| (in millions, except share data) |
|
|
|
Common
Stock |
|
Additional
Paid-In
Capital |
|
Retained
Earnings
(Accumulated
Deficit) |
|
Accumulated
Other
Comprehensive
Income
(Loss) |
|
Treasury
Stock |
|
Total |
Balance at January 1, 2007 (Predecessor) |
|
|
|
$ |
2 |
|
|
$ |
1,561 |
|
|
$ |
(14,444 |
) |
|
$ |
(518 |
) |
|
$ |
(224 |
) |
|
$ |
(13,623 |
) |
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
from January 1 to April 30, 2007 |
|
|
|
|
– |
|
|
|
– |
|
|
|
1,298 |
|
|
|
– |
|
|
|
– |
|
|
|
1,298 |
|
Other
comprehensive income |
|
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
75 |
|
|
|
– |
|
|
|
75 |
|
Total comprehensive income |
|
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
1,373 |
|
Balance at April 30, 2007 (Predecessor) (Unaudited) |
|
|
|
|
2 |
|
|
|
1,561 |
|
|
|
(13,146 |
) |
|
|
(443 |
) |
|
|
(224 |
) |
|
|
(12,250 |
) |
Fresh
start adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation
of Predecessor common stock |
|
|
|
|
(2 |
) |
|
|
(1,561 |
) |
|
|
– |
|
|
|
– |
|
|
|
224 |
|
|
|
(1,339 |
) |
Elimination
of Predecessor accumulated deficit and
accumulated other comprehensive loss |
|
|
|
|
– |
|
|
|
– |
|
|
|
13,146 |
|
|
|
443 |
|
|
|
– |
|
|
|
13,589 |
|
Reorganization value ascribed to Successor |
|
|
|
|
– |
|
|
|
9,400 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
9,400 |
|
Balance at May 1, 2007 (Successor) (Unaudited) |
|
|
|
|
– |
|
|
|
9,400 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
9,400 |
|
Issuance of
275,454,694 shares of common stock
($0.0001 per share), including 6,339,220 shares held in
Treasury ($20.52 per share)(1) |
|
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(130 |
) |
|
|
(130 |
) |
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
from May 1 to September 30, 2007 |
|
|
|
|
– |
|
|
|
– |
|
|
|
384 |
|
|
|
– |
|
|
|
– |
|
|
|
384 |
|
Other
comprehensive income |
|
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
15 |
|
|
|
– |
|
|
|
15 |
|
Total
comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
399 |
|
Compensation expense associated with equity awards |
|
|
|
|
– |
|
|
|
79 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
79 |
|
Balance at September 30, 2007 (Successor) (Unaudited) |
|
|
|
$ |
– |
|
|
$ |
9,479 |
|
|
$ |
384 |
|
|
$ |
15 |
|
|
$ |
(130 |
) |
|
$ |
9,748 |
|
DELTA AIR LINES, INC.
Notes to the Condensed
Consolidated Financial Statements
September 30, 2007
(Unaudited)
1. CHAPTER 11 PROCEEDINGS
General Information
Delta Air Lines, Inc., a Delaware
corporation, is a major air carrier that provides air transportation for passengers and cargo throughout the United States (“U.S.”) and
around the world. Our Condensed Consolidated Financial Statements include the accounts of Delta Air Lines, Inc. and wholly owned subsidiaries,
including Comair, Inc. (“Comair”), which are collectively referred to as Delta.
On September 14, 2005 (the
“Petition Date”), we and substantially all of our subsidiaries (collectively, the “Debtors”) filed voluntary petitions for
reorganization under Chapter 11 of the U.S. Bankruptcy Code (the “Bankruptcy Code”) in the U.S. Bankruptcy Court for the Southern District of
New York (the “Bankruptcy Court”). The reorganization cases were jointly administered under the caption “In re Delta Air Lines, Inc., et
al., Case No. 05-17923-ASH.” On April 25, 2007, the Bankruptcy Court approved the Debtors’ Joint Plan of Reorganization (the
“Plan”). On April 30, 2007 (the “Effective Date”), we emerged from bankruptcy as a competitive airline with a global
network.
Upon emergence from Chapter 11, we
adopted fresh start reporting in accordance with American Institute of Certified Public Accountants’ Statement of Financial Position 90-7,
“Financial Reporting by Entities in Reorganization under the Bankruptcy Code” (“SOP 90-7”). The adoption of fresh start reporting
resulted in our becoming a new entity for financial reporting purposes. Accordingly, the Condensed Consolidated Financial Statements on or after May 1,
2007 are not comparable to the Condensed Consolidated Financial Statements prior to that date.
Fresh start reporting requires
resetting the historical net book value of assets and liabilities to fair value by allocating the entity’s reorganization value to its assets and
liabilities pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” (“SFAS
141”). The excess reorganization value over the fair value of tangible and identifiable intangible assets is recorded as goodwill on our
Consolidated Balance Sheet. Deferred taxes are determined in conformity with SFAS No. 109, “Accounting for Income Taxes” (“SFAS
109”). For additional information regarding the impact of fresh start reporting on the Consolidated Balance Sheet as of the Effective Date, see
“Fresh Start Consolidated Balance Sheet” below.
References in this Form 10-Q to
“Successor” refer to Delta on or after May 1, 2007, after giving effect to (1) the cancellation of Delta common stock issued prior to the
Effective Date; (2) the issuance of new Delta common stock and certain debt securities in accordance with the Plan; and (3) the application of fresh
start reporting. References to “Predecessor” refer to Delta prior to May 1, 2007.
Effectiveness of Plan of
Reorganization. Under the Plan, most holders of allowed general, unsecured claims against the Debtors received or will receive newly issued common
stock in satisfaction of their claims. Holders of de minimis allowed general, unsecured claims received cash in satisfaction of their
claims.
The Plan contemplates the distribution
of 400 million shares of common stock, consisting of (1) 386 million shares to holders of allowed general, unsecured claims (including our pilots) and
(2) 14 million shares to our approximately 39,000 eligible non-contract, non-management employees. The new common stock was listed on the New York
Stock Exchange and began trading under the symbol “DAL” on May 3, 2007. As of October 30, 2007, the following distributions of common stock
have been made or will be commenced shortly in accordance with the Plan:
• |
|
276 million shares of common stock to holders of allowed
general, unsecured claims of $12.5 billion. We have reserved 110 million shares of common stock for future distributions to holders of allowed general,
unsecured claims when disputed claims are resolved. |
7
• |
|
Nearly all 14 million shares of common stock to eligible
non-contract, non-management employees. We will distribute the remaining shares of common stock as eligible employees return to work during
2007. |
The Bankruptcy Court also authorized
the distribution of equity awards to our approximately 1,200 officers, director level employees and managers and senior professionals (“management
personnel”). For additional information about these awards, see Note 10.
In addition, as of October 30, 2007, we
issued the following debt securities and made the following cash distributions under the Plan:
• |
|
$66 million principal amount of senior unsecured notes in
connection with our settlement agreement relating to the restructuring of certain of our lease and other obligations at the Cincinnati-Northern
Kentucky International Airport (the “Cincinnati Airport Settlement Agreement”). For additional information on this subject, see Note
4; |
• |
|
an aggregate of $102 million in cash to holders in satisfaction
of their claims, including to holders of administrative claims, state and local priority tax claims, certain secured claims and de minimis allowed
unsecured claims; |
• |
|
$225 million in cash to the Pension Benefit Guaranty Corporation
(the “PBGC”) in connection with the termination of our qualified defined benefit pension plan for pilots (the “Pilot Plan”);
and |
• |
|
$650 million in cash to fund an obligation (the “Pilot
Obligation”) under our comprehensive agreement with the Air Line Pilots Association, International (“ALPA”), the collective bargaining
representative of Delta’s pilots, to reduce pilot labor costs. We paid $353 million and deposited the remaining $297 million in a grantor trust
for the benefit of Delta pilots. The amount in the grantor trust is classified as restricted cash with a corresponding note payable on our Consolidated
Balance Sheet until it is distributed in January 2008. |
Under the priority scheme established
by the Bankruptcy Code, unless creditors agree otherwise, pre-petition liabilities and post-petition liabilities must be satisfied in full before
shareowners are entitled to receive any distribution or retain any property under the Plan. In accordance with the Plan, holders of our equity
interests that were in existence prior to April 30, 2007, including our common stock, did not receive any distributions, and their equity interests
were cancelled on the Effective Date.
On the Effective Date, we entered into
a senior secured exit financing facility (the “Exit Facilities”) to borrow up to $2.5 billion from a syndicate of lenders. We used a portion
of the proceeds from the Exit Facilities and existing cash to repay our two then outstanding debtor-in-possession financing facilities (the “DIP
Facility”). For additional information regarding the Exit Facilities, see Note 4.
We continue to incur expenses related
to our Chapter 11 proceedings, primarily professional fees that were classified as a reorganization item by the Predecessor. After we emerged, these
expenses are classified in their appropriate line item, primarily in other expense, in the Successor’s Consolidated Statements of
Operations.
Significant Ongoing Chapter 11
Matters
Resolution of Outstanding
Claims. The Debtors have filed with the Bankruptcy Court schedules and statements of financial affairs setting forth, among other things, the
assets and liabilities of the Debtors, subject to the assumptions filed in connection therewith. All of the schedules are subject to amendment or
modification.
Bankruptcy Rule 3003(c)(3) requires the
Bankruptcy Court to set the time within which proofs of claim must be filed in a Chapter 11 case. The Bankruptcy Court established August 21, 2006 (the
“Bar Date”) as the last date for each person or entity to file a proof of claim against the Debtors. Subject to certain exceptions, the Bar
Date applies to all claims against the Debtors that arose prior to the Petition Date.
As of October 30, 2007, claims totaling
$91.8 billion have been filed with the Bankruptcy Court against the Debtors. This amount includes $12.5 billion of allowed general, unsecured claims
with respect to which
8
common stock distributions have
occurred or commenced and $36.6 billion of claims which have been expunged, reduced or withdrawn. We expect new and amended claims to be filed in the
future, including claims amended to assign values to claims originally filed with no designated value. We have identified, and we expect to continue to
identify, many claims that we believe should be disallowed by the Bankruptcy Court because they are duplicative, have been later amended or superseded,
are without merit, are overstated or for other reasons. We currently estimate that the total allowed general, unsecured claims in our Chapter 11
proceedings will be approximately $15 billion, including claims with respect to which we have issued or commenced distributions of common
stock.
The Plan provides that administrative
and priority claims will be satisfied with cash. Certain administrative and priority claims remain unpaid, and we will continue to settle claims and
file objections with the Bankruptcy Court with respect to such claims. All of these claims have been accrued by the Successor based upon the best
available estimates of amounts to be paid. However, it should be noted that the claims resolution process is uncertain and could result in material
adjustments to the Successor’s financial statements.
Through the claims resolution process,
differences in amounts scheduled by the Debtors and claims filed by creditors will be investigated and resolved, including through the filing of
objections with the Bankruptcy Court where appropriate. In light of the substantial number and amount of claims filed, the claims resolution process
may take considerable time to complete, and we expect that it will continue for some time. Accordingly, the ultimate number and amount of allowed
claims is not presently known, nor is the exact recovery with respect to allowed claims presently known.
Cincinnati Airport Settlement.
On April 24, 2007, the Bankruptcy Court approved the Cincinnati Airport Settlement Agreement. A small group of bondholders (the “Objecting
Bondholders”) challenged the settlement in U.S. District Court for the Southern District of New York. In August 2007, the District Court affirmed
the Bankruptcy Court’s order approving the settlement. The Objecting Bondholders appealed the District Court’s decision to the U.S. Court of
Appeals for the Second Circuit. For additional information on this subject, see Note 4.
Tax Indemnity Agreements/Stipulated
Loss Value Claims. A significant amount of disputed claims involves claims related to aircraft matters that have been filed by certain parties to
aircraft leveraged lease transactions. Some of these claims arise from tax indemnity agreements entered into with certain parties to these leveraged
lease transactions. We have filed objections, and expect to file further objections, seeking to expunge or reduce such claims. The Bankruptcy Court has
entered orders affirming our objections as to certain claims and, in certain cases, ordering those claims be expunged. Motions for reconsideration or
notices of appeal have been or are expected to be filed by the parties to the leveraged lease transactions. Hearing dates as to further objections by
us as to other claims are being set, the next of which will occur in mid-November. We continue to negotiate and review opportunities to settle such
other claims where the settlements are advisable. We cannot predict the ultimate outcome of these negotiations or the ultimate resolution of these
claims.
Liabilities Subject to Compromise
The following table summarizes the
components of liabilities subject to compromise included on our Consolidated Balance Sheet at December 31, 2006:
| (in millions) |
|
|
|
Predecessor
December 31,
2006 |
Pension,
postretirement and other benefits |
|
|
|
$ |
10,329 |
|
Debt and
accrued interest |
|
|
|
|
5,079 |
|
Aircraft
lease related obligations |
|
|
|
|
3,115 |
|
Accounts payable and other accrued liabilities |
|
|
|
|
1,294 |
|
Total liabilities subject to compromise |
|
|
|
$ |
19,817 |
|
Liabilities subject to compromise
refers to pre-petition obligations that were impacted by the Chapter 11 reorganization process. The amounts represented our estimate of known or
potential obligations to be resolved in connection with our Chapter 11 proceedings.
9
At September 30, 2007, we had a zero
balance for liabilities subject to compromise due to our emergence from bankruptcy. For information regarding the discharge of liabilities subject to
compromise, see “Fresh Start Consolidated Balance Sheet” below.
Differences between liabilities we have
estimated and the claims filed will be investigated and resolved in connection with the claims resolution process.
