
10.
|
|
(5) |
Allowed
general, unsecured pre-petition claims primarily related to the rejection
of an executory contract with our main flight service food supply
vendor.
|
|
(6)
|
Reflects
a charge for rejecting substantially all of our stock options in
our
Chapter 11 proceedings. For additional information regarding the
rejection
of our stock options, see Note 2.
|
|
(7)
|
Reflects
interest earned due to the preservation of cash from our Chapter
11
proceedings.
|
Note
2. Summary of Significant Accounting Policies
Basis
of Presentation
The
accompanying 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”). This contemplates the realization of assets
and satisfaction of liabilities in the ordinary course of business. Accordingly,
the 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.
Due
to
our Chapter 11 proceedings, the realization of assets and satisfaction of
liabilities, without substantial adjustments and/or changes in ownership, are
subject to uncertainty. Accordingly,
there is substantial doubt about the current financial reporting entity’s
ability to continue as a going concern. Upon emergence from bankruptcy, we
expect to adopt fresh start reporting in accordance with 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”), which
will
result in our becoming a new entity for financial reporting
purposes. The adoption of fresh start reporting may have a material
impact on the consolidated financial statements of the new financial
reporting entity.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The
accompanying Consolidated Financial Statements do not reflect or provide for
the
consequences of our Chapter 11 proceedings. In particular, the financial
statements do not 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
their status and priority; (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 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. We did not control any company in which we had an ownership interest
of
50% or less for any period presented in our Consolidated Financial
Statements.
In
preparing our Consolidated Financial Statements, we applied SOP 90-7 which
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 on the accompanying Consolidated Statements of
Operations. In addition, pre-petition obligations that may be impacted by the
bankruptcy reorganization process have been classified as liabilities subject
to
compromise on our Consolidated Balance Sheets at December 31, 2006 and 2005.
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).
Subject
to the approval of the Bankruptcy Court or otherwise as permitted in the
ordinary course of business, the Debtors may sell or otherwise dispose of or
liquidate assets or settle liabilities in amounts other than those reflected
in
the Consolidated Financial Statements. Further, our plan of reorganization
could
materially change the amounts and classifications in our historical Consolidated
Financial Statements.
Accounting
Adjustments
During
2006, we recorded certain out-of-period adjustments (“Accounting Adjustments”)
in our Consolidated Financial Statements that are reflected in our results
for
the year ended December 31, 2006. These adjustments resulted in an aggregate
net
noncash charge approximating $310 million to our Consolidated Statement of
Operations consisting primarily of:
|
·
|
A
$112 million charge in landing fees and other rents. This adjustment
is
associated primarily with our airport facility leases at John F.
Kennedy
International Airport in New York. 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 Standards (“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 years ended December 31, 2006, 2005 and 2004. In making this assessment,
we
considered qualitative and quantitative factors, including our substantial
net
loss in each of these three years, the noncash nature of the Accounting
Adjustments, our substantial shareowners’ deficit at the end of each of these
three years and our status as a debtor-in-possession under Chapter 11 of the
Bankruptcy Code.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Use
of Estimates
We
are
required to make estimates and assumptions when preparing our Consolidated
Financial Statements in accordance with GAAP. These estimates and assumptions
affect the amounts reported in our Consolidated Financial Statements and the
accompanying notes. Actual results could differ materially from those
estimates.
New
Accounting Standards
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 158, “Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans, an amendment of SFAS Nos. 87, 88, 106 and 132(R)” (“SFAS
158”). This statement, among other things, requires that we recognize the funded
status of our defined benefit pension and other postretirement plans in our
Consolidated Balance Sheet as of December 31, 2006, with changes in the funded
status recognized through comprehensive loss in the year in which such changes
occur. Application of this standard resulted in (1) a $685 million net decrease
in accrued pension and other postretirement and postemployment liabilities,
(2)
a $248 million decrease in the intangible pension asset in other noncurrent
assets and (3) a $437 million decrease in shareowners’ deficit. The
adoption of SFAS 158 had no effect on our Consolidated Statement of Operations
for any period presented. For additional information regarding the impact of
SFAS 158 on our Consolidated Financial Statements, see Note 10.
In
July
2006, the 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 is intended 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. The cumulative effect of applying this interpretation must
be
reported as an adjustment to the opening balance of shareowners’ deficit in
2007. We are currently evaluating the impact of FIN 48 on our Consolidated
Financial Statements and anticipate the adjustment to shareowners’ deficit will
not be material.
In
December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based
Payment” (“SFAS 123R”), which requires an entity to recognize compensation
expense in an amount equal to the fair value of its share based payments, such
as stock options granted to employees. This standard replaces SFAS No. 123,
“Accounting for Stock-Based Compensation” (“SFAS 123”), and supersedes APB
Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB 25”). We
adopted SFAS 123R on January 1, 2006. For additional information regarding
SFAS
123R, see “Stock-Based Compensation” in this Note.
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
at
December 31, 2006 and 2005 include $156 million and $155 million, respectively,
which is set aside for the payment of certain operational taxes and fees to
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 on our Consolidated Balance Sheets. These amounts
totaled zero and $66 million at December 31, 2006 and 2005,
respectively.
Short-Term
Investments
At
December 31, 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 record these investments as
trading securities at fair value on our Consolidated Balance Sheets. At December
31, 2005, we did not have any short-term investments. For additional information
about our accounting for trading securities, see “Investments in Debt and Equity
Securities” in this Note.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Restricted
Cash
We
have
restricted cash, which primarily relates to cash held as collateral by credit
card processors and interline clearinghouses and to support certain projected
insurance obligations. Restricted cash included in current assets on our
Consolidated Balance Sheets totaled $750 million and $870 million at December
31, 2006 and 2005, respectively. Restricted cash recorded in other noncurrent
assets on our Consolidated Balance Sheets totaled $52 million and $58 million
at
December 31, 2006 and 2005, respectively.
Derivative
Financial Instruments
Fuel
Hedging Program
We
periodically use derivative instruments designated as cash flow hedges, which
are comprised of 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 market value of our fuel hedge contracts on our
Consolidated Balance Sheets and recognize certain changes in these fair values
on our Consolidated Statements of Operations.
We
believe our fuel hedge contracts will be highly effective during their term
in
offsetting changes in cash flow attributable to the hedged risk. We perform
both
a prospective and retrospective assessment to this effect at least quarterly,
including assessing the possibility of counterparty default. If we determine
that a derivative is no longer expected to be highly effective, we discontinue
hedge accounting prospectively and recognize subsequent changes in the fair
market value of the hedge to other (expense) income on our Consolidated
Statements of Operations rather than being deferred in accumulated other
comprehensive loss on our Consolidated Balance Sheets. As a result of our
effectiveness assessment at December 31, 2006, we believe our fuel hedge
contracts will continue to be highly effective in achieving offsetting changes
in cash flows.
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 perfectly offset the change in the value of the aircraft fuel being hedged,
the ineffective portion of the hedge is immediately recognized in other
(expense) income on our Consolidated Statements of Operations. For our heating
oil and jet fuel option contracts, ineffectiveness is measured based on the
intrinsic value of the derivative. The difference between the fair value and
intrinsic value represents the time value of the option contract. Time value
is
excluded from the calculation of ineffectiveness and immediately recognized
in
other (expense) income on our Consolidated Statements of
Operations.
For
additional information about our derivative instruments, see Note
4.
Equity
Warrants and Other Similar Rights
We
record
our equity warrants and other similar rights in certain companies at fair value
at the date of acquisition in other noncurrent assets on our Consolidated
Balance Sheets. In accordance with SFAS 133, we regularly adjust the recorded
amount to reflect the changes in the fair values of the equity warrants and
other similar rights, and recognize the related gains or losses in other
(expense) income on our Consolidated Statements of Operations.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Revenue
Recognition
Passenger
Revenue
We
record
sales of passenger tickets as air traffic liabilities on our Consolidated
Balance Sheets. Passenger revenue is recognized when we provide transportation
or when the ticket expires unused, reducing the related air traffic liability.
We periodically evaluate the estimated air traffic liability and record any
resulting adjustments in our Consolidated Statements of Operations in the period
in which the evaluations are completed. These adjustments relate primarily
to
refunds, exchanges, transactions with other airlines and other items for which
final settlement occurs in periods subsequent to the sale of the related tickets
at amounts other than the original sales price.
We
are
required to charge certain taxes and fees on our passenger tickets. These taxes
and fees include U.S. federal transportation taxes, federal security charges,
airport passenger facility charges and foreign arrival and departure taxes.
These taxes and fees are legal assessments on the customer. We have an
obligation to act as a collection agent. As we are not entitled to retain these
taxes and fees, we do not include such amounts in passenger revenue. We record
a
liability when the amounts are collected and reduce the liability when payments
are made to the applicable government agency or operating carrier.
We
sell
mileage credits in our SkyMiles frequent flyer program to participating
companies 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 and recognized as passenger
revenue over the period when transportation is expected to be provided. Amounts
received in excess of the transportation’s fair value are recognized in income
currently and classified as other revenue. A change in assumptions as to the
period over which the mileage credits are expected to be used (currently 15
to
41 months), the actual redemption activity for mileage credits or our estimate
of the fair value of transportation expected to be provided could have a
material impact on our revenue in the year in which the change occurs and in
future years.
Under
our
contract carrier agreements with six regional air carriers (see Note 8), we
purchase all or a portion of their capacity and are responsible for selling
the
seat inventory we purchase. We record revenue and expenses related to our
contract carrier agreements as regional affiliates passenger revenue and
contract carrier agreements, respectively.
Cargo
Revenue
Cargo
revenue is recognized in our Consolidated Statements of Operations when we
provide the transportation.
Other,
net
Other,
net revenue includes revenue from (1) a portion of the sale of mileage credits
in our SkyMiles frequent flyer program, discussed above, (2) codeshare
agreements with certain airlines and (3) other miscellaneous service revenue.
Under our codeshare agreements, we sell seats on other airlines’ flights and
other airlines sell seats on our flights, with each airline separately marketing
its respective seats. Our revenue from other airlines’ sale of codeshare seats
on our flights is recorded in passenger revenue on our Consolidated Statement
of
Operations.
Long-Lived
Assets
We
record
property and equipment at cost and depreciate or amortize these assets on a
straight-line basis to their estimated residual values over their respective
estimated useful lives. Residual values for flight equipment are generally
5% of
cost except when guaranteed by a third party for a different amount. We also
capitalize certain internal and external costs incurred to develop internal-use
software. For the years ended December 31, 2006 and 2005, we recorded $109
million and $101 million, respectively, for amortization for long-lived assets.
The net book value of these assets totaled $252 million and $288 million at
December 31, 2006 and 2005, respectively, and is included in ground property
and
equipment, net on our Consolidated Balance Sheets. The estimated useful lives
for major asset classifications are as follows:
Asset
Classification
|
Estimated
Useful Life
|
Flight
equipment
|
25
years
|
Capitalized
software
|
5-7
years
|
Ground
property and equipment
|
3-40
years
|
Leasehold
improvements
|
Generally
shorter of lease term or estimated useful life
|
Flight
and ground equipment under capital lease
|
Shorter
of lease term or estimated useful
life
|
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets,” we record impairment losses on long-lived assets used in
operations when events and circumstances indicate the assets may be impaired
and
the estimated future cash flows generated by those assets are less than their
carrying amounts. For long-lived assets held for sale, we record impairment
losses when the carrying amount is greater than the fair value less the cost
to
sell. We discontinue depreciation of long-lived assets when these assets are
classified as held for sale.
To
determine impairments for aircraft used in operations, we group assets at the
fleet-type level (the lowest level for which there are identifiable cash flows)
and then estimate future cash flows based on projections of capacity, passenger
yield, fuel costs, labor costs and other relevant factors. If impairment occurs,
the impairment loss recognized is the amount by which the aircraft’s carrying
amount exceeds its estimated fair value. We estimate aircraft fair values using
published sources, appraisals and bids received from third parties, as
available. See Note 5 for additional information about asset
impairments.
Goodwill
and Intangible Assets
In
accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” we apply a
fair value-based impairment test to the net book value of goodwill and
indefinite-lived intangible assets on an annual basis and, if certain events
or
circumstances indicate that an impairment loss may have been incurred, on an
interim basis. The annual impairment test date for our goodwill and
indefinite-lived intangible assets is December 31. Intangible assets with
determinable useful lives are amortized on a straight-line basis over their
estimated useful lives. Our operating rights have definite useful lives and
are
amortized over their respective lease terms, which range from nine to 19
years.
We
had
one reporting unit with assigned goodwill at December 31, 2006 and 2005. In
evaluating our goodwill for impairment, we first compare the reporting unit’s
fair value to its carrying value. We estimate the fair value of our reporting
unit by considering (1) market multiple and recent transaction values of peer
companies and (2) projected discounted future cash flows, if reasonably
estimable. In applying the projected discounted future cash flow methodology,
we
(1) estimate the reporting unit’s future cash flows based on capacity, passenger
yield, fuel costs, labor costs and other relevant factors and (2) discount
those
cash flows based on the reporting unit’s weighted average cost of capital. If
the reporting unit’s fair value exceeds its carrying value, no further testing
is required. If, however, the reporting unit’s carrying value exceeds its fair
value, we then determine the amount of the impairment charge, if any. We
recognize an impairment charge if the carrying value of the reporting unit’s
goodwill exceeds its implied fair value.
We
perform the impairment test for our indefinite-lived intangible assets by
comparing the asset’s fair value to its carrying value. Fair value is estimated
based on projected discounted future cash flows using a similar methodology
as
described above for goodwill. We recognize an impairment charge if the asset’s
carrying value exceeds its estimated fair value.
See
Note
5 for additional information about goodwill and intangible assets impairment
charges recorded during 2004.
Interest
Expense
While
operating as a debtor-in-possession, 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 $870 million and $1.0 billion for the years
ended December 31, 2006 and 2005, respectively. Contractual interest expense
(including interest expense that is associated with obligations classified
as
liabilities subject to compromise) totaled $1.2 billion for each of the years
ended December 31, 2006 and 2005.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Equity
Method Investments
We
use
the equity method to account for our investment in a company when we have
significant influence but not control over the company’s operations. Under the
equity method, we initially record our investment at cost and then adjust the
carrying value of the investment to recognize our proportional share of the
company’s net income (loss). In addition, dividends received from the company
reduce the carrying value of our investment.
During
2004, we sold our remaining ownership and voting interest in Orbitz, Inc. for
$143 million. We recognized a gain of $123 million on this transaction in gain
from sale of investments, net in our Consolidated Statement of Operations for
the year ended December 31, 2004.
Income
Taxes
In
accordance with SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”), we
account for deferred income taxes under the liability method. Under this method,
we recognize deferred tax assets and liabilities based on the tax effects of
temporary differences between the financial statement and tax bases of assets
and liabilities, as measured by current enacted tax rates. A valuation allowance
is recorded to reduce deferred tax assets when necessary. Deferred tax assets
and liabilities are recorded net as current and noncurrent deferred income
taxes
on our Consolidated Balance Sheets (see Note 9).
Our
income tax provisions are based on calculations and assumptions that are subject
to examination by the Internal Revenue Service and other tax authorities.
Although we believe that the positions taken on previously filed tax returns
are
reasonable, we have established tax and interest reserves in recognition that
various taxing authorities may challenge the positions we have taken, which
could result in additional liabilities for taxes and interest. We review the
reserves as circumstances warrant and adjust the reserves as events occur that
affect our potential liability, such as lapsing of applicable statutes of
limitations, conclusion of tax audits, a change in exposure based on current
calculations, identification of new issues, release of administrative guidance,
or the rendering of a court decision affecting a particular issue. We would
adjust the income tax provision in the period in which the facts that give
rise
to the revision become known.
Investments
in Debt and Equity Securities
We
record
our investments classified as available-for-sale securities at fair value in
other noncurrent assets on our Consolidated Balance Sheets. Any change in the
fair value of these securities is recorded in accumulated other comprehensive
loss. We record our investments classified as trading securities at fair value
in current assets on our Consolidated Balance Sheets and recognize changes
in
the fair value of these securities in other (expense) income on our Consolidated
Statements of Operations.
