F I N A N C I A L H I G H L I G H T S f i s c a I l 9 9 6 ct 11 cl I 9 9 5 (Dollar amounts in millions, except share data. Data excludes restructuring and other non-recurring charges and the cumulative effect of an accounting change.) r 1996 1995 Change lo R $12,455 $12,194 + 2% perat,ng evenues .... ... .. ... .... .. Operating Expenses ............ .. .... $11,163 $11,533 - 3% Operating Income ........ .. ... .... . . . $1 ,292 $661 + 95% Net Income ... .. .... ................. $662 $294 +125% Primary Income Per Common Share .. $11.13 $4.07 +173% Fully Diluted Income Per Common Share $8.49 $4.01 +112% Dividends Declared on Common Stock $10 $10 Dividends Per Common Share .. .. .. .. $0.20 $0.20 Common Shares Issued a,nd Outstanding at Year End .. ...... .. .. 67,778,106 50,816,010 + 33% Debt-to-Equity Position . .. .. . ... .. .... 47%153% 65%/35% Revenue Passengers Enplaned (Thousands) .. ...... ... .. .. .. ... ... 91,341 88,893 + 3% Revenue Passenger Miles (Millions) .... 88,673 86,417 + 3% Available Seat Miles (Millions) ... . ..... 130,751 130,645 Passenger Mile Yield .. ... .. . ..... ... .. 13.10 13.10 Operating Revenue Per Available Seat Mile .... .. ..... ... .. . ..... ... .. 9.53 9.33 + 2% Operating Cost Per Available Seat Mile 8.54 8.83 - 3% Passenger Load Factor .... .... ... .. ... 67.8% 66.2% +1.6 pts. Breakeven Passenger Load Factor .. .. . 60.3% 62.3% - 2.0 pts. Cargo Ton Miles (Millions) ... ... ... .. .. 1,368 1,500 - 9% Cargo Ton Mile Yield ...... .. .... .. . ... 38.08 37.67 + 1% Fuel Gallons Consumed (Millions) ... . . 2,500 2,533 1% Average Jet Fuel Price Per Gallon . ... .. 58.53 54.09 + 8% Number of Aircraft in Fleet at Year End 539 543 - 1% Average Age of Aircraft Fleet at Year End (Years) .... .. ... . ... .. . . ... 11.2 10.4 + 8% Stage 3AircraftatYear End (As a Percent ofTotal Aircraft) .. .. ... .... . Average Seats Per Aircraft Mile .... , ... + 1% Average Passenger Trip Length (Miles) . AverageAircra DELTA AIR LINES , INC . {2 DELTA A I R LINES COR P ORATE G O A L S Providing safe, secure, and reliable air transportation is Delta Air Lines' absolute priority. In pursuing t his imperative, our corporate vision is to become t he W orldwide Airline of Choice for customers, stockholders and Delta people. W e will achieve this vision by building on a hard-won competitive cost structure to provide value for our cus~omers, sustained profitability and growth for our stockholders, and financial and personal rewards for Delta people. ' CUSTOMERS Safe, secure and reli abl e service Distinctive products Wor ldwide service STOCKHOLDERS ' DELTA PEOPLE Sustained profitability Profitable growth Sense of ownership Tra ined for success Hub car rie r cost leader DESCRIPTION OF BUSINESS Focused on results Rewarded for performance Delta Air Lines, Inc. provides scheduled air transportation over an extensive route network. Based on calendar 1995 data, Delta is the largest U.S. airline as measured by aircraft departures and passengers enplaned, and the third largest U.S. airline as measured by operating revenues and revenue passenger miles flown. As of August 16, 1996, Delta provided scheduled service to 153 domestic cities in 43 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands, and 44 cities in 25 foreign countries. Service over most of Delta's routes is highly competitive. In addition to scheduled passenger service, Delta also provides air freight, mail and other related aviation services. Delta is incorporated under the laws of the State of Delaware and is subject to government regulation under the Federal Aviation Act of 1958, as amended, as well as many other federal, state and foreign laws and regulations. DELTA AIR LINES , INC . R E P O R T T O -, 1 <, , /( Ii <, I ii <' , -, To the Owners of Delta Air Lines: In fiscal 1996, Delta Air Lines achieved the best financial results in the company's history.This tremendous achievement is a tribute to the professionalism and commitment of the Delta people. Equally important for our future, Delta continued to put in place the foundation to provide our company with the potential to earn superior financial returns year after year. Delta is not finished with the task begun more than two years ago to return to sustained profitability and to create opportunities for growth, but we are well on track. We approached the job in a disciplined, structured way. During fiscal 1 99 5, we stopped severe financial losses through aggressive cost reductions, and we reported solid profits. Fiscal 1996 was a rebuilding year. Delta people reduced costs further while they increased revenues, rebuilt our financial base and began to reshape our corporate strategy. A solid economy helped produce record results, but most of all we helped ourselves through our actions. Fiscal 1997 will be a transition year. We will use our hard-won experience to build on our rich past and create our future. People who once wondered, "Will Delta stop the losses?" now ask, "What will Delta become?" This letter is the first installment in the answer to that complex question. FISCAL YEAR 1996 REVIEW Delta's results for fiscal 1 996 set the stage for our future. Here are some of the financial highlights ( excluding restructuring and other non-recurring charges in fiscal 1996 and the cumulative effect of an accounting change in fiscal 1995): Operating income was $1.3 billion, the company's best fiscal year operating income performance ever; nearly doubling fiscal 1995 operating income of$661 million. Net income of $662 million also exceeded the previous record, increasing 125% over fiscal 1995. Total operating revenue and unit revenue (operating revenue per available seat mile) both grew 2% from fiscal 1995, the result of strong domestic passenger traffic growth. Total operating expenses and unit cost ( operating cost per available seat mile) declined over 3% as a result of continued progress of Leadership 7.5 cost