DAL

Business Context and Reporting Period

Company: Delta Air Lines, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2002
Context: The airline industry continues to face severe headwinds following the September 11, 2001 terrorist attacks. Delta reported a significant net loss driven by reduced passenger traffic, lower yields, and increased costs related to security, insurance, and pension adjustments. The company implemented a 16% capacity reduction in November 2001 and reduced staffing by approximately 11,000 employees.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Operating revenues fell 19% to $3.1 billion. Passenger revenues dropped 20% due to an 8% decline in traffic and a 13% decline in yield, primarily attributed to the post-9/11 environment.
• Expense Reduction: Operating expenses decreased 11% to $3.5 billion. Salaries and related costs fell 7% due to staffing reductions. Aircraft fuel expense dropped 34% to $339 million, aided by lower fuel prices (56.68¢/gallon vs. 73.81¢/gallon) and reduced consumption.
• Widened Loss: The net loss more than tripled from $133 million in Q1 2001 to $397 million in Q1 2002. Operating margin deteriorated from -3% to -14%.
• Cash Flow: Net cash provided by operating activities plummeted from $296 million to $38 million, despite a one-time $300 million tax refund and a $160 million tax refund included in the quarter.
• Accounting Changes: Adoption of SFAS 142 eliminated goodwill amortization, providing a $15 million pretax benefit. Adoption of SFAS 133 resulted in a $28 million non-cash charge for fair value adjustments of derivatives.

Guidance, Outlook, and Risks

Outlook and Guidance

• 2002 Forecast: Management expects the nine months ending December 31, 2002, to be challenging. A loss is expected for the June 2002 quarter, though it should be significantly less than the March quarter loss.
• Profitability: Management believes profitability may return in the second half of 2002 if traffic and yields continue to improve.
• Cost Pressures: Estimated annual cost increases for 2002 compared to 2001 range from $650 million to $700 million due to pension expenses, interest, war risk insurance, and security costs.
• Unusual Costs: Expected unusual operating costs for the year are approximately $110 million related to carrying surplus pilots and grounded aircraft.

Risks and Contingencies

• Credit Ratings: Senior unsecured long-term debt is rated Ba3 (Moody's) and BB (S&P) with negative outlooks. Further downgrades could trigger a requirement to repurchase $176 million in sold receivables.
• Insurance: The company is working on "Equitime," a group insurance vehicle for war and terrorism risk, contingent on government reinsurance and industry participation.
• Labor: An arbitrator ruled in Delta's favor regarding pilot furloughs, but the union may appeal or raise further issues regarding recall mechanisms.
• Goodwill Impairment: Delta is evaluating potential goodwill impairment under SFAS 142, with initial testing expected by June 30, 2002.

Investor Verification Checklist

• Liquidity Position: Verify the sufficiency of the $1.5 billion cash balance against the $9.4 billion total debt and capital lease obligations.
• Debt Refinancing: Confirm the status of the $1.1 billion EETC financing issued in April 2002 and its impact on the 1997 Bank Credit Agreement repayment.
• Insurance Viability: Monitor the progress of the "Equitime" initiative and the potential cost impact if it fails to launch as expected.
• Goodwill Impairment: Watch for the results of the SFAS 142 impairment test due by June 30, 2002, which could result in significant non-cash charges.
• Receivable Repurchase Risk: Track credit rating changes; a downgrade below Ba2 (Moody's) or BB (S&P) would force the repurchase of $176 million in receivables.
• Cost Savings Realization: Validate the realization of the projected $100-$150 million savings from the elimination of travel agent base commissions.