Sub Filer Id
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 June 30, 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
Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange
Act
of 1934 subsequent to the distribution of securities under a plan confirmed
by a
court.
Yes
R
No
£
Number
of
shares outstanding by each class of common stock, as of June 30, 2007:
Common
Stock, $0.0001 par value - 240,670,191 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”) and “Part II, Item IA. Risk Factors” of this Form 10-Q. All
forward-looking statements speak only as of the date made, and 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 U.S. Bankruptcy Code (the
“Bankruptcy Code”) in the U.S. Bankruptcy Court for the Southern District
of New York (the “Bankruptcy Court”). On April 25, 2007, the Bankruptcy Court
approved the Debtors’ Joint Plan of Reorganization (the “Plan”). On April 30,
2007 (the “Effective Date”), the Debtors emerged from bankruptcy.
On
the
Effective Date, we adopted fresh start reporting in accordance with American
Institute of Certified Public Accountants’ Statement of Financial Position 90-7,
“Financial Reporting by Entities in Reorganization under the Bankruptcy Code”
(“SOP 90-7”). The adoption of fresh start reporting results in our becoming a
new entity for financial reporting purposes. Accordingly, our Condensed
Consolidated Financial Statements on or after May 1, 2007 are not comparable
to
our Condensed Consolidated Financial Statements prior to that date.
References
in this Form 10-Q to “Successor” refer to Delta on or after May 1, 2007, after
giving effect to (1) the cancellation of Delta common stock issued prior to
the
Effective Date; (2) the issuance of new Delta common stock and certain debt
securities in accordance with the Plan; and (3) the application of fresh start
reporting. References to “Predecessor” refer to Delta prior to May 1, 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.
|
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
Predecessor
|
|
ASSETS
|
|
June
30,
|
|
December
31,
|
|
(in
millions)
|
|
2007
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,830
|
|
$
|
2,034
|
|
Short-term
investments
|
|
|
1,549
|
|
|
614
|
|
Restricted
cash
|
|
|
333
|
|
|
750
|
|
Accounts
receivable, net of an allowance for uncollectible accounts
|
|
|
|
|
|
|
|
of
$21 at June 30, 2007 and $21 at December 31, 2006
|
|
|
1,140
|
|
|
915
|
|
Expendable
parts and supplies inventories, net of an allowance for
|
|
|
|
|
|
|
|
obsolescence
of $3 at June 30, 2007 and $161 at December 31, 2006
|
|
|
246
|
|
|
181
|
|
Deferred
income taxes, net
|
|
|
731
|
|
|
402
|
|
Prepaid
expenses and other
|
|
|
420
|
|
|
489
|
|
Total
current assets
|
|
|
6,249
|
|
|
5,385
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT:
|
|
|
|
|
|
|
|
Flight
equipment
|
|
|
9,176
|
|
|
17,641
|
|
Accumulated
depreciation
|
|
|
(76
|
)
|
|
(6,800
|
)
|
Flight
equipment, net
|
|
|
9,100
|
|
|
10,841
|
|
|
|
|
|
|
|
|
|
Ground
property and equipment
|
|
|
1,750
|
|
|
4,575
|
|
Accumulated
depreciation
|
|
|
(64
|
)
|
|
(2,838
|
)
|
Ground
property and equipment, net
|
|
|
1,686
|
|
|
1,737
|
|
|
|
|
|
|
|
|
|
Flight
and ground equipment under capital leases
|
|
|
556
|
|
|
474
|
|
Accumulated
amortization
|
|
|
(14
|
)
|
|
(136
|
)
|
Flight
and ground equipment under capital leases, net
|
|
|
542
|
|
|
338
|
|
|
|
|
|
|
|
|
|
Advance
payments for equipment
|
|
|
141
|
|
|
57
|
|
|
|
|
|
|
|
|
|
Total
property and equipment, net
|
|
|
11,469
|
|
|
12,973
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS:
|
|
|
|
|
|
|
|
Goodwill
|
|
|
12,373
|
|
|
227
|
|
Operating
rights and other intangibles, net of accumulated
amortization
|
|
|
|
|
|
|
|
of
$35 at June 30, 2007 and $190 at December 31, 2006
|
|
|
2,918
|
|
|
89
|
|
Other
noncurrent assets
|
|
|
725
|
|
|
948
|
|
Total
other assets
|
|
|
16,016
|
|
|
1,264
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
33,734
|
|
$
|
19,622
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
|
|
DELTA
AIR LINES, INC.
|
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
Predecessor
|
|
LIABILITIES
AND SHAREOWNERS' EQUITY (DEFICIT)
|
|
June
30,
|
|
December
31,
|
|
(in
millions, except share data)
|
|
2007
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
Current
maturities of long-term debt and capital leases
|
|
$
|
1,386
|
|
$
|
1,503
|
|
Air
traffic liability
|
|
|
2,684
|
|
|
1,797
|
|
Accounts
payable
|
|
|
1,288
|
|
|
936
|
|
Taxes
payable
|
|
|
438
|
|
|
500
|
|
Deferred
revenue
|
|
|
1,155
|
|
|
363
|
|
Accrued
salaries and related benefits
|
|
|
621
|
|
|
405
|
|
Other
accrued liabilities
|
|
|
159
|
|
|
265
|
|
Total
current liabilities
|
|
|
7,731
|
|
|
5,769
|
|
|
|
|
|
|
|
|
|
NONCURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
Long-term
debt and capital leases
|
|
|
6,913
|
|
|
6,509
|
|
Pension
and related benefits
|
|
|
3,235
|
|
|
-
|
|
Postretirement
benefits
|
|
|
1,042
|
|
|
-
|
|
Deferred
income taxes, net
|
|
|
1,502
|
|
|
406
|
|
Deferred
revenue
|
|
|
2,599
|
|
|
346
|
|
Notes
payable
|
|
|
640
|
|
|
-
|
|
Other
|
|
|
600
|
|
|
368
|
|
Total
noncurrent liabilities
|
|
|
16,531
|
|
|
7,629
|
|
|
|
|
|
|
|
|
|
LIABILITIES
SUBJECT TO COMPROMISE
|
|
|
-
|
|
|
19,817
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREOWNERS'
EQUITY (DEFICIT):
|
|
|
|
|
|
|
|
Common
stock:
|
|
|
|
|
|
|
|
Predecessor
common stock at $0.01 par value; 900,000,000 shares authorized,
|
|
|
|
|
|
|
|
202,081,648
shares issued at December 31, 2006
|
|
|
-
|
|
|
2
|
|
Successor
common stock at $0.0001 par value; 1,500,000,000 shares
authorized,
|
|
|
|
|
|
|
|
246,863,602
shares issued at June 30, 2007
|
|
|
-
|
|
|
-
|
|
Additional
paid-in capital
|
|
|
9,428
|
|
|
1,561
|
|
Retained
earnings (accumulated deficit)
|
|
|
164
|
|
|
(14,414
|
)
|
Accumulated
other comprehensive income (loss)
|
|
|
8 |
|
|
(518
|
)
|
Predecessor
stock held in treasury, at cost, 4,745,710 shares at December 31,
2006
|
|
|
-
|
|
|
(224
|
)
|
Successor
stock held in treasury, at cost, 6,193,411 shares at June 30,
2007
|
|
|
(128
|
)
|
|
-
|
|
Total
shareowners' equity (deficit)
|
|
|
9,472
|
|
|
(13,593
|
)
|
|
|
|
|
|
|
|
|
Total
liabilities and shareowners' equity (deficit)
|
|
$
|
33,734
|
|
$
|
19,622
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
|
DELTA
AIR LINES,
INC.
|
|
Consolidated
Statements of
Operations
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
Predecessor
|
|
Successor
|
|
Predecessor
|
|
|
|
Two
Months
|
|
One
Month
|
|
Three
|
|
Two
Months
|
|
Four
Months
|
|
Six
|
|
|
|
Ended
|
|
Ended
|
|
Months
Ended
|
|
Ended
|
|
Ended
|
|
Months
Ended
|
|
|
|
June
30,
|
|
April
30,
|
|
June
30,
|
|
June
30,
|
|
April
30,
|
|
June
30,
|
|
(in
millions, except per share data)
|
|
2007
|
|
2007
|
|
2006
|
|
2007
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
REVENUE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline
|
|
$
|
2,338
|
|
$
|
1,046
|
|
$
|
3,176
|
|
$
|
2,338
|
|
$
|
3,829
|
|
$
|
5,669
|
|
Regional
affiliates
|
|
|
760
|
|
|
349
|
|
|
1,035
|
|
|
760
|
|
|
1,296
|
|
|
1,893
|
|
Cargo
|
|
|
82
|
|
|
36
|
|
|
128
|
|
|
82
|
|
|
148
|
|
|
251
|
|
Other,
net
|
|
|
268
|
|
|
124
|
|
|
402
|
|
|
268
|
|
|
523
|
|
|
722
|
|
Total
operating revenue
|
|
|
3,448
|
|
|
1,555
|
|
|
4,741
|
|
|
3,448
|
|
|
5,796
|
|
|
8,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft
fuel and related taxes
|
|
|
790
|
|
|
322
|
|
|
1,142
|
|
|
790
|
|
|
1,270
|
|
|
2,101
|
|
Salaries
and related costs
|
|
|
708
|
|
|
331
|
|
|
1,070
|
|
|
708
|
|
|
1,302
|
|
|
2,293
|
|
Contract
carrier arrangements
|
|
|
530
|
|
|
239
|
|
|
660
|
|
|
530
|
|
|
956
|
|
|
1,269
|
|
Depreciation
and amortization
|
|
|
193
|
|
|
95
|
|
|
318
|
|
|
193
|
|
|
386
|
|
|
619
|
|
Contracted
services
|
|
|
160
|
|
|
83
|
|
|
218
|
|
|
160
|
|
|
326
|
|
|
440
|
|
Aircraft
maintenance materials and outside repairs
|
|
|
165
|
|
|
82
|
|
|
232
|
|
|
165
|
|
|
320
|
|
|
459
|
|
Passenger
commissions and other selling expenses
|
|
|
175
|
|
|
78
|
|
|
234
|
|
|
175
|
|
|
298
|
|
|
446
|
|
Landing
fees and other rents
|
|
|
122
|
|
|
60
|
|
|
194
|
|
|
122
|
|
|
250
|
|
|
491
|
|
Passenger
service
|
|
|
61
|
|
|
24
|
|
|
81
|
|
|
61
|
|
|
95
|
|
|
154
|
|
Aircraft
rent
|
|
|
36
|
|
|
20
|
|
|
73
|
|
|
36
|
|
|
90
|
|
|
168
|
|
Profit
sharing
|
|
|
65
|
|
|
14
|
|
|
-
|
|
|
65
|
|
|
14
|
|
|
-
|
|
Other
|
|
|
98
|
|
|
62
|
|
|
150
|
|
|
98
|
|
|
189
|
|
|
211
|
|
Total
operating expense
|
|
|
3,103
|
|
|
1,410
|
|
|
4,372
|
|
|
3,103
|
|
|
5,496
|
|
|
8,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
INCOME (LOSS)
|
|
|
345
|
|
|
145
|
|
|
369
|
|
|
345
|
|
|
300
|
|
|
(116
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
(EXPENSE) INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense (contractual interest expense totaled $88 and $366 for
the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
one
month and four months ended April 30, 2007, respectively, and $306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
$615 for the three and six months ended June 30, 2006,
respectively)
|
|
|
(120
|
)
|
|
(62
|
)
|
|
(227
|
)
|
|
(120
|
)
|
|
(262
|
)
|
|
(441
|
)
|
Interest
income
|
|
|
33
|
|
|
4
|
|
|
18
|
|
|
33
|
|
|
14
|
|
|
30
|
|
Miscellaneous,
net
|
|
|
9
|
|
|
(2
|
)
|
|
19
|
|
|
9
|
|
|
27
|
|
|
19
|
|
Total
other expense, net
|
|
|
(78
|
)
|
|
(60
|
)
|
|
(190
|
)
|
|
(78
|
)
|
|
(221
|
)
|
|
(392
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) BEFORE REORGANIZATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEMS,
NET
|
|
|
267
|
|
|
85
|
|
|
179
|
|
|
267
|
|
|
79
|
|
|
(508
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REORGANIZATION
ITEMS, NET
|
|
|
-
|
|
|
1,339
|
|
|
(2,380
|
)
|
|
-
|
|
|
1,215
|
|
|
(3,783
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) BEFORE INCOME TAXES
|
|
|
267
|
|
|
1,424
|
|
|
(2,201
|
)
|
|
267
|
|
|
1,294
|
|
|
(4,291
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
TAX (PROVISION) BENEFIT
|
|
|
(103
|
)
|
|
4
|
|
|
(4
|
)
|
|
(103
|
)
|
|
4
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
|
164
|
|
|
1,428
|
|
|
(2,205
|
)
|
|
164
|
|
|
1,298
|
|
|
(4,274
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PREFERRED
STOCK DIVIDENDS
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS) ATTRIBUTABLE TO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMON
SHAREOWNERS
|
|
$
|
164
|
|
$
|
1,428
|
|
$
|
(2,205
|
)
|
$
|
164
|
|
$
|
1,298
|
|
$
|
(4,276
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
INCOME (LOSS) PER SHARE
|
|
$
|
0.42
|
|
$
|
7.24
|
|
$
|
(11.18
|
)
|
$
|
0.42
|
|
$
|
6.58
|
|
$
|
(21.86
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
INCOME (LOSS) PER SHARE
|
|
$
|
0.42
|
|
$
|
5.19
|
|
$
|
(11.18
|
)
|
$
|
0.42
|
|
$
|
4.63
|
|
$
|
(21.86
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
|
DELTA
AIR LINES, INC.
|
Condensed
Consolidated Statements of Cash Flows
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
Predecessor
|
|
|
|
Two
Months
|
|
Four
|
|
Six
|
|
|
|
Ended
|
|
Months
Ended
|
|
Months
Ended
|
|
|
|
June
30,
|
|
April
30,
|
|
June
30,
|
|
(in
millions)
|
|
2007
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by operating activities
|
|
$
|
(210
|
)
|
$
|
1,025
|
|
$
|
770
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment additions:
|
|
|
|
|
|
|
|
|
|
|
Flight
equipment, including advance payments
|
|
|
(89
|
)
|
|
(167
|
)
|
|
(102
|
)
|
Ground
property and equipment, including technology
|
|
|
(31
|
)
|
|
(41
|
)
|
|
(62
|
)
|
Proceeds
from sales of flight equipment
|
|
|
6
|
|
|
21
|
|
|
26
|
|
Proceeds
from sales of investments
|
|
|
-
|
|
|
34
|
|
|
-
|
|
Decrease
in restricted cash
|
|
|
58
|
|
|
56
|
|
|
8
|
|
Other,
net
|
|
|
-
|
|
|
-
|
|
|
5
|
|
Net
cash used in investing activities
|
|
|
(56
|
)
|
|
(97
|
)
|
|
(125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
Payments
on long-term debt and capital lease obligations
|
|
|
(74
|
)
|
|
(166
|
)
|
|
(217
|
)
|
Proceeds
from Exit Facilities
|
|
|
-
|
|
|
1,500
|
|
|
-
|
|
Payments
on DIP Facility
|
|
|
-
|
|
|
(2,076
|
)
|
|
-
|
|
Other,
net
|
|
|
-
|
|
|
(50
|
)
|
|
(5
|
)
|
Net
cash used in financing activities
|
|
|
(74
|
)
|
|
(792
|
)
|
|
(222
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
(Decrease) Increase in Cash and Cash Equivalents
|
|
|
(340
|
)
|
|
136
|
|
|
423
|
|
Cash
and cash equivalents at beginning of period
|
|
|
2,170
|
|
|
2,034
|
|
|
2,008
|
|
Cash
and cash equivalents at end of period
|
|
$
|
1,830
|
|
$
|
2,170
|
|
$
|
2,431
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash paid (refunded) for:
|
|
|
|
|
|
|
|
|
|
|
Interest,
net of amounts capitalized
|
|
$
|
77
|
|
$
|
243
|
|
$
|
347
|
|
Interest
received from the preservation of cash due to Chapter 11
filing
|
|
|
-
|
|
|
(50
|
)
|
|
(47
|
)
|
Cash
received from aircraft renegotiation
|
|
|
-
|
|
|
-
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
transactions:
|
|
|
|
|
|
|
|
|
|
|
Flight
equipment
|
|
$
|
-
|
|
$
|
135
|
|
$
|
-
|
|
Flight
equipment under capital leases
|
|
|
4
|
|
|
13
|
|
|
156
|
|
Debt
extinguishment from aircraft renegotiation
|
|
|
-
|
|
|
-
|
|
|
171
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
Delta
Air Lines, Inc.
|
Consolidated
Statements of Shareowners' Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
Other
|
|
|
|
|
|
|
|
|
|
Additional
|
|
Earnings
|
|
Comprehensive
|
|
|
|
|
|
|
|
Common
|
|
Paid-In
|
|
(Accumulated
|
|
Income
|
|
Treasury
|
|
|
|
(in
millions, except share data)
|
|
Stock
|
|
Capital
|
|
Deficit)
|
|
(Loss)
|
|
Stock
|
|
Total
|
|
Balance
at January 1, 2007 (Predecessor)
|
|
$
|
2
|
|
$
|
1,561
|
|
$
|
(14,444
|
)
|
$
|
(518
|
)
|
$
|
(224
|
)
|
$
|
(13,623
|
)
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income from January 1 to April 30, 2007
|
|
|
-
|
|
|
-
|
|
|
1,298
|
|
|
-
|
|
|
-
|
|
|
1,298
|
|
Other
comprehensive income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
75
|
|
|
-
|
|
|
75
|
|
Total
comprehensive income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,373
|
|
Balance
at April 30, 2007 (Predecessor) (Unaudited)
|
|
|
2
|
|
|
1,561
|
|
|
(13,146
|
)
|
|
(443
|
)
|
|
(224
|
)
|
|
(12,250
|
)
|
Fresh
start adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation
of Predecessor common stock
|
|
|
(2
|
)
|
|
(1,561
|
)
|
|
-
|
|
|
-
|
|
|
224
|
|
|
(1,339
|
)
|
Elimination
of Predecessor accumulated deficit and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accumulated
other comprehensive loss
|
|
|
-
|
|
|
-
|
|
|
13,146
|
|
|
443
|
|
|
-
|
|
|
13,589
|
|
Reorganization
value ascribed to Successor
|
|
|
-
|
|
|
9,400
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
9,400
|
|
Balance
at May 1, 2007 (Successor) (Unaudited)
|
|
|
-
|
|
|
9,400
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
9,400
|
|
Issuance
of 246,863,602 shares of common stock in connection
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
with
emergence from Chapter 11 ($0.0001 per share),
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
including
6,193,411 shares held in Treasury ($20.60 per share)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(128
|
)
|
|
(128
|
)
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income from May 1 to June 30, 2007
|
|
|
-
|
|
|
-
|
|
|
164
|
|
|
-
|
|
|
-
|
|
|
164
|
|
Other
comprehensive income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
8
|
|
|
-
|
|
|
8
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
172
|
|
Compensation
expense associated with equity awards
|
|
|
-
|
|
|
28
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
28
|
|
Balance
at June 30, 2007 (Successor) (Unaudited)
|
|
$
|
-
|
|
$
|
9,428
|
|
$
|
164
|
|
$
|
8
|
|
$
|
(128
|
)
|
$
|
9,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these Condensed Consolidated
Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DELTA
AIR LINES, INC.
Notes
to the Condensed Consolidated Financial Statements
June
30, 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 U.S. Bankruptcy Code (the “Bankruptcy
Code”) in the U.S. Bankruptcy Court for the Southern District of New York (the
“Bankruptcy Court”). The reorganization cases were jointly administered under
the caption “In re Delta Air Lines, Inc., et al., Case No. 05-17923-ASH.” On
April 25, 2007, the Bankruptcy Court approved the Debtors’ Joint Plan of
Reorganization (the “Plan”). On April 30, 2007 (the “Effective Date”), we
emerged from bankruptcy as a competitive airline with a global network.
Upon
emergence from Chapter 11, we adopted fresh start reporting in accordance with
American Institute of Certified Public Accountants’ Statement of Financial
Position 90-7, “Financial Reporting by Entities in Reorganization under the
Bankruptcy Code” (“SOP 90-7”). The adoption of fresh start reporting results in
our becoming a new entity for financial reporting purposes. Accordingly, our
Condensed Consolidated Financial Statements on or after May 1, 2007 are not
comparable to our Condensed Consolidated Financial Statements prior to that
date.
Fresh
start reporting requires resetting the historical net book value of assets
and
liabilities to fair value by allocating the entity’s reorganization value to its
assets and liabilities pursuant to Statement of Financial Accounting Standards
(“SFAS”) No. 141, “Business Combinations” (“SFAS 141”). The excess
reorganization value over the fair value of tangible and identifiable intangible
assets is recorded as goodwill on our Consolidated Balance Sheet. Deferred
taxes
are determined in conformity with SFAS No. 109, “Accounting for Income Taxes”
(“SFAS 109”). For additional information regarding the impact of fresh start
reporting on our Consolidated Balance Sheet as of the Effective Date, see “Fresh
Start Consolidated Balance Sheet” below.
References
in this Form 10-Q to “Successor” refer to Delta on or after May 1, 2007, after
giving effect to (1) the cancellation of Delta common stock issued prior to
the
Effective Date; (2) the issuance of new Delta common stock and certain debt
securities in accordance with the Plan; and (3) the application of fresh start
reporting. References to “Predecessor” refer to Delta prior to May 1, 2007.
Effectiveness
of Plan of Reorganization. Under
the
Plan, most holders of allowed general, unsecured claims against the Debtors
received or will receive newly issued common stock in satisfaction of their
claims. Holders of de minimis allowed general, unsecured claims received cash
in
satisfaction of their claims.
The
Plan
contemplates the distribution of 400 million shares of common stock, consisting
of (1) 386 million shares to holders of allowed general, unsecured claims
(including our pilots) and (2) 14 million shares to our approximately 39,000
eligible non-contract, non-management employees. The new common stock was listed
on the New York Stock Exchange (the “NYSE”) and began trading under the symbol
“DAL” on May 3, 2007. As of July 31, 2007, the following distributions of common
stock have been made or commenced in accordance with the Plan:
|
·
|
254
million shares of common stock to holders of allowed general, unsecured
claims with respect to allowed general, unsecured claims of $11.4
billion.
We have reserved 132 million shares of common stock for future
distributions to holders of allowed general, unsecured claims when
disputed claims are resolved.
|
|
·
|
Approximately
all 14 million shares of common stock to eligible non-contract,
non-management employees. We expect to issue the remaining shares
as
eligible employees return to work during
2007.
|
The
Bankruptcy Court also authorized the distribution of equity awards to our
approximately 1,200 officers, director level employees and managers and senior
professionals (“management personnel”). For additional information about these
awards, see Note 10.
In
addition, as of July 31, 2007, we issued the following debt securities and
made
the following cash distributions under the Plan:
|
·
|
$66
million principal amount of senior unsecured notes in connection
with our
settlement agreement relating to the restructuring of certain of
our lease
and other obligations at the Cincinnati-Northern Kentucky International
Airport (the “Cincinnati Airport Settlement Agreement”). For additional
information on this subject, see Note 4;
|
|
·
|
an
aggregate of $78 million in cash to holders in satisfaction of their
claims, including to holders of administrative claims, state and
local
priority tax claims and de minimis allowed unsecured claims;
|
|
·
|
$225
million in cash to the Pension Benefit Guaranty Corporation (the
“PBGC”)
in connection with the termination of our qualified defined benefit
pension plan for pilots (the “Pilot
Plan”).
|
During
our Chapter 11 proceedings, we entered into a comprehensive agreement with
the
Air Line Pilots Association, International, the collective bargaining
representative of Delta’s pilots (“ALPA”), to reduce our pilot labor costs.
