Cr ~ .Delta Air Lines 1999 ANNUAL REPORT BUSINESS DESCRIPTION D lta ir Lin Inc. pro ide ch duled air tran portation o er an e t n ive route network. Ba ed on alendar 1998 data Delta is the largest U . . airline in tenns of aircraft departures and passengers enplaned and th third- large ta mea ured b operating re enue and re enu pa nger mile flown. Delta i the leader aero the orth tlanti off ring the mo t daily flight departure er ing the large t number of non t p market and carr ing the mo t pa enger of an U. . airline. As of August 1, 1999, Delta served 184 domestic cities in 44 states the District of Columbia, Puerto Rico and the U. . Virgin Islands as well as 42 cities in 29 international countries. With its domestic and international code- share partners, Delta's route network covers 225 domestic cities in 48 states, and 126 cities in 58 international countries. In addition to cheduled pa enger ervice Delta pro ide air freight mail and related aviation ervice . Delta i incorporated under the law of the tate of Delaware and i ubject to go ernment regulation under the Federal A iation Act of 1958, a amended, a well a many other federal, tate and foreign law and regulation . Delta's corporate headquarter i located in Atlanta, Georgia. TABLE OF CONTENTS CELEBRATING DELTA'S 70TH YEAR On June 17, 1929, a Travel Air Model -6000-B departed from Dallas, Texas, for Jack on, Mis i sippi, with five pa senger . From thi humble beginning, Delta has grown into the most-flown airline in the world, carrying approximately 107 million passengers to their destinations in fi cal 1999. Started as Delta Air Service, with its fir t headquarter in Monroe, Louisiana, the Company has always mirrored the optimism of its founder, C.E. Woolman. Delta weathered the economic storms of the late 1920s and early '30s with the innovation and resilience that remain its hallmarks. As the years passed, Delta merged with other airline companies and expanded its reach into new regions and international markets to become a truly global enterprise. Today, Delta is approximately 74,000 employees strong and offers more than 2,600 flights per day. While the indus- try has changed dramatically since 1929, Delta's customer service philosophy has not. Whether it's flying five passengers or 107 million, superior customer service continues to be at the heart of the Company, responsible for its success in 1999 and defining its focus for the next 70 years and beyond. 2 Letter to Shareowners 7 Creating The World's Greatest Airline 16 Supplemental Data 25 Financial Review Back Cover Foldout Delta Route Maps CONSOLIDATED FINANCIAL HIGHLIGHTS Delta Air Lines, Inc. [Fiscal 1999 data includes Atlantic Southeast Airlines (ASA)] Dollar amounts in millions, except per share data. Fiscal Year Ended June 3 0 1999 1998 Change Operating Revenues $14,711 $14,138 4.1 % Operating Expenses $12,841 $12,444 3.2% Operating Income $ 1,870 $ 1,694 10.4% Operating Margin 12.7% 12.0% 0.7pts. Net Income $ 1,101 $ 1,001 10.0% Basic Earnings Per Share $ 7.63 $ 6.64 14.9% Diluted Earnings Per Share $ 7.20 $ 6.34 13.6% Dividends Declared on Common Stock $ 14 $ 15 (6.7%) Dividends Per Common Share $ 0.10 $ 0.10 - Common Shares Issued and Outstanding at Year End 138,553,719 150,450,394 (7.9%) Debt-to-Equity Position 36%164% 32%/68 % NA CONSOLIDATED OPERATING HIGHLIGHTS Delta Air Lines, Inc. [Fiscal 1999 data includes Atlantic Southeast Airlines (ASA)] Fiscal Year Ended June 3 0 1999 1998 Change I Revenue Passengers Enplaned (Thousands) 106,902 104,148 2.6% Revenue Passenger Miles (Millions) 104,575 101,136 3.4% Passenger Mile Yield 12.83 12.85 (0.2% ) Available Seat Miles (Millions) 144,003 140,149 2.7% Operating Revenue Per Available Seat Mile 10.22 10.09 1.3% Operating Cost Per Available Seat Mile 8.92 8.88 0.5% Operating Cost (Excluding Fuel) Per Available Seat Mile 7.97 7.80 2.2% Passenger Load Factor 72.6% 72.2% 0.4 pts. Breakeven Passenger Load Factor 62.5% 62.8 % (0.3)pts. - - - - - - Cargo Ton Miles (Millions) 1,690 1,745 (3.2%) Cargo Ton Mile Yield 32.97 33.35 (1.1 %) Fuel Gallons Consumed (Millions) 2,730 2,664 2.4% Average Aircraft Fuel Price Per Gallon 49.83 56.54 (11.9% ) Number of Aircraft in Fleet at Year End 676 569 18.8% Average Age of Aircraft Fleet at Year End (Years) 11.6 12.3 (5.7%) Stage 3 Aircraft at Year End (As a Percent of Total Aircraft) 92% 81 % 11.0 pts. -- Average Seats Per Aircraft Mile 176 180 (2.2% ) Average Passenger Trip Length (Miles) 978 971 0.7% Average Aircraft Flight Length (Miles) 852 804 6.0% Average Aircraft Utilization (Hours per Day) 8.7 8.7 - Average Full-Time Equivalent Employees 74,000 67,400 9.8% DELTA AIR LINES 1999 ANNUAL REPORT 1 LETTER TO SHAREOWNERS During the la t ear D lta ir Lin on i t ntl delivered r cord br a king finan ial r ult and indu tr leading u t mer er i tati ti whil gro ing and panding in imp rtant trat gi direction . Our pr gre ha garn r d bu ine and indu try recognition including the a ard and commentar indicated on the e page . e are proud of our achievement and honored b the e prizes. We did not et our cour e with the goal of inning a ard - we ve charted our journe with the goal of creating the world greate t airline. But though good work wa the goal, recognition urel followed a a con equence. We are deeply gratified. At this intermediate point in Delta' Journey, our strategic direction remains clear and offer the continuing pro pect of an extremely bright future for our Company. In thi letter, I will review for you - the owner of Delta Air Lines - the key component of our strategy, the progress we've made so far, and our plans going forward. Those strategic points of focus are that we will: Become #1 in the eyes of our customers. Develop an airline network that takes passengers from anywhere to everywhere. Continue to build a superior Delta team. Continue to achieve superior financial results. Leverage our strengths. Become #1 in the eyes of our customers Providing excellent customer service is at the very heart of Delta Air Lines. Other than safety - which, of course, is the underpinning of everything we do - nothing matters more to us than satisfying our customers. Leo F. Mullin President and hie( Executive Officer La t year, we were proud to report to you that we had made real trides in returning our Company to high level of cu tomer atisfaction. This year, we made sure tho e hard won gains were firmly estab- lished as we raised the bar even higher. For the fiscal year ended June 30, 1999, Delta was the only major U.S. airline to rank in the top three for each of the U.S. Department of Transporta- tion's key service indicators: on-time performance, mishandled bags and customer complaints. In addition, Delta made significant improvements to our fleet and facilities. We completed refurbish- ment of all aircraft interiors and reconfigured the business class seating in our transoceanic fleet for Delta's industry-leading BusinessElite service. We also completed renovations of 139 airport facilities, including our Crown Room Clubs. During fiscal 1999, Delta implemented inno- vative technology such as our new check-in and boarding system that shortens airport lines and frees up agents to interact more with customers. Delta also developed a customer service initia- tive that ~ill reach to every part of our Company with a concise, articulated plan to ensure that we deliver the reliable, courteous air travel experience that passengers expect. This initiative provides the focus and the impetus to move our Company's pur- suit and attainment of service excellence to higher levels during the coming year. Develop an airline network that takes passengers from anywhere to everywhere Airline customers want to arrive at their destina- tions in the easiest, fastest, and most seamless way possible, regardless of where in the world that destination might be. But realistically, no single airline can accomplish that objective - due to both finite resources and governmental restrictions. So Delta is adding to its own list of destinations and also expanding partnerships and alliances. We are particularly excited about the Delta- Air France alliance announced earlier this summer. LETTER TO SHAREOWNERS continued The combined trength and r our e of Delta and Air France alone create e cellent era el opportuni- tie for our cu comer . However both carri r are committed to e panding current bilateral agree- ments to include other carrier worldwide o that the alliance founded by Delta and Air France can and will become the be tin the world. Thi part- nership lays the corner tone for that global multi- carrier alliance. Delta took another important tep this ear with the purcha e of Atlantic outheast Airlines (ASA), a Delta Connection carrier that links smaller communi- ur ompany ha long enjoyed the dependabil- ity and ac umulated knowledge of an employee group with many year of company affiliation. More recently, we've buttre sed this trength by drawing new team members from other companies and indus- trie whenever kills or experience levels we need can't be found within Delta. Because of this, our team increa ingly better balanced and more capable. A we build chi team, we're also working to make Delta a highly productive environment that helps people reach their full growth potential and to become a preferred com- ties in the economically vital Southeast to Delta hubs. This move not only provides excellent support of our highly We did not set our course with the goal pany for employment. of winning awards - we've charted our journey with the goal of creating Delta is examining and improving the tools and training we provide for the world's greatest airline. prized Atlanta hub, it also gives Delta an important strategic position in the emerging market of regional jet service. The smaller, cost-effective regional jets have the potential to alter the aviation landscape, opening up untapped point-to-point markets too small for more expensive larger aircraft. Delta intends to be a part of this new market, and own- ership of ASA will help us reach that objective. Continue to build a superior Delta team Delta is building an exemplary workforce by recruiting, retaining, and incentivizing the most talented people in the marketplace. personnel at every level. We've increased educational reimbursement limits; we're making the workplace more responsive with, for example, extended flextime and relaxed dress codes; and we're responding to work-life issues with enhancements such as adoption benefits and flexible maternity p og am . In addition, we remain committed to providing Delta people with top compensation for top perfor- mance. That commitment extends to Delta pilots, who are represented by the Air Line Pilots Asso- ciation. When we introduced the new generation Boeing 737 to our fleet last year, Delta and ALPA reached a timely agreement for top-of-industry pilot pay rates and work rules. We also offered top-of-industry pay rates for the Boeing 777. However, since we were unable to reach agreement with ALPA, that aircraft is no longer part of Delta's current fleet plan. Delta has once more opened ALPA negotiations with top-of-industry pay rates and work rules as we seek to add the Boeing 767-400 to our fleet. We are hopeful that a mutually satisfactory agreement will be reached soon on that aircraft so that we can continue to provide Delta passengers with the very best travel options, includ- ing the optimal aircraft types. Maintained our unit cost advantage relative to hub-and-spoke competitors Diluted earnings per share of $7.20, up 14% year over year Our long-term financial plan provides for sus- tainable growth so that we can continue to produce consistently superior financial results. Leverage our strengths Our passenger service operations - Delta domestic Continue to achieve superior financial results We remain committed to providing Delta people with and international flights, Delta Express, Delta Connection carriers, Delta Shuttle, and our alliances - comprise a Financial results are the universal measurement top compensation for top performance. of a company's success. And excellent financial performance derives from operating a sound business with a well-conceived, well-executed strategy. In fiscal 1999, Delta had outstanding financial results: Record net income of $1.1 billion, up 10% year over year Recor~ operating revenues of $14.7 billion, up 4 % year over year Record operating income of $1.9 billion, up 10% year over year Excellent unit revenue performance, outperforming the industry in year over year domestic unit rev- . enue growth every month of the fiscal year powerful engine that drives our Company's success. The complexity and variety of components required for these operations spawn business opportunities that are ancillary but related to the passenger airline company. We will find new ways to exploit these opportunities. One such arena is the emerging potential for Internet travel and ticket commerce that has prompted Delta to create a new business unit - e-Delta - to capture distribution savings and added revenue from this new channel. Delta also launched a partnership with priceline.com that generates incremental revenue in exchange for the sale of airplane seats that may otherwise fly empty. Delta is realizing significant financial benefits from LETTER TO SHAREOWNERS continued tock purcha rrant rec 1 d a part f our agr ment ith pri elin om. In et another ar a of our airlin p rati n and apabilit m aircraft maintenan e. ur ompan urrentl pr - ide contract maintenance r ic to irb rn . .. rtainly p t ntial hallenge li ahead: mode t ag re ive apacity growth by th r airlin , pr ur n unit revenue growth in omp titi unt airline and r gional jet , and br ad ning mp titiv international alliance . But at D lta wear well prepared to meet any and all of tho e challenge . E pre and e 11 oon add Boeing etJ et commercial fleet to our li t of customer . E ti- mate how that total We ve laid a firm foundation that allows us to maintain a clear focus on our Company's goals even as we accelerate the pace. We have ucceeded in creating for our Company not ju t operational and potential indu try revenue for airline maintenance contract i ver high o additional bu ine opportunitie in thi field are exten ive. We will find avenue imilar to the e that will allow u to leverage the trengths of our pa senger airline operation as we tap additional future bu i- ne s opportunities. Looking ahead In the past year, Delta Air Lines not only led the major airlines in operational and financial perfor- mance, we al o laid a foundation that will allow our success to continue and to grow. Fiscal 2000 will be a challenging year, but it will also be a year of acceleration. financial achievement , but al o the capacity to control our de tiny. We've laid a firm foundation that allow u to maintain a clear focu on our Company' goal even as we accelerate the pace. Delta i entering the next mil- lennium with the re ource and the trategic direc- tion needed to continue and extend our success. Leo F. Mullin President and Chief Executive Officer September 1, 1999 Retiring Henry A. Biedenharn, Ill Henry A. Biedenharn, Ill is retiring from the Delta Board of Directors after 13 years of service . The Biedenharn family has been deeply involved with Delta Air Lines since the 1920s as original investors and officers of the Company. A member of the Biedenharn family has been on the Delta Board since 1930. Delta's Board of Directors, management team and employees are sincerely grateful for the many contributions Mr. Biedenharn and the Biedenharn family have made to our Company's success. 6 DELTA AIR LINES 1999 ANNUAL REPORT Maurice W. Worth Maurice W. Worth, Chief Operating Officer, will retire October 1, 1999 after a 38-year career with Delta that began when he joined the Company as a ramp agent. Mr. Worth has been a strong part ner during Delta's transition to a new leadership team and his focus on superior customer service and operational excellence contributed significantly to Delta's readiness to take th_ e next essential steps in our journey to become the world's greatest airline. We owe him special thanks for all that he has accomplished . y ... Delta Air Lines is committed to becoming #1 in the eyes of our customers. We strive to show we care for our customers and value their time. Our strategy is to unite high-tech, our cutting-edge tools, systems and processes, with high-touch, our way of delivering distinctive customer service. Here's how we are doing it. Safety and Operational Excellence Keeping Delta safe for our customers and employees is always our #1 priority. Operational excellence is the key: the flawless execution of every task, every time, every day. For fiscal 1999, we ranked 2nd in on-time performance, 2nd in fewest mishandled bags and 3rd in fewest customer complaints. We are the only airline to rank among the top three positions in all of these measures. We are particu- larly proud of this achievement because it occurred in a year in which we carried a record 107 million customers. BusinessElite Our customers r~sponded positively to one of the largest initiatives we've undertaken this year. BusinessElite is our industry-leading product for intercontinental business class travelers. This service offers superior seating comfort, a redesigned food service, a new wine selection from Delta's award-winning VmumTM program, personalized flight attendant service, worldwide concierge service, and many other on-board amenities and ground product enhance- ments. BusinessElite is available on Delta operated aircraft flying between North America and Europe, Japan, Brazil and India. Faster Aircraft Boarding In fiscal 1999, we began implementing new gate and board- ing technology and our customers are beginning to notice shorter lines and improved boarding processes in major cities. We will have our top 26 cities completed by the end of this calendar year. Also, pas- sengers with electronic tickets who check in curbside are now able to check their bags and receive a boarding pass with- out standing in line at the ticket counter or gate. Other technology and process initiatives aimed at simplifying the air travel experience are also underway. These include installing kiosks for self-service ticketing, enhancing gate information displays and equipping our agents with handheld electronic devices for check-in and informational purposes. Booking and Ticketing Delta's Internet website is becoming one of the top sites in our industry. Early next calendar year, customers will see a friendlier gateway with enhanced reservation and ticketing capabilities. Our partnerships with priceline.com and iXL are creating a new level of web-based links, low- cost distribution channels and electronic commerce opportunities for our products and services. Better Menu Beginning this fall, newly enhanced breakfast menus will be served on more flights. We are also introducing new menus throughout the day for increased variety. Still in the development stage are special occasion foods to surprise and delight our customers. We will con- tinue to expand our use of name-brand foods, such as Omaha Steaks and Caribou Coffee. Delta-Style Service Delta-Style Service is the "high-touch" aspect of distinctive customer service. It's also a philosophy that guides our leadership team to coach and mentor our customer contact employees in ways that serve our customer be t. Our goal is to deliver courteous, efficient and professional service every time we encounter a passenger. Going forward, we will continue our focus on excel- lence as we implement the Air Transport Association's Airline Customer Service Commitment. We have volun- tarily j0ined with other airlines in a plan to improve customer service across our industry. We value and respect our customers, and are devoting the time, energy and resources necessary to truly become #1 in their eyes. DELTA AIR LINES 1999 ANNUAL REPORT 9 Delta Air Lines is committed to providing passengers with convenient access to any destination they choose. By optimizing our network assets, we offer customers more schedule choices, better connections and more reasons to fly Delta. Including domestic and international code-share partners, our route network offers over 5,200 daily flights to 225 domestic cities in 48 states and 126 cities in 58 international countries. Delta is the #1 U.S. carrier across the North Atlantic, with more nonstop destinations than any other U.S. airline. We will continue to capitalize on the power of our Atlanta Worldport, the world's largest airline hub, by building an exciting new gateway to Latin America and extending our reach in other key business and leisure markets. Delta's Network Assets (5) Delta Express, which holds a leadership position in low-fare travel on the East Coast, offers our customers nonstop, low-fare service to leisure des- tinations in Florida (Fort Lauderdale, Fort Myers, Orlando, Tampa and West Palm Beach) from high demand areas in the Northeast and Midwest. ( 6) Our alliances with global airlines of distinction enable us to pursue our goal of growth while pro- viding our customers with a seamless, integrated worldwide network. ASA Acquisition In fiscal 1999, we acquired ASA to solidify our posi- tion in the increasingly important regional jet market, as well as to enhance service to our customers. ASA is a successful To expand our network, we utilize an integrated strategy that leverages the strength of six key components. AIR FRANCE regional jet operator and Delta Connection carrier at our Atlanta and Dallas/Fort Worth hubs. Use of