Delta Air Lines annual report 1978

Description of Business
Delta Air Lines, Inc., is a certificated trunk air carrier
providing scheduled air transportation for passengers
and cargo over a network of routes covering approxi-
mately 38,000 miles. Delta's route structure connects
the Northeast and Mid west with, the Southern States
from Texas to Florida; the Southeast to the Midwest,
West, and California; and the East Coast to Florida.
In addition, Delta operates international flights to
Canada, Bermuda, the Bahamas, Venezuela, Puerto
Rico and England. Service over nearly all of Delta's
routes is highly competitive. As an air carrier, Delta
is subject to federal regulation pursuant to the Fed-
eral Aviation Act of 1958, as amended, as well as
other federal and state statutes.
Contents
Highlights of the Year 2
Report to the Stockholders 3
Earnings and Dividends 9
Operating Revenues 11
Operating Expenses 13
Capitalization and Financing 14
Flight Equipment and Purchase
Commitments 16
Personnel 17
Facilities 18
Regulatory Matters 20
Route Map 24
Financial Statements-
Balance Sheets 26
Statements of Income 28
Statements of Retained Earnings 29
Statements of Additional Paid-in Capital 29
Statements of Changes in Financial Position 30
Notes to Financial Statements 31
Auditors' Report 41
Summary of Operations 42
Other Financial and Statistical Data 42
Management's Analysis and Discussion
of Summary of Operations 44
Board of Directors 46
Officers 47
HIGHLIGHTS OF THE YEAR
The following comparative summary highlights
the accomplishments of the past year in a num-
ber of major categories. Dollars are expressed
in thousands, except per share figures.
Operating
Revenues.
Operating
Expenses . . . . . .. . . . . .
Net Income.
Earnings Per
Share . .. . .. . .
Revenue Passengers
Enplaned. . ..
Available Seat
Miles (000) . . . . ..
Revenue Passenger
Miles (000) . . . . ... . . . .
Passenger Load
Factor . . . . . .... ... . . .
2
1978 1977
Per Cent
Change
$2,050,911 $1,719,645 + 19%
$1 ,845,816 $1 ,578,464
$131 ,127 $92,380
$6.60 $4.65
33,007,670 28,811 ,966
35,135,046 32,614,260
20,825,722 18,042,339
59.27% 55.32%
+ 17%
+ 42%
+ 42%
+ 15%
+ 8%
+ 15%
+ 7%
REPORT TO THE STOCKHOLDERS
It is our pleasure to report to you that fiscal
1978 was the most successful year in the history
of Delta Air Lines. For the second consecutive
year profits set a new record, reaching
$131.1 million, 42% above the $92.4 million
reported to you last year. Passenger revenue
and total revenues also set new records of
$1 .86 billion and $2.05 billion, respectively,
marking the first time in Delta's history that
total revenues surpassed $2 billion. We were
privileged to serve over 33 million passengers
and carry them a record 20.83 billion passenger
miles, 15% more than in 1977.
Delta's achievements in the past year have
been the subject of a number of awards.
Air Transport World magazine named Delta the
"Airline of the Year" and Dun's Review selected
Delta as "One of the Five Best Managed Com-
panies in the Country." Such awards are a tribute
to all the people who make up the Delta family,
those whose hard work and dedication have
been the foundation of Delta's success.
Air Transport World stated, "We, at least, are
convinced that there really is a 'Delta Family'
which includes all of the Delta people, and that
this is a large part of the reason for the stability
of the airline. Delta does well in good times and
bad. It has truly been an airline for all seasons."
To the more than 31 ,000 Delta Professionals,
on behalf of our stockholders, we express
thanks for a job well done.
In the past year, the Company's financial
position was substantially strengthened. Total
debt was reduced by $88.1 million to
$177.1 million, equal to 24% of equity, one of
the lowest debt-to-equity ratios in the airline
industry. Expenditures for flight and ground
equipment totaled $231 .7 million. Both the debt
repayment and the capital expenditures were
financed with internally generated funds. Delta's
financial strength was exemplified by the
renegotiation of the 1973 Bank Credit Agree-
ment which was amended to provide a number
3
David C. Garrett, Jr., President and Chief Executive Officer,
and W.T. Beebe, Chairman of the Board.
of changes favorable to the Company. These
include reducing the interest rate to the prime
rate, extending the agreement nine months to
June 30, 1981 , increasing the voluntary pre-
payment privileges, and eliminating a number
of restrictive covenants.
Delta's competitive posture was further
enhanced during the year as excellent progress
was made in the continuing program to stan-
dardize and increase the efficiency of the
aircraft fleet. Fourteen older aircraft were sold
which resulted in an after-tax gain of 83 per
share. The Company accepted delivery of 11
new aircraft including three L-1011 'sand
eight B-727-200's.
The Company's already strong route system
was further strengthened with the implemen-
tation of service on a number of new routes and
by the award of other routes on which service
will begin in the first half of fiscal 1979. On
4
April 30, 1978, the Company fulfilled one of its
long-standing ambitions when nonstop service
was begun between Atlanta and London. For
the first time, travelers from the Southeastern
U.S. will have the benefits of both nonstop
flights to Europe and Delta's unique brand of
customer service and convenience. To operate
this milestone route, we have ordered two
Lockheed L-1011-500's, the most technolog-
ically advanced aircraft available. These aircraft
will be delivered in the summer of 1979. In the
meantime, Delta is operating the route with two
leased L-1011 's. Customer response has been
extremely gratifying, and, during the peak
travel season, it has already begun to make a
positive contribution to the Company's
financial results.
In addition to Atlanta-London , service was
begun earlier in the fiscal year on new routes
between Atlanta, Tulsa and Denver; and be-
tween Memphis and Tampa. Service between
Cleveland and Indianapolis was started on
July 1, 1978. Service is scheduled to begin early
in fiscal 1979 on new routes between Atlanta-
Cleveland, Atlanta-Hartford/Springfield,
Cincinnati-Cleveland, Louisville-Memphis and
Las Vegas-Reno. The CAB has also given tenta-
tive approval for a realignment of Delta's route
structure which will give the Company some
new authority as well as increase our
operating flexibility.
While fiscal 1978 was a banner year of new
records and accomplishments, it has not been
without some difficulties and setbacks. Inflation
continues unchecked and in the past six months
has accelerated. The much needed national
energy program continues in limbo during
Congressional debate. Interest rates have
soared to their highest level since early 1975.
Our greatest concern has been in the area
of regulation. While the Congress considers
how much and in what form the airline industry
should be regulated , the CAB has already under-
taken the deregulation of the industry in a
number of important areas. Route cases are
being instituted at a record pace, and multiple
5
competitive permissive route awards are rapidly
changing the structure of the air transportation
network. The Board is in the process of imple-
menting a policy that any "fit, willing , and able"
carrier can be granted any route for which it
applies without demonstrating that the route
needs or can economically sustain such com-
petitive service. The Company believes that
this action by the Board is contrary to the
requirements of the Federal Aviation Act, the
legislation which created and defined the
responsibilities of the CAB. As a result, Delta
has filed suit in federal court to have this
practice reviewed.
The CAB has moved vigorously in the area
of fares. Much of the fare policy established in
the comprehensive Domestic Passenger Fare
Investigation Case, concluded by the CAB in
1975, has been abandoned in favor of a confus-
ing array of rules and pronouncements. Almost
any kind of discount fare is not only approved
but encouraged. Nationwide discount fares
allowing as much as a 50% reduction from the
normal fare have been approved by the Board
with no offsetting reductions in the cost of that
service. As a result, the 6% average increase
in normal fares which the Board allowed during
the year to help offset mounting inflation, has
disappeared, and the average passenger
mile yield is now below what it was at this
time last year.
Although the low fares have contributed
to some degree to current passenger traffic
growth, these low fares have had a disturbing
effect on both the traveling public and the air-
lines. Since the end of last year, Delta has had
to increase its reservations staff by more than
35%. This was necessary not only as a result of
the growth in passengers, but also to answer
the many questions of a confused public about
the more than one hundred discount fares which
the Board has allowed to be implemented. The
Board has now permitted further reductions in
fares by as much as 70% off the normal fare.
6
While the CAB has pursued its policies of
free entry and low fares, it has maintained rigid
control over increases in the normal fare. It
continues to impose arbitrary and self-serving
adjustments to the carriers' actual financial
results, the effect of which is to deny carriers
needed and justified fare increases.
The Board 's current policies in the route
and fare areas, while described by the Board as
"deregulatory", in fact constitut~ some of the
most forceful regulation that the industry has
experienced. In areas other than routes and
fares the CAB is increasing its regulation of the
day-to-day conduct of the airline business.