Frequent
Flyer Program
For
SkyMiles accounts with sufficient mileage credits to qualify for a free travel
award, we record a liability for the estimated incremental cost of flight awards
that are earned and expected to be redeemed for travel on Delta or other
airlines. Our incremental costs include (1) our system average cost per
passenger for fuel, food and other direct passenger costs for awards to be
redeemed on Delta and (2) contractual costs for awards to be redeemed on other
airlines. We periodically record adjustments to this liability in other
operating expenses on our Consolidated Statements of Operations based on awards
earned, awards redeemed, changes in our estimated incremental costs and changes
to the SkyMiles program. Changes in these estimates could have a material impact
on the liability in the year in which the change occurs and in future years.
The
liability is recorded in other accrued liabilities on our Consolidated Balance
Sheets.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Deferred
Gains on Sale and Leaseback Transactions
We
amortize deferred gains on the sale and leaseback of property and equipment
under operating leases over the lives of these leases. The amortization of
these
gains is recorded as a reduction to rent expense. Gains on the sale and
leaseback of property and equipment under capital leases reduce the carrying
value of the related assets.
Manufacturers’
Credits
We
periodically receive credits in connection with the acquisition of aircraft
and
engines. These credits are deferred until the aircraft and engines are
delivered, and then applied on a pro rata basis as a reduction to the cost
of
the related equipment.
Maintenance
Costs
We
record
maintenance costs in operating expenses as they are incurred.
Inventories
Inventories
of expendable parts related to flight equipment are carried at moving average
cost and charged to operations as consumed. An allowance for obsolescence is
provided for the cost of these parts over the remaining useful life of the
related fleet. We also provide allowances for parts currently identified as
excess or obsolete to reduce the carrying costs to the lower of cost or net
realizable value. These parts are assumed to have an estimated residual value
of
5% of the original cost.
Advertising
Costs
We
expense advertising costs as other selling expenses in the year incurred.
Advertising expense was $150 million, $164 million, and $148 million for the
years ended December 31, 2006, 2005 and 2004, respectively.
Commissions
We
record
passenger commissions in prepaid expenses and other on our Consolidated Balance
Sheets when the related passenger tickets are sold. Passenger commissions are
recognized in operating expenses on our Consolidated Statements of Operations
when the transportation is provided and the related revenue is
recognized.
Stock-Based
Compensation
Effective
January 1, 2006, we adopted the fair value provisions of 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 of the awards). Prior to the adoption of SFAS 123R,
we accounted for stock option grants in accordance with APB 25, and accordingly
recognized no compensation expense for the stock option grants if the exercise
price is equal to or more than the fair value of the shares at the date of
grant.
SFAS
123R
is effective for any stock options granted after December 31, 2005. For stock
options 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.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
We
did
not grant any stock options during the year ended December 31, 2006. The
estimated fair values of stock options granted during the years ended December
31, 2005 and 2004 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
|
|
Assumption
|
|
2006
|
|
2005
|
|
2004
|
|
Risk-free
interest rate
|
|
|
—
|
|
|
3.8
|
%
|
|
3.1
|
%
|
Average
expected life of stock options (in years)
|
|
|
—
|
|
|
3.0
|
|
|
3.2
|
|
Expected
volatility of common stock
|
|
|
—
|
|
|
73.6
|
%
|
|
68.8
|
%
|
Weighted
average fair value of a stock option granted
|
|
$
|
—
|
|
$
|
2
|
|
$
|
3
|
|
The
following table reflects for the years ended December 31, 2005 and 2004,
the pro forma impact to net loss and basic and diluted loss per share had we
accounted for our stock-based compensation plans under the fair value method
in
accordance with SFAS 123, as amended.
|
|
Year
Ended December 31,
|
(in
millions, except per share data)
|
|
2005
|
|
2004
|
|
Net
loss:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
(3,818
|
)
|
$
|
(5,198
|
)
|
Stock
option compensation expense determined under the fair value
method
|
|
|
(108
|
)
|
|
(38
|
)
|
As
adjusted for the fair value method under SFAS 123R
|
|
$
|
(3,926
|
)
|
$
|
(5,236
|
)
|
Basic
and diluted loss per share:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
(23.75
|
)
|
$
|
(41.07
|
)
|
As
adjusted for the fair value method under SFAS 123R
|
|
$
|
(24.42
|
)
|
$
|
(41.36
|
)
|
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.
For
additional information about our stock options, see Note 12.
Fair
Value of Financial Instruments
We
record
our cash equivalents and short-term investments at cost, which we believe
approximates fair value due to their short-term maturities. The estimated fair
values of other financial instruments, including debt and derivative
instruments, have been determined using available market information and
valuation methodologies, primarily discounted cash flow analyses and the
Black-Scholes model.
The
aggregate fair value of our secured and unsecured debt, based primarily on
reported market values, was $11.5 billion and $10.5 billion at December 31,
2006
and 2005 (which includes debt classified as liabilities subject to compromise),
respectively. For additional information about our debt, see Note
6.
Reclassifications
Under
our Visa/MasterCard Processing Agreement, the
credit card processor (“Processor”)
is permitted to
withhold payment from our receivables of an amount (“Cash Reserve”)
that is equal to
the Processor’s
potential liability for tickets purchased with Visa or MasterCard which have
not
yet been used for travel. The Cash Reserve is recorded in Restricted cash
on our Consolidated Balance Sheets. See Note 6 for additional information
related to our processing agreement.
For
the year ended December 31, 2006, the change in Cash
Reserve has been reported as a component of operating activities on
our Consolidated Statement of Cash Flows to better reflect the nature of the
restricted cash activities. Prior to 2006, we presented such change as an
investing activity. We have reclassified prior period amounts to be
consistent with the current year presentation. These reclassifications
resulted in a decrease to cash flows from operating activities and a
corresponding increase to cash flows from investing activities of $482 million
for the year ended December 31, 2005 and $15 million for the year ended December
31, 2004 from the amounts previously reported.
We
reclassified certain other prior period amounts in our Consolidated Financial
Statements to be consistent with our current period presentation. The effect
of
these reclassifications is not material.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note
3. Marketable and Other Equity Securities
Republic
Airways Holdings, Inc. (“Republic Holdings”) and
Affiliates
We
have
contract carrier agreements with two subsidiaries of Republic Holdings —
Chautauqua Airlines, Inc. (“Chautauqua”) and Shuttle America Corporation
(“Shuttle America”). As part of these agreements, we received warrants to
purchase 3.5 million shares of Republic Holdings common stock with exercise
prices ranging from $11.60 to $13.00 per common share. The warrants have
expiration dates between June 2012 and December 2014.
The
warrants were recorded at their fair values on the date received in other
noncurrent assets on our Consolidated Balance Sheets. The fair values are
primarily being recognized on a straight-line basis over a five year period.
Changes in fair value are recorded in other (expense) income on our
Consolidated Statements of Operations. The fair values totaled $33 million
and
$29 million at December 31, 2006 and 2005, respectively.
For
additional information about our contract carrier agreements with Chautauqua
and
Shuttle America, see Note 8.
priceline.com
Incorporated (“priceline”)
We
have
an agreement with priceline under which we (1) provide ticket inventory that
may
be sold through priceline’s Internet-based e-commerce system and (2) received
certain equity interests in priceline.
At
December 31, 2006 and 2005, our investment in priceline consisted of (1) 13.5
million shares of Series B Preferred Stock and (2) warrants issued in 2001
to
purchase 0.8 million shares of priceline common stock at $17.81 per common
share. The Series B Preferred Stock had a carrying value of $13 million, was
classified as an available-for-sale security under SFAS 115 and was recorded
at
face value, which approximates fair value, in other noncurrent assets on our
Consolidated Balance Sheets. The warrants were recorded at fair value in other
noncurrent assets on our Consolidated Balance Sheets, with any changes in fair
value recorded in other (expense) income on our Consolidated Statements of
Operations. The fair value of the warrants was $20 million and $7 million at
December 31, 2006 and 2005, respectively.
Note
4. Risk Management and Financial Instruments
Fuel
Price Risk
Our
results of operations may be materially impacted by changes in the price of
aircraft fuel. To manage this risk, we periodically enter into derivative
contracts comprised of heating oil and jet fuel swap and collar contracts to
hedge a portion of our projected aircraft fuel requirements. We do not enter
into fuel hedge contracts for speculative purposes.
Under
our
Chapter 11 proceedings, we were 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 80% of our
projected fuel consumption for each month in the quarter ending March 31, 2007,
up to 50% for each month in the quarter ending June 30, 2007, up to 35% for
each
month in the quarter ending September 30, 2007 and up to 25% for each month
in
the quarter ending December 31, 2007. We currently cannot enter into any fuel
hedge contract that extends beyond December 31, 2007 without approval from
the
Bankruptcy Court or the Creditors Committee. As of January 31, 2007, we had
hedged approximately 24% of our projected aircraft fuel requirements for the
nine months ended September 2007 using heating oil and jet fuel zero-cost collar
and swap contracts. We have not entered into any hedges for the December 2007
quarter.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Losses
(gains) recorded on our Consolidated Statements of Operations for the years
ended December 31, 2006, 2005 and 2004 related to our fuel hedge contracts
are
as follows:
|
|
For
the Years Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
(in
millions)
|
|
Aircraft
fuel
expense
|
|
Other
expense
(income)
|
|
Aircraft
fuel
expense
|
|
Other
expense
(income)
|
|
Aircraft
fuel
expense
|
|
Other
expense
(income)
|
|
Open
fuel hedge contracts
|
|
$
|
—
|
|
$
|
5
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Settled
fuel hedge contracts
|
|
|
108
|
|
|
32
|
|
|
—
|
|
|
—
|
|
|
(105
|
)
|
|
28
|
|
Total
|
|
$
|
108
|
|
$
|
37
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(105
|
)
|
$
|
28
|
|
Our
open
fuel hedge contracts at December 31, 2006 had an estimated fair value loss
of
$27 million, which we recorded in accounts payable on our Consolidated Balance
Sheet. We did not have any fuel hedge contracts at December 31, 2005.
Interest
Rate Risk
Our
exposure to market risk from volatility in interest rates is associated with
our
long-term debt obligations, cash portfolio, workers’ compensation obligations
and pension, postemployment and postretirement benefits.
Market
risk associated with our fixed and variable rate long-term debt relates to
the
potential reduction in fair value and negative impact to future earnings,
respectively, from an increase in interest rates. At December 31, 2006 and
2005,
$5.6 billion and $6.0 billion, respectively, of our debt (including debt
classified as liabilities subject to compromise) had a variable interest
rate.
Market
risk associated with our cash portfolio relates to the potential change in
interest income from a decrease in interest rates. Workers’ compensation
obligation risk relates to the potential changes in our future obligations
and
expenses from a change in interest rates used to discount these obligations.
Pension, postemployment and postretirement benefits risk relates to the
potential changes in our benefit obligations, funding and expenses from a change
in interest rates (see Note 10).
Credit
Risk
To
manage
credit risk associated with our aircraft fuel price hedging program, we select
counterparties based on their credit ratings and limit our exposure to any
one
counterparty. We also monitor the market position of this program and our
relative market position with each counterparty. The credit exposure related
to
this program was not significant at December 31, 2006 and 2005.
Our
accounts receivable are generated largely from the sale of passenger airline
tickets and cargo transportation services. The majority of these sales are
processed through major credit card companies, resulting in accounts receivable,
which are subject to certain holdbacks by the credit card processors. We also
have receivables from the sale of mileage credits under our SkyMiles frequent
flyer program to participating companies such as credit card companies, hotels
and car rental agencies. We believe that the credit risk associated with these
receivables is minimal and that the allowance for uncollectible accounts that
we
have provided is appropriate.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Self-Insurance
Risk
We
self-insure a portion of our losses from claims related to workers’
compensation, environmental issues, property damage, medical insurance for
employees and general liability. Losses are accrued based on an estimate of
the
ultimate aggregate liability for claims incurred, using independent actuarial
reviews based on standard industry practices and our historical experience.
A
portion of our projected workers’ compensation liability is secured with
restricted cash collateral (see Note 2).
Equity
Warrants and Other Similar Rights
We
own
equity warrants and other similar rights in certain companies, primarily
Republic Holdings and priceline. The fair value of these rights were $53 million
and $37 million at December 31, 2006 and 2005, respectively. The fair value
gain
(loss) adjustment of equity rights totaled $16 million, $1 million, and $(3)
million for the years ended December 31, 2006, 2005, and 2004 respectively.
For
additional information about our accounting policy for and ownership of these
rights, respectively, see Notes 2 and 3.
Note
5. Goodwill and Other Intangible Assets
The
following table includes the components of goodwill at December 31, 2006, 2005
and 2004, and impairment charges recorded during 2004:
|
|
Reporting
Unit
|
|
(in
millions)
|
|
Mainline
|
|
ASA
|
|
Comair
|
|
Total
|
|
Balance
at January 1, 2004
|
|
$
|
227
|
|
$
|
498
|
|
$
|
1,367
|
|
$
|
2,092
|
|
Impairment
charge
|
|
|
—
|
|
|
(498
|
)
|
|
(1,367
|
)
|
|
(1,865
|
)
|
Balance
at December 31, 2006, 2005 and 2004
|
|
$
|
227
|
|
$
|
—
|
|
$
|
—
|
|
$
|
227
|
|
During
2004, we re-evaluated the estimated fair values of our reporting units
(Mainline, Atlantic Southeast Airlines, Inc. (“ASA”) and Comair) in light of the
implementation of initiatives intended to strengthen our competitive position
and the completion of our new long-range cash flow plans. These actions
reflected, among other things, (1) the strategic role of ASA and Comair in
our
business (see Note 11 for information about our sale of ASA in 2005), (2) the
projected impact of changes to our fare structure on the revenues of each of
our
reporting units and (3) an expectation of the continuation of historically
high
fuel prices. These factors had a substantial negative impact on the impairment
test results for ASA and Comair. Accordingly, we recorded an impairment charge
for the full value of goodwill at ASA and Comair.
Our
goodwill impairment test for Mainline as of December 31, 2006, 2005, and 2004
resulted in no impairment.
The
following table presents information about our intangible assets, other than
goodwill, at December 31:
|
|
2006
|
|
2005
|
|
(in
millions)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Definite-lived
intangible assets:
|
|
|
|
|
|
|
|
|
|
Operating
rights
|
|
$
|
121
|
|
$
|
(104
|
)
|
$
|
125
|
|
$
|
(103
|
)
|
Other
|
|
|
3
|
|
|
(3
|
)
|
|
3
|
|
|
(3
|
)
|
Total
|
|
$
|
124
|
|
$
|
(107
|
)
|
$
|
128
|
|
$
|
(106
|
)
|
(in
millions)
|
Net
Carrying
Amount
|
|
Net
Carrying
Amount
|
|
Indefinite-lived
intangible assets:
|
|
|
|
|
|
|
International
routes and slots
|
$
|
71
|
|
$
|
51
|
|
Other
|
|
1
|
|
|
1
|
|
Total
|
$
|
72
|
|
$
|
52
|
|
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
At
December 31, 2004, we recorded a $9 million impairment charge for certain of
our
international routes due to our decision not to utilize these routes for the
foreseeable future. This charge is recorded in impairment of intangible assets
on our Consolidated Statements of Operations. At December 31, 2006 and 2005,
our
impairment test for indefinite-lived intangible assets resulted in no
impairment. For additional information about our accounting policy for goodwill
and other intangible assets, see Note 2.
London
Route Agreement
On
October 30, 2006, we purchased from United Air Lines, Inc. 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, consisting of $13 million
which we paid at the closing of the transaction and four annual payments of
$2
million payable in 2007 through 2010. 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.
