Delta Air Lines annual report 2002

A .Delta
The enormous challenges airlines faced in 2001,
especially in the months following the events of
September 11, set the stage for an even more difficult
2002 - a year in which survival quickly became an
immediate, consistent theme for the industry. Provid-
ing grim evidence of the high degree of duress, some
U.S. carriers succumbed to the growing financial pres-
sures, ending the year in bankruptcy.
Still grappling with the aftershocks of September 11 -
including depressed revenue, fewer customers and high
costs - Delta's management team in 2002 acted quickly
to stabilize our company. At the same time that we moved
forward on these issues so important to our immediate sur-
vival, Delta also continued to make important progress on
the longer-term strategic initiatives that are fundamental
to our company's future competitiveness and profitability.
Despite unprecedented challenges, Delta emerged from
2002 as an industry leader and as the best-positioned of
any network carrier. The hard-won achievements of the
year and the groundwork laid during this time for future
success - the subjects of this report - clearly reflect strong
performance, unity and the unflagging and innovative
spirit of Delta employees worldwide.
ENSURING DELTA'S SURVIVAL Delta's disappointing
2002 net loss of $1.3 billion is indicative of the contin-
ued revenue pressures facing the industry. Recognizing
early on the dangers to survival that the continued
revenue shortfall trend presented, Delta's management
team immediately initiated a two-part plan: first, build
adequate liquidity and, second, simultaneously mitigate
reduced revenue with significant reductions in costs.
By the end of the year, Delta had succeeded on both
counts. Cash and short-term liquidity totaled $2.5
billion while additional financing capacity, based on
unencumbered aircraft ap.d other assets, was the best
of any hub-and-spoke carrier. Delta maintained access
to capital markets during a period of significant con-
straints. In addition, through di ciplined co t reduction
programs and careful revenue management, the com-
pany decrea ed free cash flow drain, excluding capital
expenditure for aircraft, to near zero.
As part of these cost reduction programs, Delta removed
72 aircraft from the fleet and trimmed mainline capacity
by 16%, as compared to pre-9/11 levels. In addition, as
a result of these changes as well as productivity improv~-
ments, Delta has made the difficult but necessary decisions
that will result in the elimination of approximately 16,000
jobs, or 21 % of our workforce compared to pre-9/11 lev-
els, by mid-2003. Due to these and other efforts, Delta's
operating expenses fell by approximately $1 billion year-
over-year in 2002. Importantly, our commitment to
disciplined cost management is ongoing. Initiatives already
in place or soon to be under way are intended to reduce
Delta's non-fuel unit costs by 15% by the end of 2005.
FOCUSING ON THE FUTURE Even as Delta was
solidifying its position in the current tough business envi-
ronment, we also continued to implement our plans for
an integrated strategy that allows us to compete effectively
in all markets we choose to serve, now and in the future.
One of the areas in which competitive pressures have been
growing steadily is the low-fare sector. While we have
noted previously that low-fare airlines represent a serious
threat to Delta, these carriers have been making even
more dramatic inroads during this period of economic
and financial duress. As a result, Delta in 2002 responded
proactively to expanding low-fare pressures with the
announcement of Song, our new, highly competitive,
wholly owned subsidiary.
Operating with an all Boeing 757 fleet, Song begins serv-
ice in April 2003, initially on routes between the Northeast
and Florida but quickly expanding to provide other excit-
ing destinations including flights between Atlanta and
New York-Kennedy starting June 1, 2003. The new carrier
replaces Delta Express, providing an even more effective,
more competitive and more sus~ainable product. Along
with many other advantages Song gains from its affiliation
with Delta, customers will also earn Sky Miles
, which can
be redeemed for travel to destinations such as Honolulu,
Bermuda, Paris and Rome - all well beyond the options
generally offered by smaller, non-hub carriers.
Delta also reacted quickly in 2002 to the announcement
of a new domestic allian~e between United Airlines and
US Airways. Within weeks, Delta, Continental and
Northwest Airlines had agreed on a proposed domestic
alliance that would provide customers with an.expanded
\
array of destinations and other choices while maintain-
ing competition among the three carriers. The current
expectation is that final government review should be
completed and international airline partner consents
obtained in the near future, allowing for implementation
of the alliance this year.
Delta made significant progress during the year in other
important areas, too. For example, we:
Continued to strengthen Delta's presence in the South-
east, adding flights at Delta's No. 1 hub - Hartsfield
Atlanta International Airport - and ensuring the start-
up of construction on Atlanta's new fifth runway, a
project vital to our ability to grow in the region.
Optimized operations at our secondary hubs, includ-
ing Delta's Dallas/Fort Worth operation, in part by
increasing the proportion of service provided by
regional jets. Additional use of regional jets helps move
Delta's average aircraft capacity downward to better
match demand.
Extended our presence in the Northeast, adding new
service as opportunities became available and also
beginning construction of Delta's new Boston facility.
Leveraged our transatlantic strength by expanding serv-
ice at our Sky Team partners' European hubs - growth
which is significantly enhanced by the antitrust immu-
nity granted to Delta and our European Partners (Air
France, Alitalia and CSA Czech Airlines) in January
2002, and to Delta and Korean Airlines in June 2002.
By maintaining a steady focus on these and other long-
term strategic objectives while also ensuring that the
immediate-term issues essential to Delta's survival are
fully addressed, we are positioning our company not only
to survive, but to be ready for a profitable recovery as the
economic environment improves.
SEEKING RELIEF FROM UNFAIR BURDENS In addi-
tion to the many challenges Delta as well as other airlines
continues to confront, we also are operating under two
significant financial burdens unique to our industry,
both of which are the result of governmental policies
that need substantial revision. These burdens - including
enormous post-9/11 increases in aviation security costs
and excessive taxation of air travel - are creating signifi-
cant barriers to industry recovery efforts.
Regarding increased security costs, it is important to
recall that the September 11 terrorist attacks in which
commercial aircraft were used as weapons was not an
attack on the airlines; instead, it was an attack on our
nation and the principles for which we stand. Following
that attack, as part of a national security effort to protect
U.S. citizens in the war against terrorism, Congress
imposed many new aviation security requirements.
These requirements included a new security tax on air
travel, restrictions on air transport of mail and cargo,
and a wide range of mandated but unfunded security
requirements - for example, reinforcement of cockpit
doors, various new equipment and training, and
additional security checks for employees and suppliers.
In addition, premiums paid by the airlines for war and
terrorism risk insurance - primarily for the protection
of U.S. citizens and their property from terrorist- and
war-related incidents - also skyrocketed post-9/11. We
estimate that the impact on Delta alone of these and
similar items in 2002 totaled approximately $700 million.
In a second area of concern, airlines and air travel have, over
the last several years, been subjected to increasing levels of
taxation. Tax rates for air travel now exceed the so-called
"sin taxes" imposed on items such as tobacco, alcohol and
handguns. These taxes and fees, which have doubled in
the past 10 years, comprise 26% of the price of a $300
roundtrip airfare with a single connection point. In the
current low-demand, Internet-driven shopping environ-
ment, passengers won't accept fare increases when they
can easily shop for a lower fare on a competitor. As a
result, ticket taxes and fees cannot in fact be passed on
to passengers but instead are absorbed by Delta and
other airlines, directly impacting profitability.
During 2002, Delta joined with other airlines in
requesting from our government an end to "special
treatment" of the industry in both these areas. Airlines
are unique in shouldering part of the burden of protect-
ing U.S. citizens from the war on terrorism, and we will
continue to seek federal government funding for these
homeland security concerns. We will also continue to
advocate for reductions in the high level of taxation
applied to air travel. Airlines made some progress in
these areas over the past year and set the stage for even
more progress in 2003.
LOOKING AHEAD Looking back on 2002, we at Delta
are extremely proud of how our team has pulled together
at every level and at every location to form a strong,
determined and resilient force fully focused on ensuring
our airline's ability to first survive, then thrive. Despite
the enormous challenges of the current environment, the
Delta team has not only established a firm foundation,
we have also continued moving forward with strategic
initiatives that support our vision of a successful and
prosperous future.
Clearly, the airline industry will face additional uncertainty
and continued duress in the months ahead. Economic
analysts indicate that recovery is unlikely before 2004, if
then; competition in the air travel marketplace continues
to escalate; revenue remains depressed; and geopolitical
concerns are increasingly complex. As this report goes to
press, continuing threats of war in the Middle East are
-
clearly suppressing travel demand, especially with regard
to business passengers. Yet, even as we understand fully
the challenges and the task before us, we at Delta remain
optimistic about our company's future. By continuing to
be vigilant about the fundamentals, by maintaining our
focus on longer-term strategic issues, by solidifying
Delta's leadership position and with the continued sup-
port of our experienced and determined Delta team, we
believe we can and will weather these storms and emerge
from them poised for success.
Leo F. Mullin
Chairman and Chief Executive Officer
March 12, 2003
6
Officers
LEO F. MULLIN
Chairman and Chief Executive Officer
FREDERICK W REID
President and Chief Operating Officer
M. MICHELE BURNS
Executive Vice President and
Chief Financial Officer
ROBERT L. COLMAN
Executive Vice President -
Human Resources
VICKI B. ESCARRA
Executive Vice President and
Chief Marketing Officer
EDWARD H. BASTIAN
Senior Vice President -
Finance and Controller
VINCENT F. CAMINITI
Senior Vice President -
Profitability Initiatives
Executive Council
ANTHONY N. CHARAF
Senior Vice President -
Delta Air Logistics
W LAMAR CHESNEY
Senior Vice President -
Supply Chain Management
RICHARD W CORDELL
Senior Vice President - Airport
Customer Service
ROBERT S. HARKEY
Senior Vice President - General
Counsel and Secretary
SUBODH KARNIK
Senior Vice President - Network
and Revenue Management
JOSEPH C. KOLSHAK
Senior Vice President -
Flight Operations
LEE A. MACENCZAK
Senior Vice President -
Sales and Distribution
PAUL G. MATSEN
Senior Vice President -
International and Alliances
THOMAS J. SLOCUM
Senior Vice President -
Corporate Communications
RAYVALEIKA
Senior Vice President -
Technical Operations
JAMES M . WHITEHURST
Senior Vice President - Finance,
Treasury and Business Development
SHARON WIBBEN
Senior Vice President - In-Flight Service
D. SCOTT YOHE
Senior Vice President -
Government Affairs
From left to right: J. MARK BALLOUN, M. MICHELE BURNS, ROBERT L. OLMAN, D. COTT YOHE, LEO F. MULLIN, ROBERTS. HARKEY,
VICKI B. ESCARRA, FREDERICK W. REID AND THOMAS J. SLOCUM
J. MARK BALLOUN
Vice President - Corporate
Strategic Planning
R. MICHAEL BELL
Vice President - Schedule Development
GERALD A. BEMIS
Vice President - Line
Maintenance Operations
HARLAN R. BENNETT
Vice President - Revenue Management
HAROLD L. BEVIS
Vice President - Public Affairs
DOUG BLISSIT
Vice President - Network Analysis
WALTER A. BRILL
Vice President - Associate
General Counsel
ROBERT T. CIRULNICK
Vice President - Finance,
In-Flight and Operations
PAULETTE L. CORBIN
Vice President - Airport Customer
Service - West
JACK A. DAULTON
Vice President - Corporate Security
CHRISTOPHER A. DUNCAN
Vice President - Finance and
Chief Risk Officer
TERRY M. ERSKINE
Vice President - Labor Relations
CAROLYN EZZELL
Vice President - Atlantic Region
MICHELLE MCKINNEY FRYMIRE
Vice President - Finance - Sales,
Marketing and International
PAUL M. GRAVES
Vice President - Global Diversity
HANK HALTER
Vice President - Finance and
Assistant Controller
TODD G. HELVIE
Vice President - Corporate Tax
LESLIE P. KLEMPERER
Vice President - Associate General
Counsel and Assistant Secretary
WILLIAM D. KLINE
Vice President - HR - Marketing
and Chief Learning Officer
JOSEPH LICITRA
Vice President - Airport
Customer Service - East
JOHN C. MARSHALL
Vice President - Corporate
Safety and Compliance
JAMES V MAUCERE
Vice President - Base, Engine
and Component Maintenance
PATRICE G. MILES
Vice President - Consumer Marketing
LEON A. PIPER
Vice President - Worldwide Benefits
and Health Resources
UDO RIEDER
Vice President - Engineering
and Planning
GREGORY L. RIGGS
Vice President - Deputy General
Counsel and Assistant Secretary
DEBBIE SIEK
Vice President - Reservation
Sales and Customer Care
DAVID J. SMITH
Vice President - Global Rewards
and Recognition
WILLIAM F. WANGERIEN
Vice President - Operational Planning,
Control and Reliability
PATRICK H. WILDENBURG, JR.
Vice President - Corporate Operations
and Real Estate Strategy
LEMUEL R. WIMBISH
Vice President - Airport/Customer
Service - Atlanta Worldport
MICHAEL M. YOUNG
Vice President - Community Affairs
DEAN C. ARVIDSON
Assistant Secretary
SUSAN T. HUDSON
Assistant Secretary
DELTA SUBSIDIARIES
FRED BUTTRELL
President and Chief Executive Officer -
Delta Connection, Inc.
JEFFREY T. FISHER
Vice President and Chief Financial
Officer - Delta Connection, Inc.
W E. (SKIP) BARNETTE
President - ASA Holdings Inc.,
and Atlantic Southeast Airlines, Inc.
RANDY D. RADEMACHER
President - Comair Holdings, Inc.,
and Comair, Inc.
JOHN N. SELVAGGIO
President - Song
CURTIS ROBB
President and Chief Executive
Officer-Delta Technology, Inc.
Chief Information Officer -
Delta Air Lines, Inc.
7
8
Board of Directors
EDWARD H. BUDD GEORGE M.C. FISHER DAVID R. GOODE
LEO F. MULLIN JOHN F. SMITH, JR. JOAN E. SPERO
EDWARD H. BUDD
Retired Chairman of the Board
and Chief Executive Officer, The
Travelers Corporation
GEORGE M.C. FISHER
Retired Chairman of the Board
and Chief Executive Officer,
Eastman Kodak Company
DAVID R. GOODE
Chairman of the Board, President
and Chief Executive Officer,
Norfolk Southern Corporation
GERALD GRINSTEIN
Principal of Madrona Investment
Group, LLC; retired Chairman
of the Board, Burlington Northern
Santa Fe Corporation
JAMES M. KILTS
Chairman of the Board and
Chief Executive Officer, The
Gillette Company
LEO F. MULLIN
Chairman of the Board
and Chief Executive Officer,
Delta Air Lines, Inc.
JOHN F. SMITH, JR.
Chairman of the Board and
retired Chief Executive Officer,
General Motors Corporation
GERALD GRINSTEIN JAMES M. KILTS
ANDREW J. YOUNG
JOANE. SPERO
President of the Doris Duke
Charitable Foundation; former
U.S. Undersecretary of State
for Economic, Business &
Agricultural Affairs
ANDREW}. YOUNG
Chairman of the Board and senior
partner, Goodworks International,
Inc.; former Mayor of Atlanta,
Georgia; former U.S. Ambassador
to the United Nations
Board Committees
AUDIT
George M.C. Fisher, Chairman
Joan E. Spero
Andrew J. Young
BENEFIT FUNDS INVESTMENT
Andrew J. Young, Chairman
John F. Smith, Jr.
Joan E. Spero
CORPORATE GOVERNANCE
John F. Smith, Jr., Chairman
Gerald Grinstein
Andrew J. Young
CORPORATE STRATEGY
Gerald Grinstein, Chairman
Edward H. Budd
David R. Goode
George M.C. Fisher
EXECUTIVE
Gerald Grinstein, Chairman
Edward H. Budd
George M.C. Fisher
David R. Goode
John F. Smith, Jr.
Andrew J. Young
Delta Board Council Representatives
MICHELE F. CHASE
Management and Administrative
Support
WILLIAM M. MOREY
Reservation Sales and City
Ticket Offices
KENNETH R. NOWLING
Technical Operations
LARRY J. STITES
Airport Customer Service and
Air Logistics
DALE C. WILLIAMS
In-Flight Service
Corporate Governance Principles
The Board of Directors believes
that sound corporate governance
practices provide an important
framework in assisting the Board
to fulfill its responsibilities.
Accordingly, the Board has adopted
corporate governance principles
relating to its structure, operations
and functions. The Board is review-
ing these principles in light of the
rules recently adopted by the Securi-
ties and Exchange Commission
under the Sarbanes-Oxley Act and
the proposed corporate governance
listing standards issued by the New
York Stock Exchange.
Delta's current corporate governance
principles require that:
the Board conduct an annual
evaluation of the CEO and the
effectiveness of the Board,
the Board review annually with
the CEO management succession
planning and. development,
executive compensation
be aligned with Delta's business
strategy and long-term goals,
a substantial majority of .the Board
be outside directors who have no
significant financial or personal
FINANCE
David R. Goode, Chairman
Edward H. Budd
George M.C. Fisher
Gerald Grinstein
PERSONNEL & COMPENSATION
Edward H. Budd, Chairman
George M. C. Fisher
David R. Goode
Gerald Grinstein
Representative of Air
Line Pilots Association,
International
CAPTAIN DAVE A. MILLER
Associate non-voting member of
the Board of Directors
ties to Delta, other th~n common
stock ownership and the right to
receive compensation earned for
serving as a director,
there be a mandatory retirement
age for directors,
each Board committee, other than
the executive committee, consist
solely of outside directors,
directors be encouraged to own
a significant equity interest
in Delta, and
executive sessions of the Board be
held at least twice a year.
9
10
Report of Management
The integrity and objectivity of the information presented in this Annual Report are the responsibility of Delta management.
The 2002 financial statements contained in this report have been audited by Deloitte & Touche LLP, independent auditors, whose
report appears on page 66.
Delta maintains a system of internal financial controls which are assessed periodically through a program of internal audits.
These controls include the selection and training of Delta's managers, organizational arrangements that provide a division of
responsibilities, and communication programs explaining our policies and standards. We believe this system provides reasonable
assurance that transactions are executed in accordance with management's authorization; that transactions are appropriately
recorded to permit preparation of financial statements which, in all material respects, are presented in conformity with accounting
principles generally accepted in the United States of America; and that assets are properly accounted for and safeguarded against
loss from unauthorized use.
The Board of Directors pursues its responsibilities for these financial statements through its Audit Committee, which consists solely
of directors who are neither officers nor employees of Delta. The Audit Committee meets periodically with the independent public
accountants, the internal auditors and management to discuss internal accounting control, auditing and financial reporting matters.
M. Michele Burns Leo F. Mullin
Executive Vice President and Chief Financial Officer Chairman and Chief Executive Officer
Index to Financials
10 Report of Management 29 Consolidated Statements of Cash Flows
11 Consolidated Financial Highlights 30 Consolidated Statements of Shareowners' Equity
11 Consolidated Operating Highlights 31 Notes to the Consolidated Financial Statements
12 Reconciliation of Net Loss and Diluted Loss per 66 Independent Auditors' Report
Share - Excluding
68 Consolidated Summary of Operations
12 Glossary of Defined Terms
68 Ocher Financial and Statistical Data
13 Management's Discussion and Analysis of
Business Description
Financial Condition and Results of Operations
69
26 Consolidated Balance Sheets 69 Shareowner Information
28 Consolidated Statements of Operations
70 Delta's Aircraft Fleet
Consolidated Financial Highlights
Years ended December 31, 2002 and 2001
2002 2001 Change
Operating revenues (millions) $ 13,305 $ 13,879 (4.1%)
Operating expenses (millions) $ 14,614 $ 15,481 (5.6%)
Operating loss (millions) $ (1,309) $ (1,602) 18.3%
Operating margin (9.8)% (11.5)% 1.7 pts
Net loss (millions) $ (1,272) $ (1,216) (4.6%)
Net loss - excluding (millions)O! $ (958) $ (1,027) 6.7%
Diluted loss per share $ (10.44) $ (9.99) (4.5%)
Diluted loss per share - excluding0J $ (7.89) $ (8.46) 6.7%
Passenger mile yield 12.08 12.74 (5.2%)
Operating revenue per available seat mile 9.39 9.39
Passenger revenue per available seat mile 8.69 8.77 (0.9%)
Operating cost per available seat mile 10.31 10.47 (1.5%)
Operating cost per available seat mile - excluding(2l 10.03 10.14 (1.1%)
Dividends declared on common stock (millions) $ 12 $ 12
Dividends per common share 10.00 10.00
Common shares issued and outstanding at year end (thousands) 123,359 123,246 0.1%
Consolidated Operating Highlights
Years ended December 31, 2002 and 2001
2002 2001 Change
Revenue passengers enplaned (thousands) 107,048 104,943 2.0%
Revenue passenger miles (millions) 102,029 101,717 0.3%
Available seat miles (millions) 141,719 147,837 (4.1 %)
Passenger load factor 72.0% 68.8% 3.2 pts.
Breakeven passenger load factor 79.6% 77.3% 2.3 pts.
Breakeven passenger load factor - excluding(2
l 77.3% 74.7% 2.6 pts.
Cargo ton miles (millions) 1,495 1,583 (5.6%)
Cargo ton mile yield 30.62 31.95 (4.2%)
Fuel gallons consumed (millions) 2,514 2,649 (5.1 %)
Average aircraft fuel price per gallon, net of hedging gains 66.94 68.60 (2.4%)
Number of aircraft in fleet at year end 831 814 17
Average age of aircraft fleet at year end (years) 9.0 9.1 (1.1%)
Average aircraft utilization (hours per day) 7.3 7.3
End of year full-time equivalent employees 75,100 76,300 (1.6%)
(1) See reconciliation of net loss and diluted loss per share - excluding on page 12.
(2) Excludes net charges totaling $405 million for 2002 and $485 million for 2001 for (i) asset writedowns, restructuring and related items, net and (ii) Stabilization
Act compensation (see Notes 16 and 19, respectively, of the Notes to the Consolidated Financial Statements).
11
Reconciliation of Net Loss and Diluted Loss Per Share - Excluding
The following table shows a reconciliation of our net loss and diluted loss per share excluding certain items to our reported net
loss and diluted loss per share for the years ended December 31, 2002 and 2001:
(in millions, except per share data)
Net loss and diluted loss per share - excluding
Excluded items, net of tax:
Asset writedowns, restructuring and related items, net<
1
>
Stabilization Act compensation<
2
>
Other income (expense) items<
3
>
Total excluded items, net of tax
Net loss and diluted loss per share
(I) See Note 16 of the Notes to the Consolidated Financial Statements.
(2) See Note 19 of the Notes to the Consolidated Financial Statements.
(3) See page 17 of Management's Discussion and Analysis.
12
Glossary of Defined Terms
ABO - Accumulated Benefit Obligation - The actuarial present
value of benefits (whether vested or nonvested) attributed by the
pension benefit formula, under Delta's defined benefit pension
plans, to employee service rendered before a specified date and
based on employee service length and compensation levels prior
to that date. The accumulated benefit obligation differs from the
projected benefit obligation in that it includes no assumption
about future compensation levels.
APBO -Accumulated Postretirement Benefit Obligation -
The actuarial present value of benefits (other than pensions)
attributed to employee service rendered before a specified date
under Delta's postretirement welfare benefit plans.
Air Traffic Liability - A liability on Delta's Consolidated Balance
Sheets that represents amounts received for the sale of passenger
tickets for which services have not yet been provided. As the
transportation service is provided by Delta, the amount paid for
the service is removed from air traffic liability and is recognized
as revenue.
ASM -Available Seat Mile -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 dur-
ing a reporting period.
Cargo Ton Miles - The total number of tons of cargo transport-
ed during a reporting period, multiplied by the total number of
miles cargo is flown.
Cargo Ton Mile Yield - The amount of cargo revenue earned per
cargo ton mile during a reporting period.
CASM - (Operating) Cost per Available Seat Mile - The
amount of operating cost incurred per available seat mile during
a r~porting period. Also referred to as unit cost.
EETC - Enhanced equipment trust certificate. These certificates
do not represent obligations of Delta, but represent an undivided
interest in a pass through trust which has purchased equipment
notes issued by Delta. The equipment notes are full recourse
obligations of Delta and are secured by certain aircraft.
2002 2001
$ (958) $ (7.89) $ (1,027) $ (8.46)
(277) (2.25) (695) (5.63)
22 0.17 392 3.18
(59) (0.47) 114 0.92
(314) (2.55) (189) (1.53)
$ (1,272) $ (10.44) $ (1,216) $ (9.99)
Fuel Price Neutralized CASM - The amount of operating cost
incurred per available seat mile during a reporting period, adjust-
ing average fuel price per gallon to equal the prior year.
Net Debt-to-Capital Ratio - A measure of leverage which is
calculated by dividing net debt by total capitalization. Net debt
includes short-term and long-term debt, capital lease obligations
and the present value of operating lease obligations, reduced by
cash and short-term investments. Capital includes total debt and
shareowners' equity, including Series B ESOP Convertible
Preferred Stock.
Passenger Load Factor - A measure of utilized available seating
capacity, which is calculated by dividing RPMs by ASMs for a
reporting period.
Passenger Mile Yield - The amount of passenger revenue
earned per revenue passenger mile during a reporting period.
PBO - Projected Benefit Obligation - The actuarial present
value as of a date of all benefits attributed by the pension benefit
formula, under Delta's defined benefit pension plans, to employ-
ee service rendered prior to that date. The projected benefit
obligation is measured using assumptions about future
compensation levels.
RASM - (Operating or Passenger) Revenue per Available
Seat Mile - The amount of operating or passenger revenue
earned per available seat mile during a reporting period.
Passenger RA.SM is also referred to as unit revenue.
RPM - Revenue Passenger Mile - One revenue-paying passen-
ger transported one mile. RPMs are calculated by multiplying the
number of revenue passengers by the number of miles they are
flown for the reporting period. Also referred to as traffic.
Section 1110 - Section 1110 of the U.S. Bankruptcy Code
enables a lessor or secured creditor to a U.S. airline to repossess
eligible equipment that secures the lease or security interest 60
days after the airline files a petition for bankruptcy protection,
unless the airline cures the default and agrees to meet its future
obligations to the creditor under the lease or security agreement.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
BUSINESS ENVIRONMENT
Since September 11, 2001, Delta and the airline industry
have faced unprecedented challenges. Our industry has expe-
rienced substantial revenue declines and cost increases, creating
industry-wide liquidity issues which have resulted in two major
airlines filing for bankruptcy. The following discussion was
prepared as of March 12, 2003.
