~~ OF THE YEAR \--- lill ' ENDED JUNE 30, 1954 ACTUAL integration of the Delta and C&S systems was substantially accomplished, following the merger of Chicago and Southern Air Lines, Inc. with and into Delta Air Lines, Inc. on May 1, 1953. Four Douglas DC-7 aircraft and 13 Convair 340 aircraft were placed in service, and 16 older-type aircraft were sold. Seat miles operated with modern, pressurized airplanes increased 71 % over the preceding year for the combined Delta and C&S operations, and constituted 85% of total seat miles flown during the year. Off-hour aircoach service was extended to six additional cities, and 103 million more seat miles of this reduced-fare service was offered the public. Four quarterly dividends of 30 cents each were paid to the common stockholders. Common stock book value increased almost $1.00 a share after payment of $1.20 a share in dividends, notwithstanding the sub- stantial extraordinary expenses of consummating the merger and introducing new equipment, and with no mail pay subsidies for either domestic or international operations. In addition, the in- tangible account arising from the merger was reduced $1,668,000, or $2.78 a share. The Supreme Court decision in the C&S mail rate case released February 1, 1954, involving the so-called "off-set" issue, raised substantial questions which have not yet been answered concern- ing the availability of governmental subsidy support for our in- ternational operations and for those of other U. S. carriers with both domestic and foreign routes. The number of employees remained approximately the same during the year even though seat miles increased 20% over the total for the Delta and C&S systems for the preceding year. This reflects both the realization of improved efficiencies anticipated because of the merger and the increased productivity of the newer flight equipment. TO THE STOCKHOLDERS DELTA AIR LINES, INC. June 30, 1954 marked the completion of the first full year of combined operations of Delta- C&S. It was a highly significant year in which notable progress was achieved. Total operating revenues were increased during the year, and gains were scored in every phase of operations. Simultaneously with the harmonious and suc- cessful integration of the two systems, an exten- sive aircraft modernization program was ef- fected. A firm foundation has been laid for the continued development of your Company and Operating revenues Operating expenses (excluding depreciation) Depreciation expense Operating Income . Non-operating cash charges-net (excluding costs of capital) Capital costs- Interest on debentures Interest on bank loans entry into the nation's major travel mark,ets so important to the communities it serves. EARNINGS-Operations for the fiscal year ended June 30, 1954, resulted in operating in- come of $2,037,571, total profits of $2,106,949 , before taxes on income, and net profits after taxes of $1,305,949 (equivalent to $2.18 per share of outstanding common stock). A formal statement of income is presented on page 14 of this report, but a summary of these earnings 1s shown below. $50,333,882 43,021,159 7,312,723 5,275,152 2,037,571 76,785 594,647 388,812 $2,114,356 983,459 1,130,897 Amortization of Property Acquisition Adjustment account charged against income 453,313 677,584 Profits from flight equipment sales (after applying $1,226,000 of sale proceeds against the Property Acquisition Account) Total Profits before taxes on income Accrual for taxes on income Net earnings after taxes on income 1,429,365 2,106,949 801,000 $1,305,949 2 SOURCES OF THE 1954 REVENUE DOLLAR 40.000,000 DELTA AIR LINES, INC. EXPRESS & FREIGHT '45 '46 '47 '48 '49 SOURCE OF OPERATING REVENUES REVENUES-Total operating revenues of $50,- 333,882 were $2,078,572 above the preceding year for the Delta and C&S systems combined. Passenger revenues increased $2,967,845, from $42,177,104 to $45,144,949, with a 7.74% in- crease in revenue passenger miles to 769,654 million. Available seat miles operated increased 19.9%, however, and the passenger load factor dropped from 63.76% the preceding year to 57.26%. This decline in load factor is due largely to the time required for the develop- ment of additional traffic commensurate with the increased seating capacities of the new air- craft placed in service. The entire domestic Delta-C&S system was operated under compensatory (subsidy-free) mail rates during the year; the Civil Aeronau- tics Board estimated that the merger therefore resulted in savings to the Government of $539,000 which would otherwise have been payable as subsidy support for the C&S domes- tic routes. The elimination of domestic subsidy coupled with the absence of final action upon our request for international mail pay subsidy resulted in a decrease in mail revenue from the preceding year of $909,728, exclusive of such additional international mail revenue as may ultimately be forthcoming. Recorded mail reve- --- '50 '51 '52 '53 '54 FOR YEARS ENDING JUNE 30 nue of $1,723,703 for the year represents only 3.42% of total revenues. Air freight revenues increased 10.17%, to $1,766,266, and represented 3.51 % of total reve- nues. Following the nation-wide trend, revenue from air express dropped slightly, from $887,- 923 the preceding year to $844,483. Revenues from charters and incidental sources were $236,697, representing a decrease of $150,760 from the preceding year. 30 .000.000 20.000.000 10.000.000 Four DC.7's already in service and six more on order will enable Delta-C&S to offer the finest, fastest transportation in the U. S. EXPENSES- Operating expenses of $48,296,311 for the year represent an increase of 12.28% for the combined Delta and C&S systems over the preceding year. Increases of I 9.97% in available seat miles and 18.23% in available ton miles resulted in lowered capacity unit costs, however; the cost per available ton mile declined from 31.32 to 29.75. The total dollar increase in operating ex- penses of $5,283,732 is made up of the follow- ing principal items, representing 82.22% of the total increase: Depreciation, reflecting the new flight equipment placed in service . . $1,673,017 Gasoline, because of the increase in volume of operations and price increases during the year 1,497,528 Salaries, primarily attributable to a general wage and salary increase effective in August 1953 1,173,897 $4,344,442 Financing-Capitalization BANK LOANS -An additional $11,600,000 was borrowed under the Credit Agreement of September 2, 1952, in connection with the pur- chase of new flight equipment, bringing total Attentive service, speed and comfort attract customers to the popu- lar Delta-C&S flights operated with four-engined DC-6 equipment. REVENUE PASSENGER MILES MILLIONS COMBINED DEL TA -C&S SYSTEMS 72 --,----,--F _O ..