Business Context and Reporting Period
Company: Delta Air Lines, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 1999
Context: Delta reported strong operational results for the first quarter of fiscal 1999, driven by increased passenger traffic and lower fuel costs. A significant corporate event during the period was the acquisition of Atlantic Southeast Airlines (ASA) Holdings, Inc., finalized via a tender offer and subsequent merger. The company also executed a two-for-one stock split effective November 1998, with all share data restated accordingly.
Key Financial Metrics
| Metric (in millions, except per share) | Q1 1999 | Q1 1998 | 9 Months 1999 | 9 Months 1998 |
|---|---|---|---|---|
| Total Operating Revenues | $3,504 | $3,390 | $10,754 | $10,377 |
| Operating Income | $356 | $337 | $1,228 | $1,101 |
| Net Income | $216 | $195 | $737 | $639 |
| Diluted EPS | $1.42 | $1.23 | $4.80 | $4.06 |
| Operating Margin | 10.2% | 10.0% | 11.4% | 10.6% |
| Cash from Operations (9 Mo) | $1,795 | $2,016 | - | - |
| Total Debt (Current + Long-term) | $2,550 | - | - | - |
| Cash & Equivalents | $979 | - | - | - |
Note: Debt figures represent total debt and capital lease obligations including current maturities as of March 31, 1999.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 3% in Q1 1999 compared to Q1 1998. Passenger revenue rose 3% due to a 4% increase in revenue passenger miles, partially offset by a 1% decline in passenger mile yield.
- Cost Management: Aircraft fuel expense decreased 8% in Q1 1999 as the average fuel price per gallon fell 9% to 48.52 cents. Salaries and related costs increased 5% due to a 6% rise in full-time equivalent employees and a 2% general salary increase.
- Profitability: Operating income grew 6% to $356 million, and net income increased 11% to $216 million. The operating margin improved to 10.2% from 10.0%.
- Acquisition Impact: Delta acquired ASA Holdings for approximately $700 million. While ASA's results were not consolidated until April 1, 1999, the acquisition drove a significant increase in debt and a reduction in cash and short-term investments.
- Accounting Change: The company extended the depreciable life of certain new generation aircraft from 20 to 25 years, reducing depreciation expense by approximately $71 million for the nine months ended March 31, 1999.
Outlook, Risks, and Management Commentary
- Liquidity and Capital: Cash and short-term investments decreased 38% to $1.01 billion, primarily due to aircraft acquisitions and stock repurchases. The company maintains $1.25 billion in available credit under its 1997 Bank Credit Agreement. Management expects to meet obligations through cash, investments, and internally generated funds.
- Debt Structure: Total debt increased to $2.55 billion (from $1.91 billion at June 30, 1998) to finance the ASA acquisition. The debt-to-equity ratio shifted to 39% debt and 61% equity.
- Year 2000 Readiness: Estimated total cost for Y2K compliance is $120 million to $135 million. Approximately $84 million has been expensed through March 31, 1999.
- Labor Relations:
- Pilot Negotiations: Negotiations regarding pay rates for new B-777 aircraft are ongoing. Delta has deferred delivery of four B-777s to fiscal 2005 due to the lack of progress in these negotiations and the risk of pilots refusing to fly the aircraft without agreed rates.
- ALPA Lawsuit: The Air Line Pilots Association filed a lawsuit regarding the use of regional jets for the new Delta Shuttle operation, alleging a violation of the Railway Labor Act.
- Market Risks: Delta manages fuel price risk by hedging up to 80% of expected annual jet fuel requirements. Foreign currency risk is managed using options rather than forward contracts.
Investor Verification Checklist
- ASA Acquisition Integration: Verify the final allocation of the $700 million purchase price and the impact of ASA's consolidation on future quarters starting April 1, 1999.
- Pilot Contract Status: Monitor the outcome of B-777 pay rate negotiations with ALPA, as a failure to agree could disrupt fleet deployment and service schedules.
- Debt Servicing: Review the company's ability to service the increased debt load ($2.55 billion) given the reduction in cash reserves and the timing of debt maturities.
- Y2K Costs: Track remaining Year 2000 implementation costs against the $120-$135 million estimate to ensure no material overruns.
- Fleet Strategy: Confirm the impact of deferring B-777 deliveries and replacing them with B-767-300ERs on long-term capacity planning and capital expenditures.