Reorganization Items, net
The following table summarizes the
components of reorganization items, net on our Consolidated Statements of Operations for the four months ended April 30, 2007, and the three and nine
months ended September 30, 2006:
|
|
|
|
Predecessor |
|
| (in millions) |
|
|
|
Four Months
Ended
April 30,
2007 |
|
Three
Months
Ended
September 30,
2006 |
|
Nine
Months
Ended
September 30,
2006 |
Discharge of
claims and liabilities(1) |
|
|
|
$ |
4,424 |
|
|
$ |
– |
|
|
$ |
– |
|
Revaluation
of frequent flyer obligation(2) |
|
|
|
|
(2,586 |
) |
|
|
– |
|
|
|
– |
|
Revaluation
of other assets and liabilities(3) |
|
|
|
|
238 |
|
|
|
– |
|
|
|
– |
|
Aircraft
financing renegotiations and rejections(4) |
|
|
|
|
(440 |
) |
|
|
100 |
|
|
|
(1,490 |
) |
Contract
carrier agreements(5) |
|
|
|
|
(163 |
) |
|
|
– |
|
|
|
– |
|
Emergence
compensation(6) |
|
|
|
|
(162 |
) |
|
|
– |
|
|
|
– |
|
Professional
fees |
|
|
|
|
(88 |
) |
|
|
(34 |
) |
|
|
(87 |
) |
Pilot
collective bargaining agreement(7) |
|
|
|
|
(83 |
) |
|
|
– |
|
|
|
(2,100 |
) |
Interest
income(8) |
|
|
|
|
50 |
|
|
|
32 |
|
|
|
79 |
|
Facility
leases(9) |
|
|
|
|
43 |
|
|
|
(1 |
) |
|
|
(25 |
) |
Vendor waived
pre-petition debt |
|
|
|
|
29 |
|
|
|
15 |
|
|
|
20 |
|
Retiree
healthcare claims(10) |
|
|
|
|
(26 |
) |
|
|
– |
|
|
|
– |
|
Debt issuance
costs |
|
|
|
|
– |
|
|
|
– |
|
|
|
(13 |
) |
Compensation
expense(11) |
|
|
|
|
– |
|
|
|
– |
|
|
|
(55 |
) |
Other |
|
|
|
|
(21 |
) |
|
|
(14 |
) |
|
|
(14 |
) |
Total reorganization items, net |
|
|
|
$ |
1,215 |
|
|
$ |
98 |
|
|
$ |
(3,685 |
) |
(1) |
|
The discharge of claims and liabilities primarily relates to
allowed general, unsecured claims in our Chapter 11 proceedings, such as (a) ALPA’s claim under our comprehensive agreement reducing pilot labor
costs; (b) the PBGC’s claim relating to the termination of the Pilot Plan; (c) claims relating to changes in postretirement healthcare benefits
and the rejection of our non-qualified retirement plans; (d) claims associated with debt and certain municipal bond obligations based upon their
rejection; (e) claims relating to the restructuring of financing arrangements or the rejection of leases for aircraft; and (f) other claims due to the
rejection or modification of certain executory contracts, unexpired leases and contract carrier agreements. For additional information on these
subjects, see Notes 1 and 10 of the Notes to the Consolidated Financial Statements in our Form 10-K. |
|
|
In accordance with the Plan, we discharged our obligations to
holders of allowed general, unsecured claims in exchange for the distribution of 386 million newly issued shares of common stock and the issuance of
certain debt securities and obligations. Accordingly, in discharging our liabilities subject to compromise, we recognized a reorganization gain of $4.4
billion as follows: |
| (in millions) |
|
|
|
|
Liabilities
subject to compromise |
|
|
|
$ |
19,345 |
|
Reorganization value |
|
|
|
|
(9,400 |
) |
Liabilities
reinstated |
|
|
|
|
(4,429 |
) |
Issuance of
new debt securities and obligations, net of discounts of $22 |
|
|
|
|
(938 |
) |
Other |
|
|
|
|
(154 |
) |
Discharge of claims and liabilities |
|
|
|
$ |
4,424 |
|
(2) |
|
We revalued our SkyMiles frequent flyer obligation at fair value
as a result of fresh start reporting, which resulted in a $2.6 billion reorganization charge. For information about a change in our accounting policy
for the SkyMiles program, see Note 2. |
10
(3) |
|
We revalued our assets and liabilities at estimated fair value
as a result of fresh start reporting. This resulted in a $238 million gain, primarily reflecting the fair value of newly recognized intangible assets,
which was partially offset by reductions in the fair value of tangible property and equipment. |
(4) |
|
Estimated claims for the four months ended April 30, 2007 relate
to the restructuring of the financing arrangements for 143 aircraft, the rejection of two aircraft leases and adjustments to prior claims estimates.
The credit for the three months ended September 30, 2006 related to adjustments to claims estimates. Estimated claims for the nine months ended
September 30, 2006 relate to the restructuring of the financing arrangements for 169 aircraft and the rejection of 16 aircraft leases. |
(5) |
|
In connection with amendments to our contract carrier agreements
with Chautauqua Airlines, Inc. (“Chautauqua”) and Shuttle America Corporation (“Shuttle America”), both subsidiaries of Republic
Airways Holdings, Inc. (“Republic Holdings”), which, among other things, reduced the rates we pay those carriers, we recorded (1) a $91
million allowed general, unsecured claim and (2) a $37 million net charge related to our surrender of warrants to purchase up to 3.5 million shares of
Republic Holdings common stock. Additionally, in connection with an amendment to our contract carrier agreement with Freedom Airlines, Inc.
(“Freedom”), a subsidiary of Mesa Air Group, Inc., which, among other things, reduced the rates we pay that carrier, we recorded a $35
million allowed general, unsecured claim. |
(6) |
|
In accordance with the Plan, we made $130 million in lump-sum
cash payments to approximately 39,000 eligible non-contract, non-management employees. We also recorded an additional charge of $32 million related to
our portion of payroll related taxes associated with the issuance, as contemplated by the Plan, of approximately 14 million shares of common stock to
these employees. For additional information regarding the stock grants, see Note 10. |
(7) |
|
Allowed general, unsecured claims of $83 million for the four
months ended April 30, 2007 and $2.1 billion for the nine months ended September 30, 2006 in connection with Comair’s and Delta’s respective
comprehensive agreements with ALPA reducing pilot labor costs. |
(8) |
|
Reflects interest earned due to the preservation of cash during
our Chapter 11 proceedings. |
(9) |
|
For the four months ended April 30, 2007, we recorded a net $43
million gain, primarily reflecting a $126 million net gain in connection with our settlement agreement with the Massachusetts Port Authority
(“Massport”) which was partially offset by a net $80 million charge from an allowed general, unsecured claim under the Cincinnati Airport
Settlement Agreement. For additional information regarding our settlement agreement with Massport and the Cincinnati Airport Settlement Agreement, see
Note 4. |
(10) |
|
Allowed general, unsecured claims in connection with agreements
reached with committees representing pilot and non-pilot retired employees reducing their postretirement healthcare benefits. |
(11) |
|
Reflects a charge for rejecting substantially all of our stock
options in our Chapter 11 proceedings. For additional information regarding this matter, see Note 2 of the Notes to the Consolidated Financial
Statements in our Form 10-K. |
Fresh Start Consolidated Balance
Sheet
As previously noted, upon emergence
from Chapter 11, we adopted fresh start reporting, which required us to revalue our assets and liabilities to fair value. In estimating fair value, we
based the estimates and assumptions on guidance prescribed by SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157, among
other things, defines fair value, establishes a framework for measuring fair value and expands disclosure about fair value measurements. For additional
information about SFAS 157, see Note 12.
Our estimates of fair value are based
on independent appraisals and valuations, some of which are not final. Where independent appraisals and valuations are not available, we estimate fair
value using industry data and trends and refer to relevant market rates and transactions. As new or improved information on asset and liability
appraisals and valuations becomes available, we may adjust our preliminary allocation of fair value within one year from the Effective Date.
Adjustments to the recorded fair values of these assets and liabilities may impact the amount of recorded goodwill.
To facilitate the calculation of the
enterprise value of the Successor, management developed a set of financial projections for the Successor using a number of estimates and assumptions.
With the assistance of financial advisors, management determined the enterprise and corresponding reorganization value of the Successor based on the
financial projections using various valuation methods, including (1) a comparison of our projected performance to the market values of comparable
companies; (2) a review and analysis of several recent transactions in the airline industry; and (3) a calculation of the present value of future cash
flows based on our projections. Utilizing this methodology, the reorganization value of the Successor was estimated to be in the range of $9.4 billion
and $12.0 billion. The enterprise value, and corresponding reorganization value, is dependent upon achieving the future financial results set forth in
our projections, as well as the realization of certain other assumptions. There can be no assurance that the projections will be achieved or that the
assumptions will be realized. The excess reorganization value (using the low end of the range) over the fair
11
value of tangible and identifiable
intangible assets has been reflected as goodwill in the Consolidated Fresh Start Balance Sheet. The financial projections and estimates of enterprise
and reorganization value are not incorporated herein.
All estimates, assumptions, valuations,
appraisals and financial projections, including the fair value adjustments, the financial projections, the enterprise value and reorganization value
projections, are inherently subject to significant uncertainties and the resolution of contingencies beyond our control. Accordingly, there can be no
assurance that the estimates, assumptions, valuations, appraisals and the financial projections will be realized, and actual results could vary
materially.
The adjustments set forth in the
following Fresh Start Consolidated Balance Sheet in the columns captioned “Debt Discharge, Reclassifications and Distribution to Creditors,”
“Repayment of DIP Facility and New Exit Financing” and “Revaluation of Assets and Liabilities” reflect the effect of the
consummation of the transactions contemplated by the Plan, including the settlement of various liabilities, securities issuances, incurrence of new
indebtedness and cash payments.
The effects of the Plan and fresh start
reporting on our Consolidated Balance Sheet at April 30, 2007 are as follows:
12
Fresh Start Consolidated Balance Sheet
| (in millions) |
|
|
|
Predecessor
April 30,
2007 |
|
Debt Discharge,
Reclassifications
and
Distribution
to Creditors |
|
Repayment
of
DIP Facility
and New
Exit
Financing |
|
Revaluation
of Assets and
Liabilities |
|
Successor
Reorganized
Balance
Sheet
May 1, 2007 |
CURRENT
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash
equivalents and short-term investments |
|
|
|
$ |
2,915 |
|
|
$ |
– |
|
|
$ |
(557 |
) |
|
$ |
– |
|
|
$ |
2,358 |
|
Restricted
and designated cash |
|
|
|
|
1,069 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
1,069 |
|
Accounts
receivable, net |
|
|
|
|
1,086 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
1,086 |
|
Expendable
parts and supplies inventories, net |
|
|
|
|
183 |
|
|
|
– |
|
|
|
– |
|
|
|
58 |
|
|
|
241 |
|
Deferred
income taxes, net |
|
|
|
|
441 |
|
|
|
– |
|
|
|
– |
|
|
|
302 |
|
|
|
743 |
|
Prepaid
expenses and other |
|
|
|
|
437 |
|
|
|
(19 |
) |
|
|
– |
|
|
|
(75 |
) |
|
|
343 |
|
Total current
assets |
|
|
|
|
6,131 |
|
|
|
(19 |
) |
|
|
(557 |
) |
|
|
285 |
|
|
|
5,840 |
|
PROPERTY
AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net flight
equipment and net flight equipment under capital lease |
|
|
|
|
11,087 |
|
|
|
– |
|
|
|
– |
|
|
|
(1,254 |
) |
|
|
9,833 |
|
Other
property and equipment, net |
|
|
|
|
1,498 |
|
|
|
– |
|
|
|
– |
|
|
|
215 |
|
|
|
1,713 |
|
Total
property and equipment, net |
|
|
|
|
12,585 |
|
|
|
– |
|
|
|
– |
|
|
|
(1,039 |
) |
|
|
11,546 |
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
|
|
227 |
|
|
|
– |
|
|
|
– |
|
|
|
12,199 |
|
|
|
12,426 |
|
Intangibles,
net |
|
|
|
|
88 |
|
|
|
– |
|
|
|
– |
|
|
|
2,865 |
|
|
|
2,953 |
|
Other
noncurrent assets |
|
|
|
|
740 |
|
|
|
– |
|
|
|
48 |
|
|
|
68 |
|
|
|
856 |
|
Total other
assets |
|
|
|
|
1,055 |
|
|
|
– |
|
|
|
48 |
|
|
|
15,132 |
|
|
|
16,235 |
|
Total
assets |
|
|
|
$ |
19,771 |
|
|
$ |
(19 |
) |
|
$ |
(509 |
) |
|
$ |
14,378 |
|
|
$ |
33,621 |
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
maturities of long-term debt and capital leases |
|
|
|
$ |
1,292 |
|
|
$ |
5 |
|
|
$ |
– |
|
|
$ |
35 |
|
|
$ |
1,332 |
|
DIP
Facility |
|
|
|
|
1,959 |
|
|
|
– |
|
|
|
(1,959 |
) |
|
|
– |
|
|
|
– |
|
Accounts
payable, accrued salaries and related benefits |
|
|
|
|
1,396 |
|
|
|
561 |
|
|
|
(50 |
) |
|
|
155 |
|
|
|
2,062 |
|
SkyMiles
deferred revenue |
|
|
|
|
602 |
|
|
|
– |
|
|
|
|
|
|
|
620 |
|
|
|
1,222 |
|
Air traffic
liability |
|
|
|
|
2,567 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
2,567 |
|
Taxes
payable |
|
|
|
|
423 |
|
|
|
– |
|
|
|
– |
|
|
|
(2 |
) |
|
|
421 |
|
Total current
liabilities |
|
|
|
|
8,239 |
|
|
|
566 |
|
|
|
(2,009 |
) |
|
|
808 |
|
|
|
7,604 |
|
NONCURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt and capital leases |
|
|
|
|
5,132 |
|
|
|
37 |
|
|
|
– |
|
|
|
398 |
|
|
|
5,567 |
|
Exit
Facilities |
|
|
|
|
– |
|
|
|
– |
|
|
|
1,500 |
|
|
|
– |
|
|
|
1,500 |
|
SkyMiles
deferred revenue |
|
|
|
|
294 |
|
|
|
– |
|
|
|
– |
|
|
|
1,958 |
|
|
|
2,252 |
|
Other notes
payable |
|
|
|
|
– |
|
|
|
697 |
|
|
|
– |
|
|
|
– |
|
|
|
697 |
|
Pension,
postretirement and related benefits |
|
|
|
|
62 |
|
|
|
4,202 |
|
|
|
– |
|
|
|
– |
|
|
|
4,264 |
|
Other |
|
|
|
|
1,026 |
|
|
|
– |
|
|
|
– |
|
|
|
1,311 |
|
|
|
2,337 |
|
Total
noncurrent liabilities |
|
|
|
|
6,514 |
|
|
|
4,936 |
|
|
|
1,500 |
|
|
|
3,667 |
|
|
|
16,617 |
|
Liabilities
subject to compromise |
|
|
|
|
19,345 |
|
|
|
(19,345 |
) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
SHAREOWNERS’ (DEFICIT) EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debtors |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
and additional paid in capital – Debtors |
|
|
|
|
1,563 |
|
|
|
– |
|
|
|
– |
|
|
|
(1,563 |
) |
|
|
– |
|
Retained
deficit and other – Debtors |
|
|
|
|
(15,890 |
) |
|
|
4,424 |
|
|
|
– |
|
|
|
11,466 |
|
|
|
– |
|
Reorganized Debtors |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
and additional paid in capital – Reorganized Debtors |
|
|
|
|
– |
|
|
|
9,400 |
|
|
|
– |
|
|
|
– |
|
|
|
9,400 |
|
Total
liabilities and shareowners’ (deficit) equity |
|
|
|
$ |
19,771 |
|
|
$ |
(19 |
) |
|
$ |
(509 |
) |
|
$ |
14,378 |
|
|
$ |
33,621 |
|
13
• |
|
Debt Discharge, Reclassifications and Distribution to
Creditors. Adjustments reflect the elimination of liabilities subject to compromise totaling $19.3 billion on our Consolidated Balance Sheet
immediately prior to the Effective Date. Excluding certain liabilities assumed by the Successor, liabilities subject to compromise of $13.8 billion
were discharged in the Chapter 11 cases. Adjustments include: |
(a) |
|
The recognition or reinstatement of $561 million to accounts
payable, accrued salaries and related benefits comprised of (1) a $225 million obligation to the PBGC relating to the termination of the Pilot Plan
(which is reflected on the Consolidated Balance Sheet net of a $3 million discount) and (2) $339 million to reinstate or accrue certain liabilities
related to the current portion of our pension and postretirement benefit plans and for certain administrative claims and cure costs. |
(b) |
|
The recognition of $697 million in other notes payable comprised
of (1) the $650 million Pilot Obligation relating to our comprehensive agreement with ALPA reducing pilot labor costs (which is reflected on the
Consolidated Balance Sheet net of a $19 million discount) and (2) $66 million principal amount of senior unsecured notes (following the reduction of
the $85 million face value of the notes for the application of certain payments made by us in 2006 and 2007) under the Cincinnati Airport Settlement
Agreement. For additional information on the Cincinnati Airport Settlement Agreement, see Note 4. |
(c) |
|
The reinstatement of $4.2 billion to pension, postretirement and
related benefits comprised of (1) $3.2 billion associated with our non-pilot defined benefit pension plan (the “Non-pilot Plan”) and other
long-term accrued benefits and (2) $1.0 billion associated with postretirement benefits. |
• |
|
Repayment of DIP Facility and New Exit Financing.
