DAL

Business Context and Reporting Period

Company: Delta Air Lines, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2003
Context: Delta operates in a severely challenged airline industry following the September 11, 2001 attacks, compounded by the 2003 military action in Iraq and the SARS outbreak. The company is executing profit improvement initiatives to reduce non-fuel unit costs by 15% by the end of 2005. Management notes that while demand remains weak, the company has improved productivity and reduced capacity to match demand.

Key Financial Metrics

Note: Total Debt calculated as Current maturities of long-term debt ($1,005) + Long-term debt ($10,939) + Long-term debt issued by Massachusetts Port Authority ($498) + Capital leases ($77 + $24 current).

Material Changes vs. Prior Period

• Revenue: Operating revenues increased 1% ($3.44B) for the quarter compared to the prior year, driven by an 8% increase in passenger revenue per available seat mile (RASM) despite a 6% decline in capacity. International revenues declined 4% due to capacity reductions related to the Iraq conflict.
• Profitability: Operating loss improved significantly to $81 million from $385 million in the prior year quarter. This improvement is largely due to the absence of $225 million in asset writedowns and restructuring charges recorded in the prior year, as well as $34 million in Stabilization Act compensation received in 2002.
• Costs: Operating expenses decreased 7% to $3.52 billion. Salaries and related costs rose 1% due to pension expense increases and pilot pay raises, partially offset by workforce reductions. Fuel expenses increased 3% due to higher prices, though total gallons consumed dropped 7%.
• Balance Sheet: Cash and cash equivalents increased to $2.7 billion from $2.0 billion at year-end 2002. Shareowners' equity declined to $497 million from $893 million, primarily due to the net loss for the period.

Guidance, Outlook, and Risks

• Q4 2003 Outlook: Management expects a net loss of approximately $365 million to $415 million for the December 2003 quarter. This estimate includes:
  • An estimated $140 million non-cash settlement charge (net of tax) related to the pilots' defined benefit pension plan.
  • A $26 million charge (net of tax) associated with the planned sale of 11 B-737-800 aircraft.
• Equity Impact: Due to the expected Q4 loss and an estimated $700 million additional minimum pension liability adjustment (non-cash) to be recorded at year-end, Delta projects negative shareowners' equity of approximately $600 million by December 31, 2003.
• Dividend Suspension: Effective December 2003, the Board suspended dividends on Series B ESOP Convertible Preferred Stock indefinitely due to anticipated negative surplus under Delaware law. Future redemptions of ESOP stock will be made in common stock rather than cash.
• Risks: Key risks include the availability of financing on commercially reasonable terms, continued geopolitical uncertainty (Iraq, terrorism), fuel price volatility, and the outcome of labor negotiations with the Air Line Pilots Association (ALPA).

Investor Verification Checklist

• Pension Obligations: Verify the magnitude of the $700 million year-end pension liability adjustment and the $140 million settlement charge, as these are estimates based on actuarial assumptions not yet finalized.
• Liquidity and Debt: Confirm the company's ability to service $12.5 billion in debt obligations given the projected negative equity and negative surplus status.
• Asset Sales: Review the terms of the agreement to sell 11 B-737-800 aircraft, including the contingent payment obligation of up to $70 million to the third-party buyer.
• ESOP Terms: Understand the implications of the shift from cash to stock redemptions for the ESOP Preferred Stock and the potential dilution to common shareholders.
• Government Reimbursements: Note that Q3 2003 results benefited from the suspension of the passenger security fee; verify the impact of the fee's re-imposition on October 1, 2003, on future revenues.