Form 10-Q
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
R
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the quarterly period ended March 31, 2007
Or
£
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
Commission
File Number 1-5424
DELTA
AIR LINES, INC.
State
of Incorporation: Delaware
IRS
Employer Identification No.: 58-0218548
P.O.
Box 20706, Atlanta, Georgia 30320-6001
Telephone:
(404) 715-2600
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes
R
No
£
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer £
Accelerated
filer R
Non-accelerated
filer £
Indicate
by check mark whether the registrant is a shell company (as defined
in
Rule
12b-2 of the Exchange Act).
Yes
£
No R
Number
of shares outstanding by each class of common stock, as of April 27,
2007:
Common
Stock, $0.01 par value - 197,335,938 shares outstanding
This
document is also available on our website at
http://investor.delta.com/edgar.cfm.
FORWARD-LOOKING
STATEMENTS
Statements
in this Form 10-Q (or otherwise made by us or on our behalf) that are not
historical facts, including statements regarding our estimates, expectations,
beliefs, intentions, projections or strategies for the future, may be
“forward-looking statements” as defined in the Private Securities Litigation
Reform Act of 1995. Forward-looking statements involve risks and uncertainties
that could cause actual results to differ materially from historical experience
or our present expectations. For examples of such risks and uncertainties,
please see the cautionary statements contained in “Item 1A. Risk Factors” of our
Annual Report on Form 10-K for the fiscal year ended December 31, 2006 (“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.
OTHER
INFORMATION
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”). On December 19, 2006, we filed with the Bankruptcy Court a
Plan of Reorganization, which contemplates that Delta will emerge from
bankruptcy as an independent airline. The Plan of Reorganization, as amended
(the “Plan”), was approved by the holders of claims against the Debtors. On
April 25, 2007, the Bankruptcy Court confirmed the Plan. Under the Plan, holders
of our currently outstanding equity securities will not receive any
distributions and those equity securities will be cancelled when we emerge
from
Chapter 11, which we expect will occur on April 30, 2007. Additional information
about our Chapter 11 filing is available on the Internet at www.delta.com/restructure.
Bankruptcy Court filings, claims information and our Plan are available at
www.deltadocket.com.
Unless
otherwise indicated, the terms “Delta,” the “Company,” “we,” “us,” and “our”
refer to Delta Air Lines, Inc. and its subsidiaries.
PART
I. FINANCIAL INFORMATION
|
|
|
|
|
|
|
|
|
|
Item
1. Financial Statements
|
|
|
|
|
|
|
|
|
|
Delta
Air Lines, Inc.
|
Debtor
and Debtor-In-Possession
|
Consolidated
Balance Sheets
|
|
|
|
|
|
|
ASSETS
|
|
March
31,
|
|
December
31,
|
|
(in
millions)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,093
|
|
$
|
2,034
|
|
Short-term
investments
|
|
|
790
|
|
|
614
|
|
Restricted
cash
|
|
|
1,046
|
|
|
750
|
|
Accounts
receivable, net of an allowance for uncollectible accounts
|
|
|
|
|
|
|
|
of
$21 at March 31, 2007 and December 31, 2006
|
|
|
986
|
|
|
915
|
|
Expendable
parts and supplies inventories, net of an allowance for
|
|
|
|
|
|
|
|
obsolescence
of $131 and $161 at March 31, 2007 and December 31, 2006,
respectively
|
|
|
184
|
|
|
181
|
|
Deferred
income taxes, net
|
|
|
463
|
|
|
402
|
|
Prepaid
expenses and other
|
|
|
572
|
|
|
489
|
|
Total
current assets
|
|
|
6,134
|
|
|
5,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT:
|
|
|
|
|
|
|
|
Flight
equipment
|
|
|
17,483
|
|
|
17,641
|
|
Accumulated
depreciation
|
|
|
(6,901
|
)
|
|
(6,800
|
)
|
Flight
equipment, net
|
|
|
10,582
|
|
|
10,841
|
|
|
|
|
|
|
|
|
|
Ground
property and equipment
|
|
|
4,218
|
|
|
4,575
|
|
Accumulated
depreciation
|
|
|
(2,690
|
)
|
|
(2,838
|
)
|
Ground
property and equipment, net
|
|
|
1,528
|
|
|
1,737
|
|
|
|
|
|
|
|
|
|
Flight
and ground equipment under capital leases
|
|
|
474
|
|
|
474
|
|
Accumulated
amortization
|
|
|
(151
|
)
|
|
(136
|
)
|
Flight
and ground equipment under capital leases, net
|
|
|
323
|
|
|
338
|
|
|
|
|
|
|
|
|
|
Advance
payments for equipment
|
|
|
95
|
|
|
57
|
|
|
|
|
|
|
|
|
|
Total
property and equipment, net
|
|
|
12,528
|
|
|
12,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS:
|
|
|
|
|
|
|
|
Goodwill
|
|
|
227
|
|
|
227
|
|
Operating
rights and other intangibles, net of accumulated
amortization
|
|
|
|
|
|
|
|
of
$191 and $190 at March 31, 2007 and December 31, 2006, respectively
|
|
|
88
|
|
|
89
|
|
Other
noncurrent assets
|
|
|
834
|
|
|
948
|
|
Total
other assets
|
|
|
1,149
|
|
|
1,264
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
19,811
|
|
$
|
19,622
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these Condensed
Consolidated
Financial Statements.
|
|
|
|
|
|
|
|
Delta
Air Lines, Inc.
|
Debtor
and Debtor-In-Possession
|
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREOWNERS' DEFICIT
|
|
March
31,
|
|
December
31,
|
|
(in
millions, except share data)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
Current
maturities of long-term debt and capital leases
|
|
$
|
3,219
|
|
$
|
1,503
|
|
Air
traffic liability
|
|
|
2,437
|
|
|
1,797
|
|
Accounts
payable
|
|
|
884
|
|
|
936
|
|
Taxes
payable
|
|
|
473
|
|
|
500
|
|
Deferred
revenue
|
|
|
379
|
|
|
363
|
|
Accrued
salaries and related benefits
|
|
|
361
|
|
|
405
|
|
Other
accrued liabilities
|
|
|
246
|
|
|
265
|
|
Total
current liabilities
|
|
|
7,999
|
|
|
5,769
|
|
|
|
|
|
|
|
|
|
NONCURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
Long-term
debt and capital leases
|
|
|
4,792
|
|
|
6,509
|
|
Deferred
income taxes, net
|
|
|
385
|
|
|
406
|
|
Deferred
revenue and credits
|
|
|
339
|
|
|
346
|
|
Other
|
|
|
623
|
|
|
368
|
|
Total
noncurrent liabilities
|
|
|
6,139
|
|
|
7,629
|
|
|
|
|
|
|
|
|
|
LIABILITIES
SUBJECT TO COMPROMISE
|
|
|
19,349
|
|
|
19,817
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREOWNERS'
DEFICIT:
|
|
|
|
|
|
|
|
Common
stock:
|
|
|
|
|
|
|
|
$0.01
par value, 900,000,000 shares authorized, 202,081,648
|
|
|
|
|
|
|
|
shares
issued at March 31, 2007 and December 31, 2006
|
|
|
2
|
|
|
2
|
|
Additional
paid-in capital
|
|
|
1,561
|
|
|
1,561
|
|
Accumulated
deficit
|
|
|
(14,574
|
)
|
|
(14,414
|
)
|
Accumulated
other comprehensive loss
|
|
|
(441
|
)
|
|
(518
|
)
|
Treasury
stock at cost, 4,745,710 shares at March 31, 2007
|
|
|
|
|
|
|
|
and
December 31, 2006
|
|
|
(224
|
)
|
|
(224
|
)
|
Total
shareowners' deficit
|
|
|
(13,676
|
)
|
|
(13,593
|
)
|
|
|
|
|
|
|
|
|
Total
liabilities and shareowners' deficit
|
|
$
|
19,811
|
|
$
|
19,622
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
|
|
|
|
|
|
|
|
Delta
Air Lines, Inc.
|
Debtor
and Debtor-In-Possession
|
Consolidated
Statements of Operations
|
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
(in
millions, except per share data)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
REVENUE:
|
|
|
|
|
|
|
|
Passenger:
|
|
|
|
|
|
|
|
Mainline
|
|
$
|
2,796
|
|
$
|
2,572
|
|
Regional
affiliates
|
|
|
947
|
|
|
858
|
|
Cargo
|
|
|
112
|
|
|
123
|
|
Other,
net
|
|
|
289
|
|
|
166
|
|
Total
operating revenue
|
|
|
4,144
|
|
|
3,719
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSE:
|
|
|
|
|
|
|
|
Aircraft
fuel
|
|
|
920
|
|
|
929
|
|
Salaries
and related costs
|
|
|
906
|
|
|
1,166
|
|
Contract
carrier arrangements
|
|
|
717
|
|
|
609
|
|
Depreciation
and amortization
|
|
|
291
|
|
|
301
|
|
Contracted
services
|
|
|
289
|
|
|
261
|
|
Passenger
commissions and other selling expenses
|
|
|
220
|
|
|
212
|
|
Landing
fees and other rents
|
|
|
185
|
|
|
292
|
|
Aircraft
maintenance materials and outside repairs
|
|
|
184
|
|
|
196
|
|
Passenger
service
|
|
|
70
|
|
|
71
|
|
Aircraft
rent
|
|
|
70
|
|
|
95
|
|
Other
|
|
|
137
|
|
|
72
|
|
Total
operating expense
|
|
|
3,989
|
|
|
4,204
|
|
|
|
|
|
|
|
|
|
OPERATING
INCOME (LOSS)
|
|
|
155
|
|
|
(485
|
)
|
|
|
|
|
|
|
|
|
OTHER
(EXPENSE) INCOME:
|
|
|
|
|
|
|
|
Interest
expense (contractual interest expense equals $412 and $309
|
|
|
|
|
|
|
|
for
the three months ended March 31, 2007 and 2006,
respectively)
|
|
|
(200
|
)
|
|
(214
|
)
|
Interest
income
|
|
|
10
|
|
|
12
|
|
Miscellaneous,
net
|
|
|
29
|
|
|
-
|
|
Total
other expense, net
|
|
|
(161
|
)
|
|
(202
|
)
|
|
|
|
|
|
|
|
|
LOSS
BEFORE REORGANIZATION ITEMS
|
|
|
(6
|
)
|
|
(687
|
)
|
|
|
|
|
|
|
|
|
REORGANIZATION
ITEMS, NET
|
|
|
(124
|
)
|
|
(1,403
|
)
|
|
|
|
|
|
|
|
|
LOSS
BEFORE INCOME TAXES
|
|
|
(130
|
)
|
|
(2,090
|
)
|
|
|
|
|
|
|
|
|
INCOME
TAX BENEFIT
|
|
|
-
|
|
|
21
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
|
(130
|
)
|
|
(2,069
|
)
|
|
|
|
|
|
|
|
|
PREFERRED
STOCK DIVIDENDS
|
|
|
-
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
NET
LOSS ATTRIBUTABLE TO COMMON
|
|
|
|
|
|
|
|
SHAREOWNERS
|
|
$
|
(130
|
)
|
$
|
(2,071
|
)
|
|
|
|
|
|
|
|
|
BASIC
AND DILUTED LOSS PER SHARE
|
|
$
|
(0.66
|
)
|
$
|
(10.68
|
)
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
|
|
|
|
|
|
|
|
Delta
Air Lines, Inc.
|
|
Debtor
and Debtor-In-Possession
|
|
Condensed
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
(in
millions)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
$
|
360
|
|
$
|
631
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities:
|
|
|
|
|
|
|
|
Property
and equipment additions:
|
|
|
|
|
|
|
|
Flight
equipment, including advance payments
|
|
|
(131
|
)
|
|
(63
|
)
|
Ground
property and equipment, including technology
|
|
|
(24
|
)
|
|
(29
|
)
|
Proceeds
from sale of flight equipment
|
|
|
18
|
|
|
19
|
|
Proceeds
from sale of investments
|
|
|
34
|
|
|
-
|
|
Decrease
in restricted cash
|
|
|
27
|
|
|
7
|
|
Other,
net
|
|
|
1
|
|
|
4
|
|
Net
cash used in investing activities
|
|
|
(75
|
)
|
|
(62
|
)
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
|
Payments
on long-term debt and capital lease obligations
|
|
|
(226
|
)
|
|
(143
|
)
|
Other,
net
|
|
|
-
|
|
|
(5
|
)
|
Net
cash used in financing activities
|
|
|
(226
|
)
|
|
(148
|
)
|
|
|
|
|
|
|
|
|
Net
Increase In Cash and Cash Equivalents
|
|
|
59
|
|
|
421
|
|
Cash
and cash equivalents at beginning of period
|
|
|
2,034
|
|
|
2,008
|
|
Cash
and cash equivalents at end of period
|
|
$
|
2,093
|
|
$
|
2,429
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash paid (refunded) for:
|
|
|
|
|
|
|
|
Interest,
net of amounts capitalized
|
|
$
|
168
|
|
$
|
178
|
|
Professional
fee disbursements due to bankruptcy
|
|
|
19
|
|
|
22
|
|
Interest
received from the preservation of cash due to Chapter 11
proceedings
|
|
|
(38
|
)
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
Non-cash
transactions:
|
|
|
|
|
|
|
|
Flight
equipment under capital leases
|
|
|
-
|
|
|
156
|
|
Dividends
on Series B ESOP Convertible Preferred Stock
|
|
|
-
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
|
|
|
|
|
|
|
|
DELTA
AIR LINES, INC.