Adjustments reflect the repayment of the DIP Facility and borrowing under the Exit Facilities. Financing fees related to (1) the DIP Facility were
written off at the Effective Date and (2) fees related to the Exit Facilities were capitalized and will be amortized over the term of the facility. For
additional information regarding the Exit Facilities, see Note 4. |
• |
|
Revaluation of Assets and Liabilities. Significant
adjustments reflected in the Fresh Start Consolidated Balance Sheet based on the revaluation of assets and liabilities are summarized as
follows: |
(a) |
|
Property and equipment, net. A net adjustment of $1.0
billion to reduce the net book value of fixed assets to their estimated fair value. |
(b) |
|
Goodwill. An adjustment of $12.2 billion to reflect
reorganization value of the Successor in excess of the fair value of tangible and identified intangible assets. During the September 2007 quarter,
goodwill decreased by $50 million as a result of net adjustments in the fair value of certain assets and liabilities. These adjustments were recorded
on the Successor’s opening balance sheet at May 1, 2007. |
(c) |
|
Intangibles. An adjustment of $2.9 billion to recognize
identifiable intangible assets. These intangible assets reflect the estimated fair value of our trade name, takeoff and arrival slots, SkyTeam alliance
agreements, marketing agreements, customer relationships and certain contracts. Certain of these assets will be subject to an annual impairment review.
For additional information on intangible assets, see Note 2. |
(d) |
|
Long-term debt and capital leases. An adjustment of $398
million primarily to reflect a $223 million net premium associated with long-term debt and a $138 million net premium associated with capital lease
obligations to be amortized to interest expense over the life of such debt and capital lease obligations. |
(e) |
|
SkyMiles deferred revenue. An adjustment to revalue our
obligation under the SkyMiles frequent flyer program to reflect the estimated fair value of miles to be redeemed in the future. Adjustments of $2.0
billion and $620 million were reflected for the fair value of these miles in long-term and current classifications, respectively. Effective with our
emergence from bankruptcy, we changed our accounting policy from an incremental cost basis to a deferred revenue model for miles earned |
14
|
|
through travel. For additional information on the accounting
policy for our SkyMiles frequent flyer program, see Note 2. |
(f) |
|
Noncurrent liabilities – other. An adjustment of
$1.3 billion primarily related to the tax effect of fresh start valuation adjustments. |
(g) |
|
Total shareowners’ deficit. The adoption of fresh
start reporting resulted in a new reporting entity with no beginning retained earnings or accumulated deficit. All common stock of the Predecessor was
eliminated and replaced by the new equity structure of the Successor based on the Plan. The Fresh Start Consolidated Balance Sheet reflects initial
shareowners’ equity value of $9.4 billion, representing the low end in the range of $9.4 billion to $12.0 billion estimated in our financial
projections developed in connection with the Plan. The low end of the range is estimated to reflect market conditions as of the Effective Date and
therefore was used to establish initial shareowners’ equity value. |
2. ACCOUNTING AND REPORTING POLICIES
Basis of Presentation
These unaudited Condensed Consolidated
Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”)
for interim financial information. Consistent with these requirements, this Form 10-Q does not include all the information required by GAAP for
complete financial statements. As a result, this Form 10-Q should be read in conjunction with the Consolidated Financial Statements and accompanying
Notes in our Form 10-K.
In preparing our Consolidated Financial
Statements for the Predecessor, we applied SOP 90-7, which requires that the financial statements, for periods subsequent to the Chapter 11 filing,
distinguish transactions and events that were directly associated with the reorganization from the ongoing operations of the business. Accordingly,
certain revenues, expenses, realized gains and losses and provisions for losses that were realized or incurred in the bankruptcy proceedings were
recorded in reorganization items, net on the accompanying Consolidated Statements of Operations. In addition, pre-petition obligations that were
impacted by the bankruptcy reorganization process were classified as liabilities subject to compromise on our Consolidated Balance Sheet at December
31, 2006. For additional information regarding the discharge of liabilities subject to compromise upon emergence, see Note 1.
We have eliminated all material
intercompany transactions in our Condensed Consolidated Financial Statements. 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. We did not control any company in which we had an ownership interest of 50%
or less for any period presented in our Condensed Consolidated Financial Statements.
Management believes that the
accompanying unaudited Condensed Consolidated Financial Statements reflect all adjustments, including adjustments required by fresh start reporting,
normal recurring items, restructuring and related items, and reorganization items, considered necessary for a fair statement of results for the interim
periods presented.
Due to the impact of our Chapter 11
proceedings, seasonal variations in the demand for air travel, the volatility of aircraft fuel prices and other factors, operating results for the
three and five months ended September 30, 2007 and the four months ended April 30, 2007 are not necessarily indicative of operating results for the
entire year.
New Accounting Standards
Effective January 1, 2007, we adopted
Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an
interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting and disclosure for uncertainty in tax positions, as
defined. FIN 48 is intended to reduce the diversity in practice associated with certain aspects of the recognition and
15
measurement related to accounting
for income taxes. The adoption of FIN 48 resulted in a $30 million charge to accumulated deficit that is reported as a cumulative effect adjustment for
a change in accounting principle to the opening balance sheet position of shareowners’ deficit at January 1, 2007. For additional information
regarding FIN 48, see Note 8.
In September 2006, the FASB issued SFAS
157. This statement, among other things, defines fair value, establishes a framework for measuring fair value and expands disclosure about fair value
measurements. SFAS 157 is intended to eliminate the diversity in practice associated with measuring fair value under existing accounting
pronouncements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We adopted
SFAS 157 on April 30, 2007 in connection with the adoption of fresh start reporting. For a presentation associated with the recurring and nonrecurring
fair value measurements, see Note 12.
In June 2006, the FASB ratified the
Emerging Issues Task Force (“EITF”) consensus on EITF Issue No. 06-03, “How Taxes Collected From Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement (“EITF 06-03”). The scope of EITF 06-03 includes any tax assessed by a governmental
authority that is directly imposed on a revenue-producing transaction between a seller and a customer, and provides that a company may adopt a policy
of presenting taxes either gross within revenue or on a net basis. For any such taxes that are reported on a gross basis, a company should disclose the
amounts of those taxes for each period for which an income statement is presented if those amounts are significant. This statement is effective for
interim and annual reporting periods beginning after December 15, 2006. We adopted EITF 06-03 on January 1, 2007. Various taxes and fees on the sale of
tickets to customers are collected by us as an agent and remitted to the respective taxing authority. These taxes and fees have been presented on a net
basis in the accompanying Consolidated Statements of Operations and recorded as a liability until remitted to the respective taxing
authority.
Reclassifications
Prior to amending our Visa/MasterCard
processing agreement, as described in Note 5, the credit card processor (“Processor”) withheld payment from our receivables and/or required a
cash reserve of an amount (“Reserve”) equal to the Processor’s potential liability for tickets purchased with Visa or MasterCard that
had not yet been used for travel (the “unflown ticket liability”). The cash portion of the Reserve was recorded in restricted cash on our
Consolidated Balance Sheet.
For the five months ended September 30,
2007 and the four months ended April 30, 2007, the change in the cash portion of the Reserve is reported as a component of operating activities on our
Condensed Consolidated Statements of Cash Flows to better reflect the nature of the restricted cash activities. For the nine months ended September 30,
2006, we presented such change as an investing activity. We have reclassified prior period amounts to be consistent with the current period
presentation. For the nine months ended September 30, 2006, these reclassifications resulted in a $52 million decrease to cash flows from operating
activities and a corresponding increase to cash flows from investing activities from the amounts previously reported.
Upon emergence and as a result of the
adoption of fresh start reporting, we changed the classification of certain items in our Consolidated Statements of Operations. We also reclassified
prior period amounts to conform to current period presentation. These changes have no impact on operating and net income in any period prior to or
subsequent to our emergence. These reclassifications are as follows for the three and nine months ended September 30, 2006:
• |
|
In-sourcing revenue. We reclassified $79 million and $215
million, respectively, associated with revenue for our maintenance in-sourcing business to other, net revenue, and reclassified the related costs to
(1) salaries and related costs, (2) aircraft maintenance materials and outside repairs and (3) other operating expense. Previously, these revenues and
expenses were reflected on a net basis in other operating expense. |
16
• |
|
Delta Global Services, LLC (“DGS”). We
reclassified $45 million and $127 million, respectively, associated with salaries for employees at our wholly owned subsidiary, DGS, to salaries and
related costs. DGS provides staffing services to both internal and external customers. Previously, these costs were recorded in contracted
services. |
• |
|
Fuel taxes. We reclassified $34 million and $95 million,
respectively, to aircraft fuel expense. Previously, fuel taxes were recorded in other operating expense. |
• |
|
Crown Room Club. We reclassified $13 million and $38
million, respectively, associated with the expense of our Crown Room Club operations to several operating expense line items, primarily salaries and
related costs and contracted services. Our Crown Room Club provides amenities to members when traveling. Previously, these expenses were recorded net
in other, net revenue. |
• |
|
Arrangements with Other Airlines. We reclassified to
passenger revenue $20 million and $116 million, respectively, of revenue associated with (1) SkyMiles earned or redeemed on other airlines and (2)
frequent flyer miles of other airlines earned or redeemed on Delta. Previously, these amounts were reflected in other, net revenue. |
Cash and Cash Equivalents
We classify short-term, highly liquid
investments with maturities of three months or less when purchased as cash and cash equivalents. These investments are recorded at cost, which
approximates fair value.
Under our cash management system, we
utilize controlled disbursement accounts that are funded daily. Checks we issue that have not been presented for payment are recorded in accounts
payable on our Consolidated Balance Sheets. These amounts totaled $90 million and zero at September 30, 2007 and December 31, 2006,
respectively.
Short-Term Investments
At September 30, 2007 and December 31,
2006, our short-term investments were comprised primarily of auction rate securities. In accordance with SFAS No. 115, “Accounting for Certain
Investments in Debt and Equity Securities,” we record these investments as trading securities at fair value on our Consolidated Balance
Sheets.
Restricted Cash
Our restricted cash balance at
September 30, 2007 primarily relates to cash held in a grantor trust for the benefit of Delta pilots to fund the Pilot Obligation.
Restricted cash included in current
assets on our Consolidated Balance Sheets totaled $579 million and $750 million at September 30, 2007 and December 31, 2006, respectively. Restricted
cash recorded in other noncurrent assets on our Consolidated Balance Sheets totaled $14 million and $52 million at September 30, 2007 and December 31,
2006, respectively.
Long-Lived Assets
We record 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.
In connection with our adoption of fresh start reporting, we recorded the net book values of property and equipment to their estimated fair values and
revised the estimated useful lives of flight equipment. The estimated useful lives for major asset classifications are as follows:
17
|
|
|
|
Estimated Useful Life |
|
| Asset Classification |
|
|
|
Successor |
|
Predecessor |
Flight
equipment |
|
|
|
25–30
years |
|
25
years |
Capitalized
software |
|
|
|
5–7
years |
|
5–7
years |
Ground property
and equipment |
|
|
|
3–40
years |
|
3–40
years |
Leasehold
improvements |
|
|
|
Shorter of
lease term or
estimated useful life |
|
Shorter of
lease term or
estimated useful life |
Flight equipment under capital lease |
|
|
|
Shorter of lease term or
estimated useful life |
|
Shorter of lease term or
estimated useful life |
Goodwill and Intangible Assets
Goodwill reflects the excess of the
reorganization value of the Successor over the fair value of tangible and identifiable intangible assets from the adoption of fresh start reporting. We
recorded $12.4 billion of goodwill upon emergence from bankruptcy.
Identifiable intangible assets consist
primarily of trade name, takeoff and arrival slots, SkyTeam alliance agreements, marketing agreements, customer relationships and certain contracts.
These intangible assets, excluding marketing agreements, customer relationships and certain contracts, are indefinite-lived assets and are not
amortized. Marketing agreements, customer relationships and certain contracts are definite-lived intangible assets and are amortized over the estimated
economic life of the respective agreements and contracts.
In accordance with SFAS No. 142,
“Goodwill and Other Intangible Assets,” we apply a fair value-based impairment test to the net book value of goodwill and indefinite-lived
intangible assets on an annual basis and, if certain events or circumstances indicate that an impairment loss may have been incurred, on an interim
basis. The annual impairment test date for our goodwill and indefinite-lived intangible assets is October 1. In accordance with fresh start reporting,
we adjusted our Consolidated Balance Sheet to fair value on the Effective Date. We have not yet completed our annual impairment test.
In accordance with SOP 90-7, a
reduction in the valuation allowance associated with the realization of pre-emergence deferred tax assets will sequentially reduce the value of
recorded goodwill followed by other indefinite-lived assets until the net carrying cost of these assets is zero. During the five months ended September
30, 2007, we reduced goodwill by $257 million comprised of (1) $246 million associated with recognition of pre-emergence deferred tax assets and (2)
$11 million of other income tax reserve adjustments.
The following table presents
information about our intangible assets, including goodwill, at September 30, 2007 and December 31, 2006.