Delta has long maintained its position that
the nation's air transportation system is a vital
national asset, more important than the narrow
interest of one airline or one governmental
agency. It is a delicately balanced structure
which has been developed over many years.
The Company believes that present regulatory
and legislative efforts may erode the founda-
tion of that structure. Rather than have the
"Cannon/Kennedy Bill " passed by the Congress
or have the CAB continue its present course,
Delta believes that it would be more in the
public interest to abolish the CAB entirely. It
would be preferable to entrust the economic
future of the air transportation system to a
completely free market than have it regulated
in chaotic fashion .
We are concerned about the coming year
because of the uncertainty of the regulatory
situation. We frankly do not know where the
regulatory morass will lead, either at the CAB
or in the Congress. The national economic
picture appears to be reasonably good for the
first half of the coming year although many of
the same negative influences with which we
have had to deal still confront us. These include
mounting inflation, higher interest rates, and
the lack of a sound national energy policy.
In spite of these negative influences,
Delta's prospects for the coming year appear
good. At the present time, advance traffic book-
ings are encouraging. Progress will continue to
7
be made in standardizing and increasing the
efficiency of the aircraft fleet. We will continue
our determined efforts to minimize the effects
of inflation through gains in productivity with-
out compromising service to our customers.
If we are to continue to be an industry
leader in service to our customers and produce
superior financial results, our team of Delta
Professionals will again be tested, as they have
been tested in the past by strengthened com-
petition, unstable economic situations, energy
crises, and mounting government regulation.
We are confident that they will again measure
up to the challenge and that Delta will continue
its position as one of the finest airlines in
the world.
DAVID C. GARRETT, JR.
President and
Chief Executive Officer
August 29, 1978
8
WT. BEEBE
Chairman of the Board
EARNINGS AND DIVIDENDS
Fiscal 1978 earnings were $131.1 million
($6.60 per share)., an increase of 42% over the
1977 earnings of $92.4 million ($4.65 per share).
The following table compares operating results
for fiscal 1978 and 1977.
1978 1977
Per Cent
Change
(In Thousands)
Operating Income. $205,095 $141,181 + 45%
Other Expense (Income):
22,107 25,983 - 15
Interest Expense.
Less- Interest
Capitalized on
Advances for
Equipment. . . . (4,794) (2,922) + 64
17,313 23,061 - 25
Gain on Disposition of
Aircraft. .... . .. . (32,689) (29,403) + 11
Realized/Unrealized
Loss (Gain) on Foreign
CurrencyTranslation. . 3,339
Miscellaneous Income,
Net.. . . . . . . (7,640)
(19,677)
Income Before Taxes.... . 224,772
Provision for Income Taxes:
Income Taxes Provided 109,296
Less-Amortization of
Investment Tax
(2,699) - 224
(4,825) + 58
(13,866) + 42
155,047 + 45
76,362 + 43
Credits ........... . . (15,651 ) (13,695) _____H__
93,645 62,667 + 49
Net Income . ...... ..... . $131,127 $ 92,380 + 42%
Net Income Per Share ... . $6.60 $4.65 + 42%
Operating income increased 45% to
$205.1 million on a 19% growth in operating
revenue, and a 17% increase in operating
expense. Net interest expense declined
$5.7 million or 25% as the average debt out-
standing was reduced , and interest capitalized
increased $1.9 million as the result of higher
average equipment purchase deposits.
Gains from the sale of aircraft totaled
$32. 7 million, 83 per share after taxes, while
fiscal 1977 results included gains from flight
equipment sales of $29.4 million, or 75 per
share after taxes. Translation of foreign debt
9
Earnings per Share*
In Dollars
- - - - - - - - - - - - - - - - - 7
6
5
4
3
2
0
69 70 71 72 73 74 75 76 77 78
*These data reflect the operations of Delta Ai r Lines, Inc.,
and do not include the North east Ai rlines' system prior
to August 1, 1972.
repayable in pounds sterling resulted in a loss
in the current year of $3.3 million or 9 per
share after taxes compared to a gain of
$2. 7 million, 7 per share after taxes, in fiscal
1977. Miscellaneous income increased
$2.8 million, principally from higher interest
income.
Income taxes were provided on book
income at a rate of approximately 49% in both
fiscal years. The provisions were reduced by
investment tax cred it amortization of
$15.7 million in 1978 and $13.7 million in 1977.
During the year, the Company reached
agreement with the Internal Revenue Service
providing for settlement of proposed income
tax deficiencies for fiscal years 1966 through
1972. These taxes had been provided for in
prior years.
10
Total dividend payments for the year
amounted to $14.9 million, 75 per share, a 7%
increase over the $13.9 million, 70 per share,
paid last year.
At the July, 1978, meeting of the Board of
Directors, the quarterly dividend was increased
25% to 25 per share. This was the second in-
crease in the dividend rate in the last six months.
Fiscal 1978 marked the 29th consecutive year
in which Delta has made cash dividend
payments.
OPERATING REVENUES
The following table compares operating
revenues for fiscal 1978 and 1977 by major
revenue category.
1978 1977
(In Thousands)
Per Cent
Change
Scheduled Passenger $1 ,861 ,100 $1 ,575,642 + 18.1%
Cargo . . ... ... .. , . . . 153,233 114,800 + 33.5
Charter..... . . . . . . . . 18,284 13,039 + 40.2
Other, Net. . . . . . . . . . 18,294 16 164 + 13.2
Total. ............ $2,050,911 $1 ,719,645 + 19.3%
Total operating revenues in 1978 increased
by $331.3 million to $2.05 billion from the
$1 .72 billion reported last year. Scheduled pas-
senger revenues rose 18% or $285.5 million to
$1 .86 billion. Revenue passenger miles totaled
20.83 billion, a 15% gain over the previous year.
In the last four months of fiscal 1978, revenue
passenger miles grew 22% reflecting strong
consumer confidence, a high level of economic
activity, and the stimulation of low discount
fares. During the year the CAB approved
increases to the basic fare averaging 6%.
Two-thirds of the increase was offset by the
proliferation of deep discount fares in the last
half of the year, and the average passenger
mile yield for the year increased only 2% to
8.94. For the June, 1978 quarter, when the
impact of the deep discount fares was strongest,
the average yield was down 1 % from the yield
in the June, 1977 quarter.
Cargo revenues increased 33% to
$153.2 million, including a $15.2 million adjust-
ment in mail payments, of which $12.3 million
11
was applicable to prior fiscal years. Cargo ton
miles grew 8%, and the average yield
increased 12%.
Charter revenues totaled $18.3 million, a
gain of 40%, which resulted from strengthened
marketing programs aimed at developing
charter operations.
Other net revenues increased by
$2.1 million, most of which related to the strong
traffic growth in passengers and cargo.
Per Cent
Revenue Statistics 1978 1977 Change
Revenue Passenger
Miles (000) ........ 20,825,722 18,042,339 + 15.4%
Revenue Passengers
Enplaned ......... 33,007,670 28,811 ,966 + 14.6%
Cargo Ton Miles (000) 298,246 277,498 + 7.5%
Passenger Load
Factor . . .......... 59.27% 55.32% + 7.1%
Passenger Mile Yield 8.94 8.73 + 2.4%
12
OPERATING EXPENSES
The following table compares operating
expenses for fiscal year 1978 with 1977 by major
expense category.
1978 1977
(In Thousands)
Salaries and Related
Per Cent
Change
Costs ....... ... .. . . $ 831 ,818 $ 706,770 + 18%
AircraftFuel. .. . . . . ... 382,159 316,478 + 21
Aircraft Maintenance
Materials and Repairs
Aircraft Rentals .. . . . . .
Other Rentals .. . ..... .
Landing Fees . . . . . ... .
Passenger Food and
Related Supplies . . ..
Agency Commissions ..
Advertising . .... . . . . . .
Other Cash Costs ..
44,794
6,295
32,629
38,354
71 ,863
64,800
28,835
176,114
Total Cash Costs. . . . . $1 , 677,661
Depreciation and
Amortization .. .. .. . . 168,155
Total Operating
30,818 + 45
5,248 + 20
30,887 + 6
35,941 + 7
59,224 + 21
52,846 + 23
23,461 + 23
150,751 __1L_
$1,412,424 + 19%
166,040 + 1
Expenses .. ... . . . . $1 ,845,816 $1,578,464 + 17%
Total operating expenses increased
$267 million or 17% over last year. Significant
increases in traffic and operating capacity, start-
up of service on new routes, and continuing
inflationary pressures affected practically all
areas of expense.
Aircraft fuel and labor cost increases
accounted for $191 mi 11 ion or 71 % of the total
increase in operating expenses. Fuel consump-
tion increased 8%, equal to the growth in avail-
able seat miles, and the price of fuel increased
an average of 11% to 37.12 per gallon. Salaries
and related costs were up 18% as the average
level of employment rose 6%.
