e10vk
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 001-5424
DELTA AIR LINES, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of incorporation or organization)
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58-0218548
(I.R.S. Employer Identification No.) |
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Post Office Box 20706
Atlanta, Georgia
(Address of principal executive offices)
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30320-6001
(Zip Code) |
Registrants telephone number, including area code: (404) 715-2600
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Name of each exchange on which registered |
Common Stock, par value $0.0001 per share
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Exchange Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated
filer þ |
Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates
of the registrant as of June 30, 2010 was approximately $9.3 billion.
Indicate by check mark whether the registrant has filed all documents and reports required to
be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court. Yes þ No o
On
January 31, 2011, there were outstanding 834,829,734 shares of the registrants common stock.
This document is also available on our website at http://www.delta.com/about_delta/investor_relations.
Documents Incorporated By Reference
Part III of this Form 10-K incorporates by reference certain information from the registrants
definitive Proxy Statement for its Annual Meeting of Stockholders to be filed with the Securities
and Exchange Commission.
TABLE OF CONTENTS
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i
Unless otherwise indicated, the terms Delta, we, us, and our refer to Delta Air Lines,
Inc. and its subsidiaries.
Forward-Looking Information
Statements in this Form 10-K (or otherwise made by us or on our behalf) that are not
historical facts, including statements about our estimates, expectations, beliefs, intentions,
projections or strategies for the future, may be forward-looking statements as defined in the
Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and
uncertainties that could cause actual results to differ materially from historical experience or
our present expectations. For examples of such risks and uncertainties, please see the cautionary
statements contained in Risk Factors Relating to Delta and Risk Factors Relating to the Airline
Industry in Item 1A. Risk Factors of this Form 10-K. All forward-looking statements speak only
as of the date made, and we undertake no obligation to publicly update or revise any
forward-looking statements to reflect events or circumstances that may arise after the date of this
report.
1
PART I
ITEM 1. BUSINESS
General
We provide scheduled air transportation for passengers and cargo throughout the United States
and around the world. Our global route network gives us a presence in every major domestic and
international market. Our route network is centered around the hub system we operate at airports in
Amsterdam, Atlanta, Cincinnati, Detroit, Memphis, Minneapolis-St. Paul, New York-JFK, Paris-Charles
de Gaulle, Salt Lake City and Tokyo-Narita. Each of these hub operations includes flights that
gather and distribute traffic from markets in the geographic region surrounding the hub to domestic
and international cities and to other hubs. Our network is supported by a fleet of aircraft that is
varied in terms of size and capabilities, giving us flexibility to adjust aircraft to the network.
Other key characteristics of our route network include:
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our alliances with foreign airlines, including our membership in SkyTeam, a global
airline alliance; |
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our transatlantic joint venture with Air France-KLM and Alitalia; |
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our domestic marketing alliance with Alaska Airlines, which expands our
west coast service; and |
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agreements with multiple domestic regional carriers, which operate as Delta Connection,
including our wholly-owned subsidiary, Comair, Inc. |
We are incorporated under the laws of the State of Delaware. Our principal executive offices
are located at Hartsfield-Jackson Atlanta International Airport in Atlanta, Georgia. Our telephone number is (404) 715-2600 and our Internet address is www.delta.com.
Information contained on this website is not part of, and is not incorporated by reference in, this
Form 10-K.
International Alliances
We have bilateral and multilateral marketing alliances with foreign airlines to improve our
access to international markets. These arrangements can include codesharing, reciprocal frequent
flyer program benefits, shared or reciprocal access to passenger lounges, joint promotions, common
use of airport gates and ticket counters, ticket office co-location and other marketing agreements.
These alliances often present opportunities in other areas, such as airport ground handling
arrangements and aircraft maintenance insourcing.
Our international codesharing agreements enable us to market and sell seats to an expanded
number of international destinations. Under international codesharing arrangements, we and a
foreign carrier each publish our respective airline designator codes on a single flight operation,
thereby allowing us and the foreign carrier to offer joint service with one aircraft, rather than
operating separate services with two aircraft. These arrangements typically allow us to sell seats
on a foreign carriers aircraft that are marketed under our designator code and permit the foreign
airline to sell seats on our aircraft that are marketed under the foreign carriers designator
code.
We have international codeshare arrangements with Aeromexico, Air France, Air Nigeria,
Alitalia, Avianca, China Airlines, China Southern, CSA Czech Airlines, KLM Royal Dutch Airlines,
Korean Air, Olympic Air, Royal Air Maroc, VRG Linhas Aéreas (GOL), Vietnam Airlines and Virgin Blue
Airlines (and some affiliated carriers operating in conjunction with some of these airlines).
2
SkyTeam. In addition to our marketing alliance agreements with individual foreign airlines, we
are a member of the SkyTeam global airline alliance. The other members of SkyTeam are Aeroflot,
Aeromexico, Air Europa, Air France, Alitalia, China Southern, CSA Czech Airlines, Kenya Airways,
KLM, Korean Air, Tarom and Vietnam Airlines. Aerolineas Argentinas, China Eastern, Garuda Indonesia
and Saudi Arabian Airlines have announced their formal intent to join SkyTeam within the next 2
years. One goal of SkyTeam is to link the route networks of the member airlines, providing
opportunities for increased connecting traffic while offering enhanced customer service through
mutual codesharing arrangements, reciprocal frequent flyer and lounge programs and coordinated
cargo operations.
Transatlantic joint venture. In addition to being members in SkyTeam with Air France and KLM,
both of which are subsidiaries of the same holding company, and Alitalia, we have a transatlantic
joint venture agreement with these carriers. This agreement provides for the sharing of revenues
and costs on transatlantic routes, as well as coordinated pricing, scheduling, and product
development on included routes. Pursuant to this joint venture, we, Air France-KLM and Alitalia
operate an extensive transatlantic network, primarily on routes between North America and Europe,
and secondarily on routes between North America and Africa, the Middle East and India, and routes
between Europe and Central America and several countries in northern South America.
Proposed joint venture with Virgin Blue Airlines Group. In July 2009, we and Virgin Blue
International Airlines (VAustralia), Virgin Blue Airlines, Pacific Blue Airlines (Australia) and
Pacific Blue Airlines (New Zealand) filed an application with the U.S. Department of Transportation
(DOT) for antitrust immunity for a proposed joint venture that will expand the reach of Delta and
the Virgin Blue carriers between the United States and Australia and the South Pacific. In
September 2010, the DOT tentatively denied this application. We and the Virgin Blue carriers
subsequently submitted additional information about our proposed joint venture to the DOT and will
submit further information in early 2011. We expect the DOT to make a final ruling on this
application in 2011.
Domestic Alliances
We
have entered into a marketing alliance with Alaska Airlines, which includes mutual
codesharing and reciprocal frequent flyer and airport lounge access arrangements. Our alliance
agreement with Alaska Airlines provides for extensive cooperation with respect to our west coast
presence.
We also have frequent flyer and reciprocal lounge agreements with Hawaiian Airlines, and
codesharing agreements with American Eagle Airlines (American Eagle) and Hawaiian Airlines. These
marketing relationships are designed to permit the carriers to retain their separate identities and
route networks while increasing the number of domestic and international connecting passengers
using the carriers route networks.
Regional Carriers
We have air service agreements with multiple domestic regional air carriers that feed traffic
to our route system by serving passengers primarily in small-and medium-sized cities. These
arrangements enable us to increase the number of flights we have available in certain locations and
to better match capacity with demand. Approximately 21% of our passenger revenue in 2010 was
related to flying by regional air carriers.
Through our regional carrier program, we have contractual arrangements with nine regional
carriers to operate regional jet and, in certain cases, turbo-prop aircraft using our DL
designator code. In addition to our wholly-owned subsidiary, Comair, we have contractual
arrangements with: Atlantic Southeast Airlines, Inc. and SkyWest Airlines, Inc., both subsidiaries
of SkyWest, Inc.; Chautauqua Airlines, Inc. and Shuttle America Corporation, both subsidiaries of
Republic Airways Holdings, Inc.; Compass Airlines, Inc.; Pinnacle Airlines, Inc. and Mesaba
Aviation, Inc., both subsidiaries of Pinnacle Airlines Corp.; and American Eagle.
3
With the exception of American Eagle and a portion of the flights operated for us by SkyWest
Airlines as described below, these agreements are capacity purchase arrangements, under which we
control the scheduling, pricing, reservations, ticketing and seat inventories for the regional
carriers flights operating under our DL designator code, and we are entitled to all ticket,
cargo, mail and in-flight and ancillary revenues associated with these flights. We pay those
airlines an amount, as defined in the applicable agreement, which is based on a determination of
their cost of operating those flights and other factors intended to approximate market rates for
those services. These capacity purchase agreements are long-term agreements, usually with initial
terms of at least 10 years, which grant us the option to extend the initial term. Certain of these
agreements provide us the right to terminate the entire agreement, or in some cases remove some of
the aircraft from the scope of the agreement, for convenience at certain future dates.
Our arrangements with American Eagle, limited to certain flights operated to and from the Los
Angeles International Airport, as well as a portion of the flights operated for us by SkyWest
Airlines, are structured as revenue proration agreements. These proration agreements establish a
fixed dollar or percentage division of revenues for tickets sold to passengers traveling on
connecting flight itineraries.
Frequent Flyer Program
Our SkyMiles® frequent flyer program is designed to retain and increase traveler loyalty by
offering incentives to customers to increase travel on Delta. The SkyMiles program allows program
members to earn mileage for travel awards by flying on Delta, Deltas regional carriers and other
participating airlines. Mileage credit may also be earned by using certain services offered by
program participants, such as credit card companies, hotels and car rental agencies. In addition, individuals and companies may purchase mileage
credits.
Miles will not expire, but are subject to all program rules.
We reserve the right to terminate the program with six months advance notice, and to
change the programs terms and conditions at any time without notice.
SkyMiles program mileage credits can be redeemed for air travel on Delta and participating
airlines, for membership in our Delta Sky Clubs® and for other program participant awards. Mileage
credits are subject to certain transfer restrictions and travel awards are subject to
capacity-controlled seating. In 2010, program members redeemed more than
264 billion miles in the SkyMiles program for more than 12 million award redemptions. During this
period, 8.3% of revenue miles flown on Delta were from award travel.
Other Businesses
Cargo
Through the strength of our global network, our cargo operations are able to connect all of
the worlds major freight gateways. We generate cargo revenues in domestic and international
markets primarily through the use of cargo space on regularly scheduled passenger aircraft. We are
a member of SkyTeam Cargo, a global airline cargo alliance, whose other members are Aeromexico
Cargo, Air France Cargo, Alitalia Cargo, CSA Czech Airlines Cargo, KLM Cargo and Korean Air Cargo.
SkyTeam Cargo offers a global network spanning six continents, provides customers a consistent
international product line and permits its members to improve their efficiency and effectiveness in
the marketplace.
4
Delta TechOps, Delta Global Services, MLT Vacations and Delta Private Jets
We have several other businesses arising from our airline operations, including aircraft
maintenance, repair and overhaul (MRO), staffing services for third parties, vacation
wholesale operations and our private jet operations. Our MRO operations, known as Delta TechOps, is the largest airline MRO in
North America. In addition to providing maintenance and engineering support for our fleet of
approximately 750 aircraft, Delta TechOps serves more than 150 aviation and airline customers from
around the world. Delta TechOps employs approximately 8,500 maintenance professionals and is one of
the most experienced MRO providers in the world. Our staffing services business, Delta Global
Services, provides staffing services, professional security, training services and aviation
solutions to approximately 150 customers. Our vacation wholesale business, MLT Vacations, is one
of the largest providers of vacation packages in the United States. Our private jet operations, Delta
Private Jets, provides aircraft charters, aircraft management and programs allowing members to
purchase flight time by the hour. In 2010, the total revenue
from these businesses was approximately $700 million.
Fuel
Our results of operations are significantly impacted by changes in the price and availability
of aircraft fuel. The following table shows our aircraft fuel consumption and costs for 2008
through 2010.
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Gallons |
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Average |
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Percentage of |
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Consumed(2) |
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Cost(2)(3) |
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Price Per |
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Total Operating |
Year |
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(Millions) |
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Gallon(2)(3) |
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Expense(2) |
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2010 |
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3,823 |
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8,901 |
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2.33 |
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30 |
% |
2009 |
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3,853 |
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$ |
8,291 |
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$ |
2.15 |
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29 |
% |
2008(1) |
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2,740 |
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$ |
8,686 |
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3.16 |
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38 |
%(4) |
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(1) |
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Includes operations of Northwest Airlines, Inc. (NWA) for the period from October 30 to December 31,
2008. |
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Includes the operations of our contract carriers under capacity purchase agreements. |
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Net of fuel hedge losses under our fuel hedging program of $89 million, $1.4 billion
and $65 million for 2010, 2009 and 2008, respectively. |
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Total operating expense for 2008 reflects a $7.3 billion non-cash charge from an
impairment of goodwill and other intangible assets and $1.1 billion in primarily non-cash
merger-related charges. Including these charges, fuel costs accounted for 28% of total
operating expense. |
Our aircraft fuel purchase contracts do not provide material protection against price
increases or assure the availability of our fuel supplies. We purchase most of our aircraft fuel
under contracts that establish the price based on various market indices. We also purchase aircraft
fuel on the spot market, from off-shore sources and under contracts that permit the refiners to set
the price.
We use derivative instruments, which generally consist of crude oil, heating oil and jet fuel
swap, collar and call option contracts, in an effort to manage our exposure to changes in aircraft
fuel prices.
We are currently able to obtain adequate supplies of aircraft fuel, but it is impossible to
predict the future availability or price of aircraft fuel. Weather-related events, natural
disasters, political disruptions or wars involving oil-producing countries, changes in government
policy concerning aircraft fuel production, transportation or marketing, changes in aircraft fuel
production capacity, environmental concerns and other unpredictable events may result in fuel
supply shortages and fuel price increases in the future.
Competition
We face significant competition with respect to routes, services and fares. Our domestic
routes are subject to competition from both new and established carriers, some of which have lower
costs than we do and provide service at low fares to destinations served by us. In particular, we
face significant competition at our domestic hub airports in Atlanta, Cincinnati, Detroit, Memphis,
Minneapolis-St. Paul, New York-JFK and Salt Lake City either directly at those airports or at the
hubs of other airlines that are located in close proximity to our hubs. We also face competition in
smaller to medium-sized markets from regional jet operators. Our ability to compete effectively
depends, in part, on our ability to maintain a competitive cost structure. If we cannot maintain
our costs at a competitive level, then our business, financial condition and operating results
could be materially adversely affected.
5
Our international routes are subject to competition from both domestic and foreign carriers.
Through alliance and other marketing and codesharing agreements with foreign carriers, U.S.
carriers have increased their ability to sell international transportation, such as services to and
beyond traditional European and Asian gateway cities. Similarly, foreign carriers have obtained
increased access to interior U.S. passenger traffic beyond traditional U.S. gateway cities through
these relationships. In particular, alliances formed by domestic and foreign carriers, including
the Star Alliance (among United Air Lines, Continental Airlines, Lufthansa German Airlines, Air
Canada and others) and the oneworld alliance (among American Airlines, British Airways, Qantas and
others) have significantly increased competition in international markets. The adoption of
liberalized Open Skies Aviation Agreements with an increasing number of countries around the world,
including in particular the Open Skies Treaties with the Member States of the European Union and
Japan, could significantly increase competition among carriers serving those markets.
Several joint ventures among U.S. and foreign carriers, including our transatlantic joint
venture with Air France-KLM and Alitalia, have received grants of antitrust immunity allowing the
participating carriers to coordinate schedules, pricing, sales and inventory. Other joint ventures
that have received anti-trust immunity include a transatlantic alliance among United, Continental,
Air Canada and Lufthansa, a transpacific joint venture among United, Continental and All Nippon
Airways, a transatlantic joint venture among American, British Airways and Iberia, and a
transpacific joint venture between American and Japan Air Lines.
Consolidation
in the airline industry and changes in international alliances have
altered and will
continue to alter the competitive landscape in the industry by resulting in the formation of
airlines and alliances with increased financial resources, more extensive global networks and
altered cost structures.
Regulatory Matters
The DOT and the Federal Aviation Administration (the FAA) exercise regulatory authority over
air transportation in the U.S. The DOT has authority to issue certificates of public convenience
and necessity required for airlines to provide domestic air transportation. An air carrier that the
DOT finds fit to operate is given authority to operate domestic and international air transportation
(including the carriage of passengers and cargo). Except for constraints imposed by regulations
regarding Essential Air Services, which are applicable to certain small communities, airlines may
terminate service to a city without restriction.
The DOT has jurisdiction over certain economic and consumer protection matters, such as unfair
or deceptive practices and methods of competition, advertising, denied boarding compensation,
baggage liability and disabled passenger transportation. The DOT also has authority to review
certain joint venture agreements between major carriers and engages in regulation of economic matters such as slot transactions. The FAA has primary responsibility for
matters relating to the safety of air carrier flight operations, including airline operating certificates,
control of navigable air space, flight personnel, aircraft certification and maintenance and other
matters affecting air safety.
Authority to operate international routes and international codesharing arrangements is
regulated by the DOT and by the governments of the foreign countries involved. International
certificate authorities are also subject to the approval of the U.S. President for conformance with
national defense and foreign policy objectives.
The Transportation Security Administration and the U.S. Customs and Border Protection, each a
division of the Department of Homeland Security, are responsible for certain civil aviation
security matters, including passenger and baggage screening at U.S. airports and international
passenger prescreening prior to entry into or departure from the U.S.
Airlines are also subject to various other federal, state, local and foreign laws and
regulations. For example, the U.S. Department of Justice has jurisdiction over airline competition
matters. The U.S. Postal Service has authority over certain aspects of the transportation of mail.
Labor relations in the airline industry, as discussed below, are generally governed by the Railway
Labor Act. Environmental matters are regulated by various federal, state, local and foreign
governmental entities. Privacy of passenger and employee data is regulated by domestic and foreign
laws and regulations.
6
Fares and Rates
Airlines set ticket prices in all domestic and most international city pairs with minimal governmental regulation, and the industry is characterized by significant price competition.
Certain international fares and rates are subject to the jurisdiction of the DOT and the
governments of the foreign countries involved. Many of our tickets are sold by travel agents, and
fares are subject to commissions, overrides and discounts paid to travel agents, brokers and
wholesalers.
Route Authority
Our flight operations are authorized by certificates of public convenience and necessity and
also by exemptions and limited-entry frequency awards issued by the DOT. The requisite approvals of
other governments for international operations are controlled by bilateral agreements (and a multi-lateral agreement in the case of the U.S. and the European Union) with, or
permits or approvals issued by, foreign countries. Because international air transportation is
governed by bilateral or other agreements between the U.S. and the foreign country or countries
involved, changes in U.S. or foreign government aviation policies could result in the alteration or
termination of such agreements, diminish the value of our international route authorities or
otherwise affect our international operations. Bilateral agreements between the U.S. and various
foreign countries served by us are subject to renegotiation from time to time.
Certain of our international route authorities are subject to periodic renewal requirements.
We request extension of these authorities when and as appropriate. While the DOT usually renews
temporary authorities on routes where the authorized carrier is providing a reasonable level of
service, there is no assurance this practice will continue in general or with respect to a specific
renewal. Dormant route authorities may not be renewed in some cases, especially where another U.S.
carrier indicates a willingness to provide service.
Airport Access
Operations at four major domestic airports and certain foreign airports served by us are
regulated by governmental entities through allocations of slots or similar regulatory mechanisms
which limit the rights of carriers to conduct operations at those airports. Each slot represents
the authorization to land at or take off from the particular airport during a specified time
period.
In the U.S., the FAA currently regulates the allocation of slots, slot exemptions, operating
authorizations, or similar capacity allocation mechanisms at Reagan National in Washington, D.C.
and LaGuardia, John F. Kennedy International Airport (JFK) and Newark in the New York City area.
Our operations at these airports generally require the allocation of slots or analogous regulatory
authorities. Similarly, our operations at Tokyos Narita Airport, Londons Gatwick and Heathrow
airports and other international airports are regulated by local slot coordinators pursuant to the
International Air Transport Associations Worldwide Scheduling Guidelines and applicable local law.
We are beginning operations at Tokyos Haneda Airport, which is also regulated, in February 2011.
We currently have sufficient slots or analogous authorizations to operate our existing flights, and
we have generally been able to obtain the rights to expand our operations and to change our
schedules. There is no assurance, however, that we will be able to do so in the future because,
among other reasons, such allocations are subject to changes in governmental policies.
Environmental Matters
Noise. The Airport Noise and Capacity Act of 1990 recognizes the rights of operators of
airports with noise problems to implement local noise abatement programs so long as such programs
do not interfere unreasonably with interstate or foreign commerce or the national air
transportation system. This statute generally provides that local noise restrictions on Stage 3
aircraft first effective after October 1, 1990, require FAA approval. While we have had sufficient
scheduling flexibility to accommodate local noise restrictions in the past, our operations could be
adversely impacted if locally-imposed regulations become more restrictive or widespread.
Emissions. The U.S. Environmental Protection Agency (the EPA) is authorized to regulate
aircraft emissions and has historically implemented emissions control standards previously adopted
by the International Civil Aviation Organization (ICAO). Our aircraft comply with the existing
EPA standards as applicable by engine design date. ICAO has adopted additional aircraft engine
emissions standards applicable to engines certified after December 31, 2007, but the EPA has not
yet proposed a rule that incorporates these new ICAO standards.
7
Concern about aviation environmental issues, including climate change and greenhouse gases,
has led to taxes on our operations in the United Kingdom and in Germany, both of which have levied
taxes directly on our customers. We may face additional regulation of aircraft emissions in the
United States and abroad and become subject to further taxes, charges or additional requirements
to obtain permits or purchase allowances or emission credits for greenhouse gas emissions in
various jurisdictions. This could result in taxation or permitting requirements from multiple
jurisdictions for the same operations. Ongoing bilateral discussions between the United States and
other nations as well as discussions at the ICAO Assembly and Conference of the Parties, most
recently in Cancun in December 2010, may lead to international treaties or other actions focusing
on reducing greenhouse gas emissions from aviation.
The European Union has required its member states to implement regulations including aviation
in its Emissions Trading Scheme (ETS). Under these regulations, any airline with flights
originating or landing in the European Union will be subject to the ETS and, beginning in 2012, may
be required to purchase emissions allowances if the airline exceeds the number of free allowances
allocated to it under the ETS. We expect that such a system would impose significant costs on our
operations in the European Union. The Air Transport Association and several U.S. carriers have filed
an action in the United Kingdom challenging the legality of the ETS on various grounds. This case
has been referred to the European Court of Justice for adjudication. Airlines will, however, be
required to comply with the ETS unless interim relief is granted.
Cap and trade restrictions have also been proposed in the United States. In addition, other
legislative or regulatory action, including by the EPA, to regulate greenhouse gas emissions is
possible. In particular, the EPA has found that greenhouse gases threaten the public health and
welfare, which could result in regulation of greenhouse gas emissions from aircraft. In the event
that legislation or regulation is enacted in the U.S. or in the event similar legislation or
regulation is enacted in jurisdictions other than the European Union where we operate or where we
may operate in the future, it could result in significant costs for us and the airline industry. We
are monitoring and evaluating the potential impact of such legislative and regulatory developments.
In addition to direct costs, such regulation may have a greater effect on the airline industry
through increases in fuel costs that could result from fuel suppliers passing on increased costs
that they incur under such a system.
We seek to minimize the impact of carbon emissions from our operations through reductions in
our fuel consumption and other efforts. We have reduced the fuel needs of our aircraft fleet
through the retirement and replacement of certain elements of our fleet and with newer, more fuel
efficient aircraft. In addition, we have implemented fuel saving procedures in our flight and
ground support operations that further reduce carbon emissions. We are also supporting efforts to
develop alternative fuels and efforts to modernize the air traffic control system in the U.S., as
part of our efforts to reduce our emissions and minimize our impact on the environment.
Other Environmental Matters. We have been identified by the EPA as a potentially responsible
party (a PRP) with respect to certain Superfund Sites, and have entered into consent decrees
regarding some of these sites. Our alleged disposal volume at each of these sites is small when
compared to the total contributions of all PRPs at each site. We are aware of soil and/or ground
water contamination present on our current or former leaseholds at several domestic airports. To
address this contamination, we have a program in place to investigate and, if appropriate,
remediate these sites. Although the ultimate outcome of these matters cannot be predicted with
certainty, management believes that the resolution of these matters will not have a material
adverse effect on our consolidated financial statements.
We are also subject to various other federal, state and local laws governing environmental
matters, including the management and disposal of chemicals, waste and hazardous materials,
protection of surface and subsurface waters and regulation of air emissions and drinking water.
Civil Reserve Air Fleet Program
We participate in the Civil Reserve Air Fleet program (the CRAF Program), which permits the
U.S. military to use the aircraft and crew resources of participating U.S. airlines during airlift
emergencies, national emergencies or times of war. We have agreed to make available under the CRAF
Program a portion of our international long-range aircraft during the contract period ending September 30,
2011.
8
As of January 1, 2011, the following numbers of our international long-range aircraft were
available for CRAF activation:
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Number of |
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Description of |
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International |
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Aeromedical |
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Total |
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Event Leading to |
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Passenger |
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Aircraft |
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Aircraft by |
Stage |
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Activation |
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Aircraft Allocated |
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Allocated |
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Stage |
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I
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Minor Crisis
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5 |
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N/A |
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5 |
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II
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Major Theater Conflict |
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23 |
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21 |
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44 |
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III
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Total National Mobilization
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59 |
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33 |
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92 |
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We have also committed 75 aircraft to international short-range requirements. The CRAF
Program has only been activated twice, both times at the Stage I level, since it was created in
1951.
Employee Matters
Railway Labor Act
Our relations with labor unions in the U.S. are governed by the Railway Labor Act. Under the
Railway Labor Act, a labor union seeking to represent an unrepresented craft or class of employees
is required to file with the National Mediation Board (the NMB) an application alleging a
representation dispute, along with authorization cards signed by at least 35% of the employees in
that craft or class. The NMB then investigates the dispute and, if it finds the labor union has
obtained a sufficient number of authorization cards, conducts an election to determine whether to
certify the labor union as the collective bargaining representative of that craft or class. Under
new voting rules implemented by the NMB on July 1, 2010, a labor union will be certified as the
representative of the employees in a craft or class if more than 50% of votes cast are for that
union. A certified labor union would commence negotiations toward a collective bargaining agreement
with the employer.
Under the Railway Labor Act, a collective bargaining agreement between an airline and a labor
union does not expire, but instead becomes amendable as of a stated date. Either party may request
that the NMB appoint a federal mediator to participate in the negotiations for a new or amended
agreement. If no agreement is reached in mediation, the NMB may determine, at any time, that an
impasse exists and offer binding arbitration. If either party rejects binding arbitration, a 30-day
cooling off period begins. At the end of this 30-day period, the parties may engage in self
help, unless the U.S. President appoints a Presidential Emergency Board (PEB) to investigate and
report on the dispute. The appointment of a PEB maintains the status quo for an additional 60
days. If the parties do not reach agreement during this period, the parties may then engage in
self help. Self help includes, among other things, a strike by the union or the imposition of
proposed changes to the collective bargaining agreement by the airline. Congress and the President
have the authority to prevent self help by enacting legislation that, among other things, imposes
a settlement on the parties.
Collective Bargaining
As
of December 31, 2010, we had approximately 80,000 full-time equivalent employees. Approximately 17% of
these employees were represented by unions, including the following domestic employee groups.
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Approximate |
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Number of Active |
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Date on which Collective |
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Employees |
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Bargaining Agreement |
Employee Group |
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Represented |
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Union |
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Becomes Amendable |
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Delta Pilots
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10,900 |
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ALPA
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December 31, 2012 |
Delta Flight Superintendents (Dispatchers)
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350 |
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PAFCA
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December 31, 2013 |
Comair Pilots
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1,100 |
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ALPA
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March 2, 2011 |
Comair Maintenance Employees
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350 |
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IAM
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December 31, 2010 |
Comair Flight Attendants
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700 |
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IBT
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December 31, 2010 |
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Labor unions periodically engage in organizing efforts to represent various groups of our
employees, including at our airline subsidiary, that are not represented for collective bargaining
purposes.
9
Completion of Merger Integration
Integration of a number of the workgroups following our merger with NWA (including pilots, aircraft
maintenance technicians, dispatchers, meteorologists, simulator technicians, and office and clerical staff) has been completed. As discussed below, completion of the
integration of certain workgroups (including flight attendants, airport employees and reservations
employees) will require the final resolution of representation issues. We cannot predict when these
representation issues will be finally resolved.
Under procedures that have been utilized by the NMB, each labor union that represented
U.S.-based employees at pre-merger Delta or NWA, as well as other groups of employees with a
sufficient showing of interest, may invoke the NMBs jurisdiction to address representation issues
arising from the merger. Once its jurisdiction is invoked, the NMBs rules call for it to first
determine whether the airlines have combined or will combine to form a single carrier. On January
7, 2009, the NMB first ruled that Delta and NWA constitute a single transportation system for
representation purposes under the Railway Labor Act in response to applications filed by certain of
the pre-merger unions at Delta and NWA. The NMB subsequently made the same determination as the
unions filed applications to resolve post-merger representation issues in the remaining workgroups.
The NMB has utilized certain procedures to address and resolve representation issues arising
from airline mergers which generally have included the following:
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Where employees in the same craft or class at the two carriers are represented by the
same union, that union will be certified to represent the combined group, without an
election. |
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Where employees in the same craft or class at the two carriers have different
representation statuseither they are represented by different unions or one group is
represented by a union and the other is notthe NMBs rules provide for a representation
election among the combined employee groups if the groups are comparable in size. In
general, the NMB has considered two groups to be comparable in size if the smaller group is
at least 35% of the combined group. If the representation election results in the combined
group not being represented by a union, the collective bargaining agreement covering the
group that had previously been unionized will terminate. |
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If the two groups are not comparable in size, the smaller group will be folded into and
have the same representation status as the larger group. Even where the two groups are not
comparable in size, the smaller group can still obtain an election if, within 14 days after
the NMBs single carrier determination with respect to that group, the smaller group
submits a showing of interest from at least 35% of the combined group. The showing of
interest can consist of authorization cards as well as the seniority list of the smaller
group, if the smaller group had been represented by a union. |
Based upon these procedures, representation and related issues have been resolved in
U.S.-based workgroups represented by six of the eight labor unions at Delta and NWA pre-merger. As
noted, in 2010, the NMB changed the voting rules for representation elections in the airline
industry to provide that a majority of votes cast (rather than a majority of votes eligible to be
cast) is necessary to certify a union to represent a craft or class of employees. Following the
change in voting rules, the NMB authorized and conducted elections sought by the two remaining
pre-merger NWA unions, the Association of Flight Attendants-CWA (AFA), which represented flight
attendants at pre-merger NWA, and the International Association of Machinists (IAM), which
represented various categories of ground employees at pre-merger NWA. The employee groups, the
union seeking representation and the approximate number of employees in each workgroup prior to the
election is set forth in the table below:
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Approximate Number |
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of Employees |
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Union Seeking |
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(as of June 30, |
Employee Group |
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Representation |
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2010) |
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Flight Attendants |
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AFA |
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20,100 |
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Fleet Service(1) |
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IAM |
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14,100 |
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Stores Employees(2) |
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IAM |
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700 |
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Passenger Service(3) |
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IAM |
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16,400 |
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(1) |
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Includes below-wing airport customer service employees, cargo
warehouse employees and related positions |
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(2) |
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Includes technical operations supply attendants, stock clerks and
stores utility employees |
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(3) |
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Includes above-wing airport customer service agents, cargo sales
agents and passenger reservations sales agents |
10
In each case, the employee groups rejected representation by the unions and the unions
have filed claims with the NMB alleging that Delta interfered with the elections. While we are
vigorously challenging the interference claims, we cannot predict when or how these matters will be
resolved for these workgroups. However, based on the election results, the NMB terminated the pre-merger
certifications of the unions to represent employees in those groups. As a result, matters that were tied to
union representation, such as mandatory union dues check off, shop steward and similar positions, and union
committees and offices have also terminated.
If a labor union is certified to represent a combined group post-merger, the terms and
conditions of employment of the combined work group ultimately will be subject to negotiations
toward a joint collective bargaining agreement. Completing joint collective bargaining agreements
covering combined work groups that choose to be represented by a labor union could take significant
time, which could delay or impede our ability to achieve targeted synergies from the merger.
With respect to integration of seniority lists, where the two employee groups in a craft or
class have different representation status, federal law requires that seniority integration be
governed by the procedures first issued by the Civil Aeronautics Board in the Allegheny-Mohawk
mergerknown as the Allegheny-Mohawk Labor Protective Provisions. In general, Allegheny-Mohawk
Labor Protective Provisions require that seniority be integrated in a fair and equitable manner
and that any disputes not resolved by negotiations may be submitted to binding arbitration by a
neutral arbitrator. This requirement is consistent with the seniority protection policy that has
been adopted by the Delta board of directors. Where both groups are represented by the same union
prior to the merger, seniority integration is governed by the unions bylaws and policies. The
integration of the seniority lists of the pilots of Delta and NWA as well as flight dispatchers,
meteorologists and aircraft maintenance technicians and related Technical Operations employees has
been resolved.
Executive Officers
Richard H. Anderson, Age 55: Chief Executive Officer of Delta since September 1, 2007;
Executive Vice President of UnitedHealth Group and President of its Commercial Services Group
(December 2006August 2007); Executive Vice President of UnitedHealth Group (November
2004December 2006); Chief Executive Officer of Northwest Airlines Corporation (Northwest) (2001November
2004).
Edward H. Bastian, Age 53: President of Delta since September 1, 2007; President of Delta and
Chief Executive Officer NWA (October 2008December 2009); President and Chief Financial Officer of
Delta (September 2007October 2008); Executive Vice President and Chief Financial Officer of Delta
(July 2005September 2007); Chief Financial Officer, Acuity Brands (June 2005July 2005); Senior
Vice PresidentFinance and Controller of Delta (2000April 2005); Vice President and Controller
of Delta (19982000).
Michael H. Campbell, Age 62: Executive Vice PresidentHR & Labor Relations of Delta since
October 2008; Executive Vice PresidentHR, Labor & Communications of Delta (December 2007October
2008); Executive Vice PresidentHuman Resources and Labor Relations of Delta (July 2006December
2007); Of Counsel, Ford & Harrison (January 2005July 2006); Senior Vice PresidentHuman
Resources and Labor Relations, Continental Airlines, Inc. (19972004); Partner, Ford & Harrison
(19781996).
Stephen E. Gorman, Age 55: Executive Vice President and Chief Operating Officer of Delta since
October 2008; Executive Vice PresidentOperations of Delta (December 2007-October 2008); President
and Chief Executive Officer of Greyhound Lines, Inc. (June 2003October 2007); President, North
America and Executive Vice President Operations Support at Krispy Kreme Doughnuts, Inc. (August
2001June 2003); Executive Vice President, Technical Operations and Flight Operations of Northwest
(February 2001August 2001), Senior Vice President, Technical Operations of Northwest (January
1999February 2001), and Vice President, Engine Maintenance Operations of Northwest (April
1996January 1999).
Glen W. Hauenstein, Age 50: Executive Vice PresidentNetwork Planning and Revenue Management
of Delta since April 2006; Executive Vice President and Chief of Network and Revenue Management of
Delta (August 2005April 2006); Vice General DirectorChief Commercial Officer and Chief
Operating Officer of Alitalia (20032005); Senior Vice PresidentNetwork of Continental Airlines
(2003); Senior Vice PresidentScheduling of Continental Airlines (2001 2003); Vice President
Scheduling of Continental Airlines (19982001).
11
Hank Halter, Age 45: Senior Vice President and Chief Financial Officer of Delta since October
2008; Senior Vice PresidentFinance and Controller of Delta (May 2005October 2008); Vice
PresidentController of Delta (March 2005May 2005); Vice PresidentAssistant Controller of
Delta (January 2002March 2005); and Vice PresidentFinanceOperations of Delta (February
2000December 2001); various finance leadership positions at Delta and American Airlines, Inc.
(June 1993February 2000).
Richard B. Hirst, Age 66: Senior Vice President and General Counsel of Delta since October
2008; Senior Vice PresidentCorporate Affairs and General Counsel of Northwest (March 2008
October 2008); Executive Vice President and Chief Legal Officer of KB Home (March 2004 November
2006); Executive Vice President and General Counsel of Burger King Corporation (March 2001June
2003); General Counsel of the Minnesota Twins (19992000); Senior Vice PresidentCorporate
Affairs of Northwest (19941999); Senior Vice PresidentGeneral Counsel of Northwest
(19901994); Vice PresidentGeneral Counsel and Secretary of Continental Airlines (19861990).
Additional Information
We make available free of charge on our website our Annual Report on Form 10-K, our Quarterly
Reports on Form 10-Q, our Current Reports on Form 8-K and amendments to those reports as soon as
reasonably practicable after these reports are filed with or furnished to the Securities and
Exchange Commission. Information on our website is not incorporated into this Form 10-K or our
other securities filings and is not a part of those filings.
ITEM 1A. RISK FACTORS
Risk Factors Relating to Delta
Our business and results of operations are dependent on the price and availability of aircraft
fuel. High fuel costs or cost increases could have a materially adverse effect on our operating
results. Likewise, significant disruptions in the supply of aircraft fuel would materially
adversely affect our operations and operating results.
Our operating results are significantly impacted by changes in the price and availability of
aircraft fuel. Fuel prices have increased substantially since the middle part of the last decade
and spiked at record high levels in 2008 before falling dramatically during the latter part of
2008. In 2010, our average fuel price per gallon was $2.33, an 8% increase from an average fuel
price of $2.15 in 2009. In 2008, our average fuel price per gallon was $3.16, a 41% increase from
an average price of $2.24 in 2007, which in turn was significantly higher than fuel prices just a
few years earlier. Fuel costs represented 30%, 29%, and 38% of our operating expense in 2010, 2009
and 2008, respectively. Total operating expense for 2008 reflects a $7.3 billion non-cash charge
from an impairment of goodwill and other intangible assets and $1.1 billion in primarily non-cash
merger-related charges. Including these charges, fuel costs accounted for 28% of total operating
expense in 2008. Volatility in fuel costs has had a significant negative effect on our results of
operations and financial condition.
Our ability to pass along the increased costs of fuel to our customers may be affected by the
competitive nature of the airline industry. We often have not been able to increase our fares to
offset fully the effect of increased fuel costs in the past and we may not be able to do so in the
future.
In addition, our aircraft fuel purchase contracts do not provide material protection against
price increases or assure the availability of our fuel supplies. We purchase most of our aircraft
fuel under contracts that establish the price based on various market indices. We also purchase
aircraft fuel on the spot market, from offshore sources and under contracts that permit the
refiners to set the price. In an effort to manage our exposure to changes in fuel prices, we use
derivative instruments, which generally consist of crude oil, heating oil and jet fuel swap, collar
and call option contracts, though we may not be able to successfully manage this exposure.