Revenues
The depressed revenue environment is the result of various
factors, including (1) a sharp decline in high-yield business
travel after the September 11, 2001 terrorist attacks; (2) indus-
try capacity exceeding demand, which has resulted in heavy
fare discounting to stimulate demand; (3) a government-
imposed passenger security fee adopted after September 11,
2001, which we have not been able to pass on to our customers
because of the weak demand situation; and ( 4) a reduction in
traffic due to the real and perceived "hassle factor" resulting
from increased airport security measures. Additionally, 01.1-r
revenues have been adversely impacted by the continuing
weakness of the U.S. and world economies, the growth of
low-cost carriers and increased price-sensitivity in customers'
purchasing behavior.
The following table shows the change in our traffic, capacity
and yield for the year ended December 31, 2002, compared
to the years ended December 31, 2001 and 2000:
2002 VS. 2001 (l )
2002 vs. 2000
Traffic 0% (10%)
Capacity<
2>
(4%) (9%)
Yield (5%) (13%)
(1) During 2001, our financial performance was materially adversely affected by
(i) the September 11, 2001 terrorist attacks; (ii) the slowing US. and world
economies; (iii) the cancel/,ation of a substantial number of flights due to a job
action by some Delta pilots and public concern over a possible strike by Delta
pilots; and (iv) the Comair, Inc. (Comair) pilot strike, which resulted in
Comair's suspension of operations between March 26, 2001 and July 1, 2001,
and its gradual return to prestrike service levels following the strike.
(2) We currently have 25 mainline aircraft that remain temporarily grounded as
a result of capacity reductions implemented since September 11, 2001.
Operating revenues in 2002 were $13.3 billion, a 4% decrease
from $13.9 billion in 2001 and a 21 % decrease from $16.7
billion in 2000. We have announced initiatives to mitigate
revenue pressures, such as our plans to implement a marketing
agreement with Continental Airlines and Northwest Airlines,
and the launch in April 2003 of a low-fare carrier, Song.
Because of the difficult revenue environment, however, we do
not expect significant improvement in our revenues in 2003.
Costs
Our cost pressures in 2002 included increases in (1) pension
expense due primarily to increased obligations resulting from
declining interest rates, a decrease in fair value of our pension
plan assets, as well as scheduled pilot pay increases; (2) interest
expense primarily due to an increase in debt outstanding; (3)
war and terrorism risk insurance premiums; and ( 4) security
costs. These costs increased by a total of approximately $645
million from 2001 to 2002. In addition, aircraft fuel prices
began to rise significantly beginning in November 2002,
reflecting both the Middle East uncertainty and the
Venezuelan political crisis.
To mitigate these cost pressures, we implemented cost savings
initiatives after September 11, 2001 and throughout 2002
which resulted in approximately $1 billion in savings in 2002.
These initiatives included (1) a decrease in salary expense related
to our 2001 workforce reduction programs, partially offset by
pilot and mechanic rate increases; (2) a decrease in passenger
commission expense due to the elimination of travel agent
base commissions for tickets sold in the U.S. and Canada;
and (3) declines in contract work, aircraft maintenance
materials volume, advertising expenditures, passenger service
expense and professional fees. While these savings were signif-
icant, and resulted in a net decrease in unit costs compared to
2001, our unit cost remained higher than our unit revenue.
During 2003, we expect pension,. interest and fuel expenses
to increase by approximately $600 million to $800 million
compared to 2002, not including the impact of events out-
side our control, such as a war with Iraq or other geopolitical
risks. Assuming the Federal Aviation Administration (FM)
continues to sell war and terrorism risk insurance to airlines
at current rates and there are no Ghanges to our security
requirements in 2003, we expect insurance and security
costs to remain relatively flat as compared to 2002. For
additional information on our war and terrorism risk
in~urance, see Note 19 of the Notes to the Consolidated
Financial Statements.
Initiatives
We believe it is essential for us to continue to reduce our
costs. Accordingly, we have initiated actions to reduce costs
and capital expenditures in 2003 and later years, with the goal
of reducing non-fuel unit costs by 15% by the end of 2005.
These initiatives include the following:
Reducing staffing by up to an additional 8,000 jobs. We
estimate that our workforce reduction programs announced
in 2002 will result in approximately $350 million in annual
13
14
Management's Discussion and Analysis of Financial Condition and Results of Operations
savings, with $250 million being realized in 2003. Most of
these job reductions will be complete by May 1, 2003. We
recorded a pretax charge of $127 million in the December
2002 quarter related to these workforce reduction programs
and expect to record a pretax charge of approximately $43
million in the March 2003 quarter for the associated cost
of curtailing the pension and postretirement obligations for
employees participating in these programs. See Notes 16
and 17 of the Notes to the Consolidated Financial
Statements for additional information on this charge.
Investing in technology to improve efficiencies. These initia-
tives include installing over 400 additional self-service kiosks
in airports during 2003 and implementing an SAP inventory
and supply chain management system.
Utilizing our regional jet aircraft to decrease the average
number of available seats per aircraft while increasing the
number of flights in certain locations. This will allow us
to better match capacity with demand.
Modifying our employee benefits programs through a
strategic benefits review. Beginning in 2003, we implemented
changes to our healthcare benefits which we expect to offset
rising healthcare costs in 2003 by approximately $80 mil-
lion. In July 2003, we will begin the migration to a new
cash balance pension plan, which we anticipate will result
in cost savings of approximately $600 million over the next
five years, including $120 million in 2003.
Making significant changes to our fleet plan by (I) reducing
costs through fleet simplification and (2) reducing capital
expenditures in 2003 and 2004 by deferring delivery of 31
aircraft, which will result in no scheduled mainline aircraft
deliveries during this two-year period.
Liquidity
Due to the depressed revenue environment and cost pressures,
we borrowed $2.6 billion in 2002. The net proceeds from
these transactions were primarily used to finance aircraft and
repay certain debt obligations. All of our borrowings in 2002
were secured by aircraft.
At February 28, 2003, we had cash and cash equivalents tot~-
ing $ 1. 9 billion. This reflects (I) the proceeds from our sale
on January 30, 2003 of $392 million principal amount of
insured enhanced equipment trust certificates, which is
due in installments through January 2008 and is secured
by 12 mainline aircraft owned by us, and (2) our purchase
on February 25, 2003, of a portion of outstanding ESOP
Notes for $74 million. We also have $500 million ofliquidity
available under a secured credit facility which expires on
August 21, 2003, and unencumbered assets available for
use in potential financing transactions.
We estimate that the value of our unencumbered aircraft
assets at February 28, 2003 is approximately $3.6 billion,
(excluding the aircraft that would secure the $500 million
secured credit facility described above), approximately $800
million of which consists of aircraft that are eligible under
Section 1110. Because this provision provides protection to
lessors and creditors, and because Section 1110 aircraft are
generally newer, they are more desirable to lenders as collateral
in financing transactions than aircraft that are not eligible
under Section 1110.
The values of our unencumbered aircraft assets were derived
by us from published third-party estimates of the "base value"
of similar aircraft using certain assumptions and may not
accurately reflect the current market value of the aircraft. Base
value is an estimate of the underlying economic value of an
aircraft based on historic and future value trends in a stable
market environment, while current market value is the value
of the aircraft in the actual market; both methods assume
an aircraft is in average condition and in its "highest and best
use." Given the difficult business environment, there is no
assurance we would have access to financing using these air-
craft as collateral. In any event, the amount we could finance
using these aircraft would likely be significantly less than
their base value.
As a result of our revenue and cost initiatives described above,
we believe that our cash flows from operations in 2003 will
be sufficient to fund our daily operations and non-fleet capital
expenditures. This expectation reflects the softness in traffic
and advance bookings we are now experiencing as a result of
public concern over possible military action in Iraq. Because
we cannot predict either the occurrence or the scope and
duration of events that are beyond our control, the actual
effect on our business of the current geopolitical risks may
differ materially from the level we have assumed.
We expect capital expenditures in 2003 to total approximately
$1.5 billion, including $1.0 billion for regional jet aircraft
and $500 million for non-fleet capital expenditures. We have
available commitments from a third party to provide
long-term financing on a secured basis for a substantial
portion of our commitments for regional jet aircraft to be
delivered through 2004.
We have approximately $700 million of current debt maturi-
ties and capital lease obligations due in 2003, including $301
million under a Reimbursement Agreement and related letters
of credit that terminate on June 8, 2003 (see Note 6 of the
Notes to the Consolidated Financial Statements). We will also
be required to pay (1) $102 million related to additional let-
ters of credit under the Reimbursement Agreement mentioned
above and (2) $250 million under a receivables securitization
agreement when it expires on March 31, 2003 (see Note 8 of
the Notes to the Consolidated Financial Statements). We are
seeking to renew or refinance the receivables and letter of
credit facilities, but there is no assurance we will be able to
do so. In addition, our estimated pension funding is approxi-
mately $80 million for 2003.
We expect to meet our obligations as they come due through
available cash and cash equivalents, investments, internally gen-
erated funds and borrowings under existing and new financing
transactions. We do not expect new financing transactions to
be available on an unsecured basis. While we expect secured .
financing to be available to us on commercially reasonable
terms, in the current business environment access to financing .
cannot be assured. Failure to obtain new financing could have
a material adverse effect on our liquidity.
2003 Results
Based on the difficult business environment discussed above,
we anticipate our net loss for the March 2003 quarter to be
greater than our March 2002 quarter net loss. We also expect
to report a net loss for 2003. In addition, the following signif-
icant external risks exist, which could adversely impact our
results of operations, our financial condition and our ability
to access capital markets for additional financing:
The possibility of a war with Iraq and other geopolitical
risks, which could have a material adverse impact on our
results of operations and cash flows.
Two major competitors, United and US Airways, are cur-
rently operating under bankruptcy protection. Historically,
air carriers involved in reorganizations have undertaken
substantial fare discounts in order to maintain cash flows
and to enhance customer loyalty. Such fare discounting
has lowered, and may continue to lower, yields for all airlines.
Moreover, carriers operating in bankruptcy, or that successfully
emerge from bankruptcy, may be able to achieve reduced
costs which could place us at a competitive disadvantage.
The possibility that other carriers may file for bankruptcy
protection.
2002 Compared to 2001
NET INCOME (LOSS) AND EARNINGS (LOSS) PER SHARE (EPS)
We recorded a consolidated net loss of $1.3 billion ($10.44
diluted EPS) in 2002, compared to a consolidated net loss
of $1.2 billion ($9.99 diluted EPS) in 2001.
OPERATING REVENUES
Operating revenues were $13.3 billion in 2002, decreasing
4% from $13.9 billion in 2001. Passenger revenues fell 5%
to $12.3 billion. RPMs were flat on a capacity decline of 4%,
while passenger mile yield decreased 5% to 12.08. The
decreases in operating revenues, passenger revenues and
passenger mile yield from depressed 2001 levels reflect
the continuing effects of the September 11 terrorist attacks
on our business and other factors negatively impacting the
revenue environment, which are discussed in the Business
Environment section of Management's Discussion and
Analysis on pages 13-15.
North American Passenger Revenues
North American passenger revenues fell 6% to $10.0 billion.
RPMs increased 1 % on a capacity decrease of 3%, while
passenger mile yield decreased 7%. The decline in passenger
mile yield reflects the challenging revenue environment,
including significant fare discounting as well as a substantial
reduction in high-yield business traffic after the September 11
terrorist attacks.
International Passenger Revenues
International passenger revenues decreased 2% to $2.3 billion.
RPMs fell 2% on a capacity decline of 7%, while passenger
mile yield increased 1 %. The decline in our international
capacity was primarily driven by reductions in our Pacific
operations due to weak demand. ,
Cargo and Other Revenues
Cargo revenues decreased 9% to $458 million. This reflects
a 7% decline due to FM security measures adopted after
September 11, 2001, that prohibit passenger airlines from
transporting mail weighing more than 16 ounces, which pre-
viously represented approximately 50% of our mail business.
The decline in cargo revenues also reflects a 2% decrease due
to lower domestic freight volumes and yields. Cargo ton miles
decreased 6% and cargo ton mile yield decreased 4%. Other
revenues increased 29% to $526 million, primarily reflecting
a 12 % increase due to higher administrative service fees and
a 12% increase due to higher codeshare revenues ..
15
Management's Discussion and Analysis of Financial Condition and Results of Operations
OPERATING EXPENSES
Operating expenses for 2002 totaled $14.6 billion, decreasing
6% from $15.5 billion in 2001. Operating capacity decreased
4% to 142 billion ASMs. CASM fell 2% to 10.31 , while
fuel price neutralized CASM fell 1 % to 10.34. Operating
expenses include asset writedowns, restructuring and related
items, net totaling a $439 million charge in 2002 and a
$1.1 billion charge in 2001, as well as Stabilization Act
compensation of $34 million in 2002 and $634 million in
2001 (see Notes 16 and 19, respectively, of the Notes to
the Consolidated Financial Statements). Excluding these
items, operating expenses decreased 5% to $14.2 billion,
CASM fell 1 % to 10.03, and fuel price neutralized CASM
fell 1 % to 10.06.
Salaries and related costs totaled $6.2 billion in 2002, a 1 %
increase from $6.1 billion in 2001. This reflects a 6% increase
from higher pension expense and a 5% increase due to higher
salary and benefit rates, primarily for pilots and mechanics.
These increases were largely offset by decreases due to work-
force reductions implemented after we reduced capacity
following September 11, 2001.
Aircraft fuel expense totaled $1. 7 billion during 2002, a 7%
decrease from $1.8 billion during 2001. Total gallons con-
sumed decreased 5% mainly due to capacity reductions. The
average fuel price per gallon fell 2% to 66.94. Our fuel cost
is shown net of fuel hedge gains of $136 million for 2002 and
$299 million for 2001. Approximately 56% and 58% of our
aircraft fuel requirements were hedged during 2002 and
2001, respectively. For additional information about our fuel
hedge contracts, see Note 4 of the Notes to the Consolidated
Financial Statements.
Depreciation and amortization expense fell 11 % in 2002,
reflecting a 6% decrease due to a change in our asset base
and a 5% decrease due to our adoption on January 1, 2002,
of Statement of Financial Accounting Standards (SFAS) No.
142, "Goodwill and Other Intangible Assets" (SFAS 142).
SFAS 142 requires that goodwill and certain other intangible
assets no longer be amortized (see Note 5 of the Notes to the
Consolidated Financial Statements).
Contracted services expense declined 1 % primarily due to
a 4% decrease from fewer contract workers across all work-
groups, partially offset by a 3% increase due to higher security
costs. Landing fees and other rents rose 7%, of which 3% was
related to an increase in landing fee rates and 2% was due to
lower costs in 2001 resulting from Comair's reduced opera-
tions in 2001 due to its pilot strike and gradual return to
previous levels of service after the strike. Aircraft maintenance
materials and outside repairs expense fell 11 %, primarily
reflecting a reduction in maintenance volume and materials
consumption due to the timing of maintenance events. Aircraft
rent expense decreased 4%, primarily due to lower numbers
of leased aircraft during the March, June and September 2002
quarters resulting from our fleet simplification efforts. Other
selling expenses fell 13%, of which 6% was due to lower costs
associated with our mileage partnership programs and 4% was
due to reduced advertising and promotion spending.
Passenger commission expense declined 40%, primarily due
to a change in our commission rate structure. On March 14,
2002, we eliminated travel agent base commissions for tickets
sold in the U.S. and Canada. Passenger service expense
decreased 20%, primarily due to meal service reductions.
Asset writedowns, restructuring and related items, net totaled
$439 million in 2002 compared to $1.1 billion in 2001. Our
2002 charge consists of $251 million in asset writedowns, $127
million related to our 2002 workforce reduction programs,
$93 million for the temporary carrying cost of surplus pilots
and grounded aircraft, $30 million due to the deferred delivery
of certain mainline aircraft, $14 million for .the closure of
certain leased facilities and $3 million related to other items,
partially offset by a $79 million reversal of certain reserves.
Our 2001 charge consists of $566 million related to our 2001
workforce reduction programs, $363 million from a decrease
in value of certain aircraft and other fleet-related charges, $160
million related primarily to discontinued contracts, facilities
and information technology projects and $30 million for the
temporary carrying cost of surplus pilots and grounded aircraft.
See Note 16 of the Notes to the Consolidated Financial
Statements for additional information on these asset write-
downs, restructuring and related items, net.
Stabilization Act compensation totaled $34 million in 2002
compared to $634 million in 2001, representing amounts
we recognized as compensation in the applicable period
under the Air Transportation Safety and System Stabilization
Act (Stabilization Act). See Note 19 of the Notes to the
Consolidated Financial Statements for additional information.
Other operating expenses decreased 11 % primarily due to
declines in miscellaneous expenses such as supplies, utilities,
interrupted operation expenses and professional fees, which
were partially offset by a 19% increase in expenses due to a
rise in war and terrorism risk insurance rates.
OPERATING INCOME (LOSS) AND OPERATING MARGIN
We incurred an operating loss of $1.3 billion in 2002, com-
pared to an operating loss of $1.6 billion in 2001. Operating
margin was (10%) and (12%) for 2002 and 2001, respectively.
Excluding asset writedowns, restructuring and related items,
net, and Stabilization Act compensation discussed above, we
incurred an operating loss of $904 million in 2002, compared
to an operating loss of $1.1 billion in 2001. Operating
margin excluding these items was (7%) and (8%) for 2002
and 2001, respectively.
OTHER INCOME (EXPENSE)
Other expense totaled $693 million during 2002, compared
to other expense of $262 million in 2001. Included in these
results are the following:
A $127 million gain in 2001 on the sale of certain invest-
ments. This primarily relates to a $111 million gain on the
sale of our equity interest in SkyWest, Inc., the parent com-
pany of SkyWest Airlines, and an $11 million gain from the
sale of our equity interest in Equant, N.V., an international
data network services company.
A $39 million charge in 2002 compared to a $68 million
gain in 2001 (or fair value adjustments of financial instru-
ments accounted for under SPAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SPAS 133).
This relates to derivative instruments we use in our fuel
hedging program and to our equity warrants and other
similar rights in certain companies.
A $42 million charge for the extinguishment of debt and a
$13 million loss for the reduction in value of certain invest-
ments in 2002.
The change in other income (expense) is also attributable
to the following:
Interest expense increased $147 million in 2002 compared
to 2001, primarily due to higher levels of outstanding debt.
Interest income decreased $53 million in 2002 due to
lower interest rates and a lower average cash balance
compared to 2001.
Miscellaneous income, net was $1 million in 2002 compared
to a $47 million expense in 2001, due primarily to increased
earnings from our equity investment in WORLDSPAN, LP.
(Worldspan), a computer reservations system partnership.
2001 Compared to 2000
NET INCOME (LOSS) AND EARNINGS (LOSS) PER SHARE
We recorded a consolidated net loss of $1.2 billion ($9.99
diluted EPS) in 2001 and consolidated net income of
$828 million ($6.28 diluted EPS) in 2000.
OPERATING REVENUES
Operating revenues were $13.9 billion in 2001, decreasing
17% from $16.7 billion in 2000. Passenger revenues fell 17%
to $13.0 billion. RPMs declined 10% _
on a capacity decrease
of 5%, while passenger mile yield declined 8% to 12.74.
These decreases were primarily the result of the effects of the
terrorist attacks on September 11, the slowing U.S. and world
economies and pilot labor issues at both Delta and Comair.
North American Passenger Revenues
North American passenger revenues fell 19% to $10.6 billion.
RPMs decreased 11 % on a capacity decrease of 6%, while
passenger mile yield decreased 9%. These decreases resulted
from the September 11 terrorist attacks, the slowing economy
and pilot labor issues.
International Passenger Revenues
International passenger revenues decreased 6% tg $2.3
billion. RPMs fell 6% mainly due to the terrorist attacks on
September 11 and the slowing U.S. and world economies.
Passenger mile yield remained Bat while capacity increased
2%, reflecting our international expansion, particularly in
Latin American markets.
Cargo and Other Revenues
Cargo revenues decreased 13% to $506 million. This reflects
an 8% decline due to lower mail revenues resulting from the
implementation of new FAA restrictions on mail and weak
U.S. and world economies, and a 5% decrease due to a decline
in freight volumes, also resulting from the slow~ng U.S. and
world economies. Cargo ton miles decreased 15% and cargo
ton mile yield increased 2%. Other revenues decreased 18%
to $409 million, primarily. due to lower codeshare revenues,
resulting from the terrorist attacks on September 11 and the
slowing U.S. and world economies.
18
Management's Discussion and Analysis of Financial Condition and Results of Operations
OPERATING EXPENSES
Operating expenses for 2001 totaled $15. 5 billion, increasing
2% from $15.1 billion in 2000. Operating capacity decreased
5% to 148 billion ASMs. CASM rose 7% to 10.47, and
fuel price neutralized CASM grew 7% to 10.45. Operating
expenses include asset writedowns, restructuring and related
items, net totaling a $1.1 billion charge in 2001 and a
$108 million charge in 2000, as well as Stabilization Act
compensation of $634 million in 2001 (see Notes 16 and
19, respectively, of the Notes to the Consolidated Financial
Statements). Excluding these items, operating expenses
remained flat at $15.0 billion, CASM rose 5% to 10.14,
and fuel price neutralized CASM grew 5% to 10.12.
Salaries and related costs increased 3% during 2001 to $6.1
billion, primarily due to a rise in costs associated with a new
collective bargaining agreement between Delta and its pilots.
Aircraft fuel expense decreased 8% in 2001. Total gallons
consumed decreased 9% due primarily to a decrease in flights
resulting from the September 11 terrorist attacks and the
Comair pilot strike, as well as fuel efficiencies realized from
our fleet renewal efforts. The average fuel price per gallon
rose 2% to 68.60. Our fuel cost is shown net of fuel hedge
gains of $299 million for 2001 and $684 million for 2000.
Approximately 58% and 67% of our aircraft fuel requirements
were hedged during 2001 and 2000, respectively. For additional
information about our fuel hedge contracts, see Note 4 of the
Notes to the Consolidated Financial Statements.
Depreciation and amortization expense rose 8% in 2001
due to the acquisition of additional aircraft and ground
equipment. Contracted services expense increased 5% result-
ing primarily from a 1 % rise due to rate increases for building
and equipment maintenance and a 1 % increase due to a rise
in security costs. Landing fees and other rents rose 1 %. This
change includes a 2% rise from increased rates at various loca-
tions and a 2% decrease due to Comair's reduced operations
from its pilot strike. Aircraft maintenance materials and out-
side repairs expense grew 11 % due primarily to the timing of
certain maintenance work. Aircraft rent expense decreased 1 %
due to a decrease in the number of leased aircraft.
Other selling expenses decreased 10% due to a lower volume
of credit card charges from lower revenue. Passenger commis-
sion expense declined 18%, primarily as a result of lower
passenger revenues. Passenger service expense decreased 1 %.
Asset writedowns, restructuring and related items, net totaled
$1.1 billion in 2001 compared to $108 million in 2000. Our
2001 charge is described on page 16. Our 2000 charge consists
of $86 million related to our decision to offer an early retire-
ment medical option program and $22 million from the
closure of our Pacific gateway in Portland, Oregon. See Note
16 of the Notes to the Consolidated Financial Statements
for additional information on these asset writedowns,
restructuring and related items, net.
Stabilization Act compensation totaled $634 million in
2001. This represents the amount we recognized in 2001
as compensation under the Stabilization Act. See Note 19
of the Notes to the Consolidated Financial Statements for
additional information.
Other operating expenses decreased 4% as a result of decreases
in miscellaneous expenses such as fuel-related taxes, interrupted
trip expenses and professional fees, which were partially offset
by a 2% increase due to new uniform costs and a 3% increase
due to higher insurance expenses.
OPERATING INCOME (LOSS) AND OPERATING MARGIN
We incurred an operating loss of $1.6 billion in 2001, com-
pared to operating income of $1.6 billion in 2000. Operating
margin was (12%) and 10% for 2001 and 2000, respectively.
Excluding asset writedowns, restructuring and related items,
net and Stabilization Act compensation discussed above, we
incurred an operating loss of $1.1 billion in 2001, compared
to operating income of $1.7 billion in 2000. Operating
margin excluding these items was (8%) and 10% for 2001
and 2000, respectively.
OTHER INCOME (EXPENSE)
Other expense totaled $262 million during 2001, compared
to other expense of $88 million in 2000. Included in these
results are the following:
A $301 million gain in 2000 for the sale of certain invest-
ments. This includes a $73 million gain from the sale of
1.2 million shares of priceline.com, Incorporated (priceline)
common stock and a $228 million non-cash gain from the
exchange of six million shares of priceline common stock for
priceline preferred stock.
A $127 million gain in 2001 on the sale of certain invest-
ments. This primarily relates to a $111 million gain on the
sale of our equity interest in SkyWest, Inc., the parent com-
pany of SkyWest Airlines and an $11 million gain from the
sale of our equity interest in Equant, N.V., an international
data network services company.
A $68 million gain in 2001 compared to a $159 million charge
in 2000 for fair value adjustments of financial instruments
accounted for under SFAS 133. This relates to derivative
instruments we use in our fuel hedging program and to our
equity warrants and other similar rights in certain companies.
A $16 million one-time, non-cash gain in 2000 related to
our equity investment in Worldspan. This gain represents
our share of Worldspan's favorable outcome in certain
arbitration proceedings.
The change in other income (expense) is also attributable
to the following:
Interest expense increased $119 million in 2001 primarily
due to higher levels of outstanding debt;
Interest income decreased $34 million in 2001 primarily
due to lower interest rates; and
Miscellaneous expense, net was $47 million in 2001 com-
pared to $27 million in income in 2000 mainly due to a
decrease in our equity earnings from Worldspan.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE
During 2000 we recorded a $164 million cumulative effect,
non-cash charge ($100 million net of tax, or $0.77 diluted
EPS) resulting from our adoption of SFAS 133 on July 1,
2000 (see Note 4 of the Notes to the Consolidated
Financial Statements).
Financial Condition and Liquidity
SOURCES AND USES OF CASH
2002
Cash and cash equivalents totaled $2.0 billion at December
31, 2002, compared to $2.2 billion at December 31, 2001.
For 2002, net cash provided by operations totaled $285 mil-
lion, including receipt of (1) a $472 million tax refund due
to a new tax law and (2) $112 million in compensation under
the Stabilization Act. Our cash flows from significant financ-
ing and investing activities are described below.
