01—Abstract
Summary
Summary of the 10-K filed March 10, 2005. Cited figures are marked; the original filing is the authoritative source.
Delta Air Lines, Inc. reported a 2004 net loss of $5.2 billiona ($41.07 per diluted share), its fourth consecutive year of substantial losses, compared with a net loss of $773 million in 2003.
Operating revenues rose 6% to $15.0 billionb, but operating expenses increased 23% to $18.3 billion, driven by a $1.9 billion goodwill impairment charge, sharply higher fuel prices (average price per gallon up 42% to $1.16), and the absence of 2003 Appropriations Act reimbursements. Passenger mile yield fell 4%, which management attributes to low-cost carrier growth, high industry capacity and customer price sensitivity. Unrestricted cash and short-term investments declined to $1.8 billion from $2.7 billion.
The filing states that Deloitte & Touche's audit report contains a going concern explanatory paragraph. Management says Delta must achieve approximately $5 billionc in annual benefits from its transformation plan by the end of 2006 (about $2.3 billion was achieved by end-2004), and that it expects a substantial net loss in 2005 and cash flows insufficient to meet all 2005 liquidity needs. If the plan's assumptions fail and asset sales or capital markets access are unavailable, the company states it would need to seek restructuring under Chapter 11 of the U.S. Bankruptcy Code.
Total debt and capital leases were $13.9 billiond, and shareowners' deficit stood at $5.8 billion at year-end. Key near-term items include a 2005 jet fuel price assumption of approximately $1.22 per gallon, a pilot agreement that yields about $1 billion in annual savings, the February 2005 Amex prepayment, and covenants under the GE Commercial Finance and Amex facilities that the company does not expect to exceed by a significant margin.
02—Key points
Key Highlights
- Net loss of $5.2 billion in 2004 versus $773 million in 2003; diluted loss per share of $41.07.
- Operating revenues of $15.0 billion (up 6%); operating expenses of $18.3 billion (up 23%), including a $1.9 billion goodwill and intangible impairment charge.
- Aircraft fuel expense rose 51% to $2.9 billion; average fuel price per gallon rose 42% to $1.16 net of hedging gains, and the company held no fuel hedges at December 31, 2004.
- Going concern explanatory paragraph in the auditor's report; the filing states the company may need to restructure under Chapter 11 if its plan fails.
- Transformation plan targets about $5 billion in annual benefits by end-2006 versus 2002, with about $2.3 billion achieved by end-2004; the pilot agreement is expected to deliver $1 billion annually.
- Total debt and capital leases of $13.9 billion; shareowners' deficit of $5.8 billion; cash and short-term investments of $1.8 billion.
- Credit ratings lowered to Ca (Moody's), CC (S&P) and C (Fitch); the company expects to be unable to obtain material additional debt financing.
03—Questions
Frequently Asked Questions
Why did Delta report such a large loss in 2004?
The filing attributes the $5.2 billion net loss to a $1.9 billion impairment charge (primarily goodwill for ASA and Comair), a $1.2 billion non-cash income tax provision to reserve substantially all net deferred tax assets, sharply higher fuel prices, and a significant decline in passenger mile yield from low-cost carrier competition and fare discounting.
Is Delta at risk of bankruptcy?
The filing states that if the company does not reduce operating expenses sufficiently or achieve its transformation plan benefits, it would need to seek restructuring under Chapter 11. It also notes that substantially all unencumbered collateral was pledged in the December 2004 quarter, which could make a Chapter 11 restructuring particularly difficult, and that the auditor's report includes a going concern paragraph.
How does Delta plan to return to profitability?
The transformation plan includes redesigning the Atlanta hub into a continuous hub, dehubbing Dallas/Fort Worth, growing the Song low-fare operation, eliminating 6,000 to 7,000 non-pilot jobs, reducing pilot costs by about $1 billion annually, and launching SimpliFares fare simplification. The company targets about $5 billion in annual benefits by the end of 2006 versus 2002, but states that it expects a substantial net loss in 2005.
How will Delta fund its 2005 liquidity needs?
Delta expects to rely on operating cash flow, existing cash and short-term investments, a commitment from a third party to finance 32 regional jets, and the final $250 million Amex borrowing received March 1, 2005. The company says it does not expect to obtain material additional debt financing, and expects cash balances to be substantially lower at December 31, 2005 unless it sells assets or accesses equity or convertible debt markets.
What are the main assumptions and risks in Delta's business plan?
The plan assumes an average 2005 jet fuel price of about $1.22 per gallon; each 1-cent increase in the annual average price raises liquidity needs by about $25 million. It also assumes achievement of transformation plan benefits, passenger yields, competitive conditions, pension funding obligations, and continued access to financing. The filing notes the company has no hedges that would reduce fuel costs below market prices and that its Visa/MasterCard processing contract expires in August 2005.
04—Continue