-R _ Y-.-- E_ A_ R..,.. S _E _N _.,. D _I_ N_ G~J_U _N ,_ E_ 3 _0 ---,-----,---,-----, 70 -+- -+--+----+-- -+----+- -+-- +--- 66 58 54 50 46 42 38 1954 1953 1952 1951 JUL AUG SEPT OCT NOV DEC JAN FEB MAR APR MAY JUN borrowings thereunder to $14,000,000 of the $20,000,000 made available by the Agreement. This Credit Agreement provides for borrowing a maximum of $20,000,000 on unsecured notes at 3% interest, with each individual loan payable in quarterly installments over a four- year period beginning 15 months after the bor- rowing date. Its original expiration date of From Chicago to the Caribbean, the pressurized comfort of the Super Convair is winning new passenger acclaim for Delta-C&S. 3 August 1, 1954, has been extended to May 1, 1955, in recognition of the additional new flight equipment being delivered in early 1955. It is not presently anticipated that the entire $20,000,000 credit will be used; in any event, loan repayments will not exceed depreciation charges during the repayment period. The Credit Agreement also provides that no cash dividends on common stock shall be paid which would reduce earned surplus below $3,700,000, and that working capital of not less than $1,500,000 must be maintained. On June 30, 1954, earned surplus was $8,760,791, and working capital as defined in the loan agree- ment was approximately $5,000,000 above the specified minimum. DEBENTURES-On May 1, 1953, there were issued to former C&S stockholders $10,695,846 of 5% Convertible Debentures (subordinated) maturing May 1, 1973. Since that date $162,700 face value of debentures have been issued against options held by former officers of C&S, bringing total debentures issued at June 30, 1954, to $10,858,546. There remain outstanding options which when exercised will require the issuance of an additional $84,000 of debentures. Earnings for the fiscal year ended June 30, 1954, were not sufficient to bring into operation the Purchase Fund provision of the Indenture covering these debentures, which requires that From this Automatic Switching Center at Delta-C&S headquarters in Atlanta, teletype messages are flashed simultaneously to all stations. 4 REVENUE PASSENGER MILES DELTA AIR LINES, INC. '45 '46 '47 '48 '49 '50 '51 '52 '53 '54 MILLIONS FOR YE.t.RS ENDING JUNE 30 under certain conditions a maximum of $250,000 a year be set aside for the purchase of debentures on the open market at not more than face value. COMMON STOCKHOLDER EQUITY-The difference of $585,949 between net earnings for the year and dividends paid common stockhold- ers increased the book value of the stockholder equity to $16,233,227 at June 30, 1954, a record high and equivalent to $27.06 per share. Round the clock orerators man the switchboard in new Atlanta Reser- vations Office. Flight board shows seat availibility over entire System. In addition, the intangible asset "Property Acquisition Adjustment" (representing the amount by which the face value of debentures exceeded the book value of C&S assets) was reduced by $1,668,012 during the year, from $2,661,603 at the beginning of the year to $993,591 at the end of the year. This total reduction was provided by (a) amortization charges against income of $453,313 and (b) a portion of the proceeds from the sale of former C&S flight equipment of $1,214,699. Mail Rates DOMESTIC-Delta has operated under sub- sidy-free, compensatory mail rates since Octo- ber 1951; the C&S system required subsidy support up to the May 1, 1953, date of the merger. Since that date compensatory mail revenue only for the entire Delta-C&S system has been assumed, although the final proce- dural action establishing such rates has not in some instances occurred. Revenue for mail carried in the months of January, February, and March has been re- corded at rates proposed by the CAB in a case designed to eliminate any differentials in serv- ice rates of different airlines between the same cities. Effective April 1, 1954, the compensatory mail rates for the domestic operations of all U. S. carriers were opened for investigation and review by the CAB; mail revenue A pleasant air journey begins for Shreveport travelers in new air- conditioned Delta-C&S City Tide+ Office in Captain Shreve Hotel. since that date has been recorded on a tempo- rary basis, but it is not expected that the rates finally established retroactively to April 1, 1954, will require a material adjustment in recorded mail revenue since that date. INTERNATIONAL -Prior to the merger, C&S received mail pay subsidy support for its international operations. In a proceeding begun as of the merger date, the CAB on September 21, 1953, proposed a new rate for international operations which provided for the continuation TON MILES and PLANE MILES FOR YEARS ENDING JUNE 30 DEL TA AIR LINES. INC. rt o - - - - - - - - - - - + - - - - + - - - - - + - - - - - - - - 170 60 40 20 of subsidy support (but in a reduced amount) in recognition of the losses being incurred in that operation. This proposal never became effective because of the then pending judicial review of a Post Office Department objection to a C&S mail rate decision. The final decision in that case, as described below, requires a re- examination of our international mail pay re- quirements from May 1, 1953, forward by the CAB. This re-examination is currently in proc- ess. Only compensatory (or service) mail pay on international operations has been recorded since May 1, 1953, so that the approval of any portion of our claim for subsidy will result in an upward adjustment of revenues. The compensatory mail rates for all U. S. 5 Flag carrier international routes were opened for CAB review effective April 8, 1954, and in- ternational mail revenue since that date has been recorded at a temporary service rate. Again, it is not expected that the final rate will require a material adjustment of revenue. OFF-SET ISSUE-In 1952 the Post Office De- partment filed a petition requiring judicial review of a CAB rate order of October 1951 establishing international mail pay rates for C&S, contending that the CAB erred in refusing NET BOOK VALUE PER SHARE OF COMMON STOCK AS OF JUNE 30 DOLLARS PER SHARE DELTA AIR LINES, INC . 