Debtor
and Debtor-In-Possession
Notes
to the Condensed Consolidated Financial Statements
March
31, 2007
(Unaudited)
1.
CHAPTER 11 PROCEEDINGS
General
Information
Delta
Air Lines, Inc., a Delaware corporation, is a major air carrier that provides
air transportation for passengers and cargo throughout the United States
(“U.S.”) and around the world. Our Condensed Consolidated Financial Statements
include the accounts of Delta Air Lines, Inc. and our wholly owned subsidiaries,
including Comair, Inc. (“Comair”), which are collectively referred to as
Delta.
On
September 14, 2005 (the “Petition Date”), we and substantially all of our
subsidiaries (collectively, the “Debtors”) filed voluntary petitions for
reorganization under Chapter 11 of the United States Bankruptcy Code (the
“Bankruptcy Code”), in the United States Bankruptcy Court for the Southern
District of New York (the “Bankruptcy Court”). The reorganization cases are
being jointly administered under the caption “In re Delta Air Lines, Inc., et
al., Case No. 05-17923-ASH.”
The
Debtors are operating as “debtors-in-possession” under the jurisdiction of the
Bankruptcy Court and in accordance with the applicable provisions of the
Bankruptcy Code. In general, as debtors-in-possession, the Debtors are
authorized under Chapter 11 to continue to operate as an ongoing business,
but
may not engage in transactions outside the ordinary course of business without
the prior approval of the Bankruptcy Court.
Our
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.
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.
Filing
of Disclosure Statement and 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 have the
exclusive right until June 1, 2007 to file and to solicit acceptances of a
plan
of reorganization. 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.
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 deadline for creditors to vote on the Plan was April
9,
2007. The Plan was approved by the creditors and, on April 25, 2007, confirmed
by the Bankruptcy Court. The Debtors are planning to emerge from Chapter 11
on
April 30, 2007.
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 have the right
to
request cash proceeds of sales of common stock of reorganized Delta in lieu
of
such stock, and holders of certain claims will receive cash in satisfaction
of
their claims.
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, holders
of
Delta’s existing equity interests, including Delta’s common stock, will not
receive any distributions, and their equity interests will be cancelled once
the
Plan becomes effective.
Magnitude
of Potential Claims. The
Debtors have filed with the Bankruptcy Court schedules and statements of
financial affairs setting forth, among other things, the assets and liabilities
of the Debtors, subject to the assumptions filed in connection therewith. All
of
the schedules are subject to 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 April 13, 2007, claims totaling $91.0 billion have been filed with the
Bankruptcy Court against the Debtors, including $27.9 billion of claims which
have been withdrawn. 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 April 13, 2007, the Bankruptcy
Court has disallowed $1.8 billion of these 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.
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 have been and are being
paid
for goods furnished and services provided after the Petition Date in the
ordinary course of business.
Appointment
of Creditors Committee.
As required by the Bankruptcy Code, the United States Trustee for the Southern
District of New York appointed the official committee of unsecured creditors
(the “Creditors Committee”). The Creditors Committee and its legal
representatives have a right to be heard on all matters that come before the
Bankruptcy Court with respect to the Debtors. The Creditors Committee has been
generally supportive of the Debtors’ positions on various matters, including the
Debtors’ Plan.
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 certain aircraft and entered into
Section 1110(b) Stipulations with respect to other 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.
For
those mortgaged aircraft where we have made a Section 1110(a) Election, we
have
elected, effective upon the effective date of the Plan, to reinstate the
mortgages on such aircraft. For those leased aircraft where we have made a
Section 1110(a) Election, our intention is to assume the leases with respect
to
such aircraft.
We
have reached agreement with respect to substantially all of our aircraft
obligations, subject in certain instances to the execution of definitive
documentation. There are a small number of aircraft about which we are engaged
in continuing negotiations, the ultimate outcome of which cannot be predicted
with certainty. Upon emergence from bankruptcy, we will lose the protection
of
the automatic stay or extension of the stay through a Section 1110(b)
Stipulation for these aircraft. To the extent we are unable to reach definitive
agreements with, or obtain an extension and forbearance from, 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; however we do not expect to have a material number
of
aircraft at risk at our emergence from bankruptcy.
Cincinnati
Airport Settlement.
On March 8, 2007, we filed a motion with the Bankruptcy Court seeking approval
of a settlement agreement (the “ KCAB Settlement Agreement”) with the Kenton
County Airport Board (“KCAB”) and UMB Bank, N.A. (the “Bond Trustee”) for the
$419 million Kenton County Airport Board Special Facilities Revenue Bonds,
1992
Series A (Delta Air Lines, Inc. Project), $397 million of which remains
outstanding, and the $19 million Kenton County Airport Board Special Facilities
Revenue Bonds, 1992 Series B (Delta Air Lines, Inc. Project), $16 million of
which remains outstanding (collectively, the “1992 Bonds”), related to the 1992
Bonds and our obligations with respect to certain facilities and improvements
at
the Cincinnati-Northern Kentucky International Airport (the “Cincinnati
Airport”). The KCAB Settlement Agreement settles and resolves all disputes among
us, KCAB, the Bond Trustee and the former, present and future holders of record
or beneficial interests in the 1992 Bonds (all holders of such 1992 Bonds,
the
“1992 Bondholders”). The KCAB Settlement Agreement sets forth the parties’
agreement that, among other things:
|
· |
the
Facilities Lease Agreement, dated February 1, 1992, between us and
KCAB
and certain other agreements pursuant to which we use and occupy
certain
facilities and improvements at the Cincinnati Airport will be deemed
rejected or terminated as of the dates set forth and described in
the KCAB
Settlement Agreement;
|
|
· |
we,
together with KCAB, will enter into a new facilities lease agreement
and
such other leases and agreements as we and KCAB deem necessary or
appropriate in connection with our continued occupancy of certain
facilities and improvements at the Cincinnati Airport;
|
|
· |
unless
prepaid by us under the terms of the KCAB Settlement Agreement, we
will
issue a note to the Bond Trustee, on behalf of the 1992 Bondholders,
providing for equal monthly payments that will yield a net present
value
equal to $85 million (using a discount rate of 8%) less certain amounts
paid by us in 2006 and that are paid or may be paid in 2007, which
will
have a term ending on December 1, 2015 (the “New KCAB Note”);
|
|
· |
the
Bond Trustee, as trustee and on behalf of the 1992 Bondholders, will
have
a $260 million allowed general, unsecured pre-petition claim in our
bankruptcy proceedings; and
|
|
· |
we,
the KCAB, the Bond Trustee and the 1992 Bondholders will release,
discharge, waive and abandon any claims or rights that each may have
against the others with respect to the 1992 Bonds, the facilities
financed
thereby, and certain related agreements as set forth in the KCAB
Settlement Agreement.
|
The
KCAB Settlement Agreement is subject to Bankruptcy Court approval. An
objection to the KCAB Settlement Agreement was filed on behalf of a small number
of 1992 Bondholders (the “Objecting
Bondholders”).
On April
24, 2007, the Bankruptcy Court issued an order approving the KCAB Settlement
Agreement, which order is effective by its terms at 10 a.m. prevailing
Eastern time on May 3, 2007. The Objecting Bondholders have appealed
that decision to the United States District Court for the Southern District
of New York (the “District
Court”).
They also sought from the Bankruptcy Court a stay of its order pending
appeal, which stay request was denied. We expect that the Objecting
Bondholders will now request such a stay from the District Court. We
cannot predict the outcome of this matter.
Payment
of Insurance Benefits to Retired Employees.
Section 1114 of the Bankruptcy Code addresses a debtor’s ability to modify
certain retiree disability, medical and death benefits (“Covered Benefits”). To
modify Covered Benefits, the debtor must satisfy certain statutorily prescribed
procedural and substantive prerequisites and obtain either (1) the Bankruptcy
Court’s approval or (2) the consent of an authorized representative of retirees.
The debtor must make a proposal to modify the Covered Benefits based on the
most
complete and reliable information available at the time, must bargain in good
faith and must share relevant information with the retiree representative.
In
addition, the proposed modifications must be necessary to permit the
reorganization of the debtor and must ensure that all affected parties are
treated fairly and equitably relative to the creditors and the
debtor.
The
Bankruptcy Court directed the appointment of two separate retiree committees
under Section 1114, one to serve as the authorized representative of 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.
Costs
of Reorganization.
We have incurred significant costs associated with our reorganization in our
Chapter 11 proceedings. The disposition of these costs that result in a
liability classified in liabilities subject to compromise will be resolved
in
conjunction with our confirmed Plan. See Note 11, for Pro Forma effects
associated with the disposition of liabilities subject to compromise on our
Consolidated Balance Sheet.
Notice
and Hearing Procedures for Trading in Claims and Equity
Securities.
On December 19, 2005, the Bankruptcy Court issued a final order to assist us
in
preserving our net operating losses (the “NOL Order”) during our Chapter 11
proceedings. The NOL Order provides for certain notice and hearing procedures
regarding trading in our common stock. It also provides a mechanism by which
certain holders of claims may be required to sell some of their holdings in
connection with implementation of a plan of reorganization.
Under
the NOL Order, any person or entity that (1) is a Substantial Equityholder
(as
defined below) and intends to purchase or sell or otherwise acquire or dispose
of Tax Ownership (as defined in the NOL Order) of any shares of our common
stock
or (2) may become a Substantial Equityholder as a result of the purchase or
other acquisition of Tax Ownership of shares of our common stock, must provide
advance notice of the proposed transaction to the Bankruptcy Court, to us and
to
the Creditors Committee. A “Substantial Equityholder” is any person or entity
that has Tax Ownership of at least nine million shares of our common stock.
The
proposed transaction may not be consummated unless written approval is received
from us within the 15 day period following our receipt of the notice. A
transaction entered into in violation of these procedures will be void as a
violation of the automatic stay under Section 362 of the Bankruptcy Code and
may
subject the participant to other sanctions. The NOL Order also requires that
each Substantial Equityholder file with the Bankruptcy Court and serve on us
a
notice identifying itself. Failure to comply with this requirement also may
result in the imposition of sanctions.