Aircraft maintenance materials and repairs
expense increased 45% reflecting initial over-
hauls on a number of the newer aircraft during
the year as well as an abnormally low level of
expense in fiscal 1977. Aircraft rentals were up
due to the leasing of two long-range L-101 rs
from TWA to allow the timely implementation of
Atlanta-London service. Promotion of new
routes and fares contributed to the 23% increase
in advertising expenditures.
13
Passenger food and related supplies in-
creased 21 % due to passenger growth and
price increases. Substantial increases in pas-
senger revenues and continued growth in the
number of passengers using travel agencies
accounted for the 23% growth in agency com-
missions. Landing fees and other rentals
increased 7% and 6%, respectively, generally
keeping pace with capacity growth . Other cash
costs increased 17% as the result of inflation,
traffic growth, and the higher level of operations.
Depreciation increased 1 %.
Per Cent
Operating Statistics 1978 1977 Change
Revenue Plane
Miles (000) .. 240,234 227,171 + 6%
Available Seat
Miles (000). 35,135,046 32,614,260 + 8%
Available Ton
Miles (000) .. . . . . . . 4,743,778 4,478,038 + 6%
Fuel Gallons
Consumed (000) ... 1,029,597 949,369 + 8%
Average Price per
Fuel Gallon . .. . 37.12 33.34 + 11 %
Breakeven Load
Factor .. ....... . . . 52.74% 50.36% + 5%
CAPITALIZATION AND FINANCING
During fiscal 1978 no additional borrowing was
required . However, to comply with the require-
ments of Financial Accounting Standards Board
Statement No.13, the Company capitalized
several new long-term leases totaling
$3.1 million . Internally generated funds of
$334.5 million were used primarily to purchase
$231 .7 million of flight and ground equipment
and to reduce long-term debt.
On June 30, 1978, the 1973 Bank Credit
Agreement was amended to provide a number
of changes favorable to the Company. The new
terms include a nine-month extension of the
agreement to June 30, 1981 , reduction of the
interest rate to the prime rate, and a change in
the provision for voluntary prepayment to allow
prepayment of up to eight quarters. In addition,
a number of restrictive covenants were either
lessened or eliminated.
Total debt at June 30, 1978, was
$177.1 million, including current maturities, a
14
decrease of $88.1 million from the previous
year. The year-end balance was 24% of equity.
At June 30, 1978, the Company had voluntarily
prepaid the next six quarterly installments
totaling $66 million and $11 .3 million of the final
payment due June 30, 1981, under the 1973
Bank Credit Agreement. Also, $2 million of the
6% Convertible Subordinated Debentures
had been acquired for future sinking fund
requirements. At June 30, 1978: the Company
had forward exchange contracts for the pur-
chase of pounds sterling to cover a portion of
scheduled fiscal 1979 principal and interest
payments on the Lazard debt.
Outstanding purchase commitments at
year-end for aircraft and related spares will
require future expenditures of approximately
$607 million during fiscal years 1979 through
1982. Mandatory debt repayments due in fiscal
1979 total $9.7 million.
Total stockholder equity at June 30, 1978,
was $736.8 million or $37.06 per share, 19%
over the $31 .22 per share last year.
Stockholder Equity per Share*
In Dollars
- - - - - - - - - - - - - - - - - 40
35
30
25
20
15
10
5
0
69 70 71 72 73 74 75 76 77 78
*These data reflect the operations of Delta Air Lines, Inc.,
and do not include the Northeast Airlines system prior
to August 1, 1972.
15
FLIGHT EQUIPMENT AND
PURCHASE COMMITMENTS
During the past fiscal year Delta accepted
delivery of three Lockheed L-1011 aircraft and
eight advanced model Boeing 8-727-200 air-
craft. Two long-range L-1011 's were leased from
Trans World Airlines for an 18-month period.
These two aircraft will be used primarily on the
Atlanta-London route until Delta receives its
two long-range L-1011-500's which are sched-
uled for delivery in May and September, 1979.
The fleet was reduced by the sale of five
DC-9-32 's, four B-727-100's and five DC-8-51 's.
At June 30, 1978, Delta operated the following
aircraft fleet:
Type of
Aircraft Seats Owned Leased Total
L-1011-1. 264/ 293 24 24
L-1011-100. 253 2 2
DC-8-61 . 199 13 13
DC-8-51 ..... ... 143/ 153 10 10
B-727-200 . .. 137 89 7 96
DC-9-32. . . . . . . . . . . . .
88 51 51
Total. .............. ___J_fil_ 9 196
At the end of the fiscal year, arrangements
had been finalized for the sale of three addi-
tional DC-9-32 aircraft, two scheduled for deliv-
ery in December, 1978 and one in March , 1979.
At June 30, 1978, Delta had purchase com-
mitments for 28 Boeing B-727-200 aircraft, 14
of which were confirmed for delivery between
August, 1978 and June, 1979. Subsequent to
the end of the year, an additional four
B-727-200's were confirmed for delivery in the
December, 1979 quarter. The Company has the
right to confirm delivery dates for the remain-
ing ten aircraft at specified intervals to
August, 1979. These aircraft are tentatively
scheduled for delivery in the June and
December quarters of 1980. The Company also
has outstanding commitments to purchase
six Lockheed L-1011-1 and five L-1011-500
aircraft. Four of the L-1011-1 aircraft are confirm-
ed for delivery between February, 1979
and January, 1980. The remaining two are
cancellable to February, 1979 and are
16
tentatively scheduled for delivery in May and
December, 1980. Two of the L-1011-500 aircraft
are confirmed for delivery in May and
September, 1979, and three are cancellable at
specified intervals to November, 1979. These
three aircraft, which Delta has the option to
convert to L-1011-1 's, are tentatively scheduled
for delivery in the December quarter of 1981.
PERSONNEL
At June 30, 1978, the team of full-time Delta
Professionals numbered 31 ,195 (an average of
29,857 during the year), compared to the
June 30, 1977, total of 28,527 (an average of
28,234 during the year). Direct salaries totaled
$676.9 million, a 17% increase over last year,
and related fringe benefits increased 22% to
$154.9 million. Expenditures for salaries and
fringe benefits equalled 41 of each revenue
dollar, the same as fiscal years 1976 and 1977.
During the year Mr. David C. Garrett, Jr.,
Delta's President, was elected to the additional
post of Chief Executive Officer. Mr. W. T. Beebe,
Delta's Board Chairman and formerly Chief
Executive Officer, will reach his normal retire-
ment age in only two years, and he and the
Board of Directors concluded that it was of
prime importance that an orderly transition of
duties be initiated. Mr. Richard S. Maurer was
promoted to the newly created position of
Vice Chairman of the Board and Secretary.
17
Other officer promotions during the year
included Mr. James W. Callison to Senior Vice
President-General Counsel and Mr. Frank Rox
to Senior Vice President-Flight Operations.
Mr. Hoyt T. Fincher was named Senior Vice
President-Technical Operations.
Mr. Robert Oppenlander, whose responsibilities
remain unchanged, was named Senior Vice
President-Finance. Mr. Sidney F. Davis was
promoted to Vice President-Assistant General
Counsel and Assistant Secretary;
Mr. John Hume to Vice President-Personnel;
Mr. Russell H. Heil to Vice President-Personnel
Administration; Mr. M. 0. Galloway was
named Vice President-Finance;
Mr. R. Anthony McKinnon was promoted to
Assistant Vice President-Marketing
Administration; Mr. M. E. Dullum to Assistant
Vice President-Government Affairs;
Mr. R. Lamar Durrett to Assistant Vice
President-Facilities; and Mr. Robert H. Cowart
to Assistant Vice President-Consumer Affairs.
Elevated to the position of Treasurer was
Mr. Frank S. Chew, and Mr. Julius P. Gwin was
elected to the position of Comptroller.
In August, 1978, Mr. George E. Shedd,
Assistant Vice President-Public Relations,
suffered a fatal heart attack. Mr. Shedd 's out-
standing career spanned more than 37 years
of dedicated service to Delta.
FACILITIES
During the past year, the Company completed
and occupied a 135,000 square foot office build-
ing at the Hartsfield Atlanta International Air-
port. The new facility houses the Atlanta Reser-
vations office as well as some Personnel,
Marketing, and Finance staff functions.
Terminal facilities were completed and
occupied in Tulsa, Denver and London to sup-
port route awards to those new cities. A new
customs facility was constructed in Atlanta for
the convenience of Delta's London passengers.