Depending on the type of hedging instrument used, our ability to benefit from declines in fuel
prices may be limited.
12
We are currently able to obtain adequate supplies of aircraft fuel, but it is impossible to
predict the future availability or price of aircraft fuel. Weather-related events, natural
disasters, political disruptions or wars involving oil-producing countries, changes in governmental
policy concerning aircraft fuel production, transportation or marketing, changes in aircraft fuel
production capacity, environmental concerns and other unpredictable events may result in additional
fuel supply shortages and fuel price increases in the future. Additional increases in fuel costs or
disruptions in fuel supplies could have additional negative effects on us.
Our funding obligations with respect to defined benefit pension plans we sponsor is significant
and can vary materially because of changes in investment asset returns and values.
The recent financial crisis and economic downturn resulted in broadly lower investment asset
returns and values, including in the defined benefit pension plans that we sponsor for eligible
employees and retirees. As of December 31, 2010, the defined benefit pension plans had an estimated
benefit obligation of approximately $17.5 billion and were funded through assets with a value of
approximately $8.2 billion. The benefit obligation is significantly affected by investment asset returns and changes in interest rates, neither of which is in the control of Delta. We estimate that our funding requirement for our defined benefit
pension plans, which are governed by ERISA and have been frozen for future accruals, is
approximately $600 million in 2011. The significant level of required funding is due primarily to
the decline in the investment markets in 2008, which negatively affected the value of our pension
assets. Estimates of pension plan funding requirements can vary materially from actual funding
requirements because the estimates are based on various assumptions concerning factors outside our
control, including, among other things, the market performance of assets; statutory requirements;
and demographic data for participants, including the number of participants and the rate of
participant attrition. Results that vary significantly from our assumptions could have a material
impact on our future funding obligations.
Our obligation to post collateral in connection with our hedge contracts may have a substantial
impact on our short-term liquidity.
Under hedge contracts that we may enter into from time to time, counterparties to those
contracts can require us to fund the margin associated with any loss position on the contracts. If
fuel prices fall significantly below the levels at the time we enter into fuel hedging contracts,
we may be required to post a significant amount of collateral, which could have an impact on the
level of our unrestricted cash and cash equivalents and short-term investments.
Our substantial indebtedness may limit our financial and operating activities and may adversely
affect our ability to incur additional debt to fund future needs.
We have substantial indebtedness, which could:
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require us to dedicate a substantial portion of cash flow from operations to
the payment of principal and interest on indebtedness, thereby reducing the funds available
for operations and future business opportunities; |
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make it more difficult for us to satisfy our payment and other obligations
under our indebtedness; |
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limit our ability to borrow additional money for working capital,
restructurings, capital expenditures, research and development, investments, acquisitions
or other purposes, if needed, and increasing the cost of any of these borrowings; |
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make us more vulnerable to economic downturns, adverse industry conditions or
catastrophic external events; |
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limit our ability to withstand competitive pressures; |
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reduce our flexibility in planning for or responding to changing business and
economic conditions; and/or |
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limit our flexibility in responding to changing business and economic
conditions, including increased competition and demand for new services, placing us at a
disadvantage when compared to our competitors that have less debt, and making us more
vulnerable than our competitors who have less debt to a downturn in our business, industry
or the economy in general. |
13
In addition, a substantial level of indebtedness, particularly because substantially all of
our assets are currently subject to liens, could limit our ability to obtain additional financing
on acceptable terms or at all for working capital, capital expenditures and general corporate
purposes. We have historically had substantial liquidity needs in the operation of our business.
These liquidity needs could vary significantly and may be affected by general economic conditions,
industry trends, performance and many other factors not within our control.
Agreements governing our debt, including credit agreements and indentures, include financial and
other covenants that impose restrictions on our financial and business operations.
Our credit facilities and indentures for secured notes have various financial and other
covenants that require us to maintain, depending on the particular agreement, minimum fixed charge
coverage ratios, minimum unrestricted cash reserves and/or minimum collateral coverage ratios. The
value of the collateral that has been pledged in each facility may change over time, including due
to factors that are not under our control, resulting in a situation where we may not be able to
maintain the collateral coverage ratio. In addition, the credit facilities and indentures contain
other negative covenants customary for such financings. If we fail to comply with these covenants
and are unable to obtain a waiver or amendment, an event of default would result. These covenants
are subject to important exceptions and qualifications.
The credit facilities and indentures also contain other events of default customary for such
financings. If an event of default were to occur, the lenders or the trustee could, among other
things, declare outstanding amounts due and payable, and our cash may become restricted. We cannot
provide assurance that we would have sufficient liquidity to repay or refinance the borrowings or
notes under any of the credit facilities if such amounts were accelerated upon an event of default.
In addition, an event of default or declaration of acceleration under any of the credit facilities
or the indentures could also result in an event of default under other of our financing agreements.
Employee strikes and other labor-related disruptions may adversely affect our operations.
Our business is labor intensive, utilizing large numbers of pilots, flight attendants and
other personnel. As of December 31, 2010, approximately 17% of our workforce was unionized. Strikes
or labor disputes with our unionized employees may adversely affect our ability to conduct
business. Relations between air carriers and labor unions in the United States are governed by the
Railway Labor Act, which provides that a collective bargaining agreement between an airline and a
labor union does not expire, but instead becomes amendable as of a stated date. The Railway Labor
Act generally prohibits strikes or other types of self-help actions both before and after a
collective bargaining agreement becomes amendable, unless and until the collective bargaining
processes required by the Railway Labor Act have been exhausted.
In addition, if we or our affiliates are unable to reach agreement with any of our unionized
work groups on future negotiations regarding the terms of their collective bargaining agreements or
if additional segments of our workforce become unionized, we may be subject to work interruptions
or stoppages, subject to the requirements of the Railway Labor Act. Likewise, if third party
regional carriers with whom we have contract carrier agreements are unable to reach agreement with
their unionized work groups on current or future negotiations regarding the terms of their
collective bargaining agreements, those carriers may be subject to work interruptions or stoppages,
subject to the requirements of the Railway Labor Act, which could have a negative impact on our
operations.
Completion of the integration of the Delta and Northwest Airlines workforces may present challenges.
The successful integration of the pre-merger NWA operations into Delta and achievement of the
anticipated benefits of the combination depend on integrating the pre-merger Delta
and NWA employee groups and on maintaining productive employee relations. While integration of a
number of the workgroups (including pilots, aircraft maintenance technicians, dispatchers, meteorologists, simulator technicians and office and clerical staff) has been
completed, completion of the integration of certain workgroups (including flight attendants,
airport employees and reservations employees) of the two pre-merger airlines will require the final
resolution of union representation issues. We cannot predict when or how these remaining
representation issues will be resolved. Unexpected delay, expense or other challenges to
integrating the workforces could affect our financial performance.
14
Extended interruptions or disruptions in service at one of our hub airports could have a
material adverse impact on our operations.
Our business is heavily dependent on our operations at the Atlanta airport and at our other
hub airports in Amsterdam, Cincinnati, Detroit, Memphis, Minneapolis-St. Paul, New York-JFK,
Paris-Charles de Gaulle, Salt Lake City and Tokyo-Narita. Each of these hub operations includes
flights that gather and distribute traffic from markets in the geographic region surrounding the
hub to other major cities and to other Delta hubs. A significant interruption or disruption in
service at one of our hubs could have a serious impact on our
business, financial condition and results of operations.
We are increasingly dependent on technology in our operations, and if our technology fails or we
are unable to continue to invest in new technology, our business may be adversely affected.
We have become increasingly dependent on technology initiatives to reduce costs and to enhance
customer service in order to compete in the current business environment. For example, we have made
significant investments in delta.com, check-in kiosks and related initiatives. The performance and
reliability of the technology are critical to our ability to attract and retain customers and our
ability to compete effectively. Because of the rapid
pace of new developments, these initiatives will continue to require significant capital
investments in our technology infrastructure. If we are unable to make these investments, our
business and operations could be negatively affected. If we are unable to manage these challenges
effectively, our business and results of operations could be negatively affected.
In addition, any internal technology error or failure impacting systems hosted internally at
our data centers or externally at third party locations or large scale external interruption in
technology infrastructure we depend on, such as power, telecommunications or the internet, may
disrupt our technology network. Any individual, sustained or repeated failure of technology could
impact our customer service and result in increased costs. Our technology systems and related data
may be vulnerable to a variety of sources of interruption due to events beyond our control,
including natural disasters, terrorist attacks, telecommunications failures, computer viruses,
hackers and other security issues. While we have in place, and continue to invest in, technology
security initiatives and disaster recovery plans, these measures may not be adequate or implemented
properly to prevent a business disruption and its adverse financial consequences to our business.
If we experience losses of senior management personnel and other key employees, our operating
results could be adversely affected.
We are dependent on the experience and industry knowledge of our officers and other key
employees to execute our business plans. If we experience a substantial turnover in our leadership
and other key employees, our performance could be materially adversely impacted. Furthermore, we
may be unable to attract and retain additional qualified executives as needed in the future.
Our credit card processors have the ability to take significant holdbacks in certain
circumstances. The initiation of such holdbacks likely would have a material adverse effect on
our liquidity.
Most of the tickets we sell are paid for by customers who use credit cards. Our credit card
processing agreements provide that no holdback of receivables or reserve is required except in
certain circumstances, including if we do not maintain a required level of unrestricted cash. If
circumstances were to occur that would allow American Express or our VISA/MasterCard processor to
initiate a holdback, the negative impact on our liquidity likely would be material.
We are at risk of losses and adverse publicity stemming from any accident involving our
aircraft.
An aircraft crash or other accident could expose us to significant tort liability. The
insurance we carry to cover damages arising from any future accidents may be inadequate. In the
event that the insurance is not adequate, we may be forced to bear substantial losses from an
accident. In addition, any accident involving an aircraft that we operate or an aircraft that is
operated by an airline that is one of our codeshare partners could create a public perception that
our aircraft are not safe or reliable, which could harm our reputation, result in air travelers
being reluctant to fly on our aircraft and harm our business.
15
Our business is subject to the effects of weather and natural disasters and seasonality, which
can cause our results to fluctuate.
Our results of operations will reflect fluctuations from weather, natural disasters and
seasonality. Severe weather conditions and natural disasters can significantly disrupt service and
create air traffic control problems. These events decrease revenue and can also increase costs. In
addition, increases in frequency, severity or duration of thunderstorms, hurricanes, typhoons or
other severe weather events, including from changes in the global climate, could result in
increases in fuel consumption to avoid such weather, turbulence-related injuries, delays and
cancellations, any of which would increase the potential for greater loss of revenue and higher
costs. In addition, demand for air travel is typically higher in the June and September quarters,
particularly in international markets, because there is more vacation travel during these periods
than during the remainder of the year. Because of fluctuations in our results from weather,
natural disasters and seasonality, operating results for a historical period are not necessarily
indicative of operating results for a future period and operating results for an interim period are
not necessarily indicative of operating results for an entire year.
An extended disruption in services provided by our third party regional carriers could have a
material adverse effect on our results of operations.
We utilize the services of third party providers in a number of areas in support of our
operations that are integral to our business, including third party carriers in the Delta
Connection program. While we have agreements with these providers that define expected service
performance, we do not have direct control over the operations of these carriers. To the extent
that a significant disruption in our regional operations occurs because any of these providers are
unable to perform their obligations over an extended period of time, our revenue may be reduced or
our expenses may be increased resulting in a material adverse effect on our results of operations.
Our ability to use net operating loss carryforwards to offset future taxable income for U.S.
federal income tax purposes is subject to limitation.
In general, under Section 382 of the Internal Revenue Code of 1986, as amended, a corporation
that undergoes an ownership change is subject to limitations on its ability to utilize its
pre-change net operating losses (NOLs), to offset future taxable income. In general, an ownership
change occurs if the aggregate stock ownership of certain stockholders (generally 5% shareholders,
applying certain look-through rules) increases by more than 50 percentage points over such
stockholders lowest percentage ownership during the testing period (generally three years).
As of December 31, 2010, Delta reported a consolidated federal and state pretax NOL
carryforward of approximately $17.5 billion. Both Delta and Northwest experienced an ownership
change in 2007 as a result of their respective plans of reorganization under Chapter 11 of the U.S.
Bankruptcy Code. As a result of the merger, Northwest experienced a subsequent ownership change.
Delta also experienced a subsequent ownership change on December 17, 2008 as a result of the
merger, the issuance of equity to employees in connection with the merger and other transactions
involving the sale of our common stock within the testing period.
The Delta and Northwest ownership changes resulting from the merger could limit the ability to
utilize pre-change NOLs that were not subject to limitation, and could further limit the ability to
utilize NOLs that were already subject to limitation. Limitations imposed on the ability to use
NOLs to offset future taxable income could cause U.S. federal income taxes to be paid earlier than
otherwise would be paid if such limitations were not in effect and could cause such NOLs to expire
unused, in each case reducing or eliminating the benefit of such NOLs. Similar rules and
limitations may apply for state income tax purposes. NOLs generated subsequent to December 17, 2008
are not limited.
16
Risk Factors Relating to the Airline Industry
The airline industry is highly competitive and, if we cannot successfully compete in the
marketplace, our business, financial condition and operating results will be materially
adversely affected.
We face significant competition with respect to routes, services and fares. Our domestic
routes are subject to competition from both new and established carriers, some of which have lower
costs than we do and provide service at low fares to destinations served by us. In particular, we
face significant competition at our domestic hub airports in Atlanta, Cincinnati, Detroit, Memphis,
Minneapolis-St. Paul, New York-JFK and Salt Lake City either directly at those airports or at the
hubs of other airlines that are located in close proximity to our hubs. We also face competition in
smaller to medium-sized markets from regional jet operators.
Discount carriers, including Southwest, AirTran and JetBlue, have placed significant
competitive pressure on us in the United States and on other network carriers in the domestic
market. In addition, other network carriers have also significantly reduced their costs over the
last several years. Our ability to compete effectively depends, in part, on our ability to maintain
a competitive cost structure. If we cannot maintain our costs at a competitive level, then our
business, financial condition and operating results could be materially adversely affected.
Our international routes are subject to competition from both domestic and foreign carriers.
Through alliance and other marketing and codesharing agreements with foreign carriers, U.S.
carriers have increased their ability to sell international transportation, such as services to and
beyond traditional European and Asian gateway cities. Similarly, foreign carriers have obtained
increased access to interior U.S. passenger traffic beyond traditional U.S. gateway cities through
these relationships. In particular, alliances formed by domestic and foreign carriers, including
the Star Alliance (among United Air Lines, Continental Airlines, Lufthansa German Airlines, Air
Canada and others) and the oneworld alliance (among American Airlines, British Airways, Qantas and
others) have significantly increased competition in international markets. The adoption of
liberalized Open Skies Aviation Agreements with an increasing number of countries around the world,
including in particular the Open Skies Treaties with the Member States of the European Union and
Japan, could significantly increase competition among carriers serving those markets.
Several joint ventures among U.S. and foreign carriers, including our transatlantic joint
venture with Air France-KLM and Alitalia, have received grants of antitrust immunity allowing the
participating carriers to coordinate schedules, pricing, sales and inventory. Other joint ventures
that have received anti-trust immunity include a transatlantic alliance among United, Continental,
Air Canada and Lufthansa, a transpacific joint venture among United, Continental and All Nippon
Airways, a transatlantic joint venture among American, British Airways and Iberia, and a
transpacific joint venture between American and Japan Air Lines.
Consolidation in the domestic airline
industry and changes in international alliances have altered and
will continue to alter the competitive landscape in the industry by resulting in the formation of
airlines and alliances with increased financial resources, more extensive global networks and
altered cost structures.
The rapid spread of contagious illnesses can have a material adverse effect on our business and
results of operations.
The rapid spread of a contagious illness can have a material adverse effect on the demand for
worldwide air travel and therefore have a material adverse effect on our business and results of
operations. Moreover, our operations could be negatively affected if employees are quarantined as
the result of exposure to a contagious illness. Similarly, travel restrictions or operational
problems resulting from the rapid spread of contagious illnesses in any part of the world in which
we operate may have a materially adverse impact on our business and results of operations.
17
Terrorist attacks or international hostilities may adversely affect our business, financial
condition and operating results.
The terrorist attacks of September 11, 2001 caused fundamental and permanent changes in the
airline industry, including substantial revenue declines and cost increases, which resulted in
industry-wide liquidity issues. Potential terrorist attacks or security breaches or fear of such events, even if not
made directly on the airline industry, could negatively affect us and the airline industry. The
potential negative effects include increased security (including as a result of our global operations), insurance and other costs and lost revenue
from increased ticket refunds and decreased ticket sales. Our financial resources might not be
sufficient to absorb the adverse effects of any further terrorist attacks or other international
hostilities involving the United States.
The airline industry is subject to extensive government regulation, and new regulations may
increase our operating costs.
Airlines are subject to extensive regulatory and legal compliance requirements that result in
significant costs. For instance, the FAA from time to time issues directives and other regulations
relating to the maintenance and operation of aircraft that necessitate significant expenditures. We
expect to continue incurring expenses to comply with the FAAs regulations.
Other laws, regulations, taxes and airport rates and charges have also been imposed from time
to time that significantly increase the cost of airline operations or reduce revenues. The industry is heavily taxed. For example,
the Aviation and Transportation Security Act mandates the federalization of certain airport
security procedures and imposes security requirements on airports and airlines, most of which are
funded by a per ticket tax on passengers and a tax on airlines. The federal government has on
several occasions proposed a significant increase in the per ticket tax. A ticket tax increase, if
implemented, could negatively impact our results of operations.
Proposals to address congestion issues at certain airports or in certain airspace,
particularly in the Northeast United States, have included concepts such as congestion-based
landing fees, slot auctions or other alternatives that could impose a significant cost on the
airlines operating in those airports or airspace and impact the ability of those airlines to
respond to competitive actions by other airlines. Furthermore, events related to extreme weather
delays have caused Congress and the DOT to consider proposals related to airlines handling of
lengthy flight delays. The recent enactment of such a regulation by the DOT could have a negative
impact on our operations in certain circumstances.
Future regulatory action concerning climate change and aircraft emissions could have a
significant effect on the airline industry. For example, the European Commission has adopted an
emissions trading scheme applicable to all flights operating in the European Union, including
flights to and from the United States. We expect that such a system will impose significant costs
on our operations in the European Union. Other laws or regulations such as this emissions trading
scheme or other U.S. or foreign governmental actions may adversely affect our operations and
financial results, either through direct costs in our operations or through increases in costs for
jet fuel that could result from jet fuel suppliers passing on increased costs that they incur under
such a system.
We and other U.S. carriers are subject to domestic and foreign laws regarding privacy of
passenger and employee data that are not consistent in all countries in which we operate. In
addition to the heightened level of concern regarding privacy of passenger data in the United
States, certain European government agencies are initiating inquiries into airline privacy
practices. Compliance with these regulatory regimes is expected to result in additional operating
costs and could impact our operations and any future expansion.
18
Our insurance costs have increased substantially as a result of the September 11, 2001 terrorist
attacks, and further increases in insurance costs or reductions in coverage could have a
material adverse impact on our business and operating results.
As a result of the terrorist attacks on September 11, 2001, aviation insurers significantly
(1) reduced the maximum amount of insurance coverage available to commercial air carriers for
liability to persons (other than employees or passengers) for claims resulting from acts of
terrorism, war or similar events and (2) increased the premiums for such coverage and for aviation
insurance in general. Since September 24, 2001, the U.S. government has been providing U.S.
airlines with war-risk insurance to cover losses, including those resulting from terrorism, to
passengers, third parties (ground damage) and the aircraft hull. The coverage currently extends
through September 30, 2011, and we expect the coverage to be further extended. The withdrawal of
government support of airline war-risk insurance would require us to obtain war-risk insurance
coverage commercially, if available. Such commercial insurance could have substantially less
desirable coverage than that currently provided by the U.S. government, may not be adequate to
protect our risk of loss from future acts of terrorism, may result in a material increase to our
operating expenses or may not be obtainable at all, resulting in an interruption to our operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
19
ITEM 2. PROPERTIES
Flight Equipment
Our operating fleet at December 31, 2010 is summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Fleet |
|
|
|
|
|
|
|
|
|
|
Capital |
|
Operating |
|
|
|
|
|
Average |
Aircraft Type |
|
Owned |
|
Lease |
|
Lease |
|
Total |
|
Age |
|
Passenger Aircraft: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
B-737-700 |
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
1.9 |
|
B-737-800 |
|
|
73 |
|
|
|
|
|
|
|
|
|
|
|
73 |
|
|
|
9.9 |
|
B-747-400 |
|
|
4 |
|
|
|
9 |
|
|
|
3 |
|
|
|
16 |
|
|
|
17.1 |
|
B-757-200 |
|
|
90 |
|
|
|
40 |
|
|
|
34 |
|
|
|
164 |
|
|
|
17.9 |
|
B-757-300 |
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
16 |
|
|
|
7.8 |
|
B-767-300 |
|
|
9 |
|
|
|
|
|
|
|
5 |
|
|
|
14 |
|
|
|
19.7 |
|
B-767-300ER |
|
|
49 |
|
|
|
2 |
|
|
|
6 |
|
|
|
57 |
|
|
|
14.7 |
|
B-767-400ER |
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
21 |
|
|
|
9.8 |
|
B-777-200ER |
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
10.9 |
|
B-777-200LR |
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
1.8 |
|
A319-100 |
|
|
55 |
|
|
|
|
|
|
|
2 |
|
|
|
57 |
|
|
|
8.9 |
|
A320-200 |
|
|
41 |
|
|
|
|
|
|
|
28 |
|
|
|
69 |
|
|
|
15.8 |
|
A330-200 |
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
5.8 |
|
A330-300 |
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
21 |
|
|
|
5.4 |
|
MD-88 |
|
|
66 |
|
|
|
49 |
|
|
|
2 |
|
|
|
117 |
|
|
|
20.5 |
|
MD-90 |
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
19 |
|
|
|
14.9 |
|
DC-9 |
|
|
39 |
|
|
|
|
|
|
|
|
|
|
|
39 |
|
|
|
34.1 |
|
CRJ-100 |
|
|
21 |
|
|
|
13 |
|
|
|
23 |
|
|
|
57 |
|
|
|
12.9 |
|
CRJ-200 |
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
8 |
|
|
|
12.6 |
|
CRJ-700 |
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
15 |
|
|
|
7.1 |
|
CRJ-900 |
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
13 |
|
|
|
3.1 |
|
|
|
|
|
|
Total |
|
|
591 |
|
|
|
113 |
|
|
|
111 |
|
|
|
815 |
|
|
|
15.1 |
|
|
The above table:
|
|
|
Excludes all grounded aircraft, including 28 DC-9 and 13 CRJ-100 aircraft, which were grounded during the year ended December 31, 2010; and |
|
|
|
|
Excludes 175 CRJ-200, 51 CRJ-900, 36 Embraer 175, 26 SAAB 340+ and 12 CRJ-700
aircraft flown by our third party contract carriers. For additional information, see Note 7
of the Notes to the Consolidated Financial Statements. |
|
|
During 2010, we had the following activity: |
|
|
|
Purchased 22 B-737-800 (20 of which were immediately sold to third parties) and
two B-777-200LR; |
|
|
|
|
Purchased 12 previously owned MD-90 aircraft and the following aircraft off
lease: 10 B-767-300, four B-757-200, three MD-88 and one B-767-300ER aircraft; and |
|
|
|
|
Entered into an agreement to lease from a third party eight previously owned
MD-90 aircraft. Two of these aircraft were delivered in 2010, and the remainder will be
delivered in 2011. |
Aircraft Purchase Commitments
Our aircraft purchase commitments at December 31, 2010 relate to 18 B-787-8 aircraft and 12
previously owned MD-90 aircraft. During 2010, we entered into an agreement with The Boeing Company
to reaffirm our previous orders for 18 B-787-8 aircraft and to defer delivery of those aircraft
from 2008-2010 to 2020-2022. Our aircraft purchase commitments do not include orders for five
A319-100 aircraft and two A320-200 aircraft because we have the right to cancel these orders.
20
Aircraft on Option
Our options to purchase additional aircraft at December 31, 2010 are shown in the following
table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delivery in Calendar Years Ending |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After |
|
|
|
|
|
Rolling |
Aircraft on Option(1) |
|
2012 |
|
2013 |
|
2014 |
|
2014 |
|
Total |
|
Options |
|
B-737-800 |
|
|
16 |
|
|
|
30 |
|
|
|
14 |
|
|
|
|
|
|
|
60 |
|
|
|
78 |
|
B-767-300ER |
|
|
|
|
|
|
1 |
|
|
|
1 |
|
|
|
3 |
|
|
|
5 |
|
|
|
|
|
B-767-400 |
|
|
1 |
|
|
|
2 |
|
|
|
2 |
|
|
|
5 |
|
|
|
10 |
|
|
|
|
|
B-777-200LR |
|
|
2 |
|
|
|
4 |
|
|
|
4 |
|
|
|
4 |
|
|
|
14 |
|
|
|
|
|
EMB 175 |
|
|
4 |
|
|
|
18 |
|
|
|
14 |
|
|
|
|
|
|
|
36 |
|
|
|
|
|
|
Total |
|
|
23 |
|
|
|
55 |
|
|
|
35 |
|
|
|
12 |
|
|
|
125 |
|
|
|
78 |
|
|
|
|
|
(1) |
|
Aircraft options have scheduled delivery slots, while rolling options replace
options and are assigned delivery slots as options expire or are exercised. |
Ground Facilities
We lease most of the land and buildings that we occupy. Our largest aircraft maintenance base,
various computer, cargo, flight kitchen and training facilities and most of our principal offices
are located at or near the Atlanta airport, on land leased from the City of Atlanta generally under
long-term leases. We own our Atlanta reservations center, other real property in Atlanta and the
former Northwest headquarters building and flight training buildings, which are located near the
Minneapolis-St. Paul International Airport. Other owned facilities include reservations centers in
Minot, North Dakota and Chisholm, Minnesota, and a data processing center in Eagan, Minnesota. We
also own property in Tokyo, including a 1.3-acre site in downtown Tokyo and a 33-acre land parcel,
512-room hotel and flight kitchen located near Tokyos Narita International Airport.
We lease ticket counter and other terminal space, operating areas and air cargo facilities in
most of the airports that we serve. At most airports, we have entered into use agreements which
provide for the non-exclusive use of runways, taxiways, and other improvements and facilities;
landing fees under these agreements normally are based on the number of landings and weight of
aircraft. These leases and use agreements generally run for periods of less than one year to 30
years or more, and often contain provisions for periodic adjustments of lease rates, landing fees
and other charges applicable under that type of agreement. Examples of major leases and use
agreements at hub or other significant airports that will expire in the next few years include,
among others: (1) our Salt Lake City International Airport use and lease agreement, which expires
in 2013; and (2) our Memphis International Airport use and lease agreement, which expires in 2011.
We also lease aircraft maintenance facilities and air cargo facilities at certain airports,
including, among others: (1) our main Atlanta maintenance base; (2) our Atlanta air cargo
facilities and our hangar and air cargo facilities at the Cincinnati/Northern Kentucky
International Airport, Salt Lake City International Airport, Detroit Metropolitan International
Airport, Minneapolis-St. Paul International Airport and Seattle-Tacoma International Airport. Our
aircraft maintenance facility leases generally require us to pay the cost of providing, operating
and maintaining such facilities, including, in some cases, amounts necessary to pay debt service on
special facility bonds issued to finance their construction. We also lease marketing, ticketing and
reservations offices in certain locations for varying terms.
In recent years, some airports have increased or sought to increase the rates charged to
airlines to levels that we believe are unreasonable. The extent to which such charges are limited
by statute or regulation and the ability of airlines to contest such charges has been subject to
litigation and to administrative proceedings before the DOT. If the limitations on such charges are
relaxed, or the ability of airlines to challenge such proposed rate increases is restricted, the
rates charged by airports to airlines may increase substantially.
The City of Atlanta is currently implementing portions of a 10 year capital improvement
program (the CIP) at the Atlanta airport. The CIP includes, among other things, a 9,000 foot
full-service runway that opened in May 2006, related airfield improvements, additional terminal and
gate capacity, new cargo and other support facilities and roadway and other infrastructure
improvements. The CIP will not be complete until at least 2012, with individual projects scheduled
to be constructed at different times. A combination of federal grants, passenger facility charge
revenues, increased user rentals and fees, and other airport funds are expected to be used to pay
CIP costs directly and through the payment of debt service on bonds.
21
During the December 2010 quarter, we began a redevelopment project at JFK, where we currently
operate primarily at Terminal 2 for domestic flights and Terminal 3 for international flights under leases with the Port Authority of New York and New Jersey (Port Authority). We estimate
this project will cost approximately $1.2 billion and will be completed in stages over
five years. We also conduct some flights from Terminal 4, which is operated by JFK International
Air Terminal, LLC, a private party, under a lease with the Port Authority. Our JFK
redevelopment project includes the (1) enhancement and expansion of Terminal 4, including the
construction of nine new gates; (2) construction of a passenger connector between Terminal 2 and
Terminal 4; (3) demolition of the outdated Terminal 3 facilities; and (4) development of the
Terminal 3 site for aircraft parking positions. Upon completion of the Terminal 4 expansion,
expected to occur in 2013, we will relocate our operations from Terminal 3 to Terminal 4, proceed
with demolition activities in Terminal 3 and thereafter conduct coordinated flight operations from
Terminals 2 and 4. For information about special project bonds issued to fund a substantial
majority of the project and our 30 year sublease of space in Terminal 4 from the operator of
Terminal 4, see Note 8 of the Notes to the Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
First Bag Fee Antitrust Litigation
In May, June and July, 2009, a number of purported class action antitrust lawsuits were filed
in the U.S. District Courts for the Northern District of Georgia, the Middle District of Florida,
and the District of Nevada, against Delta and AirTran Airways (AirTran). The plaintiffs
originally alleged that Delta and AirTran engaged in collusive behavior in violation of Section 1
of the Sherman Act in November 2008 based upon certain public statements made in October 2008 by
AirTrans CEO at an analyst conference concerning fees for the first checked bag, Deltas
imposition of a fee for the first checked bag on November 4, 2008 and AirTrans imposition of a
similar fee on November 12, 2008. The plaintiffs sought to assert claims on behalf of an alleged
class consisting of passengers who paid the first bag fee after December 5, 2008 and seek
injunctive relief and unspecified treble damages. All of these cases have been consolidated for
pre-trial proceedings in the Northern District of Georgia by the Multi-District Litigation (MDL)
Panel.
In February 2010, the plaintiffs in the MDL proceeding filed a consolidated amended class
action complaint which substantially expanded the scope of the original complaint. In the
consolidated amended complaint, plaintiffs added new allegations concerning alleged signaling by
both Delta and AirTran based upon statements made to the investment community by both carriers
relating to industry capacity levels during 2008-2009. Plaintiffs also added a new cause of action
against Delta alleging attempted monopolization in violation of Section 2 of the Sherman Act,
paralleling a claim previously asserted against AirTran but not Delta.
In August 2010, the District Court issued an order granting Deltas motion to dismiss the
Section 2 claim, but denying its motion to dismiss the Section 1 claim. Plaintiffs have filed a
motion to certify the Section 1 class, which Delta has opposed. This motion remains pending. We
believe the claims in these cases are without merit and are vigorously defending these lawsuits.
Canadian Passenger Surcharge Antitrust Litigation
On July 31, 2009, two parallel putative class actions were filed against a number of Canadian,
Asian, European, and U.S. carriers (including Delta) in the Ontario Superior Court of Justice. Both
allege that the defendants colluded to fix the price of passenger surcharges, in Canada-Asia and
Canada-Europe markets respectively. There are no allegations in the complaints of any specific act
by Delta in furtherance of either conspiracy. The complaints seek damages in excess of $100
million. We believe the allegations against Delta are without merit and intend to vigorously defend
these cases.
***
For a discussion of certain environmental matters, see BusinessEnvironmental Matters in
Item 1.
22
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
Market Information
Our common stock is listed on the New York Stock Exchange. The following table sets forth for
the periods indicated the highest and lowest sales price for our common stock as reported on the
NYSE.
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
High |
|
Low |
|
Fiscal 2009 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
12.65 |
|
|
$ |
3.51 |
|
Second Quarter |
|
$ |
8.27 |
|
|
$ |
5.31 |
|
Third Quarter |
|
$ |
9.88 |
|
|
$ |
5.56 |
|
Fourth Quarter |
|
$ |
12.08 |
|
|
$ |
6.78 |
|
|
Fiscal 2010 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
14.90 |
|
|
$ |
10.93 |
|
Second Quarter |
|
$ |
14.94 |
|
|
$ |
10.90 |
|
Third Quarter |
|
$ |
12.80 |
|
|
$ |
9.60 |
|
Fourth Quarter |
|
$ |
14.54 |
|
|
$ |
10.96 |
|
|
Holders
As of January 31, 2011, there were approximately 3,670 holders of record of our common
stock.
Dividends
We expect to retain any future earnings to fund our operations and meet our cash and liquidity
needs. In addition, our ability to pay dividends or repurchase common stock is restricted under
several of our credit facilities. Therefore, we do not anticipate paying any dividends on our
common stock or repurchasing common stock for the foreseeable future.
23
Stock Performance Graph
The following graph compares the cumulative total returns during the period from April 30,
2007 to December 31, 2010 of our common stock to the Standard & Poors 500 Stock Index and the Amex
Airline Index. The comparison assumes $100 was invested on April 30, 2007 in each of our common
stock and the indices and assumes that all dividends were reinvested. Data for periods prior to
April 30, 2007 is not shown because of the period we were in bankruptcy and the lack of
comparability of financial results before and after April 30, 2007.
The Amex Airline Index (ticker symbol XAL) consists of Alaska Air Group, Inc., AMR
Corporation, Copa Holdings SA, Delta, GOL Linhas Areas Inteligentes S.A., JetBlue Airways
Corporation, LAN Airlines SA ADS, Ryanair Holdings plc, SkyWest, Inc., Southwest Airlines Company,
TAM S.A. ADS, United Continental Holdings, Inc., and US Airways Group, Inc.
Issuer Purchases of Equity Securities
We withheld the following shares of common stock to satisfy tax withholding obligations during
the December 2010 quarter from the distributions described below. These shares may be deemed to be
issuer purchases of shares that are required to be disclosed pursuant to this Item.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares (or Approximate |
|
|
Total |
|
|
|
|
|
Total Number of Shares |
|
Dollar Value) of Shares |
|
|
Number of |
|
Average |
|
Purchased as Part of |
|
That May Yet Be |
|
|
Shares |
|
Price Paid |
|
Publicly Announced |
|
Purchased Under the |
Period |
|
Purchased(1) |
|
Per Share |
|
Plans or Programs(1) |
|
Plan or Programs |
|
October 1-31, 2010 |
|
|
49,511 |
|
|
$ |
12.01 |
|
|
|
49,511 |
|
|
|
(1) |
|
November 1-30, 2010 |
|
|
14,014 |
|
|
$ |
13.53 |
|
|
|
14,014 |
|
|
|
(1) |
|
December 1-31, 2010 |
|
|
2,364 |
|
|
$ |
13.88 |
|
|
|
2,364 |
|
|
|
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
65,889 |
|
|
|
|
|
|
|
65,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Shares were withheld from employees to satisfy certain tax obligations due in
connection with grants of stock under our 2007 Performance Compensation Plan. The 2007
Performance Compensation Plan and Deltas Plan of Reorganization both provide for the
withholding of shares to satisfy tax obligations. Neither specifies a maximum number of shares
that can be withheld for this purpose. See Note 11 and Note 13 of the Notes to the
Consolidated Financial Statements elsewhere in this Form 10-K for more information about
Deltas Plan of Reorganization and the 2007 Performance Compensation Plan, respectively. |
24
ITEM 6. SELECTED FINANCIAL DATA
On October 29, 2008, a wholly-owned subsidiary of ours merged with and into Northwest Airlines
Corporation. Our Consolidated Financial Statements include the results of operations of Northwest
and its wholly-owned subsidiaries for the period from October 30 to December 31, 2008. For
additional information regarding purchase accounting, see Note 12 of the Notes to the Consolidated
Financial Statements.
On September 15, 2005, we and substantially all of our subsidiaries (the Delta Debtors)
filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. On April
30, 2007 (the Effective Date), the Delta Debtors emerged from bankruptcy. Upon emergence from
Chapter 11, we adopted fresh start reporting which resulted in our becoming a new entity for
financial reporting purposes. Accordingly, consolidated financial data on or after May 1, 2007 is
not comparable to the consolidated financial data prior to that date.
References in the tables below to Successor refer to Delta on or after May 1, 2007, after
giving effect to (1) the cancellation of Delta common stock issued prior to the Effective Date, (2)
the issuance of new Delta common stock and certain debt securities in accordance with the Delta
Debtors Joint Plan of Reorganization, and (3) the application of fresh start reporting. References
to Predecessor refer to Delta prior to May 1, 2007.
The following tables are derived from our audited consolidated financial statements, and
present selected financial and operating data for the (1) years ended December 31, 2010, 2009 and
2008 of the Successor, (2) eight months ended December 31, 2007 of the Successor, (3) four months
ended April 30, 2007 of the Predecessor and (4) year ended December 31, 2006 of the Predecessor.