Indefinite-lived intangible assets
|
|
|
|
Successor |
|
Predecessor |
|
|
|
|
|
September 30,
2007 |
|
December 31,
2006 |
|
| (in millions) |
|
|
|
Gross
Carrying
Amount |
|
Gross
Carrying
Amount |
|
Goodwill |
|
|
|
$ |
12,169 |
|
|
$ 227 |
|
Trade
name |
|
|
|
|
880 |
|
|
1 |
|
Takeoff and
arrival slots |
|
|
|
|
635 |
|
|
71 |
|
SkyTeam
alliance |
|
|
|
|
480 |
|
|
– |
|
Other |
|
|
|
|
2 |
|
|
– |
|
Total |
|
|
|
$ |
14,166 |
|
|
$ 299 |
|
18
Definite-lived intangible assets
|
|
|
|
Successor |
|
Predecessor |
|
|
|
|
|
September 30, 2007 |
|
December 31, 2006 |
|
| (in millions) |
|
|
|
Esitmated
Life in
Year(s) |
|
Gross
Carrying
Amount |
|
Accumulated
Amortization |
|
Estimated
Life in
Years |
|
Gross
Carrying
Amount |
|
Accumulated
Amortization |
Marketing
agreements |
|
|
|
|
4 |
|
|
$ |
710 |
|
|
$ |
(81 |
) |
|
|
|
|
|
$ |
– |
|
|
$ |
– |
|
Contracts
|
|
|
|
17 to
34 |
|
|
205 |
|
|
|
(7 |
) |
|
|
|
|
|
|
– |
|
|
|
– |
|
Customer
relationships |
|
|
|
|
4 |
|
|
|
40 |
|
|
|
(4 |
) |
|
|
|
|
|
|
– |
|
|
|
– |
|
Operating
rights |
|
|
|
|
|
|
|
|
– |
|
|
|
– |
|
|
9 to
19 |
|
|
|
121 |
|
|
|
(104 |
) |
Other |
|
|
|
|
1 |
|
|
|
1 |
|
|
|
– |
|
|
3 to 5 |
|
|
|
3 |
|
|
|
(3 |
) |
Total |
|
|
|
|
|
|
|
$ |
956 |
|
|
$ |
(92 |
) |
|
|
|
$ |
124 |
|
|
$ |
(107 |
) |
Total amortization expense recognized
by the Successor for the three and five months ended September 30, 2007 was $57 million and $92 million, respectively. The following table summarizes
the expected amortization expense for the definite-lived intangible assets:
| (in millions) |
|
|
|
|
Three months
ending December 31, 2007 |
|
|
|
$ |
55 |
|
2008
|
|
|
|
|
217 |
|
2009
|
|
|
|
|
217 |
|
2010
|
|
|
|
|
217 |
|
2011
|
|
|
|
|
18 |
|
After 2011 |
|
|
|
|
140 |
|
Total |
|
|
|
$ |
864 |
|
Revenue Recognition and Frequent Flyer Program
We recognize revenue from the sale of
passenger tickets as air transportation is provided or when the ticket expires unused. Our SkyMiles program offers participants the opportunity to earn
travel awards primarily by flying on Delta, Delta Connection carriers and participating airlines. We also sell mileage credits in our frequent flyer
program to participating companies such as credit card companies, hotels and car rental agencies.
As a result of the adoption of fresh
start reporting, we revalued our SkyMiles frequent flyer award liability to estimated fair value. In accordance with SFAS 157, fair value represents
the estimated amount we would pay a third party to assume the obligation for miles expected to be redeemed under the SkyMiles program. We calculated
fair value based on a blended rate comprised of (1) our weighted average equivalent ticket rate which considers, among other factors, differing class
of service and domestic and international itineraries and (2) the weighted average of amounts paid to other SkyTeam alliance members. At April 30,
2007, we recorded deferred revenue equal to $0.0083 for each mile we estimate will ultimately be redeemed under the SkyMiles program.
We previously accounted for frequent
flyer miles earned on Delta flights on an incremental cost basis as an accrued liability and as operating expense, while miles sold to airline and
non-airline businesses were accounted for on a deferred revenue basis. For additional information concerning the accounting for the SkyMiles program
prior to May 1, 2007, see “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Application of
Critical Accounting Policies – Frequent Flyer Program” in our Form 10-K.
Upon emergence from bankruptcy, we
changed our accounting policy to a deferred revenue model for all frequent flyer miles. We now account for all miles earned and sold as separate
deliverables in a multiple element revenue arrangement as prescribed by EITF 00-21, “Revenue Arrangements with Multiple Deliverables.” Our
revenues are generated from the sale of passenger tickets, which includes air transportation and mileage credits. Our revenues are also generated from
the sale of miles to other airline and non-airline businesses, which may include a marketing premium.
19
We use the residual method for revenue
recognition. The fair value of the mileage credit component is determinable based on the selling rate per mile to other SkyTeam alliance members. The
fair values of the air transportation and marketing premium components are not determinable because they are not sold without mileage credits. Under
the residual method, the fair value of the mileage credits is deferred and the remaining portion of the sale is allocated to air transportation or the
marketing premium component, as applicable, and is recognized as revenue when the related services are provided.
The fair value of the mileage credit
earned is based on the low end of the range for our inter-airline SkyMiles selling rates to partner carriers, which is currently $0.0054 per mile.
Revenue associated with these mileage credits is recognized when miles are redeemed and services are provided based on the weighted average rate of all
miles that have been deferred. Miles earned after April 30, 2007, will be valued and the related revenue deferred using a rate of $0.0054 per mile,
which will be evaluated annually.
The value associated with mileage
credits that we estimate are not likely to be redeemed in the future is recognized as passenger revenue in proportion to actual mileage redemptions
over the period redemptions occur.
3. DERIVATIVE INSTRUMENTS
Fuel Hedging Program
As of September 30, 2007, we had hedged
20% of our projected aircraft fuel requirements for the December 2007 quarter using heating oil zero-cost collar contracts with weighted average
contract cap and floor prices of $2.13 and $1.96, respectively. These open fuel hedge contracts had an estimated fair value gain of $17 million at
September 30, 2007, which we recorded in prepaid expenses and other on our Consolidated Balance Sheet.
Prior to the adoption of fresh start
reporting, we had recorded as a component of shareowners’ deficit a $46 million unrealized gain related to our fuel hedging program. This gain
would have been recognized as an offset to aircraft fuel expense as the underlying fuel hedge contracts were settled. However, as required by fresh
start reporting, our accumulated shareowners’ deficit and accumulated other comprehensive loss were reset to zero. Accordingly, fresh start
reporting adjustments eliminated the unrealized gain and increased aircraft fuel expense by $21 million and $46 million for the three and five months
ended September 30, 2007, respectively.
Gains (losses) recorded on our
Consolidated Statements of Operations for the three months ended September 30, 2007 and 2006 related to our fuel hedge contracts are as
follows:
|
|
|
|
Aircraft Fuel and Related Taxes |
|
Other Income (Expense) |
|
|
|
|
|
Successor |
|
Predecessor |
|
Successor |
|
Predecessor |
| (in millions) |
|
|
|
Three
Months
Ended
September 30,
2007 |
|
Three
Months
Ended
September 30,
2006 |
|
Three
Months
Ended
September 30,
2007 |
|
Three
Months
Ended
September 30,
2006 |
Open fuel
hedge contracts |
|
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
(3 |
) |
|
$ |
(11 |
) |
Settled fuel hedge contracts |
|
|
|
|
17 |
|
|
|
(26 |
) |
|
|
4 |
|
|
|
(20 |
) |
Total |
|
|
|
$ |
17 |
|
|
$ |
(26 |
) |
|
$ |
1 |
|
|
$ |
(31 |
) |
20
Gains (losses) recorded on our
Consolidated Statements of Operations for the five months ended September 30, 2007, four months ended April 30, 2007 and nine months ended September
30, 2006 related to our fuel hedge contracts are as follows:
|
|
|
|
Aircraft Fuel and Related Taxes |
|
Other Income (Expense) |
|
|
|
|
|
Successor |
|
Predecessor |
|
Successor |
|
Predecessor |
|
| (in millions) |
|
|
|
Five
Months
Ended
September 30,
2007 |
|
Four
Months
Ended
April 30,
2007 |
|
Nine
Months
Ended
September 30,
2006 |
|
Five
Months
Ended
September 30,
2007 |
|
Four
Months
Ended
April 30,
2007 |
|
Nine
Months
Ended
September 30,
2006 |
Open fuel
hedge contracts |
|
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
(1 |
) |
|
$ |
15 |
|
|
$ |
(3 |
) |
Settled fuel hedge contracts |
|
|
|
|
21 |
|
|
|
(8 |
) |
|
|
(22 |
) |
|
|
5 |
|
|
|
(1 |
) |
|
|
(20 |
) |
Total |
|
|
|
$ |
21 |
|
|
$ |
(8 |
) |
|
$ |
(22 |
) |
|
$ |
4 |
|
|
$ |
14 |
|
|
$ |
(23 |
) |
For additional information about our
fuel hedging program, see Note 2 of the Notes to the Consolidated Financial Statements in our Form 10-K.
4. DEBT
The following table summarizes our debt
at September 30, 2007 and December 31, 2006:
|
|
|
|
Successor |
|
Predecessor |
| (in millions) |
|
|
|
September 30,
2007 |
|
December 31,
2006 |
Senior
Secured(1)
|
|
|
|
|
|
|
|
|
|
|
Senior
Secured Exit Financing Facility(2)
|
|
|
|
|
|
|
|
|
|
|
7.36%
First-Lien Synthetic Revolving Facility due April 30, 2012 |
|
|
|
$ |
567 |
|
|
$ |
– |
|
8.61% Second-Lien Term Loan due April 30, 2014 |
|
|
|
|
900 |
|
|
|
– |
|
|
|
|
|
|
1,467 |
|
|
|
– |
|
Secured
Super-Priority Debtor-in-Possession Credit Agreement(2)
|
|
|
|
|
|
|
|
|
|
|
8.12% GE DIP
Credit Facility Term Loan A due March 16, 2008 |
|
|
|
|
– |
|
|
|
600 |
|
10.12% GE DIP
Credit Facility Term Loan B due March 16, 2008 |
|
|
|
|
– |
|
|
|
700 |
|
12.87% GE DIP Credit Facility Term Loan C due March 16, 2008 |
|
|
|
|
– |
|
|
|
600 |
|
|
|
|
|
|
– |
|
|
|
1,900 |
|
Other
senior secured debt(2)
|
|
|
|
|
|
|
|
|
|
|
14.11% Amex Facility Note due in installments during 2007 |
|
|
|
|
– |
|
|
|
176 |
|
|
|
|
|
|
– |
|
|
|
176 |
|
Secured(1)
|
|
|
|
|
|
|
|
|
|
|
Series
2000-1 Enhanced Equipment Trust Certificates (“EETC”)
|
|
|
|
|
|
|
|
|
|
|
7.38% Class
A-1 due in installments from 2007 to May 18, 2010 |
|
|
|
|
120 |
|
|
|
136 |
|
7.57% Class
A-2 due November 18, 2010 |
|
|
|
|
738 |
|
|
|
738 |
|
7.92% Class B due November 18, 2010 |
|
|
|
|
182 |
|
|
|
182 |
|
|
|
|
|
|
1,040 |
|
|
|
1,056 |
|
Series
2001-1 EETC
|
|
|
|
|
|
|
|
|
|
|
6.62% Class
A-1 due in installments from 2007 to March 18, 2011 |
|
|
|
|
127 |
|
|
|
130 |
|
7.11% Class
A-2 due September 18, 2011 |
|
|
|
|
571 |
|
|
|
571 |
|
7.71% Class B due September 18, 2011 |
|
|
|
|
207 |
|
|
|
207 |
|
|
|
|
|
|
905 |
|
|
|
908 |
|
Series
2001-2 EETC(2)(3)
|
|
|
|
|
|
|
|
|
|
|
7.35% Class A
due in installments from 2007 to December 18, 2011 |
|
|
|
|
291 |
|
|
|
313 |
|
8.55% Class B
due in installments from 2007 to December 18, 2011 |
|
|
|
|
124 |
|
|
|
145 |
|
9.90% Class C due in installments from 2007 to December 18, 2011 |
|
|
|
|
55 |
|
|
|
64 |
|
|
|
|
|
|
470 |
|
|
|
522 |
|
21
|
|
|
|
Successor |
|
Predecessor |
| (in millions) |
|
|
|
September 30,
2007 |
|
December 31,
2006 |
Series 2002-1 EETC
|
|
|
|
|
|
|
|
|
|
|
6.72% Class
G-1 due in installments from 2007 to January 2, 2023 |
|
|
|
|
421 |
|
|
|
454 |
|
6.42% Class
G-2 due July 2, 2012 |
|
|
|
|
370 |
|
|
|
370 |
|
7.78% Class C due in installments from 2007 to January 2, 2012 |
|
|
|
|
95 |
|
|
|
111 |
|
|
|
|
|
|
886 |
|
|
|
935 |
|
Series
2003-1 EETC(2)
|
|
|
|
|
|
|
|
|
|
|
6.11% Class G
due in installments from 2007 to January 25, 2008 |
|
|
|
|
272 |
|
|
|
291 |
|
9.11% Class C due in installments from 2007 to January 25, 2008 |
|
|
|
|
135 |
|
|
|
135 |
|
|
|
|
|
|
407 |
|
|
|
426 |
|
General
Electric Capital Corporation(“GECC”)(2)(4)(5)
|
|
|
|
|
|
|
|
|
|
|
9.86% Notes
due in installments from 2007 to July 7, 2011 |
|
|
|
|
145 |
|
|
|
168 |
|
9.86% Notes
due in installments from 2007 to July 7, 2011(3) |
|
|
|
|
103 |
|
|
|
119 |
|
7.33% Notes due in installments from 2007 to September 27, 2014(6) |
|
|
|
|
415 |
|
|
|
271 |
|
|
|
|
|
|
663 |
|
|
|
558 |
|
Other
secured debt(2)
|
|
|
|
|
|
|
|
|
|
|
8.70% Senior
Secured Notes due in installments from 2007 to September 29, 2012 |
|
|
|
|
169 |
|
|
|
189 |
|
4.95% to 7.56% Other secured financings due in installments from 2007 to September 28, 2022(7)(8) |
|
|
|
|
1,001 |
|
|
|
1,354 |
|
Total senior secured and secured debt |
|
|
|
$ |
7,008 |
|
|
$ |
8,024 |
|
Unsecured(8)
|
|
|
|
|
|
|
|
|
|
|
Massachusetts Port Authority Special Facilities Revenue Bonds
|
|
|
|
|
|
|
|
|
|
|
5.0–5.5%
Series 2001A due in installments from 2012 to January 1, 2027 |
|
|
|
$ |
– |
|
|
$ |
338 |
|
4.25% Series
2001B due in installments from 2027 to January 1, 2031(2) |
|
|
|
|
– |
|
|
|
80 |
|
4.3% Series
2001C due in installments from 2027 to January 1, 2031(2) |
|
|
|
|
– |
|
|
|
80 |
|
8.75% Boston
Terminal A due in installments from 2007 to June 30, 2016 |
|
|
|
|
209 |
|
|
|
– |
|
Development Authority of Clayton County, loan agreement(2)(3)
|
|
|
|
|
|
|
|
|
|
|
3.92% Series
2000A due June 1, 2029 |
|
|
|
|
65 |
|
|
|
65 |
|
4.00% Series
2000B due May 1, 2035 |
|
|
|
|
110 |
|
|
|
110 |
|
4.00% Series
2000C due May 1, 2035 |
|
|
|
|
120 |
|
|
|
120 |
|
Other
unsecured debt
|
|
|
|
|
|
|
|
|
|
|
7.7% Notes
due December 15, 2005 |
|
|
|
|
– |
|
|
|
122 |
|
7.9% Notes
due December 15, 2009 |
|
|
|
|
– |
|
|
|
499 |
|
9.75%
Debentures due May 15, 2021 |
|
|
|
|
– |
|
|
|
106 |
|
8.3% Notes
due December 15, 2029 |
|
|
|
|
– |
|
|
|
925 |
|
8.125% Notes
due July 1, 2039 |
|
|
|
|
– |
|
|
|
538 |
|
10.0% Senior
Notes due August 15, 2008 |
|
|
|
|
– |
|
|
|
248 |
|
8.0%
Convertible Senior Notes due June 3, 2023 |
|
|
|
|
– |
|
|
|
350 |
|
2 7/8%
Convertible Senior Notes due February 18, 2024 |
|
|
|
|
– |
|
|
|
325 |
|
3.01% to 8.00% Other unsecured debt due in installments from 2007 to December 1, 2030 |
|
|
|
|
71 |
|
|
|
703 |
|
Total unsecured debt |
|
|
|
|
575 |
|
|
|
4,609 |
|
Total secured and unsecured debt, including liabilities subject to compromise |
|
|
|
|
7,583 |
|
|
|
12,633 |
|
Plus: unamortized premiums, net |
|
|
|
|
185 |
|
|
|
– |
|
Total secured and unsecured debt, including liabilities subject to compromise |
|
|
|
|
7,768 |
|
|
|
12,633 |
|
Less: pre-petition debt classified as liabilities subject to compromise(7)(8) |
|
|
|
|
– |
|
|
|
(4,945 |
) |
Total debt |
|
|
|
|
7,768 |
|
|
|
7,688 |
|
Less: current maturities |
|
|
|
|
(819 |
) |
|
|
(1,466 |
) |
Total long-term debt |
|
|
|
$ |
6,949 |
|
|
$ |
6,222 |
|
22
(1) |
|
Our senior secured debt and secured debt is collateralized by
first liens, and in many cases second and junior liens, on substantially all of our assets, including but not limited to accounts receivable, owned
aircraft, certain spare engines, certain spare parts, certain flight simulators, ground equipment, landing slots, international routes, equity
interests in certain of our domestic subsidiaries, intellectual property and real property. For more information on the Senior Secured Exit Financing
Facility, see “Exit Financing” in this Note. |
(2) |
|
Our variable interest rate long-term debt is shown using
interest rates which represent LIBOR or Commercial Paper plus a specified margin, as provided for in the related agreements. The rates shown were in
effect at September 30, 2007, if applicable. For our long-term debt discharged as part of our emergence from bankruptcy, the rates shown were in effect
at December 31, 2006. |
(3) |
|
In October 2007, we completed the issuance and sale of $1.4
billion of Pass Through Certificates, Series 2007-1 (the “Certificates”). The proceeds from this offering are primarily being used to prepay
certain existing aircraft-secured financings. For additional information regarding the Certificates, see “2007-1 EETC” below. |
(4) |
|
For information about the letters of credit issued by, and our
related reimbursement obligation to, GECC, see “Letter of Credit Enhanced Special Facility Bonds” and “Reimbursement Agreement and Other
GECC Agreements” in Note 6 of the Notes to the Consolidated Financial Statements in our Form 10-K. |
(5) |
|
For additional information about this debt, as amended, see
“Reimbursement Agreement and Other GECC Agreements” in Note 6 of the Notes to the Consolidated Financial Statements in our Form
10-K. |
(6) |
|
On September 27, 2007, we and GECC amended this credit facility,
among other things, to increase to $415 million the outstanding principal amount of borrowings under this facility and to reduce the interest rate we
pay on these borrowings. |
(7) |
|
In accordance with SOP 90-7, substantially all of our unsecured
debt had been classified as liabilities subject to compromise at December 31, 2006. Additionally, certain of our undersecured debt had been classified
as liabilities subject to compromise at December 31, 2006. For more information on liabilities subject to compromise, see Note 1. |
(8) |
|
Certain of our secured and undersecured debt, which was
classified as liabilities subject to compromise at December 31, 2006, has been reclassified from liabilities subject to compromise to long-term debt or
converted to operating leases as of emergence in connection with restructuring initiatives during our Chapter 11 reorganization. |
Future Maturities
The following table summarizes the
contractual maturities of our debt, including current maturities, at September 30, 2007:
Years Ending December 31,
(in
millions)
|
|
|
|
Principal
Amount |
Three months
ending December 31, 2007 |
|
|
|
$ |
95 |
|
2008
|
|
|
|
|
803 |
|
2009
|
|
|
|
|
477 |
|
2010
|
|
|
|
|
1,379 |
|
2011
|
|
|
|
|
1,204 |
|
After 2011 |
|
|
|
|
3,810 |
|
Total |
|
|
|
$ |
7,768 |
|
Exit Financing
On April 30, 2007 (the “Closing
Date”), we entered into the Exit Facilities to borrow up to $2.5 billion from a syndicate of lenders. Proceeds from a portion of the Exit
Facilities and existing cash were used to repay the DIP Facility. The remainder of the proceeds from the Exit Facilities and the letters of credit
issued thereunder are available for general corporate purposes.