As
contemplated by the NOL Order, the Bankruptcy Court entered a “Claims Trading
Notice Order” on April 3, 2007 requiring advance notice of certain acquisitions
of Covered Claims (as defined in the NOL Order). Under the Claims Trading Notice
Order, in the case of a proposed acquisition of Covered Claims (i) by any
Potentially Substantial New Equityholder (as defined below), if, following
the
proposed acquisition, such person or entity would have Tax Ownership of Covered
Claims that would entitle it to receive shares of our stock under the Plan
in
excess of the amount of equity to which such person or entity would have been
entitled based on the holdings reported on its Substantial Claimholder Notice
(in accordance with the Reporting Notice, which was filed with the Bankruptcy
Court on February 15, 2007) or (ii) by any person or entity that would become
a
Potentially Substantial New Equityholder by virtue of the proposed acquisition
of Covered Claims, the potential acquiror generally will be required, prior
to
the consummation of any such transaction, to serve on us, our counsel, and
counsel
for the Creditors’ Committee a Proposed Covered Claim Transaction Notice. A
“Potentially Substantial New Equityholder” is any person or entity that has Tax
Ownership of an aggregate amount of Adjusted Covered Claims that equals or
exceeds $600 million. “Adjusted Covered Claims” means, in the case of Covered
Claims against the Delta Debtors (as defined in the Plan), an amount equal
to
100% of such Covered Claims, and in the case of Covered Claims against the
Comair Debtors (as defined in the Plan), an amount equal to 130% of such Covered
Claims. In accordance with the NOL Order, any person or entity that acquires
Covered Claims in violation of the Claims Trading Notice Order may not be
entitled to
acquire Tax Ownership of any
of our stock (or consideration in lieu thereof) in excess of the percentage
of
equity to which such person or entity would have been entitled had it not
acquired such Covered Claims.
Liabilities
Subject to Compromise
The
following table summarizes the components of liabilities subject to compromise
included on our Consolidated Balance Sheets at March 31, 2007 and December
31,
2006:
(in
millions)
|
|
March
31,
2007
|
|
December
31,
2006
|
Pension,
postretirement and other benefits
|
|
$
|
10,338
|
|
$
|
10,329
|
Debt
and accrued interest
|
|
|
4,368
|
|
|
5,079
|
Aircraft
lease related obligations
|
|
|
3,180
|
|
|
3,115
|
Accounts
payable and other accrued liabilities
|
|
|
1,463
|
|
|
1,294
|
Total
liabilities subject to compromise
|
|
$
|
19,349
|
|
$
|
19,817
|
Liabilities
subject to compromise refers to pre-petition obligations that may be impacted
by
the Chapter 11 reorganization process. The amounts represent our current
estimate of known or potential obligations to be resolved in connection with
our
Chapter 11 proceedings.
Differences
between liabilities we have estimated and the claims filed, or to be filed,
will
be investigated and resolved in connection with the claims resolution process.
We will continue to evaluate these liabilities throughout and subsequent to
our
emergence from the Chapter 11 process and adjust amounts as necessary. Such
adjustments may be material.
Reorganization
Items, net
The
following table summarizes the components included in reorganization items,
net
on our Consolidated Statements of Operations for the three months ended March
31, 2007 and 2006:
(in
millions)
|
|
2007
|
|
2006
|
|
Contract
carrier agreements(1)
|
|
$
|
163
|
|
$
|
—
|
|
Facility
leases(2)
|
|
|
(124
|
)
|
|
35
|
|
Pilot
collective bargaining agreement(3)
|
|
|
83
|
|
|
—
|
|
Interest
income(4)
|
|
|
(38
|
)
|
|
(21
|
)
|
Professional
fees
|
|
|
37
|
|
|
28
|
|
Retiree
healthcare claims(5)
|
|
|
26
|
|
|
—
|
|
Vendor
waived pre-petition debt
|
|
|
(24
|
)
|
|
—
|
|
Aircraft
financing renegotiations and rejections(6)
|
|
|
2
|
|
|
1,306
|
|
Compensation
expense(7)
|
|
|
—
|
|
|
55
|
|
Other
|
|
|
(1
|
)
|
|
—
|
|
Total
reorganization items, net
|
|
$
|
124
|
|
$
|
1,403
|
|
|
(1) |
In
connection with amendments to our contract carrier agreements with
Chautauqua Airlines, Inc. (“Chautauqua”) and Shuttle America Corporation
(“Shuttle America”), both subsidiaries of Republic Airways Holdings, Inc.
(“Republic Holdings”), to reduce rates, among other items, we recorded (1)
a $91 million allowed general, unsecured pre-petition claim and
(2) a $37
million net charge related to the surrender of warrants to purchase
up to
3.5 million shares of Republic Holdings common stock. Additionally,
in
connection with an amendment to our contract carrier agreement
with
Freedom Airlines, Inc. (“Freedom”), a subsidiary of Mesa Air Group, Inc.,
to reduce rates, among other items, we recorded a $35 million allowed
general unsecured pre-petition claim.
|
|
(2)
|
Primarily
reflects a $126 million net gain in connection with our settlement
agreement with the Massachusetts Port Authority (“Massport”). For
additional information regarding our settlement agreement with
Massport,
see Note 4.
|
|
(3) |
Allowed
general, unsecured pre-petition claim in connection with Comair’s
agreement with the Air Line Pilots Association, International (“ALPA”)
reducing Comair’s pilot labor costs.
|
|
(4) |
Reflects
interest earned due to the preservation of cash from our Chapter
11
proceedings.
|
|
(5) |
Allowed
general, unsecured pre-petition claims in connection with agreements
reached with the committees representing pilot and non-pilot retired
employees.
|
|
(6) |
Estimated
claims for the three months ended March 31, 2007 relate to the
restructuring of the financing arrangements of 16 aircraft offset by
credits for adjustments to prior claims estimates. Estimated claims
for
the three months ended March 31, 2006 relate to the restructuring
of the
financing arrangements of 126 aircraft and the rejection of two aircraft
leases.
|
|
(7) |
Reflects
a charge for rejecting substantially all of our stock options in
our
Chapter 11 proceedings. For additional information regarding this
matter,
see Note 2 of the Notes to the Consolidated Financial Statements
in our
Form 10-K.
|
2.
ACCOUNTING AND REPORTING POLICIES
Basis
of Presentation
The
accompanying unaudited Condensed Consolidated Financial Statements have been
prepared on a going concern basis in accordance with accounting principles
generally accepted in the United States of America (“GAAP”) for interim
financial information, the instructions to Form 10-Q and Article 10 of
Regulation S-X. This contemplates the realization of assets and satisfaction
of
liabilities in the ordinary course of business. Accordingly, the Condensed
Consolidated Financial Statements do not include any adjustments relating to
the
recoverability of assets and classification of liabilities that might be
necessary should we be unable to continue as a going concern.
This
Form 10-Q does not include all the information required by GAAP for complete
financial statements. As a result, this Form 10-Q should be read in conjunction
with the Consolidated Financial Statements and accompanying Notes in our Form
10-K.
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 will adopt fresh start reporting in
accordance with American Institute of Certified Public Accountants 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. For additional information on the pro forma impact
of fresh start reporting on our Consolidated Balance Sheet, see Note
11.
The
accompanying Condensed 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 Condensed
Consolidated Financial Statements. We do not consolidate the financial
statements of any company in which we have an ownership interest of 50% or
less
unless we control that company. We did not control any company in which we
had
an ownership interest of 50% or less for any period presented in our Condensed
Consolidated Financial Statements.
In
preparing our Condensed 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 March 31, 2007 and 2006. 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).
Management
believes that the accompanying unaudited Condensed Consolidated Financial
Statements reflect all adjustments, including normal recurring items,
restructuring and related items, and reorganization items, considered necessary
for a fair statement of results for the interim periods presented.
Due
to the impact of our Chapter 11 proceedings, seasonal variations in the demand
for air travel, the volatility of aircraft fuel prices and other factors,
operating results for the three months ended March 31, 2007 are not necessarily
indicative of operating results for the entire year.
New
Accounting Standards
Effective
January 1, 2007, we adopted Financial Accounting Standards Board (“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.
The
adoption of FIN 48 resulted in a $30 million charge to accumulated deficit
that
is reported as a cumulative effect adjustment for a change in accounting
principle to the opening balance sheet position of shareowners’ deficit at
January 1, 2007. For additional information regarding FIN 48, see Note
8.
In
June 2006, the FASB ratified the Emerging Issues Task Force (“EITF”) consensus
on EITF Issue No. 06-03 “How Taxes Collected From Customers and Remitted to
Governmental Authorities Should Be Presented in the Income Statement (“EITF
06-03”). The scope of EITF 06-03 includes any tax assessed by a governmental
authority that is directly imposed on a revenue-producing transaction between
a
seller and a customer, and provides that a company may adopt a policy of
presenting taxes either gross within revenue or on a net basis. For any such
taxes that are reported on a gross basis, a company should disclose the amounts
of those taxes for each period for which an income statement is presented if
those amounts are significant. This statement is effective to financial reports
for interim and annual reporting periods beginning after December 15, 2006.
We
adopted EITF 06-03 on January 1, 2007. Various taxes and fees on the sale of
tickets to customers are collected by us as an agent and remitted to the
respective taxing authority. These taxes and fees have been presented on a
net
basis in the accompanying consolidated statement of operations and recorded
as a
liability until remitted to the respective taxing authority.
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.
For
the three months ended March 31, 2007, the change in Cash Reserve has been
reported as a component of operating activities on our Condensed
Consolidated Statement of Cash Flows to better reflect the nature of the
restricted cash activities. For the three months ended March 31, 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 $70
million for the three months ended March 31, 2006 from the amounts previously
reported.
We
have reclassified certain other prior period amounts in our Condensed
Consolidated Financial Statements to be consistent with our current period
presentation. The effect of these reclassifications is not
material.
Cash
and Cash Equivalents
We
classify short-term, highly liquid investments with maturities of three months
or less when purchased as cash and cash equivalents. These investments are
recorded at cost, which approximates fair value. Cash and cash equivalents
at
March 31, 2007 and December 31, 2006 include $187 million and $156 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 $68 million and zero at March 31, 2007 and December 31, 2006,
respectively.
Short-Term
Investments
At
March 31, 2007 and December 31, 2006, our short-term investments were comprised
of auction rate securities. In accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and
Equity Securities,” we record these investments as trading securities at fair
value on our Consolidated Balance Sheets. For additional information about
our
accounting for trading securities, see “Investments in Debt and Equity
Securities” in Note 2 of the Notes to the Consolidated Financial Statements in
our Form 10-K.
Restricted
Cash
We
have restricted cash, which primarily relates to cash held as collateral by
credit card processors and interline clearinghouses to support certain projected
insurance obligations. Restricted cash included in current assets on our
Consolidated Balance Sheets totaled $1.0 billion and $750 million at March
31,
2007 and December 31, 2006, respectively. Restricted cash recorded in other
noncurrent assets on our Consolidated Balance Sheets totaled $67 million and
$52
million at March 31, 2007 and December 31, 2006, respectively.
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 $200 million and $214 million for the three
months ended March 31, 2007 and 2006, respectively. Contractual interest expense
(including interest expense that is associated with obligations in liabilities
subject to compromise) totaled $412 million and $309 million for the three
months ended March 31, 2007 and 2006, respectively.
Stock-Based
Compensation
Effective
January 1, 2006, we adopted the fair value provisions of SFAS No. 123 (revised
2004), “Share-Based Payment” (“SFAS 123R”). This standard requires companies to
measure the cost of employee services in exchange for an award of equity
instruments (typically stock options) based on the grant-date fair value of
the
award. The fair value is estimated using option-pricing models. The resulting
cost is recognized over the period during which an employee is required to
provide service in exchange for the awards (usually the vesting period of the
awards). Prior to the adoption of SFAS 123R, we accounted for stock option
grants in accordance with Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees,” 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 we grant after December 31, 2005. For
stock options we granted prior to January 1, 2006, but for which vesting was
not
complete on that date, we applied the modified prospective transition method
in
accordance with SFAS 123R. Under this method, we account for such awards on
a
prospective basis, with expense being recognized in our Consolidated Statement
of Operations beginning in the March 2006 quarter using the grant-date fair
values previously calculated for our pro forma disclosures. Due to the
application of the modified prospective transition method, comparable prior
periods have not been retroactively adjusted to include share-based
compensation.