regional jets has grown substan- tially throughout our industry, from 48 aircraft flown at year end 1996 to 3 70 aircraft expected in service by year end 1999, an average annual growth ate of 98 %. (1) Our mainline system, encom- passing 148 cities in North America, commands a strong competitive position in A.Delta Air Lines the Southeast and Florida. (2) Our international system enables us to grow our transatlantic leadership position and extend our reach into Latin America and Asia. (3) Delta Shuttle, our specialized, high-frequency product serving the Northeast corridor, provides distinctive customer service to our business pas- sengers in that region. ( 4) Our regional jet service, operated by ASA, as well as other Delta Connection carriers, enables us to provide reliable jet service to many smaller domestic cities. Alliance with Air France In June 1999, we announced an enhanced strategic marketing agreement with Air France that laid the foundation for a major global alliance. Air France operates one of the continent's most efficient and well-positioned hubs at Charles de Gaulle Airport in Paris and is a leader in Europe's largest domestic market. Delta and Air France bring valuable and unique assets to the partnership and combined we provide a comprehensive route system. DELTA AIR LINES 1999 ANNUAL REPORT 11 A Great Place to Work Delta employees are the foandat.ion-upon which we._will build the greatest All efforts to foster a dynamic work environment will be based on our Company's core values: safety, customer- focused professionalism, teamwork and participation, world-class performance, trust and respect. leaves of absence to accom- modate a variety of personal needs, including the pursuit airline in the world. Our Company recognizes that the hard work and dedication of our employees enabled us to achieve our record financial performance and significant operational improvements in fiscal 1999. To build on this success, we must continue to develop a highly skilled, globally diverse and motivated work- force. We will continue to recruit and retain the most talented people in the marketplace to build our team. Our strategy is to provide: Industry-Leading Compensation and Benefits A Great Place to Work Open Communication Opportunities for Development Industry-Leading Compensation and Benefits We believe that to attract and retain the best, we must offer a performance-based total compensation package valued at or near the top of the airline industry. Delta's package allows employees to customize benefit options and services to best meet their individual needs. Improve- ments have also been made to pay and benefits for part-time workers. of an advanced degree, caring for an ill family member, raising a family or participating in a volunteer program. Open Communication We also promote open, two-way communication to foster the employer-employee partnership. We have created employee forums and councils to enhance communication. The Delta Board Council, made up of frontline employees, serves as the eyes, ears and voice to the Board of Directors. Quarterly leadership meetings and regularly scheduled executive roadshows give nearly every employee the opportunity to meet face-to-face with senior management to discuss corpo- rate goals and strategies. Opportunities for Development During fiscal 1999, we created the Learning Services organization to provide professional training and development to employees at all levels. These programs help our people to strengthen customer service skills, enhance leadership abilities, and further their career growth and development. A Great Place to Work The Chairman's Club We are also in the process of developing the "Delta Delta continues to provide programs to help employ- ees balance the demands of work and family life. In addition to paid time- off benefits like vacations and holidays, we offer flextime, and educational and adoption assistance. Our Company allows employees extended The Chairman's Club is an annual tradition recognizing 100 employees who consistently exemplify superior job performance and offer our customers nothing less than the best. These employees are selected by their peers as the "best of the best" and are honored at a gala reception and banquet hosted by Delta's CEO and other senior officers. University," which is an accredited program offer- ing employees on-site and Internet-based courses. This program will be offered in association with national and international colleges and universities, providing employees the opportunity to earn bachelors and masters degrees. DELTA AIR LINES 1999 ANNUAL REPORT 1 J Strong Financial Results and Cash Returns - A Foundation for Profitable Growth During fiscal 1999, Delta focused on three key funda- mental financial objectives to create value for our shareowners: accelerating earnings growth and cash returns, maximizing the $4,000 $3,500 $3,000 $2,500 $2,000 $1 ,500 $1 ,000 $ 500 I I I I I I investing in strategic ini- tiatives to improve cus- tomer service, to develop our network, to build a balance sheet and mini- FY97 FY98 FY99 FY97 FY98 FY99 FY97 FY98 FY99 superior Delta team and to create value for our share- owners. Capital expendi- tures for fiscal 2000 will be approximately $3.1 bil- mizing fixed costs. Our relentless pursuit of these Net Income Operating Cash Flows Share Repurchases objectives resulted in record financial results and strength- ened our position for future growth. Record Financial Results Fiscal 1999 was a year of record financial performance for Delta. Operating revenues of $14.7 billion and net income of $ 1. 1 billion were the highest in our Company's 70-year history. Revenue Performance During fiscal 1999, our year over year domestic unit revenue growth exceeded the industry average in every month. This was achieved by better managing our network, leveraging and growing upon our strengths and capturing incremental revenue through process- and technology-oriented initiatives. Cost Management While producing record results, we were able to maintain our enviable cost leadership position. Delta's unit cost continues to be the lowest among the major network carriers. One way we have been able to decrease costs is through more effective and efficient use of alternate distribution channels such as the Internet. Reinvesting in Our Business Strong cash returns, together with a solid capital struc- ture, have provided the foundation to pursue our goal of becoming the world's greatest airline. We will continue lion, consisting primarily of aircraft acquisitions and technology enhancements. We expect these investments to drive additional rev- enue and operating efficiencies. Fiscal 2000 - A Year of Acceleration During fiscal 2000, we will build upon our recent suc- cess while accelerating the pace of change. The ASA operation will continue to add incremental revenue through better market selection and aircraft realloca- tion. During fiscal 2000, we plan to introduce new revenue management technology which will enable us to forecast demand more accurately and allow us to better manage unit revenues. We will also continue to diligently attack costs. By hedging approximately 80% of our estimated fiscal 2000 fuel consumption, we have reduced our exposure to jet fuel price volatility. Also, as more consumers book travel over the Internet, we expect distribution costs to continue to decrease. While our exposure to economic uncertainty will never be eliminated, we are better positioned today to deal with its consequences. We have a flexible fleet plan that allows us to match aircraft deliveries with market demand. We are also building a strong presence in the regional jet market to increase the reach and growth of our key hub airports. Finally, we will allocate Delta's resources, focusing our efforts in those areas that promise the greatest long-term growth, to continue building and sustaining greater shareowner value. DELTA AIR LINES 1999 ANNUAL REPORT 15 GLOSSARY OF TERMS Accumulated Postretirement Benefit Obligation - a measure of the deferred compensation obligation, other than pensions, that Delta has to its employees under post- retirement welfare benefit plans. Air Traffic Liability - a liability on Delta's balance sheet that represents the payment received for passenger ticket sales and cargo transportation services which have not yet been provided. As the transportation ser- vice is provided by Delta, the amount is removed from the air traffic liability and is recognized as revenue. ASM - Available Seat Miles. A measure of capacity which is calculated by multiplying the total number of seats available for transporting passengers by the total number of miles flown during a reporting period. Cargo Ton Miles - The total number of tons of cargo transported during a reporting period, multiplied by the number of miles flown. CASM - (Operating) Cost per Available Seat Mile. The amount of operating cost incurred per available seat mile during a reporting period. Also referred to as unit cost. Collective Bargaining Agreement - an agreement between an employer and a union representing a group of employ- ees which details pay rates and working conditions for that group of employees. Common Stock - the common stock, par value $1.50 per share, of Delta Air Lines, Inc. Debt-to-Equity Position - a measure of liquidity which is calculated by dividing long-term debt and capital lease obligations, including current maturities, by share- owners' equity, including Series B ESOP Convertible Preferred Stock. ERISA - The Employee Retirement Income Security Act of 1974. This federal law governs employee benefit and retirement plans. Non-Fuel CASM - the amount of operating cost, exclud- ing aircraft fuel expense, incurred per available seat mile during a reporting period. Operating Margin - operating income divided by operat- mg revenues. Passenger Load Factor - a measure of aircraft occupancy which is calculated by dividing RPMs by ASMs. Passenger Mile Yield - amount of passenger revenue earned per revenue passenger mile during a reporting period. Projected Benefit Obligation - a measure of the deferred compensation obligation that Delta has to its employees under its pension plans. RASM - (Operating) Revenue per Available Seat Mile. The amount of operating revenue earned per available seat mile during a reporting period. Also referred to as unit revenue. RPM - Revenue Passenger Mile. One revenue-paying passenger transported one mile. RPMs are calculated by multiplying the number of revenue passengers by the number of miles that they are flown. Series B ESOP Convertible Preferred Stock - convertible preferred stock, $1.00 par value, $72.00 stated and liquidation value, which is allocated to participants as part of the Employee Stock Ownership Plan. Ton Mile Yield - amount of cargo revenue earned per cargo ton mile during a reporting period. Working Capital Position - current assets less current liabilities. DELTA'S AIRCRAFT FLEET t the enter of our ompan operation i Delta' aircraft fleet. To maintain a oung and te hn logi all ad anced fleet Delta ha entered into long-term air- raft purcha e agreement with The Boeing ompany (Boeing). The agreement cover firm order , option and rolling option for certain air raft through cal ndar ear 2017 and upport Delta plan for di ciplined growth, aircraft rationalization and fleet replacement. The al o provide Delta with fle ibility to adju t ched- uled aircraft deliverie or ub titute between aircraft model and aircraft type . Increased Fleet Standardization Delta' long-term plan is to reduce aircraft family type from even to three. Moving to a more tandardized fleet should impro e reliability and result in long-term cost savings. The majority of the aircraft under firm order will replace older aircraft. As previously announced, the Company plans to retire its remaining L-1011 aircraft by August 2001, replacing them primarily with B-767 aircraft. The Company also completed an agreement to sell 119 B-727 aircraft during the next six years. Thi agreement supports the Company's plan to retire the B-72 7 fleet by the end of fiscal 2005, replacing it primarily with new generation B-73 7 aircraft. Status of B -777-200 In April 1999, Delta entered into an agreement with Boeing to defer four B-777 deliveries from fiscal 2000 to fiscal 2005, and ordered four B-767-300ER aircraft for delivery in fiscal 2000. In June 1999, the Company announced that it is deferring deliveries of all 11 remain- ing B-777 aircraft on firm order. These actions are a consequence of the lack of a collective bargaining agree- ment with ALPA on pilot pay rates and working con- ditions for the B-777 aircraft. DELTA AIRCRAFT FLEET AT JUNE 30, 1999 (For 111format1on regarding A As fleet, see page 21 of this report.) erage Lea ed ir raft T pe ge wned apital perating Total B-727-200 21.9 110 10 120 B-737-200 14.6 1 45 8 54 B-737-300 12.6 3 23 26 B-737-800 0.6 7 7 B-7 7-200 9.6 59 41 100 B-767-200 16.1 15 15 B-767-300 9.4 4 24 28 B-767-300ER 4.1 43 8 51 B-777-200 0.3 2 2 L-1011-1 19.9 13 13 L-1011-250 16.7 6 6 L-1011-500 18.4 11 11 MD-11 5.4 8 7 15 MD-88 9.0 63 57 120 MD-90 3.6 16 16 Total 12.3 358 48 178 584 AIRCRAFT DELIVERY SCHEDULES AT JUNE 30, 1999 Delivery in Year Ending June 30 After Aircraft on Firm Order 2000 2001 2002 2003 2003 Total B-73 7-600/700/800 17 17 12 11 43 100 B-757-200 11 8 19 B-767-300/300ER 7 1 8 B-767-400 2 19 21 B-777-200 ':- 5 1 1 4 11 Total 42 45 13 12 47 159 *Delivery of B-777's have been deferred indefinitely (see "Pilot Collective Bargaining Agreement" on page 32 of this report). AIRCRAFT ON OPTION Delivery in Year Ending June 30 After Rolling Aircraft on Option* 2000 2001 2002 2003 2003 Total Option B-73 7-600/700/800 - 9 7 7 37 60 267 B-757-200 2 8 10 20 80 B-767-300/300ER 2 2 2 5 11 16 B-767-400 12 5 7 24 25 B-777-200 1 5 5 9 20 30 Total 14 34 29 58 135 418 * Aircraft options have scheduled delivery slots, while rolling options replace options and are assigned delivery slots as options expire or are exercised. DELTA EXPRESS Point-to-point low-fare flying is one of the fastest growing segments in the airline industry. Delta Express offers customers nonstop, low-fare, high value service between Northeast and Midwest cities and leisure destinations in Florida. Since its launch on October 1, 1996, Delta Express has established a leadership position in this market. Our cost position enables Delta Express to offer competitive fares in major origin- destination markets, which contributes significant economic and strategic value to Delta. In addition to competitive fares and reliable service, Delta Express passengers are provided with advanced seat selection and earn SkyMiles on each flight. Delta Express continued to grow in fiscal 1999, adding eight aircraft to its fleet and initiating service between Orlando, FL and Albany, NY; Allentown, PA and Syracuse, NY. Also, in response to the growing demand for nonstop service to the South Florida region, Delta Express expanded its flights between Fort Lauderdale, FL and Hartford, CT; Newark, NJ and Washington, D.C.-Dulles. As of June 30, 1999, Delta Express operated 168 daily flights with a fleet of 37 B-737-200 jet aircraft, offering service between 17 cities to Orlando and four other popular Florida destinations. DELTA EXPRESS FACTS Fleet size and type - 37 B-737-200 aircraft; plans are to increase to 41 B-737-200 aircraft during fiscal 2000 168 daily flights between 17 Northeast and Midwest cities to five Florida cities - Fort Lauderdale, Fort Myers, Orlando, Tampa and West Palm Beach On-time arrival percentage within 15 minutes - 86% As of June 30, 1999, Delta Express operated 168 daily flights. Kansas \City DELTA SHUTTLE As of June 30, 1999, Delta Shuttle operated 80 daily flights. Delta Shuttle is our Company's very successful, high- frequency specialty product providing service targeted to the Northeast business traveler. It provides a strong presence in the highly competitive Northeast market, offering hourly service between New York's LaGuardia Marine Air Terminal and Washington, D.C.'s Ronald Reagan National Airport and Boston's Logan Interna- tional Airport. Effective June 1, 1999, Delta Shuttle expanded its service by inaugurating nonstop service HIGHLIGHTS OF DELTA SHUTTLE Market leader in Northeast Corridor with 58% share Carried over 14 million passengers since September 1991 FISCAL 1999 PERFORMANCE Operated over 25,000 flights On-time departure rate: 97% (most reliable shuttle service in the industry) SERVICE Boston-Washington, D.C. (inaugurated June 1999) New York-Boston (hourly service) New York-Washington, D.C. (hourly service) LaGuardia Marine Air Terminal between Boston and Washington, D.C. Delta Shuttle has gained its leading market position by providing an unparalleled customer experience that focuses on a premium product and service; the value of the cus- tomer's time; and exceptional operational reliability. The Delta Shuttle fleet consists of 16 specially designed B-727-200 aircraft which offer all-leather seats and more leg room than any of its competitors. ATLANTIC SOUTHEAST AIRLINES (ASA) Atlantic Southeast Airlines (ASA) became a wholly owned subsidiary of Delta on May 11, 1999. Through more closely integrated schedules, Delta and ASA will offer customers better connections and service. ASA service is being enhanced by the introduction of opera- tional improvements that have been successful at Delta. These improvements will produce positive results in the areas of on-time performance, baggage handling and other customer service activities. Delta's acquisition of ASA also enables both airlines to allocate aircraft more efficiently across their respective route systems. AIRCRAFT FLEET AT JUNE 30, 1999 Average Leased Aircraft Type Age Owned Capital Operating Total EMB-120 10.0 56 1 57 ATR-72 5.7 4 8 12 CRJ-200 (Regional Jet) 0.9 2 21 23 Total 7.2 62 30 92 AIRCRAFT DELIVERY SCHEDULES AT JUNE 30, 1999 Delivery in Year Ending June 30 After Aircraft on Firm Order 2000 2001 2002 2003 2003 Total CRJ-200 (Regional Jet) 12 10 22 CRJ-700 (Regional Jet) - 5 7 12 Total 12 10 5 7 34 ASA has options to purchase 45 CRJ-200 aircraft and eight CRJ-700 aircraft. On August 9, 1999, ASA entered into a memorandum of understanding to lease seven ATR-72 aircraft during fiscal 2000. ASA HIGHLIGHTS Atlanta's largest regional airline with service to 44 markets Dallas/Fort Worth hub serves 17 markets Average number of full-time equivalent employees: 2,500 CANADAIR REGIONAL JET (CRJ) SERVICE As of August 1, 1999, ASA provided CRJ service to 32 cities from Atlanta. Most recent additions include: Austin, Texas Daytona Beach, Florida Houston (Hobby), Texas Long Island/Islip, New York Melbourne, Florida Montgomery, Alabama San Antonio, Texas By the end of calendar 1999, additional CRJ service is planned for: Des Moines, Iowa Fort Wayne, Indiana Toledo, Ohio See ASA's route map on back cover foldout of this Annual Report. COMMUNITY AND ENVIRONMENTAL CONCERN Community Service Delta belie e it ha a re pon ibility t impro e th qualit of life in th ommuniti it r e through both financial and non-finan ial contributi n . Finan ial on- tribution ar pro ided through the Delta Foundati n, orporate ontribution and from Delta pe pl through th Fair har program. Delta al o ork to rganiz the energie and kill of ur emplo ee to upport com- munitie through the ommunit Partner pr gram. Each ear, thou and of dedicat d Delta people giv their time to build home donate blood 1 an up park lead organization parti ipate in harit walk and do the other work nece ary to build communitie . Delta al o make contribution in the form of in-kind ervice , uch as airline ticket , to qualified organization . Delta focus i on the following three area for the Compan ' giving: Building trong communitie . Delta upport our employee in making our communitie better place to live and work. upporting familie with children. Delta wants to help young familie provide their children with a good tart in life. Fostering cultural/international under randing. A an international airline, Delta understands that awarene and personal contact between culture brings understanding. 