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