Consolidated Summary of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
Predecessor |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight |
|
Four |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Months |
|
Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended |
|
Ended |
|
Year Ended |
|
|
Year Ended December 31, |
|
December 31, |
|
April 30, |
|
December 31, |
(in millions, except share data) |
|
2010(1) |
|
2009(2) |
|
2008(3) |
|
2007 |
|
2007(4) |
|
2006(5) |
|
|
|
Operating revenue |
|
$ |
31,755 |
|
|
$ |
28,063 |
|
|
$ |
22,697 |
|
|
$ |
13,358 |
|
|
$ |
5,796 |
|
|
$ |
17,532 |
|
Operating expense |
|
|
29,538 |
|
|
|
28,387 |
|
|
|
31,011 |
|
|
|
12,562 |
|
|
|
5,496 |
|
|
|
17,474 |
|
|
|
|
Operating income (loss) |
|
|
2,217 |
|
|
|
(324 |
) |
|
|
(8,314 |
) |
|
|
796 |
|
|
|
300 |
|
|
|
58 |
|
Interest expense, net |
|
|
(1,185 |
) |
|
|
(1,251 |
) |
|
|
(613 |
) |
|
|
(276 |
) |
|
|
(248 |
) |
|
|
(801 |
) |
Miscellaneous, net |
|
|
(424 |
) |
|
|
(6 |
) |
|
|
(114 |
) |
|
|
5 |
|
|
|
27 |
|
|
|
(19 |
) |
|
|
|
Income (loss) before
reorganization items, net |
|
|
608 |
|
|
|
(1,581 |
) |
|
|
(9,041 |
) |
|
|
525 |
|
|
|
79 |
|
|
|
(762 |
) |
Reorganization items, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,215 |
|
|
|
(6,206 |
) |
|
|
|
Income (loss) before income taxes |
|
|
608 |
|
|
|
(1,581 |
) |
|
|
(9,041 |
) |
|
|
525 |
|
|
|
1,294 |
|
|
|
(6,968 |
) |
Income tax (provision) benefit |
|
|
(15 |
) |
|
|
344 |
|
|
|
119 |
|
|
|
(211 |
) |
|
|
4 |
|
|
|
765 |
|
|
|
|
Net income (loss) |
|
|
593 |
|
|
|
(1,237 |
) |
|
|
(8,922 |
) |
|
|
314 |
|
|
|
1,298 |
|
|
|
(6,203 |
) |
Preferred stock dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
|
Net income (loss) attributable
to common stockholders |
|
$ |
593 |
|
|
$ |
(1,237 |
) |
|
$ |
(8,922 |
) |
|
$ |
314 |
|
|
$ |
1,298 |
|
|
$ |
(6,205 |
) |
|
|
|
Basic earnings (loss) per share |
|
$ |
0.71 |
|
|
$ |
(1.50 |
) |
|
$ |
(19.08 |
) |
|
$ |
0.80 |
|
|
$ |
6.58 |
|
|
$ |
(31.58 |
) |
|
|
|
Diluted earnings (loss) per share |
|
$ |
0.70 |
|
|
$ |
(1.50 |
) |
|
$ |
(19.08 |
) |
|
$ |
0.79 |
|
|
$ |
4.63 |
|
|
$ |
(31.58 |
) |
|
|
|
|
|
|
(1) |
|
Includes (a) $450 million, or $0.53 diluted loss per share, in
restructuring and merger-related charges primarily associated with (i) Northwest and the
integration of Northwest operations into Delta and (ii) asset impairment charges related to
the initiative to substantially reduce our 50-seat aircraft fleet and retired dedicated
freighter aircraft and (b) $401 million, or $0.48 diluted loss per share, primarily
due to a loss on extinguishment of debt. |
|
(2) |
|
Includes (a) $407 million, or $0.49 diluted loss per share, in restructuring and
merger-related charges associated with (i) Northwest and the integration of Northwest
operations into Delta and (ii) severance and related costs, (b) an $83 million, or $0.10
diluted loss per share, non-cash loss for the write-off of the unamortized discount on the
extinguishment of certain Northwest debt and (c) a non-cash income tax benefit of $321
million, or $0.39 diluted earnings per share, from our consideration of all income sources,
including other comprehensive income. |
|
(3) |
|
Includes a $7.3 billion non-cash charge, or $15.59 diluted loss per share, from an
impairment of goodwill and other intangible assets and $1.1 billion, or $2.42 diluted loss per
share, in primarily non-cash merger-related charges relating to the issuance or vesting of
employee equity awards in connection with our merger with Northwest. |
|
(4) |
|
Includes a $1.2 billion non-cash gain, or $5.20 diluted earnings per share, for
reorganization items. |
25
|
|
|
(5) |
|
Includes a $6.2 billion non-cash charge, or $31.58 diluted loss per share, for
reorganization items, a $310 million non-cash charge, or $1.58 diluted loss per share,
associated with certain accounting adjustments and a $765 million income tax benefit, or $3.89
diluted earnings per share. |
Other Financial and Statistical Data
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
Predecessor |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight Months |
|
Four Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended |
|
Ended |
|
Year Ended |
|
|
Year Ended December 31, |
|
December 31, |
|
April 30, |
|
December 31, |
Consolidated(1) |
|
2010 |
|
2009 |
|
2008 |
|
2007 |
|
2007 |
|
2006 |
|
|
|
Revenue passenger miles (millions) |
|
|
193,169 |
|
|
|
188,943 |
|
|
|
134,879 |
|
|
|
85,029 |
|
|
|
37,036 |
|
|
|
116,133 |
|
Available seat miles (millions) |
|
|
232,684 |
|
|
|
230,331 |
|
|
|
165,639 |
|
|
|
104,427 |
|
|
|
47,337 |
|
|
|
147,995 |
|
Passenger mile yield |
|
|
14.11 |
¢ |
|
|
12.60 |
¢ |
|
|
14.52 |
¢ |
|
|
13.88 |
¢ |
|
|
13.84 |
¢ |
|
|
13.34 |
¢ |
Passenger revenue per available seat
mile |
|
|
11.71 |
¢ |
|
|
10.34 |
¢ |
|
|
11.82 |
¢ |
|
|
11.30 |
¢ |
|
|
10.83 |
¢ |
|
|
10.47 |
¢ |
Operating cost per available seat mile |
|
|
12.69 |
¢ |
|
|
12.32 |
¢ |
|
|
18.72 |
¢ |
|
|
12.03 |
¢ |
|
|
11.61 |
¢ |
|
|
11.80 |
¢ |
Passenger load factor |
|
|
83.0 |
% |
|
|
82.0 |
% |
|
|
81.4 |
% |
|
|
81.4 |
% |
|
|
78.2 |
% |
|
|
78.5 |
% |
Fuel gallons consumed (millions) |
|
|
3,823 |
|
|
|
3,853 |
|
|
|
2,740 |
|
|
|
1,742 |
|
|
|
792 |
|
|
|
2,480 |
|
Average price per fuel gallon, net of
hedging |
|
$ |
2.33 |
|
|
$ |
2.15 |
|
|
$ |
3.16 |
|
|
$ |
2.38 |
|
|
$ |
1.93 |
|
|
$ |
2.12 |
|
Full-time equivalent employees, end
of period |
|
|
79,684 |
|
|
|
81,106 |
|
|
|
84,306 |
|
|
|
55,044 |
|
|
|
52,704 |
|
|
|
51,322 |
|
|
|
|
|
|
|
(1) |
|
Includes the operations of our contract carriers under capacity purchase
agreements; full-time equivalent employees excludes employees of contract carriers we do not
own. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
Predecessor |
|
|
December 31, |
|
December 31, |
(in millions) |
|
2010 |
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
Total assets |
|
$ |
43,188 |
|
|
$ |
43,789 |
|
|
$ |
45,084 |
|
|
$ |
32,423 |
|
|
$ |
19,622 |
|
Long-term debt and capital leases
(including current maturities) |
|
$ |
15,252 |
|
|
$ |
17,198 |
|
|
$ |
16,571 |
|
|
$ |
9,000 |
|
|
$ |
8,012 |
|
Stockholders equity (deficit) |
|
$ |
897 |
|
|
$ |
245 |
|
|
$ |
874 |
|
|
$ |
10,113 |
|
|
$ |
(13,593 |
) |
Common stock outstanding |
|
|
835 |
|
|
|
784 |
|
|
|
695 |
|
|
|
292 |
|
|
|
197 |
|
|
26
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General Information
We provide scheduled air transportation for passengers and cargo throughout the United States
(U.S.) and around the world. On October 29, 2008 (the Closing Date), a wholly-owned subsidiary
of ours merged (the Merger) with and into Northwest Airlines Corporation. On the Closing Date,
Northwest Airlines Corporation and its wholly-owned subsidiaries, including Northwest Airlines,
Inc. (collectively, Northwest), became wholly-owned subsidiaries of Delta. On December 31, 2009,
Northwest Airlines, Inc. merged with and into Delta. As a result of this merger, Northwest
Airlines, Inc. ceased to exist as a separate entity.
Results of Operations 2010 Compared to 2009
We reported net income of $593 million for 2010, compared to a net loss of $1.2 billion for
2009. This $1.8 billion improvement primarily reflects a strengthening of the airline industry
revenue environment. In 2010, we recorded special items totaling $851 million in expenses,
including $450 million of restructuring and merger-related items and $401 million primarily due to a loss on extinguishment of
debt. In 2009, our special items totaled $169 million in net expenses. Operating
margin excluding special items (a non-GAAP financial measure as defined in Supplemental
Information below) was 8.4% in 2010, compared to 0.3% in 2009.
Operating Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
Year Ended December 31, |
|
Increase |
|
Increase |
(in millions) |
|
2010 |
|
2009 |
|
(Decrease) |
|
(Decrease) |
|
Passenger: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mainline |
|
$ |
21,408 |
|
|
$ |
18,522 |
|
|
$ |
2,886 |
|
|
|
16 |
% |
Regional carriers |
|
|
5,850 |
|
|
|
5,285 |
|
|
|
565 |
|
|
|
11 |
% |
|
|
|
|
|
Total passenger revenue |
|
|
27,258 |
|
|
|
23,807 |
|
|
|
3,451 |
|
|
|
14 |
% |
Cargo |
|
|
850 |
|
|
|
788 |
|
|
|
62 |
|
|
|
8 |
% |
Other |
|
|
3,647 |
|
|
|
3,468 |
|
|
|
179 |
|
|
|
5 |
% |
|
|
|
|
|
Total operating revenue |
|
$ |
31,755 |
|
|
$ |
28,063 |
|
|
$ |
3,692 |
|
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) |
|
|
|
|
|
|
vs. Year Ended December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger |
|
|
|
|
|
|
|
|
Year Ended |
|
Passenger |
|
RPMs |
|
ASMs |
|
Mile |
|
|
|
|
|
Load |
(in millions) |
|
December 31, 2010 |
|
Revenue |
|
(Traffic) |
|
(Capacity) |
|
Yield |
|
PRASM |
|
Factor |
|
Domestic |
|
$ |
11,878 |
|
|
|
11 |
% |
|
|
1 |
% |
|
|
2 |
% |
|
|
9 |
% |
|
|
9 |
% |
|
(0.3)pts |
Atlantic |
|
|
5,152 |
|
|
|
18 |
% |
|
|
0 |
% |
|
|
(3 |
)% |
|
|
18 |
% |
|
|
21 |
% |
|
2.3 pts |
Pacific |
|
|
2,806 |
|
|
|
38 |
% |
|
|
14 |
% |
|
|
9 |
% |
|
|
21 |
% |
|
|
26 |
% |
|
7.3 pts |
Latin America |
|
|
1,572 |
|
|
|
13 |
% |
|
|
4 |
% |
|
|
3 |
% |
|
|
8 |
% |
|
|
10 |
% |
|
1.0 pts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mainline |
|
|
21,408 |
|
|
|
16 |
% |
|
|
3 |
% |
|
|
2 |
% |
|
|
12 |
% |
|
|
14 |
% |
|
1.0 pts |
Regional carriers |
|
|
5,850 |
|
|
|
11 |
% |
|
|
(1 |
)% |
|
|
(2 |
)% |
|
|
12 |
% |
|
|
13 |
% |
|
1.0 pts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total passenger revenue |
|
$ |
27,258 |
|
|
|
14 |
% |
|
|
2 |
% |
|
|
1 |
% |
|
|
12 |
% |
|
|
13 |
% |
|
1.0 pts |
|
Mainline Passenger Revenue. Mainline passenger revenue increased primarily due to increased
business demand for air travel and an increase in fares, largely due to the strengthening of the
airline industry revenue environment. During 2009, weakened demand for air travel from the global
recession and the effects of the H1N1 virus and related capacity reductions had a significant
negative impact on our mainline passenger revenue.
|
|
|
Domestic Passenger Revenue. Domestic passenger revenue increased 11% from a 9% increase
in PRASM on a 0.3 point decrease in load factor and a 2% increase in capacity. The passenger mile yield increased 9%, reflecting an
increase in business travel and an increase in fares. |
|
|
|
|
International Passenger Revenue. International passenger revenue increased 22% from a
21% increase in PRASM and a 2.4 point increase in load factor on a 1% increase in capacity.
The passenger mile yield increased 17%, reflecting an increase in demand for air travel and
an increase in fares. |
27
Regional carriers. Passenger revenue of regional carriers increased 11% from a 13% increase in
PRASM and a 1.0 point increase in load factor on a 2% decline in capacity. The passenger mile yield
increased 12%, reflecting an increase in demand for air travel and an increase in fares.
Cargo. Cargo revenue increased due to a 13% increase in yield and a 25% increase in volume,
primarily in international markets, partially offset by capacity reductions due to the retirement
of our dedicated freighter aircraft in 2009.
Other. Other revenue increased due to higher baggage fee revenue from an increased volume of
checked bags.
Operating Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
|
|
December 31, |
|
Increase |
|
% Increase |
(in millions) |
|
2010 |
|
2009 |
|
(Decrease) |
|
(Decrease) |
|
Aircraft fuel and related taxes |
|
$ |
7,594 |
|
|
$ |
7,384 |
|
|
$ |
210 |
|
|
|
3 |
% |
Salaries and related costs |
|
|
6,751 |
|
|
|
6,838 |
|
|
|
(87 |
) |
|
|
(1 |
)% |
Contract carrier arrangements |
|
|
4,305 |
|
|
|
3,823 |
|
|
|
482 |
|
|
|
13 |
% |
Aircraft maintenance materials and outside repairs |
|
|
1,569 |
|
|
|
1,434 |
|
|
|
135 |
|
|
|
9 |
% |
Contracted services |
|
|
1,549 |
|
|
|
1,595 |
|
|
|
(46 |
) |
|
|
(3 |
)% |
Depreciation and amortization |
|
|
1,511 |
|
|
|
1,536 |
|
|
|
(25 |
) |
|
|
(2 |
)% |
Passenger commissions and other selling expenses |
|
|
1,509 |
|
|
|
1,405 |
|
|
|
104 |
|
|
|
7 |
% |
Landing fees and other rents |
|
|
1,281 |
|
|
|
1,289 |
|
|
|
(8 |
) |
|
|
(1 |
)% |
Passenger service |
|
|
673 |
|
|
|
638 |
|
|
|
35 |
|
|
|
5 |
% |
Aircraft rent |
|
|
387 |
|
|
|
480 |
|
|
|
(93 |
) |
|
|
(19 |
)% |
Profit sharing |
|
|
313 |
|
|
|
|
|
|
|
313 |
|
|
NM(1) |
Restructuring and merger-related items |
|
|
450 |
|
|
|
407 |
|
|
|
43 |
|
|
|
11 |
% |
Other |
|
|
1,646 |
|
|
|
1,558 |
|
|
|
88 |
|
|
|
6 |
% |
|
|
|
|
|
Total operating expense |
|
$ |
29,538 |
|
|
$ |
28,387 |
|
|
$ |
1,151 |
|
|
|
4 |
% |
|
On July 1, 2010, we sold Compass Airlines, Inc. (Compass) and Mesaba Aviation, Inc.
(Mesaba) to Trans States Airlines, Inc. (Trans States) and Pinnacle Airlines Corp.
(Pinnacle), respectively. Upon the closing of these transactions, we entered into new or amended
long-term capacity purchase agreements with Compass, Mesaba and Pinnacle. Prior to these sales,
expenses related to Compass and Mesaba as our wholly-owned subsidiaries were reported in the
applicable expense line items. Subsequent to these sales, expenses related to Compass and Mesaba
are reported as contract carrier arrangements expense.
Aircraft fuel and related taxes. Aircraft fuel and related taxes increased due to higher
average unhedged fuel prices, which increased fuel costs $1.6 billion, partially offset by
reductions of $1.3 billion in fuel hedge costs and $156 million from the change in reporting described above due to the transactions involving
Compass and Mesaba. We recorded $89 million in net fuel hedge costs for 2010, compared to $1.4
billion in 2009. The fuel hedge costs for 2009 were primarily from losses on hedge contracts purchased in
2008 when fuel prices reached record highs and were expected to continue to rise but instead
declined.
Contract carrier arrangements. Contract carrier arrangements expense increased primarily due
to higher average fuel prices and the change in reporting described above due to the transactions involving Compass and Mesaba.
Aircraft maintenance materials and outside repairs. Aircraft maintenance materials and outside
repairs expense increased primarily due to returning aircraft to service after temporary storage,
as well as the timing of engine and airframe maintenance volumes.
Passenger commissions and other selling expenses. Passenger commissions and other selling
expenses increased primarily due to higher revenue-related expenses, such as booking fees and sales
commissions, from the increase in revenue.
Profit sharing. We recorded $313 million related to our broad-based employee profit sharing
plans for 2010. We did not record any profit sharing expense in 2009. Our broad-based profit
sharing plans provide that, for each year in which we have an annual pre-tax profit (as defined in
the plan document), we will pay a specified portion of that profit to eligible employees.
28
Restructuring and merger-related items. Restructuring and merger-related items increased
primarily due to the following:
|
|
|
During 2010, we recorded a $268 million charge primarily for merger-related items and
$182 million in asset impairment charges related to the initiative to substantially reduce
our 50-seat aircraft and the retired dedicated freighter aircraft. |
|
|
|
|
During 2009, we recorded a $288 million charge primarily for merger-related items and a
$119 million charge in connection with employee workforce reduction programs. |
Other (Expense) Income
Other expense, net for 2010 was $1.6 billion, compared to $1.3 billion for 2009. This change
is attributable to the following:
|
|
|
|
|
|
|
(Unfavorable) Favorable vs. |
|
|
Year Ended |
(in millions) |
|
December 31, 2009 |
|
Loss on extinguishment of debt |
|
$ |
(308 |
) |
Net interest expense |
|
|
(88 |
) |
Mark-to-market adjustments on the ineffective portion of fuel hedge contracts |
|
|
(61 |
) |
Foreign currency exchange rates |
|
|
(52 |
) |
Amortization of debt discount, net |
|
|
154 |
|
Other |
|
|
3 |
|
|
Total other expense, net |
|
$ |
(352 |
) |
|
For additional information regarding our loss on extinguishment of debt and amortization of
debt discount, net, see Note 5 of the Notes to the Consolidated Financial Statements.
Income Taxes
We consider all income sources, including other comprehensive income, in determining the
amount of tax benefit allocated to continuing operations. For 2010, we recorded an
income tax provision of $15 million, primarily related to international and state income taxes. We
did not record an income tax provision for U.S. federal income tax purposes since our deferred tax
assets are fully reserved by a valuation allowance.
For 2009, we recorded an income tax benefit of $344 million, including a non-cash income tax
benefit of $321 million on the loss from continuing operations, with an offsetting non-cash income
tax expense of $321 million on other comprehensive income. We did not record an income tax benefit
for U.S. federal income tax purposes in 2009 since our deferred tax assets are fully reserved by a
valuation allowance.
At December 31, 2010, we had $17.1 billion of U.S. federal pre-tax net operating loss
carryforwards. Accordingly, we believe we will not pay any cash federal income taxes during the
next several years. Our U.S. federal pre-tax net operating loss carryforwards do not begin to expire
until 2022.
Results of Operations 2009 GAAP Compared to 2008 Combined
In this section, we compare Deltas results of operations under GAAP for the year ended
December 31, 2009 with Deltas results of operations on a combined basis for the year ended
December 31, 2008. For this purpose, Deltas results of operations for 2008 on a combined basis
add (1) Deltas results of operations under GAAP for 2008, which includes Northwests results of operations from
October 30 to December 31, 2008 and (2) Northwests results of operations from January 1 to October 29, 2008.
This presentation of the 2008 financial results provides a more meaningful basis for comparing
Deltas financial performance in 2009 and 2008.
29
Deltas results of operations for 2008 on a combined basis are derived from our Consolidated Financial
Statements but are not presented in accordance with GAAP. Certain of this information is considered
non-GAAP financial measures under the U.S. Securities and Exchange Commission rules. The
non-GAAP financial measures should be considered in addition to results prepared in accordance with
GAAP, but should not be considered a substitute for or superior to GAAP results.
Operating Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP |
|
2008 |
|
2009 GAAP vs. 2008 Combined |
|
|
Year Ended |
|
GAAP |
|
Northwest |
|
Combined |
|
|
|
|
|
% |
|
|
December 31, |
|
Year Ended |
|
January 1 to |
|
Year Ended |
|
Increase |
|
Increase |
(in millions) |
|
2009 |
|
December 31 |
|
October 29 |
|
December 31 |
|
(Decrease) |
|
(Decrease) |
|
Passenger: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
10,737 |
|
|
$ |
8,580 |
|
|
$ |
4,872 |
|
|
$ |
13,452 |
|
|
$ |
(2,715 |
) |
|
|
(20 |
)% |
Atlantic |
|
|
4,357 |
|
|
|
4,390 |
|
|
|
1,450 |
|
|
|
5,840 |
|
|
|
(1,483 |
) |
|
|
(25 |
)% |
Pacific |
|
|
2,034 |
|
|
|
678 |
|
|
|
2,029 |
|
|
|
2,707 |
|
|
|
(673 |
) |
|
|
(25 |
)% |
Latin America |
|
|
1,394 |
|
|
|
1,489 |
|
|
|
131 |
|
|
|
1,620 |
|
|
|
(226 |
) |
|
|
(14 |
)% |
|
|
|
|
|
Total Mainline |
|
|
18,522 |
|
|
|
15,137 |
|
|
|
8,482 |
|
|
|
23,619 |
|
|
|
(5,097 |
) |
|
|
(22 |
)% |
Regional carriers |
|
|
5,285 |
|
|
|
4,446 |
|
|
|
1,643 |
|
|
|
6,089 |
|
|
|
(804 |
) |
|
|
(13 |
)% |
|
|
|
|
|
Total passenger revenue |
|
|
23,807 |
|
|
|
19,583 |
|
|
|
10,125 |
|
|
|
29,708 |
|
|
|
(5,901 |
) |
|
|
(20 |
)% |
Cargo |
|
|
788 |
|
|
|
686 |
|
|
|
667 |
|
|
|
1,353 |
|
|
|
(565 |
) |
|
|
(42 |
)% |
Other |
|
|
3,468 |
|
|
|
2,428 |
|
|
|
799 |
|
|
|
3,227 |
|
|
|
241 |
|
|
|
7 |
% |
|
|
|
|
|
Total operating revenue |
|
$ |
28,063 |
|
|
$ |
22,697 |
|
|
$ |
11,591 |
|
|
$ |
34,288 |
|
|
$ |
(6,225 |
) |
|
|
(18 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) |
|
|
GAAP |
|
2009 GAAP vs. 2008 Combined |
|
|
Year Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger |
|
|
|
|
|
|
|
|
December 31, |
|
Passenger |
|
|
|
|
|
ASMs |
|
Mile |
|
|
|
|
|
Load |
(in millions) |
|
2009 |
|
Revenue |
|
RPMs (Traffic) |
|
(Capacity) |
|
Yield |
|
PRASM |
|
Factor |
|
Domestic |
|
$ |
10,737 |
|
|
|
(20 |
)% |
|
|
(7 |
)% |
|
|
(8 |
)% |
|
|
(14 |
)% |
|
|
(14 |
)% |
|
pts |
Atlantic |
|
|
4,357 |
|
|
|
(25 |
)% |
|
|
(8 |
)% |
|
|
(9 |
)% |
|
|
(20 |
)% |
|
|
(19 |
)% |
|
0.9 pts |
Pacific |
|
|
2,034 |
|
|
|
(25 |
)% |
|
|
(12 |
)% |
|
|
(8 |
)% |
|
|
(14 |
)% |
|
|
(17 |
)% |
|
(3.5) pts |
Latin America |
|
|
1,394 |
|
|
|
(14 |
)% |
|
|
(2 |
)% |
|
|
(1 |
)% |
|
|
(12 |
)% |
|
|
(14 |
)% |
|
(1.3) pts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mainline |
|
|
18,522 |
|
|
|
(22 |
)% |
|
|
(8 |
)% |
|
|
(7 |
)% |
|
|
(15 |
)% |
|
|
(15 |
)% |
|
(0.3) pts |
Regional carriers |
|
|
5,285 |
|
|
|
(13 |
)% |
|
|
(1 |
)% |
|
|
0 |
% |
|
|
(13 |
)% |
|
|
(13 |
)% |
|
(0.1) pts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total passenger revenue |
|
$23,807 |
|
|
(20 |
)% |
|
|
(7 |
)% |
|
|
(6 |
)% |
|
|
(14 |
)% |
|
|
(14 |
)% |
|
(0.4) pts |
|
Mainline Passenger Revenue. Mainline passenger revenue decreased in 2009 compared to 2008 on a
combined basis primarily due to weakened demand for air travel from the global recession, capacity
reductions and the effects of the H1N1 virus on passenger travel. Passenger mile yield and PRASM
both declined 15%.
|
|
|
Domestic Passenger Revenue. Domestic passenger revenue decreased 20% from a 14%
decrease in PRASM on an 8% decline in capacity. The passenger mile yield decreased 14%,
reflecting (1) a reduction in business demand due to the global recession, (2) an overall
decrease in average fares due to competitive pricing pressures and (3) lower fuel
surcharges due to the year-over-year decline in fuel prices. |
|
|
|
|
International Passenger Revenue. International passenger revenue decreased 23% from a
17% decrease in PRASM on a 7% decline in capacity. The passenger mile yield decreased 17%,
reflecting (1) significantly reduced demand for international travel, (2) competitive
pricing pressures (especially in the Atlantic market, which experienced a 20% decrease in
passenger mile yield), primarily from a significant decrease in business demand due to the
global recession and (3) the impact of the H1N1 virus, most notably in the Pacific and
Latin America markets. The decrease in passenger mile yield in the Atlantic market also
reflects unfavorable foreign currency exchange rates and lower fuel surcharges due to the
year-over-year decline in fuel prices. |
Regional carriers. Passenger revenue of regional carriers declined $804 million primarily as a
result of a 13% decrease in passenger mile yield while traffic and capacity remained flat. The
decrease in passenger mile yield reflects a reduction in demand for air travel due to the global
recession and an overall decrease in average fares due to competitive pricing pressures.
30
Cargo. Cargo revenue decreased due to capacity reductions, significantly reduced cargo
yields and international volume as a result of the global recession, and lower fuel surcharges due
to the year-over-year decline in fuel prices. During 2009, we retired our remaining 10 dedicated
freighter aircraft, which contributed to a 40% decline in capacity.
Other. Other revenue increased $241 million primarily due to new or increased baggage handling
fees and higher SkyMiles program revenue, partially offset by decreased revenue from our alliance
agreements and a reduction in our aircraft maintenance and repair service.
Operating Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP |
|
2008 |
|
2009 GAAP vs. 2008 Combined |
|
|
Year Ended |
|
GAAP |
|
Northwest |
|
Combined |
|
|
|
|
|
% |
|
|
December 31, |
|
Year Ended |
|
January 1 to |
|
Year Ended |
|
Increase |
|
Increase |
(in millions) |
|
2009 |
|
December 31 |
|
October 29 |
|
December 31 |
|
(Decrease) |
|
(Decrease) |
|
Aircraft fuel and related taxes |
|
$ |
7,384 |
|
|
$ |
7,346 |
|
|
$ |
4,996 |
|
|
$ |
12,342 |
|
|
$ |
(4,958 |
) |
|
|
(40 |
)% |
Salaries and related costs |
|
|
6,838 |
|
|
|
4,329 |
|
|
|
2,220 |
|
|
|
6,549 |
|
|
|
289 |
|
|
|
4 |
% |
Contract carrier arrangements |
|
|
3,823 |
|
|
|
3,766 |
|
|
|
901 |
|
|
|
4,667 |
|
|
|
(844 |
) |
|
|
(18 |
)% |
Contracted services |
|
|
1,595 |
|
|
|
1,062 |
|
|
|
667 |
|
|
|
1,729 |
|
|
|
(134 |
) |
|
|
(8 |
)% |
Depreciation and amortization |
|
|
1,536 |
|
|
|
1,266 |
|
|
|
1,054 |
|
|
|
2,320 |
|
|
|
(784 |
) |
|
|
(34 |
)% |
Aircraft maintenance materials and
outside repairs |
|
|
1,434 |
|
|
|
1,169 |
|
|
|
612 |
|
|
|
1,781 |
|
|
|
(347 |
) |
|
|
(19 |
)% |
Passenger commissions and other
selling expenses |
|
|
1,405 |
|
|
|
1,030 |
|
|
|
737 |
|
|
|
1,767 |
|
|
|
(362 |
) |
|
|
(20 |
)% |
Landing fees and other rents |
|
|
1,289 |
|
|
|
787 |
|
|
|
456 |
|
|
|
1,243 |
|
|
|
46 |
|
|
|
4 |
% |
Passenger service |
|
|
638 |
|
|
|
440 |
|
|
|
210 |
|
|
|
650 |
|
|
|
(12 |
) |
|
|
(2 |
)% |
Aircraft rent |
|
|
480 |
|
|
|
307 |
|
|
|
184 |
|
|
|
491 |
|
|
|
(11 |
) |
|
|
(2 |
)% |
Impairment of goodwill and other
intangible assets |
|
|
|
|
|
|
7,296 |
|
|
|
3,841 |
|
|
|
11,137 |
|
|
|
(11,137 |
) |
|
NM |
Restructuring and merger-related
items |
|
|
407 |
|
|
|
1,131 |
|
|
|
225 |
|
|
|
1,356 |
|
|
|
(949 |
) |
|
|
(70 |
)% |
Other |
|
|
1,558 |
|
|
|
1,082 |
|
|
|
644 |
|
|
|
1,726 |
|
|
|
(168 |
) |
|
|
(10 |
)% |
|
|
|
|
|
Total operating expense |
|
$ |
28,387 |
|
|
$ |
31,011 |
|
|
$ |
16,747 |
|
|
$ |
47,758 |
|
|
$ |
(19,371 |
) |
|
|
(41 |
)% |
|
Aircraft fuel and related taxes. Aircraft fuel and related taxes decreased $5.0 billion in
2009 compared to 2008 on a combined basis primarily due to $4.8 billion associated with lower
average fuel prices and $858 million from a 7% decline in fuel consumption due to capacity
reductions. These decreases were partially offset by $1.4 billion in fuel hedge losses for 2009,
compared to $666 million in fuel hedge losses for 2008. The fuel hedge losses in 2009 are primarily
from hedges purchased in 2008 during the period fuel prices reached record highs and were expected
to continue to rise but instead declined.
Salaries and related costs. Salaries and related costs increased $289 million due to (1) pay
increases for pilot and non-pilot frontline employees, (2) higher pension expense from a decline in
the value of our defined benefit plan assets as a result of market conditions and (3) Delta airline
tickets awarded to employees as part of an employee recognition program. These increases were
partially offset by a 5% average decrease in headcount primarily related to workforce reduction
programs.
Contract carrier arrangements. Contract carrier arrangements expense decreased $844 million
primarily due to decreases of $714 million associated with lower average fuel prices and $119
million from a 7% decline in fuel consumption due to capacity reductions.
Depreciation and amortization. Depreciation and amortization decreased $784 million as a
result of $641 million in impairment related charges recorded in the year ended December 31, 2008,
primarily related to certain definite-lived intangible assets and aircraft, and $125 million
related to the December 2008 multi-year extension of our co-brand credit card relationship with
American Express (the American Express Agreement), extending the useful life of the American
Express Agreement intangible asset to the date the contract expires.
Aircraft maintenance materials and outside repairs. Aircraft maintenance materials and outside
repairs decreased $347 million primarily from capacity reductions.
31
Passenger commissions and other selling expenses. Passenger commissions and other selling
expenses decreased $362 million primarily in connection with the passenger revenue decrease.
Impairment of goodwill and other intangible assets. During 2008, we experienced a significant
decline in market capitalization primarily from record high fuel prices and overall airline
industry conditions. In addition, the announcement of our intention to merge with Northwest
established a stock exchange ratio based on the relative valuation of Delta and Northwest. We
determined goodwill was impaired and recorded a non-cash charge of $10.2 billion on a combined
basis. We also recorded a non-cash charge of $955 million on a combined basis to reduce the
carrying value of certain intangible assets based on their revised estimated fair values.
Restructuring and merger-related items. Restructuring and merger-related items decreased $949
million, primarily due to the following:
|
|
|
During 2009, we recorded a $288 million charge for merger-related items. |
|
|
|
|
For 2009, we recorded a $119 million charge in connection with employee workforce
reduction programs. |
|
|
|
|
During 2008, we recorded $1.2 billion primarily in non-cash, merger-related charges
related to the issuance or vesting of employee equity awards in connection with the Merger
and $114 million in restructuring and related charges in connection with voluntary
workforce reduction programs. In addition, we recorded charges of $25 million related to
the closure of certain facilities and $14 million associated with the early termination of
certain contract carrier arrangements. |
Other (Expense) Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP |
|
2008 |
|
|
|
|
Year Ended |
|
GAAP |
|
Northwest |
|
Combined |
|
|
|
|
December 31, |
|
Year Ended |
|
January 1 to |
|
Year Ended |
|
Favorable |
(in millions) |
|
2009 |
|
December 31 |
|
October 29 |
|
December 31 |
|
(Unfavorable) |
|
Interest expense |
|
$ |
(1,278 |
) |
|
$ |
(705 |
) |
|
$ |
(373 |
) |
|
$ |
(1,078 |
) |
|
$ |
(200 |
) |
Interest income |
|
|
27 |
|
|
|
92 |
|
|
|
86 |
|
|
|
178 |
|
|
|
(151 |
) |
Loss on extinguishment of debt |
|
|
(83 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(83 |
) |
Miscellaneous, net |
|
|
77 |
|
|
|
(114 |
) |
|
|
(230 |
) |
|
|
(344 |
) |
|
|
421 |
|
|
Total other expense, net |
|
$ |
(1,257 |
) |
|
$ |
(727 |
) |
|
$ |
(517 |
) |
|
$ |
(1,244 |
) |
|
$ |
(13 |
) |
|
Other expense, net for 2009 was $1.3 billion, compared to $1.2 billion for 2008 on a combined
basis. This change is primarily attributable to (1) a $200 million increase in interest expense
from increased amortization of debt discount, (2) a $151 million decrease in interest income
primarily from significantly reduced short-term interest rates, (3) an $83 million non-cash loss
for the write-off of the unamortized discount on the extinguishment of certain Northwest debt and
(4) a $421 million favorable change in miscellaneous, net due to the following:
|
|
|
|
|
|
|
Favorable (Unfavorable) |
|
|
2009 GAAP vs. |
(in millions) |
|
2008 Combined |
|
Miscellaneous, net |
|
|
|
|
Impairment in 2008 of minority ownership interest |
|
$ |
213 |
|
Foreign currency exchange rates |
|
|
99 |
|
Mark-to-market adjustments on the ineffective portion of fuel hedge contracts |
|
|
77 |
|
Loss on investments in 2008 |
|
|
41 |
|
Other |
|
|
(9 |
) |
|
Total miscellaneous, net |
|
$ |
421 |
|
|
32
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
GAAP |
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
GAAP |
|
Northwest |
|
Combined |
|
|
|
|
December 31, |
|
Year Ended |
|
January 1 to |
|
Year Ended |
|
|
(in millions) |
|
2009 |
|
December 31 |
|
October 29 |
|
December 31 |
|
Increase |
|
Income tax benefit |
|
$ |
344 |
|
|
$ |
119 |
|
|
$ |
211 |
|
|
$ |
330 |
|
|
$ |
14 |
|
|
We consider all income sources, including other comprehensive income, in determining the
amount of tax benefit allocated to continuing operations. For 2009, we recorded an
income tax benefit of $344 million, including a non-cash income tax benefit of $321 million on the
loss from continuing operations, with an offsetting non-cash income tax expense of $321 million on
other comprehensive income. We did not record an income tax benefit for U.S. federal income tax
purposes in 2009 since our deferred tax assets are fully reserved by a valuation allowance.
We recorded an income tax benefit of $330 million for 2008 on a combined basis due to the
impairment of our indefinite-lived intangible assets. The impairment of goodwill did not result in
an income tax benefit because goodwill is not deductible for income tax purposes. We did not record
an income tax benefit for U.S. federal income tax purposes as a result of the remaining loss for
2008. The deferred tax asset resulting from such a net operating loss is fully reserved by a
valuation allowance.
Financial Condition and Liquidity
We expect to meet our cash needs for the next 12 months from cash flows from operations, cash
and cash equivalents, short-term investments and financing arrangements. As of December 31, 2010,
we had $5.2 billion in unrestricted liquidity, consisting of $3.6 billion in cash and cash
equivalents and short-term investments and $1.6 billion in undrawn revolving credit facilities.
At December 31, 2010, total debt and capital leases, including current maturities, was $15.3 billion, a
$1.9 billion reduction from December 31, 2009.
Our ability to obtain additional financing, if needed, on acceptable terms could be adversely
affected by the fact that substantially all of our assets are subject to liens.
Fleet Strategy. We continue to focus on investing in our existing fleet, including investments
in our domestic mainline aircraft to: (1) add winglets to increase fuel efficiency and (2) expand
the First Class cabin on much of our domestic mainline fleet in response to business customer
demand. We are also investing in our international transoceanic aircraft to enhance our product by featuring full flat bed seats in BusinessElite and in-seat audio and video in all cabins.
In addition, we are making investments in our regional aircraft product to create a consistent
experience by adding First Class to 70 and 76 seat regional jets.
Throughout 2010, we have been acquiring previously owned MD-90 aircraft at significantly lower
ownership and total cost relative to comparable new aircraft, and we will seek to acquire additional
previously owned MD-90 aircraft in the future. We are also evaluating the future
replacement needs for our domestic mainline fleet. If determined necessary, we will seek to acquire previously owned aircraft or place an aircraft order
to replace older, less efficient aircraft, such as the DC-9
aircraft. If an aircraft order is placed, we would not expect deliveries of new
aircraft to begin earlier than 2013. We have no immediate fleet renewal needs for
international aircraft. As previously announced, we continue to substantially
reduce our 50-seat regional jet aircraft fleet, retire our DC-9 fleet and eliminate our regional turboprop fleet.
JFK Redevelopment. John F. Kennedy International Airport (JFK) is one of the worlds busiest
airports in one of the most competitive airline markets. We currently operate primarily at
Terminal 2 for domestic flights and Terminal 3, which was constructed in 1960, for international
flights under leases with the Port Authority of New York and New Jersey (Port Authority). We also conduct some flights from Terminal 4, which is operated by JFK International Air
Terminal, LLC, a private party, under its lease with the Port Authority.
33
During the December 2010 quarter, we began a redevelopment project that we believe will create a
state-of-the-art facility for us at JFK. We estimate this project will cost approximately $1.2
billion and will be completed in stages over five years. This project includes the (1) enhancement
and expansion of Terminal 4, including the construction of nine new gates; (2) construction of a
passenger connector between Terminal 2 and Terminal 4; (3) demolition of the outdated Terminal 3
facilities; and (4) development of the Terminal 3 site for aircraft parking positions. Upon
completion of the Terminal 4 expansion, expected to occur in 2013, we will relocate our operations
from Terminal 3 to Terminal 4; proceed with demolition activities in Terminal 3; and thereafter
conduct coordinated flight operations from Terminals 2 and 4. Once our project is complete, we
expect that passengers will benefit from an enhanced customer experience and improved operational
performance, including reduced taxi times and better on-time performance. For additional information, see Note 8 of the Notes to the Consolidated Financial Statements.