Capital expenditures, including aircraft acquisitions made under
seller financing arrangements, were $2.0 billion during 2002
and included the acquisition of four B-737-800, three B-767-
400, one B-777-200, 34 CRJ-200 and 15 CRJ-700 aircraft.
Debt and capital lease obligations, including current maturities
and short-term obligations, totaled$ 10.9 billion at December
31, 2002, compared to $9 .4 billion at December 31, 2001.
During 2002, we entered into or amended the following credit
facilities to increase our liquidity (see Note 6 of the Notes to
the Consolidated Financial Statements):
We issued a total of$ 1 .4 billion of enhanced equipment
trust certificates, which are secured by 17 B-737-800, one
B-757-200, eight B-767-300ER and six B-767-400 aircraft.
These financings are due in installments through January
2023. At December 31, 2002, there was $1.4 billion out-
standing under these financings.
In addition to the enhanced equipment trust certificates
described above, during 2002 we borrowed $1.2 billion,
which is due in installments through June 2019 and is
secured by 56 regional jet aircraft, five B-737-800 aircraft,
three B-767-300ER aircraft and two B-767-300 aircraft. At
December 31, 2002, there was $1.2 billion in borrowings
outstanding under these financings. These transactions
resulted in the termination of a $350 million short-term
facility that we had entered into in January 2002.
On January 31, 2002, we entered into a facility to finance,
on a secured basis at the time of acquisition, certain future
deliveries of regional jet aircraft. At December 31, 2002,
total borrowings available to us under this facility, as amended,
were $197 million, of which $31 million was outstanding.
On August 22, 2002, we amended and restated an existing
credit facility to (1) extend the term from December 27,
2002 to August 21, 2003 and (2) reduce the maximum
amount we may borrow under this agreement from $625
million to $500 million. Any borrowings under this facility
will be secured by certain aircraft owned by us. At December
31, 2002, no borrowings were outstanding under this facility.
In October 2002, we amended our unsecured letter of credit
Reimbursement Agreement with Commerzbank AG and a
group of banks to (1) eliminate the debt-to-equity ratio and
secured debt covenants from that agreement and (2) add a
covenant requiring us to maintain a minimum ,of $1 billion
. of unrestricted cash, cash equivalents and short-term invest-
ments as of the end of each month, beginning on October
31, 2002. The Reimbursement Agreement and the related
letters of credit will terminate on June 8, 2003.
In addition, during 2002, we deferred delivery of the
following 31 mainline aircraft:
19
20
Management's Discussion and Analysis of Financial Condition and Results of Operations
five B-737-800 aircraft deferred from 2003 to 2006;
23 B-737-800 aircraft deferred from 2004 to 2007;
one B-777-200 aircraft deferred from 2004 to 2006; and
two B-777-200 aircraft deferred from 2005 to 2006.
As a result of these deferrals, we have no mainline aircraft
deliveries scheduled in 2003 or 2004, which will reduce capital
expenditures by approximately $1.3 billion during that two-
year period.
Shareowners' equity was $893 million at December 31, 2002
and $3.8 billion at December 31, 2001. The decrease in our
shareowners' equity is primarily due to the $1.6 billion non-
cash charge to equity related to our pension plans (see Note
11 of the Notes to the Consolidated Financial Statements)
and our consolidated net loss in 2002. These items, as well
as an increase in outstanding debt, have caused our net debt-
to-capital ratio, which includes implied debt from operating
leases, to increase to 94% at December 31, 2002 from 80%
at December 31, 2001.
For additional information on our liquidity, see the Business
Environment section of Management's Discussion and
Analysis on pages 13-15.
WORKING CAPITAL POSITION
As of December 31, 2002, we had negative working capital
of $2.6 billion, compared to negative working capital of
$2.8 billion at December 31, 2001. A negative working capi-
tal position is normal for us, typically due to our air traffic
liability and the fact that we primarily generate revenue by
providing air transportation through the utilization of property
and equipment, which are classified as long-term assets. Our
negative working capital position also reflects our losses over
the past two years.
CREDIT RATINGS AND COVENANTS
At December 31, 2002, our senior unsecured long-term debt
was rated Ba3 by Moody's and BB- by Standard and Poor's.
On February 18, 2003, Standard & Poor's lowered their
ratings on certain of our enhanced equipment trust certifi-
cates. Both Moody's and Standard & Poor's outlooks for
our long-term credit ratings are negative. Our current credit
ratings have negatively impacted our ability (1) to issue unse-
cured debt, (2) to renew outstanding letters of credit that back
certain of our obligations and (3) to obtain certain financial
instruments that we use in our fuel hedging program. They
have also increased the cost of our financing transactions
and the amount of collateral required for certain financial
instruments and insurance coverage. Subsequent to December
31, 2002, our collateral requirements related to our workers'
compensation insurance increased by $55 million. As dis-
cussed in Note 8 of the Notes to the Consolidated Financial
Statements, we may be required to repurchase outstanding
receivables that we sold to a third party ($250 million at
December 31, 2002) if our senior unsecured long-term debt
is rated either below Ba3 by Moody's or below BB- by
Standard & Poor's.
We have obtained from a third party unsecured letters of
credit totaling $409 million relating to bonds issued by vari-
ous municipalities to finance construction at certain airport
facilities leased to us. As discussed under "Letter of Credit
Enhanced Municipal Bonds" in Note 6 of the Notes to the
Consolidated Financial Statements, we will be required to
accelerate the repayment of these obligations if we do not
extend those letters of credit prior to their expiration on
June 8, 2003.
The Reimbursement Agreement relating to the letters of
credit described in the above paragraph contains covenants
that (1) require us to maintain a minimum of $1 billion of
unrestricted cash, cash equivalents and short-term investments
at the end of each month; (2) limit the amount of current
debt and convertible subordinated debt that we may have
outstanding; and (3) limit our annual flight equipment
rental expense. It also provides that, upon the occurrence of
a change in control of Delta, we shall, at the request of the
banks, deposit cash collateral with the banks in an amount
equal to all letters of credit outstanding and other amounts
we owe under the agreement. We are in compliance with all
of our financial covenants.
PRIOR YEARS
2001
Cash and cash equivalents totaled $2.2 billion at December
31, 2001. Net cash provided by operations totaled $236 million
during 2001, including $556 million of compensation received
under the Stabilization Act. Capital expenditures, including
aircraft acquisitions made under seller financing arrangements,
were $2.9 billion during 2001 and included the acquisition
of27 B-737-800, three B-757-200, two B-767-300ER, six
B-767-400, 23 CRJ-200 and four CRJ-100 aircraft. Debt
and capital lease obligations, including current maturities and
short-term obligations, totaled $9 .4 billion at December 31,
2001. Of this amount, $2.3 billion of secured long-term debt
was issued during the year.
2000
Cash, cash equivalents and short-term investments totaled
$1.6 billion at December 31, 2000. Net cash provided
by operations totaled $2.9 billion during 2000. Capital
expenditures were $4.1 billion during 2000 and included
the acquisition of 24 B-737-800, 12 B-757-200, seven
B-767-300ER, 12 B-767-400, 11 CRJ-200, 19 CRJ-100 and
seven ATR-72 aircraft. We also paid $232 million to complete
our acquisition of Comair Holdings, Inc. Debt and capital
lease obligations, including current maturities and short-term
obligations, totaled $6.0 billion at December 31, 2000. Of
this amount, $1.9 billion of long-term debt was issued during
the year (including $1. 5 billion of secured debt).
Financial Position
DECEMBER 31, 2002 COMPARED TO DECEMBER 31, 2001
This section discusses certain changes in our Consolidated
Balance Sheets which are not otherwise discussed in this
Annual Report.
Prepaid expenses and other current assets increased by 23%, or
$66 million, primarily due to our recognition of an intangible
asset in connection with the recording of an additional mini-
mum pension liability and an increase in prepaid aircraft rent.
Investments in debt and equity securities decreased 66%, or _
$63 million, primarily due to the partial exercise of our price-
line warrants and the sale of a portion of the related shares,
as well as a decrease in fair value of our equity securities.
Restricted investments for the Boston airport terminal project
decreased 12%, or $58 million, due to the capitalization of
(in millions) Total 2003
Debt<!) $ 10,740 $ 666
Capital Lease Obligations<
2J 172 40
Operating Lease Payments<
3J 12,744 1,277
Estimated Future Expenditures
for Aircraft and Engines<
4
l 5,027 1,024
Other Purchase Obligations 66 33
Total $ 28,749 $ 3,040
$
$
project expenditures and interest paid. Other noncurrent
assets increased 47%, or $472 million, due to an increase in
our deferred tax assets and our recognition of an intangible
asset in connection with the recording of an additional mini-
mum pension liability.
Taxes payable decreased 18%, or $187 million, primarily
due to a decrease in ticket, transportation and airport taxes
payable for which payment was deferred under the Stabilization
Act until January 2002. Accrued salaries and benefits increased
22%, or $244 million, primarily due to an increase in the
. number of retired employees and employees on leave and
severance programs.
Pension and related benefits increased $2.9 billion, primarily
due to an additional minimum pension liability recorded at
December 31, 2002. For additional information on our
employee benefit plans, see Note 11 of the Notes to the
Consolidated Financial Statements.
CONTRACTUAL OBLIGATIONS
The following table provides a summary of our debt obliga-
tions, capital lease obligations, operating lease payments,
estimated future expenditures for aircraft and engines and
certain other material purchase obligations as of December
31, 2002. This table excludes other obligations that we may
have, such as pension obligations (discussed in Note 11 of the
Notes to the Consolidated Financial Statements). The table
also excludes information about our obligations related to our
contract carrier agreements (discussed below) due to the fact that
costs beyond 2003 are not reasonably estimable at this time.
Contractual Payments Due by Period
2004 2005 2006 2007 After 2007
623 $ 1,203 $ 602 $ 285 $ 7,361
31 24 16 15 46
1,203 1,176 1,128 1,042' 6,918
672 1,191 1,281 859
33
2,562 $ 3,594 $ 3,027 $ 2,201 $ 14,325
(1) These amounts are included on our Consolidated Balance Sheets. A portion of this debt is backed by letters of credit totaling $305 million at December 31, 2002,
which expire on June 8, 2003. See Note 6 of the Notes to the Comolidated Financial Statements for additional information about our debt and related matters.
(2) The present value of these obligatiom, excluding interest, is included on our Consolidated Balance Sheets. See Note 7 of the Notes to the Consalidated Financial
Statements for additional information about our capital lease obligations.
(3) Our operating lease obligations are described in Note 7 of the Notes to the Consolidated Financial Statements. A portion of these obligations is backed by letters of
credit totaling $104 million at December 31, 2002, which expire on June 8, 2003. See Note 6 of the Notes to the Consolidated Financial Statements for additional
information about these letters of credit.
( 4) Our estimated future expenditures for aircraft and engines are discussed in Note 9 of the Notes to the Consolidated Financial Statements.
21
22
Management's Discussion and Analysis of Financial Condition and Results of Operations
Our estimated pension funding is approximately $80 million
for 2003 and between $350 million and $450 million for
2004. These funding estimates are based on various assump-
tions, including actual market performance of our plan assets
and future 30-year U.S. Treasury bond yields. Our 2004
estimate could change significantly prior to the funding date
and funding beyond 2004 is not reasonably estimable at this
time. Pension funding requirements are governed by ERISA
and subject to certain federal tax regulations. See Note 11 of
the Notes to the Consolidated Financial Statements for addi-
tional information about our pension plans.
In addition, we have contractual obligations related to our
contract carrier agreements with SkyWest Airlines, Atlantic
Coast Airlines and Chautauqua Airlines. We estimate that
our obligations under these contracts will total approximately
$780 million in 2003. Costs beyond 2003 under these agree-
ments will be impacted by certain variable operating costs
that cannot be reasonably determined at this time. See Note
9 of the Notes to the Consolidated Financial Statements for
additional information about these agreements.
OFF-BALANCE SHEET ARRANGEMENTS
Sale of Receivables
We are a party to an agreement under which we sell a defined
pool of our accounts receivable, on a revolving basis, through
a special-purpose, wholly owned subsidiary to a third party. In
accordance with accounting principles generally accepted in
the United States of America (GAAP), we do not consolidate
this subsidiary in our Consolidated Financial Statements. This
agreement is scheduled to terminate on March 31, 2003. If
the agreement is not renewed prior to this date, we will be
required to repurchase outstanding receivables which totaled
$250 million at December 31, 2002. This amount is not
included on our Consolidated Balance Sheets. See Note 8 of
the Notes to the Consolidated Financial Statements for addi-
tional information about this agreement.
OTHER
Legal Contingencies
We are involved in legal proceedings relating to antitrust
matters, employment practices, environmental issues and
other matters concerning our business. We cannot reasonably
estimate the potential loss for certain legal proceedings because,
for example, the litigation is in its early stages or the plaintiff
does not specify damages being sought. Although the ultimate
outcome of these matters cannot be predicted with certainty,
we believe that the resolution of these actions will not have
a material adverse effect on our Consolidated Financial
Statements.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Critical Accounting Estimates
The preparation of financial statements in conformity with
GAAP requires management to make certain estimates and
assumptions. We periodically evaluate these estimates and
assumptions, which are based on historical experience, changes
in the business environment and other factors that manage-
ment believes to be reasonable under the circumstances.
Actual results may differ materially from these estimates.
Rules proposed by the Securities and Exchange Commission
define critical accounting estimates as those accounting esti-
mates which (1) require management to make assumptions
about matters that are highly uncertain at the time the estimate
is made and (2) would have resulted in material changes to
our Consolidated Financial Statements if different estimates,
which we reasonably could have used, were made. Our critical
accounting estimates are briefly described below. Additional
information about these estimates and our significant accounting
policies are included in Notes 1, 5, 10 and 11 of the Notes to
the Consolidated Financial Statements.
Goodwill
On January 1, 2002, we adopted SFAS 142, which addresses
financial accounting and reporting for goodwill and other
intangible assets, including when and how to perform impair-
ment tests of recorded balances.
We have three reporting units that have assigned goodwill:
Delta-mainline, Atlantic Southeast Airlines, Inc. (ASA) and
Comair. Quoted stock market prices are not available for
these individual reporting units. Accordingly, consistent with
SFAS 142, our methodology for estimating the fair value
of each reporting unit primarily considers discounted future
cash flows. In applying this methodology, we (1) make
assumptions about each reporting unit's future cash flows
based on capacity, yield, traffic, operating costs and other
relevant factors and (2) discount those cash flows based on
each reporting unit's weighted average cost of capital. Changes
in these assumptions may have a material impact on our
Consolidated Financial Statements.
Income Tax Valuation Allowance
In accordance with SFAS No. 109, "Accounting for Income
Taxes" (SFAS 109), deferred tax assets should be reduced by
a valuation allowance if it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
In making this determination, we consider both positive and
negative evidence and make certain assumptions, including
projections of taxable income. Changes in these assumptions
may have a material impact on our Consolidated Financial
Statements.
Pension Plans
We sponsor defined benefit pension plans (Plans) for eligible
employees and retirees. The impact of the Plans on our
Consolidated Financial Statements as of December 31, 2002
and 2001 and for each of the three years in the period ended
December 31, 2002 is presented in Note 11 of the Notes to
the Consolidated Financial Statements. We currently estimate
that our defined benefit pension expense in 2003 will be
approximately $335 million. The effect of our Plans on our
Consolidated Financial Statements is subject to many assump-
tions. We believe the most critical assumptions are (1) the
weighted average discount rate; (2) the rate of increase in.
future compensation levels; and (3) the expected long-term
rate of return on Plan assets.
We determine our weighted average discount rate on our
measurement date primarily by reference to annualized rates
earned on high quality fixed income investments and yield-
to-maturity analysis specific to our estimated future benefit
payments. Lowering our discount rate (6.75% at September
30, 2002) by 0.5% would increase our accrued pension cost
by approximately $730 million at December 31, 2002 and
increase our estimated pension expense in 2003 by approxi-
mately $80 million.
Our rate of increase in future compensation levels is based
primarily on labor contracts currently in effect with our
employees under collective bargaining agreements and expected
future pay rate increases for other employees. Increasing
our estimated rate of increase in future compensation levels
(2.67% at September 30, 2002) by 0.5% would increase
our estimated pension expense in 2003 by approximately
$40 million.
The expected long-term rate of return on our Plan assets
is based primarily on Plan-specific asset/liability investment
studies performed by outside consultants and recent and
historical returns on our Plans' assets. Lowering our expected
long-term rate of return (9% at September 30, 2002) by 0.5%
would increase our estimated pension expense in 2003
by approximately $60 million.
MARKET RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS
We have market risk exposure related to aircraft fuel prices,
stock prices, interest rates and foreign currency exchange
rates. 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, we periodically enter into derivative transac-
. tions pursuant to stated policies (see Notes 3 and 4 of the
Notes to the Consolidated Financial Statements). Management
expects adjustments to the fair value of financial instruments
accounted for under SFAS 133 to result in ongoing volatility
in earnings and shareowners' equity.
The following sensitivity analyses do not consider the effects
of a decline in demand for air trav~l, the economy as a whole
or additional actions by management to mitigate our exposure
to a particular risk. For these and other reasons, the actual
results of changes in these prices or rates may differ materially
from the following hypothetical results.
Aircraft Fuel Price Risk
Our results of operations may be significantly impacted by
changes in the price of aircraft fuel. To manage this risk, we
periodically enter into heating and crude oil derivative contracts
to hedge a portion of our projected annual aircraft fuel require-
ments. Heating and crude oil prices have a highly correlated
relationship to fuel prices, making these derivatives effective
in offsetting changes in the cost of aircraft fuei. We do not
enter into fuel hedge contracts for speculative purposes. These
contracts are intended to reduce our exposure to changes in
aircraft fuel prices.
The following table shows our fuel hedging position based on
instruments held at December 31; 2002, as supplemented by
fuel hedge contracts acquired through March 12, 2003:
March 2003 Quarter
June 2003 Quarter
September 2003 Quarter
December 2003 Quarter
% of Projected
Aircraft Fuel
Requirements
Hedged
Year Ending Decembe~ 31, 2003
Year Ending December 31, 2004
77%
78%
52%
36%
61%
10%
Average Hedge
Price per Gallon
79.10
78.27
78.88
74.25
78.08
68.88
23
24
Management's Discussion and Analysis of fznancial Condition and Results of Operations
The fair values of our heating and crude oil derivative
instruments were $73 million at December 31, 2002 and
$64 million at December 31, 2001. A 10% decrease in the
average annual price of heating and crude oil would have
decreased the fair values of these instruments by $70 million
at December 31, 2002.
During 2002, aircraft fuel accounted for 12% of our total
operating expenses. Based on our projected aircraft fuel con-
sumption of 2.4 billion gallons for 2003, a 10% rise in our jet
fuel prices would increase our aircraft fuel expense by approxi-
mately $46 million in 2003. This analysis includes the effects
of fuel hedging instruments in place at December 31, 2002.
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
We hold equity-based interests, including warrants and other
similar rights, in certain companies, primarily priceline and
Republic Airways Holdings, Inc. (Republic). The estimated
fair values and aggregate unrealized and unrecognized losses
from these investments were $31 million and $9 million,
respectively, at December 31, 2002. At December 31, 2001,
the estimated fair values of our equity-based interests totaled
$81 million, with aggregate unrealized and unrecognized losses
of $3 million. The risk associated with these investments is
the potential loss in fair value resulting from a decrease in the
price of the issuer's common stock. Based on the fair value of
these equity-based interests at December 31, 2002, a 10%
decline in the price of the underlying common stock would
decrease the fair value of these instruments by approximately
$3 million. For additional information regarding our equity-
based interests, see Note 2 of the Notes to the Consolidated
Financial Statements.
Interest Rate Risk
Our exposure to market risk due to changes in interest rates
primarily relates to our long-term debt obligations and cash
investment portfolio.
~arket risk associated with our long-term debt is the poten-
ual change in fair value resulting from a change in interest
rates. A 10% decrease in average annual interest rates would
have increased the estimated fair value of our long-term debt
by approximately $395 million at December 31, 2002, and
$373 million at December 31, 2001. To manage our interest
rate exposure, we have entered into two interest rate swap
agreements. At December 31, 2002, the fair value of these
agreements was $21 million. A 10% increase in average annual
interest rates would have had an immaterial effect on the fair
value of these instruments at December 31, 2002. A 10%
increase in average annual interest rates would have had an
approximately $17 million impact on our interest expense in
2002. For additional information on our interest rate swap
and long-term debt agreements, see Notes 4 and 6 of the
Notes to the Consolidated Financial Statements.
Market risk associated with our cash portfolio is the potential
change in earnings resulting from a change in interest rates.
Based on our average balance of cash and cash equivalents
during 2002, a 10% decrease in average annual interest rates
would have decreased our interest income by approximately
$4 million.
Foreign Currency Exchange Rate Risk
We have limited revenues and expenses denominated in foreign
currencies. As a result, we are exposed to limited foreign
currency exchange rate risk. The majority of our exposure
results from transactions denominated in the euro, British
pound and Canadian dollar. To manage exchange rate risk,
we net foreign currency revenues and expenses, to the extent
practicable, to take advantage of natural offsets. We may use
foreign currency option and forward contracts with maturities
of up to 12 months to manage the remaining net exposure.
We did not have any of these instruments outstanding at
December 31, 2002. Based on our average annual net
foreign currency positions during 2002, a 10% adverse
change in average annual foreign currency exchange rates
would not have had a material impact on our Consolidated
Financial Statements.
Forward-Looking Information
Statements in this Annual Report (or otherwise made by
Delta or on Delta's behalf), which are not historical facts,
including statements about Delta's estimates, expectations,
beliefs, intentions, projections or strategies for the future,
may be "forward-looking statements" as defined in the Private
Securities Litigation Reform Act of 1995. Forward-looking
statements involve risks and uncertainties that could cause
actual results to differ materially from historical experience
or Delta's present expectations. Factors that could cause these
differences include, but are not limited to:
1. The many effects on Delta and the airline industry from
the terrorist attacks on the United States on September
11, 2001, including the following:
The adverse impact of the terrorist attacks on the
demand for air travel;
The change in Delta's operations and higher costs resulting
from, and customer reaction to, new airline and airport
security directives;
The availability and cost of war and terrorism risk and
other insurance for Delta;
Potential declines in the values of the aircraft in Delta's
fleet or facilities and any related asset impairment
charges;
2. The availability to Delta of financing on commercially
reasonable terms, which may be influenced by, among
other things, airline bankruptcies, the creditworthiness of
the airline industry in general and Delta in particular, and
actions by credit rating agencies;
3. Continued geopolitical uncertainty, including additional
terrorist activity and/or war with Iraq;
4. General economic conditions, both in the United States
and in our markets outside the United States;
5. The willingness of customers to travel generally, and with
Delta specifically, which could be affected by factors such
as Delta's and the industry's safety record and geopolitical
uncertainty;
6. Competitive factors in our industry, such as airline
bankruptcies, the airline pricing environment, the growth
of low-cost carriers, international alliances, codesharing
programs, capacity decisions by competitors and mergers
and acquisitions;
7. Outcomes of negotiations on collective bargaining agree-
ments and other labor issues;
8. Changes in the availability or cost of aircraft fuel or fuel
hedges;
9. Disruptions to operations due to adverse weather condi-
tions and air traffic control-related constraints;
10. Actions by the United States or foreign governments,
including the FAA and other regulatory agencies; and
11. The outcome of Delta's litigation.
Caution should be taken not to place undue reliance on
Delta's forward-looking statements, which represent Delta's
views only as of March 12, 2003, and which Delta has no
current intention to update.
25
December 31, 2002 and 2001
Assets
(in millions) 2002 2001
Current Assets:
Cash and cash equivalents $ 1,969 $ 2,210
Restricted cash 134
Accounts receivable, net of an allowance for uncollectible accounts of $33
at December 31, 2002, and $43 at December 31, 2001 292 368
Income tax receivable 319
Expendable parts and supplies inventories, net of an allowance for obsolescence
of $183 at December 31, 2002, and $139 at December 31, 2001 164 181
Deferred income taxes 668 518
Prepaid expenses and other 356 290
26
Total current assets 3,902 3,567
Property and Equipment:
Flight equipment 20,295 19,427
Accumulated depreciation (6,109) (5,730)
Flight equipment, net 14,186 13,697
Flight and ground equipment under capital leases 439 382
Accumulated amortization (297) (262)
Flight and ground equipment under capital leases, net 142 120
Ground property and equipment 4,270 4,412
Accumulated depreciation (2,206) (2,355)
Ground property and equipment, net 2,064 2,057
Advance payments for equipment 132 223
Total property and equipment, net 16,524 16,097
Other Assets:
Investments in debt and equity securities 33 96
Investments in associated companies 174 180
Goodwill 2,092 2,092
Operating rights and other intangibles, net of accumulated amortization
of $172 at December 31, 2002, and $246 at December 31, 2001 102 94
Restricted investments for Boston airport terminal project 417 475
Other noncurrent assets 1,476 '1,004
Total other assets 4,294 3,941
Total assets $ 24,720 $ 23,605
Liabilities and Shareowners' Equity
(in millions, except share data)
Current Liabilities:
Current maturities of long-term debt
Short-term obligations
Current obligations under capital leases
Accounts payable, deferred credits and other accrued liabilities
Air traffic liability
Taxes payable
Accrued salaries and related benefits
Accrued rent
Total current liabilities
Noncurrent Liabilities:
Long-term debt
Long-term debt issued by Massachusetts Port Authority (Note 6)
Capital leases
Postretirement benefits
Accrued rent
Deferred income taxes
Pension and related benefits
Other
Total noncurrent liabilities
Deferred Credits:
Deferred gains on sale and leaseback transactions
Deferred revenue and other credits
Total deferred credits
Commitments and Contingencies (Notes 3, 4, 6, 7, 8 and 9)
Employee Stock Ownership Plan Preferred Stock:
Series B ESOP Convertible Preferred Stock, $1.00 par value, $72.00 stated and liquidation
value; 6,065,489 shares issued and outstanding at December 31, 2002, and 6,278,210
shares issued and outstanding at December 31, 2001
Unearned compensation under Employee Stock Ownership Plan
Total Employee Stock Ownership Plan Preferred Stock
Shareowners' Equity:
Common stock, $1.50 par value; 450,000,000 shares authorized; 180,903,373 shares issued
at December 31, 2002, and 180,890,356 shares issued at December 31, 2001
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Treasury stock at cost, 57,544,168 shares at December 31, 2002, and 57,644,690
shares at December 31, 2001
Total shareowners' equity
Total liabilities and shareowners' equity
The accompanying notes are an integral part of these Consolidated Financial Statements.