1999 MAJOR RECIPIENTS AIDS Walk (Atlanta and New York) American Red Cross CARE Children's Miracle Network Cystic Fibrosis Foundation Delta's International Scholars Program Habitat for Humanity High Museum of Art Juvenile Diabetes Foundation March of Dimes National Black Arts Festival Project Open Hand Environmental Leadership Delta i al o committed to the pre ervation of the envi- ronment. The core of our environmental management program focu e on compliance with regulation and requirement de igned to control the potential impact of our operation on the environment. Delta has responded in the following ways to these concern : Pioneered the practice of u ing one engine to taxi aircraft between the airport gate and the runway. This imple innovation allows Delta to cut fuel con- sumption by approximately 40 million gallons per year and to reduce aircraft engine emissions. Delta worked closely with other airlines, suppliers, and airport authorities to reduce the quantities of de-icing fluids necessary to ensure safe flights in winter weather. The environment benefits because less de-icing fluid means less impact on water quality. Sponsored "Waste to Work Day" in conjunction with Earth Day, to provide employees with the oppor- tunity to safely dispose of household hazardous waste. A copy of our 1999 Environmental Report is available upon request. BOARD OF DIRECTORS Retired Chairman of the Board, President and Chief Executive Officer, l:ichita Coca-Cola Bottling Company, Inc. I Retired Chairman of the Board and Chief Executive Officer, The Travelers Corporation Director of Baxter International, Inc.; Dun & Bradstreet Corporation; Household International, Inc.; and Sun Company, Inc. Non-Executive Chairman of the Board, Delta Air Lines, Inc.; Non-Executive Chairman of the Board, Agilent Technologies, Inc.; Retired Chairman, Burlington Northern Santa Fe Corporation; Former Chief Executive Officer, Western Air Lines, Inc. Co-Chairman and Senior Partner, GoodWorks International, Inc.; Chairman of the Southern Africa Enterprise Development Fund; Former Mayor of Atlanta, Georgia; Former United States Ambassador to the United Nations; Former member of the United States House of Representatives Henry A. Biedenharn, ill Edward H. Budd Mary Johnston Evan Andrew J. Young Retired Chairman of the Board and Chief Executive Officer, The Procter & Gamble Company Chairman of the Board and Chief Executive Officer, FPL Group, Inc.; Chairman of the Board and Chief Executive Officer, Florida Power & Light Company Former Chairman of the Board, Savannah Foods & Industries, Inc.; Retired Chairman of the Board and Chief Executive Officer, Union Camp Corporation Chairman, President and Chief Executive Officer, Norfolk Southern Corporation President and Chief Executive Officer, Delta Air Lines, Inc.; Former Vice hairman, Unicom Corporation and Commonwealth Edison Company; Former President and Chief Operating Officer, First Chicago orporation Chairman and Chief Executive Officer, Eastman Kodak Company (Nominee for election to the Board of Directors at the 1999 Annual Meeting of Shareowners) BOARD COMMITTEES Audit James L. Broadhead, Chairman Henry A. Biedenharn III Mary Johnston Evans David R. Goode Benefit Funds love tment Andrew]. Young Chairman Henry A. Biedenharn, III James L. Broadhead David R. Goode Corporate Governance Mary Johnston Evans, hairman James L. Broadhead Gerald Grinstein Andrew]. Young Corporate trategy Edward H. Budd Chairman Edwin L. Artzt R. Eugene Cartledge Gerald Grinstein ecutive Mary Johnston Evans, Edwin L. Artzt James L. Broadhead Edward H. Budd R. Eugene artledge Andrew J. Young hairman REPRESENTATIVE OF AIR LINE PILOTS ASSOCIATION, INTERNATIONAL Captain Mark D. Halsor - Associate on-voting member of the Board of Directors DELTA BOARD COUNCIL REPRESENTATIVES Airport Customer Service and Cargo C. Bradley Bray Technical Operation Paul A. Letourneau OFFICERS Leo F. Mullin President and Chief Executive Officer Maurice W. Worth Chief Operating Officer, Retiring October 1, 1999 Malcolm B. Armstrong Executive Vice President - Operations Robert L. Colman Executive Vice President - Human Resources Vicki B. Escarra Executive Vice President - Customer Service Frederick W. Reid Executive Vice President and Chief Marketing Officer Edward H. West Chief Financial Officer W. E. (Skip) Barnette President - ASA Holdings and Atlantic Southeast Airlines David S. Bushy Senior Vice President - Flight Operations Vincent F. Caminiti Senior Vice President - Sales and Distribution Mark A. P. Drusch Senior Vice President - Network Management Robert S. Harkey Senior Vice President - General Counsel and Secretary Paul G. Matsen Senior Vice President - Alliances Supervisory/ Administrative Curt D. Bryant Re ervation ale and City Ticket Offices William M. Morey Rick ixon Senior Vice President - Delta Air Logistics Jenny R. Poole Senior Vice President - In-Flight Service, Retired September 1, 1999 John N. Selvaggio Senior Vice President - Airport Customer Service Thomas J. Slocum Senior Vice President - Corporate Communications Ray Valeika Senior Vice President - Technical Operations Sharon I. Wibben Senior Vice President - In-Flight Service D. Scott Yohe Senior Vice President - Government Affairs Anthony L. Austin Vice President - Human Resources - Marketing Brenda A. Barnes Vice President - Revenue Management Edward H. Bastian Vice President and Controller R. Michael Bell Vice President - Schedule Development Harold L. Bevis Vice President - Public Affairs Douglas W. Blissit Vice President - Network Analysis Operational Support/Clerical Richard C. Buckalew Field/Cargo Sales Nancie W. Parker John W. Boatright Vice President - Properties and Facilities W. Martin Braham Vice President - Delta Air Lines Global Services M. Michele Burns Vice President and Treasurer Frederick W.P. Buttrell Vice President - Atlanta Worldport Anthony N. Charaf Vice President - Maintenance - Engines, Components and Ground Support Equipment Stephan J. Egli Vice President - Atlantic Region Michael S. Ellenburg Vice President - Purchasing Terry M. Erskine Vice President - Employee Relations Jeffrey T. Fisher Vice President - Finance - Customer Service Subodh Karnik Vice President - Finance - Sales and Marketing J.B. Kirk Vice President - Finance - Operations William D. Kline Vice President - Chief Learning Officer Joseph Licitra Vice President - Airport Customer Service Finance Edwin L. Artzt, hairman Edward H. Budd R. ugene art/edge erald rinstein Per onnel & Compensation R. ugene Cartledge, Chairman dward H. Budd Mary Johnston Evans Gerald Grinstein In-Flight Service athy Cleveland Cone Lee A. Macenczak Vice President - Reservation Sales John C. Marshall Vice President - Corporate Safety and Compliance Patrice G. Miles Vice President - Distribution Planning Leon A. Piper Vice President - Compensation and Benefits Joseph V. Pollino Vice President - Human Resources - Customer Service Udo Rieder Vice President - Engineering and Quality Gregory L. Riggs Vice President - Deputy General Counsel and Assistant Secretary William F. Wangerien Vice President - Operational Planning, Control and Reliability Martin C. White Vice President - Consumer Marketing Michael M. Young Vice President - Community Affairs Dean C. Arvidson Assistant Secretary Susan T. Hudson Assistant Secretary Leslie P. Klemperer Assistant Secretary FINANCIAL REVIEW INCLUDING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DELTA AIR LINES, IN . Consistently superior financial performance is an integral part of our goal to become the world's greatest airline. For Delta, "consistently superior financial per- formance" means that our management team is focused on executing business strategies that increase share- owner value and provide the resources needed to rein- vest in our business. Using the capital generated by our business in fiscal 1999, we are laying the foundation to continue produc- ing strong financial results by concentrating reinvestment on high-priority business initiatives. Current initiatives include network growth, customer service and technol- ogy enhancements and partnering with employees. Focus on these initiatives in fiscal 1999 contributed to financial results that were the best in Delta's 70-year history. MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS FISCAL 1999 COMPARED TO FISCAL 1998 Net Income and Earnings per Share For the year ended June 30, 1999, our Company reported record net income of $1.1 billion, a 10 % increase from our previous record of$ 1.0 billion reported for fiscal 1998. Our fiscal 1999 results include the results of operations for ASA Holdings, Inc. (ASA Holdings) for the period April 1, 1999 through June 30, 1999 (see Note 17 of the Notes to the Consolidated Financial Statements). Diluted EPS* In Dollars $6.34 $5 60 $5.73 $2.72 $720 Basic earnings per share totaled $7.63 in fiscal 1999, com- pared to $6.64 in fiscal 1998, a 15% increase. Diluted EPS was $7.20 for fiscal 1999, a 14% increase from fiscal 1998 diluted EPS of $6.34. EPS for years prior to fiscal 1999 has been restated to reflect our two-for-one common stock split, which became effective L.__ 95 96 91 98_ :j_ b in Novem er 1998. Excluding ~ Excludes restructuring and other non-recurri1:$ char;es and cumulative effects o changes in accounting standards. restructuring and other non- recurring charges and cumulative effects of changes in accounting standards, diluted EPS has grown over 150% over the past four fiscal years. Operating Revenues Operating revenues were $14.7 billion for fiscal 1999, increasing 4% from $14.1 billion in fiscal 1998. 2 6 DELTA AIR LINES 1999 ANNUAL REPORT Operating Revenues In Millions of Dollars $14.138 $13 594 $12,455 $12,194 95 $14.711 Passenger revenue growth of 3 % reflects a 3 % increase in RPMs on 3 % capacity growth. Passenger mile yield remained virtually flat at 12.83. Domestic Passenger Revenues - Domestic passenger revenues grew 4 % to $11.1 bil- lion, driven by a 3 % increase in RPMs on capacity growth of 2 % . The increase in RP Ms is a result of favorable eco- nomic conditions and increased traffic (including the effects of pilot labor actions at two of our competitors), as well as our reallocation of aircraft to higher-demand markets. Passenger mile yield rose 1 % due to the full- year effect of a domestic fare increase in September 1997 and improved asset utilization, partially offset by increased low-fare competition and matching sale fares implemented by a competitor after its pilot strike. International Passenger Revenues - International passenger revenues remained flat at $2.3 billion during fiscal 1999. A 5% increase in RPMs on capacity growth of 7% was offset by a 6% decline in passenger mile yield. The increase in RPMs reflects the addition of new Atlantic routes, continued expansion into Latin America and implementation of additional service to Japan. The decline in passenger mile yield is a result of increased competitive pressures due to industry-wide capacity growth in the Atlantic and Latin American markets. Cargo Revenues and Other Revenues - Cargo rev- enues fell 4% to $557 million, reflecting a 3% decrease in cargo ton miles and a 1 % decrease in ton mile yield. The decrease in cargo ton miles reflects an industry-wide decrease in demand in the Atlantic freight market. Mail volume also decreased as the U.S. Postal Service shifted certain business from major passenger carriers to ground service and dedicated air freight carriers. The decrease in ton mile yield is due to competitive pricing strategies. Other revenues increased 31 % to $737 million, mainly a result of higher revenues from frequent flyer programs. During fiscal 1999, we initiated programs with new frequent flyer partners and expanded pro- grams with existing partners. Other revenues also increased due to higher revenue from code-sharing programs and other fee-based income. Operating Expenses Operating expenses totaled $12.8 billion for fiscal 1999, increasing 3 % from $12.4 billion in fiscal 1998. Operating capacity rose 3 % to 144 billion ASMs. CASM remained flat year over year. Non-fuel CASM grew 2% to 7.97. Salaries and related costs increased 3 % during fiscal 1999. We increased the number of full-time equivalent employees to implement our customer service initiatives and support our growth. On January 1, 1999, we imple- mented a general salary increase for most domestic employees. The increase in salary expense due to our increase in staffing and the general salary increase is partially offset by lower retirement and survivor expense, mainly due to higher returns on plan assets. Aircraft fuel expense decreased 10% in fiscal 1999, with the average fuel price per gallon falling 12 % to 49.83. Total gallons consumed increased 2% due to increased operations on a 3 % rise in capacity. Passenger commissions expense declined 12 %, reflecting lower effective commission rates and increased utilization of low-cost distribution channels, partially offset by higher passenger volume. Depreciation and amortization expense rose 12 % due to the acquisition of additional aircraft and ground equipment, partially offset by an increase in the useful lives of certain aircraft types (see Note 1 of the Notes to the Consolidated Finan- cial Statements). Contracted services expense grew 11 % due to expanded operations into new and existing markets, rate increases in ground handling and cabin cleaning contracts, and higher passenger volume. Other selling expenses increased 11 % , resulting from increased advertising and promotional activities, as well as an increase in credit card charges due to higher passenger volume. Landing fees and other rents increased 9% primarily due to increased terminal rentals, resulting from our expan- sion into new and existing markets. Aircraft rental expense increased 7% due to an increased number of leased aircraft. Aircraft mainte- nance materials and outside repair expense grew 13 % due to the expiration of certain engine warranties and other costs associated with the maturation of the fleet. Passenger service expense increased 11 % due to higher food costs, which are associated with higher passenger volume and product upgrades. Other costs increased 7% due to higher expenses associated with enhanced customer loyalty programs, supplies, and communica- tions expense, partially offset by lower insurance costs. Operating Income* In Millions of Dollars $1 ,294 $661 $1,583 $1,870 $1 ,694 Operating Margin* 116% 120% 127% 10.4% l 951 97 98 99 * Excludes restructuring and other non-recurring charges. Operating Income and Operating Margin Operating income totaled $1.9 billion for fiscal 1999, which represented an increase of 10% over fiscal 1998. Delta has nearly tripled operating income ( excluding restructuring and other non- recurring charges) over the past four fiscal years. Our revenue growth combined with our focus on cost management resulted in a fiscal 1999 record operat- ing margin of 12. 7%, a 6% increase from the prior year. Other Income (Expense) Other expense decreased 4% to $44 million during fiscal 1999. Higher interest expense, due to higher aver- age outstanding debt bal- ances, and lower interest income, due to lower average balances in short-term investments, were offset by a $34 million increase in miscellaneous income. Miscel- laneous income increased primarily due to a $26 million gain on the sale of a portion of our interest in Equant N.V., an international data network services company. FISCAL 1998 COMPARED TO FISCAL 1997 Net Income and Earnings per Share Net income grew 17% during fiscal 1998, from $854 million reported in fiscal 1997. Basic EPS was $6.64 in fiscal 1998 and $5.70 in fiscal 1997. Diluted EPS was $6.34 for fiscal 1998, compared to $5.52 for fiscal 1997. Fiscal 1997 operating results include pretax restructur- ing and other non-recurring charges of $52 million ($32 million after-tax or $0.22 basic and $0.21 diluted EPS) related to the realignment of our transatlantic and European operations. Operating Revenues Fiscal 1998 operating revenues rose 4% over fiscal 1997. Passenger revenues increased 4%, reflecting a 3% rise in RP Ms on ASM growth of 2 % . Passenger mile yield increased slightly to 12.85 . DELTA AIR LINES 1999 ANNUAL REPORT 2 7 FINANCIAL REVIEW INCLUDING MANAGEMENT'S DISCUSSION AND ANAL YSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DELTA AIR LI E , I C. Domestic Passenger Revenues - During fiscal 1998, domestic passenger revenues grew 4% to $10.7 billion, driven by a 3 % rise in RPMs on a 2 % increase in capac- ity, and 1 % passenger mile yield growth. We experi- enced greater demand for air traffic and favorable economic conditions in fiscal 1998, and allocated more aircraft to higher-demand markets. Passenger mile yield increa ed due to a domestic fare increase implemented during the September 1997 quarter, offset by more low- fare competition and the full-year impact of the U.S. transportation excise tax. International Passenger Revenues - As a result of our efforts to expand our global reach, international passenger revenues increased 3 % to $2.3 billion during fiscal 1998. RPMs grew 6% on a 5% increase in ASMs. The growth in RP Ms was offset by a 3 % decline in passenger mile yield. The increase in RPMs is due to our addition of new routes to Latin America and other markets, strong demand in the Atlantic market and improved asset utilization. The decline in passenger mile yield was mainly due to overall industry capacity growth in the Atlantic market. Cargo Revenues and Other Revenues - Cargo rev- enues grew 5% during fiscal 1998, reflecting a 14% increase in cargo ton miles and an 8 % decline in ton mile yield. Other revenues increased 5%, mainly due to higher revenues from frequent flyer programs and fee- based income. Operating Expenses In fiscal 1998, operating expenses grew to $12.4 bil- lion, up 3% from $12.1 billion in fiscal 1997. Operat- ing capacity increased 2 % to 140 billion ASMs. CASM increased 1 % during fiscal 1998. Non-fuel CASM increased 3% to 7.80. The increase in operating expenses resulted from higher salaries and related costs due to headcount growth and compensation enhancements, increased technology spending, onboard passenger enhancements and increased pas- senger volume, offset by lower fuel expense. Operating Income and Operating Margin During fiscal 1998, operating income grew to $1. 7 billion, an 11 % increase. Operating margin increased from 11.3 % in fiscal 1997 to 12.0% in fiscal 1998. 2 8 DELTA AIR LINES 1999 ANNUAL REPORT Other Income (Expense) Other expense for fiscal 1998 decrea ed $70 million to $46 million, primarily a re ult of lower interest expense and higher interest income. FINANCIAL CONDITION AND LIQUIDITY FI CAL YEAR 1999 Cash and cash equivalent and short-term invest- ments totaled $1.1 billion at June 30, 1999, compared to $1.6 billion at June 30, 1998. The decrease in cash and cash equivalents and short-term investments is due to aircraft acquisitions and common stock repurchases during fiscal 1999. Our principal sources and uses of cash are detailed below. Sources: Generated $2.9 billion of cash from operations. Borrowed $500 million under our 1999 Bank Credit Agreement to finance a portion of our purchase of ASA Holdings. These borrowings are due on March 22, 2001 (see Note 5 of the Notes to the Consolidated Financial Statements). Issued $300 million of Medium-Term Notes, a portion of which were used to fund our purchase of ASA Hold- ings. These notes mature during fiscal 2004 (see Note 5 of the Notes to the Consolidated Financial Statements). Received $325 million from the sale of a defined pool of our accounts receivable, accelerating our cash flows at a low effective rate (see Note 16 of the Notes to the Consolidated Financial Statements). Issued 3.2 million shares of common stock for $165 mil- lion (including an income tax benefit of $34 million for stock options exercised). These shares were pri- marily issued under our broad-based stock option plans (see Note 1,5 of the Notes to the Consolidated Financial Statements). Uses: Invested $2.3 billion in flight equipment and $561 mil- lion in ground property and equipment. Repurchased 15.1 million shares of common stock for $885 million as part of our share repurchase pro- grams (see Note 11 of the Notes to the Consolidated Financial Statements). Paid $700 million to acquire ASA Holdings (see Note 17 of the Notes to the Consolidated Financial Statements). Repaid $431 million of long-term and short-term debt and capital lease obligations. Paid $43 million in cash dividends on our preferred and common stock. Cash Used in Investing Activities In Millions of Dollars $2,791 $2,324 $1,941 Tl 95 96 97 98 99 Cash flows from opera- tions for fiscal 1999 totaled $2.9 billion, a slight increase over the prior year and a new record for our Company. We have reinvested cash generated during fiscal 1999 in future growth opportunities by purchasing ASA Holdings, implementing fleet initiatives, upgrading airport and admin- istrative technology and investing in customer service improvements. We have increased the amount of cash used in investing activities every year since fiscal 1995, highlighting our emphasis on business reinvestment and growth opportunities. As of June 30, 1999, our Company had a negative working capital position of $2. 7 billion, compared to negative working capital of $1.2 billion at June 30, 1998. The increase results from our use of cash for aircraft acquisitions and common stock repurchases, as well as increased current maturities of long-term debt. A negative working capital position is normal for us, primarily due to our air traffic liability, and does not indicate a lack of liquidity. We expect to meet our obli- gations as they become due through available cash, short-term investments and internally generated funds, supplemented as necessary by debt financings and pro- ceeds from sale and leaseback transactions. At August 13, 1999, we had $1.25 billion of credit available under our 1997 Bank Credit Agreement (see Note 5 of the Notes to the Consolidated Financial Statements). Long-term debt and capital lease obligations, includ- ing current maturities, totaled $2. 