Restructuring drives $2.1 billion improvement in operating results for 2006
ATLANTA – Delta Air Lines (Other OTC: DALRQ) reported results for the quarter and year ended December 31, 2006. Key points include:
• Delta reported a full-year operating profit of $58 million, a $2.1 billion improvement over
2005, and the company’s first annual operating profit since 2000.
• Delta’s fourth quarter net loss was $2.0 billion. Excluding reorganization and special items,
the fourth quarter net loss was $179 million, a $603 million improvement over the 2005 fourth
quarter.
• Delta reached its goal of $3 billion in annual financial improvements – one year ahead of
the originally targeted completion date.
• As of December 31, 2006, Delta had $3.5 billion in cash and cash equivalents, of which
$2.6 billion was unrestricted.
Delta reported a net loss of $2.0 billion in the fourth quarter of 2006, compared to a net loss
of $1.2 billion in the fourth quarter of 2005. Excluding the reorganization and special items
described below, the net loss was $179 million in the fourth quarter of 2006, a $603 million
improvement from the fourth quarter of 2005. Operating income for the December 2006
quarter was $6 million, which represents Delta’s third consecutive quarterly operating profit.
For the full year 2006, Delta recorded a net loss of $6.2 billion, compared to 2005’s full year net loss of $3.8 billion. Excluding reorganization and special items, the net loss was $406 million in 2006, a $1.8 billion improvement over 2005. Delta’s operating income of $58 million for 2006 was a $2.1 billion improvement over 2005 and the company’s first annual operating profit since 2000.
“A full year operating profit, and the magnitude of the progress it represents, marks a major ilestone for Delta. This is testimony to the dedication and hard work of Delta employees,” said Gerald Grinstein, Delta’s chief executive officer. “With Court approval of the company’s Disclosure Statement earlier this month, there is great momentum building towards a
successful emergence from Chapter 11 this spring as a strong, healthy and independent global competitor.”
Revenue Performance
For the December 2006 quarter, total passenger revenue increased 5.9% on a 3.6% decrease in capacity. Delta’s consolidated passenger unit revenues (PRASM) increased 9.9% in the December 2006 quarter compared to the same period in 2005. Delta’s length of
haul adjusted PRASM increased 12.1% for the fourth quarter 2006 versus fourth quarter 2005, as compared to the industry (excluding Delta) average PRASM increase of 5.1% over the same period.
For the full year 2006, Delta’s consolidated PRASM rose 13.2% compared to the prior year.
Delta’s length of haul adjusted PRASM increased 17.8% for 2006 versus 2005, as compared
to the industry (excluding Delta) average PRASM increase of 10.7% over the same period.
Operating Expense
For the December 2006 quarter, Delta’s operating expenses decreased 10.2%, or $471 million, compared to the December 2005 quarter. Driven by its restructuring efforts, Delta’s mainline unit costs in the fourth quarter of 2006 decreased by 9.3% as compared to the fourth quarter of 2005. Excluding fuel and special items, mainline unit costs decreased 6.2%
over the prior year period. Despite the $804 million increase in expense due to higher fuel prices in 2006 , Delta’s operating expenses decreased by $1.1 billion, or 5.9%. Delta’s 2006 mainline unit costs decreased by 3.9% in comparison to the prior year. Excluding fuel and special items, mainline unit costs decreased 3.9% for the same period.
Fuel Hedging
Delta recorded $86 million and $108 million in net charges for settled fuel hedge contracts for the December 2006 quarter and the full year, respectively. These charges are reflected in aircraft fuel expense. In addition, the company recorded charges of $14 million and $37 million associated with the ineffective portion of fuel hedges in miscellaneous expense, net, for the December 2006 quarter and full year respectively.
As of February 12, 2007, the company had hedged approximately 52% of its planned fuel consumption for the March 2007 quarter through a combination of swaps and collars at an average cap of $1.95 per gallon and an average floor of $1.88 per gallon. The company is currently forecasting its average fuel price for the March 2007 quarter to be $1.89 per gallon.