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.
We
did not grant any stock options during the three months ended March 31, 2007.
3.
DERIVATIVE INSTRUMENTS
Fuel
Hedging Program
Under
our Chapter 11 proceedings, we were authorized to hedge up to 80% of our
projected fuel consumption for each month in the quarter ended March 31, 2007.
We are also authorized to hedge 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. As of
March 31, 2007, we had hedged 48% and 21% of our projected aircraft fuel
requirements for the June and September 2007 quarters, respectively, using
heating oil zero-cost collar and swap contracts. We have not entered into any
fuel hedge contracts for the December 2007 quarter.
Losses
(gains) recorded on our Consolidated Statements of Operations for the three
months ended March 31, 2007 and 2006 related to our fuel hedge contracts are
as
follows:
|
|
2007
|
|
2006
|
(in
millions)
|
|
Aircraft
fuel
expense
|
|
Other
expense
(income)
|
|
Aircraft
fuel
expense
|
|
Other
expense
(income)
|
Open
fuel hedge contracts
|
|
$
|
—
|
|
$
|
(23
|
)
|
$
|
—
|
|
$
|
—
|
Settled
fuel hedge contracts
|
|
|
18
|
|
|
(1
|
)
|
|
(3
|
)
|
|
—
|
Total
|
|
$
|
18
|
|
$
|
(24
|
)
|
$
|
(3
|
)
|
$
|
—
|
Our
open fuel hedge contracts at March 31, 2007 had an estimated fair market value
gain of $73 million, which we recorded in prepaid expenses and other on our
Consolidated Balance Sheet. For
additional information about our fuel hedging program, see Notes 2 and 4 of
the
Notes to the Consolidated Financial Statements in our Form 10-K.
4.
DEBT
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
six joint bookrunners and will consist of a $1.0 billion first-lien revolving
credit facility, a $600 million first-lien synthetic revolving facility and
a
$900 million second-lien term loan facility. The Exit Facility will be secured
by substantially all of the first priority collateral securing the existing
Amended and Restated DIP Credit Facility.
Proceeds
from the first lien synthetic loans and the second lien term loans and existing
cash will be used to repay the outstanding principal amounts of $1.9 billion
and
$115 million, together with interest thereon, and all other amounts outstanding
under the Amended and Restated DIP Credit Facility and the Amex Post-Petition
Facility (collectively, the “DIP Facility”), respectively, as defined and
described in Note 6 to the Consolidated Financial Statements in our Form 10-K,
and in the case of letters of credit outstanding under the Amended and Restated
DIP Credit Facility, back-to-back letters of credit will be issued under the
first-lien revolving credit facility in guarantee thereof. In anticipation
of
these repayments, we have reclassified the long-term portion of the DIP Facility
to current maturities of long-term debt and capital leases on our Consolidated
Balance Sheet at March 31, 2007.
The
scheduled maturity date for the first-lien revolving credit facility and the
first-lien synthetic revolving facility will be the fifth anniversary of the
closing date of the Exit Facility. The scheduled maturity date for the
second-lien term will be the seventh anniversary of the closing date 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.
Boston
Airport Terminal Project
During
2001, we entered into lease and financing agreements with 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.
As
part of our Chapter 11 proceedings, 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 will be eliminated, including the guarantee of debt service, and
that all rental payments for the leased space will 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. Due to the settlement with Massport,
we
derecognized debt associated with the Special Facility Revenue Bonds in the
amount of $498 million offset primarily by (1) $155 million in asset charges
related to a reduction in space and (2) $134 million associated with the
recording of new debt, which resulted in a net reorganization gain in the amount
of $126 million for the three months ended March 31, 2007.
Other
The
DIP Facility contains certain affirmative, negative and financial covenants,
which are described in Note 6 of the Notes to the Consolidated Financial
Statements in our Form 10-K. In addition, as is customary in the airline
industry, our aircraft lease and financing agreements require that we maintain
certain levels of insurance coverage, including war-risk insurance. For
additional information about our war-risk insurance currently provided by the
U.S. Government, see Note 5.
We
were in compliance with these covenant requirements at March 31, 2007.
5.
PURCHASE COMMITMENTS AND CONTINGENCIES
Aircraft
Order Commitments
Future
commitments for aircraft on firm order as of March 31, 2007 are estimated to
be
approximately $3.7 billion. The following table shows the timing of these
commitments:
Year
Ending December 31,
(in
millions)
|
|
Amount
|
|
Nine
months ending December 31, 2007
|
|
$
|
579
|
|
2008
|
|
|
1,232
|
|
2009
|
|
|
1,140
|
|
2010
|
|
|
712
|
|
Total
|
|
$
|
3,663
|
|
Our
aircraft order commitments as of March 31, 2007 consist of firm orders to
purchase five B-777-200LR aircraft, 10 B-737-700 aircraft, 50 B-737-800 aircraft
and 30 CRJ-900 aircraft discussed below. Our firm orders to purchase 50 B737-800
aircraft include 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 2007. In April 2007, we consummated
the first of these sales. These sales will reduce our future commitments by
approximately $1.9 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 entered into agreements to lease 10 B-757-200ER aircraft. These aircraft
will be delivered to us 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 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. This transaction is subject to the completion of definitive
documentation.
Contract
Carrier Agreements
Delta
Connection Carriers
As
of March 31, 2007, we had contract carrier agreements with nine regional air
carriers (“Connection Carriers”), including our wholly owned subsidiary, Comair,
and eight unaffiliated carriers.
Capacity
Purchase Agreements.
During the three months ended March 31, 2007, six carriers operated as contract
carriers for us (in addition to Comair) pursuant to capacity purchase
agreements. Under these agreements, 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. We have entered into
more than one capacity purchase agreement with two of these carriers.
The
following table shows, by carrier and contract, (1) the number of aircraft
in
Delta Connection operation as of March 31, 2007, (2) the number of aircraft
scheduled to be in Delta Connection operation as of December 31, 2007, (3)
the
number of aircraft scheduled to be in Delta Connection operation immediately
prior to the expiration date of the agreement and (4) the expiration date of
the
agreement:
Carrier
|
|
Aircraft
in
Operation as of
March
31, 2007
|
|
Aircraft in
Operation
as of
December
31,
2007
|
|
Aircraft in
Operation
Immediately
Prior
to the
Expiration
Date
of
the Agreement
|
|
Expiration
Date
of
Agreement
|
Atlantic
Southeast Airlines, Inc. (“ASA”)
|
|
153
|
|
153
|
|
149
|
|
2020
|
SkyWest
Airlines, Inc. (“SkyWest”)
|
|
78
|
|
82
|
|
82
|
|
2020
|
SkyWest/ASA
|
|
8
|
|
12
|
|
12
|
|
2012
|
Chautauqua
|
|
39
|
|
39
|
|
24
|
|
2016
|
Freedom(1)
|
|
30
|
|
36
|
|
22
|
|
2017
|
Freedom(1)
|
|
—
|
|
2
|
|
14
|
|
2017
|
Freedom(1)
|
|
12
|
|
—
|
|
12
|
|
2007
|
Shuttle
America
|
|
16
|
|
16
|
|
16
|
|
2019
|
ExpressJet
Airlines, Inc. (“ExpressJet”)
|
|
—
|
|
10
|
|
10
|
|
2009
|
|
(1) |
We
have separate agreements with Freedom that involve different aircraft
types (specifically ERJ-145s, CRJ-900s and Dash 8 Turboprops,
respectively), expiration dates and terms. These agreements are
shown separately to illustrate the variance in the number of aircraft
that
will be operated during the term of the
agreements.
|
The
following table shows the available seat miles (“ASMs”) and revenue passenger
miles (“RPMs”) operated for us
under capacity purchase agreements with the following six unaffiliated
regional air carriers for the three months ended March 31, 2007 and
2006:
|
· |
ASA,
SkyWest, Chautauqua, Freedom and Shuttle America for all periods
presented; and
|
|
· |
ExpressJet
from February 27, 2007 to March 31,
2007.
|
(in
millions, except for number of aircraft operated)
|
|
2007
|
|
2006
|
ASMs
|
|
4,195
|
|
3,473
|
RPMs
|
|
3,170
|
|
2,709
|
Number
of aircraft operated, end of period
|
|
336
|
|
280
|
The
table above was not subject to the review procedures of our Independent
Registered Public Accounting Firm.
Revenue
Proration Agreements.
We have revenue proration agreements with American Eagle Airlines, Inc.
(“Eagle”) and Big Sky Airlines (“Big Sky”). These agreements establish a fixed
dollar or percentage division of revenues for tickets sold to passengers
traveling on connecting flight itineraries.
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 March 31, 2007, 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 $480 million and $350 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 Chautauqua and Shuttle America total $44
million and $66 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
March
31, 2007 and December 31, 2006.
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 38 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. 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.”
Comair
and Delta are pursuing settlement negotiations with the plaintiffs in these
lawsuits, and the defendants recently entered into the first such settlement.
The settled case has been dismissed with prejudice. 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), 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
2006, 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 amounts may be revised as additional information
becomes available and as settlements are finalized. 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.
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
March 31, 2007, we had a total of 52,260 full-time equivalent employees.
Approximately 17% of these employees, including all of our pilots, are
represented by labor unions.
As
described in Note 1 of the Notes to the Consolidated Financial Statements in
our
Form 10-K, Delta reached a comprehensive agreement with ALPA, which is the
collective bargaining representative of Delta’s 5,931 pilots, to reduce Delta’s
pilot labor costs. This agreement became effective June 1, 2006 and becomes
amendable on December 31, 2009. In addition, Comair reached agreements with
each
of the International Brotherhood of Teamsters (“IBT”), representing Comair’s 945
flight attendants, the International Association of Machinists and Aerospace
Workers (“IAM”), representing Comair’s 533 maintenance employees, and ALPA,
representing Comair’s approximately 1,418 pilots, to reduce the labor costs of
each of these employee groups. Comair’s agreement with the IBT and IAM became
effective on December 31, 2006 and becomes amendable on December 31, 2010.
Comair’s agreement with ALPA became effective on March 2, 2007 and becomes
amendable on March 2, 2011.
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
In
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.
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.
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.
6.
FLEET INFORMATION
Our
active fleet, orders, options and rolling options at March 31, 2007 are
summarized in the following table. Options have scheduled delivery slots.
Rolling options replace options and are assigned delivery slots as options
expire or are exercised.
|
|
Current
Fleet
|
|
|
|
|
|
|
|
|
|
Aircraft
Type
|
|
Owned
|
|
Capital
Lease
|
|
Operating
Lease
|
|
Total
|
|
Average
Age
|
|
Orders
|
|
Options
|
|
Rolling
Options
|
|
B-737-700
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
10
|
|
—
|
|
—
|
|
B-737-800
|
|
71
|
|
—
|
|
—
|
|
71
|
|
6.4
|
|
50
|
|
60
|
|
120
|
|
B-757-200
|
|
68
|
|
32
|
|
21
|
|
121
|
|
15.5
|
|
—
|
|
—
|
|
—
|
|
B-767-300
|
|
4
|
|
1
|
|
19
|
|
24
|
|
16.7
|
|
—
|
|
—
|
|
—
|
|
B-767-300ER
|
|
50
|
|
—
|
|
9
|
|
59
|
|
11.1
|
|
—
|
|
10
|
|
2
|
|
B-767-400ER
|
|
21
|
|
—
|
|
—
|
|
21
|
|
6.1
|
|
—
|
|
18
|
|
—
|
|
B-777-200ER
|
|
8
|
|
—
|
|
—
|
|
8
|
|
7.2
|
|
—
|
|
—
|
|
—
|
|
B-777-200LR
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
5
|
|
|
|
|
|
MD-88
|
|
63
|
|
32
|
|
25
|
|
120
|
|
16.8
|
|
—
|
|
—
|
|
—
|
|
MD-90
|
|
16
|
|
—
|
|
—
|
|
16
|
|
11.3
|
|
—
|
|
—
|
|
—
|
|
CRJ-100
|
|
18
|
|
—
|
|
83
|
|
101
|
|
9.5
|
|
—
|
|
—
|
|
—
|
|
CRJ-200
|
|
11
|
|
—
|
|
9
|
|
20
|
|
4.5
|
|
—
|
|
28
|
|
—
|
|
CRJ-700
|
|
17
|
|
—
|
|
—
|
|
17
|
|
3.4
|
|
—
|
|
33
|
|
—
|
|
CRJ-900
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
30
|
|
30
|
|
—
|
|
Total
|
|
347
|
|
65
|
|
166
|
|
578
|
|
11.8
|
|
95
|
|
190
|
|
135
|
|
The
table above was not subject to the review procedures of our Independent
Registered Public Accounting Firm.