reduction initiatives, despite higher fuel costs, a 4.3 per gallon tax on jet fuel, and increased passenger traffic. Fully diluted earnings per common share increased by over I 00% to $8.49, after preferred stock dividend requirements. Profit sharing earned by eligible Delta people totaled $144 million for the year. Long-term debt declined to $1.8 billion from a high of $3.6 billion in June 1993, primarily through voluntary debt repurchases and the conversion of Delta's 3.23% convertible subordinated notes into common stock. As a result of fiscal 1996 debt repurchases and the conversion, interest expense will decline by approximately $65 million annually. Stockholders' equity increased to $2.5 billion at June 30, 1996, from$ 1.8 billion at June 30, 1995. Delta's unsecured long-term debt ratings were upgraded by both Moody's and Standard & Poor's to investment grade with Moody's and one level below investment grade with Standard & Poor's. Cash generated from operations was nearly $1.4 billion. Delta's year-end liquidity position was $2.9 billion, including cash, short-term investments and available bank lines. LEADERSHIP 7 . 5 Two years ago, Delta announced our Leadership 7.5 program to stop the financial threat to our company and to create a base for profitable growth. Our goal was to reduce annual operating costs permanently by $2 billion by the end of fiscal 1997 as measured in operating cost per available seat mile (ASM), the unit cost in commercial aviation. Our final unit cost target was 7.5 per ASM, close to the unit costs of low-cost carriers which were expanding rapidly into our markets.Today, two years into the three year program, Delta has the lowest costs of any major hub and spoke carrier; and during fiscal 1996 we reached our stated three year goal of earning a I 0% operating margin. We have not changed the 7.5 per ASM goal. There are many cost reduction opportunities we haven't found yet, and we will search them out We intend to be smart about reaching that goal, however. The 7.5 goal was based on conservative revenue assumptions made in late 1993 and early 1994. Revenues have been better than we anticipated due to a strong economy and good work by Delta DELTA AIR LINES , INC . people in sales, pricing and marketing. In this environment, focusing solely on cost reductions could limit our profitability. We won't let that happen. 7.5 per ASM remains an important strategic goal. We will not reach that level, however, by the end of fiscal 1997. Instead, in fiscal 1 997, we will focus on improved profitability. As part of that effort, we increased our three year goal for operating margin to 1 2%, a very tough target in our industry. TOWARD A BROADER STRATEGIC VIEW Renewed financial strength now enables Delta to broaden our strategic view. Cost reduction and control will be at the heart of that strategy. Today, commercial aviation is enjoying good economic times, and we will adjust our short-term strategies and goals to refiect this very welcome change. However, we won't be lulled into a false sense of security. In our cyclical industry, tough times will return, and an unrelenting commitment to control costs is the only way to sustain profits in good times and bad. Delta can, however, take the next step forward. Our company is moving toward a leadership strategy which balances superior financial results for stockholders with our traditional dedication to safe, secure, reliable transportation, distinctive customer service and a strong sense of unity and shared purpose among Delta people. In a service industry like ours, each of those constituencies - stockholders, customers and Delta people - is critical to long-term profitability and growth. Delta's turnaround has been more than a cost cutting exercise. Our company also is changing the way we work. The success of the past two years reveals the company we are becoming. We set clear priorities, with safety and security as the first commitments; understand that distinctive customer service is our competitive edge; rely on rigorous analysis, strategic planning and fiexible thinking to recognize opportunities; lead change; set aggressive goals, strategies and plans; use cross-functional teams of Delta people to plan and accomplish our work; demand tough-minded discipline once a course is determined; have an unrelenting commitment to results; provide rewards for performance; respect each other and the work we do; and demand integrity in everything we do. DELTA EXPRESS On October I, 1996, Delta begins Delta Express, our new low-fare product initially serving IO cities in the northeast and midwest with 62 daily non-stop fiights to Orlando and four other Florida cities. Delta saw the need to create this type of service to compete with the growing number of low-fare carriers in our markets. Equally important, Florida has long been a critical market for Delta, and we intend to maintain a strong competitive presence there. Before we could launch a product, however, we had to get our costs in line. Our cost reduction program achieved that, with a critical boost from the new pilot contract which makes pilot costs on the new service very competitive. The new Delta service will offer low fares with high value for our customers. This new service will be run by a dedicated group of Delta professionals on the ground and in the air: It will be low-fare travel with a Delta touch, including assigned seats, SkyMiles, and modern Delta aircraft maintained and fiown by experienced Delta people. GOALS AND VAL U ES We don't have all the answers yet to every question about our future, but we have a clear view of what we intend to be as we work toward our vision of becoming the Worldwide Airline of Choice. Importantly for Delta, our business goals closely match our core values as we pursue our vision. Delta will offer safe, secure and reliable transportation. This is the foundation of our service and our first