01—Abstract
Summary
Summary of the 10-K filed March 12, 2004. Cited figures are marked; the original filing is the authoritative source.
Delta Air Lines, Inc. reported a 2003 net loss of $773 milliona, or $6.40 per diluted share, compared with a net loss of $1.3 billion ($10.44 per share) in 2002.
Operating revenues were $13.3 billionb, essentially flat with 2002, while operating expenses fell to $14.1 billion and the operating loss narrowed to $786 million from $1.3 billion. The company describes a severely depressed revenue environment since September 11, 2001, with its unit costs (CASM of 10.48 cents) now among the highest of the hub-and-spoke carriers, which it identifies as a serious competitive disadvantage against low-cost carriers and restructured rivals. Management expects a net loss of approximately $400 million in the March 2004 quarter and does not anticipate significant revenue improvement in 2004.
Liquidity and balance sheet strain are central concerns. Debt and capital lease obligations totaled $12.6 billionc at year-end, shareowners' equity was a deficit of $(659) million, and the company had negative working capital of $1.7 billion. Cash and cash equivalents rose to $2.7 billion, supported by $2.2 billion of 2003 borrowings and a February 2004 $325 million convertible note issuance, but the company has no undrawn lines of credit.
Credit ratings were cut to B3 (Moody's), B (S&P) and B (Fitch), and the company faces about $1.0 billiond of 2004 debt maturities and estimated 2004 pension funding of about $440 million. The company also discontinued its common dividend in July 2003 and is reassessing its operating and business strategy, with completion expected by July 2004.
Key 2004 cost pressures identified include higher aircraft fuel, pension and interest expenses, with estimated annual increases of approximately $180 million, $130 million and $75 million, respectively. The filing also notes that the pilot labor agreement is amendable May 1, 2005, and that management is in discussions with the Air Line Pilots Association aimed at reducing pilot labor costs, though the outcome cannot be predicted.
02—Key points
Key Highlights
- 2003 net loss of $773 million ($6.40 per diluted share), improved from a $1.3 billion net loss in 2002, but the third consecutive year of substantial losses
- Operating revenues were flat at $13.3 billion; operating loss narrowed to $786 million from $1.3 billion
- Unit costs (CASM) of 10.48 cents rose from 10.31 and are described as among the highest of U.S. hub-and-spoke carriers, a stated competitive disadvantage
- Total debt and capital leases of $12.6 billion; shareowners' deficit of $(659) million; negative working capital of $1.7 billion
- Cash and cash equivalents of $2.7 billion at year-end, but no undrawn lines of credit; $2.2 billion borrowed in 2003
- Credit ratings lowered to B3/B/B (Moody's/S&P/Fitch); company expects a net loss of about $400 million in the March 2004 quarter
- Pension funding of about $440 million expected in 2004, including a $325 million voluntary contribution; dividend on common stock discontinued in July 2003
03—Questions
Frequently Asked Questions
Why did Delta report a larger loss than its operating revenues trend would suggest?
Delta's 2003 operating loss of $786 million reflects operating expenses of $14.1 billion against revenues of $13.3 billion. Non-operating items added to the pre-tax loss, with interest expense rising to $732 million from $646 million. The filing attributes cost pressure to higher pension expense (up about $290 million), aircraft fuel (up $255 million) and interest, partly offset by $398 million in Appropriations Act reimbursements recorded as an expense reduction.
How much debt does Delta have coming due, and can it meet those obligations?
Delta has approximately $1.0 billion of debt maturities in 2004 and $1.2 billion in 2005 as adjusted for regional jet refinancings. The company expects to meet obligations through cash, investments, internally generated funds and borrowings, but notes it has no undrawn credit lines and that access to new financing cannot be assured. Failure to obtain new financing could have a material adverse effect on liquidity.
What are the main risks to Delta's future profitability?
The filing cites continued revenue weakness from reduced high-yield business travel, low-cost carrier growth, excess industry capacity and fare price sensitivity. Cost risks include fuel prices, rising pension funding obligations expected to be significant in 2005 through 2008, and pilot labor costs that exceed competitors'. Litigation, including September 11-related lawsuits, and possible further credit rating downgrades are also identified as risks.
What actions is Delta taking to improve its financial position?
Delta has a profit improvement initiative covering self-service check-in, in-flight food changes, crew scheduling technology, restructuring of Salt Lake City and Dallas/Fort Worth hub operations, and its marketing alliance with Continental and Northwest. It also deferred or reduced mainline aircraft deliveries, agreed to sell 11 B-737-800 aircraft after 2005 delivery, grounded the MD-11 fleet, and is in pilot cost discussions with ALPA. A strategic review is scheduled for completion by July 2004.
What changed in leadership and governance?
Gerald Grinstein became Chief Executive Officer in January 2004, and Leo F. Mullin became Chairman of the Board effective January 2004. President and Chief Operating Officer Frederick W. Reid announced his retirement effective April 1, 2004. The annual shareowners meeting is scheduled for April 23, 2004, and John F. Smith Jr. is to become Chairman of the Board on that date.
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