Liquidity Events
Significant liquidity events during 2010 included the following (see also Note 5 of the Notes
to the Consolidated Financial Statements for additional information):
|
|
|
American Express Agreement. We and American Express modified our agreement under which
we received $1.0 billion in 2008 from American Express for their advance purchase of
SkyMiles. Our obligations with respect to the advance payment will be satisfied by the use
of SkyMiles by American Express over a specified period (SkyMiles Usage Period) rather
than by cash payments from us to American Express. The 2010 modification changed the SkyMiles Usage Period to a three-year period beginning in December 2011 from a
two-year period beginning in December 2010. |
|
|
|
|
Pension Obligations. We sponsor a defined benefit pension plan for eligible non-pilot
pre-Merger Delta employees and retirees, and defined benefit pension plans for eligible
pre-Merger Northwest employees and retirees. These plans are closed to new entrants and are frozen for future benefit
accruals. Our funding obligations for these plans are generally governed by the Employee
Retirement Income Security Act. We contributed $728 million to our defined benefit pension
plans during 2010. |
|
|
|
|
Exit Revolving Facility. We (1) repaid $914 million of our $1.0 billion first-lien
revolving credit facility (the Exit Revolving Facility) and (2) amended the Exit
Revolving Facility to convert the remaining $86 million of revolving commitment to a fully
funded, non-revolving loan due April 2012. Borrowings under the Exit Revolving Facility
can be repaid without penalty and amounts repaid can be reborrowed. |
|
|
|
|
2009-1 EETC. We received $347 million of net proceeds, which were previously held in
escrow, from the 2009 offering of Pass Through Certificates, Series 2009-1 (the 2009-1
EETC). We used the proceeds received in 2010 to refinance 22 aircraft that secured our
2000-1 EETC, which matured in November 2010. The 2009-1 EETC has a weighted average fixed
interest rate of 8.1% and has a final maturity in December 2019. |
|
|
|
|
2010-1A EETC. We completed a $450 million offering of Pass Through Certificates, Series
2010-1A (the 2010-1A EETC), through a pass through trust. We used the net proceeds to
finance two B-777-200LR aircraft purchased in March 2010 and refinance 22 aircraft that
secured our 2000-1 EETC. The 2010-1A EETC bears interest at a fixed rate of 6.2% per year
and has a final maturity in July 2018. |
|
|
|
|
2010-2A EETC. We completed a $474 million offering of Pass Through Certificates, Series
2010-2A (the 2010-2A EETC), through a pass through trust. We used $270 million in net
proceeds to finance or refinance 12 aircraft. The remaining $204 million is being held in
escrow until we refinance other aircraft, including 10 aircraft currently securing our
2001-1 EETC, which matures in September 2011. The 2010-2A EETC bears interest at a fixed
rate of 4.95% per year and has a final maturity in May 2019. |
|
|
|
|
Other. We used $1.0 billion to: |
|
|
|
Repurchase in cash tender offers $300 million principal amount of debt; |
|
|
|
|
Prepay $435 million of existing debt; |
|
|
|
|
Redeem $75 million of other secured financings; and |
|
|
|
|
Purchase 18 aircraft off lease.
|
|
|
|
We also restructured $820 million of existing debt, including changes in applicable interest
rates and other payment terms. |
34
Sources and Uses of Cash
Cash Flows From Operating Activities
Cash provided by operating activities totaled $2.8 billion for 2010, primarily reflecting (1)
$2.6 billion in net income after adjusting for items such as depreciation and amortization, (2) a
$516 million increase in accounts payable and accrued liabilities primarily related to our broad-based employee profit sharing plans and increased operations due to
the improving economy and (3) a $232 million increase in advance ticket sales primarily due to an
increase in air fares. Cash provided by operating activities for the year ended December 31, 2010
was partially offset by a $345 million decrease in frequent flyer liability.
Cash provided by operating activities totaled $1.4 billion for 2009, primarily reflecting the
return from counterparties of $1.1 billion of hedge margin primarily used to settle hedge losses
recognized during the period and $690 million in net income after adjusting for items such as
depreciation and amortization.
Cash used in operating activities totaled $1.7 billion for 2008, primarily reflecting (1) an
increase in aircraft fuel payments due to record high fuel prices for most of the year, (2) the
posting of $680 million in margin with counterparties primarily from our estimated fair value loss
position on our fuel hedge contracts at December 31, 2008, (3) the payment of $438 million in
premiums for fuel hedge derivatives entered into during 2008, (4) a $374 million decrease in
advance ticket sales due to the slowing economy and (5) the payment of $158 million in 2008 under
our broad-based employee profit sharing plan related to 2007. Cash used in operating activities was
partially offset by cash flows driven by a $3.5 billion increase in operating revenue, $2.0 billion
of which is directly attributable to Northwests operations since the Closing Date.
Cash Flows From Investing Activities
Cash used in investing activities totaled $2.0 billion for 2010, primarily reflecting
investments of (1) $1.1 billion for flight equipment, including aircraft modifications and parts,
(2) $287 million for ground property and equipment and (3) $730 million for purchases of investments. Flight equipment acquisitions include the purchase of 34 aircraft, four of which were purchased new from the manufacturer, 18 of
which were purchased off lease and 12 of which were previously owned.
Cash used in investing activities totaled $1.0 billion for 2009, primarily reflecting net
investments of $951 million for flight equipment and $251 million for ground property and
equipment. Cash used in investing activities was partially offset by a $142 million distribution of
our investment in a money market fund that was liquidated in an orderly manner in 2010 and $100 million of
proceeds from the sale of flight equipment.
Cash provided by investing activities totaled $1.6 billion for 2008, primarily reflecting the
inclusion of $2.4 billion in cash and cash equivalents from Northwest in the Merger and $609
million in restricted cash and cash equivalents, primarily related to $500 million of cash from a
Northwest borrowing that was released from escrow. These inflows were partially offset by
investments of $1.3 billion for flight equipment and $241 million for ground property and
equipment.
Cash Flows From Financing Activities
Cash used in financing activities totaled $2.5 billion for 2010, reflecting the repayment of
$3.7 billion in long-term debt and capital lease obligations, including the repayment of $914
million of our Exit Revolving Facility. Cash used in financing activities was partially offset by
$1.1 billion in proceeds from aircraft financing, including the 2009-1 EETC, 2010-1A EETC and
2010-2A EETC.
Cash used in financing activities totaled $19 million for 2009, primarily reflecting $3.0
billion in proceeds from long-term debt and aircraft financing, largely associated with the
issuance of (1) $2.1 billion under three new financings, which included (a) $750 million of senior
secured credit facilities, (b) $750 million of senior secured
notes, and (c) $600 million of senior
second lien notes, (2) $342 million from the 2009-1 EETC offering and (3) $150 million of tax
exempt bonds, mostly offset by the repayment of $2.9 billion in long-term debt and capital lease
obligations, including the Northwest senior secured exit financing facility and the Revolving
Facility.
35
Cash provided by financing activities totaled $1.7 billion for 2008, primarily reflecting (1)
$1.0 billion in borrowings under a revolving credit facility, (2) $1.0 billion received under the
American Express Agreement for an advance purchase of SkyMiles and (3) $1.0 billion from aircraft
financing. Cash provided by financing activities was partially offset by the repayment of $1.6
billion of long-term debt and capital lease obligations.
Contractual Obligations
The following table summarizes our contractual obligations at December 31, 2010 that we expect
will be paid in cash. The table does not include amounts that are contingent on events or other
factors that are uncertain or unknown at this time, including legal contingencies, uncertain tax
positions, and amounts payable under collective bargaining arrangements, among others. In
addition, the table does not include expected significant cash payments which are generally
ordinary course of business obligations that do not include contractual commitments.
The amounts presented are based on various estimates, including estimates regarding the timing
of payments, prevailing interest rates, volumes purchased, the occurrence of certain events and
other factors. Accordingly, the actual results may vary materially from the amounts presented in
the table.
During 2010, the following significant events impacted our contractual obligations:
|
|
|
Our JFK redevelopment initiative. Estimated amounts payable by us under our new 33
year sublease are included in operating lease payments below. |
|
|
|
|
Our agreement with The Boeing Company to reaffirm our previous orders for 18 B-787-8
aircraft and to defer delivery of those aircraft from 2008-2010 to 2020-2022. Our
estimated payments to purchase these aircraft are included in aircraft purchase
obligations below. |
|
|
|
|
Our sale of Compass and Mesaba. Our estimated minimum fixed obligations under our
capacity purchase agreements with these airlines are included in contract carrier
obligations below. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations by Year |
(in millions) |
|
2011 |
|
2012 |
|
2013 |
|
2014 |
|
2015 |
|
Thereafter |
|
Total |
|
Long-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal amount |
|
$ |
2,004 |
|
|
$ |
2,041 |
|
|
$ |
1,443 |
|
|
$ |
2,793 |
|
|
$ |
1,271 |
|
|
$ |
4,890 |
|
|
$ |
14,442 |
|
Interest payments |
|
|
750 |
|
|
|
650 |
|
|
|
560 |
|
|
|
480 |
|
|
|
310 |
|
|
|
1,010 |
|
|
|
3,760 |
|
Contract carrier obligations |
|
|
2,080 |
|
|
|
1,970 |
|
|
|
2,040 |
|
|
|
2,050 |
|
|
|
2,020 |
|
|
|
6,740 |
|
|
|
16,900 |
|
Operating lease payments |
|
|
1,420 |
|
|
|
1,351 |
|
|
|
1,320 |
|
|
|
1,263 |
|
|
|
1,169 |
|
|
|
8,423 |
|
|
|
14,946 |
|
Employee benefit obligations |
|
|
730 |
|
|
|
810 |
|
|
|
730 |
|
|
|
710 |
|
|
|
700 |
|
|
|
9,370 |
|
|
|
13,050 |
|
Aircraft purchase commitments |
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,500 |
|
|
|
2,560 |
|
Capital lease obligations |
|
|
214 |
|
|
|
193 |
|
|
|
160 |
|
|
|
130 |
|
|
|
124 |
|
|
|
404 |
|
|
|
1,225 |
|
Other obligations |
|
|
380 |
|
|
|
220 |
|
|
|
140 |
|
|
|
60 |
|
|
|
60 |
|
|
|
300 |
|
|
|
1,160 |
|
|
Total |
|
$ |
7,638 |
|
|
$ |
7,235 |
|
|
$ |
6,393 |
|
|
$ |
7,486 |
|
|
$ |
5,654 |
|
|
$ |
33,637 |
|
|
$ |
68,043 |
|
|
Long-Term Debt, Principal Amount. Represents scheduled principal payments on long-term debt
reported on our Consolidated Balance Sheet at December 31, 2010. The table excludes $1.0 billion we
received from American Express for its advance purchase of SkyMiles because this obligation will be
satisfied by American Express use of SkyMiles over a specified period rather than by cash payments
from us. For additional information about our long-term debt and agreement with American Express,
see Note 5 of the Notes to the Consolidated Financial Statements.
Long-Term Debt, Interest Payments. Represents estimated interest payments under our long-term
debt based on the interest rates specified in the applicable debt agreements. Interest payments on
variable interest rate debt were calculated using LIBOR at December 31, 2010. For additional
information, see Note 5 of the Notes to the Consolidated Financial Statements.
Contract Carrier Obligations. Represents our estimated minimum fixed obligations under
capacity purchase agreements with regional carriers (excluding Comair). The reported amounts are
based on (1) the required minimum levels of flying by our contract carriers under the applicable
agreements and (2) assumptions regarding the costs associated with such minimum levels of flying.
For additional information about our capacity purchase agreements, see Note 7 of the Notes to the
Consolidated Financial Statements.
Operating Lease Payments. Includes our noncancelable operating leases. For additional
information, see Note 6 and Note 8 of the Notes to the Consolidated Financial Statements.
36
Employee Benefit Obligations. Represents primarily (1) our estimated minimum required funding
for our qualified defined benefit pension plans based on actuarially determined estimates and (2)
projected future benefit payments from our unfunded postretirement and postemployment plans. For
additional information about our defined benefit pension plans, see Critical Accounting Policies
and Estimates and Note 10 of the Notes to the Consolidated Financial Statements.
Aircraft Purchase Commitments. Represents primarily our commitments to purchase 18 B-787-8
aircraft and 12 previously owned MD-90 aircraft. The table excludes our orders for five A319-100
aircraft and two A320-200 aircraft because we have the right to cancel these orders. For
additional information, see Note 7 of the Notes to the Consolidated Financial Statements.
Other Obligations. Represents primarily estimated purchase obligations under which we are
required to make minimum payments for goods and services, including but not limited to insurance,
outsourced human resource services, marketing, maintenance, technology, sponsorships and other
third party services and products.
Critical Accounting Policies and Estimates
Our critical accounting policies and estimates are those that require significant judgments
and estimates. Accordingly, the actual results may differ materially from these estimates. For a
discussion of these and other accounting policies, see Note 1 of our Notes to our Consolidated
Financial Statements.
Frequent Flyer Program
Our frequent flyer program (the SkyMiles Program) offers incentives to increase travel on
Delta. This program allows customers to earn mileage credits by flying on Delta, regional air
carriers with which we have contract carrier agreements (Contract Carriers) and participating
airlines, as well as through participating companies such as credit card companies, hotels and car
rental agencies. We also sell mileage credits to non-airline businesses, customers and other
airlines. Mileage credits can be redeemed for air travel on Delta and participating airlines,
membership in our Sky Club and other program awards.
We use the residual method for revenue recognition of mileage credits. The fair value of the
mileage credit component is determined based on prices at which we sold mileage credits to other
airlines, $0.0054 per mile at December 31, 2010, and is re-evaluated at least annually. Under the
residual method, the portion of the revenue from the sale of mileage credits and the mileage
component of passenger ticket sales that approximates fair value is deferred and recognized as
passenger revenue when miles are redeemed and services are provided. The portion of the revenue
received in excess of the fair value of mileage credits sold is
recognized in income when the related marketing services are provided and classified as other
revenue. For additional information, see Recent Accounting Standards.
For mileage credits which we estimate are not likely to be redeemed (Breakage), we recognize
the associated value proportionally during the period in which the remaining mileage credits are
expected to be redeemed. The estimate of Breakage is based on historical redemption patterns. A
change in assumptions as to the period over which mileage credits are expected to be redeemed, the
actual redemption activity for mileage credits or the estimated fair value of mileage credits
expected to be redeemed could have a material impact on our revenue in the year in which the change
occurs and in future years. At December 31, 2010, the aggregate deferred revenue balance associated
with the SkyMiles Program was $4.5 billion. A hypothetical 1%
change in the number of outstanding miles estimated to be redeemed would result in a $32 million impact on our deferred revenue
liability at December 31, 2010.
Fair Value
Fair
value is defined as an exit price, representing the amount that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants.
Fair value is a market-based measurement that is determined based on assumptions market
participants would use in pricing an asset or liability. A three-tier fair value hierarchy
is used to prioritize the inputs in measuring fair value. Assets and liabilities measured
at fair value are based on one or more of the following valuation techniques: market approach,
cost approach and income approach. Accordingly, the actual amounts may differ materially from
the estimates. See Note 2 of the Notes to the Consolidated Financial Statements for additional
information.
37
Goodwill and Other Intangible Assets
We apply a fair value-based impairment test to the net book value of goodwill and
indefinite-lived intangible assets on an annual basis and, if certain events or circumstances
indicate that an impairment loss may have been incurred, on an interim basis. The annual impairment
test date for our goodwill and indefinite-lived intangible assets is October 1.
As of October 1, 2010, the date of our most recent goodwill and indefinite-lived intangible
assets impairment tests, the fair value of goodwill and indefinite-lived intangible assets exceeded
the carrying values. The key assumptions included (1) our projected revenues, expenses and cash
flows, (2) an estimated weighted average cost of capital of 10%, (3) assumed discount rates ranging
from 10% to 15% depending on the asset and (4) a tax rate of 39.2%. These assumptions are
consistent with those hypothetical market participants would use. Since we are required to make
estimates and assumptions when evaluating goodwill and indefinite-lived intangible assets for
impairment, the actual amounts may differ materially from these estimates.
Changes in assumptions or circumstances could result in impairment. Factors which could cause
impairment include, but are not limited to, (1) negative trends in our market capitalization, (2)
an increase in fuel prices, (3) declining passenger mile yields, (4) lower passenger demand as a
result of the weakened U.S. and global economy, (5) interruption to our operations due to an
employee strike, terrorist attack, or other reasons, (6) changes to the regulatory environment and
(7) consolidation of competitors in the airline industry.
Goodwill. Goodwill reflects (1) the excess of the reorganization value of Delta over the fair
values of tangible and identifiable intangible assets, net of liabilities, from the adoption of
fresh start reporting upon emergence from bankruptcy, adjusted for impairment and (2) the excess of
purchase price over the fair values of tangible and identifiable intangible assets acquired and
liabilities assumed from Northwest in the Merger.
In evaluating goodwill for impairment, we first compare our one reporting units fair value to
its carrying value. We estimate the fair value of our reporting unit by considering (1) market
capitalization, (2) controlling interest premiums, (3) recent market transactions, (4) projected
discounted future cash flows and (5) other factors. If the reporting units fair value exceeds its
carrying value, no further testing is required. If, however, the reporting units carrying value
exceeds its fair value, we then determine the amount of the impairment charge, if any. We recognize
an impairment charge if the carrying value of the reporting units goodwill exceeds its estimated
fair value.
Identifiable Intangible Assets. Identifiable intangible assets reflect intangible assets
recorded as a result of our adoption of fresh start reporting upon emergence from bankruptcy and
acquired in the Merger. Indefinite-lived assets are not amortized and consist primarily of routes,
slots, the Delta tradename and the SkyTeam alliance. Definite-lived intangible assets consist
primarily of marketing agreements and contracts and are amortized on a straight-line basis or under
the undiscounted cash flows method over the estimated economic life of the respective agreements
and contracts.
We perform the impairment test for our indefinite-lived intangible assets by comparing the
assets fair value to its carrying value. Fair value is estimated based on (1) recent market
transactions, where available, (2) potential lease savings from owning the assets, (3) hypothetical
royalties generated from using our tradename or (4) projected discounted future cash flows. We
recognize an impairment charge if the assets carrying value exceeds its estimated fair value.
As
of October 1, 2010, the date of our most recent impairment test,
we determined our Pacific routes and slots continue to have an indefinite life
and are not presently impaired. We considered that the U.S. and Japan signed an open skies
agreement in October 2010. We currently believe this agreement will not have a significant
long-term impact on our Pacific routes and slots. See Note 4 of the Notes to the Consolidated
Financial Statements for additional information.
38
Long-Lived Assets
Our flight equipment and other long-lived assets have a recorded value of $20.3 billion on our
Consolidated Balance Sheet at December 31, 2010. This value is based on various factors, including
the assets estimated useful lives and salvage values. We record impairment losses on flight
equipment and other long-lived assets used in operations when events and circumstances indicate the
assets may be impaired and the estimated future cash flows generated by those assets are less than
their carrying amounts. Factors which could cause impairment include, but are not limited to, (1)
deciding to permanently remove flight equipment or other long-lived assets from operations, (2)
significant changes in the estimated useful life, (3) operational downsizing, (4) significant
changes in the projected cash flows, (5) permanent and significant declines in fleet fair values
and (6) changes to the regulatory environment. For long-lived assets held for sale, we record
impairment losses when the carrying amount is greater than the fair value less the cost to sell. We
discontinue depreciation of long-lived assets when these assets are classified as held for sale.
To determine whether impairments exist for aircraft used in operations, we group assets at the
fleet-type level (the lowest level for which there are identifiable cash flows) and then estimate
future cash flows based on projections of capacity, passenger mile yield, fuel costs, labor costs
and other relevant factors. If an impairment occurs, the impairment loss recognized is the amount
by which the aircrafts carrying amount exceeds its estimated fair value. We estimate aircraft fair
values using published sources, appraisals and bids received from third parties, as available. For
additional information, see Note 1 of the Notes to the Consolidated Financial Statements.
Income Tax Valuation Allowance and Contingencies
We periodically assess whether it is more likely than not that we will generate sufficient
taxable income to realize our deferred income tax assets and establish valuation allowances if it
is not likely we will realize our deferred income tax assets. In making this determination, we
consider all available positive and negative evidence and make certain assumptions. We consider,
among other things, our deferred tax liabilities, the overall business environment, our historical
financial results, our industrys historically cyclical financial results and potential, current
and future tax planning strategies. We cannot presently determine when we will be able to generate
sufficient taxable income to realize our deferred tax assets. Accordingly, we have recorded a full
valuation allowance against our net deferred tax assets.
Our income tax provisions are based on calculations and assumptions that are subject to
examination by the Internal Revenue Service and other taxing authorities. Although the positions we
have taken on previously filed tax returns are reasonable, we have established tax and interest
reserves in recognition that taxing authorities may challenge these positions, which could result
in additional liabilities for taxes and interest. We review and adjust the reserves as
circumstances warrant and events occur, such as lapsing of applicable statutes of limitations,
conclusion of tax audits, a change in exposure based on current calculations, identification of new
issues, release of administrative guidance or the rendering of a court decision affecting a
particular issue. We adjust the income tax provision in the period in which the facts that give
rise to the revision become known. For additional information about income taxes, see Notes 1 and
9 of the Notes to the Consolidated Financial Statements.
Defined Benefit Pension Plans
We sponsor defined benefit pension plans for our eligible employees and retirees. These plans
are closed to new entrants and frozen for future benefit accruals. As of December 31, 2010, the
unfunded benefit obligation for these plans recorded on our Consolidated Balance Sheet was $9.3
billion. During 2010, we contributed $728 million to these plans and recorded $367 million of
expense in salaries and related costs on our Consolidated Statement of Operations. In 2011, we
estimate we will contribute approximately $600 million to these plans and that our expense will be
approximately $300 million. The most critical assumptions impacting our defined benefit pension
plan obligations and expenses are the weighted average discount rate and the expected long-term
rate of return on the assets.
39
Discount Rate. We determine our weighted average discount rate on our measurement date
primarily by reference to annualized rates earned on high quality fixed income investments and
yield-to-maturity analysis specific to our estimated future benefit payments. We used a weighted
average discount rate of 5.69% and 5.93% at December 31, 2010 and 2009, respectively. Our weighted
average discount rate for net periodic pension benefit cost in each of the past three years has varied from
the rate selected on our measurement date, ranging from 5.93% to 7.19% between 2008 and 2010, due
to remeasurements throughout the year.
Expected Long-Term Rate of Return. The expected long-term rate of return on the assets
(currently approximately 9%) is based primarily on plan-specific investment studies using
historical market returns and volatility data with forward looking estimates based on existing
financial market conditions and forecasts. Modest excess return expectations versus some market
indices are incorporated into the return projections based on the actively managed structure of the
investment programs and their records of achieving such returns historically. We review our rate of
return on plan asset assumptions annually. These assumptions are largely based on the asset
category rate-of-return assumptions developed annually with our pension plan investment advisors;
however, our annual investment performance for one particular year does not, by itself,
significantly influence our evaluation. The investment strategy for our defined benefit pension
plan assets is to utilize a diversified mix of global public and private equity portfolios, public
and private fixed income portfolios, and private real estate and natural resource investments to
earn a long-term investment return that meets or exceeds a 9% annualized return target.
The impact of a 0.50% change in these assumptions is shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect on Accrued |
|
|
Effect on 2011 |
|
Pension Liability at |
Change in Assumption |
|
Pension Expense |
|
December 31, 2010 |
|
0.50%
decrease in weighted average discount rate |
|
+$8 million |
|
+$1.1 billion |
0.50% increase in weighted average discount rate |
|
- $12 million |
|
- $1.0 billion |
0.50%
decrease in expected long-term rate of return on assets |
|
+$40 million |
|
|
|
|
0.50% increase in expected long-term rate of return on assets |
|
- $40 million |
|
|
|
|
|
Funding. Our funding obligations for qualified defined benefit plans are governed by the
Employee Retirement Income Security Act. The Pension Protection Act of 2006 allows commercial
airlines to elect alternative funding rules (Alternative Funding Rules) for defined benefit plans
that are frozen. Delta elected the Alternative Funding Rules under which the unfunded liability for
a plan (1) may be funded over a fixed 17-year period beginning at the
election date and (2) is
calculated using a fixed interest rate of 8.85%.The Alternative Funding Rules apply to our defined
benefit pension plan for eligible non-pilot pre-Merger Delta employees and retirees, effective
April 1, 2007, and to our defined benefit pension plans for eligible pre-Merger Northwest employees and
retirees, effective October 1, 2006.
While the Pension Protection Act makes our funding obligations for these plans more
predictable, factors outside our control continue to have an impact on the funding requirements.
Estimates of future funding requirements are based on various assumptions and can vary materially
from actual funding requirements. Assumptions include, among other things, the actual and projected
market performance of assets; statutory requirements; and demographic data for participants.
For additional information about our defined benefit pension plans, see Note 10 of the Notes
to the Consolidated Financial Statements.
Recent Accounting Standards
In October 2009, the Financial Accounting Standards Board issued Revenue Arrangements with
Multiple Deliverables. The standard revises guidance on the determination of when individual
deliverables may be treated as separate units of accounting and the allocation of consideration
among separately identified deliverables. It also expands disclosure requirements regarding an
entitys multiple element revenue arrangements. The standard is effective for fiscal years
beginning on or after June 15, 2010.
We adopted this standard on a prospective basis beginning January 1, 2011. The adoption of
this standard did not have a material impact on our Consolidated Financial Statements, although it
could significantly impact our future financial results as we enter into new or materially modified
revenue arrangements related to our SkyMiles Program.
40
Supplemental Information
We sometimes use information that is derived from our Consolidated Financial Statements, but
that is not presented in accordance with GAAP. Certain of this information is considered non-GAAP
financial measures under the U.S. Securities and Exchange Commission rules. The non-GAAP financial
measures should be considered in addition to results prepared in accordance with GAAP, but should
not be considered a substitute for or superior to GAAP results.
The
following table shows a reconciliation of a non-GAAP financial measure to the corresponding
GAAP financial measure. We use this measure because management believes the exclusion of special items is helpful
to investors to evaluate our recurring operational performance.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
(in millions) |
|
2010 |
|
2009 |
|
Operating income (loss) |
|
$ |
2,217 |
|
|
$ |
(324 |
) |
Item excluded: |
|
|
|
|
|
|
|
|
Restructuring and merger-related items |
|
|
450 |
|
|
|
407 |
|
|
Operating income excluding special items |
|
$ |
2,667 |
|
|
$ |
83 |
|
|
Glossary of Defined Terms
ASMAvailable Seat Mile. A measure of capacity. ASMs equal the total number of seats
available for transporting passengers during a reporting period multiplied by the total number of
miles flown during that period.
CASM(Operating) Cost per Available Seat Mile. The amount of operating cost incurred per ASM
during a reporting period.
Passenger Load FactorA measure of utilized available seating capacity calculated by dividing
RPMs by ASMs for a reporting period.
Passenger Mile Yield or YieldThe amount of passenger revenue earned per RPM during a
reporting period.
PRASM Passenger Revenue per ASM. The amount of passenger revenue earned per ASM during a
reporting period. PRASM is also referred to as unit revenue.
RPMRevenue Passenger Mile. One revenue-paying passenger transported one mile. RPMs equal the
number of revenue passengers during a reporting period multiplied by the number of miles flown by
those passengers during that period. RPMs are also referred to as traffic.
41
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have significant market risk exposure related to aircraft fuel prices, interest rates and
foreign currency exchange rates. Market risk is the potential negative impact of adverse changes in
these prices or rates on our Consolidated Financial Statements. In an effort to manage our exposure
to these risks, we periodically enter into derivative transactions pursuant to stated policies. We
expect adjustments to the fair value of financial instruments to result in ongoing volatility in
earnings and stockholders equity.
The following sensitivity analysis does not consider the effects of a change in demand for air
travel, the economy as a whole or actions we may take to seek to mitigate our exposure to a
particular risk. For these and other reasons, the actual results of changes in these prices or
rates may differ materially from the following hypothetical results.
Fuel Price Risk
Our results of operations are materially impacted by changes in aircraft fuel prices. In an
effort to manage our exposure to this risk, we periodically enter into derivative instruments
designated as cash flow hedges, which are comprised of crude oil, heating oil and jet fuel call
option, collar and swap contracts, to hedge a portion of our projected aircraft fuel requirements,
including those of our Contract Carriers under capacity purchase agreements.
As of January 31, 2011, our open fuel hedge position is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Fair |
|
|
|
|
|
|
|
|
|
|
Value at |
|
|
|
|
|
|
|
|
|
|
January 31, |
|
|
Weighted |
|
Percentage of |
|
2011 |
|
|
Average Contract |
|
Projected |
|
Based Upon |
|
|
Strike Price |
|
Fuel Requirements |
|
$92 per Barrel of |
(in millions, unless otherwise stated) |
|
per Gallon |
|
Hedged |
|
Crude Oil |
|
Year ending December 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
Crude Oil |
|
|
|
|
|
|
|
|
|
|
|
|
Call options |
|
$ |
2.05 |
|
|
|
19 |
% |
|
$ |
239 |
|
Collars cap/floor |
|
|
2.10/1.78 |
|
|
|
10 |
|
|
|
84 |
|
Swaps |
|
|
2.12 |
|
|
|
9 |
|
|
|
58 |
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
38 |
% |
|
$ |
381 |
|
|
|
|
|
|
|
|
|
Year ending December 31, 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
Crude Oil |
|
|
|
|
|
|
|
|
|
|
|
|
Call Options |
|
$ |
1.97 |
|
|
|
1 |
% |
|
$ |
29 |
|
Swaps |
|
|
2.30 |
|
|
|
1 |
|
|
|
3 |
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
2 |
% |
|
$ |
32 |
|
|
For 2010, aircraft fuel and related taxes, including our Contract Carriers under capacity
purchase agreements, accounted for $8.9 billion, or 30%, of our total operating expense, including
$89 million of net fuel hedge costs. The following table shows the projected impact to aircraft
fuel expense and fuel hedge margin for 2011 based on the impact of our open fuel hedge contracts at
January 31, 2011, assuming the following per barrel prices of crude oil:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel Hedge |
|
|
Year ending December 31, 2011 |
|
Margin |
|
|
(Increase) |
|
|
|
|
|
|
|
|
|
Received from |
|
|
Decrease to |
|
Hedge Gain |
|
|
|
|
|
(Posted to) |
(in millions) |
|
Fuel Expense(1) |
|
(Loss)(2) |
|
Net impact |
|
Counterparties |
|
$60 / barrel |
|
$ |
2,786 |
|
|
$ |
(496 |
) |
|
$ |
2,290 |
|
|
$ |
(126 |
) |
$80 / barrel |
|
|
1,054 |
|
|
|
(230 |
) |
|
|
824 |
|
|
|
4 |
|
$100 / barrel |
|
|
(677 |
) |
|
|
345 |
|
|
|
(332 |
) |
|
|
387 |
|
$120 / barrel |
|
|
(2,409 |
) |
|
|
996 |
|
|
|
(1,413 |
) |
|
|
999 |
|
|
|
|
|
(1) |
|
Projections based on the decrease (increase) to fuel expense as compared to
the estimated crude oil price per barrel of $92 and estimated
aircraft fuel consumption of 3.6 billion gallons for the 11 months
ending December 31, 2011. |
|
(2) |
|
Projections based on average futures prices per gallon by contract settlement
month. |
42
Interest Rate Risk
Our exposure to market risk from adverse changes in interest rates is primarily associated
with our long-term debt obligations. Market risk associated with our fixed and variable rate
long-term debt relates to the potential reduction in fair value and negative impact to future
earnings, respectively, from an increase in interest rates. At December 31, 2010, we had $8.6
billion of fixed-rate long-term debt and $6.8 billion of variable-rate long-term debt. An increase
of 100 basis points in average annual interest rates would have decreased the estimated fair value
of our fixed-rate long-term debt by $320 million at December 31, 2010 and would have increased
annual interest expense on our variable-rate long-term debt by
$55 million, inclusive of the impact of our interest rate hedge instruments.
Foreign Currency Exchange Risk
Our results of operations may be impacted by foreign exchange rate fluctuations on the U.S.
dollar value of foreign currency-denominated operating revenue and expense. Our largest exposures
come from the Japanese yen and Canadian dollar. To manage exchange rate risk, we attempt to execute
both our international revenue and expense transactions in the same foreign currency to the extent
practicable. Changes in foreign currency exchange rates are not material to our results of
operations.
43
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
44
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Delta Air Lines, Inc.
We have audited the accompanying consolidated balance sheets of Delta Air Lines, Inc. (the
Company) as of December 31, 2010 and 2009, and the related consolidated statements of operations,
stockholders equity, and cash flows for the years ended December 31, 2010, 2009 and 2008. These
financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Delta Air Lines, Inc. at December 31, 2010, 2009
and 2008, and the consolidated results of its operations and its cash flows for the years ended
December 31, 2010, 2009 and 2008, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Delta Air Lines, Inc.s internal control over financial reporting
as of December 31, 2010, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
February 15, 2011 expressed an unqualified opinion thereon.
Atlanta, Georgia
February 15, 2011
45
DELTA AIR LINES, INC.
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
(in millions, except share data) |
|
2010 |
|
|
2009 |
|
|
ASSETS
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
2,892 |
|
|
$ |
4,607 |
|
Short-term investments |
|
|
718 |
|
|
|
71 |
|
Restricted cash, cash equivalents and short-term investments |
|
|
409 |
|
|
|
423 |
|
Accounts receivable, net of an allowance for uncollectible accounts of $40 and $47
at December 31, 2010 and 2009, respectively |
|
|
1,456 |
|
|
|
1,353 |
|
Expendable parts and supplies inventories, net of an allowance for obsolescence of $104 and $75
at December 31, 2010 and 2009, respectively |
|
|
318 |
|
|
|
327 |
|
Deferred income taxes, net |
|
|
355 |
|
|
|
357 |
|
Prepaid expenses and other |
|
|
1,159 |
|
|
|
853 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
7,307 |
|
|
|
7,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment, Net: |
|
|
|
|
|
|
|
|
Property and equipment, net of accumulated depreciation and amortization of $4,164 and $2,924
at December 31, 2010 and 2009, respectively |
|
|
20,307 |
|
|
|
20,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets: |
|
|
|
|
|
|
|
|
Goodwill |
|
|
9,794 |
|
|
|
9,787 |
|
Identifiable intangibles, net of accumulated amortization of $530 and $451
at December 31, 2010 and 2009, respectively |
|
|
4,749 |
|
|
|
4,829 |
|
Other noncurrent assets |
|
|
1,031 |
|
|
|
749 |
|
|
|
|
|
|
|
|
Total other assets |
|
|
15,574 |
|
|
|
15,365 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
43,188 |
|
|
$ |
43,789 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Current maturities of long-term debt and capital leases |
|
$ |
2,073 |
|
|
$ |
1,533 |
|
Air traffic liability |
|
|
3,306 |
|
|
|
3,074 |
|
Accounts payable |
|
|
1,713 |
|
|
|
1,249 |
|
Frequent flyer deferred revenue |
|
|
1,690 |
|
|
|
1,614 |
|
Accrued salaries and related benefits |
|
|
1,370 |
|
|
|
1,037 |
|
Taxes payable |
|
|
579 |
|
|
|
525 |
|
Other accrued liabilities |
|
|
654 |
|
|
|
765 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
11,385 |
|
|
|
9,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent Liabilities: |
|
|
|
|
|
|
|
|
Long-term debt and capital leases |
|
|
13,179 |
|
|
|
15,665 |
|
Pension, postretirement and related benefits |
|
|
11,493 |
|
|
|
11,745 |
|
Frequent flyer deferred revenue |
|
|
2,777 |
|
|
|
3,198 |
|
Deferred income taxes, net |
|
|
1,924 |
|
|
|
1,917 |
|
Other noncurrent liabilities |
|
|
1,533 |
|
|
|
1,222 |
|
|
|
|
|
|
|
|
Total noncurrent liabilities |
|
|
30,906 |
|
|
|
33,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity: |
|
|
|
|
|
|
|
|
Common stock at $0.0001 par value; 1,500,000,000 shares authorized, 847,716,723 and 794,873,058
shares issued at December 31, 2010 and 2009, respectively |
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
13,926 |
|
|
|
13,827 |
|
Accumulated deficit |
|
|
(9,252 |
) |
|
|
(9,845 |
) |
Accumulated other comprehensive loss |
|
|
(3,578 |
) |
|
|
(3,563 |
) |
Treasury stock, at cost, 12,993,100 and 10,918,274 shares at December 31, 2010
and 2009, respectively |
|
|
(199 |
) |
|
|
(174 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
897 |
|
|
|
245 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
43,188 |
|
|
$ |
43,789 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
46
DELTA AIR LINES, INC.
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
(in millions, except per share data) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
Operating Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Passenger: |
|
|
|
|
|
|
|
|
|
|
|
|
Mainline |
|
$ |
21,408 |
|
|
$ |
18,522 |
|
|
$ |
15,137 |
|
Regional carriers |
|
|
5,850 |
|
|
|
5,285 |
|
|
|
4,446 |
|
|
|
|
|
|
|
|
|
|
|
Total passenger revenue |
|
|
27,258 |
|
|
|
23,807 |
|
|
|
19,583 |
|
Cargo |
|
|
850 |
|
|
|
788 |
|
|
|
686 |
|
Other |
|
|
3,647 |
|
|
|
3,468 |
|
|
|
2,428 |
|
|
|
|
|
|
|
|
|
|
|
Total operating revenue |
|
|
31,755 |
|
|
|
28,063 |
|
|
|
22,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Aircraft fuel and related taxes |
|
|
7,594 |
|
|
|
7,384 |
|
|
|
7,346 |
|
Salaries and related costs |
|
|
6,751 |
|
|
|
6,838 |
|
|
|
4,329 |
|
Contract carrier arrangements |
|
|
4,305 |
|
|
|
3,823 |
|
|
|
3,766 |
|
Aircraft maintenance materials and
outside repairs |
|
|
1,569 |
|
|
|
1,434 |
|
|
|
1,169 |
|
Contracted services |
|
|
1,549 |
|
|
|
1,595 |
|
|
|
1,062 |
|
Depreciation and amortization |
|
|
1,511 |
|
|
|
1,536 |
|
|
|
1,266 |
|
Passenger commissions and other
selling expenses |
|
|
1,509 |
|
|
|
1,405 |
|
|
|
1,030 |
|
Landing fees and other rents |
|
|
1,281 |
|
|
|
1,289 |
|
|
|
787 |
|
Passenger service |
|
|
673 |
|
|
|
638 |
|
|
|
440 |
|
Aircraft rent |
|
|
387 |
|
|
|
480 |
|
|
|
307 |
|
Profit sharing |
|
|
313 |
|
|
|
|
|
|
|
|
|
Impairment of goodwill and other
intangible assets |
|
|
|
|
|
|
|
|
|
|
7,296 |
|
Restructuring and merger-related items |
|
|
450 |
|
|
|
407 |
|
|
|
1,131 |
|
Other |
|
|
1,646 |
|
|
|
1,558 |
|
|
|
1,082 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expense |
|
|
29,538 |
|
|
|
28,387 |
|
|
|
31,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss) |
|
|
2,217 |
|
|
|
(324 |
) |
|
|
(8,314 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (Expense) Income: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(1,004 |
) |
|
|
(908 |
) |
|
|
(685 |
) |
Amortization of debt discount, net |
|
|
(216 |
) |
|
|
(370 |
) |
|
|
(20 |
) |
Interest income |
|
|
35 |
|
|
|
27 |
|
|
|
92 |
|
Loss on extinguishment of debt |
|
|
(391 |
) |
|
|
(83 |
) |
|
|
|
|
Miscellaneous, net |
|
|
(33 |
) |
|
|
77 |
|
|
|
(114 |
) |
|
|
|
|
|
|
|
|
|
|
Total other expense, net |
|
|
(1,609 |
) |
|
|
(1,257 |
) |
|
|
(727 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Income Taxes |
|
|
608 |
|
|
|
(1,581 |
) |
|
|
(9,041 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax (Provision) Benefit |
|
|
(15 |
) |
|
|
344 |
|
|
|
119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
|
$ |
593 |
|
|
$ |
(1,237 |
) |
|
$ |
(8,922 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings (Loss) per Share |
|
$ |
0.71 |
|
|
$ |
(1.50 |
) |
|
$ |
(19.08 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted Earnings (Loss) per Share |
|
$ |
0.70 |
|
|
$ |
(1.50 |
) |
|
$ |
(19.08 |
) |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
47
DELTA AIR LINES, INC.