commitment to our customers and to ourselves. We will offer distinctive customer service. Our founder, CE. Woolman, called it "service and hospitality from the heart." We know that this Delta-style service is our historical competitive edge, and we intend to build on that tradition. During fiscal 1996, Delta began a company-wide training program, "Success Through Service," to renew our commitment to customer service. Delta senior officers and I were in the first group to complete the program, and every Delta person will participate. Delta also added front line people in selected areas to bolster service as customer traffic increased. In addition, Delta opened the Operations Control Center, a state-of-the-art facility for improving customer service by closely coordinating the fiow of aircraft on Delta's 2,600 daily fiights across our worldwide system. Every month, we ask 1,200 of our customers to measure us on 18 critical aspects of customer satisfaction, such as the efficiency of our check-in process and the attentiveness of our fiight attendants. We take this feedback seriously, and hold our- selves responsible for meeting tough targets. DELTA AIR LINES, INC . Delta intends to be the financially strongest hub and spoke carrier in the United States. We intend to be the lowest cost and most profitable hub and spoke carrier in the United States, and a company that will provide superior returns for stockholders. Superior financial returns aren't the only measure of success, but they are the "enabler"that allows us to do everything else we must do to succeed. Delta will serve customers worldwide. Delta has the strongest route network in the United States, and we are a leading international carrier. In addition, we have created a network of 13 code share agreements with quality airlines in Europe, the Pacific and L atin America. During fiscal 1996, Delta, Swissair; Sabena and Austrian Airlines received approval of antitrust immunity from the U.S. Department ofT ransportation to pursue a ( D e l t a h a s t h e s t r o n g e s t global marketing alliance. route network in the United States, and Our goal isto establish a seamless transportation system we are a leading in le mat ion al carrier. which allows our customers to go anywhere in the world by connecting through Delta hubs and the hubs of our partners and business associates.This ability to take people from Boise to Bucharest and beyond through a network of U.S. and international hubs distinguishes Delta from point-to-point airlines and makes us a worldwide carrier. Delta people will be aligned with corporate goals and achievements through a sense of unity, ownership and shared purpose. Delta's internal strength is based on the belief that people who share a sense of unity and common purpose can create superior results D e I t a p e o p I e w i l l b e a I i g n e d w i t h c o r p o r a t e g o a l s for our stockholders, our customers and and achievements through a sense of unity, ownership and shared purpose. Delta people themselves. So much has occurred at Delta in recent years that it is difficult at times to put it into perspective. In a very short period of time we have moved from a one-dimensional company with service primarily in the United States to a multi-dimensional company offering a variety of aviation products around the world. Our industry is going through difficult and very challenging times that require decisive and fundamental change. As the people of Delta face these challenges everyday, we are committed to emerge stronger and more focused than ever. The one unshakable constant throughout the recent past has been the critical role of Delta people. They have a powerful commitment to this company and a deep respect for each other as professionals. Delta never lost the key to its future - Delta people. New programs strengthened the ties. Pay for performance programs help align Delta people with results, but Delta people also share in the company's success through profit sharing. In fiscal 1996, these programs paid $144 million. Proposed, broad-based stock option programs for most Delta personnel to be considered by Delta stockholders in October would make the sense of ownership even stronger. In addition, during fiscal 1996, Delta people chose seven colleagues for the new Delta Personnel Board Council. Three members of that group, along with a Delta pilot, attend regularly scheduled, quarterly Board of Directors meetings. They don't vote, but they do have the ability to be heard and to make a difference. Other groups within Delta add to this sense of shared participation in the company During the fiscal year; Delta pilots overwhelmingly approved a new four year collective bargaining agreement. It was a forward- looking step by pilots and important for Delta. It not only helps to lower Delta's costs while addressing many issues critical to pilots, but it also allows the entire company to focus on the future together. Belief in people is the critical core value of Delta. Some people contend that this company has moved away from this rich legacy I take a very different view. I believe that the commitment to Delta and to each other by the people who work here is a deep reservoir of strength which allowed us to survive the testing times and has put us in position to prosper once again. We will not abandon our traditions which give us such great strength. We will build on them and replenish that reservoir in order to meet the ever-changing requirements of our fiercely competitive business. Delta will continue to be a great airline. We are now becoming a better business as well, built on clear goals and solid values. That combination, which no other airline can match, is the new tradition of Delta. Ronald W Allen Chairman of the Board, President 9nd Chief Executive Officer August 16, 1996 DELTA AIR L I NES, INC. s} OPERATIONAL /(\IC\\ ( THE YEAR IN REVIEW i September 1995 Quarter