2s~~-~-~-~-~-~--r--r---.----, 26--1-----1-----1---+----+---l----1----!----+-- 24--1-----1-----1---+----+---1----1----l----+-- 22...___,_ _ __,__ _ ___.__---+-_ _.__-+-_-+--_+-- 20...___,_ _ __,__ _ ___.__---+-_ _.__-+-_-+-_+-- 18-+-----+-----1------+---+----+---1--+- 16 --1-----1-------l---+----+---1---+-- 14-'-----1-------L--_._ _ _,_____,_ 12-+----+------1-----+-- 10 8 6 4 2 6 to take into consideration certain profits earned on the C&S domestic operations in determining the mail pay requirements of its international operations. In May 1953 the Circuit Court of Appeals for the District of Columbia ruled in favor of the Post Office Department, and this ruling was upheld by U. S. Supreme Court decision issued February 1, 1954. This decision requires the CAB to redeter- mine the mail pay requirements of the C&S system for the years 1948-1950 ( and possibly for a portion of 1951) in accordance with the prin- ciple that the entire operations of the carrier must be considered in making that determina- tion. The Post Office Department originally contended that C&S was overpaid $654,000 for the years in question, and we will endeavor to sustain our position that the "need" of C&S for that period does not warrant any reduction. This case is now before the CAB, and it is im- possible to predict when final action may be expected. In May 1954 legislation was introduced in Congress which, if adopted, would reestablish the divisional rate-making procedure followed by the CAB before the Su pre me Court decision with respect to all pending rate matters. Equipment and Facilities ADDITIONS-Continued progress was made toward the replacement of older types of flight equipment with the most modern aircraft avail- able, and our re-equipment program was sub- stantially complete at the end of the year. The 13 Super-Convair 340 planes received during the year brought our total of this type to 20 and completed the order. These 44-passen- ger, pressurized planes have replaced all DC-4's and a large number of DC-3's on semi-express flights. Four of the 10 Douglas DC-7's on order were delivered in the latter part of the year and were placed in scheduled service on April 1, 1954. Your company is one of the five domestic carriers who are operating or have ordered DC-7's which are the most modern transport SYMBOL OF SUPREMACY aircraft offered by American manufacturers. They have a cruising speed of 367 miles an hour and seating capacity for 69 passengers, and have been very well received by the traveling public. These airplanes insure for Delta-C&S competitive equality in equipment for some years ahead. The six DC-7's still on order are scheduled for delivery between November 1954 and April 1955; their delivery will complete the major re-equipment program begun over two years ago. The amount of $2,587,200 shown on the Balance Sheet as "Advance payments on new flight equipment" applies to these aircraft and related spares; the additional capital require- ments of approximately $10,000,000 in connec- tion with the conclusion of the program will come primarily from general corporate funds and, to a lesser extent, from additional borrow- ings under the Credit Agreement. 1\f aintenance and office facilities at the At- lanta Airport General Offices were materially enlarged during the year to accommodate head- quarters of the merged system. A portion of the maintenance facilities at the Memphis base no longer required for airline operations has been leased, and negotiations are currently in process with prospective tenants o( additional space there as it becomes available. RETIRElVCENTS-In furtherance of the over- all program, one "Delta" and 12 "C&S" DC-3's and three "C&S" Constellations were sold dur- ing the year for an aggregate sales price of $3,715,000, which produced a net profit of $1,022,365, after applying $1,214,699 of the sales price to reduce the "Property Acquisition Adjustment" account and after reserving $407,000 for taxes. Sales-Advertising A substantial portion of . the sales and adver- tising effort during the year was directed to the introduction of new flight equipment and the inauguration of new services. - - - - - - - - - - - - - - - - - - - ---40 FLIGHT EQUIPMENT AS OF JUNE 30, 1953 AND 1954 NET BOOK VALUE DE PRE CIATION 1953 NET BOOK VALUE DEPRE CIATION 1954 As a result of the new aircraft placed in service and the retirement of older types, 85% . of total seat miles were operated with modern, pressurized aircraft, and currently this per- centage stands at 92%- Increasing emphasis within the industry is being placed on reduced fare air coach service. Notwithstanding our general position that the price differential between regular and coach fares is not justified by the service differential, your Company recognized the prevailing trend and broadened its pattern of air coach service. This service was extended to six additional cities during the year, and it constituted 18% of total seat miles operated domestically. 