01—Abstract
Summary
Summary of the 10-K filed March 27, 2006. Cited figures are marked; the original filing is the authoritative source.
Delta Air Lines, Inc. filed its 2005 Form 10-K on March 27, 2006, after filing for Chapter 11 reorganization on September 14, 2005 in the U.S. Bankruptcy Court for the Southern District of New York.
The company reported a 2005 consolidated net loss of $3.8 billiona (net loss attributable to common shareowners of $3.836 billion, or $23.75 per share), compared with $5.2 billion in 2004. Operating revenues rose 6% to $16.2 billion on a 6% rise in revenue passenger miles, but operating expenses were $18.2 billion, including an $888 million restructuring, pension settlement and related charge and $1.3 billion higher aircraft fuel expense (average price per gallon up 47% to $1.71). The auditor's report includes a going-concern paragraph, and the company states that its common stock will have no value and will be canceled under any plan it proposes.
Liquidity is a central concern. Cash and short-term investments were $2.0 billionb at year-end, with restricted cash of $928 million, and the company's post-petition financing includes financial covenants such as a minimum unrestricted-funds requirement and EBITDAR targets. Management is pursuing a business plan targeting $3 billion in additional annual benefits by the end of 2007, on top of a $5 billion transformation plan due by the end of 2006.
Key open items include a pilot labor dispute, in which a neutral panel was to issue a decision on whether Delta may reject its pilot collective bargaining agreement by April 15, 2006, and a pending $3.4 billionc of pension funding requirements for 2006 through 2008 that the company believes it need not fund while in Chapter 11. For investors, the filing is a restructuring-stage document.
Total assets were $20.0 billiond and shareowners' deficit was $9.9 billion at year-end. Recovery to pre-petition creditors and shareowners is described as highly speculative, and the filing explicitly urges caution in investing in existing common stock or other securities.
02—Key points
Key Highlights
- 2005 net loss of $3.8 billion ($23.75 loss per share), versus a $5.2 billion net loss in 2004.
- Chapter 11 petition filed September 14, 2005; common stock suspended from NYSE on October 13, 2005 and delisted November 30, 2005; the company says current common stock will have no value and will be canceled under any plan it proposes.
- Operating revenues of $16.2 billion (up 6%), while operating expenses were $18.2 billion, including an $888 million restructuring, asset writedown and pension settlement charge.
- Aircraft fuel expense of $4.27 billion, up 46%, with the average price per gallon rising 47% to $1.71.
- Cash and short-term investments of $2.0 billion at December 31, 2005, plus $928 million of restricted cash; the company expects cash to remain under pressure in 2006 and beyond.
- Business plan targets an additional $3 billion in annual benefits by end-2007, in addition to the $5 billion transformation plan targeted for end-2006.
- Auditor's report includes a going-concern explanatory paragraph; total shareowners' deficit was $9.9 billion at year-end.
03—Questions
Frequently Asked Questions
Why did Delta file for Chapter 11 bankruptcy protection?
The company stated that, despite its transformation efforts, it experienced a liquidity shortfall in 2005 due to historically high aircraft fuel prices and other cost pressures, continued low passenger mile yields, and cash holdbacks instituted by its credit card processors. It concluded it could not continue to operate without Chapter 11 protection.
What happens to Delta's common stock under the bankruptcy?
The company believes its currently outstanding common stock will have no value and will be canceled under any plan of reorganization it proposes. Trading on the NYSE was suspended on October 13, 2005, and the stock was delisted on November 30, 2005; it has since been quoted on the Pink Sheets. The filing urges caution regarding existing and future investments in the common stock and other securities.
How much liquidity does Delta have, and what constraints apply?
Cash and cash equivalents and short-term investments totaled $2.0 billion at December 31, 2005. The post-petition financing agreements require unrestricted funds of at least $750 million through May 31, 2006, rising to $1 billion at various times thereafter, and impose EBITDAR targets. The company also states it does not expect to be able to obtain a material amount of additional debt financing during Chapter 11.
What is the status of the pilot labor negotiations?
Delta filed to reject its pilot collective bargaining agreement with ALPA in November 2005 and reached an interim agreement in December 2005 that cut hourly pilot wage rates by 14% plus an additional roughly 1% in other pay items. Because the March 1, 2006 negotiating deadline was missed, the matter was submitted to a neutral panel, whose decision was due by April 15, 2006. The company states it cannot predict the outcome, and ALPA has threatened to strike if rejection is authorized.
What are the main pension funding risks?
The company estimates funding requirements under its defined benefit plans for 2006 through 2008 of approximately $3.4 billion, but believes it is not required to fund pre-petition benefit amounts while in Chapter 11; that position was challenged in Bankruptcy Court and is on appeal. The company also notes that early pilot retirements, combined with a lump sum option, could trigger additional contribution requirements and that it would likely need to seek distress termination of its plans to emerge from Chapter 11 under current funding rules.
04—Continue