$
2002
666
27
1,921
1,270
862
1,365
344
6,455
9,576
498
100
2,282
739
3,242
93
16,530
478
100
578
437
(173)
264
271
3,263
1;639
(1,562)
(2,718)
893
$ 24,720
$
2001
260
765
31
1,617
1,224
1,049
1,121
336
6,403
7,781
498
68
2,292
781
465
359
105
12,349
519
310
829
452
(197)
255
271
3,267
2,930
25
(2,724)
3,769
$ 23,605
27
Consolidated Statements of Operations
For the years ended December 31, 2002, 2001 and 2000
(in millions, except per share data) 2002 2001 2000
Operating Revenues:
Passenger $ 12,321 $ 12,964 $ 15,657
Cargo 458 506 583
Other, net 526 409 501
Total operating revenues 13,305 13,879 16,741
Operating Expenses:
Salaries and related costs 6,165 6,124 5,971
Aircraft fuel 1,683 1,817 1,969
Depreciation and amortization 1,148 1,283 1,187
Contracted services 1,003 1,016 966
Landing fees and other rents 834 780 771
Aircraft maintenance materials and outside repairs 711 801 723
Aircraft rent 709 737 741
Other selling expenses 539 616 688
28
Passenger commissions 322 540 661
Passenger service 372 466 470
Asset writedowns, restructuring and related items, net 439 1,119 108
Sta ilization Act compensation (34) (634)
Other 723 816 849
Total operating expenses 14,614 15,481 15,104
Operating Income (Loss) {1,309) (1,602) 1,637
Other Income (Expense):
Interest expense (646) (499) (380)
Interest income 36 89 123
Loss on extinguishment of ESOP Notes (42)
Gain (loss) from sale of investments, net (3) 127 301
Fair value adjustments of SFAS 133 derivatives (39) 68 (159)
Miscellaneous income (expense), net 1 (47) 27
Total other income (expense) (693) (262) (88)
Income (Loss) Before Income Taxes and Cumulative Effect
of Change in Accounting Principle {2,002) (1,864) 1,549
Income Tax Benefit (Provision) 730 648 (621)
Income (Loss) Before Cumulative Effect of Change in Accounting
Principle, Net of Tax {1,272) (1,216) 928
Cumulative Effect of Change in Accounting Principle,
Net of Tax of $64 Million in 2000 (100)
Net Income (Loss) (1,272) (1,216) 828
Preferred Stock Dividends (15) (14) (13)
Net Income (Loss) Available to Common Shareowners $ (1,287) $ (1,230) $ 815
Basic Earnings (Loss) per Share Before Cumulative Effect
of Change in Accounting Principle $ {10.44) $ (9.99) $ 7.39
Basic Earnings (Loss) per Share $ {10.44) $ (9.99) $ 6.58
Diluted Earnings (Loss) per Share Before Cumulative Effect
of Change in Accounting Principle $ {10.44) $ (9.99) $ 7.05
Diluted Earnings (Loss) per Share $ {10.44) $ (9.99) $ 6.28
The accompanying notes are an integral part of these Consolidated Financial Statements.
Consolidated Statements of Cash Flows
For the years ended December 31, 2002, 2001 and 2000
(in millions) 2002 2001 2000
Cash Flows From Operating Activities:
Net income (loss) $ (1,272) $ (1,216) $ 828
Adjustm~nts to _r~c~mcile net income (loss) to cash provided by
operacmg acuvmes:
Cumulative effect of change in accounting principle 100
Asset and other wricedowns 287 339
Depreciation and amortization 1,181 1,283 1,187
Deferred income taxes (411) (648) 396
Fair value adjustments of SFAS 133 derivatives 39 (68) 159
Pension, postretirement and postemployment expense in excess of
(less than) payments 177 419 (17)
Loss on extinguishment of ESOP Notes 42
Dividends (less than) in excess of equity income (3) 51 (28)
Loss (gain) from sale of investments, net 3 (127) (301)
Income tax benefit from exercise of stock options 5
Changes in certain current assets and liabilities:
(Increase) decrease in receivables (243) 47 86 29
Increase in restricted cash (134)
(Increase) decrease in prepaid expenses and other current assets (35) 60 92
Increase (decrease) in air traffic liability 46 (215) (49)
Increase in ocher payables, deferred credits and accrued liabilities 675 274 395
Other, net (67) 37 45
Net cash provided by operating activities 285 236 2,898
Cash Flows From Investing Activities:
Property and equipment additions:
Flight equipment, including advance payments (922) (2,321) (3,426)
Ground property and equipment, including technology (364) (472) (634)
Decrease (increase) in restricted investments related to the Boston airport
terminal project 58 (485)
Decrease in short-term investments, net 5 238 456
Proceeds from sales of flight equipment 100 66 384
Proceeds from sales of investments 24 286 73
Acquisitions of companies, net of cash acquired (232)
Other, net (IO) (8) (17)
Net cash used in investing activities (1,109) (2,696) (3,396)
Cash Flows From Financing Activities:
Payments on long-term debt and capital lease obligations (734) (173) (853)
Prepayment of long-term lease obligations (215)
Cash dividends (39) (40) (40)
Issuance of long-term obligations 2,554 2,335 1,867
Issuance of long-term debt by Massachusetts Port Authority 498
(Payments on) proceeds from short-term obligations and notes payable, net (1,144) 701 (51)
Issuance of common stock 2 33
Repurchase of common stock (502)
Payments on excinguishment of ESOP Notes (42)
Ocher, net (12) (17)
Net cash provided by financing activities 583 3,306 239
Net (Decrease) Increase In Cash and Cash Equivalents (241) 846 (259)
Cash and cash equivalents at beginning of year 2,210 1,364 1,623
Cash and cash equivalents at end of year $ 1,969 $ 2,210 $ 1,364
Supplemental disclosure of cash paid (refunded) for:
Interest, net of amounts capitalized $ 569 $ 490 $ 410
Income taxes $ (649) $ (103) $ 131
Non-cash transactions:
Aircraft delivered under seller-financing $ 705 $ 77 $
Aircraft capital leases from sale and leaseback transactions $ 52 $ $
The accompanying notes are an integral part of these Consolidated Financial Statements.
Consolidated Statements of Shareowners' Equity
For the years ended December 31, 2002, 2001 and 2000
Accumulated
Additional Other
Common Paid-In Retained Comprehensive Treasury
(in millions, except share data) Stock Capital Earnin~s Income (Loss) Stock Total
Balance at December 31, 1999 $ 270 $ 3,222 $ 3,377 $ 266 $ (2,227) $ 4,908
Comprehensive income:
Net income 828 828
Other comprehensive income 94 94
Total comprehensive income (See Note 14) 922
Dividends on common stock ($0.10 per share) (12) (12)
Dividends on Series B ESOP Convertible
Preferred Stock allocated shares (13) (13)
Issuance of 729,426 shares of common stock under
dividend reinvestment and stock purchase plan
and stock options ($44.86 per share0>
) 32 33
Repurchase of 10,626,104 common shares
(502) (502)
($47.26 per share0>
)
Income tax benefit from exercise of stock options 5 5
30
Transfers and forfeitures of 16,580 shares of
common from Treasury under stock incentive
plan ($52.61 per share(l))
Other 5 (4) 1
Balance at December 31, 2000 271 3,264 4,176 360 (2,728) 5,343
Comprehensive loss:
Net loss (1,216) (1,216)
Other comprehensive loss (335) (335)
Total comprehensive loss (See Note 14) (1,551)
Dividends on common stock ($0.10 per share) (12) (12)
Dividends on Series B ESOP Convertible
Preferred Stock allocated shares (14) (14)
Issuance of 126,299 shares of common stock under
dividend reinvestment and stock purchase plan
and stock options ( $38 .10 per share(l)) 5 5
Transfers and forfeitures of 105,995 shares of
common from Treasury under stock incentive
plan ($37.10 per share(l)) (4) 4
Other 2 (4) (2)
Balance at December 31, 2001 271 3,267 2,930 25 (2,724) 3,769
Comprehensive loss:
Net loss (1,272) (1,272)
Other comprehensive loss (1,587) (1,587)
Total comprehensive loss (See Note 14) (2,859)
Dividends on common stock ($0.10 per share) (12) (12)
Dividends on Series B ESOP Convertible
Preferred Stock allocated shares (15) (15)
Issuance of 13,017 shares of common stock
under stock purchase plan and stock options
($15.70 per share0>
)
Forfeitures of 82,878 shares of common to
Treasury under stock incentive plan
($27.31 per share0>
) (2) (2)
Transfers of 183,400 shares of common from
Treasury under stock incentive plan
($47.11 per share<
l)) (5) 8 3
Other 1 8 9
Balance at December 31, 2002 $ 271 $ 3,263 $ 1,639 $ (1,562) $ (2,718) $ 893
(I) Average price per share
The accompanying notes are an integral part of these Consolidated Financial Statements.
Notes to the Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
BASIS OF PRESENTATION
Delta Air Lines, Inc. (a Delaware corporation) is a major air carrier that provides air transportation for passengers and cargo through-
out the U.S. and around the world. Our Consolidated Financial Statements include the accounts of Delta Air Lines, Inc. and our
wholly owned subsidiaries, including ASA Holdings, Inc. (ASA Holdings) and Comair Holdings, Inc. (Comair Holdings), collectively
referred to as Delta. ASA Holdings is the parent company of Atlantic Southeast Airlines, Inc. (ASA), and Comair Holdings is the
parent company of Comair, Inc. (Comair). We completed our acquisitions of ASA Holdings and Comair Holdings in April 1999 and
in January 2000, respectively. We have eliminated all material intercompany transactions in our Consolidated Financial Statements.
These Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the
United States of America (GAAP). We have reclassified certain prior period amounts in our Consolidated Financial Statements to
be consistent with our current period presentation. The effect of these reclassifications is not material.
We do not consolidate the financial statements of any company in which we have an ownership interest of 50% or less unless
we control that company. During 2002, 2001 and 2000, we did not control any company in which we had an ownership interest
of 50% or less. 31
-~ANGE IN YEAR E D
Effective December 31, 2000, we changed our year end from June 30 to December 31. Accordingly, this Annual Report includes
audited Consolidated Balance Sheets as of December 31, 2002 and 2001, and audited Consolidated Statements of Operations,
Cash Flows and Shareowners' Equity for the years ended December 31, 2002, 2001 and 2000.
USE OF ESTIMATES
We are required to make estimates and assumptions when preparing our Consolidated Financial Statements in accordance with
GMP. These estimates and assumptions affect the amounts reported in our financial statements and the accompanying notes.
Actual results could differ materially from those estimates .
.. YJ ACCOUNTINC TAI'- DARDS
On January 1, 2002, we adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142), which addresses financial accounting and reporting for goodwill and other intangible assets (see Note 5).
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, ''Accounting for Asset Retirement
Obligations" (SFAS 143), which is effective for fiscal years beginning after June 15, 2002. We adopted SFAS 143 on January 1,
2003. The adoption of SFAS 143 did not have a material impact on our Consolidated Financial Statements. -
On January 1, 2002, we adopted SFAS No. 144, ''Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144),
which supersedes previous accounting and reporting standards for (1) testing for impairment or disposal oflong-lived assets and
(2) the disposal of segments of a business. Our impairment charges recorded during 2002 were determined in accordance with
SFAS 144 (see Note 16).
On October 1, 2002, we adopted SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13 and Technical Corrections" (SFAS 145), which, among other things, (1) requires that gains and losses due to
the extinguishment of debt be classified as extraordinary items on the Consolidated Statements of Operations only if certain
criteria are met and (2) amends the accounting for sale and leaseback transactions. In accordance with SFAS 145, we recorded
a $42 million loss on the extinguishment of ESOP Notes in other income (expense) on our 2002 Consolidated Statement of
Operations (see Note 6).
In June 2002, the FASB issued SFAS No. 146, ''Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146),
which supersedes previous accounting and reporting standards for costs associated with exit or disposal activities by requiring the
related liability to be recognized and measured initially at fair value when the liability is incurred. Under the previous accounting
Notes to the Consolidated Financial Statements
and reporting standards, the liability for exit or disposal costs was recognized at the date management committed to a plan.
The adoption of SFAS 146 will impact the timing of the recognition of liabilities related to future exit or disposal activities
and is effective for such activities that are initiated after December 31, 2002.
In December 2002, the FASB issued SFAS No. 148, ''Accounting for Stock-Based Compensation - Transition and Disclosure"
(SFAS 148), which amends SFAS No. 123, ''Accounting for Stock Based Compensation" (SFAS 123), by revising the methods
of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS
148 also requires additional disclosures in annual and interim financial statements related to stock-based employee compensation.
On December 31, 2002, we adopted SFAS 148 as it relates to the additional disclosures required for registrants that account for
employee stock-based compensation under Accounting Principles Bulletin (APB) Opinion 25, ''Accounting for Stock Issued to
Employees" (APB 25) and related interpretations. For additional information, see our stock-based compensation policy in this
Note on page 36.
In November 2002, the FASB issued FASB Interpretation No. (FIN) 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45), which expands the disclosures a guarantor is
32 required to provide in its annual and interim financial statements regarding its obligations for certain guarantees. Disclosures are
required to be included in financial statements issued after December 15, 2002 (see Note 9). FIN 45 also requires the guarantor
to recognize a liability for the fair value of an obligation assumed for guarantees issued or modified after December 31, 2002.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities" (FIN 46), which addresses how to identify
variable interest entities and the criteria that require a company to consolidate such entities in its financial statements. FIN 46 is
effective on February 1, 2003 for new transactions and on July 1, 2003 for existing transactions. We are evaluating the impact of
FIN 46 on our Consolidated Financial Statements.
During 2000, we adopted SFAS No. 133, ''Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), as
amended (see Note 4 for additional information), and SFAS No. 140, ''Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" (SFAS 140). The adoption of SFAS 140 did not have a material impact on our Consolidated
Financial Statements.
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 recorded at cost, which we believe approximates fair value.
Under our cash management system, we utilize controlled disbursement accounts that are funded daily. Payments issued by us,
which have not been presented to the bank for payment, are recorded in accounts payable, deferred credits and other accrued
liabilities on our Consolidated Balance Sheets.
RESTRICTED ASSETS
We have restricted cash, which primarily relates to cash held as collateral to support certain projected insurance obligations.
At December 31, 2002, restricted cash included in current assets on our Consolidated Balance Sheets totaled $134 million.
We have restricted investments for the redevelopment and expansion of Terminal A at Boston's Logan International Airport
(see Note 6 for additional information about this project). At December 31, 2002 and 2001, our restricted
investments included in other assets on our Consolidated Balance Sheets totaled $417 million and $475 million, respectively.
DERIVATIVE FINANCIAL INSTRUMENT
We account for derivative financial instruments in accordance with SFAS 133. These derivative instruments include fuel hedge
contracts, interest rate swap agreements and equity warrants and other similar rights in certain companies (see Note 4).
Fuel Hedge Contracts
Our fuel hedge contracts qualify as cash flow hedges under SFAS 133. We record the fair value of our fuel hedge contracts on our
Consolidated Balance Sheets and regularly adjust the balances to reflect changes in the fair values of chose contracts.
Effective gains or losses related to the fair value adjustments of the fuel hedge contracts are recorded in shareowners' equity as
a component of accumulated other comprehensive income (loss). These gains or losses are recognized in aircraft fuel expense
in the period in which the related aircraft fuel purchases being hedged are consumed and when the fuel hedge contract is settled.
However, to the extent that the change in fair value of a fuel hedge contract does not perfectly offset the change in the value of
the aircraft fuel being hedged, the ineffective portion of the hedge is immediately recognized as a fair value adjustment of SFAS
133 derivatives in other income (expense) on our Consolidated Statements of Operations. In calculating the ineffective portion
of our hedges under SFAS 133, we include all changes in the fair value attributable to the time value component and recognize
the amount in income during the life of the contract. Prior to the adoption of SFAS 133, the fuel hedge gains or losses that were
netted against fuel expense included the total fuel-related hedge premiums.
Interest Rate Swap Agreements
Our interest rate swap agreements qualify as fair value hedges under SFAS 133. We record the fair value of these interest rate
swap agreements on our Consolidated Balance Sheets and regularly adjust these amounts and the related debt to reflect changes
in their fair values. Net periodic interest rate swap settlements are recorded as adjustments to interest expense in other income
(expense) on our Consolidated Statements of Operations.
Equity Warrants and Other Similar Rights
We record our equity warrants and other similar rights in certain companies at fair value at the date of acquisition in invest-
ments in debt and equity securities on our Consolidated Balance Sheets. In accordance with SFAS 133, we regularly adjust our
Consolidated Balance Sheets to reflect the changes in the fair values of the equity warrants and other similar rights, and recognize
the related gains or losses as fair value adjustments of SFAS 133 derivatives in other income (expense) on our Consolidated
Statements of Operations.
REVENUE RECOGNITION
Passenger Revenues
We record sales of passenger tickets as air traffic liability on om Consolidated Balance Sheets. Passenger revenues are recognized
when we provide the transportation, reducing the related air traffic liability. We periodically evaluate the estimated air traffic
liability and record any resulting adjustments in the Consolidated Statements of Operations in the period that the evaluations
are completed.
We sell mileage credits in the SkyMiles frequent flyer program to participating partners such as credit card companies, hotels
and car rental agencies. A portion of the revenue from the sale of mileage credits is deferred until the credits are redeemed for
travel. For accounting purposes, we amortize the deferred revenue on a straight-line basis over a 30-month period. The majority
of the revenue from the sale of mileage credits, including the amortization of deferred revenue, is recorded in passenger revenue;
the remaining portion is recorded as an offset to other selling expenses.
Cargo Revenues
Cargo revenues are recognized in our Consolidated Statements of Operations when we provide the transportation.
Other, Net
We are party to codeshare agreements with certain foreign airlines. Under these agreements, we sell seats on these airlines'
flights, and they sell seats on our flights, with each airline separately marketing its respective seats. The revenue from our sale
of codeshare seats flown by certain foreign airlines and the direct costs incurred in marketing the codeshare flights are recorded
in other, net in operating revenues on our Consolidated Statements of Operations. Our revenue from certain foreign airlines'
sale of codeshare seats flown by us is recorded in passenger revenue on our Consolidated Statements of Operations.
We record revenues under our contract carrier agreements, reduced by related expenses, in other, net in operating revenues on
our Consolidated Statements of Operations (see Note 9).
33
Notes to the Consolidated Financial Statements
LONG-LIVED ASSETS
We record our property and equipment at cost and depreciate or amortize these assets on a straight-line basis to their estimated
residual values over their respective estimated useful lives. Residual values for flight equipment range from 5%-40% of cost. We
also capitalize certain internal and external costs incurred to develop internal-use software during the application stage; these assets
are included in ground property and equipment, net on our Consolidated Balance Sheets. The estimated useful lives for major
asset classifications are as follows:
Asset Classification
Owned Bight equipment
Flight and ground equipment under capital lease
Ground property and equipment
Estimated Useful Life
15-25 years
Lease Term
3-30 years
In accordance with SPAS 144, we record impairment losses on long-lived assets used in operations when events and circum-
stances indicate the assets may be impaired and the undiscounted cash flows estimated to be generated by those assets are
less than their carrying amounts. For long-lived assets held for sale, we record impairment losses when the carrying amount is
34 greater than the fair value less the cost to sell. We discontinue depreciation of long-lived assets once they are classified as held
for sale.
To determine impairments for aircraft used in operations, we group assets at the fleet type level (the lowest level for which there
are identifiable cash flows) and then estimate future cash flows based on projections of passenger yield, fuel costs, labor costs and
other relevant factors in the markets in which these aircraft operate. If an impairment occurs, the amount of the impairment loss
recognized is the amount by which the carrying amount of the aircraft exceeds the estimated fair value. Aircraft fair values are
estimated by management using published sources, appraisals and bids received from third parties, as available.
GOODWILL AND OTHER INTANGIBLE ASSETS
Prior to our adoption of SPAS 142 on January 1, 2002, goodwill and other intangible assets were amortized over their estimated
useful lives (not to exceed 40 years in the case of goodwill). Upon adoption of SPAS 142, we discontinued the amortization of
goodwill and other intangible assets with indefinite useful lives. Instead, in accordance with SPAS 142, we now apply a fair value-
based impairment test to the net book value of goodwill and indefinite-lived intangible assets on an annual basis and on an
interim basis if certain events or circumstances indicate that an impairment loss may have been incurred. Intangible assets that
have determinable useful lives continue to be amortized on a straight-line basis over their remaining estimated useful lives. Our
leasehold and operating rights have definite useful lives and we will continue to amortize these assets over their respective lease
terms which range from nine to 19 years.
SPAS 142 requires a two-step process in evaluating goodwill for impairment. The first step requires the comparison of the fair
value of each reporting unit to its carrying value. We have identified three reporting units which have assigned goodwill: Delta-
mainline, ASA and Comair. Our methodology for estimating the fair value of each reporting unit primarily considers discounted
future cash flows. If the fair value of a reporting unit exceeds its carrying value, then no further testing is required. If the carrying
value of a reporting unit exceeds its fair value, however, a second step is required to determine the amount of the impairment
charge, if any. An impairment charge is recognized if the carrying value of a reporting unit's goodwill exceeds its implied fair value.
We perform our impairment test for our indefinite-lived intangible assets by comparing the fair value of each indefinite-lived
intangible asset unit to its carrying value. The fair value of the asset unit is estimated based on its discounted future cash flows.
We recognize an impairment charge if the carrying value of the asset unit exceeds its estimated fair value.
The annual impairment test date for our goodwill and indefinite-lived intangible assets is December 31 (see Note 5).
INTEREST CAPITALIZED
We capitalize interest on advance payments for the acquisition of new aircraft and on construction of ground facilities as an addi-
tional cost of the related assets. Interest is capitalized at our weighted average interest rate on long-term debt or, if applicable, the
interest rate related to specific asset financings. Interest capitalization ends when the equipment or facility is ready for service or
its intended use. Capitalized interest totaled $15 million, $32 million and $45 million for the years ended December 31, 2002, 2001
and 2000, respectively.
EQUITY METHOD INVESTMENTS
We use the equity method to account for our 40% ownership interest in WORLDSPAN, LP. (Worldspan), a computer reservations
system partnership. Our equity earnings from this investment totaled $43 million, $19 million and $59 million for the years ended
December 31, 2002, 2001 and 2000, respectively. We also received cash dividends from Worldspan of $40 million, $70 million
and $32 million for the years ended December 31, 2002, 2001 and 2000, respectively. Worldspan provides computer reservation
and related services for us, which totaled approximately $180 million for the year ended December 31, 2002. At December 31,
2002, we had a liability to Worldspan for $15 million which is included in accounts payable, deferred credits and other accrued
liabilities on our Consolidated Balance Sheet.
We account for our 18% ownership interest in Orbitz, LLC (Orbitz), an on-line travel agency, under the equity method. We
use the equity method of accounting for this investment because we believe we have the ability to exercise significant influence,
but not control, over the financial and operating policies of Orbitz. This influence is evidenced by, among other things, our right
to appoint two of our senior officers to the 11 member Board of Managers of Orbitz, which allows us to participate in Orbitz's
financial and operating decisions.
Our investments in Worldspan and Orbitz are recorded in investments in associated companies on our Consolidated Balance Sheets.
INCOME TAXES
We account for deferred income taxes under the liability method in accordance with SPAS No. 109, ''Accounting for Income
Taxes" (SPAS 109). Under this method, we recognize deferred tax assets and liabilities based on the tax effects of temporary
differences between the financial statement and tax bases of assets and liabilities, as measured by current enacted tax rates. A
valuation allowance is recorded to reduce deferred tax assets when determined necessary in accordance with SPAS 109. Deferred
tax assets and liabilities are recorded net as current and noncurrent deferred income taxes on our Consolidated Balance Sheets.
FREQUENT FLYER PROGRAM
We record an estimated liability for the incremental cost associated with providing free transportation under our SkyMiles
frequent flyer program when a free travel award is earned. The liability is recorded in accounts payable, deferred credits and
other accrued liabilities on our Consolidated Balance Sheets. It is adjusted periodically based on awards earned, awards
redeemed, changes in the SkyMiles program and changes in estimated incremental costs.
DEFERRED GAi NS ON SALE AND LEASEBACK TRANSACTIONS
We amortize deferred gains on the sale and leaseback of property and equipment under operating leases over the lives of these
leases. The amortization of these gains is recorded 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
We periodically receive credits in connection with the acquisition of aircraft and engines. These credits are deferred until the
aircraft and engines are delivered, then applied on a pro rata basis as a reduction to the cost of the related equipment.
MAINTENANCE COSTS
We record maintenance costs in operating expenses as they are incurred.
INVENTORIES
Inventories of expendable parts related to flight equipment are carried at cost and charged to operations as consumed. An
allowance for obsolescence for the cost of these parts is provided over the remaining useful life of the related Beet.
35
Notes to the Consolidated Financial Statements
ADVERTISING COSTS
We expense advertising costs as other selling expenses in the year incurred. Advertising expense was $130 million, $153 million
and $151 million for the years ended December 31, 2002, 2001 and 2000, respectively.
COMMISSIONS
We record passenger commissions in prepaid expenses and other on our Consolidated Balance Sheets when the related passenger
tickets are sold. Passenger commissions are recognized in operating expenses on our Consolidated Statements of Operations when
the transportation is provided and the related revenue is recognized.
FOREIGN CURRENCY REMEASUREMENT
We remeasure assets and liabilities denominated in foreign currencies using exchange rates in effect on the balance sheet date.
Fixed assets and the related depreciation or amortization charges are recorded at the exchange rates in effect on the date we
acquired the assets. Revenues and expenses denominated in foreign currencies are remeasured using average exchange rates
for all periods presented. We recognize the resulting foreign exchange gains and losses as a component of miscellaneous income
(expense). These gains and losses are immaterial for all periods presented.
STOCK-BASED COMPENSATION
We account for our stock-based compensation plans under the intrinsic value method in accordance with APB 25 and related
interpretations (see Note 12 for additional information related to our stock-based compensation plans). No stock option com-
pensation expense is recognized in net income (loss) as all stock options granted had an exercise price equal to the fair value of
the underlying common stock on the grant date.