7.
EMPLOYEE BENEFIT PLANS
Net
Periodic Benefit Costs
Net
periodic benefit cost for the three months ended March 31, 2007 and 2006
included the following components:
|
|
|
|
Other
|
|
Other
|
|
|
|
|
|
Postretirement
|
|
Postemployment
|
|
|
|
Pension
Benefits
|
|
Benefits
|
|
Benefits
|
|
(in
millions)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Service
cost
|
|
$
|
—
|
|
$
|
35
|
|
$
|
3
|
|
$
|
5
|
|
$
|
5
|
|
$
|
13
|
|
Interest
cost
|
|
|
109
|
|
|
178
|
|
|
16
|
|
|
24
|
|
|
31
|
|
|
31
|
|
Expected
return on plan assets
|
|
|
(97
|
)
|
|
(130
|
)
|
|
—
|
|
|
—
|
|
|
(38
|
)
|
|
(40
|
)
|
Amortization
of prior service benefit
|
|
|
—
|
|
|
—
|
|
|
(23
|
)
|
|
(11
|
)
|
|
(2
|
)
|
|
__
|
|
Recognized
net actuarial loss
|
|
|
14
|
|
|
58
|
|
|
6
|
|
|
2
|
|
|
4
|
|
|
3
|
|
Net
periodic cost
|
|
$
|
26
|
|
$
|
141
|
|
$
|
2
|
|
$
|
20
|
|
$
|
—
|
|
$
|
7
|
|
Cash
Flows
We
expect qualified defined benefit pension contributions for 2007 to be
approximately $100 million. In the March 2007 quarter, we contributed $50
million to our qualified defined benefit pension plan for non-pilot employees
(“Non-pilot Plan”).
For
additional information about our benefit plans, see Note 10 of the Notes to
the
Consolidated Financial Statements in our Form 10-K.
8.
INCOME TAXES
Deferred
income taxes reflect the net tax effect of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes
and
income tax purposes. The following table shows significant components of our
deferred tax assets and liabilities at March 31, 2007 and December 31,
2006:
(in
millions)
|
|
March
31,
2007
|
|
December
31,
2006
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
2,944
|
|
$
|
2,921
|
|
Pension
benefits
|
|
|
615
|
|
|
615
|
|
Postretirement
benefits
|
|
|
673
|
|
|
681
|
|
Other
employee benefits
|
|
|
2,918
|
|
|
2,898
|
|
AMT
credit carryforward
|
|
|
346
|
|
|
346
|
|
Rent
expense
|
|
|
1,213
|
|
|
1,215
|
|
Other
|
|
|
752
|
|
|
598
|
|
Valuation
allowance
|
|
|
(5,287
|
)
|
|
(5,169
|
)
|
Total
deferred tax assets
|
|
$
|
4,174
|
|
$
|
4,105
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
$
|
3,855
|
|
$
|
3,850
|
|
Other
|
|
|
241
|
|
|
259
|
|
Total
deferred tax liabilities
|
|
$
|
4,096
|
|
$
|
4,109
|
|
The
following table shows the current and noncurrent deferred tax assets
(liabilities) recorded on our Consolidated Balance Sheets at March 31, 2007
and
December 31, 2006:
(in
millions)
|
|
|
|
|
|
Current
deferred tax assets, net
|
|
$
|
463
|
|
$
|
402
|
|
Noncurrent
deferred tax liabilities, net
|
|
|
(385
|
)
|
|
(406
|
)
|
Net
deferred tax assets (liabilities)
|
|
$
|
78
|
|
$
|
(4
|
)
|
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
March 31, 2007, we had (1) $346 million of federal alternative minimum tax
(“AMT”) credit carryforwards, which do not expire, and (2) $7.9 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.
On
July 13, 2006, the FASB issued FIN 48, which clarifies the accounting for
uncertainty in income taxes recognized in an entity’s financial statements in
accordance with SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”), and
prescribes a recognition threshold and measurement attributes for financial
statement disclosure of tax positions taken or expected to be taken on a tax
return. Under FIN 48, the impact of an uncertain income tax position on the
income tax return must be recognized at the largest amount that is
more-likely-than-not to be sustained upon audit by the relevant taxing
authority. An uncertain income tax position will not be recognized if it is
less
than a 50% likelihood of being sustained. Additionally, FIN 48 provides guidance
on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006.
We
adopted the provisions of FIN 48 on January 1, 2007. The adoption of FIN 48
resulted in a $30 million charge to accumulated deficit that is reported as
a
cumulative effect adjustment for a change in accounting principle to
the opening balance sheet position of shareowners’ deficit
at
January 1, 2007. The total amount of unrecognized tax benefits as of that date
of adoption was $217 million which did not change significantly during the
three
months ended March 31, 2007. Included in the total unrecognized tax benefits
at
January 1, 2007, are $86 million of tax benefits that, if recognized, would
affect the effective tax rate.
We
accrued interest related to unrecognized tax benefits in interest expense
and penalties in operating expenses. We had $65 million for the payment of
interest accrued at January 1, 2007. Upon adoption of FIN 48 we increased our
accrual for interest by $4 million. We have no amounts accrued for
penalties.
We
are subject to taxation in the U.S. and various states and are subject to
examination by those authorities for the tax years 2001 and forward. We
are currently under audit by the Internal Revenue Service for the 2001 to 2004
tax years and it is reasonably possible the audit will conclude in 2007.
It is reasonably possible that the amount of the unrecognized benefit with
respect to certain of our unrecognized tax positions will significantly change
within the next 12 months. These changes may be the result of bankruptcy
emergence adjustments or the settlement of audits. At this time, an
estimate of the range of the reasonably possible outcomes cannot be
made.
9.
COMPREHENSIVE LOSS
Comprehensive
loss primarily includes (1) our reported net loss, (2) changes in our
unrecognized pension, postretirement, and postemployment benefit liabilities,
(3) changes in our deferred tax asset valuation allowance related to our
unrecognized pension, postretirement, and postemployment liabilities and (4)
changes in the effective portion of our open fuel hedge contracts, which qualify
for hedge accounting. The following table shows our comprehensive loss for
the
three months ended March 31, 2007 and 2006:
(in
millions)
|
|
2007
|
|
2006
|
|
Net
loss as reported
|
|
$
|
(130
|
)
|
$
|
(2,069
|
)
|
Other
comprehensive income
|
|
|
77
|
|
|
1
|
|
Comprehensive
loss
|
|
$
|
(53
|
)
|
$
|
(2,068
|
)
|
10.
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
for the three months ended March 31, 2007 and 2006:
(in
millions, except per share data)
|
|
2007
|
|
2006
|
|
Basic
and diluted:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(130
|
)
|
$
|
(2,069
|
)
|
Dividends
on allocated Series B ESOP Convertible Preferred Stock
|
|
|
—
|
|
|
(2
|
)
|
Net
loss attributable to common shareowners
|
|
|
(130
|
)
|
|
(2,071
|
)
|
Weighted
average shares outstanding
|
|
|
197.3
|
|
|
193.9
|
|
Basic
and diluted loss per share
|
|
$
|
(0.66
|
)
|
$
|
(10.68
|
)
|
For
the three months ended March 31, 2007 and 2006, we excluded from our loss per
share calculations all common stock equivalents because their effect on loss
per
share was anti-dilutive. These common stock equivalents primarily include
shares of common stock issuable upon conversion of our 8.0% Convertible Senior
Notes due 2023 and our 27/8%
Convertible Senior Notes due 2024. The common stock equivalents totaled 36.4
million shares for the three months ended March 31, 2007 and 2006.
11. |
PRO
FORMA FRESH START CONSOLIDATED BALANCE SHEET
(Not subject to the review
procedures
of our Independent Registered Public Accounting
Firm)
|
Upon
emergence from Chapter 11, we will adopt fresh start reporting in accordance
with SOP 90-7. Fresh start reporting results in our becoming a new entity for
financial reporting purposes. Upon adoption of fresh start reporting, our
financial statements will not be comparable, in various material respects,
to
any of our previously issued financial statements.
Fresh
start reporting requires an allocation of the reorganization value to the
reorganized entity’s assets pursuant to SFAS No. 141, “Business Combinations.”
Fresh start reporting also requires that all liabilities, other than deferred
taxes, be stated at present values of amounts to be paid at appropriate market
interest rates. Deferred taxes are determined in conformity with SFAS 109.
The
adjustments set forth in the Pro Forma Fresh Start Consolidated Balance Sheet
in
the columns captioned “Debt Discharge, Reclassifications and Distribution to
Creditors,” “Repayment of DIP Facility and New Exit Facility” and “Fresh Start
Adjustments” reflect the assumed effect of the consummation of the transactions
contemplated by the Plan, including the settlement of various liabilities and
securities issuances, incurrence of new indebtedness and cash payments. These
adjustments reflect preliminary estimates of fair value. Actual fair value
amounts to be recorded when Debtors emerge from Chapter 11, which is expected
to
be April 30, 2007 (the “Effective Date”), may be materially different from these
estimates.
Asset
appraisals for fresh start reporting are preliminary and subject to change.
As a
result, changes in values and assumptions from those reflected below may
materially affect the reported value of goodwill. Additionally, amounts will
differ due to the results of operations between March 31, 2007 and the Effective
Date.