Under this agreement, we are required to issue by August 28, 2007, for the
benefit of Delta pilots, senior unsecured notes (the “Pilot Obligation”) with an
aggregate principal amount equal to $650 million, a term of up to 15 years
and
an annual interest rate calculated to ensure that the Pilot Obligation trades
at
par on the issuance date. The Pilot Obligation is pre-payable at any time at
our
option, and we may replace all or a portion of the Pilot Obligation with
cash prior to issuance.
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 the Plan. In accordance with the Plan, holders of
our
equity interests that were in existence prior to April 30, 2007, including
our
common stock, did not receive any distributions, and their equity interests
were
cancelled on the Effective Date.
On
the
Effective Date, we entered into a senior secured exit financing facility (the
“Exit Facilities”) to borrow up to $2.5 billion from a syndicate of lenders. We
used a portion of the proceeds from the Exit Facilities and existing cash to
repay our two then outstanding debtor-in-possession financing facilities (the
“DIP Facility”). For additional information regarding the Exit Facilities, see
Note 4.
We
continue to incur expenses related to our Chapter 11 proceedings, primarily
professional fees that were classified as a reorganization item in the
Predecessor. After we emerged, these expenses are classified in their
appropriate line item, primarily in other expenses, in the Successor’s
Consolidated Statement of Operations. For the two months ended June 30, 2007,
the amount of such expenses was $9 million.
Significant
Ongoing Chapter 11 Matters
Resolution
of Outstanding 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 (the “Bar Date”) as the last date 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
July 31, 2007, claims totaling $91 billion have been filed with the Bankruptcy
Court against the Debtors. This amount includes $11.4 billion of allowed
general, unsecured claims with respect to which common stock distributions
have occurred or commenced and $32
billion of claims which have been expunged, reduced or 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 July 31, 2007, we have filed objections with respect to an additional
$528
million in claims, but the Bankruptcy Court has not yet ruled on these
objections. We expect to continue to file objections in the future. Because
the
process of analyzing and objecting to claims is ongoing, the amount of
disallowed claims may increase significantly in the future. We currently
estimate that the total allowed general, unsecured claims in our Chapter 11
proceedings will be approximately $15 billion, including claims with respect
to
which we have issued or commenced distributions of common stock.
The
Plan
provides that administrative and priority claims will be satisfied with
cash. Certain administrative and priority claims remain unpaid, and we will
continue to settle claims and file objections with the Bankruptcy
Court with respect to such claims. All of these claims have been
accrued by the Successor based upon the best available estimates of amounts
to
be paid. However, it should be noted that the claims resolution process is
uncertain and could result in material adjustments to the Successor’s financial
statements.
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 for some time. 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.
Cincinnati
Airport Settlement. On
April
24, 2007, the Bankruptcy Court approved the Cincinnati Airport Settlement
Agreement. A small group of bondholders is challenging the settlement in U.S.
District Court for the Southern District of New York. For additional information
on this subject, see Note 4.
Section
1110 Matters.
During
our Chapter 11 proceedings, we reached agreement with respect to substantially
all of our aircraft financing obligations, subject in certain instances to
the
execution of definitive documentation. As of July 31, 2007, we were
continuing to negotiate an agreement with aircraft financing parties for 12
aircraft; the outcome of these negotiations cannot be predicted with
certainty. Upon emergence from bankruptcy, we lost the protection of the
automatic stay provided under Section 362 of the Bankruptcy Code. 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 such aircraft.
Tax
Indemnity Agreements/Stipulated Loss Value Claims. A
significant amount of disputed claims involves claims related to aircraft
matters that have been filed by certain parties to aircraft leverage lease
transactions. Some of these claims arise from tax indemnity agreements
entered into with certain parties to these leverage lease transactions. We
have
filed objections, and expect to file further objections, seeking to expunge
or
reduce such claims. On July 19, 2007, the Bankruptcy Court entered an
order affirming Delta’s objections
as to
certain claims and ordering those claims be expunged. A notice of appeal
of that order is pending. Hearing dates as to further objections by Delta
as to other claims have not yet been set. We continue to negotiate and
review opportunities to settle such other claims where such settlements are
advisable. We cannot predict the ultimate outcome of these negotiations or
the
ultimate resolution of these claims.
Liabilities
Subject to Compromise
The
following table summarizes the components of liabilities subject to compromise
included on our Consolidated Balance Sheet at December 31, 2006:
|
|
Predecessor
|
(in
millions)
|
|
December
31,
2006
|
Pension,
postretirement and other benefits
|
|
$
|
10,329
|
|
Debt
and accrued interest
|
|
|
5,079
|
|
Aircraft
lease related obligations
|
|
|
3,115
|
|
Accounts
payable and other accrued liabilities
|
|
|
1,294
|
|
Total
liabilities subject to compromise
|
|
$
|
19,817
|
|
Liabilities
subject to compromise refers to pre-petition obligations that were impacted
by
the Chapter 11 reorganization process. The amounts represented our estimate
of
known or potential obligations to be resolved in connection with our Chapter
11
proceedings.
At
June
30, 2007, we had a zero balance for liabilities subject to compromise due to
our
emergence from bankruptcy. For information regarding the discharge of
liabilities subject to compromise, see “Fresh Start Consolidated Balance Sheet”
below.
Differences
between liabilities we have estimated and the claims filed will be investigated
and resolved in connection with the claims resolution process.
Reorganization
Items, net
The
following table summarizes the components of reorganization items, net on our
Consolidated Statements of Operations for the one month and four months ended
April 30, 2007, and the three and six months ended June 30, 2006:
|
|
Predecessor
|
|
(in
millions)
|
|
One
Month
Ended
April
30,
2007
|
|
Three
Months
Ended
June
30,
2006
|
|
Four
Months
Ended
April
30,
2007
|
|
Six
Months
Ended
June
30,
2006
|
|
Discharge
of claims and liabilities(1)
|
|
$
|
4,424
|
|
$
|
-
|
|
$
|
4,424
|
|
$
|
-
|
|
Revaluation
of frequent flyer obligation(2)
|
|
|
(2,586
|
)
|
|
-
|
|
|
(2,586
|
)
|
|
-
|
|
Revaluation
of other assets and liabilities(3)
|
|
|
238
|
|
|
-
|
|
|
238
|
|
|
-
|
|
Aircraft
financing renegotiations and rejections(4)
|
|
|
(438
|
)
|
|
(284
|
)
|
|
(440
|
)
|
|
(1,590
|
)
|
Contract
carrier agreements(5)
|
|
|
-
|
|
|
-
|
|
|
(163
|
)
|
|
-
|
|
Emergence
compensation(6)
|
|
|
(162
|
)
|
|
-
|
|
|
(162
|
)
|
|
-
|
|
Professional
fees
|
|
|
(51
|
)
|
|
(25
|
)
|
|
(88
|
)
|
|
(53
|
)
|
Pilot
collective bargaining agreement(7)
|
|
|
-
|
|
|
(2,100
|
)
|
|
(83
|
)
|
|
(2,100
|
)
|
Interest
income(8)
|
|
|
12
|
|
|
26
|
|
|
50
|
|
|
47
|
|
Facility
leases(9)
|
|
|
(81
|
)
|
|
11
|
|
|
43
|
|
|
(24
|
)
|
Vendor
waived pre-petition debt
|
|
|
5
|
|
|
-
|
|
|
29
|
|
|
-
|
|
Retiree
healthcare claims(10)
|
|
|
-
|
|
|
-
|
|
|
(26
|
)
|
|
-
|
|
Debt
issuance costs
|
|
|
-
|
|
|
(13
|
)
|
|
-
|
|
|
(13
|
)
|
Compensation
expense(11)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(55
|
)
|
Other
|
|
|
(22
|
)
|
|
5
|
|
|
(21
|
)
|
|
5
|
|
Total
reorganization items, net
|
|
$
|
1,339
|
|
$
|
(2,380
|
)
|
$
|
1,215
|
|
$
|
(3,783
|
)
|
|
|
The
discharge of claims and liabilities primarily relates to allowed
general,
unsecured claims in our Chapter 11 proceedings, such as (a) ALPA’s claim
under our comprehensive agreement reducing pilot labor costs; (b)
the
PBGC’s claim relating to the termination of the Pilot Plan; (c) claims
relating to changes in postretirement healthcare benefits and the
rejection of our non-qualified retirement plans; (d) claims associated
with debt and certain municipal bond obligations based upon their
rejection; (e) claims relating to the restructuring of financing
arrangements or the rejection of leases for aircraft; and (f) other
claims
due to the rejection or modification of certain executory contracts,
unexpired leases and contract carrier agreements. For additional
information on these subjects, see Notes 1 and 10 of the Notes to
the
Consolidated Financial Statements in our Form 10-K.
In
accordance with the Plan, we discharged our obligations to holders
of
allowed general, unsecured claims in exchange for the distribution
of 386
million newly issued shares of common stock and the issuance of
certain
debt securities and obligations. Accordingly, in discharging our
liabilities subject to compromise, we recognized a reorganization
gain of
$4.4 billion as follows:
|
(in
millions)
|
|
|
|
Liabilities
subject to compromise
|
|
$
|
19,345
|
|
Reorganization
equity value
|
|
|
(9,400
|
)
|
Liabilities
reinstated
|
|
|
(4,429
|
)
|
Issuance
of new debt securities and obligations, net of discounts of
$22
|
|
|
(938
|
)
|
Other
|
|
|
(154
|
)
|
Discharge
of claims and liabilities
|
|
$
|
4,424
|
|
|
(2) |
We
revalued our SkyMiles frequent flyer obligation at fair value as
a result
of fresh start reporting, which resulted in a $2.6 billion reorganization
charge. For information about a change in our accounting policy
for the
SkyMiles program, see Note 2.
|
|
(3) |
We
revalued our assets and liabilities at estimated fair value as
a result of
fresh start reporting. This resulted in a $238 million gain, primarily
reflecting the fair value of newly recognized intangible assets,
which was
partially offset by reductions in the fair value of tangible property
and
equipment.
|
|
(4) |
Estimated
claims for the one month ended April 30, 2007 relate to the
restructuring of the financing arrangements for 127
aircraft, the rejection of two aircraft leases and adjustments to
prior claims estimates. Estimated claims for the four months ended
April
30, 2007 relate to the restructuring of the financing arrangements
for 143 aircraft, the rejection of two aircraft leases and
adjustments to prior claims estimates. Estimated claims for the
three months ended June 30, 2006 related to the restructuring of
the
financing arrangements for 17 aircraft and the rejection of 14
aircraft
leases. Estimated claims for the six months ended June 30, 2006
relate to
the restructuring of the financing arrangements for 143 aircraft
and the
rejection of 16 aircraft leases.
|
|
(5) |
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”), which, among other things, reduced the rates we pay
those carriers, we recorded (1) a $91 million allowed general,
unsecured
claim and (2) a $37 million net charge related to our 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., which, among other things, reduced the rates
we pay
that carrier, we recorded a $35 million allowed general, unsecured
claim.
|
|
(6) |
In
accordance with the Plan, we made $130 million in lump-sum cash
payment to
approximately 39,000 eligible non-contract, non-management
employees. We also recorded an additional charge of $32 million
related to our portion of payroll related taxes associated with
the
issuance, as contemplated by the Plan, of approximately 14
million shares of common stock to these employees. For additional
information regarding the stock grants, see Note
10.
|
|
(7) |
Allowed
general, unsecured claims of $83 million for the four months ended
April
30, 2007 and $2.1 billion for the three months and six months ended
June
30, 2006 in connection with Comair’s and Delta’s respective comprehensive
agreements with ALPA reducing pilot labor costs.
|
|
(8) |
Reflects
interest earned due to the preservation of cash during our Chapter
11
proceedings.
|
|
(9) |
Primarily
reflects a net $80 million charge from an allowed general, unsecured
claim
under the Cincinnati Airport Settlement Agreement for the one month
ended
April 30, 2007. For the four months ended April 30, 2007, we recorded
a
net $43 million gain, primarily reflecting a $126 million net gain
in
connection with our settlement agreement with the Massachusetts
Port
Authority (“Massport”) which was partially offset by the aforementioned
$80 million charge. For additional information regarding the Cincinnati
Airport Settlement Agreement and our settlement agreement with
Massport,
see Note 4.
|
|
(10) |
Allowed
general, unsecured claims in connection with agreements reached
with
committees representing pilot and non-pilot retired employees reducing
their postretirement healthcare
benefits.
|
|
(11) |
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.
|
Fresh
Start Consolidated Balance Sheet
As
previously noted, upon emergence from Chapter 11, we adopted fresh start
reporting, which required us to revalue our assets and liabilities to fair
value. In estimating fair value, we based our estimates and assumptions on
the
guidance prescribed by SFAS No. 157, “Fair Value Measurements” (“SFAS 157”),
which we adopted in conjunction with our adoption of fresh start reporting.
SFAS
157, among other things, defines fair value, establishes a framework for
measuring fair value and expands disclosure about fair value measurements.
For
additional information about SFAS 157, see Note 2.
Our
estimates of fair value are based on independent appraisals and valuations,
some
of which are not final. Where independent appraisals and valuations are not
available, we estimate fair value using industry data and trends and refer
to
relevant market rates and transactions. As new or improved information on asset
and liability appraisals and valuations becomes available, we may adjust our
preliminary allocation of fair value within one year from the Effective Date.
Adjustments to the recorded fair values of these assets and liabilities may
impact the amount of recorded goodwill.
To
facilitate the calculation of the enterprise value of the Successor, management
developed a set of financial projections for the Successor using a number of
estimates and assumptions. With the assistance of financial advisors, management
determined the enterprise and corresponding equity value of the Successor based
on the financial projections using various valuation methods, including (1)
a
comparison of our projected performance to the market values of comparable
companies; (2) a review and analysis of several recent transactions in the
airline industry; and (3) a calculation of the present value of future cash
flows based on our projections. Utilizing this methodology, the equity value
of
the Successor was estimated to be in the range of $9.4 billion and $12.0
billion. The enterprise value, and corresponding equity value, are dependent
upon achieving the future financial results set forth in our projections, as
well as the realization of certain other assumptions. There can be no assurance
that the projections will be achieved or that the assumptions will be realized.
The excess equity value (using the low end of the range) over the fair value
of
tangible and identifiable intangible assets has been reflected as goodwill
in
the Consolidated Fresh Start Balance Sheet. The financial projections and
estimates of enterprise and equity value are not incorporated
herein.
All
estimates, assumptions, valuations, appraisals and financial projections,
including the fair value adjustments, the financial projections, the enterprise
value and equity value projections, are inherently subject to significant
uncertainties and the resolution of contingencies beyond our control.
Accordingly, there can be no assurance that the estimates, assumptions,
valuations, appraisals and the financial projections will be realized, and
actual results could vary materially.
The
adjustments set forth in the following Fresh Start Consolidated Balance Sheet
in
the columns captioned “Debt Discharge, Reclassifications and Distribution to
Creditors,” “Repayment of DIP Facility and New Exit Financing” and “Revaluation
of Assets and Liabilities” reflect the effect of the consummation of the
transactions contemplated by the Plan, including the settlement of various
liabilities, securities issuances, incurrence of new indebtedness and cash
payments.
The
effects of the Plan and fresh start reporting on our Consolidated Balance Sheet
at April 30, 2007 are as follows:
Fresh
Start Consolidated Balance Sheet
(in
millions)
|
|
(Predecessor)
April
30, 2007
|
|
Debt
Discharge,
Reclassifications
and
Distribution
to
Creditors
|
|
Repayment
of
DIP
Facility
and
New Exit
Financing
|
|
Revaluation
of
Assets and
Liabilities
|
|
(Successor)
Reorganized
Balance
Sheet
May
1, 2007
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
cash equivalents and short-term investments
|
|
$
|
2,915
|
|
$
|
—
|
|
$
|
(557
|
)
|
$
|
—
|
|
$
|
2,358
|
|
Restricted
and designated cash
|
|
|
1,069
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,069
|
|
Accounts
receivable, net
|
|
|
1,086
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,086
|
|
Expendable
parts and supplies inventories, net
|
|
|
183
|
|
|
—
|
|
|
—
|
|
|
58
|
|
|
241
|
|
Deferred
income taxes, net
|
|
|
441
|
|
|
—
|
|
|
—
|
|
|
296
|
|
|
737
|
|
Prepaid
expenses and other
|
|
|
437
|
|
|
(19
|
)
|
|
—
|
|
|
(69
|
)
|
|
349
|
|
Total
current assets
|
|
|
6,131
|
|
|
(19
|
)
|
|
(557
|
)
|
|
285
|
|
|
5,840
|
|
PROPERTY
AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
flight equipment and net flight equipment under capital
lease
|
|
|
11,087
|
|
|
—
|
|
|
—
|
|
|
(1,254
|
)
|
|
9,833
|
|
Other
property and equipment, net
|
|
|
1,498
|
|
|
—
|
|
|
—
|
|
|
215
|
|
|
1,713
|
|
Total
property and equipment, net
|
|
|
12,585
|
|
|
—
|
|
|
—
|
|
|
(1,039
|
)
|
|
11,546
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
227
|
|
|
—
|
|
|
—
|
|
|
12,249
|
|
|
12,476
|
|
Intangibles,
net
|
|
|
88
|
|
|
—
|
|
|
—
|
|
|
2,865
|
|
|
2,953
|
|
Other
noncurrent assets
|
|
|
740
|
|
|
—
|
|
|
48
|
|
|
87
|
|
|
875
|
|
Total
other assets
|
|
|
1,055
|
|
|
—
|
|
|
48
|
|
|
15,201
|
|
|
16,304
|
|
Total
assets
|
|
$
|
19,771
|
|
$
|
(19
|
)
|
$
|
(509
|
)
|
$
|
14,447
|
|
$
|
33,690
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
maturities of long-term debt and capital leases
|
|
$
|
1,292
|
|
$
|
5
|
|
$
|
—
|
|
$
|
35
|
|
$
|
1,332
|
|
DIP
Facility
|
|
|
1,959
|
|
|
—
|
|
|
(1,959
|
)
|
|
—
|
|
|
—
|
|
Accounts
payable, accrued salaries and related benefits
|
|
|
1,396
|
|
|
561
|
|
|
(50
|
)
|
|
155
|
|
|
2,062
|
|
SkyMiles
deferred revenue
|
|
|
602
|
|
|
—
|
|
|
|
|
|
620
|
|
|
1,222
|
|
Air
traffic liability
|
|
|
2,567
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,567
|
|
Taxes
payable
|
|
|
423
|
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
421
|
|
Total
current liabilities
|
|
|
8,239
|
|
|
566
|
|
|
(2,009
|
)
|
|
808
|
|
|
7,604
|
|
NONCURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt and capital leases
|
|
|
5,132
|
|
|
37
|
|
|
—
|
|
|
398
|
|
|
5,567
|
|
Exit
Facilities
|
|
|
—
|
|
|
—
|
|
|
1,500
|
|
|
—
|
|
|
1,500
|
|
SkyMiles
deferred revenue
|
|
|
294
|
|
|
—
|
|
|
—
|
|
|
1,966
|
|
|
2,260
|
|
Other
notes payable
|
|
|
—
|
|
|
697
|
|
|
—
|
|
|
—
|
|
|
697
|
|
Pension,
postretirement and related benefits
|
|
|
62
|
|
|
4,202
|
|
|
—
|
|
|
—
|
|
|
4,264
|
|
Other
|
|
|
1,026
|
|
|
—
|
|
|
—
|
|
|
1,372
|
|
|
2,398
|
|
Total
noncurrent liabilities
|
|
|
6,514
|
|
|
4,936
|
|
|
1,500
|
|
|
3,736
|
|
|
16,686
|
|
Liabilities
subject to compromise
|
|
|
19,345
|
|
|
(19,345
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
SHAREOWNERS’
(DEFICIT) EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debtors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock and additional paid in capital - Debtors
|
|
|
1,563
|
|
|
—
|
|
|
—
|
|
|
(1,563
|
)
|
|
—
|
|
Retained
deficit and other - Debtors
|
|
|
(15,890
|
)
|
|
4,424
|
|
|
__
|
|
|
11,466
|
|
|
—
|
|
Reorganized
Debtors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock and additional paid in capital - Reorganized Debtors
|
|
|
—
|
|
|
9,400
|
|
|
—
|
|
|
—
|
|
|
9,400
|
|
Total
liabilities and shareowners’ (deficit) equity
|
|
$
|
19,771
|
|
$
|
(19
|
)
|
$
|
(509
|
)
|
$
|
14,447
|
|
$
|
33,690
|
|
· |
Debt
Discharge, Reclassifications and Distribution to Creditors.
Adjustments
reflect the elimination of liabilities subject to compromise totaling
$19.3 billion on our Consolidated Balance Sheet immediately prior
to the
Effective Date. Excluding certain liabilities, which were assumed
by the
Successor, liabilities subject to compromise of $13.8 billion were
discharged in the Chapter 11 cases. Adjustments
include:
|
|
(a) |
The
recognition or reinstatement of $561 million to accounts payable,
accrued
salaries and related benefits comprised of (1) a $225 million obligation
to the PBGC relating to the termination of the Pilot Plan (which is
reflected on the Consolidated Balance Sheet net of a $3 million discount)
and (2) $339 million to reinstate or accrue certain liabilities related
to
the current portion of our pension and postretirement benefit plans
and
for certain administrative claims and cure
costs.
|
|
(b) |
The
recognition of $697 million in other notes payable comprised of (1) the
$650 million Pilot Obligation relating to our comprehensive agreement
with
ALPA reducing pilot labor costs (which is reflected on the Consolidated
Balance Sheet net of a $19 million discount) and (2) $66 million
principal amount of senior unsecured notes (following the reduction
of the
$85 million face value of the notes for the application of certain
payments made by us in 2006 and 2007) under the Cincinnati Airport
Settlement Agreement. For additional information on the Cincinnati
Airport
Settlement Agreement, see Note 4.
|
|
(c) |
The
reinstatement from liabilities subject to compromise of $3.2 billion
associated with our non-pilot defined benefit pension plan (the “Non-pilot
Plan”) and other long-term accrued benefits and $1.0 billion associated
with postretirement benefits.
|
·
|
Repayment
of DIP Facility and New Exit Financing.
Adjustments reflect the repayment of the DIP Facility and borrowing
under
the Exit Facilities. Financing fees related to (1) the DIP Facility
were
written off at the Effective Date and (2) fees related to the Exit
Facilities were capitalized and will be amortized over the term of
the facility. For additional information regarding the Exit Facilities,
see Note 4.
|
·
|
Revaluation
of Assets and Liabilities.
Significant adjustments reflected in the Fresh Start Consolidated
Balance
Sheet based on the revaluation of assets and liabilities are summarized
as
follows:
|
|
(a) |
Property
and equipment, net.
A
net adjustment of $1.0 billion was recorded to reduce the net book
value
of fixed assets to their estimated fair value.
|
|
(b) |
Goodwill.
An adjustment of $12.2 billion was recorded to reflect reorganization
value of the Successor in excess of the fair value of tangible and
identified intangible assets.
|
|
(c) |
Intangibles.
