DAL

Delta Air Lines, Inc. - 10-Q Summary (Quarter Ended Dec 31, 1999)

Business Context and Reporting Period

This Form 10-Q covers the quarterly and six-month periods ended December 31, 1999. Delta Air Lines, Inc. operates as a single business unit providing air transportation for passengers and cargo. The reporting period includes the results of operations for Atlantic Southeast Airlines (ASA) and Comair, Inc. (from November 22, 1999), following their acquisitions. The company completed its Year 2000 remediation program without operational disruption.

Key Financial Metrics

Note: Operating income for the quarter was significantly impacted by non-recurring items. Excluding asset writedowns and investment gains, adjusted operating income for the quarter was $328 million.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 8% for the quarter and 5% for the six months compared to the prior year, driven by the inclusion of ASA and Comair and increased passenger volume.
• Profitability Volatility: Reported operating income for the quarter dropped to $8 million (0.2% margin) from $320 million in the prior year quarter. This decline is primarily due to a $320 million pretax asset writedown related to the early retirement of MD-90 and MD-11 aircraft.
• Investment Gains: Net income was significantly boosted by $649 million in pretax gains from the sale of investments (primarily Priceline.com stock) in the quarter, compared to zero in the prior year.
• Debt Levels: Long-term debt increased substantially to fund the Comair acquisition. Total debt rose from $2.7 billion (June 30, 1999) to $5.0 billion (Dec 31, 1999), including $2 billion in new senior unsecured notes issued in December 1999.
• Operating Expenses: Expenses rose 18% for the quarter, largely due to the consolidation of ASA and Comair, higher fuel costs, and the aforementioned asset writedowns.

Guidance, Outlook, and Risks

• Management Commentary: Management attributes revenue growth to acquisitions and strategic focus on Latin America. However, yields are pressured by industry capacity growth and low-fare competition. The company expects to meet obligations through cash, investments, and borrowings.
• Future Commitments: Future expenditures for aircraft and engines on firm order are estimated at $9.5 billion through 2004.
• Share Repurchase: On January 12, 2000, the Board authorized a new $500 million common stock repurchase program, largely funded by proceeds from investment sales.
• Labor Risks: The company faces ongoing negotiations with the Air Line Pilots Association (ALPA) and a pending election for ramp and cargo employees to determine union representation (TWU). Comair is also in negotiations with multiple unions.
• Contingencies: A one-time charge of approximately $125 million to $135 million is expected for a new early retirement medical option announced in January 2000. The company is also defending a class-action lawsuit filed by travel agents regarding commission reductions.

Investor Verification Checklist

• Adjusted Earnings: Verify the company's "adjusted" operating income and EPS figures, as reported results are heavily skewed by $320 million in asset writedowns and $649 million in investment gains.
• Debt Servicing: Review the impact of the new $2 billion debt issuance on future interest expense and liquidity, given the increased debt-to-equity ratio (49% debt).
• Acquisition Integration: Assess the financial performance of the newly acquired Comair and ASA units to ensure projected synergies are materializing.
• Labor Costs: Monitor the outcome of the TWU election and ALPA negotiations, as these could significantly impact future salary and benefit costs.
• Investment Portfolio: Confirm the remaining value and liquidity of the Priceline.com holdings and other equity investments, which have been a major source of recent non-operating income.