Other new or expanded facilities were occupied
18
or begun in Cleveland; Baltimore; Phoenix;
Orlando; Columbus, Ohio; and LaGuardia
airport in New York. Numerous expansions of
reservation facilities were started throughout
the Delta system.
Excellent progress on Atlanta's new ter-
minal facility was made during the year. Upon
completion , currently scheduled for early 1981 ,
the facility will be the largest passenger ter-
minal in the nation. Excluding tenant improve-
ments, it will cost approximately $240 million,
some portion of which will be provided from the
Airport and AirwayTrust Fund which was
created by the 8% airline ticket tax. Delta's
share of the project cost, including leasehold
improvements, is currently estimated at
$80 million .
19
REGULATORY MATTERS
The Regulatory Environment
The regulatory reform movement in
Congress continues. The Senate has passed the
"Cannon/Kennedy Bill" to which Delta remains
opposed because of the Company's belief that
it would lead to deterioration of airline service
and to more, not less regulation. While Delta's
financial strength and outstanding corps of
dedicated employees mean that the Company
would likely do well under any regime, passage
of the Cannon/Kennedy Bill by the entire
Congress could unnecessarily harm the national
air route system. Rather than see this bill
passed, Delta would prefer to see the CAB
abolished entirely. On the House side of
Congress, a more modest bill is under con-
sideration, which may be considered by the
full House near the end of this term .
In the meantime, unprecedented and dras-
tic changes in the regulatory environment are
taking place under the leadership of Chairman
Kahn of the Civil Aeronautics Board. While Delta
favors some of the programs, e.g., certain of
the proposals to expedite the administrative
process, a number of the Board's policies and
decisions, in Delta's view, are contrary to the
Federal Aviation Act. This is particularly true of
the Board 's apparent intention to eliminate the
service obligations of virtually all airline certif-
icates, converting them to "permissive" licenses,
and the Board 's related program , dependent on
the "permissive" award approach, of licensing
multiple carriers in all markets, large or small ,
and of doing so at a rapid pace. This seems to
be an attempt by the Board to move at an accel-
erated rate to an "open entry and exit" policy
under the existing statute, without awaiting a
declaration by Congress as to the direction in
wh ich Congress desires the CAB to move. Delta
has sought Federal Court review of this aspect
of CAB activity.
As the Board takes an increasingly super-
ficial approach to the processing of route appli-
cations under this new policy, and toward tariff
20
filings, the attention of the Board's staff is being
redirected to other areas, where the CAB is
regulating more, not less. Most of this type of
regulation (e.g., a proposed requirement to re-
port the number of lavatories per seat on aircraft,
detailed prescriptions as to how a carrier is to
accommodate non-smokers and smokers, and
requirements for posting virtually useless fare
summaries) directly interferes with the day-to-
day conduct of airline business, in contrast to
the developmental nature of route regulation.
Passage of the Cannon/Kennedy Bill by Con-
gress would add impetus to this trend of
increased regulation.
Although the regulatory environment under
the present CAB administration is highly volatile
and unpredictable, Delta is continuing a pro-
gram of route development and expansion,
involving the following matters of major interest:
Route Developments
During the past several months, Delta has
been awarded the following new nonstop routes:
Atlanta-London Reno-Las Vegas
Atlanta-Hartford/ Atlanta-Cleveland
Springfield Cincinnati-Cleveland
Lou isvi I le-M em phis Indianapolis-Cleveland
In addition, Delta received "fill up" or local traffic
rights between San Francisco-Los Angeles and
Houston-New Orleans on flights operated to
the Caribbean. The Atlanta-London service was
inaugurated April 30, 1978; Indianapolis-
Cleveland service started July 1, 1978; and the
other new services will be inaugurated in the
near future.
Delta has applications pending before the
CAB in various procedural stages, for nonstop
authority in a number of additional markets.
The CAB issued an order in April ,1978,
proposing the consolidation , realignment and
simplification of Delta's domestic route authori-
ties which- if finalized - would remove or
modify many of the conditions and restrictions
on Delta's operating authority.This in turn would
provide the Company with more scheduling
flexibility and enhanced opportunities for effi-
cient routing of aircraft. Delta has urged the
21
Board to finalize the realignment as promptly
as possible.
Competitive rights have recently been
granted other carriers in the following Delta-
served markets:
Atlanta-Charleston Atlanta-Columbia
Atlanta-Cincinnati Atlanta-Detroit
Dallas/Ft.Worth- Atlanta-Savannah
Las Vegas
Competitive authority is sought by other carriers
in a number of additional Delta markets, some
of which are now being processed by the CAB
and others of which are awaiting consideration .
Route Suspensions
Delta remains suspended at Havana, Cuba,
at a number of points in New England currently
served by other carriers, and has suspended all
service at Montego Bay, Jamaica. Delta's
Brunswick, Georgia, authority, which had been
under suspension , was recently transformed
to permissive authority.
Fare and Rate Matters
While the CAB has approved certain in-
creases (as discussed elsewhere in this report)
in standard fares during the past year, it has also
encouraged and approved the filing of a pleth-
ora of discount fares. In addition, the Board has
decided to modify its fare-setting standards and
policies as established in the Domestic
Passenger Fare Investigation, by providing for
"no suspend zones" which would permit carriers
to lower standard fares by as much as 70%. The
Board will also permit carrier management
some small degree (not more than 10%) of
upward flexibility to increase basic fares under
tight conditions and in selected markets.
Those provisions of the Federal Aviation
Act regulating the carriage of property in air
transportation were drastically altered in
November of 1977, essentially "deregulating "
the air freight and express industry. Specifically,
the law was changed to permit all "fit, willing
and able" carriers who had operated all-cargo
air services at any time during 1977 to receive
22
"grandfather" certificates authorizing the car-
riage of property between any or all pairs of
points in the continental United States. After
one year following the law's enactment, any
applicant which meets the fitness test can re-
ceive similar authority. In addition, the law was
changed so as to remove the CAB 's jurisdiction
over most aspects of property rate and tariff
matters, which essentially mooted the rate-
making conclusions which had been established
in the Domestic Air Freight Rate Investigation,
finalized in the latter part of 1977 shortly before
the law was changed .
Charter and Tour Services
The last year has produced a continuation
of the CAB's drive to liberalize charter rules
and remove distinctions between individually
ticketed services and charter services. In its
most recent action, the Board has created a
new charter mode, the "Public Charter," which
will replace all existing charter forms (with the
exception of Single Entity and Affinity Charters),
and which allows charter air transportation to
be sold to individual members of the general
public on a one-way basis through tour
operators.
23
Delta Air Lines System Route Map
DENVER KANSA.
New Delta Routes: From Atlanta:
London, England, Cleveland, and
nonstop Hartford/Springfield;
Indianapolis/Cincinnati-Cleveland,
Louisville-Memphis, Las Vegas-Reno;
and (on "fillup" basis) San Francisco-
Los Angeles and Houston-New Orleans
on Caribbean route.
24
-----
- - - CAHACAS
MAn~
25
DELTA AIR LINES, INC.
Balance Sheets
June 30, 1978 and 1977
ASSETS
CURRENT ASSETS:
1978 1977
(In Thousands)
Cash ....... . . . .. . ......... $ 7,347 $ 26,209
Short-term cash investments,
atcost ........... . .. . . . .
Accounts receivable, net. ....
Maintenance and operating
supplies, at average cost. .
Prepaid expenses, etc .. . .. . . .
Total current assets . ..... .
PROPERTY AND EQUIPMENT
(Notes 2 and 4):
Cost-
Flight
Equipment Other
1978 $1 ,862,231 $282,149
1977 1,720,843 256,949
Accumulated depreciation-
1978 755,747 148,081
1977 630,260 133,470
Advance payments for new
equipment (Note 2).
OTHER ASSETS:
Long-term receivables and
prepayments, etc ...
Nonoperating flight
equipment held for sale.
Preoperating expenses-
London service ....
26
116,764
124,111
181,019
12,892
7,108
325,130
2,144,380
903,828
1,240,552
71,983
1,312,535
7,250
955
813
9,018
26 103
52,312
144,592
12,567
7,269
216,740
1,977,792
763,730
1,214,062
45 084
1,259,146
4,539
11 ,394
15,933
$1,646,683 $1,491 ,819
LIABILITIES AND
STOCKHOLDER EQUITY
CURRENT LIABILITIES:
Current maturities of long-
term debt . .. ...... .
Accounts payable and accrued
liabilities. . . ..... .
Air traffic liability.
Accrued income taxes .. . . .
Total current liabilities.
LONG-TERM DEBT (Note 3) ...
DEFERRED CREDITS:
Deferred income taxes ..
Unamortized investment tax
credits . . . . . . . . . . .
Other .. . . .