30 20 10 MILLIONS AMERICA'S FASTEST AND FINEST AIRLINER 8 A vigorous and aggressive advertising pro- gram was carried on, with 3.24% of commercial revenues being applied to advertising and pro- motional activities. Safety-Dependability Your Company completed another year with- out an accident resulting in death or serious injury of passengers or flight ~rews. Notwithstanding the operating problems at- tendant upon the inauguration of service with two new types of flight equipment, the com- pletion factor (percentage of scheduled miles actually operated) of 98.29% compares satis- factorily with the industry average. Route Extensions and Modifications The several new route applications which Delta and C&S as individual companies filed before the merger have been revised to better serve the needs of the Delta-C&S system. The status of current proceedings and the principal applications are shown below. The hearing before a CAB Examiner in the Southwest-Northeast route case began Septem- ber 8, 1954. This is probably the most impor- tant route case in which your Company has ever participated, involving as it does our request to provide vital new and competitive services between the South and Southwest areas and the New York/ Washington areas. This appli- cation also provides for the closing of the gaps in our present route structure between New Orleans and Houston and between Memphis and Birmingham/ Atlanta. The tremendous im- provement in air service for the South and Southwest that v.rould result from the granting of the requested authority is shown in the map on pages 10-11 of this Report. Also on file but not a part of the current proceedings are applications to provide service between Florida and the New York/ Washing- ton area. Included in these applications is a proposal for a Havana-Miami route extension which would connect all present operations north of Miami with the Caribbean operations through Havana. Other applications, on file with the Civil Aeronautics Board and awaiting action, include: An extension of service from Chicago to Mil- waukee, Rochester and Minneapolis/ St. Paul. The substitution of Ft. Wayne for Ander- son/ Muncie/ Newcastle as a junction point for Routes 8 and 54, which will permit service between Detroit, Cincinnati and points south. The bridging of the gap between Memphis and Cincinnati. The improvement of east-west service through the extension of the Dallas-Atlanta route sou th to Miami by way of Tampa. West coast extensions from Memphis, Ft. Worth and Houston. Two cases not yet finally decided will deter- mine whether Terre Haute, Longview / Kil- gore/ Gladewater and Tyler would be served better by local service carriers than by the trunkline operations of the Company. No further procedural steps looking toward CAB approval have occurred in the proposed Northeast Airlines merger, which is contingent upon a connection between the two route sys- tems, nor is there any present indication of when this matter may again acquire an active status. Equipment Interchanges Your Company continues its operation of sev- eral equipment interchange services, in conjunc- tion with other airlines, providing the benefits DOLLARS 7 6 5 EARNINGS and-------~ DIVIDENDS PER SHARE DELTA AIR LINES . INC . FOR YEARS ENDING JUNE 30 4 1------,,, ,N= c,u =o1N =G...,., PR= oF1= TS = FRo =M - - - - - - SALES OF EQUIPMENT 5 Y E A R T O T A L IIIIZI:II 4.20 EARN I NGS D IVIDENDS PERSONNEL BY LENGTH OF SERVICE AS OF JWNE 30, 1953 AND 1954 OVER 20 j 15-20 f 10-15 YEARS YEARS - 17 84 414 1953 6 85 390 of through-plane service to substantial num- bers of the traveling public. These are- a) Between the Southeast and the West Coast, via Dallas as the interchange point, with American Airlines. b) Between Florida and California, via Dal- las as the interchange point, with Ameri- can Airlines and National Air Lines. c) Between the Southeast and Detroit, via Cincinnati as the interchange point, with Trans World Airlines. d) Between the Southwest and New York, via Indianapolis as the interchange point, with Trans World Airlines. There is also before the CAB for approval an agreement between Delta-C&S and Pan American Airways to provide through-plane service between Chicago and Mexico City with Houston as the interchange point. Personnel One of the brightest spots in the sometimes difficult periods experienced in the integration of two such large organizations as Delta and C&S has been the splendid cooperation received from the personnel of both companies. In rec- ognition of this, every possible step has been taken to make this merger desirable for the employees too. A general wage and salary increase was granted in August 1953 in order to maintain rates in line with general industry levels. The retirement income program begun July 1, 1942, was substantially modified and modernized on July 1, 1953, with no change in accrued benefits for service prior to that date. Continued in force were such employee benefits as a liberal 1,510 1.472 1,586 1,571 LESS THAN 1 YEAR 646 767 TOTAL 4,257 4,281 group insurance plan, paid vacations, sick leave, and free transportation; in addition, the Com- pany sponsors an Employees' Credit Union and numerous recreational programs. . The increasing number of employees with several years of service is indeed gratifying and comforting, for it is upon those employees that the continued growth of the Company will be built. Looking Ahead The steady annual gain of traffic stemming from the increasing public acceptance of air transportation, the unprecedented rate of growth of the areas we serve, and the possibili- ties inherent in current applications for route extensions afford substantial reasons for your Company to look to the future with confidence. A tremendous potential for further develop- ment exists in the Great New South and the Southwest. In this area Delta-C&S was born and developed its present route pattern. And it is for this area that Delta-C&S seeks CAB permission to provide direct service linking it to Main Street America. Your Company's sound financial condition, the support of the communities we are priv- ileged to serve, and the loyalty of employees and stockholders form the basis for our full participation in the continuing development of the nation's air transportation system. President and General Manager September 16, 