An adjustment of $2.9 billion was recorded to recognize identifiable
intangible assets. These intangible assets reflect the estimated
fair
value of our trade name, takeoff and arrival slots, SkyTeam
alliance agreements, marketing agreements, customer relationships
and
certain contracts. Certain of these assets will be subject to an
annual
impairment review. For additional information on intangible assets,
see
Note 2.
|
|
(d) |
Long-term
debt and capital leases.
An adjustment of $398 million was recorded primarily to reflect a
$223
million net premium associated with long-term debt and a $138 million
net
premium associated with capital lease obligations to be amortized
to
interest expense over the life of such debt and capital lease obligations.
|
|
(e) |
SkyMiles
deferred revenue.
An
adjustment to revalue our obligation under the SkyMiles frequent
flyer
program was recorded to reflect the estimated fair value of miles
to be
redeemed in the future. An adjustment of $2.0 billion and $620 million
was
reflected for the fair value of these miles in long-term and current
classifications, respectively. Effective with our emergence from
bankruptcy, we changed our accounting policy from an incremental cost
basis to a deferred revenue model for miles earned through travel.
For additional information on the accounting policy for our SkyMiles
frequent flyer program, see Note 2.
|
|
(f) |
Noncurrent
liabilities - other.
An adjustment of $1.4 billion was recorded primarily related to the
tax
effect of fresh start valuation adjustments.
|
|
(g) |
Total
shareowners’ deficit.
The adoption of fresh start reporting resulted in a new reporting
entity with no beginning retained earnings or accumulated deficit.
All
common stock of the Predecessor was eliminated and replaced by the
new
equity structure of the Successor based on the Plan. The Fresh Start
Consolidated Balance Sheet reflects initial shareowners’ equity value of
$9.4 billion, representing the low end in the range of $9.4 billion
to $12.0 billion estimated in our financial projections developed
in
connection with the Plan. The low end of the range is estimated to
reflect
market conditions as of the Effective Date and therefore was used
to
establish initial shareowners’ equity value.
|
2.
ACCOUNTING AND REPORTING POLICIES
Basis
of Presentation
Our
unaudited Condensed Consolidated Financial Statements have been prepared in
accordance with accounting principles generally accepted in the United States
of
America (“GAAP”) for interim financial information. Consistent with these
requirements, 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.
Upon
emergence from Chapter 11, we adopted fresh start reporting in accordance with
SOP 90-7. The adoption of fresh start reporting results in our becoming a new
entity for financial reporting purposes. Accordingly, our Condensed Consolidated
Financial Statements on or after May 1, 2007 are not comparable to our Condensed
Consolidated Financial Statements prior to that date.
Fresh
start reporting requires resetting the historical net book value of assets
and
liabilities to fair value by allocating the entity’s reorganization value to its
assets and liabilities pursuant to SFAS 141. The excess reorganization value
over the fair value of tangible and identifiable intangible assets is recorded
as goodwill on our Consolidated Balance Sheet. Deferred taxes are determined
in
conformity with SFAS 109. For additional information regarding the impact of
fresh start reporting on our Consolidated Balance Sheet as of the Effective
Date, see Note 1.
In
preparing our Consolidated Financial Statements for the Predecessor, we applied
SOP 90-7, which requires that the financial statements, for periods subsequent
to the Chapter 11 filing, distinguish transactions and events that were 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 were realized or incurred in the bankruptcy
proceedings were recorded in reorganization items, net on the accompanying
Consolidated Statements of Operations. In addition, pre-petition obligations
that were impacted by the bankruptcy reorganization process were classified
as liabilities subject to compromise on our Consolidated Balance Sheet at
December 31, 2006. For additional information regarding the discharge of
liabilities subject to compromise upon emergence, see Note 1.
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.
Management
believes that the accompanying unaudited Condensed Consolidated Financial
Statements reflect all adjustments, including adjustments required by fresh
start reporting, 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 two months ended June 30, 2007 and the one and four months
ended
April 30, 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
September 2006, the FASB issued SFAS 157. This statement, among other things,
defines fair value, establishes a framework for measuring fair value and expands
disclosure about fair value measurements. SFAS 157 is intended to eliminate
the
diversity in practice associated with measuring fair value under existing
accounting pronouncements. SFAS 157 is effective for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. We
adopted SFAS 157 on April 30, 2007 in connection with our adoption of fresh
start reporting. For our presentation associated with our recurring and
nonrecurring fair value measurements, see Note 12.
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 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 Statements of Operations and recorded as a liability
until remitted to the respective taxing authority.
Reclassifications
Prior
to
amending our Visa/MasterCard processing agreement, as described in Note 5,
the
credit card processor (“Processor”) withheld payment from our receivables and/or
required a cash reserve of an amount (“Reserve”) equal to the Processor’s
potential liability for tickets purchased with Visa or MasterCard that had
not
yet been used for travel (the “unflown ticket liability”). The cash portion of
the Reserve was recorded in restricted cash on our Consolidated Balance Sheet.
For
the
two months ended June 30, 2007 and the four months ended April 30, 2007, the
change in the cash portion of the Reserve is reported as a component
of operating activities on our Condensed Consolidated Statements of Cash
Flows to better reflect the nature of the restricted cash activities. For the
six months ended June 30, 2006, we presented such change as an investing
activity. We have reclassified prior period amounts to be consistent with the
current period presentation. For the six months ended June 30, 2006, these
reclassifications resulted in a $177 million decrease to cash flows from
operating activities and a corresponding increase to cash flows from investing
activities from the amounts previously reported.
|
· |
In-sourcing
revenue.
We reclassified $75 million and $136 million, respectively, associated
with revenue for our maintenance in-sourcing business to other,
net
revenue, and reclassified the related costs to (1) salaries and
related
costs, (2) aircraft maintenance materials and outside repairs
and (3)
other operating expense. Previously, these revenues and expenses
were
reflected on a net basis in other operating expense.
|
|
·
|
Delta
Global Services, LLC (“DGS”).
We reclassified $41 million and $82 million, respectively, associated
with
salaries for employees at our wholly owned subsidiary, DGS, to
salaries
and related costs. DGS provides staffing services to both internal
and
external customers. Previously, these costs were recorded in
contracted
services.
|
|
·
|
Fuel
taxes.
We reclassified $31 million and $61 million, respectively, to aircraft
fuel expense. Previously, fuel taxes were recorded in other operating
expense.
|
|
·
|
Crown
Room Club.
We reclassified $11 million and $25 million, respectively, associated
with
the expense of our Crown Room Club operations to several operating
expense
line items, primarily salaries and related costs and contracted services.
Our Crown Room Club provides amenities to members when traveling.
Previously, these expenses were recorded net in other, net
revenue.
|
|
·
|
Arrangements
with Other Airlines.
We reclassified to passenger revenue $17 million and $96 million,
respectively, of revenue associated with (1) SkyMiles earned or
redeemed on other airlines and (2) frequent flyer miles of other
airlines
earned or redeemed on Delta. Previously, these amounts were reflected
in
other, net revenue.
|
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.
Under
our
cash management system, we utilize controlled disbursement accounts that are
funded daily. Checks we issue that have not been presented for payment are
recorded in accounts payable on our Consolidated Balance Sheets. These amounts
totaled $109 million and zero at June 30, 2007 and December 31, 2006,
respectively.
Short-Term
Investments
At
June
30, 2007 and December 31, 2006, our short-term investments were comprised of
auction rate securities. In accordance with SFAS No. 115, “Accounting for
Certain Investments in Debt and Equity Securities,” 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 projected self-insurance
obligations. In June 2007, we amended our Visa/MasterCard processing agreement
to provide for the return of the then existing Reserve. This Reserve consisted
of an $804 million cash reserve and a related $300 million letter of credit.
Pursuant to the amendment, the entire cash reserve was returned to us and the
letter of credit was terminated. No future holdback or cash reserve is required
except in certain circumstances. The $804 million cash reserve was
reclassified from restricted cash to cash and cash equivalents. For additional
information regarding our amended Visa/MasterCard processing agreement, see
Note
5.
Restricted
cash included in current assets on our Consolidated Balance Sheets totaled
$333
million and $750 million at June 30, 2007 and December 31, 2006, respectively.
Restricted cash recorded in other noncurrent assets on our Consolidated Balance
Sheets totaled $15 million and $52 million at June 30, 2007 and December 31,
2006, respectively.
Long-Lived
Assets
We
record
property and equipment at cost and depreciate or amortize these assets on a
straight-line basis to their estimated residual values over their respective
estimated useful lives. In connection with our adoption of fresh start
reporting, we reduced the net book values of property and equipment to their
estimated fair values and revised the estimated useful life of flight equipment.
The estimated useful lives for major asset classifications are as follows:
|
|
|
|
|
|
|
Estimated
Useful Life
|
Asset
Classification
|
|
Successor
|
|
Predecessor
|
Flight
equipment
|
|
25-30
years
|
|
25
years
|
Capitalized
software
|
|
5-7
years
|
|
5-7
years
|
Ground
property and equipment
|
|
3-40
years
|
|
3-40
years
|
Leasehold
improvements
|
|
Shorter
of lease term or estimated useful life
|
|
Shorter
of lease term or estimated useful life
|
Flight
equipment under capital lease
|
|
Shorter
of lease term or estimated useful life
|
|
Shorter
of lease term or estimated useful
life
|
Goodwill
and Intangible Assets
Goodwill
reflects the excess of the reorganization value of the Successor over the fair
value of tangible and identifiable intangible assets from our adoption of fresh
start reporting. We recorded $12.5 billion of goodwill upon emergence from
bankruptcy.
Identifiable
intangible assets consist primarily of our trade name, takeoff and arrival
slots, our SkyTeam alliance agreements, marketing agreements, customer
relationships and certain contracts. These intangible assets, excluding
marketing agreements, customer relationships and certain contracts, are
indefinite-lived assets and are not amortized. Marketing agreements, customer
relationships and certain contracts are definite-lived intangible assets and
are
amortized over the expected term of the respective agreements and
contracts.
In
accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” we apply a
fair value-based impairment test to the net book value of goodwill and
indefinite-lived intangible assets on an annual basis and, if certain events
or
circumstances indicate that an impairment loss may have been incurred, on an
interim basis. The annual impairment test date for our goodwill and
indefinite-lived intangible assets is October 1. We have not performed
impairment testing on goodwill and intangible assets subsequent to May 1, 2007,
because there have been no events or changes that would indicate that such
assets are impaired.
In
accordance with SOP 90-7, if we utilize pre-emergence bankruptcy net operating
loss (“NOL”)
carryforwards,
we will sequentially reduce the cost of goodwill followed by other
indefinite-lived assets until the net carrying cost of these assets is
zero. Accordingly, during the two months ended June 30, 2007, we reduced
goodwill by $103 million with respect to utilization of pre-emergence NOL
carryforwards.
The
following table presents information about our intangible assets, including
goodwill, at June 30, 2007 and December 31, 2006.
Indefinite-lived
intangible assets
|
|
Successor
|
|
Predecessor
|
|
|
|
June
30,
2007
|
|
December
31,
2006
|
|
|
|
Gross
Carrying
|
|
Gross
Carrying
|
|
(in
millions)
|
|
Amount
|
|
Amount
|
|
Goodwill
|
|
$
|
12,373
|
|
$
|
227
|
|
Trade
name
|
|
|
880
|
|
|
1
|
|
Takeoff
and arrival slots
|
|
|
635
|
|
|
71
|
|
SkyTeam
alliance
|
|
|
480
|
|
|
-
|
|
Other
|
|
|
2
|
|
|
-
|
|
Total
|
|
$
|
14,370
|
|
$
|
299
|
|
Definite-lived
intangible assets
|
|
Successor
|
|
Predecessor
|
|
|
|
June
30, 2007
|
|
December
31, 2006
|
|
|
|
Estimated
|
|
Gross
Carrying
|
|
Accumulated
|
|
Estimated
|
|
Gross
Carrying
|
|
Accumulated
|
|
(in
millions)
|
|
life
|
|
Amount
|
|
Amortization
|
|
life
|
|
Amount
|
|
Amortization
|
|
Marketing
agreements
|
|
|
4
years
|
|
$
|
710
|
|
$
|
(32
|
)
|
|
|
|
$
|
-
|
|
$
|
-
|
|
Contracts
|
|
|
17 to 34
years
|
|
|
205
|
|
|
(3
|
)
|
|
|
|
|
-
|
|
|
-
|
|
Customer
relationships
|
|
|
4
years
|
|
|
40
|
|
|
-
|
|
|
|
|
|
-
|
|
|
-
|
|
Operating
rights
|
|
|
|
|
|
-
|
|
|
-
|
|
|
9
to 19 years
|
|
|
121
|
|
|
(104
|
)
|
Other
|
|
|
1
year
|
|
|
1
|
|
|
-
|
|
|
3
to 5 years
|
|
|
3
|
|
|
(3
|
)
|
Total
|
|
|
|
|
$
|
956
|
|
$
|
(35
|
)
|
|
|
|
$
|
124
|
|
$
|
(107
|
)
|
The
following table summarizes the expected amortization expense for the
definite-lived intangible assets:
(in
millions)
|
|
|
|
Six
months ending December 31, 2007
|
|
$
|
112
|
|
2008
|
|
|
217
|
|
2009
|
|
|
217
|
|
2010
|
|
|
217
|
|
2011
|
|
|
18
|
|
After
2011
|
|
|
140
|
|
Total
|
|
$
|
921
|
|
Revenue
Recognition and Frequent Flyer Program
We
recognize revenue from the sale of passenger tickets as air transportation
is
provided or when the ticket expires unused. Our SkyMiles program offers
participants the opportunity to earn travel awards primarily by flying on Delta,
Delta Connection carriers and participating airlines. We also sell mileage
credits in our frequent flyer program to participating companies such as credit
card companies, hotels and car rental agencies.
As
a
result of the adoption of fresh start reporting, we revalued our SkyMiles
frequent flyer award liability to estimated fair value. In accordance with
SFAS
157, fair value represents the estimated amount we would pay a third party
to assume the obligation for miles expected to be redeemed under the SkyMiles
program. These miles were valued based upon the weighted average of amounts
paid
to SkyTeam alliance members and the equivalent ticket value of similar
fares on Delta.
We
previously accounted for frequent flyer miles earned on Delta flights on an
incremental cost basis as an accrued liability and as operating expense, while
miles sold to airline and non-airline businesses were accounted for on a
deferred revenue basis. For additional information concerning the accounting
for
the SkyMiles program prior to May 1, 2007, see “Management’s Discussion and
Analysis of Financial Condition and Results of Operation - Application of
Critical Accounting Policies - Frequent Flyer Program” in our Form 10-K.
Upon
emergence from bankruptcy, we changed our accounting policy to a deferred
revenue model for all frequent flyer miles. We now account for all miles earned
and sold as separate deliverables in a multiple element revenue
arrangement as prescribed by EITF 00-21, “Revenue Arrangements with Multiple
Deliverables.” Our revenues are generated from the sale of passenger tickets,
which includes air transportation and mileage credits. Our revenues are also
generated from the sale of miles to other airline and non-airline businesses,
which may include a marketing premium.
We
use
the residual method for revenue recognition. The fair value of the mileage
credit component is determinable based on the selling rate per mile to other
SkyTeam alliance members. The fair values of the air transportation and
marketing premium components are not determinable because they are not sold
without mileage credits. Under the residual method,
the fair value of the mileage credits is deferred and the remaining portion
of
the sale is allocated to air transportation or the marketing premium component,
as applicable, and is recognized as revenue when the related services are
provided.
The
value
associated with mileage credits that we estimate are not likely to be redeemed
in the future is recognized as passenger revenue in proportion to actual mileage
redemptions over the period redemptions occur.
3.
DERIVATIVE INSTRUMENTS
Fuel
Hedging Program
As
of
June 30, 2007, we had hedged 22% of our projected aircraft fuel requirements
for
the September 2007 quarter using heating oil zero-cost collar contracts. We
have
not entered into any fuel hedge contracts for the December 2007 quarter or
thereafter.
Prior
to
the adoption of fresh start reporting, we had recorded as a component of
shareowners’ deficit a $46 million unrealized gain related to our fuel hedging
program. This gain would have been recognized as an offset to aircraft fuel
expense as the underlying fuel hedge contracts were settled. However, as
required by fresh start reporting, our accumulated shareowners’ deficit and
accumulated other comprehensive loss were reset to zero. Accordingly, fresh
start reporting adjustments eliminated the unrealized gain and increased
aircraft fuel expense by $25 million for the two months ended June 30,
2007.
Gains
(losses) recorded on our Consolidated Statements of Operations for the two
months ended June 30, 2007, one month ended April 30, 2007 and three months
ended June 30, 2006 related to our fuel hedge contracts are as
follows:
|
|
Aircraft
fuel and related taxes
|
|
Other
income (expense)
|
|
|
|
Successor
|
|
Predecessor
|
|
Successor
|
|
Predecessor
|
|
|
|
Two
Months
|
|
One
Month
|
|
Three
Months
|
|
Two
Months
|
|
One
Month
|
|
Three
Months
|
|
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Ended
|
|
|
|
June
30,
|
|
April
30,
|
|
June
30,
|
|
June
30,
|
|
April
30,
|
|
June
30,
|
|
(in
millions)
|
|
2007
|
|
2007
|
|
2006
|
|
2007
|
|
2007
|
|
2006
|
|
Open
fuel hedge contracts
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
2
|
|
$
|
(7
|
)
|
$
|
7
|
|
Settled
fuel hedge contracts
|
|
|
4
|
|
|
10
|
|
|
1
|
|
|
-
|
|
|
(2
|
)
|
|
-
|
|
Total
|
|
$
|
4
|
|
$
|
10
|
|
$
|
1
|
|
$
|
2
|
|
$
|
(9
|
)
|
$
|
7
|
|
Gains
(losses) recorded on our Consolidated Statements of Operations for the two
months ended June 30, 2007, four months ended April 30, 2007 and six months
ended June 30, 2006 related to our fuel hedge contracts are as
follows:
|
|
Aircraft
fuel and related taxes
|
|
Other
income (expense)
|
|
|
|
Successor
|
|
Predecessor
|
|
Successor
|
|
Predecessor
|
|
|
|
Two
Months
|
|
Four
Months
|
|
Six
Months
|
|
Two
Months
|
|
Four
Months
|
|
Six
Months
|
|
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Ended
|
|
|
|
June
30,
|
|
April
30,
|
|
June
30,
|
|
June
30,
|
|
April
30,
|
|
June
30,
|
|
(in
millions)
|
|
2007
|
|
2007
|
|
2006
|
|
2007
|
|
2007
|
|
2006
|
|
Open
fuel hedge contracts
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
2
|
|
$
|
15
|
|
$
|
7
|
|
Settled
fuel hedge contracts
|
|
|
4
|
|
|
(8
|
)
|
|
4
|
|
|
-
|
|
|
(1
|
)
|
|
-
|
|
Total
|
|
$
|
4
|
|
$
|
(8
|
)
|
$
|
4
|
|
$
|
2
|
|
$
|
14
|
|
$
|
7
|
|
Our
open
fuel hedge contracts at June 30, 2007 had an estimated fair value gain of $37
million, which we recorded in prepaid expenses and other on our Consolidated
Balance Sheet. For additional information about our fuel hedging program, see
Note 2 of the Notes to the Consolidated Financial Statements in our Form
10-K.
4.
DEBT
The
following table summarizes our debt at June 30, 2007 and December 31,
2006:
|
|
Successor
|
|
Predecessor
|
|
(in
millions)
|
|
June
30,
2007
|
|
December
31,
2006
|
|
Senior
Secured(1)
|
|
|
|
|
|
|
|
Senior
Secured Exit Financing Facility(2)
|
|
|
|
|
|
|
|
7.36%
First-Lien Synthetic Revolving Facility due April 30, 2012
|
|
$
|
600
|
|
$
|
—
|
|
8.61%
Second-Lien Term Loan due April 30, 2014
|
|
|
900
|
|
|
—
|
|
|
|
|
1,500
|
|
|
—
|
|
Secured
Super-Priority Debtor-in-Possession Credit Agreement(2)
|
|
|
|
|
|
|
|
8.12%
GE DIP Credit Facility Term Loan A due March 16, 2008
|
|
|
—
|
|
|
600
|
|
10.12%
GE DIP Credit Facility Term Loan B due March 16, 2008
|
|
|
—
|
|
|
700
|
|
12.87%
GE DIP Credit Facility Term Loan C due March 16, 2008
|
|
|
—
|
|
|
600
|
|
|
|
|
—
|
|
|
1,900
|
|
Other
senior secured debt(2)
|
|
|
|
|
|
|
|
14.11%
Amex Facility Note due in installments during 2007
|
|
|
—
|
|
|
176
|
|
|
|
|
—
|
|
|
176
|
|
Secured(1)
|
|
|
|
|
|
|
|
Series
2000-1 Enhanced Equipment Trust Certificates
|
|
|
|
|
|
|
|
7.38%
Class A-1 due in installments from 2007 to May 18, 2010
|
|
|
120
|
|
|
136
|
|
7.57%
Class A-2 due November 18, 2010
|
|
|
738
|
|
|
738
|
|
7.92%
Class B due November 18, 2010
|
|
|
182
|
|
|
182
|
|
|
|
|
1,040
|
|
|
1,056
|
|
Series
2001-1 Enhanced Equipment Trust Certificates
|
|
|
|
|
|
|
|
6.62%
Class A-1 due in installments from 2007 to March 18, 2011
|
|
|
130
|
|
|
130
|
|
7.11%
Class A-2 due September 18, 2011
|
|
|
571
|
|
|
571
|
|
7.71%
Class B due September 18, 2011
|
|
|
207
|
|
|
207
|
|
|
|
|
908
|
|
|
908
|
|
Series
2001-2 Enhanced Equipment Trust Certificates(2)
|
|
|
|
|
|
|
|
7.06%
Class A due in installments from 2007 to December 18, 2011
|
|
|
298
|
|
|
313
|
|
8.26%
Class B due in installments from 2007 to December 18, 2011
|
|
|
131
|
|
|
145
|
|
9.61%
Class C due in installments from 2007 to December 18, 2011
|
|
|
58
|
|
|
64
|
|
|
|
|
487
|
|
|
522
|
|
Series
2002-1 Enhanced Equipment Trust Certificates
|
|
|
|
|
|
|
|
6.72%
Class G-1 due in installments from 2007 to January 2, 2023
|
|
|
421
|
|
|
454
|
|
6.42%
Class G-2 due July 2, 2012
|
|
|
370
|
|
|
370
|
|
7.78%
Class C due in installments from 2007 to January 2, 2012
|
|
|
95
|
|
|
111
|
|
|
|
|
886
|
|
|
935
|
|
Series
2003-1 Enhanced Equipment Trust Certificates(2)
|
|
|
|
|
|
|
|
6.11%
Class G due in installments from 2007 to January 25, 2008
|
|
|
279
|
|
|
291
|
|
9.11%
Class C due in installments from 2007 to January 25, 2008
|
|
|
135
|
|
|
135
|
|
|
|
|
414
|
|
|
426
|
|
|
|
Successor
|
|
Predecessor
|
|
(in
millions)
|
|
June
30,
2007
|
|
December
31, 2006
|
|
General
Electric Capital Corporation(2)(3)(4)
|
|
|
|
|
|
|
|
9.85%
Notes due in installments from 2007 to July 7, 2011
|
|
|
153
|
|
|
168
|
|
9.85%
Notes due in installments from 2007 to July 7, 2011
|
|
|
109
|
|
|
119
|
|
9.85%
Notes due in installments from 2007 to July 7, 2011
|
|
|
246
|
|
|
271
|
|
|
|
|
508
|
|
|
558
|
|
Other
secured debt(2)
|
|
|
|
|
|
|
|
8.86%
Senior Secured Notes due in installments from 2007 to September
29,
2012
|
|
|
175
|
|
|
189
|
|
5.00%
to 8.83% Other secured financings due in installments from 2007
to June
19, 2021(5)(6)
|
|
|
1,040
|
|
|
1,354
|
|
Total
senior secured and secured debt
|
|
$
|
6,958
|
|
$
|
8,024
|
|
Unsecured(5)
|
|
|
|
|
|
|
|
Massachusetts
Port Authority Special Facilities Revenue Bonds
|
|
|
|
|
|
|
|
5.0-5.5%
Series 2001A due in installments from 2012 to January 1, 2027
|
|
$
|
—
|
|
$
|
338
|
|
4.25%
Series 2001B due in installments from 2027 to January 1, 2031(2)
|
|
|
—
|
|
|
80
|
|
4.3%
Series 2001C due in installments from 2027 to January 1, 2031(2)
|
|
|
—
|
|
|
80
|
|
8.75%
Boston Terminal A due in installments from 2007 to June 30,
2016
|
|
|
204
|
|
|
—
|
|
Development
Authority of Clayton County, loan agreement(2)
|
|
|
|
|
|
|
|
3.82%
Series 2000A due June 1, 2029
|
|
|
65
|
|
|
65
|
|
3.89%
Series 2000B due May 1, 2035
|
|
|
110
|
|
|
110
|
|
3.89%
Series 2000C due May 1, 2035
|
|
|
120
|
|
|
120
|
|
Other
unsecured debt
|
|
|
|
|
|
|
|
7.7%
Notes due December 15, 2005
|
|
|
—
|
|
|
122
|
|
7.9%
Notes due December 15, 2009
|
|
|
—
|
|
|
499
|
|
9.75%
Debentures due May 15, 2021
|
|
|
—
|
|
|
106
|
|
8.3%
Notes due December 15, 2029
|
|
|
—
|
|
|
925
|
|
8.125%
Notes due July 1, 2039
|
|
|
—
|
|
|
538
|
|
10.0%
Senior Notes due August 15, 2008
|
|
|
—
|
|
|
248
|
|
8.0%
Convertible Senior Notes due June 3, 2023
|
|
|
—
|
|
|
350
|
|
2
7/8%
Convertible Senior Notes due February 18, 2024
|
|
|
—
|
|
|
325
|
|
3.01%
to 8.00% Other unsecured debt due in installments from 2007 to
December 1,
2030
|
|
|
72
|
|
|
703
|
|
Total
unsecured debt
|
|
|
571
|
|
|
4,609
|
|
Total
secured and unsecured debt, including liabilities subject to
compromise
|
|
|
7,529
|
|
|
12,633
|
|
Plus:
unamortized premiums, net
|
|
|
214
|
|
|
—
|
|
Total
secured and unsecured debt, including liabilities subject to
compromise
|
|
|
7,743
|
|
|
12,633
|
|
Less:
pre-petition debt classified as liabilities subject to
compromise(5)(6)
|
|
|
—
|
|
|
(4,945
|
)
|
Total
debt
|
|
|
7,743
|
|
|
7,688
|
|
Less:
current maturities
|
|
|
(1,305
|
)
|
|
(1,466
|
)
|
Total
long-term debt
|
|
$
|
6,438
|
|
$
|
6,222
|
|
(1) |
Our
senior secured debt and secured debt is collateralized by first liens,
and
in many cases second and junior liens, on substantially all of our
assets,
including but not limited to accounts receivable, owned aircraft,
certain
spare engines, certain spare parts, certain flight simulators, ground
equipment, landing slots, international routes, equity interests
in
certain of our domestic subsidiaries, intellectual property and real
property. For more information on the Senior Secured Exit Financing
Facility, see “Exit Financing” in this
Note.