Note
6. Debt
The
following table summarizes our debt at December 31, 2006 and 2005:
(dollars
in millions)
|
|
2006
|
|
2005
|
|
Senior
Secured(1)
|
|
|
|
|
|
|
|
Secured
Super-Priority Debtor-in-Possession Credit Agreement
|
|
|
|
|
|
|
|
8.12%
GE DIP Credit Facility Term Loan A due March 16, 2008(2)
|
|
$
|
600
|
|
$
|
600
|
|
10.12%
GE DIP Credit Facility Term Loan B due March 16, 2008(2)
|
|
|
700
|
|
|
700
|
|
12.87%
GE DIP Credit Facility Term Loan C due March 16, 2008(2)
|
|
|
600
|
|
|
600
|
|
|
|
|
1,900
|
|
|
1,900
|
|
Other
senior secured debt
|
|
|
|
|
|
|
|
14.11%
Amex Facility Note due in installments during 2007(2)(3)
|
|
|
176
|
|
|
300
|
|
|
|
|
176
|
|
|
300
|
|
Secured(1)
|
|
|
|
|
|
|
|
Series
2000-1 Enhanced Equipment Trust Certificates
|
|
|
|
|
|
|
|
7.38%
Class A-1 due in installments from 2007 to May 18, 2010
|
|
|
136
|
|
|
174
|
|
7.57%
Class A-2 due November 18, 2010
|
|
|
738
|
|
|
738
|
|
7.92%
Class B due November 18, 2010
|
|
|
182
|
|
|
182
|
|
|
|
|
1,056
|
|
|
1,094
|
|
Series
2001-1 Enhanced Equipment Trust Certificates
|
|
|
|
|
|
|
|
6.62%
Class A-1 due in installments from 2007 to March 18, 2011
|
|
|
130
|
|
|
150
|
|
7.11%
Class A-2 due September 18, 2011
|
|
|
571
|
|
|
571
|
|
7.71%
Class B due September 18, 2011
|
|
|
207
|
|
|
207
|
|
7.30%
Class C due September 18, 2006
|
|
|
—
|
|
|
60
|
|
|
|
|
908
|
|
|
988
|
|
Series
2001-2 Enhanced Equipment Trust Certificates
|
|
|
|
|
|
|
|
7.06%
Class A due in installments from 2007 to December 18, 2011(2)
|
|
|
313
|
|
|
341
|
|
8.26%
Class B due in installments from 2007 to December 18, 2011(2)
|
|
|
145
|
|
|
172
|
|
9.61%
Class C due in installments from 2007 to December 18, 2011(2)
|
|
|
64
|
|
|
77
|
|
|
|
|
522
|
|
|
590
|
|
Series
2002-1 Enhanced Equipment Trust Certificates
|
|
|
|
|
|
|
|
6.72%
Class G-1 due in installments from 2007 to January 2, 2023
|
|
|
454
|
|
|
488
|
|
6.42%
Class G-2 due July 2, 2012
|
|
|
370
|
|
|
370
|
|
7.78%
Class C due in installments from 2007 to January 2, 2012
|
|
|
111
|
|
|
126
|
|
|
|
|
935
|
|
|
984
|
|
Series
2003-1 Enhanced Equipment Trust Certificates
|
|
|
|
|
|
|
|
6.13%
Class G due in installments from 2007 to January 25, 2008(2)
|
|
|
291
|
|
|
318
|
|
9.11%
Class C due in installments from 2007 to January 25, 2008(2)
|
|
|
135
|
|
|
135
|
|
|
|
|
426
|
|
|
453
|
|
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(dollars
in millions)
|
|
2006
|
|
2005
|
|
General
Electric Capital Corporation(4)
|
|
|
|
|
|
|
|
9.87%
Notes due in installments from 2007 to July 7, 2011(2)(5)
|
|
|
168
|
|
|
198
|
|
9.87%
Notes due in installments from 2007 to July 7, 2011(2)(6)
|
|
|
119
|
|
|
134
|
|
9.87%
Notes due in installments from 2007 to July 7, 2011(2)(7)
|
|
|
271
|
|
|
293
|
|
|
|
|
558
|
|
|
625
|
|
Other
secured debt
|
|
|
|
|
|
|
|
8.86%
Senior Secured Notes due in installments from 2007 to September
29,
2012(8)
|
|
|
189
|
|
|
235
|
|
4.62%
to 8.85% Other secured financings due in installments from 2007
to May 9,
2021(2)(9)(10)
|
|
|
1,354
|
|
|
1,715
|
|
Total
senior secured and secured debt
|
|
$
|
8,024
|
|
$
|
8,884
|
|
Unsecured(9)
|
|
|
|
|
|
|
|
Massachusetts
Port Authority Special Facilities Revenue Bonds
|
|
|
|
|
|
|
|
5.0-5.5%
Series 2001A due in installments from 2012 to January 1,
2027
|
|
$
|
338
|
|
$
|
338
|
|
4.25%
Series 2001B due in installments from 2027 to January 1, 2031(2)
|
|
|
80
|
|
|
80
|
|
4.3%
Series 2001C due in installments from 2027 to January 1, 2031(2)
|
|
|
80
|
|
|
80
|
|
7.7%
Notes due December 15, 2005
|
|
|
122
|
|
|
122
|
|
7.9%
Notes due December 15, 2009
|
|
|
499
|
|
|
499
|
|
9.75%
Debentures due May 15, 2021
|
|
|
106
|
|
|
106
|
|
Development
Authority of Clayton County, loan agreement
|
|
|
|
|
|
|
|
3.98%
Series 2000A due June 1, 2029(2)
|
|
|
65
|
|
|
65
|
|
4.05%
Series 2000B due May 1, 2035(2)
|
|
|
110
|
|
|
110
|
|
4.05%
Series 2000C due May 1, 2035(2)
|
|
|
120
|
|
|
120
|
|
8.3%
Notes due December 15, 2029
|
|
|
925
|
|
|
925
|
|
8.125%
Notes due July 1, 2039
|
|
|
538
|
|
|
538
|
|
10.0%
Senior Notes due August 15, 2008
|
|
|
248
|
|
|
248
|
|
8.0%
Convertible Senior Notes due June 3, 2023
|
|
|
350
|
|
|
350
|
|
2
7/8%
Convertible Senior Notes due February 18, 2024
|
|
|
325
|
|
|
325
|
|
3.01%
to 10.375% Other unsecured debt due in installments from 2006 to
May 1,
2033
|
|
|
703
|
|
|
703
|
|
Total
unsecured debt
|
|
|
4,609
|
|
|
4,609
|
|
Total
secured and unsecured debt, including liabilities subject to
compromise
|
|
|
12,633
|
|
|
13,493
|
|
Less:
pre-petition debt classified as liabilities subject to
compromise(9)(10)
|
|
|
(4,945
|
)
|
|
(5,766
|
)
|
Total
debt
|
|
|
7,688
|
|
|
7,727
|
|
Less:
current maturities
|
|
|
(1,466
|
)
|
|
(1,183
|
)
|
Total
long-term debt
|
|
|
6,222
|
|
|
6,544
|
|
|
(1) |
Our
senior secured debt and secured debt is collateralized by first liens,
and
in many cases second and junior liens, on substantially all of our
assets,
including but not limited to accounts receivable, owned aircraft,
certain
spare engines, certain spare parts, certain flight simulators, ground
equipment, landing slots, international routes, equity interests
in
certain of our domestic subsidiaries, intellectual property and real
property. For more information on the Secured Super-Priority
Debtor-in-Possession Credit Agreement and other senior secured debt,
see
“DIP Credit Facility” and “Financing Agreement with Amex”, respectively,
in this Note.
|
|
(2) |
Our
variable interest rate long-term debt is shown using interest rates
which
represent LIBOR or Commercial Paper plus a specified margin, as provided
for in the related agreements. The rates shown were in effect at
December
31, 2006, if applicable.
|
|
(3) |
For
additional information about the repayment terms related to these
debt
maturities, see “Financing Agreement with Amex” in this
Note.
|
|
(4) |
For
information about the letters of credit issued by, and our related
reimbursement obligation to, General Electric Capital Corporation
(“GECC”), see “Letter of Credit Enhanced Special Facility Bonds” and
“Reimbursement Agreement and Other GECC Agreements” in this
Note.
|
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
(5) |
For
additional information about this debt, as amended (“Spare Engines Loan”),
see “Reimbursement Agreement and Other GECC Agreements” in this
Note.
|
|
(6) |
For
additional information about this debt, as amended (“Aircraft Loan”), see
“Reimbursement Agreement and Other GECC Agreements” in this
Note.
|
|
(7) |
For
additional information about this debt, as amended (“Spare Parts Loan”),
see “Reimbursement Agreement and Other GECC Agreements” in this
Note.
|
|
(8) |
In
October 2006, we refinanced our 9.5% Senior Secured Notes due 2008
(“Senior Notes”). In connection with the refinancing, we repaid $39
million in principal of the Senior Notes. We refinanced the remaining
$196
million principal of the 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.
|
|
(9) |
In
accordance with SOP 90-7, substantially all of our unsecured debt
has been
classified as liabilities subject to compromise. Additionally, certain
of
our undersecured debt has been classified as liabilities subject
to
compromise. For more information on liabilities subject to compromise,
see
Note 1.
|
|
(10)
|
Certain
of our secured and under-secured debt, which was classified as liabilities
subject to compromise at December 31, 2005, has been reclassified
from
liabilities subject to compromise or converted to operating leases
during
the year ended December 31, 2006 in connection with in-court restructuring
initiatives undertaken as part of our Chapter 11
reorganization.
|
Future
Maturities
The
following table summarizes the contractual maturities of our debt, including
current maturities, at December 31, 2006:
Years
Ending December 31,
(in
millions)
|
|
Principal
Not
Subject
to
Compromise
|
|
Principal
Subject
to
Compromise
|
|
Total
Principal
Amount
|
|
2007
|
|
$
|
1,466
|
|
$
|
453
|
|
$
|
1,919
|
|
2008
|
|
|
2,152
|
|
|
640
|
|
|
2,792
|
|
2009
|
|
|
392
|
|
|
868
|
|
|
1,260
|
|
2010
|
|
|
1,300
|
|
|
177
|
|
|
1,477
|
|
2011
|
|
|
1,307
|
|
|
103
|
|
|
1,410
|
|
After
2011
|
|
|
1,071
|
|
|
2,704
|
|
|
3,775
|
|
Total
|
|
$
|
7,688
|
|
$
|
4,945
|
|
$
|
12,633
|
|
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.
The
DIP
Credit Facility consists of a $600 million Term Loan A arranged by GECC (the
“TLA”), a $700 million Term Loan B arranged by GECC (the “TLB”) and a $600
million Term Loan C arranged jointly by GECC and Morgan Stanley (the “TLC”)
(together with the TLA and TLB, collectively, the “DIP Loans”). We applied a
portion of these proceeds to (1) repay in full the $480 million principal amount
outstanding under our pre-petition credit facility for which GECC was agent
(“GE
Pre-Petition Facility”); (2) repay in full the $500 million principal amount
outstanding under our Amex Pre-Petition Facility (defined below); and (3) prepay
$50 million of the $350 million principal amount outstanding under our Amex
Post-Petition Facility (defined below). The remainder of the proceeds of the
DIP
Loans is available for our general corporate purposes.
Availability
of funds under the TLA is subject to a borrowing base calculation. If the
outstanding amount of the TLA at any time exceeds the borrowing base, we must
immediately repay the TLA or post cash collateral in an amount equal to the
excess.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The
TLA,
TLB and TLC each mature on the earliest of (1) March 16, 2008, (2) the effective
date of a plan of reorganization in the Debtors’ bankruptcy cases or (3)
accelerations and termination of the obligations under such loans if an event
of
default occurs under the DIP Credit Facility, as more fully discussed below.
Prior to March 27, 2006, the TLA bore interest, at our option, at LIBOR plus
4.50% or an index rate plus 3.75%; the TLB bore interest, at our option, at
LIBOR plus 6.50% or an index rate plus 5.75%; and the TLC bore interest, at
our
option, at LIBOR plus 9.00% or an index rate plus 8.25%.
We
may
also request the issuance of up to $200 million in letters of credit under
the
DIP Credit Facility, which must be fully cash collateralized at all times such
letters of credit are outstanding.
Our
obligations under the DIP Credit Facility are guaranteed by substantially all
of
our domestic subsidiaries (the “Guarantors”). We will be required to make
certain mandatory repayments of the DIP Loans in the event we sell certain
assets, subject to certain exceptions. Any portion of the DIP Loans that is
repaid through either voluntary or mandatory prepayment may not be
reborrowed.
The
DIP
Loans and the related guarantees are secured by first priority liens on
substantially all of our and the Guarantors’ present and future assets
(including assets that previously secured the GE Pre-Petition Facility) and
by
junior liens on certain of our and our Guarantors’ other assets (including
certain accounts receivable and other assets subject to a first priority lien
securing the Amex Post-Petition Facility described below), in each case subject
to certain exceptions, including an exception for assets that are subject to
financing agreements that are entitled to the benefits of Section 1110 of the
Bankruptcy Code, to the extent such financing agreements prohibit such
liens.
The
DIP
Credit Facility includes affirmative, negative and financial covenants that
impose substantial restrictions on our financial and business operations,
including our ability to, among other things, incur or secure other debt, make
investments, sell assets and pay dividends or repurchase stock.
The
financial covenants require us to:
|
● |
maintain
unrestricted funds in an amount not less than $750 million through
May 31,
2006; $1.0 billion at all times from June 1, 2006, through November
30,
2006; $750 million at all times from December 1, 2006, through February
28, 2007; and $1.0 billion at all times thereafter (“Liquidity
Covenant”);
|
|
● |
not
exceed specified levels of capital expenditures during any fiscal
quarter;
and
|
|
● |
achieve
specified levels of earnings before interest, taxes, depreciation,
amortization and aircraft rent, as defined (“EBITDAR”), for successive
trailing 12-month periods through March 2008. During 2005, we were
required to achieve increasing levels of EBITDAR, including EBITDAR
of
$644 million for the 12-month period ending December 31, 2005. Thereafter,
the minimum EBITDAR level for each successive trailing 12-month period
continues to increase, including $1.4 billion for the 12-month period
ended December 31, 2006; $2.0 billion for the 12-month period ending
December 31, 2007; and $2.0 billion for each 12-month period ending
thereafter. If our cash on hand exceeds the minimum cash on hand
that we
are required to maintain pursuant to the Liquidity Covenant, then
the
EBITDAR level that we are required to achieve is effectively reduced
by
the amount of such excess cash, up to a maximum reduction of $250
million
from the required EBITDAR level.
|
The
DIP
Credit Facility contains events of default customary for debtor-in-possession
financings, including cross-defaults to the Amex Post-Petition Facility and
certain change of control events. The DIP Credit Facility also includes events
of default specific to our business, including if all or substantially all
of
our flight and other operations are suspended for longer than two days, other
than in connection with a general suspension of all U.S. flights, or if certain
routes and, subject to certain materiality thresholds, other routes, and slots
and gates are revoked, terminated or cancelled. Upon the occurrence of an event
of default, the outstanding obligations under the DIP Credit Facility may be
accelerated and become due and payable immediately.
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 TLA bears
interest, at our option, at LIBOR plus 2.75% or an index rate plus 2.00%; the
TLB bears interest, at our option, at LIBOR plus 4.75% or an index rate plus
4.00%; and the TLC bears interest, at our option, at LIBOR plus 7.50% or an
index rate plus 6.75%.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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. The Amended and Restated DIP Credit
Facility allowed the execution of amendments to (1) the Other GECC Agreements
(defined below) and 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 originally totaling $403
million which were issued on our behalf by GECC, to support our obligations
with
respect to 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
(see
Note 8).
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. The
Amex Pre-Petition Facility consisted of substantially identical supplements
to
the two existing agreements under which Amex purchases SkyMiles from us, the
Membership Rewards Agreement and the Co-Branded Credit Card Program Agreement
(collectively, the “SkyMiles Agreements”). The Bankruptcy Court approved our
entering into the Modification Agreement and our assuming the SkyMiles
Agreements. Amex has the right, in certain circumstances, to impose a
significant holdback on our receivables, including for tickets purchased using
an American Express credit card but not yet used for travel.
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”). The amount borrowed under the Amex Post-Petition
Facility is being repaid in equal monthly installments, either as direct monthly
payments from us or as a credit towards Amex’s actual purchases of SkyMiles
during the 17-month period commencing in July 2006. Any unused prepayment credit
will carryover to the next succeeding month with a final repayment date for
any
then outstanding advances no later than November 30, 2007. Prior to March 27,
2006, the outstanding advances bore a fee, equivalent to interest, at a rate
of
LIBOR plus a margin of 10.25%. As of the date of effectiveness of the Amended
and Restated DIP Credit Facility, to which Amex consented, the fee on
outstanding advances decreased to a rate of LIBOR plus a margin of
8.75%.
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 from
$1.7
billion to $1.9 billion in return for a prepayment of $50 million under the
Amex
Post-Petition Facility. The prepayment was credited in inverse order of monthly
installments during the 17-month period commencing in July 2006.