7 billion at June 30, 1999, compared to $1.9 billion at June 30, 1998. The increase in debt is a result of borrowings to finance our acquisition of ASA Holdings. Shareowners' equity was $4.5 billion at June 30, 1999, compared to $4.0 billion at June 30, 1998. Our debt-to-equity position, includ- ing current maturities, was 36% debt and 64% equity at June 30, 1999, compared to 32% debt and 68% equity at June 30, 1998. In July 1999, we issued $538 million of 8.125% notes in a public offering. We will use the proceeds of this offering for general corporate purposes. The notes mature on July 1, 2039, but may be redeemed at par on or after July 1, 2004. At August 13, 1999, $290 million in Delta Family- Care Savings Plan's Series C Guaranteed Serial ESOP Notes were outstanding. Delta guarantees the Series C ESOP Notes and is required to purchase these notes in certain circumstances (see Note 5 of the Notes to the Consolidated Financial Statements). PRIOR YEARS Fiscal 1998 During fiscal 1998, our principal source of funds was $2.9 billion of cash from operations. We invested $1.8 billion in flight equipment and $531 million in ground property and equipment, and made payments of $307 million on long-term debt and capital lease obligations. Delta also repurchased $354 million of common stock and paid cash dividends of $43 million to our preferred and common shareowners. Fiscal 1997 In fiscal 1997, our principal source of funds was $2.0 billion of cash from operations. We invested $1.6 billion in flight equipment and $350 million in ground property and equipment. We made payments of $196 million on long-term debt and capital lease obligations. We also repurchased $379 million of common stock and paid cash dividends of $44 mil- lion to our preferred and common shareowners. COMMITMENTS Estimated future expenditures for aircraft and engines on firm order as of August 13, 1999 total approximately $10 billion. In addition, we have authorized capital expenditures of approximately $794 million for fiscal 2000 to be used for facilities improvements, aircraft modifications and the purchase of ground equipment and other assets. See Notes 6 and 7 of the Notes to the Consolidated Financial Statements for additional informa- tion on our lease obligations and purchase commitments. OTHER MATTERS YEAR 2000 READINESS Background Many computer systems in use today were designed and developed using two digits, rather than four, to specify the year. As a result, these systems may recognize the year 2000 as "00." This could cause many computer applications to fail or to create errors unless corrective measures are taken. Our Year 2000 Program Our Company's flight operations, flight support units and other business support units depend on inter- nal and external computer systems and equipment that DELTA AIR LINES 1999 ANNUAL REPORT 2 9 FINANCIAL REVIEW INCLUDING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DELTA AIR LI E , I C. may be affected by the Year 2000 issue. Accordingly, achieving Year 2000 readiness is one of our top priori- ties. We have implemented a Year 2000 program for our internal systems and equipment which has four phases: 1. identification; 2. assessment of issues (including prioritization); 3. remediation, which includes the modification, upgrad- ing and replacement of noncompliant systems; and 4. testing of remediated systems, including monitoring. We are also reviewing the Year 2000 readiness of third parties who provide goods or services essential to our operations. In addition, we have revised our exist- ing business interruption contingency plans to address issues that could arise from the Year 2000 problem. Senior management and the Board of Directors receive regular status updates on our Year 2000 program. Safety-of-Flight Systems We have completed our review of the potential impact of Year 2000 issues on our aircraft fleet and onboard flight support systems, and have determined that there are no safety-of-flight issues with this equip- ment or these systems. We have also completed all phases of our Year 2000 program for onboard flight management systems. These management systems help us to operate efficiently but are not essential to the safe operation of flights. We use ground-based, safety-related computer systems and equipment that are vital to the maintenance of aircraft and the control of flight operations. All Year 2000 program phases for these systems and equipment are complete. Selective testing of safety-of-flight systems will con- tinue through December 31, 1999 as part of normal systems maintenance. In addition, we will monitor reme- dia ted and tested systems well into calendar year 2000 to confirm that these systems operate correctly. Critical Internal Business Systems Our critical internal business systems and equip- ment include computer hardware, software and related equipment essential for the following functions: customer reservations ticketing flight scheduling seat inventory management airport customer services finance administration internal voice and data communications aircraft ground handling J Q DELTA AIR LINES 1999 ANNUAL REPORT baggage handling facility management security We have completed the identification and assess- ment phases for all of our critical internal business sys- tems and equipment. Remediation is in process for one of our vendor-supported baggage handling systems, and we expect to complete its remediation and testing by October 1999. We have completed the remediation and testing phases for all other critical internal business systems and equipment. We will continue selective test- ing of our critical internal business systems through December 31, 1999 as part of normal systems mainte- nance. We will monitor remediated and tested systems well into calendar year 2000 to confirm that our hard- ware and software operates correctly. We are replacing customer service hardware that is currently installed at our airport facilities with upgraded, Year 2000 compliant hardware. We began this effort in September 1998 and expect to complete installation dur- ing the December 1999 quarter. Interfaces with Third Parties Our Company has communicated with, and contin- ues to review, third parties that provide essential goods or services to our Company in order to: 1. determine the extent to which we are vulnerable to the failure of these third parties to remediate their Year 2000 issues, and 2. resolve any problems discovered to the extent practicable. These third parties include suppliers of infrastruc- ture critical to the airline industry, such as air traffic control and related systems of the U.S. Federal Aviation Administration and international aviation authorities, the U.S. Department of Transportation (DOT) and local airport authorities. Other critical third parties include other airlines as well as suppliers of aircraft fuel, utilities, external computer reservations services and communica- tion services. We are actively involved in airline indus- try Year 2000 review efforts led by the Air Transport Association (ATA), the International Civil Aviation Organization (ICAO) and the International Air Transport Association (IATA). This review has identified potential Year 2000 compliance issues at several international locations. Delta, along with other airlines and the ATA, ICAO and IATA, is continuing to assess these specific situations. We will make future flight schedule revisions if necessary to ensure safe operations. Estimated Year 2000 Costs Our Company estimates the total cost of achieving Year 2000 readiness for our internal systems and equip- ment is approximately $105 million to $120 million, of which $91 million has been recognized as expense in the Consolidated Statements of Operations through June 30, 1999. The majority of the estimated Year 2000 compli- ance costs have been funded by reallocating existing resources rather than incurring incremental costs. Contingency Planning We revised our existing business interruption contin- gency plans to address internal and external issues spe- cific to the Year 2000 problem. These plans are intended to enable us to continue to operate, to the extent that we can do so safely. Our contingency plans include performing processes manually, repairing or obtaining replacement systems, changing suppliers and reducing or suspending operations. We believe, however, that due to the widespread nature of potential Year 2000 issues, the contingency planning process is ongoing and will require further modifica- tions as we receive information about the results of the Year 2000 programs of Delta and of third parties. Possible Consequences of Year 2000 Problems Management believes that completed and planned modifications and conversions of our Company's inter- nal systems and equipment will allow us to be Year 2000 compliant in a timely manner. There can be no assurance, however, that our internal systems or equip- ment or those of the third parties on whom we rely will be Year 2000 compliant in a timely manner, or that our Company's or third parties' contingency plans will mit- igate the effects of issues that arise. The failure of our systems or equipment or of an essential third party (whose failure we believe is the most reasonably likely worst-case scenario) could result in the reduction or suspension of our operations and could have a mate- rial adverse effect on our business or consolidated financial statements. Other Matters The section above entitled "Year 2000 Readiness" is a "Year 2000 Readiness Disclosure" within the meaning of the Year 2000 Information and Readiness Disclosure Act (Public Law 105-271) enacted in October 1998. This "Year 2000 Readiness" section includes forward- looking statements as defined in the Private Securities Litigation Reform Act of 1995. Our Company uses the words "believes," "expects," "estimates" and similar expressions to identify forward-looking statements. See the "Forward-Looking Information" section on page 35. PRICELINE.COM During fiscal 1999, Delta entered into an agree- ment with priceline.com Incorporated. Under this agree- ment, ticket inventory provided by Delta is sold through priceline.com's Internet-based e-commerce system. As part of this agreement, we received warrants to purchase up to 18.6 million shares of priceline.com's common stock for $0.93 per share. These warrants are exercis- able beginning when certain performance thresholds are met and ending December 31, 2005. Delta has now met the performance thresholds relating to the exercise of the warrants. These warrants, and the shares issuable when the warrants are exercised, are not registered under the Securities Act of 1933. We have certain demand and piggyback registration rights relating to the shares. On August 10, 1999, priceline.com filed a registra- tion statement with the SEC for a proposed public offering of its common stock. On August 17, 1999, we exercised 1.8 million of our warrants and sold the related shares in the public offering. The exercise of the warrants and the sale of the related stock resulted in a pretax gain of approximately $115 million. ALLIANCE AGREEMENTS On June 22, 1999, we entered into a long-term marketing agreement with Air France which facilitates our growth in Atlantic markets. The alliance will include code-sharing arrangements, reciprocal frequent flyer programs and coordinated cargo operations. PERSONNEL MATTERS Compensation Changes During fiscal 1999, we changed the compensation program for most of our domestic, noncontract employ- ees. On January 1, 1999, we discontinued our broad- based employee profit-sharing program. We converted the annual profit-sharing payout, of up to 6% of annual base salary, to a 6% base salary increase for all eligible employ- ees. On the same date, we also increased base salaries by an additional 2 % for all eligible personnel. In January 1999, eligible employees received a profit-sharing payment equal to 6% of their base salary for the period July 1, 1998 through December 31, 1998. Our Company made similar compensation program changes for our pilots and flight superintendents. DELTA AIR LINES 1999 ANNUAL REPORT J 1 FINANCIAL REVIEW INCLUDING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DELTA AIR LI E , I C. Collective Bargaining Agreements Group of Employee Representing Union Delta Pilots Delta Flight Superintendents ASA Pilots Approximate Number of Employees 9,000 210 770 370 30 Air Line Pilots Association, International (ALPA) Professional Airline Flight Controller Association ALPA Amendable Date of ollective Bargaining Agreement May 2000 January 2003 September 2002 eptember 2002 ASA Flight Attendants ASA Flight Dispatchers Association of Flight Attendants Transport Worker ' Union of Amenca (TWU) *In ovember 1998, the National Mediation Board ( MB) certified the TWU as the collective bargammg representative of ASA's flight dis- patchers. egotiations for the initial collective bargaining agreement between ASA and TWU have not yet begun. No other domestic employees of our Company are represented by unions. In March 1999, the TWU filed an application with the NMB to represent Delta's approximately 110 pilot ground training instructors. On August 9, 1999, the NMB authorized an election to determine whether to certify the TWU as the collective bargaining representative of this group of employees. Unions are currently seeking to become the collective bargaining representative of various groups of our employees. None of these unions other than the TWU has filed an application with the NMB. The out- come of these matters cannot presently be determined. Pilot Collective Bargaining Agreement In May 1996, our Company and ALPA entered into a new collective bargaining agreement that estab- lishes the pay rates and working conditions for Delta pilots. This agreement becomes amendable on May 2, 2000. It provides in part that, if we operate an aircraft type for which the pay rates and working conditions are not set forth in the collective bargaining agreement: (1) our Company and ALPA will negotiate the pay rates and working conditions for the new aircraft type; (2) Delta pilots will fly the new aircraft type whether or not these matters have been agreed to; but (3) the obligation of Delta pilots to fly the new aircraft type will end six months after we place that new aircraft type in service if an agreement has not been reached on pay rates and working conditions. In October 1997, we entered into aircraft pur- chase agreements with Boeing under which we agreed to purchase various aircraft, including the following three types that we had not previously operated: the 737-600/700/800, the 777-200 and the 767-400. The May 1996 collective bargaining agreement with ALPA J 2 DELTA AIR LINES 1999 ANNUAL REPORT does not cover the pay rates and working conditions for these aircraft types. 73 7-600/700/800 Negotiations Our Company and ALPA began negotiations on pilot pay rates and working conditions for the 737-600/700/ 800 aircraft types in October 1997. In July 1998, we and ALPA reached an agreement, subject to ratification by Delta pilots, that established industry-leading pilot pay rates for these new aircraft types. In October 1998, ALPA announced that 60% of voting Delta pilots approved this agreement. 777-200 Negotiations In February 1999, Delta and ALPA began negotia- tions on pay rates and working conditions for 777 air- craft, but the parties remain far apart. We have offered to provide industry-leading pay rates for 777 pilots; ALPA is seeking pay rates significantly higher than our offer, as well as work rules that would further increase our cost of operating 777 aircraft. During fiscal 1999, our Company accepted deliv- ery of two 777 aircraft, which we placed in service on May 1, 1999. We have orders to purchase 11 additional 777 aircraft. The scheduled delivery dates for these air- craft are as follows: five in fiscal 2000; one in each of fiscal 2002 and fiscal 2003; and four in fiscal 2005. ALPA has announced plans to request Delta pilots not to fly 777 aircraft as early as November 1, 1999 - six months after we initially placed that aircraft type in service - unless an agreement on pay rates and work- ing conditions for 777 aircraft is reached by that time. In June 1999, Delta pilots authorized ALPA to assess pilots 3.5% of their gross pay for up to nine months to finance a contingency fund for pilots who would have flown 777 aircraft. In June 1999, our Company announced that we would indefinitely defer the delivery of the eleven 777 aircraft on order, and would remove from service on November 1, 1999 the two 777 aircraft we currently operate. We made this decision to protect our customers against schedule disruptions that would result if Delta pilots stopped flying 777 aircraft. We published our win- ter 1999/2000 flight schedule, which begins November 1, 1999, in computer reservations systems on or about August 1, 1999. ALPA had previously informed us that a tentative agreement on 777 pay rates and working conditions would have to be reached by May 28, 1999 to achieve a pilot-ratified 777 agreement by August 1, 1999. Accordingly, 777 aircraft are not included in our winter flight schedule. Delta intends to continue to negotiate in good faith with ALPA on 777 pay rates and working conditions. Concurrently, we are marketing the two 777 aircraft we own and are reviewing our alternatives regarding the 11 remaining 777 aircraft on order. 767-400 Negotiations In August 1999, our Company and ALPA began negotiations on pay rates and working conditions for 767- 400 aircraft. We have 21 767-400 aircraft on order, which are scheduled to be delivered beginning in May 2000. Other Personnel Matters Our Company will begin negotiations with ALPA in September 1999 on a new collective bargaining agreement to replace the existing contract that becomes amendable on May 2, 2000. The outcome of our negotiations with ALPA regard- ing 777 aircraft, 767-400 aircraft and a new collective bargaining agreement cannot presently be determined. NEW ACCOUNTING STANDARDS In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use," which defines the type of costs related to internal use software that should be capital- ized, versus those that should be expensed as incurred. In April 1998, the AICPA issued SOP 98-5, "Report- ing on the Costs of Start-Up Activities," which requires all costs related to the start-up of a new business or busi- ness segment to be expensed as incurred. Any start-up costs which have been capitalized are required to be expensed when SOP 98-5 is adopted. Delta is required to adopt SOP 98-1 and SOP 98-5 in fiscal 2000. The adoption of these statements will not have a material impact on our Company's consoli- dated financial statements. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Stan- dards No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivatives and hedging activities. We are required to adopt SFAS 133 during fiscal 2001. We are currently evaluating whether the implementation of SFAS 133 will have a material impact on our consolidated financial statements. GOVERNMENTAL MATTERS During fiscal 1999, the ATA and the major U.S. airlines worked with Congressional leaders to create a voluntary program to improve customer service. Under this program, known as the "Airline Customer Service Commitment," each major carrier will develop a plan for achieving stated goals. These goals include providing customers with timely information concerning flight delays and cancellations, on-time baggage delivery, meet- ing customers' needs during lengthy delays and being responsive to customer complaints. Each major U.S. carrier agreed to file its customer service plan with the DOT by September 15, 1999 and implement its plan by December 15, 1999. The DOT will audit carriers for compliance starting on June 15, 2000 and ill issue its first assessment on December 15, 2000. On April 6, 1998, the DOT published a proposed statement of enforcement policy to address DOT con- cerns that major air carriers were taking actions designed to exclude new carriers in certain airline markets, par- ticularly at hub airports. The proposed guidelines focus on unreasonable price cuts and/or capacity increases by major carriers in response to entry by new carriers at hub airports, and on whether the major carriers could have pursued a more reasonable alternative strategy for competing with new entrants. The proposed policy, if adopted, could adversely affect our ability to respond to competitive challenges by new entrant carriers. COMPETITIVE ENVIRONMENT AND SEASONALITY We expect low-fare competition to continue in domestic and international markets. If price reductions are not offset by increases in traffic or changes in the mix of traffic that improve our passenger mile yield, our operating results will be adversely affected. DELTA AIR LINES 1999 ANNUAL REPORT J J FINANCIAL REVIEW INCLUDING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DELTA AIR LINES, INC. There are seasonal variations in the demand for air travel. Therefore, operating results for an interim period do not necessarily indicate results for an entire year. In general, demand for air travel is higher in the June and September quarters, particularly in interna- tional markets, because there is more vacation travel during these periods than during the remainder of the year. Demand is also affected by factors such as eco- nomic conditions and fare levels. ENVIRONMENTAL AND LEGAL CONTINGENCIES Delta is a defendant in legal actions relating to alleged employment discrimination practices, antitrust matters, environmental issues and other matters con- cerning our business. Although the ultimate outcome of these matters cannot be predicted with certainty, we believe that the resolution of these actions is not likely to have a material adverse effect on our consolidated financial statements. MARKET RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS Our Company has market risk exposure related to aircraft fuel prices, stock prices, interest rates and for- eign currency exchange rates. The market risk is the potential negative impact of adverse changes in these prices or rates on our consolidated financial statements. To manage the volatility relating to these exposures, our Company enters into derivative transactions pur- suant to our stated policies. See Note 4 of the Notes to the Consolidated Financial Statements for further dis- cussion of our policies for managing such exposures. The