|
(2) |
Our
variable interest rate long-term debt is shown using interest rates
which
represent LIBOR or Commercial Paper plus a specified margin, as provided
for in the related agreements. The rates shown were in effect at
June 30,
2007, if applicable. For our long-term debt discharged as part of
our
emergence from bankruptcy, the rates shown were in effect at December
31,
2006.
|
(3) |
For
information about the letters of credit issued by, and our related
reimbursement obligation to, General Electric Capital Corporation
(“GECC”), see “Letter of Credit Enhanced Special Facility Bonds” and
“Reimbursement Agreement and Other GECC Agreements” in Note 6 of the Notes
to the Consolidated Financial Statements in our Form
10-K.
|
(4) |
For
additional information about this debt, as amended, see “Reimbursement
Agreement and Other GECC Agreements” in Note 6 of the Notes to the
Consolidated Financial Statements in our Form
10-K.
|
(5) |
In
accordance with SOP 90-7, substantially all of our unsecured debt
had been
classified as liabilities subject to compromise at December 31, 2006.
Additionally, certain of our undersecured debt had been classified
as
liabilities subject to compromise at December 31, 2006. For more
information on liabilities subject to compromise, see Note
1.
|
(6) |
Certain
of our secured and undersecured debt, which was classified as liabilities
subject to compromise at December 31, 2006, has been reclassified
from
liabilities subject to compromise to long-term debt or converted
to
operating leases as of June 30, 2007 in connection with restructuring
initiatives during our Chapter 11
reorganization.
|
Future
Maturities
The
following table summarizes the contractual maturities of our debt, including
current maturities, at June 30, 2007:
Years
Ending December 31,
(in
millions)
|
|
Principal
Amount
|
|
Six
months ending December 31, 2007
|
|
$
|
515
|
|
2008
|
|
|
982
|
|
2009
|
|
|
487
|
|
2010
|
|
|
1,392
|
|
2011
|
|
|
1,389
|
|
After
2011
|
|
|
2,978
|
|
Total
|
|
$
|
7,743
|
|
Exit
Financing
On
April
30, 2007 (the “Closing Date”), we entered into the Exit Facilities to borrow up
to $2.5 billion from a syndicate of lenders. Proceeds from a portion of the
Exit
Facilities and existing cash were used to repay the DIP Facility. The remainder
of the proceeds from the Exit Facilities and the letters of credit issued
thereunder are available for general corporate purposes.
The
Exit
Facilities consist of a $1.0 billion first-lien revolving credit facility,
up to
$400 million of which may be used for the issuance of letters of credit (the
“Revolving Facility”), a $600 million first-lien synthetic revolving facility
(the “Synthetic Facility”) (together with the Revolving Facility, the
“First-Lien Facilities”), and a $900 million second-lien term loan facility (the
“Term Loan” or the “Second-Lien Facility”). The scheduled maturity dates for the
First-Lien Facilities and the Second-Lien Facility are the fifth and seventh
anniversaries, respectively, of the Closing Date of the Exit Facilities.
The
First-Lien Facilities bear interest, at our option, at LIBOR plus 2.0% or an
index rate plus 1.0%; the Second-Lien Facility bears interest, at our option,
at
LIBOR plus 3.25% or an index rate plus 2.25%. Interest is payable (1) with
respect to LIBOR loans, on the last day of each relevant interest period
(defined as one, two, three or six months or any longer period available to
all
lenders under the relevant facility) and, in the case of any interest period
longer than three months, on each successive date three months after the first
day of such interest period, and (2) with respect to indexed loans, quarterly
in
arrears.
Our
obligations under the Exit Facilities are guaranteed by substantially all of
our
domestic subsidiaries (the “Guarantors”). The Exit Facilities and the related
guarantees are secured by liens on substantially all of our and the Guarantors’
present and future assets that previously secured the DIP Facility on a first
priority basis (the “Collateral”). The First-Lien Facilities are secured by a
first priority security interest in the Collateral. The Second-Lien Facility
is
secured by a second priority security interest in the Collateral.
We
are
required to make mandatory repayments of the Exit Facilities, subject to certain
reinvestment rights, from the sale of any Collateral or receipt of insurance
proceeds in respect of any Collateral in the event we fail to maintain the
minimum collateral coverage ratios described below. Any portion of the Exit
Facilities that is repaid through mandatory prepayments may not be reborrowed.
Any portion of the Term Loan that is voluntarily repaid may also not be
reborrowed.
The
Exit
Facilities include affirmative, negative and financial covenants that restrict
our ability to, among other things, incur additional secured indebtedness,
make
investments, sell or otherwise dispose of assets if not in compliance with
the
collateral coverage ratio tests, pay dividends or repurchase stock. These
covenants provide us with increased financial and operating flexibility as
compared to the DIP Facility, but may still have a material adverse impact
on
our operations.
The
Exit
Facilities contain financial covenants that require us to:
|
· |
maintain
a minimum fixed charge coverage ratio (defined as the ratio of
(1)
earnings before interest, taxes, depreciation, amortization and
aircraft
rent, and subject to other adjustments to net income (“EBITDAR”) to (2)
the sum of gross cash interest expense, cash aircraft rent expense
and the
interest portion of our capitalized lease obligations, for successive
trailing 12-month periods ending at each quarter-end date through
the
maturity date of the respective Exit Facilities), which minimum
ratio will
range from 1.00:1 to 1.20:1 in the case of the First-Lien Facilities
and
from 0.85:1 to 1.02:1 in the case of the Second-Lien Facility;
|
|
· |
maintain
unrestricted cash, cash equivalents and short-term investments of
not less
than $750 million in the case of the First-Lien Facilities and $650
million in the case of the Second-Lien Facility, in each case at
all times
following the 30th
day after the Closing Date;
|
|
· |
maintain
a minimum total collateral coverage ratio (defined as the ratio of
(1)
certain of our Collateral that meets specified eligibility standards
(“Eligible Collateral”) to (2) the sum of the aggregate outstanding
exposure under the First-Lien Facilities and the Second-Lien Facility
and
the aggregate termination value of certain hedging agreements) of
125% at
all times; and
|
|
· |
in
the case of the First-Lien Facilities, also maintain a minimum first-lien
collateral coverage ratio (together with the total collateral coverage
ratio described above, the “collateral coverage ratios”) (defined as
the ratio of (1) Eligible Collateral to (2) the sum of the aggregate
outstanding exposure under the First Lien Facilities and the aggregate
termination value of certain hedging agreements) of 175% at all
times.
|
The
Exit
Facilities contain events of default customary for Chapter 11 exit financings,
including cross-defaults to other material indebtedness and certain change
of
control events. The Exit Facilities also include events of default specific
to
our business, including if all or substantially all of our flights and other
operations are suspended for more than two consecutive days (other than as
a
result of a Federal Aviation Administration (the “FAA”) suspension due to
extraordinary events similarly affecting other major U.S. air carriers). Upon
the occurrence of an event of default, the outstanding obligations under the
Exit Facilities may be accelerated and become due and payable
immediately.
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 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, the reduction of our lease term to ten years and the
elimination of the guarantee of debt service. On February 14, 2007, the
Bankruptcy Court approved the settlement agreement, the assumption of the
amended lease and the restructuring of related agreements.
Due
to
the settlement with Massport, we derecognized $498 million of debt associated
with the Special Facility Revenue Bonds offset in part 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. As a result, we recorded a net
reorganization gain of $126 million for the three months ended March 31, 2007.
In
connection with our adoption of fresh start reporting, the remaining Massport
assets and debt were revalued at estimated fair value, resulting in (1) a $70
million increase in the fair value of the debt and (2) a $41 million reduction
in the fair value of the assets.
Cincinnati
Airport Settlement
On
April
24, 2007, the Bankruptcy Court approved the Cincinnati Airport Settlement
Agreement with the Kenton County Airport Board (“KCAB”) and UMB Bank, N.A., the
trustee (the “Bond Trustee”) for the Series 1992 Bonds (as defined below), to
restructure certain of our lease and other obligations at the
Cincinnati-Northern Kentucky International Airport (the “Cincinnati Airport”).
The Series 1992 Bonds include: (1) the $419 million Kenton County Airport Board
Special Facilities Revenue Bonds, 1992 Series A (Delta Air Lines, Inc. Project),
$397 million of which were then outstanding; and (2) the $19 million Kenton
County Airport Board Special Facilities Revenue Bonds, 1992 Series B (Delta
Air
Lines, Inc. Project), $16 million of which were then
outstanding.
The
Cincinnati Airport Settlement Agreement, among other things:
|
· |
provides
for agreements under which we will continue to use certain facilities
at
the Cincinnati Airport at substantially reduced costs;
|
|
· |
settles
all disputes among us, the KCAB, the Bond Trustee and the former,
present
and future holders of the 1992 Bonds (the “1992 Bondholders”);
|
|
· |
gives
the Bond Trustee, on behalf of the 1992 Bondholders, a $260 million
allowed general, unsecured pre-petition claim in our bankruptcy
proceedings; and
|
|
· |
provides
for our issuance of $66 million principal amount of senior unsecured
notes
to the Bond Trustee on behalf of the 1992
Bondholders.
|
A
small
number of 1992 Bondholders (the “Objecting Bondholders”) is challenging the
settlement in the U.S. District Court for the Southern District of New York
(the “District Court”). We cannot predict the outcome of this litigation. On May
3, 2007, the parties to the Cincinnati Airport Settlement Agreement implemented
that agreement in accordance with its terms.
Other
The
Exit
Facilities contain certain affirmative, negative and financial covenants, which
are described above. 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 June 30, 2007.
5.
PURCHASE COMMITMENTS AND CONTINGENCIES
Aircraft
Order Commitments
Future
commitments for aircraft on firm order as of June 30, 2007 are estimated to
be
approximately $3.5 billion. The following table shows the timing of these
commitments:
Year
Ending December 31,
(in
millions)
|
|
Amount
|
|
Six
months ending December 31, 2007
|
|
$
|
576
|
|
2008
|
|
|
1,207
|
|
2009
|
|
|
1,050
|
|
2010
|
|
|
712
|
|
Total
|
|
$
|
3,545
|
|
Our
aircraft order commitments as of June 30, 2007 consist of firm orders to
purchase six B-777-200LR aircraft, 10 B-737-700 aircraft, 46 B-737-800 aircraft
and 28 CRJ-900 aircraft as discussed below. Our firm orders to purchase 46
B-737-800 aircraft include 44 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. These sales will reduce our future
commitments by approximately $1.8 billion during the period from the
six months ending December 31, 2007 through 2010.
We
entered into agreements with Bombardier (1) in January 2007 to purchase 30
CRJ-900 aircraft for delivery between September 2007 and February 2010 (the
“January 2007 Agreement”) and (2) in May 2007 to purchase 14 CRJ-900 aircraft
for delivery between August 2007 and February 2008. These aircraft will be
delivered in two-class, 76 seat configuration. We have available to us
long-term, secured financing commitments to fund a substantial portion of the
aircraft purchase price for these orders.
We
expect
these aircraft will be operated by regional air carriers under our contract
carrier agreements. Our agreements with Bombardier permit us to assign to other
carriers our CRJ-900 aircraft orders and related support provisions. In April
2007, we assigned to a regional air carrier our orders to purchase 16 CRJ-900
aircraft under the January 2007 Agreement (the “CRJ-900 Assigned Aircraft”). The
remaining 14 CRJ-900 aircraft under the January 2007 Agreement will be delivered
between September 2007 and May 2009.
The
above
table does not include any commitments by us for the CRJ-900 Assigned Aircraft
because the regional air carrier is required to purchase and make the related
payments for those aircraft. While we would be required to purchase the CRJ-900
Assigned Aircraft in the event of a default by the regional air carrier of
its
purchase obligation, we currently believe such an event is not
likely.
We
have
also entered into agreements to lease 10 B-757-200ER aircraft. We took delivery
of two of these aircraft in July 2007. The remaining eight aircraft will be
delivered to us from July 2007 through November 2007. We will lease each of
these aircraft for seven years and three months.
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.
In
July
2007, we exercised an option to purchase an additional B-777-200LR
aircraft.
Contract
Carrier Agreements
Delta
Connection Carriers
As
of
June 30, 2007, we had contract carrier agreements with ten regional air carriers
(“Connection Carriers”), including our wholly owned subsidiary, Comair, and nine
unaffiliated carriers.
Capacity
Purchase Agreements.
During
the two months ended June 30, 2007 and the four months ended April 30, 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 June 30, 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
June
30, 2007
|
|
Number
of
Aircraft
Scheduled
to
be in
Operation
as of
December
31,
2007
|
|
Number
of Aircraft Scheduled
to
be 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
(ERJ-145 aircraft)(1)
|
|
|
33
|
|
|
36
|
|
|
22
|
|
|
2017
|
|
Freedom
(CRJ-900 aircraft)(1)
|
|
|
—
|
|
|
2
|
|
|
14
|
|
|
2017
|
|
Freedom
(Dash 8 Turboprop aircraft)(1)
|
|
|
9
|
|
|
—
|
|
|
9
|
|
|
2007
|
|
Shuttle
America
|
|
|
16
|
|
|
16
|
|
|
16
|
|
|
2019
|
|
ExpressJet
Airlines, Inc. (“ExpressJet”)
|
|
|
7
|
|
|
10
|
|
|
10
|
|
|
2009
|
|
Pinnacle
Airlines, Inc.
|
|
|
—
|
|
|
1
|
|
|
16
|
|
|
2019
|
|
The
table
above was not subject to the review procedures of our Independent Registered
Public Accounting Firm.
(1) |
We
have separate agreements with Freedom that involve different aircraft
types, 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 each
agreement.
|
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 and six
months ended June 30, 2007 and June 30, 2006:
|
· |
ASA,
SkyWest, Chautauqua, Freedom and Shuttle America for all periods
presented; and
|
|
· |
ExpressJet
from February 27, 2007 to June 30,
2007.
|
|
|
Three
Months Ended
June
30,
|
|
Six
Months Ended
June
30,
|
|
(in
millions)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
ASMs
|
|
|
4,427
|
|
|
3,805
|
|
|
8,682
|
|
|
7,277
|
|
RPMs
|
|
|
3,528
|
|
|
3,004
|
|
|
6,779
|
|
|
5,714
|
|
Number
of aircraft operated, end of period
|
|
|
343
|
|
|
289
|
|
|
343
|
|
|
289
|
|
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., Big Sky
Airlines and ExpressJet. 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 June 30, 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 $497 million and $353 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.
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 43 passengers. A number of
lawsuits also name Delta as a defendant. Additional lawsuits on behalf of the
four remaining passengers are anticipated. The lawsuits generally assert claims
for wrongful death and related personal injuries, and seek unspecified damages,
including punitive damages in most cases. As of June 30, 2007, settlements
have
been reached with the families of six of the 43 passengers on whose behalf
lawsuits were filed. Lawsuits are currently pending in the U.S. District Court
for the Eastern District of Kentucky on behalf of 13 passengers, and in state
court in Fayette County, Kentucky, on behalf of 23 passengers. One lawsuit
was
filed in state court in Broward County, Florida, and removed to the U.S.
District Court for the Southern District of Florida by Comair. A motion is
currently pending in federal court in Florida to transfer the case filed in
Florida 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 continue to pursue settlement negotiations with the plaintiffs in
these lawsuits. The six settled cases have been dismissed with prejudice.
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 FAA), and in
state court in Fayette County, Kentucky, against the Lexington Airport Board
and
certain other Lexington airport defendants. These actions seek to apportion
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 that this insurance is sufficient to cover
any
liability likely to arise from this accident.
Credit
Card Processing Agreements
Visa/Mastercard
Processing Agreement
On
June
8, 2007, we entered into an amended and restated Visa/MasterCard credit card
processing agreement (the “Amended Processing Agreement”) that, among other
things, resulted in the release by the Processor of the Reserve under the
agreement and extended the term of the agreement to October 31, 2008.
Prior
to
the amendment, the Processor was permitted to withhold payment from our
receivables for the Reserve. The Processing Agreement also allowed us to
substitute a letter of credit, which was issued by Merrill Lynch, for a portion
of the Reserve equal to the lesser of $300 million and 45% of the unflown ticket
liability.
Including
the letter of credit, the Reserve, which adjusted daily, totaled approximately
$1.1 billion prior to entering into the Amended Processing Agreement. On May
31,
2007, Delta and the Processor entered into a letter agreement pursuant to which
the Processor surrendered the letter of credit and correspondingly reduced
the
amount of the Reserve. Upon entering into the Amended Processing Agreement,
the
Processor returned to us the remaining $804 million Reserve.
The
Amended Processing Agreement provides that no future Reserve is required except
in certain circumstances, including events that in the reasonable determination
of the Processor would have a material adverse effect on us.
Further,
if either we or the Processor determines not to extend the term of the Amended
Processing Agreement beyond October 31, 2008, then the Processor may maintain
a
Reserve during the period of 90 days before the expiration date of the
agreement. The Reserve would equal approximately 100% of the value of tickets
for which we had received payment under the Amended Processing Agreement, but
which have not been used for travel, unless we have unrestricted cash above
a
level specified in the Amended Processing Agreement. Such a Reserve would be
released to us following termination of the Amended Processing Agreement as
tickets are used for travel.
American
Express
Our
American Express credit card processing agreement, entered into in 2004 and
amended in 2005, provides that American Express is permitted to withhold our
receivables in certain circumstances. These circumstances include a material
increase in the risk that we will be unable to meet our obligations under the
agreement or our business undergoing a material adverse change. No amounts
were withheld as of June 30, 2007 and December 31, 2006.
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.
Employees
Under Collective Bargaining Agreements
At
June
30, 2007, we had a total of 55,542 full-time equivalent employees. Approximately
17% of these employees, including all of our pilots, are represented by labor
unions. The following table presents certain information concerning the union
representation of our active domestic employees as of June 30,
2007.
Employee
Group
|
|
Approximate
Number
of
Employees
Represented
|
|
Union
|
|
Date
on which Collective
Bargaining
Agreement
Becomes
Amendable
|
Delta
Pilots
|
|
6,050
|
|
|
ALPA
|
|
December
31, 2009
|
Delta
Flight Superintendents
|
|
180
|
|
|
PAFCA(1)
|
|
January
1, 2010
|
Comair
Pilots
|
|
1,560
|
|
|
ALPA
|
|
March
2, 2011
|
Comair
Maintenance Employees
|
|
520
|
|
|
IAM(2)
|
|
December
31, 2010
|
Comair
Flight Attendants
|
|
910
|
|
|
IBT(3)
|
|
December
31, 2010
|
The
table
above was not subject to the review procedures of our Independent Registered
Public Accounting Firm.
(1) |
PAFCA
- Professional Airline Flight Controllers’
Association
|
(2) |
IAM
- International Association of Machinists and Aerospace
Workers
|
(3) |
IBT
- International Brotherhood of
Teamsters
|
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 September 30, 2007, and the Secretary of Transportation
may
extend coverage through December 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. Our
cost
to purchase such inventory may
be
material.