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
(in millions) |
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
Cash Flows From Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
593 |
|
|
$ |
(1,237 |
) |
|
$ |
(8,922 |
) |
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,511 |
|
|
|
1,536 |
|
|
|
1,266 |
|
Amortization of debt discount, net |
|
|
216 |
|
|
|
370 |
|
|
|
20 |
|
Loss on extinguishment of debt |
|
|
391 |
|
|
|
83 |
|
|
|
|
|
Fuel hedge derivative instruments |
|
|
(136 |
) |
|
|
(148 |
) |
|
|
(443 |
) |
Deferred income taxes |
|
|
9 |
|
|
|
(329 |
) |
|
|
(119 |
) |
Pension, postretirement and postemployment expense (less than) in excess of payments |
|
|
(301 |
) |
|
|
307 |
|
|
|
(278 |
) |
Equity-based compensation expense |
|
|
89 |
|
|
|
108 |
|
|
|
54 |
|
Impairment of goodwill and other intangible assets |
|
|
|
|
|
|
|
|
|
|
7,296 |
|
Restructuring and merger-related items |
|
|
182 |
|
|
|
|
|
|
|
892 |
|
Changes in certain current assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in receivables |
|
|
(141 |
) |
|
|
147 |
|
|
|
194 |
|
Decrease (increase) in hedge margin receivables |
|
|
|
|
|
|
1,132 |
|
|
|
(680 |
) |
Decrease in restricted cash and cash equivalents |
|
|
16 |
|
|
|
79 |
|
|
|
320 |
|
Increase in prepaid expenses and other current assets |
|
|
(105 |
) |
|
|
(61 |
) |
|
|
(18 |
) |
Increase (decrease) in air traffic liability |
|
|
232 |
|
|
|
(286 |
) |
|
|
(374 |
) |
Decrease in frequent flyer deferred revenue |
|
|
(345 |
) |
|
|
(298 |
) |
|
|
(255 |
) |
Increase (decrease) in accounts payable and accrued liabilities |
|
|
516 |
|
|
|
143 |
|
|
|
(526 |
) |
Other, net |
|
|
105 |
|
|
|
(167 |
) |
|
|
(134 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
2,832 |
|
|
|
1,379 |
|
|
|
(1,707 |
) |
|
Cash Flows From Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment additions: |
|
|
|
|
|
|
|
|
|
|
|
|
Flight equipment, including advance payments |
|
|
(1,055 |
) |
|
|
(951 |
) |
|
|
(1,281 |
) |
Ground property and equipment, including technology |
|
|
(287 |
) |
|
|
(251 |
) |
|
|
(241 |
) |
(Increase) decrease in restricted cash and cash equivalents |
|
|
(2 |
) |
|
|
(59 |
) |
|
|
609 |
|
(Purchase) redemption of investments |
|
|
(730 |
) |
|
|
142 |
|
|
|
(92 |
) |
Increase in cash in connection with the Merger |
|
|
|
|
|
|
|
|
|
|
2,441 |
|
Proceeds from sales of flight equipment |
|
|
36 |
|
|
|
100 |
|
|
|
154 |
|
Other, net |
|
|
12 |
|
|
|
11 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
(2,026 |
) |
|
|
(1,008 |
) |
|
|
1,598 |
|
|
Cash Flows From Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Payments on long-term debt and capital lease obligations |
|
|
(3,722 |
) |
|
|
(2,891 |
) |
|
|
(1,296 |
) |
Proceeds from long-term obligations |
|
|
1,130 |
|
|
|
2,966 |
|
|
|
2,132 |
|
Proceeds from American Express Agreement |
|
|
|
|
|
|
|
|
|
|
1,000 |
|
Payment of short-term obligations, net |
|
|
|
|
|
|
|
|
|
|
(300 |
) |
Proceeds from sale of treasury stock, net of commissions |
|
|
|
|
|
|
|
|
|
|
192 |
|
Other, net |
|
|
71 |
|
|
|
(94 |
) |
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(2,521 |
) |
|
|
(19 |
) |
|
|
1,716 |
|
|
Net (Decrease) Increase in Cash and Cash Equivalents |
|
|
(1,715 |
) |
|
|
352 |
|
|
|
1,607 |
|
Cash and cash equivalents at beginning of period |
|
|
4,607 |
|
|
|
4,255 |
|
|
|
2,648 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
2,892 |
|
|
$ |
4,607 |
|
|
$ |
4,255 |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash paid for interest |
|
$ |
1,036 |
|
|
$ |
867 |
|
|
$ |
742 |
|
|
Non-cash transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
Flight equipment under capital leases |
|
|
329 |
|
|
|
57 |
|
|
|
32 |
|
Debt relief through vendor negotiations |
|
|
160 |
|
|
|
|
|
|
|
|
|
Debt discount on American Express Agreement |
|
|
110 |
|
|
|
|
|
|
|
303 |
|
Aircraft delivered under seller financing |
|
|
20 |
|
|
|
139 |
|
|
|
|
|
Shares of Delta common stock issued or issuable in connection with the Merger |
|
|
|
|
|
|
|
|
|
|
3,251 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
48
DELTA AIR LINES, INC.
Consolidated Statements of Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained |
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Earnings |
|
|
Comprehensive |
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Paid-In |
|
|
(Accumulated |
|
|
Income |
|
|
Treasury Stock |
|
|
|
|
(in millions, except per share data) |
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit) |
|
|
(Loss) |
|
|
Shares |
|
|
Amount |
|
|
Total |
|
|
Balance at January 1, 2008 |
|
|
299 |
|
|
$ |
|
|
|
$ |
9,512 |
|
|
$ |
314 |
|
|
$ |
435 |
|
|
|
7 |
|
|
$ |
(148 |
) |
|
$ |
10,113 |
|
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,922 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,922 |
) |
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,515 |
) |
|
|
|
|
|
|
|
|
|
|
(4,515 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,437 |
) |
Shares of common stock issued pusuant to Deltas Plan of Reorganization |
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of common stock issued and compensation expense associated with
equity awards (Treasury shares withheld for payment of taxes, $10.73
per share)(1) |
|
|
1 |
|
|
|
|
|
|
|
54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
50 |
|
Stock options assumed in connection with the Merger |
|
|
|
|
|
|
|
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18 |
|
Shares of common stock issued or issuable in exchange for Northwest
common stock outstanding or issuable in connection with the Merger |
|
|
330 |
|
|
|
|
|
|
|
3,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,251 |
|
Shares of common stock issued or issuable in connection with the Merger
(Treasury shares withheld for payment of taxes, $10.92 per
share)(1) |
|
|
52 |
|
|
|
|
|
|
|
803 |
|
|
|
|
|
|
|
|
|
|
|
16 |
|
|
|
(171 |
) |
|
|
632 |
|
Shares of common stock issued and compensation expense associated with
vesting equity awards in connection with the Merger (Treasury shares
withheld for payment of taxes, $7.99 per share)(1) |
|
|
2 |
|
|
|
|
|
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
(20 |
) |
|
|
55 |
|
Sale of Treasury shares ($10.78 per share)(1) |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
(18 |
) |
|
|
191 |
|
|
|
192 |
|
|
Balance at December 31, 2008 |
|
|
703 |
|
|
|
|
|
|
|
13,714 |
|
|
|
(8,608 |
) |
|
|
(4,080 |
) |
|
|
8 |
|
|
|
(152 |
) |
|
|
874 |
|
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,237 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,237 |
) |
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
517 |
|
|
|
|
|
|
|
|
|
|
|
517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(720 |
) |
Shares of common stock issued pursuant to Deltas Plan of Reorganization |
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of common stock issued pursuant to Northwests Plan of
Reorganization |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of common stock issued to Delta and Northwest pilots in
connection with the Merger (Treasury shares withheld for payment of
taxes, $4.55 per share)(1) |
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
(2 |
) |
Shares of common stock issued and compensation expense associated with
equity awards (Treasury shares withheld for payment of taxes, $6.77 per
share)(1) |
|
|
3 |
|
|
|
|
|
|
|
108 |
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
(20 |
) |
|
|
88 |
|
Stock options exercised |
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
Balance at December 31, 2009 |
|
|
795 |
|
|
|
|
|
|
|
13,827 |
|
|
|
(9,845 |
) |
|
|
(3,563 |
) |
|
|
11 |
|
|
|
(174 |
) |
|
|
245 |
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
593 |
|
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
578 |
|
Shares of common stock issued pursuant to Deltas Plan of Reorganization |
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of common stock issued pursuant to Northwests Plan of
Reorganization |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of common stock issued and compensation expense associated with
equity awards (Treasury shares withheld for payment of taxes, $12.41
per share)(1) |
|
|
3 |
|
|
|
|
|
|
|
89 |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
(25 |
) |
|
|
64 |
|
Stock options exercised |
|
|
1 |
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
Balance at December 31, 2010 |
|
|
848 |
|
|
$ |
|
|
|
$ |
13,926 |
|
|
$ |
(9,252 |
) |
|
$ |
(3,578 |
) |
|
|
13 |
|
|
$ |
(199 |
) |
|
$ |
897 |
|
|
|
|
|
(1) |
|
Weighted average price per share |
The accompanying notes are an integral part of these Consolidated Financial Statements.
49
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Background
Delta Air Lines, Inc., a Delaware corporation, provides scheduled air transportation for
passengers and cargo throughout the United States (U.S.) and around the world.
On October 29, 2008 (the Closing Date), a wholly-owned subsidiary of Delta merged (the
Merger) with and into Northwest Airlines Corporation. On the Closing Date, (1) Northwest Airlines
Corporation and its wholly-owned subsidiaries, including Northwest Airlines, Inc. (collectively,
Northwest), became wholly-owned subsidiaries of Delta and (2) each share of Northwest common
stock outstanding on the Closing Date or issuable under Northwests Plan of Reorganization (as
defined in Note 11) was converted into the right to receive 1.25 shares of Delta common stock.
On December 31, 2009, Northwest Airlines, Inc. merged with and into Delta. As a result of this
merger, Northwest Airlines, Inc. ceased to exist as a separate entity.
Unless otherwise indicated, Delta Air Lines, Inc. and our wholly-owned subsidiaries are
collectively referred to as Delta, we, us, and our. Prior to October 30, 2008, these
references do not include Northwest.
Basis of Presentation
The accompanying Consolidated Financial Statements have been prepared in accordance with
accounting principles generally accepted in the U.S. (GAAP). Our Consolidated Financial
Statements include the accounts of Delta Air Lines, Inc. and our wholly-owned subsidiaries. As a
result of the Merger, the accounts of Northwest are included for all periods subsequent to the
Closing Date. We reclassified certain prior period amounts, none of which were material, to conform
to the current period presentation.
We eliminate all material intercompany transactions in our Consolidated Financial
Statements. We do not consolidate the financial statements of any company in which we have an
ownership interest of 50% or less. We are not the primary beneficiary of nor do we have a
controlling financial interest in any variable interest entity. Accordingly, we have not
consolidated any variable interest entity.
We have marketing alliances with other airlines to enhance our access to domestic and
international markets. These arrangements may include codesharing, reciprocal frequent flyer
program benefits, shared or reciprocal access to passenger lounges, joint promotions, common use of
airport gates and ticket counters, ticket office co-location and other marketing agreements. We
have received antitrust immunity for certain marketing arrangements, which enables us to offer a
more integrated route network and develop common sales, marketing and discount programs for
customers. Some of our marketing arrangements provide for the sharing of revenues and expenses.
Revenues and expenses associated with collaborative arrangements are presented on a gross basis in
the applicable line items on our Consolidated Statements of Operations.
On July 1, 2010, we sold Compass Airlines, Inc. (Compass) and Mesaba Aviation, Inc.
(Mesaba), our wholly-owned subsidiaries, to Trans States Airlines, Inc. (Trans States) and
Pinnacle Airlines Corp. (Pinnacle), respectively. Upon the closing of these transactions, we
entered into new or amended long-term capacity purchase agreements with Compass, Mesaba and
Pinnacle. See Note 7.
Use of Estimates
We are required to make estimates and assumptions when preparing our Consolidated Financial
Statements in accordance with GAAP. These estimates and assumptions affect the amounts reported in
our Consolidated Financial Statements and the accompanying notes. Actual results could differ
materially from those estimates.
50
Recent Accounting Standards
In October 2009, the Financial Accounting Standards Board issued Revenue Arrangements with
Multiple Deliverables. The standard revises guidance on the determination of when individual
deliverables may be treated as separate units of accounting and the allocation of consideration
among separately identified deliverables. It also
expands disclosure requirements regarding an entitys multiple element revenue arrangements.
The standard is effective for fiscal years beginning on or after June 15, 2010.
We adopted this standard on a prospective basis beginning January 1, 2011. The adoption of
this standard did not have a material impact on our Consolidated Financial Statements, although it
could significantly impact our future financial results as we enter into new or materially modified
revenue arrangements related to our frequent flier program (SkyMiles Program).
Cash and Cash Equivalents
Short-term, highly liquid investments with maturities of three months or less when purchased
are classified as cash and cash equivalents on our Consolidated Balance Sheets and are recorded at
cost, which approximates fair value.
Short-Term Investments
Investments with maturities of greater than three months, but not in excess of one year, when
purchased are classified as short-term investments on our Consolidated Balance Sheets. At December
31, 2010, our short-term investments are treasury bills recorded at cost, which approximates fair
value. At December 31, 2009, our short-term investments were invested in a money market fund that
was recorded at fair value and liquidated in an orderly manner in 2010. See Note 2.
Restricted Cash and Cash Equivalents
Restricted cash and cash equivalents on our Consolidated Balance Sheets are primarily held to
meet certain projected self-insurance obligations and are recorded at cost, which approximates fair
value.
Accounts Receivable
Accounts receivable primarily consist of amounts due from credit card companies from the sale
of passenger airline tickets, customers of our aircraft maintenance and cargo transportation
services and other companies for the purchase of mileage credits under our SkyMiles Program. We
provide an allowance for uncollectible accounts equal to the estimated losses expected to be
incurred based on historical chargebacks, write-offs, bankruptcies and other specific analyses. Bad
debt expense and write-offs were not material for the years ended December 31, 2010, 2009 and 2008.
Derivative Financial Instruments
Our results of operations are significantly impacted by changes in aircraft fuel prices,
interest rates and foreign currency exchange rates. In an effort to manage our exposure to these
risks, we periodically enter into derivative instruments, including fuel, interest rate and foreign
currency hedges. We recognize derivative instruments at fair value on our Consolidated Balance
Sheets and recognize certain changes in the fair value of derivative instruments on our
Consolidated Statements of Operations.
We perform, at least quarterly, both a prospective and retrospective assessment of the
effectiveness of our derivative instruments designated as hedges, including assessing the
possibility of counterparty default. If we determine that a derivative is no longer expected to be
highly effective, we discontinue hedge accounting prospectively and recognize subsequent changes in
the fair value of the hedge in earnings. As a result of our effectiveness assessment at December
31, 2010, we believe our derivative instruments designated as hedges will continue to be highly
effective in offsetting changes in cash flow attributable to the hedged risk.
51
Cash flow hedges
For derivative instruments designated as cash flow hedges, the effective portion of the gain
or loss on the derivative is reported as a component of accumulated other comprehensive loss and
reclassified into earnings in the same period in which the hedged transaction affects earnings. The
effective portion of the derivative represents the change in fair value of the hedge that offsets
the change in fair value of the hedged item. To the extent the change in the fair value of the
hedge does not perfectly offset the change in the fair value of the hedged item, the ineffective
portion of the hedge is immediately recognized in other (expense) income on our Consolidated
Statements of Operations. The following table summarizes the accounting treatment and
classification of our cash flow hedges on our Consolidated Financial Statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of Realized |
|
|
|
|
Impact of Unrealized Gains and Losses |
|
Gains and Losses |
|
|
|
|
|
|
Consolidated |
|
|
|
|
|
|
Consolidated |
|
Statements of |
|
Consolidated |
|
|
|
|
Balance Sheets |
|
Operations |
|
Statements of Operations |
Derivative Instrument(1) |
|
Hedged Risk |
|
Effective Portion |
|
Ineffective Portion |
|
Effective Portion |
Designated as cash flow hedges: |
|
|
|
|
|
|
|
|
Fuel hedges consisting of
crude oil, heating oil, and jet
fuel swaps, collars and call
options(2)
|
|
Volatility in jet
fuel prices
|
|
Effective portion
of hedge is
recorded in
accumulated other
comprehensive loss
|
|
Excess, if any,
over effective
portion of hedge is
recorded in other
(expense) income
|
|
Amounts reclassified into
earnings from accumulated
other comprehensive loss
are recorded in aircraft
fuel and related costs |
|
|
|
|
|
|
|
|
|
Interest rate swaps and call
options
|
|
Increase in
interest rates
|
|
Entire hedge is
recorded in
accumulated other
comprehensive loss
|
|
Expect hedge to
fully offset hedged
risk; no
ineffectiveness
recorded
|
|
Amounts reclassified into
earnings from accumulated
other comprehensive loss
are recorded in interest
expense |
|
|
|
|
|
|
|
|
|
Foreign currency forwards and
collars
|
|
Fluctuations in
foreign currency
exchange rates
|
|
Entire hedge is
recorded in
accumulated other
comprehensive loss
|
|
Expect hedge to
fully offset hedged
risk; no
ineffectiveness
recorded
|
|
Amounts reclassified into
earnings from accumulated
other comprehensive loss
are recorded in passenger
revenue and cargo revenue |
|
|
|
|
|
|
|
|
|
Not designated as hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel contracts consisting of
crude oil, heating oil and jet
fuel extendable swaps and
three-way collars
|
|
Volatility in jet
fuel prices
|
|
Entire amount of change in fair
value of hedge is recorded in
aircraft fuel expense and related
taxes |
|
|
|
(1) |
|
In the Merger, we assumed Northwests outstanding hedge contracts, which
included fuel, interest rate and foreign currency cash flow hedges. On the Closing Date, we
designated certain of these contracts as hedges. The remaining Northwest derivative contracts
did not qualify for hedge accounting and settled as of June 30, 2009. |
|
(2) |
|
Ineffectiveness on our fuel hedge option contracts is calculated using a perfectly
effective hypothetical derivative, which acts as a proxy for the fair value of the change in
expected cash flows from the purchase of aircraft fuel. |
Hedge Margin
In accordance with our fuel, interest rate and foreign currency hedge agreements, we may
require counterparties to fund the margin associated with our gain position on hedge contracts
and/or counterparties may require us to fund the margin associated with our loss position on these
contracts. The amount of the margin, if any, is periodically adjusted based on the fair value of
the hedge contracts. The margin requirements are intended to mitigate a partys exposure to market
volatility and the associated risk of contracting party default. We do not offset margin funded to
counterparties or margin funded to us by counterparties against fair value amounts recorded for our
hedge contracts.
52
The hedge margin we receive from counterparties is recorded in cash and cash equivalents
or restricted cash, cash equivalents and short-term investments, with the offsetting obligation in
accounts payable on our Consolidated Balance Sheets. The hedge margin we provide to counterparties
is recorded in accounts receivable or restricted cash, cash equivalents and short-term investments
on our Consolidated Balance Sheets. All cash flows associated with purchasing and settling fuel
hedge contracts are classified as operating cash flows on our Consolidated Statements of Cash Flow.
Revenue Recognition
Passenger Revenue
Passenger Tickets. We record sales of passenger tickets in air traffic liability on our
Consolidated Balance Sheets. Passenger revenue is recognized when we provide transportation or when
the ticket expires unused, reducing the related air traffic liability. We periodically evaluate the
estimated air traffic liability and record any adjustments in our Consolidated Statements of
Operations. These adjustments relate primarily to refunds, exchanges, transactions with other
airlines and other items for which final settlement occurs in periods subsequent to the sale of the
related tickets at amounts other than the original sales price.
Taxes and Fees. We are required to charge certain taxes and fees on our passenger tickets,
including U.S. federal transportation taxes, federal security charges, airport passenger facility
charges and foreign arrival and departure taxes. These taxes and fees are legal assessments on the
customer for which we act as a collection agent.
Because we are not entitled to retain these taxes and fees, we do not include such amounts in passenger revenue.
We record a liability when the amounts are
collected and reduce the liability when payments are made to the applicable government agency or
operating carrier.
Frequent Flyer Programs. The SkyMiles Program offers incentives to increase travel on Delta.
This program allows customers to earn mileage credits by flying on Delta, regional air carriers
with which we have contract carrier agreements (Contract Carriers) and airlines that participate
in the SkyMiles Program, as well as through participating companies such as credit card companies,
hotels and car rental agencies. We also sell mileage credits to non-airline businesses, customers
and other airlines. Mileage credits can be redeemed for air travel on Delta and participating
airlines, membership in our Sky Club and other program awards.
In the Merger, we assumed Northwests frequent flyer program (the WorldPerks Program). In
October 2009, we completed the consolidation of the SkyMiles and WorldPerks Programs, which
combined miles from each program at a one-to-one ratio.
We use the residual method for revenue recognition of mileage credits. The fair value of the
mileage credit component is determined based on prices at which we sell mileage credits to other
airlines, $0.0054 per mile at December 31, 2010, and is re-evaluated at least annually. Under the
residual method, the portion of the revenue from the sale of mileage credits and the mileage
component of passenger ticket sales that approximates fair value is deferred and recognized as
passenger revenue when miles are redeemed and services are provided. The portion of the revenue
received in excess of the fair value of mileage credits sold (the Marketing Premium) is
recognized in income when the related marketing services are provided and classified as other
revenue. For additional information, see Recent Accounting Standards.
For mileage credits which we estimate are not likely to be redeemed (Breakage), we recognize
the associated value proportionally during the period in which the remaining mileage credits are
expected to be redeemed. The estimate of Breakage is based on historical redemption patterns. A
change in assumptions as to the period over which mileage credits are expected to be redeemed, the
actual redemption activity for mileage credits or the estimated fair value of mileage credits
expected to be redeemed could have a material impact on our revenue in the year in which the change
occurs and in future years.
53
Regional Carriers Revenue. During the year ended December 31, 2010, we had contract carrier
agreements with 10 Contract Carriers, including our wholly-owned subsidiary, Comair, Inc.
(Comair). Our Contract Carrier agreements are structured as either (1) capacity purchase
agreements where we purchase all or a portion of the Contract Carriers capacity and are
responsible for selling the seat inventory we purchase or (2) revenue proration agreements, which
are based on a fixed dollar or percentage division of revenues for tickets sold to passengers
traveling on connecting flight itineraries. We record revenue related to all of our Contract
Carrier agreements as regional carriers passenger revenue. We record expenses related to our
Contract Carrier agreements, excluding Comair, as contract carrier arrangements expense.
Cargo Revenue
Cargo revenue is recognized in our Consolidated Statements of Operations when we provide the
transportation.
Other Revenue
Other revenue includes revenue from (1) the Marketing Premium component of the sale of mileage
credits discussed above, (2) baggage handling fees, (3) the sale of seats on other airlines
flights under alliance agreements and (4) other miscellaneous service revenue, including
administrative service charges and revenue from ancillary businesses, such as the aircraft
maintenance and repair and staffing services we provide to third parties. Revenue from other
airlines sale of seats on our flights under alliance agreements is recorded in passenger revenue
on our Consolidated Statements of Operations.
Long-Lived Assets
The following table shows our property and equipment:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
(in millions) |
|
2010 |
|
|
2009 |
|
|
Flight equipment |
|
$ |
20,312 |
|
|
$ |
19,513 |
|
Accumulated depreciation |
|
|
(2,605 |
) |
|
|
(1,731 |
) |
|
|
|
|
|
|
|
Flight equipment, net |
|
|
17,707 |
|
|
|
17,782 |
|
|
|
|
|
|
|
|
Ground property and equipment |
|
|
3,123 |
|
|
|
2,936 |
|
Accumulated depreciation |
|
|
(1,214 |
) |
|
|
(949 |
) |
|
|
|
|
|
|
|
Ground property and equipment, net |
|
|
1,909 |
|
|
|
1,987 |
|
|
|
|
|
|
|
|
Flight and ground equipment under capital leases |
|
|
988 |
|
|
|
717 |
|
Accumulated amortization |
|
|
(345 |
) |
|
|
(244 |
) |
|
|
|
|
|
|
|
Flight and ground equipment under capital leases, net |
|
|
643 |
|
|
|
473 |
|
|
|
|
|
|
|
|
Advance payments for equipment |
|
|
48 |
|
|
|
191 |
|
|
Total property and equipment, net |
|
$ |
20,307 |
|
|
$ |
20,433 |
|
|
We record property and equipment at cost and depreciate or amortize these assets on a
straight-line basis to their estimated residual values over their estimated useful lives. Residual
values for owned spare parts and simulators are generally 5% of cost except when guaranteed by a
third party for a different amount. The estimated useful lives for major asset classifications are
as follows:
|
|
|
Asset Classification |
|
Estimated Useful Life |
|
Flight equipment
|
|
21-30 years |
|
|
|
Capitalized software(1)
|
|
3-7 years |
|
|
|
Ground property and equipment
|
|
3-40 years |
|
|
|
Leasehold improvements(2)
|
|
Shorter of lease term or estimated useful life |
|
|
|
Flight equipment under capital lease
|
|
Shorter of lease term or estimated useful life |
|
|
|
|
(1) |
|
We capitalize certain internal and external costs incurred to develop and
implement software. For the years ended December 31, 2010, 2009 and 2008, we recorded $71
million, $95 million and $99 million, respectively, for amortization of capitalized software.
The net book value of these assets totaled $153 million and $126 million at December 31, 2010
and 2009, respectively. |
|
(2) |
|
For leasehold improvements at certain airport facilities, we apply estimated
useful lives which extend beyond the contractual lease terms. |
54
We record impairment losses on flight equipment and other long-lived assets used in
operations when events and circumstances indicate the assets may be impaired and the estimated
future cash flows generated by those assets are less than their carrying amounts. Factors which
could cause impairment include, but are not limited to, (1) deciding to permanently remove flight
equipment or other long-lived assets from operations, (2) significant changes in the estimated
useful life, (3) operational downsizing, (4) significant changes in projected cash flows, (5)
permanent and significant declines in fleet fair values and (6) changes to the regulatory
environment. For long-lived assets held for sale, we record impairment losses when the carrying
amount is greater than the fair value less the cost to sell. We discontinue depreciation of
long-lived assets when these assets are classified as held for sale.
To determine whether impairments exist for aircraft used in operations, we group assets at the
fleet-type level (the lowest level for which there are identifiable cash flows) and then estimate
future cash flows based on projections of capacity, passenger mile yield, fuel costs, labor costs
and other relevant factors. If an impairment occurs, the impairment loss recognized is the amount
by which the aircrafts carrying amount exceeds its estimated fair value. We estimate aircraft fair
values using published sources, appraisals and bids received from third parties, as available.
Goodwill and Other Intangible Assets
We apply a fair value-based impairment test to the net book value of goodwill and
indefinite-lived intangible assets on an annual basis and, if certain events or circumstances
indicate that an impairment loss may have been incurred, on an interim basis. The annual impairment
test date for goodwill and indefinite-lived intangible assets is October 1.
We value goodwill and identified intangible assets primarily using the income approach
valuation technique. These measurements include the following significant unobservable inputs: (1)
our projected revenues, expenses and cash flows, (2) an estimated weighted average cost of capital,
(3) assumed discount rates depending on the asset and (4) a tax rate. These assumptions are
consistent with those hypothetical market participants would use. Since we are required to make
estimates and assumptions when evaluating goodwill and indefinite-lived intangible assets for
impairment, the actual amounts may differ materially from these estimates.
Changes in assumptions or circumstances could result in impairment. Factors which could cause
impairment include, but are not limited to, (1) negative trends in our market capitalization, (2)
an increase in fuel prices, (3) declining passenger mile yields, (4) lower passenger demand as a
result of the weakened U.S. and global economy, (5) interruption to our operations due to an
employee strike, terrorist attack, or other reasons, (6) changes to the regulatory environment and
(7) consolidation of competitors in the airline industry.
Goodwill
Goodwill reflects (1) the excess of the reorganization value of Delta over the fair values of
tangible and identifiable intangible assets, net of liabilities, from the adoption of fresh start
reporting upon emergence from bankruptcy, adjusted for impairment and (2) the excess of purchase
price over the fair values of tangible and identifiable intangible assets acquired and liabilities
assumed from Northwest in the Merger.
In evaluating goodwill for impairment, we first compare our one reporting units fair value to
its carrying value. We estimate the fair value of our reporting unit by considering (1) market
capitalization, (2) controlling interest premiums, (3) recent market transactions, (4) projected
discounted future cash flows and (5) other factors. If the reporting units fair value exceeds its
carrying value, no further testing is required. If, however, the reporting units carrying value
exceeds its fair value, we then determine the amount of the impairment charge, if any. We recognize
an impairment charge if the carrying value of the reporting units goodwill exceeds its estimated
fair value.
55
Identifiable Intangible Assets
Identifiable intangible assets reflect intangible assets recorded as a result of our adoption
of fresh start reporting upon emergence from bankruptcy and acquired in the Merger.
Indefinite-lived assets are not amortized. Definite-lived intangible assets are amortized on a
straight-line basis or under the undiscounted cash flows method over the estimated economic life of
the respective agreements and contracts. Costs incurred to renew or extend the term of an
intangible asset are expensed as incurred.
We perform the impairment test for our indefinite-lived intangible assets by comparing the
assets fair value to its carrying value. Fair value is estimated based on (1) recent market
transactions, where available, (2) the lease savings method for certain airport slots (which
reflects potential lease savings from owning the slots rather than leasing them from another
airline at market rates), (3) the royalty method for the Delta tradename (which assumes
hypothetical royalties generated from using our tradename) or (4) projected discounted future cash
flows. We recognize an impairment charge if the assets carrying value exceeds its estimated fair
value.
Income Taxes
We account for deferred income taxes under the liability method. We recognize deferred tax
assets and liabilities based on the tax effects of temporary differences between the financial
statement and tax bases of assets and liabilities, as measured by current enacted tax rates. A
valuation allowance is recorded to reduce deferred tax assets when necessary. Deferred tax assets
and liabilities are recorded net as current and noncurrent deferred income taxes on our
Consolidated Balance Sheets.
Our income tax provisions are based on calculations and assumptions that are subject to
examination by the Internal Revenue Service (the IRS) and other taxing authorities. Although the
positions we have taken on previously filed tax returns are reasonable, we have established tax and
interest reserves in recognition that taxing authorities may challenge these positions, which could
result in additional liabilities for taxes and interest. We review and adjust the reserves as
circumstances warrant and events occur, such as lapsing of applicable statutes of limitations,
conclusion of tax audits, a change in exposure based on current calculations, identification of new
issues, release of administrative guidance or the rendering of a court decision affecting a
particular issue. We adjust the income tax provision in the period in which the facts that give
rise to the revision become known.
Long-Term Investments
Investments with maturities of greater than one year when purchased are recorded at fair value
in other noncurrent assets on our Consolidated Balance Sheets. Our long-term investments are
comprised of student loan backed auction rate securities classified as available-for-sale and
insured auction rate securities classified as trading securities. Any change in the fair value of
these securities is recorded in accumulated other comprehensive loss or earnings, as appropriate.
For additional information regarding our auction rate securities, see Note 2.
Manufacturers Credits
We periodically receive credits in connection with the acquisition of aircraft and engines.
These credits are deferred until the aircraft and engines are delivered, and then applied on a pro
rata basis as a reduction to the cost of the related equipment.
Maintenance Costs
We record maintenance costs to aircraft maintenance materials and outside repairs on our
Consolidated Statements of Operations. Maintenance costs are expensed as incurred, except for costs
incurred under power-by-the-hour contracts, which are expensed based on actual hours flown.
Power-by-the-hour contracts transfer certain risk to third party service providers and fix the
amount we pay per flight hour to the service provider in exchange for maintenance and repairs under
a predefined maintenance program. Modifications that enhance the operating performance or extend
the useful lives of airframes or engines are capitalized and amortized over the remaining estimated
useful life of the asset or the remaining lease term, whichever is shorter.
56
Inventories
Inventories of expendable parts related to flight equipment are carried at moving average cost
and charged to operations as consumed. An allowance for obsolescence is provided over the remaining
useful life of the related fleet for spare parts expected to be available at the date aircraft are
retired from service. We also provide allowances for parts identified as excess or obsolete to
reduce the carrying costs to the lower of cost or net realizable value. These parts are assumed to
have an estimated residual value of 5% of the original cost.
Advertising Costs
We expense advertising costs as other selling expenses in the year incurred. Advertising
expense was $169 million, $176 million and $114 million for the years ended December 31, 2010, 2009
and 2008, respectively.
Commissions
Passenger commissions are
recognized in operating expense on our Consolidated Statements of Operations when the related
revenue is recognized.
Equity-Based Compensation
We measure the cost of employee services in exchange for an award of equity instruments based
on the grant-date fair value of the award. The fair value of our stock options is estimated using
an option pricing model. The cost of equity awards granted to employees is recognized over the
period during which an employee is required to provide service in exchange for the award (usually
the vesting period of the award).
57
NOTE 2. FAIR VALUE MEASUREMENTS
Fair value is defined as an exit price, representing the amount that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between market participants.
Fair value is a market-based measurement that is determined based on assumptions market
participants would use in pricing an asset or liability. A three-tier fair value hierarchy is used
to prioritize the inputs in measuring fair value as follows:
|
|
|
Level 1. Observable inputs such as quoted prices in active markets; |
|
|
|
|
Level 2. Inputs, other than quoted prices in active markets, that are observable either
directly or indirectly; and |
|
|
|
|
Level 3. Unobservable inputs in which there is little or no market data, which require
the reporting entity to develop its own assumptions. |
Assets and liabilities measured at fair value are based on one or more of three valuation
techniques identified in the tables below. The valuation techniques are as follows:
|
(a) |
|
Market approach. Prices and other relevant information generated by market transactions
involving identical or comparable assets or liabilities; |
|
|
(b) |
|
Cost approach. Amount that would be required to replace the service capacity of an asset
(replacement cost); and |
|
|
(c) |
|
Income approach. Techniques to convert future amounts to a single present amount based on
market expectations (including present value techniques, option-pricing and excess earnings
models). |
Assets (Liabilities) Measured at Fair Value on a Recurring Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation |
(in millions) |
|
2010 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Technique |
|
Cash equivalents |
|
$ |
2,696 |
|
|
$ |
2,696 |
|
|
$ |
|
|
|
$ |
|
|
|
|
(a) |
|
Short-term investments |
|
|
718 |
|
|
|
718 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Restricted cash equivalents
and short-term investments |
|
|
440 |
|
|
|
440 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Long-term investments |
|
|
144 |
|
|
|
|
|
|
|
25 |
|
|
|
119 |
|
|
|
(a)(c) |
|
Hedge derivatives, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel derivatives |
|
|
351 |
|
|
|
|
|
|
|
351 |
|
|
|
|
|
|
|
(a)(c) |
|
Interest rate derivatives |
|
|
(74 |
) |
|
|
|
|
|
|
(74 |
) |
|
|
|
|
|
|
(a)(c) |
|
Foreign
currency derivatives |
|
|
(96 |
) |
|
|
|
|
|
|
(96 |
) |
|
|
|
|
|
|
(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation |
(in millions) |
|
2009 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Technique |
|
Cash equivalents |
|
$ |
4,335 |
|
|
$ |
4,335 |
|
|
$ |
|
|
|
$ |
|
|
|
|
(a) |
|
Short-term investments |
|
|
71 |
|
|
|
|
|
|
|
|
|
|
|
71 |
|
|
|
(c) |
|
Restricted cash equivalents
and short-term investments |
|
|
435 |
|
|
|
435 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Long-term investments |
|
|
129 |
|
|
|
|
|
|
|
|
|
|
|
129 |
|
|
|
(c) |
|
Hedge derivatives, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel derivatives |
|
|
176 |
|
|
|
|
|
|
|
176 |
|
|
|
|
|
|
|
(a)(c) |
|
Interest rate derivatives |
|
|
(45 |
) |
|
|
|
|
|
|
(45 |
) |
|
|
|
|
|
|
(a)(c) |
|
Foreign currency derivatives |
|
|
(23 |
) |
|
|
|
|
|
|
(23 |
) |
|
|
|
|
|
|
(a) |
|
|
58
Cash Equivalents. Cash equivalents consist primarily of money market funds and treasury bills
and are recorded in cash and cash equivalents on our Consolidated Balance Sheets at cost, which
approximates fair value.
Short-Term Investments. At December 31, 2010, short-term investments on our Consolidated
Balance Sheet consist of treasury bills and are recorded at cost, which approximates fair value.
During the year ended December 31, 2010, we received $77 million from an investment in a money
market fund that was liquidated in an orderly manner, $71 million of which was recorded in
short-term investments on our Consolidated Balance Sheet at December 31, 2009. This investment was
classified in Level 3 of the three-tier fair value hierarchy due to uncertainty regarding the
timing and expected amount of our distribution.
