DAL

Business Context and Reporting Period

This Form 10-Q covers Delta Air Lines, Inc. for the quarterly period ended June 30, 2003. The airline industry continues to face a severe financial crisis driven by the aftermath of the September 11, 2001 attacks, the military action in Iraq, and the SARS outbreak. Delta implemented a 12% reduction in mainline capacity in April 2003 in response to demand declines, partially restoring it in June. The company is actively pursuing cost-saving initiatives targeting $2.5 billion in savings by 2005, including the launch of its low-fare carrier, Song, and a marketing alliance with Continental and Northwest Airlines.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability: The company reported a net income of $184 million for the quarter, a significant turnaround from a net loss of $186 million in the same period in 2002. However, for the six-month period, the net loss narrowed to $282 million from $583 million in 2002.
• One-Time Items: The Q3 2003 results were heavily influenced by two non-recurring events: a $398 million reimbursement from the U.S. government for security fees (Appropriations Act) and a $279 million gain from the sale of Delta's 40% equity investment in Worldspan.
• Revenues: Total operating revenues decreased 5% in the quarter and 2% for the six months compared to 2002, driven by reduced demand due to the Iraq war and weak economic conditions. International revenues fell 16% in the quarter.
• Costs: Operating expenses decreased 14% in the quarter and 5% for the six months, largely due to capacity reductions and the government reimbursement offset. However, fuel expenses rose 8% in the quarter and 28% for the six months due to higher prices, despite hedging gains.
• Liquidity: Cash and cash equivalents increased to $2.8 billion from $2.0 billion at year-end 2002, bolstered by the Worldspan sale proceeds and government reimbursements.

Guidance, Outlook, and Risks

• Outlook: Management expects a net loss of approximately $200 million to $250 million for the September 2003 quarter and anticipates a net loss for the full year 2003 due to the weak revenue environment and cost pressures from pension and interest expenses.
• Dividends: On July 24, 2003, the Board of Directors announced the immediate discontinuation of quarterly common stock cash dividends to preserve cash flow.
• Key Risks:
  • Geopolitical: Continued uncertainty regarding military action in Iraq and potential terrorist activity.
  • Financial: Availability of financing on commercially reasonable terms; high debt levels ($12.3 billion total obligations); and significant future pension funding obligations (estimated $350-$450 million for 2004).
  • Operational: Rising fuel prices, labor negotiations (specifically with the Air Line Pilots Association), and competitive pressures from low-cost carriers.
• Unusual Items: The $398 million government reimbursement and the $279 million Worldspan gain are not indicative of ongoing operational performance.

Investor Verification Checklist

• Sustainability of Earnings: Verify the extent to which the Q3 2003 profit relies on the one-time Worldspan gain and government reimbursement versus core operational improvements.
• Liquidity and Debt: Assess the company's ability to service $12.3 billion in debt and meet future pension obligations given the negative credit rating outlook (B3/B) and the discontinuation of dividends.
• Fuel Hedging: Review the effectiveness of the fuel hedging program, which covered 84% of requirements in Q3, against rising global fuel prices.
• Labor Relations: Monitor the status of negotiations with the Air Line Pilots Association (ALPA), as a failure to reach a cost-reduction agreement could impact long-term profitability.
• Capacity Management: Track the restoration of capacity reductions and the impact on load factors and yields as the revenue environment evolves.