Business Context and Reporting Period
Company: Delta Air Lines, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2002
Context: Delta's financial results for the first half of 2002 were materially adversely affected by the continuing impact of the September 11, 2001 terrorist attacks. The airline industry faced reduced traffic, lower yields, and increased costs related to security, insurance, and pension expenses. Delta implemented a 16% capacity reduction effective November 1, 2001, and reduced staffing levels by approximately 11,000 employees.
Key Financial Metrics
| Metric (in millions, except per share) | Six Months Ended June 30, 2002 | Six Months Ended June 30, 2001 | Three Months Ended June 30, 2002 | Three Months Ended June 30, 2001 |
|---|---|---|---|---|
| Operating Revenues | $6,577 | $7,618 | $3,474 | $3,776 |
| Operating Expenses | $7,139 | $7,847 | $3,601 | $3,890 |
| Operating Loss | $(562) | $(229) | $(127) | $(114) |
| Net Loss | $(583) | $(223) | $(186) | $(90) |
| Net Loss Available to Common Shareowners | $(590) | $(230) | $(189) | $(94) |
| Diluted Loss Per Share | $(4.79) | $(1.87) | $(1.54) | $(0.76) |
| Cash and Cash Equivalents (End of Period) | $1,747 | $1,505 | $1,747 | $1,505 |
| Total Debt (Current + Long-term) | $9,349 | $8,041 | $9,349 | $8,041 |
| Net Cash Provided by Operating Activities | $75 | $551 | N/A | N/A |
Note: Debt figures include current maturities, short-term obligations, and long-term debt. Operating cash flow for the six-month period included significant one-time tax refunds and government stabilization payments.
Material Changes vs. Prior Period
- Revenue Decline: Operating revenues decreased 14% for the six months ended June 30, 2002, compared to the prior year. Passenger revenues fell 15% due to a 7% decline in traffic and an 8% decline in yield. Cargo revenues dropped 19%.
- Cost Reductions: Operating expenses decreased 9% year-over-year. Salaries and related costs fell 3% due to staffing reductions, partially offset by increased pension expenses. Aircraft fuel expense decreased 24% due to lower fuel prices and reduced consumption.
- Widening Losses: The net loss for the six-month period more than doubled from $223 million in 2001 to $583 million in 2002. This was driven by lower revenues, higher interest expense ($119 million increase), and non-cash charges related to derivative instruments.
- Accounting Changes: Adoption of SFAS 142 (Goodwill and Other Intangible Assets) on January 1, 2002, eliminated goodwill amortization, providing a positive impact of $30 million to net income for the six-month period.
Guidance, Outlook, and Risks
Outlook and Guidance
- Revenue Environment: Management anticipates a weak revenue environment to continue for the remainder of 2002, with passenger revenue recovery lagging traffic improvements due to a decline in business travel.
- Cost Pressures: Total annual cost increases for 2002 compared to 2001 are estimated at $750 million to $800 million, driven by pension, interest, insurance, and security costs.
- Unusual Costs: Delta expects to incur approximately $100 million in unusual operating costs for the full year 2002 related to the temporary carrying cost of surplus pilots and grounded aircraft.
- Capacity Plans: Capacity for the September 2002 quarter is expected to be 3%-4% below the September 2001 quarter. Management does not expect September 2002 results to differ significantly from June 2002 results.
Risks and Contingencies
- War and Terrorism Insurance: The U.S. government's temporary excess war and terrorism risk insurance coverage was set to expire on August 17, 2002. Failure to renew this coverage would materially adversely affect results. Delays in the "Equitime" industry reinsurance plan have increased cost projections.
- Credit Ratings: Standard & Poor's downgraded Delta's senior unsecured long-term debt to BB- (Moody's Ba3) with a negative outlook. Further downgrades could trigger repurchase obligations for sold receivables and increase financing costs.
- Litigation: Delta is a defendant in multiple antitrust class-action lawsuits regarding travel agent commissions and market monopolization, with trials scheduled for 2003.
- Labor Issues: Ongoing disputes regarding pilot furloughs and union representation elections for flight attendants and ground instructors.
Investor Verification Checklist
- Liquidity Position: Verify the sufficiency of the $1.7 billion cash balance against the $10.0 billion total debt and $5.2 billion in aircraft order commitments.
- Insurance Renewal: Monitor the status of the U.S. government's war and terrorism risk insurance extension beyond August 17, 2002, and the progress of the Equitime plan.
- Credit Rating Triggers: Confirm current credit ratings (Moody's Ba3, S&P BB-) to assess the risk of triggering the $176 million receivable repurchase clause if ratings fall further.
- Unusual Items Impact: Review the $63 million expense for surplus pilots/grounded aircraft and $43 million non-cash derivative charge to understand the core operating performance.
- Government Assistance: Track the receipt of the remaining $30 million in Air Transportation Safety and System Stabilization Act compensation expected in the third quarter.