Restricted Cash Equivalents and Short-term Investments. Restricted investments consist
primarily of money market funds and time deposits and are recorded at cost, which approximates fair
value. At December 31, 2010 and 2009, we recorded $407 million and $419 million, respectively, in
restricted cash, cash equivalents and short-term investments and $33 million and $16 million,
respectively, in other noncurrent assets on our Consolidated Balance Sheets.
Long-Term Investments. Our long-term investments are comprised of student loan backed and
insured auction rate securities, which are recorded at fair value. At December 31, 2010 and 2009,
the fair value of our auction rate securities was $119 million and $128 million, respectively. The
cost of these investments was $143 million and $155 million, respectively. These investments are
classified as long-term in other noncurrent assets on our Consolidated Balance Sheets due to the
protracted failure in the auction process and long-term nature of these contractual maturities.
Because auction rate securities are not actively traded, fair values were estimated by
discounting the cash flows expected to be received over the remaining maturities of the underlying
securities. We based the valuations on our assessment of observable yields on instruments bearing
comparable risks and consider the creditworthiness of the underlying debt issuer. Changes in market
conditions could result in further adjustments to the fair value of these securities.
Hedge Derivatives. Our derivative instruments are comprised of contracts that are privately
negotiated with counterparties without going through a public exchange. Accordingly, our fair value
assessments give consideration to the risk of counterparty default (as well as our own credit
risk).
|
|
|
Fuel Derivatives. Our fuel derivative instruments generally consist of crude oil, heating
oil and jet fuel swap, collar, and call option contracts. Swap contracts are valued under
the income approach using a discounted cash flow model based on data either readily
observable or derived from public markets. Discount factors used in these valuations ranged
from 0.996 to 0.999 based on interest rates applicable to the maturity dates of the
respective contracts. Option contracts are valued under the income approach using option
pricing models based on data either readily observable in public markets, derived from
public markets or provided by counterparties who regularly trade in public markets.
Volatilities used in these valuations ranged from 16% to 34% depending on the maturity dates
of the respective contracts. |
|
|
|
|
Interest Rate Derivatives. Our interest rate derivative instruments consist of swap and
call option contracts and are valued primarily based on data readily observable in public
markets. |
|
|
|
|
Foreign Currency Derivatives. Our foreign currency derivative instruments consist of
Japanese yen and Canadian dollar forward contracts and are valued based on data readily
observable in public markets. |
For additional information regarding the classification of derivative instruments on our
Consolidated Balance Sheets, see Note 3.
59
Benefit Plan Assets
Benefit plan assets relate to our defined benefit pension plans and certain of our
postemployment benefit plans that are funded through trusts. The following table shows our benefit
plan assets by asset class. These investments are presented net of the related benefit obligation
in pension, postretirement, and related benefits on our Consolidated Balance Sheets. For
additional information regarding benefit plan assets, see Note 10.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation |
(in millions) |
|
2010 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Technique |
|
Common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
$ |
1,427 |
|
|
$ |
1,402 |
|
|
$ |
25 |
|
|
$ |
|
|
|
|
(a) |
|
Non-U.S. |
|
|
1,058 |
|
|
|
1,058 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Mutual funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
|
860 |
|
|
|
1 |
|
|
|
859 |
|
|
|
|
|
|
|
(a) |
|
Non-U.S. |
|
|
290 |
|
|
|
|
|
|
|
290 |
|
|
|
|
|
|
|
(a) |
|
Non-U.S. emerging markets |
|
|
370 |
|
|
|
|
|
|
|
370 |
|
|
|
|
|
|
|
(a) |
|
Diversified fixed income |
|
|
289 |
|
|
|
|
|
|
|
289 |
|
|
|
|
|
|
|
(a) |
|
High yield |
|
|
300 |
|
|
|
|
|
|
|
300 |
|
|
|
|
|
|
|
(a)(c) |
|
Commingled funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
|
917 |
|
|
|
|
|
|
|
917 |
|
|
|
|
|
|
|
(a) |
|
Non-U.S. |
|
|
224 |
|
|
|
|
|
|
|
224 |
|
|
|
|
|
|
|
(a) |
|
Non-U.S. emerging markets |
|
|
79 |
|
|
|
|
|
|
|
79 |
|
|
|
|
|
|
|
(a) |
|
Diversified fixed income |
|
|
405 |
|
|
|
|
|
|
|
405 |
|
|
|
|
|
|
|
(a) |
|
High yield |
|
|
53 |
|
|
|
|
|
|
|
53 |
|
|
|
|
|
|
|
(a) |
|
Alternative investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private equity |
|
|
1,494 |
|
|
|
|
|
|
|
|
|
|
|
1,494 |
|
|
|
(a)(c) |
|
Real estate and natural resources |
|
|
396 |
|
|
|
|
|
|
|
|
|
|
|
396 |
|
|
|
(a)(c) |
|
Fixed income |
|
|
511 |
|
|
|
|
|
|
|
511 |
|
|
|
|
|
|
|
(a)(c) |
|
Foreign currency derivative asset |
|
|
879 |
|
|
|
|
|
|
|
879 |
|
|
|
|
|
|
|
(a) |
|
Foreign currency derivative liability |
|
|
(874 |
) |
|
|
|
|
|
|
(874 |
) |
|
|
|
|
|
|
(a) |
|
Cash equivalents and other |
|
|
681 |
|
|
|
52 |
|
|
|
557 |
|
|
|
72 |
|
|
|
(a) |
|
|
|
|
|
|
Total benefit plan assets |
|
$ |
9,359 |
|
|
$ |
2,513 |
|
|
$ |
4,884 |
|
|
$ |
1,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation |
(in millions) |
|
2009 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Technique |
|
Common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
$ |
1,661 |
|
|
$ |
1,661 |
|
|
$ |
|
|
|
$ |
|
|
|
|
(a) |
|
Non-U.S. |
|
|
842 |
|
|
|
842 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Mutual funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
|
851 |
|
|
|
2 |
|
|
|
849 |
|
|
|
|
|
|
|
(a) |
|
Non-U.S. |
|
|
251 |
|
|
|
|
|
|
|
251 |
|
|
|
|
|
|
|
(a) |
|
Non-U.S. emerging markets |
|
|
335 |
|
|
|
55 |
|
|
|
280 |
|
|
|
|
|
|
|
(a) |
|
Diversified fixed income |
|
|
310 |
|
|
|
|
|
|
|
310 |
|
|
|
|
|
|
|
(a) |
|
High yield |
|
|
317 |
|
|
|
|
|
|
|
271 |
|
|
|
46 |
|
|
|
(a)(c) |
|
Commingled funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
|
891 |
|
|
|
|
|
|
|
891 |
|
|
|
|
|
|
|
(a) |
|
Non-U.S. |
|
|
187 |
|
|
|
|
|
|
|
187 |
|
|
|
|
|
|
|
(a) |
|
Non-U.S. emerging markets |
|
|
86 |
|
|
|
|
|
|
|
86 |
|
|
|
|
|
|
|
(a) |
|
Diversified fixed income |
|
|
346 |
|
|
|
|
|
|
|
346 |
|
|
|
|
|
|
|
(a) |
|
High yield |
|
|
50 |
|
|
|
|
|
|
|
50 |
|
|
|
|
|
|
|
(a) |
|
Alternative investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private equity |
|
|
1,216 |
|
|
|
|
|
|
|
|
|
|
|
1,216 |
|
|
|
(a)(c) |
|
Real estate and natural resources |
|
|
336 |
|
|
|
|
|
|
|
|
|
|
|
336 |
|
|
|
(a)(c) |
|
Fixed income |
|
|
389 |
|
|
|
|
|
|
|
389 |
|
|
|
|
|
|
|
(a)(c) |
|
Foreign currency derivative asset |
|
|
833 |
|
|
|
|
|
|
|
833 |
|
|
|
|
|
|
|
(a) |
|
Foreign currency derivative liability |
|
|
(833 |
) |
|
|
|
|
|
|
(833 |
) |
|
|
|
|
|
|
(a) |
|
Cash equivalents and other |
|
|
684 |
|
|
|
43 |
|
|
|
606 |
|
|
|
35 |
|
|
|
(a) |
|
|
|
|
|
|
Total benefit plan assets |
|
$ |
8,752 |
|
|
$ |
2,603 |
|
|
$ |
4,516 |
|
|
$ |
1,633 |
|
|
|
|
|
|
|
|
|
|
60
Common Stock. Common stock is valued at the closing price reported on the active market on
which the individual securities are traded.
Mutual and Commingled Funds. These funds are valued using the net asset value divided by
the number of shares outstanding, which is based on quoted market prices of the underlying assets
owned by the fund.
Alternative Investments. The valuation of alternative investments requires significant
judgment due to the absence of quoted market prices as well as the inherent lack of liquidity and
the long-term nature of these assets. Accordingly, these assets are generally classified in Level
3. Alternative investments include private equity, real estate, energy and timberland.
Investments are valued based on recommendations of our investment managers who use valuation models
where one or more of the significant inputs into the model cannot be observed and which require the
development of assumptions. We also assess the potential for adjustment to the fair value of these
investments due to the lag in the availability of data. In these cases, we solicit preliminary
valuation updates at year-end from the investment managers and use that information and
corroborating data from public markets to determine any needed adjustments to fair value.
Fixed Income. Investments include corporate bonds, government bonds, collateralized mortgage
obligations and other asset backed securities. These investments are generally valued at the bid
price or the average of the bid and asked price. Prices are obtained from independent pricing
services and are based on pricing models, quoted prices of securities with similar characteristics,
or broker quotes.
Foreign Currency Derivatives.
Our foreign currency derivative instruments consist of various forward contracts and are valued based on data readily
observable in public markets.
Cash Equivalents and Other. These investments primarily consist of short term investment
funds which are valued using the net asset value based on the value of the underlying assets minus
the liabilities and then divided by the number of shares outstanding. Cash is not included in the
table above.
Assets Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
December 31, 2009 |
December 31, 2008 |
|
|
|
|
|
|
Hedge |
|
|
|
Hedge |
|
|
Benefit Plan |
|
Derivatives |
|
Benefit Plan |
|
Derivatives |
(in millions) |
|
Assets |
|
Asset, Net |
|
Assets |
|
Liability, Net |
|
Balance at beginning of period |
|
$ |
1,633 |
|
|
$ |
(1,091 |
) |
|
$ |
1,797 |
|
|
$ |
|
|
Liabilities assumed from Northwest |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
(567 |
) |
Change in fair value included in earnings |
|
|
|
|
|
|
(1,232 |
) |
|
|
|
|
|
|
(203 |
) |
Change in fair value included in other
comprehensive income (loss) |
|
|
264 |
|
|
|
1,230 |
|
|
|
(56 |
) |
|
|
(1,298 |
) |
Purchases and settlements, net |
|
|
65 |
|
|
|
1,199 |
|
|
|
(108 |
) |
|
|
924 |
|
Transfers from/to Level 3(1) |
|
|
|
|
|
|
(106 |
) |
|
|
|
|
|
|
53 |
|
|
Balance at end of period |
|
$ |
1,962 |
|
|
$ |
|
|
|
$ |
1,633 |
|
|
$ |
(1,091 |
) |
|
|
|
|
(1) |
|
During 2008, we reevaluated certain valuation inputs used for our option contracts. As a result, we reclassified these contracts from Level 2
to Level 3 since valuation at December 31, 2007. During 2009, we implemented systems that better provide for the evaluation of
these inputs against market data and ceased reliance on data provided by counterparties as
a source for our valuation assessments. As a result, we reclassified our option contracts to
Level 2. |
(Losses) gains included in earnings above for hedge derivatives for the year ended
December 31, 2009 are recorded on our Consolidated Statements of Operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
December 31, 2008 |
|
|
Aircraft Fuel |
|
Other |
|
Aircraft Fuel |
|
Other |
|
|
Expense and Related |
|
(Expense) |
|
Expense and Related |
|
(Expense) |
(in millions) |
|
Taxes |
|
Income |
|
Taxes |
|
Income |
|
Total (losses) gains included in earnings |
|
$ |
(1,263 |
) |
|
$ |
31 |
|
|
$ |
(176 |
) |
|
$ |
(27 |
) |
|
Change in unrealized gains (losses) relating
to assets and liabilities still held at end
of period |
|
$ |
|
|
|
$ |
26 |
|
|
$ |
(91 |
) |
|
$ |
(5 |
) |
|
61
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant Unobservable |
|
|
|
|
Inputs (Level 3) |
|
|
|
|
December 31, |
|
December 31, |
|
Valuation |
(in millions) |
|
2010 |
|
2009 |
|
Technique |
|
Goodwill(1)
|
|
$ |
9,794 |
|
|
$ |
9,787 |
|
|
(a)(b)(c) |
Indefinite-lived intangible assets(1)
|
|
|
4,303 |
|
|
|
4,304 |
|
|
(a)(c) |
Definite-lived intangible assets(1)
|
|
|
446 |
|
|
|
525 |
|
|
(c) |
|
|
|
|
(1) |
|
See Note 1, Goodwill and Other Intangible Assets, for a description of how
these assets are tested for impairment. |
In September 2010, we recorded a $146 million impairment charge primarily related to our
decision to substantially reduce Comairs fleet over the next two years by retiring older,
less-efficient CRJ-100/200 50-seat aircraft. In evaluating these aircraft for impairment, we
estimated their fair value by utilizing a market approach considering (1) published market data
generally accepted in the airline industry, (2) recent market transactions, where available, (3)
the current and projected supply and demand of these aircraft and (4) the overall condition and age
of the aircraft. Based on our fair value assessments, these aircraft have an estimated fair value
of $97 million and are classified in Level 3 of the three-tier fair value hierarchy. For additional
information regarding this impairment charge, see Note 16.
Fair Value of Debt
Market risk associated with our fixed and variable rate long-term debt relates to the
potential reduction in fair value and negative impact to future earnings, respectively, from an
increase in interest rates. The following table presents information about our debt:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
(in millions) |
|
2010 |
|
2009 |
|
Total debt at par value |
|
$ |
15,442 |
|
|
$ |
18,068 |
|
Unamortized discount, net |
|
|
(935 |
) |
|
|
(1,403 |
) |
|
Net carrying amount |
|
$ |
14,507 |
|
|
$ |
16,665 |
|
|
Fair value(1) |
|
$ |
15,400 |
|
|
$ |
15,400 |
|
|
|
|
|
(1) |
|
The aggregate fair value of debt was based primarily on reported market values
and recently completed market transactions and estimates based on interest rates, maturities,
credit risk and underlying collateral. |
NOTE 3. RISK MANAGEMENT AND FINANCIAL INSTRUMENTS
Hedge Position
The following tables reflect the estimated fair value asset (liability) positions of our hedge
contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
Hedge |
(in millions, unless |
|
Notional |
|
Maturity |
|
Prepaid Expenses |
|
Other Noncurrent |
|
Other Accrued |
|
Noncurrent |
|
Margin |
otherwise stated) |
|
Balance |
|
Date |
|
and Other Assets |
|
Assets |
|
Liabilities |
|
Liabilities |
|
Payable, net |
|
Designated as hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel hedge swaps,
collars and call
options |
|
1.5 billion gallons crude oil |
|
January 2011 February 2012 |
|
$328 |
|
$24 |
|
$ |
|
$ |
|
|
Interest rate swaps
and call options |
|
$1,143 |
|
August 2011 May 2019
|
|
|
|
|
|
(35) |
|
(39) |
|
|
Foreign currency
exchange forwards |
|
141.1 billion Japanese
yen; 233 million Canadian dollars
|
|
January 2011
November 2013 |
|
|
|
|
|
(60) |
|
(36) |
|
|
|
|
|
|
|
|
|
|
|
Total designated |
|
|
|
|
|
328 |
|
24 |
|
(95) |
|
(75) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not designated as hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel hedge swaps |
|
192 million gallons crude oil and crude oil products
|
|
January 2011 December 2011 |
|
27 |
|
14 |
|
(19) |
|
(8) |
|
|
|
|
|
|
|
|
|
|
|
Total not designated |
|
|
|
|
|
27 |
|
14 |
|
(19) |
|
(8) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative instruments |
|
|
|
|
|
$355 |
|
$38 |
|
$(114) |
|
$(83) |
|
$(119) |
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
(in millions, |
|
|
|
|
|
Prepaid |
|
|
|
Other |
|
Hedge |
unless otherwise |
|
Notional |
|
Maturity |
|
Expenses and |
|
Other Accrued |
|
Noncurrent |
|
Margin |
stated) |
|
Balance |
|
Date |
|
Other Assets |
|
Liabilities |
|
Liabilities |
|
Payable, net |
|
Designated as hedges |
|
|
|
|
|
|
|
|
|
|
|
|
Fuel
hedge swaps,
collars and
call options |
|
795 million gallons crude oil, heating oil, jet fuel |
|
January 2010 December 2010 |
|
$180 |
|
$(89) |
|
$ |
|
|
Interest rate
swaps and call
options |
|
$1,478 |
|
September 2010 May 2019 |
|
2 |
|
(38) |
|
(9) |
|
|
Foreign
currency
exchange
forwards |
|
55.8 billion Japanese Yen; 295 million Canadian Dollars
|
|
January 2010 September 2012 |
|
1 |
|
(12) |
|
(12) |
|
|
|
|
|
Total derivative instruments |
|
|
|
|
|
$183 |
|
$(139) |
|
$(21) |
|
$(10) |
|
Fuel Price Risk
Our results of operations are materially impacted by changes in aircraft fuel prices. In an
effort to manage our exposure to this risk, we periodically enter into derivative instruments
generally comprised of crude oil, heating oil and jet fuel swap, collar and call option contracts
to hedge a portion of our projected aircraft fuel requirements, including those of our Contract
Carriers under capacity purchase agreements.
As of December 31, 2010, our open fuel hedge position is as follows:
|
|
|
|
|
|
|
|
|
|
|
Percentage of |
|
|
|
|
Projected |
|
Fair Value at |
|
|
Fuel Requirements |
|
December 31, |
(in millions, unless otherwise stated) |
|
Hedged |
|
2010 |
|
2011 |
|
|
36 |
% |
|
$ |
328 |
|
2012 |
|
|
1 |
|
|
|
24 |
|
|
Total |
|
|
|
|
|
$ |
352 |
|
|
In the Merger, we assumed all of Northwests outstanding fuel hedge contracts. On the Closing
Date, we designated certain of Northwests derivative instruments, comprised of crude oil collar
and swap contracts, as hedges. All Northwest fuel hedge contracts settled as of June 30, 2009.
63
Hedge Gains (Losses)
Gains (losses) recorded on our Consolidated Financial Statements related to our hedge
contracts are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Portion Recognized |
|
Effective Portion Reclassified from Accumulated Other |
|
|
|
|
in Other Comprehensive Income |
|
Comprehensive |
|
Ineffective Portion Recognized |
|
|
(Loss) |
|
Loss to Earnings |
|
in Other (Expense) Income |
|
|
Year Ended December 31, |
(in millions) |
|
2010 |
|
2009 |
|
2008 |
|
2010 |
|
|
2009(1) |
|
|
2008(1) |
|
2010 |
|
2009 |
|
2008 |
|
Designated as hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel hedge
swaps, collars,
and call options |
|
$ |
153 |
|
|
$ |
1,268 |
|
|
$ |
(1,268 |
) |
|
$ |
(87 |
) |
|
$ |
(1,344 |
) |
|
$ |
26 |
|
|
$ |
(4 |
) |
|
$ |
57 |
|
|
$ |
(20 |
) |
Interest rate
swaps and call
options |
|
|
(28 |
) |
|
|
51 |
|
|
|
(94 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
exchange forwards
and collars |
|
|
(73 |
) |
|
|
11 |
|
|
|
(33 |
) |
|
|
(31 |
) |
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total designated |
|
$ |
52 |
|
|
$ |
1,330 |
|
|
$ |
(1,395 |
) |
|
$ |
(123 |
) |
|
$ |
(1,350 |
) |
|
$ |
26 |
|
|
$ |
(4 |
) |
|
$ |
57 |
|
|
$ |
(20 |
) |
|
|
|
|
(1) |
|
In 2008, we recorded a mark-to-market adjustment of $91 million related to
Northwest derivative contracts settling in 2009 that were not designated as hedges in aircraft
fuel and related taxes on our Consolidated Statement of Operations. In 2009, we recorded an
additional $15 million loss. |
As of December 31, 2010, we recorded in accumulated other comprehensive loss on our
Consolidated Balance Sheet $109 million of net gains on our hedge contracts scheduled to settle in
the next 12 months.
In 2008, one of our fuel hedge contract counterparties, Lehman Brothers, filed for bankruptcy.
As a result, we terminated our fuel hedge contracts with Lehman Brothers prior to their scheduled
settlement dates. Additionally, we terminated certain fuel hedge contracts with other
counterparties to reduce our exposure to projected fuel hedge losses due to the decrease in crude
oil prices. We recorded an unrealized loss of $324 million, which represents the effective portion
of these terminated contracts at the date of settlement, in accumulated other comprehensive loss on
our Consolidated Balance Sheet. These losses were reclassified into the Consolidated Statements of
Operations in accordance with their original contract settlement dates through December 2009.
Interest Rate Risk
Our exposure to market risk from adverse changes in interest rates is primarily associated
with our long-term debt obligations. Market risk associated with our fixed and variable rate
long-term debt relates to the potential reduction in fair value and negative impact to future
earnings, respectively, from an increase in interest rates. We also have exposure to market risk
from adverse changes in interest rates associated with our cash portfolio and benefit plan
obligations. Market risk associated with our cash portfolio relates to the potential decline in
interest income from a decrease in interest rates. Workers compensation, pension, postemployment,
and postretirement benefit obligation risk relates to the potential increase in our future
obligations and expenses from a decrease in interest rates used to discount these obligations.
In an effort to manage our exposure to the risk associated with our variable rate long-term
debt, we periodically enter into derivative instruments comprised of interest rate swaps and call
option agreements. In the Merger, we assumed Northwests outstanding interest rate swap and call
option agreements. On the Closing Date, we designated these derivative instruments as cash flow
hedges for purposes of converting our interest rate exposure on a portion of our debt portfolio
from a floating rate to a fixed rate. The floating rates are based on three-month LIBOR plus a
margin. Our interest rate swap and call option agreements had an estimated fair value liability
position of $74 million at December 31, 2010.
64
Foreign Currency Exchange Rate Risk
We are subject to foreign currency exchange rate risk because we have revenue and expense
denominated in foreign currencies, primarily the Japanese yen and the Canadian dollar. To manage
exchange rate risk, we attempt to execute both our international revenue and expense transactions
in the same foreign currency to the extent practicable. From time to time, we may also enter into
foreign currency options and forward contracts.
In the Merger, we assumed Northwests outstanding foreign currency derivative instruments. On
the Closing Date, we designated certain of these derivative instruments, comprised of Japanese yen
forward and collar contracts, as cash flow hedges. All Northwest foreign currency derivative
instruments settled as of December 31, 2009.
As of December 31, 2010, we have hedged approximately 50%, 32% and 23% of anticipated Japanese
yen-denominated, and 20%, 10% and 1% of anticipated Canadian dollar-denominated, cash flows from
sales in 2011, 2012 and 2013 respectively. These foreign currency derivative instruments had an
estimated fair value liability position of $96 million at December 31, 2010.
Credit Risk
To manage credit risk associated with our aircraft fuel price, interest rate and foreign
currency hedging programs, we select counterparties based on their credit ratings and limit our
exposure to any one counterparty. We also monitor the market position of these programs and our
relative market position with each counterparty.
Due to the estimated fair value position of our fuel hedge contracts as of December 31, 2010,
we received $119 million in net fuel hedge margin from counterparties. Margin requirements are
driven by changes in the underlying price of the commodity. If the price of crude oil increases
significantly, our counterparties may be required to post significant additional margin to us.
Conversely, if the price of crude oil decreases significantly, we may be required to post
significant additional margin to counterparties.
Our accounts receivable are generated largely from the sale of passenger airline tickets and
cargo transportation services. The majority of these sales are processed through major credit card
companies, resulting in accounts receivable that may be subject to certain holdbacks by the credit
card processors.
We also have receivables from the sale of mileage credits under our SkyMiles Program to
participating airlines and non-airline businesses such as credit card companies, hotels and car
rental agencies. The credit risk associated with these receivables is minimal and that the
allowance for uncollectible accounts that we have provided is appropriate.
Self-Insurance Risk
We self-insure a portion of our losses from claims related to workers compensation,
environmental issues, property damage, medical insurance for employees and general liability.
Losses are accrued based on an estimate of the ultimate aggregate liability for claims incurred,
using independent actuarial reviews based on standard industry practices and our historical
experience. A portion of our projected workers compensation liability is secured with restricted
cash collateral.
65
NOTE 4. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table reflects the changes in the carrying amount of goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying |
|
|
|
|
(in millions) |
|
Amount |
|
Impairment |
|
Net |
|
Balance at January 1, 2009 |
|
$ |
16,670 |
|
|
$ |
(6,939 |
) |
|
$ |
9,731 |
|
|
Northwest Merger |
|
|
60 |
|
|
|
|
|
|
|
60 |
|
Other |
|
|
(4 |
) |
|
|
|
|
|
|
(4 |
) |
|
Balance at December 31, 2009 |
|
|
16,726 |
|
|
|
(6,939 |
) |
|
|
9,787 |
|
|
Other |
|
|
7 |
|
|
|
|
|
|
|
7 |
|
|
Balance at December 31, 2010 |
|
$ |
16,733 |
|
|
$ |
(6,939 |
) |
|
$ |
9,794 |
|
|
During 2008, we experienced a significant decline in market capitalization primarily from
record high fuel prices and overall airline industry conditions. In addition, the announcement of
our intention to merge with Northwest established a stock exchange ratio based on the relative
valuation of Delta and Northwest (see Note 12). We determined that these factors combined with
further increases in fuel prices were an indicator that a goodwill impairment test was required. As
a result, we estimated fair value based on a discounted projection of future cash flows, supported
with a market-based valuation. We determined that goodwill was impaired and recorded a non-cash
charge of $6.9 billion for the year ended December 31, 2008.
We also recorded a non-cash charge of $357 million ($238 million after tax) for the year ended
December 31, 2008 to reduce the carrying value of certain intangible assets based on their revised
estimated fair values. This charge was included in impairment of goodwill and other intangible
assets on our Consolidated Statement of Operations for the year ended December 31, 2008.
The following tables reflect the carrying amount of intangible assets:
Indefinite-Lived Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
Carrying |
|
Carrying |
|
|
Amount |
|
Amount |
|
|
December 31, |
|
December 31, |
(in millions) |
|
2010 |
|
2009 |
|
International routes and slots |
|
$ |
2,290 |
|
|
$ |
2,290 |
|
Delta tradename |
|
|
850 |
|
|
|
850 |
|
SkyTeam alliance |
|
|
661 |
|
|
|
661 |
|
Domestic routes and slots |
|
|
500 |
|
|
|
500 |
|
Other |
|
|
2 |
|
|
|
3 |
|
|
Total |
|
$ |
4,303 |
|
|
$ |
4,304 |
|
|
International Routes and Slots. In October 2010, the U.S. and Japan signed an open skies
agreement (Japan Open Skies), which allows U.S. air carriers unlimited flying to and from Japan
under route authorities granted by the U.S. Department of Transportation. Access to the
primary Japanese airports (Haneda and Narita airports in Tokyo)
continues to be regulated through
allocations of take-off and landing authorizations or slots, which limit the rights of carriers
to operate at these airports. The U.S. and Japan have agreed on plans for a limited number of
additional slots at these airports. The substantial number of slots we hold
at Tokyo Narita Airport, combined with limited-entry rights we hold
in other countries, enables us to operate a hub at
Tokyo serving the Asia-Pacific region. We currently believe that Japan Open Skies will not have a
significant long-term impact on our Pacific routes and slots; therefore, these assets continue to
have an indefinite life and are not presently impaired. Negative changes to our operations could
result in an impairment charge or a change from indefinite-lived to definite-lived in the period in
which the changes occur or are projected to occur.
66
Definite-Lived Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
December 31, 2009 |
|
|
Estimated |
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
Life in |
|
Carrying |
|
Accumulated |
|
Carrying |
|
Accumulated |
(in millions) |
|
Year(s) |
|
Amount |
|
Amortization |
|
Amount |
|
Amortization |
|
Marketing agreements |
|
|
1 to 18 |
|
|
$ |
730 |
|
|
$ |
(428 |
) |
|
$ |
730 |
|
|
$ |
(370 |
) |
Contracts |
|
|
17 to 34 |
|
|
|
193 |
|
|
|
(49 |
) |
|
|
193 |
|
|
|
(36 |
) |
Other |
|
|
1 to 4 |
|
|
|
53 |
|
|
|
(53 |
) |
|
|
53 |
|
|
|
(45 |
) |
|
Total |
|
|
|
|
|
$ |
976 |
|
|
$ |
(530 |
) |
|
$ |
976 |
|
|
$ |
(451 |
) |
|
Total amortization expense for the years ended December 31, 2010, 2009 and 2008 was $79
million, $97 million and $207 million, respectively. The following table summarizes the expected
amortization expense for our definite-lived intangible assets:
|
|
|
|
|
Years Ending December 31, |
|
|
|
|
(in millions) |
|
|
|
|
|
2011 |
|
$ |
70 |
|
2012 |
|
|
69 |
|
2013 |
|
|
68 |
|
2014 |
|
|
67 |
|
2015 |
|
|
67 |
|
Thereafter |
|
|
105 |
|
|
Total |
|
$ |
446 |
|
|
NOTE 5. DEBT
The following table summarizes our debt:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
(in millions) |
|
2010 |
|
2009 |
|
Senior Secured Exit Financing Facilities due 2012 and 2014 |
|
$ |
1,450 |
|
|
$ |
2,444 |
|
Senior Secured Credit Facilities due 2013 |
|
|
247 |
|
|
|
249 |
|
Senior Secured Notes due 2014 |
|
|
675 |
|
|
|
750 |
|
Senior Second Lien Notes due 2015 |
|
|
397 |
|
|
|
600 |
|
Bank Revolving Credit Facilities due 2011 and 2012 |
|
|
|
|
|
|
|
|
Other Financing Arrangements |
|
|
|
|
|
|
|
|
Certificates due in installments from 2011 to 2023 |
|
|
5,310 |
|
|
|
5,709 |
|
Aircraft financings due in installments from 2011 to 2025 |
|
|
5,170 |
|
|
|
6,005 |
|
Other secured financings due in installments from 2011 to 2031 |
|
|
810 |
|
|
|
911 |
|
|
Total secured debt |
|
|
14,059 |
|
|
|
16,668 |
|
|
American Express Agreement |
|
|
1,000 |
|
|
|
1,000 |
|
Clayton County Bonds, Series 2009 due in installments from 2014 to 2035 |
|
|
150 |
|
|
|
150 |
|
Other unsecured debt due in installments from 2011 to 2030 |
|
|
233 |
|
|
|
250 |
|
|
Total unsecured debt |
|
|
1,383 |
|
|
|
1,400 |
|
|
Total secured and unsecured debt |
|
|
15,442 |
|
|
|
18,068 |
|
Unamortized discount, net |
|
|
(935 |
) |
|
|
(1,403 |
) |
|
Total debt |
|
|
14,507 |
|
|
|
16,665 |
|
Less: current maturities |
|
|
(1,954 |
) |
|
|
(1,445 |
) |
|
Total long-term debt |
|
$ |
12,553 |
|
|
$ |
15,220 |
|
|
67
Senior Secured Exit Financing Facilities due 2012 and 2014
In connection with Deltas emergence from bankruptcy in April 2007, we entered into a senior
secured exit financing facility (the Senior Secured Exit Financing Facilities) to borrow up to
$2.5 billion. The Senior Secured Exit Financing Facilities originally consisted of a:
|
|
|
$1.0 billion first-lien revolving credit facility (the
Exit Revolving Facility); |
|
|
|
|
$600 million first-lien synthetic revolving facility (the Synthetic Facility)
(together with the Exit Revolving Facility, the First- Lien
Facilities); and |
|
|
|
|
$900 million second-lien term loan facility (the Second-Lien Facility). |
During 2010, we (1) repaid $914 million of our Exit Revolving Facility and (2) amended the
Exit Revolving Facility to convert the remaining $86 million of revolving commitment to a fully
funded, non-revolving loan due April 2012. Borrowings under the Senior Secured Exit Financing
Facilities can be repaid without penalty and amounts repaid under the Exit Revolving Facility and
Synthetic Facility can be reborrowed. As of December 31, 2010, the Exit Revolving Facility was
undrawn.
Borrowings under the Synthetic Facility and Second-Lien Facility must be repaid annually in an
amount equal to 1% of the original principal amount of the respective loans (to be paid annually
with respect to the Synthetic Facility and in equal quarterly installments with respect to the
Second-Lien Facility). All remaining borrowings under the First-Lien Facilities and the Second-Lien
Facility are due in April 2012 and April 2014, respectively. As of December 31, 2010, the Senior
Secured Exit Financing Facilities had interest rates ranging from 2.3% to 3.5% per annum.
Our obligations under the Senior Secured Exit Financing Facilities are guaranteed by
substantially all of our domestic subsidiaries (the Guarantors). The Senior Secured Exit
Financing Facilities and the related guarantees are secured by liens on substantially all of our
and the Guarantors present and future assets that do not secure other financings (the
Collateral). The First-Lien Facilities are secured by a first priority security interest in the
Collateral. The Second-Lien Facility is secured by a second priority security interest in the
Collateral.
The Senior Secured Exit Financing Facilities include affirmative, negative and financial
covenants that restrict our ability to, among other things, incur additional secured indebtedness,
make investments, sell or otherwise dispose of assets if not in compliance with the collateral
coverage ratio tests, pay dividends or repurchase stock. These covenants may have a material
adverse impact on our operations and require us to:
|
|
|
maintain a minimum fixed charge coverage ratio (defined as the ratio of (1) earnings
before interest, taxes, depreciation, amortization and aircraft rent, and subject to other
adjustments to net income (EBITDAR) to (2) the sum of gross cash interest expense, cash
aircraft rent expense and the interest portion of our capitalized lease obligations, for
successive trailing 12-month periods ending at each quarter-end date through the maturity
date of the respective Senior Secured Exit Financing Facilities), which minimum ratio is
1.20:1 under the First-Lien Facilities and 1.02:1 under the Second-Lien Facility; |
|
|
|
|
maintain unrestricted cash, cash equivalents and permitted investments of not less than
$750 million under the First-Lien Facilities and $650 million under the Second-Lien
Facility; |
|
|
|
|
maintain a minimum total collateral coverage ratio (defined as the ratio of (1) certain
of the Collateral that meets specified eligibility standards (Eligible Collateral) to (2)
the sum of the aggregate outstanding exposure under the First-Lien Facilities and the
Second-Lien Facility and the aggregate termination value of certain hedging agreements) of
1.25:1 at all times; and |
|
|
|
|
in the case of the First-Lien Facilities, also maintain a minimum first-lien collateral
coverage ratio (together with the total collateral coverage ratio described above, the
collateral coverage ratios) (defined as the ratio of (1) Eligible Collateral to (2) the
sum of the aggregate outstanding exposure under the First Lien Facilities and the aggregate
termination value of certain hedging agreements) of 1.75:1 at all times. |
68
If the collateral coverage ratios are not maintained, we must either provide additional
collateral to secure our obligations, or we must repay the loans under the Senior Secured Exit
Financing Facilities by an amount necessary to maintain compliance with the collateral coverage
ratios.
The Senior Secured Exit Financing Facilities contain events of default customary for senior
secured exit financings, including cross-defaults to other material indebtedness and certain change
of control events. The Senior Secured Exit Financing Facilities also include events of default
specific to our business, including the suspension of all or substantially all of our flights and
other operations for more than two consecutive days (other than as a result of a Federal Aviation
Administration suspension due to extraordinary events similarly affecting other major U.S. air
carriers). Upon the occurrence of an event of default, the outstanding obligations under the Senior
Secured Exit Financing Facilities may be accelerated and become due and payable immediately, and
our cash may become restricted.
Senior Secured Credit Facilities due 2013
In 2009, we entered into a first-lien revolving credit facility in the aggregate principal
amount of $500 million (the Revolving Facility) and a first-lien term loan facility in the
aggregate principal amount of $250 million (the Term Facility and collectively with the Revolving
Facility, the Senior Secured Credit Facilities). The Senior Secured Credit Facilities are
guaranteed by the Guarantors and are secured by a first lien on our Pacific route authorities and
certain related assets (the Pacific Collateral). Lenders under the Senior Secured Credit
Facilities and holders of the Senior Secured Notes (as described below) have equal rights to
payment and collateral.
Borrowings under the Term Facility must be repaid in an amount equal to 1% of the original
principal amount of the term loans annually (to be paid in equal quarterly installments), with the
balance of the term loans due and payable in September 2013. Borrowings under the Term Facility
bear interest at a variable rate equal to LIBOR or another index rate, in each case plus a
specified margin. As of December 31, 2010, the Term Facility had an interest rate of 8.8% per
annum.
In 2009, we borrowed and subsequently repaid the entire amount of the Revolving Facility,
which matures in March 2013. Borrowings under the Revolving Facility can be repaid without penalty
and amounts repaid can be reborrowed. Borrowings under the Revolving Facility bear interest at a
variable rate equal to LIBOR or another index rate, in each case plus a specified margin. As of
December 31, 2010, the Revolving Facility was undrawn.
The Senior Secured Credit Facilities contain affirmative and negative covenants and default
provisions that are substantially similar to the ones described under Senior Secured Exit
Financing Facilities above. The Senior Secured Credit Facilities also contain financial covenants
that require us to:
|
|
|
maintain a minimum fixed charge coverage ratio (defined as the ratio of (1) EBITDAR
(excluding gains and losses arising under fuel hedging arrangements incurred prior to the
closing date of the Senior Secured Credit Facilities) to (2) the sum of cash interest
expense plus cash aircraft rent expense plus the interest portion of Deltas capitalized
lease obligations) in each case for the 12-month period ending as of the last day of each
fiscal quarter of not less than 1.20:1; |
|
|
|
|
maintain a minimum collateral coverage ratio (defined as the ratio of aggregate current
fair market value of the collateral to the sum of the aggregate outstanding exposure under
the Senior Secured Credit Facilities and certain obligations with equal rights to payment
and collateral and the aggregate principal amount of the outstanding Senior Secured Notes)
of 1.60:1; and |
|
|
|
|
maintain unrestricted cash, cash equivalents, short-term investments and availability
under other undrawn revolving credit facilities of not less than $2 billion. |
The Senior Secured Credit Facilities also contain mandatory prepayment provisions that require
us in certain instances to prepay obligations under the Senior Secured Credit Facilities in
connection with dispositions of collateral. In addition, if the collateral coverage ratio is less
than 1.60:1, we must either provide additional collateral in the form of cash or additional routes
and slots to secure our obligations, or we must repay the loans under the Senior Secured Credit
Facilities by an amount necessary to comply with the collateral coverage ratio.
