DAL

Business Context and Reporting Period

Company: Delta Air Lines, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009

Delta Air Lines, Inc. provides scheduled air transportation for passengers and cargo globally. The reporting period covers the full year of 2009, which includes the complete integration of Northwest Airlines (NWA) following the merger closing on October 29, 2008. On December 31, 2009, NWA merged into Delta, ceasing to exist as a separate entity. The company is currently focused on right-sizing operations in response to the global recession, integrating NWA systems, and strengthening its balance sheet.

Key Financial Metrics

Note: 2008 GAAP figures include Northwest only from October 30, 2008. 2008 Combined figures include Northwest for the full year to allow for meaningful comparison with 2009.

Material Changes vs. Prior Period

• Revenue Decline: Operating revenue decreased $6.2 billion (18%) compared to the 2008 combined basis. This was driven by a 6% reduction in system capacity (Available Seat Miles) and a 14% decline in passenger mile yield due to the global recession, reduced business demand, and lower fuel surcharges.
• Cost Reductions: Total operating expenses decreased $19.4 billion compared to the 2008 combined basis. This significant reduction was primarily due to the absence of the $7.3 billion goodwill impairment charge and $1.1 billion in merger-related charges recorded in 2008, as well as lower fuel costs ($5.0 billion decrease) and reduced capacity.
• Fuel Hedging Impact: While the average fuel price per gallon dropped 35% to $2.15 in 2009 compared to 2008 combined, the company recorded $1.4 billion in fuel hedge losses in 2009. These losses stemmed from hedges purchased in 2008 when fuel prices were at record highs.
• Workforce Reduction: The total workforce decreased by 4% compared to the combined Delta and NWA workforce at the end of 2008, primarily through voluntary reduction programs and attrition.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• 2010 Flight Plan: Key goals include positioning Delta as the global airline of choice, enhancing customer service, and delivering industry-leading financial results.
• Merger Synergies: The company achieved over $700 million in merger synergy benefits in 2009 and targets an additional $600 million in 2010. The goal is to realize $2 billion in annual synergies by 2012.
• Liquidity Strategy: Management intends to prudently manage costs and free cash flow to conserve liquidity. There are no immediate needs for significant aircraft purchases, with limited capital expenditures planned for the next three years.
• Network Expansion: Delta plans to invest $1 billion through mid-2013 to improve the customer experience, including installing flat-bed seats on trans-oceanic aircraft and winglets on over 170 aircraft.

Risks and Contingencies

• Fuel Price Volatility: Results remain significantly impacted by fuel prices. While prices fell in 2009, crude oil prices rose 78% from December 2008 to December 2009. The company faces risks from future price spikes and supply disruptions.
• Debt Covenants: Substantial indebtedness limits financial flexibility. Credit agreements include covenants requiring minimum fixed charge coverage ratios and collateral coverage ratios. Failure to comply could result in an event of default.
• Integration Challenges: Full realization of merger synergies depends on the successful integration of technologies and workforces. Unresolved representation issues for certain employee groups (e.g., flight attendants) could delay synergy realization.
• Legal Proceedings: The company is defending against antitrust litigation regarding baggage fees and capacity signaling, as well as various other legal proceedings including environmental and employment matters.
• Pension Obligations: Defined benefit pension plans are underfunded, with an estimated benefit obligation of $17.0 billion against assets of $7.6 billion. Funding requirements for 2010 are estimated at $720 million.

Investor Verification Checklist

• Merger Integration Progress: Verify the status of workforce integration, specifically the resolution of representation issues for flight attendants and ground employees, and the timeline for technology system consolidation.
• Fuel Hedging Exposure: Review the open fuel hedge position for 2010 (approximately 24% of projected consumption) and assess the potential impact of rising crude oil prices on future earnings.
• Debt Covenant Compliance: Monitor the company's ability to maintain minimum fixed charge coverage ratios and collateral coverage ratios required by its senior secured credit facilities and notes.
• Pension Funding: Track the actual funding contributions required for 2010 against the estimated $720 million obligation and monitor the funded status of the defined benefit plans.
• Antitrust Litigation: Follow developments in the "First Bag Fee" antitrust class action lawsuits to assess potential liability exposure.