For the June 2007 quarter, Delta has hedged approximately 40% of its planned fuel consumption, through a combination of swaps and collars with an average cap of $1.91 per gallon and an average floor of $1.71 per gallon. For the September 2007 quarter, the
company has hedged approximately 18% of its planned fuel consumption at an average cap of $1.93 per gallon and an average floor of $1.76 per gallon.
Liquidity
At December 31, 2006, Delta had $3.5 billion in cash, cash equivalents and short-term investments, of which $2.6 billion was unrestricted. On January 30, 2007, Delta announced that it had obtained commitments for a $2.5 billion exit financing facility, a significant step in the company’s plan to exit bankruptcy. The exit
facility will be co-led by six financial institutions – JPMorgan, Goldman Sachs & Co., Merrill Lynch, Lehman Brothers, UBS, and Barclays Capital – and will consist of a $1 billion first-lien revolving credit facility, a $500 million first-lien Term Loan A, and a $1 billion second-lien Term Loan B. The facility will be secured by substantially all of the first-priority collateral securing Delta’s existing Debtor-In-Possession (DIP) facilities.
Restructuring Progress
On February 7, 2007, the Bankruptcy Court, with no creditors objecting, approved Delta’s Disclosure Statement and authorized the company to begin soliciting approval from its creditors for the Plan of Reorganization. The Unsecured Creditors Committee supports Delta’s Plan of Reorganization and recommends that creditors vote in favor of the Plan. A
confirmation hearing for the Bankruptcy Court to consider approval of the Plan of Reorganization has been scheduled for April 25, 2007.
Delta remains on course to emerge from Chapter 11 in Spring 2007 as a strong, competitive, independent airline. As of December 31, 2006, the company had achieved its full $3 billion goal of annual financial improvements through revenue improvements and cost reductions, reaching its goal one year ahead of schedule. Delta made the following progress against its
restructuring benchmarks:
• Attain a best-in-class cost structure – The company achieved the lowest mainline non-fuel
CASM of the network carriers with 2006 mainline CASM excluding fuel and special items of
7.20 cents.
• Improve unit revenue performance – Delta’s length of haul adjusted PRASM was 93% of
industry average, up substantially from 86% in 2005.
• Eliminate cash bleed and repair the balance sheet – Delta generated $1.2 billion of free
cash flow, its first positive free cash flow since 1998.
• Restore profitability – The company recorded its first annual operating profit since 2000.
„By executing on all aspects of our restructuring plan – increasing liquidity, improving unit revenues and reducing unit costs, while simultaneously investing in our network and product
– we exceeded our goals for 2006 and positioned Delta to become a fierce competitor in this
industry,“ said Edward H. Bastian, Delta’s executive vice president and chief financial officer.
“Because of the strength and determination of the entire Delta team, we expect this momentum to continue into 2007 and beyond.” 2006 Accomplishments Delta has made enormous progress in transforming the airline into a strong, healthy, and
vibrant competitor. While many companies use the bankruptcy process simply to shore up their balance sheet and reduce debt, Delta achieved a top-to-bottom transformation that touched every aspect of how it does business to improve and strengthen the airline.
• Safety remains Delta’s highest priority. The company was named the 2006 Occupational Industry Leader by the National Safety Council – the first airline to receive this recognition.
• Delta was ranked in the top two of all network carriers in overall customer service by J.D.
Power and Associates in 2006. J.D. Power rated Delta #1 for customer services across three metrics – aircraft condition/cleanliness, boarding/deplaning/baggage, and flight crew. In addition, Delta was awarded “Best Frequent Flyer Program,” “Best Airline Web Site” and
“Best Airport Lounge” by Business Traveler readers in the 2006 Best in Business Travel Awards.