following sensitivity analyses do not consider the effects that an adverse change would have on demand for air travel, the economy as a whole, or addi- tional actions by management to mitigate our exposure to that risk. For these and other reasons, the actual results of adverse changes in these prices or rates may differ materially from the following hypothetical results. ] 4 DELTA AIR LINES 1999 ANNUAL REPORT Aircraft Fuel Price Risk Our Company's results of operations could be sig- nificantly impacted by changes in the price and avail- ability of aircraft fuel. During fiscal 1999, aircraft fuel accounted for 11 % of our operating expenses. Based on our projected fiscal 2000 aircraft fuel consumption of 2.8 billion gallons, a 10% increase in our projected jet fuel prices would increase our aircraft fuel expense by approximately $31 million for fiscal 2000. This analy- sis includes the effects of fuel hedging instruments in place at June 30, 1999. Based on our fiscal 1999 aircraft fuel consumption of 2.7 billion gallons, a 10% rise in our jet fuel prices would have increased our aircraft fuel expense by approximately $25 million in fiscal 1999. This analysis includes the effects of fuel hedging instru- ments in place at June 30, 1998. For additional information regarding our aircraft fuel price risk management program, see Note 4 of the Notes to the Consolidated Financial Statements. Equity Securities Risk At June 30, 1999, the estimated fair value of our marketable equity investments in Comair Holdings, Inc., Singapore Airlines Limited, SAirGroup and Sky- West, Inc. totaled $962 million. The aggregate unrealized gain from these investments was $568 million at June 30, 1999. At June 30, 1998, the estimated fair value of our equity investments totaled $1.3 billion, with an aggre- gated unrealized gain of $785 million. The decrease in fair value of these investments at June 30, 1999 compared to June 30, 1998 is due to the inclusion of our equity inter- est in ASA Holdings at June 30, 1998. ASA Holdings was not included in these investments at June 30, 1999, because it was consolidated into our Company as a wholly owned subsidiary during fiscal 1999 (see Note 17 of the Notes to the Consolidated Financial Statements). The market risk associated with these investments is the poten- tial loss in fair value resulting from a decrease in the stock prices of these companies. We also have exposure to foreign currency exchange rate risk relating to our investments in Singapore Airlines and SAirGroup. We believe the foreign currency exchange rate risk related to these investments is not material to our Company. See Notes 2 and 4 of the Notes to the Consolidated Financial Statements. We are a member of the SITA Foundation, whose principal asset is its equity interest in Equant, N.V., an international data network services company. The market risk relating to our remaining investment in Equant is the potential reduction in the value of our investment resulting from decreases in Equant's stock price. For further discussion of our membership in the SITA Foundation, see Note 2 of the Notes to the Consolidated Financial Statements. At June 30, 1999, we had warrants to purchase approximately 18.6 million shares of the common stock of priceline.com. Our market risk associated with these warrants is the potential loss of gain based on decreases in the price of the common stock of priceline.com. For additional information regarding these warrants, see "Priceline.com" on page 31 and Note 2 of the Notes to the Consolidated Financial Statements. Interest Rate Risk Our exposure to market risk due to changes in interest rates relates to our long-term debt obligations and cash investment portfolio. Market risk associated with our long-term debt is the potential change in fair value resulting from a change in interest rates. A 10% adverse change in assumed inter- est rates would increase the estimated fair value of our long-term debt by $100 million and $117 million at June 30, 1999 and June 30, 1998, respectively. A 10% increase in average annual interest rates would not have had a material impact on our interest expense for fiscal 1999 or fiscal 1998. Based on our average balance of cash and cash equivalents and short-term investments during fiscal 1999, a 10% decrease in average annual interest rates would not have a material impact on our interest income. Foreign Currency Exchange Rate Risk Our Company is subject to foreign currency exchange rate fluctuations on the U.S. dollar value of foreign currency-denominated transactions. Based on our average annual net currency positions in fiscal 1999 and 1998, a 10% adverse change in average annual foreign currency exchange rates would not have been material to our consolidated financial statements for the years ending June 30, 1999 or 1998. We use foreign currency options and forward con- tracts with maturities of up to 12 months to manage our foreign currency exchange rate risk. In fiscal 1998, we used foreign currency forward contracts, generally with maturities of less than two months, to mitigate foreign currency risk. We did not use foreign currency option contracts in fiscal 1998. For additional information regarding our foreign currency exchange rate risk management program, see Note 4 of the Notes to the Consolidated Financial Statements. FORWARD-LOOKING INFORMATION This Annual Report to Shareowners includes for- ward-looking statements as defined in the Private Securi- ties Litigation Reform Act of 1995. We may also make forward-looking statements about our Company and our business either verbally or in writing. We use the words "believes," "expects," "estimates" and similar expres- sions to identify forward-looking statements. All forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from projected results. Factors and events that could cause these differences include, but are not limited to: general economic conditions; competitive factors, such as the airline pricing envi- ronment, international alliances, code-sharing pro- grams and capacity decisions by competitors; outcomes of negotiations on collective bargaining agreements; changes in aircraft fuel prices; fluctuations in foreign currency exchange rates; actions by the United States and foreign governments; and the willingness of customers to travel. In addition, the following factors relate to our Year 2000 program: the ability to identify and remediate all date-sensitive lines of computer code or to replace embedded com- puter chips in affected systems or equipment; the availability of qualified information technology personnel and other information technology resources; and the actions of governmental agencies or other third parties with respect to Year 2000 problems. DELTA AIR LINES 1999 ANNUAL REPORT J 5 CONSOLIDATED BALANCE SHEETS JUNE 30, 1999 A D 1998 DELTA AIR LIN E , I ASSETS 1999 1998 (In Millions) Current Assets: Cash and cash equivalents $ 1,124 $ 1,077 Short-term investments 19 557 Accounts receivable, net of allowance for uncollectible accounts of $30 at June 30, 1999 and $36 at June 30, 1998 602 938 Deferred income taxes 403 464 Prepaid expenses and other 524 326 Total current assets 2,672 3,362 Property and Equipment: Flight equipment 13,389 11,180 Less: Accumulated depreciation 4,405 3,895 8,984 7,285 Flight equipment under capital leases 515 515 Less: Accumulated amortization 264 216 251 299 Ground property and equipment 3,862 3,285 Less: Accumulated depreciation 2,123 1,854 1,739 1,431 Advance payments for equipment 493 306 Total property and equipment 11,467 9,321 Other Assets: Marketable equity securities 523 424 Investments in associated companies 300 326 Cost in excess of net assets acquired, net of accumulated amortization of $121 at June 30, 1999 and $112 at June 30, 1998 782 265 Leasehold and operating rights, net of accumulated amortization of $220 at June 30, 1999 and $209 at June 30, 1998 113 124 Other noncurrent assets 687 781 Total other assets 2,405 1,920 Total assets $16,544 $14,603 J 6 DELTA AIR LINES 1999 ANNUAL REPORT LIABILITIES AND SHAREOWNERS' EQUITY (In Millions, Except Share Data) Current Liabilities: Current maturities of long-term debt Current obligations under capital leases Accounts payable and miscellaneous accrued liabilities Air traffic liability Accrued rent Accrued salaries and vacation pay Total current liabilities Noncurrent Liabilities: Long-term debt Postretirement benefits Accrued rent Capital leases Deferred income taxes Other Total noncurrent liabilities Deferred Credits: Deferred gain on sale and leaseback transactions Manufacturers' and other credits Total deferred credits Commitments and Contingencies (Notes 4, 5, 6, 7 and 8) Employee Stock Ownership Plan Preferred Stock: Series B ESOP Convertible Preferred Stock, $ 1.00 par value, $72.00 stated and liquidation value; issued and outstanding 6,547,495 shares at June 30, 1999 and 6,603,429 shares at June 30, 1998 Unearned compensation under employee stock ownership plan Total Employee Stock Ownership Plan Preferred Stock Shareowners' Equity: Common stock, $1.50 par value; authorized 450,000,000 shares; issued 179,763,547 shares at June 30, 1999 and 176,566,178 shares at June 30, 1998 Additional paid-in capital Retained earnings Accumulated other comprehensive income Treasury stock at cost, 41,209,828 shares at June 30, 1999 and 26,115,784 shares at June 30, 1998 Total shareowners' equity Total liabilities and shareowners' equity The accompanying notes are an integral part of these Consolidated Balance Sheets. $ 1999 660 39 2,144 1,819 195 470 5,327 1,756 1,894 720 196 820 470 5,856 642 76 718 471 (276) 195 270 3,208 2,756 149 (1,935) 4,448 $16,544 $ 1998 67 63 2,025 1,667 202 553 4,577 1,533 1,873 651 249 262 511 5,079 694 55 749 475 (300) 175 265 3,034 1,687 89 (1,052) 4,023 $14,603 DELTA AIR LINES 1999 ANNUAL REPDRT J 7 CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR E DED JUNE 30, 1999, 1998 A D 1997 DELTA AIR LI E , I C. (In Millions, Except Per Share Data) 1999 1998 1997 Operating Revenues: Passenger $13,417 $12,994 $12,505 Cargo 557 582 554 Other, net 737 562 535 Total operating revenues 14,711 14,138 13,594 Operating Expenses: Salaries and related costs 4,993 4,850 4,534 Aircraft fuel 1,360 1,507 1,722 Passenger commissions 867 980 1,017 Depreciation and amortization 961 860 710 Contracted services 772 694 630 Other selling expenses 755 681 677 Landing fees and other rents 707 649 649 Aircraft rent 590 552 547 Aircraft maintenance materials and outside repairs 561 495 434 Passenger service 500 450 389 Restructuring and other non-recurring charges 52 Other 775 726 702 Total operating expenses 12,841 12,444 12,063 Operating Income 1,870 1,694 1,531 Other Income (Expense): Interest expense (199) (186) (207) Interest capitalized 46 38 33 Interest income 52 79 63 Miscellaneous income (expense), net 57 23 (5) Total other income (expense) (44) (46) (116) Income Before Income Taxes 1,826 1,648 1,415 Income Taxes Provided (725) (647) (561) Net Income 1,101 1,001 854 Preferred Stock Dividends (11) (11) (9) Net Income Available To Common Shareowners $ 1,090 $ 990 $ 845 Basic Earnings Per Share $ 7.63 $ 6.64 $ 5.70 Diluted Earnings Per Share $ 7.20 $ 6.34 $ 5.52 The accompanying notes are an integral part of these consolidated statements. J 8 DEL TA AIR LINES 1999 ANNUAL REPORT CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997 DELTA AIR LINES , INC . (In Millions) Cash Flows From Operating Activities: Net income Adjustments to reconcile net income to cash provided by operating activities: Restructuring and other non-recurring charges Depreciation and amortization Deferred income taxes Rental expense in excess of (less than) rent payments Pension, postretirement and postemployment expense in excess of payments Changes in certain current assets and liabilities: Decrease in accounts receivable (Increase) decrease in prepaid expenses and other current assets Increase in air traffic liability Increase in other payables and accrued expenses Other, net Net cash provided by operating activities Cash Flows From Investing Activities: Property and equipment additions: Flight equipment, including advance payments Ground property and equipment Decrease (increase) in short-term investments, net Proceeds from sale of flight equipment Acquisition, net of cash acquired Net cash used in investing activities Cash Flows From Financing Activities: Payments on long-term debt and capital lease obligations Payments on notes payable Cash dividends Issuance of long-term obligations Issuance of short-term obligations Issuance of common stock Income tax benefit from exercise of stock options Repurchase of common stock Net cash used in financing activities Net Increase (Decrease) In Cash and Cash Equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year The accompanying notes are an integral part of these consolidated statements. 1999 1998 1997 $ 1,101 $ 1,001 $ 854 52 961 860 710 418 294 240 10 (17) (58) 34 179 92 339 5 25 (176) 15 (31) 152 249 4 12 330 186 78 (35) 2,929 2,916 2,039 (2,258) (1,760) (1,598) (561) (531) (350) 568 (43) (1) 30 10 8 (570) (2,791) (2,324) (1,941) (154) (307) (196) (277) (43) (43) (44) 324 125 779 131 318 38 34 84 (885) (354) (379) (91) (177) (581) 47 415 (483) 1,077 662 1,145 $ 1,124 $ 1,077 $ 662 DELTA AIR LINES 1999 ANNUAL REPORT J 9 CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY FOR THE YEAR ENDED JUNE 30, 1999, 1998 A D 1997 DELTA AIR LI E , I Accumulated Additional Retained Ocher ommon Paid-In Earnings omprehensive Treasury (In Millions, Except hare Data) rock apical (Deficit) Income Stock Total Balance at June 30, 1996 $21 7 $2,627 $ (119) $126 $ (311) $2,540 Fiscal Year 1997: Net income 854 854 Dividends on common stock ($0.10 per share) (15) (15) Dividends on Series B ESOP Convertible Preferred Stock allocated shares (9) (9) Issuance of 1,496,984 shares of common stock under dividend reinvestment and stock purcha e plan and stock options ($32.61 per share::) 2 47 (7) 42 Issuance of 21,258,930 shares of common stock on conversions of Series C Preferred Stock ($32.19 per share"") 32 (32) Repurchase of 10,757,400 common shares ($35.27 per share':) (379) (379) Accumulated other comprehensive income (25) (25) Other 3 (4) (1) Balance at June 30, 1997 251 2,645 711 101 (701) 3,007 Fiscal Year 1998: Net income 1,001 1,001 Dividends on common stock ($0.10 per share) (15) (15) Dividends on Series B ESOP Convertible Preferred Stock allocated shares (11) (11) Issuance of 9,276,084 shares of common stock under dividend reinvestment and stock purchase plan and stock options ($34.28 per share::) 14 304 318 Repurchase of 6,316,746 common shares ( $5 6. 04 per share,:-) (354) (354) Income tax benefit from exercise of stock options 84 84 Transfer of 99,082 shares of common stock from treasury under stock incentive plan ($38.59 per share':) - 3 3 Accumulated other comprehensive income (12) (12) Other 1 1 2 Balance at June 30, 1998 265 3,034 1,687 89 (1,052) 4,023 Fiscal Year 1999: Net income 1,101 1,101 Dividends on common stock ($0.10 per share) (14) (14) Dividends on Series B ESOP Convertible Preferred Stock allocated shares (11) (11) Issuance of 3,197,369 shares of common stock under dividend reinvestment and stock purchase plan and stock options ($41.01 per share': ) 5 126 131 Repurchase of 15,149,658 common shares ($58.45 per share':-) (885) (885) Income tax benefit from exercise of stock options 34 34 Transfer of 55,614 shares of common stock from treasury under stock incentive plan ($36.54 per share':) - 2 2 Accumulated other comprehensive income 60 60 Other 14 (7) 7 Balance at June 30, 1999 $270 $3,208 $2,756 $149 $(1,935) $4,448 Y.Average price per share. The accompanying notes are an integral part of these consolidated statements. 40 DELTA AIR LINES 1999 ANNUAL REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999, 1998 AND 1997 DELTA AIR LINES, INC. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business - Delta Air Lines, Inc. (a Delaware corporation) is a major air carrier that provides air trans- portation for passengers, freight and mail throughout the United States and around the world. As of August 1999, we served 184 domestic cities in 44 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands, as well as 42 cities in 29 international countries. Basis of Presentation - Our consolidated financial statements contain information for Delta Air Lines, Inc. and our wholly owned subsidiaries (Delta or our Com- pany). We have eliminated all significant intercompany account balances and transactions. We have also reclas- sified certain amounts from prior years to be consistent with the presentation in our 1999 financial statements. Use of Estimates - Preparing our financial statements in conformity with generally accepted accounting princi- ples requires us to make estimates and assumptions that affect the amounts reported in our financial state- ments and the accompanying footnotes. Actual results could differ from those estimates. New Accounting Standards - During fiscal 1999, we adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (see Note 12) and SFAS 131, "Disclosures about Segments of an Enterprise and Related Information" (see Note 13). During fiscal 1998, we adopted SFAS 128, "Earnings Per Share" (see Note 14) and SFAS 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" (see Note 9). During fiscal 1997, we adopted SFAS 123, "Accounting for Stock-Based Compensation" (see Note 15). Cash and Cash Equivalents - We classify short-term, highly liquid investments with original maturities of three months or less as cash and cash equivalents. These investments are stated at cost, which approxi- mates fair value. Depreciation and Amortization - Owned flight equipment is depreciated on a straight-line basis over the estimated service lives, which range from 15 to 25 years, to a residual value ranging from 5% to 10% of cost. We amortize flight equipment under capital leases on a straight-line basis over the original terms of the leases, which range from 6 to 13 years. Ground prop- erty and equipment is depreciated on a straight-line basis over the estimated service lives, which range from 3 to 30 years. Costs assigned to the purchase of lease- hold rights and landing slots are amortized over the lives of the leases at the associated airports. We amortize pur- chased international route authorities over the lives of the authorities as determined by their expiration dates. Permanent route authorities with no stated expiration dates are amortized over 40 years. Our cost in excess of net assets acquired (goodwill) is amortized over 40 years and is primarily related to our acquisition of ASA Hold- ings, Inc. (ASA Holdings) in March 1999 and Western Air Lines, Inc. in December 1986. ASA Holdings is the parent of Atlantic Southeast Airlines, Inc. (ASA). As of July 1, 1998, we increased the depreciable lives of certain aircraft types from 20 to 25 years. The change in estimate reduced depreciation expense by $92 million ($0.64 basic and $0.60 diluted earnings per share) for fiscal 1999. Interest Capitalized - Interest paid on funds used to acquire new aircraft and to construct ground facilities is capitalized as an additional cost of the related assets. We capitalize interest at our weighted average interest rate on long-term debt or, if applicable, the interest rate related to specific borrowings. Interest capitaliza- tion ends when the property or equipment is ready for service or its intended use. Investments in Associated Companies - The equity method of accounting is used for our investments in WORLDSPAN, L.P., a computer reservations system partnership, and Comair Holdings, Inc., the parent of Comair, Inc. We own a 40% interest in WORLDSPAN and a 22 % interest in Comair Holdings. Our equity earnings in these investments totaled $54 million in fis- cal 1999, $39 million in fiscal 1998 and $39 million in DELTA AIR LINES 1999 ANNUAL REPORT 41 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999, 1998 AND 1997 DELTA AIR LI E , I fiscal 1997. We accounted for our investment in ASA Holdings under the equity method until April 1, 1999, when we began to con olidate its results (see ote 17). We acquired a majority interest in ASA Holdings on March 22, 1999 and completed the acquisition on May 11, 1999. Its results of operations for the period March 22, 1999 through March 31, 1999 were not material to our consolidated financial statements. Frequent Flyer Program - The estimated incremental cost of providing free travel awards earned under our SkyMiles frequent flyer program is accrued as our customers achieve free travel award levels. The accrued cost is included in accounts payable and miscellaneous accrued liabilities on our Consolidated Balance Sheets. Delta also sells mileage credits to participating partners in the SkyMiles program, such as hotels, car rental agencies and credit card companies, and recognizes the resulting revenue as other operating revenue at the time of sale. Passenger and Cargo Revenues - We record sales of passenger tickets and cargo services as air traffic liability on our Consolidated Balance Sheets. Passenger and cargo revenues are recognized and the related air traffic lia- bility is reduced when we provide the transportation. Periodically, we evaluate the estimated air traffic liability based on statistical and other reviews. Any resulting adjustments, which can be significant, are included in our Consolidated Statements of Operations in the period that the evaluations are completed. Def erred Gains on Sale and Leaseback Transactions - Deferred gains on the sale and lease- back of property and equipment under operating leases are amortized over the lives of these leases. The gains are reflected as a reduction in rent expense. Gains on the sale and leaseback of property and equipment under capital leases reduce the carrying value of the related assets. Manufacturers' Credits - Delta periodically receives credits in connection with the acquisition of aircraft and engines. These credits are deferred until the aircraft 4 2 DELTA AIR LINES 1999 ANNUAL REPORT and engines are delivered, then applied on a pro rata basis as a reduction to the cost of the related equipment. Advertising Costs - We expense advertising costs as other selling expense in the fiscal year incurred. Advertising expense for fiscal 1999, 1998 and 1997 totaled $136 million, $105 million and $121 million, res pecti vel y. Foreign Currency Remeasurement- Assets and lia- bilities denominated in foreign currencies are generally remeasured using exchange rates in effect on the balance sheet date. We recognize the resulting foreign exchange gains and losses as a component of miscellaneous income (expense). Fixed assets and the related depreciation or amortization charges are recorded at the exchange rates in effect on the date we acquired the assets. Stock-Based Compensation - Stock-based compen- sation plans are accounted for in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Under APB 25, we do not recognize compensation expense for a stock option grant if the exercise price at the measurement date is equal to or greater than the fair market value of our common stock on the grant date (see Note 15). Stock Split - On October 22, 1998, our shareown- ers approved an amendment to the Certificate of Incorporation to increase our authorized common stock from 150 million shares to 450 million shares, and to decrease the par value of our common stock from $3.00 to $1.50 per share. As part of this amend- ment, which became effective on November 2, 1998, our shareowners also approved a two-for-one split of the issued common stock. All references in this annual report to the number of shares of common stock (including references to our broad-based employee stock option programs and our common stock repur- chase programs), our earnings per share and our per share common stock prices have been restated to reflect the stock split. 