1954 9 THE DELTA-C&S SYSTEM TODAY Delta-C&S Air Lines today serves 16 states and seven countries. Your Company's scheduled services link 56 cities located in the Great Golden Triangle of America and in the Caribbean. Our domestic routes cover nearly 6,500 miles, while our international rou_ tes extend just over 3,000 miles. PROPOSED ROUTE EXTENSION The current Southwest-Northeast route case before the CAB is the most important in your Company's history, involving as it does pro- posals for additional air service from the South and Southwest to the industrial and financial centers of the Northeast. In this case, Delta-C&S is seeking to provide vitally needed competitive service from 26 cities of the South and Southwest to Washington, Baltimore, Philadelphia, and New York, as shown on this map. Certification of this extension would create a new airline route for 29 cities with a total population of 26,116,411 in an area whose sound and rapidly expanding economy demands additional air service. For 12 of these cities, we would provide their first direct service to Northeastern points. They include Austin and Jackson, the only two major state cap- itals currently lacking direct air service to Washington and New York. Exactly 44.8 per cent of all the nation's air passengers begin or end their trips in just four cities: New York, Washington, Philadelphia, and Baltimore. Delta-C&S is the only major trunk airline operating east of the Mississippi which does not have access to this prime air travel mar- ket. This is the market your Company has always needed, and which it now needs more than ever to provide the economic stability and finan- cial strength upon which its future growth depends. What type of service is Delta-C&S in position to provide? If author- ized to do so by the CAB, we will operate new non-stop flights from both ends of the line, new one-stop and express flights, both standard and coach services. Additional new services which we propose to furnish include: non- stop flights between New York and Houston; Washington and Mem- phis; Washington and New Orleans; New York and Dallas; Washington and Dallas; New York and New Orleans; Washington and Atlanta; and New York and Atlanta. Delta-C&S is willing and able also to provide service to Tulsa and Oklahoma City on an extension of its routes from Memphis, and to serve Chattanooga, Nashville, Knoxville, and Pittsburgh on routes to the Northeast if the CAB should determine that such service is required. The well-being of the South and Southwest depends heavily on the provision of adequate, competitive air transportation. Delta-C&S is the carrier best fitted to close this existing gap in the airline pattern of the United States, and to do so without governmental subsidy. All of our documented exhibits in the case seek to establish this fact clearly. Your Company stands ready to provide that service, as it has since it first sought certification by the Civil Aeronautics Board to do so a decade ago. - Delta-C&S Present Airline Routes Through Plane Service with American Airlines =-:a:11:::aE TWA National Airlines Proposed New Services PHI LAD EL BALTIMOR..,,. ~- .h WASHINGTON l l ~ XVILLE f' VILLE ~CHARLOTTE SONVILLE 12 ASSETS CURRENT ASSETS: Cash . . . . . . . . . . . . . . . . . . . Marketable securities, at cost which approximates market- U. S. Government securities . . . . . . Federal Land Bank and Horne Loan Bonds . . . . . Accounts receivable- Traffic (net) . . . . . . . . . . . . . . . . . U. S. Post Office Department, for carrying mail (Note 4) Refundable 1952 Federal excess profits tax . . . . . Other . . . . . . . . . . . . . . . . . . . Maintenance and operating supplies, at average cost or less Other current assets . . . . Total current assets OTHER ASSETS: Advance paym~nts for new flight equipment (Note 5) Net assets of dusting division Miscellaneous . . . . . . . . . . . . . . . OPERATING PROPER TY AND EQUIPMENT (Including $3,974,097 and $4,782,471 fully depreciated in 1954 and 1953, respectively): Cost- Flight Equipment In Service 1954 $34,245,171 1953 22,290,074 Reserve for depreciation- 1954 11,345,275 1953 . . . . . . 10,324,775 Other Property and Equipment $6,028,542 5,469,753 2,852,358 2,502,646 PROPERTY ACQUISITION ADJUSTMENT (Note 3) DEFERRED CHARGES: Unamortized DC-7 and Convair preinaugural expense Advances for leased facilities, being amortized . Other deferred charges . . . . . . . . . . . DELTA AIR LINES. INC. ATLANTA, GEORGIA BALANCE SHEETS- JU NE 30.1954 AND 1953 LIABILITIES 1954 $ 6,403,316 3,298,683 1,002,293 2,985,946 186,657 1,012,764 2,424,648 278,632 $17,592,939 $ 2,587,200 149,049 118,189 $ 2,854,438 $40,273, 7 I 3 14,197,633 $26,076,080 $ 993,591 $ 222,036 104,886 246,027 $ 572,949 $48,089,997 1953 $ 7,038,496 1,768,902 730,000 2,713,014 409,687 370,000 547,614 2,342,012 443,076 $16,362,801 $ 3,381,798 141,051 119,814 $ 3,642,663 $27,759,827 12,827,421 $14,932,406 $ 2,661,603 $ 124,442 107,962 134,592 $ 366,996 $37,966,469 The accompanying notes are an CURRENT LIABILITIES: Current maturities of notes payable Accounts payable and accrued liabilities . Advance sales of tickets for transportation Accrued Federal and state taxes on income Air travel plan deposits . . . . Total current liabilities . . . NOTES PAYABLE TO BANKS (less current maturities above)-Note 6 . . . . . . . . . . . 5% CONVERTIBLE DEBENTURES (SUBORDINATED) due May 1, 1973 (convertible into common stock at $35.00 per share) . . . . . . . . . . . . . . . . . . DEFERRED FEDERAL INCOME TAXES (Note 2) . . . RESERVE FOR AIRCRAFT OVERHAUL . . . . . . CAPITAL STOCK AND SURPLUS: Common stock, par value $3.00 per share, Authorized 1,500,000 shares, of which 312,646 shares are reserved for conversion of Debentures Issued and outstanding 600,000 shares . . . . . . . Capital surplus, no change during 1954 . . . . . . . Earned surplus (of which $3,700,000 is not available for cash dividends under terms of credit agreement and indenture) PURCHASE COMMITMENTS AND CONTINGENT LIABILITY (Note 5) integral part of these statements. 