DAL

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2007, for Delta Air Lines, Inc. The filing is significant as it represents the first full quarter of operations for the "Successor" entity following Delta's emergence from Chapter 11 bankruptcy on April 30, 2007. Consequently, the company adopted "fresh start" reporting, resetting the historical net book value of assets and liabilities to fair value. Financial results for the nine months ended September 30, 2007, combine the four-month Predecessor period (ended April 30, 2007) and the five-month Successor period (ended September 30, 2007).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Operating revenue increased 10% ($476 million) in the quarter and 9% ($1.2 billion) for the nine-month period compared to 2006. This was driven by a 10% increase in passenger revenue, supported by a 2.9-point increase in load factor and higher yields.
• Profitability: The company returned to profitability, reporting $220 million in net income for the quarter compared to $52 million in the prior year quarter. The nine-month period showed a net income of $1.7 billion, a stark contrast to the $4.2 billion net loss in the prior year, which included significant reorganization charges.
• Cost Structure: Operating expenses increased 4% in the quarter but remained flat (1% increase) for the nine-month period. Notable reductions were seen in salaries (due to benefit cost reductions) and landing fees (due to lease restructuring), partially offset by increases in contract carrier arrangements and profit sharing.
• Balance Sheet Transformation: Total assets increased from $19.6 billion (Predecessor, Dec 31, 2006) to $32.8 billion (Successor, Sept 30, 2007). This includes a $12.2 billion increase in goodwill and $2.9 billion in identifiable intangible assets recorded upon emergence. Liabilities subject to compromise were eliminated.

Guidance, Outlook, and Risks

• Outlook: Management expects to meet 2008 cash needs through operating cash flows, existing cash reserves, and financing arrangements, including an undrawn $1.0 billion revolving credit facility. The company entered a joint venture with Air France in October 2007 to share revenues and costs on transatlantic routes, with initial implementation in April 2008.
• Reorganization Items: The nine-month 2007 results included a $1.2 billion gain from reorganization items, primarily a $2.1 billion emergence gain (discharge of liabilities) offset by a $2.6 billion charge for the revaluation of the SkyMiles frequent flyer obligation.
• Risks and Contingencies:
  • Legal Proceedings: Ongoing litigation regarding the Comair Flight 5191 crash (settlements reached with 15 of 47 families as of Oct 30, 2007) and challenges to the Cincinnati Airport Settlement Agreement by objecting bondholders.
  • Liquidity: Credit card processors retain the right to impose holdbacks on receivables under certain circumstances, which could materially impact liquidity.
  • Insurance: Government-provided war-risk insurance coverage expires December 31, 2007. Commercial coverage may be more expensive or have less desirable terms.
  • Regulatory: Potential new regulations regarding climate change emissions and airport congestion pricing could increase operating costs.

Investor Verification Checklist

• Fresh Start Accounting Impact: Verify the sustainability of earnings excluding the one-time $2.1 billion emergence gain and the $2.6 billion SkyMiles revaluation charge.
• Debt Covenants: Confirm continued compliance with the financial covenants of the $2.5 billion Exit Financing Facility, specifically the fixed charge coverage ratio and collateral coverage ratios.
• Contract Carrier Commitments: Review the "Put Right" obligations associated with contract carrier agreements (Chautauqua and Shuttle America), which could require the purchase of aircraft valued at approximately $819 million if agreements are terminated without cause.
• Claims Resolution: Monitor the resolution of outstanding bankruptcy claims, as the final allowed claim amount is estimated at $15 billion but remains subject to adjustment.
• War-Risk Insurance: Assess the cost and availability of commercial war-risk insurance coverage following the expiration of government support on December 31, 2007.