The estimated fair values of stock options granted during the years ended December 31, 2002, 2001 and 2000, were derived
using the Black-Scholes model. The following table includes the assumptions used in estimating fair values and the resulting
weighted average fair value of a stock option granted in the periods presented:
Stock Oetions Granted
Assumption 2002 2001 2000
Risk-free interest rate 4.4% 5.8% 6.2%
Average expected life of stock options (in years) 6.7 7.5 7.5
Expected volatility of common stock 38.9% 26.9% 26.9%
Expected annual dividends on common stock $ 0.10 $ 0.10 $ 0.10
Weighted average fair value of a stock option granted $ 9 $ 20 $ 23
The following table shows what our net income (loss) and earnings (loss) per share would have been for the years ended
December 31, 2002, 2001 and 2000, had we accounted for our stock-based compensation plans under the fair value method
of SFAS 123 using the assumptions in the table above:
(in millions, except p er share data) 2002 2001 2000
Net income (loss):
As reported $ (1,272) $ (1,216) $ 828
Deduct: total stock option compensation expense determined
under the fair value based method, net of tax (47) (30) (27)
As adjusted for the fair value method under SPAS 123 $ (1,319) $ (1,246) $ 801
Basic earnings (loss) per share:
As reported $ (10.44) $ (9.99) $ 6.58
As adjusted for the fair value method under SPAS 123 $ (10.82) $ (10.23) $ 6.36
Diluted earnings (loss) per share:
As reported $ (10.44) $ (9.99) $ 6.28
As adjusted for the fair value method under SPAS 123 $ (10.82) $ (10.23) $ 6.07
FAIR VALUE OF FINANCIAL INSTRUMENTS
We record our cash equivalents and short-term investments at cost, which we believe approximates their fair values. The estimated
fair values of other financial instruments, including debt and derivative instruments, have been determined using available market
information and valuation methodologies, primarily discounted cash flow analyses and the Black-Scholes model.
Note 2. Marketable and Other Equity Securities
priceline.com INCORPORATED (priceline)
We are party to an agreement with priceline under which we (1) provide ticket inventory that may be sold through priceline's
Internet-based e-commerce system and (2) received certain equity interests in priceline. We are required to provide priceline
access to unpublished fares.
2000
At January 1, 2000, our equity interests in priceline included (1) a warrant to purchase up to 5.5 million shares of priceline
common stock for $56.63 per share (1999 Warrant) (see discussion below); (2) a right to exchange six million shares of priceline
common stock for six million shares of priceline convertible preferred stock (Exchange Right); and (3) 7.2 million shares of price-
line common stock. During 2000, we (1) exercised the Exchange Right in full, receiving six million shares of priceline Series A
Convertible Preferred Stock (Series A Preferred Stock); (2) sold 1.2 million shares of priceline common stock; and (3) received
549,764 shares of priceline common stock as a dividend on the Series A Preferred Stock. In our 2000 Consolidated Statement
of Operations, we recognized (1) a pretax gain of $301 million from the exercise of the Exchange Right and the sale of priceline
common stock and (2) other income of $14 million, pretax, from the dividend.
The fair value of the 1999 Warrant on the date received was determined to be $61 million based on an independent third-party
appraisal. This amount was recognized in income ratably from November 1999 through November 2002.
On November 2, 2000, the 1999 Warrant was amended to reduce (1) the number of shares underlying the warrant from
5.5 million to 4.7 million and (2) our per share purchase price for those shares from $56.63 to $4.72 (Amended 1999 Warrant).
The Amended 1999 Warrant became exercisable in full on January 1, 2001, and expires on November 17, 2004. The amend-
ment of the 1999 Warrant did not have a material impact on our Consolidated Financial Statements.
2001
On February 6, 2001, we and priceline agreed to restructure our investment in priceline. We exchanged our six million shares
of Series A Preferred Stock for (1) 80,000 shares of priceline Series B Redeemable Preferred Stock (Series B Preferred Stock)
and (2) a warrant to purchase up to 26.9 million shares of priceline common stock for $2.97 per share (2001 Warrant).
The Series B Preferred Stock ( 1) bears an annual per share dividend of approximately 36 shares of priceline comn:ion stock;
(2) has a liquidation preference of $1,000 per share plus any dividends accrued or accumulated but not yet paid (Liquidation
Preference); (3) is subject to mandatory redemption on February 6, 2007, at a price per share equal to the Liquidation
Preference; and ( 4) is subject to redemption in whole, at the option of us or priceline, if priceline completes any of certain
business combination transactions (Optional Redemption).
Based on an independent third-party appraisal, at February 6, 2001, the fair value of (1) the Series B Preferred Stock was estimated
to be $80 million and (2) the 2001 Warrant was estimated to be $46 million. The total fair value of these securities equaled the
carrying amount of the Series A Preferred Stock, including its c_onversion feature and accumulated dividends on the date the
Series A Preferred Stock was exchanged for the Series B Preferred Stock and the 2001 Warrant. Accordingly, we did not recognize
a gain or loss on this transaction.
37
Notes to the Consolidated Financial Statements
& discussed above, the 2001 Warrant provides us with the right to purchase up to an additional 26.9 million shares of priceline
common stock for $2.97 per share. We may exercise the 2001 Warrant, in whole or in part, at any time prior to the close of
business on February 6, 2007, unless all of the shares of Series B Preferred Stock owned by us are redeemed in an Optional
Redemption, in which case we may not exercise the 2001 Warrant after the date of the Optional Redemption. The exercise
price may be paid by us only by the surrender of shares of Series B Preferred Stock, valued at $1,000 per share.
The 2001 Warrant also provides that it will automatically be deemed exercised if the closing sales price of priceline common
stock exceeds $8.91 for 20 consecutive trading days. In that event, our rights in the shares of Series B Preferred Stock necessary to
pay the exercise price of the 2001 Warrant would automatically be converted into the right to receive shares of priceline common
stock pursuant to the 2001 Warrant.
During 2001, we (1) exercised the 2001 Warrant in part to purchase 18.4 million shares of priceline common stock, paying
the exercise price by surrendering to priceline 54,656 shares of Series B Preferred Stock; (2) sold 18.7 million shares of priceline
common stock; and (3) received 986,491 shares of priceline common stock as a dividend on the Series B Preferred Stock. In our
2001 Consolidated Statement of Operations, we recognized (1) other income of $9 million, pretax, from the dividend and (2) a
38 pretax gain of $4 million from the exercise of the 2001 Warrant and the sale of priceline common stock.
2002
During 2002, we (1) exercised the 2001 Warrant in part to purchase 4.0 million shares of priceline common stock, paying the
exercise price by surrendering to priceline 11,875 shares of Series B Preferred Stock; (2) sold 3.9 million shares of priceline com-
mon stock; and (3) received 695,749 shares of priceline common stock as dividends on the Series B Preferred Stock. In our 2002
Consolidated Statement of Operations, we recognized (1) a pretax loss of $3 million from the exercise of the 2001 Warrant and
the sale of priceline common stock and (2) other income of $2 million, pretax, from the dividends.
The following table represents our equity interests in priceline and their respective carrying values at December 31, 2002 and 2001:
Number of Shares<
1
>
Carrying Values
(in millions, except shares of Series B Preferred Stock) 2002 2001 2002 2001
Series B Preferred Stock 13,469 25,344 $ 13 $ 25
2001 Warrant 4.S 8.5 3 31
Amended 1999 Warrant 4.7 4.7 13
priceline common stock 2.1 1.3 3 7
{]) We have certain registration rights relating to shares of priceline common stock we acquire from the exercise of the Amended 1999 Warrant or the 2001 Warrant or
receive as dividends on the Series B Preferred Stock.
The Series B Preferred Stock and priceline common stock are accounted for as available-for-sale securities. In accordance with
SPAS No. 115, ''Accounting for Certain Investments in Debt and Equity Securities" (SPAS 115), the Series B Preferred Stock and
the priceline common stock are recorded at fair value in investments in debt and equity securities on our Consolidated Balance
Sheets. Any changes in fair value of these assets are recorded, net of tax, in accumulated other comprehensive income (loss). The
Series B Preferred Stock is recorded at face value, which we believe approximates fair value. The warrants are recorded at fair
value in investments in debt and equity securities on our Consolidated Balance Sheets and any changes in fair value are recorded
in other income (expense) on our Consolidated Statements of Operations in accordance with SPAS 133.
REPUBLIC AIRWAYS HOLDINGS, INC. (REPUBLIC)
On June 7, 2002, we entered into a contract carrier agreement with Chautauqua Airlines, Inc. (Chautauqua), a regional air carrier
which is a subsidiary of Republic (see Note 9). In conjunction with this agreement, we received from Republic (1) a warrant to
purchase up to 1.5 million shares of Republic common stock for $12.50 per share (2002 Warrant); (2) a warrant to purchase up to
1.5 million shares of Republic common stock at a price per share equal to 95% of the public offering price per share in Republic's
initial public offering of common stock (IPO Warrant); (3) the right to purchase up to 5% of the shares of common stock that
Republic offers for sale in its initial public offering at a price per share equal to the initial public offering price; and (4) the right to
receive a warrant to purchase up to an additional 60,000 shares of Republic common stock for each additional aircraft Chautauqua
operates for us above the 22 aircraft under the original contract carrier agreement.
The 2002 Warrant is exercisable in whole or in part at any time until June 7, 2012. The fair value of the 2002 Warrant on the
date received was approximately $11 million, and will be recognized in income ratably over a five-year period. The carrying value
of the 2002 Warrant was approximately $10 million at December 31, 2002. The 2002 Warrant is accounted for in the same
manner as the priceline warrants described above.
The IPO Warrant is exercisable in whole or in part at any time (1) beginning on the closing date of Republic's initial public
offering of common stock and (2) subject to earlier cancellation if the contract carrier agreement is terminated in certain
circumstances, ending on the tenth anniversary of that closing date. We will record the fair value of the IPO Warrant on the
closing date of Republic's initial public offering of common stock.
The 2002 Warrant, the IPO Warrant and the shares of Republic common stock underlying these securities are not registered
under the Securities Act of 1933; however, we have certain demand and piggyback registration rights relating to the underlying
39
shares of Republic common stock.
OTHER
Our equity interest in SkyWest, Inc., the parent company of SkyWest Airlines, was classified as an available-for-sale equity security
under SFAS 115. During 2001, we sold our equity interest in SkyWest, Inc. for $125 million and recorded a pretax gain of $111
million. We recorded this gain in our 2001 Consolidated Statement of Operations in gain (loss) from sale of investments, net.
During 2001, we also sold our remaining equity interest in Equant, N.V. (Equant), an international data services company,
recognizing a pretax gain of $11 million. We recorded this gain in our 2001 Consolidated Statement of Operations in gain
(loss) from sale of investments, net.
Note 3. Risk Management
AIRCRAFT FUEL PRICE RISK
Our results of operations can be significantly impacted by changes in the price of aircraft fuel. To manage this risj{, we periodically
purchase options and other similar non-leveraged derivative instruments and enter into forward contracts for the purchase of fuel.
These contracts may have maturities of up to 36 months. We may hedge up to 80% of our expected fuel requirements on a 12-
month rolling basis. See Note 4 for additional information about our fuel hedge contracts. We do not enter into fuel hedge con-
tracts for speculative purposes.
INTEREST RATE RISK
Our exposure to market risk due to changes in interest rates primarily relates to our long-term debt obligations and cash portfolio.
Market risk associated with our long-term debt relates to the potential change in fair value resulting from a change in interest
rates as well as the potential increase in interest we would pay on variable rate debt. At December 31, 2002 and 2001, approxi-
mately 26% and 25%, respectively, of our total debt was variable rate debt. Market risk associated with our cash portfolio relates
to the potential change in our earnings resulting from a decrease in interest rates.
From time to time, we may enter into interest rate swap agreements, provided that the notional amount of th~se transactions
does not exceed 50% of our long-term debt. See Note 4 for additional information about our interest rate swap agreements.
We do not enter into interest rate swap agreements for speculative purposes.
FOREIGN CURRENCY EXCHANGE RISK
We are subject to foreign currency exchange risk because we have revenues and expenses denominated in foreign currencies,
primarily the euro, the British pound and the Canadian dollar. To manage exchange rate risk, we net foreign currency revenues
and expenses, to the extent practicable. From time to time, we may also enter into foreign currency options and forward con-
tracts with maturities of up to 12 months. We did not have any foreign currency hedge contracts at December 31, 2002. The fair
value of our foreign currency hedge contracts was not material at December 31, 2001. We do not enter into foreign currency
hedge contracts for speculative purposes.
CREDIT RISK
To manage credit risk associated with our aircraft fuel price, interest rate and foreign currency exchange risk management programs,
we select counterparties based on their credit ratings and limit our exposure 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 at December 31, 2002 and 2001.
Our accounts receivable are generated largely from the sale of passenger airline tickets and cargo transportation services to
4 customers. The majority of these sales are processed through major credit card companies, resulting in accounts receivable which
are generally short-term in duration. We also have receivables from the sale of mileage credits to partners, such as credit card
companies, hotels and car rental agencies, that participate in our SkyMiles program. We believe that the credit risk associated
with these receivables is minimal and that the allowance for uncollectible accounts that we have provided is sufficient.
SELF-INSURANCE RISK
We self-insure a portion of our losses from claims related to workers' compensation, environmental issues, property damage,
medical insurance for employees and general liability. Losses are accrued based on an estimate of the ultimate aggregate liability
for claims incurred, using independent actuarial reviews based on standard industry practices and our actual experience. A portion
of our projected workers' compensation liability is secured with restricted cash collateral (see Note 1).
Note 4. Derivative Instruments
On July 1, 2000, we adopted SFAS 133, as amended. SFAS 133 requires us to record all derivative instruments on our
Consolidated Balance Sheets at fair value and to recognize certain non-cash changes in these fair values in our Consolidated
Statements of Operations. SFAS 133 impacts the accounting for our fuel hedging program, our interest rate hedging program
and our holdings of equity warrants and other similar rights in certain companies.
The impact of SFAS 133 on our Consolidated Statements of Operations is summarized as follows:
Income (Expense)
For the For the For the Six
Year Ended Year Ended Months Ended Cumulative
December 31, December 31 , December 31, Effect
(in millions) 2002 2001 2000 July 1, 2000
Write-off of fuel hedge contract premiums $ $ $ $ (143)
Change in time value of fuel hedge contracts (23) (1) 7
Ineffective portion of fuel hedge contracts 13 (3) (2) 16
Fair value adjustment of equity rights (29) 72 (164) (37)
Fair value adjustments of SPAS 133 derivatives, pretax (39) 68 (159) (164)
Total, net of tax $ (25) $ 41 $ (97) $ (100)
FUEL HEDGING PROGRAM
Because there is not a readily available market for derivatives in aircraft fuel, we use heating and crude oil derivative contracts
to manage our exposure to changes in aircraft fuel prices. Changes in the fair value of these contracts (fuel hedge contracts) are
highly effective at offsetting changes in aircraft fuel prices.
At December 31, 2002, our fuel hedge contracts had an estimated short-term fair value of $68 million and an estimated long-
term fair value of $5 million, with unrealized gains of $29 million, net of tax, recorded in accumulated other comprehensive
income (loss). At December 31, 2001, our fuel hedge contracts had an estimated short-term fair value of $55 million and an
estimated long-term fair value of $9 million, with unrealized gains of $25 million, net of tax, recorded in accumulated other
comprehensive income (loss). See Note 1 for information about our accounting policy for fuel hedge contracts.
INTEREST RATE HEDGING PROGRAM
To manage our interest rate exposure, in July 2002, we entered into two interest rate swap agreements relating to our (1) $300
million principal amount of unsecured Series C Medium Term Notes due March 15, 2004, which pay interest at a fixed rate of
6.65% per year and (2) $500 million principal amount of unsecured Notes due December 15, 2005, which pay interest at a fixed
rate of 7.70% per year. 41
Under the first interest rate swap agreement, we are paying the London lnterBank Offered Rate (LIBOR) plus a margin per
year and receiving 6.65% per year on a notional amount of $300 million until March 15, 2004. Under the second agreement,
we are paying LIBOR plus a margin per year and receiving 7.70% per year on a notional amount of $500 million until
December 15, 2005.
At December 31, 2002, our interest rate swap agreements had an estimated long-term fair value of $21 million which was
recorded in other noncurrent assets on our Consolidated Balance Sheets. In accordance with fair value hedge accounting, we also
recorded a $21 million increase to the carrying value of our long-term debt. We did not have any interest rate swap agreements
outstanding at December 31, 2001. See Note 1 for information about our accounting policy for interest rate swap agreements.
EQUITY WARRANTS AND OTHER SIMILAR RIGHTS
We own equity warrants and other similar rights in certain companies, primarily Republic and priceline. The total fair value of
these rights at December 31, 2002 and 2001, was $14 million and $48 million, respectively. See Notes 1 and 2 for information
about our accounting policy for these rights and the significant rights that we own, respectively.
Note 5. Goodwill and Intangible Assets
On January 1, 2002, we adopted SPAS 142, which requires that we discontinue the amortization of goodwill and other intangible
assets with indefinite useful lives. Instead, we now apply a fair value-based impairment test to the net ~ook ~alue of goodwill and
indefinite-lived intangible assets. See Note 1 for information about our accounting policy for the impairment tests of goodwill
and other intangible assets.
42
Notes to the Consolidated Financial Statements
The adoption of SFAS 142 decreased our operating expenses on our Consolidated Statements of Operations by approximately
$60 million, net of tax, for the year ended December 31, 2002, due to the discontinuance of amortization of goodwill and
indefinite-lived intangible assets. The following table reconciles our reported net income (loss) and earnings (loss) per share to
adjusted net income (loss) and earnings (loss) per share as if the non-amortization provisions of SFAS 142 had been applied to
prior year periods:
For the Years Ended December 31,
(in millions, except per share data) 2002 2001 2000
Net income (loss) before cumulative effect of change in accounting principle $ (1,272) $ (1,216) $ 928
Net income (loss) $ (1,272) $ (1,216) $ 828
Add back: goodwill and international route amortization, net of tax 60 60
Adjusted net income (loss) before cumulative effect of change in accounting principle $ (1,272) $ (1,156) $ 988
Adjusted net income (loss) $ (1,272) $ (1,156) $ 888
Basic earnings per share:
Net income (loss) before cumulative effect of change in accounting principle $ (10.44) $ (9.99) $ 7.39
Net income (loss) $ (10.44) $ (9.99) $ 6.58
Add back: goodwill and international route amortization, net of tax 0.49 0.49
Adjusted net income (loss) before cumulative effect of change in accounting principle $ (10.44) $ (9.50) $ 7.88
Adjusted net income (loss) $ (10.44) $ (9.50) $ 7.07
Diluted earnings per share:
Net income (loss) before cumulative effect of change in accounting principle $ (10.44) $ (9.99) $ 7.05
Net income (loss) $ (10.44) $ (9.99) $ 6.28
Add back: goodwill and international route amortization, net of tax 0.49 0.46
Adjusted net income (loss) before cumulative effect of change in accounting principle $ (10.44) $ (9.50) $ 7.51
Adjusted net income (loss) $ (10.44) $ (9.50) $ 6.74
During the March 2002 quarter, we completed the required initial test of potential impairment of indefinite-lived intangible
assets, other than goodwill; that test indicated no impairment at the date of adoption of SFAS 142. The following table presents
information about our intangible assets, other than goodwill, at December 31, 2002 and 2001:
2002 2001
Gross Carrying Accumulated Gross Carrying Accumulated
(in milliom) Amount Amortization Amount Amortization
-------------------------------------
Amortized intangible assets:
Leasehold and operating rights
Other
Total
Unamortized intangible assets:
International routes
Other
Total
$ 125
3
$ 128
$ (86)
(1)
$ (87)
Net Carrying
Amount
$ 60
1
$ 61
$ 113 $ (81)
2 (1)
$ 115 $ (82)
Net Carrying
Amount
$ 60
$ 61
During the June 2002 quarter, we completed our transitional goodwill impairment test, which indicated no impairment at the
date of adoption of SFAS 142. At December 31, 2002, we performed the required annual impairment test of our goodwill and
indefinite-lived intangible assets, which also indicated no impairment.
Note 6. Debt
The following table summarizes our debt at December 31, 2002 and 2001:
(dollars in millions) 2002 2001
Secured1
'1
Series 2000-1 Enhanced Equipment Trust Certificates
7.38% Class A-1 due in installments from 2003 to May 18, 2010 $ 274 $ 308
7.57% Class A-2 due November 18, 2010 738 738
7.92% Class B due November 18, 2010 182 182
7.78% Class C due November 18, 2005 239 239
9.11% Class D due November 18, 2005 176
1,609 1,467
Series 2001-1 Enhanced Equipment Trust Certificates
6.62% Class A-1 due in installments from 2003 to March 18, 2011 262 300
7.11 % Class A-2 due September 18, 2011 571 571
7.71 % Class B due September 18, 2011 207 207
7.30% Class C due September 18, 2006 170 170
6.95% Class D due September 18, 2006 150 150 43
1,360 1,398
Series 2001-2 Enhanced Equipment Trust Certificates
3.11 % Class A due in installments from 2003 to December 18, 2011 <
21 423 449
4.31 % Class B due in installments from 2003 to December 18, 2011 <
2l 254 282
5.66% Class C due in installments from 2005 to December 18, 2011 <
2l 80
757 731
Series 2002-1 Enhanced Equipment Trust Certificates
6.72% Class G-1 due in installments from 2003 to January 2, 2023 587
6.42% Class G-2 due July 2, 2012 370
7.78% Class C due in installments from 2003 to January 2, 2012 169
1,126
1.9%-5.9% Other aircraft financings due in installments from 2003 to June 19, 2019<
2l 1,555 506
Total secured debt 6,407 4,102
Unsecured
1997 Bank Credit Agreement, paid in full and terminated on May 1, 2002 625
Massachusetts Port Authority Special Facilities Revenue Bonds
5.0-5.5% Series 2001A due in installments from 2012 to 2027 338 338
l.3%<
2l Series 2001B due in installments from 2027 to January 1, 2031 80 80
1.4%<
2
J
Series 2001 C due in installments from 2027 to January 1, 2031 80 80
8.10% Series C Guaranteed Serial ESOP Notes, due in installments from 2003 to 2009 92 290
6.65% Medium-Term Notes, Series C, due March 15, 2004 300 300
7.7% Notes due December 15, 2005 500 500
7.9% Notes due December 15, 2009 499 499
9.75% Debentures due May 15, 2021 106 106
Development Authority of Clayton County, loan agreement,
3.2%<
2l Series 2000A due June 1, 2029 65 65
3.3%12l Series 2000B due May 1, 2035 116 116
3.3%(2) Series 2000C due May 1, 2033 120 120
8.3% Notes due December 15, 2029 925 925
8.125% Notes due July 1, 2039<
3l 538 538
5.3% to 10.375% Other unsecured debt due 2003 to 2033 574 620
Total unsecured debt 4,333 5,202
Total debt 10,740 9,304
Less: current maturities 666 1,025
Total lon~-term debt $ 10,074 $ 8,279
(1) Our secured debt is secured by first mortgage liens on a total of 249 aircraft (69 B-737-800, 32 B-757-200, two B-767-300, 28 B-767-300ER, six B-767-400,
four B-777-200, 93 CRJ-100/200, 11 EMB-120 and four ATR-72) delivered new to us from March 1992 through December 2002. These aircraft had ari aggregate
net book value of approximately $7 0 billion at December 31, 2002.
(2) Our variable interest rate long-term debt is shown using interest rates in effect at December 31, 2002.
(3) The 8.125% Notes due 2039 are redeemable by us, in whole or in part, at par on or after July 1, 2004.
44
Notes to the Consolidated Financial Statements
The fair value of our total debt was $9.5 billion and $8.9 billion at December 31, 2002 and 2001, respectively.
FUTURE MATURITIES
The following table summarizes the scheduled maturities of our debt at December 31, 2002, for the next five years and thereafter:
Years Ending December 31, Principal
(in millions) Amount
2003 $ 666
2004 623
2005 1,203
2006 602
2007 285
After 2007 7,361
Total $ 10,740
BOSTON AIRPORT TERMINAL PROJECT
During 2001, we entered into lease and financing agreements with the Massachusetts Port Authority (Massport) for the redevel-
opment and expansion of Terminal A at Boston's Logan International Airport. The completion of this project will enable us to
consolidate all of our domestic operations at that airport into one location. Construction began in the June 2002 quarter and
is expected to be completed during 2005. Project costs will be funded with $498 million in proceeds from Special Facilities
Revenue Bonds issued by Massport on August 16, 2001. We agreed to pay the debt service on the bonds under a long-term lease
agreement with Massport and issued a guarantee to the bond trustee covering the payment of the debt service on the bonds. For
additional information about these bonds, see "Massachusetts Port Authority Special Facilities Revenue Bonds" on the table on
page 43. Because we have issued a guarantee of the debt service on the bonds, we have included the bonds, as well as the related
bond proceeds, on our Consolidated Balance Sheets. The bonds are reflected in noncurrent liabilities and the related proceeds,
which are held in trust, are reflected as restricted investments in other assets on our Consolidated Balance Sheets.
LETTER OF CREDIT ENHANCED MUNICIPAL BONDS
In June 2000, the Development Authority of Clayton County (Development Authority) issued $301 million principal amount of
bonds in three series with scheduled maturities between 2029 and 2035. The proceeds of this sale were used to refund bonds that
had been issued to finance certain of our facilities at Hartsfield Atlanta International Airport. The new bonds are secured by the
Development Authority's pledge of revenues derived by the Development Authority under related loan agreements between us
and the Development Authority. The Development Authority bonds currently bear interest at a variable rate which is determined
weekly. The bonds may be tendered for purchase by their holders on seven days notice. Subject to certain conditions, tendered
bonds will be remarketed at then prevailing interest rates.
Principal and interest on the bonds, and the payment of the purchase price of bonds tendered for purchase, are presently paid
under three irrevocable, direct-pay letters of credit totaling $305 million issued by Commerzbank AG under a Reimbursement
Agreement between us and a group of banks (Reimbursement Agreement).
There are also outstanding under the Reimbursement Agreement irrevocable direct-pay letters of credit totaling $104 million
relating to $102 million principal amount of bonds issued by other municipalities to build certain airport facilities leased to us.