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 June 30, 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
|
|
6.7
|
|
46
|
(1)
|
60
|
|
120
|
|
B-757-200
|
|
68
|
|
34
|
|
19
|
|
121
|
|
15.8
|
|
—
|
|
—
|
|
—
|
|
B-767-300
|
|
4
|
|
—
|
|
20
|
|
24
|
|
16.9
|
|
—
|
|
—
|
|
—
|
|
B-767-300ER
|
|
50
|
|
—
|
|
9
|
|
59
|
|
11.3
|
|
—
|
|
10
|
|
1
|
|
B-767-400ER
|
|
21
|
|
—
|
|
—
|
|
21
|
|
6.3
|
|
—
|
|
17
|
|
—
|
|
B-777-200ER
|
|
8
|
|
—
|
|
—
|
|
8
|
|
7.4
|
|
—
|
|
—
|
|
—
|
|
B-777-200LR
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
6
|
|
11
|
|
12
|
|
MD-88
|
|
63
|
|
32
|
|
25
|
|
120
|
|
17.0
|
|
—
|
|
—
|
|
—
|
|
MD-90
|
|
16
|
|
—
|
|
—
|
|
16
|
|
11.6
|
|
—
|
|
—
|
|
—
|
|
CRJ-100
|
|
10
|
|
38
|
|
51
|
|
99
|
|
9.7
|
|
—
|
|
—
|
|
—
|
|
CRJ-200
|
|
5
|
|
—
|
|
12
|
|
17
|
|
5.0
|
|
—
|
|
25
|
|
—
|
|
CRJ-700
|
|
17
|
|
—
|
|
—
|
|
17
|
|
3.7
|
|
—
|
|
29
|
|
—
|
|
CRJ-900
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
28
|
|
30
|
|
—
|
|
Total
|
|
333
|
|
104
|
|
136
|
|
573
|
|
12.2
|
|
90
|
|
182
|
|
133
|
|
The
table
above was not subject to the review procedures of our Independent Registered
Public Accounting Firm.
(1)
|
Includes
44 aircraft which we have entered into definitive agreements to sell
to
third parties immediately following delivery of these aircraft to
us by
the manufacturer.
|
(2) |
Excludes
16 aircraft orders we assigned to a regional air carrier in April
2007. See “Aircraft
Order Commitments”
in Note 5
for additional information regarding this
matter.
|
7.
EMPLOYEE BENEFIT PLANS
Net
Periodic (Benefit) Cost
Net
periodic (benefit) cost for the two months ended June 30, 2007, one month and
four months ended April 30, 2007 and the three and six months ended June 30,
2006 included the following components:
|
|
Pension
Benefits
|
|
|
|
Successor
|
|
Predecessor
|
|
Successor
|
|
Predecessor
|
|
|
|
Two
Months
|
|
One
Month
|
|
Three
Months
|
|
Two
Months
|
|
Four
Months
|
|
Six
Months
|
|
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Ended
|
|
|
|
June
30,
|
|
April
30,
|
|
June
30,
|
|
June
30,
|
|
April
30,
|
|
June
30,
|
|
(in
millions)
|
|
2007
|
|
2007
|
|
2006
|
|
2007
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
35
|
|
Interest
cost
|
|
|
74
|
|
|
36
|
|
|
178
|
|
|
74
|
|
|
145
|
|
|
356
|
|
Expected
return on plan assets
|
|
|
(70
|
)
|
|
(32
|
)
|
|
(130
|
)
|
|
(70
|
)
|
|
(129
|
)
|
|
(260
|
)
|
Amortization
of prior service cost
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1
|
|
Recognized
net actuarial loss
|
|
|
-
|
|
|
5
|
|
|
57
|
|
|
-
|
|
|
19
|
|
|
114
|
|
Settlement
gain on termination
|
|
|
-
|
|
|
(30
|
)
|
|
-
|
|
|
-
|
|
|
(30
|
)
|
|
-
|
|
Revaluation
of liability
|
|
|
-
|
|
|
(143
|
)
|
|
-
|
|
|
-
|
|
|
(143
|
)
|
|
-
|
|
Net
periodic (benefit) cost
|
|
$
|
4
|
|
$
|
(164
|
)
|
$
|
105
|
|
$
|
4
|
|
$
|
(138
|
)
|
$
|
246
|
|
|
|
Other
Postretirement Benefits
|
|
|
|
Successor
|
|
Predecessor
|
|
Successor
|
|
Predecessor
|
|
|
|
Two
Months
|
|
One
Month
|
|
Three
Months
|
|
Two
Months
|
|
Four
Months
|
|
Six
Months
|
|
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Ended
|
|
|
|
June
30,
|
|
April
30,
|
|
June
30,
|
|
June
30,
|
|
April
30,
|
|
June
30,
|
|
(in
millions)
|
|
2007
|
|
2007
|
|
2006
|
|
2007
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
2
|
|
$
|
1
|
|
$
|
5
|
|
$
|
2
|
|
$
|
4
|
|
$
|
10
|
|
Interest
cost
|
|
|
10
|
|
|
5
|
|
|
25
|
|
|
10
|
|
|
21
|
|
|
49
|
|
Amortization
of prior service benefit
|
|
|
-
|
|
|
(8
|
)
|
|
(10
|
)
|
|
-
|
|
|
(31
|
)
|
|
(21
|
)
|
Recognized
net actuarial loss
|
|
|
-
|
|
|
2
|
|
|
2
|
|
|
-
|
|
|
8
|
|
|
4
|
|
Revaluation
of liability
|
|
|
-
|
|
|
49
|
|
|
-
|
|
|
-
|
|
|
49
|
|
|
-
|
|
Net
periodic cost
|
|
$
|
12
|
|
$
|
49
|
|
$
|
22
|
|
$
|
12
|
|
$
|
51
|
|
$
|
42
|
|
|
|
Other
Postemployment Benefits
|
|
|
|
Successor
|
|
Predecessor
|
|
Successor
|
|
Predecessor
|
|
|
|
Two
Months
|
|
One
Month
|
|
Three
Months
|
|
Two
Months
|
|
Four
Months
|
|
Six
Months
|
|
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Ended
|
|
|
|
June
30,
|
|
April
30,
|
|
June
30,
|
|
June
30,
|
|
April
30,
|
|
June
30,
|
|
(in
millions)
|
|
2007
|
|
2007
|
|
2006
|
|
2007
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
5
|
|
$
|
3
|
|
$
|
13
|
|
$
|
5
|
|
$
|
8
|
|
$
|
27
|
|
Interest
cost
|
|
|
21
|
|
|
10
|
|
|
31
|
|
|
21
|
|
|
41
|
|
|
62
|
|
Expected
return on plan assets
|
|
|
(26
|
)
|
|
(13
|
)
|
|
(41
|
)
|
|
(26
|
)
|
|
(51
|
)
|
|
(81
|
)
|
Amortization
of prior service benefit
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2
|
)
|
|
-
|
|
Recognized
net actuarial loss
|
|
|
-
|
|
|
1
|
|
|
3
|
|
|
-
|
|
|
5
|
|
|
6
|
|
Revaluation
of liability
|
|
|
-
|
|
|
(273
|
)
|
|
-
|
|
|
-
|
|
|
(273
|
)
|
|
-
|
|
Net
periodic (benefit) cost
|
|
$
|
-
|
|
$
|
(272
|
)
|
$
|
6
|
|
$
|
-
|
|
$
|
(272
|
)
|
$
|
14
|
|
Revaluation
of Benefit Plans
In
accordance with fresh start reporting, we completed a revaluation of the
pension, postretirement, and postemployment liabilities upon emergence from
bankruptcy on April 30, 2007, resulting in a net reorganization gain of $367
million. The weighted average discount rate used in our revaluation at
April 30, 2007 was 5.96%, as compared to the weighted average discount rate
of
5.88% as of our last measurement date, September 30, 2006. In connection with
this revaluation, we also early adopted the requirements under SFAS No. 158,
“Employers Accounting for Defined Benefit Pension and Other Postretirement
Plans, an amendment of SFAS Nos. 87, 88, 106 and 132(R)” (“SFAS 158”), to
measure the funded status of our plans as of the date of the remeasurement,
eliminating our early measurement date.
Non-Qualified
Plans
We
sponsored non-qualified defined benefit pension plans for eligible non-pilot
employees (“Non-Qualified Plans”). Almost all pension benefits under the
Non-Qualified Plans accrued prior to our Chapter 11 filing. Because we did
not
seek authority from the Bankruptcy Court to pay those pre-petition benefits,
we
were precluded from doing so during our Chapter 11 proceedings. We rejected
the
Non-Qualified Plans as a part of our Plan. As a result, no further benefits
will
be paid from the Non-Qualified Plans.
In
April
2007, we recorded a settlement gain of $30 million in reorganization items,
net,
related to the rejection of the Non-Qualified Plans, derecognizing the accrued
pension liability and amounts in other comprehensive loss. We also adjusted
our
accrual for the allowed general, unsecured claim that participants in the
Non-Qualified Plans received by recording a charge of $41 million to
reorganization items, net. The $30 million reversal of the pension liability
and
the recording of the additional $41 million in claims resulted in net increase
of $11 million in liabilities subject to compromise.
Cash
Flows
For
the
six months ended June 30, 2007, we contributed $50 million to our Non-pilot
Plan
and $8 million to a separate frozen qualified defined benefit pension plan
for
certain pilots formerly employed by Western Air Lines (the “Western Plan”).
Pursuant to our settlement agreement with the PBGC, we have initiated a standard
termination of the Western Plan.
For
the
six months ended June 30, 2007, we contributed $75 million to our defined
contribution pension plans. This does not include the portion of the proceeds
of
ALPA’s allowed general, unsecured claim that we contributed to the Delta
Family-Care Savings Plan under our agreement with ALPA.
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 June 30, 2007 and December 31, 2006.
The
components are estimates and are subject to revision, which could be
significant.
|
|
Successor
|
|
Predecessor
|
|
(in
millions)
|
|
June
30,
2007
|
|
December
31,
2006
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
3,217
|
|
$
|
2,921
|
|
Additional
minimum pension liability
|
|
|
—
|
|
|
615
|
|
AMT
credit carryforward
|
|
|
346
|
|
|
346
|
|
Employee
benefits
|
|
|
1,078
|
|
|
2,898
|
|
Deferred
revenue
|
|
|
1,318
|
|
|
311
|
|
Other
temporary differences (primarily reorganization charges)
|
|
|
2,566
|
|
|
2,183
|
|
Valuation
allowance
|
|
|
(4,835
|
)
|
|
(5,169
|
)
|
Total
deferred tax assets
|
|
$
|
3,690
|
|
$
|
4,105
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
Depreciation
|
|
$
|
3,158
|
|
$
|
3,870
|
|
Intangibles
|
|
|
1,092
|
|
|
(20
|
)
|
Other
|
|
|
211
|
|
|
259
|
|
Total
deferred tax liabilities
|
|
$
|
4,461
|
|
$
|
4,109
|
|
The
following table shows the current and noncurrent deferred tax assets
(liabilities) recorded on our Consolidated Balance Sheets at June 30, 2007
and
December 31, 2006:
|
|
Successor
|
|
Predecessor
|
|
(in
millions)
|
|
June
30,
2007
|
|
December
31,
2006
|
|
Current
deferred tax assets, net
|
|
$
|
731
|
|
$
|
402
|
|
Noncurrent
deferred tax liabilities, net
|
|
|
(1,502
|
)
|
|
(406
|
)
|
Net
deferred tax liabilities
|
|
$
|
(771
|
)
|
$
|
(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 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.
The
provision for income taxes has been calculated and
presented on our Consolidated Statements of Operations for the two months ended
June 30, 2007 as if our earnings were fully taxable. The amount of income
taxes payable is determined after utilizing pre-emergence bankruptcy NOL
carryforwards. Under SOP 90-7, the tax benefit for the utilization of
these NOL carryforwards must be recognized as a reduction of intangibles rather
than a reduction of the provision for income taxes.
At
June
30, 2007, we had (1) $346 million of federal alternative minimum tax (“AMT”)
credit carryforwards, which do not expire, and (2) approximately $8.5 billion
of
federal and state pretax NOL carryforwards, substantially all of which will
not
begin to expire until 2022. As a result of our emergence from bankruptcy, the
federal and state NOL carryforwards were reduced by discharge of indebtedness
income of approximately $2.4 billion. We have not finalized our assessment
of
the tax effects of the bankruptcy emergence and this estimate, as well as the
Plan’s overall effect on all tax attributes, is subject to revision, which could
be significant.
As
a
result of the issuance of new common stock upon emergence from bankruptcy,
we
realized a change of ownership for purposes of Section 382 of the Internal
Revenue Code. We do not currently expect this change
to significantly limit our ability to utilize our AMT credit
or NOLs in the carryforward period.
We
adopted FIN 48 on January 1, 2007, at which time the total amount of
unrecognized tax benefit on the Consolidated Balance Sheet was $217 million.
Included in the total unrecognized tax benefits was $86 million of tax
benefits that, if recognized, would affect the effective tax rate.
The
total amount of unrecognized tax benefits on the
Consolidated Balance Sheet at June 30, 2007 is $215 million. Included
in the total unrecognized tax benefits are $49 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. As of January 1,
2007, we had $65 million for the payment of interest accrued and $5 million
for
the payment of penalties. Upon adoption of FIN 48 on January 1, 2007, we
increased our accrual for interest and penalties by $4 million.
We
are
currently under audit by the Internal Revenue Service for the 2001 to 2004
tax
years. It is reasonably possible the audit will conclude in 2007, resulting
in a
change to our total unrecognized tax benefit of approximately $130 million.
It
is
also reasonably possible that during 2007 the settlement of bankruptcy claims
and audits will result in significant changes to the amount of unrecognized
tax
benefits on the Consolidated Balance Sheet. At this time, we cannot estimate
the
range of the reasonably possible outcomes.
9.
COMPREHENSIVE INCOME (LOSS)
Comprehensive
income (loss) primarily includes (1) our reported net income (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.
2007
The
following table shows our comprehensive income (loss) for the two months ended
June 30, 2007 and one month and four months ended April 30,
2007.
(in
millions)
|
|
Unrecognized
Pension
Liability
|
|
Fuel
Derivative
Instruments
|
|
Marketable
Equity
Securities
|
|
Valuation
Allowance
|
|
Total
|
|
Balance
at January 1, 2007 (Predecessor)
|
|
$
|
(727
|
)
|
$
|
(23
|
)
|
$
|
2
|
|
$
|
230
|
|
$
|
(518
|
)
|
Unrealized
gain
|
|
|
—
|
|
|
68
|
|
|
—
|
|
|
—
|
|
|
68
|
|
Realized
loss
|
|
|
—
|
|
|
9
|
|
|
—
|
|
|
—
|
|
|
9
|
|
Balance
at March 31, 2007 (Predecessor)
|
|
|
(727
|
)
|
|
54
|
|
|
2
|
|
|
230
|
|
|
(441
|
)
|
SFAS
158
|
|
|
6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6
|
|
Unrealized
gain
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Realized
gain
|
|
|
—
|
|
|
(10
|
)
|
|
—
|
|
|
—
|
|
|
(10
|
)
|
Balance
at April 30, 2007 (Predecessor)
|
|
|
(721
|
)
|
|
46
|
|
|
2
|
|
|
230
|
|
|
(443
|
)
|
Elimination
of Predecessor other
comprehensive loss
|
|
|
721
|
|
|
(46
|
)
|
|
(2
|
)
|
|
(230
|
)
|
|
443
|
|
Unrealized
gain
|
|
|
—
|
|
|
5
|
|
|
—
|
|
|
—
|
|
|
5
|
|
Realized
gain
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
3
|
|
Tax
effect
|
|
|
—
|
|
|
(3
|
)
|
|
—
|
|
|
3
|
|
|
—
|
|
Net
of tax
|
|
|
—
|
|
|
5
|
|
|
—
|
|
|
3
|
|
|
8
|
|
Balance
at June 30, 2007 (Successor)
|
|
$
|
—
|
|
$
|
5
|
|
$
|
—
|
|
$
|
3
|
|
$
|
8
|
|
2006
The
following table shows our comprehensive (loss) for the three and six months
ended June 30, 2006.
|
|
Predecessor
|
(in
millions)
|
|
Additional
Minimum
Pension
Liability
|
|
Unrecognized
Pension
Liability
|
|
Fuel
Derivative
Instruments
|
|
Marketable
Equity
Securities
|
|
Valuation
Allowance
|
|
Total
|
|
Balance
at January 1, 2006
|
|
$
|
(2,553
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
1
|
|
$
|
(170
|
)
|
$
|
(2,722
|
)
|
Unrealized
gain
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Balance
at March 31, 2006
|
|
|
(2,553
|
)
|
|
—
|
|
|
1
|
|
|
1
|
|
|
(170
|
)
|
|
(2,721
|
)
|
Unrealized
gain
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
3
|
|
Realized
gain
|
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
Balance
at June 30, 2006
|
|
$
|
(2,553
|
)
|
$
|
—
|
|
$
|
2
|
|
$
|
1
|
|
$
|
(170
|
)
|
$
|
(2,720
|
)
|
10.
EQUITY AND EQUITY BASED COMPENSATION
Equity
Common
Stock. On
the Effective Date, all common stock issued by the Predecessor was cancelled.
In
connection with our emergence from bankruptcy, we began issuing shares of new
common stock, par value $0.0001 per share, pursuant to the Plan. The new common
stock is subject to the terms of our Amended and Restated Certificate of
Incorporation (the “New Certificate”), which supersedes the Certificate of
Incorporation in effect prior to the Effective Date.
The
New Certificate authorizes us to issue a total of 2.0 billion shares of capital
stock, of which 1.5 billion may be shares of common stock and 500 million may
be
shares of preferred stock. The Plan contemplates the issuance of 400 million
shares of common stock, consisting of 386 million shares to holders of allowed
general, unsecured claims and 14 million shares under the compensation program
for our non-contract, non-management employees (the “Non-contract Program”)
described below. The Plan also contemplates the issuance of common stock under
the compensation program for management employees (the “Management Program”)
described below. For additional information regarding the distribution of new
common stock under the Plan, see Note 1.
Preferred
Stock.
The New Certificate provides that preferred stock may be issued in one or more
series. It authorizes the Board of Directors (1) to fix the descriptions, powers
(including voting powers), preferences, rights, qualifications, limitations
and
restrictions with respect to any series of preferred stock and (2) to specify
the number of shares of any series of preferred stock. At June 30, 2007, no
preferred stock was issued and outstanding.
Treasury
Stock.
In connection with the issuance of common stock to employees under the Plan,
we
withheld the portion of these shares necessary to cover the employees’ portion
of required tax withholdings. See “Stock Grants” below for additional
information on the issuance of the common stock under the Non-contract Program.
These shares are valued at cost, which equals the market price of the common
stock on the date of issuance. At June 30, 2007, there were 6,193,411 shares
held in treasury at costs ranging from $18.98 to $20.98 per share.
Predecessor.
We
concluded that all of our stock options would be cancelled as part of our
emergence from Chapter 11. Accordingly, in March 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. As of April 30, 2007, we did
not have any stock options outstanding.
Successor.
Upon
emergence from Chapter 11, we adopted with Bankruptcy Court approval new
compensation programs, the Non-contract Program and the Management Program.
The
Non-contract Program includes the grant of common stock to our approximately
39,000 non-contract, non-management employees. The Management Program covers
our
approximately 1,200 officers, director level employees and management personnel.
Under the Management Program, officers received restricted stock, stock options
and performance shares; director level employees received restricted stock
and
stock options; and management personnel received restricted stock. All of these
awards have been made under the Delta Air Lines, Inc. 2007 Performance
Compensation Plan (the “2007 Plan”) described below. During the two months ended
June 30, 2007, the total compensation cost related to the Management Program
was
$26 million.
The
Bankruptcy Court approved the 2007 Plan. Subject to adjustment, up to 30 million
shares of common stock are available for awards under the 2007 Plan.
Shares
of
common stock to be issued under the 2007 Plan may be made available from
authorized but unissued common stock or common stock we acquire. If any shares
of our common stock are covered by an award under the 2007 Plan that is
cancelled, forfeited or otherwise terminates without delivery of shares
(including shares surrendered or withheld for payment of the exercise price
of an award or taxes related to an award), then such shares will again be
available for issuance under the 2007 Plan. The following table shows the equity
transactions under the 2007 Plan during the two months ended June 30, 2007:
|
|
Shares
(000)
|
|
Authorized
under the 2007 Plan
|
|
|
30,000
|
|
Awarded(1)
|
|
|
(25,281
|
)
|
Forfeited
|
|
|
13
|
|
Returned
to Treasury
|
|
|
5,176
|
|
Available
for Future Grants
|
|
|
9,908
|
|
(1)
Awards
include stock grants, restricted stock, stock options and performance
shares.
Stock
Grants. Under
the
Plan, 14 million shares of common stock are issuable as a part of the
Non-contract Program. As of June 30, 2007, we distributed in excess of 13
million shares of common stock to eligible employees under the Non-contract
Program. We will distribute the remaining shares of common stock under the
Non-contract Program as eligible employees return to work during 2007. Employees
may hold or sell these shares without restriction.
Restricted
Stock. We
granted approximately seven million shares of restricted stock to eligible
employees under the Management Program. Restricted stock is common stock that
may not be sold or otherwise transferred for a period of time (the
“Restriction”), and that is subject to forfeiture in certain circumstances until
the Restriction lapses. The Restriction will lapse in three equal installments
six, 18 and 30 months after the Effective Date, subject to the employee’s
continued employment on that date. The Restriction on the third installment
of
the restricted stock will instead lapse 18 months after the Effective Date
if,
during the period beginning six months and ending 18 months after the Effective
Date, the aggregate market value of our outstanding common stock is at least
$14.0 billion for ten consecutive trading days.
The
following table summarizes restricted stock activity for the two months ended
June 30, 2007:
|
|
Shares
(000)
|
|
Weighted
Average
Grant-Date
Fair
Value
|
|
Granted
|
|
|
7,015
|
|
$
|
20.43
|
|
Vested
|
|
|
-
|
|
|
-
|
|
Forfeited
|
|
|
(13
|
) |
|
-
|
|
Non-vested
at June 30, 2007
|
|
|
7,002
|
|
$
|
20.43
|
|
Stock
Options. We
granted options to purchase a total of approximately three million shares of
common stock to eligible employees under the Management Program. These options
(1) have an exercise price equal to the closing price of the common stock on
the
grant date, (2) generally become exercisable in three equal installments on
the
first, second, and third anniversary of the Effective Date, subject to the
employee’s continued employment and (3) expire on the tenth anniversary of the
Effective Date.
The
fair
value of stock options are determined at the grant date using a Black-Scholes
model, which requires us to make several assumptions. The risk-free rate is
based on the U.S. Treasury yield curve in effect for the expected term of the
options at the time of grant. The dividend yield on our common stock is assumed
to be zero since we do not pay dividends and have no current plans to do so.
Due
to the impact of our bankruptcy on our stock price and employees, our historical
volatility data and employee stock option exercise patterns were not considered
in determining the volatility and expected life assumptions. The volatility
assumptions were based on (1) historical volatilities of the stock of comparable
airlines whose shares are traded using daily stock price returns equivalent
to
the expected term of the options and (2) implied volatility. The expected life
of an option was determined based on a simplified assumption that the option
will be exercised evenly from the time it becomes exercisable to expiration,
as
allowed by Staff Accounting Bulletin No. 107, “Share Based Payments.”
The
weighted average fair value of options granted during the two months ended
June
30, 2007 was determined based on the following weighted average
assumptions.
Assumption
|
|
|
|
Risk-free
interest rate
|
|
|
4.9
|
%
|
Average
expected life of stock options (in years)
|
|
|
6.0
|
|
Expected
volatility of common stock
|
|
|
55.0
|
%
|
Weighted
average fair value of a stock option granted
|
|
$
|
10.76
|
|
The
following table summarizes stock option activity for the two months ended June
30, 2007:
|
|
Shares
(000)
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding
at the beginning of the period
|
|
|
-
|
|
$
|
-
|
|
Granted
|
|
|
3,024
|
|
|
18.84
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
-
|
|
Outstanding
at the end of the period
|
|
|
3,024
|
|
$
|
18.84
|
|
Exercisable
at the end of the period
|
|
|
-
|
|
|
-
|
|
Performance
Shares. We
granted to eligible employees under the Management Program performance shares
with an aggregate target payout opportunity covering approximately one million
shares of common stock. These awards are long-term incentives payable in common
stock and are contingent upon our achieving certain financial goals for the
years ending December 31, 2007, 2008 and 2009, and the occurrence of a
contemporaneous payout under the Profit Sharing Program.