• Delta began 124 new nonstop routes and added 41 destinations to its network in 2006, with 35 additional nonstop routes and 19 new destinations announced for 2007. Delta provides service to more destinations than any global airline with Delta and Delta Connection carrier service to 304 destinations in 52 countries. Delta is the only airline to serve all 50 states and,
through both its Atlanta and New York-JFK hubs, is the only carrier to serve to five continents from a single city.
• Delta made significant investments in its customer products and services, including stateof-
the-art, on-demand TV, movies, and music on many domestic and international flights; major improvements in airport facilities at Atlanta and New York-JFK; multiple new SkyMiles program features; and signature food and beverages on Delta flights worldwide with celebrity partners like Michelle Bernstein and Rande Gerber.
• Delta improved functionality at delta.com – which celebrated its 10th anniversary in 2006 –
including enhanced mobile device access and itinerary management, as well as comprehensive content in Spanish, with French, Italian, German and Portuguese availability coming soon.
• Delta announced plans to enhance its mainline fleet with 28 internationally-capable aircraft
scheduled for delivery in 2007-2009.
• Delta announced the recall of nearly 2,500 employees, including more than 1,200 flight
attendants, 300 pilots, and 900 maintenance employees.
• Through more than 100,000 messages and dozens of visits to Capitol Hill, employee and retiree grassroots advocacy pushed pension reform legislation through each step of the complex legislative process. The Pension Protection Act of 2006 was signed into law in
August, enabling Delta to preserve its defined benefit pension plan for active and retired ground and flight attendant employees.
• Delta employees earned 20 Shared Rewards payments in 2006, for top performance in ontime arrivals, completion factor and customer satisfaction. The total bonus amount per employee was $700, for a total payout of over $30 million.
December Monthly Operating Report Delta filed its Monthly Operating Report for December 2006 with the U.S. Bankruptcy Court. As reflected in that report, the company recorded a $1.8 billion net loss for the month.
Excluding reorganization and special items, the net loss was $103 million for the month, a $255 million improvement over December 2005.
Reorganization and Special Items
In the fourth quarter of 2006, Delta recorded $1.8 billion in net charges for reorganization and special items. These items are described below:
• A $2.5 billion net charge for reorganization items, primarily consisting of:
o An allowed general, unsecured pre-petition claim in our Chapter 11 case (Claim) of $2.2
billion for the Pension Benefit Guaranty Corporation (PBGC) relating to the termination of
Delta’s primary qualified defined benefit pension plan for pilots (Pilot Plan), partially offset by
an $897 million liability for Pilot Plan pension costs previously recorded.
o An $801 million Claim for retired pilots relating to the termination of their nonqualified
pension benefits, partially offset by a $387 million liability for pilot nonqualified pension costs
previously recorded.
o A $539 million Claim for pilot and non-pilot retirees relating to a reduction of their
postretirement healthcare benefits.
o A $181 million net charge for the restructuring of aircraft financing arrangements.
• A $719 million income tax benefit from the reversal of accrued pension liabilities related to
the Pilot Plan termination.
In the fourth quarter of 2005, Delta recorded a $453 million charge for reorganization and special items, including (1) a $277 million charge for reorganization items; and (2) a $176 million net charge associated with pension and restructuring items.
Other Matters
Attached to this press release are Delta’s Consolidated Statements of Operations for the three and twelve months ended December 31, 2006, and 2005; a statistical summary for those periods; selected balance sheet data as of December 31, 2006 and December 31,
2005; and a reconciliation of certain GAAP to non-GAAP financial measures. The Consolidated Statements of Operations show Delta’s net loss as reported under GAAP, as well as Delta’s net loss excluding reorganization and special items.
Important Financial Disclosure
Current holders of Delta’s equity will not receive any distributions under Delta’s proposed Plan of Reorganization. These equity interests would be cancelled upon the effectiveness of the proposed Plan of Reorganization, which the company believes will be shortly after the confirmation hearing scheduled on April 25, 2007. Accordingly, we urge that caution be
exercised with respect to existing and future investments in Delta’s equity securities and any
of Delta’s liabilities and other securities.