These bonds currently bear interest at a variable rate, which is determined weekly, and may be tendered for purchase by their
holders on seven days notice. We pay the debt service on these bonds under long-term lease agreements (see Note 7). The related
letters of credit are similar to the letters of credit relating to the Development Authority bonds.
In October 2002, we and the banks that are parties to the Reimbursement Agreement amended that agreement to eliminate
coyenants that limited our secured debt and debt-to-equity ratio. We took this action to increase our financial flexibility and
because we believed we would not be in compliance with the debt-to-equity covenant at December 31, 2002, due to the
combined effect of (1) the anticipated need to record at December 31, 2002, a substantial non-cash charge to equity relating to
our defined benefit pension plans (see Note 11); (2) our increased debt levels; and (3) our continuing losses since 2001. In con-
sideration for these changes, we:
Agreed to comply with a new cash maintenance covenant that was added to the Reimbursement Agreement. See the Covenants
and Change in Control Provisions section below.
Agreed that the Reimbursement Agreement and the letters of credit issued thereunder would terminate on June 8, 2003. These
letters of credit were originally scheduled to expire between June 8, 2003 and December 4, 2003.
Terminated in October 2002 a reimbursement agreement with Bayerische Hypo-Und Vereinsbank AG and a group of banks
(HVB Agreement) and the related letter of credit that supported our obligations with respect to the Series C Guaranteed Serial
ESOP Notes (ESOP Notes). Several of the banks that are parties to the Reimbursement Agreement also participated in the HVB
Agreement. The HVB Agreement was originally scheduled to expire on May 19, 2003. See the ESOP Notes section below.
The Reimbursement Agreement generally provides that, if there is a drawing under a letter of credit to purchase bonds that have
been tendered, we may convert our repayment obligation to a loan that becomes due and payable on the earlier of (1) the date 45
the related bonds are remarketed or (2) June 8, 2003.
Unless the letters of credit issued under the Reimbursement Agreement are extended in a timely manner, we will be required to
purchase on June 3, 2003, five days prior to the expiration of the letters of credit, the related $403 million principal amount of
tax-exempt municipal bonds. In these circumstances, we could seek, but there is no assurance we would be able, to (1) sell the
bonds without a letter of credit enhancement at then prevailing fixed interest rates or (2) replace the expiring letters of credit with
a new letter of credit from an alternate credit provider and_ remarket the related bonds.
ESOP NOTES
We guarantee the ESOP Notes issued by the Delta Family-Care Savings Plan. The holders of the ESOP Notes were entitled to
the benefits of an unconditional, direct-pay letter of credit issued under the HVB Agreement. Required payments of principal,
interest and make-whole premium amounts on the ESOP Notes were paid under the letter of credit. As part of the amendment
to the Reimbursement Agreement discussed above, we terminated the HVB Agreement on October 21, 2002. _
To effect the termination of the HVB Agreement, on September 30, 2002, we provided the required advance notice of our
decision to terminate early the letter of credit issued under that agreement. As a result of this action, each holder of the ESOP
Notes had the right to require us to purchase its ESOP Notes before the termination of the letter of credit. Some, but not all, of
the holders of the ESOP Notes exercised this right. On October 15, 2002, we purchased ESOP Notes for _
$215 million, covering
$169 million principal amount of ESOP Notes, $4 million of accrued interest and $42 million of iake-whole premium. The
$42 million loss recognized for the make-whole premium related to this extinguishment of debt was recorded in other income
(expense) on our Consolidated Statements of Operations.
As a result of the termination of the letter of credit issued under the HVB Agreement, the holders of the remaining $92 million
principal amount of ESOP Notes that we did not purchase on October 15, 2002, had the right to tender their ESOP Notes for
purchase by January 26, 2003. Some, but not all, of the remaining holders of the ESOP Notes exercised this right. On January 26,
2003, we incurred an obligation to purchase on February 25, 2003, ESOP Notes for $74 million, covering $57 million principal
amount of ESOP Notes, $3 million of accrued interest and $14 million of make-whole premium. The $14 million loss recognized
for the make-whole premium related to this extinguishment of debt will be recorded during the March 2003 quarter in other
income (expense) on our Consolidated Statements of Operations. Subsequent to our purchase of these ESOP Notes, $35 million
principal amount of ESOP Notes is held by third parties.
N ates to the Consolidated Financial Statements
COVENANTS AND CHANGE IN CONTROL PROVISIONS
The Reimbursement Agreement, as amended, contains covenants that (1) require us to maintain a minimum of$ 1 billion of
unrestricted cash, cash equivalents and short-term investments at the end of each month; (2) limit the amount of current debt
and convertible subordinated debt that we may have outstanding; and (3) limit our annual flight equipment rental expense.
It also provides that, upon the occurrence of a change in control of Delta, we shall, at the request of the banks, deposit cash
collateral with the banks in an amount equal to all letters of credit outstanding and other amounts we owe under the
Reimbursement Agreement.
As is customary in the airline industry, our aircraft lease and financing agreements require that we maintain certain levels of insur-
ance coverage. We were in compliance with all of the covenants and requirements discussed above at December 31, 2002 and 2001.
OTHER FINANCING ARRANGEMENTS
On December 12, 2001, we entered into an agreement under which we were able to borrow, prior to July 1, 2002, up to $935
million on a secured basis. Upon completion of the Series 2002-1 enhanced equipment trust certificates financing on April 30,
2002, this facility terminated. No borrowings were outstanding under this facility during its term.
- On December 28, 2001, we entered into a credit facility with certain banks under which, as amended, we may borrow up to
$500 million on a secured basis until August 21, 2003, subject to certain conditions. The banks' lending commitment under this
facility is reduced, however, to the extent we receive net cash proceeds from the issuance of certain financings. The interest rate
under this facility is, at our option, LIBOR or a specified base rate plus a margin that varies depending on the period during
which borrowings are outstanding. Any borrowings under this facility will be secured by certain aircraft owned by us. At
December 31, 2002 and 2001, no borrowings were outstanding under this facility.
On January 31, 2002, we entered into a facility under which we were able to borrow up to approximately $350 million secured
by certain regional jet aircraft which we purchased for cash. This facility was scheduled to expire on February 1, 2003, except that
amounts borrowed prior to that date were due between 366 days and 18 months after the date of borrowing. In December 2002,
we utilized as security for longer-term financings all of the regional jet aircraft that served as collateral under this facility. As a
result, we terminated this facility on December 19, 2002. No borrowings were outstanding under this facility on that date.
Also on January 31, 2002, we entered into a facility to finance, on a secured basis at the time of acquisition, certain future
deliveries of regional jet aircraft. At December 31, 2002, the total borrowings available to us under this facility, as amended, were
$ 197 million, of which $31 million was outstanding. Borrowings under this facility (1) are due between 366 days and 18 months
after the date of borrowing (subject to earlier repayment if certain longer-term financing is obtained for these aircraft) and (2) bear
interest at LIBOR plus a margin.
We have available to us long-term, secured financing commitments from a third party that we may elect to use for a substantial
portion of the commitments for regional jet aircraft to be delivered to ASA and Comair through 2004 (see Note 9). Any borrowings
under these commitments would be at a fixed interest rate determined by reference to IO-year U.S. Treasury Notes and would have
various repayment dates.
Note 7. Lease Obligations
We lease aircraft, airport terminal and maintenance facilities, ticket offices and other property and equipment. Rental expense
for operating leases, which is recorded on a straight-line basis over the life of the lease, totaled $1.3 billion for each year ended
December 31, 2002, 2001 and 2000. Amounts due under capital leases are recorded as liabilities. Our interest in assets acquired
under capital leases is recorded as property and equipment on our Consolidated Balance Sheets. Amortization of assets recorded
under capital leases is included in depreciation and amortization expense on our Consolidated Statements of Operations. Our
leases do not include residual value guarantees.
The following table summarizes, as of December 31, 2002, our minimum rental commitments under capital leases and
noncancelable operating leases with initial or remaining terms in excess of one year:
Years Ending December 31, Capital Operating
(in millions) Leases Leases
2003 $ 40 $ 1,277
2004 31 1,203
2005 24 1,176
2006 16 1,128
2007 15 1,042
After 2007 46 6,918
Total minimum lease payments 172 $ 12,744
Less: lease payments that represent interest 45
Present value of future minimum capital lease payments 127
Less: current obligations under capital leases 27
Lon~-term capital lease obligations $ 100
The total minimum rental commitments under operating leases in the table above do not include approximately $144 million in
future minimum lease payments which we expect to receive under noncancelable subleases.
As of December 31, 2002, we operated 313 aircraft under operating leases and 45 aircraft under capital leases. These leases have
remaining terms ranging from one month to 15 years.
Certain municipalities have issued special facilities revenue bonds to build or improve airport and maintenance facilities leased to
us. The facility lease agreements require us to make rental payments sufficient to pay principal and interest on the bonds. The
above table includes $1.8 billion of operating lease rental commitments for such payments.
Note 8. Sale of Receivables
We are party to an agreement, as amended, under which we sell a defined pool of our accounts rece'ivable, on a revolving basis,
through a special-purpose, wholly owned subsidiary, which then sells an undivided interest in the defined pool of accounts receiv-
able to a third party. In accordance with SFAS 140, this subsidiary is not consolidated in our Consolidated Financial Statements.
We retain servicing and record-keeping responsibilities for the receivables sold, the fair value of which is not material at
December 31, 2002 and 2001.
In exchange for the sale of receivables, we receive (1) cash up to a maximum of $250 million from the subsidiary's sale of an
undivided interest in the pool of receivables to the third party and (2) a subordinated promissory note from the subsidiary, less
certain program fees. Proceeds from new securitizations under this agreement were approximately $38 million for the year ended
December 31, 2002, which are recorded as cash flows from operations on our Consolidated Statements of Cash Flows. The
amount of the promissory note fluctuates because it represents the portion of the purchase price payable for the volume of
receivables sold. The principal amount of the promissory note was $67 million and $144 million at December 31, 2002 and
2001, respectively, and is included in accounts receivable on our Consolidated Balance Sheets. Additionally, our investment in
the subsidiary, which represents our funding of the entity, totaled $117 million at December 31, 2002, and is recorded in invest-
ments in associated companies on our Consolidated Balance Sheets.
47
Notes to the Consolidated Financial Statements
The program fees related to chis agreement are paid to the third party based on the amounts invested by the third party.
These fees were $4 million, $14 million and $22 million for the years ended December 31, 2002, 2001 and 2000, respectively,
and are recorded in miscellaneous income (expense), net included in ocher income (expense) on our Consolidated Statements
of Operations.
This agreement, as amended during the June 2002 quarter, expires on March 31, 2003. However, the third party may terminate
chis agreement prior to its scheduled terminatio~ date if our senior unsecured long-term debt is rated either below Ba3 by Moody's
or below BB- by Standard & Poor's. If chis agreement is terminated under these circumstances or upon expiration, we would be
required to repurchase the funded receivables, which totaled $250 million at December 31, 2002. At December 31, 2002, our
senior unsecured long-term debt was rated Ba3 by Moody's and BB- by Standard & Poor's. Boch Moody's and Standard & Poor's
ratings outlook for our long-term debt is negative.
Note 9. Purchase Commitments and Contingencies
AIRCRAFT & ENGINE ORDER COMMITMENTS
48 Future expenditures for aircraft and engines on firm order as of December 31, 2002 are estimated to be $5.0 billion. The following
table shows the timing of these commitments:
Year Ending December 31,
(in billions) Amount
2003
2004
2005
2006
2007
After 2007
Total
CONTRACT CARRIER AGREEMENT CO MITMENTS
$
$
We have contract carrier agreements with two regional air carriers, Atlantic Coast Airlines (ACA) and SkyWest Airlines, Inc.
(SkyWest), which expire in 2010. During the June 2002 quarter, we entered into a contract carrier agreement with a third
regional air carrier, Chautauqua Airlines, which expires in 2012. Chautauqua began operations under our Delta Connection
program in November 2002.
1.0
0.7
1.2
1.3
0.8
5.0
Under these contract carrier agreements, we schedule certain aircraft that are operated by those airlines using our flight code, sell
the seats on those flights and retain the related revenues. We pay those airlines an amount that is based on their cost of operating
those flights plus a specified margin. The following table shows the number of aircraft and available seat miles (ASMs) operated for
us by the regional air carriers, and our expenses related to the contract carrier agreements for the years ended December 31, 2002,
2001 and 2000:
(in millions, except aircraft)
Number of aircraft operated0J
ASMs<
1
,2J
Expenses
(1) These amounts are unaudited.
(2) These ASMs are not included in our ASMs on pages 11 and 68.
2002
100
3,513
$ 561
2001
72
1,562
$ 240
2000
23
328
$ 89
We expect to incur approximately $780 million in expenses related to these contract carrier agreements in 2003. We anticipate
that the number of aircraft operated for us by these regional air carriers will increase to 136 by December 31, 2003, including
the 12 additional Chautauqua aircraft discussed in Note 22. See Note 1 for information about our accounting policy for revenues
and expenses related to our contract carrier agreements.
We may terminate the ACA and SkyWest agreements without cause at any time by giving the airlines certain advance notice.
If we terminate the ACA agreement in this manner, ACA has the right to (1) assign to us leased aircraft that it operates for us,
provided we are able to continue the leases on the same financial terms ACA had prior to the assignment, and (2) require us
to purchase, at fair value, aircraft that ACA operates for us and owns at the time of the termination. If we terminate the SkyWest
agreement in this manner, SkyWest has the right to assign to us leased regional jet aircraft that it operates for us, provided we are
able to continue the leases on the same terms SkyWest had prior to the assignment.
We may not terminate the Chautauqua agreement without cause during the approximately first five years of its term. After that
period, we may terminate this agreement without cause at any time. If we terminate the Chautauqua agreement in this manner,
Chautauqua has the right to (1) assign to us leased aircraft that it operates for us, provided we are able to continue the leases
on the same terms Chautauqua had prior to the assignment, and (2) require us to purchase or sublease any of the aircraft that
it owns and operates for us. If we are required to purchase aircraft owned by Chautauqua, the purchase price would be equal to
the amount necessary (1) to reimburse Chautauqua for the equity it provided to purchase the aircraft and (2) to repay in full any
debt outstanding at such time that is not being assumed in connection with such purchase. If we are required to sublease aircraft
owned by Chautauqua, the sublease would have (1) a rate equal to the debt payments of Chautauqua for the debt financing of
the aircraft calculated as if 90% of the aircraft was debt financed by Chautauqua and (2) specified other terms and conditions.
We estimate that the total fair value of the aircraft that all three regional air carriers could assign to us or require that we purchase
is approximately $1.5 billion.
LEGAL CONTINCENCIES
We are involved in legal proceedings relating to antitrust matters, employment practices, environmental issues and other matters
concerning our business. We cannot reasonably estimate the potential loss for certain legal proceedings because, for example, the
litigation is in its early stages or the plaintiff does not specify damages being sought. Although the ultimate outcome of our legal
proceedings cannot be predicted with certainty, we believe that the resolution of these actions will not have a material adverse effect
on our Consolidated Financial Statements.
OTHER CONTINGENCIES
Regional Airports Improvement Corporation (RAIC)
In 1996, the RA.IC refinanced $88 million in Facilities Sublease Revenue Bonds which had been initially issued in 1985 for the
construction of certain airport terminal facilities at Los Angeles International Airport for Western Airlines (Western) prior to our
merger with them. We are obligated under a facilities sublease with the RAIC to pay the trustee rent in an amount sufficient to
pay the debt service on the bonds. When the bonds were refinanced in 1996, we also provided a guarantee to the bond trustee
covering the payment of the debt service on the bonds substantially similar to the guarantee provided by Western in 1985. In
November 2002, the City of Los Angeles (City) deposited in escrow with the bond trustee approximately $38 million as prepay-
ment of an ongoing rental credit for certain City areas within the terminal facilities constructed and financed with the bonds.
Subsequent to December 31, 2002, these escrow funds were used to purchase, at a discount in the open market, and retire
approximately $41 million principal amount of the bonds.
General Indemnifications
We are the lessee under many real estate leases. It is common in these commercial lease transactions for us, as ~he lessee, to agree
to indemnify the lessor and other related third parties for tort, environmental and other liabilities that arise out of or relate to our
use or occupancy of the leased premises. Typically, this type of indemnity would make us responsible to indemnified parties for
liabilities arising out of the conduct of, among others, contractors, licensees and invitees at or in connection with the use or occu-
pancy of the leased premises. Often, this indemnity extends to related liabilities arising from the negligence of the indemnified
parties, but usually excludes any liabilities caused by their gross negligence or willful misconduct.
Our aircraft and other equipment lease and financing agreements typically contain provisions requiring us, as the lessee or obligor,
to indemnify the other parties to those agreements, including certain related parties, against virtually any liabilities that might
arise from the condition, use or operation of the aircraft or such other equipment.
49
50
Notes to the Consolidated Financial Statements
We believe that our insurance coverage would cover most, but not all, of such liabilities and related indemnities associated with
the types of lease and financing agreements described above, including real estate leases.
Certain of our aircraft and other financing transactions also often include provisions which require us to make payments to the
lenders to preserve an expected economic return to the lenders if that economic return is diminished due to certain changes in
law or regulations. In certain of these financing transactions, we also bear the risk of certain changes in tax laws that would sub-
ject payments to non-U.S. lenders to withholding taxes.
We cannot reasonably estimate our potential future payments under the indemnities and related provisions described above.
Employees Under Collective Bargaining Agreements
At December 31, 2002, Delta, ASA and Comair had a total of approximately 75,100 full-time equivalent employees. Approximately
18% of these employees, including all of our pilots, are represented by labor unions. Approximately 3% of our total full-time
equivalent employees are covered under collective bargaining agreements that are either in negotiations or will become amendable
by December 31, 2003. ASA is currently in collective bargaining negotiations with the Air Line Pilots Association, International,
which represents ASN.s approximately 1,520 pilots. This contract became amendable in September 2002. The outcome of these
collective bargaining negotiations cannot presently be determined. In addition, ASN.s contract with the Association of Flight
Attendants, which represents ASN.s approximately 775 flight attendants, becomes amendable in September 2003.
Note 10. Income Taxes
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and income tax purposes. See Note 1 for information about our accounting policy for income taxes.
At December 31, 2002, we had $349 million of federal alternative minimum tax (AMT) credit carryforward, which does not
expire. We also had federal and state pretax net operating loss carryforwards of approximately $3.3 billion at December 31, 2002,
substantially all of which will not expire until 2022. The following table shows significant components of our deferred tax assets
and liabilities at December 31, 2002 and 2001:
(in millions)
Deferred tax assets:
Net operating loss carryforwards
Additional minimum pension liability (see Note 14)
Postretirement benefits
Other employee benefits
AMT credit carryforward
Gains on sale and leaseback transactions, net
Rent expense
Other
Valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Depreciation and amortization
Other
Total deferred tax liabilities
2002
$ 1,256
972
909
404
349
217
215
508
(16)
$ 4,814
$ 3,639
332
$ 3,971
2001
$ 911
1,025
254
23
239
220
455
(16)
$ 3,111
$ 2,696
362
$ 3,058
The following table shows the current and noncurrent deferred tax assets (liabilities) recorded on our Consolidated Balance
Sheets at December 31, 2002 and 2001:
(in millions) 2002 2001
Current deferred tax assets, net $ 668 $ 518
Noncurrent deferred tax assets (liabilities), net 175 (465)
Total deferred tax assets, net $ 843 $ 53
Based on the actions we have taken and will continue to take to improve financial performance and other relevant factors, we
believe that it is more likely than not that our net deferred tax assets recorded at December 31, 2002, will be fully realized.
Our income tax benefit (provision) for the years ended December 31, 2002, 2001 and 2000 consisted of:
(in millions) 2002 2001 2000
Current tax benefit (provision) $ 319 $ $ (230)
Deferred tax benefit (provision) 407 644 (396)
Tax benefit of dividends on allocated Series B ESOP Convertible
Preferred Stock 4 4 5
Income tax benefit (provision) $ 730 $ 648 $ (621)
The following table presents the principal reasons for the difference between our effective income tax rate and the U.S. federal
statutory income tax rate for the years ended December 31, 2002, 2001 and 2000:
U.S. federal statutory income tax rate
State taxes, net of federal income tax effect
Meals and entertainment
Amortization
Municipal bond interest
Increase in valuation allowance
Other, net
Effective income tax rate
Note 11. Employee Benefit Plans
2002
(35.0)%
(2.4)
0.7
0.2
(36.5)%
2001 2000
(35.0)% 35.0%
(2.6) 3.4
1.0 1.1
1.0 1.0
(O. l) (0.2)
0.8
0.1 (0.2)
(34.8)% 40.1%
We sponsor qualified and non-qualified defined benefit pension plans, defined contribution pension plans, healthcare plans, and dis-
ability and survivorship plans for eligible employees and retirees, and their eligible family members. 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 the
Employee Retirement Income Security Act (ERISA).
DEFINED BENEFIT PENSION PLANS
Our qualified defined benefit pension plans meet or exceed ERISA's minimum funding requirements as of December 31, 2002.
Our non-qualified pension plans are funded primarily with current assets.
The following table shows the change in the projected benefit obligation for our defined benefit pension plans for the years ended
December 31, 2002 and 2001 (as measured at September 30, 2002 and 2001):
(in millions) 2002 2001
Projected benefit obligation at beginning of period $ 10,657 $ 9,263
Service cost 282 246
Interest cost 825 763
Actuarial loss 798 531
Benefits paid (888) (623)
Special termination benefits 185
Curtailment loss 30
Plan amendments 8 262
Projected benefit obligation at end of period $ 11,682 $ 10,657
The special termination benefits and curtailment loss reflected in the table above relate to the workforce reduction programs
offered to certain of our employees in 2001. In December 2002, we recorded a $7 million pretax charge for special termination
benefits related to the 2002 workforce reduction programs. During the March 2003 quarter, we will record a $47 million pretax
charge for the associated cost of curtailing the pension obligations for participants in the 2002 workforce reduction programs.
51
52
Notes to the Consolidated Financial Statements
See Note 16 for additional information about our 2002 and 2001 workforce reduction programs.
The following table shows the change in the fair value of our defined benefit pension plan assets for the years ended December
31, 2002 and 2001 (as measured at September 30, 2002 and 2001):
(in millions)
Fair value of plan assets at beginning of period
Actual loss on plan assets
Employer contributions
Benefits paid
Fair value of plan assets at end of period
2002
$ 8,304
(718)
77
(888)
$ 6,775
2001
$ 10,398
(1,521)
50
(623)
$ 8,304
The accrued pension cost recognized for these plans on our Consolidated Balance Sheets at December 31, 2002 and 2001 is
computed as follows:
(in millions) 2002 2001
Funded status $ (4,907) $ (2,353)
Unrecognized net actuarial loss 4,092 1,584
Unrecognized transition obligation 41 49
Unrecognized prior service cost 292 308
Contributions made between the measurement date and year end 10 12
Special termination benefits recognized between the measurement date and year end (7)
Intangible asset (333) (7)
Accumulated other comprehensive loss (2,558) (12)
Accrued pension cost recognized on the Consolidated Balance Sheets $ (3,370) $ (419)
Net periodic pension cost for the years ended December 31, 2002, 2001 and 2000 included the following components:
(in millions) 2002 2001
Service cost $ 282 $ 246
Interest cost 825 763
Expected return on plan assets (984) (1,040)
Amortization of prior service cost 24 5
Recognized net actuarial gain (8) (51)
Amortization of net transition obligation 8 4
Settlement costs 1
Special termination benefits 7
Net periodic pension cost $ 155 $ (73)
We used the following actuarial assumptions to account for our defined benefit pension plans:
Weighted average discount rate
Rate of increase in future compensation levels
Expected long-term rate of return on plan assets
September 30, 2002
6.75%
2.67%
9.00%
September 30, 2001
7.75%
4.67%
10.00%
2000
$ 250
686
(924)
4
(22)
2
$ (4)
September 30, 2000
8.25%
5.35%
10.00%
At December 31, 2002, we recorded a non-cash charge to accumulated other comprehensive income (loss) to recognize a portion
of our additional minimum pension liability in accordance with SFAS No. 87, "Employers' Accounting for Pensions" (SFAS 87).
SFAS 87 requires that this liability be recognized at year end in an amount equal to the amount by which the the accumulated
benefit obligation (ABO) exceeds the fair value of the defined benefit pension plan assets. The additional minimum pension
liability was recorded by recognizing an intangible asset to the extent of any unrecognized prior service costs and transition
liability was recorded by recognizing an intangible asset to the extent of any unrecognized prior service costs and transition
obligation, which totaled $333 million at December 31, 2002. The remaining portion of the additional minimum pension
liability totaling $1.6 billion, net of tax, was recorded in accumulated other comprehensive income (loss) on our Consolidated
Balance Sheets (see Note 14).
The ABO and the fair value of plan assets for the plans with an ABO in excess of plan assets were $10.1 billion and $6.8 billion,
respectively, as of September 30, 2002, and $303 million and zero, respectively, as of September 30, 2001.
DEFINED CONTRIBUTION PENSION PLANS
Delta Pilots Money Purchase Pension Plan (M PPP)
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 benefit pension payable to a pilot is reduced by the actuarial equivalent of the accumulated account balance in
the MPPP. During the years ended December 31, 2002, 2001 and 2000, we recognized expense of $71 million, $69 million and
$63 million, respectively, for this plan.
Delta Family-Care Savings Plan
Our Savings Plan includes an employee stock ownership plan (ESOP) feature. Eligible employees may contribute a portion of
their covered pay to the Savings Plan.
Prior to July 1, 2001, we matched 50% of employee contributions with a maximum employer contribution of 2% of a
participant's covered pay for all participants. Effective July 1, 2001, the Savings Plan was amended to provide all eligible Delta
pilots with an employer contribution of 3% of their covered pay to replace their former matching contribution. We make our
contributions for non-pilots and pilots by allocating Series B ESOP Convertible Preferred Stock (ESOP Preferred Stock), com-
mon stock or cash to the Savings Plan. Our contributions, which are recorded as salaries and related costs in the accompanying
Consolidated Statements of Operations, totaled $85 million, $83 million and $69 million for the years ended December 31,
2002, 2001 and 2000, respectively.
When we adopted the ESOP in 1989, we sold 6,944,450 shares of ESOP Preferred Stock to the Savings Plan for $500 million. We
have recorded unearned compensation equal to the value of the shares of preferred stock not yet allocated to participants' accounts.