69
Senior Secured Notes due 2014
Also in 2009, we issued $750 million principal amount of Senior Secured Notes (the Senior
Secured Notes). The Senior Secured Notes mature in September 2014 and have a fixed interest rate
of 9.5% per annum. We may redeem some or all of the Senior Secured Notes at any time on or after
September 15, 2011 at specified redemption prices. If we sell certain of our assets or if we
experience specific kinds of changes in control, we must offer to repurchase the Senior Secured
Notes. During 2010, we voluntarily redeemed $75 million principal amount of Senior Secured Notes.
Our obligations under the Senior Secured Notes are guaranteed by the Guarantors. The Senior
Secured Notes and related guarantees are secured on a senior basis equally and ratably with the
indebtedness incurred under our Senior Secured Credit Facilities by security interests in the
Pacific Collateral.
The Senior Secured Notes include covenants that, among other things, restrict our ability to
sell assets, incur additional indebtedness, issue preferred stock, make investments or pay
dividends. In addition, in the event the collateral coverage ratio, which has the same definition
as the Senior Secured Credit Facilities, is less than 1.60:1, we must pay additional interest on
the Senior Secured Notes at the rate of 2% per annum until the collateral coverage ratio equals at
least 1.60:1.
The Senior Secured Notes contain events of default customary for similar financings, including
cross-defaults to other material indebtedness. Upon the occurrence of an event of default, the
outstanding obligations under the Senior Secured Notes may be accelerated and become due and
payable immediately.
Senior Second Lien Notes due 2015
In conjunction with the issuance of the Senior Secured Notes, we issued $600 million principal
amount of Senior Second Lien Notes (the Senior Second Lien Notes). The Senior Second Lien Notes
mature in March 2015 and have a fixed interest rate of 12.25% per annum. We may redeem some or all
of the Senior Second Lien Notes at any time on or after March 15, 2012 at specified redemption
prices. If we sell certain of our assets or if we experience specific kinds of changes in control,
we must offer to repurchase the Senior Second Lien Notes. During 2010, we repurchased in a cash
tender offer $171 million principal amount of Senior Second Lien Notes.
Our obligations under the Senior Second Lien Notes are guaranteed by the Guarantors. The
Senior Second Lien Notes and related guarantees are secured on a junior basis by security interests
in the Pacific Collateral.
The Senior Second Lien Notes include covenants and default provisions that are substantially
similar to the ones described under Senior Secured Notes due 2014 above. In addition, in the
event (1) the collateral coverage ratio (defined as the ratio of aggregate current market value of
the collateral to the sum of the aggregate outstanding exposure under the Senior Secured Credit
Facilities and certain obligations with equal rights to payment and collateral, the aggregate
principal amount of the outstanding Senior Secured Notes, and the aggregate principal amount of the
outstanding Senior Second Lien Notes and any other permitted junior indebtedness that is secured by
the collateral) is less than 1.00:1 or (2) we are required to pay additional interest on the Senior
Secured Notes, we must pay additional interest on the Senior Second Lien Notes at the rate of 2%
per annum until the later of (a) the collateral coverage ratio equals at least 1.00:1 or (b)
special interest on the Senior Secured Notes ceases to accrue.
Bank Revolving Credit Facilities due 2011 and 2012
In 2009, we entered into a $100 million first-lien revolving credit facility, which is
guaranteed by the Guarantors and is secured by a first lien on certain aircraft, engines and
related assets. Borrowings under this facility are due in December 2012, can be repaid and
reborrowed without penalty and bear interest at a variable rate equal to LIBOR or another index
rate, in each case plus a specified margin. As of December 31, 2010, the facility was undrawn.
70
In 2009, we also entered into a $150 million first-lien revolving credit facility, which is
guaranteed by the Guarantors and is secured by a first lien on certain aircraft, engines and
related assets owned by Delta and Comair. In December 2010, we amended the facility to reduce the
revolving commitment to $100 million and extend the maturity to June 2011. Borrowings can be
repaid and reborrowed without penalty and bear interest at a variable rate equal to LIBOR or
another index rate, in each case plus a specified margin. As of December 31, 2010, the facility was
undrawn.
Under both of these facilities, we must maintain a minimum balance of cash, permitted
investments and available borrowing capacity under committed facilities at a specified level. We
are also required to maintain a minimum collateral coverage ratio under both facilities. If the
collateral coverage ratio is not maintained, we must either provide additional collateral to secure
our obligations or repay the relevant facility by an amount necessary to maintain compliance with
the collateral coverage ratio. Both facilities contain other covenants and events of default,
including cross-defaults to other material indebtedness, that are substantially similar to the ones
described under Senior Secured Exit Financing Facilities due 2012 and 2014 above.
Other Financing Agreements
Other Financing Arrangements. During 2010, we (1) repurchased in cash tender offers $129
million of four series of Pass-Through Trust Certificates, (2) achieved $160 million of debt relief
through vendor negotiations and (3) prepaid or repurchased $403 million of other existing debt. We
also restructured $820 million of existing debt, including changes in applicable interest rates and
other payment terms.
Certificates. Pass-Through Trust Certificates and Enhanced Equipment Trust Certificates
(EETC) (collectively, the Certificates) are secured by 256 aircraft. As of December 31, 2010,
the Certificates had interest rates ranging from 0.8% to 9.8%.
In 2009, we completed a $689 million offering of Class A and Class B Pass Through
Certificates, Series 2009-1, through two separate pass through trusts (the 2009-1 EETC). We used
$342 million in net proceeds to prepay existing mortgage financings with respect to two B-737-700
aircraft and three B-777-200LR aircraft that were delivered and financed in 2009 and for general
corporate purposes. The remaining $347 million was held in escrow and used to refinance 22
aircraft that secured our 2000-1 EETC prior to its maturity in November 2010. The 2009-1 EETC has
a weighted average fixed interest rate of 8.1% and has a final maturity in December 2019.
In July 2010, we completed a $450 million offering of Pass Through Certificates, Series
2010-1A (the 2010-1A EETC), through a pass through trust. We used the net proceeds to finance two
B-777-200LR aircraft purchased in March 2010 and refinance 22 aircraft that secured our 2000-1
EETC. The 2010-1A EETC bears interest at a fixed rate of 6.2% per year and has a final maturity in
July 2018.
In November 2010, we completed a $474 million offering of Pass Through Certificates, Series
2010-2A (the 2010-2A EETC), through a pass through trust. We used $270 million in net proceeds to
finance or refinance 12 aircraft. The remaining $204 million is being held in escrow until we
refinance other aircraft, including 10 aircraft currently securing our 2001-1 EETC that matures in
September 2011. Accordingly, we reclassified $154 million of principal related to these financings
from current maturities to long-term. The 2010-2A EETC bears interest at a fixed rate of 4.95% per
year and has a final maturity date in May 2019.
The $204 million held in escrow under the 2010-2A EETC is not recorded on the balance sheet as
we have no right to these funds until the equipment notes securing the certificates are issued. We
assessed whether the pass through trusts formed for the 2010-2A EETC are variable interest entities
required to be consolidated. Because our only obligation with respect to the trusts is to make
interest and principal payments on the equipment notes held by the trusts and because we have no
current rights to the escrowed funds, we concluded we do not have a variable interest in the
related trusts. Accordingly, we have not consolidated them.
71
Aircraft Financing. We have $5.2 billion of loans secured by 287 aircraft, not including
aircraft securing the Certificates. These loans had interest rates ranging from 0.8% to 6.8% at
December 31, 2010. In 2010, we took delivery of and financed the purchase of four aircraft, two of
which were refinanced in connection with the 2010-2A EETC. In 2009, we took delivery of and
financed 20 aircraft, five of which were refinanced in connection with the 2009-1 EETC.
Other Secured Financings. Other secured financings primarily include (1) manufacturer term
loans, secured by spare parts, spare engines and aircraft and (2) real estate loans. The financings
had annual interest rates ranging from 2.3% to 7.8% at December 31, 2010.
American Express Agreement. In 2010, we and American Express modified our agreement under
which we received $1.0 billion in 2008 from American Express for their advance purchase of SkyMiles. This
advance payment is classified as debt on our Consolidated Balance Sheets. Our obligations with
respect to the advance payment will be satisfied by the use of SkyMiles by American Express over a
specified period (SkyMiles Usage Period) rather than by cash payments from us to American
Express. The modification, among other things, (1) provides that Delta-American Express co-branded
credit card holders may check their first bag for free on every Delta flight through June 2013, (2)
changes the SkyMiles Usage Period to a three-year period beginning in December 2011 from a two-year
period beginning in December 2010, and (3) gives American Express the option to extend the
agreement for one year. The change in the SkyMiles Usage Period deferred $480 million of debt
maturities originally due in 2011.
Clayton County Bonds, Series 2009. In 2009, the Development Authority of Clayton County (the
Development Authority) issued bonds with principal of $150 million, in two series, maturing in
2029 and 2035 (the Clayton Bonds). The Clayton Bonds have a weighted average fixed interest rate
of 8.9% and are subject to mandatory sinking fund redemption requirements. The proceeds were loaned
to us to refund bonds that previously had been issued to refinance certain of our facilities at
Atlantas Hartsfield-Jackson International Airport. The bonds are secured solely by the Development
Authoritys pledge of the revenues payable to it under loan agreements between Delta and the
Development Authority. Our obligations under the loan agreements are not secured.
Unamortized Discount, Net. Unamortized discount, net primarily represents a reduction in the
carrying value of (1) Northwests debt as a result of purchase accounting related to the Merger,
(2) the debt recorded in connection with our American Express Agreement and (3) fair value
adjustments to our long-term debt in connection with our adoption of fresh start reporting upon
emergence from bankruptcy. As described in the table below, we amortize these adjustments over the
remaining maturities of the respective debt to amortization of debt discount, net on our
Consolidated Statements of Operations.
During 2010, we recorded a $391 million loss on extinguishment of debt, of which $304 million
related to a non-cash write-off of debt discounts that were recorded as part of purchase
accounting.
Future Maturities
The following table summarizes scheduled maturities of our debt, including current maturities,
at December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ending December 31, |
|
Total Secured and |
|
Amortization of |
|
|
|
|
(in millions) |
|
Unsecured Debt |
|
Debt Discount, Net |
|
|
|
|
|
2011 |
|
$ |
2,024 |
|
|
$ |
(203 |
) |
|
|
|
|
2012 |
|
|
2,374 |
|
|
|
(203 |
) |
|
|
|
|
2013 |
|
|
1,776 |
|
|
|
(165 |
) |
|
|
|
|
2014 |
|
|
3,107 |
|
|
|
(108 |
) |
|
|
|
|
2015 |
|
|
1,271 |
|
|
|
(72 |
) |
|
|
|
|
Thereafter |
|
|
4,890 |
|
|
|
(184 |
) |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
15,442 |
|
|
$ |
(935 |
) |
|
$ |
14,507 |
|
|
Covenants
We were in compliance with all covenants in our financing agreements at December 31, 2010.
72
NOTE 6. LEASE OBLIGATIONS
We lease aircraft, airport terminals, maintenance facilities, ticket offices and other
property and equipment from third parties. Rental expense for operating leases, which is recorded
on a straight-line basis over the life of the lease term, totaled $1.2 billion, $1.3 billion and
$798 million for the years ended December 31, 2010, 2009 and 2008, respectively. Amounts due under
capital leases are recorded as liabilities on our Consolidated Balance Sheets. Assets acquired
under capital leases are recorded as property and equipment on our Consolidated Balance Sheets.
Amortization of assets recorded under capital leases is included in depreciation and amortization
expense on our Consolidated Statements of Operations. Many of our aircraft, facility, and equipment
leases include rental escalation clauses and/or renewal options. Our leases do not include residual
value guarantees and we are not the primary beneficiary in or have any other forms of variable
interest with the lessor of the leased assets. As a result, we have not consolidated any of the
entities that lease to us. As discussed in Note 8, we have a variable interest associated with our JFK
redevelopment project.
The following tables summarize, as of December 31, 2010, our minimum rental commitments under
capital leases and noncancelable operating leases (including certain aircraft under Contract
Carrier agreements) with initial or remaining terms in excess of one year:
Capital Leases
|
|
|
|
|
Years Ending December 31, |
|
|
|
|
(in millions) |
|
|
|
|
|
2011 |
|
$ |
214 |
|
2012 |
|
|
193 |
|
2013 |
|
|
160 |
|
2014 |
|
|
130 |
|
2015 |
|
|
124 |
|
Thereafter |
|
|
404 |
|
|
Total minimum lease payments |
|
|
1,225 |
|
Less: amount of lease payments representing interest |
|
|
(487 |
) |
|
Present value of future minimum capital lease payments |
|
|
738 |
|
Plus: unamortized premium, net |
|
|
7 |
|
Less: current obligations under capital leases |
|
|
(119 |
) |
|
Long-term capital lease obligations |
|
$ |
626 |
|
|
Operating Leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract |
|
|
|
|
|
|
|
|
Carrier |
|
|
|
|
Delta |
|
Aircraft |
|
|
Years Ending December 31, |
|
Lease |
|
Lease |
|
|
(in millions) |
|
Payments(1) |
|
Payments(2) |
|
Total |
|
2011 |
|
$ |
899 |
|
|
$ |
521 |
|
|
$ |
1,420 |
|
2012 |
|
|
840 |
|
|
|
511 |
|
|
|
1,351 |
|
2013 |
|
|
816 |
|
|
|
504 |
|
|
|
1,320 |
|
2014 |
|
|
770 |
|
|
|
493 |
|
|
|
1,263 |
|
2015 |
|
|
688 |
|
|
|
481 |
|
|
|
1,169 |
|
Thereafter |
|
|
7,096 |
|
|
|
1,327 |
|
|
|
8,423 |
|
|
Total minimum lease payments |
|
$ |
11,109 |
|
|
$ |
3,837 |
|
|
$ |
14,946 |
|
|
|
|
|
(1) |
|
These amounts include payments accounted for as construction obligations,
which are described in Note 8 JFK Redevelopment. |
|
(2) |
|
These amounts represent the minimum lease obligations under our Contract
Carrier agreements with Atlantic Southeast Airlines, Inc. (ASA), Chautauqua Airlines, Inc.
(Chautauqua), Compass, Mesaba, Pinnacle, Shuttle America Corporation (Shuttle America) and
SkyWest Airlines, Inc. (SkyWest Airlines). |
At December 31, 2010, we operated 111 aircraft under operating leases and 113 aircraft
under capital leases. Our Contract Carriers under capacity purchase agreements operated 540
aircraft under operating leases (see Note 7). Leases for aircraft operated by us and our Contract
Carriers have expiration dates ranging from 2011 to 2025.
73
NOTE 7. PURCHASE COMMITMENTS AND CONTINGENCIES
Aircraft Purchase Commitments
Future aircraft purchase commitments at December 31, 2010 are estimated to total approximately
$2.6 billion. The following table shows the timing of these commitments:
|
|
|
|
|
Years Ending December 31, |
|
|
(in millions) |
|
Total |
|
2011 |
|
$ |
60 |
|
2020 to 2022 |
|
|
2,500 |
|
|
Total |
|
$ |
2,560 |
|
|
Our aircraft purchase commitments at December 31, 2010 relate to 18 B-787-8 aircraft and 12
previously owned MD-90 aircraft. During 2010, we entered into an agreement with The Boeing Company
to reaffirm our previous orders for 18 B-787-8 aircraft and to defer delivery of those aircraft
from 2008-2010 to 2020-2022. Our aircraft purchase commitments do not include orders for five
A319-100 aircraft and two A320-200 aircraft because we have the right to cancel these orders.
Contract Carrier Agreements
During the year ended December 31, 2010, we had Contract Carrier agreements with 10 Contract
Carriers, including our wholly-owned subsidiary, Comair.
On July 1, 2010, we sold Compass and Mesaba, our wholly-owned subsidiaries, to Trans States
and Pinnacle, respectively. The sales of Compass and Mesaba did not have a material impact on our
Consolidated Financial Statements. Upon the closing of these transactions, we entered into new or
amended long-term capacity purchase agreements with Compass, Mesaba and Pinnacle.
On September 1, 2010, Freedom Airlines, Inc. ceased operating flights for us under a capacity purchase agreement.
Capacity Purchase Agreements. During the year ended December 31, 2010, eight Contract
Carriers operated for us (in addition to Comair) under capacity purchase agreements. Under these
agreements, the Contract Carriers operate some or all of their aircraft using our flight designator
codes, and we control the scheduling, pricing, reservations, ticketing and seat inventories of
those aircraft and retain the revenues associated with those flights. We pay those airlines an
amount, as defined in the applicable agreement, which is based on a determination of their cost of
operating those flights and other factors intended to approximate market rates for those services.
74
The following table shows our minimum fixed obligations under these capacity purchase
agreements (excluding Comair). The obligations set forth in the table contemplate minimum levels of
flying by the Contract Carriers under the respective agreements and also reflect assumptions
regarding certain costs associated with the minimum levels of flying such as the cost of fuel,
labor, maintenance, insurance, catering, property tax and landing fees. Accordingly, our actual
payments under these agreements could differ materially from the minimum fixed obligations set
forth in the table below.
|
|
|
|
|
Year Ending December 31, |
|
|
(in millions) |
|
Amount(1) |
|
2011 |
|
$ |
2,080 |
|
2012 |
|
|
1,970 |
|
2013 |
|
|
2,040 |
|
2014 |
|
|
2,050 |
|
2015 |
|
|
2,020 |
|
Thereafter |
|
|
6,740 |
|
|
Total |
|
$ |
16,900 |
|
|
|
|
|
(1) |
|
These amounts exclude Contract Carrier lease payments accounted for as
operating leases, which are described in Note 6. The contingencies described below under
Contingencies Related to Termination of Contract Carrier Agreements are also excluded from
this table. |
The following table shows information about our third-party Contract Carrier agreements
as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
Number of Aircraft |
|
|
|
|
Aircraft in |
|
Number of Aircraft |
|
Scheduled to be in |
|
|
|
|
Operation as of |
|
Scheduled to be in |
|
Operation Immediately |
|
|
|
|
December 31, |
|
Operation as of |
|
Prior to the Expiration |
|
Expiration Date |
Carrier |
|
2010 |
|
December 31, 2011 |
|
of the Agreement |
|
of Agreement |
|
ASA |
|
|
142 |
|
|
|
146 |
|
|
|
26 |
|
|
|
2020 |
|
SkyWest Airlines |
|
|
82 |
|
|
|
87 |
|
|
|
37 |
|
|
|
2020 |
|
ASA/SkyWest Airlines(1) |
|
|
12 |
|
|
|
12 |
|
|
|
12 |
|
|
|
2012 |
|
Chautauqua |
|
|
24 |
|
|
|
24 |
|
|
|
24 |
|
|
|
2016 |
|
Shuttle America |
|
|
16 |
|
|
|
16 |
|
|
|
16 |
|
|
|
2019 |
|
Pinnacle (CRJ-900 aircraft) |
|
|
16 |
|
|
|
16 |
|
|
|
1 |
|
|
|
2018 |
|
Pinnacle/Mesaba (CRJ-200 aircraft)(2) |
|
|
145 |
|
|
|
145 |
|
|
|
141 |
|
|
|
2017 |
|
Pinnacle/Mesaba (CRJ-900 aircraft)(2) |
|
|
41 |
|
|
|
41 |
|
|
|
41 |
|
|
|
2022 |
|
Compass |
|
|
36 |
|
|
|
36 |
|
|
|
36 |
|
|
|
2020 |
|
Mesaba (Saab 340B+ aircraft) |
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
2012 |
|
|
|
|
|
|
Total |
|
|
540 |
|
|
|
523 |
|
|
|
334 |
|
|
|
|
|
|
The table above was not subject to the audit procedures of our Independent Registered Public
Accounting Firm.
|
|
|
(1) |
|
We have an agreement with ASA, SkyWest Airlines and SkyWest, Inc. (SkyWest), the
parent company of ASA and SkyWest Airlines, under which the parties collectively determine
whether the aircraft are operated by ASA or SkyWest Airlines. |
|
(2) |
|
We have an agreement with Mesaba Airlines, Pinnacle Airlines and Pinnacle
Airlines Corp., the parent company of Mesaba Airlines and Pinnacle Airlines, under which the
parties collectively determine whether the aircraft are operated by Mesaba Airlines or
Pinnacle Airlines. |
The following table shows the available seat miles (ASMs) and revenue passenger miles
(RPMs) operated for us under capacity purchase agreements with our Contract Carriers. It
excludes Comair for all years presented, and also excludes Compass and Mesaba for the years ended
December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except for number of aircraft operated) |
|
2010 |
|
2009 |
|
2008 |
|
ASMs |
|
|
27,228 |
|
|
|
20,852 |
|
|
|
17,425 |
|
RPMs |
|
|
21,512 |
|
|
|
16,424 |
|
|
|
13,899 |
|
Number of aircraft operated, end of period |
|
|
540 |
|
|
|
450 |
|
|
|
443 |
|
|
The table above was not subject to the audit procedures of our Independent Registered Public
Accounting Firm.
75
Revenue Proration Agreements. As of December 31, 2010, we had a revenue proration
agreement with American Eagle Airlines, Inc. In addition, a portion of our Contract Carrier
agreement with SkyWest Airlines is structured as a revenue proration agreement. These revenue
proration agreements establish a fixed dollar or percentage division of revenues for tickets sold
to passengers traveling on connecting flight itineraries.
Contingencies Related to Termination of Contract Carrier Agreements
We may terminate without cause the Chautauqua agreement at any time and the Shuttle America
agreement at any time after January 2016 by providing certain advance notice. If we terminate
either the Chautauqua or Shuttle America agreements without cause, Chautauqua or Shuttle America,
respectively, has the right to (1) assign to us leased aircraft that the airline operates for us,
provided we are able to continue the leases on the same terms the airline had prior to the
assignment and (2) require us to purchase or lease any aircraft the airline owns and operates for
us at the time of the termination. If we are required to purchase aircraft owned by Chautauqua or
Shuttle America, the purchase price would be equal to the amount necessary to (1) reimburse
Chautauqua or Shuttle America for the equity it provided to purchase the aircraft and (2) repay in
full any debt outstanding at such time that is not being assumed in connection with such purchase.
If we are required to lease aircraft owned by Chautauqua or Shuttle America, the lease would have
(1) a rate equal to the debt payments of Chautauqua or Shuttle America for the debt financing of
the aircraft calculated as if 90% of the aircraft was debt financed by Chautauqua or Shuttle
America and (2) other specified terms and conditions.
We estimate that the total fair values, determined as of December 31, 2010, of the aircraft
Chautauqua or Shuttle America could assign to us or require that we purchase if we terminate
without cause our Contract Carrier agreements with those airlines (the Put Right) are
approximately $160 million and $370 million, respectively. The actual amount we may be required to
pay in these circumstances may be materially different from these estimates. If the Put Right is
exercised, we must also pay the exercising carrier 10% interest (compounded monthly) on the equity
the carrier provided when it purchased the put aircraft. These equity amounts for Chautauqua and
Shuttle America total $25 million and $52 million, respectively.
Legal Contingencies
We are involved in various legal proceedings relating to employment practices, environmental
issues, bankruptcy matters, antitrust matters and other matters concerning our business. We cannot
reasonably estimate the potential loss for certain legal proceedings because, for example, the
litigation is in its early stages or the plaintiff does not specify the damages being sought.
Credit Card Processing Agreements
Our VISA/MasterCard and American Express credit card processing agreements provide that no
cash reserve (Reserve) is required, and no withholding of payment related to receivables
collected will occur, except in certain circumstances, including when we do not maintain a required
level of unrestricted cash. In circumstances in which the credit card processor can establish a
Reserve or withhold payments, the amount of the Reserve or payments that may be withheld would be
equal to the potential liability of the credit card processor for tickets purchased with
VISA/MasterCard or American Express credit cards, as applicable, that had not yet been used for
travel. There was no Reserve or amounts withheld as of December 31, 2010 and 2009.
76
Other Contingencies
General Indemnifications
We are the lessee under many commercial real estate leases. It is common in these transactions
for us, as the lessee, to agree to indemnify the lessor and the lessors related parties for tort,
environmental and other liabilities that arise out of or relate to our use or occupancy of the
leased premises. This type of indemnity would typically make us responsible to indemnified parties
for liabilities arising out of the conduct of, among others, contractors, licensees and invitees
at, or in connection with, the use or occupancy of the leased premises. This indemnity often
extends to related liabilities arising from the negligence of the indemnified parties, but usually
excludes any liabilities caused by either their sole or gross negligence or their willful
misconduct. For additional information about our obligations under the JFK redevelopment project,
see Note 8.
Our aircraft and other equipment lease and financing agreements typically contain provisions
requiring us, as the lessee or obligor, to indemnify the other parties to those agreements,
including certain of those parties related persons, against virtually any liabilities that might
arise from the use or operation of the aircraft or such other equipment.
We believe our insurance would cover most of our exposure to liabilities and related
indemnities associated with the commercial real estate leases and aircraft and other equipment
lease and financing agreements described above. While our insurance does not typically cover
environmental liabilities, we have certain insurance policies in place as required by applicable
environmental laws.
Certain of our aircraft and other financing transactions include provisions, which require us
to make payments to preserve an expected economic return to the lenders if that economic return is
diminished due to certain changes in law or regulations. In certain
of these financing transactions, we also bear the risk of certain changes in tax laws that
would subject payments to non-U.S. lenders to withholding taxes.
We cannot reasonably estimate our potential future payments under the indemnities and related
provisions described above because we cannot predict (1) when and under what circumstances these
provisions may be triggered and (2) the amount that would be payable if the provisions were
triggered because the amounts would be based on facts and circumstances existing at such time.
Employees Under Collective Bargaining Agreements
At December 31, 2010, we had approximately 80,000 full-time equivalent employees. Approximately 17% of these
employees were represented by unions, including the following domestic employee groups.
|
|
|
|
|
|
|
|
|
|
|
Approximate Number |
|
|
|
Date on which Collective |
|
|
of Active Employees |
|
|
|
Bargaining Agreement |
Employee Group |
|
Represented |
|
Union |
|
Becomes Amendable |
|
Delta Pilots |
|
|
10,900 |
|
|
ALPA |
|
December 31, 2012 |
Delta Flight Superintendents (Dispatchers) |
|
|
350 |
|
|
PAFCA |
|
December 31, 2013 |
Comair Pilots |
|
|
1,100 |
|
|
ALPA |
|
March 2, 2011 |
Comair Maintenance Employees |
|
|
350 |
|
|
IAM |
|
December 31, 2010 |
Comair Flight Attendants |
|
|
700 |
|
|
IBT |
|
December 31, 2010 |
|
77
In connection with efforts to resolve union representation for employee groups where
representation has not been resolved following our Merger with Northwest, the National Mediation
Board (NMB) held elections for the following employee groups during 2010. The employee groups,
the union seeking representation and the approximate number of employees in each workgroup prior to
the election is set forth in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Number of Employees |
Employee Group |
|
Union Seeking Representation |
|
(as of June 30, 2010) |
|
Flight Attendants |
|
AFA |
|
|
20,100 |
|
Fleet Service(1) |
|
IAM |
|
|
14,100 |
|
Stores
Employees(2) |
|
IAM |
|
|
700 |
|
Passenger
Service(3) |
|
IAM |
|
|
16,400 |
|
|
|
|
|
(1) |
|
Includes below-wing airport customer service employees, cargo
warehouse employees and related positions |
|
(2) |
|
Includes technical operations supply attendants, stock clerks and
stores utility employees |
|
(3) |
|
Includes above-wing airport customer service agents, cargo sales agents
and passenger reservations sales agents |
In each case, the employee groups rejected representation by the unions and the unions
filed claims with the NMB alleging that we interfered with the elections. While we are vigorously
challenging the interference claims, we cannot predict when or how these matters will be resolved
for each workgroup.
In an election conducted in September 2010, Deltas 91 simulator technicians rejected
representation by the IAM.
War-Risk Insurance Contingency
As a result of the terrorist attacks on September 11, 2001, aviation insurers significantly
(1) reduced the maximum amount of insurance coverage available to commercial air carriers for
liability to persons (other than employees or passengers) for claims from acts of terrorism, war or
similar events and (2) increased the premiums for such coverage and for aviation insurance in
general. Since September 24, 2001, the U.S. government has been providing U.S. airlines with
war-risk insurance to cover losses, including those resulting from terrorism, to passengers, third
parties (ground damage) and the aircraft hull. The U.S. Secretary of Transportation has extended
coverage through September 30, 2011, and we expect the coverage to be further extended. The
withdrawal of government support of airline war-risk insurance would require us to obtain war-risk
insurance coverage commercially, if available. Such commercial insurance could have substantially
less desirable coverage than currently provided by the U.S. government, may not be adequate to
protect our risk of loss from future acts of terrorism, may result in a material increase to our
operating expense or may not be obtainable at all, resulting in an interruption to our operations.
Other
We have certain contracts for goods and services that require us to pay a penalty, acquire
inventory specific to us or purchase contract specific equipment, as defined by each respective
contract, if we terminate the contract without cause prior to its expiration date. Because these
obligations are contingent on our termination of the contract without cause prior to its expiration
date, no obligation would exist unless such a termination occurs.
NOTE 8. JFK REDEVELOPMENT
During the December 2010 quarter, we began a redevelopment project at John F. Kennedy
International Airport (JFK). At JFK, we currently operate primarily at Terminal 2 for domestic
flights and Terminal 3 for international flights under leases with the Port Authority of New York
and New Jersey (Port Authority), which operates JFK. We also conduct some flights from Terminal
4, which is operated by JFK International Air Terminal LLC (IAT), a private party, under its
lease with the Port Authority.
78
We estimate the redevelopment project, which will be completed in stages over five years, will
cost approximately $1.2 billion. The project includes the (1) enhancement and expansion of
Terminal 4, including the construction of nine new gates, (2) construction of a passenger
connector between Terminal 2 and Terminal 4, (3) demolition of the outdated Terminal 3 facilities;
and (4) development of the Terminal 3 site for aircraft parking positions. Upon completion of the
Terminal 4 expansion, expected to occur in 2013, we will relocate our operations from Terminal 3 to
Terminal 4, proceed with pre-demolition activities in Terminal 3, and thereafter conduct
coordinated flight operations from Terminals 2 and 4.
In
December 2010, the Port Authority issued approximately
$800 million principal amount of special project
bonds to fund the substantial majority of the project. Also in December 2010, we entered into a 33
year agreement with IAT (Sublease) to sublease space in
Terminal 4.
IAT is unconditionally obligated under its lease with the
Port Authority to pay rentals from the revenues it receives from its
operation and management of Terminal 4, including among others our
rental payments under the Sublease, in an amount sufficient to pay
principal and interest on the bonds. We do not guarantee payment of the bonds. We anticipate that the balance of the project
costs will be provided by Port Authority passenger facility charges, Transportation Security
Administration funding, and our contributions.
Our annual rent, operation and maintenance payments for the use of terminal facilities at JFK
were approximately $135 million in 2010, and we estimate our
future annual payments will be approximately $200
million after the project is complete in 2016. Future payments will vary
based on our share of total passenger and baggage counts at Terminal 4, the number of gates we
occupy in Terminal 4, IATs actual expenses of operating Terminal 4 and other factors.
Accordingly, the amount of our annual rent, operation and maintenance payments in the future may
vary substantially from our estimate.
We will be responsible for the management and construction of the project and bear
construction risk, including cost overruns. As construction progresses, the project will be
recorded on our Consolidated Balance Sheet as a fixed asset as if we owned the asset. We will
also record a related construction obligation on our Consolidated Balance Sheet. Future rental
payments will reduce this construction obligation and result in the recording of interest expense
on our Consolidated Statement of Operations.
We have an equity-method investment in the entity which owns IAT, our sublessor at Terminal 4.
The Sublease requires us to pay certain fixed management fees. We determined the investment is a
variable interest and assessed whether we have a controlling financial interest in IAT. Our rights
under the Sublease with respect to management of Terminal 4 are consistent with rights granted
to an anchor tenant under a standard airport lease. Accordingly, we do not consolidate the entity
in which we have an investment in our Consolidated Financial Statements.
NOTE 9. INCOME TAXES
Income Tax (Provision) Benefit
Our income tax (provision) benefit consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
(in millions) |
|
2010 |
|
2009 |
|
2008 |
|
Current tax (provision) benefit |
|
$ |
(7 |
) |
|
$ |
15 |
|
|
$ |
|
|
Deferred tax (provision) benefit exclusive of the
other components listed below |
|
|
(265 |
) |
|
|
850 |
|
|
|
866 |
|
Decrease (increase) in valuation allowance |
|
|
257 |
|
|
|
(521 |
) |
|
|
(747 |
) |
|
Income tax (provision) benefit |
|
$ |
(15 |
) |
|
$ |
344 |
|
|
$ |
119 |
|
|
79
The following table presents the principal reasons for the difference between the effective
tax rate and the U.S. federal statutory income tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2010 |
|
2009 |
|
2008 |
|
U.S. federal statutory income tax rate |
|
|
35.0 |
% |
|
|
(35.0 |
)% |
|
|
(35.0 |
)% |
State taxes, net of federal income tax effect |
|
|
2.3 |
|
|
|
(1.8 |
) |
|
|
(0.6 |
) |
(Decrease) increase in valuation allowance |
|
|
(42.3 |
) |
|
|
32.9 |
|
|
|
8.3 |
|
Income Tax Allocation (1) |
|
|
|
|
|
|
(20.2 |
) |
|
|
|
|
Goodwill impairment |
|
|
|
|
|
|
|
|
|
|
26.8 |
|
Other, net |
|
|
7.6 |
|
|
|
2.4 |
|
|
|
(0.8 |
) |
|
Effective income tax rate |
|
|
2.6 |
% |
|
|
(21.7 |
)% |
|
|
(1.3 |
)% |
|
|
|
|
(1) |
|
We consider all income sources, including other comprehensive income, in
determining the amount of tax benefit allocated to continuing operations (the Income Tax
Allocation). For the year ended December 31, 2009, as a result of the Income Tax Allocation,
we recorded a non-cash income tax benefit of $321 million on the loss from continuing operations,
with an offsetting non-cash income tax expense of $321 million in other comprehensive income. |
Deferred Taxes
Deferred income taxes reflect the net tax effect of temporary differences between the carrying
amounts of assets and liabilities for financial reporting and income tax purposes. The following
table shows significant components of our deferred tax assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
(in millions) |
|
2010 |
|
2009 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
6,472 |
|
|
$ |
6,419 |
|
Pension postretirement and other benefits |
|
|
4,527 |
|
|
|
4,661 |
|
AMT credit carryforward |
|
|
424 |
|
|
|
452 |
|
Deferred revenue |
|
|
2,202 |
|
|
|
2,282 |
|
Rent expense |
|
|
280 |
|
|
|
272 |
|
Reorganization items, net |
|
|
674 |
|
|
|
1,033 |
|
Fuel hedge derivatives |
|
|
|
|
|
|
30 |
|
Other temporary differences |
|
|
495 |
|
|
|
413 |
|
Valuation allowance |
|
|
(9,632 |
) |
|
|
(9,897 |
) |
|
Total deferred tax assets |
|
$ |
5,442 |
|
|
$ |
5,665 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Depreciation |
|
$ |
4,837 |
|
|
$ |
4,925 |
|
Debt valuation |
|
|
330 |
|
|
|
431 |
|
Intangible assets |
|
|
1,731 |
|
|
|
1,757 |
|
Fuel hedge derivatives |
|
|
73 |
|
|
|
|
|
Other |
|
|
40 |
|
|
|
112 |
|
|
Total deferred tax liabilities |
|
$ |
7,011 |
|
|
$ |
7,225 |
|
|
The following table shows the current and noncurrent deferred tax assets (liabilities)
recorded on our Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
(in millions) |
|
2010 |
|
2009 |
|
Current deferred tax assets, net |
|
$ |
355 |
|
|
$ |
357 |
|
Noncurrent deferred tax liabilities, net |
|
|
(1,924 |
) |
|
|
(1,917 |
) |
|
Total deferred tax liabilities, net |
|
$ |
(1,569 |
) |
|
$ |
(1,560 |
) |
|
80
The current and noncurrent components of our deferred tax balances are generally based on the
balance sheet classification of the asset or liability creating the temporary difference. If the
deferred tax asset or liability is not based on a component of our balance sheet, such as our net
operating loss (NOL) carryforwards, the classification is presented based on the expected
reversal date of the temporary difference. Our valuation allowance has been classified as current
or noncurrent based on the percentages of current and noncurrent deferred tax assets to total
deferred tax assets.
At December 31, 2010, we had (1) $424 million of federal alternative minimum tax (AMT)
credit carryforwards, which do not expire and (2) $17.5 billion of federal and state pretax NOL
carryforwards, substantially all of which will not begin to expire until 2022.
Both Delta and Northwest experienced an ownership change in 2007 as a result of their plans of
reorganization under Chapter 11 of the U.S. Bankruptcy Code. As a result of the Merger, Northwest
experienced a subsequent ownership change. Delta also experienced a subsequent ownership change on
December 17, 2008 due to the Merger, the issuance of equity to employees in connection with the
Merger and other transactions involving the sale of common stock within the testing period. We
currently expect these ownership changes will not significantly limit our ability to utilize our
AMT credit or NOLs in the carryforward period.
Uncertain Tax Positions
The following table shows the amount of unrecognized tax benefits on our Consolidated Balance
Sheets and summarizes the changes to the amount of unrecognized tax benefits:
|
|
|
|
|
(in millions) |
|
|
|
|
|
Unrecognized
tax benefits at January 1, 2008 |
|
$ |
143 |
|
Gross increases-tax positions in prior period |
|
|
2 |
|
Gross decreases-tax positions in prior period |
|
|
(91 |
) |
Settlements |
|
|
(25 |
) |
|
Unrecognized tax benefits at December 31, 2008(1) |
|
|
29 |
|
|
Gross increases-tax positions in prior period |
|
|
1 |
|
Gross decreases-tax positions in prior period |
|
|
(1 |
) |
Gross increases-tax positions in current period |
|
|
40 |
|
Settlements |
|
|
(3 |
) |
|
Unrecognized tax benefits at December 31, 2009(1) |
|
|
66 |
|
|
Gross decreases-tax positions in prior period |
|
|
(3 |
) |
Gross increases-tax positions in current period |
|
|
29 |
|
Lapse of statute of limitations |
|
|
(2 |
) |
Settlements |
|
|
(1 |
) |
|
Unrecognized tax benefits at December 31, 2010(1) |
|
$ |
89 |
|
|
|
|
|
(1) |
|
Unrecognized tax benefits on our Consolidated Balance Sheets as of December
31, 2010, 2009 and 2008, include tax benefits of $72 million, $47 million, and $10 million,
respectively, which will affect the effective tax rate when recognized. |
We accrue interest and penalties related to unrecognized tax benefits in interest expense
and operating expense, respectively. The impact related to interest and penalties on our
Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008 was not
material.