1954 $ 2,150,000 4,441,961 1,020,156 662,919 586,075 $ 8,861,111 $11,700,000 $10,858,546 $ 335,000 $ 102,113 $ 1,800,000 5,672,436 8,760,791 $16,233,227 $48,089,997 1953 $ 450,000 4,368,424 990,469 2,856,998 526,150 $ 9,192,041 $ 2,250,000 $10,758,846 $ $ 118,304 $ 1,800,000 5,672,436 8,174,842 $15,647.278 $37,966,469 13 STATEMENTS of INCOME FOR THE YEARS ENDED JUNE 30, 1954 AND 1953 14 OPERATING REVENUES: Passenger . . . . U. S. Mail (Note 4) Freight . . . . . Express . . . . . Excess baggage Other operating revenue- net Total operating revenues OPERATING EXPENSES: Flying operations . . . . Direct maintenance-flight equipment Depreciation-flight equipment . . Total direct aircraft operating expenses Ground operations . . . . . . Ground and indirect maintenance Passenger service . . . . Traffic and sales . . . . . . . Advertising and publicity . . . General and administrative . . . Depreciation-ground equipment . Total operating expenses . Net income from operations before income taxes and rental payments for leased flight equipment RENTAL PAYMENTS FOR LEASED FLIGHT EQUIPMENT OTHER EXPENSE (INCOME): Interest on notes payable . . . . . . . . Interest on debentures . . . . . . . . . . Amortization of property acquisition adjustment Net loss (profit) of dusting division .. . Other income-net . . . . . . . . Total other expense (income) Net income before income taxes PROVISION FOR TAXES ON INCOME: (Note 3) Federal and state taxes on income (no excess profits tax pay- able, including deferred taxes of $335,000 in I 954- Note 2) Refundable 1952 Federal excess profits tax . . . . . . . Net income . . . . . . . . . . . . . . SPECIAL ITEM-Profit on disposition of flight equipment (less applicable income taxes of $407,000 in 1954 and $1,066,000 in 1953) . . . . . . . . . . . . Net income and special item . . . . . . . . 1954 $45,144,949 1,723,703 1,766,266 844,483 602,579 251,902 $50,333,882 $15,229,008 5,210,545 4,879,128 $25,318,681 6,591,262 3,410,455 3,375,200 4,871,386 1,574,364 2,758,939 396,024 $48,296,311 $ 2,037,571 $ $ 388,812 594,647 453,313 23,252) 53,533) $ 1,359,987 $ 677,584 $ 394,000 $ 394,000 $ 283,584 1,022,365 $ 1,305,949 1953 ( NOTE 1 ) $28,946,479 1,131,578 1,044,338 550,305 380,298 284,804 $32,337,802 $ 8,558,952 3,903,396 2,003,577 $14,465,925 3,949,720 2,258,382 2,024,778 3,085,461 1,021,002 1,840,253 256,207 $28,901,728 $ 3,436,074 $ 1,067,800 $ 125,238 98,547 91,778 31,337 68,743) $ 278,157 $ 2,090,117 $ 1,058,000 ( 370,000) $ 688,000 $ 1,402,117 2,756,561 $ 4,158,678 The accompanying notes are an ARTHUR ANDERSEN & Co. ACCOUNTANTS AND AUDITORS To the Board of Directors, Delta Air Lines, Inc.: THE WILLIAM-OLIVER BUILDING ATLANTA 3 We have examined the balance sheet of Delta Air Lines, Inc. (a Louisiana corporation) as of June 30, 1954, and the related statements of income and surplus for the year then ended. Our examination was made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances . In our opinion, the accompanying balance sheet and statements of income and surplus present fairly the financial position of Delta Air Lines, Inc. as of June 30, 1954, and the results of its operations for the year then ended, and were prepared in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding year. Atlanta, Georgia, August 13, 1954. AUDITOR'S CERTIFICATE EARNED SURPLUS FOR THE YEARS ENDED JUNE 30, 1954 AND 1953 Balance at beginning of year Add: Net income. . . . . . Special item-Profit on disposition of flight equipment (less applicable income taxes of $407,000 in 1954 and $1,066,000 in 1953) . . . . . . . . . . . . . . Deduct: Cash dividends on common stock . . . . . . . . . Balance at end of year ($3,700,000 of earned surplus is re- stricted as indicated on balance sheet) . . . . . . . . integral part of these statements. 1954 $8,174,842 283,584 1,022,365 $9,480,791 720,000 $8,760,791 1953 $4,591,164 1,402,117 2,756,561 $8,749,842 575,000 $8,174,842 15 NOTES to FINANCIAL STATEMENTS 16 1. MERGER WITH CHICAGO AND SOUTHERN AIR LINES, INC.: On May I, 1953, Chicago and Southern Air Lines, Inc. (C&S) was merged with and into Delta Air Lines, Inc. Consequently, the accompanying statement of income for the year ended June 30, 1953 reflects the operations of the merged system only since May 1, 1953. 2. DEPRECIATION RATES AND EMERGENCY AMORTIZATION: The Company's 3 Model 649 Constellations are being depreciated to a residual value of $50,000 each from the dates placed in service ( I in 1950 and 2 in 1951) to December 31, 1955. The 7 DC-6's are being depreciated to a residual_ value of 10% of cost from the dates placed in service (4 in 1948, 2 in 1949 and I in 1951) to December 31, 1955. The 16 DC-3's have been fully depreciated to a residual value of 10% of cost. The 4 DC-7's and 20 Model 340 Convairs are being depreciated for book purposes to residual values (10% of cost of DC-7's and 2% of cost of Convairs) over a period of seven years from the dates placed in service (Convairs in 1953 and 1954 and DC-7's in 1954). For Federal income tax purposes, 80% of the cost of these aircraft and related spare parts is being amortized under Certificates of Necessity over a 60-month period from the dates placed in service. The reduction of current Federal income taxes of $335,000, resulting from this accel- erated amortization, has been charged to income and set up in a special deferred tax re- serve to provide for the estimated Federal income taxes which may arise in later years when the depreciation which is taken on the books for this flight equipment is no longer deductible for tax purposes. The effect of such accounting is to prevent the tax deferments resulting from accelerated amortization from distorting annual net income during the period of accelerated amortization or in subsequent periods. 