The Exit Facilities consist of a $1.0
billion first-lien revolving credit facility, up to $400 million of which may be used for the issuance of letters of credit (the “Revolving
Facility”), a $600 million first-lien synthetic revolving facility (the “Synthetic Facility”) (together with the Revolving Facility, the
“First-Lien Facilities”), and a $900 million second-lien term loan facility (the “Term Loan” or the “Second-Lien
Facility”). The scheduled maturity dates for the First-Lien Facilities and the Second-Lien Facility are the fifth and seventh anniversaries,
respectively, of the Closing Date of the Exit Facilities.
The First-Lien Facilities bear
interest, at our option, at LIBOR plus 2.0% or an index rate plus 1.0%; the Second-Lien Facility bears interest, at our option, at LIBOR plus 3.25% or
an index rate plus 2.25%. Interest is payable (1) with respect to LIBOR loans, on the last day of each relevant interest period (defined as one, two,
three or six months or any longer period available to all lenders under the relevant facility) and, in the
23
case of any interest period longer
than three months, on each successive date three months after the first day of such interest period, and (2) with respect to indexed loans, quarterly
in arrears.
Our obligations under the Exit
Facilities are guaranteed by substantially all of our domestic subsidiaries (the “Guarantors”). The Exit Facilities and the related
guarantees are secured by liens on substantially all of our and the Guarantors’ present and future assets that previously secured the DIP Facility
on a first priority basis (the “Collateral”). The First-Lien Facilities are secured by a first priority security interest in the Collateral.
The Second-Lien Facility is secured by a second priority security interest in the Collateral.
We are required to make mandatory
repayments of the Exit Facilities, subject to certain reinvestment rights, from the sale of any Collateral or receipt of insurance proceeds in respect
of any Collateral in the event we fail to maintain the minimum collateral coverage ratios described below. Any portion of the Exit Facilities that is
repaid through mandatory prepayments may not be reborrowed. Any portion of the Term Loan that is voluntarily repaid may also not be
reborrowed.
The Exit Facilities include
affirmative, negative and financial covenants that restrict our ability to, among other things, incur additional secured indebtedness, make
investments, sell or otherwise dispose of assets if not in compliance with the collateral coverage ratio tests, pay dividends or repurchase stock.
These covenants provide us with increased financial and operating flexibility as compared to the DIP Facility, but may still have a material adverse
impact on our operations.
The Exit Facilities contain financial
covenants that require us to:
• |
|
maintain a minimum fixed charge coverage ratio (defined as the
ratio of (1) earnings before interest, taxes, depreciation, amortization and aircraft rent, and subject to other adjustments to net income
(“EBITDAR”) to (2) the sum of gross cash interest expense, cash aircraft rent expense and the interest portion of our capitalized lease
obligations, for successive trailing 12-month periods ending at each quarter-end date through the maturity date of the respective Exit Facilities),
which minimum ratio will range from 1.00:1 to 1.20:1 in the case of the First-Lien Facilities and from 0.85:1 to 1.02:1 in the case of the Second-Lien
Facility; |
• |
|
maintain unrestricted cash, cash equivalents and short-term
investments of not less than $750 million in the case of the First-Lien Facilities and $650 million in the case of the Second-Lien Facility, in each
case at all times following the 30th day after the Closing Date; |
• |
|
maintain a minimum total collateral coverage ratio (defined as
the ratio of (1) certain of our Collateral that meets specified eligibility standards (“Eligible Collateral”) to (2) the sum of the aggregate
outstanding exposure under the First-Lien Facilities and the Second-Lien Facility and the aggregate termination value of certain hedging agreements) of
125% at all times; and |
• |
|
in the case of the First-Lien Facilities, also maintain a
minimum first-lien collateral coverage ratio (together with the total collateral coverage ratio described above, the “collateral coverage
ratios”) (defined as the ratio of (1) Eligible Collateral to (2) the sum of the aggregate outstanding exposure under the First Lien Facilities and
the aggregate termination value of certain hedging agreements) of 175% at all times. |
The Exit Facilities contain events of
default customary for Chapter 11 exit financings, including cross-defaults to other material indebtedness and certain change of control events. The
Exit Facilities also include events of default specific to our business, including if all or substantially all of our flights and other operations are
suspended for more than two consecutive days (other than as a result of a Federal Aviation Administration (the “FAA”) suspension due to
extraordinary events similarly affecting other major U.S. air carriers). Upon the occurrence of an event of default, the outstanding obligations under
the Exit Facilities may be accelerated and become due and payable immediately.
24
Boston Airport Terminal Project
During 2001, we entered into lease and
financing agreements with Massport for the redevelopment and expansion of Terminal A at Boston’s Logan International Airport. The construction of
the new terminal was 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 an agreement with Massport and issued a guarantee to the bond trustee covering the payment of the debt
service.
As part of our Chapter 11 proceedings,
we entered into a settlement agreement with Massport, the bond trustee and the bond insurer providing, among other things, for a reduction in our
leasehold premises, the ability to return some additional space in 2007 and 2011, the reduction of our lease term to 10 years and the elimination of
the guarantee of debt service. On February 14, 2007, the Bankruptcy Court approved the settlement agreement, the assumption of the amended lease and
the restructuring of related agreements.
Due to the settlement with Massport, we
derecognized $498 million of debt associated with the Special Facility Revenue Bonds offset in part primarily by (1) $155 million in asset charges
related to a reduction in space and (2) $134 million associated with the recording of new debt. As a result, we recorded a net reorganization gain of
$126 million for the three months ended March 31, 2007.
In connection with our adoption of
fresh start reporting, the remaining Massport assets and debt were revalued at estimated fair value, resulting in (1) a $70 million increase in the
fair value of the debt and (2) a $41 million reduction in the fair value of the assets.
Cincinnati Airport Settlement
On April 24, 2007, the Bankruptcy Court
approved the Cincinnati Airport Settlement Agreement with the Kenton County Airport Board (“KCAB”) and UMB Bank, N.A., the trustee (the
“Bond Trustee”) for the Series 1992 Bonds (as defined below), to restructure certain of our lease and other obligations at the
Cincinnati-Northern Kentucky International Airport (the “Cincinnati Airport”). The Series 1992 Bonds include: (1) the $419 million Kenton
County Airport Board Special Facilities Revenue Bonds, 1992 Series A (Delta Air Lines, Inc. Project), $397 million of which were then outstanding; and
(2) the $19 million Kenton County Airport Board Special Facilities Revenue Bonds, 1992 Series B (Delta Air Lines, Inc. Project), $16 million of which
were then outstanding.
The Cincinnati Airport Settlement
Agreement, among other things:
• |
|
provides for agreements under which we will continue to use
certain facilities at the Cincinnati Airport at substantially reduced costs; |
• |
|
settles all disputes among us, the KCAB, the Bond Trustee and
the former, present and future holders of the 1992 Bonds (the “1992 Bondholders”); |
• |
|
gives the Bond Trustee, on behalf of the 1992 Bondholders, a
$260 million allowed general, unsecured pre-petition claim in our bankruptcy proceedings; and |
• |
|
provides for our issuance of $66 million principal amount of
senior unsecured notes to the Bond Trustee on behalf of the 1992 Bondholders. |
On May 3, 2007, the parties to the
Cincinnati Airport Settlement Agreement implemented that agreement in accordance with its terms. The Objecting Bondholders challenged the settlement in
the U.S. District Court for the Southern District of New York (the “District Court”). In August 2007, the District Court affirmed the
Bankruptcy Court’s order approving the settlement. The Objecting Bondholders have appealed the decision of the District Court to the U.S. Court of
Appeals for the Second Circuit.
2007-1 EETC
In October 2007, we completed the
issuance and sale of $1.4 billion of the Certificates. The Certificates were issued in three classes, comprised of $924 million of Class A Certificates
with an interest rate of 6.821% per annum, $265 million of Class B Certificates with an interest rate of 8.021% per annum and $220
million of Class C Certificates with an interest rate of 8.954% per annum. Each class of Certificates was issued by a different pass through trust.
25
The proceeds from the sale of the
Certificates were placed in escrow to be used to acquire equipment notes (the “Equipment Notes”) from us in an aggregate principal amount of
$1.4 billion. The Equipment Notes will be secured by 36 Boeing aircraft delivered to us from 1998 to 2002. The aircraft are currently securing existing
financings described below. The Equipment Notes will be issued in three series, bearing interest and in principal amounts corresponding to the
respective class of Certificates, within 90 days of the date of the closing of the sale of the Certificates.
The interest on the escrowed funds is
payable on February 10, 2008 and interest on the Equipment Notes is payable semiannually on each February 10 and August 10, beginning on February 10,
2008. The principal payments on the Equipment Notes are scheduled on February 10 and August 10 in certain years, beginning on February 10, 2008. The
final payments will be due on August 10, 2022, in the case of the Series A and Series B Equipment Notes, and August 10, 2014, in the case of the Series
C Equipment Notes. The Equipment Notes issued with respect to each aircraft will be secured by a lien on such aircraft and will also be
cross-collateralized by the other aircraft. Payments on the Equipment Notes held in each pass through trust will be passed through to the certificate
holders of such trust.
We are using the proceeds from the
issuance of the Equipment Notes for the prepayment of $961 million of existing financings, which are collectively secured by the 36 aircraft, and for
general corporate purposes. The existing financings that are being prepaid include (1) our Series 2001-2 EETC, (2) a credit facility with GECC referred
to as the Aircraft Loan under the heading “Reimbursement Agreement and Other GECC Agreements” in Note 6 to the Notes to our Consolidated
Financial Statements in our Form 10-K and (3) the bond issues that are backed by a letter of credit facility provided by GECC as described under the
heading “Letter of Credit Enhanced Special Facility Bonds” in Note 6 of the Notes to the Consolidated Financial Statements in our Form
10-K.
The Certificates were sold in a private
placement to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended. Pursuant to a registration rights agreement,
which we entered into upon the issuance of the Certificates, we expect to file an exchange offer registration statement or, under specific
circumstances, a shelf registration statement with respect to the Certificates.
Other
The Exit Facilities contain certain
affirmative, negative and financial covenants, which are described above. In addition, as is customary in the airline industry, our aircraft lease and
financing agreements require that we maintain certain levels of insurance coverage, including war-risk insurance. For additional information about our
war-risk insurance currently provided by the U.S. Government, see Note 5.
We were in compliance with these
covenant requirements at September 30, 2007.
5. PURCHASE COMMITMENTS AND CONTINGENCIES
Aircraft Order Commitments
Future commitments for aircraft on firm
order as of September 30, 2007 are estimated to be approximately $3.5 billion. The following table shows the timing of these
commitments:
Year Ending December 31,
(in millions) |
|
|
|
Amount |
Three months
ending December 31, 2007 |
|
|
|
$ |
315 |
|
2008
|
|
|
|
|
1,273 |
|
2009
|
|
|
|
|
1,225 |
|
2010 |
|
|
|
|
712 |
|
Total |
|
|
|
$ |
3,525 |
|
26
Our aircraft order
commitments as of September 30, 2007 consist of firm orders to purchase eight B-777-200LR aircraft, 10 B-737-700 aircraft, 43 B-737-800 aircraft and 24
CRJ-900 aircraft as discussed below. Our firm orders to purchase 43 B-737-800 aircraft include 41 B-737-800 aircraft, which we have entered into
definitive agreements to sell to third parties immediately following delivery of these aircraft to us by the manufacturer. These sales will reduce our
future commitments by approximately $1.7 billion during the period from the three months ending December 31, 2007 through 2010.
