Delta Airlines 2004 Annual Report Download - page 46

Table of Contents
during the next several years, our annual pension funding obligations for each of 2006 through 2009 will be significantly higher than in 2005 and could have a
material adverse impact on our liquidity.
Contract Carriers. We have long-term contract carrier agreements with three regional air carriers, SkyWest, Chautauqua and Republic Airline. Under
these agreements, SkyWest and Chautauqua operate certain 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 an annual determination of their
cost of operating those flights and other factors intended to approximate market rates for those services. Republic Airline will begin operating certain of their
aircraft using our flight code in July 2005.
We expect to incur expenses of approximately $1.0 billion in 2005 under our contract carrier agreements, which includes $79 million in the table above
under our contract carrier agreement with Chautauqua. Under the Chautauqua agreement, we are obligated to pay certain minimum fixed obligations. The
remaining estimated expenses are not included in the table above because these expenses are contingent based on the costs associated with the operation of
contract carrier flights by those air carriers as well as rates that are unknown at this time. We cannot reasonably estimate at this time our expenses under the
contract carrier agreements in 2006 and thereafter, except for the minimum obligations under the Chautauqua agreement included in the table above.
In April 2004, we notified FLYi, Inc. ("Flyi"), another regional air carrier that previously operated certain of their aircraft using our flight code, of our
election to terminate its contract carrier agreement due to Flyi's decision to operate a new low-fare airline using jet aircraft with more than 70 seats. Flyi
ceased operating Delta Connection flights in November 2004. Flyi exercised its right to require us to assume the leases on the 30 Fairchild Dornier FRJ-328
regional jet aircraft that it operated for us. We are currently conducting inspections of these aircraft. After we complete the inspections, we expect to assume
these leases. We estimate that the total remaining lease payments on these 30 aircraft leases will be approximately $275 million. These lease payments will be
made over the remaining terms of the aircraft leases, which are approximately 13 years. We are evaluating our options for utilizing these 30 aircraft, including
having another air carrier operate these aircraft for us under the Delta Connection carrier program. There are no residual value guarantees related to these
leases.
If we assume the leases for the 30 FRJ-328 aircraft as currently in effect, a Flyi bankruptcy or insolvency or, with respect to certain of the leases, a Flyi
default under various contracts, including leases, loans and purchase contracts having a value or amount in excess of $15 million, would constitute an event of
default. If an event of default were to occur, the financing parties could exercise one or more remedies, including the right to require us to purchase the
aircraft at a purchase price stipulated in the applicable lease. At March 1, 2005, the purchase price for each aircraft was approximately $9 million, which we
estimate exceeds the current market value of each aircraft by approximately $3 million. Our estimate of the current market value of these aircraft is based on
published industry data. We cannot determine the likelihood of the occurrence of an event relating to Flyi that would constitute an event of default under the
leases or the likelihood of the financing parties seeking to exercise certain remedies against us if such an event of default were to occur.
Flyi has stated that as part of its restructuring effort, it has secured commitments from certain of the financing parties that, upon our assumption of the
leases, such parties will effectively release Flyi from its future obligations to such financing parties under the leases. We are in discussions with the financing
parties to restructure these leases so that events relating to Flyi would not constitute an event of default after we assume the leases.
We may terminate certain of our contract carrier agreements without cause, which may require us to assume the leases or purchase the aircraft the contract
carrier operates for us. For additional information regarding our contract carrier agreements, including our obligations if we elect to terminate certain
agreements without cause, see Note 8 of the Notes to the Consolidated Financial Statements.
GECC Aircraft. In November 2004, as a condition to availability of the GE Commercial Finance Facility, we granted GECC the right, exercisable until
November 2, 2005, to lease to us (or, at our option subject to certain conditions, certain Delta Connection carriers) up to 12 CRJ-200 aircraft then leased to
another airline. Subsequent to December 31, 2004, GECC exercised this right with respect to eight CRJ-200 aircraft. The lease terms for these eight aircraft
begin throughout 2005 and have terms of 138 to 168 months. We estimate that our
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