We are currently under audit by the IRS for the 2008, 2009 and 2010 tax years.
81
Valuation Allowance
We periodically assess whether it is more likely than not that we will generate sufficient
taxable income to realize our deferred income tax assets and establish valuation allowances if it
is not likely we will realize our deferred income tax assets. In making this determination, we
consider all available positive and negative evidence and make certain assumptions. We consider,
among other things, our deferred tax liabilities, the overall business environment, our historical
financial results, our industrys historically cyclical financial results and potential, current
and future tax planning strategies. We cannot presently determine when we will be able to generate
sufficient taxable income to realize our deferred tax assets. Accordingly, we have recorded a full
valuation allowance against our net deferred tax assets.
The following table shows the balance of our valuation allowance and the associated activity:
|
|
|
|
|
|
|
Valuation |
(in millions) |
|
Allowance(1) |
|
Balance at January 1, 2008 |
|
$ |
4,843 |
|
|
Income tax benefit |
|
|
747 |
|
OCI income tax benefit |
|
|
1,681 |
|
Liabilities assumed from Northwest |
|
|
2,686 |
|
Other |
|
|
(127 |
) |
|
Balance at December 31, 2008 |
|
|
9,830 |
(2) |
|
Income tax benefit |
|
|
521 |
|
OCI income tax provision |
|
|
(308 |
) |
Other |
|
|
(146 |
) |
|
Balance at December 31, 2009 |
|
|
9,897 |
(2) |
|
Income tax provision |
|
|
(257 |
) |
OCI income tax benefit |
|
|
6 |
|
Other |
|
|
(14 |
) |
|
Balance at December 31, 2010 |
|
$ |
9,632 |
(2) |
|
|
|
|
(1) |
|
Prior to January 1, 2009, any reduction in the valuation allowance as a result of
the recognition of deferred tax assets was adjusted first through goodwill followed by other
indefinite-lived intangible assets until the new carrying value of those assets was zero.
Beginning January 1, 2009, any reduction in the valuation allowance is reflected through the
income tax provision. |
|
(2) |
|
At December 31, 2010, 2009 and 2008, $1.2 billion, $1.2 billion and $1.5 billion
of these balances were recorded in accumulated other comprehensive loss on our Consolidated
Balance Sheets, respectively. |
NOTE 10. EMPLOYEE BENEFIT PLANS
We sponsor defined benefit and defined contribution pension plans, healthcare plans, and
disability and survivorship plans for eligible employees and retirees, and their eligible family
members.
Defined Benefit Pension Plans. We sponsor a defined benefit pension plan for eligible
pre-Merger non-pilot Delta employees and retirees (the Delta Non-Pilot Plan) and defined benefit
pension plans for eligible pre-Merger Northwest employees and retirees (the Northwest Pension
Plans). These plans are closed to new entrants and frozen for future benefit accruals.
The Pension Protection Act of 2006 allows commercial airlines to elect alternative funding
rules (Alternative Funding Rules) for defined benefit plans that are frozen. Under the
Alternative Funding Rules, the unfunded liability for a frozen defined benefit plan may be
amortized over a fixed 17-year period and is calculated using an 8.85% interest rate. The
Alternative Funding Rules apply to the Delta Non-Pilot Plan and the Northwest Pension Plans. We
estimate the funding requirements under these plans will total approximately $600 million in 2011.
Defined Contribution Pension Plans. Delta sponsors several defined contribution plans. These
plans generally cover different employee groups and employer contributions vary by plan. The cost
associated with our defined contribution pension plans is shown in the tables below.
82
Postretirement Healthcare Plans. We sponsor healthcare plans that provide benefits to eligible
retirees and their dependents who are under age 65. During bankruptcy, we generally eliminated
company-paid post age 65 healthcare coverage, except for (1) subsidies available to a limited group
of retirees and their dependents and (2) a group of retirees who retired prior to 1987. Benefits
under these plans are funded from current assets and employee contributions.
Postemployment Plans. We provide certain other welfare benefits to eligible former or inactive
employees after employment but before retirement, primarily as part of the disability and
survivorship plans. Substantially all employees are eligible for benefits under these plans in the
event of a participants death and/or disability.
Benefit obligations, fair value of plan assets, and funded status were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension |
|
Other Postretirement and |
|
|
Benefits |
|
Postemployment Benefits |
|
|
December 31, |
|
December 31, |
(in millions) |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Benefit obligation at beginning of period |
|
$ |
17,031 |
|
|
$ |
15,929 |
|
|
$ |
3,427 |
|
|
$ |
3,276 |
|
Service cost |
|
|
|
|
|
|
|
|
|
|
58 |
|
|
|
53 |
|
Interest cost |
|
|
982 |
|
|
|
1,002 |
|
|
|
196 |
|
|
|
207 |
|
Actuarial loss (gain) |
|
|
570 |
|
|
|
1,170 |
|
|
|
(115 |
) |
|
|
164 |
|
Benefits paid, including lump sums and annuities |
|
|
(1,013 |
) |
|
|
(1,021 |
) |
|
|
(333 |
) |
|
|
(328 |
) |
Participant contributions |
|
|
|
|
|
|
|
|
|
|
59 |
|
|
|
56 |
|
Plan amendments |
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
(7 |
) |
Special termination benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
Settlements |
|
|
(64 |
) |
|
|
(49 |
) |
|
|
|
|
|
|
|
|
|
Benefit obligation at end of period(1) |
|
$ |
17,506 |
|
|
$ |
17,031 |
|
|
$ |
3,298 |
|
|
$ |
3,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of period |
|
$ |
7,623 |
|
|
$ |
7,295 |
|
|
$ |
1,153 |
|
|
$ |
1,052 |
|
Actual (loss) gain on plan assets |
|
|
975 |
|
|
|
1,198 |
|
|
|
140 |
|
|
|
291 |
|
Employer contributions |
|
|
728 |
|
|
|
200 |
|
|
|
171 |
|
|
|
158 |
|
Participant contributions |
|
|
|
|
|
|
|
|
|
|
59 |
|
|
|
56 |
|
Benefits paid, including lump sums and annuities |
|
|
(1,013 |
) |
|
|
(1,021 |
) |
|
|
(403 |
) |
|
|
(404 |
) |
Settlements |
|
|
(64 |
) |
|
|
(49 |
) |
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of period |
|
$ |
8,249 |
|
|
$ |
7,623 |
|
|
$ |
1,120 |
|
|
$ |
1,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of period |
|
$ |
(9,257 |
) |
|
$ |
(9,408 |
) |
|
$ |
(2,178 |
) |
|
$ |
(2,274 |
) |
|
|
|
|
(1) |
|
At each period-end presented, our accumulated benefit obligations for
our pension plans are equal to the benefit obligations shown above. |
Amounts recognized on our Consolidated Balance Sheets consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension |
|
Other Postretirement and |
|
|
Benefits |
|
Postemployment Benefits |
|
|
December 31, |
|
December 31, |
(in millions) |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
(13 |
) |
|
$ |
(13 |
) |
|
$ |
(144 |
) |
|
$ |
(142 |
) |
Noncurrent liabilities |
|
|
(9,244 |
) |
|
|
(9,395 |
) |
|
|
(2,034 |
) |
|
|
(2,132 |
) |
|
Total liabilities |
|
$ |
(9,257 |
) |
|
$ |
(9,408 |
) |
|
$ |
(2,178 |
) |
|
$ |
(2,274 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss, pretax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) gain |
|
$ |
(3,299 |
) |
|
$ |
(3,089 |
) |
|
$ |
44 |
|
|
$ |
(117 |
) |
Prior service cost |
|
|
|
|
|
|
|
|
|
|
(3 |
) |
|
|
7 |
|
|
Total accumulated other comprehensive (loss) income |
|
$ |
(3,299 |
) |
|
$ |
(3,089 |
) |
|
$ |
41 |
|
|
$ |
(110 |
) |
|
83
Estimated amounts that will be amortized from accumulated other comprehensive income into net
periodic benefit cost in 2011 are an actuarial loss of $55 million in pension benefits and an
actuarial gain of $14 million relating to other postretirement and postemployment benefits. Amounts
are generally amortized into accumulated other comprehensive income over the expected future
lifetime of plan participants.
Net periodic cost included the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension |
|
Other Postretirement and |
|
|
Benefits |
|
Postemployment Benefits |
|
|
Year Ended December 31, |
|
Year Ended December 31, |
(in millions) |
|
2010 |
|
2009 |
|
2008 |
|
2010 |
|
2009 |
|
2008 |
Service cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
58 |
|
|
$ |
53 |
|
|
$ |
38 |
|
Interest cost |
|
|
982 |
|
|
|
1,002 |
|
|
|
550 |
|
|
|
196 |
|
|
|
207 |
|
|
|
192 |
|
Expected return on plan assets |
|
|
(677 |
) |
|
|
(615 |
) |
|
|
(479 |
) |
|
|
(90 |
) |
|
|
(79 |
) |
|
|
(151 |
) |
Amortization of prior service cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
18 |
|
|
|
|
|
Recognized net actuarial (gain) loss |
|
|
48 |
|
|
|
33 |
|
|
|
|
|
|
|
(4 |
) |
|
|
(18 |
) |
|
|
(6 |
) |
Settlement charge, net |
|
|
14 |
|
|
|
9 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Special termination benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
Net periodic cost |
|
$ |
367 |
|
|
$ |
429 |
|
|
$ |
74 |
|
|
$ |
156 |
|
|
$ |
187 |
|
|
$ |
73 |
|
|
Defined contribution plan costs |
|
|
334 |
|
|
|
306 |
|
|
|
211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost |
|
$ |
701 |
|
|
$ |
735 |
|
|
$ |
285 |
|
|
$ |
156 |
|
|
$ |
187 |
|
|
$ |
73 |
|
|
Assumptions. We used the following actuarial assumptions to determine our benefit obligations
and our net periodic cost for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
Benefit Obligations(1)(2) |
|
2010 |
|
2009 |
Weighted average discount rate |
|
|
5.69 |
% |
|
|
5.93 |
% |
Assumed healthcare cost trend rate(3) |
|
|
7.00 |
% |
|
|
7.50 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
Net Periodic Benefit Cost(2)(4) |
|
2010 |
|
2009 |
|
2008 |
Weighted average discount rate pension benefit |
|
|
5.93 |
% |
|
|
6.49 |
% |
|
|
7.19 |
% |
Weighted average discount rate other postretirement benefit |
|
|
5.75 |
% |
|
|
6.46 |
% |
|
|
6.46 |
% |
Weighted average discount rate other postemployment benefit |
|
|
5.88 |
% |
|
|
6.50 |
% |
|
|
6.95 |
% |
Weighted average expected long-term rate of return on plan assets |
|
|
8.82 |
% |
|
|
8.83 |
% |
|
|
8.96 |
% |
Assumed healthcare cost trend rate(3) |
|
|
7.50 |
% |
|
|
8.00 |
% |
|
|
8.00 |
% |
|
|
|
|
(1) |
|
Our 2010 and 2009 benefit obligations are measured using a mortality
table projected to 2013. |
|
(2) |
|
Future compensation levels do not impact our frozen defined benefit pension plans or
other postretirement plans and impact only a small portion of our other postemployment
liability. |
|
(3) |
|
The assumed healthcare cost trend rate at December 31, 2010 is assumed to decline
gradually to 5.00% by 2019 and remain level thereafter. |
|
(4) |
|
Our assumptions reflect various remeasurements of certain portions of our
obligations and represent the weighted average of the assumptions used for each measurement
date. |
84
Assumed healthcare cost trend rates have an effect on the amounts reported for the other
postretirement benefit plans. A 1% change in the healthcare cost trend rate used in measuring the
accumulated plan benefit obligation (APBO) for these plans at December 31, 2010, would have the
following effects:
|
|
|
|
|
|
|
|
|
(in millions) |
|
1% Increase |
|
1% Decrease |
Increase (decrease) in total service and interest cost |
|
$ |
6 |
|
|
$ |
(6 |
) |
Increase (decrease) in the APBO |
|
$ |
49 |
|
|
$ |
(59 |
) |
The
expected long-term rate of return on plan assets is based primarily on plan-specific
investment studies using historical market return and volatility data with forward looking
estimates based on existing financial market conditions and forecasts. Modest excess return
expectations versus some market indices are incorporated into the return projections based on the
actively managed structure of the investment programs and their records of achieving such returns
historically. We review our rate of return on plan asset assumptions annually. These assumptions
are largely based on the asset category rate-of-return assumptions developed annually with our
pension plan investment advisors. The advisors asset category return assumptions are based in part
on a review of historical asset returns, but also emphasize current market conditions to develop
estimates of future risk and return.
Plan Assets. We have adopted and implemented investment policies for our defined
benefit pension plans and disability and survivorship plan for pilots that incorporate strategic
asset allocation mixes intended to best meet the plans long-term obligations. This asset
allocation policy mix utilizes a diversified mix of investments and is reviewed periodically. The weighted-average target
and actual asset allocations for the plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
|
Target |
|
December 31, |
|
|
|
|
(in millions) |
|
Allocations |
|
2010 |
|
2009 |
|
|
|
|
|
Domestic equity securities |
|
|
40 |
% |
|
$ |
3,234 |
|
|
$ |
3,435 |
|
|
|
|
|
Non-U.S. developed equity securities |
|
|
18 |
% |
|
|
1,695 |
|
|
|
1,384 |
|
|
|
|
|
Diversified fixed income |
|
|
17 |
% |
|
|
1,275 |
|
|
|
1,372 |
|
|
|
|
|
Private equity / real estate / natural resources |
|
|
15 |
% |
|
|
1,890 |
|
|
|
1,552 |
|
|
|
|
|
Non-U.S. emerging equity securities |
|
|
5 |
% |
|
|
449 |
|
|
|
422 |
|
|
|
|
|
High yield fixed income |
|
|
5 |
% |
|
|
397 |
|
|
|
372 |
|
|
|
|
|
Cash equivalents |
|
|
0 |
% |
|
|
429 |
|
|
|
239 |
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
$ |
9,369 |
|
|
$ |
8,776 |
|
|
|
|
|
|
The
overall asset mix of the portfolios is more heavily weighted in
equity-like investments. Active management strategies are utilized where feasible in an effort to realize investment returns
in excess of market indices. For additional information regarding the fair value of
pension assets, see Note 2.
85
Benefit Payments. Benefit payments in the table below are based on the same assumptions
used to measure the related benefit obligations and are paid from both funded benefit plan trusts
and current assets. Actual benefit payments may vary significantly from these estimates. Benefits
earned under our pension plans and certain postemployment benefit plans are expected to be paid
from funded benefit plan trusts, while our other postretirement benefits are funded from current
assets.
The following table summarizes, the benefit payments that are
scheduled to be paid in the following years ending December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement |
|
|
Pension |
|
and Postemployment |
(in millions) |
|
Benefits |
|
Benefits |
|
2011 |
|
$ |
1,048 |
|
|
$ |
266 |
|
2012 |
|
|
1,036 |
|
|
|
266 |
|
2013 |
|
|
1,048 |
|
|
|
264 |
|
2014 |
|
|
1,059 |
|
|
|
261 |
|
2015 |
|
|
1,077 |
|
|
|
259 |
|
2016-2020 |
|
|
5,738 |
|
|
|
1,348 |
|
|
Total |
|
$ |
11,006 |
|
|
$ |
2,664 |
|
|
Other Plans. We also sponsor defined benefit pension plans for eligible employees
in certain foreign countries. These plans did not have a material impact on our Consolidated
Financial Statements in any period presented.
Profit Sharing Program. Our broad based employee profit sharing program provides that, for
each year in which we have an annual pre-tax profit, as defined, we will pay a specified portion of
that profit to employees. Based on our pre-tax earnings for the year ended December 31, 2010, we
accrued $313 million under the profit sharing program for 2010. We did not record an accrual under
the profit sharing program in 2009 or 2008.
NOTE 11. BANKRUPTCY CLAIMS RESOLUTION
In September 2005, we and substantially all of our subsidiaries (the Delta Debtors) filed
voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. On April 30,
2007, the Delta Debtors emerged from bankruptcy. Under the Delta Debtors Joint Plan of
Reorganization (Deltas Plan of Reorganization), most holders of allowed general, unsecured
claims against the Delta Debtors received or will receive Delta common stock in satisfaction of
their claims. In December 2010, the Bankruptcy Court issued an order approving a final
distribution to claimholders under Deltas Plan of Reorganization by March 31, 2011, and closing
the bankruptcy cases for Delta and Comair. The bankruptcy cases for the other Delta Debtors
previously closed. As of December 31, 2010, we have reserved nine million shares of common stock for
issuance to holders of allowed general, unsecured claims.
In September 2005, Northwest Airlines Corporation and substantially all of its subsidiaries
(the Northwest Debtors) filed voluntary petitions for reorganization under Chapter 11 of the
Bankruptcy Code. On May 31, 2007, the Northwest Debtors emerged from bankruptcy. The Northwest
Debtors First Amended Joint and Consolidated Plan of Reorganization (Northwests Plan of
Reorganization) generally provides for the distribution of Northwest common stock to the Northwest
Debtors creditors, employees and others in satisfaction of allowed general, unsecured claims.
Pursuant to the Merger, each outstanding share of Northwest common stock (including shares issuable
under Northwests Plan of Reorganization) was converted into the right to receive 1.25 shares of
Delta common stock. As of December 31, 2010, one million shares of Delta common stock were reserved
for issuance in exchange for shares of Northwest common stock that, but for the Merger, would have
been issued under Northwests Plan of Reorganization.
There will be no further material impact to our Consolidated Statements of Operations from the
settlement of claims because the holders of such claims will receive under Deltas and Northwests
Plan of Reorganization, as the case may be, only their pro rata share of the distributions of
common stock contemplated by the applicable Plan of Reorganization.
86
NOTE 12. NORTHWEST MERGER
On the Closing Date, Northwest became a wholly-owned subsidiary of Delta. Northwest was a
major air carrier that provided scheduled air transportation for passengers and cargo throughout
the U.S. and around the world.
The Merger better positions us to manage through economic cycles and volatile fuel prices,
invest in our fleet, improve services for customers and achieve our strategic objectives. Benefits
from the Merger include more effective aircraft utilization, a more comprehensive and diversified
route system, reduced overhead and improved operational efficiency.
As a result of the Merger, each share of Northwest common stock outstanding on the Closing
Date or issuable under Northwests Plan of Reorganization was converted into the right to receive
1.25 shares of Delta common stock. We issued, or expect to issue, a total of 339 million shares of
Delta common stock for these purposes, or approximately 41% of the sum of the shares of Delta
common stock (1) outstanding on the Closing Date (including shares issued to Northwest stockholders
in the Merger), (2) issuable in exchange for shares of Northwest common stock reserved for issuance
under Northwests Plan of Reorganization, (3) reserved for issuance under Deltas Plan of
Reorganization and (4) issuable to our employees in connection with the Merger. As of December 31,
2010, we had issued 338 million shares of Delta common stock in connection with the Merger.
The purchase price paid to effect the Merger was allocated to the tangible and identifiable
intangible assets acquired and liabilities assumed from Northwest based on their estimated fair
values as of the Closing Date. The Merger was valued at $3.4 billion. This amount was derived from
(1) the 339 million shares of Delta common stock we issued or expect to issue, as discussed above,
at a price of $9.60 per share, the average closing price of our common stock on the New York Stock
Exchange for the five consecutive trading days that include the two trading days before, the day of
and the two trading days after the public announcement on April 14, 2008 of the then planned Merger
and (2) capitalized Merger-related transaction costs. The purchase price also included the fair
value of Delta stock options and other equity awards issued on the Closing Date in exchange for
similar securities of Northwest. Northwest stock options and other equity awards vested on the
Closing Date and were assumed by Delta and modified to provide for the purchase of Delta common
stock. The number of shares and, if applicable, the price per share were adjusted for the 1.25
exchange ratio. Vested stock options held by employees of Northwest were considered part of the
purchase price.
The purchase price was calculated as follows:
|
|
|
|
|
(in millions, except per share data) |
|
|
|
|
|
Shares of Northwest common stock exchanged |
|
|
271 |
|
Exchange ratio |
|
|
1.25 |
|
|
Shares of Delta common stock issued or issuable |
|
|
339 |
|
Price per share |
|
$ |
9.60 |
|
|
Fair value of Delta common stock issued or issuable |
|
$ |
3,251 |
|
Fair value of outstanding Northwest stock options |
|
|
18 |
|
Delta transaction costs |
|
|
84 |
|
|
Total purchase price |
|
$ |
3,353 |
|
|
87
The table below represents the allocation of the total consideration to tangible and
intangible assets acquired and liabilities assumed from Northwest in the Merger based on our
estimate of their respective fair values on the Closing Date:
|
|
|
|
|
(in millions) |
|
|
|
|
|
Cash and cash equivalents |
|
$ |
2,441 |
|
Other current assets |
|
|
2,732 |
|
Property and equipment |
|
|
8,536 |
|
Goodwill |
|
|
4,632 |
|
Identifiable intangible assets |
|
|
2,701 |
|
Other noncurrent assets |
|
|
292 |
|
Long-term debt and capital leases |
|
|
(6,239 |
) |
Pension and postretirement related benefits |
|
|
(4,010 |
) |
Air traffic liability and frequent flyer deferred revenue |
|
|
(3,802 |
) |
Other liabilities assumed |
|
|
(3,930 |
) |
|
Total purchase price |
|
$ |
3,353 |
|
|
The excess of the purchase price over the fair values of the tangible and identifiable
intangible assets acquired and liabilities assumed from Northwest in the Merger was allocated to
goodwill. The portion of the purchase price attributable to goodwill represents the benefits
expected to be realized from the Merger, as discussed above. This goodwill is not deductible or
amortizable for tax purposes.
The following unaudited pro forma combined results of operations give effect to the Merger as
if it had occurred at the beginning of the period presented. The unaudited pro forma combined
results of operations do not purport to represent Deltas consolidated results of operations had
the Merger occurred on the date assumed, nor are these results necessarily indicative of Deltas
future consolidated results of operations. We expect to realize significant benefits from
integrating the operations of Delta and Northwest, as discussed above, and to incur certain
one-time cash costs, which are not reflected in the unaudited pro forma combined results of
operations shown below.
|
|
|
|
|
|
|
Year Ended |
|
|
December 31, |
(in millions, except per share data) |
|
2008(1)(2) |
|
Operating revenue |
|
$ |
34,288 |
|
Net loss |
|
|
(14,706 |
) |
Basic and diluted loss per share |
|
|
(18.13 |
) |
|
|
|
|
(1) |
|
Includes a $1.1 billion one-time primarily non-cash charge related to the
issuance or vesting of employee equity awards in connection with the Merger. |
|
(2) |
|
Includes $11.6 billion in non-cash charges from impairments of goodwill and other
intangible assets for Delta and Northwest prior to the Closing Date. |
NOTE 13. EQUITY AND EQUITY COMPENSATION
Equity
Common Stock. We are authorized to issue 2.0 billion shares of capital stock, of which up to
1.5 billion may be shares of common stock, par value $0.0001 per share, and up to 500 million may
be shares of preferred stock.
In connection with the Merger, we issued, or expect to issue, a total of 339 million shares of
Delta common stock in exchange for the Northwest common stock outstanding on the Closing Date or
issuable under Northwests Plan of Reorganization. Additionally, in connection with the Merger, we
(1) issued 50 million shares of common stock to eligible Delta and Northwest pilots; (2) granted 34
million shares of common stock to substantially all U.S. based non-pilot employees of Delta and
Northwest; and (3) granted 17 million shares of restricted stock and non-qualified stock options to
purchase 12 million shares of common stock to management personnel.
88
Preferred Stock. We may issue preferred stock in one or more series. The Board of Directors is
authorized (1) to fix the descriptions, powers (including voting powers), preferences, rights,
qualifications, limitations and restrictions with respect to any series of preferred stock and (2)
to specify the number of shares of any series of preferred stock. As of December 31, 2010, we have
not issued any preferred stock.
Treasury Stock. We generally withhold shares of Delta common stock to cover employees portion
of required tax withholdings when employee equity awards are issued or vest. These shares are
valued at cost, which equals the market price of the common stock on the date of issuance or
vesting. The weighted average cost of shares held in treasury was $15.33 and $15.89 as of December
31, 2010 and 2009, respectively.
Equity-Based Compensation
Our broad based equity and cash compensation plan provides for grants of restricted stock,
stock options, performance awards, including cash incentive awards, and other equity-based awards
(the 2007 Plan). Shares of common stock issued under the 2007 Plan may be made available from
authorized but unissued common stock or common stock we acquire. If any shares of our common stock
are covered by an award that is cancelled, forfeited or otherwise terminates without delivery of
shares (including shares surrendered or withheld for payment of the exercise price of an award or
taxes related to an award), such shares will again be available for issuance under the 2007 Plan.
The 2007 Plan authorizes the issuance of up to 157 million shares of common stock. As of December
31, 2010 there were 35 million shares available for future grants.
We make long term incentive awards annually to eligible management employees under the 2007
Plan. Non-cash compensation expense for equity awards is recognized over the employees requisite
service period (generally, the vesting period of the award). We use straight-line recognition for
awards with installment vesting. The following table shows non-cash equity compensation expense
recognized in salaries and related costs on our Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
(in millions) |
|
2010 |
|
2009 |
|
2008 |
|
Restricted stock |
|
$ |
65 |
|
|
$ |
77 |
|
|
$ |
62 |
|
Stock options |
|
|
18 |
|
|
|
26 |
|
|
|
12 |
|
Performance shares |
|
|
6 |
|
|
|
5 |
|
|
|
(8 |
) |
|
Total |
|
$ |
89 |
|
|
$ |
108 |
|
|
$ |
66 |
|
|
These amounts do not represent cash payments made to employees; rather they represent non-cash
compensation expense recognized for financial reporting purposes. The actual value of these awards
to recipients depends on various factors, including (1) the risk the award may be forfeited in the
event of certain terminations of employment, (2) for an award subject to performance conditions,
the risk there is no payout because the performance conditions are not met and (3) the price of
Delta common stock when the award vests.
As of December 31, 2010, approximately $65 million of total unrecognized costs related to
unvested shares and stock options are expected to be recognized over the remaining weighted average
period of 0.6 years, including approximately $60 million in 2011.
Stock Grants. In connection with the Merger, U.S. based non-pilot, non-management employees
received 34 million shares of common stock and pilot employees received 50 million shares of common
stock, which resulted in a $791 million charge in restructuring and merger-related items in 2008.
Additionally, the closing of the Merger constituted a change in control under the 2007 Plan, which
caused the vesting of substantially all previously unvested equity awards and resulted in an
additional $75 million of restructuring and merger-related items in 2008.
Restricted Stock. Restricted stock is common stock that may not be sold or otherwise
transferred for a period of time and is subject to forfeiture in certain circumstances. Generally,
awards vest over several years, subject to the employees continued employment. The fair value of
restricted stock awards is based on the closing price of the common stock on the grant date. We
expect substantially all unvested restricted stock awards at December 31, 2010 to vest.
89
The following table summarizes restricted stock activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Grant Date |
(in millions, except per share amounts) |
|
Shares |
|
Fair Value |
|
Unvested at January 1, 2010 |
|
|
13 |
|
|
$ |
7.73 |
|
Granted |
|
|
2 |
|
|
|
11.73 |
|
Vested |
|
|
(6 |
) |
|
|
7.83 |
|
|
Unvested at December 31, 2010 |
|
|
9 |
|
|
$ |
8.81 |
|
|
The weighted average grant-date fair value of restricted stock granted was $11.73, $6.71, and
$8.04 during the years ended December 31, 2010, 2009, and 2008, respectively. The total fair value
of restricted stock vested during the years ended December 31, 2010, 2009 and 2008 was $45 million,
$68 million and $107 million, respectively.
Stock Options. Stock option awards are granted with an exercise price equal to the closing
price of Delta common stock on the grant date. Generally, outstanding employee stock options vest
over several years and have a 10-year term, subject to the employees continued employment. We
determine the fair value of stock options at the grant date using an option pricing model.
The following table summarizes stock option activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
Weighted |
|
Remaining |
|
Aggregate |
|
|
|
|
|
|
Average |
|
Contractual |
|
Intrinsic |
|
|
Shares |
|
Exercise |
|
Life |
|
Value |
|
|
(in millions) |
|
Price |
|
(in years) |
|
(in millions) |
|
Outstanding at January 1, 2010 |
|
|
22 |
|
|
$ |
12.79 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(1 |
) |
|
|
8.00 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(1 |
) |
|
|
17.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010(1) |
|
|
20 |
|
|
$ |
12.92 |
|
|
|
5.3 |
|
|
$ |
47 |
|
|
Exercisable at December 31, 2010 |
|
|
17 |
|
|
$ |
14.03 |
|
|
|
4.7 |
|
|
$ |
29 |
|
|
|
|
|
(1) |
|
We expect substantially all of our unvested stock options at December 31,
2010 to vest. |
Performance Shares. Performance shares are long-term incentive opportunities which are
payable in common stock and are generally contingent upon our achieving certain financial goals.
Other. There was no tax benefit recognized in 2010, 2009 or 2008 related to equity-based
compensation, as we record a full valuation allowance against our deferred tax assets due to the
uncertainty regarding the ultimate realization of those assets. For additional information, see
Note 9.
90
NOTE 14. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table shows the components of accumulated other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and Other |
|
|
|
|
|
Deferred Tax |
|
|
|
|
Benefits |
|
Derivative |
|
Valuation |
|
|
(in millions) |
|
Liabilities |
|
Instruments |
|
Allowance |
|
Total |
|
Balance at January 1, 2008 |
|
$ |
253 |
|
|
$ |
16 |
|
|
$ |
166 |
|
|
$ |
435 |
|
|
Changes in fair value |
|
|
(3,117 |
) |
|
|
(1,369 |
) |
|
|
|
|
|
|
(4,486 |
) |
Reclassification into earnings |
|
|
(3 |
) |
|
|
(26 |
) |
|
|
|
|
|
|
(29 |
) |
Tax effect |
|
|
1,165 |
|
|
|
516 |
|
|
|
(1,681 |
) |
|
|
|
|
|
Balance at December 31, 2008 |
|
|
(1,702 |
) |
|
|
(863 |
) |
|
|
(1,515 |
) |
|
|
(4,080 |
) |
|
Changes in fair value |
|
|
(540 |
) |
|
|
(20 |
) |
|
|
|
|
|
|
(560 |
) |
Reclassification into earnings |
|
|
48 |
|
|
|
1,350 |
|
|
|
|
|
|
|
1,398 |
|
Income Tax Allocation |
|
|
|
|
|
|
(321 |
) |
|
|
|
|
|
|
(321 |
) |
Tax effect |
|
|
183 |
|
|
|
(491 |
) |
|
|
308 |
|
|
|
|
|
|
Balance at December 31, 2009 |
|
|
(2,011 |
) |
|
|
(345 |
) |
|
|
(1,207 |
) |
|
|
(3,563 |
) |
|
Changes in fair value |
|
|
(121 |
) |
|
|
(71 |
) |
|
|
|
|
|
|
(192 |
) |
Reclassification into earnings |
|
|
54 |
|
|
|
123 |
|
|
|
|
|
|
|
177 |
|
Tax effect |
|
|
25 |
|
|
|
(19 |
) |
|
|
(6 |
) |
|
|
|
|
|
Balance at December 31, 2010 |
|
$ |
(2,053 |
) |
|
$ |
(312 |
) |
|
$ |
(1,213 |
) |
|
$ |
(3,578 |
) |
|
NOTE 15. GEOGRAPHIC INFORMATION
Operating segments are defined as components of an enterprise whose separate financial
information is regularly reviewed by the chief operating decision maker and used in resource
allocation and performance assessments.
We are managed as a single business unit that provides air transportation for passengers and
cargo. This allows us to benefit from an integrated revenue pricing and route network. Our flight
equipment forms one fleet, which is deployed through a single route scheduling system. When making
resource allocation decisions, our chief operating decision maker evaluates flight profitability
data, which considers aircraft type and route economics, but gives no weight to the financial
impact of the resource allocation decision on an individual carrier basis. Our objective in making
resource allocation decisions is to optimize our consolidated financial results.
Operating revenue is assigned to a specific geographic region based on the origin, flight path
and destination of each flight segment. Our operating revenue by geographic region is summarized in
the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
(in millions) |
|
2010 |
|
2009 |
|
2008 |
|
Domestic |
|
$ |
20,744 |
|
|
$ |
19,043 |
|
|
$ |
14,937 |
|
Atlantic |
|
|
5,931 |
|
|
|
4,970 |
|
|
|
5,149 |
|
Pacific |
|
|
3,283 |
|
|
|
2,485 |
|
|
|
867 |
|
Latin America |
|
|
1,797 |
|
|
|
1,565 |
|
|
|
1,744 |
|
|
Total |
|
$ |
31,755 |
|
|
$ |
28,063 |
|
|
$ |
22,697 |
|
|
Our tangible assets consist primarily of flight equipment, which is mobile across geographic
markets. Accordingly, assets are not allocated to specific geographic regions.
91
NOTE 16. RESTRUCTURING AND MERGER-RELATED ITEMS
The following table shows charges recorded in restructuring and merger-related items on our
Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
(in millions) |
|
2010 |
|
2009 |
|
2008 |
|
Merger-related items |
|
$ |
233 |
|
|
$ |
275 |
|
|
$ |
978 |
|
Asset impairment |
|
|
182 |
|
|
|
|
|
|
|
|
|
Facilities and other |
|
|
20 |
|
|
|
13 |
|
|
|
39 |
|
Severance and related costs |
|
|
15 |
|
|
|
119 |
|
|
|
114 |
|
|
Total restructuring and merger-related items |
|
$ |
450 |
|
|
$ |
407 |
|
|
$ |
1,131 |
|
|
Merger-Related Items. Merger-related items are costs associated with Northwest and the
integration of Northwest operations into Delta, including costs related to information technology,
employee relocation, employee training, and re-branding of aircraft and stations. In 2008,
merger-related items primarily relate to non-cash charges related to the issuance or vesting of
employee equity awards in connection with the Merger (see Note 13).
Asset Impairment. In 2010, we recorded a $146 million impairment charge related to our
decision to substantially reduce Comairs fleet over the two years ending December 31, 2012 by
retiring older, less-efficient CRJ-100/200 50-seat aircraft. For a discussion of the techniques
used to estimate the current fair values, see Note 2. We also recorded an impairment charge
related to our retired B-747-200 aircraft, which we sold.
Severance and Related Costs. In 2010, severance and related costs primarily relate to our
wholly-owned subsidiaries, including charges associated with the Comair fleet reduction initiative
and the consolidation of operations at the Cincinnati/Northern Kentucky International Airport. In
2009 and 2008, we recorded charges associated primarily with voluntary workforce reduction
programs, including $6 million of special termination benefits related to retiree healthcare in
2009. We do not expect to record any additional material charges related to our severance
initiatives discussed above.
The following table shows the balances and activity for restructuring charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and |
|
|
|
|
(in millions) |
|
related costs |
|
Facilities and other |
|
Total |
|
Balance as of January 1, 2008 |
|
$ |
|
|
|
$ |
3 |
|
|
$ |
3 |
|
|
Additional costs and expenses |
|
|
114 |
|
|
|
39 |
|
|
|
153 |
|
Purchase accounting |
|
|
62 |
|
|
|
32 |
|
|
|
94 |
|
Payments |
|
|
(126 |
) |
|
|
(20 |
) |
|
|
(146 |
) |
|
Balance as of December 31, 2008 |
|
|
50 |
|
|
|
54 |
|
|
|
104 |
|
|
Additional costs and expenses |
|
|
113 |
|
|
|
13 |
|
|
|
126 |
|
Purchase accounting |
|
|
|
|
|
|
19 |
|
|
|
19 |
|
Payments |
|
|
(94 |
) |
|
|
(12 |
) |
|
|
(106 |
) |
|
Balance as of December 31, 2009 |
|
|
69 |
|
|
|
74 |
|
|
|
143 |
|
|
Additional costs and expenses |
|
|
15 |
|
|
|
20 |
|
|
|
35 |
|
Other |
|
|
|
|
|
|
14 |
|
|
|
14 |
|
Payments |
|
|
(64 |
) |
|
|
(23 |
) |
|
|
(87 |
) |
|
Balance as of December 31, 2010 |
|
$ |
20 |
|
|
$ |
85 |
|
|
$ |
105 |
|
|
92
NOTE 17. EARNINGS (LOSS) PER SHARE
We calculate basic earnings (loss) per share by dividing the net income (loss) by the weighted
average number of common shares outstanding. Shares issuable upon the satisfaction of certain
conditions are considered outstanding and included in the computation of basic earnings (loss) per
share. Accordingly, the calculation of basic earnings (loss) per share for the years ended December
31, 2010, 2009 and 2008 assumes there was outstanding at the beginning of each of these periods all
386 million shares of Delta common stock contemplated by Deltas Plan of Reorganization to be
distributed to holders of allowed general, unsecured claims. Similarly, the calculation of basic
loss per share for the years ended December 31, 2009 and 2008 assumes there was outstanding at
January 1, 2009 and the Closing Date, respectively, the following shares in connection with the
Merger (1) 50 million shares of Delta common stock we agreed to issue on behalf of pilots and (2)
nine million shares of Delta common stock reserved for issuance in exchange for shares of Northwest
common stock that, but for the Merger, would have been issued under Northwests Plan of
Reorganization.
The following table shows our computation of basic and diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
(in millions, except per share data) |
|
2010 |
|
2009 |
|
2008 |
|
Net income (loss) |
|
$ |
593 |
|
|
$ |
(1,237 |
) |
|
$ |
(8,922 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
|
834 |
|
|
|
827 |
|
|
|
468 |
|
Dilutive effects of share based awards |
|
|
9 |
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding |
|
|
843 |
|
|
|
827 |
|
|
|
468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share |
|
$ |
0.71 |
|
|
$ |
(1.50 |
) |
|
$ |
(19.08 |
) |
Diluted earnings (loss) per share |
|
$ |
0.70 |
|
|
$ |
(1.50 |
) |
|
$ |
(19.08 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Antidilutive common stock equivalents
excluded from diluted earnings (loss) per
share |
|
|
22 |
|
|
|
35 |
|
|
|
41 |
|
|
NOTE 18. QUARTERLY FINANCIAL DATA
(UNAUDITED)
The following table summarizes our unaudited results of operations on a quarterly basis. The
quarterly earnings (loss) per share amounts for a year will not add to the earnings (loss) per
share for that year due to the weighting of shares used in calculating per share data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
Three Months Ended |
(in millions, except per share data) |
|
March 31 |
|
June 30 |
|
September 30(1) |
|
December 31 |
|
Operating revenue |
|