About Delta
Delta Air Lines (Other OTC: DALRQ) offers customers service to more destinations than any
global airline with Delta and Delta Connection carrier service to 304 destinations in 52 countries. With more than 50 new international routes added in the last year, Delta is America’s fastest growing international airline and is a leader across the Atlantic with flights to 31 trans-Atlantic destinations. To Latin America and the Caribbean, Delta offers nearly 600 weekly flights to 58 destinations. Delta’s marketing alliances also allow customers to earn and redeem SkyMiles on more than 14,000 flights offered by SkyTeam and other partners.
Delta is a founding member of SkyTeam, a global airline alliance that provides customers with extensive worldwide destinations, flights and services. Including its SkyTeam and worldwide codeshare partners, Delta offers flights to 453 worldwide destinations in 97
countries. Customers can check in for flights, print boarding passes and check flight status at
delta.com.
Endnotes
Statements in this news release that are not historical facts, including statements regarding our estimates, expectations, beliefs, intentions, projections or strategies for the future, may be “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. All forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from the estimates, expectations, beliefs, intentions,
projections and strategies reflected in or suggested by the forward-looking statements. These risks and uncertainties include, but are not limited to, the actions and decisions of our creditors and other third parties with interests in our Chapter 11 proceedings; our ability to obtain court approval with respect to motions in the Chapter 11 proceedings prosecuted from
time to time; our ability to prosecute, confirm and consummate our proposed plan of reorganization with respect to the Chapter 11 proceedings and to consummate all of the transactions contemplated by such plan of reorganization or upon which consummation of such plan may be conditioned; risks associated with third parties seeking and obtaining court approval to terminate or shorten the exclusivity period for us to propose and confirm one or more plans of reorganization, to appoint a Chapter 11 trustee or to convert the cases to Chapter 7 cases; our ability to obtain and maintain normal terms with vendors and service providers; our ability to maintain contracts that are critical to our operations; our ability to maintain adequate liquidity to fund and execute our business plan during the Chapter 11 proceedings and in the context of our proposed plan of reorganization and thereafter; our ability to comply with financial covenants in our financing agreements; our ability to
implement our business plan successfully; the cost of aircraft fuel; labor issues; pension plan funding obligations; interruptions or disruptions in service at one of our hub airports; our increasing dependence on technology in our operations; our ability to retain management and key employees; restructurings by competitors; the effects of terrorist attacks; and
competitive conditions in the airline industry.
Additional information concerning risks and uncertainties that could cause differences between actual results and forward-looking statements is contained in Delta’s Securities and Exchange Commission filings, including its Form 10-K, filed on March 27, 2006 and its Form 10-Q, filed on November 9, 2006. The risks and uncertainties and the terms of any reorganization plan ultimately confirmed can
affect the value of our various pre-petition liabilities, common stock and/or other securities. No assurance can be given as to what values, if any, will be ascribed in the bankruptcy proceedings to each of these liabilities or securities. Current holders of Delta’s equity will not receive any distributions under Delta’s proposed Plan of Reorganization. These equity interests would be cancelled upon the effectiveness of
the proposed Plan of Reorganization. Accordingly, we urge that caution be exercised with respect to existing and future investments in Delta’s equity securities and any of Delta’s liabilities and other securities. Investors and other interested parties can obtain information
about Delta’s Chapter 11 filing on the Internet at delta.com/restructure. Court filings and claims information are available at deltadocket.com. Caution should be taken not to place undue reliance on Delta’s forward-looking statements, which represent Delta’s views only as of February 14, 2007, and which Delta has no current intention to update. None of the statements in this press release is a solicitation of votes for or against any plan of reorganization. Any such solicitation will only be made through a disclosure
statement approved by the Bankruptcy Court pursuant to section 1125 of the Bankruptcy Code.