Our
obligations under the Amex Post-Petition Facility are guaranteed by the
Guarantors of the DIP Credit Facility. Our obligations under certain of our
agreements with Amex, including our obligations under the Amex Post-Petition
Facility, the SkyMiles Agreements and the agreement pursuant to which Amex
processes travel and other purchases made from us using Amex credit cards (“Card
Services Agreement”), and the corresponding obligations of the Guarantors, are
secured by (1) a first priority lien on our right to payment from Amex for
purchased SkyMiles, our interest in the SkyMiles Agreements and related assets
and our right to payment from Amex under, and our interest in, the Card Services
Agreement and (2) a junior lien on the collateral securing the DIP Credit
Facility on a first priority basis.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
With
certain exceptions, the Amex Post-Petition Facility contains affirmative,
negative and financial covenants substantially the same as in the DIP Credit
Facility. The Amex Post-Petition Facility contains customary events of default,
including cross-defaults to our obligations under the DIP Credit Facility and
to
defaults under certain other of our agreements with Amex. The Amex Post-Petition
Facility also includes events of default specific to our business, including
upon cessation of 50% or more of our business operations (measured by net
revenue) and other events of default comparable to those in the DIP Credit
Facility. Upon the occurrence of an event of default under the Amex
Post-Petition Facility, the loan under the Amex Post-Petition Facility may
be
accelerated and become due and payable immediately. An event of default under
the Amex Post-Petition Facility results in an immediate cross-default under
the
Amended and Restated DIP Credit 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. 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 (see Note
8).
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.
Letter
of Credit Enhanced Special Facility Bonds
At
December 31, 2006, there were outstanding $381 million aggregate principal
amount of tax exempt special facility bonds (“Bonds”) enhanced by letters of
credit, including:
|
● |
$295
million principal amount of bonds issued by the Development Authority
of
Clayton County (“Clayton Authority”) to refinance the construction cost of
certain facilities leased to us at Hartsfield-Jackson Atlanta
International Airport. We pay debt service on these bonds pursuant
to loan
agreements between us and the Clayton
Authority.
|
|
● |
$86
million principal amount of bonds issued by other municipalities
to
refinance the construction cost of certain facilities leased to us
at
Cincinnati/Northern Kentucky International Airport and Salt Lake
City
International Airport. We pay debt service on these bonds pursuant
to
long-term lease agreements.
|
The
Bonds
(1) have scheduled maturities between 2029 and 2035, (2) currently bear interest
at a variable rate that is determined weekly and (3) may be tendered for
purchase by their holders on seven days notice. Tendered Bonds are remarketed
at
prevailing interest rates.
Principal
and interest on the Bonds are currently paid through drawings on irrevocable,
direct-pay letters of credit currently totaling $387 million issued by GECC
pursuant to the Reimbursement Agreement. In addition, if tendered Bonds cannot
be remarketed, the purchase price is paid by drawings on these letters of
credit. The GECC letters of credit were originally scheduled to expire on May
20, 2008. Pursuant to the Amendments (defined below), the GECC letters of credit
will now expire on July 7, 2011. The GECC letters of credit were originally
issued in the amount of $403 million, but a draw on one of the letters of credit
paid off approximately $16 million in special facility bonds related to a Tampa
maintenance base when we rejected the lease for this facility in June 2006
to
streamline our maintenance operations and obtain other cost
savings.
If
a
drawing under a letter of credit is made to pay the purchase price of Bonds
tendered for purchase and not remarketed, our resulting reimbursement obligation
to GECC will bear interest at a base rate or three-month LIBOR plus a margin.
The principal amount of any outstanding reimbursement obligation will be repaid
quarterly through July 7, 2011. Our obligation to reimburse GECC for the drawing
on the letter of credit that secured the Tampa maintenance base special facility
bonds is on these terms as well.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Unless
the GECC letters of credit are extended in a timely manner, we will be required
to purchase the Bonds on July 2, 2011, five calendar days prior to the
expiration of the letters of credit. In this circumstance, we could seek, but
there is no assurance that we would be able (1) to sell the Bonds without credit
enhancement at then-prevailing fixed interest rates or (2) to replace the
expiring letters of credit with new letters of credit from an alternate credit
provider and remarket the Bonds.
Reimbursement
Agreement and Other GECC Agreements
Under
the
Reimbursement Agreement between us and GECC, we are required to reimburse GECC
for drawings on the letters of credit that support the Bonds. Prior to the
Amendments (as defined below), our reimbursement obligations to GECC were
secured by (1) nine B-767-400 and three B-777-200 aircraft (“LOC Aircraft
Collateral”), (2) 93 spare Mainline aircraft engines (“Engine Collateral”) and
(3) a portion of the Mainline aircraft spare parts owned by us (“Spare Parts
Collateral”), as discussed below.
We
have
three additional financing arrangements with GECC (other than the Amended and
Restated DIP Credit Facility), as referenced in the footnotes to the table
above
in this Note. Prior to the Amendments, the Spare Engines Loan was secured by
(1)
the Engine Collateral, (2) so long as the letters of credit discussed above
are
outstanding, the LOC Aircraft Collateral and (3) a portion of the Spare Parts
Collateral, as discussed below. The Spare Engines Loan
is not repayable at our election prior to maturity.
Prior
to
the Amendments, the Aircraft Loan was secured by (1) five B-767-400 aircraft
(“Other Aircraft Collateral”), (2) the Engine Collateral and (3) all Spare Parts
Collateral. Also prior to the Amendments, the Spare Parts Loan was secured
by
(1) the Other Aircraft Collateral, (2) the Engine Collateral and (3) the Spare
Parts Collateral.
Under
our
prior agreement with GECC, the Spare Parts Collateral secured up to $75 million
of our obligations to GECC under (1) the Reimbursement Agreement, (2) the Spare
Engines Loan and (3) 12 CRJ-200 aircraft leases. Additionally, the Engine
Collateral and the Spare Parts Collateral secured, on a subordinated basis,
up
to $160 million of certain other existing debt and aircraft lease obligations
to
GECC and its affiliates (“Subordinated GECC Obligations”).
On
March
31, 2006, we entered into amendments (the “Amendments”) to the Reimbursement
Agreement, the Spare Engines Loan, the Aircraft Loan, the Spare Parts Loan
(these last three credit facilities will be referred to collectively as the
“Other GECC Agreements”) and certain other credit facilities with GECC (other
than the Amended and Restated DIP Credit Facility).
As
a
result of the Amendments, the LOC Aircraft Collateral, the Spare Engines
Collateral, the Spare Parts Collateral and the Other Engine Collateral
(collectively, the “Collateral Pool”) secure (1) each of the Other GECC
Agreements, (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, (4) the Reimbursement Agreement and (5) all of the
Subordinated GECC Obligations (with no maximum amount). In addition, the
expiration dates of the letters of credit issued in connection with the
Reimbursement Agreement were extended from 2008 to 2011, and the minimum
collateral value test formerly 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. As of December 31, 2006,
GECC has leased nine of these aircraft to us and we have subleased all nine
aircraft to Connection Carriers.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Boston
Airport Terminal Project
During
2001, we entered into lease and financing agreements with the Massachusetts
Port
Authority (“Massport”) for the redevelopment and expansion of Terminal A at
Boston’s Logan International Airport. The construction of the new terminal was
funded with $498 million in proceeds from Special Facilities Revenue Bonds
issued by Massport on August 16, 2001. We agreed to pay the debt service on
the
bonds under an agreement with Massport and issued a guarantee to the bond
trustee covering the payment of the debt service. For additional information
about these bonds, see the debt table above. Because we have issued a guarantee
of the debt service on the bonds, we have included the bonds, as well as the
related bond proceeds, on our Consolidated Balance Sheets. The bonds are
reflected as liabilities subject to compromise and the related remaining
proceeds, which are held in a trust, are reflected as restricted investments
in
other assets on our Consolidated Balance Sheets.
As
part
of our restructuring efforts, we have entered into a settlement agreement with
Massport, the bond trustee and the bond insurer providing, among other things,
for a reduction in our leasehold premises, the ability to return some additional
space in 2007 and 2011 and the reduction of our lease term to ten years. The
settlement agreement also provides that our obligations with respect to the
bonds shall be eliminated, including the guarantee of debt service, and that
all
rental payments for the leased space shall be made to Massport. On
February 14, 2007, the Bankruptcy Court approved a consent motion
authorizing the settlement agreement, the assumption of the amended lease and
the restructuring of related agreements.
Letter
of Credit Facility Related to Visa/MasterCard Credit Card Processing
Agreement
On
January 26, 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 (“Merrill Lynch Letter of Credit”) for the benefit of our
Processor. As contemplated in our Visa/MasterCard credit card processing
agreement (“Processing Agreement”), we are providing the Merrill Lynch Letter of
Credit as a substitution for a portion of the cash withholding that the
Processor maintains.
Under
the
Processing Agreement, the Processor is permitted to withhold a Cash Reserve
that
is equal to the Processor’s potential liability for tickets purchased with Visa
or MasterCard which have not yet been used for travel (the “unflown ticket
liability”). We estimate that the Cash Reserve, which adjusts daily, will range
between $450 million and $1.1 billion during the term of the Processing
Agreement. The Processing Agreement allows us to substitute the Merrill Lynch
Letter of Credit for a portion of the Cash Reserve equal to the lesser of $300
million and 45% of the unflown ticket liability. See Note 2 for additional
information about our reclassification of the change in Cash Reserve on our
Consolidated Statements of Cash Flows.
The
Merrill Lynch Letter of Credit may only be drawn upon following certain events
as described in the Processing Agreement. In addition, the Processor must first
apply both the portion of the Cash Reserve that the Processor will continue
to
hold and any offsets from collections by the Processor before drawing on the
Merrill Lynch Letter of Credit to cover fare refunds paid to passengers by
the
Processor.
Our
obligation to reimburse Merrill Lynch under the Merrill Lynch Letter of Credit
for any draws made by the Processor is not secured and will constitute a
super-priority administrative expense claim that is subject to certain other
claims, including our post-petition financing. The Merrill Lynch Letter of
Credit was originally due to expire on January 21, 2008. In July 2006, with
the
approval of the Bankruptcy Court, we amended the Merrill Lynch Letter of Credit
to, among other matters, extend the expiration date to September 14, 2008 and
to
reduce the fees payable by us. The Merrill Lynch Letter of Credit will renew
automatically for one-year periods after September 14, 2008 unless Merrill
Lynch
notifies the Processor 420 days prior to the applicable expiration date that
it
will not renew the Merrill Lynch Letter of Credit.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Bombardier
Agreement
During
the June 2006 quarter, Comair, Bombardier, Inc. (“Bombardier”) and a subsidiary
of Bombardier completed, with the approval of the Bankruptcy Court, an agreement
under which, among other things, (1) Comair surrendered a letter of credit
supporting certain reimbursement obligations owed by Bombardier to Comair,
which were simultaneously released by Comair and (2) Bombardier transferred
to Comair $171 million aggregate principal amount of secured notes issued to
Bombardier by Delta. The transfer of the secured notes constitutes an
extinguishment of debt under SFAS No. 140, “Accounting for the Transfer and
Services of Financial Assets and Extinguishment of Liabilities.” We recognized a
$26 million gain as a result of this extinguishment of debt, which is classified
in reorganization items, net.
Covenants
As
discussed above, the Amended and Restated DIP Credit Facility and the Amex
Post-Petition Facility include certain affirmative, negative and financial
covenants. In addition, as is customary in the airline industry, our aircraft
lease and financing agreements require that we maintain certain levels of
insurance coverage, including war-risk insurance. Failure to maintain these
coverages may result in an interruption to our operations. See Note 8 for
additional information about our war-risk insurance currently provided by the
U.S. government.
We
were
in compliance with these covenant requirements at December 31, 2006 and
2005.
Exit
Financing
On
January 29, 2007, we secured commitments for a $2.5 billion exit financing
facility (the “Exit Facility”) to be used in connection with our plan to exit
bankruptcy in the second quarter of 2007. The Exit Facility will be co-led
by a
syndicate of six lenders and will consist of a $1.0 billion first-lien revolving
credit facility, a $500 million first-lien Term Loan A and a $1.0 billion
second-lien Term Loan B. Proceeds from the Exit Facility will be used to repay
the outstanding principal amounts of $1.9 billion and $176 million, together
with interest thereon and all other amounts outstanding thereunder, for the
Amended and Restated DIP Credit Facility and the Amex Post-Petition Facility,
respectively. The Exit Facility will be secured by substantially all of the
first priority collateral in the existing Amended and Restated DIP Credit
Facility.
The
scheduled maturity date for the revolving credit facility and the Term Loan
A
will be the fifth anniversary of the closing date of the Exit Facility. The
scheduled maturity date for the Term Loan B will be the seventh anniversary
of
the closing date of the closing of the Exit Facility.
The
Exit
Facility will contain financial covenants that will require us to maintain
a
minimum fixed charge coverage ratio, minimum unrestricted cash reserves and
minimum collateral coverage ratios. In addition, the Exit Facility will restrict
our ability to, among other things, incur additional secured indebtedness,
make
investments, sell assets if not in compliance with the collateral coverage
ratio
tests, pay dividends or repurchase stock. These covenants may have a material
impact on our operations.
The
closing and funding of the Exit Facility is subject to the completion of
definitive documentation and certain other conditions precedent.
Note
7. Lease Obligations
We
lease
aircraft, airport terminals and maintenance facilities, ticket offices and
other
property and equipment from third parties. As allowed 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 leases of real property, aircraft and aircraft engines, subject to
the
approval of the Bankruptcy Court and certain other conditions, including
compliance with Section 1110.
Rental
expense for operating leases, which is recorded on a straight-line basis over
the life of the lease term, totaled $945 million, $1.1 billion, and $1.3 billion
for the years ended December 31, 2006, 2005, and 2004, respectively. Amounts
due
under capital leases are recorded as liabilities on our Consolidated Balance
Sheets. Our interest in assets acquired under capital leases is recorded as
property and equipment on our Consolidated Balance Sheets. Amortization of
assets recorded under capital leases is included in depreciation and
amortization expense on our Consolidated Statements of Operations. Our leases
do
not include residual value guarantees.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The
following tables summarize, as of December 31, 2006, our minimum rental
commitments under capital leases and noncancelable operating leases (including
certain aircraft under contract carrier agreements) with initial terms in excess
of one year:
Capital
Leases
Years
Ending December 31,
(in
millions)
|
|
Not
Subject to
Compromise
|
|
Subject
to
Compromise
|
|
Total
|
|
2007
|
|
$
|
104
|
|
$
|
6
|
|
$
|
110
|
|
2008
|
|
|
100
|
|
|
3
|
|
|
103
|
|
2009
|
|
|
99
|
|
|
—
|
|
|
99
|
|
2010
|
|
|
99
|
|
|
—
|
|
|
99
|
|
2011
|
|
|
94
|
|
|
—
|
|
|
94
|
|
After
2011
|
|
|
94
|
|
|
—
|
|
|
94
|
|
Total
minimum lease payments
|
|
|
590
|
|
|
9
|
|
|
599
|
|
Less:
amount of lease payments representing interest
|
|
|
266
|
|
|
1
|
|
|
267
|
|
Present
value of future minimum capital lease payments
|
|
|
324
|
|
|
8
|
|
|
332
|
|
Less:
current obligations under capital leases
|
|
|
37
|
|
|
5
|
|
|
42
|
|
Long-term
capital lease obligations
|
|
$
|
287
|
|
$
|
3
|
|
$
|
290
|
|
Operating
Leases
Years
Ending December 31,
(in
millions)
|
|
Delta
Lease
Payments
|
|
Contract
Carrier
Agreements
Lease
Payments(1)
|
|
Total
|
|
2007
|
|
$
|
871
|
|
$
|
386
|
|
$
|
1,257
|
|
2008
|
|
|
798
|
|
|
384
|
|
|
1,182
|
|
2009
|
|
|
652
|
|
|
325
|
|
|
977
|
|
2010
|
|
|
590
|
|
|
325
|
|
|
915
|
|
2011
|
|
|
467
|
|
|
325
|
|
|
792
|
|
After
2011
|
|
|
2,607
|
|
|
2,308
|
|
|
4,915
|
|
Total
minimum lease payments
|
|
$
|
5,985
|
|
$
|
4,053
|
|
$
|
10,038
|
|
|
(1) |
Emerging
Issues Task Force 01-08, “Determining Whether an Arrangement Contains a
Lease”, provides guidance on whether an arrangement contains a lease
within the scope of SFAS 13 and is applicable to agreements entered
into
or modified after June 30, 2003. Because we entered into our contract
carrier agreement with Chautauqua prior to June 30, 2003, payments
totaling $183 million related to Chautauqua aircraft are not included
in
the table.
|
At
December 31, 2006, we operated 166 aircraft under operating leases and 65
aircraft under capital leases. These leases have remaining terms ranging from
10
months to nine years. For the year ended December 31, 2006, we recorded
estimated claims relating to the restructuring of the financing arrangements
of
188 aircraft and the rejection of 16 leases. Many of these transactions are
subject to Bankruptcy Court approval.