We reduce the unearned compensation as shares of preferred stock are allocated to participants' accounts. Dividends on unallocated
shares of preferred stock are used for debt service on the Savings Plan's ESOP Notes and are not considered dividends for financial
reporting purposes. Dividends on allocated shares of preferred stock are credited to participants' accounts and are considered divi-
dends for financial reporting purposes. Only allocated shares of preferred stock are considered outstanding when we compute diluted
earnings per share. At December 31, 2002, 3,666,639 shares of ESOP Preferred Stock were allocated to participants' accounts and
2,398,850 shares were held by the ESOP for future allocations.
Other Plans
ASA, Comair and DAL Global Services, Inc., three of our wholly owned subsidiaries, sponsor defined contribution retirement
plans for eligible employees. These plans did not have a material impact on our Consolidated Financial Statements in 2002, 2001
and 2000.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Our medical plans provide medical and dental benefits to substantially all Delta retirees and their eligible dependents. Benefits
are funded from our general assets on a current basis. Plan benefits are subject to copayments, deductibles and other limits as
described in the plans.
53
N ates to the Consolidated Financial Statements
The following table shows the change in our accumulated postretirement benefit obligation (APBO) for the years ended
December 31, 2002 and 2001 (as measured at September 30, 2002 and 2001):
(in millions)
APBO at beginning of period
Service cost
Interest cost
Benefits paid
Actuarial loss
Plan amendments
Curtailment loss
Special termination benefits
APBO at end of period
2002
$ 2,100
30
160
(154)
234
$ 2,370
2001
$ 1,780
37
146
(102)
163
(176)
49
203
$ 2,100
The special termination benefits and curtailment loss reflected in the table above relate to the workforce reduction programs
offered to certain of our employees during 2001. In December 2002, we recorded a $44 million pretax charge for special
54 termination benefits related to the 2002 workforce reduction programs. During the March 2003 quarter, we will recorded a
$4 million pretax gain for the associated cost of curtailing the future obligations for the participants in these programs. See
, Note 16 for additional information about our 2002 and 2001 workforce reduction program.
A 1 % change in the healthcare cost trend rate used in measuring the APBO at September 30, 2002, would have the following
effects:
(in millions)
Increase (decrease) in total service and interest cost
Increase (decrease) in the APBO
1 % Increase
$
$
12
108
1 % Decrease
$
$
(11)
(106)
The following table shows the calculation of the accrued postretirement benefit cost recognized on our Consolidated Balance
Sheets at December 31, 2002 and 2001 (as measured at September 30, 2002 and 2001):
{in millions) 2002 2001
Funded status $ (2,370) $ (2,100)
Unrecognized net actuarial loss 299 100
Unrecognized prior service cost (353) (421)
Special termination benefits recognized between the measurement date and year end (44)
Contributions made between the measurement date and year end 45 29
Accrued postretirement benefit cost recognized on the Consolidated Balance Sheets $ (2,423) $ (2,392)
Our net periodic postretirement benefit cost for the years ended December 31, 2002, 2001 and 2000, included the following
components:
(in millions)
Service cost
Interest cost
Amortization of prior service cost
Recognized actuarial loss
Special termination benefits
Net periodic postretirement benefit cost
$
$
2002
30
160
(50)
2
44
186
2001 2000
$ 37 $ 37
146 129
(39) (40)
$ 144 $ 126
We used the following actuarial assumptions to account for our postretirement benefit plans:
Weighted average discount rate
Assumed healthcare cost trend rateC
l)
September 30, 2002
6.75%
10.00%
September 30, 2001
7.75%
6.25%
September 30, 2000
8.25%
7.00%
(1) The assumed healthcare cost trend rate is assumed to decline gradually to 5.25% by 2007 for noncapped plans and to zero between 2005 and 2007 for capped plans,
and remain level thereafter.
POSTEM PLOYM ENT BENEFITS
We provide certain other welfare benefits to eligible former or inactive employees after employment but before retirement,
primarily as part of the disability and survivorship plans.
Postemployment benefit (expense) income was $(62) million, $23 million and $51 million for the years ended December 31,
2002, 2001 and 2000, respectively. 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 regularly evaluate ways to better manage employee benefits and control costs. Any changes to the plans or assumptions used
to estimate future benefits could have a significant effect on the amount of the reported obligation and future annual expense.
During the December 2002 quarter, we announced the implementation of and migration to a cash balance pension plan for non-
pilot employees. As a result of the changes to our pension_
plans and 2002 workforce reductions (see Note 16), we were required
to remeasure our pension plan obligations, which will impact our pension expense in 2003.
Note 12. Common and Preferred Stock
STOCK OPTION AND OTHER STOCK-BASED AWARD PLANS
I
To more closely align the interests of directors, officers and other employees with the interests of our shareowners, we maintain
certain plans which provide for the issuance of common stock in connection with the exercise of stock options and for other
stock-based awards. Stock options awarded under these plans (1) have an exercise price equal to the fair value of the common
stock on the grant date; (2) become exercisable one to five years after the grant date; and (3) generally expire 10 years after the
grant date. The following table includes additional information about these plans as of December 31, 2002:
Shares
Total Shares Non-Qualified Reserved
Authorized for Stock Options for Future
Plan Issuance Granted Grant
Broad-based employee stock option plansC
l) 49,400,000 49,400,000
Delta 2000 Performance Compensation PlanC
2l 16,000,000 10,802,850 4,963,183
Non-Employee Directors' Stock Option PlanC
3l 250,000 119,245 132,755
Non-Employee Directors' Stock PlanC
4
>
500,000 457,272
(I) In 1996, shareowners approved broad-based pilot and non-pilot stock option plans. Under these two plans, we granted eligible employees non-qualified stock options to
purchase a total of 49.4 million shares of common stock in three approximately equal installments on October 30, 1996, 1997 and 1998.
(2) On October 25, 2000, shareowners approved this plan, which authorizes the grant of stock options and a limited number of other stock awards. The plan amends
and restates a prior plan which was also approved by shareowners. No awards have been, or will be, granted under the prior plan on or after October 25, 2000.
At December 31, 2002, there were 11. 0 million shares of common stock reserved for awards (primarily non-qualified stock options) that were outstanding under the
prior plan. The current plan provides that shares reserved for awards under the plans that are forfeited, settled in cash rather than stock or withheld, plus shares ten-
dered to Delta in connection with such awards, may be added back to the shares available for fature grants. At December 31, 2002, 1.5 million shares had been
added back pursuant to that provision.
(3) On October 22, 1998, the Board of Directors approved this plan. Each non-employee director receives an annual grant of non-qualified stock options. This plan pro-
vides that shares reserved for awards that are forfeited may be added back to the shares available for fature grants.
(4) In 1995, shareowners approved this plan, which provides that a portion of each non-employee director's compensation for serving as a director will be paid in shares of
common stock. It also permits non-employee directors to elect to receive all or a portion of their cash compensation for service as a director in shares of common stock at
current market prices.
55
56
Notes to the Consolidated Financial Statements
The following table summarizes all stock option and stock appreciation rights (SAR) activity for the years ended December 31,
2002, 2001 and 2000:
2002 2001 2000
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
(shares in thousands) Shares Price Shares Price Shares Price
Outstanding at the beginning of the year 51,537 $ 48 50,365 $ 48 47,859 $ 48
Granted 8,478 21 2,358 46 3,914 52
Exercised (9) 27 (76) 34 (725) 41
Forfeited (1,200) 48 (1,110) 53 (683) 53
Outstanding at the end of the year 58,806 44 51,537 48 50,365 48
Exercisable at the end of the year 45,996 $ 48 44,751 $ 48 46,309 $ 48
The following table summarizes information about stock options outstanding and exercisable at December 31, 2002:
Stock Options Outstanding Stock Options Exercisable
Weighted Weighted Weighted
Number Average Average Number Average
Outstanding Remaining Exercise Exercisable Exercise
Stock Options (000) Life (years) Price (000) Price
$9-$20 4,573 10 $ 11 $
$21-$35 10,756 5 $ 33 6,960 $ 34
$36-$50 36,101 5 $ 49 33,743 $ 49
$51-$69 7,376 7 $ 56 5,293 $ 56
ESOP PREFERRED STOCK
Each outstanding share of ESOP Preferred Stock pays a cumulative cash dividend of 6% per year, is convertible into 1.7155
shares of common stock at a conversion price of $41.97 per share and has a liquidation price of $72.00, plus accrued and unpaid
dividends. The ESOP Preferred Stock generally votes together as a single class with the common stock and has two votes per share.
It is redeemable at our option at $72.00 per share plus accrued and unpaid dividends, payable in cash or common stock. We cannot
pay cash dividends on common stock until all cumulative dividends on the ESOP Preferred Stock have been paid. The conversion
rate, conversion price and voting rights of the ESOP Preferred Stock are subject to adjustment in certain circumstances.
All shares of ESOP Preferred Stock are held of record by the trustee of the Delta Family-Care Savings Plan (see Note 11). At
December 31, 2002, 10,405,346 shares of common stock were reserved for issuance for the conversion of the ESOP Preferred Stock.
SHAREOWNER RIGHTS PLAN
The Shareowner Rights Plan is designed to protect shareowners against attempts to acquire Delta that do not offer an adequate
purchase price to all shareowners, or are otherwise not in the best interest of Delta and our shareowners. Under the plan, each
outstanding share of common stock is accompanied 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, 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 ownership of 15% or more of our common stock. If a person 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 rights to purchase our
common stock having a market value of twice the exercise price.
If a person acquires beneficial interest of 15% or more of our common stock and (1) we are involved in a merger or other
business combination in which we are not the surviving corporation, or (2) 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 their rights to purchase common
stock of the acquiring company having a market value of twice the exercise price.
The rights expire on November 4, 2006. We may redeem the rights for $0.01 per right at any time before a person becomes
the beneficial owner of 15% or more of our common stock. At December 31, 2002, 2,250,000 shares of preferred stock were
reserved for issuance under the Shareowner Rights Plan.
PAYMENT OF DIVIDENDS
The determination to pay cash dividends on our ESOP Preferred Stock and our common stock is at the discretion of our Board
of Directors, and is also subject to the provisions of Delaware General Corporation Law, which authorizes the payment of divi-
dends from (1) surplus, defined as the excess of net assets (total assets minus total liabilities) over the amount determined to be
capital, or (2) if there is no surplus, out of net profits for the current fiscal year or the previous fiscal year. The terms of the ESOP
Preferred Stock discussed above provide for cumulative dividends and also limit our ability to pay cash dividends to our common
shareowners in certain circumstances. Our debt agreements do not limit the payment of dividends on-our capital stock.
Note 13. Common Stock Repurchases
We repurchased 10.6 million shares of common stock for $502 million in 2000. These repurchases were made under certain
now-completed stock buyback programs, and the ongoing common stock repurchase authorization described below.
In 1996, our Board of Directors authorized us to repurchase up to 49 .4 million shares of common stock issued under our broad-
based employee stock option plans (see Note 12). As of December 31, 2002, we had repurchased a total of 21.6 million shares
of common stock under this authorization. We are authorized to repurchase the remaining shares as employees exercise their
stock options under those plans. Repurchases are subject to market conditions and may be made in the open market or privately
negotiated transactions.
Note 14. Comprehensive Income (Loss)
Comprehensive income (loss) includes (1) reported net income (loss); (2) the additional minimum pension liability; and
(3) unrealized gains and losses on marketable equity securities and fuel derivative instruments that qualify for hedge accounting.
The following table shows our comprehensive income (loss) for the years ended December 31, 2002, 2001 and 2000:
(in millions) 2002 2001 2000
Net income $ (1,272) $ (1,216) $ 828
Other comprehensive income (loss) (1,587) (335) 94
Comprehensive income (loss) $ (2,859) $ (1,551) $ 922
57
58
Notes to the Consolidated Financial Statements
The following table shows the components of accumulated other comprehensive income (loss) at December 31, 2002, 2001 and
2000, and the activity for the years then ended:
Additional
Minimum Fuel Marketable
Pension Derivative Equity
(in millions) Liability Instruments Securities Other Total
Balance at December 31, 1999 $ $ $ 266 $ $ 266
Unrealized gain (loss) 814 16 830
Realized (gain) loss (375) (301) (676)
Tax effect (171) 111 (60)
Net of tax 268 (174) 94
Balance at December 31, 2000 268 92 360
Unrealized gain (loss) (100) (84) 2 (182)
Realized (gain) loss (299) (73) (372)
Tax effect 156 64 (I) 219
Net of tax (243) (93) (335)
Balance at December 31, 2001 25 (I) 25
Additional minimum pension liability adjustment (2,558) (2,558)
Unrealized gain (loss) 143 (9) (2) 132
Realized (gain) loss (136) 4 (132)
Tax effect 972 (3) 1 1 971
Net of tax (1,586) 4 (4) (1) (1,587)
Balance at December 31, 2002 $(1,586) $ 29 $ (5) $ $(1,562)
We anticipate that gains of $29 million, net of tax, will be realized during 2003 as (1) fuel hedge contracts settle and (2) the
related aircraft fuel purchases being hedged are consumed and recognized in expense. For additional information regarding our
fuel hedge contracts, see Note 4.
See Note 11 for further information related to the additional minimum pension liability.
Note 15. Geographic Information
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131), requires us to disclose
certain information about our operating segments. 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 for passengers and cargo. This allows us to benefit from
an integrated revenue pricing and route network that includes Delta-mainline, ASA and Comair. The flight equipment of all
three carriers is combined to form one fleet which is deployed through a single route scheduling system. When making resource
allocation decisions, our chief operating decision-maker evaluates flight profitability data, which considers aircraft type and route
economics, but gives no weight to the financial impact of the resource allocation decision on an individual carrier basis. Their
objective in making resource allocation decisions is to maximize our consolidated financial results, not the individual results of
Delta-mainline, ASA and Comair.
Operating revenues are assigned to a specific geographic region based on the origin, flight path and destination of each flight
segment. Our operating revenues by geographic region for the years ended December 31, 2002, 2001 and 2000, are summarized
in the following table:
(in millions) 2002 2001 2000
North America $ 10,778 $ 11,288 $ 14,004
Atlantic 1,860 1,823 1,988
Pacific 127 222 297
Latin America 540 546 452
Total $ 13,305 $ 13,879 $ 16,741
Our tangible assets consist primarily of flight equipment which is mobile across geographic markets. Accordingly, assets are not
allocated to specific geographic regions.
Note 16. Asset Writedowns, Restructuring and Related Items, Net
2002
In 2002, we recorded net charges totaling $439 million ($277 million net of tax, or $2.25 diluted earnings per share) in asset
writedowns, restructuring and related items, net on our Consolidated Statements of Operations, as follows:
Fleet Changes
During 2002, we made significant changes in our fleet plan (1) to reduce costs through fleet simplification and capacity
reductions and (2) to decrease capital expenditures through aircraft deferrals. These actions resulted in $225 million in net
asset impairments and other charges, which are discussed below.
During the September 2002 quarter, we recorded an impairment charge, shown in the table below, related to 59 owned B-727
aircraft. The impairment of 23 B-727 aircraft used in operations resulted from a further reduction in their estimated future
cash flows and fair values since our impairment review in 2001. The impairment of 36 B-727 aircraft held for sale resulted
from a further decline in their fair values less the cost to sell since our impairment review in 2001. The aircraft held for sale
will be disposed of as part of our fleet simplification plan and are expected to be sold by December 31, 200 3, under an existing
agreement. The net book value of these aircraft held for sale is included in other noncurrent assets on our C~nsolidated
Balance Sheets at December 31, 2002, and is not material; these aircraft are not included in the aircraft fleet table on
page 70 because they have been removed from service.
During the September 2002 quarter, we also decided to temporarily remove our MD-11 aircraft from service beginning in
early 2003. As a result of this decision, we recorded an impairment charge, shown in the table below, related to our eight
owned MD-11 aircraft. This charge reflects the further reduction in estimated future cash flows a11:d fair ~alues-of these aircraft
since our impairment review in 2001. The MD-11 aircraft will be replaced on international routes by B-767-300ER aircraft
that are currently used in the domestic system. We will use smaller mainline aircraft to replace the B-767 aircraft on domestic
routes, thereby reducing our domestic capacity.
During the December 2002 quarter, we decided to return to service, beginning in 2003, nine leased B-737-300 aircraft
to replace the B-767 aircraft on domestic routes. This decision was based on (1) capacity and operating cost considerations
and (2) our inability to sublease the B-737 -300 aircraft due to the difficult business environment facing the airline industry
after September 11, 2001. As discussed below, during the June 2001 quarter, we decided to remove the B-737-300 aircraft
from service and recorded a reserve for future lease payments less estimated sublease income. Due to our decision to return
these aircraft to service, we reversed the remaining $56 million reserve related to these B-737-300 aircraft.
During the December 2002 quarter, we entered into an agreement with Boeing to defer 31 mainline aircraft previously
scheduled for delivery in 2003 and 2004. As a result of these deferrals, we have no mainline aircraft scheduled for delivery
during 2003 or 2004. We incurred a $30 million charge related to these deferrals.
59
60
During the December 2002 quarter, we decided to accelerate the retirement of 37 owned EMB-120 aircraft to achieve costs
savings and operating efficiencies. We plan to remove these aircraft from service beginning in 2003. The accelerated retirement
of these aircraft as well as a reduction in their estimated future cash flows and fair values resulted in an impairment charge.
During 2002, we recorded the following impairment charges for our owned B-727, MD-11 and EMB-120 aircraft:
Used in Operations Held for Sale
No. of No. of Spare
(dollars in millions) Writedown<
1
>
Aircraft Writedown Aircraft Subtotal Parts<
2
>
Total
B-727 $ 24 23 $ 37 36 $ 61 $ - $ 61
MD-11 141 8 141 18 159
EMB-120 27 37 27 4 31
Total $192 $ 37 $229 $ 22 $ 251
(I) The fair value of aircraft used in operations was determined using third-party appraisals.
(2) Charges related to the writedown of the related spare parts inventory to their net realizable value.
Workforce Reductions
We recorded a $127 million charge related to our decision in October 2002 to reduce staffing by up to approximately 8,000 jobs
across all work groups, excluding pilots, to further reduce operating costs. We offered eligible non-pilot employees several programs,
including voluntary severance, leaves of absence and early retirement. Approximately 3,900 employees elected to participate in
one of these programs. Involuntary reductions will affect up to approximately 4,000 employees and are expected to be completed
by May 2003.
The total charge includes (1) $51 million for costs associated with the voluntary programs that were recorded as special
termination benefits under our pension and postretirement medical benefit obligations (see Note 11) and (2) $76 million
for severance and related costs.
Surplus Pilots and Grounded Aircraft
We recorded $93 million in expenses for the temporary carrying cost of surplus pilots and grounded aircraft related to our
capacity reductions which became effective on November 1, 2001. This cost also includes related requalification training and
relocation costs for certain pilots.
Other
We also recorded (1) a $23 million gain related to the adjustment of certain prior year restructuring reserves based on revised
estimates of remaining costs; (2) a $14 million charge associated with our decision to close certain leased facilities; and (3) a
$3 million charge related to other items.
2001
In 2001, we recorded charges totaling $1.1 billion ($695 million net of tax, or $5.63 diluted earnings per share) in asset write-
downs, restructuring and related items, net on our Consolidated Statements of Operations, as follows:
Workforce Reductions
We recorded a $566 million charge relating to our decision in 2001 to reduce staffing across all workgroups due to the capacity
reductions we implemented as a result of the September 11 terrorist attacks. We offered eligible employees several programs,
including voluntary severance, leaves of absence and early retirement. Approximately 10,000 employees elected to participate
in one of the voluntary programs. Involuntary reductions were expected to affect up to approximately 1,700 employees - up
to 1,400 pilots and 300 employees from other workgroups.
The total charge includes $475 million for costs associated with the early retirement and certain voluntary leave of absence
programs which are recorded as special termination benefits under our pension and postretirement medical benefit obligations
(see Note 11). The remaining $91 million relates to severance and related costs.
Fleet Changes
As a result of the effects of the September 11 terrorist attacks on our business and the related decline in aircraft values, we
recorded $286 million in asset writedowns. These writedowns include (1) the impairment of 16 MD-90 and eight MD-11
owned aircraft, which reflects further reductions in the estimated future cash flows and fair values of these aircraft since our
impairment review in 1999, as well as a revised schedule for retiring these aircraft; (2) charges related to the accelerated
retirement of 40 owned B-727 aircraft by 2003; and (3) the writedown to fair value of 18 owned L-1011 aircraft. These
charges are summarized in the table below:
Used in Operations Held for Sale
No. of No. of
(dollars in millions) Writedown> Aircraft Writedown Aircraft Total
MD-90 $ 98 16 $ - $ 98
MD-11 93 8 93
B-727-200 81 36 2 4 83
L-1011 12 18 12
Total $ 272 $ 14 $ 286
(1) The fair value of aircraft used in operations was determined using third-party appraisals.
The net book value of the aircraft held for sale is included in other noncurrent assets on our Consolidated Balance Sheets
at December 31, 2001, and is not material.
In addition, we recorded a $71 million reserve related to our decision to remove nine leased B-737-300 aircraft from service
to more closely align capacity and demand, and to improve scheduling and operating efficiency. The reserve consisted of
future lease payments for these aircraft less estimated sublease income. We also recorded an additional $6 million charge
for the writedown to net realizable value of related aircraft spare parts.
Surplus Pilots and Grounded Aircraft
We recorded $30 million in expenses for the temporary carrying cost of surplus pilots and grounded aircraft related to our
capacity reductions which became effective on November 1, 2001. This cost also includes related requalification training and
relocation costs for certain pilots.
Other
We recorded $160 million in charges that include (1) an $81 million charge related to the write-off of previously capitalized
amounts that would provide no future economic benefit due to our decision to cancel or delay certain airport and technology
projects following September 11, 2001; (2) a $63 million charge related to contract termination costs; (3) a $9 million charge
related to the write-off of certain receivables, primarily those of foreign air carriers and other related businesses, that we believe
became uncollectible as a result of those businesses' weakened financial condition after September 11, 2001; and ( 4) a $7
million charge related to our decision to close certain facilities.
In 2000, we recorded charges totaling $108 million ($66 million net of tax, or $0.53 basic and $0.50 diluted earnings per share)
in asset writedowns, restructuring and related items, net on our Consolidated Statements of Operations, as follows:
Workforce Reductions
We recorded an $86 million charge relating to our decision to offer an early retirement medical option program to enable
eligible employees to retire with continued medical coverage without paying certain early retirement medical premiums.
Approximately 2,500 employees participated in this program.
Other
We recorded a $22 million restructuring charge relating to our decision to close our Pacific gateway in Portland, Oregon.
61
62
N ates to the Consolidated Financial Statements
Note 17. Restructuring and Other Reserves
The following table shows changes in our restructuring and other reserve balances as of December 31, 2002, 2001 and 2000,
and the associated activity for the years then ended:
Restructuring and Other Charges
Severance and Related Costs
Leased Facilities 2002 Workforce 2001 Workforce
(in millions) Aircraft and Other Reduction Programs Reduction Programs
Balance at December 31, 1999 $ $ 41 $ $
Additional costs and expenses 22
Payments (7)
Balance at December 31, 2000 56
Additional costs and expenses 71 24 91
Payments (1) (6) (44)
Balance at December 31, 2001 70 74 47
Additional costs and expenses 14 76
Payments (14) (9) (5) (35)
Adjustments (56) (14) (9)
Balance at December 31, 2002 $ $ 65 $ 71 $ 3
At December 31, 2002, the facilities and other reserve represents costs related primarily to (1) future lease payments for facilities
closures and (2) contract termination fees. During 2002, we recorded a $14 million charge related to our decision in 2002 to close
certain facilities and a $14 million adjustment to prior year reserves based on revised estimates of remaining costs.
The leased aircraft reserve represents future lease payments for B-737 aircraft previously removed from service prior to the lease
expiration date, less estimated sublease income. Due to changes in our fleet plan during the December 2002 quarter, these air-
craft will be returned to service in 2003. Therefore, we reversed the remaining $56 million balance of this reserve.
The severance and related costs reserve represents future payments associated with our 2002 and 2001 voluntary and involuntary
workforce reduction programs. At December 31, 2002, the remaining $71 million balance related to the 2002 workforce reduction
programs represents severance and medical benefits for employees who received severance or are participating in certain leave of
absence programs; this amount will be paid during 2003. At December 31, 2002, the remaining $3 million balance related to
the 2001 workforce reduction programs primarily consists of severance for international employees that will be paid during early
2003 in accordance with local country laws and regulations. During 2002, we also recorded a $9 million adjustment to the 2001
reserve based on revised estimates of the remaining costs, including (1) the adjustment of medical benefits for certain employees
participating in the leave of absence programs who returned to the workforce earlier than originally scheduled and (2) the change
in the number of pilot furloughs from up to 1,400 to approximately 1,100.
See Note 16 for additional information related to the charges discussed above.
Note 18. Earnings (Loss) per Share
We calculate basic earnings (loss) per share by dividing the income (loss) available to common shareowners by the weighted average
number of common shares outstanding. Diluted earnings (loss) per share includes the dilutive effects of stock options and con-
vertible securities. To the extent stock options and convertible securities are anti-dilutive, they are excluded from the calculation
of diluted earnings (loss) per share. The following table shows our computation of basic and diluted earnings (loss) per share:
Years Ended December 31,
(in millions, except per share data)
Basic:
Net income {loss) excluding cumulative effect of change in
accounting principle
Dividends on allocated Series B ESOP Convertible Preferred Stock
Net income (loss) available to common shareowners, excluding
cumulative effect of change in accountirig principle
Weighted average shares outstanding
Basic earnings {loss) per share excluding cumulative effect of change
in accounting principle
Diluted:
Net income (loss) available to common shareowners, excluding
cumulative effect of change in accounting principle
Income tax effect assuming conversion of allocated Series B ESOP
Convertible Preferred Stock
Income (loss) available to common shareowners including
assumed conversion
Weighted average shares outstanding
Additional shares assuming:
Exercise of stock options
Conversion of allocated Series B ESOP Convertible Preferred Stock
Conversion of performance-based stock units
Weighted average shares outstanding, as adjusted
Diluted earnings (loss) per share excluding cumulative effect of
change in accounting principle
2002
$ (1,272)
(15)
$ (1,287)
123.3
$ (10.44)
$ (1,287)
$ (1,287)
123.3
123.3
$ (10.44)
2001
$ (1,216)
(14)
$ (1,230)
123.1
$ (9.99)
$ (1,230)
$ (1,230)
123.1
123.1
$ (9.99)
2000
$ 928
(13)
$ 915
123.8
$ 7.39
$ 915
8
$ 923
123.8
1.6
5.4
0.2
131.0
$ 7.05
For the years ended December 31, 2002, 2001 and 2000, we excluded from the diluted earnings (loss) per share computation
(1) 54.5 million, 44.3 million and 23.4 million stock options, respectively, because the exercise price of the options was greater
than the average price of common stock and (2) 6.9 million, 6.5 million and zero additional shares, respectively, because their
effect on earnings (loss) per share was anti-dilutive.