2. FINANCIAL INSTRUMENTS Our financial instruments, except long-term debt and certain investments, are carried at fair value or have a carrying value which approximates fair value. Long-Term Debt - The following table shows the estimated fair value and carrying value of long-term debt, including current maturities, at June 30, 1999 and 1998: (In Billions) Fair value Carrying value 1999 $2.6 $2.4 1998 $1.9 $1.6 Fair values are estimated based on quoted market prices, where available, or on discounted cash flow analyses. Changes in assumptions or estimation meth- ods may significantly affect these fair value estimates. Marketable Equity Securities - On July 1, 1997, we began accounting for our investment in SkyWest, Inc. under the cost method due to a decrease in our owner- ship percentage. Our investments in Singapore Airlines Limited, SAirGroup and SkyWest are classified as available-for-sale securities and are recorded at fair value. The following table summarizes these investments: (In Millions) Singapore Airlines SAirGroup SkyWest Quoted Fair Value June 30, 1999 1998 $335 $165 $110 $172 $ 78 $ 87 Cost Unrealized Basis Gain (Loss) June 30, 1999 1998 $181 $154 $(16) $ 85 $ 25 $ 87 $ 14 $ 64 $ 73 Accumulated other comprehensive income reflects the aggregate unrealized gains of these investments, net of the related deferred tax provision, at June 30, 1999 and 1998. Our right to vote, transfer or acquire addi- tional shares of stock of Singapore Airlines and SAirGroup is subject to certain restrictions. Short-Term Investments - Delta invests cash in excess of operating requirements in short-term, highly liquid investments. These investments are classified as available-for-sale securities under SFAS 115 and are stated at fair value. The aggregate fair value of short- term investments totaled $19 million at June 30, 1999 and $557 million at June 30, 1998. Accumulated other comprehensive income reflects unrealized gains and losses from these investments, net of related deferred taxes. The unrealized gains and losses on our short- term investments were not material at June 30, 1999 and 1998. Convertible Securities - During fiscal 1999, we entered into an agreement with priceline.com Incorporated. Under this agreement, ticket inventory provided by Delta is sold through priceline.com's Internet-based e-commerce system. As part of this agreement, we received warrants to purchase up to 18.6 million shares of priceline.com's common stock for $0.93 per share. The warrants are exercisable beginning when certain performance thresh- olds are met and ending December 31, 2005. We have now met the performance thresholds relating to the exercise of the warrants. These warrants, and the shares issuable when the warrants are exercised, are not regis- tered under the Securities Act of 1933; accordingly, the fair value of these warrants is not reflected on our Con- solidated Balance Sheets as of June 30, 1999. The value of the priceline.com common stock underlying our warrants is $1.2 billion, based upon the NASDAQ closing price as quoted on August 13, 1999. However, due to the nature of our equity interest in priceline.com, the fair value of our unexercised war- rants in priceline.com cannot be readily determined. Subsequent to June 30, 1999 we executed a regis- tration rights agreement with priceline.com which gives us certain demand and piggyback registration rights for the priceline.com common stock underlying our warrants. We are currently evaluating which portion of the war- rants will become readily available within the next year. Upon completion of thi evaluation during the first quar- ter of fiscal 2000, we will record the estimated fair value of these warrants on our Consolidated Balance Sheets. DELTA AIR LINES 1999 ANNUAL REPORT 4] NOTES TO THE CONSOLIDATED FINANCIAL STA TEMENTS JUNE 30, 1999, 1998 A D 1997 DELTA AIR LINE , INC . We are a member of the SITA Foundation, whose principal asset is its equity interest in Equant, N.V., an international data network services company. In February 1999, SITA sold a portion of its interest in Equant and distributed the proceeds on a pro rata basis to members that elected to participate in the offering. We sold approx- imately one-third of our ownership in Equant as part of this offering, resulting in a pretax gain of $26 million. We now hold depository certificates that may become convertible into 816,228 shares of Equant, N.V. Our equity interest is not recorded on our Consolidated Balance Sheets at June 30, 1999. The shares underlying the value of these certificates had an estimated fair mar- ket value of $72 million at August 13, 1999. 3. INCOME TAXES Deferred income taxes reflect the net tax effect of timing differences between the carrying amounts of assets and liabilities for financial reporting and for income tax purposes. The table below shows signifi- cant components of our deferred tax assets and liabili- ties at June 30, 1999 and 1998: (In Millions) Deferred Tax Assets: Postretirement benefits Other employee benefits Gains on sale and leaseback transactions (net) Rent expense Spare parts repair expense Alternative minimum tax credit carryforwards Other Total deferred tax assets Deferred Tax Liabilities: Depreciation and amortization Other Total deferred tax liabilities 44 DELTA AIR LINES 1999 ANNUAL REPORT 1999 1998 $ 766 $ 756 335 405 278 257 206 200 151 27 157 $1,920 $1,960 139 107 159 $2,023 $1,446 377 375 - - - - $2,337 $1,821 Income taxes provided in fiscal 1999, 1998 and 1997 consisted of: (In Millions) Current taxes Deferred taxes Tax benefit of dividends on allocated Series B ESOP 1999 $(307) (423) Convertible Preferred Stock 5 Income taxes provided $(725) 1998 $(353) (298) 4 $(647) 1997 $(321) (244) 4 $(561) The following table shows the difference between the income tax provision recorded for fiscal 1999, 1998 and 1997 and the amount that would result if we applied the federal statutory tax rate to pretax income: (In M1l/1ons) 1999 Income before income taxes $1,826 Items not deductible for tax purposes: Meals and entertainment Amortization of goodwill Other, net Adjusted pretax income Federal statutory tax rate Federal income tax provision at statutory rate State and other income taxes Income taxes provided 41 11 (20) 1,858 35% (650) (75) $ (725) 1998 1997 $1,648 $1,415 42 39 9 9 (27) (17) 1,672 1,446 35% 35% (585) (506) (62) (55) $ (647) $ (561) Our income tax payments, net of income tax refunds, totaled $242 million in fiscal 1999, $244 mil- lion in fiscal 1998 and $336 million in fiscal 1997. 4. RISK MANAGEMENT Fuel Price Risk Management - Our Company uses options and other non-leveraged, over-the-counter instruments, which have maturities of up to 36 months, to manage the risk associated with changes in aircraft fuel prices. In fiscal 1998, we primarily entered into swap contracts to manage fiscal 1999 risk. The changes in the market value of fuel hedging contracts have a high correlation to changes in aircraft fuel prices. Gains and losses from fuel hedging contracts are recognized as part of fuel expense when we use the underlying fuel hedged. Premiums paid to enter into hedging contracts are recorded as prepaid expenses and amortized to fuel expense over the contract settlement period. We do not enter into fuel hedging contracts for trading purposes. At June 30, 1999, we had entered into hedge agreements for a total of 4.6 billion gallons of our projected aircraft fuel requirements for fiscal years 2000 through 2002, including approximately 80% of our projected fiscal 2000 fuel requirements. At June 30, 1999, these contracts had an estimated fair value of $333 million with unrealized gains of $137 million. At June 30, 1998, we had entered into hedge agree- ments for 2.1 billion gallons of our projected aircraft fuel requirements for fiscal 1999. On that date, these contracts were in a loss position of $19 million, with unrealized losses of $32 million. During fiscal 1999, our Board of Directors increased our maximum fuel hedging horizon from 12 months to 36 months. This change impacted the notional amounts and estimated fair values of our fuel hedging contracts at June 30, 1999 compared to June 30, 1998. Foreign Currency Exchange Risk Management - Foreign currency options and forward contracts are used to manage the risk associated with our net foreign currency-denominated transactions. The contracts are denominated in the same currency in which the projected foreign cash flows are expected to occur and have matu- rities of up to 12 months. The principal amount of out- standing foreign currency forward contracts totaled approximately $26 million at June 30, 1999. The notional amount of option contracts outstanding at June 30, 1999 was approximately $330 million. At June 30, 1998, the principal amount of foreign cur- rency forward contracts outstanding totaled approxi- mately $26 million. The estimated fair value of our foreign currency contracts was not material at June 30, 1999 or 1998. We do not enter into foreign currency hedging contracts for trading purposes. We recognize the gains and losses from foreign currency exchange contracts as a component of mis- cellaneous income (expense) as we recognize the underlying transaction. These gains and losses are not material for any period presented in our consolidated financial statements. Credit Risk Management- To manage credit risk associated with our fuel price and foreign currency exchange risk management programs, we select counter- parties based on their credit ratings and limit our expo- sure to any one counterparty under defined guidelines. We also monitor the market position of these programs and our relative market position with each counterparty. The credit exposure related to these programs was not significant to our Company at June 30, 1999. Concentration of Credit Risk - Our accounts receivable are generated largely from the sale of airline tickets and cargo services to customers who are eco- nomically and geographically dispersed. In addition, our accounts receivable are generally short-term in duration. Therefore, we believe we have no significant concentration of credit risk. DELTA AIR LINES 1999 ANNUAL REPORT 4 5 NOTES TO THE CONSOLIDATED FINANCIAL STA TEMENTS JUNE 30, 1999, 1998 AND 1997 DELTA AIR LI E , I 5. LONG-TERM DEB T The following table summarizes our long-term debt, including current maturities, at June 30, 1999 and 1998: (In Millions) 1999 1998 Medium-Term ote, Series A and B, unsecured, intere t rates from 8.25% to 9.15%; maturities ranging from 1999 to 2007 $ 61 $ 128 97/i % otes, unsecured, due May 15, 2000 142 142 1999 Bank Credit Agreement, 5.92% interest, due March 22, 2001 8% otes, unsecured, due March 15, 2002 500 71 71 6.65% Medium-Term otes, Series C, unsecured, due March 15, 2004 300 8.10% Series C Guaranteed Serial ESOP otes, unsecured, due in installments between 2002 and 2009 101/s Debentures, unsecured, due May 15, 2010 290 113 290 113 103/s Debentures, unsecured, due February 1, 2011 175 175 Development Authority of Fulton County, unsecured loan agreement, $19 million due on May 1, 2013, $85 million on May 1, 2023 and $21 million on May 1, 2033; interest rates from 5.30% to 5.50% 9% Debentures, unsecured, due May 15, 2016 125 101 125 101 9% Debentures, unsecured, due May 15, 2021 103/s Debentures, unsecured, due December 15, 2022 Other Total Less: Current maturities Total long-term debt Our variable interest rate long-term debt is shown using interest rates in effect at June 30, 1999. 1999 Bank Credit Agreement - During fiscal 1999, we entered into a $500 million credit agreement with a group of banks to finance a portion of our purchase of ASA Holdings (see Note 17). Our interest rate under this agreement is either the base rate or the Eurodollar rate, plus a margin that is dependent on Delta's long- term senior unsecured debt ratings. This agreement expires on March 22, 2001, but we may prepay the outstanding borrowings at any time. The 1999 Bank Credit Agreement contains negative covenants. These covenants restrict our ability to grant liens, to incur or guarantee debt and to enter into flight equipment leases. This agreement also provides that, if our long-term senior unsecured debt is rated below investment grade, we are required to maintain a specific coverage ratio as of the last day of each fiscal quarter. The banks have the right to terminate the 4 6 DELTA AIR LINES 1999 ANNUAL REPORT 250 250 66 66 222 139 2,416 1,600 660 67 $1,756 $1,533 agreement if there is a change of control of Delta. In this event all outstanding borrowings would become due immediately. At August 13, 1999, $500 million was outstanding under our 1999 Bank Credit Agreement. This obligation is included in current maturities of long-term debt on our Consolidated Balance Sheets because we intend to repay the amounts outstanding before June 30, 2000. 1997 Bank Credit Agreement - Under our 1997 Bank Credit Agreement with a group of banks, we may borrow up to $1.25 billion on an unsecured and revolving basis until May 1, 2002, subject to our com- pliance with certain conditions. We may use up to $700 million of this facility for the issuance of letters of credit. Our interest rate under this facility is either LIBOR or the prime rate, plus a margin that is depen- dent on Delta's long-term senior unsecured debt rat- ings. We can also obtain loans through a competitive bid procedure. The 1997 Bank Credit Agreement contains negative covenants and a change of control provision similar to the corresponding provisions of the 1999 Bank Credit Agreement. At June 30 and August 13, 1999, no amounts were outstanding under the 1997 Bank Credit Agreement. Series C ESOP Notes - At June 30, 1999, there were $290 million of Delta Family-Care Savings Plan's Series C Guaranteed Serial ESOP Notes outstanding. We guarantee the Series C ESOP Notes, which are payable in installments between July 1, 2002 and January 1, 2009. Under the note purchase agreements related to the Series C ESOP Notes, the noteholders have the option to require us to purchase the Series C ESOP Notes if the credit rating of our long-term senior unsecured debt falls below Baa3 by Moody's and BBB- by Standard & Poor's (a purchase event). We have no obligation to purchase the Series C ESOP Notes if we obtain, within a certain amount of time of a purchase event, a credit enhancement that increases the debt rating for the Series C ESOP Notes to at least A3 by Moody's and A- by Standard & Poor's (required ratings). The purchase price of the Series C ESOP Notes would include their outstanding principal amount, accrued interest and, potentially, a make whole premium amount. During fiscal 1993, a purchase event occurred. We obtained a credit enhancement that resulted in the Series C ESOP Notes receiving the required ratings. Accordingly, we were not required to purchase the Series C ESOP Notes as a result of this purchase event. The credit enhancement for the Series C ESOP Notes is currently provided in the form of a letter of credit issued under a $425 million letter of credit facility with ABN AMRO Bank and a group of banks. This facility, which expires June 6, 2000, contains negative covenants and a change of control provision similar to those in the 1999 and 1997 Bank Credit Agreements. If there is a drawing on the letter of credit, we must repay it immediately or convert our repayment obliga- tion to a short-term loan. At August 13, 1999, the face amount of the letter of credit was $421 million. It covers the $290 million of outstanding principal of the Series C ESOP Notes, up to $98 million of make whole premium amount and approximately one year of interest on the Series C ESOP Notes. We also have a trust indenture with a third-party trustee and the Delta Family-Care Savings Plan which contains terms and conditions relating to any letter of credit used to credit enhance the Series C ESOP Notes. The indenture requires the trustee to draw under the letter of credit to make regularly scheduled payments of principal and interest on the Series C ESOP Notes, and to purchase the Series C ESOP Notes in certain circumstances in which we would not be required to purchase the Series C ESOP Notes under the note pur- chase agreements. The indenture requires the trustee to purchase the Series C ESOP Notes at the option of the noteholders if: 1. the required ratings on the Series C ESOP Notes are not maintained; 2. the letter of credit is not extended 20 days before its scheduled expiration date; 3. we terminate the letter of credit; or 4. the trustee receives notice that an event of default has occurred under the letter of credit facility. In the situations described above, the trustee may not repurchase the Series C ESOP Notes if the Series C ESOP Notes receive the required ratings within 10 days of the event. The required ratings on the Series C ESOP Notes can be changed at any time, and are subject to confir- mation annually, by Moody's and Standard & Poor's. Circumstances that might cause either rating agency to lower or fail to confirm its rating include, but are not limited to, the following: 1. downgrading of the deposits of the issuer of the letter of credit to below A3 by Moody's or below A- by Standard & Poor's; or 2. a determination that the make whole premium amount covered by the letter of credit is insufficient. DELTA AIR LINES 1999 ANNUAL REPORT 4 7 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999, 1998 A D 1997 DELTA AIR LI E , I The indenture doe not permit the tru tee to pur- cha e the erie ESOP ote if they receive the required rating without a credit enhancement. The erie C E OP ote are not likely to receive the required rat- ing without a credit enhancement unle our long-term enior unsecured debt is rated at lea t A3 by Moody's and A- by tandard & Poor's. On Augu t 13, 1999, our long-term enior unsecured debt was rated Baa3 by Moody's and BBB- by tandard & Poor' . Future Maturities - At June 30, 1999, the annual scheduled maturities of long-term debt during the next five fi cal years were as follow : Year Ending June 30 (In Milltons) Amount 2000 $ 660 2001 16 2002 86 2003 22 2004 312 After 2004 $1,320 Cash payments for interest, net of interest capital- ized, totaled $130 million in fiscal 1999, $152 million in fiscal 1998 and $171 million in fiscal 1997. Debt Covenants - Our debt agreements contain negative covenants, but these covenants do not limit the payment of dividends on our capital stock. The terms of the Series B ESOP Convertible Preferred Stock limit our ability to pay cash dividends to our common shareowners in certain circumstances (see Note 10). ASNs credit agreements contain negative covenants that apply only to the financial position of ASA. The covenants, among other things, limit ASNs ability to transfer funds in the form of cash dividends, loans or advances. At June 30, 1999, approximately $218 mil- lion of ASNs net assets were subject to these restric- tions and approximately $57 million of net assets were available for distribution by ASA to Delta under the most restrictive of these provisions. 