Highlights Delta and A ll Nippon A irways announce plans for a broad-based business and marketing alliance between the two airlines. Plans include code sharing on fiights between the two countries, starting with Tokyo (Narita) - Los Angeles, which is served by both carriers. Delta, Swissair; Sabena, and Austrian Airlines file a joint application to the U.S. Department of Transportation seeking antitrust immunity for agreements that would allow the carriers to pursue a global marketing alliance. USA Today names Delta best U.S. Domestic Airline as ranked by their survey of airline customers. Delta reports best-ever September quarter financial results, recording operating income of$386 million and net income of$201 million. December 1995 Quarter Highlights Delta realigns its domestic route syst em and repositions resources as a strategic step in its plan to restore and sustain profitability.The realignment increases long-haul fiying and reduces short-haul fiying at Atlanta, adds frequencies and new service at Cincinnati, and reduces and refocuses resources at Dallas/Fort Worth. Delta announces formation of a new cargo unit, bringing cargo marketing, sales and service, and administrative functions into a single business unit. Delta reports operating income of$ 1 69 million and net income of$70 million forthe quarter. March 1996 Quarter Highlights Delta and the American Express Company launch the Delta SkyMiles co-branded credit card, allowing card- members to earn one Delta SkyMile for every dollar charged to the card. Delta announces plans to begin phasing out its entire Lockheed L-1011 fieet, with all L-1011 s to be removed from transatlantic service by late 1998. Delta and the Air Line Pilots Association (ALPA) announce a tentative collective bargaining agreement on a new four year contract for Delta pi lots. Delta reports record March quarter operating income of $169 million and net income of $63 million, excluding restructuring and other non-recurring charges. June 1996 Quarter Highlights Delta's Board of Directors adopts, subject to stockholder approval, two broad-based stock option plans for Delta people involving 24.7 million shares of Delta common stock. Concurrently, the Board authorizes a common stock repurchase program of up to 24.7 million shares and approves the attendance of Delta personnel representatives at regular quarterly Board of Directors meetings. Delta's new collective bargaining agreement with ALPA becomes effective May I, 1 996. Delta also announces projected cost savings under the agreementtotaling approximately $760 million over the four year term of the contract, before considering any payments under the pilots' profit sharing program. Delta announces redemption of its 3.23 % Convertible Subordinated Notes due June 15, 2003. As a result of the conversion of substantially all the notes into shares of common stock, long term debt is reduced by $626 million and stockholders' equity is increased by approximately the same amount. In addition, approximately $46 million in annual interest expense w ill be eliminated. DELTA AIR LINES , INC . Delta announces its election to redeem on July 11, 1996 all outstanding shares of its Series C Convertible Preferred Stock and related Depositary Shares. A s a result of the conversion of the preferred stock into approximately 17.5 million shares of Delta's common stock, Delta will eliminate approximately $80 million in annual preferred dividend payments. Delta, Swissair, Sabena, and Austrian Airlines receive U.S. Department ofrransportation approval of antitrust immunity for agreements allowing the carriers to pursue a global marketing alliance. Delta unveils its new worldwide corporate identity in conjunction with the Grand Reopening of its flagship Crown Room membership club at Hartsfield Atlanta International A irport. For the quarter, Delta reports best-ever operating income of$569 million and net income of$328 million, excluding a restructuring charge. For the fiscal year ended June 30, 1996, Delta reports all-time record operating income of $1.3 billion and net income of $662 million, excluding restructuring and other non-recurring charges. r LEADERSHIP 7.5 AND BEYOND i In April 1994, Delta announced Leadership 7.5, a three year plan to return the Company to sustained profitability and position it for future growth. The core of the program was a goal of reducing the Company's annual operating expense by approximately $2 billion by the end of the June 1997 quarter: Delta also established operating cost per available seat mile ( unit cost) goals of 8.6 for the June 199 5 quarter, 8.0 for the June 1996 quarter, and 7.5 for the June 1997 quarter: The unit cost goals reflected the phase-in of the $2 billion in targeted cost savings, excluding restructuring and other non-recurring charges, and assumed other costs and operating capacity would remain at calendar 1993 levels. Developments in the airline industry during fiscal 1996 reaffirmed Delta's belief that the only W?+Y for the Company to succeed in the highly competitive environment in which it operates is to permanently reduce operating costs to a competitive level. The level of low-cost, low-fare competition in Delta's domestic markets continued to rise during fiscal 1996 at a rate faster than that experienced by Delta's major competitors, negatively impacting average fare levels in affected markets. Traffic patterns during fiscal 1996 validated the prediction that business traffic growth would stabilize while leisure . traffic growth would accelerate. 