3. PROPERTY ACQUISITION ADJUSTMENT: The original amount in this account was recorded at the time of the merger referred to in Note I and is approximately equivalent to the excess of the fair market value of the flight equipment acquired from C&S over the net book value thereof at the merger date (May 1, 1953). Transactions in the account since the merger date are summarized as follows: Total Flight Equipment Intangibles Original amount of acquisition ad- justment . $2,753,381 $2,655,597 $97,784 Less-Amortization to June 30, 1953 91,778 88,520 3,258 Balance, June 30, 1953 $2,661,603 $2,567,077 $94,526 Less- Amortization for year ended June 30, 1954 453,313 433,765 19,548 Credits for equipment sales 1,214,699 1,214,699 - - - Balance, June 30, 1954 $ 993,591 $ 918,613 $74,978 This account is being amortized as a nonoperating deduction from income over a 60- month period commencing with the month of May 1953. In addition, the account has been credited with the amount by which the proceeds from the sale of flight equipment acquired in the merger exceeded its net book value (including the unamortized portion of the acquisition adjustment applicable to such equipment at the date of sale); the same procedure will be followed with respect to any sales of the remaining aircraft acquired in the merger. NOTES to FINANCIAL STATEMENTS I 4. MAIL REVENUES: Mail revenues from the U. S. Government since May 1, 1953, have been accrued at com- pensatory rates and include no elements of subsidy. The Civil Aeronautics Board instituted an investigation of domestic service mail rates for the industry effective April 1, 1954, and the rates ultimately established in this proceeding may be retroactive to that date. Simi- larly, international service mail rates are subject to redetermination from April 8, 1954, forward. The Company's domestic service mail rate between January 1, 1954, and April 1, 1954, is also subject to final determination in a proceeding involving it and three other carriers. It is not believed that the conclusion of these proceedings will require a material adjustment in the estimated mail revenues recorded to June 30, 1954. The Company's request for mail pay subsidy support for its international operations from May 1, 1953, forward is still pending before the Civil Aeronautics Board. 5. PURCHASE COMMITMENTS AND CONTINGENT LIABILITY: The Company has outstanding commitments for six DC-7 aircraft (to be delivered in 1954 and 1955). It is estimated that the acquisition of these aircraft and related spare parts and accessories will require a total capital outlay of approximately $11,500,000. Advances to manufacturers in connection with these commitments amounted to $2,587,200 at June 30, 1954. The Supreme Court of the United States by decision dated February 1, 1954, sustained the Post Office Department's objection to a C&S international mail rate order issued by the CAB in October 1951 (the so-called "offset" case). The Department contended that the en- tire operations of a carrier with both domestic and international divisions should be taken into consideration in determining the mail pay requirements of either division, and that accordingly the rate order in question provided excess mail revenue of $654,000 for the calendar years 1948-1950. The Supreme Court decision requires the CAB to review its orig- inal order and redetermine the mail pay requirements for the C&S international operations for the periods involved in accordance with the principles therein established. The amount of mail pay refund, if any, that Delta may be required to pay as successor of C&S cannot now be determined. 6. BANK LOAN AGREEMENT: On September 2, 1952, Delta entered into a Credit Agreement with twenty-five banks under which $20,000,000 may be borrowed at any time prior to August 1, 1954 (now ex- tended to May 1, 1955), on unsecured notes bearing interest at 3% repayable in 16 quar- terly installments commencing 15 months after the date of each loan. Under terms of the agreement a commitment fee of of 1 % per annum is payable on the unused portion of the commitment. At June 30, 1954, $14,000,000 (repayable serially to March 1959) had been borrowed under the agreement. 7. OPTIONS HELD BY FORMER OFFICERS: The merger agreement referred to in Note 1 provides that options granted to certain officers of C&S for the purchase of the ll,750 shares of common stock of C&S for $10 per share shall be honored by Delta by selling to holders of the options at $10 per share the amount ($21.00) of 5% Convertible Debentures (Subordinated) which stockholders of C&S may receive in exchange for each share of their common stock. As of June 30, 1954, holders of these options had paid in $77,476 and received therefor $162,700 in Debentures, the difference being charged to expense ($33,000 in 1953 and $52,224 in 1954). The remain- ing options to acquire $84,000 of Debentures for $40,000 expire August 21, 1956. 17 18 DELTA AIR LINES. INC.-A DECADE OF GROWTH CURRENT ASSETS Current Liabilities Net Working Capital Total Assets . Stockholders' Equity . Stockholder Equity Per Share Shares of Common Stock Outstand- ing at Close of Year . OPERATING REVENUES: Passenger . Mail Express Freight All Other. Total Revenues Operating Expenses (Excluding Depreciation) Depreciation Total Operating Expenses Operating Profit, Before Income Taxes . . . Non-Operating Revenue or (Expense) Net Income Before Taxes Federal and State Taxes on Income Net Income Before Aircraft Sale Profits Profit from Major Aircraft Sales (after taxes) . Total Profits Profit Per Share of Stock Outstanding at Close of Year . . . . . . . REVENUE PLANE MILES (000) Available Seat Miles (000) Revenue Passenger Miles (000) Passenger Load Factor . Available Ton Miles (000) Revenue Ton Miles (000) . . . % of Scheduled Mileage Completed 1954 $17,592,939 8,861,111 8,731,828 48,089,997 16,233,227 27.06 600,000 $45,144,949 1,723,703 844,483 1,766,266 854,481 50,333,882 43,021,159 5,275,152 48,296,311 2,037,571 (1,359,987) 677,584 394,000 283,584 1,022,365 1,305,949 2.18 31,916 1,344,069 769,654 57.26% 162,345 87,251 98.29% 1953 $16,362,801 9,192,041 7,170,760 37,966,469 15,647,278 26.08 600,000 $28,946,479 1,131,578 550,305 1,044,338 665,102 32,337,802 26,641,944 2,259,784 28,901,728 3,436,074 (1,345,957) 2,090,117 688,000 1,402,117 2,756,561 4,158,678 6.93 20,672 776,157 507,714 65.41 % 94,045 57,565 98.83% 1952 $ 9,027,490 6,618,627 2,408,863 16,836,905 9,808,493 19.61 500,000 $23,995,938 1,035,599 431,240 827,927 727,417 27,018,121 21,155,513 1,485,556 22,641,069 4,377,052 12,398 4,389,450 2,739,000 1,650,450 1,650,450 3.30 17,531 653,121 427,534 65.46% 80,089 48,093 98.98% These data refiect operations of Delta Air Lines, Inc., and do not include the C&S system prior to May 1, 1953. 