The
pro forma effects of the Plan and fresh start reporting on our Consolidated
Balance Sheet at March 31, 2007 are as follows:
Pro
Forma Fresh Start Consolidated Balance Sheet
|
|
|
|
|
(in
millions)
|
|
(Predecessor)
March
31, 2007
|
|
Release
of
Restricted/
Designated
Cash
|
|
Debt
Discharge, Reclassifications
and
Distribution to Creditors
|
|
Repayment
of
DIP
Facility
and
New Exit
Financing
|
|
Fresh
Start Adjustments
|
|
(Successor)
Reorganized
Balance
Sheet
March
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
cash equivalents and short-term investments
|
|
$
|
2,696
|
|
$
|
237
|
|
$
|
(69
|
)
|
$
|
(503
|
)
|
$
|
-
|
|
$
|
2,361
|
|
Restricted
and designated cash
|
|
|
1,233
|
|
|
(237
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
996
|
|
Accounts
receivable, net
|
|
|
986
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
986
|
|
Expendable
parts and supplies inventories, net
|
|
|
184
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
33
|
|
|
217
|
|
Deferred
income taxes, net
|
|
|
463
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
463
|
|
Prepaid
expenses and other
|
|
|
572
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
572
|
|
Total
current assets
|
|
|
6,134
|
|
|
-
|
|
|
(69
|
)
|
|
(503
|
)
|
|
33
|
|
|
5,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
flight equipment and net flight equipment under capital
lease
|
|
|
11,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,468
|
)
|
|
9,532
|
|
Other
property and equipment, net
|
|
|
1,528
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(25
|
)
|
|
1,503
|
|
Total
property and equipment, net
|
|
|
12,528
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,493
|
)
|
|
11,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
227
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
8,857
|
|
|
9,084
|
|
Operating
rights and other intangibles, net
|
|
|
88
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,857
|
|
|
2,945
|
|
Other
noncurrent assets
|
|
|
834
|
|
|
-
|
|
|
-
|
|
|
44
|
|
|
-
|
|
|
878
|
|
Total
other assets
|
|
|
1,149
|
|
|
-
|
|
|
-
|
|
|
44
|
|
|
11,714
|
|
|
12,907
|
|
Total
assets
|
|
$
|
19,811
|
|
$
|
-
|
|
$
|
(69
|
)
|
$
|
(459
|
)
|
$
|
10,254
|
|
$
|
29,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
maturities of long-term debt and capital leases
|
|
$
|
1,260
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
1,260
|
|
DIP
loan Facility
|
|
|
1,959
|
|
|
-
|
|
|
-
|
|
|
(1,959
|
)
|
|
-
|
|
|
-
|
|
Accounts
payable, accrued salaries and related benefits
|
|
|
1,870
|
|
|
-
|
|
|
307
|
|
|
-
|
|
|
-
|
|
|
2,177
|
|
Air
traffic liability
|
|
|
2,437
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,437
|
|
Taxes
payable
|
|
|
473
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
473
|
|
Total
current liabilities
|
|
|
7,999
|
|
|
-
|
|
|
307
|
|
|
(1,959
|
)
|
|
-
|
|
|
6,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONCURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt and capital leases
|
|
|
4,792
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
323
|
|
|
5,115
|
|
Exit
Facility
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,500
|
|
|
-
|
|
|
1,500
|
|
Deferred
revenue and credits
|
|
|
339
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(24
|
)
|
|
315
|
|
Other
notes payable
|
|
|
-
|
|
|
-
|
|
|
717
|
|
|
-
|
|
|
-
|
|
|
717
|
|
Pension,
postretirement and related benefits
|
|
|
-
|
|
|
-
|
|
|
4,277
|
|
|
-
|
|
|
-
|
|
|
4,277
|
|
Other
|
|
|
1,008
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
858
|
|
|
1,866
|
|
Total
noncurrent liabilities
|
|
|
6,139
|
|
|
-
|
|
|
4,994
|
|
|
1,500
|
|
|
1,157
|
|
|
13,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
subject to compromise
|
|
|
19,349
|
|
|
-
|
|
|
(19,349
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREOWNERS'
(DEFICIT) EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debtors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock and additional paid in capital - Debtors
|
|
|
1,563
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,563
|
)
|
|
-
|
|
Accumulated
deficit and other - Debtors
|
|
|
(15,239
|
)
|
|
-
|
|
|
13,979
|
|
|
-
|
|
|
1,260
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reorganized
Debtors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock and additional paid in capital - Reorganized Debtors
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
9,400
|
|
|
9,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareowners' (deficit) equity
|
|
$
|
19,811
|
|
$
|
-
|
|
$
|
(69
|
)
|
$
|
(459
|
)
|
$
|
10,254
|
|
$
|
29,537
|
|
|
· |
Release
of Restricted and Designated Cash.
Adjustments include the reclassification to cash, cash equivalents
and
short-term investments of cash (1) designated for the payment of
certain
operational taxes and fees to governmental authorities and (2)
restricted
by interline clearing houses.
|
|
· |
Debt
Discharge, Reclassifications and Distribution to Creditors.
Adjustments include (1) the payment of certain administrative claims
of
$69 million, (2) the reclassification of certain estimated claims
recorded
in liabilities subject to compromise, which are to be assumed or
reinstated to their appropriate balance sheet classification, including
the reinstatement and reclassification of $3.3 billion associated
with the
Non-pilot Plan and accrued benefits and $1.0 billion associated
with
postretirement benefits, (3) the accrual of an obligation of $225
million
to the Pension Benefit Guaranty Corporation that is anticipated
to be paid shortly after emergence and (4) $717 million of new
unsecured
debt which is contemplated to be issued in conjunction with the
satisfaction of claims, including the issuance of the Pilot Notes
(as
defined in Note 1 of the Notes to the Consolidated Financial Statements
in
our Form 10-K) ($650 million), and the New KCAB Note ($67 million)
pursuant to the Plan. We expect liabilities subject to compromise
to be
approximately $19.0 billion immediately prior to the Effective
Date, of
which approximately $14.0 billion will be discharged in the Chapter
11
cases.
|
|
· |
Repayment
of DIP Facility and New Exit Financing.
Adjustments reflect the repayment of the DIP Facility and expected
borrowing under the new Exit Facility. Financing fees related to
(1) the
DIP Facility will be written off at the Effective Date and (2)
fees
related to the new Exit Facility will be capitalized and amortized
over
the term of the facility. See Note 4 for information regarding
the Exit
Facility.
|
|
· |
Fresh
Start Adjustments.
Adjustments reflected in the Pro Forma Fresh Start Consolidated
Balance
Sheet are summarized as
follows:
|
|
(a)
|
Current
assets and liabilities.
Current assets and liabilities are primarily estimated to reflect
fair
value in the Pro Forma Fresh Start Consolidated Balance Sheet.
|
|
(b)
|
Property
and equipment, net.
An adjustment of $1.5 billion was recorded to reduce the net book
values
of fixed assets to their estimated fair market value.
|
|
(c)
|
Goodwill.
An adjustment of $8.9 billion was recorded to reflect reorganization
equity value of the reorganized entity that is not attributed to
specific
tangible or identified intangible
assets.
|
|
(d)
|
Intangibles.
An adjustment of $2.9 billion was recorded to allocate reorganization
value to identified intangible assets. These intangible assets reflect
the
estimated fair value of the Debtors’ domestic slots, international route
authorities, SkyMiles partner and customer relationships and trade
names,
as well as various other identified intangible assets. Certain of
these
assets, such as the international route authorities and trade names,
are
expected to have an indefinite estimated life as they are considered
renewable assets. The carrying value of these indefinite-lived assets
will
be subject to an annual impairment review.
|
|
(e)
|
Long-term
debt and capital leases.
An adjustment of $323 million was recorded to increase debt to fair
value.
The increase represents a net premium to be accreted to interest
expense
over the term of the respective debt instrument.
|
|
(f)
|
Deferred
revenue and credits.
We have not reflected fresh start reporting adjustments for the frequent
flyer obligation associated with flight awards earned as part of
the
SkyMiles frequent flyer program. We are currently evaluating whether
to elect a deferred revenue model upon emergence from bankruptcy.
Prior to emergence, we record a liability for the estimated incremental
cost of flight awards which are earned under our SkyMiles frequent
flyer
program. If we elect a deferred revenue model, it may have a
material impact on our prospective financial results. For additional
information regarding our accounting policy for the frequent flyer
obligation see Note 2 of the Notes to the Consolidated Financial
Statements in our Form 10-K.
|
|
(g)
|
Noncurrent
liabilities - other.
An adjustment was recorded in the amount of $858 million to primarily
reflect the tax effect of fresh start reporting.
|
|
(h)
|
Total
shareowners’ deficit.
Adopting fresh start reporting results in a new reporting entity
with no
retained earnings or accumulated deficit. All pre-existing common
stock is
eliminated and replaced by the new equity structure based on the
Plan. The
Pro Forma Fresh Start Consolidated Balance Sheet reflects initial
shareowners’ equity value of $9.4 billion, representing the low
end in the estimated range of $9.4 billion to $12.0 billion. The
low end of the range is estimated to reflect current market conditions
as
of the March 2007 quarter.
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Background
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.
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 deadline for creditors to vote on the Plan was April
9,
2007. The Plan was approved by the creditors and, on April 25, 2007, confirmed
by the Bankruptcy Court. The Debtors are planning to emerge from Chapter 11
on
April 30, 2007.
For
additional information regarding the Debtors’ Chapter 11 proceedings, see
Note 1 of the Notes to the Condensed Consolidated Financial
Statements.
Overview
of March 2007 Quarter Results
In
the March 2007 quarter, we recorded a net loss of $130 million, which includes
a
$124 million charge to reorganization items, net. For additional information
regarding this charge, see “Results of Operations - March 2007 and 2006 Quarters
- Reorganizations Items, Net” below.
From
an operational perspective, we reported operating income of $155 million in
the
March 2007 quarter, a $640 million improvement in operating results compared
to
the March 2006 quarter. 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.
Cash
and cash equivalents and short-term investments totaled $2.9 billion at March
31, 2007, compared to $2.4 billion at March 31, 2006.
Our
Business Plan
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.
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 were reflected in our Consolidated
Financial Statements for 2006. 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. We expect we will achieve additional financial
improvements in 2007.
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.
For
additional information regarding our business plan, see “Our Business Plan” in
“Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations” in our Form 10-K.
Basis
of Presentation
Our
Condensed Consolidated Financial Statements have been prepared on a going
concern basis in accordance with accounting principles generally accepted in
the
United States of America, 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 Condensed Consolidated Financial
Statements do not include any adjustments relating to the recoverability of
assets and classification of liabilities that might be necessary should we
be
unable to continue as a going concern.
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 will 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. For additional information on the pro forma
impact of fresh start reporting on our Consolidated Balance Sheet, see Note
11
of the Notes to the Condensed Consolidated Financial Statements.
The
accompanying Condensed 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;
or
(4) as to operations, the effect of any changes that may be made in our
business.
Accounting
Adjustments
During
2006, we recorded certain out-of-period adjustments (“Accounting Adjustments”)
in our Condensed Consolidated Financial Statements that are reflected in our
results for the three months ended March 31, 2006. These adjustments resulted
in
an aggregate net noncash charge totaling $310 million to our Consolidated
Statement of Operations, consisting 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.”
|
|
· |
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 years, the noncash nature of the Accounting Adjustments,
our substantial shareowners’ deficit at the end of each of these years and our
status as a debtor-in-possession under Chapter 11 of the Bankruptcy
Code.
Results
of Operations — March 2007 and 2006 Quarters
Net
Loss
Our
consolidated net loss was $130 million for the March 2007 quarter and $2.1
billion for the March 2006 quarter. The net loss for the March 2007 quarter
includes a $124 million charge to reorganization items, net, (see
“Reorganization Items, Net” below). The net loss for the March 2006 quarter
includes (1) a $1.4 billion charge to reorganization items, net and (2) $310
million of noncash charges associated with the Accounting Adjustments (see
“Accounting Adjustments” above).
Operating
Revenue
|
|
Three
Months Ended
March
31,
|
|
Increase
(Decrease)
|
|
%
Increase
(Decrease)
|
|
(in
millions)
|
|
2007
|
|
2006
|
|
|
|
Operating
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline
|
|
$
|
2,796
|
|
$
|
2,572
|
|
$
|
224
|
|
|
9
|
%
|
Regional
affiliates
|
|
|
947
|
|
|
858
|
|
|
89
|
|
|
10
|
%
|
Total
passenger revenue
|
|
|
3,743
|
|
|
3,430
|
|
|
313
|
|
|
9
|
%
|
Cargo
|
|
|
112
|
|
|
123
|
|
|
(11
|
)
|
|
(9
|
)%
|
Other,
net
|
|
|
289
|
|
|
166
|
|
|
123
|
|
|
74
|
%
|
Total
operating revenue
|
|
$
|
4,144
|
|
$
|
3,719
|
|
$
|
425
|
|
|
11
|
%
|
Operating
revenue totaled $4.1 billion in the March 2007 quarter, a $425 million, or
11%,
increase compared to the March 2006 quarter. Passenger revenue increased 9%
on a
2% increase in capacity. The increase in passenger revenue is primarily due
to a
rise of 6% and 7% in passenger mile yield and passenger revenue per available
seat mile (“Passenger RASM”), respectively. Mainline passenger revenue
increased primarily due to our increased service to international
destinations. Passenger revenue of regional affiliates increased primarily
due to increased flying by our contract carriers, which resulted in an 8%
increase in revenue passenger miles (“RPMs”), or traffic, on 11% greater
capacity. In the March 2006 quarter, passenger revenue and other, net
revenue were negatively impacted by certain Accounting Adjustments discussed
above.
|
|
Three
Months Ended
March 31, 2007
|
|
Increase
(Decrease)
Three
Months Ended March 31, 2007 vs. 2006
|
|
(in
millions)
|
|
Passenger
Revenue
|
|
Passenger
Revenue
|
|
RPMs
|
|
Passenger
Mile
Yield
|
|
Passenger
RASM
|
|
Load
Factor
|
|
Passenger
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
American passenger revenue
|
|
$
|
2,800
|
|
3%
|
|
(4)%
|
|
8%
|
|
9%
|
|
0.8
|
|
International
passenger revenue
|
|
|
917
|
|
36%
|
|
27%
|
|
8%
|
|
10%
|
|
1.4
|
|
Charter
revenue
|
|
|
26
|
|
(27)%
|
|
(38)%
|
|
18%
|
|
0%
|
|
(6.8)
|
|
Total
passenger revenue
|
|
$
|
3,743
|
|
9%
|
|
3%
|
|
6%
|
|
7%
|
|
0.9
|
|
North
American Passenger Revenue.