48 DELTA AIR LINES 1999 ANNUAL REPORT 6. LEASE OBLIGATIONS Our Company lea e aircraft, airport terminal and maintenance facilitie , ticket office and other property and equipment. We record rent expen e on a straight- line ba i over the life of the lea e. Rental expense for operating lea e totaled $1.1 billion in fi cal 1999, $0.9 billion in fiscal 1998 and $0.9 billion in fiscal 1997. Amount due under capital leases are recorded a liabilitie , and our intere t in a et acquired under capital lease are hown as assets on our Consolidated Balance heets. The following table summarize our minimum rental commitment under capital lease and operating lea es with initial or remaining terms of more than one year a of June 30, 1999: Year Ending June 30 Capital (In M1/l1ons) 2000 2001 2002 2003 2004 After 2004 Total minimum lease payments Less: Amounts of lease payments which represent interest Present value of future minimum capital lease payments Less: Current obligations under capital leases Long-term capital lease obligations Leases $ 63 57 57 48 32 40 297 62 235 39 $196 Operating Leases $ 1,020 1,030 1,040 1,020 980 9,440 $14,530 As of June 30, 1999, we operated 208 aircraft under operating leases and 48 aircraft under capital leases. These leases have remaining terms ranging from 6 months to 18 years. Several municipalities and air- port authorities have issued special facility revenue bonds to build or improve airport terminal and main- tenance facilities that we lease. Under these operating lease agreements, we are required to make rental pay- ments that are sufficient to pay principal and interest on these bonds. 7. PURCHASE COMMITMENTS Future expenditures for aircraft and engines on firm order as of August 13, 1999 are estimated at approximately $10.0 billion. The following table shows the timing of these commitments: Year Ending June 30 (In Millions) Amount 2000 $2,310 2001 2,710 2002 1,190 2003 920 2004 740 After 2004 2,080 Total $9,950 Our purchase commitments at August 13, 1999 include future payments for eleven 777 aircraft on order. These future payments have been included in the above table based on their delivery dates under the purchase agreement. As discussed in "Personnel Matters - 777-200 Negotiations" on page 32 of Management's Discussion and Analysis, delivery of these aircraft has been deferred indefinitely. These deferrals may impact the timing of future payments. Capital expenditures of approximately $794 million have also been authorized for fiscal 2000 for airport and office facility improvements, aircraft modifica- tions, and the purchase of ground equipment and other assets. We expect to finance our commitments and other capital expenditures with available cash, short- term investments and internally generated funds, supplemented as necessary by debt financings and proceeds from sale and leaseback transactions. Delta has code-sharing agreements with several air- lines. Under some of these agreements, we have com- mitments to purchase a block of seats at negotiated prices. None of these agreements require a purchase commitment in excess of one year. 8. CONTINGENCIES Delta is a defendant in legal actions related to alleged employment discrimination practices, antitrust matters, environmental issues and other matters con- cerning our business. Although the ultimate outcome of these matters cannot be predicted with certainty, we believe that the resolution of these actions is not likely to have a material adverse effect on our consolidated financial statements. Approximately 14 % of our employees are repre- sented by unions. See "Personnel Matters - Collective Bargaining Agreements" on page 32 of Management's Discussion and Analysis for additional information on this subject. 9. EMPLOYEE BENEFIT PLANS Delta sponsors defined benefit and defined contri- bution pension plans, medical plans and disability and survivorship plans for eligible employees, their eligible family members and retirees. We reserve the right to modify or terminate these plans as to all participants and beneficiaries at any time, except as restricted by the Internal Revenue Code or ERISA. Defined Benefit Pension Plans: The retirement plans we sponsor include defined benefit pension plans. The qualified defined benefit plans are currently funded to meet the minimum ERISA funding requirements. The following table shows the change in projected benefit obligation for our defined benefit pension plans for the plan years ended June 30, 1999 and 1998: (In Millions) Projected benefit obligation at beginning of year Service cost Interest cost Actuarial loss Benefits paid Curtailment loss Plan amendments Projected benefit obligation at end of year 1999 1998 $8,342 $ 7,591 240 209 585 575 158 608 (456) (648) 1 3 6 $8,872 $8,342 DELTA AIR LINES 1999 ANNUAL REPORT 4 9 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS J E 0, 1999, 1998 D 1997 DELTA AIR LI E , I The following table show the change in the fair value of defined benefit pension plan a et for the plan years ended June 30, 1999 and 1998: (In Millions) 1999 1998 Fair value of plan a sets at beginning of year 9,121 $7,512 Actual return on plan assets 310 2,203 Employer contributions 45 54 Benefits paid (456) (648) Fair value of plan assets at end of year $9,020 $9,121 The accrued pension cost recognized for these plans on our Consolidated Balance Sheets is computed as follows: (In Millions) 1999 1998 Funded status $ 148 $ 779 Unrecognized net actuarial gain (607) (1,231) Unrecognized transition obligation 60 62 Unrecognized prior service cost 37 39 Contributions made between April 1 and June 30 12 12 Intangible asset (13) (12) Other comprehensive income (2) (2) Accrued pension cost recognized on the Consolidated Balance Sheets $(365) $ (353) Net periodic pension cost for fiscal 1999, 1998 and 1997 included the following components: (In Millions) 1999 1998 1997 Service cost $ 240 $ 209 $ 188 Interest cost 585 575 570 Expected return on plan assets (776) (685) (653) Amortization of prior service cost 5 3 3 Recognized net actuarial (gain) loss (4) 3 Amortization of net transition obligation 2 2 2 Net periodic pension cost $ 56 $ 100 $ 113 5 Q DELTA AIR LINES 1999 ANNUAL REPORT We u ed the following actuarial assumptions to determine the actuarial pre ent value of our pro- jected benefit obligation: March 31: 1999 1998 Weighted average di count rate 7.25% 7.00% Rate of increase in future compensation levels 4.43% 4.30% Expected long-term rate of return on plan as ets 10.00% 10.00% Delta also sponsors several non-qualified pension plans which are funded from current assets. The accu- mulated benefit obligation of these plans totaled $301 million at March 31, 1999 and $285 million at March 31, 1998. Defined Contribution Pension Plans: Delta Pilots Money Purchase Pension Plan (MPPP) - We contribute 5% of covered pay to the MPPP for each eligible Delta pilot. The MPPP is related to the Delta Pilots Retirement Plan. The defined bene- fit pension payable to a pilot is reduced by the actu- arial equivalent of the accumulated account balance in the MPPP. During fiscal 1999, 1998 and 1997, we recognized expense of $53 million, $54 million and $49 million, respectively, for this plan. Delta Family-Care Savings Plan - Our Savings Plan includes an employee stock ownership plan (ESOP) feature. Eligible personnel may contribute a portion of their earnings to the Savings Plan. Delta matches 50% of those contributions with a maximum employer contribution of 2 % of a participant's earn- ings. We make quarterly employer contributions by allocating Series B ESOP Convertible Preferred Stock, common stock or cash to the plan. These contribu- tions, which are recorded as salaries and related costs in our Consolidated Statements of Operations, totaled $52 million in fiscal 1999, $49 million in fiscal 1998 and $45 million in fiscal 1997. When we adopted the ESOP in 1989, we sold 6,944,450 shares of Series B ESOP Convertible Preferred Stock to the Savings Plan for approximately $500 million. We have recorded unearned compensa- tion equal to the value of the preferred stock sold to the Savings Plan but not yet allocated to participants' accounts. We reduce the unearned compensation as shares of the preferred stock are allocated to partici- pants' accounts. Dividends on unallocated shares of preferred stock are used for debt service on the Savings Plan's Series C ESOP Notes and are not con- sidered dividends for financial reporting purposes. Dividends on allocated shares of preferred stock are credited to participants and are considered dividends for financial reporting purposes. Only allocated shares of preferred stock are considered outstanding when we compute diluted earnings per share. ASA Investment Savings Plan - ASA sponsors a defined contribution retirement plan for its eligible employees. Eligible personnel may contribute a portion of their earnings to the plan and ASA matches from 20% to 75% of those contributions, depending on the number of years an employee has participated in the plan. The maximum annual employer contribution is 6% of a participant's earnings. The ASA Investment Savings Plan did not have a material impact on our consolidated financial statements for the year ended June 30, 1999. Postretirement Benefits Other Than Pensions: Our medical plans provide medical and dental ben- efits to substantially all Delta retirees and their eligi- ble dependents. Benefits are funded from general assets on a current basis. Plan benefits are subject to copay- ments, deductibles and other limits as described in the plans. Benefits are reduced when a retiree is eligible for Medicare. The following table shows the change in our accu- mulated postretirement benefit obligation (APBO) for the plan years ended June 30, 1999 and 1998: (In Millions) 1999 1998 APBO at beginning of year $1,627 $1,565 Service cost 37 33 Interest cost 112 110 Benefits paid (71) (64) Actuarial gain (65) (17) Substantive plan change (28) APBO at end of year $1,612 $1,627 The following table shows the calculation of the accrued postretirement benefit cost recognized on our Consolidated Balance Sheets: (In Millions) 1999 1998 Funded status $(1,612) $(1,627) Unrecognized net loss 1 61 Unrecognized prior service cost (371) (388) Contributions made between April 1 and June 30 17 16 Accrued postretirement benefit cost on the Consolidated Balance Sheets $(1,965) $(1,938) Net periodic postretirement benefit cost for fiscal 1999, 1998 and 1997 included the following components: (In Millions) 1999 1998 1997 Service cost $ 37 $ 33 $ 25 Interest cost 112 110 115 Amortization of prior service cost (40) (38) (38) Recognized net actuarial (gain) loss (2) 1 Other (10) Net periodic postretirement benefit cost $ 99 $103 $103 DELTA AIR LINES 1999 ANNUAL REPORT 51 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999, 199 AND 1997 DELTA AIR LI ES , I C . We used the following actuarial assumptions to determine the actuarial present value of our APBO: March 31: 1999 1998 Weighted average discount rate 7.25% 7.00% As urned health care cost trend rate~ 5.50% 6.00% "The assumed health care cost trend rate is assumed to decline gradually to 4.2510 by March 31, 2000 and remain level after that pomt. A 1 % change in the health care cost rate used in measuring the APBO at March 31, 1999 would have the following effects: (In Millions) Increase (decrease) in total service and interest cost Increase (decrease) in the APBO 1 % Increase 1 % Decrease $ 15 $141 $ (13) $(127) Postemployment Benefits - Delta provides certain other welfare benefits to eligible former or inactive employees after employment but before retirement, primarily as part of disability and survivorship plans. Postemployment benefit (income) expense was $(13) million in fiscal 1999, $74 million in fiscal 1998 and $71 million in fiscal 1997. We include the amount funded in excess of the liability in other noncurrent assets on our Consolidated Balance Sheets. Future period expenses will vary based on actual claims experience and the return on plan assets. Gains and losses occur because actual experience differs from assumed experience. These gains and losses are amortized over the average future service period of employees. We also amortize differences in prior service costs resulting from amendments affecting the benefits of retired and inactive employees. We continually evaluate ways to better manage employee benefits and control costs. Any changes to the plans or assumptions used to estimate future bene- fits could have a significant effect on the amount of the reported obligation and future annual expense. 5 2 DELTA AIR LINES 1999 ANNUAL REPORT 10. COMMON AND PREFERRED STOCK In fiscal 1999, we issued 2,463,427 shares of com- mon stock under our broad-based employee stock option plans and a total of 733,942 shares of common stock under our 1989 Stock Incentive Plan and Dividend Reinvestment and Stock Purcha e Plan. We also distrib- uted 55,614 shares of common stock from treasury under the 1989 Stock Incentive Plan. During fiscal 1999, we repurchased 15,149,658 shares of common stock as part of our share repurchase programs described in Note 11. At June 30, 1999, our Company had shares of stock reserved as follows: 38,615,471 shares of common stock for issuance under our broad-based employee stock option plans; 14,538,639 shares of common stock for issuance under our 1989 Stock Incentive Plan; 11,232,228 shares of common stock for conversion of Series B ESOP Convertible Preferred Stock; 500,000 shares of common stock for issuance under our Non-Employee Directors' Stock Option Plan; 494,341 shares of common stock for issuance under our Non-Employee Directors' Stock Plan; and 2,250,000 shares of preferred stock for issuance under our Shareowner Rights Plan. Each share of Series B ESOP Convertible Preferred Stock pays a cumulative cash dividend of 6% per year. Each preferred share is convertible into 1.7155 shares of common stock at a conversion price of $41.97 and has a liquidation price of $72, plus accrued and unpaid dividends. The preferred stock generally votes together as a single class with the common stock and has two votes per share. The preferred stock is redeemable at our option at $72 per share, payable in cash or com- mon stock. We cannot pay cash dividends on common stock until all cumulative dividends on the preferred stock have been paid. The conversion rate, conversion price and voting rights of the preferred stock are sub- ject to adjustment in certain circumstances. The Shareowner Rights Plan is designed to protect shareowners against attempts to acquire our Company that do not offer an adequate purchase price to all shareowners, or are otherwise not in the best interest of our Company and our shareowners. Under the plan, each outstanding share of common stock is accompa- nied by one-half of a preferred stock purchase right. Each whole right entitles the holder to purchase 1/100 of a share of Series D Junior Participating Preferred Stock at an exercise price of $300, which is subject to adjustment. The rights become exercisable only after a person acquires, or makes a tender or exchange offer that would result in the person acquiring, beneficial owner- ship of 15% or more of our common stock. If a per- son acquires beneficial ownership of 15% or more of our common stock, each right will entitle its holder (other than the acquiring person) to exercise his or her rights to purchase our common stock having a market value of twice the exercise price. Alternatively, if a person acquires beneficial own- ership of 15% or more of our common stock and either (a) we are involved in a merger or other busi- ness combination in which our Company is not the surviving corporation or (b) we sell more than 50% of our assets or earning power, then each right will entitle its holder (other than the acquiring person) to exercise his or her rights to purchase the common stock of the acquiring company, having a market value of twice the exercise price. The rights expire on November 4, 2006. Delta may redeem the rights for $0.01 per right until 10 business days following the announcement that a person benefi- cially owns 15% or more of our common stock. 11 . SHARE REPURCHASE AUTHORIZATIONS In April 1996, our Board of Directors authorized us to repurchase a total of 49.4 million shares of com- mon stock and common stock equivalents. Under this authorization, we could repurchase up to 12.4 million of these shares before October 30, 1997 - the date the initial stock option grants under the broad-based employee stock option plans became exercisable. We may purchase the remaining shares as employees exer- cise their stock options under those plans (see Note 15). Repurchases are subject to market conditions, and may be made on the open market or in privately negotiated transactions. The following table summarizes our repurchase activity under this authorization: Amount Number of Shares Spent Repurchased (In Millions) Fiscal 1999 1,943,053 $128 Fiscal 1998 6,158,000 $345 Fiscal 1997 10,757,400 $379 In July 1998, our Board of Directors authorized us to repurchase up to $750 million of common stock through December 31, 1999. We completed this repur- chase program during fiscal 1999 by repurchasing 13 095 420 shares of common stock for approximately ' ' $750 million. 12. COMPRE HENSIVE INCOME During fiscal 1999, we adopted SPAS 130, which establishes standards for reporting comprehensive income and its components. The adoption of SPAS 130 had no net effect on our net income or shareown- ers' equity for fiscal years ended June 30, 1999, 1998 and 1997. Comprehensive income for the fiscal years ended June 30, 1999, 1998 and 1997 included the fol- lowing components: For the Year Ended June 30, (In Mzllions) 1999 1998 1997 Net income $1,101 $1,001 $854 Unrealized gain (loss) on marketable equity securities 99 (22) (40) Other 1 (1) Total other comprehensive income 99 (21) (41) Income tax effect on other comprehensive income (39) 9 16 Total other comprehensive income, net of income taxes 60 (12) (25) Comprehensive income, net of income taxes $1,161 $ 989 $829 DELTA AIR LINES 1999 ANNUAL REPORT 5 J NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS J E 30, 1999, 1998 D 1997 DELTA AIR LI E , I 13. GEOGRAPHIC INFORMATION During fiscal 1999, we adopted SFAS 131, which require us to disclose information about all operating segments. Under SFAS 131, operating segments are defined as components of an enterprise with separate financial information which is evaluated regularly by the chief operating decision maker and is used in resource allocation and performance assessments. We are managed as a single business unit that provides air transportation of passengers and cargo. Our operating revenues by geographic region are summarized in the following table: (In Millions) Domestic Atlantic Pacific Latin America Total 1999 1998 1997 $12,070 $11,497 $11,027 1,973 326 2,092 304 342 245 $14,711 $14,138 2,024 325 218 $13,594 Operating revenues are assigned to a specific geo- graphic region based on the origin and destination of each flight segment. Our tangible assets consist pri- marily of flight equipment, which is mobile across geographic markets. Therefore, assets are not allocated to specific geographic regions. 