We entered into agreements with
Bombardier (1) in January 2007 to purchase 30 CRJ-900 aircraft for delivery between September 2007 and February 2010 (the “January 2007
Agreement”) and (2) in May 2007 to purchase 14 CRJ-900 aircraft for delivery between August 2007 and February 2008 (the “May 2007
Agreement”). These aircraft will be delivered in two-class, 76 seat configuration. We have available to us long-term, secured financing
commitments to fund a substantial portion of the aircraft purchase price for these orders.
We expect these aircraft will be
operated by regional air carriers under our contract carrier agreements. Our agreements with Bombardier permit us to assign to other carriers our
CRJ-900 aircraft orders and related support provisions. In April 2007, we assigned to a regional air carrier our orders to purchase 16 CRJ-900 aircraft
under the January 2007 Agreement (the “CRJ-900 Assigned Aircraft”). The remaining 14 CRJ-900 aircraft under the January 2007 Agreement will
be delivered between September 2007 and May 2009. During the September 2007 quarter, we accepted delivery of one aircraft under the January 2007
Agreement and three aircraft under the May 2007 Agreement.
The above table does not include any
commitments by us for the CRJ-900 Assigned Aircraft because the regional air carrier is required to purchase and make the related payments for those
aircraft. While we would be required to purchase the CRJ-900 Assigned Aircraft in the event of a default by the regional air carrier of its purchase
obligation, we currently believe such an event is not likely.
We have also entered into agreements to
lease 13 B-757-200ER aircraft, 10 of which we will lease for seven years and three months and three of which we will lease for five years. We accepted
delivery of six of these aircraft in the September 2007 quarter. We expect to receive the remaining seven aircraft in the December 2007 and March 2008
quarters.
We have also signed a letter of intent
with a third party to lease two B-757-200ER aircraft, which will be delivered to us during the December 2007 and March 2008 quarters. We will lease
each of these aircraft for seven years. This transaction is subject to the completion of definitive documentation.
Contract Carrier Agreements
Delta Connection Carriers
As of September 30, 2007, we had
contract carrier agreements with 10 regional air carriers (“Connection Carriers”), including our wholly owned subsidiary, Comair, and nine
unaffiliated carriers.
Capacity Purchase Agreements.
During the five months ended September 30, 2007 and the four months ended April 30, 2007, six carriers operated as contract carriers for us (in
addition to Comair) pursuant to capacity purchase agreements. Under these agreements, the regional air carriers operate some or all of their aircraft
using our flight code, and we schedule those aircraft, sell the seats on those flights and retain the related revenues. We pay those airlines an
amount, as defined in the applicable agreement, which is based on a determination of their cost of operating those flights and other factors intended
to approximate market rates for those services. We have entered into more than one capacity purchase agreement with two of these
carriers.
The following table shows, by carrier
and contract, (1) the number of aircraft in Delta Connection operation as of September 30, 2007, (2) the number of aircraft scheduled to be in Delta
Connection operation as of December 31, 2007, (3) the number of aircraft scheduled to be in Delta Connection operation immediately prior to the
expiration date of the agreement and (4) the expiration date of the agreement:
27
| Carrier |
|
|
|
Aircraft
in
Operation
as of
September
30,
2007 |
|
Number of
Aircraft
Scheduled
to be in
Operation
as of
December 31,
2007 |
|
Number of
Aircraft
Scheduled
to be in
Operation
Immediately
Prior to the
Expiration Date
of the Agreement |
|
Expiration
Date of
Agreement |
Atlantic
Southeast Airlines, Inc. (“ASA”) |
|
|
|
|
153 |
|
|
|
153 |
|
|
|
149 |
|
|
|
2020 |
|
SkyWest
Airlines, Inc. (“SkyWest”) |
|
|
|
|
82 |
|
|
|
82 |
|
|
|
82 |
|
|
|
2020 |
|
SkyWest/ASA(1) |
|
|
|
|
10 |
|
|
|
12 |
|
|
|
12 |
|
|
|
2012 |
|
Chautauqua
|
|
|
|
|
39 |
|
|
|
39 |
|
|
|
24 |
|
|
|
2016 |
|
Freedom
(ERJ-145 aircraft)(2) |
|
|
|
|
36 |
|
|
|
36 |
|
|
|
22 |
|
|
|
2017 |
|
Freedom
(CRJ-900 aircraft)(2) |
|
|
|
|
– |
|
|
|
2 |
|
|
|
14 |
|
|
|
2017 |
|
Shuttle
America |
|
|
|
|
16 |
|
|
|
16 |
|
|
|
16 |
|
|
|
2019 |
|
ExpressJet
Airlines, Inc. (“ExpressJet”) |
|
|
|
|
10 |
|
|
|
10 |
|
|
|
10 |
|
|
|
2009 |
|
Pinnacle Airlines, Inc. |
|
|
|
|
– |
|
|
|
1 |
|
|
|
16 |
|
|
|
2019 |
|
|
|
The table above was not subject to the review procedures of our
Independent Registered Public Accounting Firm.
|
(1) |
|
We have an agreement with SkyWest, ASA and Sky West, Inc., the
parent company of SkyWest and ASA, under which the parties collectively determine whether the aircraft are operated by SkyWest or ASA. |
(2)
|
|
We have separate agreements with Freedom that involve different
aircraft types, expiration dates and terms. These agreements are shown separately to illustrate the variance in the number of aircraft that will be
operated during the term of each agreement. |
The following table shows the available
seat miles (“ASMs”) and revenue passenger miles (“RPMs”) operated for us under capacity purchase agreements with the following six
unaffiliated regional air carriers for the three and nine months ended September 30, 2007 and 2006:
• |
|
ASA, SkyWest, Chautauqua, Freedom and Shuttle America for all
periods presented; and |
• |
|
ExpressJet from February 27, 2007 to September 30,
2007. |
|
|
|
|
Three Months Ended
September 30, |
|
Nine Months Ended
September 30, |
|
| (in millions) |
|
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
ASMs
|
|
|
|
|
4,691 |
|
|
|
4,033 |
|
|
|
13,373 |
|
|
|
11,310 |
|
RPMs
|
|
|
|
|
3,771 |
|
|
|
3,107 |
|
|
|
10,551 |
|
|
|
8,820 |
|
Number of aircraft operated, end of period |
|
|
|
|
346 |
|
|
|
324 |
|
|
|
346 |
|
|
|
324 |
|
|
|
The table above was not subject to the review procedures of our
Independent Registered Public Accounting Firm.
|
Revenue Proration Agreements. We
have revenue proration agreements with American Eagle Airlines, Inc., Big Sky Airlines and ExpressJet. These agreements establish a fixed dollar or
percentage division of revenues for tickets sold to passengers traveling on connecting flight itineraries.
Contingencies Related to Termination of Contract Carrier
Agreements
We may terminate the Chautauqua and
Shuttle America agreements without cause at any time after May 2010 and July 2015, respectively, by providing certain advance notice. If we terminate
either the Chautauqua or Shuttle America agreements without cause, Chautauqua or Shuttle America, respectively, has the right to (1) assign to us
leased aircraft that the airline operates for us, provided we are able to continue the leases on the same terms the airline had prior to the assignment
and (2) require us to purchase or lease any of the aircraft that the airline owns and operates for us at the time of the termination. If we are
required to purchase aircraft owned by Chautauqua or Shuttle America, the purchase price would be equal to the amount necessary to (1) reimburse
Chautauqua or Shuttle America for the equity it provided to purchase the aircraft and (2) repay in full any debt outstanding at such time that is not
being assumed in connection with such purchase. If we are required to lease aircraft owned by Chautauqua or Shuttle America, the lease would have (1) a
rate equal to the debt payments of Chautauqua or Shuttle America for the debt financing of the aircraft calculated as if 90% of the
aircraft was debt financed by Chautauqua or Shuttle America and (2) other specified terms and conditions.
28
We estimate that the total fair values,
determined as of September 30, 2007, of the aircraft that Chautauqua or Shuttle America could assign to us or require that we purchase if we terminate
without cause our contract carrier agreements with those airlines (the “Put Right”) are $466 million and $353 million, respectively. The
actual amount that we may be required to pay in these circumstances may be materially different from these estimates. If the Chautauqua or Shuttle
America Put Right is exercised, we must also pay to the exercising carrier 10% interest (compounded monthly) on the equity the carrier provided when it
purchased the put aircraft. These equity amounts for Chautauqua and Shuttle America total $44 million and $66 million, respectively.
Legal Contingencies
We are involved in various legal
proceedings relating to 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 the damages
being sought.
Comair Flight 5191
On August 27, 2006, Comair Flight 5191
crashed shortly after take-off in a field near the Blue Grass Airport in Lexington, Kentucky. All 47 passengers and two members of the flight crew died
in the accident. The third crew member survived with severe injuries. Lawsuits arising out of this accident have been filed against our wholly owned
subsidiary, Comair, on behalf of 44 passengers. A number of lawsuits also name Delta as a defendant. The lawsuits generally assert claims for wrongful
death and related personal injuries, and seek unspecified damages, including punitive damages in most cases. As of October 30, 2007, settlements have
been reached with the families of 15 of the 47 passengers. Lawsuits are currently pending in the U.S. District Court for the Eastern District of
Kentucky and in state court in Fayette County, Kentucky. The FAA, named as a third-party defendant in the passenger actions by Comair, has recently
removed all the cases pending in state court to federal court. The matters pending in the Eastern District of Kentucky have been consolidated as
“In Re Air Crash at Lexington, Kentucky, August 27, 2006, Master File No. 5:06-CV-316.”
Comair and Delta continue to pursue
settlement negotiations with the plaintiffs in these lawsuits. The settled cases have been dismissed with prejudice.
Comair has filed direct actions in the
U.S. District Court for the Eastern District of Kentucky against the United States (based on the actions of the FAA), and in state court in Fayette
County, Kentucky, against the Lexington Airport Board and certain other Lexington airport defendants. Comair has also filed third party complaints
against these same parties in each of the pending passenger lawsuits. These actions seek to apportion liability for damages arising from this accident
among all responsible parties.
During 2006, we recorded a long-term
liability with a corresponding long-term receivable from our insurance carriers in other noncurrent liabilities and assets, respectively, on our
Consolidated Balance Sheet relating to the Comair Flight 5191 accident. These amounts may be revised as additional information becomes available and as
settlements are finalized. We carry aviation risk liability insurance and believe that this insurance is sufficient to cover any liability likely to
arise from this accident.
Credit Card Processing Agreements
Visa/Mastercard Processing Agreement
On June 8, 2007, we entered into an
amended and restated Visa/MasterCard credit card processing agreement (the “Amended Processing Agreement”) that, among other things, resulted
in the release by the Processor of the Reserve under the agreement and extended the term of the agreement to October 31, 2008.
29
Prior to the amendment, the Processor
was permitted to withhold payment from our receivables for the Reserve. The Processing Agreement also allowed us to substitute a letter of credit,
which was issued by Merrill Lynch, for a portion of the Reserve equal to the lesser of $300 million and 45% of the unflown ticket
liability.
Including the letter of credit, the
Reserve, which adjusted daily, totaled approximately $1.1 billion prior to entering into the Amended Processing Agreement. On May 31, 2007, Delta and
the Processor entered into a letter agreement pursuant to which the Processor surrendered the letter of credit and correspondingly reduced the amount
of the Reserve. Upon entering into the Amended Processing Agreement, the Processor returned to us the remaining $804 million Reserve.
The Amended Processing Agreement
provides that no future Reserve is required except in certain circumstances, including events that in the reasonable determination of the Processor
would have a material adverse effect on us.
Further, if either we or the Processor
determines not to extend the term of the Amended Processing Agreement beyond October 31, 2008, then the Processor may maintain a Reserve during the
period of 90 days before the expiration date of the agreement. The Reserve would equal approximately 100% of the value of tickets for which we had
received payment under the Amended Processing Agreement, but which have not been used for travel, unless we have unrestricted cash above a level
specified in the Amended Processing Agreement. Such a Reserve would be released to us following termination of the Amended Processing Agreement as
tickets are used for travel.
American Express
Our American Express credit card
processing agreement, entered into in 2004 and amended in 2005, provides that American Express is permitted to withhold our receivables in certain
circumstances. These circumstances include a material increase in the risk that we will be unable to meet our obligations under the agreement or our
business undergoing a material adverse change. No amounts were withheld as of September 30, 2007 and December 31, 2006.
Other Contingencies
Regional Airports Improvement Corporation
(“RAIC”)
We have obligations under a facilities
agreement with the RAIC to pay the bond trustee amounts sufficient to pay the debt service on $47 million in Facilities Sublease Refunding Revenue
Bonds. These bonds were issued in 1996 to refinance bonds that financed the construction of certain airport and terminal facilities we use at Los
Angeles International Airport. We also provide a guarantee to the bond trustee covering payment of the debt service.
General Indemnifications
We are the lessee under many commercial
real estate leases. It is common in these transactions for us, as the lessee, to agree to indemnify the lessor and the lessor’s related parties
for tort, environmental and other liabilities that arise out of or relate to our use or occupancy of the leased premises. This type of indemnity would
typically 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 occupancy of the leased premises. This indemnity often extends to related liabilities arising from the negligence
of the indemnified parties, but usually excludes any liabilities caused by either their sole or gross negligence and their 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 of those parties’ related persons, against virtually any liabilities that might arise from the condition, use or operation of
the aircraft or such other equipment.
30
We believe that our insurance would
cover most of our exposure to such liabilities and related indemnities associated with the types of lease and financing agreements described above,
including real estate leases. However, our insurance does not typically cover environmental liabilities, although we have certain policies in place to
meet the requirements of applicable environmental laws.
Certain of our aircraft and other
financing transactions include provisions which require us to make payments 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 subject 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 because we cannot predict (1) when and under what circumstances
these provisions may be triggered and (2) the amount that would be payable if the provisions were triggered because the amounts would be based on facts
and circumstances existing at such time.