COMMITMENTS AND
CONTINGENCIES (Notes 2,
4, and 7)
$
STOCKHOLDER EQUITY (Note 6):
Common stock, par value
$3.00 per share-Authorized
25,000,000 shares;
Outstanding 19,880,577
shares. .. .. . . .. .... . .
Common stock purchase
warrants . . . .. .
Additional paid-in capital.
Retained earnings (of which
$335,580,000 is restricted
at June 30, 1978 as to the
payment of cash dividends
under debt agreements).
DELTA AIR LINES, INC.
1978 1977
(In Thousands)
9,731
166,966
129,607
66,490
372,794
167,331
296,239
68,094
5,426
369,759
59,642
80,088
597,069
$ 27,628
139,834
90,351
14 662
272,475
237,497
288,783
66,697
5 784
361 ,264
59,642
6,750
73,338
480,853
736,799 620,583
$1,646,683 $1,491 ,819
The accompanying notes are an integral part of these balance sheets.
27
DELTA AIR LINES, INC.
Statements of Income
For the years ended June 30, 1978 and 1977
1978 1977
(In Thousands)
OPERATING REVENUES:
Passenger ......... . . . . . . .. $1 ,861,100 $1 ,575,642
Cargo. . . . . . . . . . . . . . . . . . . . . 153,233 114,800
Other, net. .. . . . . . . . . . . . . . . . 36,578 29,203
Total operating revenues . . 2,050,911 1,719,645
OPERATING EXPENSES:
Salaries and related costs .... 831 ,818 706,770
Aircraft fuel. ... . .... 382,159 316,478
Aircraft maintenance materials
and repairs ...... . .... . ... 44,794 30,818
Rentals and landing fees . .... 77,278 72,076
Passenger service . .... .... .. 83,286 68,276
Agency commissions . ....... 64,800 52,846
Other cash costs ............ 193,526 165,160
Depreciation and amortization. 168,155 166,040
Total operating expenses .. 1,845,816 1,578,464
OPERATING INCOME . .. . .... 205,095 141 181
OTHER EXPENSE (INCOME):
Interest expense . ........... 22,107 25,983
Less-Interest capitalized on
advances for equipment. 4,794 2,922
17,31 3 23,061
Gain on disposition of aircraft. . (32,689) (29,403)
Realized and unrealized loss
(gain) on foreign currency
translation ........ .... ... . 3,339 (2,699)
Miscellaneous income, net. ... (7,640) (4,825)
(19,677) (13,866)
INCOME BEFORE INCOME
TAXES ........... . .. . ..... 224,772 155,047
PROVISION FOR INCOME
TAXES (Note 5):
Income taxes provided ....... 109,296 76,362
Less- Amortization of
investment tax credits ...... (15,651) (13,695)
93,645 62,667
NET INCOME ................ $ 131,127 $ 92,380
NET INCOME PER COMMON
SHARE . .. ....... . ......... $6.60 $4.65
The accompanying notes are an integral part o f these statements.
28
DELTA AIR LINES, INC.
Statements of Retained Earnings
For the years ended June 30.1978 and 1977
BALANCE AT BEGINNING
OF YEAR ............ . .. .. .
Add (Deduct):
Net income .............. . .
Cash dividends-$ .75 per
share in 1978 and $.70 per
share in 1977 . .... . ...... . .
BALANCE AT END OF YEAR
(restricted as indicated on
balance sheet) .......... . .
1978 1977
(In Thousands)
$480,853
131,127
(14,911)
$597,069
$402,389
92,380
(13,916)
$480,853
Statements of Additional Paid-in Capital
For the years ended June 30, 1978 and 1977
BALANCE AT BEGINNING
OF YEAR ... . ....... . .... . .
Transfer of amount assigned to
common stock purchase
warrants resulting from the
expiration of unexercised
warrants (Note 6) ........... .
Income tax reduction to
Company resulting from sales
by employees of common
shares issued under stock
option plan .. . . . ........... .
BALANCE AT END OF YEAR .. .
1978 1977
(In Thousands)
$73,338 $73,331
6,750
7
$80,088 $73,338
The accompanying notes are an integral part of these statements.
29
DELTA AIR LINES, INC.
Statements of Changes in Financial Position
For the years ended June 30, 1978 and 1977
1978 1977
(In Thousands)
FU NDS PROVI DED BY:
Net income ... . ....... . ... $131 ,127 $ 92,380
Add (deduct) items not affecting
working capital-
Depreciation and amortization.
Deferred income taxes ...
Unrealized loss (gai n) on trans-
lation of long-term portion of
debt payable in sterling .. _
..
Investment tax credits, net. ....
Other ..... . ..............
Total from operations . . .
Long-term financing -
Capitalized leases ...
Other . . ......
Disposition of property and
equipment (book value) . ..... .
Other ......... .
FUNDS USED FOR :
Property and equipment additions-
Flight equipment and advances ..
Ground property and equipment ..
Reduction of long-term debt, net of
unrealized fore ign currency gains
Prior years' income taxes ........
Cash dividends . . .. . .. . .........
Increase in long-term notes
receivable .. ... . .... . ..... . . . .
Preoperating expenses . ..... . .. .
Other . .. . ...... . ....... .
INCREASE (DECREASE) IN
WORKI NG CAPITAL. ........ . ... $
CH AN GES IN WO RKING CAPITAL
COMPONENTS:
Increase (decrease) in-
168,194
23,703
3,517
2,550
(333)
328,758
3,109
20,612
1,438
353,917
200,820
30,837
231,657
76,792
17,400
14,911
2,671
913
1,502
166,238
15, 119
(1 ,819)
37,743
886
31 0,547
932
1,087
44,093
580
357,239
228,189
20,790
248,979
113,671
13,916
1,529
345,846 378,095
8,071 $ (20,856)
Cash and short-term investments. $ 71 ,799 $ (30,596)
Accounts receivable , net. 36,427 18,364
Other current assets....... . .... 164 (1,481 )
Decrease (increase) in-
Current maturities of long-term
debt.... . . . . . . . . . . . . . . . . . . . . 17,897 23,826
Accounts payable and accrued
liabilities . . . . .. .. . .. ..... . .. . (27,1 32) (11 ,581 )
Air traffic liability ........... . . (39,256) (1 3,495)
Accrued income taxes .... . . . .. . (51 ,828) (5,893)
$ 8,071 $ (20,856)
The accompanying notes are an integral part of these statements.
30
DELTA AIR LIN ES, INC.
Notes to Financial Statements
June 30, 1978 and 1977
1 . SUM MARY OF ACCOUNTING POLICIES:
Passenger Revenue-Passenger ticket
sales are recorded as revenue when the trans-
portation is used. The value of unused tickets
is included in current liabilities in the financial
statements.
Depreciation-Substantially all of the Com-
pany's flight equipment is being depreciated
on a straight-line basis to residual values (10%
of cost) over a 10-year period from dates placed
in service. Ground property and equipment is
depreciated on a straight-line basis over its
estimated service life (various lives ranging
from three to 30 years).
Maintenance and Repairs-All main-
tenance and repair costs, including engine and
airframe overhau Is, are charged to maintenance
expense when incurred. Major replacements
and betterments are capitalized.
Preoperating Expenses- When major new
routes or new types of aircraft are introduced,
leasing, training and other major costs incurred
are deferred and then amortized on a straight-
line basis generally over a period of two years
or less. Preoperating expenses related to the
new Atlanta-London route are being amortized
over a 17-month period which began in May,
1978.
Interest Capitalized-Interest on advances
for new equipment is capitalized based on the
Company's current interest rate on long-term,
debt in order to properly reflect the total cost
of acquiring such equipment. Capitalization of
interest ceases when the equipment is placed
in service. Assuming all interest had been
charged to expense as incurred, net income
would have been lower by approximately
$595,000 in 1978 and higher by approximately
$1 , 118,000 in 19 77.
31
DELTA AIR LINES, INC.
Foreign Currency Transactions-Realized
and unrealized foreign exchange adjustments
are included in income on a current basis.
Retirement Plans-All of the Company's
permanent employees are covered under its
noncontributory trusteed plans providing for
retirement, disability and survivor benefits. The
total expense under these plans amounted to
approximately $61,364 ,000 in 1978 and
$52,324,000 in 1977. The Company's policy is
to fund each year's accrued costs under the
plans, which costs include amortization of prior
service costs ($47,924,000 at June 30, 1977)
over varying periods up to thirty years. As of
June 30, 1977 (date of the most recent actuarial
study), the actuarially computed present value
of vested benefits under the retirement plans
exceeded the assets of those plans by
approximately $10,776,000.