Note 19. Stabilization Act
On September 22, 2001, the Air Transportation Safety and System Stabilization Act (Stabilization Act) became effective.
The Stabilization Act is intended to preserve the viability of the U.S. air transportation system following the terrorist attacks on
September 11, 2001 by, among other things, (1) providing for payments from the U.S. Government totaling $5 billion to com-
pensate U.S. air carriers for losses in~urred from September 11, 2001 through December 31, 2001 as a result of the September
11 terrorist attacks and (2) permitting the Secretary of Transportation to sell insurance to U.S. air carriers.
Our allocated portion of compensation under the Stabilization Act was $668 million. Due to uncertainties regarding the U.S.
government's calculation of compensation, we recognized $634 million of this amount in our 2001 Consolidated Statement
of Operations. We recognized the remaining $34 million of compensation in our 2002 Consolidated Statement of Operations.
We received $112 million and $556 million in cash for the years ended December 31, 2002 and 2001, respectively, under the
Stabilization Act.
63
Notes to the Consolidated Financial Statements
Subsequent to September 11, 2001, our insurance providers reduced our coverage and significantly increased our premium rates
for war and terrorism risk insurance. Under the provisions of the Stabilization Act, the Federal Aviation Administration (FM)
has been selling U.S. airlines excess war and terrorism risk insurance coverage since the September 11 terrorist attacks. Effective
January 24, 2003, under the Homeland Security Act, the FM is required to sell passenger, third-party (ground damage) and air-
craft hull war and terrorism risk insurance to U.S. airlines through August 31, 2003.
Note 20. Related Party Transaction
The Delta Employees Credit Union (DECU) is an independent entity that is chartered to provide banking and financial services
to our employees, former employees and certain relatives of these persons. At December 31, 2002, we had a $71 million liability
to DECU recorded in accounts payable, deferred credits and other accrued liabilities on our Consolidated Balance Sheet. The lia-
bility results from a timing difference in funding a portion of our 2002 year end payroll and is reflected as a non-cash transaction
on our Consolidated Statement of Cash Flows for the year ended December 31, 2002. We paid the liability on January 2, 2003.
Note 21. Valuation and Qualifying Accounts
The following table shows the valuation and qualifying accounts as of December 31, 2002, 2001 and 2000, and the associated
a~tivity for the years then ended:
(in millions)
Balance at December 31, 1999
Additional costs and expenses
Payments and deductions
Balance at December 31, 2000
Additional costs and expenses
Payments and deductions
Balance at December 31, 2001
Additional costs and expenses
Payments and deductions
Balance at December 31, 2002
$
$
Leased
Aircraft<
!)
71
(1)
70
(70)
Restructuring
and Other
Charges<
!)
$ 41
$
22
(7)
56
115
(50)
121
90
(72)
139
(1) See Note 17 for additional information related to leased aircraft and restructuring and other charges.
Allowance for:
U ncollectible
Accounts
Receivable<
2
>
$ 39
$
15
(23)
31
18
(6)
43
21
(31)
33
Obsolescence
of Expendable
Parts & Supplies
Inventory<3
>
$ 104
$
22
(2)
124
38
(23)
139
51
(7)
183
(2) The payments and deductions related to the allowance for uncollectible accounts receivable represent the write-off of accounts considered to be uncollectible, less recoveries.
(3) These additional costs and expenses in 2001 and 2002 include the charges related to the writedown of certain aircraft spare parts inventory to their net realizable
value (see Note 16).
Note 22. Subsequent Events (Unaudited)
ENHANCED EQUIPMENT TRUST CERTIFICATES
On January 30, 2003, we issued, in a private placement, $392 million aggregate principal amount of insured Pass Through
Certificates, Series 2003-1 G (Certificates). The certificates bear interest at floating rates based on LIBOR + 0.75% and require
principal payments from 2003 to 2008. This financing is secured by two B-737-800 and 10 B-767-300ER aircraft owned by us.
The net proceeds of this financing were made available for general corporate purposes.
CONTRACT CARRIER AGREEMENT
During February 2003, we amended our contract carrier agreement with Chautauqua to increase from 22 to 34 the number of
aircraft Chautauqua will operate for us. All of these aircraft are scheduled to be in service under the Delta Connection program by
the end of 2003. We estimate that the total fair value of these additional aircraft that Chautauqua could assign to us or require
that we purchase if we were to terminate this agreement without cause is approximately $200 million (see Note 9).
As part of this amended agreement, we received a warrant to purchase up to an additional 720,000 shares of Republic common
stock for (1) $12.50 per share, if the warrant is exercised prior to the completion of Republic's initial public offering of common
stock (IPO) or (2) the price per share at which Republic common stock is sold in the IPO, if the warrant is exercised after or
in connection with the IPO. The warrant is exercisable in whole or in part at any time until February 7, 2013. The fair value
of this warrant on the date received was not material.
Note 23. Quarterly Financial Data (Unaudited)
The following table summarizes our unaudited quarterly results of operations for 2002 and 2001:
2002 Three Months Ended
(in milliom, except per share data) March 31 June 30 September 30 December 31
Operating revenues $ 3,103 $ 3,474 $ 3,420 $ 3,308
Operating loss $ (435) $ (127) $ (385) $ (362)
Net loss $ (397) $ (186) $ (326) $ (363)
Basic and diluted loss per share0
>
$ (3.25) $ (1.54) $ (2.67) $ (2.98)
2001 Three Months Ended
(in millions, except per share data) March 31 June 30 September 30 December 31
Operating revenues $ 3,842 $ 3,776 $ 3,398 $ 2,863
Operating loss $ (115) $ (114) $ (251) $ (1,122)
Net loss $ (133) $ (90) $ (259) $ (734)
Basic and diluted loss per share0
>
$ (1.11) $ (0.76) $ (2.13) $ (5.98)
(1) The sum of the quarterly earnings per share does not equal the annual_
earnings per share due to changes in average shares outstanding.
Our financial results for the years ended December 31, 2002 and 2001 were materially impacted by certain events, as discussed below:
During the six months ended June 30, 2001, public concern over a possible strike by Delta pilots relating to then ongoing
collective bargaining negotiations caused some customers to make reservations and travel with airlines other than Delta. On
June 20, 2001, Delta pilots ratified a new collective bargaining agreement, avoiding a possible strike.
On March 26, 2001, Comair pilots began a strike, which continued until June 22, 2001 when they ratified a new collective
bargaining agreement. As a result of this 89-day strike, Comair suspended its operations between March 26, 2001 and July 1,
2001. Comair resumed partial service on July 2, 2001, and gradually began restoring service during the remainder of the year.
Service was fully restored to pre-strike levels during January 2002.
Prior to September 11, 2001, the slowing U.S. and world economies reduced the demand for air travel among both business
and leisure passengers. This decline in demand negatively impacted our passenger traffic and yield in 2001 and 2002.
The business environment significantly worsened as a result of the September 11 terrorist attacks. ~ee No.te 16 for information
regarding certain charges and costs we recorded in 2001 as a result of these attacks.
During 2002, we made significant changes in our fleet plan to simplify our aircraft fleet to reduce capacity and to decrease
capital expenditures through aircraft deferrals. See Note 16 for information related to charges and other costs associated with
these fleet changes.
65
66
To the Board of Directors and Shareowners' of Delta Air Lines, Inc.:
We have audited the accompanying consolidated balance sheet of Delta Air Lines, Inc. (a Delaware corporation) and subsidiaries
( the "Company'') as of December 31, 2002, and the related consolidated statements of operations, cash flows and shareowners'
equity for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our audit. The consolidated financial statements of Delta Air Lines,
Inc. as of December 31, 2001, and for each of the two years in the period ended December 31, 2001, before the revisions dis-
cussed below to Notes 5, 9, 17 and 21 to the consolidated financial statements, were audited by other auditors who have ceased
operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated January 23, 2002.
Their report contained an explanatory paragraph related to the Company's change in its method of accounting for derivative
instruments and hedging activities effective July 1, 2000 as discussed in Note 4 to the consolidated financial statements.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those stan-
dards 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 supporting the amounts and disclosures in the finan-
cial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such 2002 consolidated financial statements present fairly, in all material respects, the financial position of the
Company as of December 31, 2002 and the results of its operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America .
.A5 discussed in Note 5 to the consolidated financial statements, effective January 1, 2002, the Company changed its method of
accounting for goodwill and other intangible assets to conform to Statement of Financial Accounting Standards No. 142 ("SFAS 142") .
.A5 discussed above, the financial statements of the Company as of December 31, 2001, and for each of the two years in the period
ended December 31, 2001, were audited by other auditors who have ceased operations. These consolidated financial statements
have been revised as follows:
k described in Note 5, the Company adopted the provisions of SFAS 142 as ofJanuary 1, 2002. These consolidated financial
statements have been revised to include the disclosures required by SFAS 142.
In Note 9, the Company has disclosed the amount of expenses incurred related to contract carrier agreements. These consolidated
financial statements have been revised to include such disclosures for 2001 and 2000.
In Note 17, the Company has disclosed the amounts of the additional costs and expenses and payments related to restructuring
and other reserves for leased aircraft and facilities and other items. These consolidated financial statements have been revised to
include such disclosures for 2001 and 2000.
In Note 21, the Company has disclosed the amounts of additional costs and expenses and deductions related to the allowance
for obsolescence of expendable parts and supplies inventories. These consolidated financial statements have been revised to
include such disclosures for 2001 and 2000.
We audited the disclosures in Notes 5, 9, 17 and 21 that were included to revise the 2001 and 2000 consolidated financial statements.
In our opinion, such disclosures are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2001
and 2000 consolidated financial statements of the Company other than with respect to such disclosures and, accordingly, we do not
express an opinion or any other form of assurance on the 2001 and 2000 consolidated financial statements taken as a whole.
Adan ta, Georgia
January 31, 2003
Report of Independent Public Accountants
The following is a copy of the audit report previously issued by Arthur Andersen LLP in connection with Deltas Annual Report
for the year ended December 31, 2001. This audit report has not been reissued by Arthur Andersen LLP.
To Delta Air Lines, Inc.:
We have audited the accompanying consolidated balance sheets of Delta Air Lines, Inc. (a Delaware corporation) and sub-
sidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, cash flows and shareowners'
equity for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of
the company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by manage-
ment, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred co above present fairly, in all material respects, the consolidated financial posi-
tion of Delta Air Lines, Inc. and subsidiaries as of December 31, 2001 and 2000, and the consolidated results of their opera-
tions and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.
As discussed in Note 4 to the consolidated financial statements, effective July 1, 2000, Delta Air Lines, Inc. changed its method
of accounting for derivative instruments and hedging activities.
~
Atlanta, Georgia
January 23, 2002
67
68
For the years ended December 31, 2002- 1998
(in millions, except per share data) 2002<
1>
2001 (Z) 2000<
3)
1999<
4
) 1998
Operating revenues $ 13,305 $ 13,879 $ 16,741 $ 14,883 $ 14,312
Operating expenses 14,614 15,481 15,104 13,565 12,509
Operating income (loss) (1,309) (1,602) 1,637 1,318 1,803
Interest income (expense), net<
5
>
(610) (410) (257) (126) (66)
Miscellaneous income (expense), net<
6
>
(2) 80 328 901 39
Loss on extinguishment of ESOP Notes (42)
Fair value adjustments of SFAS 133 derivatives (39) 68 (159)
Income (loss) before income taxes and cumulative
effect of change in accounting principle (2,002) (1,864) 1,549 2,093 1,776
Income tax benefit (provision) 730 648 (621) (831) (698)
Net income (loss) before cumulative effect
of change in accounting principle (1,272) (1,216) 928 1,262 1,078
Net income (loss) after cumulative effect
of change in accounting principle (1,272) (1,216) 828 1,208 1,078
Preferred stock dividends (15) (14) (13) (12) (11)
Net income (loss) attributable to
common shareowners $ (1,287) $ (1,230) $ 815 $ 1,196 $ 1,067
Earnings (loss) per share before cumulative
effect of change in accounting principle <
7
>
Basic $ (10.44) $ (9.99) $ 7.39 $ 9.05 $ 7.22
Diluted $ (10.44) $ (9.99) $ 7.05 $ 8.52 $ 6.87
Earnings (loss) per share<
7
>
Basic $ (10.44) $ (9.99) $ 6.58 $ 8.66 $ 7.22
Diluted $ (10.44) $ (9.99) $ 6.28 $ 8.15 $ 6.87
Dividends declared per common share $ 0.10 $ 0.10 $ 0.10 $ 0.10 $ 0.10
Other Financial and Statistical Data
For the years ended December 31, 2002-1998
2002<
1>
2001 (Z)
2000<
3)
1999<
4
) 1998
Total assets (millions) $ 24,720 $ 23,605 $ 21,931 $ 19,942 $ 14,727
Long-term debt and capital leases
(excluding current maturities) (millions) $ 10,174 $ 8,347 $ 5,896 $ 4,303 $ 1,720
Shareowners' equity (millions) $ 893 $ 3,769 $ 5,343 $ 4,908 $ 4,077
Shares of common stock outstanding
at year end<
7
>
123,359,205 123,245,666 123,013,372 132,893,470 141,514,262
Revenue passengers enplaned (thousands) 107,048 104,943 119,930 110,083 105,304
Available seat miles (millions) 141,719 147,837 154,974 147,073 142,154
Revenue passenger miles (millions) 102,029 101,717 112,998 106,165 103,342
Operating revenue per available seat mile 9.39 9.39 10.80 10.12 10.07
Passenger mile yield 12.08 12.74 13.86 13.14 12.99
Operating cost per available seat mile 10.31 10.47 9.75 9.22 8.80
Passenger load factor 71.99% 68.80% 72.91% 72.18% 72.70%
Breakeven passenger load factor 79.64% 77.31% 65.29% 65.37% 62.94%
Available ton miles (millions) 21,548 22,282 22,925 21,245 20,312
Revenue ton miles (millions) 11,698 11,752 13,058 12,227 12,052
Operating cost per available ton miles 67.82 69.48 65.88 63.85 61.58
(1) Includes a $439 million charge ($271 million net of tax, or $2.25 diluted EPS) for asset writedowns, restructuring and related items, net; a $34 million gain
($22 million net of tax, or $0.17 diluted EPS) for Stabilization Act compensation; and a $94 million charge ($59 million net of tax, or $0. 47 diluted EPS) for other
income and expense items (see pages 16-17 of Management's Discussion and Analysis).
(2) Includes a $1. l billion charge ($695 million net of tax, or $5.63 diluted EPS) for asset writedowns, restructuring and related items, net; a $634 million gain
($392 million net of tax, or $3.18 diluted EPS) for Stabilization Act compensation; and a $186 million gain ($114 million net of tax, or $0.92 diluted EPS) for
other income and expense items (see pages 16-17 of Management's Discussion and Analysis).
(3) Includes a $108 million charge ($66 million net of tax, or $0.50 diluted EPS) for asset writedowns, restructuring and related items, net; a $151 million gain
($93 million net of tax, or $0.70 diluted EPS) for other income and expense items; and a $164 million cumulative effect, non-cash charge ($100 million net of tax,
or $0.77 diluted EPS), resulting.from our adoption of SPAS 133 on July 1, 2000 (see pages 18-19 of Management's Discussion and Analysis).
(4) Includes a $469 million charge ($286 million net of tax, or $1.94 diluted EPS) for asset writedowns; $927 million gain ($565 million net of tax, or $3.83 diluted
EPS) from the sale of certain investments; an $89 million non-cash charge ($54 million net of tax, or $0.37 diluted EPS) from the cumulative effect of a change in
accounting principle resulting from our adoption on January 1, 1999 of SAB 101; and a $40 million charge ($24 million net of tax, or $0.16 diluted EPS) for the
early extinguishment of certain debt obligations. .
(5) Includes interest income.
(6) Includes gains (losses) from the sale of investments.
(1) All earnings per share amounts for 1998 have been restated to reflect the two-for-one common stock split that became effective on November 2, 1998.
Delta Air Lines, Inc. provides air transportation for passengers and cargo throughout the United States and around the world. AB of
February 1, 2003, Delta (including its wholly owned subsidiaries, Atlantic Southeast Airlines, Inc. and Comair, Inc.) served 219 domestic
cities in 47 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands, as well as 48 cities in 32 countries. With its domestic
and international codeshare partners, Delta's route network covers 237 domestic cities in 48 states, and 203 cities in 78 countries.
Based on calendar 2002 data, Delta is the second-largest carrier in terms of passengers carried, and third-largest as measured by operating
revenues and revenue passenger miles flown. Delta is the leading U.S. airline across the Atlantic offering the most daily flight departures,
serving the largest number of nonstop markets and carrying more passengers than any other U.S. airline.
Delta is a Delaware corporation headquartered in Atlanta, Georgia. Delta is subject to government regulation under the Federal Aviation
Act of 1958, as amended, as well as many other federal, state and foreign laws.
Shareowner Information
TRANSFER AGENT, REGISTRAR, AND DIVIDEND PAYING
AGENT FOR COMMON STOCK
Registered shareowner inquiries related to stock transfers, address
changes, lost stock certificates, dividend payments or account
consolidations should be directed to:
Wells Fargo Shareowner Services
P.O. Box 64854
St. Paul, MN 55164-0854
Telephone (800) 259-2345 or (651) 450-4064
www.wellsfargo.com/ shareownerservices
SHAREOWN ER SERVICE PLUS PLAN5
M
Investors may purchase Delta common stock under this program,
which is sponsored and administered by Wells Fargo Shareowner
Services. All correspondence and inquiries concerning the pro-
gram should be directed to:
Delta Air Lines, Inc.
cl o Wells Fargo Shareowner Services
P.O. Box 64863
St. Paul, MN 5 5164-0863
Telephone (800) 259-2345 or (651) 450-4064
ORM 10-K AND OTHER FINANCIAL INFORMATION
A copy of the Form 10-K for the year ended December 31, 2002
and other financial reports filed by Delta with the SEC is avail-
able on Delta's Web site at www.delta.com or the SEC's Web site
at www.sec.gov, or may be obtained without charge by calling
(866) 240-0597 or by writing to:
Delta Air Lines, Inc.
Investor Relations, Department 829
P. 0. Box 20706
Atlanta, Georgia 30320-6001
A copy of this Annual Report can be found on Delta's Web
site, www.delta.com. Registered shareowners and participants
in the Delta Family-Care Savings Plan may elect to receive
future annual meeting materials electronically by signing up
at www.delta.com/inside/investors/index.jsp
AVAILABILITY OF ANNUAL REPORT ON COMMUNITY
AFFAIRS AND ANNUAL REPORT ON GLOBAL DIVERSITY
Copies of these reports are available online at www.delta.com.
INVESTOR RELATIONS
Telephone inquiries related to financial information, other than
requests for financial documents, may be directed to Delta
Investor Relations at (866) 715-2170.
INDEPENDENT AUDITORS
Deloitte & Touche LLP
191 Peachtree Street, N .E., Suite 1500
Atlanta, GA 30303-1924
COM MON STOCK
Delta's Common Stock is traded on the New York Stock
Exchange under the ticker symbol DAL. AB of December 31,
2002, there were 22,390 registered owners of common stock.
MARKET PRICES AND DIVIDENDS
Price of
Year 2002 Common Stock
Quarter Ended: High Low
March 31 $ 38.69 $ 28.52
June 30 32.65 18.30
September 30 20.12 8.30
December 31 14.09 6.10
Price of
Year 2001 Common Stock
Quarter Ended: High Low
March 31 $ 52.94 . $ 37.51
June 30 48.05 37.80
September 30 46.56 20.00
December 31 31.15 22.20
AVAILABILITY OF EQUAL EMPLOYMENT
OPPORTUNITY REPORT
Cash Dividends
per Common Share
$ 0.025
0.025
0.025
0.025
Cash Dividends
eer Common Share
$ 0.025
0.025
0.025
0.025
A copy of Delta's Equal Employment Opportunity Report is
available without charge upon written request to:
Delta Air Lines, Inc.
Equal Opportunity, Department 955
P.O. Box 20706
Atlanta, Georgia 30320-6001
69
MAINLINE Al RC RAFT FLEET AIRCRAFT FLEET AT DECEMBER 31, 2002
Our mainline fleet strategy is designed to achieve Current Fleet
operational and cost efficiencies through fleet Capital Operating Average
modernization. Our long-term agreement with Aircraft Type Owned Lease Lease Total Age
The Boeing Company (Boeing) covers firm B-727-200 18 3 21 23.5
orders, options and rolling options for certain B-737-200 42 10 52 17.8
aircraft through calendar year 2017. This agree- B-737-300 26 26 16.1
ment supports our plan for disciplined growth, B-737-800 71 71 2.2
aircraft rationalization and fleet replacement. It
B-757-200 77 3 41 121 11.3
B-767-200 15 15 19.6
also gives us certain flexibility to adjust scheduled
B-767-300 4 24 28 12.9
aircraft deliveries and to substitute between air- B-767-300ER 51 8 59 6.9
craft models and aircraft types. The majority of B-767-400 21 21 1.8
the aircraft under firm order from Boeing will be B-777-200 8 8 2.9
used to replace older aircraft. During 2002, we MD-11 8 7 15 8.9
deferred delivery of 31 mainline aircraft. As a MD-88 63 57 120 12.5
70 result of these deferrals, we have no mainline MD-90 16 16 7.1
aircraft deliveries scheduled in 2003 or 2004.
EMB-120 29 29 11.8
ATR-72 4 15 19 8.5
'Our long-term plan is to reduce our mainline CRJ-100/200 73 122 195 3.7
aircraft fleet to three family types. We believe CRJ-700 15 15 0.3
fleet standardization will improve reliability and Total 473 45 313 831 9.0
produce long-term cost savings. Consistent with
this plan, we will retire our last B-727 aircraft in AIRCRAFT DELIVERY SCHEDULE AT DECEMBER 31, 2002
April 2003. Due to the weak demand environ-
Delivery in Calendar Year Ending
ment, we will temporarily ground the entire
After
MD-11 fleet by March 31, 2004. As a result
Aircraft on Firm Order 2003 2004 2005 2006 2006 Total
of these actions, by early 2004, we will operate
B-737-800 19 19 23 61
a mainline fleet composed entirely of two-pilot,
B-777-200 2 3 5
two-engine aircraft. CRJ-100/200 31 31
Our fleet at December 31, 2002, includes the fol- CRJ-700 20 23 43
lowing 25 aircraft that have been temporarily Total 51 23 21 22 23 140
grounded: 14 B-737-200, eight B-737-300 and
three B-767-200 aircraft. These aircraft are AIRCRAFT ON OPTION AT DECEMBER 31, 2002
included in the table to the right.
Delivery in Calendar Year Ending
REGIONAL JET AIRCRAFT FLEET After Rolling
Our regional jet program offers service to Aircraft on OptionC1
l 2003 2004 2005 2006 2006 Total Options
small and medium-sized cities and enables us B-737-800 4 8 10 38 60 231
to supplement mainline frequencies and service B-757-200 3 6 6 5 20 43
to larger cities. In 2000, ASA and Comair B-767-300/300ER 2 2 6 10 9
entered into agreements with Bombardier, Inc. B-767-400 2 2 2 18 24 3
to purchase a total of 94 Canadair Regional Jet B-777-200 2 5 1 12 20 14
(CRJ) aircraft, including 69 CRJ-200 aircraft
CRJ-100/200 27 38 33 99 197
CRJ-700 5 30 30 100 165
with a mix of 40 and 50 seats, and 25 CRJ-700
Total 43 91 84 278 496 300
aircraft with 70 seats. ASA and Comair also
(1) Aircraft options have scheduled delivery slots, while rolling options replace options and are assigned
received options to purchase 406 CRJ aircraft delivery slots as options expire or are exercised.
through 2010. In 2002, ASA and Comair each
took delivery of their first CRJ-700 aircraft.
Additionally, Comair now operates an all-jet fleet,
having retired its last EMB-120 turbo prop air-
craft in August 2002.
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PACIFIC
OCEAN
PACIFIC
STANDARD TIME
4:00
MOUNTAIN
Key to states in
central Mexico
1. AGUASCALIENTES
2 . GUANAJUATO
3 . OUER~TARO
4 . HIDALGO
5. M~X ICO
6 . OISTRITO FEDERAL
7 . MORELOS
8 . TLAXCALA
STANDARD TIME
5:00
___ Codeshare routes are operated
by one of Delta 's Worldwide
PartnersTM
0
Destination served by Delta Air
Lines
Seasonal service
Time zone (Legislated standard
time zones shown. Observed
time may differ.)
GU LF OF MEXICO
COMAIR'"
.. =
To: Seoul, Korea !
To: Tokyo, Japan (
To: Seoul, Korea ~
To: Guangzhou, China
~ H o n olulu
Korea Hawaiian
Islands
(US)
North America
on the following
for routes withi
United States and M
PAC FIC
OCEAN
CANADA
7 am
-5
8 am
-4
BR AZ I L\
Codeshare routes are operated
- -- by one of Delta's Worldwide
PartnersTM
Codeshare route via French
Rail connection
Destination served by Delta Air
lines
Time ,one (Legislated standard
time zones shown. ObseTVed
time may differ.)
* No local traffic rights in this
marker
Routes within Europe are shown on the-
Europe inset.
Routes within Southeast Asia are
shown on the Southeast Asia inset.
805--HERZ. BOSMA & HERZEGOVINA
LUX. LUXEMBOURG
MAC. FORMER YUGOSLAV REPUBLIC OF MACEDONIA
U.A.E. UNITED ARAB EMIRATES
The names of countries in Europe
can be-found on the urope lns.t
The routes iodic:ated by the lines on the
Wortdwide Rout. Mep are Intended-to
refleaonly the-destinations of Defla AirUnes
and its airline~; U- lines do not
reflect-the actual routesflown to~
destina&>ns.
R U; S S I A
OCEAN
. A .Delta