Employees Under Collective Bargaining
Agreements
At September 30, 2007, we had a total
of 55,022 full-time equivalent employees. Approximately 17% of these employees, including all of our pilots, are represented by labor unions. The
following table presents certain information concerning the union representation of our active domestic employees as of September 30,
2007.
| Employee Group |
|
|
|
Approximate
Number of
Employees
Represented |
|
Union |
|
Date on which Collective
Bargaining Agreement
Becomes Amendable |
Delta Pilots
|
|
|
|
|
6,200 |
|
|
ALPA |
|
December 31,
2009 |
Delta Flight
Superintendents |
|
|
|
|
180 |
|
|
PAFCA(1) |
|
January 1,
2010 |
Comair Pilots
|
|
|
|
|
1,520 |
|
|
ALPA |
|
March 2,
2011 |
Comair
Maintenance Employees |
|
|
|
|
530 |
|
|
IAM(2) |
|
December 31,
2010 |
Comair Flight Attendants |
|
|
|
|
920 |
|
|
IBT(3) |
|
December 31, 2010 |
|
|
The table above was not subject to the review procedures of our
Independent Registered Public Accounting Firm.
|
(1) |
|
PAFCA – Professional Airline Flight Controllers’
Association |
(2) |
|
IAM – International Association of Machinists and Aerospace
Workers |
(3) |
|
IBT – International Brotherhood of Teamsters |
War-Risk Insurance Contingency
As a result of the terrorist attacks on
September 11, 2001, aviation insurers significantly reduced the maximum amount of insurance coverage available to commercial air carriers for liability
to persons (other than employees or passengers) for claims resulting from acts of terrorism, war or similar events. At the same time, aviation insurers
significantly increased the premiums for such coverage and for aviation insurance in general. Since September 24, 2001, the U.S. government has been
providing U.S. airlines with war-risk insurance to cover losses, including those resulting from terrorism, to passengers, third parties (ground damage)
and the aircraft hull. The coverage currently extends to December 31, 2007. The withdrawal of government support of airline war-risk insurance would
require us to obtain war-risk insurance coverage commercially, if available. Such commercial insurance could have substantially less desirable coverage
than currently provided by the U.S. government, may not be adequate to protect our risk of loss from future acts of terrorism, may result in a material
increase to our operating expenses or may not be obtainable at all, resulting in an interruption to our operations.
Fuel Inventory Supply Agreement
In 2006, we entered into an agreement
with J. Aron & Company (“Aron”), an affiliate of Goldman Sachs & Co., pursuant to which Aron became the exclusive jet fuel supplier
for our operations at the Atlanta airport, the Cincinnati airport and the three major airports in the New York City area. In August 2007, we and Aron
amended and restated the agreement effective as of September 15, 2007. As amended, the agreement with Aron is effective through September 30, 2008 and
automatically renews for a one year term thereafter unless
31
terminated by either party thirty
days prior to September 30, 2008. Upon termination of the agreement, we will be required to purchase, at market prices at the time of termination, all
jet fuel inventory that Aron is holding in the storage facilities that support our operations at the Atlanta and Cincinnati airports and all jet fuel
inventory that is in transit to these airports as well as to the three New York City area airports. Our cost to purchase such inventory may be
material.
Other
We have certain contracts for goods and
services that require us to pay a penalty, acquire inventory specific to us or purchase contract specific equipment, as defined by each respective
contract, if we terminate the contract without cause prior to its expiration date. Because these obligations are contingent on our termination of the
contract without cause prior to its expiration date, no obligation would exist unless such a termination occurs.
6. FLEET INFORMATION
Our active fleet, orders, options and
rolling options at September 30, 2007 are summarized in the following table. Options have scheduled delivery slots. Rolling options replace options and
are assigned delivery slots as options expire or are exercised.
|
|
|
|
Current Fleet |
|
| Aircraft Type |
|
|
|
Owned |
|
Capital
Lease |
|
Operating
Lease |
|
Total |
|
Average
Age |
|
Orders |
|
Options |
|
Rolling
Options |
B-737-700
|
|
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
10 |
|
|
|
– |
|
|
|
– |
|
B-737-800
|
|
|
|
|
71 |
|
|
|
– |
|
|
|
– |
|
|
|
71 |
|
|
|
6.9 |
|
|
|
43 |
(1) |
|
|
60 |
|
|
|
120 |
|
B-757-200
|
|
|
|
|
68 |
|
|
|
34 |
|
|
|
18 |
|
|
|
120 |
|
|
|
16.0 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
B-757-200ER
|
|
|
|
|
– |
|
|
|
2 |
|
|
|
4 |
|
|
|
6 |
|
|
|
10.7 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
B-767-300
|
|
|
|
|
4 |
|
|
|
– |
|
|
|
20 |
|
|
|
24 |
|
|
|
17.2 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
B-767-300ER
|
|
|
|
|
50 |
|
|
|
– |
|
|
|
9 |
|
|
|
59 |
|
|
|
11.6 |
|
|
|
– |
|
|
|
10 |
(3) |
|
|
– |
|
B-767-400ER
|
|
|
|
|
21 |
|
|
|
– |
|
|
|
– |
|
|
|
21 |
|
|
|
6.6 |
|
|
|
– |
|
|
|
16 |
|
|
|
– |
|
B-777-200ER
|
|
|
|
|
8 |
|
|
|
– |
|
|
|
– |
|
|
|
8 |
|
|
|
7.7 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
B-777-200LR
|
|
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
8 |
|
|
|
11 |
|
|
|
12 |
|
MD-88
|
|
|
|
|
63 |
|
|
|
33 |
|
|
|
23 |
|
|
|
119 |
|
|
|
17.3 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
MD-90
|
|
|
|
|
16 |
|
|
|
– |
|
|
|
– |
|
|
|
16 |
|
|
|
11.8 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
CRJ-100
|
|
|
|
|
35 |
|
|
|
13 |
|
|
|
49 |
|
|
|
97 |
|
|
|
10.1 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
CRJ-200
|
|
|
|
|
5 |
|
|
|
– |
|
|
|
12 |
|
|
|
17 |
|
|
|
5.2 |
|
|
|
– |
|
|
|
20 |
|
|
|
– |
|
CRJ-700
|
|
|
|
|
17 |
|
|
|
– |
|
|
|
– |
|
|
|
17 |
|
|
|
3.9 |
|
|
|
– |
|
|
|
25 |
|
|
|
– |
|
CRJ-900 |
|
|
|
|
3 |
|
|
|
– |
|
|
|
– |
|
|
|
3 |
|
|
|
0.1 |
|
|
|
24 |
(2) |
|
|
30 |
|
|
|
– |
|
Total |
|
|
|
|
361 |
|
|
|
82 |
|
|
|
135 |
|
|
|
578 |
|
|
|
12.4 |
|
|
|
85 |
|
|
|
172 |
|
|
|
132 |
|
|
|
The table above was not subject to the review procedures of our
Independent Registered Public Accounting Firm.
|
(1) |
|
Includes 41 aircraft which we have entered into definitive
agreements to sell to third parties immediately following delivery of these aircraft to us by the manufacturer. |
(2)
|
|
Excludes 16 aircraft orders we assigned to a regional air
carrier in April 2007. See “Aircraft Order Commitments” in Note 5 for additional information regarding this matter. |
(3)
|
|
At our discretion, these options may be exercised for either B-767-300 or B-767-300ER aircraft. |
32
7. EMPLOYEE BENEFIT PLANS
Net Periodic (Benefit) Cost
Net periodic (benefit) cost for the
three and five months ended September 30, 2007, four months ended April 30, 2007 and the three and nine months ended September 30, 2006 included the
following components:
|
|
|
|
Pension Benefits |
|
|
|
|
|
Successor |
|
Predecessor |
|
Successor |
|
Predecessor |
|
| (in millions) |
|
|
|
Three Months
Ended
September
30,
2007 |
|
Three Months
Ended
September 30,
2006 |
|
Five Months
Ended
September 30,
2007 |
|
Four Months
Ended
April 30,
2007 |
|
Nine Months
Ended
September 30,
2006 |
Service cost
|
|
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
35 |
|
Interest cost
|
|
|
|
|
110 |
|
|
|
178 |
|
|
|
184 |
|
|
|
145 |
|
|
|
534 |
|
Expected
return on plan assets |
|
|
|
|
(105 |
) |
|
|
(130 |
) |
|
|
(175 |
) |
|
|
(129 |
) |
|
|
(390 |
) |
Amortization
of prior service cost |
|
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
1 |
|
Recognized
net actuarial loss |
|
|
|
|
– |
|
|
|
57 |
|
|
|
– |
|
|
|
19 |
|
|
|
171 |
|
Settlement
gain on termination |
|
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(30 |
) |
|
|
– |
|
Revaluation of liability |
|
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(143 |
) |
|
|
– |
|
Net periodic (benefit) cost |
|
|
|
$ |
5 |
|
|
$ |
105 |
|
|
$ |
9 |
|
|
$ |
(138 |
) |
|
$ |
351 |
|
|
|
|
|
Other Postretirement Benefits |
|
|
|
|
|
Successor |
|
Predecessor |
|
Successor |
|
Predecessor |
|
| (in millions) |
|
|
|
Three Months
Ended
September
30,
2007 |
|
Three Months
Ended
September 30,
2006 |
|
Five Months
Ended
September 30,
2007 |
|
Four Months
Ended
April 30,
2007 |
|
Nine Months
Ended
September 30,
2006 |
Service cost
|
|
|
|
$ |
3 |
|
|
$ |
4 |
|
|
$ |
5 |
|
|
$ |
4 |
|
|
$ |
14 |
|
Interest cost
|
|
|
|
|
16 |
|
|
|
24 |
|
|
|
26 |
|
|
|
21 |
|
|
|
73 |
|
Amortization
of prior service benefit |
|
|
|
|
– |
|
|
|
(11 |
) |
|
|
– |
|
|
|
(31 |
) |
|
|
(32 |
) |
Recognized
net actuarial loss |
|
|
|
|
– |
|
|
|
2 |
|
|
|
– |
|
|
|
8 |
|
|
|
6 |
|
Revaluation of liability |
|
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
49 |
|
|
|
– |
|
Net periodic cost |
|
|
|
$ |
19 |
|
|
$ |
19 |
|
|
$ |
31 |
|
|
$ |
51 |
|
|
$ |
61 |
|
|
|
|
|
Other Postemployment Benefits |
|
|
|
|
|
Successor |
|
Predecessor |
|
Successor |
|
Predecessor |
|
| (in millions) |
|
|
|
Three Months
Ended
September
30,
2007 |
|
Three Months
Ended
September 30,
2006 |
|
Five Months
Ended
September 30,
2007 |
|
Four Months
Ended
April 30,
2007 |
|
Nine Months
Ended
September 30,
2006 |
Service cost
|
|
|
|
$ |
8 |
|
|
$ |
11 |
|
|
$ |
13 |
|
|
$ |
8 |
|
|
$ |
37 |
|
Interest cost
|
|
|
|
|
31 |
|
|
|
31 |
|
|
|
52 |
|
|
|
41 |
|
|
|
93 |
|
Expected
return on plan assets |
|
|
|
|
(39 |
) |
|
|
(41 |
) |
|
|
(65 |
) |
|
|
(51 |
) |
|
|
(122 |
) |
Amortization
of prior service benefit |
|
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(2 |
) |
|
|
– |
|
Recognized
net actuarial loss |
|
|
|
|
– |
|
|
|
2 |
|
|
|
– |
|
|
|
5 |
|
|
|
8 |
|
Revaluation of liability |
|
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(273 |
) |
|
|
– |
|
Net periodic (benefit) cost |
|
|
|
$ |
– |
|
|
$ |
3 |
|
|
$ |
– |
|
|
$ |
(272 |
) |
|
$ |
16 |
|
Revaluation of Benefit Plans
In accordance with fresh start
reporting, we completed a revaluation of the pension, postretirement, and postemployment liabilities upon emergence from bankruptcy on April 30, 2007,
resulting in a net reorganization gain of $367 million. The weighted average discount rate used in our revaluation at April 30, 2007 was 5.96%, as
compared to the weighted average discount rate of 5.88% as of our last measurement date, September 30, 2006. In connection with this revaluation, we
also early adopted the requirements under
33
SFAS No. 158, “Employers
Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of SFAS Nos. 87, 88, 106 and 132(R)” (“SFAS 158”),
to measure the funded status of our plans as of the date of the remeasurement, eliminating our early measurement date.
Non-Qualified Plans
We sponsored non-qualified defined
benefit pension plans for eligible non-pilot employees (“Non-Qualified Plans”). Almost all pension benefits under the Non-Qualified Plans
accrued prior to our Chapter 11 filing. Because we did not seek authority from the Bankruptcy Court to pay those pre-petition benefits, we were
precluded from doing so during our Chapter 11 proceedings. We rejected the Non-Qualified Plans as a part of our Plan. As a result, no further benefits
will be paid from the Non-Qualified Plans.
In April 2007, we recorded a settlement
gain of $30 million in reorganization items, net, related to the rejection of the Non-Qualified Plans, derecognizing the accrued pension liability and
amounts in other comprehensive loss. We also adjusted our accrual for the allowed general, unsecured claim that participants in the Non-Qualified Plans
received by recording a charge of $41 million to reorganization items, net. The $30 million reversal of the pension liability and the recording of the
additional $41 million in claims resulted in net increase of $11 million in liabilities subject to compromise.
Cash Flows
For the nine months ended September 30,
2007, we contributed $92 million to our Non-pilot Plan and $8 million to a separate frozen qualified defined benefit pension plan for certain pilots
formerly employed by Western Air Lines (the “Western Plan”). Pursuant to our settlement agreement with the PBGC, we have initiated a standard
termination of the Western Plan.
For the nine months ended September 30,
2007, we paid a total of $122 million related to our qualified defined contribution pension plans. This does not include the portion of the proceeds of
ALPA’s allowed general, unsecured claim that we contributed to the Delta Family-Care Savings Plan under our agreement with ALPA.
For additional information about our
benefit plans, see Note 10 of the Notes to the Consolidated Financial Statements in our Form 10-K.
8. 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.
The following table shows significant components of our deferred tax assets and liabilities at September 30, 2007 and December 31, 2006. The components
are estimates and are subject to revision, which could be significant.
|
|
|
|
Successor |
|
Predecessor |
| (in millions) |
|
|
|
September 30,
2007 |
|
December 31,
2006 |
Deferred
tax assets:
|
|
|
|
|
|
|
|
|
|
|
Net operating
loss carryforwards |
|
|
|
$ |
2,834 |
|
|
$ |
2,921 |
|
Additional
minimum pension liability |
|
|
|
|
– |
|
|
|
615 |
|
AMT credit
carryforward |
|
|
|
|
346 |
|
|
|
346 |
|
Employee
benefits |
|
|
|
|
1,741 |
|
|
|
2,898 |
|
Deferred
revenue |
|
|
|
|
1,300 |
|
|
|
311 |
|
Other
temporary differences (primarily reorganization charges) |
|
|
|
|
2,408 |
|
|
|
2,183 |
|
Valuation allowance |
|
|
|
|
(4,614 |
) |
|
|
(5,169 |
) |
Total deferred tax assets |
|
|
|
$ |
4,015 |
|
|
$ |
4,105 |
|
34
|
|
|
|
Successor |
|
Predecessor |
| (in millions) |
|
|
|
September 30,
2007 |
|
December 31,
2006 |
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
|
$ |
3,425 |
|
|
$ |
3,870 |
|
Intangibles
|
|
|
|
|
1,062 |
|
|
|
(20 |
) |
Other |
|
|
|
|
245 |
|
|
|
259 |
|
Total deferred tax liabilities |
|
|
|
$ |
4,732 |
|
|
$ |
4,109 |
|
The following table shows the current
and noncurrent deferred tax assets (liabilities) recorded on our Consolidated Balance Sheets at September 30, 2007 and December 31,
2006:
|
|
|
|
Successor |
|
Predecessor |
| (in millions) |
|
|
|
September 30,
2007 |
|
December 31,
2006 |
Current
deferred tax assets, net |
|
|
|
$ |
807 |
|
|
$ |
402 |
|
Noncurrent deferred tax liabilities, net |
|
|
|
|
(1,524 |
) |
|
|
(406 |
) |
Net deferred tax liabilities |
|
|
|
$ |
(717 |
) |
|
$ |
(4 |
) |
The current and noncurrent components
of our deferred tax balances are generally based on the balance sheet classification of the asset or liability creating the temporary difference. If
the deferred tax asset or liability is not based on a component of our balance sheet, such as our net operating loss (“NOL”) carryforwards,
the classification is presented based on the expected reversal date of the temporary difference. Our valuation allowance has been classified as current
or noncurrent based on the percentages of current and noncurrent deferred tax assets to total deferred tax assets.