1951 $ 7,184,532 4,541,282 2,6-43,250 14,402,050 8,658,043 17.32 500,000 $19,006,936 1,306,752 374,480 720,719 812,112 22,220,999 17,499,480 1,389,721 18,889;201 3,331,798 (75,000) 3,256,798 1,625,000 1,631,798 1,631,798 3.26 15,698 541,038 345,246 63.81% 71,987 40,480 98.91% 1950 1949 1948 1947 1946 1945 $ 5,170,591 $ 5,310,482 $ 4,682,029 $ 5,630,338 $2,765,210 $4,573,035 2,950,443 2,751,859 2,180,988 2,253,963 1,638,948 1,451,981 2,220,148 2,558,623 2,501,041 3,376,375 1,126,262 3,121,054 12,371,851 12,629,268 9,352,827 9,306,766 6,034,364 5,537,587 7,401,245 6,710,494 6,l-96,053 5,789,701 4,220,770 4,085,606 14.80 13.42 12.39 11.58 10.55 10.21 500,000 500,000 500,000 500,000 400,000 400,000 $13,761,453 $11,987,246 $10,079,272 $10,558,559 $6,944,162 $4,193,214 2,373,213 2,434,888 2,010,668 423,292 680,359 752,719 238,441 244,859 273,099 242,978 137,540 97,286 478,537 358,503 303,115 109,603 333,651 202,349 152,815 154,404 97,955 113,063 17,185,295 15,227,845 12,818,969 11,488,836 7,860,016 5,156,282 14,568,386 13,096,091 11,605,990 10,837,709 6,694,265 3,360,400 1,206,755 1,185,865 1,012,954 944,659 609,888 289,687 15,775,141 14,281,956 12,618,944 11,782,368 7,304,153 3,650,087 1,410,154 945,889 200,025 (293,532) 555,863 1,506,195 (5,403) (52,603) (50,845) (67,302) (12,793) (57,279) 1,404,751 893,286 149,180 (360,834) 543,070 1,448,916 589,000 336,000 56,343 127,459* 232,835 910,221 815,751 557,286 92,837 (233,375) 310,235 538,695 82,154 111,893 815,751 639,440 204,730 (233,375) 310,235 538,695 1.63 1.28 .41 (.47) .78 1.34 13,804 12,921 12,803 11,822 8,195 4,676 437,209 361,199 349,235 335,630 186,650 96,927 238,335 201,711 188,293 222,704 150,072 84,877 54.51% 55.84% 53.92% 66.35% 80.04% 87.57% 59.532 49,544 46,562 42,716 21,981 11,221 27,259 22,805 19,966 22,799 15,860 9,741 97.90% 97.69% 94.22% 94.71% 96.63% 95.55% * Credit ) Loss 19 20 ALEXANDRIA . . . . . . Alexandria Air Base ASHEVILLE . . . . Battery Park Hotel ATLANTA . . . . Piedmont and Biltmore Hotels AUGUSTA . . . . . . . . . Richmond Hotel BATON ROUGE . . . Heidelberg Hotel BEAUMONT . . Jefferson County Airport BIRMINGHAM . . . 2002 Fifth Ave., North BRUNSWICK . . Malcolm-McKinnon Airport CARACAS, Venez. . Edificio Paris, Plaza Candelaria CHARLESTON . . . . . Francis Marion Hotel CHATTANOOGA . . . . . . . Hotel Patten CHICAGO . 67 East Monroe & Conrad Hilton Hotel 1649 Orrington, Evanston, Illinois CINCINNATI . . . . Sheraton-Gibson Hotel and Netherland Plaza CIUDAD TRUJILLO, D. R., Arz. Nouel esq. Sanchez COLUMBIA . . . . . Hotel Wade Hampton COLUMBUS, GA. . . . . . . . Ralston Hotel DALLAS . . 214 S. Akard St. (Baker Hotel) DETROIT . . 1235 Washington Blvd. EVANSVILLE . . . McCurdy Hotel FORT WAYNE . . Baer Field Airport FORT WORTH . . . . . Hotel Texas GLADEWATER Gregg County Airport GREENVILLE Municipal Airport GREENWOOD Municipal Airport HATTIESBURG Municipal Airport HAVANA, Cuba . . . Prado 301 HENDERSONVILLE Asheville-Hendersonville Airport HOT SPRINGS . . Hot Springs Memorial Airport HOUSTON . . Mellie-Esperson Bldg. & Rice Hotel INDIANAPOLIS . . . . . . . Claypool Hotel JACKSON . . . . . Heidelberg Hotel JACKSONVILLE . . . . . 226 West Forsyth St. KANSAS CITY . . . . . . . Muehlebach Hotel KILGORE . . . Gregg County Airport KNOXVILLE . . Farragut Hotel LEXINGTON . . . Blue Grass Airport LITTLE ROCK . . . . Marion Hotel LONGVIEW . . . . . . Gregg County Airport MACON . Hotel Dempsey MEMPHIS . . . . . . . . Peabody Hotel MERIDIAN . . . . . . . . . . Key Field MIAMI . . . . 300 N. E. First (Columbus Hotel) MIAMI BEACH . . . . . 1636 Collins Avenue A vigorous and aggressive advertising program attracts customers for Delta-C&S, plays an important role in Company's success. TICKET OFFICES MONROE . . . . . . . . . . Frances Hotel MONTEGO BAY, Jamaica . Montego Bay Airport MONTGOMERY . . . . . Jefferson Davis Hotel NEW ORLEANS, 708 Common St. (St. Charles Hotel) and Roosevelt Hotel PADUCAH . . . . . . . . . . Barkley Field PORT AR THUR . . . Jefferson County Airport PORT-AU-PRINCE, Haiti . . . c/o Nadal & Co. SAN JU AN, Puerto Rico . Cari be Hilton Hotel SAVANNAH . . . Hotel Savannah SELMA . . . . . . . . . Selfield Airport SHREVEPORT . . . . Captain Shreve Hotel SPARTANBURG . . . . . . Memorial Airport SPRINGFIELD . . . . . . Municipal Airport ST. LOUIS . . . . . . . . . . Statler Hotel TERRE HAUTE TOLEDO TYLER . . . . . . . . H ulman Airport . Commodore Perry Arcade . . . . . Pounds Field C the ar1 ~;:0':~J- 4 ::.:....-:..-:.-::.,.=:.:- - ~-...... ..--.- - -w. ...... ....-- - :::::-.:.-::.::.~.: .. , R. w. COURTS Atlanta R .. w. FREEMAN New Orleans EDWARD H. GERRY New York City JOHN R. LONGMIRE St. Louis LAIGH C. p ARKER Vice President - Traffic and Sales CHARLES H. DOLSON Vice President - Operations w. T. ARTHUR Asst. Vice President - Operations Transfer Agent for Common Stock CARLETON PUTNAM, Chairman Washington, D. C. R. s. MAURER Atlanta C. H. McHENRY Monroe, La. LAIGH C. PARKER Atlanta WINSHIP NUNNALLY Atlanta C. E. w OOLMAN President and General Manager ToDD G. CoLE Vice President - Comptroller and Assistant Secretary R. s. MAURER Vice President - Legal T. M. MILLER Asst. Vice President - Traffic and Sales CATHERINE FITZGERALD Assistant Treasurer Trustee for Debentures The Citizens & Southern National Bank Atlanta, Georgia The First National Bank of Atlanta Atlanta, Georgia TRAVIS OLIVER Monroe, La. R. J. REYNOLDS Winston-Salem, N. C. D. Y. SMITH Monroe, La. C. E. w OOLMAN Atlanta w. T. BEEBE Vice President - Personnel TRAVIS OLIVER Treasurer C.H. McHENRY Secretary Registrar for Common Stock Trust Company of Georgia Atlanta, Georgia Auditors - Arthur Andersen & Co. Annual Meeting - October 19, 1954, Monroe, Louisiana