10 *Excludes restructuring charges 8 As of June 30, 1995, Delta had succeeded in achieving its first Leadership 7.5 unit cost goal, beating the 8.6 goal by a generous margin with a unit cost of8.39 for the June 1995 quarter: By the end of fiscal 1995, Delta had already implemented initiatives estimated to generate approximately $1.6 billion in annual cost reductions. During fiscal 1996, the Company continued to reduce costs, recording a 3% reduction in both total operating expenses and unit costs for the year, excluding restructuring and other non-recurring charges. Actual June 1 996 quarter unit cost came in at 8.33, excluding a restructuring charge.The June 1996 quarter unit cost reflects expense reductions in several categories which were partially offset by a significant increase in the price of jet fuel, a 7 . . . . . .. June '94 . June '9 5 June '96 Long-term Goal in cents QUARTERLY UNIT C OST * DELTA AIR LINES , INC . {s 4.3 per gallon federal tax on jet fuel and costs associated with carrying record levels of passenger traffic during the quarter. A major milestone was reached in the Leadership 7.5 program in April 1996, when Delta pilots ratified a new four year collective bargaining agreement, which became effective May I, 1996.The new agreement is expected to contribute approximately $760 million to Leadership 7.5 cost reductions over the four year term of the contract, before considering any payments under the pilots' profit sharing program. A key outcome of the new pilot agreement is the formation of a low-fare operation. Subsequent to the end of fiscal 1996, the Company announced the October I, 1996 launch of Delta Express, a low-fare business unit within Delta operating in certain highly competit ive, leisure-oriented markets within Delta's system. Delta Express will begin daily nonstop service connecting IO midwest and northeast cities with Orlando and four other Florida cities, operating with a dedicated fleet of Boeing 737-200 aircraft. Delta Express is scheduled to grow to 25 aircraft by January, 1997 In July 1996, the Company announced a shift in strategy from a strict focus on operating costs to a more balanced approach that focuses on both operating cost reduction and revenue improvement. Delta's success in strengthening its financial condition, changes in the industry environment, and a renewed emphasis on customer service motivated the shift. While the unit cost goal of 7.5 per available seat mile will be maintained as a long-term goal, the Company no longer expects to reach this goal by the June 1997 quarter. Delta increased its three year operating margin goal to 12% by the end of fiscal 1999. Delta's operating margin goal is aggressive, and no assurance can be given that the Company will meet this goal. ( INTERNATIONAL OPERATIONS i Transatlantic Performance The financial performance of Delta's transatlantic operations continued to improve during fiscal 1996, with the June 1996 quarter representing the fourth consecutive quarter in which Delta reported twelve month operating profits in the transatlantic, excluding restructuring and other non-recurring charges. Cost reductions and marketing initiatives contributed to a $119 million improvement in transatlantic operating income for fiscal 1 996 versus fiscal 1 995. Delta reported $76 million in operating income, excluding restructuring and other non-recurring charges, in fiscal 1996 compared with an operating loss of$43 million for fiscal 1995.These results are based on allocations performed in accordance with requirements established by the U.S. Department of Transportation. The improvement in transatlantic profitability resulted from both cost reductions and revenue improvements.Total operating expenses declined 5% as a result of continued implementation of cost reduction initiatives, excluding restructuring and other non-recurring charges. Unit revenues increased 7% over fiscal 1 99 5, result ing from higher passenger mile yields and increased code share revenues.These improvements were accomplished despite a 6% reduction in transatlantic capacity as a result of cancellation of unprofitable routes. DELTA AIR LINES, INC. *As reported to U.S. Department ofTransportation; excluding restructuring and other non-recurring charges /00 : 0 : (/00): (200) : (300) : (400) : (500) : (600) : FY93 FY94 FY95 FY96 ,n m1/lions of dollars TRANSATLANT I C OPERAT I NG RESULTS * 12 MONTH MOV I NG TOTALS During fiscal 1996, Delta announced service changes consistent with the Company's commitment to eliminating unprofitable routes. In the second quarter of fiscal 1 996, the Company discontinued service from Paris to Tel Aviv; from New York-Kennedy and Atlanta to Hamburg; from Dallas/Fort Worth to Frankfurt; from Frankfurt to Delhi; and from New York-Kennedy to Lisbon. Delta continued to pursue new or expanded code sharing arrangements as a means of establishing, maintaining, or increasing its presence in key international markets while efficiently managing resources. During fiscal 1996, Delta expanded its code sharing agreement with Austrian Airlines to form a trilateral agreement with Malev Hungarian Airlines to code share from Atlanta to Vienna and Budapest Delta and Austrian Airlines also expanded their agreement to include code sharing on service from New York-Kennedy to Vienna. In addition, Delta announced a new code sharing agreement with Aer Lingus for service between New York-Kennedy, Dublin, and Shannon airports. During the June 1 996 quarter, Delta, Swissair, Sabena, and Austrian Airlines received approval of antitrust immunity from the U.S. Department of Transportation to pursue a global marketing alliance.The alliance agreements establish a legal framework, subject to the negotiation of definitive operating agreements, to allow the four carriers to form a seamless transatlantic air transport system while retaining their unique corporate and national identities, and to link Delta's strong U.S. domestic hub system with four additional hubs in Europe - Brussels, Zurich.Vienna, and Geneva.The alliance will include code sharing; pricing, scheduling, and operational coordination; and joint sales and marketing opportunities. Other International Operations Delta implemented several initiatives to strengthen its Pacific operations. During fiscal 1 996, Delta