North American passenger revenue increased 3%, driven by an 8% increase in
passenger mile yield and a 0.8 point increase in load factor, which were
partially offset by a 5% decline in capacity. Passenger RASM increased 9%.
The
decline in capacity, partially offset by the increase in load factor, resulted
in a 4% decline in RPMs. The increases in passenger revenue, passenger mile
yield and Passenger RASM reflect (1) strong passenger demand and
(2) revenue and network productivity improvements, including right-sizing
capacity to better meet customer demand and the continued restructuring of
our
route network to reduce less productive short haul domestic flights and
reallocate widebody aircraft to international routes.
International
Passenger Revenue.
International passenger revenue increased 36%, generated by a 27% increase
in
RPMs from a 24% increase in capacity. The passenger mile yield and Passenger
RASM increased 8% and 10%, 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
|
|
Three
Months Ended
March
31,
|
|
Increase
(Decrease)
|
|
%
Increase
(Decrease)
|
|
(in
millions)
|
|
2007
|
|
2006
|
|
|
|
Operating
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft
fuel
|
|
$
|
920
|
|
$
|
929
|
|
$
|
(9
|
)
|
|
(1
|
)%
|
Salaries
and related costs
|
|
|
906
|
|
|
1,166
|
|
|
(260
|
)
|
|
(22
|
)%
|
Contract
carrier arrangements
|
|
|
717
|
|
|
609
|
|
|
108
|
|
|
18
|
%
|
Depreciation
and amortization
|
|
|
291
|
|
|
301
|
|
|
(10
|
)
|
|
(3
|
)%
|
Contracted
services
|
|
|
289
|
|
|
261
|
|
|
28
|
|
|
11
|
%
|
Passenger
commissions and other selling expenses
|
|
|
220
|
|
|
212
|
|
|
8
|
|
|
4
|
%
|
Landing
fees and other rents
|
|
|
185
|
|
|
292
|
|
|
(107
|
)
|
|
(37
|
)%
|
Aircraft
maintenance materials and outside repairs
|
|
|
184
|
|
|
196
|
|
|
(12
|
)
|
|
(6
|
)%
|
Passenger
service
|
|
|
70
|
|
|
71
|
|
|
(1
|
)
|
|
(1
|
)%
|
Aircraft
rent
|
|
|
70
|
|
|
95
|
|
|
(25
|
)
|
|
(26
|
)%
|
Other
|
|
|
137
|
|
|
72
|
|
|
65
|
|
|
90
|
%
|
Total
operating expense
|
|
$
|
3,989
|
|
$
|
4,204
|
|
$
|
(215
|
)
|
|
(5
|
)%
|
Operating
expense was $4.0 billion for the March 2007 quarter, a $215 million, or 5%,
decrease compared to the March 2006 quarter. As discussed below, the decrease
in
operating expense was primarily due to a decrease in salaries and related costs
and landing fees and other rents. These decreases were partially offset by
an
increase in contract carrier arrangements and other expenses.
Operating
capacity increased 2% to 35.3 billion ASMs primarily due to higher contract
carrier flying from our business plan initiatives to right-size capacity.
Operating cost per available seat mile decreased 7% to 11.31¢.
Aircraft
fuel.
Aircraft fuel expense decreased due to a 2% reduction in consumption. Fuel
prices remained relatively constant averaging $1.87 per gallon, including fuel
hedge losses of $18 million, for the March 2007 quarter, compared to $1.86
per
gallon, including fuel hedge gains of $3 million, for the March 2006 quarter.
Salaries
and related costs.
The decrease in salaries and related costs reflects a decline of (1) 15% due
to
lower Mainline headcount and benefit cost reductions for our pilot and non-pilot
employees and (2) 8% because we recorded a charge during the March 2006 quarter
associated with certain Accounting Adjustments discussed above.
Contract
carrier arrangements.
Contract carrier arrangements expense increased primarily due to a 19% growth
in
contract carrier flying resulting from our business plan initiatives to
right-size capacity.
Contracted
services.
The increase in contracted services is primarily due to higher outsourcing
related to our technology center and certain of our aircraft cleaning
services.
Landing
fees and other rents.
Landing fees and other rents decreased because we recorded a charge during
the
March 2006 quarter associated with certain Accounting Adjustments described
above.
Aircraft
rent.
The decline in aircraft rent expense is due to the renegotiation and rejection
of certain leases in connection with our restructuring efforts under Chapter
11.
Other.
The increase in other operating expense is primarily due to a credit we recorded
during the March 2006 quarter related to certain Accounting Adjustments
described above.
Operating
Income (Loss) and Operating Margin
We
reported operating income of $155 million in the March 2007 quarter, compared
to
an operating loss of $485 million in the March 2006 quarter. Operating margin,
which is the ratio of operating income (loss) to operating revenues, was 4%
and
(13%) for the March 2007 and 2006 quarters, respectively.
Other
(Expense) Income
Other
expense, net for the March 2007 quarter was $161 million, compared to $202
million for the March 2006 quarter. This change is substantially attributable
to
(1) a 7%, or $14 million, decrease in interest expense primarily due to a lower
level of debt outstanding and (2) a $29 million gain in miscellaneous, net
primarily associated with gains related to the ineffective portion of our fuel
hedge positions. For additional information about our fuel hedge positions,
see
Note 3 of the Notes to the Condensed Consolidated Financial
Statements.
Reorganization
Items, Net
Reorganization
items, net totaled a $124 million charge in the March 2007 quarter, primarily
consisting of the following:
|
· |
Contract
carrier agreements. A
net charge of $163 million in connection with amendments to certain
contract carrier agreements. For additional information regarding
this
charge and our contract carrier agreements, see Notes 1 and 5 of
the Notes
to the Condensed Consolidated Financial
Statements.
|
|
· |
Facility
leases.
A $126 million net gain related to our settlement agreement with
the
Massachusetts Port Authority (“Massport”). For additional information
regarding this settlement agreement, see Note 4 of the Notes to the
Condensed Consolidated Financial Statements.
|
|
· |
Pilot
collective bargaining agreement.
An $83 million allowed general, unsecured pre-petition claim in connection
with Comair’s agreement with the Air Line Pilots Association,
International to reduce Comair’s pilot labor costs.
|
Reorganization
items, net totaled a $1.4 billion charge in the March 2006 quarter, primarily
consisting of the following:
|
· |
Aircraft
financing renegotiations and rejections.
A $1.3 billion charge for estimated claims associated with restructuring
the financing arrangements for 126 aircraft and the rejection of
two
aircraft leases.
|
For
additional information about our reorganization items, see Note 1 of the Notes
to the Condensed Consolidated Financial Statements.
Income
Tax Benefit
For
the March 2006 quarter, we recorded an income tax benefit totaling $21 million.
The amount is primarily related to the recognition of tax benefits for a portion
of our March 2006 quarter losses as a result of an analysis of our estimated
required valuation allowance, including the reversal of future temporary
differences. For
additional information about the income tax valuation allowance, see Note 8
of
the Notes to the Condensed Consolidated Financial Statements.
Operating
Statistics
The
following table sets forth our operating statistics for the three months ended
March 31, 2007 and 2006.
|
|
2007
|
|
2006
|
|
Consolidated:
|
|
|
|
|
|
|
|
Revenue
Passenger Miles (millions) (1)
|
|
|
27,213
|
|
|
26,384
|
|
Available
Seat Miles (millions) (1)
|
|
|
35,279
|
|
|
34,602
|
|
Passenger
Mile Yield
(1)
|
|
|
13.75
|
¢
|
|
13.00
|
¢
|
Operating
Revenue Per Available Seat Mile
(1)
|
|
|
11.75
|
¢
|
|
10.75
|
¢
|
Passenger
Revenue Per Available Seat Mile
(1)
|
|
|
10.61
|
¢
|
|
9.91
|
¢
|
Operating
Cost Per Available Seat Mile (1)
|
|
|
11.31
|
¢
|
|
12.15
|
¢
|
Passenger
Load Factor (1)
|
|
|
77.1
|
%
|
|
76.2
|
%
|
Breakeven
Passenger Load Factor (1)
|
|
|
73.9
|
%
|
|
87.0
|
%
|
Passengers
Enplaned (thousands)
(1)
|
|
|
25,325
|
|
|
25,531
|
|
Fuel
Gallons Consumed (millions)
|
|
|
491
|
|
|
500
|
|
Average
Price Per Fuel Gallon, Net of Hedging
|
|
$
|
1.87
|
|
$
|
1.86
|
|
Number
of Aircraft in Fleet, End of Period
|
|
|
584
|
|
|
638
|
|
Full-Time
Equivalent Employees, End of Period
|
|
|
52,260
|
|
|
53,735
|
|
Mainline:
|
|
|
|
|
|
|
|
Revenue
Passenger Miles (millions)
|
|
|
22,994
|
|
|
22,481
|
|
Available
Seat Miles (millions)
|
|
|
29,554
|
|
|
29,428
|
|
Operating
Cost Per Available Seat Mile
|
|
|
10.03
|
¢
|
|
11.12
|
¢
|
Number
of Aircraft in Fleet, End of Period
|
|
|
440
|
|
|
469
|
|
(1) |
Includes
the operations under contract carrier agreements with unaffiliated
regional air carriers:
|
|
- |
Atlantic
Southeast Airlines, Inc., SkyWest Airlines, Inc., Chautauqua Airlines,
Inc., Freedom Airlines, Inc. and Shuttle America Corporation for
all
periods presented and
|
|
- |
ExpressJet
Airlines, Inc. from February 27, 2007 to March 31,
2007.
|
For
additional information about our contract carrier agreements, see Note 5 of
the
Notes to the Condensed Consolidated Financial Statements.
Financial
Condition and Liquidity
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 4 and 5
of
the Notes to the Condensed Consolidated Financial Statements and Notes 6 and
8
of the Notes to the Consolidated Financial Statements in our Form
10-K.
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. For further information about the Exit Facility, see Note 4 of
the
Notes to the Condensed Consolidated Financial Statements.
On
February 14, 2007, the Bankruptcy Court authorized us to enter into a settlement
agreement with Massport regarding our Boston Logan International Airport
Terminal lease. For additional information regarding the settlement agreement,
see Note 4 of the Notes to the Condensed Consolidated Financial
Statements.
On
March 8, 2007, we filed a motion with the Bankruptcy Court seeking approval
of a
settlement agreement with the Kenton County Airport Board and UMB Bank, N.A.
regarding certain bonds and our related lease obligations at the
Cincinnati-Northern Kentucky International Airport. An objection to this motion
was filed on behalf of a group of bondholders. The Bankruptcy Court held a
hearing on the motion, but has not yet ruled. We cannot predict the outcome
of
this matter. For additional information regarding this agreement, see Note
1 of
the Notes to the Condensed Consolidated Financial Statements.
Our
Amended and Restated DIP Credit Facility and the Amex Post-Petition
Facility (collectively, the “DIP Facility”),
as defined and
described in Note 6 to the Consolidated Financial Statements in our Form 10-K,
include certain affirmative, negative and financial covenants. We were in
compliance with these covenant requirements at March 31, 2007 and 2006.
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 4 of the Notes to the Condensed Consolidated Financial
Statements, we have obtained commitments for a $2.5 billion Exit Facility in
connection with our plan to exit bankruptcy.