14. EARNINGS PER SHARE We calculate basic earnings per share by dividing the income available to common shareowners by the weighted average number of common shares out- standing. Diluted earnings per share includes the dilu- tive effects of stock options and convertible securities. The following table shows our computation of basic and diluted earnings per share: 5 4 DELTA AIR LINES 1999 ANNUAL REPORT Fiscal Year Ended June 30, \ (In M,ll,ons, Except Per Share Data) Basic: Net income Dividends on allocated Series B ESOP Convertible Preferred Stock Income available to common shareowners Weighted average shares outstanding Basic earnings per share Diluted: et income Adjustment to net income assuming conversion of allocated Series B ESOP Convertible Preferred Stock Income available to 1999 $1,101 (11) $1,090 142.9 $ 7.63 $1,101 (4) common shareowners $1,097 Weighted average shares outstanding 142.9 Additional shares assuming: Exercise of stock options 4.7 Conversion of allocated Series B ESOP Convertible Preferred Stock Conversion of Series C Convertible Preferred Stock Weighted average shares outstanding as adjusted Diluted earnings per share 4.7 152.3 $ 7.20 1998 $1,001 (11) $ 990 149.2 $ 6.64 $1,001 (4) $ 997 149.2 3.8 4.2 157.2 $ 6.34 1997 $ 854 (9) $ 845 148.3 $5.70 $ 854 (5) $ 849 148.3 1.2 3.8 .6 153.9 $5.52 15. STOCK OPTIONS AND AWARDS Under our 1989 Stock Incentive Plan and a prede- cessor plan, we granted non-qualified stock options and, prior to fiscal 1993, tandem stock appreciation rights (SARs) to officers and other key employees. The exercise price for all stock options, and the base mea - suring price of the SARs, is the fair market value of our common stock on the grant date. In fiscal 1997, our shareowners approved two broad-based employee stock option plans. One plan is for eligible nonpilot personnel and the other plan covers eligible pilots. The nonpilot and pilot plans involve non-qualified stock options to purchase a total of 49.4 million shares of common stock. The plans provided for grants in three annual installments on October 30, 1998, 1997 and 1996. The exercise price of each grant equaled the opening per share price of the common stock on the New York Stock Exchange on the grant date. Stock options are generally exercisable during the period beginning one year after their grant date and ending ten years after their grant date, and are not transfer- able for any reason other than the death of the eligible employee. The following table summarizes grant activ- ity under the broad-based plans for the years ended June 30, 1999, 1998 and 1997: Options Granted Exercise Price Grant Date (In Millions) (Per Share) October 30, 1996 16.4 $34.50 October 30, 1997 16.6 $49.00 October 30, 1998 16.4 $50.59 The following table summarizes all stock option and SAR activity during fiscal 1999, 1998 and 1997: Fiscal 1999 Fiscal 1998 Fiscal 1997 Weighted Weighted Weighted Average Average Average Shares Exercise Shares Exercise Shares Exercise Stock Options (000) Price (000) Price (000) Price Outstanding at beginning of fiscal year 30,006 $45 19,802 $35 4,664 $33 Granted 19,639 51 19,698 50 17,864 35 Exercised (3,256) 41 (9,318) 35 (2,558) 34 Forfeited (245) 51 (176) 46 (168) 38 Outstanding at end of fiscal year 46,144 48 30,006 45 19,802 35 Stock options exercisable at fiscal year end 26,640 $45 10,422 $35 2,098 $32 The following table summarizes information about stock options outstanding and exercisable at June 30, 1999: Stock Options Outstanding Stock Options Exercisable Number Weighted Number Range of Outstanding at Average Expected Weighted Exercisable at Weighted Exercise June 30, 1999 Remaining Life Average June 30, 1999 Average Prices (000) (Years) Exercise Price (000) Exercise Price $26-$34 240 5 $26 240 $26 $35-$41 8,242 4 35 8,242 35 $42-$63 37,662 5 50 18,158 50 DELTA AIR LINES 1999 ANNUAL REPORT 5 5 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999, 1998 D 1997 DELTA AIR LI E , I The e timated fair value of tock option granted in fi al 1999 1998 and 1997 wa derived u ing the Black- choles tock option pricing model. The follow- ing table how our a umption and the weighted average fair value of tock option : tock Options Granted m Fi cal Year As umption 1999 1998 1997 Risk-free intere t rate 4.3% 5.81 0 6.010 Average e pected life of stock option (m years) 5.1 3.3 2.7 Expected volatility of common tock 26.3% 25.3 10 26.4% E pected annual dividend on common tock 0.10 0.10 $0.10 Weighted average fair value of stock options 16 $ 13 $ 9 The following table hows our net income and earnings per share as if we accounted for our tock option plans under the fair value method of SFAS 123: For the Year Ended June 30, 1999 1998 1997 et income (in millions}: As reported $1,101 $1,001 $ 854 Fair value method under SFAS 123 935 875 791 Basic earnings per share: As reported $ 7.63 $ 6.64 $5.70 Fair value method under SFAS 123 6.47 5.80 5.27" Diluted earnings per share: As reported $ 7.20 $ 6.34 $5.52 Fair value method under SFAS 123 6.11 5.54 5.11 * Restated in accordance wtth SFAS 128. 5 6 DELTA AIR LINES 1999 ANNUAL REPORT Under FAS 123, we are not required to include tock option granted before fiscal 1996 a compensa- tion in determining pro forma net income. Therefore, the pro forma effect of FA 123 on net income and earning per share for fiscal 1999 may not be repre enta- tive of the pro forma effect of SFA 123 in future years. In July 1999, we granted approximately 1.7 million tock option , with exerci e price ranging from $60 to $63 per hare. 16. SALE OF RECEIVABLES During June 1999, we entered into an agreement under which we sold a defined pool of our accounts receivable, on a revolving ba i , through a pecial pur- po e, wholly owned sub tdiary to a third party. We ini- tially old receivable with a fair value of $54 7 million to the ub idiary. In exchange for the receivables sold, we received (a) $325 million in cash from the sub- sidiary's ale of an undivided interest in the pool of receivables to a third party and (b) a $222 million sub- ordinated promissory note from the subsidiary. The amount of the promissory note fluctuates because it rep- resent the portion of the purcha e price payable for the volume of receivables old. We retained servicing and record-keeping responsibilities for the receivables sold. This agreement expire on June 15, 2000. As part of the agreement, the subsidiary is obli- gated to pay fees to a third party based on the amounts invested by the third party. For fiscal 1999, these fees totaled approximately $2 million and are included in other income (expense) under miscellaneous income (expense), net in our Consolidated Statements of Oper- ations. The promissory note totaled $17 5 million at June 30, 1999 and is included as accounts receivable on our Consolidated Balance Sheets. 17. ACQUISITION OF ASA HOLDINGS, INC. On February 16, 1999, we entered into an agree- ment with ASA Holdings to acquire its outstanding common stock for approximately $700 million. ASA Holdings is a holding company whose principal assets are its wholly owned subsidiaries, ASA and ASA Investments, Inc. ASA is a regional air carrier that serves airports primarily in the southeastern United States. ASA Investments, Inc. manages cash for ASA Holdings and ASA. Prior to this agreement, we owned approximately 28 % of ASA Holdings' outstanding common stock. Delta acquired ASA Holdings in two steps. In the first step, our wholly owned subsidiary made a tender offer to purchase all of the outstanding shares of ASA Holdings for $34 per share. At the completion of the tender offer in March 1999, we owned approximately 91 % of the outstanding common stock of ASA Holdings. The second step occurred in May 1999, when our wholly owned subsidiary merged into ASA Holdings. 18. QUARTERLY FINANCIAL DATA (UNAUDITED) As a result of this merger, ASA Holdings' remaining out- standing shares of common stock were converted into the right to receive $34 per share. ASA Holdings became an indirect, wholly owned subsidiary of our Company. We used the purchase method of accounting to record the acquisition of ASA Holdings. The purchase price of the shares acquired was allocated to the assets acquired and the liabilities assumed. The allocation was based on the preliminary estimated fair values at the acquisition date. Based on the allocation as of June 30, 1999, the total cost of the acquisition exceeded the estimated fair value of the underlying net assets by approximately $508 million, which will be amortized over 40 years. Our consolidated financial statements as of June 30, 1999 include ASA Holdings' balance sheet as of June 30, 1999, as well as its results of oper- ations from April 1, 1999. The pro forma effects had ASA Holdings been consolidated as of July 1, 1998 would not have been material to our revenues, net income, or earnings per share for fiscal 1999. The following table summarizes our unaudited quarterly results of operations for fiscal 1999 and 1998 (in millions, except per share data): Three Months Ended Fiscal 1999 Sept. 30 Dec. 31 Mar. 31 June 30 Operating revenues $3,802 $3,448 $3,504 $3,957 Operating income $ 552 $ 320 $ 356 $ 642 Net income $ 327 $ 194 $ 216 $ 364 Basic earnings per share'''' $ 2.19 $ 1.34 $ 1.51 $ 2.59 Diluted earnings per share'''' $ 2.08 $ 1.29 $ 1.42 $ 2.40 Fiscal 1998 Sept. 30 Dec. 31 Mar. 31 June 30 Operating revenues $3,553 $3,434 $3,390 $3,761 Operating income $ 431 $ 332 $ 336 $ 595 Net income $ 254 $ 190 $ 195 $ 362 Basic earnings per share'''' $ 1.71" $ 1.26 $ 1.29 $ 2.39 Diluted earnings per share'''' $ 1.63'' $ 1.20 $ 1.23 $ 2.26 *Restated to conform with SPAS 128. * *The sum of the quarterly earnings per share may not equal the fiscal earnings per share due to changes in average share calculations. DELTA AIR LINES 1999 ANNUAL REPORT 57 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS DELTA AIR LI E TO DELTA AIR LINES, INC.: We have audited the accompanying consolidated balance sheets of Delta Air Lines, Inc. (a Delaware corporation) and subsidiaries as of June 30, 1999 and 1998, and the related consolidated statements of operations, cash flows and shareowners' equity for each of the three years in the period ended June 30, 1999. These financial state- ments are the responsibility of the Company's manage- ment. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with gen- erally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence support- ing the amounts and disclosures in the financial state- ments. An audit also includes assessing the accounting 5 8 DELTA AIR LINES 1999 ANNUAL REPORT principles used and significant estimates made by man- agement, as well as evaluating the overall financial state- ment presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Delta Air Lines, Inc. and subsidiaries as of June 30, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 1999, in conformity with generally accepted accounting principles. ~ ~ J_ j_ p Atlanta, Georgia August 13, 1999 REPORT OF MANAGEMENT DELTA AIR LINES, INC. The integrity and objectivity of the information pre- sented in this Annual Report are the responsibility of Delta management. The financial statements contained in this report have been audited by Arthur Andersen LLP, independent public accountants, whose report appears on page 5 8 of this report. Delta maintains a system of internal financial con- trols which are independently assessed on an ongoing basis through a program of internal audits. These con- trols include the selection and training of the Company's managers, organizational arrangements that provide a division of responsibilities, and communication pro- grams explaining the Company's policies and standards. We believe that this system provides reasonable assur- ance that transactions are executed in accordance with management's authorization; that transactions are appropriately recorded to permit preparation of financial statements that, in all material respects, are presented in conformity with generally accepted accounting princi- ples; and that assets are properly accounted for and safe- guarded against loss from unauthorized use. The Board of Directors pursues its responsibilities for these financial statements through its Audit Com- mittee, which consists solely of directors who are neither officers nor employees of the Company. The Audit Committee meets periodically with the independent pub- lic accountants, the internal auditors and representatives of management to discuss internal accounting control, auditing and financial reporting matters. Edward H. West Chief Financial Officer Leo F. Mullin President and Chief Executive Officer DELTA AIR LINES 1999 ANNUAL REPORT 5 9 CONSOLIDATED SUMMARY OF OPERATIONS DELTA AIR LINES, INC. For the fiscal year ended June 30 (In Millions, Except Per Share Data) Operating revenues Operating expenses Operating income (loss) Interest expense, net Miscellaneous income, net6 Income (loss) before income taxes Income tax benefit (provision) Amortization of investment tax credits Net income (loss) Preferred stock dividends Net income (loss} attributable to common shareowners Earnings (loss) per share7 Basic Diluted Dividends declared on common stock Dividends declared per common share7 OTHER FINANCIAL AND STATISTICAL DATA For the fiscal year ended June 30 Total assets (millions) Long-term debt and capital leases (excluding current maturities) (millions) Shareowners' equity (millions) 1999 1998 $14,711 $14,138 12,841 12_,444 1,870 1,694 (153) (148) 109 102 1,826 1,648 (725) (647) 1,101 1,001 (11) (11) $ 1,090 $ 990 $ 7.63 $ 6.64 $ 7.20 $ 6.34 $ 14 $ 15 $ 0.10 $ 0.10 1999 1998 $16,544 $14,603 $ 1,952 $ 1,782 $ 4,448 $ 4,023 19971 19962 $13,594 $12,455 12,063 11,990 1,531 465 (174) (243) 58 54 1,415 276 (561) (120) 854 156 (9) (82) $ 845 $ 74 $ 5.70 $ 0.72 $ 5.52 $ 0.72 $ 15 $ 10 $ 0.10 $ 0.10 19971 19962 $12,741 $12,226 $ 1,797 $ 2,175 $ 3,007 $ 2,540 Shares of common stock outstanding at year end7 138,553,719 150,450,394 147,391,974 135,556,212 Revenue passengers enplaned (thousands) Available seat miles (millions) Revenue passenger miles (millions) Operating revenue per available seat mile Passenger mile yield Operating cost per available seat mile Passenger load factor Breakeven passenger load factor Available ton miles (millions) Revenue ton miles (millions) Operating cost per available ton mile 106,902 144,003 104,575 10.22 12.83 8.92 72.6% 62.5% 20,627 12,115 62.25 104,148 101,147 140,149 136,821 101,136 97,758 10.09 9.94 12.85 12.79 8.88 8.82 72.2% 71.4% 62.8% 62.7% 19,890 18,984 11,859 11,308 62.56 63.54 1 Summary of operations and other financial and statistical data include $52 million in pretax restructuring and other non-recurring charges ($0.22 basic and $0.21 diluted after-tax earning_s per share). 2 Summary of operations and other financial and statistical data include $829 million in pretax restructuring and other non-recurring charges ($4.88 after-tax earnings per share). 3 Summary of operations and other financial and statistical data excludes $114 million after-tax cumulative effect of change in accounting standards ($1.13 basic and $0.71 diluted earnings per share). 4 Summary of operations and other financial and statistical data include $526 million in pretax restructuring charge ($3.30 after-tax per share). 5 Summary of operations and other financial and statistical data include $82 million pretax restructuring charge ($0.53 after-tax per share). Summary of operations excludes $587 million after-tax cumulative effect of changes in accounting standards ($5.89 after-tax per share). 6 Includes interest income. 7 All share and earnings per share amounts for fiscal years prior to 1999 have been restated to reflect the two-for-one common stock split that became effective on November 2, 1998. 6 Q DELTA AIR LINES 1999 ANNUAL REPORT 91,341 130,751 88,673 9.53 13.10 9.17 67.8% 65.1% 18,084 10,235 66.30 19953 19944 19935 1992 1991 1990 1989 $12,194 $12,077 $11,657 $10,837 $9,171 $8,583 $8,089 11~5_TI_ __!b522 12_,_167 11,477 9,604 8,145 7,394 661 (445) (510) (640) (433) 438 695 (262) (271) (177) (151) (97) (27) (39) 95 56 36 5 30 57 55 494 (660) (651) (786) (500) 468 711 (200) 250 233 271 163 (187) (279) 1 3 9 13 22 29 294 (409) (415) (506) (324) 303 461 (88) (110) (110) (19) (19) (18) $ 206 $ (519) $ (525) $ (525) $ (343) $ 285 $ 461 $ 2.04 $ (5.16) $ (5.27) $ (5.30) $ (3.87) $ 2.90 $ 4.69 $ 2.01 $ (5.16) $ (5.27) $ (5.30) $ (3.87) $ 2.64 $ 4.69 $ 10 $ 10 $ 35 $ 59 $ 54 $ 85 $ 59 $ 0.10 $ 0.10 $ 0.35 $ 0.60 $ 0.60 $ 0.85 $ 0.60 19953 19944 19935 1992 1991 1990 1989 $12,143 $11,896 $11,871 $10,162 $8,411 $7,227 $6,484 $ 3,121 $ 3,228 $ 3,716 $ 2,833 $2,059 $1,315 $ 703 $ 1,827 $ 1,467 $ 1,913 $ 1,894 $2,457 $2,596 $2,620 101,632,020 100,906,544 100,127,682 99,398,196 98,803,558 92,172,220 98,531,768 88,893 87,399 85,085 77,038 69,127 67,240 64,242 130,645 131,906 132,282 123,102 104,328 96,463 90,742 86,417 85,268 82,406 72,693 62,086 58,987 55,904 9.33 9.16 8.81 8.80 8.79 8.90 8.91 13.10 13.23 13.23 13.91 13.80 13.63 13.56 8.83 9.49 9.20 9.32 9.21 8.44 8.15 66.2% 64.6% 62.3% 59.1% 59.5% 61.2% 61.6% 62.3% 67.2% 65.6% 63.0% 62.6% 58.0% 56.1% 18,150 18,302 18,182 16,625 13,825 12,500 11,725 10,142 9,911 9,503 8,361 7,104 6,694 6,338 63.54 68.42 66.92 69.03 69.47 65.16 63.06 DELTA AIR LINES 1999 ANNUAL REPORT 61 SHAREOWNER INFORMATION D LT IR LI , I TRAN F R GENT, REG! TRAR AND DIVID D P YING GENT FOR COMMO TO K Regi tered hareowner inquirie regarding tock tran fer , addre change , lo t tock certifi ate dividend payments or ac ount con olidation hould be directed to: Fir t hicago Tru t a di i ion of Equi erve P. 0. Bo 2500 Jer e it , e Jer ey 07303-2500 Telephone (201) 324-1225 (http://www.equi er e.com) TOCK PUR HA E PL Regi tered owner of common tock ma purcha e additional hare of uch tock through automatic dividend reinve t- ment or ca h contribution under the Company' Dividend Reinve tment and tock Purcha e Plan. Inquiries, notices, reque t and other communication regarding participation in the plan hould be directed to: Fir t Chicago Trust a divi ion of Equi erve P. 0. Bo 2598 Jer ey City, ew Jer ey 07303-2598 Telephone (201) 324-1225 (http://www.equiserve.com) INDEPENDENT PUBLIC ACCOUNTANTS Arthur Ander en LLP 133 Peachtree Street .E. Atlanta, Georgia 30303 ANNUAL MEETING The Annual Meeting of Shareowners will be held on Thursday, October 28, 1999, at 9:00 a.m., local time, at the Bo ton Harbor Hotel at 70 Rowes Wharf on Atlantic Avenue, Boston, Massachussetts 02110. AVAILABILITY OF FORM 10-K AND OTHER FINANCIAL INFORMATIO A copy of our Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1999 will be provided without charge upon written request. Requests for other financial documents may also be directed to: Delta Air Lines, Inc. Investor Relations, Department 829 P. 0. Box 20706 Atlanta, Georgia 30320-6001 Telephone (404) 715-2170 A copy of this Annual Report and Company documents filed electronically can be found on Delta's website (http://www.delta-air.com). Telephone inquiries related to financial information, other than requests for financial documents, may be directed to Delta Investor Relations at (404) 715-5039. 62 DELTA AIR LINES 1999 ANNUAL REPORT OMMON TOCK Li ted on the New York Stock Exchange under the ticker symbol DAL. NUMBER OF SHAREOWNERS A of August 1, 1999, there were approximately 21,550 reg- i tered owners of common stock. MARKET PRICES AND DMDENDS Cash Dividends per Fiscal Year 1999 Common tock Common Share Quarter Ended: High Low September 30 $71 2 $46 % $0.025 December 31 57 '6 41 1 2 0.025 March 31 70'6 49 0.025 June 30 71 % 55 6 0.025 Fiscal Year 1998 Quarter Ended: High Low September 30 $53 % $41 $0.025 December 31 60 6 47 6 0.025 March 31 61 '6 55 6 0.025 June 30 64 '6 55 0.025 ore: The stock prices listed above have been adjusted to reflect the two-for-one common stock split effective ovember 2, 1998. AVAILABILITY OF EQUAL EMPLOYMENT OPPORTUNITY REPORT A copy of the Company's Equal Employment Opportunity Report is available without charge upon written request. Requests may be directed to: Delta Air Lines, Inc. Equal Opportunity, Department 955 P.O. Box 20706 Atlanta, Georgia 30320-6001 AVAILABILITY OF ENVIRONMENTAL REPORT A copy of the Company's Environmental Report is available on-line at http://www.delta-air.com or upon written request. Requests may be directed to: Delta Air Lines, Inc. Corporate Communications, Department 978 P.O. Box 20706 Atlanta, Georgia 30320-6001 Photography by Delta Photography Department Designed and produced by Corporate Reports Inc./Atlanta (D Printed on recycled paper. I Guangzhou Asia/Pacific Delta continued to experience weakness in the Pacific due to the decline in the Asian economy. -------- service will b e discontinued on Oc tober 1, 1999. West DELTA TAKES YOU FROM ANYWHERE TO EVERYWHERE Midwest Delta enhanced its Midwest market position by adding new Delta Express service to Florida. Northeast Delta continued to strengthen its position by adding new international service from New York-Kennedy, by adding frequencies in key Northeast business markets, by expanding the Delta Shuttle to the Boston-Washington- Reagan market and by adding new Delta Express markets to Florida. Southeast Delta had strong traffic and revenue growth in East-West markets, which resulted from the strategy of reallocating assets from North-South short-haul leisure markets to East-West long-haul Delta continued to grow the Atlanta Worldport by increasing service to numerous domestic markets and four new international markets (Athens, Barcelona, Istanbul, and Rome). The Atlanta Worldport remains the largest single-carrier hub in the world. business markets. Latin America Delta's Latin America entity achieved strong revenue improvement over fiscal 1998, when Delta uma initiated service to six new Latin America countries. Delta is expanding its presence to Mexico by adding frequencies to key business markets (Mexico City, Monterrey, and Guadalajara). The Delta/AeroMexico code-share agreement continues to grow and enhance Delta's Latin America entity. Fortaleza f I Recife f i SaoPaul Curitiba\ / j Florian6polls PO rto Alegre Banjul onakry North Atlantic Delta maintained its leadership position across the North Atlantic with new flights from the Atlanta and New York-Kennedy gateways. Delta's global position will be greatly enhanced by the Delta/Air France Alliance. otonou Lome Harare Johannesburg Moscow Effective Summer 1999 Delhi Mumbai (B ombay) Flights are subject to change without notice. - - Delta Air Lines route - - Code-share route operated by one of Delta's Airline Partners T0Color,d0Sprlng1 DELTA'S CONNECTION CARRIERS DELTA'S NORTH AMERICAN NETWORK Delta's strategic partnerships with regional connection carriers allow it to extend its domestic reach. These allies make it possible for Delta travelers to reach even more U.S. destinations easily and quickly. Connection carriers - just one more way Delta is working to take passengers from anywhere to everywhere. Corpu1Ch1U Mlnn11p0Ut1 St,Paur. CedarRlpldt/ Iowa City D "~'"" '-. Ch / Hou1ton ... Orle1n1 Albuquerque K1yWHI // I ~acuN M anchtster . -.. AJ.b1:n .1,/: Phl11delphl1 ~\\oe\9'rlla i . "'f" \ .p.1,1" 6 \40~0\ ... Delta's hub operations in Atlanta, Cincinnati, Salt Lake City, Dallas/Fort Worth and New York-Kennedy form the backbone of the continent's largest airline and offers customers the most efficient connections across North America. From Atlanta alone, Delta provides travelers with 647 daily flights to 127 destinations including the premier gateway to Latin America. Today, travelers want to go in many different directions and Delta's North American network gives them a good start on taking them from anywhere to everywhere. Oaxaca Acapulco Grand cayman Effective Summer 1999 Flights are subject to change without notice. - - Delta Air Lines route - - Delta Air Lines Express route - - Code-share route operated by one of Delta 's Airline Partners Destination served by Delta Air Lines * State capital (destination) S\'"o"'as S\,cto\'j. ~ .Delta Air Lines P.O. Box 20706. Atlanta, Georgia 30320-6001 U.S.A. http://www.delta-air.com