Note
8. Purchase Commitments and Contingencies
Aircraft
Order Commitments
Future
commitments for aircraft on firm order as of December 31, 2006 are estimated
to
be $3.0 billion. The following table shows the timing of these
commitments:
Years
Ending December 31,
(in
millions)
|
|
|
|
2007
|
|
$
|
523
|
|
2008
|
|
|
823
|
|
2009
|
|
|
960
|
|
2010
|
|
|
712
|
|
Total
|
|
$
|
3,018
|
|
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Our
aircraft order commitments as of December 31, 2006 consist of firm orders to
purchase five B-777-200LR aircraft, 10 B-737-700 aircraft and 50 B-737-800
aircraft, including 48 B-737-800 aircraft, which we have entered into definitive
agreements to sell to third parties immediately following delivery of these
aircraft to us by the manufacturer starting in 2007. These sales will reduce
our
future commitments by approximately $2.0 billion during the period 2007 through
2010.
On
January 31, 2007, we entered into an agreement to purchase 30 CRJ-900 aircraft
from Bombardier Inc., with options to acquire an additional 30 CRJ-900 aircraft.
The aircraft will be delivered in two-class, 76 seat configuration between
September 2007 and February 2010. We expect these aircraft will be
operated by regional air carriers under contract carrier agreements, and the
purchase agreement permits assignment of the aircraft and related support
provisions to other carriers. We have available to us long-term, secured
financing commitments to fund a substantial portion of the aircraft purchase
price for the 30 firm orders.
We
have
signed a letter of intent with a third party to lease 10 B-757-200ER aircraft.
These aircraft will be delivered from July 2007 through November 2007 and will
be leased for seven years and three months each. We have also signed a letter
of
intent with a separate third party to lease three B-757-200ER aircraft which
would be delivered to us in the first quarter of 2008, or such earlier dates
as
the parties may agree, and will be leased for five years.
Contract
Carrier Agreements
Delta
Connection Carriers
As
of
December 31, 2006, we had contract carrier agreements with seven regional air
carriers (“Connection 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 year ended December 31, 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. The following table shows the maximum number of aircraft to
be
operated for us under, and the expiration date of, our contract carrier
agreements with each of these carriers:
Carrier(1)
|
Maximum
Number
of
Aircraft
to be
Operated
Under
Agreement
(1) (2)
|
|
Expiration
Date
of
Agreement
|
|
ASA(2)
|
|
|
161
|
|
|
2020
|
|
SkyWest
Airlines(2)
|
|
|
98
|
|
|
2020
|
|
Chautauqua
|
|
|
39
|
|
|
2016
|
|
Freedom
|
|
|
42
|
|
|
2017
|
|
Shuttle
America
|
|
|
16
|
|
|
2019
|
|
|
(1) |
The
table does not include information regarding 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.
|
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 Airlines”) and Chautauqua for all periods
presented;
|
|
·
|
Shuttle
America for the year ended December 31, 2006 and from September 1
through
December 31, 2005;
|
|
·
|
ASA
for the year ended December 31, 2006 and from September 8 through
December
31, 2005. On September 7, 2005, we sold ASA to SkyWest, Inc. (“SkyWest”);
and
|
|
·
|
Freedom
Airlines, Inc. (“Freedom”) for the year ended December 31, 2006 and from
October 1 to December 31, 2005.
|
(in
millions, except for number of aircraft operated),
unaudited
|
|
|
2006
|
|
|
2005
|
|
ASMs
|
|
|
15,390
|
|
|
8,275
|
|
RPMs
|
|
|
11,931
|
|
|
5,961
|
|
Number
of aircraft operated, end of period
|
|
|
324
|
|
|
265
|
|
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 December 31, 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 (the “Put Right”)
are
$483
million and $367 million, respectively. The actual amount that we may be
required to pay in these circumstances may be materially different from these
estimates. If the Chautauqua or Shuttle America Put
Right is exercised, we must also pay to the exercising
carrier 10% interest (compounded monthly) on the equity the carrier
provided when it purchased the put aircraft. These equity
amounts for Chautaqua and Shuttle America total $56 million and $34 million,
respectively.
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 December 31, 2006 and
2005.
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. Lawsuits arising out of this accident have been
filed against our wholly owned subsidiary, Comair, on behalf of at least 36
of
the passengers, including a number of lawsuits that also name Delta as a
defendant. 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 four 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, one lawsuit has been filed in state court in Broward County,
Florida and two lawsuits have been filed in the U.S. District Court for the
District of Kansas. The federal court in New York has ordered the case filed
there to be transferred to the federal court in Kentucky. The Debtors’ motion is
currently pending in federal court in Florida to transfer the case filed in
Florida to the federal court in Kentucky. The Debtors are also seeking to
transfer the lawsuits filed in Kansas to the federal court in Kentucky. 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.”
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In
addition, Comair has filed an action in the U.S. 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, seeking to apportion potential
liability for damages arising from this accident among all responsible
parties.
During
the September 2006 quarter, we recorded a long term liability with a
corresponding long term receivable from our insurance carriers in other
noncurrent liabilities and assets, respectively, on our Consolidated Balance
Sheet relating to the Comair Flight 5191 accident. 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 commercial real estate leases. It is common in these
transactions for us, as the lessee, to agree to indemnify the lessor and the
lessor’s related 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 of those parties’ related
persons, 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.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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
December 31, 2006, we had a total of approximately 51,300 full-time equivalent
employees. Approximately 17% of these employees, including all of our pilots,
are represented by labor unions. For additional information related to our
collective bargaining agreements, see Note 1.
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 August 31, 2007. 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.
In
accordance with this agreement, on September 6, 2006, we sold to Aron, at then
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 jet fuel inventory that was in transit to these airports
as well as to the three major 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 airport, the Cincinnati airport
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. 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 jet fuel inventory that Aron is holding in
the
storage facilities that support our operations at the Atlanta and Cincinnati
airports and all jet fuel inventory that is in transit to these airports as
well
as to the three New York City area airports. At termination of the agreement,
Aron will return to us our rights to use the storage facilities in Atlanta
and
Cincinnati and our allocations in pipeline systems.
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 on our
termination of the contract without cause prior to its expiration date, no
obligation would exist unless such a termination occurs. We also cannot predict
the impact, if any, that our Chapter 11 proceedings might have on these
obligations.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note
9. 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 (see Note 2 for information about our accounting policy
for
income taxes). The following table shows significant components of our deferred
tax assets and liabilities at December 31, 2006 and 2005:
(in
millions)
|
|
2006
|
|
2005
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
2,921
|
|
$
|
3,246
|
|
Additional
minimum pension liability (see Note 10)
|
|
|
615
|
|
|
1,565
|
|
Postretirement
benefits
|
|
|
681
|
|
|
716
|
|
Other
employee benefits
|
|
|
2,898
|
|
|
992
|
|
AMT
credit carryforward
|
|
|
346
|
|
|
346
|
|
Rent
expense
|
|
|
1,215
|
|
|
398
|
|
Other
|
|
|
598
|
|
|
757
|
|
Valuation
allowance
|
|
|
(5,169
|
)
|
|
(3,954
|
)
|
Total
deferred tax assets
|
|
$
|
4,105
|
|
$
|
4,066
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
$
|
3,850
|
|
$
|
3,763
|
|
Other
|
|
|
259
|
|
|
336
|
|
Total
deferred tax liabilities
|
|
$
|
4,109
|
|
$
|
4,099
|
|
The
following table shows the current and noncurrent deferred tax (liabilities)
assets, recorded on our Consolidated Balance Sheets at December 31, 2006 and
2005:
(in
millions)
|
|
2006
|
|
2005
|
|
Current
deferred tax assets, net
|
|
$
|
402
|
|
$
|
99
|
|
Noncurrent
deferred tax liabilities, net
|
|
|
(406
|
)
|
|
(132
|
)
|
Total
deferred tax liabilities, net
|
|
$
|
(4
|
)
|
$
|
(33
|
)
|
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
December 31, 2006, we had (1) $346 million of federal alternative minimum tax
(“AMT”) credit carryforwards, which do not expire and (2) approximately $7.8
billion of federal and state pretax NOL carryforwards, substantially all of
which will not begin to expire until 2022. Our ability to utilize our AMT and
NOL carryforwards will be subject to significant limitation if, as a result
of
our Chapter 11 proceedings, we undergo an ownership change for purposes of
Section 382 of the Internal Revenue Code of 1986, as amended. For additional
information about the Bankruptcy Court’s order designed to assist us in
preserving our NOLs, see Note 1.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Valuation
Allowance
SFAS
109
requires us to periodically assess whether it is more likely than not that
we
will generate sufficient taxable income to realize our deferred income tax
assets. In making this determination, we consider all available positive and
negative evidence and make certain assumptions. We consider, among other things,
our deferred tax liabilities, the overall business environment, our historical
earnings and losses, our industry’s historically cyclical periods of earnings
and losses and our outlook for future years.
For
the
year ended December 31, 2006, we recorded an income tax benefit totaling $765
million. This amount primarily reflects adjustments to our valuation allowance
from the reversal of accrued pension liabilities associated with the
derecognition of previously recorded Pilot Plan and pilot non-qualified plan
obligations upon each plan’s termination. For additional information regarding
the termination of the Pilot Plan, see Note 10.
In
the
June 2004 quarter, we determined that it was unclear as to the timing of when
we
will generate sufficient taxable income to realize our deferred tax assets.
Accordingly, during the year ended December 31, 2004, we recorded an additional
valuation allowance against our deferred income tax assets, which resulted
in a
$1.2 billion income tax provision on our 2004 Consolidated Statement of
Operations. Until we determine it is more likely than not that we will generate
sufficient taxable income to realize our deferred income tax assets, income
tax
benefits associated with current period losses will be fully
reserved.
Our
income tax benefit (provision) for the years ended December 31, 2006, 2005,
and
2004 consisted of:
(in
millions)
|
|
2006
|
|
2005
|
|
2004
|
|
Current
tax benefit (provision)
|
|
$
|
17
|
|
$
|
(9
|
)
|
$
|
—
|
|
Deferred
tax benefit (exclusive of the other components listed
below)
|
|
|
2,364
|
|
|
1,464
|
|
|
1,139
|
|
Increase
in valuation allowance
|
|
|
(1,616
|
)
|
|
(1,414
|
)
|
|
(2,345
|
)
|
Income
tax benefit (provision)
|
|
$
|
765
|
|
$
|
41
|
|
$
|
(1,206
|
)
|
The
following table presents the principal reasons for the difference between the
effective tax rate and the United States federal statutory income tax rate
for
2006, 2005, and 2004:
|
|
2006
|
|
2005
|
|
2004
|
|
U.S.
federal statutory income tax rate
|
|
|
(35.0
|
)%
|
|
(35.0
|
)%
|
|
(35.0
|
)%
|
State
taxes, net of federal income tax effect
|
|
|
(2.5
|
)
|
|
(3.3
|
)
|
|
(1.5
|
)
|
Goodwill
impairment
|
|
|
—
|
|
|
—
|
|
|
7.5
|
|
Increase
in valuation allowance
|
|
|
23.2
|
|
|
36.6
|
|
|
58.8
|
|
Other,
net
|
|
|
3.3
|
|
|
0.6
|
|
|
0.4
|
|
Effective
income tax rate
|
|
|
(11.0
|
)%
|
|
(1.1
|
)%
|
|
30.2
|
%
|
Note
10. Employee Benefit Plans
We
sponsor qualified defined benefit and defined contribution pension plans,
healthcare plans, and disability and survivorship plans for eligible employees
and retirees, and their eligible family members. We sponsored the Pilot Plan
and
non-qualified defined benefit pension plans for our pilots prior to the
termination of these plans as discussed below.
We
also
sponsor non-qualified defined benefit pension plans for eligible non-pilot
employees. Almost all pension benefits under these plans accrued prior to our
Chapter 11 filing and, because we did not seek authority from the Bankruptcy
Court to pay those pre-petition benefits, we are precluded from doing so during
the Chapter 11 proceedings. We intend to reject these plans in our Plan of
Reorganization. As a result, no further benefits will be paid from these
non-qualified plans.
We
regularly evaluate ways to better manage our employee benefits and control
costs. We reserve the right to modify or terminate our benefit plans as to
all
participants and beneficiaries at any time, except as restricted by the Internal
Revenue Code, the Employee Retirement Income Security Act (“ERISA”) and our
collective bargaining agreements. Any changes to the plans or assumptions used
to estimate future benefits could have a significant effect on the amount of
the
reported obligation and future annual expense.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Significant
Events in 2006
ALPA
Agreement
In
June
2006, we reached a comprehensive agreement with ALPA reducing Delta’s pilot
labor costs. The agreement, among other things:
|
·
|
amended
our postretirement healthcare plan for pilots (1) to increase healthcare
premiums for pilots who retire after June 1, 2006 and their survivors
prior to age 65 and (2) to provide that pilots who retire after June
1,
2006 are not eligible for our subsidized post-age 65 healthcare coverage.
This amendment was accounted for as a negative plan amendment under
SFAS
No. 106, “Employer’s Accounting for Postretirement Benefits Other than
Pensions” (“SFAS 106”). It reduced the accumulated plan benefit obligation
(“APBO”) for this plan by $63
million.
|
|
·
|
amended
our disability and survivorship plan for pilots (“Pilot D&S Plan”) to
replace survivor benefits and basic life insurance coverage with
term life
insurance for pilots who retire on or after January 1, 2008. This
amendment reduced the APBO for the Pilot D&S Plan by $65
million.
|
|
·
|
provided
that ALPA would not oppose the termination of the Pilot Plan and
that the
non-qualified defined benefit pension plans for pilots would be terminated
if the Pilot Plan was terminated. The Pilot Plan and these non-qualified
plans were terminated effective September 2,
2006.
|
|
·
|
changed
our contribution to the Delta Pilots Defined Contribution Plan to
9% of
covered pay for all pilots, effective upon termination of the Pilot
Plan.
Prior to this change, pilots received a contribution between zero
and 23%
of covered pay, based on the pilot’s age and years of service on January
1, 2005.
|
For
additional information regarding our comprehensive agreement with ALPA, see
“Collective Bargaining Agreements” in Note 1.
1114
Committee Agreements
In
October 2006, we and the two separate retiree committees appointed under Section
1114 of the Bankruptcy Code reached agreements (“1114 Agreements”) which
modified our postretirement benefit plan obligations by, among other things,
increasing the current retirees’ share of healthcare costs. The 1114 Agreements
also eliminate Delta’s current post-age 65 coverage for non-pilot retirees, but
provide a subsidy for certain non-pilot retirees that can be applied to
alternative coverage to be made available through the 1114 non-pilot retiree
committee. The 1114 Agreements provided retirees an allowed general, unsecured
pre-petition claim of $539 million, which was recorded in reorganization items,
net with a corresponding offset in liabilities subject to compromise. The
amendment of our postretirement plans reduces participant benefits and is
accounted for as a negative plan amendment under SFAS 106, reducing the APBO
for
these plans by $796 million. For additional information regarding these retiree
committees, see “Payment of Insurance Benefits to Retired Employees” in Note
1.
Termination
of Pilot Plan and PBGC Settlement Agreement
In
June
2006, we sent to participants and beneficiaries a Notice of Intent to Terminate
the Pilot Plan effective September 2, 2006. In September, the Bankruptcy Court
found that we met the financial requirements for a distress termination of
the
Pilot Plan and, in December 2006, we reached a comprehensive settlement
agreement (the “PBGC Settlement Agreement”) with the PBGC providing for such
termination. In accordance with the PBGC Settlement Agreement, the PBGC became
trustee of the Pilot Plan effective December 31, 2006, and the effective date
of
the termination of the Pilot Plan was deemed to be September 2, 2006.