11.
EARNINGS (LOSS) PER SHARE
We
calculate basic earnings (loss) per share by dividing the net income (loss)
attributable to common shareowners by the weighted average number of common
shares outstanding. In accordance with SFAS No. 128, “Earnings
per
Share,”
shares issuable upon the satisfaction of certain conditions pursuant to a
contingent stock agreement, such as those contemplated by the Plan, are
considered outstanding common shares and included in the computation of basic
earnings per share. Accordingly, the 386 million shares contemplated by
the Plan to be distributed to holders of allowed general, unsecured claims
are
included in the calculation of basic earnings per share for the two months
ended
June 30, 2007. For additional information regarding these shares, see
Notes 1 and 10.
Diluted
earnings (loss) per share include the dilutive effects of stock options and
restricted stock. To the extent stock options and restricted stock are
anti-dilutive, they are excluded from the calculation of diluted earnings (loss)
per share.
The
following table shows our computation of basic and diluted earnings (loss)
per
share for the two months ended June 30, 2007, the one month and four months
ended April 30, 2007 and the three and six months ended June 30,
2006:
|
|
Successor
|
|
Predecessor
|
|
Successor
|
|
Predecessor
|
|
|
|
Two
Months
|
|
One
Month
|
|
Three
Months
|
|
Two
Months
|
|
Four
Months
|
|
Six
Months
|
|
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Ended
|
|
Ended
|
|
|
|
June
30,
|
|
April
30,
|
|
June
30,
|
|
June
30,
|
|
April
30,
|
|
June
30,
|
|
(in
millions, except per share data)
|
|
2007
|
|
2007
|
|
2006
|
|
2007
|
|
2007
|
|
2006
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
164
|
|
$
|
1,428
|
|
$
|
(2,205
|
)
|
$
|
164
|
|
$
|
1,298
|
|
$
|
(4,274
|
)
|
Dividends
on allocated Series B ESOP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
Preferred Stock
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2
|
)
|
Net
income (loss) attributable to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
shareowners
|
|
$
|
164
|
|
$
|
1,428
|
|
$
|
(2,205
|
)
|
$
|
164
|
|
$
|
1,298
|
|
$
|
(4,276
|
)
|
Basic
weighted average shares outstanding
|
|
|
393.6
|
|
|
197.3
|
|
|
197.3
|
|
|
393.6
|
|
|
197.3
|
|
|
195.6
|
|
Basic
earnings (loss) per share
|
|
$
|
0.42
|
|
$
|
7.24
|
|
$
|
(11.18
|
)
|
$
|
0.42
|
|
$
|
6.58
|
|
$
|
(21.86
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
shareowners
|
|
$
|
164
|
|
$
|
1,428
|
|
$
|
(2,205
|
)
|
$
|
164
|
|
$
|
1,298
|
|
$
|
(4,276
|
)
|
Gain
recognized on the forgiveness
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
convertible debt
|
|
|
-
|
|
|
(216
|
)
|
|
-
|
|
|
-
|
|
|
(216
|
)
|
|
-
|
|
Net
income (loss) attibutable to common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shareowners
assuming conversion
|
|
$
|
164
|
|
$
|
1,212
|
|
$
|
(2,205
|
)
|
$
|
164
|
|
$
|
1,082
|
|
$
|
(4,276
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding
|
|
|
393.6
|
|
|
197.3
|
|
|
197.3
|
|
|
393.6
|
|
|
197.3
|
|
|
195.6
|
|
Additional
shares assuming:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
shares
|
|
|
0.2
|
|
|
-
|
|
|
-
|
|
|
0.2
|
|
|
-
|
|
|
-
|
|
Conversion
of 8.0% Convertible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
Notes
|
|
|
-
|
|
|
12.5
|
|
|
-
|
|
|
-
|
|
|
12.5
|
|
|
-
|
|
Conversion
of 2 7/8% Convertible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
Notes
|
|
|
-
|
|
|
23.9
|
|
|
-
|
|
|
-
|
|
|
23.9
|
|
|
-
|
|
Weighted
average shares outstanding,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
as
adjusted
|
|
|
393.8
|
|
|
233.7
|
|
|
197.3
|
|
|
393.8
|
|
|
233.7
|
|
|
195.6
|
|
Dilutive
earnings (loss) per share
|
|
$
|
0.42
|
|
$
|
5.19
|
|
$
|
(11.18
|
)
|
$
|
0.42
|
|
$
|
4.63
|
|
$
|
(21.86
|
)
|
For
the
two months ended June 30, 2007, we excluded from our earnings per share
calculations all common stock equivalents if their effect is anti-dilutive.
These common stock equivalents include options to purchase three million shares
of common stock.
For
the three and six months ended June 30, 2006, we
excluded from our loss per share calculations all common stock equivalents
because their effect on earnings per share was anti-dilutive. These common
stock equivalents include 12.5 million and 23.9 million shares of common stock
issuable upon conversion of our 8.0% Convertible Senior Notes due 2023 and
our 2
7/8% Convertible Senior Notes due 2024, respectively.
12.
FAIR VALUE MEASUREMENTS
As
described in Note 2, we adopted SFAS 157 upon emerging from bankruptcy. SFAS
157, among other things, defines fair value establishes a consistent
framework for measuring fair value and expands disclosure for each major
asset
and liability category measured at fair value on either a
recurring or nonrecurring basis. SFAS
157 clarifies that fair value is an exit price, representing the amount
that would be received to sell an asset or paid to transfer a liability in
an
orderly transaction between market participants. As such fair value
is a market-based measurement that should be determined based on assumptions
that market participants would use in pricing an asset or liability. As a
basis
for considering such assumptions, SFAS 157 establishes a three-tier fair
value
hierarchy, which prioritizes the inputs used in measuring fair value as follows:
(Level 1) observable inputs such as quoted prices in active markets; (Level
2)
inputs, other than the quoted prices in active markets, that are observable
either directly or indirectly; and (Level 3) unobservable inputs in which
there
is little or no market data, which require the reporting entity to develop
its
own assumptions.
Assets
and liabilities measured at fair value are based on one or more of
three
valuation techniques noted in SFAS 157. The three valuation techniques are
identified in the tables below. Where more than one technique is noted,
individual assets or liabilities were valued using one or more of the noted
techniques. The valuation techniques are as follows:
|
(a) |
Market
approach - prices
and other relevant information generated by market transactions
involving
identical or comparable assets or
liabilities
|
|
(b) |
Cost
approach - amount
that would be required to replace the service capacity of an asset
(replacement cost)
|
|
(c) |
Income
approach -
techniques to convert future amounts to a single present amount
based on
market expectations (including present value techniques, option-pricing
and excess earnings models).
|
Assets
and liabilities measured at fair value on a recurring
basis
|
|
Successor
June
30,
2007
|
|
Quoted
prices in
active
markets
for
identical
assets
(Level 1)
|
|
Significant
other
observable
inputs
(Level 2)
|
|
Valuation
Technique
|
|
|
|
|
|
|
|
|
|
|
|
Short
term investments
|
|
$
|
1,549
|
|
$
|
1,549
|
|
$
|
-
|
|
(a)
|
|
Fuel
hedging derivatives
|
|
|
37
|
|
|
-
|
|
|
37
|
|
(a)
|
|
There
were no changes in our valuation technique used to measure asset fair values
on
a recurring basis.
Assets
and liabilities measured at fair value on a nonrecurring
basis
|
|
Successor
May
1,
2007
|
|
Significant
other
observable
inputs
(Level 2)
|
|
unobservable
inputs
(Level 3)
|
|
Valuation
technique
|
|
|
|
|
|
|
|
|
|
Expendable
parts and supplies inventories
|
|
$
|
241
|
|
$
|
241
|
|
$
|
-
|
|
(a)
(b)
|
Prepaid
expense and other
|
|
|
349
|
|
|
349
|
|
|
-
|
|
(a)
(b) (c)
|
Net
flight equipment and net flight equipment under capital
lease
|
|
|
9,833
|
|
|
9,833
|
|
|
-
|
|
(a)
(b)
|
Other
property and equipment
|
|
|
1,713
|
|
|
1,713
|
|
|
-
|
|
(a)
(b)
|
Indefinite-lived
intangible assets (2)
|
|
|
1,997
|
|
|
-
|
|
|
1,997
|
|
(c)
|
Definite-lived
intangible assets (2)
|
|
|
956
|
|
|
-
|
|
|
956
|
|
(c)
|
Other
noncurrent assets
|
|
|
875
|
|
|
875
|
|
|
-
|
|
(a)
(b) (c)
|
Debt
and obligations under capital lease
|
|
|
6,899
|
|
|
6,899
|
|
|
-
|
|
(a)
(c)
|
SkyMiles
deferred revenue
(3)
|
|
|
3,482
|
|
|
-
|
|
|
3,482
|
|
(a)
|
Accounts
payable and other noncurrent liabilities
|
|
|
405
|
|
|
405
|
|
|
-
|
|
(a)
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
These
valuations were based on the present value of future cash flows
for
specific assets derived from our projections of future revenue,
expense
and airline market conditions. These cash flows were then discounted
to
their present value using a rate of return that considers the relative
risk of not realizing the estimated annual cash flows and time
value of
money.
|
(2) |
Intangible
assets are identified by asset type in Note
2.
|
(3) |
The
fair value of our SkyMiles frequent flyer award liability was determined
based on the estimated price we would pay a third party to assume
the
obligation for miles expected to be redeemed under our SkyMiles
program.
These miles were valued based upon the weighted average of the
equivalent
ticket value of similar fares on Delta and the amounts paid to
other
SkyTeam alliance partners. See Note 2 for the accounting policy
related to
our SkyMiles frequent flyer
program.
|
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 U.S. Bankruptcy Code (the
“Bankruptcy Code”) in the U.S. Bankruptcy Court for the Southern
District of New York (the “Bankruptcy Court”). The reorganization cases were
jointly administered under the caption “In re Delta Air Lines, Inc., et al.,
Case No. 05-17923-ASH.” On April 25, 2007, the Bankruptcy Court approved the
Debtors’ Joint Plan of Reorganization (the “Plan”).
On
April
30, 2007 (the “Effective Date”), we emerged from bankruptcy as a competitive
airline with a global network. Our business strategy touches all facets of
our
operations - the destinations we serve, the way we serve our customers, and
the
fleet we operate - in order to earn customer preference and continue to improve
revenue performance. We intend to remain focused on maintaining the competitive
cost structure we obtained from our reorganization to improve our financial
position further and achieve long-term stability.
Our
reorganization in Chapter 11 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 have achieved and expect to continue to achieve additional financial
improvements in 2007.
For
additional information regarding our Chapter 11 proceedings, see Note 1 of
the Notes to the Condensed Consolidated Financial Statements.
Basis
of Presentation
Our
unaudited Condensed Consolidated Financial Statements and the accompanying
Notes
have been prepared in accordance with accounting principles generally accepted
in the United States of America (“GAAP”) for interim financial information.
Consistent with these requirements, 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.
Upon
emergence from Chapter 11, we adopted fresh start reporting in accordance with
American Institute of Certified Public Accountants’ Statement of Financial
Position 90-7, “Financial Reporting by Entities in Reorganization under the
Bankruptcy Code” (“SOP 90-7”). The adoption of fresh start reporting results in
our becoming a new entity for financial reporting purposes. Accordingly our
Condensed Consolidated Financial Statements on or after May 1, 2007 are not
comparable to our Condensed Consolidated Financial Statements prior to that
date.
Fresh
start reporting requires resetting the historical net book value of assets
and
liabilities to fair value by allocating the entity’s reorganization value to its
assets and liabilities pursuant to Statement of Financial Accounting Standards
(“SFAS”) No. 141, “Business Combinations”. The excess reorganization value over
the fair value of tangible and identifiable intangible assets is recorded as
goodwill on our Consolidated Balance Sheet. Deferred taxes are determined in
conformity with SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”). For
additional information regarding the impact of fresh start reporting on our
Consolidated Balance Sheet as of the Effective Date, see “Fresh Start
Consolidated Balance Sheet” in Note 1 of the Notes to the Condensed Consolidated
Financial Statements.
References
in this Form 10-Q to “Successor” refer to Delta on or after May 1, 2007, after
giving effect to (1) the cancellation of Delta common stock issued prior to
the
Effective Date; (2) the issuance of new Delta common stock and certain debt
securities in accordance with the Plan; and (3) the application of fresh start
reporting. References to “Predecessor” refer to Delta prior to May 1, 2007.
Combined
Quarterly Financial Results of the Predecessor and Successor
Due
to
our adoption of fresh start reporting on April 30, 2007, the accompanying
Consolidated Statements of Operations include the results of operations for
(1)
the one month and four months ended April 30, 2007 of the Predecessor and (2)
the two months ended June 30, 2007 of the Successor.
For
purposes of management’s discussion and analysis of the results of operations in
this Form 10-Q, we combined the results of operations for (1) the one month
ended April 30, 2007 of the Predecessor with the two months ended June 30,
2007
of the Successor and (2) the four months April 30, 2007 of the Predecessor
with
the two months ended June 30, 2007 of the Successor. We then compare the
combined results of operations for the three and six months ended June 30,
2007
with the corresponding periods in the prior year.
We
believe the combined results of operations for the three and six months ended
June 30, 2007 provide management and investors with a more meaningful
perspective on Delta’s ongoing financial and operational performance and trends
than if we did not combine the results of operations of the Predecessor and
the
Successor in this manner. Similarly, we combine the financial results of the
Predecessor and the Successor when discussing our sources and uses of cash
for
the six months ended June 30, 2007.
Fresh
Start Adjustments
During
the two months ended June 30, 2007, we recorded fresh start reporting
adjustments (“Fresh Start Adjustments”) on our Condensed Consolidated Financial
Statements that are reflected in our results for the three and six months ended
June 30, 2007. These adjustments resulted in a $13 million increase to pre-tax
income on our Consolidated Statement of Operations, consisting of:
Fuel
Hedging Gains. Prior
to the adoption of fresh start reporting on April 30, 2007, we recorded as
a
component of shareowners' deficit in other comprehensive income (loss) $46
million of deferred gains related to our fuel hedging program. This gain would
have been recognized as an offset to fuel expense as the underlying fuel hedge
contracts were settled. However, as required by fresh start
reporting, accumulated other comprehensive loss prior to emergence
from Chapter 11 was reset to zero. Accordingly, Fresh Start Adjustments resulted
in a non-cash increase to fuel expense of $25 million.
Depreciation.
We revalued property and equipment to fair value, which reduced the net book
value of these assets by $1.0 billion. In addition, we increased the depreciable
lives of flight equipment to reflect revised estimated useful lives. As a
result, depreciation expense decreased by $31 million.
Amortization
of Intangible Assets. We
revalued our intangible assets to fair value, which increased the net book
value
of intangible assets (excluding goodwill) by $2.9 billion, of which $956 million
relates to amortizable intangible assets. As a result, we recorded amortization
expense of $35 million. For additional information on our intangible assets,
see
Note 2 of our Notes to the Condensed Consolidated Financial
Statements.
Aircraft
Maintenance Materials and Outside Repairs. We
changed the way we account for certain maintenance parts that were previously
capitalized and depreciated. After emergence, we will expense these parts
as they are placed on the aircraft. This change resulted in an increase in
aircraft maintenance materials and outside repairs expense of $15
million.
Interest
Expense. The
revaluation of our debt and capital lease obligations resulted in a decrease
in
interest expense due to the amortization of premiums from adjusting these
obligations to fair value. As a result, interest expense decreased by $7
million.
Other
Fresh Start Reporting Adjustments. We
recorded other Fresh Start Adjustments relating
primarily to the revaluation of our aircraft leases that
increased our pre-tax income by $8 million.
Accounting
Adjustments
During
the March 2006 quarter, we recorded certain out-of-period adjustments
(“Accounting Adjustments”) in our Condensed Consolidated Financial Statements
that affect the comparability of our results for the six months ended June
30,
2007 and 2006. These adjustments resulted in a net non-cash charge of $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 (“JFK”). 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 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.
|
Reclassifications
As
described in Note 5 of the Notes to the Condensed Consolidated Financial
Statements, we amended our Visa/MasterCard processing agreement to provide
for
the return of the then existing holdback. For information about the
reclassification of changes in the cash portion of the holdback on our Condensed
Consolidated Statements of Cash Flows prior to the amendment, see Note 2 of
the
Notes to the Condensed Consolidated Financial Statements.
Upon
emergence and as a result of fresh start reporting, we changed the
classification of certain items on our Consolidated Statements of Operations.
We
also reclassified prior period amounts to conform to current period
presentations. These changes have no impact on net income in any period prior
to
or subsequent to our emergence from bankruptcy. See Note 2 of the Notes to
the
Condensed Consolidated Financial Statements for more information about these
reclassifications.
Net
Income (Loss)
We
had
consolidated net income of $1.6 billion for the June 2007 quarter and a
consolidated net loss of $2.2 billion for the June 2006 quarter. The June 2007
quarter results include a $1.3 billion gain to reorganization items, net,
primarily reflecting a $2.1 billion gain in connection with our emergence from
bankruptcy. The June 2006 quarter results include a charge from the $2.1 billion
allowed general, unsecured claim received by the Air Line Pilots Association,
International (“ALPA”) under our comprehensive agreement reducing pilot labor
costs.
Operating
Revenue
|
|
Combined
|
|
Predecessor
|
|
|
|
|
|
|
Three
Months
|
|
Three
Months
|
|
|
|
%
|
|
|
|
Ended
|
|
Ended
|
|
Increase
|
|
Increase
|
|
(in
millions)
|
|
June
30, 2007
|
|
June
30, 2006
|
|
(Decrease)
|
|
(Decrease)
|
|
Operating
Revenue:
|
|
|
|
|
|
|
|
|
|
Passenger:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline
|
|
$
|
3,384
|
|
$
|
3,176
|
|
$
|
208
|
|
|
7
|
%
|
Regional
affiliates
|
|
|
1,109
|
|
|
1,035
|
|
|
74
|
|
|
7
|
%
|
Total
passenger revenue
|
|
|
4,493
|
|
|
4,211
|
|
|
282
|
|
|
7
|
%
|
Cargo
|
|
|
118
|
|
|
128
|
|
|
(10
|
)
|
|
(8
|
)%
|
Other,
net
|
|
|
392
|
|
|
402
|
|
|
(10
|
)
|
|
(2
|
)%
|
Total
operating revenue
|
|
$
|
5,003
|
|
$
|
4,741
|
|
$
|
262
|
|
|
6
|
%
|
Operating
revenue totaled $5.0 billion for the June 2007 quarter, a $262 million, or
6%,
increase compared to the June 2006 quarter. Passenger revenue increased 7%
on a
1% increase in capacity and 3.1 point increase in load factor. The increase
in
passenger revenue is primarily due to a rise of 2% and 6% in passenger mile
yield and passenger revenue per available seat mile (“PRASM”), respectively.
Mainline passenger revenue increased primarily due to (1) strong passenger
demand, (2) our increased service to international destinations and (3)
increased SkyMiles revenue due to certain Fresh Start Adjustments discussed
above. Passenger revenue of regional affiliates increased primarily due
to increased flying by our contract carriers, which resulted in a 9%
increase in revenue passenger miles (“RPMs”), or traffic, on 7% greater capacity
for our regional affiliates.
|
|
|
|
Increase
(Decrease)
|
|
|
|
Combined
|
|
Three
Months Ended June 30, 2007 vs. 2006
|
|
|
|
Three
Months
|
|
|
|
|
|
|
|
Passenger
|
|
|
|
|
|
|
|
Ended
|
|
Passenger
|
|
|
|
|
|
Mile
|
|
|
|
Load
|
|
(in
millions)
|
|
June
30, 2007
|
|
Revenue
|
|
RPMs
|
|
ASMs
|
|
Yield
|
|
PRASM
|
|
Factor
|
|
Passenger
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
$
|
3,208
|
|
|
1
|
%
|
|
1
|
%
|
|
(5
|
)%
|
|
(1
|
)%
|
|
6
|
%
|
|
5.0
|
|
International
|
|
|
1,260
|
|
|
26
|
%
|
|
14
|
%
|
|
15
|
%
|
|
11
|
%
|
|
10
|
%
|
|
(0.7
|
)
|
Charter
revenue
|
|
|
25
|
|
|
12
|
%
|
|
75
|
%
|
|
25
|
%
|
|
(36
|
)%
|
|
(10
|
)%
|
|
10.9
|
|
Total
passenger revenue
|
|
$
|
4,493
|
|
|
7
|
%
|
|
5
|
%
|
|
1
|
%
|
|
2
|
%
|
|
6
|
%
|
|
3.1
|
|
North
American Passenger Revenue.
North
American passenger revenue increased 1%, driven by a 5.0 point increase in
load
factor and 6% increase in PRASM on a 5% decline in capacity. The passenger
mile
yield decreased 1%. The increases in passenger revenue and PRASM 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.
As a result of our efforts to right-size capacity in domestic markets, we
increased flying by our contract carriers. For additional information regarding
our contract carriers, see Note 5 of the Notes to the Condensed Consolidated
Financial Statements.
International
Passenger Revenue.
International passenger revenue increased 26%, generated by a 14% increase
in
RPMs from a 15% increase in capacity. The passenger mile yield and PRASM
increased 11% 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. Our mix of domestic versus
international capacity was 66% and 34%, respectively, in the June 2007 quarter,
compared to 70% and 30%, respectively, in the June 2006 quarter.
Operating
Expense
|
|
Combined
|
|
Predecessor
|
|
|
|
|
|
|
|
|
Three
Months
|
|
Three
Months
|
|
|
|
|
%
|
|
|
|
Ended
|
|
Ended
|
|
Increase
|
|
|
Increase
|
|
(in
millions)
|
|
June
30, 2007
|
|
June
30, 2006
|
|
(Decrease)
|
|
|
(Decrease)
|
|
Operating
Expense:
|
|
|
|
|
|
|
|
|
|
|
Aircraft
fuel and related taxes
|
|
$
|
1,112
|
|
$
|
1,142
|
|
$
|
(30
|
)
|
|
|
(3
|
)%
|
Salaries
and related costs
|
|
|
1,039
|
|
|
1,070
|
|
|
(31
|
)
|
|
|
(3
|
)%
|
Contract
carrier arrangements
|
|
|
769
|
|
|
660
|
|
|
109
|
|
|
|
17
|
%
|
Depreciation
and amortization
|
|
|
288
|
|
|
318
|
|
|
(30
|
)
|
|
|
(9
|
)%
|
|
|
|
243
|
|
|
218
|
|
|
25
|
|
|
|
11
|
%
|
Aircraft
maintenance materials and outside repairs
|
|
|
247
|
|
|
232
|
|
|
15
|
|
|
|
6
|
%
|
Passenger
commissions and other selling expenses
|
|
|
253
|
|
|
234
|
|
|
19
|
|
|
|
8
|
%
|
Landing
fees and other rents
|
|
|
182
|
|
|
194
|
|
|
(12
|
)
|
|
|
(6
|
)%
|
Passenger
service
|
|
|
85
|
|
|
81
|
|
|
4
|
|
|
|
5
|
%
|
Aircraft
rent
|
|
|
56
|
|
|
73
|
|
|
(17
|
)
|
|
|
(23
|
)%
|
Profit
sharing
|
|
|
79
|
|
|
-
|
|
|
79
|
|
|
|
NM
|
|
Other
|
|
|
160
|
|
|
150
|
|
|
10
|
|
|
|
7
|
%
|
Total
operating expense
|
|
$
|
4,513
|
|
$
|
4,372
|
|
$
|
141
|
|
|
|
3
|
%
|
Operating
expense was $4.5 billion for the June 2007 quarter, a $141 million, or 3%,
increase compared to the June 2006 quarter. As discussed below, the increase
in
operating expense was primarily due to an increase in contract carrier
arrangements expense, an accrual for profit sharing, and certain Fresh Start
Adjustments discussed above. These increases were partially offset by decreases
in salaries and related costs, aircraft fuel and related taxes and
depreciation and amortization.
