DAL

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2001, for Delta Air Lines, Inc. The reporting period is significantly impacted by the terrorist attacks on September 11, 2001, which caused the closure of U.S. airspace and a severe decline in travel demand. Delta also faced a slowing U.S. economy and the lingering effects of a Comair pilot strike. Effective November 1, 2001, Delta reduced its network capacity by 16% and announced plans to reduce staffing by up to 13,000 positions.

Key Financial Metrics

Note: Debt figures include current maturities of long-term debt ($256M), short-term obligations ($1,250M), and long-term debt ($6,949M).

Material Changes vs. Prior Period

• Revenue Decline: Operating revenues decreased 22% in the quarter and 13% for the nine months compared to the prior year periods. Passenger revenues fell 21% in the quarter due to a 12% drop in revenue passenger miles and a 10% drop in yield.
• Profitability Reversal: The company swung from an operating income of $510 million in Q3 2000 to an operating loss of $251 million in Q3 2001. For the nine months, the company moved from $1.459 billion in operating income to a $480 million loss.
• Cost Structure: Operating expenses decreased 5% in the quarter but increased 2% for the nine months. Cost per available seat mile (CASM) excluding unusual items increased 4.5% in the quarter and 5.8% for the nine months, driven by reduced capacity and higher fixed costs.
• Liquidity: Cash and cash equivalents increased from $1,364 million at year-end 2000 to $2,786 million at September 30, 2001, bolstered by debt issuances and government stabilization payments.

Guidance, Outlook, and Risks

• Outlook: Management expects substantial losses in the December 2001 and March 2002 quarters. Demand and yields remain depressed following the September 11 attacks.
• Stabilization Act: Delta expects to receive approximately $690 million in total compensation under the Air Transportation Safety and System Stabilization Act. $346 million was received in Q3 2001, with the remainder expected by year-end. Management believes total losses from the attacks will exceed this compensation.
• Special Charges: A special charge of approximately $425-$450 million is expected in the December 2001 quarter related to employee early retirement programs. Additional charges may arise from facility closures and aircraft impairments.
• Key Risks:
  • Continued adverse impact of terrorist attacks on travel demand.
  • Increased costs from new security directives and higher war risk insurance premiums.
  • Credit rating downgrades (Moody's to Ba2, S&P to BB+) increasing financing costs and potentially triggering covenants.
  • Uncertainty regarding the outcome of union representation elections and labor negotiations.

Investor Verification Checklist

• Stabilization Act Receipts: Verify the timing and total amount of government compensation received versus actual losses incurred post-September 11.
• Debt Covenants: Monitor compliance with credit agreements, specifically the 1997 Bank Credit Agreement, given recent credit rating downgrades and the requirement to repay $625 million by November 30, 2001.
• Restructuring Costs: Track the actual costs associated with the 13,000 employee reduction plan and the $425-$450 million special charge anticipated in Q4 2001.
• Asset Impairments: Assess potential impairment charges related to the 16% capacity reduction and the grounding of 50 aircraft.
• Labor Disputes: Monitor the outcome of the pilot furlough grievance filed by ALPA and the flight attendant union representation election.