and Korean Air announced a new code sharing agreement between the two carriers on Korean's flights between Atlanta and Seoul, Korea, via Chicago. Delta and All Nippon Airways also announced their formation of a broad-based alliance on flights between the United States and Japan, including code sharing. In D ecember 1995, Delta discontinued service from Portland to Taipei and Bangkok, and from Los Angeles to Hong Kong. r DELTA CUSTOMERS i Superior customer service remains a core value of Delta Air Lines. During fiscal 1996, Delta identified refinements needed to ensure that during and after Leadership 7.5, Delta continues to serve its customers with the quality that the Company's customers and D elta's own people demand. During fiscal 1996, Delta implemented "Success Through Service," a program designed to provide standards, training, and measurements for delivering an enhanced level of customer service to every Delta customer. Plans call for every Delta person to receive "Success Through Service" training by the end of fiscal 1997. Since fiscal 1995, Delta has monitored customer satisfaction by surveying 1,200 customers each month. In response to customer feedback, Delta took actions to further enhance customer service, particularly in areas impacted by the strong growth in passenger traffic during the second half of fiscal 1996. Selective airport staffing was added at the Atlanta and Cincinnati stations.Three hundred additional flight attendants were hired to effectively handle higher passenger loads. Reservation centers increased staff and implemented technology to manage increasing call volumes and to provide special services for high value customers. Outsourcing programs were refined to ensure consistent delivery of"Delta-style" service. DELTA AIR LINES , INC . {10 These programs and others demonstrate Delta's long-standing commitment to consistently meet and exceed its customers' expectations. Delta's customer service continues to improve as a result of these and other init iatives, and such measures as customer satisfaction ratings, on-time performance, and reliability showed marked improvements during the June 1 996 quarter as compared to the March 1 996 quarter. r DELIA PEOPLE i By the beginning of fiscal 1 996, Delta had substantially concluded the staffing reductions called for under Leadership 7.5, reducing headcount by 14% in fiscal 1 995. During fiscal 1 996, Delta took necessary steps to address specific customer service issues primarily related to higher passenger loads. At the conclusion of fiscal 1 996, headcount had increased 1 % from June 30, 1 995, reflecting selective recall and hiring of personnel in critical customer service areas. As a result of continued control of headcount. salaries and related costs, in fiscal 1 996, Delta achieved reductions in salaries and related costs of 8% from the level of fiscal 1 994, the year in which Leadership 7.5 was announced. Derta's employee productivity as of June 30, 1996, exceeded that of its major competitors, as measured by available seat miles per employee. Delta's new collective bargaining agreement with it s pilots represented a major step toward restoring the Delta people's traditional sense of unity and shared purpose. In addition, the Company initiated several other efforts during fiscal 1996 to reward its people for their dedication and commitment and further align personnel objectives w ith stockholder goals: During fiscal 1 996, Delta people earned $144 million through the Company's profit sharing program. With the 72.000 : 70,000 : 68,ooo j 66,000 : 64,000 : 62,ooo j 60,000 : 58,000 : 56,0oo = .............. .. . ..... June '9 3 June '94 June '9 5 June '96 full-time equivalent employees STAFFING LEVELS AT YEAR END implementation of the new collective bargaining agreement for Delta pilots, substantially all Delta personnel now participate in a profit sharing or other incentive compensation program. On April 24, 1996, Delta's Board of Directors adopted, subject to stockholder approval, two broad-based stock option plans for Delta people involving 24.7 million shares of Delta common stock. On April 25, 1996, the Board adopted a proposal inviting selected representatives of various personnel groups across Delta to attend its regular quarterly meetings.This initiative will provide Delta personnel with a new channel of communication with the Board. DELTA AIR LINES, INC . ( A IR C R AFT FLEET i Delta continues to maintain one of the youngest, most efficient and technologically advanced fleets in the U.S. airline industry. During fiscal 1996, the Company continued to refine its aircraft fleet plan to simplify the fleet, improve operating efficiency, and better meet Aircraft Fleet At June 30, 1996 Average Age of Aircraft Type Type of Aircraft (years) Owned 8-727-200 .. .. ... .. .. 19.3 106 8-737-200 . . .. .. . .... 11 .6 8-737-300 . . . . . .. .... 10. 8-757-200 . . ... ... . .. 7.4 45 8-767-200 . ..... . . . .. 13.1 15 8-767-300 .. . .. .. ... . 7.1 2 B-767-300ER . . . .. ... . 4.2 10 L-1011 - 1. . . . . ... .. . . . 19.2 31 L-1011-200 .. .. . . . ... . 18.0 I L-1011 -250 . . .. .. ..... 13.7 6 L-1011-500 . .......... IS. 17 MD-11 . . ... .... . .... 3.1 s MD-88 .......... . ... MD-90 .. ........ . ... Leased 23 53 13 41 24 7 7 57 Total 129 54 13 86 15 26 17 31 6 customer expectations. During fiscal 1996, Delta announced plans to retire all 55 Lockheed L-1011 aircraft from its fleet, including the removal of all L-1011 aircraft from transatlantic service by the end of fiscal 1998. At the same time, Delta announced an agreement with The Boeing Company to purchase 12 additional Boeing 767-300ER aircraft for delivery in fiscal 1997 and 1998, and to cancel its 52 orders (22 of which were subject to reconfirmation by Delta) and 56 options to purchase Boeing 737-300 aircraft. The newly ordered 767-300ER aircraft, together with aircraft already on order, will replace all L-1011 aircraft now being used in transatlantic service.The L-1011 aircraft being removed from transatlantic service will be reconfigured and used for domestic service, where they will replace older; less efficient versions of the L-1011. See Note 17 of Notes to Consolidated Financial Statements. During fiscal 1996, Delta accepted delivery of 11 new aircraft, including one B-757-200 aircraft; two B-767-300ER aircraft; one MD- I I aircraft; and seven MD-90 aircraft. Also during fiscal 1996, the Company sold one L-1011-1 aircraft, and returned to lessors the remaining nine A3 I0-300 aircraft and five B-727-200 aircraft. Subsequent to June 30, 1996, Delta entered into a definitive agreement with the Nordam Group, Inc., to purchase, between fiscal years 1997 and 2000, 25 shipsets of Stage 3 engine hush kits for B-737-200 aircraft, with an option to purchase an additional 30 shipsets. The aircraft orders include four MD-90 aircraft scheduled for delivery after fiscal 1 997 that are subject to reconfirma- tion by Delta. See Note 9 of Notes to Consolidated Financial Statements. Aircraft Delivery Schedule Aircraft on Firm Order at June 30, 1996 Delivery in Year Ending June 30: After Orders 1997 1998 1999 2000 2001 2001 Total 8-757-200. . . . . . . 3 4 8-767-300 . . . ... . B-767-300ER . ... . s MD-II ........ . MD-90 .. . .... DELTA AIR LINES , INC . 9 I 2 2 _ 3 _ 11} Aircraft Delivery Schedule 2,500 Aircraft on Option at June 30, 1996 Delivery in Year Ending June 30: After Options 1997 1998 1999 2000 2001 2001 Total 2,000 Ground Propert)' and B-757-200 .... . .. 2 2 24 28 Equipment B-767-300ER .. . .. 9 5 14 Flight Equipment 5 5 5 2 17 (includes leased aircraft.) MD-II ......... MD-88 ...... . . . 15 15 1,500 MD-90 ......... II 7 8 24 50 Total ...... . .. 42 19 13 50 124 -- -- - - -- -- 1,000 Delta's aircraft which are subject to reconfirmation or are on option provide the Company with the flexibility to adjust scheduled aircraft deliveries. 500 The MD-88 options may be converted into MD-90 orders, and the B-767-300ER options may be converted into B-767-300 orders, all at Delta's election. '87 '9 I '92 '93 '94 '95 '96 in millions of dollars CAPITAL EXPE DITURES Delta continues to evaluate long-term aircraft alternatives with the goal of achieving the optimal mix of aircraft to meet operational needs. Delta also intends to continue its efforts to carefully manage capital spending and simplify the fleet. F I N A N C I A L I (' \' i C \\ Management's Discussion and Analysis of F inancial Condition and Results of Operations RESULTS OF OPERATIONS - Fiscal 1996 Com ared with Fiscal 1995 For fiscal 1996, Delta recorded net income of$156 million ($1.42 primary and fully diluted earnings per common share after preferred stock dividend requirements) and operating income of$463 million. In fiscal 1995, Delta recorded net income of$408 million ($6.32 primary and $5.43 fully diluted I 2 *Excludes restructuring and other non-recurring charges /0 8 and cumulative effects of accounting changes 0 . . . . .. . ..... . . . . . .. .. .. . ..... ... .... . . . . .. . . . . (2) (4) (6) (8) (10) (12) '87 '88 '89 '90 '9 I '92 '93 '94 '95 '96 ,n dollars PRIMARY EARNINGS ( LOSS ) PER COMMON S HARE * earnings per common share after preferred stock dividend require- ments), and operating income of$66I million. Fiscal 1996 results include pretax restructuring and other non-recurring charges totaling $829 million ($506 million after-tax or $9.71 per common share) related to the write-down of Delta's Lockheed L-1011 fleet and the continuation of the Company's Leadership 7.5 cost reduction program. See Note 17 of Notes to Consolidated Financial Statements. Fiscal 1995 results include a one-t ime $114 million after-tax benefit ($2.25 primary and $1.42 fully diluted benefit per common share) related to the adoption of Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" (SFAS 112). See Note IO of Notes to Consolidated Financial Statements. DELTA AIR LINES, INC . Excluding the restructuring and other non-recurring charges in fiscal 1996 and the cumulative effect of the adoption of SFAS 112 in fiscal 199 5, net income for fiscal 1996totaled $662 million ($11.13 primary and $8.49 fully diluted earnings per common share after preferred stock dividend requirements) and operating income was $1.3 billion, compared to net income of $294 million ($4.07 primary and $4.0 I fully diluted earnings per common share after preferred stock dividend requirements) and operating income of$661 million in fiscal 1995. The improvement in financial results forfiscal 1996ascomparedtofiscal 1995 primarily reflects cost reductions in most operating expense categories under the Company's Leadership 7.5 program. These reductions resulted in a $370 million, or 3%, decline in operating expenses, excluding restructuring and other non-recurring charges in fiscal 1996. Passenger revenue increased $297 million, or 3%, due to increased traffic stimulated by competitive pricing actions, the expiration of the U.S. transportation excise tax and general improvements in economies worldwide. Operating revenues for fiscal 1996 Financial Results Summary Operating Revenues . ... .. . ..... . Operating Expenses ... .. . ... ... . Operating Income . . . .... .. . . .. . . Other Expenses, Net . .... .. . . . . . Income Before Income Taxes and Cumulative Effect of Accounting Change . ..... . .. ... . Income laxes Provided, Net . . ... . . Income Before Cumulative Effect of Accounting Change . . .. . ... . . . Cumulative Effect of Accounting Change, Net oflax ... ... . . . . .. . Net Income . . . ....... .. .... .. . . Preferred Stock Dividends . . . .... . Net Income Available to Common Stockholders . . . ... .. . Primary Income Per Common Share: Before Cumulative Effect of Accounting Change ........ . . Cumulative Effect of Accounting Change ..... .. . . . Fully Diluted Income Per Common Share: Before Cumulative Effect of Accounting Change . . . . ... .. . Cumulative Effect of Accounting Change ...... . .. . Number of Shares Used to Compute Net Income PerCom 1996 1995 (In Millions, Except Share Data) $12,455 $12,194 11 ,992 463 ~ ) 276 ~ 156 156 ~ $ 1.42 $ 1.42 ~ 661 _JJ..~n 494 __QQQ) 294 114 408 ~ $ 4.07 2.25 $ 6.32 $ .01 1.42 $ 5.43 + 2% + 4 - 30 +12 - 44 - 40 - 47 - 62 - 7 - 77% -65% -78% - 65% - 74% NIA - NIA were $12.5 billion, up 2% from $12.2 billion in fiscal 1995. Passenger revenue increased 3%, the result of 3% growth in revenue passenger miles.The passenger mile yield was virtually unchanged. Domestic load factor increased two points to 66%, as domestic revenue passenger miles and domestic capacity rose 6% and 3%, Operating Revenue Detail Passenger .. . ... ...... . ...... . . . Cargo . ......... .. ........ . ... . Other.Net .. .. .... . .. . . ...... . lotal ..... . .... ... ..... . .... . 1996 1995 (In Millions) $1 1,616 $1 1,319 521 318 $12,455 565 310 $12,19 + 3% - 8 + 3 + 2% , respectively. The domestic passenger mile yield decreased 1%, the result of discount fare promotions and the continued presence of low-cost, low-fare carriers in markets served by Delta. International load DELTA AIR LINES, INC . . ~?:17~:~i~-'.'?::~~Jf:~ ? .?!:>. i '- ~t:=:~. ~t!?~?! .\~::~~?~:. '. ?~ L~~c~~.1~ =.90~r.~~ 1996 DISTRIBUTION OF OPERATING REVENUES Revenue-Related Statistics 1996 1995 Change Revenue Passengers Enplaned (Thousands) . . ..... . . 91,341 88,893 + 3% Revenue Passenger Miles (Millions) 88,673 86,417 + 3% Passenger Load Factor . ... .. .. . . 67.8% 66.2% +1.6 pts Passenger Mile Yield . . ... .... .... 13.10 13.10 Cargo Ton Miles (Millions) ..... .. 1,368 1 ,500 - 9% Cargo Ton Mile Yield . .. ...... . .. 38.08 37.67 + 1% Operating Revenue Per Available Seat Mile ....... . .. .. ........ 9.53 9.33 + 2% factor increased one point to 73%, as international revenue passen- ger miles decreased 7% while operating capacity decreased 8%.The decline in international capacity is mainly due to the cancellation of service on certain international routes.The international passenger mile yield increased 2%, primarily due to higher average fare levels in certain international markets. Cargo revenues in fiscal 1996 decreased 8%to $521 million, the result of a 9% decline in cargo ton miles, partially offset by a 1% increase in the ton mile yield.The decrease in cargo ton miles is primarily due to the cancellation of service on certain international routes and the resulting decrease in the average cargo trip length. All other revenues were up 3% to $318 million, mainly due to increased revenues from joint marketing programs associated with the Company's SkyMilesfrequent fiyer program. See Note I of Notes to Consolidated Financial Statements. Operating expenses in fiscal 1996 totaled $12.0 billion, up 4% from $11.5 billion in fiscal 1995. Operating capacity increased less than 1% to 130.8 billion available seat miles, and operating cost per available seat mile increased 4% to 9.17. Excluding restructuring and other non-recurring charges in fiscal 1996, operating expenses were down 3%, and operating cost per available seat mile decreased 3%. Operating Expense Detail 1996 1995 Change (In Millions) Salaries and Related Costs . .. .... $ 4,206 $ 4,354 - 3% Aircraft Fuel . . ........... . .... . 1,464 1,370 + 7 Passenger Commissions . ... . .. . . 1,042 1,195 -13 Contracted Services . . .. .. . . . .. . 704 556 +27 Depreciation and Amortization ... 634 622 + 2 Other Selling Expenses .... . ... .. 594 618 - 4 Aircraft Rent . ... . .... . .. .. .... . 555 671 -17 Facilities and Other Rent ... . .... 379 436 - 13 Aircraft Maintenance Materials and Outside Repairs .... . .... . 376 430 - 13 Passenger Service ... . ..... . . . . . 368 443 - 17 Landing Fees .... . ..... . ... . . . . . 248 266 - 7 Restructuring and Other Non-Recurring Charges . ...... Other ...................... . .. + 4 DELTA AIR LINES , INC . Salaries and related costs decreased 3%, primarily due to a lower average number of employees during the year and lower employee travel and benefit expenses, partly offset by increased costs associated with other employee compensation plans, primarily profit sharing. Aircraft fuel expense increased 7%, as the average fuel price per gallon rose 8% to 58.53, partially offset by a 1% reduction in gallons consumed. Passenger commissions expense declined 13%, mainly due to the implemen- tation of a maximum commission payment on domestic tickets and lower base commission rates. Contracted services expense rose 27%, the result of increased outsourcing of information technologies services and certain airport functions. Depreciation and amortization expense increased 2%, the result of the acquisition of additional owned aircraft and the extension of leases on 40 B-737-200 aircraft in the June 1995 quarter which, for accounting purposes, resulted in those leases being reclassified from operating to capital leases. This increase was partially offset by certain international routes becoming fully amortized and the write-down of the L-1011 fleet See Note 17 of Notes to Consolidated Financial Statements. Other selling expenses decreased 4%, primarily the result of lower advertising and promotion expense, partially offset by higher booking fee payments to computer reservation system providers related to domestic traffic growth. Aircraft rent expense decreased 17% due to the return of certain aircraft to lessors and the extension of leases on 40 B-737-200 aircraft previously discussed. Facilities and other rent expense declined 13%, the result of *Excludes restructuring and other non-recurring charges Other Selling Expenses 5% r. }J~c :9tf ~~i~!~~?:~~i 10:~~~rj9( ~ ~ .C?!-'.~!1~ -~~p_a_ics_ -~~ P.a.s.s~ _ n_g~c ? .e !.v i~~ }~ : Other 6% : : Salaries & Related Costs 38% :. ~!c~r_afi. - ~~~I .!- ~~ ~-~~~~/~. ~-~?.~~i~~ t~.~~ _I.~~ :. f.a.s.s_ e_n_g~c ~?'!;';!i~~i_o_ n_~ - ~% :. S?:1.t:9~~