Income Taxes-Total income taxes are pro-
vided by applying the applicable tax rates to
book income before income taxes. Deferred
income taxes are provided for all significant
items (principally depreciation and other prop-
erty items) where there is a timing difference
in recording such items for financial reporting
purposes and for income tax purposes. Invest-
ment tax credits are amortized (as a reduction
of the provision for income taxes) over seven
years. (See Note 5).
Earnings Per Share-Net income per com-
mon share is computed based on the weighted
average number of outstanding shares during
the year (19,880,577 shares in 1978 and 1977).
Outstanding stock options and warrants (see
Note 6) in 1978 and 1977, had no material dilu-
tive effect on net income per common share
during the periods.
32
DELTA AIR LINES, INC.
2. AIRCRAFT PURCHASE AND SALE
COMMITMENTS:
At June 30, 1978, the Company had out-
standing purchase commitments for the acqui-
sition of 28 Boeing B-727-: 200 aircraft, six
Lockheed L-1011-1 and five L-1011-500 aircraft,
including related spare engines, which will re-
quire future expenditures of approximately
$607,000,000 during fiscal years 1979 through
1982. The delivery of the last 14 Boeing
8-727-200 aircraft can be confirmed by the
Company at specified interim dates to August,
1979. Subsequent to June 30, 1978, the Com-
pany confirmed delivery of four of the Boeing
B-727-200 aircraft. The last two Lockheed
L-1011-1 aircraft are cancelable by specified
interim dates to February 28, 1979, and the last
three Lockheed L-1011-S00's are cancelable
by specified interim dates to November 1, 1979.
The Company has entered into agreements
to sell three Douglas DC-9-32 aircraft, which
agreements provide for delivery of the aircraft
during fiscal 1979.
33
DELTA AIR LINES, INC.
3. LONG-TERM DEBT:
At June 30, 1978 and 1977, the Company's
long-term debt (including current maturities)
was as follows:
a) Due Lazard Brothers & Co.,
Limited, under 5%, 6% and
7% unsecured notes, repay-
able in pounds sterling in
semiannual installments to
1986 ($7,246,000 payable in
fiscal 1979).
At original exchange rates . .
Less unrealized gain on -
Current maturities . .
Long-term portion .... .
At current exchange rates ...... .
b) Due banks under 1973 unsecured
credit agreement, (as amended
in 1978), repayable in quarterly
installments of $11 ,000,000
with the remaining $46,700,000
balance payable on June 30,
1981 . The interest rate is equal
to the prime rate ($ 77,300,000
voluntarily prepaid at June 30,
1978, without penalty) . . ... . ..
c) Convertible Subordinated
Debentures, 6%, maturing
August 1, 1986, with annual
sinking fund redemptions of
$1 ,100,000. The remaining obli-
gations at June 30, 1978 and
1977, are after deducting
$2,020,000 and $2,200,000 of
debentures, respectively,
acquired for future sinking fund
requirements (Note 6) ......
d) Due an insurance company under
a 9% unsecured note.
e) Other notes, with various interest
rates and maturity dates
($1 ,964,000 payable in fiscal
1979) ....
f) Capitalized leases (Note 4)
($521 ,000 payable in fiscal
1979) . ......
Total. .. . . .
Less- Current maturities.
34
$
1978 1977
(In Thousands)
60,790
(1,957)
(10,021)
48,812
101 ,653
17,780
4,745
4 072
177,062
(9,731)
$ 69,993
(2,420)
(15 ,572)
52,001
168,000
18,700
17,500
7,992
932
265,125
(27,628)
$167,331 $237,497
DELTA AIR LINES, INC.
In the opinion of management, funds pro-
vided from operations will sufficiently cover
future expenditures for aircraft (see Note 2)
and scheduled debt maturities. At June 30,
1978, the aggregate annual maturities of long-
term debt for the next five fiscal years were as
follows:
Amount
(In Thousands)
1979 ......... ... . ... ...... $ 9,731
1980. . . . . . . . . . . . . . . . . . . . . . 31 ,259
1981 . . . . . . . . . . . . . . . . . . . . . . 89,277
1982. . . . . . . . . . . . . . . . . . . . . . 9,605
1983. . . . . . . . . . . . . . . . . . . . . 9,658
In addition to restrictions on cash dividends
as indicated on the balance sheet, the Com-
pany's debt agreements include requirements
for maintenance of working capital (as defined)
and limitations on indebtedness, leases and
other obligations. In connection with the 1973
bank credit agreement, the Company has in-
formally agreed to maintain on deposit with
the lending banks average balances (including
normal working balances) equal to 15% (re-
duced to 10% effective June 30, 1978) of the
average daily outstanding borrowings, with
the average balances and borrowings being
computed over the term of the agreement.
There are no legal restrictions on the Com-
pany's use of these funds.
35
DELTA AIR LINES, INC.
4. LEASE OBLIGATIONS:
At June 30, 1978, the Company leased
seven Boeing B-727 and two Lockheed
L-1011-100 aircraft and certain airport terminal
and maintenance facilities, ticket offices, etc.,
under long-term agreements. Rental expense
was $38,924,000 in 1978 and $36,135,000 in
1977, including rentals under noncapitalized
capital leases (pre-1977 leases) of $5,519,000
in 1978 and 1977.
At June 30, 1978, the Company's minimum
rental commitments under noncapitalized cap-
ital leases and noncancelable operating leases
with initial or remaining terms of more than one
year were as fol lows:
Noncap-
italized
Operating Leases
Payable for Capital
Fiscal Year Leases Municipal Other Total
(In Thousands)
1979 $ 5,470 $ 19,110 $11 ,940 $ 36,520
1980 5,380 18,620 5,320 29,320
1981 5,370 17,300 2,660 25,330
1982 3,690 16,300 2,260 22,250
1983 880 15,680 1,950 18,510
After 1983 1 780 220,230 16,160 238,170
$22,570 $307,240 $40,290 $370,100
The estimated present value (based on a
weighted average interest rate in 1978 of 6.0%,
with such interest rates used ranging from 5.1%
to 8.5%) of the minimum rental commitments
under noncapitalized capital leases (pre-1977
leases) was as follows at June 30, 1978 and
1977:
Applicable to 1978 1977
(In Thousands)
Aircraft leases. . . . . . . . . . . . . . $16,290 $18,970
Other leases.. . . . . . . 2,960 3,350
$19,250 $22,320
36
DELTA AIR LINES, INC.
Assuming all noncapitalized capital leases
were capitalized and amortized, the effect on
the 1978 and 1977 financial statements would
not have been significant. In fiscal 1978 and
1977, the Company capitalized all new leases
defined as capital leases under Financial Ac-
counting Standards Board Statement No. 13.
The effect on the 1978 and 1977 financial state-
ments of capitalizing and amortizing these
leases is not significant.
The Company is participating in a major
expansion of terminal facilities at Hartsfield
Atlanta International Airport. Total project cost
(excluding tenant improvements) is presently
estimated at approximately $240,000,000. The
Company's share of this project cost, plus esti-
mated leasehold improvements, is approxi-
mately $80,000,000. The Company's annual
rentals beginning in 1981 (the planned first
year of operation) and other costs associated
with the new facility are presently estimated
at $20,000,000.
5. INCOME TAXES:
The provision for income taxes in 1978 and
1977 consisted of:
1978 1977
Un Thousands)
Current taxes .. . . . .. . ... . ... . ..... $ 67,392 $ 9,805
Deferred taxes. . . . . . . . . . . . . . . . . . . . 23,703 15,119
Investment tax credits. . . . . . . . . . . . . 18,201 51,438
Income taxes provided. . . . . . . . . . . 109,296 76,362
Less-Amortization of investment
tax credits ..................... . (15,651) (13,695)
$ 93,645 $62,667
Total income taxes provided were approxi-
mately 49% of 1978 and 1977 book income
before income taxes, representing taxes pro-
vided at the 48% Federal statutory rate plus
state income taxes. As of June 30, 1978, all
available investment tax credits have been
utilized to reduce Federal income taxes
payable.
37
DELTA AIR LIN ES, INC.
The provision for deferred income taxes
resulted from the tax effect of the following
timing differences:
1978 1977
(In Thousands)
Depreciation and other property
items. ... . . . . . . . . . . . . . . . . $22,210 $14,124
Other, net. . . . . . . . . . . . . . . . . . . . . . . . 1.493 995
$23,703 $15,119
In June, 1978, the Company reached
agreement with the Internal Revenue Service
providing for settlement of proposed income
tax deficiencies for fiscal years 1966 through
1972. These taxes had been provided for in
prior years . In the opinion of management,
adequate provisions have been made for in-
come taxes for fiscal years 1973 through 1978.
6. COMMON STOCK:
At June 30, 1978, the Company had 71 ,120
common shares reserved for conversion (at
$250 per share) of the Convertible Subordi-
nated Debentures. Warrants for the purchase
of 500,000 shares of the Company's common
stock at $48 per share expired unexercised on
May 1, 1978.
