DAL

Business Context and Reporting Period

Company: Delta Air Lines, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 1999
Business Overview: Delta operates as a single business unit providing air transportation for passengers and cargo. The quarter includes the results of operations for Atlantic Southeast Airlines, Inc. (ASA) following its acquisition.

Key Financial Metrics

Note: Operating margin excluding non-recurring charges was 12.9% for Q3 1999.

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 2% to $3.88 billion, driven by a 1% increase in passenger revenue and a 22% increase in "Other" revenues (frequent flyer miles sales). International passenger revenues declined 4% due to competitive yield pressures.
• Expense Increases: Total operating expenses rose 9% to $3.53 billion. This includes a significant 82% increase in depreciation and amortization, largely due to $133 million in non-recurring asset impairment charges. Salaries and fuel costs also increased.
• Profitability Drivers: While reported operating income decreased 37% year-over-year, this was primarily due to $149 million in non-recurring pretax charges. Conversely, net income increased 8% due to $252 million in pretax gains from the sale of investments (Singapore Airlines and Priceline.com warrants).
• Liquidity: Cash and cash equivalents increased significantly to $1.51 billion from $1.12 billion at the end of the prior quarter, aided by debt issuance and investment sales.

Guidance, Outlook, and Risks

Management Commentary and Unusual Items

• Non-Recurring Charges: The company recorded $149 million in pretax charges, including $107 million for surplus aircraft parts write-downs, $26 million for legacy technology impairments, and $16 million for streamlining operations (severance and lease terminations).
• Investment Gains: Significant gains included $137 million from the sale of Singapore Airlines equity and $115 million from the exercise and sale of Priceline.com warrants.
• Acquisition Activity: On October 17, 1999, Delta entered an agreement to acquire Comair Holdings, Inc. for approximately $1.8 billion, financed by a new $1.9 billion term loan commitment from Chase Manhattan Bank.
• Year 2000 Readiness: Delta estimates total Y2K costs at $110 million, with $97 million already expensed. Critical systems are reported as complete.

Risks and Contingencies

• Legal Litigation: Five lawsuits were filed challenging the Comair merger, alleging inadequate consideration and breach of fiduciary duty. A settlement in principle was reached on November 10, 1999, subject to court approval.
• Market Risks: Fluctuations in Priceline.com stock price could impact the valuation of remaining warrants (estimated fair value ~$1.0 billion, not currently on balance sheet).
• Operational Risks: Ongoing pilot negotiations for B-777/B-767-400 aircraft and a new collective bargaining agreement.

Investor Verification Checklist

• Non-Recurring Adjustments: Verify the sustainability of earnings by excluding the $149 million in charges and $252 million in investment gains to assess core operational performance.
• Comair Acquisition: Monitor the status of the $1.8 billion Comair merger, including regulatory approvals and the finalization of the litigation settlement.
• Debt Structure: Review the terms of the new $1.9 billion term loan facility and the impact on future interest expenses and debt covenants.
• Asset Impairments: Assess the long-term impact of the $107 million write-down on surplus aircraft parts and the strategic shift in inventory management.
• Yield Trends: Analyze the continued pressure on passenger mile yields, particularly in international markets, against the backdrop of industry-wide capacity increases.