Pursuant
to the PBGC Settlement Agreement, the PBGC received an allowed general,
unsecured pre-petition claim against each of the Debtors in the amount of $2.2
billion, but recoverable solely against Delta (“PBGC Claim”).
The PBGC Settlement Agreement also provided for the distribution to the PBGC
of
senior unsecured notes (the “PBGC Notes”) in aggregate principal amount of $225
million, a term of up to 15 years and an annual interest rate calculated to
ensure that the notes trade at par on the issuance date. We may replace all
or a
portion of the principal amount of the PBGC Notes with cash prior to the
issuance, which we are required to do under certain circumstances. We also
agreed to enter into a registration rights agreement in connection with the
PBGC
Settlement Agreement.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Some
of
the other significant terms of the PBGC Settlement Agreement include:
|
·
|
as
of the date we emerge from Chapter 11, the PBGC has agreed to irrevocably
waive its rights to restore the Pilot Plan in full or in part;
|
|
·
|
we
have agreed not to establish any new qualified defined benefit plans
for
pilots for a period of five years after we emerge from Chapter 11;
|
|
·
|
the
parties agree to take steps to protect our net operating loss carryforward
tax benefits;
|
|
·
|
absent
extraordinary unanticipated circumstances we will (a) elect the
alternative funding schedule under section 402(a)(1) of the pension
reform
legislation (“Pension Protection Act”) with respect to the qualified
defined benefit pension plan for non-pilot employees (“Non-pilot Plan”);
(b) not seek a distress termination of the Non-pilot Plan; and (c)
provide
in our reorganization plan that we shall continue the Non-pilot Plan;
and
|
|
·
|
we
confirmed our previously stated intention reached independently of
the
PBGC Settlement Agreement that we would make a contribution to the
Non-Pilot Plan of not less than $50 million minus any amounts contributed
to such plan subsequent to our election of Airline Relief under the
Pension Protection Act and prior to our emergence from Chapter 11.
|
Consistent
with the ALPA Agreement, we also terminated the pilot non-qualified plans as
of
September 2, 2006. As a result of the termination of the non-qualified plans,
retired pilots who were receiving non-qualified benefits received an $801
million allowed general, unsecured pre-petition claim and a $9 million
administrative claim. As a result of the termination of both the Pilot Plan
and
the non-qualified plans, we recorded a settlement gain of $1.3 billion in
reorganization items, net, derecognizing the accrued pension liability and
reversed the related $2.2 billion additional minimum liability to other
comprehensive loss. Additionally, the $2.2 billion claim for the PBGC and the
$810 million in total claims for the retired pilots were recorded in
reorganization items, net with a corresponding offset in liabilities subject
to
compromise. The $3.5 billion reversal of the pension liability and the recording
of the $3.0 billion in claims resulted in a net reduction of $490 million in
liabilities subject to compromise.
Claims
associated with changes made in the Chapter 11 reorganization and obligations
related to our defined benefit plans, other postretirement benefit plans, and
certain postemployment benefits have been classified as liabilities subject
to
compromise, as these obligations may be impacted by our Chapter 11 proceedings.
For additional information, see “Liabilities Subject to Compromise” in Note
1.
Adoption
of SFAS 158
On
December 31, 2006, we adopted the recognition and disclosure provisions of
SFAS
158. SFAS 158 requires that we recognize the funded status of our defined
benefit pension plans, other postretirement plans, and certain of our
postemployment plans on our Consolidated Balance Sheet as of December 31, 2006,
with a corresponding adjustment to accumulated other comprehensive loss, net
of
tax. The adjustment to accumulated other comprehensive loss at adoption
represents the net unrecognized actuarial losses and unrecognized prior service
costs and credits, which were previously netted against the plans’ funded status
in our Consolidated Balance Sheets pursuant to the provisions of SFAS No. 87,
“Employer’s Accounting for Pension” (“SFAS 87”) and SFAS 106. These amounts will
be subsequently recognized as net periodic (benefit) cost pursuant to our
accounting policy for amortizing such amounts. Actuarial gains and losses that
arise in subsequent periods and are not recognized as net periodic (benefit)
cost in the same periods will be recognized as a component of other
comprehensive loss. These gains and losses will be subsequently recognized
as a
component of net periodic (benefit) cost on the same basis as the amounts
recognized in accumulated other comprehensive loss at adoption of SFAS
158.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The
incremental effects of adopting SFAS 158 on our Consolidated Balance Sheet
at
December 31, 2006 are presented in the following table.
(in
millions)
|
|
Pre-SFAS
158
|
|
Effect
of adopting
SFAS
158
|
|
As
reported at
December
31, 2006
|
|
Other
noncurrent assets
|
|
$
|
1,196
|
|
$
|
(248
|
)
|
$
|
948
|
|
Liabilities
subject to compromise
|
|
|
20,502
|
|
|
(685
|
)
|
|
19,817
|
|
Accumulated
other comprehensive loss
|
|
|
(955
|
)
|
|
437
|
|
|
(518
|
)
|
The
requirement to measure the funded status of a plan as of the date of its
year-end is not effective for the year ended December 31, 2006. We continue
to
measure our benefit plans with a September 30 measurement date.
Defined
Benefit Pension and Other Postretirement and Postemployment Benefit
Plans
Defined
Benefit Pension Plans.
Prior to
the events described above, we sponsored both funded and nonfunded
noncontributory defined benefit pension plans that covered substantially all
of
our employees. Currently, we sponsor the Non-pilot Plan and a separate frozen
qualified defined benefit plan for certain pilots formerly employed by Western
Air Lines (“Western Plan”). Effective December 31, 2005, future pay and service
accruals under the Non-pilot Plan were frozen. The Non-pilot Plan provides
a
retirement benefit based on a combination of a final average earnings formula
and a cash balance formula, subject to the terms of that plan.
Under
our settlement agreement with the PBGC, we agreed to initiate, prior to our
emergence from Chapter 11, a standard termination of the Western Plan. Assuming
current funding rules and current plan design, we estimate that the funding
requirements under our Non-pilot Plan will be approximately $100 million in
2007.
Postretirement
Healthcare Plans.
We also
sponsor healthcare plans that provide benefits to substantially all Delta
retirees and their eligible dependents who are under age 65. Benefits under
these plans are funded from our current assets and are subject to co-payments,
deductibles and other limits as described in the plans. Non-pilot employees
are
not eligible for company provided post-retirement healthcare coverage after
age
65, except for those retirees eligible for a subsidy to be applied to
alternative coverage available through the 1114 non-pilot retiree committee.
Pilots who retire after June 1, 2006 are not eligible for subsidized post-age
65
healthcare coverage although they may purchase such coverage at full
cost.
Postemployment
Plans. We
provide certain other welfare benefits to eligible former or inactive employees
after employment, but before retirement, primarily as part of the disability
and
survivorship plans. These disability and survivorship plans provide benefits
to
substantially all Delta employees as a result of a participant’s death or
disability. As discussed above, survivor benefits have been replaced with term
life insurance coverage for pilots retiring on or after January 1, 2008.
Additionally, survivor benefits will not be paid for non-pilot employees who
die
or retire after July 1, 2010.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Obligations
(measured at September 30):
|
|
Pension
Benefit
|
|
Other
Postretirement
Benefit
|
|
Other
Postemployment
Benefit
|
|
(in
millions)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Benefit
obligation at beginning of year
|
|
$
|
12,893
|
|
$
|
12,140
|
|
$
|
1,793
|
|
$
|
1,835
|
|
$
|
2,271
|
|
$
|
2,297
|
|
Service
cost
|
|
|
34
|
|
|
155
|
|
|
17
|
|
|
17
|
|
|
45
|
|
|
64
|
|
Interest
cost
|
|
|
712
|
|
|
715
|
|
|
97
|
|
|
114
|
|
|
125
|
|
|
136
|
|
Actuarial
(gain) loss
|
|
|
(71
|
)
|
|
1,262
|
|
|
289
|
|
|
33
|
|
|
(10
|
)
|
|
(106
|
)
|
Benefits
paid, including lump sums and annuities
|
|
|
(844
|
)
|
|
(1,699
|
)
|
|
(214
|
)
|
|
(187
|
)
|
|
(128
|
)
|
|
(120
|
)
|
Participant
contributions
|
|
|
—
|
|
|
—
|
|
|
38
|
|
|
32
|
|
|
—
|
|
|
—
|
|
Settlement
gain on termination of the Pilot Plan
|
|
|
(5,169
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Curtailment
losses
|
|
|
—
|
|
|
320
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Plan
amendments
|
|
|
—
|
|
|
—
|
|
|
(859
|
)
|
|
(51
|
)
|
|
(65
|
)
|
|
—
|
|
Benefit
obligation at end of year
|
|
$
|
7,555
|
|
$
|
12,893
|
|
$
|
1,161
|
|
$
|
1,793
|
|
$
|
2,238
|
|
$
|
2,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of year
|
|
$
|
6,521
|
|
$
|
6,842
|
|
|
|
|
|
|
|
$
|
1,863
|
|
$
|
1,829
|
|
Actual
gain on plan assets
|
|
|
642
|
|
|
988
|
|
|
|
|
|
|
|
|
133
|
|
|
210
|
|
Employer
contributions
|
|
|
5
|
|
|
390
|
|
|
|
|
|
|
|
|
—
|
|
|
—
|
|
Benefits
paid, including lump sums and annuities
|
|
|
(844
|
)
|
|
(1,699
|
)
|
|
|
|
|
|
|
|
(215
|
)
|
|
(176
|
)
|
Transfer
of Pilot Plan assets to PBGC
|
|
|
(1,734
|
)
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
|
—
|
|
Fair
value of plan assets at end of year
|
|
$
|
4,590
|
|
$
|
6,521
|
|
|
|
|
|
|
|
$
|
1,781
|
|
$
|
1,863
|
|
In
2006,
the $5.2 billion decrease in the pension benefit obligation and $1.7 billion
decrease in the fair value of plan assets relate to the termination of the
Pilot
Plan and the related non-qualified pilot plans. The $859 million decrease in
other postretirement benefit obligation and the $65 million decrease in other
postemployment benefit obligation are related to plan amendments resulting
from
the 1114 Agreements and the ALPA agreement.
In
2005,
the $1.3 billion increase in our pension benefit obligation due to actuarial
losses primarily relates to (1) changes in our discount rate and participant
life expectancy assumptions used to measure the obligation and (2) the large
number of early pilot retirements and related lump sum distributions from plan
assets. The $320 million increase due to curtailment losses relates to (1)
the
combined impact on the Non-pilot Plan of an early retirement window offered
to
certain non-pilot employees in late 2004 and other components of our
transformation plan announced in 2004 and (2) the amendment of the Pilot Plan
to
freeze service accruals effective December 31, 2004. The $51 million decrease
in
the other postretirement benefit obligation due to plan amendments relates
to
the elimination of company subsidized post-age 65 healthcare coverage for pilots
hired after November 11, 2004.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Funded
Status (measured at September 30):
|
|
Pension
Benefit
|
|
Other
Postretirement
Benefit
|
|
Other
Postemployment
Benefit
|
|
(in
millions)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Funded
status
|
|
$
|
(2,965
|
)
|
$
|
(6,372
|
)
|
$
|
(1,161
|
)
|
$
|
(1,793
|
)
|
$
|
(457
|
)
|
$
|
(408
|
)
|
Unrecognized
net actuarial loss
|
|
|
—
|
|
|
4,286
|
|
|
—
|
|
|
368
|
|
|
—
|
|
|
275
|
|
Unrecognized
prior service cost (credit)
|
|
|
—
|
|
|
7
|
|
|
—
|
|
|
(496
|
)
|
|
—
|
|
|
—
|
|
Contributions,
net made between the measurement date and year-end
|
|
|
—
|
|
|
—
|
|
|
45
|
|
|
46
|
|
|
(36
|
)
|
|
(12
|
)
|
Settlement/curtailment
charge recognized between the measurement date and
year-end
|
|
|
—
|
|
|
(129
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net
amount recognized on our Consolidated Balance Sheets
|
|
$
|
(2,965
|
)
|
$
|
(2,208
|
)
|
$
|
(1,116
|
)
|
$
|
(1,875
|
)
|
$
|
(493
|
)
|
$
|
(145
|
)
|
The
settlement charge of $129 million related primarily to the Pilot Plan and is
discussed in more detail below as a component of net periodic cost.
Amounts
recognized on our Consolidated Balance Sheets consist of:
|
|
Pension
Benefit
|
|
Other
Postretirement
Benefit
|
|
Other
Postemployment
Benefit
|
|
(in
millions)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Prepaid
benefit cost
|
|
$
|
—
|
|
$
|
8
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
302
|
|
Accrued
benefit cost
|
|
|
—
|
|
|
(2,216
|
)
|
|
—
|
|
|
(1,875
|
)
|
|
—
|
|
|
(447
|
)
|
Net
prepaid/(accrued) benefit cost
|
|
|
—
|
|
|
(2,208
|
)
|
|
—
|
|
|
(1,875
|
)
|
|
—
|
|
|
(145
|
)
|
Intangible
assets
|
|
|
—
|
|
|
7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Current
liability
|
|
|
(3
|
)
|
|
—
|
|
|
(106
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Noncurrent
liability
|
|
|
(2,962
|
)
|
|
—
|
|
|
(1,010
|
)
|
|
—
|
|
|
(493
|
)
|
|
—
|
|
Additional
minimum liability
|
|
|
—
|
|
|
(4,115
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Accumulated
other comprehensive loss, pretax
|
|
|
—
|
|
|
4,108
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net
amount recognized on our Consolidated Balance
Sheets
|
|
$
|
(2,965
|
)
|
$
|
(2,208
|
)
|
$
|
(1,116
|
)
|
$
|
(1,875
|
)
|
$
|
(493
|
)
|
$
|
(145
|
)
|
Both
the
current and noncurrent portions of our pension and other postretirement and
postemployment benefit obligations are included in liabilities subject to
compromise on our Consolidated Balance Sheets.
At
December 31, 2006 and 2005, we recorded adjustments to intangible assets and
accumulated other comprehensive loss (see Note 13) to recognize our additional
minimum pension liability in accordance with SFAS 87, prior to the adoption
of
SFAS 158.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Amounts
recognized in accumulated other comprehensive loss consist of:
|
|
Pension
Benefit
|
|
Other
Postretirement
Benefit
|
|
Other
Postemployment
Benefit
|
|
(in
millions)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Net
actuarial loss
|
|
$
|
1,583
|
|
$
|
—
|
|
$
|
645
|
|
$
|
—
|
|
$
|
287
|
|
$
|
—
|
|
Prior
service cost (credit)
|
|
|
6
|
|
|
—
|
|
|
(1,311
|
)
|
|
—
|
|
|
(63
|
)
|
|
—
|
|
Additional
minimum liability
|
|
|
—
|
|
|
4,108
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Recognized
in accumulated other comprehensive loss, pretax
|
|
$
|
1,589
|
|
$
|
4,108
|
|
$
|
(666
|
)
|
$
|
—
|
|
$
|
224
|
|
$
|
—
|
|
Estimated
amounts that will be amortized from accumulated other comprehensive loss, pre
tax into net periodic cost (benefit) in 2007 (measured at September 30) are
as
follows:
(in
millions)
|
|
Pension
Benefit
|
|
Other
Postretirement
Benefit
|
|
Other
Postemployment
Benefit
|
|
Net
actuarial loss
|
|
$
|
54
|
|
$
|
30
|
|
$
|
15
|
|
Prior
service cost (credit)
|
|
|
1
|
|
|
(98
|
)
|
|
(6
|
)
|
Amount
to be amortized into net periodic cost (benefit)
|
|
$
|
55
|
|
$
|
(68
|
)
|
$
|
9
|
|
The
accumulated benefit obligation for all our defined benefit pension plans was
$7.6 billion and $12.8 billion at December 31, 2006 and 2005, respectively.