Under the Company's Qualified Stock Op-
tion Plan, the remaining outstanding options
for 1,250 shares at $51. 75 per share expired
unexercised in May, 1978. These options were
outstanding and exercisable at June 30, 1977.
38
DELTA AIR LINES, INC.
7. CONTINGENCIES:
The Company is a defendant in certain
legal actions relating to environmental prob-
lems (primarily noise), employee benefit plans,
alleged employee discrimination and other
matters. Given the unsettled status of the law
in many of the areas involved, the outcome of
these actions is d ifficu It to predict. In the
present opinion of management and its legal
counsel, however, the disposition of these mat-
ters will not have a material adverse effect on
the Company's financial condition or signifi-
cantly interfere with its operations.
8. QUARTERLY FINANCIAL DATA(Unaudited):
Three Months Ended
Sept.30 Dec.31 Mar.31 June30
(In millions, except per share)
Fiscal 1978
Operating revenues . . $465.1 $508.6 $518.7 $558.5
Operating income. . $ 34.1 $ 59.0 $ 42.1 $ 69.9
Net income. . . . $ 27.1 $ 33.5* $ 27.4 $ 43.1
Net income per
share. . .. . . $ 1.36 $ 1.68 $ 1.38 $ 2.18
Net income includes
after-tax gain on
sa I es of aircraft of. . ~ !.______lJ_ L1_& !.______lJ_
* Includes after-tax income
of $7.7 million or 39(); per share
from increases in temporary
mail rates retroactive to 1973.
Fiscal 1977
Operating revenues.. $402.8
Operating income.... $ 26.6
Net income. . . . . . . . $ 17.9
Net income per
share. . . . . . . . . . . . . L___j!Q
Net income includes
after-tax gain on
sales of aircraft of ... ~
$420.1 $440.3 $456.4
$ 32.2 $ 31 .9 $ 50.5
$ 18.5 $ 22.2 $ 33.8
~ ~ $ 1.70
L___lQ ~ ~
39
DELTA AIR LIN ES, INC.
9. PROPERTY AND EQUIPMENT
REPLACEMENT COST (Unaudited):
For operating expenses such as salaries
and wages, fuel, supplies, etc., the Company's
financial statements generally reflect current
prices. However, the Company's substantial in-
vestment in productive capacity (flight equip-
ment and ground property and equipment) and
the related depreciation expense are based on
historical cost. Although a major portion of the
Company's aircraft seat capacity has been pur-
chased in recent years, the financial statements
do not reflect the higher current replacement
cost of the Company's entire productive
capacity resulting from the cumulative impact
of inflation. Further, the Civil Aeronautics
Board presently makes no allowance for these
higher replacement costs in determining air-
line fares and rates.
As required by the Securities and Ex-
change Commission, the Company's 1978
Form 10-K Annual Report (copy of which is
available on request) contains unaudited data
on the approximate replacement cost of the
Company's property and equipment as of
June 30, 1978 and 1977, and the approximate
effect which replacement cost might have on
depreciation expense for fiscal 1978 and 1977.
40
DELTA AIR LINES, INC.
Auditors' Report
ARTHUR ANDE R SEN & Co.
ATLANTA, GEO R GI A
To the Stockholders and the Board of
Directors of Delta Air Lines, Inc.:
We have examined the balance sheets of
DELTA Al R LIN ES, I NC. (a Delaware corporation)
as of June 30, 1978 and 1977, and the related
statements of income, retained earnings, additional
paid-in capital and changes in financial position for
the years then ended . Our examinations were 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 financial statements referred
to above present fairly the financial position of
Delta Air Lines, Inc. as of June 30, 1978 and 1977,
and the results of its operations and the changes
in its financial position for the years then ended,
in conformity with generally accepted accounting
principles applied on a consistent basis.
Atlanta, Georgia,
August 18, 1978.
41
DELTA AIR LINES, INC. DELTA AIR LINES, INC.
Summary of Operations For the years ended June 30
(Dollars expressed in thousands except per share figures)
1978 1977 1976 1975 1974
Operating revenues:
Passenger. $1 ,861,100 $1 ,575,642 $1,406,417 $1 ,271,720 $1 ,124,759
Cargo . . 153,233 114,800 100,626 85,388 86,685
Other, net. 362578 29,203 21,899 19,922 15 683
Total operating revenues .. . . . . . . . .
2,050,911 1,719,645 1,528,942 1,377,030 1,227,127
Operating expenses . . 128452816 1,578,464 1,411,333 1,282,000 1,070,043
Operating income ... . . . . . . . . .
$ 205,095 $ 141 ,181 $ 117,609 $ 95,030 $ 157,084
Interest expense, etc. , net*. 9,673 18,236 29,103 28,984 14,377
Gain on disposition of aircraft .. 32,689 29,403 7,680 7,944 18,607
Realized and unrealized loss (gain) on
foreign currency translation .. 3,339 (2,699) (13,357) (5,855)
Income before income taxes. . . . .. .. . . $ 224,772 $ 155,047 $ 109,543 $ 79,845 $ 161 ,314
Income taxes ... . .. . ..... 93,645 62,667 39,336 27,965 70,665
Net income .... $ 131,127 $ 92,380 $ 70,207 $ 51 ,880 $ 90,649
Net income per share ... .. $6.60 $4.65 $3.53 $2.61 $4.56
Dividends paid .. . . . . . . . . .
$14,911 $13,916 $11 ,928 $11 ,928 $11 ,926
Dividends paid per share. $.75 $.70 $.60 $.60 $.60
*Has been reduced by interest capitalized of. $4,794 $2,922 $3,247 $6,099 $10,810
Other Financial and Statistical Data
Long-term debt. $ 167,331 $ 237,497 $ 350,968 $ 390,437 $ 345,119
Stockholder equity . . $ 736,799 $ 620,583 $ 542,112 $ 483,833 $ 443,826
Stockholder equity per share. $37.06 $31 .22 $27.27 $24.34 $22.33
Shares of common stock outstanding ... . . 19,880,577 19,880,577 19,880,577 19,880,577 19,879,377
Revenue passengers enplaned ... 33,007,670 28,811 ,966 27,996,665 25,831 ,631 25,565,208
Available seat miles (000) . . 35,135,046 32,614,260 30,389,761 29,497,234 28,417,679
Revenue passenger miles (000) ..... . . 20,825,722 18,042,339 17,621 ,247 15,916,860 15,445,891
Passenger load factor ... . . .. . . . .... 59.27% 55.32% 57.98% 53.96% 54.35%
Break-even load factor. . . . . . . ... . . . 52.74% 50.36% 53.14% 49.93% 46.76%
Available ton miles (000). 4,743,778 4,478,038 4,145,183 4,030,116 3,847,226
Revenue ton miles (000). 2,426,265 2,113,798 2,034,848 1,822,574 1,800,400
Passenger revenue per passenger mile. 8.94~ 8.73<!: 7.98(!: 7.99(!: 7.28(!:
Operating expenses per available seat mile . . 5.25~ 4.84<!: 4.64<!: 4.35(!: 3.77<!:
Operating expenses per available ton mile ... 38.9H 35.25<!: 34.05<!: 31 .81 <t: 27.81<!:
42 43
D ELTA AIR LIN ES, INC.
Management's Analysis and Discussion
of Summary of Operations
A comparison of the results of operations for
fiscal years 1978 and 1977 can be found in
previous sections of this report. The following
is a comparison of the results of 1977 and 1976.
Fiscal 1977 earnings of $92.4 million were
32% above the $70.2 million earned in 1976.
Total operating revenues were $1 .72 billion, an
increase of 12% over 1976. Passenger revenue
rose 12% on a 2% growth in revenue passenger
miles and a 9% increase in the passenger mile
yield . Cargo revenue was up 14% reflecting
the general growth in the economy during
fiscal 1977 and a 6% increase in the average
yield . Charter revenues increased 137% as the
Company transferred six DC-8-51 aircraft from
scheduled service to full-time charter
operations to take advantage of liberalized
charter regulations.
Operating expenses increased
$167.1 million or 12% over fiscal 1976.
Operating capacity grew 7% to 32.61 billion
available seat miles. Increases in salaries and
related costs and aircraft fuel expenses
accounted for$124.3 million of the $150 million
increase in cash costs. The average level of
employment rose 2%. The average price per
gallon of fuel was 33.34, up 11 %. while the
total fuel consumed increased 4%. Depreciation
expense was 12% higher in fiscal 1977 than
1976 due to the introduction of new aircraft
and the acquisition of 11 aircraft previously
leased.