At September 30, 2007, we had (1) $346
million of federal alternative minimum tax (“AMT”) credit carryforwards, which do not expire, and (2) approximately $7.5 billion of federal
and state pretax NOL carryforwards, substantially all of which will not begin to expire until 2022. As a result of our emergence from bankruptcy, the
federal and state NOL carryforwards were reduced by discharge of indebtedness income of approximately $2.4 billion. We have not finalized our
assessment of the tax effects of the bankruptcy emergence and this estimate, as well as the Plan’s overall effect on all tax attributes, is
subject to revision, which could be significant.
As a result of the issuance of new
common stock upon emergence from bankruptcy, we realized a change of ownership for purposes of Section 382 of the Internal Revenue Code. We currently
expect this change will not significantly limit our ability to utilize our AMT credit or NOLs in the carryforward period.
We adopted FIN 48 on January 1, 2007,
at which time the total amount of unrecognized tax benefit on the Consolidated Balance Sheet was $217 million. Included in the total unrecognized tax
benefits was $86 million of tax benefits that, if recognized, would affect the effective tax rate.
The total amount of unrecognized tax
benefits on the Consolidated Balance Sheet at September 30, 2007 is $197 million. As a result of fresh start accounting, pre-emergence unrecognized tax
benefits, when recognized, will result in an adjustment to goodwill. Therefore, the effective tax rate will not be affected.
We accrued interest related to
unrecognized tax benefits in interest expense and penalties in operating expenses. As of January 1, 2007, we had $65 million for the payment of
interest accrued and $5 million for the payment of penalties. Upon adoption of FIN 48 on January 1, 2007, we increased our accrual for interest and
penalties by $4 million.
We are currently under audit by the
Internal Revenue Service for the 2001 to 2004 tax years. It is reasonably possible the audit will conclude in 2007, resulting in a change to our total
unrecognized tax benefit of approximately $120 million.
35
It is also reasonably possible that
during 2007 the settlement of bankruptcy claims and audits will result in significant changes to the amount of unrecognized tax benefits on the
Consolidated Balance Sheet. At this time, we cannot estimate the range of the reasonably possible outcomes.
9. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) primarily
includes (1) our reported net income (loss), (2) changes in our unrecognized pension, postretirement, and postemployment benefit liabilities, (3)
changes in our deferred tax asset valuation allowance related to our unrecognized pension, postretirement, and postemployment liabilities and (4)
changes in the effective portion of our open fuel hedge contracts, which qualify for hedge accounting.
The following table shows our
comprehensive income (loss) for the three and five months ended September 30, 2007 and four months ended April 30, 2007:
2007
| (in millions) |
|
|
|
Unrecognized
Pension
Liability |
|
Fuel
Derivative
Instruments |
|
Marketable
Equity
Securities |
|
Valuation
Allowance |
|
Total |
Balance at January 1, 2007 (Predecessor) |
|
|
|
$ |
(727 |
) |
|
$ |
(23 |
) |
|
$ |
2 |
|
|
$ |
230 |
|
|
$ |
(518 |
) |
SFAS 158
|
|
|
|
|
6 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
6 |
|
Unrealized
gain |
|
|
|
|
– |
|
|
|
70 |
|
|
|
– |
|
|
|
– |
|
|
|
70 |
|
Realized gain |
|
|
|
|
– |
|
|
|
(1 |
) |
|
|
– |
|
|
|
– |
|
|
|
(1 |
) |
Balance at April 30, 2007 (Predecessor) |
|
|
|
|
(721 |
) |
|
|
46 |
|
|
|
2 |
|
|
|
230 |
|
|
|
(443 |
) |
Elimination
of Predecessor other comprehensive loss |
|
|
|
|
721 |
|
|
|
(46 |
) |
|
|
(2 |
) |
|
|
(230 |
) |
|
|
443 |
|
Unrealized
gain |
|
|
|
|
– |
|
|
|
5 |
|
|
|
– |
|
|
|
– |
|
|
|
5 |
|
Realized gain
|
|
|
|
|
– |
|
|
|
3 |
|
|
|
– |
|
|
|
– |
|
|
|
3 |
|
Tax effect
|
|
|
|
|
– |
|
|
|
(3 |
) |
|
|
– |
|
|
|
3 |
|
|
|
– |
|
Net of tax |
|
|
|
|
– |
|
|
|
5 |
|
|
|
– |
|
|
|
3 |
|
|
|
8 |
|
Balance at June 30, 2007 (Successor) |
|
|
|
$ |
– |
|
|
$ |
5 |
|
|
$ |
– |
|
|
$ |
3 |
|
|
$ |
8 |
|
Unrealized
gain |
|
|
|
|
– |
|
|
|
24 |
|
|
|
– |
|
|
|
– |
|
|
|
24 |
|
Realized gain
|
|
|
|
|
– |
|
|
|
(17 |
) |
|
|
– |
|
|
|
– |
|
|
|
(17 |
) |
Tax effect
|
|
|
|
|
— |
|
|
|
(3 |
) |
|
|
– |
|
|
|
3 |
|
|
|
– |
|
Net of tax |
|
|
|
|
– |
|
|
|
4 |
|
|
|
– |
|
|
|
3 |
|
|
|
7 |
|
Balance at September 30, 2007 (Successor) |
|
|
|
$ |
– |
|
|
$ |
9 |
|
|
$ |
– |
|
|
$ |
6 |
|
|
$ |
15 |
|
The following table
shows our comprehensive loss for the three and nine months ended September 30, 2006:
2006
|
|
|
|
Predecessor |
|
| (in millions) |
|
|
|
Additional
Minimum
Pension
Liability |
|
Fuel
Derivative
Instruments |
|
Marketable
Equity
Securities |
|
Valuation
Allowance |
|
Total |
Balance at January 1, 2006 |
|
|
|
$ |
(2,553 |
) |
|
$ |
– |
|
|
$ |
1 |
|
|
$ |
(170 |
) |
|
$ |
(2,722 |
) |
Unrealized
gain |
|
|
|
|
– |
|
|
|
4 |
|
|
|
– |
|
|
|
– |
|
|
|
4 |
|
Realized gain |
|
|
|
|
– |
|
|
|
(2 |
) |
|
|
– |
|
|
|
– |
|
|
|
(2 |
) |
Balance at June 30, 2006 |
|
|
|
$ |
(2,553 |
) |
|
$ |
2 |
|
|
$ |
1 |
|
|
$ |
(170 |
) |
|
$ |
(2,720 |
) |
Unrealized
(loss) gain |
|
|
|
|
– |
|
|
|
(57 |
) |
|
|
1 |
|
|
|
– |
|
|
|
(56 |
) |
Realized gain |
|
|
|
|
– |
|
|
|
(1 |
) |
|
|
– |
|
|
|
– |
|
|
|
(1 |
) |
Balance at September 30, 2006 |
|
|
|
$ |
(2,553 |
) |
|
$ |
(56 |
) |
|
$ |
2 |
|
|
$ |
(170 |
) |
|
$ |
(2,777 |
) |
36
10. EQUITY AND EQUITY BASED COMPENSATION
Equity
Common Stock. On the Effective
Date, all common stock issued by the Predecessor was cancelled. In connection with our emergence from bankruptcy, we began issuing shares of new common
stock, par value $0.0001 per share, pursuant to the Plan. The new common stock is subject to the terms of our Amended and Restated Certificate of
Incorporation (the “New Certificate”), which supersedes the Certificate of Incorporation in effect prior to the Effective
Date.
The New Certificate authorizes us to
issue a total of 2.0 billion shares of capital stock, of which 1.5 billion may be shares of common stock and 500 million may be shares of preferred
stock. The Plan contemplates the issuance of 400 million shares of common stock, consisting of 386 million shares to holders of allowed general,
unsecured claims and 14 million shares under the compensation program for our non-contract, non-management employees (the “Non-contract
Program”) described below. The Plan also contemplates the issuance of common stock under the compensation program for management employees (the
“Management Program”) described below. For additional information regarding the distribution of new common stock under the Plan, see Note
1.
Preferred
Stock. The New Certificate provides that preferred stock may be issued in one or more series. It authorizes the Board of Directors (1) to fix the
descriptions, powers (including voting powers), preferences, rights, qualifications, limitations and restrictions with respect to any series of
preferred stock and (2) to specify the number of shares of any series of preferred stock. At September 30, 2007, no preferred stock was issued and
outstanding.
Treasury Stock.
In connection with the issuance of common stock to employees under the Plan, we withheld the portion of these shares necessary to cover the
employees’ portion of required tax withholdings. See “Stock Grants” below for additional information on the issuance of the common stock
under the Non-contract Program. These shares are valued at cost, which equals the market price of the common stock on the date of issuance. At
September 30, 2007, there were 6,339,220 shares held in treasury at a weighted average cost of $20.52 per share.
Equity-Based Compensation
Predecessor. We concluded that
all of our stock options would be cancelled as part of our emergence from Chapter 11. Accordingly, in March 2006, we filed with the Bankruptcy Court a
motion to reject our then outstanding stock options to avoid the administrative and other costs associated with these awards. The Bankruptcy Court
granted our motion, which resulted in substantially all of our stock options being rejected effective March 31, 2006. As of April 30, 2007, we did not
have any stock options outstanding.
Successor. Upon
emergence from Chapter 11, we adopted with Bankruptcy Court approval new compensation programs, the Non-contract Program and the Management Program.
The Non-contract Program includes the grant of unrestricted common stock to our approximately 39,000 non-contract, non-management employees. The
Management Program covers our approximately 1,200 officers, director level employees and management personnel. Under the Management Program, officers
received restricted stock, stock options and performance shares; director level employees received restricted stock and stock options; and management
personnel received restricted stock. All of these awards have been made under the Delta Air Lines, Inc. 2007 Performance Compensation Plan (the
“2007 Plan”) described below. During the three and five months ended September 30, 2007, the total compensation cost related to the
Management Program was $50 million and $76 million, respectively.
The Bankruptcy Court
approved the 2007 Plan. Up to 30 million shares of common stock are available for awards under the 2007 Plan.
Shares of common stock
to be issued under the 2007 Plan may be made available from authorized but unissued common stock or common stock we acquire. If any shares of our
common stock are covered by an award under the 2007 Plan that is cancelled, forfeited or otherwise terminates without delivery of
shares
37
(including shares surrendered or
withheld for payment of the exercise price of an award or taxes related to an award), then such shares will again be available for issuance under the
2007 Plan. The following table shows the equity transactions under the 2007 Plan during the five months ended September 30, 2007:
| |
|
|
|
Shares
(000) |
Authorized
under the 2007 Plan |
|
|
|
|
30,000 |
|
Awarded(1) |
|
|
|
|
(26,443 |
) |
Forfeited
|
|
|
|
|
54 |
|
Returned to Treasury |
|
|
|
|
5,322 |
|
Available for Future Grants |
|
|
|
|
8,933 |
|
(1)
|
|
Awards include unrestricted common stock grants, restricted
stock, stock options and performance shares. |
Stock Grants. Under the Plan, 14
million shares of common stock are issuable as a part of the Non-contract Program. As of September 30, 2007, we distributed nearly all 14 million
shares of common stock to eligible employees under the Non-contract Program. We will distribute the remaining shares of common stock under the
Non-contract Program as eligible employees return to work during 2007. Employees may hold or sell these shares without restriction.
Restricted Stock. We granted in
excess of seven million shares of restricted stock to eligible employees under the Management Program. Restricted stock is common stock that may not be
sold or otherwise transferred for a period of time (the “Restriction”), and that is subject to forfeiture in certain circumstances until the
Restriction lapses. The Restriction will lapse in three equal installments six, 18 and 30 months after the date of grant, subject to the
employee’s continued employment on that date. The Restriction on the third installment of the restricted stock will instead lapse 18 months after
the Effective Date if, during the period beginning six months and ending 18 months after the Effective Date, the aggregate market value of our
outstanding common stock is at least $14.0 billion for 10 consecutive trading days.
The following table summarizes
restricted stock activity for the five months ended September 30, 2007:
| |
|
|
|
Shares
(000) |
|
Weighted
Average
Grant-Date
Fair Value |
Granted
|
|
|
|
|
7,455 |
|
|
$ |
20.23 |
|
Vested
|
|
|
|
|
(187 |
) |
|
|
20.45 |
|
Forfeited |
|
|
|
|
(47 |
) |
|
|
20.45 |
|
Non-vested at September 30, 2007 |
|
|
|
|
7,221 |
|
|
$ |
20.22 |
|
Stock Options. We granted
options to purchase a total of approximately three million shares of common stock to eligible employees under the Management Program. These options (1)
have an exercise price equal to the closing price of the common stock on the grant date, (2) generally become exercisable in three equal installments
on the first, second, and third anniversary of the Effective Date, subject to the employee’s continued employment and (3) expire on the tenth
anniversary of the Effective Date.
The fair value of stock options are
determined at the grant date using a Black-Scholes model, which requires us to make several assumptions. The risk-free rate is based on the U.S.
Treasury yield in effect for the expected term of the options at the time of grant. The dividend yield on our common stock is assumed to be zero since
we do not pay dividends and have no current plans to do so. Due to the impact of our bankruptcy on our stock price and employees, our historical
volatility data and employee stock option exercise patterns were not considered in determining the volatility and expected life assumptions. The
volatility assumptions were based on (1) historical volatilities of the stock of comparable airlines whose shares are traded using daily stock price
returns equivalent to the expected term of the options and (2) implied volatility. The expected life of an option was determined based on a simplified
assumption that the option will be exercised evenly from the time it becomes exercisable to expiration, as allowed by Staff Accounting Bulletin No.
107, “Share Based Payments.”
38
The weighted average fair value of
options granted during the five months ended September 30, 2007 was determined based on the following weighted average assumptions.
| Assumption |
|
|
|
|
Risk-free
interest rate |
|
|
|
|
4.8 |
% |
Average
expected life of stock options (in years) |
|
|
|
|
6.0 |
|
Expected
volatility of common stock |
|
|
|
|
55.0 |
% |
Weighted average fair value of a stock option granted |
|
|
|
$ |
10.70 |
|
The following table summarizes stock
option activity for the five months ended September 30, 2007:
| |
|
|
|
Shares
(000) |
|
Weighted
Average
Exercise
Price |
Outstanding
at the beginning of the period |
|
|
|
|
– |
|
|
$ |
– |
|
Granted
|
|
|
|
|
3,348 |
|
|
|
18.65 |
|
Exercised
|
|
|
|
|
– |
|
|
|
– |
|
Forfeited |
|
|
|
|
(9 |
) |
|
|
18.84 |
|
Outstanding at the end of the period |
|
|
|
|
3,339 |
|
|
$ |
18.65 |
|
Exercisable at the end of the period |