The
following table contains information about our pension plans with an accumulated
benefit obligation in excess of plan assets (measured at September
30):
(in
millions)
|
|
2006
|
|
2005
|
|
Projected
benefit obligation
|
|
$
|
7,555
|
|
$
|
12,893
|
|
Accumulated
benefit obligation
|
|
|
7,555
|
|
|
12,844
|
|
Fair
value of plan assets
|
|
|
4,590
|
|
|
6,521
|
|
Net
periodic (benefit) cost for the years ended December 31, 2006, 2005 and 2004
included the following components:
|
|
Pension
Benefit
|
|
Other
Postretirement
Benefit
|
|
Other
Postemployment
Benefit
|
|
(in
millions)
|
|
2006
|
|
2005
|
|
2004
|
|
2006
|
|
2005
|
|
2004
|
|
2006
|
|
2005
|
|
2004
|
|
Service
cost
|
|
$
|
34
|
|
$
|
155
|
|
$
|
233
|
|
$
|
17
|
|
$
|
17
|
|
$
|
28
|
|
$
|
45
|
|
$
|
64
|
|
$
|
86
|
|
Interest
cost
|
|
|
712
|
|
|
715
|
|
|
757
|
|
|
97
|
|
|
114
|
|
|
121
|
|
|
125
|
|
|
136
|
|
|
128
|
|
Expected
return on plan assets
|
|
|
(520
|
)
|
|
(598
|
)
|
|
(657
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(163
|
)
|
|
(165
|
)
|
|
(154
|
)
|
Amortization
of prior service cost (benefit)
|
|
|
1
|
|
|
3
|
|
|
15
|
|
|
(44
|
)
|
|
(41
|
)
|
|
(79
|
)
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
Recognized
net actuarial loss
|
|
|
226
|
|
|
179
|
|
|
194
|
|
|
8
|
|
|
13
|
|
|
6
|
|
|
9
|
|
|
20
|
|
|
29
|
|
Amortization
of net transition obligation
|
|
|
—
|
|
|
6
|
|
|
7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Settlement
(gain) charge, net
|
|
|
(1,282
|
)
|
|
388
|
|
|
257
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Curtailment
loss (gain)
|
|
|
—
|
|
|
434
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(527
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Special
termination benefits
|
|
|
—
|
|
|
—
|
|
|
10
|
|
|
—
|
|
|
—
|
|
|
142
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net
periodic (benefit) cost
|
|
$
|
(829
|
)
|
$
|
1,282
|
|
$
|
816
|
|
$
|
78
|
|
$
|
103
|
|
$
|
(309
|
)
|
$
|
14
|
|
$
|
55
|
|
$
|
89
|
|
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
During
2006, we recorded a settlement gain of $1.3 billion related to the termination
of both the Pilot Plan and the non-qualified plans in reorganization items,
net,
as discussed above.
During
2005 and 2004, we recorded settlement charges totaling $388 million and $257
million, respectively, on our Consolidated Statement of Operations. These
charges primarily related to the Pilot Plan and resulted from lump sum
distributions to pilots who retired.
During
2005, we recorded a net curtailment loss of $434 million on our Consolidated
Statement of Operations. The $434 million net curtailment loss consists of
(1) a
$13 million curtailment gain recorded in the December 2005 quarter related
to
the freeze of benefit accruals effective December 31, 2005 for the Non-pilot
Plan and (2) a curtailment loss of $447 million related to the impact of the
reduction of non-pilot jobs announced in November 2004 and the freeze of service
accruals under the Pilot Plan effective December 31, 2004. Additionally, in
the
December 2004 quarter, we recorded a $527 million curtailment gain related
to
the elimination of subsidized retiree medical benefits for eligible employees
who retire after January 1, 2006.
Assumptions
We
used
the following actuarial assumptions to determine our benefit obligations at
September 30, 2006 and 2005 and our net periodic (benefit) cost for the years
presented, as measured at September 30:
|
|
|
|
|
|
|
|
Benefit
Obligations (1)
|
|
|
|
|
|
2006
|
|
|
2005
|
|
Weighted
average discount rate
|
|
|
|
|
|
5.88
|
%
|
|
5.69
|
%
|
Rate
of increase in future compensation levels
|
|
|
|
|
|
0.36
|
%
|
|
0.72
|
%
|
Assumed
healthcare cost trend rate(2)
|
|
|
|
|
|
8.50
|
%
|
|
9.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Net
Periodic Benefit Cost (3)
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Weighted
average discount rate — pension benefit
|
|
|
5.67
|
%
|
|
5.81
|
%
|
|
6.09
|
%
|
Weighted
average discount rate — other postretirement benefit
|
|
|
5.65
|
%
|
|
6.10
|
%
|
|
6.05
|
%
|
Weighted
average discount rate — other postemployment benefit
|
|
|
5.72
|
%
|
|
6.10
|
%
|
|
6.13
|
%
|
Rate
of increase (decrease) in future compensation levels
|
|
|
0.72
|
%
|
|
(1.28
|
)%
|
|
1.89
|
%
|
Expected
long-term rate of return on plan assets
|
|
|
9.00
|
%
|
|
9.00
|
%
|
|
9.00
|
%
|
Assumed
healthcare cost trend rate(2)
|
|
|
9.50
|
%
|
|
9.50
|
%
|
|
9.00
|
%
|
|
(1) |
Our
2006 and 2005 benefit obligations are measured using the RP 2000
combined
healthy mortality table projected to
2006.
|
|
(2) |
The
assumed healthcare cost trend rate is assumed to decline gradually
to
5.00% by 2010 for health plan costs and remain level
thereafter.
|
|
(3) |
Our
2006, 2005, and 2004 assumptions reflect various remeasurements of
certain
portions of our obligations and represent the weighted average of
the
assumptions used for each measurement date.
|
The
expected long-term rate of return on our plan assets was based on plan-specific
investment studies performed by outside consultants who used historical market
return and volatility data with forward looking estimates based on existing
financial market conditions and forecasts. Modest excess return expectations
versus some market indices were incorporated into the return projections based
on the actively managed structure of our investment program and its record
of
achieving such returns historically.
Assumed
healthcare cost trend rates have an effect on the amounts reported for the
other
postretirement benefit plans. A 1% change in the healthcare cost trend rate
used
in measuring the APBO for these plans at September 30, 2006, would have the
following effects:
(in
millions)
|
|
1%
Increase
|
|
1%
Decrease
|
|
Increase
(decrease) in total service and interest cost
|
|
$
|
9
|
|
$
|
(7
|
)
|
Increase
(decrease) in the APBO
|
|
|
28
|
|
|
(48
|
)
|
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Pension
Plan Assets
The
weighted-average asset allocation for our pension plans at September 30, 2006
and 2005 is as follows:
|
|
2006
|
|
2005
|
|
U.S.
equity securities
|
|
|
34%
|
|
|
36%
|
|
Non-U.S.
equity securities
|
|
|
14%
|
|
|
13%
|
|
High
quality bonds
|
|
|
18%
|
|
|
19%
|
|
Convertible
and high yield bonds
|
|
|
8%
|
|
|
8%
|
|
Private
equity
|
|
|
17%
|
|
|
15%
|
|
Real
estate
|
|
|
9%
|
|
|
9%
|
|
Total
|
|
|
100%
|
|
|
100%
|
|
The
investment strategy for pension plan assets is to utilize a diversified mix
of
global public and private equity portfolios, public and private fixed income
portfolios, and private real estate and natural resource investments to earn
a
long-term investment return that meets or exceeds a 9% annualized return target.
The overall asset mix of the portfolio is more heavily weighted in equity-like
investments, including portions of the bond portfolio, which consist of
convertible and high yield securities. Active management strategies are utilized
throughout the program in an effort to realize investment returns in excess
of
market indices. Also, option and currency overlay strategies are used in an
effort to generate modest amounts of additional income. A bond duration
extension program utilizing fixed income derivatives is employed in an effort
to
better align the market value movements of a portion of the pension plan assets
to the related pension plan liabilities.
Target
investment allocations for the pension plan assets are as
follows:
|
|
U.S.
equity securities
|
27-41%
|
Non-U.S.
equity securities
|
12-18%
|
High
quality bonds
|
15-21%
|
Convertible
and high yield bonds
|
5-11%
|
Private
equity
|
15%
|
Real
estate
|
10%
|
Benefit
Payments
Benefit
payments in the table below are based on the same assumptions used to measure
the related benefit obligations and are paid from both funded benefit plan
trusts and current assets. Actual benefit payments may vary significantly from
these estimates. As the result of the Chapter 11 filing, benefits earned under
our non-qualified defined benefit plans will not be paid, and are not included
in the table below. Benefits earned under our qualified pension plans and other
postemployment benefit plans are expected to be paid from funded benefit plan
trusts, while our other postretirement benefits are funded from current assets.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The
following table summarizes, as of December 31, 2006 the benefit payments, which
reflect expected service, as appropriate, that are scheduled to be paid in
the
following years ending December 31:
(in
millions)
|
|
|
|
Other
Postretirement
Benefits
|
|
Other
Postemployment
Benefits
|
|
2007
|
|
$
|
472
|
|
$
|
106
|
|
$
|
140
|
|
2008
|
|
|
462
|
|
|
109
|
|
|
146
|
|
2009
|
|
|
451
|
|
|
111
|
|
|
153
|
|
2010
|
|
|
444
|
|
|
107
|
|
|
160
|
|
2011
|
|
|
439
|
|
|
102
|
|
|
166
|
|
2012
— 2016
|
|
|
2,240
|
|
|
408
|
|
|
925
|
|
Total
|
|
$
|
4,508
|
|
$
|
943
|
|
$
|
1,690
|
|
Other
Plans
We
also
sponsor defined benefit pension plans for eligible Delta employees in certain
foreign countries. These plans did not have a material impact on our
Consolidated Financial Statements in any period presented.
Defined
Contribution Pension Plans
Delta
Family-Care Savings Plan (“Savings Plan”)
Eligible
employees may contribute a portion of their covered pay to the Savings Plan.
Generally, we match 50% of non-pilot employee contributions with a maximum
employer contribution of 2% of a participant’s covered pay. In 2006 and 2005, we
provided all eligible Delta pilots with an employer contribution of 2% of their
covered pay. In 2004, the employer contribution for eligible Delta pilots was
3%
of their covered pay. Prior to the Petition Date, we generally made our
contributions for non-pilots and pilots by allocating Series B ESOP Convertible
Preferred Stock (“ESOP Preferred Stock”), common stock or cash to the Savings
Plan. Effective on the Petition Date, we began making all company contributions
to the Savings Plan in cash. Our contributions, which are recorded as salaries
and related costs on our Consolidated Statements of Operations, totaled $44
million, $56 million, and $85 million for the years ended December 31, 2006,
2005 and 2004, respectively.
During
the March 2006 quarter, all remaining unallocated shares of ESOP Preferred
Stock
were allocated to participants in the Savings Plan and converted to common
stock. All of the common stock in the Savings Plan was then sold by the Plan’s
trustee. For additional information on our ESOP Preferred Stock and Common
Stock, see Note 12.
Pilot
Defined Contribution Plan
We
established a defined contribution plan for Delta pilots effective January
1,
2005. During the year ended December 31, 2006 and 2005, we recognized expense
of
$71 million and $83 million, respectively, for this plan. Effective with the
termination of the Pilot Plan on September 2, 2006, eligible pilots received
a
contribution of 9% of covered pay.
Delta
Pilots Money Purchase Pension Plan (“MPPP”)
Effective
June 30, 2006, the MPPP was terminated and the majority of assets were
distributed to the participants. Through December 31, 2004, we contributed
5% of
covered pay to the MPPP for each eligible Delta pilot. During the year ended
December 31, 2004, we recognized expense of $65 million for this plan.
Note
11. Sale of ASA
On
September 7, 2005, we sold ASA, our wholly owned subsidiary, to SkyWest for
a
purchase price of $425 million. In conjunction with this transaction, we amended
our contract carrier agreements with ASA and SkyWest Airlines, a wholly owned
subsidiary of SkyWest, under which those regional airlines serve as Delta
Connection carriers. The sale of ASA resulted in an immaterial gain that is
being amortized over the life of our contract carrier agreement with ASA. For
additional information on our contract carrier agreements with ASA and SkyWest
Airlines, see Note 8.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Our
sale
of ASA included the following major classes of assets and
liabilities:
(in
millions)
|
|
September
7,
2005
|
Assets:
|
|
|
|
|
Current
assets
|
|
$
|
153
|
|
Flight
equipment, net
|
|
|
1,555
|
|
Other
property and equipment, net
|
|
|
61
|
|
Other
assets
|
|
|
33
|
|
Total
assets
|
|
$
|
1,802
|
|
Liabilities:
|
|
|
|
|
Current
maturities of long-term debt
|
|
$
|
222
|
|
Other
current liabilities
|
|
|
116
|
|
Long-term
debt
|
|
|
1,002
|
|
Other
noncurrent liabilities
|
|
|
8
|
|
Total
liabilities
|
|
$
|
1,348
|
|
After
the
sale of ASA to SkyWest, the revenues and expenses related to our contract
carrier agreement with ASA are reported as regional affiliates passenger
revenues and contract carrier agreements, 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.
Note
12. Common and Preferred Stock
Stock
Option and Other Stock-Based Award Plans
During
the year ended December 31, 2005, we distributed from treasury 38 million shares
of our common stock for redemptions of ESOP Preferred Stock under the Savings
Plan. We distributed these shares of common stock from treasury at an average
price that is lower than the average price we paid to purchase these shares.
As
a result, our Consolidated Balance Sheet at December 31, 2005 reflects a $1.8
billion decrease in treasury stock at cost, and a corresponding decrease in
additional paid-in-capital.
Prior
to
the Petition Date, we adopted certain plans which provide for the issuance
of
common stock in connection with the exercise of stock options and for other
stock-based awards. Effective March 31, 2006 the Bankruptcy Court granted our
motion to reject substantially all of our then outstanding stock options. For
additional information related to stock-based compensation, see Note 2.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The
following table summarizes all stock option activity for the years ended
December 31, 2006, 2005, and 2004:
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
Shares
(000)
|
|
Weighted
Average
Exercise
Price
|
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding
at the beginning of the year
|
|
|
92,401
|
|
$
|
16
|
|
|
105,933
|
|
$
|
15
|
|
|
37,893
|
|
$
|
31
|
|
Granted
|
|
|
—
|
|
|
—
|
|
|
1,939
|
|
|
5
|
|
|
70,763
|
|
|
6
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
11
|
|
Forfeited
|
|
|
—
|
|
|
—
|
|
|
(15,471
|
)
|
|
8
|
|
|
(2,720
|
)
|
|
38
|
|
Rejected
|
|
|
(92,086
|
)
|
|
16
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Outstanding
at the end of the year
|
|
|
315
|
|
$
|
16
|
|
|
92,401
|
|
$
|
16
|
|
|
105,933
|
|
$
|
15
|
|
Exercisable
at the end of the year
|
|
|
315
|
|
$
|
16
|
|
|
53,944
|
|
$
|
22
|
|
|
33,337
|
|
$
|
33
|
|
ESOP
Preferred Stock
In
December 2005, we amended the Savings Plan to give eligible participants the
opportunity to receive an in-service distribution of the ESOP Preferred Stock
and common stock in their ESOP accounts in the Savings Plan. Under this
amendment, eligible participants could make an election between December 19,
2005 and January 18, 2006 to receive such an in-service distribution. Upon
its
distribution, the ESOP Preferred Stock was automatically converted in accordance
with its terms into shares of common stock. Subsequent to January 18, 2006,
the
trustee of the Savings Plan converted all the remaining shares of ESOP Preferred
Stock into common stock.
During
2006, all shares of ESOP Preferred Stock, which were not allocated to the
accounts of participants in the Savings Plan, were allocated to participants
in
that plan. All outstanding shares of ESOP Preferred Stock were then converted,
in accordance with their terms, into approximately eight million shares of
common stock from treasury at cost. The allocation and conversion of the ESOP
Preferred Stock resulted in a $367 million decrease from treasury stock at
cost
and a corresponding $144 million decrease in additional paid-in
capital. Unpaid dividends on the ESOP Preferred Stock accrue without interest,
until paid, at a rate of $4.32 per share per year. At December 31, 2006 and
2005, accumulated but unpaid dividends on the ESOP Preferred Stock totaled
$52
million and $50 million, respectively, and are recorded in liabilities subject
to compromise on our Consolidated Balance Sheets.