Lower interest rates and a reduced level
of borrowing resulted in a 25% decline in
interest expense. Interest capitalized was down
10%. The sale of aircraft resulted in a gain of
$29.4 million, 75 per share after taxes, in
fiscal 1977 compared to a gain of $7.7 million,
20 per share after taxes, in fiscal 1976. Gain
on foreign currency translation totaled
$2.7 million in 1977 and $13.4 million in 1976.
Income taxes were provided on book
income at the rate of approximately 49% in both
years. The amortization of investment tax
credits reduced those provisions by
$13.7 million in 1977 and $14.6 million in 1976.
44
DELTA AIR LINES, INC.
Board of Directors
R.W. ALLEN 3
WT. BEEBE3
BWBIEDENHARN 3
R.W.COURTS2 ,
4
C.H . DOLSON 3
R.W. FREEMAN 2
,
4
DAVID C.GARRETT,JR3
EDWARD H .GERRY4
JESSE HILL.JR !
JOHN R.LONGMIRE1
R.S. MAURER3
BILL MICHAELS1
TM. MILLER2
,
4
ROBERT OPPENLANDER3
STUART W. PATTON 1
CARLETON PUTNAM 1
Senior Vice President- Personnel
Chairman of the Board
Chairman of the Board and
Director, Ouachita Coca-Cola
Bottling Co. and Biedenharn
Realty Co., Inc. President
and Director, Ouachita Candy Co.
Monroe, Louisiana
Director and Chairman of the
Executive Committee, Atlantic
Realty Co., Atlanta, Georgia
Chairman of the Executive Committee
Chairman of the Compensation
and Finance Committees; Chairman
of the Board and Director,
Louisiana Coca-Cola Bottling Co., Ltd.
New Orleans, Louisiana
President and Chief Executive Officer
Partner of Gerry Brothers & Co.,
Investment Management, New York,
New York
President, Chief Executive Officer
and Director, Atlanta Life Insurance
Company, Atlanta, Georgia
Partner of investment banking
firm of I. M. Simon & Co.,
St.Louis, Missouri
Vice Chairman of the Board
and Secretary
Chairman of the Audit Committee;
Chairman of the Board, Chief
Executive Officer and Director,
Storer Broadcasting Co.,
Miami, Florida
Retired Senior Vice President-
Marketing
Senior Vice President-Finance
Member of law firm of Patton,
Kanner, Segal, Zeller, King &
M iddelthon and Director of Storer
Broadcasting Co., Miami, Florida
Private Investments
GEORGE M . SNELLINGS,JR2
,
4 Member of/aw firm of Snellings,
Breard, Sartor, lnabnett & Trascher,
Monroe, Louisiana
1 Audit Committee
2 Compensation Committee
3 Executive Committee
4 Finance Committee
46
Officers
EXECUTIVE
DELTA AIR LINES, INC.
WT. BEEBE Chairman of the Board
DAVID C. GARRETT, JR. President and Chief Executive Officer
R.S. MAURER Vice Chairman of the Board and Secretary
CORPORATE AFFAIRS
MORRIS SHIPLEY Vice President- Government Affairs
ROBERT H .COWART Asst. Vice President- Consumer Affairs
M.E. DULLUM Asst. Vice President- Government Affairs
C.G . SWEAZEA Asst. Vice President- Public Affairs
IKE LASSETER Asst. Secretary
FINANCE
ROBERT OPPENLANDER Senior Vice President-Finance
WA.ATCHISON Vice President-Computer Services
J .D. DUNN Vice President-Purchasing
M .O . GALLOWAY Vice President-Finance
REX A. McCLELLAND
JULIUS P. GWIN
FRANKS. CHEW
HUGH H. SAXON
AUDLYTOLLER, JR .
FLIGHT OPERATIONS
FRANK F. ROX
C.A.SMITH
JACKS.KING
L.G . RODEFELD
LEGAL
J.W.CALLISON
SIDNEY F. DAVIS
E.A.THOMPSON
MARKETING
J.A.COOPER
R.L.GIBSON
CHARLES P. KNECHT
J .T. MAPLES
R.A.McKINNON
HENRY ROSS
PASSENGER SERVICE
HOLLIS L. HARRIS
EL.HAMNER
FOY PHILLIPS
JEANETTE EASLEY
C.A.THOMPSON
PERSONNEL
R.W.ALLEN
RUSSELL H. HEIL
JOHN HUME
J .A.YORK
H .M.JOHNSON
EUGENE H.STEWART
Vice President-Properties
Comptroller
Treasurer
Asst. Treasurer
Asst. Treasurer
Senior Vice President-Flight Operations
Vice President-Flight Operations
Asst. Vice President-Flight Control
Asst. Vice President-Communications
Senior Vice President- General Counsel
Vice President-Assistant General Counsel
and Assistant Secretary
Asst. Vice President- Economic Research
Senior Vice President-Marketing
Vice President-Traffic
Vice President-Marketing
Asst. Vice President-Marketing Planning
Asst. Vice President-Marketing
Administration
Asst. Vice President-Sales Promotion
Senior Vice President-Passenger Service
Vice President-Stations
Vice President-Passenger Service
Asst. Vice President-Passenger Service
Asst. Vice President-Stations
Senior Vice President-Personnel
Vice President-Personnel Administration
Vice President- Personnel
Vice President-Employee Benefits
Asst. Vice President- Employment
Asst. Vice President-Corporate Security
TECHNICAL OPERATIONS
HOYTT. FINCHER
D.P.HETTERMANN
J .K. BURNETTE
JOHN P. DAVIS
R. LAMAR DURRETT
AC.FORD
C.J .MAY
W.L.MILLER
Senior Vice President-Technical Operations
Vice President-Technical Operations
Asst. Vice President-Quality Control
Asst. Vice President-Maintenance
Asst. Vice President- Facilities
Asst. Vice President- Long Range Planning
Asst. Vice President-Engineering
Asst. Vice President- Materiel Services
47
DELTA AIR LINES, INC.
Transfer Agent and Registrar
The Citizens and Southern National Bank
99 Annex
Atlanta, Georgia 30399
Auditors
Arthur Andersen & Co.
25 Park Place, N.E.
Atlanta, Georgia 30303
Annual Meeting
October 26, 1978, Monroe, Louisiana
Common Stock
Listed on the New York Stock Exchange
Market Prices and Dividends
Market Price Range of
Common Stock on
Fiscal Year 1978 New York Stock Exchange
Quarter Ended: High Low
September 30. 36 32
December 31 .. 40 32%
March 31 ....... 40 36
June 30 . . ... . .. 49% 38
Fiscal Year 1977
Quarter Ended:
September 30 . .. 44 36
December 31 . 41 34
March 31 . 39 30
June 30 . .. 38 30
Availability of Form 10-K
Cash
Dividends
Paid Per Share
$.175
.175
.20
.20
$.175
.175
.175
.175
The Company will supply, upon written request and without
charge, a copy of the Company's annual report for the fiscal
year 1978 on Form 10-K to any person beneficially owning or
owning of record any of the common stock of the Company
on September 5, 1978. Requests for the report should be
directed to R.S . Maurer, Secretary, Delta Air Lines, Inc.,
Hartsfield Atlanta International Airport, Atlanta, Ga. 30320.
48
Notice to the Stockholders of Delta Air Lines, Inc.
Part 245 of the Economic Regulations of the Civil
Aeronautics Board provides that: (1) any person who either
owns, as of December 31st of the year preceding issuance
of this annual report, or subsequently acquires, beneficially
or as trustee, more than 5%, in the aggregate, of any class
of the capital stock or capital of Delta Air Lines, Inc. , shall
file with the Board a report containing the information
required by Sec. 245.12 of Subpart 245, on or before April 1,
as to the capital stock or capital owned as of December 31
of the preceding year, and, in the case of the stock
subsequently acquired, a report under Sec. 245.13, within
10 days after such acquisition, unless such person has
otherwise filed with the Board a report covering such
acquisition or ownership, (2) any bank or broker covered
by (1), to the extent that it holds shares as trustee on the
last day of any quarter of a calendar year, shall file with the
Board, within 30 days after the end of the quarter, a report
in accordance with the provisions of Section 245.14; and
(3) any person required to report under this subpart who
grants a security interest in more than 5% of any class of
the capital stock or capital of Delta Air Lines, Inc. shall
within 30 days after granting such security interest file with
the Board a report containing the information required in
Section 245.15. Any stockholder who believes that he may
be required to file such a report may obtain further
information by writing to the Director, Bureau of Operating
Rights, Civil Aeronautics Board, Washington, D.C. 20428.
Delta Air Lines, Inc.
General Offices,
Hartsfield Atlanta International Airport
Atlanta, Georgia 30320