DAL

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2005, for Delta Air Lines, Inc. The filing is prepared on a "Debtor-in-Possession" basis following the company's voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code filed on September 14, 2005. The company is operating under the jurisdiction of the U.S. Bankruptcy Court for the Southern District of New York. Trading of Delta's common stock on the New York Stock Exchange was suspended on October 13, 2005, and the stock is expected to be delisted.

Key Financial Metrics

Operational Metrics (Nine Months Ended Sep 30, 2005):

• Revenue Passenger Miles (RPMs): 92,353 million (up 8% vs. prior year).
• Passenger Load Factor: 77.35% (up 2.3 points vs. prior year).
• Average Fuel Price: $1.62 per gallon (up 51% vs. prior year).
• Operating Cost Per Available Seat Mile (CASM): 11.20 cents.

Material Changes vs. Prior Period

• Bankruptcy Filing: The most significant change is the Chapter 11 filing on September 14, 2005. This resulted in the classification of approximately $16.4 billion in pre-petition obligations as "Liabilities Subject to Compromise."
• Reorganization Costs: The company recorded $607 million in "Reorganization Items, Net" for the quarter and nine months ended September 30, 2005. This includes $444 million for the rejection of aircraft leases and $160 million for debt issuance costs.
• Fuel Expenses: Aircraft fuel expense increased 53% ($417 million) for the quarter and 55% ($1.1 billion) for the nine months compared to the prior year periods, driven by historically high fuel prices.
• Salaries and Related Costs: Decreased 24% ($381 million) for the quarter and 18% ($865 million) for the nine months, reflecting salary rate reductions and lower headcount.
• Pension Charges: The nine-month period included a $447 million curtailment charge and $258 million in settlement charges related to pension plans.
• Asset Sale: On September 7, 2005, Delta sold its subsidiary Atlantic Southeast Airlines (ASA) to SkyWest, Inc. for $425 million, receiving $350 million at closing.

Guidance, Outlook, and Risks

Expanded Transformation Plan: Management is expanding its transformation plan to target an additional $3 billion in annual financial benefits by the end of 2007, on top of the $5 billion targeted for 2006. This includes:

• Cost Reductions: Targeting $970 million from in-court restructuring (lease rejections, debt relief) and $930 million from competitive employment costs (including a motion to reject the pilots' collective bargaining agreement).
• Network Changes: Reducing domestic mainline capacity by 15-20% and increasing international capacity by 25% in 2006.

Liquidity and Financing: Delta secured $2.2 billion in post-petition financing (Debtor-in-Possession Credit Facility and Amex Post-Petition Facility). The company faces strict financial covenants, including maintaining unrestricted funds of at least $750 million through May 2006 and achieving specific EBITDAR levels.

Risks and Contingencies:

• Going Concern: There is substantial doubt about the company's ability to continue as a going concern without substantial adjustments.
• Equity Value: A plan of reorganization could result in common and preferred stockholders receiving no value for their interests.
• Section 1110 Aircraft Leases: The 60-day period for aircraft lessors to repossess equipment expires November 14, 2005. Failure to reach agreements could lead to repossession of aircraft.
• Fuel Price Volatility: Continued high fuel prices and potential supply disruptions pose a material adverse effect on operations.

Investor Verification Checklist

• Bankruptcy Plan Status: Verify the progress of the Chapter 11 reorganization plan and the likelihood of confirmation by the Bankruptcy Court.
• Equity Recovery: Assess the probability of common stockholders retaining any value, given the $16.4 billion in liabilities subject to compromise.
• Liquidity Covenants: Monitor compliance with the $750 million - $1 billion unrestricted cash covenant and EBITDAR targets required by the DIP financing.
• Aircraft Lease Rejections: Track the outcome of negotiations with aircraft lessors under Section 1110 to prevent asset repossession.
• Labor Negotiations: Follow the status of the motion to reject the pilots' collective bargaining agreement and potential labor disruptions.
• Fuel Hedging: Confirm the company has no significant fuel hedges in place to mitigate future price volatility.