Note
13. Comprehensive Loss
Comprehensive
loss primarily includes (1) our reported net loss, (2) changes in our additional
minimum pension liability, (3) changes in our deferred tax asset valuation
allowance related to our additional minimum pension liability and (4) changes
in
the effective portion of our open fuel hedge contracts which qualify for hedge
accounting.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The
following table shows the components of accumulated other comprehensive loss
at
December 31, 2006, 2005 and 2004, and the activity for the years then
ended:
(in
millions)
|
|
Additional
Minimum
Pension
Liability
|
|
Unrecognized
Pension Liability
|
|
Fuel
Derivative
Instruments
|
|
Marketable
Equity
Securities
|
|
|
|
Total
|
|
Balance
at January 1, 2004
|
|
$
|
(2,372
|
)
|
$
|
—
|
|
$
|
34
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(2,338
|
)
|
Additional
minimum pension liability adjustments
|
|
|
71
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
71
|
|
Unrealized
gain
|
|
|
—
|
|
|
—
|
|
|
50
|
|
|
—
|
|
|
|
|
|
50
|
|
Realized
gain
|
|
|
—
|
|
|
—
|
|
|
(105
|
)
|
|
—
|
|
|
|
|
|
(105
|
)
|
Tax
effect
|
|
|
(28
|
)
|
|
—
|
|
|
21
|
|
|
—
|
|
|
(29
|
)
|
|
(36
|
)
|
Net
of tax
|
|
|
43
|
|
|
—
|
|
|
(34
|
)
|
|
—
|
|
|
(29
|
)
|
|
(20
|
)
|
Balance
at December 31, 2004
|
|
|
(2,329
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(29
|
)
|
|
(2,358
|
)
|
Additional
minimum pension liability adjustments
|
|
|
(365
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
(365
|
)
|
Unrealized
gain
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
|
|
|
1
|
|
Tax
effect
|
|
|
141
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(141
|
)
|
|
—
|
|
Net
of tax
|
|
|
(224
|
)
|
|
—
|
|
|
—
|
|
|
1
|
|
|
(141
|
)
|
|
(364
|
)
|
Balance
at December 31, 2005
|
|
|
(2,553
|
)
|
|
—
|
|
|
—
|
|
|
1
|
|
|
(170
|
)
|
|
(2,722
|
)
|
Termination
of Pilot Plan
|
|
|
2,264
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
2.264
|
|
Additional
minimum pension liability
adjustments
|
|
|
257
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
257
|
|
Unrealized
(loss) gain
|
|
|
—
|
|
|
—
|
|
|
(93
|
)
|
|
1
|
|
|
|
|
|
(92
|
)
|
Realized
loss
|
|
|
—
|
|
|
—
|
|
|
70
|
|
|
—
|
|
|
|
|
|
70
|
|
Tax
effect
|
|
|
(958
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
239
|
|
|
(719
|
) |
Net
of tax
|
|
|
1,563
|
|
|
—
|
|
|
(23
|
)
|
|
1
|
|
|
239
|
|
|
1,780
|
|
Adoption
of SFAS 158
|
|
|
990
|
|
|
(727
|
)
|
|
—
|
|
|
—
|
|
|
161
|
|
|
424
|
|
Balance
at December 31, 2006
|
|
$
|
—
|
|
|
(727
|
)
|
$
|
(23
|
)
|
$
|
2
|
|
$
|
230
|
|
$
|
(518
|
)
|
We
did
not have any fuel hedge contracts at December 31, 2005 and 2004. For additional
information related to our fuel hedge contracts and our additional minimum
pension liability, see Notes 4 and 10, respectively.
Note
14. Geographic Information
SFAS
No.
131, “Disclosures about Segments of an Enterprise and Related Information”,
requires us to disclose certain information about our operating segments.
Operating segments are defined as components of an enterprise with separate
financial information, which is evaluated regularly by the chief operating
decision-maker and is used in resource allocation and performance
assessments.
We
are
managed as a single business unit that provides air transportation for
passengers and cargo. This allows us to benefit from an integrated revenue
pricing and route network that includes Mainline, Comair and our contract
carriers. The flight equipment of the carriers is combined to form one fleet,
which is deployed through a single route scheduling system. When making resource
allocation decisions, our chief operating decision maker evaluates flight
profitability data, which considers aircraft type and route economics, but
gives
no weight to the financial impact of the resource allocation decision on an
individual carrier basis. Our objective in making resource allocation decisions
is to optimize our consolidated financial results.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Operating
revenues are assigned to a specific geographic region based on the origin,
flight path and destination of each flight segment. Our operating revenues
by
geographic region for the years ended December 31, 2006, 2005 and 2004 are
summarized in the following table:
(in
millions)
|
|
2006
|
|
2005
|
|
2004
|
|
North
America
|
|
$
|
12,931
|
|
$
|
13,030
|
|
$
|
12,389
|
|
Atlantic
|
|
|
2,997
|
|
|
2,255
|
|
|
2,088
|
|
Pacific
|
|
|
164
|
|
|
150
|
|
|
143
|
|
Latin
America
|
|
|
1,079
|
|
|
756
|
|
|
615
|
|
Total
|
|
$
|
17,171
|
|
$
|
16,191
|
|
$
|
15,235
|
|
Our
tangible assets consist primarily of flight equipment, which is mobile across
geographic markets. Accordingly, assets are not allocated to specific geographic
regions.
Note
15. Restructuring
Restructuring
and Other Reserves
The
following table shows our restructuring and other reserve balances as of
December 31, 2006, 2005 and 2004, and the activity for the years then ended
related to (1) facility closures and other costs and (2) severance and related
costs under our 2005, 2004, 2002 and 2001 workforce reduction programs.
Substantially all of our restructuring and other reserves have been classified
as liabilities subject to compromise on our Consolidated Balance Sheets at
December 31, 2006 and 2005.
|
|
Restructuring
and Other Charges
|
|
|
|
Facilities
|
|
Severance
and Related Costs
|
|
|
|
and
|
|
Workforce
Reduction Programs
|
|
(in
millions)
|
|
Other
|
|
2005
|
|
2004
|
|
2002
|
|
2001
|
|
Balance
at January 1, 2004
|
|
$
|
47
|
|
$
|
—
|
|
$
|
—
|
|
$
|
5
|
|
$
|
1
|
|
Additional
costs and expenses
|
|
|
—
|
|
|
—
|
|
|
42
|
|
|
—
|
|
|
—
|
|
Payments
|
|
|
(8
|
)
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
(1
|
)
|
Adjustments
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
—
|
|
Balance
at December 31, 2004
|
|
|
38
|
|
|
—
|
|
|
42
|
|
|
—
|
|
|
—
|
|
Additional
costs and expenses
|
|
|
6
|
|
|
46
|
|
|
5
|
|
|
—
|
|
|
—
|
|
Payments
|
|
|
(8
|
)
|
|
—
|
|
|
(36
|
)
|
|
—
|
|
|
—
|
|
Adjustments
|
|
|
—
|
|
|
—
|
|
|
(9
|
)
|
|
—
|
|
|
—
|
|
Balance
at December 31, 2005
|
|
|
36
|
|
|
46
|
|
|
2
|
|
|
—
|
|
|
—
|
|
Additional
costs and expenses
|
|
|
3
|
|
|
29
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Payments
|
|
|
(8
|
)
|
|
(53
|
)
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
Adjustments
|
|
|
(27
|
)
|
|
(21
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance
at December 31, 2006
|
|
$
|
4
|
|
$
|
1
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
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 2006, we reduced the facilities and other reserve by $27
million primarily due to the rejection of certain facility leases and updated
estimates concerning future lease payments. During 2005, we recorded charges
of
$5 million for future lease payments associated with the early retirement of
leased aircraft, during the period from January 1, 2005 through the Petition
Date.
The
severance and related costs reserve represents future payments associated with
our 2005, 2004, 2002 and 2001 workforce reduction programs. During 2006,we
recorded an additional accrual of $29 million for costs associated with our
2005
program under which we planned to reduce staffing by 7,000 to 9,000 jobs by
December 2007. We also reduced the severance and related reserve associated
with
this program by $21 million due primarily to higher employee attrition than
previously assumed. At December 31, 2004, the $42 million balance related to
the
2004 workforce reduction programs represented severance and medical benefits
for
employees who qualified for the programs; this amount was paid during 2005
and
2006.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Restructuring,
Asset Writedowns, Pension Settlements and Related Items,
Net
2006
In
2006,
we recorded a $13 million charge in restructuring, asset writedowns, pension
settlements and related items, net on our Consolidated Statement of Operations,
primarily due to the following:
|
● |
Workforce
Reduction.
A
$29 million charge related to our decision to reduce staffing by
approximately 7,000 to 9,000 jobs by December 2007, which has been
substantially completed. This charge was partially offset by a $21
million
reduction in accruals associated with prior year workforce reduction
programs.
|
2005
In
2005,
we recorded an $888 million charge in restructuring, asset writedowns, pension
settlements and related items, net on our Consolidated Statement of Operations,
as follows:
|
● |
Pension
Curtailment Charge.
A
$447 million curtailment charge related to our Pilot Plan and Non-pilot
Plan. This charge related to the impact on the Non-pilot Plan of
the
planned reduction of 6,000 to 7,000 jobs announced in November 2004
and
the freeze of service accruals under the Pilot Plan effective December
31,
2004 (see Note 10).
|
|
● |
Pension
Settlements.
$388 million in settlement charges related to the Pilot Plan due
to a
significant increase in pilot retirements and lump sum distributions
from
plan assets (see Note 10).
|
|
● |
Workforce
Reduction.
A
$46 million charge related to our decision to reduce staffing by
approximately 7,000 to 9,000 jobs by December 2007, which has been
substantially completed. This charge was partially offset by a net
$3
million reduction in accruals associated with prior year workforce
reduction programs.
|
|
● |
Asset
Charges.
A
$10 million charge related to the removal from service of six B-737-200
aircraft prior to their lease expiration
dates.
|
2004
In
2004,
we recorded a $41 million net gain in restructuring, asset writedowns, pension
settlements and related items, net on our Consolidated Statement of Operations,
as follows:
|
● |
Elimination
of Retiree Healthcare Subsidy.
A
$527 million gain related to our decision to eliminate the company
provided healthcare coverage subsidy for employees who retire after
January 1, 2006 (see Note 10).
|
|
● |
Pension
Settlements.
$251 million in settlement charges related to the Pilot Plan due
to a
significant increase in pilot retirements and lump sum distribution
from
plan assets (see Note 10).
|
|
● |
Workforce
Reduction.
A
$194 million charge related to our decision to reduce staffing by
approximately 6,000 to 7,000 jobs by December 2005. This charge included
charges of $152 million related to special termination benefits (see
Note
10) and $42 million related to employee
severance.
|
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
● |
Asset
Charges.
A
$41 million aircraft impairment charge related to our agreement to
sell
eight owned MD-11 aircraft. In October 2004, we sold these aircraft
and
related inventory to a third party for $227
million.
|
Note
16. Loss per Share
We
calculate basic loss per share by dividing the net loss attributable to common
shareowners by the weighted average number of common shares outstanding. Diluted
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 loss per share.
The following table shows our computation of basic and diluted loss per
share:
|
|
Years
Ended December 31,
|
|
(in
millions, except per share data)
|
|
2006
|
|
2005
|
|
2004
|
|
Basic
and diluted:
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(6,203
|
)
|
$
|
(3,818
|
)
|
$
|
(5,198
|
)
|
Dividends
on allocated Series B ESOP Convertible Preferred Stock
|
|
|
(2
|
)
|
|
(18
|
)
|
|
(19
|
)
|
Net
loss attributable to common shareowners
|
|
|
(6,205
|
)
|
|
(3,836
|
)
|
|
(5,217
|
)
|
Weighted
average shares outstanding
|
|
|
196.5
|
|
|
161.5
|
|
|
127.0
|
|
Basic
and diluted loss per share
|
|
$
|
(31.58
|
)
|
$
|
(23.75
|
)
|
$
|
(41.07
|
)
|
For
the
years ended December 31, 2006, 2005 and 2004, 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, (see Notes 2 and 12 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, 143.2 million, and 78.8 million shares for the years ended December
31,
2006, 2005 and 2004, respectively.
Note
17. Valuation and Qualifying Accounts
The
following table shows our valuation and qualifying accounts as of December
31,
2006, 2005 and 2004, and the associated activity for the years then
ended:
|
|
|
|
Allowance
for:
|
|
(in
millions)
|
|
Restructuring
and
Other
Charges (1)
|
|
Uncollectible
Accounts
Receivable
(2)
|
|
Obsolescence
of
Expendable
Parts
&
Supplies
Inventory
|
|
|
|
Balance
at January 1, 2004
|
|
$
|
53
|
|
$
|
38
|
|
$
|
183
|
|
$
|
25
|
|
Additional
costs and expenses
|
|
|
42
|
|
|
32
|
|
|
15
|
|
|
2,508
|
|
Payments
and deductions
|
|
|
(15
|
)
|
|
(32
|
)
|
|
(14
|
)
|
|
(133
|
)
|
Balance
at December 31, 2004
|
|
|
80
|
|
|
38
|
|
|
184
|
|
|
2,400
|
(3)
|
Additional
costs and expenses
|
|
|
57
|
|
|
18
|
|
|
26
|
|
|
1,746
|
|
Payments
and deductions
|
|
|
(53
|
)
|
|
(15
|
)
|
|
(9
|
)
|
|
(192
|
)
|
Balance
at December 31, 2005
|
|
|
84
|
|
|
41
|
|
|
201
|
|
|
3,954
|
(4)
|
Additional
costs and expenses
|
|
|
32
|
|
|
16
|
|
|
12
|
|
|
2,749
|
|
Payments
and deductions
|
|
|
(111
|
)
|
|
(36
|
)
|
|
(52
|
)
|
|
(1,534
|
)
|
Balance
at December 31, 2006
|
|
$
|
5
|
|
$
|
21
|
|
$
|
161
|
|
$
|
5,169
|
(5)
|
|
(1) |
See
Note 7 for additional information related to leased aircraft and
restructuring and other charges.
|
|
(2) |
The
payments and deductions related to the allowance for uncollectible
accounts receivable represent the write-off of accounts considered
to be
uncollectible, less recoveries.
|
|
(3) |
$29
million of this amount was recorded in accumulated other comprehensive
loss on our 2004 Consolidated Balance Sheet (see
Note 13).
|
|
(4) |
$141
million of this amount was recorded in accumulated other comprehensive
loss on our 2005 Consolidated Balance Sheet (see Note
13).
|
|
(5)
|
$400
million of this amount was recorded in accumulated other comprehensive
loss on our 2006 Consolidated Balance Sheet (see Note
13).
|
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note
18. Quarterly Financial Data (Unaudited)
The
following table summarizes our unaudited quarterly results of operations for
2006 and 2005:
2006
|
|
Three
Months Ended
|
|
(in
millions, except per share data)
|
|
March
31
|
|
June
30
|
|
September
30
|
|
December
31
|
|
Operating
revenue
|
|
$
|
3,719
|
|
$
|
4,655
|
|
$
|
4,659
|
|
$
|
4,138
|
|
Operating
(loss) income
|
|
|
(485
|
)
|
|
369
|
|
|
168
|
|
|
6
|
|
Net
(loss) income
|
|
|
(2,069
|
)
|
|
(2,205
|
)
|
|
52
|
|
|
(1,981
|
)
|
Basic
(loss) earnings per share
|
|
|
(10.68
|
)
|
|
(11.18
|
)
|
|
0.26
|
|
|
(10.04
|
)
|
Diluted
(loss) earnings per share
|
|
|
(10.68
|
)
|
|
(11.18
|
)
|
|
0.22
|
|
|
(10.04
|
)
|
2005
|
|
Three
Months Ended
|
|
(in
millions, except per share data)
|
|
March
31
|
|
June
30
|
|
September
30
|
|
December
31
|
|
Operating
revenue
|
|
$
|
3,706
|
|
$
|
4,249
|
|
$
|
4,308
|
|
$
|
3,928
|
|
Operating
loss
|
|
|
(957
|
)
|
|
(129
|
)
|
|
(240
|
)
|
|
(675
|
)
|
Net
loss
|
|
|
(1,071
|
)
|
|
(382
|
)
|
|
(1,130
|
)
|
|
(1,235
|
)
|
Basic
and diluted loss per share
|
|
|
(7.64
|
)
|
|
(2.64
|
)
|
|
(6.73
|
)
|
|
(6.54
|
)
|
During
the March 2006 quarter, we recorded certain Accounting Adjustments aggregating
a
net charge approximating $310 million. For additional information about these
adjustments, see Note 2.
The
quarterly earnings (loss) per share amounts will not
necessarily add to the earnings (loss) per share computed for the year due
to the method used in calculating per share data.
F-59