Operating
capacity increased 1% to 38.1 billion available seat miles (“ASMs”) primarily
due to higher contract carrier flying from our business plan initiatives to
right-size capacity. Operating cost per available seat mile (“CASM”) increased
2% to 11.83¢.
Salaries
and related costs.
The
decrease
in salaries and related costs reflects a decline of 9% due to benefit cost
reductions for our pilot and non-pilot employees partially offset by a 5%
increase associated with (1) an 8% increase in Mainline headcount due to
our expansion at JFK and our assumption of Atlantic Southeast Airlines, Inc.
(“ASA”)
ramp operations
at Hartsfield-Jackson Atlanta International Airport and (2) compensation
program benefits primarily associated with emergence share-based
compensation.
Aircraft
fuel and related taxes.
Aircraft fuel and related taxes decreased primarily due to (1) lower
average fuel prices and (2) fuel tax refunds received, partially offset by
certain Fresh Start Adjustments discussed above. Fuel prices averaged $2.09
per
gallon, including fuel hedge gains of $14 million, for the June 2007 quarter,
compared to $2.14 per gallon, including fuel hedge gains of $1 million, for
the
June 2006 quarter.
Contract
carrier arrangements.
Contract carrier arrangements expense increased primarily due to a 19% growth
in
contract carrier flying from our business plan initiatives to right-size
capacity in domestic markets.
Depreciation
and amortization. The
decrease in depreciation and amortization primarily relates to a lower
depreciable asset base from restructuring initiatives during our Chapter 11
proceedings, partially offset by certain Fresh Start Adjustments described
above.
Contracted
services.
The
increase in contracted services is primarily due to higher outsourcing related
to our technology center and cargo handling services.
Profit
sharing.
Our
broad-based employee profit sharing plan provides that, for each year in which
we have an annual pre-tax profit we will pay at least 15% of that profit to
eligible employees. Based on our pre-tax earnings for the June 2007
quarter, we accrued $79 million under the profit sharing plan.
Operating
Income and Operating Margin
We
reported operating income of $490 million in the June 2007 quarter, compared
to
$369 million for the June 2006 quarter. Operating margin, which is the ratio
of
operating income to operating revenues, was 10% and 8% for the June 2007 and
2006 quarters, respectively.
Other
(Expense) Income
Other
expense, net for the June 2007 quarter was $138 million, compared to $190
million for the June 2006 quarter. This change is substantially attributable
to
(1) a 20%, or $45 million, net decrease in interest expense primarily due to
the
repayment of our two then outstanding debtor-in-possession financing
facilities (the “DIP Facility”)
in connection
with our emergence
from
Chapter 11, partially offset by borrowings under our senior secured
exit financing facility (the “Exit
Facilities”)
and (2) a $19 million increase in interest income primarily from interest earned
on cash savings from restructuring initiatives during bankruptcy, partially
offset by a $12 million charge to miscellaneous, net primarily associated with
losses related to the ineffective portion of our fuel hedge positions.
Reorganization
Items, Net
Reorganization
items, net totaled a $1.3 billion gain for the June 2007 quarter, primarily
consisting of the following:
|
· |
Emergence
gain. A
net $2.1 billion gain due to our emergence from bankruptcy, comprised
of
(1) a $4.4 billion gain related to the discharge of liabilities subject
to
compromise in connection with the settlement of claims, (2) a $2.6
billion
charge associated with the revaluation of our SkyMiles frequent flyer
obligation and (3) a $238 million gain from the revaluation of our
remaining assets and liabilities to fair value. For additional information
regarding this emergence gain, see Note 1 of the Notes to the Condensed
Consolidated Financial Statements.
|
|
· |
Aircraft
financing renegotiations and rejections.
$438 million of estimated claims primarily associated with the
restructuring of the financing arrangements of 127 aircraft and
adjustments to prior claims estimates.
|
|
· |
Emergence
compensation.
In accordance with the Plan, we made $130 million in lump-sum cash
payments to approximately 39,000 eligible non-contract,
non-management employees. We also recorded an additional
charge of $32 million related to our portion of payroll related taxes
associated with the issuance, as contemplated by the Plan, of
approximately 14 million shares of common stock to those employees.
For
additional information regarding the common stock issuance, see Note
10 of
the Notes to the Condensed Consolidated Financial
Statements.
|
|
· |
Facility
leases.
A
net $80 million charge from an allowed general, unsecured claim in
connection with the settlement relating to the restructuring of certain
of
our lease and other obligations at the Cincinnati-Northern Kentucky
International Airport (“CVG”). For additional information regarding this
settlement, see Note 4 of the Notes to the Condensed Consolidated
Financial Statements.
|
Reorganization
items, net totaled a $2.4 billion charge in the June 2006 quarter. This net
charge primarily reflects a $2.1 billion allowed general, unsecured claim that
we agreed to in our comprehensive agreement with ALPA reducing our pilot labor
costs. For additional information about our reorganization items, see Note
1 of
the Notes to the Condensed Consolidated Financial Statements.
Income
Tax Provision
For
the
June 2007 quarter, we recorded an income tax provision totaling $99
million. We have recorded a full valuation allowance
against the net deferred tax asset, excluding the effect of the deferred tax
liability that is unable to be used as a source of income against these deferred
tax assets, based on our belief that it is more likely than not that the asset
will not be realized in the future. This determination was made in a prior
fiscal year and is still applicable for the current period. We will
continue to assess the need for a full valuation allowance in future
quarters. In accordance with SOP 90-7, if we utilize pre-emergence
bankruptcy net operating loss (“NOL”)
carryforwards,
we will sequentially reduce the cost of goodwill followed by other
indefinite-lived assets until the net carrying cost of these assets is
zero. Accordingly, during the June 2007 quarter, we reduced goodwill by
$103 million with respect to utilization of pre-emergence NOL
carryforwards.
During
the June 2006 quarter, we recorded an income tax provision totaling $4 million.
This amount reflected an adjustment to our estimated required valuation
allowance at December 31, 2006. For additional information about the income
tax
valuation allowance, see Note 8 of the Notes to the Condensed Consolidated
Financial Statements.
Combined
Results of Operations — Six Months Ended June 2007 and
2006
Net
Income (Loss)
We
had
consolidated net income of $1.5 billion for the six months ended June 30, 2007,
and a consolidated net loss of $4.3 billion for the six months ended June 30,
2006. The results for the six months ended June 30, 2007 include a $1.2 billion
gain to reorganization items, net, primarily reflecting a $2.1 billion gain
in
connection with our emergence from bankruptcy. The results for the six months
ended June 30, 2006 include a $3.8 billion charge to reorganization items,
net,
primarily from (1) a $2.1 billion allowed general, unsecured claim received
by
ALPA under our comprehensive agreement reducing our pilot labor costs, (2)
$1.6
billion of estimated claims primarily associated with restructuring the
financing arrangements for 143 aircraft and (3) a $310 million charge associated
with the Accounting Adjustments discussed above.
Operating
Revenue
|
|
Combined
|
|
Predecessor
|
|
|
|
|
|
|
|
Six
Months
|
|
Six
Months
|
|
|
|
%
|
|
|
|
Ended
|
|
Ended
|
|
Increase
|
|
Increase
|
|
(in
millions)
|
|
June
30, 2007
|
|
June
30, 2006
|
|
(Decrease)
|
|
(Decrease)
|
|
Operating
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline
|
|
$
|
6,167
|
|
$
|
5,669
|
|
$
|
498
|
|
|
9
|
%
|
Regional
affiliates
|
|
|
2,056
|
|
|
1,893
|
|
|
163
|
|
|
9
|
%
|
Total
passenger revenue
|
|
|
8,223
|
|
|
7,562
|
|
|
661
|
|
|
9
|
%
|
Cargo
|
|
|
230
|
|
|
251
|
|
|
(21
|
)
|
|
(8
|
)%
|
Other,
net
|
|
|
791
|
|
|
722
|
|
|
69
|
|
|
10
|
%
|
Total
operating revenue
|
|
$
|
9,244
|
|
$
|
8,535
|
|
$
|
709
|
|
|
8
|
%
|
Operating
revenue totaled $9.2 billion for the six months ended June 30, 2007, a $709
million, or 8%, increase compared to the six months ended June 30, 2006.
Passenger revenue increased 9% on a 2% increase in capacity and 2.1 point
increase in load factor. The increase in passenger revenue is primarily due
to a
rise of 4% and 7% in passenger mile yield and PRASM, respectively. Mainline
passenger revenue increased primarily due to (1) strong passenger demand, (2)
our increased service to international destinations and (3) higher SkyMiles
revenue associated with certain Fresh Start Adjustments discussed above.
Passenger revenue of regional affiliates increased primarily due
to increased flying by our contract carriers, which resulted in a 9%
increase in RPMs on 9% greater capacity for our regional affiliates. For the
six
months ended June 30, 2006, passenger revenue and other, net revenue were
negatively impacted by certain Accounting Adjustments discussed
above.
|
|
|
|
Increase
(Decrease)
|
|
|
|
Combined
|
|
Six
Months Ended June 30, 2007 vs. 2006
|
|
|
|
Six
Months
|
|
|
|
|
|
|
|
Passenger
|
|
|
|
|
|
|
|
Ended
|
|
Passenger
|
|
|
|
|
|
Mile
|
|
|
|
Load
|
|
(in
millions)
|
|
June
30, 2007
|
|
Revenue
|
|
RPMs
|
|
ASMs
|
|
Yield
|
|
PRASM
|
|
Factor
|
|
Passenger
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
American
|
|
$
|
5,996
|
|
|
3
|
%
|
|
(2
|
)%
|
|
(5
|
)%
|
|
4
|
%
|
|
8
|
%
|
|
3.0
|
|
International
|
|
|
2,176
|
|
|
32
|
%
|
|
19
|
%
|
|
19
|
%
|
|
10
|
%
|
|
11
|
%
|
|
0.1
|
|
Charter
revenue
|
|
|
51
|
|
|
(12
|
)%
|
|
(8
|
)%
|
|
(8
|
)%
|
|
(4
|
)%
|
|
(4
|
)%
|
|
(0.1
|
)
|
Total
passenger revenue
|
|
$
|
8,223
|
|
|
9
|
%
|
|
4
|
%
|
|
2
|
%
|
|
4
|
%
|
|
7
|
%
|
|
2.1
|
|
North
American Passenger Revenue.
North
American passenger revenue increased 3%, driven by a 3.0 point increase in
load
factor and 8% increase in PRASM on a 5% decline in capacity. The passenger
mile
yield increased 4%. The increases in passenger revenue and PRASM 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.
As a result of our efforts to right-size capacity in domestic markets, we
increased flying by our contract carriers. For additional information regarding
our contract carriers, see Note 5 of the Notes to the Condensed Consolidated
Financial Statements.
International
Passenger Revenue.
International passenger revenue increased 32%, generated by a 19% increase
in
RPMs from a 19% increase in capacity. The passenger mile yield and PRASM
increased 10% and 11%, 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. Our mix of domestic versus
international capacity was 68% and 32%, respectively, in the six months ended
June 30, 2007, compared to 73% and 27%, respectively, for the six months ended
June 30, 2006.
Operating
Expense
|
|
Combined
|
|
Predecessor
|
|
|
|
|
|
|
Six
Months
|
|
Six
Months
|
|
|
|
%
|
|
|
Ended
|
|
Ended
|
|
Increase
|
|
Increase
|
(in
millions)
|
|
June
30, 2007
|
|
June
30, 2006
|
|
(Decrease)
|
|
(Decrease)
|
Operating
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft
fuel and related taxes
|
|
$
|
2,060
|
|
$
|
2,101
|
|
$
|
(41
|
)
|
(2
|
)%
|
Salaries
and related costs
|
|
|
2,010
|
|
|
2,293
|
|
|
(283
|
)
|
(12
|
)%
|
Contract
carrier arrangements
|
|
|
1,486
|
|
|
1,269
|
|
|
217
|
|
17
|
%
|
Depreciation
and amortization
|
|
|
579
|
|
|
619
|
|
|
(40
|
)
|
(6
|
)%
|
Contracted
services
|
|
|
486
|
|
|
440
|
|
|
46
|
|
10
|
%
|
Aircraft
maintenance materials and outside repairs
|
|
|
485
|
|
|
459
|
|
|
26
|
|
6
|
%
|
Passenger
commissions and other selling expenses
|
|
|
473
|
|
|
446
|
|
|
27
|
|
6
|
%
|
Landing
fees and other rents
|
|
|
372
|
|
|
491
|
|
|
(119
|
)
|
(24
|
)%
|
Passenger
service
|
|
|
156
|
|
|
154
|
|
|
2
|
|
1
|
%
|
Aircraft
rent
|
|
|
126
|
|
|
168
|
|
|
(42
|
)
|
(25
|
)%
|
Profit
sharing
|
|
|
79
|
|
|
-
|
|
|
79
|
|
NM
|
|
Other
|
|
|
287
|
|
|
211
|
|
|
76
|
|
36
|
%
|
Total
operating expense
|
|
$
|
8,599
|
|
$
|
8,651
|
|
$
|
(52
|
)
|
(1
|
)%
|
Operating
expense was $8.6 billion for the six months ended June 30, 2007, a $52 million,
or 1%, decrease compared to the six months ended June 30, 2006. As discussed
below, the decrease in operating expense was primarily due to a decrease in
salaries and related costs, landing fees and other rents, and certain Fresh
Start Adjustments discussed above. These decreases were partially offset by
an
increase in contract carrier arrangements expense and an accrual for profit
sharing. For the six months ended June 30, 2006, operating expense was
negatively impacted by certain Accounting Adjustments discussed above.
Operating
capacity increased 2% to 73.4 billion ASMs primarily due to higher contract
carrier flying from our business plan initiatives to right-size capacity. CASM
decreased 2% to 11.71¢.
Salaries
and related costs.
The
decrease in salaries and related costs reflects a decline of (1) 12% due to
benefit cost reductions for our pilot and non-pilot employees and (2) 4% as
a
result of a charge during the six months ended June 30, 2006 associated with
certain Accounting Adjustments discussed above. These decreases were partially
offset by a 2% increase related to (2) a 4% increase in Mainline headcount
due to our expansion at JFK and our assumption of ASA ramp operations
at Hartsfield-Jackson Atlanta International Airport and (2) compensation
program benefits primarily associated with emergence share-based
compensation.
Aircraft
fuel and related taxes.
Aircraft fuel and related taxes decreased primarily due to a 1%
decrease in consumption and fuel tax refunds received, partially offset by
certain Fresh Start Adjustments discussed above. Fuel prices remained relatively
constant averaging $2.02 per gallon, including fuel hedge losses of $4 million,
for the six months ended June 30, 2007, compared to $2.03 per gallon, including
fuel hedge gains of $4 million, for the six months ended June 30, 2006.
Contract
carrier arrangements.
Contract carrier arrangements expense increased primarily due to a 19% growth
in
contract carrier flying from our business plan initiatives to right-size
capacity in domestic markets.
Contracted
services. The increase in contracted services is primarily due to
higher outsourcing related to our technology center, cargo handling services
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 six
months ended June 30, 2006 associated with certain Accounting Adjustments
discussed above.
Aircraft
rent.
The
decline in aircraft rent expense is due to the renegotiation and rejection
of
certain leases in connection with our restructuring under Chapter
11.
Profit
sharing.
Our
broad based profit sharing plan provides that, for each year in which we have
an
annual pre-tax profit, we will pay at least 15% of that profit to eligible
employees. Based on our pre-tax earnings for the June 2007 quarter, we
accrued $79 million under the profit sharing plan.
Other.
The
increase in other operating expense was primarily due to a credit we recorded
during the six months ended June 30, 2006 related to certain Accounting
Adjustments discussed above.
Operating
Income (Loss) and Operating Margin
We
reported operating income of $645 million for the six months ended June 30,
2007, compared to an operating loss of $116 million for the six months ended
June 30, 2006. Operating margin, which is the ratio of operating income (loss)
to operating revenues, was 7% and (1)% for the six months ended June 30, 2007
and 2006, respectively.
Other
(Expense) Income
Other
expense, net for the six months ended June 30, 2007 was $299 million, compared
to $392 million for the six months ended June 30, 2006. This change is
substantially attributable to (1) a 13%, or $59 million, net decrease in
interest expense primarily due to the repayment of the DIP Facility in
connection with our emergence from Chapter 11, partially offset
by borrowings under the Exit Facilities, (2) a $17 million increase in
interest income from interest earned on cash savings from restructuring
initiatives during bankruptcy and (3) a $17 million gain to miscellaneous,
net
primarily associated with gains related to the ineffective portion of our fuel
hedge positions.
Reorganization
Items, Net
Reorganization
items, net totaled a $1.2 billion gain for the six months ended June 30, 2007,
primarily consisting of the following:
|
· |
Emergence
gain. A
net $2.1 billion gain due to our emergence from bankruptcy. For additional
information regarding this gain, see “Combined Results of Operations -
June 2007 and June 2006 Quarters - Reorganization Items, Net” above.
|
|
· |
Aircraft
financing renegotiations and rejections.
$440 million of estimated claims primarily associated with the
restructuring of the financing arrangements for 143 aircraft and
adjustments to prior claims estimates.
|
|
· |
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,
respectively, of the Notes to the Condensed Consolidated Financial
Statements.
|
|
· |
Emergence
compensation.
In accordance with the Plan, we made $130 million in lump-sum cash
payments to approximately 39,000 eligible non-contract,
non-management employees. We also recorded an additional charge
of $32 million related to our portion of payroll related taxes associated
with the issuance, as contemplated by the Plan, of approximately 14
million shares of common stock to those employees. For additional
information regarding the common stock issuance, see Note 10 of the
Notes
to the Condensed Consolidated Financial
Statements.
|
|
· |
Pilot
collective bargaining agreement.
An
$83 million allowed general, unsecured claim in connection with Comair’s
agreement with ALPA to reduce Comair’s pilot labor costs.
|
|
· |
Facility
leases.
A
net $43 million gain, which primarily reflects (1) a $126 million
net gain
related to our settlement agreement with the Massachusetts Port Authority
offset by (2) a net $80 million charge from an allowed general, unsecured
claim in connection with the settlement relating to the restructuring
of
certain of our lease and other obligations at CVG. For additional
information regarding these matters, see Notes 1 and 4 of the Notes
to the
Condensed Consolidated Financial Statements.
|
Reorganization
items, net totaled a $3.8 billion charge for the six months ended June 30,
2006. This primarily reflects (1)
a
$2.1 billion allowed general, unsecured claim that we agreed to in our
comprehensive agreement with ALPA to reduce pilot labor costs and (2) $1.6
billion of estimated claims primarily associated with the restructuring of
the
financing arrangements for 143 aircraft.
For
additional information about our reorganization items, see Note 1 of the Notes
to the Condensed Consolidated Financial Statements.
Income
Tax Provision
For
the
six months ended June 30, 2007, we recorded an income tax provision totaling
$99
million. We
have
recorded a full valuation allowance against the net deferred tax asset,
excluding the effect of the deferred tax liability that is unable to be used
as
a source of income against these deferred tax assets, based on our belief that
it is more likely than not that the asset will not be realized in the
future. This determination was made in a prior fiscal year and is still
applicable for the current period. We will continue to assess the need for
a full valuation allowance in future quarters. In accordance with SOP
90-7, if we utilize pre-emergence bankruptcy NOL carryfowards, we will
sequentially reduce the cost of goodwill followed by other indefinite-lived
assets until the net carrying cost of these assets is zero. Accordingly,
during the six months ended June 30, 2007, we reduced goodwill by $103 million
with respect to utilization of pre-emergence NOL carryforwards.
During
the six months ended June 30, 2006, we recorded an income tax benefit totaling
$17 million. This amount reflected an adjustment to our estimated required
valuation allowance at December 31, 2006. 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 and six months
ended June 30, 2007 and 2006.
|
|
Combined
|
|
Predecessor |
|
Combined
|
|
Predecessor
|
|
|
|
Three
Months
Ended
June
30,
2007
|
|
Three
Months
Ended
June
30,
2006
|
|
Six
Months
Ended
June
30,
2007
|
|
Six
Months
Ended
June
30,
2006
|
|
Consolidated
Combined:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Passenger Miles (millions) (1)
|
|
|
31,578
|
|
|
30,053
|
|
|
58,790
|
|
|
56,437
|
|
Available
Seat Miles (millions) (1)
|
|
|
38,127
|
|
|
37,718
|
|
|
73,407
|
|
|
72,321
|
|
Passenger
Mile Yield
(1)
|
|
|
14.23
|
¢
|
|
14.01
|
¢
|
|
13.99
|
¢
|
|
13.40
|
¢
|
Passenger
Revenue Per Available Seat Mile
(1)
|
|
|
11.78
|
¢
|
|
11.16
|
¢
|
|
11.20
|
¢
|
|
10.46
|
¢
|
Operating
Cost Per Available Seat Mile (1)
|
|
|
11.83
|
¢
|
|
11.59
|
¢
|
|
11.71
|
¢
|
|
11.96
|
¢
|
Passenger
Load Factor (1)
|
|
|
82.8
|
%
|
|
79.7
|
%
|
|
80.1
|
%
|
|
78.0
|
%
|
Breakeven
Passenger Load Factor (1)
|
|
|
73.8
|
%
|
|
72.7
|
%
|
|
73.8
|
%
|
|
79.2
|
%
|
Fuel
Gallons Consumed (millions)
|
|
|
531
|
|
|
534
|
|
|
1,022
|
|
|
1,034
|
|
Average
Price Per Fuel Gallon, Net of Hedging activity
|
|
$
|
2.09
|
|
$
|
2.14
|
|
$
|
2.02
|
|
$
|
2.03
|
|
Number
of Aircraft in Fleet, End of Period
|
|
|
573
|
|
|
625
|
|
|
573
|
|
|
625
|
|
Full-Time
Equivalent Employees, End of Period
|
|
|
55,542
|
|
|
51,736
|
|
|
55,542
|
|
|
51,736
|
|
Mainline:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Passenger Miles (millions)
|
|
|
26,776
|
|
|
25,658
|
|
|
49,769
|
|
|
48,139
|
|
Available
Seat Miles (millions)
|
|
|
32,130
|
|
|
32,101
|
|
|
61,684
|
|
|
61,529
|
|
Operating
Cost Per Available Seat Mile
|
|
|
10.69
|
¢
|
|
10.49
|
¢
|
|
10.53
|
¢
|
|
10.91
|
¢
|
Number
of Aircraft in Fleet, End of Period
|
|
|
440
|
|
|
457
|
|
|
440
|
|
|
457
|
|
(1) |
Includes
the operations under contract carrier agreements with unaffiliated
regional air carriers:
|
|
l |
ASA,
Chautauqua Airlines, Inc., Freedom Airlines, Inc., Shuttle America
Corporation and SkyWest Airlines, Inc. for all periods presented
and
|
|
l |
ExpressJet
Airlines, Inc. from February 27, 2007 to June 30,
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
On
the
Effective Date, we entered into the Exit Facilities to borrow up to $2.5 billion
from a syndicate of lenders. We used a portion of the proceeds from the Exit
Facilities and existing cash to repay the DIP Facility. Our Exit Facilities,
as
defined and described in Note 4 of the Notes to the Condensed Consolidated
Financial Statements, include certain affirmative, negative and financial
covenants. We were in compliance with these covenant requirements at June 30,
2007.