Our
cash and cash equivalents and short-term investments were $2.9 billion at March
31, 2007, compared to $2.4 billion at March 31, 2006. Restricted cash totaled
$1.1 billion and $991 million at March 31, 2007 and 2006, respectively. Cash
and
cash equivalents at March 31, 2007 and 2006 include $187 million and $174
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 $360 million for the March 2007 quarter,
a
decrease of $271 million compared to the March 2006 quarter. The March 2007
quarter reflects increases in investments in auction rate securities and
operating restricted cash requirements, which were partially offset by higher
cash from operations due to 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” in our Form 10-K.
Cash
flows from investing activities
Cash
used in investing activities totaled $75 million and $62 million for the
March 2007 and 2006 quarters, respectively. The March 2007 quarter
reflects a $68 million increase in our investment of flight
equipment partially offset by (1) $34 million of cash proceeds from our
sale of investment in priceline.com and (2) a $20 million decrease in
restricted cash requirements.
Cash
flows from financing activities
Cash
used in financing activities totaled $226 million and $148 million for the
March
2007 and 2006 quarter, respectively. This increase is primarily due to $97
million in principal payments related to the DIP Facility, which
commenced in July 2006. These payments were partially offset by lower principal
payments on other debt instruments.
Defined
Benefit Pension Plan
We
sponsor a qualified defined benefit pension plan for eligible non-pilot
employees and retirees (“Non-pilot Plan”). Our funding obligation for this plan
is governed by the Employee Retirement Income Security Act of 1974.
During
the March 2007 quarter, we contributed approximately $50 million to the
Non-pilot Plan. On March 15, 2007, we elected the alternative funding schedule
under section 402(a)(1) of the Pension Protection Act of 2006, effective April
1, 2007. This election permits us to extend over a longer period of time our
required funding obligations for the Non-pilot Plan, thereby reducing these
funding obligations over the next several years. As a result of this
legislation, we intend to maintain the Non-pilot Plan. While factors outside
our
control will continue to impact the funding requirements for this plan, the
legislation will make those funding requirements more predictable.
Estimates
of future funding requirements for the Non-pilot Plan are based on various
assumptions. These assumptions include, among other things, the actual and
projected market performance of assets; statutory requirements; and demographic
data for participants. We estimate that the funding requirements under the
Non-pilot Plan will aggregate approximately $100 million for each of 2007 (which
includes the $50 million discussed above), 2008 and 2009.
For
additional information about our pension plans, see Note 10 of the Notes to
the
Consolidated Financial Statements in our Form 10-K and Note 7 of the Notes
to
the Condensed Consolidated Financial Statements.
Compensation
Programs
Upon
emergence from Chapter 11, we will provide a new comprehensive compensation
program for both our non-contract employees (the “Non-contract Program”) and
management employees (the “Management Program”). Non-contract employees are
defined as the approximately 39,000 employees not covered by a domestic
collective bargaining agreement or by the Management Program. Management
employees consist of approximately 1,200 officers, director level employees,
general managers and managers.
Non-contract
Program
The
Non-contract Program will include the following:
|
· |
Stock
ownership.
Shortly after we emerge from Chapter 11, we will distribute a total
of 14
million shares of our common stock to eligible non-contract employees.
Employees may, at their option, hold or sell these shares without
restriction.
|
|
· |
Cash
lump-sum payments.
Shortly after emergence, eligible non-contract employees will receive
a
cash lump sum payment representing 8% of their 2006 earnings or
$1,000,
whichever is greater. We estimate these payments will total approximately
$130 million.
|
|
· |
Base
pay increases.
We intend to provide employees with an industry standard pay structure.
This summer, we will take the first step in this process by implementing
a
4% top of scale increase in base pay for non-contract frontline
employees.
Increases will vary between the start rate and top of
scale.
|
|
· |
Profit
sharing plan. Our
profit sharing plan provides that, for each year in which we have an
annual pre-tax profit (as defined in the profit sharing plan),
we will pay
at least 15% of that profit to eligible employees.
|
|
· |
Shared
Rewards program.
Our Shared Rewards program provides eligible employees monthly
incentives
up to $100 for our achievement of operational goals such as
on-time performance, completion rate and baggage handling
performance.
|
|
· |
Retirement
plan. A
new defined contribution benefit will provide eligible employees
the
opportunity to receive up to 7% of their pay in contributions from
us to
their 401(k) account, of which 2% will be provided automatically
to all
eligible employees and up to an additional 5% can be added as a
dollar for dollar match when the employees contribute their own
pay to
their 401(k) accounts. This retirement benefit is in addition to
benefits
that have already been earned under the Non-pilot Plan. For additional
information regarding the Non-pilot plan, see “Defined Benefit Pension
Plan” above.
|
Pilots
and flight dispatchers are excluded from the Non-contract Program, except for
the profit sharing plan and Shared Rewards program and, for flight dispatchers
the new defined contribution retirement benefit, because their compensation
is
covered by their respective collective bargaining agreements.
Management
Program
A
substantial portion of compensation being provided to management under the
Management Program will be at-risk and tied directly to both our performance
and, depending on the management employee’s level of responsibility,
individual performance. The Management Program for officers will include equity
awards comprising of restricted stock, stock options and performance shares.
Officers
and directors will not receive across-the-board pay increases until frontline
employees have reached industry standard pay. They also will not receive cash
lump-sum payments upon emergence under the Management Program. Executives will
participate in the same pension plans as under the Non-contract Program. They
also will be eligible to participate in an annual incentive plan under which
the
performance measurement for senior officers will be based on a combination
of
financial and operational goals, and no payments will be made in any year for
which there is no payout under the profit sharing plan under the Non-contract
Program. Payouts under the annual incentive plan will be largely based on the
same fundamental metrics that will affect what non-contract employees receive
under their profit sharing plan and Shared Reward programs. In addition,
executives will be eligible for certain severance benefits if their employment
terminates other than for cause or voluntary resignation or within a specified
period of time after a change in control of the company.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
There
have been no material changes in market risk from the information provided
in
the “Market Risks Associated with Financial Instruments” section of “Item 7.
Management’s Discussion and Analysis of Financial condition and Results of
Operations” in our Form 10-K other than those discussed below.
Aircraft
Fuel Price Risk
Our
results of operations may be 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.
For
the March 2007 quarter, aircraft fuel expense accounted for 23% of our total
operating expenses. Aircraft fuel expense for the March 2007 quarter decreased
1% compared to the corresponding period in the prior year due to a 2% reduction
in consumption. Fuel prices remained relatively constant averaging $1.87 per
gallon, including fuel hedge losses of $18 million, for the March 2007 quarter
compared to $1.86 per gallon, including fuel hedge gains of $3 million, for
the
March 2006 quarter.
As
of March 31, 2007, we had hedged 34% of our projected fuel requirements from
April 1, 2007 to September 30, 2007 using heating oil zero-cost collar contracts
with weighted average contract cap and floor prices of $1.81 and $1.59,
respectively, and swap contracts with a weighted average contract price of
$1.23. As of March 31, 2007, our open fuel hedge contracts had an estimated
fair
market value gain of $73 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 would change the estimated fair market value associated with our
outstanding contracts at settlement to a $141 million gain.
We
project that our aircraft fuel consumption will be 1.6 billion gallons from
April 1, 2007 to December 31, 2007. Based on a projected average jet fuel price
of $2.04 per gallon for that period, a 10% rise in jet fuel prices would
increase our aircraft fuel expense by $191 million, inclusive of the impact
of
effective hedge instruments that are outstanding as of March 31,
2007.
For
additional information regarding our other exposures to market risks, see
“Market Risks Associated with Financial Instruments” in “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations” as
well as Note 4 of the Notes to the Consolidated Financial Statements in our
Form
10-K.
Item
4. Controls and Procedures
Our
management, including our Chief Executive Officer and Executive Vice President
and Chief Financial Officer, performed an evaluation of our disclosure controls
and procedures, which have been designed to permit us to effectively identify
and timely disclose important information. Our management, including our Chief
Executive Officer and Executive Vice President and Chief Financial Officer,
concluded that the controls and procedures were effective as of March 31, 2007
to ensure that material information was accumulated and communicated to our
management, including our Chief Executive Officer and Executive Vice President
and Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure.
During
the three months ended March 31, 2007, we made no change in our internal control
over financial reporting that has materially affected, or is reasonably likely
to materially affect, our internal control over financial
reporting.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Shareowners of
Delta
Air Lines, Inc.
We
have reviewed the consolidated balance sheet of Delta Air Lines, Inc. (the
Company) as of March 31, 2007, and the related consolidated statements of
operations for the three-month periods ended March 31, 2007 and March 31, 2006
and the condensed consolidated statements of cash flows for the three-month
periods ended March 31, 2007 and March 31, 2006. These financial statements
are
the responsibility of the Company’s management.
We
conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with standards
of the Public Company Accounting Oversight Board, the objective of which is
the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based
on our review, we are not aware of any material modifications that should be
made to the accompanying condensed consolidated financial statements referred
to
above for them to be in conformity with U.S. generally accepted accounting
principles.
We
have previously audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet
of
the Company as of December 31, 2006, and the related consolidated statements
of
operations, shareowners' deficit, and cash flows for the year then ended and
in
our report dated March 1, 2007, we expressed an unqualified opinion on those
consolidated financial statements and included an explanatory paragraph for
the
Company’s ability to continue as a going concern. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of
December 31, 2006, is fairly stated, in all material respects, in relation
to
the consolidated balance sheet from which it has been derived.
Atlanta,
Georgia
April
26, 2007
PART
II. OTHER INFORMATION
Item
1. Legal Proceedings
Chapter
11 Proceedings
As
discussed elsewhere in this Form 10-Q, on September 14, 2005, we and certain
of
our subsidiaries filed voluntary petitions for reorganization under Chapter
11
of the Bankruptcy Code in the Bankruptcy Court. The reorganization cases are
being jointly administered under the caption “In re Delta Air Lines, Inc., et
al., Case No. 05-17923-ASH.” The Debtors continue to operate their business as
“debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in
accordance with the applicable provisions of the Bankruptcy Code and orders
of
the Bankruptcy Court. As of the date of the Chapter 11 filing, then pending
litigation 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. The parties have reached an agreement in principle
to
resolve this matter on a class-wide basis under which the plaintiffs would
receive a $4.5 million general, unsecured pre-petition claim in Delta’s Chapter
11 proceedings. The settlement is subject to the completion of definitive
documentation and Bankruptcy Court approval.
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 38
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. 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.”
Comair
and Delta are pursuing settlement negotiations with the plaintiffs in these
lawsuits, and the defendants recently entered into the first such settlement.
The settled case has been dismissed with prejudice. In addition, Comair has
filed actions 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), 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
additional information about other legal proceedings, see “Item 3. Legal
Proceedings” in our Form 10-K.
Item
1A. Risk Factors
“Item
1A. Risk Factors,” of our Form 10-K includes a discussion of our risk factors.
There have been no material changes from the risk factors described in our
Form
10-K.
Item
6. Exhibits
(a)
Exhibits
15
|
Letter
from Ernst & Young LLP regarding unaudited interim financial
information
|
|
|
31.1
|
Certification
by Delta’s Chief Executive Officer with respect to Delta’s Quarterly
Report on Form 10-Q for the quarterly period ended March 31,
2007
|
|
|
31.2
|
Certification
by Delta’s Executive Vice President and Chief Financial Officer with
respect to Delta’s Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2007
|
|
|
32
|
Certification
pursuant to Section 1350 of Chapter 63 of Title 18 of the United
States
Code by Delta’s Chief Executive Officer and Executive Vice President and
Chief Financial Officer with respect to Delta’s Quarterly Report on Form
10-Q for the quarterly period ended March 31, 2007
|
|
|
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
|
Delta
Air Lines, Inc.
(Registrant)
|
|
|
|
By:
/s/
Edward H. Bastian
|
|
|
|
Edward
H. Bastian
Executive
Vice President and
Chief
Financial Officer
(Principal
Financial and Accounting Officer)
|
April
27, 2007
|
|
|
|
40