On
June
8, 2007, we entered into an amended and restated Visa/MasterCard credit card
processing agreement that, among other things, resulted in the release by the
Processor of the then existing $804 million cash holdback under the agreement
and extended the term of the agreement to October 31, 2008. For additional
information regarding this agreement, see Note 5 of the Notes to the Condensed
Consolidated Financial Statements.
Combined
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
above, we entered into Exit Facilities to borrow up to $2.5 billion from a
syndicate of lenders. We used a portion of the proceeds from the Exit Facilities
and existing cash to repay our then outstanding DIP Facility. The Exit
Facilities also includes a $1.0 billion revolving credit facility, which has
not
been drawn upon. Additionally, as discussed above, $804 million was released
from restricted cash as a result of the amendment and restatement of our
Visa/Mastercard credit card processing agreement.
Our
cash
and cash equivalents and short-term investments were $3.4 billion at June 30,
2007, compared to $2.9 billion at June 30, 2006. Restricted cash totaled $348
million and $1.1 billion at June 30, 2007 and 2006, respectively.
Cash
flows from operating activities
Cash
provided by operating activities was $815 million for the six months ended
June
30, 2007, an increase of $45 million compared to the same period in 2006. Cash
provided by operating activities in 2007 primarily reflects (1) revenue
increases and cost reductions we achieved during our Chapter 11 reorganization
from revenue and network productivity improvements, in-court restructuring
initiatives and labor cost reductions and (2) the release of $804 million in
restricted cash associated with the amendment and restatement of our
Visa/Mastercard credit card processing agreement, as discussed above. These
increases were partially offset by increases of $935 million in investments
in
auction rate securities.
Cash
flows from investing activities
Cash
used
in investing activities totaled $153 million and $125 million for the six
months ended June 30, 2007 and 2006, respectively. The six months ended June
30,
2007 reflects a $154 million increase in our investment in flight
equipment and advanced payments for aircraft commitments partially offset
by (1) a $106 million decrease in restricted cash requirements and (2) $34
million from our sale of an investment in priceline.com.
Cash
flows from financing activities
Cash
used
in financing activities totaled $866 million and $222 million for the six months
ended June 30, 2007 and 2006, respectively. This increase is primarily due
to
the repayment of the DIP Facility with a portion of the proceeds from the Exit
Facilities and existing cash. For additional information regarding the Exit
Facilities, see Note 4 of the Notes to the Condensed Consolidated Financial
Statements.
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 six months ended June 30, 2007, we contributed $50 million to the Non-pilot
Plan. Effective April 1, 2007, we elected the alternative funding schedule
under
section 402(a)(1) of the Pension Protection Act of 2006. 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. While factors outside our control may continue to impact the
funding requirements for this plan, this 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 we will contribute approximately $115
million to the Non-pilot Plan in 2007 (including $50 million discussed
above) and that our funding requirements for the Non-pilot Plan will aggregate
approximately $100 million for each of 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.
The
table in the “Contractual
Obligations”
section of “Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations”
in our Form 10-K contains a line item titled “Long-term
debt
classified as liabilities subject to compromise,” which totals
$4.9 billion. As a result of our emergence from Chapter 11, $3.8
billion of this amount was discharged.
The
following paragraphs provide information about
our additional contractual obligations:
Pilot
Obligation. Under our
comprehensive agreement with ALPA reducing pilot labor costs, we are required
to
issue by August 27, 2007, for the benefit of Delta pilots, $650 million
principal amount of senior unsecured notes. We may replace all or a
portion of this obligation with cash prior to issuance of the
notes.
Airport
Settlement. We issued $66
million principal amount of senior unsecured notes in connection with our
settlement agreement relating to the restructuring of certain of our lease
and
other obligations at CVG.
Critical
Accounting Estimates
For
additional information regarding our Critical Accounting Estimates, see
“Application of Critical Accounting Polices” in Managements Discussion and
Analysis of Financial Condition and Liquidity in our Form 10-K. The following
information describes significant changes to our critical accounting
policies.
Fresh-Start
reporting
As
previously noted, upon emergence from Chapter 11, we adopted fresh start
reporting, which required us to revalue our assets and liabilities to fair
value. In estimating fair value, we based our estimates and assumptions on
the
guidance prescribed by SFAS No. 157, “Fair Value Measurements” (“SFAS 157”),
which we adopted in conjunction with our adoption of fresh start reporting.
SFAS
157, among other things, defines fair value, establishes a framework for
measuring fair value and expands disclosure about fair value measurements.
For
additional information about SFAS 157, see Note 2 of the Notes to the Condensed
Consolidated Financial Statements.
Estimates
of fair value are based on independent appraisals and valuations, some of which
are not final. Where independent appraisals and valuations are not available,
we
estimate fair value using industry data and trends and refer to relevant market
rates and transactions. As new or improved information on asset and liability
appraisals and valuations becomes available, we may adjust our preliminary
allocation of fair value within one year from the Effective Date. Adjustments
to
the recorded fair values of these assets and liabilities may impact the
amount of recorded goodwill.
To
facilitate the calculation of the enterprise value of the Successor, management
developed a set of financial projections for the Successor using a number of
estimates and assumptions. With the assistance of financial advisors, management
determined the enterprise and corresponding equity value of the Successor based
on the financial projections using various valuation methods, including (1)
a
comparison of our projected performance to the market values of comparable
companies; (2) a review and analysis of several recent transactions in the
airline industry; and (3) a calculation of the present value of future cash
flows based on our projections. Utilizing this methodology, the equity value
of
the Successor was estimated to be in the range of $9.4 billion to $12.0 billion.
The enterprise value, and corresponding equity value, are dependent upon
achieving the future financial results set forth in our projections as well
as
the realization of certain other assumptions. There can be no assurance that
the
projections will be achieved or that the assumptions will be realized. The
excess equity value (using the low end of the range) over the fair value of
tangible and identifiable intangible assets has been reflected as goodwill
in
the Consolidated Fresh Start Balance Sheet. The financial projections and
estimates of enterprise and equity value are not incorporated into this Form
10-Q.
All
estimates, assumptions, valuations, appraisals and financial projections,
including the fair value adjustments, the financial projections, the enterprise
value and equity value projections, are inherently subject to significant
uncertainties and the resolution of contingencies beyond our control.
Accordingly, there can be no assurance that the estimates, assumptions,
valuations, appraisals and the financial projections will be realized, and
actual results could vary materially.
See
Note
1 of the Notes to the Condensed Consolidated Financial Statements for the impact
the adoption of fresh start reporting had on our Consolidated Balance
Sheet.
Revenue
Recognition and Frequent Flyer Program
We
recognize revenue from the sale of passenger tickets as air transportation
is
provided or when the ticket expires unused. Our SkyMiles program offers
participants the opportunity to earn travel awards primarily by flying on Delta,
Delta Connection carriers and participating airlines. We also sell mileage
credits in our frequent flyer program to participating companies such as credit
card companies, hotels and car rental agencies.
As
a
result of the adoption of fresh start reporting, we revalued our SkyMiles
frequent flyer award liability to estimated fair value. In accordance with
SFAS
157, fair value represents the estimated amount we would pay a third party
to assume the obligation for miles expected to be redeemed under the SkyMiles
program. We calculated fair value based on a blended rate comprised of (1)
our
weighted average equivalent ticket rate which considers, among other factors,
differing class of service and domestic and international itineraries and (2)
the weighted average of amounts paid to other SkyTeam alliance members. At
April
30, 2007, we recorded deferred revenue equal to $0.0083 for each mile we
estimate will ultimately be redeemed under the SkyMiles program.
We
previously accounted for frequent flyer miles earned on Delta flights on an
incremental cost basis as an accrued liability and as operating expense, while
miles sold to airline and non-airline businesses were accounted for on a
deferred revenue basis. For additional information concerning the accounting
for
the SkyMiles program prior to May 1, 2007, see “Management’s Discussion and
Analysis of Financial Condition and Results of Operation - Application of
Critical Accounting Policies - Frequent Flyer Program” in our Form 10-K.
We
now
account for all miles earned and sold as separate deliverables in a
multiple element revenue arrangement as prescribed by EITF 00-21 “Revenue
Arrangements with Multiple Deliverables”. Our revenues are generated from the
sale of passenger tickets, which includes air transportation and mileage
credits. Our revenues are also generated from the sale of mileage
credits to other airline and non-airline businesses, which include a
marketing premium.
We
use
the residual method for revenue recognition. The fair value of the mileage
credit component is determinable based on the selling rate per mile to
other SkyTeam alliance members. The fair values of the air transportation
and marketing premium components are not determinable because they are not
sold
without mileage credits. Under
the
residual method, the fair value of the mileage credits is deferred and the
remaining portion of the sale is allocated to air transportation or the
marketing premium component, as applicable, and is recognized as revenue when
the related services are provided.
The
fair
value of the mileage credit earned is based on the low end of the range for
our
inter-airline SkyMiles selling rates to partner carriers, which is
currently $0.0054 per mile. Revenue associated with these mileage credits
is recognized when miles are redeemed and services are provided based on
the weighted average rate of all miles that have been deferred. Miles earned
after April 30, 2007, will be valued and the related revenue deferred using
a
rate of $0.0054 per mile, which will be evaluated annually.
Estimating
mileage credits that will not be redeemed (“Breakage”) requires significant
management judgment. We consider historical patterns to be a useful indicator
when estimating future Breakage. Under our deferred revenue policy, the value
associated with mileage credits due to Breakage is amortized over the period
the
redemptions are estimated to occur and recognized in passenger revenue. Changes
to program rules and redemption opportunities can significantly alter
customer behavior from historical patterns with respect to inactive accounts.
Such changes may result in material changes to the deferred revenue balance,
as
well as recognized revenue from our SkyMiles program. At June 30, 2007, the aggregate deferred revenue balance associated
with the SkyMiles program was $3.5 billion. A hypothetical 1% change
in our outstanding number of miles estimated to be redeemed would
result in a $33 million impact on our deferred revenue
liability.
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.
For
the
six months ended June 30, 2007, aircraft fuel and related
taxes accounted for 24% of our total operating expenses. Aircraft
fuel and related taxes for the six months ended June 30, 2007
decreased 2% compared to the corresponding period in the prior year primarily
due to a 1% decrease in consumption and certain fuel tax refunds received,
partially offset by certain Fresh Start Adjustments discussed above. Fuel
prices
remained relatively constant averaging $2.02 per gallon, including fuel hedge
losses of $4 million, for the six months ended June 30, 2007 compared to
$2.03
per gallon, including fuel hedge gains of $4 million, for the six months
ended
June 30, 2006.
As
of
June 30, 2007, we had hedged 22% of our projected fuel requirements for the
September 2007 quarter using heating oil zero-cost collar contracts with
weighted average contract cap and floor prices of $1.80 and $1.62, respectively.
As of June 30, 2007, our open fuel hedge contracts had an estimated fair
market
value gain of $37 million. We have not entered into any hedges for the December
2007 quarter or thereafter. We estimate that a 10% rise in the price per
gallon
of heating oil would increase the estimated fair market value associated
with
our outstanding contracts at settlement by $29 million to a $66 million
gain.
We
project that our aircraft fuel consumption will be 1.1 billion gallons from
July
1, 2007 to December 31, 2007. Based on a projected average jet fuel price
of
$2.25 per gallon for that period, a 10% rise in jet fuel prices would increase
our aircraft fuel expense by $182 million, inclusive of the impact of effective
hedge instruments that are outstanding as of June 30, 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 Condensed 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 June 30,
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.
Except
as set forth below, during the three months ended June 30, 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.
During
the June 2007 quarter, upon emergence from bankruptcy on April 30, 2007,
we
established controls over (1) the implementation of fresh start reporting
and
(2) a change in accounting for our SkyMiles frequent flyer program to a deferred
revenue model.
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 June 30, 2007 (Successor), and the related consolidated statements
of
operations for the two-month period ended June 30, 2007 (Successor), one-month
and four-month periods ended April 30, 2007 (Predecessor), and the three-month
and six-month periods ended June 30, 2006 (Predecessor), and the condensed
consolidated statements of cash flows for the two-month period ended June
30,
2007 (Successor), four-month period ended April 30, 2007 (Predecessor) and
six-month period ended June 30, 2006 (Predecessor). 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
Delta Air Lines, Inc. as of December 31, 2006 (Predecessor), and the related
consolidated statements of operations, shareowners' deficit, and cash flows
for
the year then ended (Predecessor) and in our report dated March 1, 2007,
we
expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 2006 (Predecessor), is fairly
stated, in all material respects, in relation to the balance sheet from which
it
has been derived.
Atlanta,
Georgia
August
2,
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. On April 26, 2007, the
Bankruptcy Court entered an order (the “Confirmation
Order”)
approving and confirming the Debtors Joint Plan of Reorganization. On April
30,
2007, the Debtors emerged from bankruptcy. The reorganization cases were
jointly administered under the caption “In re Delta Air Lines, Inc., et al.,
Case No. 05-17923-ASH.” The Confirmation Order provided for the discharge
upon the Effective Date of the Debtors from all Claims (as defined in the
Plan)
based upon acts or omissions that occurred prior to the Effective Date.
In addition, as provided in the Confirmation Order, holders of
pre-Effective Date claims are enjoined from commencing or continuing any
action
or proceeding against the Reorganized Debtors with respect to such
claims.
On
April
24, 2007, the Bankruptcy Court approved the Cincinnati Airport Settlement
Agreement with the Kenton County Airport Board (“KCAB”) and UMB Bank, N.A., the
trustee (the “Bond Trustee”) for the Series 1992 Bonds (as defined below), to
restructure certain of our lease and other obligations at the
Cincinnati-Northern Kentucky International Airport (the “Cincinnati Airport”).
The Series 1992 Bonds include: (1) the $419 million Kenton County Airport
Board
Special Facilities Revenue Bonds, 1992 Series A (Delta Air Lines, Inc.
Project),
$397 million of which were then outstanding; and (2) the $19 million Kenton
County Airport Board Special Facilities Revenue Bonds, 1992 Series B (Delta
Air
Lines, Inc. Project), $16 million of which were then
outstanding.
The
Cincinnati Airport Settlement Agreement, among other things:
|
· |
provides
for agreements under which we will continue to use certain facilities
at
the Cincinnati Airport at substantially reduced costs;
|
|
· |
settles
all disputes among us, the KCAB, the Bond Trustee and the former,
present
and future holders of the 1992 Bonds (the “1992 Bondholders”);
|
|
· |
gives
the Bond Trustee, on behalf of the 1992 Bondholders, a $260 million
allowed general, unsecured pre-petition claim in our bankruptcy
proceedings; and
|
|
· |
provides
for our issuance of $66 million principal amount of senior unsecured
notes
to the Bond Trustee on behalf of the 1992
Bondholders.
|
A
small
number of 1992 Bondholders (the “Objecting Bondholders”) is challenging the
settlement in the U.S. District Court for the Southern District of New York
(the “District Court”). We cannot predict the outcome of this litigation. On May
3, 2007, the parties to the Cincinnati Airport Settlement Agreement implemented
that agreement in accordance with its terms.
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 allowed general, unsecured 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 43 passengers. A number of
lawsuits also name Delta as a defendant. Additional lawsuits on behalf of
the
four remaining passengers are anticipated. The lawsuits generally assert
claims
for wrongful death and related personal injuries, and seek unspecified damages,
including punitive damages in most cases. As of June 30, 2007, settlements
have
been reached with the families of six of the 43 passengers on whose behalf
lawsuits were filed. Lawsuits are currently pending in the U.S. District
Court
for the Eastern District of Kentucky on behalf of 13 passengers, and in state
court in Fayette County, Kentucky, on behalf of 23 passengers. One lawsuit
was
filed in state court in Broward County, Florida, and removed to the U.S.
District Court for the Southern District of Florida by Comair. A motion is
currently pending in federal court in Florida to transfer the case filed
in
Florida 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 continue to pursue settlement negotiations with the plaintiffs
in
these lawsuits. The six settled cases have been dismissed with prejudice.
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), and in state court in Fayette County, Kentucky, against
the
Lexington Airport Board and certain other Lexington airport defendants. These
actions seek to apportion 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. The
information presented below updates, and should be read in conjunction with,
the
risk factors and information disclosed in our Form 10-K Except as presented
below, there have been no material changes from the risk factors described
in
our Form 10-K.
Risk
Factors Relating to Delta
Our
credit card processors have the ability to take significant holdbacks in
certain
circumstances. The initiation of such holdbacks likely would have a material
adverse effect on our financial condition.
We
sell a
substantial number of tickets that are paid for by customers who use credit
cards. We recently amended our Visa/MasterCard credit card processing agreement,
which, among other things, resulted in the release of the holdback under
the
agreement by the Visa/MasterCard credit card processor. The amended agreement
provides that no future holdback of receivables or reserve is required except
in
certain circumstances. Under its processing agreement with us, Amex has
the right, in certain circumstances, to impose a holdback of our receivables
for
tickets purchased using an American Express credit card. If circumstances
were
to occur that would allow either processor to initiate a holdback, the negative
impact on our liquidity likely would be significant.
Risk
Factors Relating to the Airline Industry
The
airline industry is highly competitive and, if we cannot successfully compete
in
the marketplace, our business, financial condition and operating results
will be
materially adversely affected.
We
face
significant competition with respect to routes, services and fares. Our domestic
routes are subject to competition from both new and established carriers,
some
of which have lower costs than we do and provide service at low fares to
destinations served by us. In particular, we face significant competition
at our
hub airports in Atlanta and JFK from other carriers. In addition, our operations
at our hub airports also compete with operations at the hubs of other airlines
that are located in close proximity to our hubs. We also face increasing
competition in smaller to medium-sized markets from rapidly expanding regional
jet operators.
The
continuing growth of low-cost carriers, including Southwest, AirTran and
JetBlue, in the United States has placed significant competitive pressure
on us
and other network carriers in the domestic market. In addition, other network
carriers have also significantly reduced their costs over the last several
years. Our ability to compete effectively depends, in part, on our ability
to
maintain a competitive cost structure. If we cannot maintain our costs at
a
competitive level, then our business, financial condition and operating results
could be materially adversely affected.
In
addition, we compete with foreign carriers, both on interior U.S. routes,
due to
marketing and codesharing arrangements, and in international markets.
International marketing alliances formed by domestic and foreign carriers,
including the Star Alliance (among United Airlines, Lufthansa German Airlines
and others) and the oneworld Alliance (among American Airlines, British Airways
and others) have significantly increased competition in international markets.
Through marketing and codesharing arrangements with U.S. carriers, foreign
carriers have obtained access to interior U.S. passenger traffic.
Similarly, U.S. carriers have increased their ability to sell international
transportation, such as transatlantic services to and beyond European cities,
through alliances with international carriers.
The
airline industry is subject to extensive government regulation, and new
regulations may increase our operating costs.
Airlines
are subject to extensive regulatory and legal compliance requirements that
result in significant costs. For instance, the FAA from time to time issues
directives and other regulations relating to the maintenance and operation
of
aircraft that necessitate significant expenditures. We expect to continue
incurring expenses to comply with the FAA’s regulations.
Other
laws, regulations, taxes and airport rates and charges have also been imposed
from time to time that significantly increase the cost of airline operations
or
reduce revenues. For example, the Aviation and Transportation Security Act,
which became law in November 2001, mandates the federalization of certain
airport security procedures and imposes additional security requirements
on
airports and airlines, most of which are funded by a per ticket tax on
passengers and a tax on airlines. The federal government has on several
occasions proposed a significant increase in the per ticket tax. Due to the
weak
revenue environment that existed for several years after the implementation
of this tax, the existing tax negatively impacted our revenues because
we have generally not been able to increase our fares to pass taxes and
fees of this sort on to our customers. Similarly, the proposed ticket tax
increase, if implemented, could negatively impact our revenues. Furthermore,
recent events related to extreme weather delays may cause Congress or the
DOT to
consider proposals related to airlines’ handling of lengthy flight delays during
extreme weather conditions. The enactment of such proposals could have a
significant negative impact on our operations.
Furthermore,
we and other U.S. carriers are subject to domestic and foreign laws regarding
privacy of passenger and employee data that are not consistent in all countries
in which we operate. In addition to the heightened level of concern regarding
privacy of passenger data in the United States, certain European government
agencies are initiating inquiries into airline privacy practices. Compliance
with these regulatory regimes is expected to result in additional operating
costs and could impact our operations and any future expansion.
Our
insurance costs have increased substantially as a result of the September
11
terrorist attacks, and further increases in insurance costs or reductions
in
coverage could have a material adverse impact on our business and operating
results.
As
a
result of the terrorist attacks on September 11, 2001, aviation insurers
significantly reduced the maximum amount of insurance coverage available
to
commercial air carriers for liability to persons (other than employees or
passengers) for claims resulting from acts of terrorism, war or similar events.
At the same time, aviation insurers significantly increased the premiums
for
such coverage and for aviation insurance in general. Since September 24,
2001,
the U.S. government has been providing U.S. airlines with war-risk insurance
to
cover losses, including those resulting from terrorism, to passengers, third
parties (ground damage) and the aircraft hull. The coverage currently extends
through September 30, 2007, and the Secretary of Transportation may extend
coverage through December 31, 2007. The withdrawal of government support
of
airline war-risk insurance would require us to obtain war-risk insurance
coverage commercially, if available. Such commercial insurance could have
substantially less desirable coverage than that currently provided by the
U.S.
government, may not be adequate to protect our risk of loss from future acts
of
terrorism, may result in a material increase to our operating expenses or
may
not be obtainable at all, resulting in an interruption to our
operations.
Item
6. Exhibits
(a)
|
Exhibits
|
|
|
10.1(a)
|
First
Lien Revolving Credit and Guaranty Agreement, dated as of April
30, 2007,
among Delta Air Lines, Inc., as Borrower, the subsidiaries of
the Borrower
named, as Guarantors, each of the Lenders from time to time party,
JPMorgan Chase Bank, N.A., as administrative agent and as collateral
agent, J.P. Morgan Securities, Inc. and Lehman Brothers Inc.,
as co-lead
arrangers and joint bookrunners, UBS Securities LLC, as syndication
agent
and as joint bookrunner, and Calyon New York Branch and RBS Securities
Corporation, as co-documentation agents
|
|
|
10.1(b)
|
Second
Lien Term Loan and Guaranty Agreement, dated as of April 30,
2007, among
Delta Air Lines, Inc., as Borrower, the subsidiaries of the Borrower
named, as Guarantors, each of the Lenders from time to time party,
Goldman
Sachs Credit Partners L.P. (“GSCP”), as administrative agent and as
collateral agent, GSCP and Merrill Lynch Commercial Finance Corp.,
as
co-lead arrangers and joint bookrunners, Barclays Capital, as
syndication
agent and as joint bookrunner, and Credit Suisse Securities (USA)
LLC and
C.I.T. Leasing Corporation, as co-documentation agents
|
|
|
10.2
|
Description
of Certain Benefits of Executive Officers
|
|
|
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 June 30,
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 June 30, 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 June 30,
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)
|
August
2,
2007
61