Summary of DELTA AIR LINES INC /DE/

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General Information
We provide scheduled air transportation for passengers and cargo throughout the United States ("U.S.") and around the world. On October 29, 2008 (the "Closing Date"), we completed our merger (the "Merger") with Northwest, creating the world's largest airline. The Merger better positions us to manage through economic cycles and volatile oil prices, invest in our fleet, improve services for customers and achieve our strategic objectives.
Our Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the U.S. ("GAAP"). In accordance with GAAP, our financial results include the results of Northwest for periods after the Closing Date, but not for periods before the Closing Date. Accordingly, our financial results under GAAP for the March 2009 quarter include the results of Northwest for that period. In contrast, our financial results under GAAP for the March 2008 quarter do not include the results of Northwest for that period. This impacts the comparability of our financial results under GAAP for the March 2009 and March 2008 quarters.
In the accompanying analysis of financial information, we sometimes use information that is derived from our Consolidated Financial Statements but that is not presented in accordance with GAAP. Certain of this information is considered "non-GAAP financial measures" under the U.S. Securities and Exchange Commission rules. These non-GAAP financial measures include financial information for the March 2008 quarter which is presented on a combined basis, which means the financial results for Delta and Northwest are combined as if the Merger had occurred on January 1, 2008. See "Supplemental Information" below for the reasons we use combined and other non-GAAP financial measures, as well as for a reconciliation to the corresponding financial measures under GAAP. Overview
The worsening global economy is placing significant pressure on the airline industry, including Delta. We reported a consolidated net loss of $794 million for the March 2009 quarter, which reflects $686 million in fuel hedge losses, weak demand for air travel as a result of the global recession, and $99 million in restructuring and merger-related items. For the quarter, our operating margin was a negative 7%.
Total operating revenue declined 15%1 in the March 2009 quarter on a 6%1 decrease in system capacity, compared with the March 2008 quarter on a combined basis. Passenger and cargo revenue decreased as a result of reduced capacity and weak economic conditions. Passenger mile yield declined 9%1 in the March 2009 quarter, compared with the March 2008 quarter on a combined basis, reflecting significantly reduced demand particularly in international markets, competitive pricing pressures and unfavorable foreign currency exchange rates. We partially offset the passenger and cargo revenue decline with other revenue from new or increased administrative service charges and baggage handling fees.
Our Mainline operating cost per available seat mile ("CASM") excluding fuel expense increased 5%1 in the March 2009 quarter, compared to a March 2008 quarter on a combined basis. Approximately half of this increase is due to an increase in pension expense as a result of an erosion in value in pension trust assets driven by market conditions. The other half of the increase primarily relates to timing differences between the implementation of capacity reductions and the achievement of associated cost savings.
At March 31, 2009, we had $4.4 billion in cash and cash equivalents and $67 million in short-term investments. In addition, we had $500 million in an undrawn revolving credit facility.
Capacity and Economy
The global recession has resulted in weak demand for air travel, particularly in the Atlantic market. In March 2009, we announced plans to reduce international capacity by an additional 10% compared to the prior year, beginning in September 2009. Accordingly, in the December 2009 quarter, we expect system capacity to be down 6-8%, and international capacity to be down 9-11%, year over year. As a result of these reductions, we plan to remove from the fleet in 2009 30-40 mainline aircraft. In addition, we grounded three dedicated cargo freighter B-747-200F aircraft during the March 2009 quarter and are planning to ground the remaining seven dedicated cargo freighters by December 31, 2009. Furthermore, we anticipate removing over 30 regional jets from our network over the next 18 months, including 11 by the end of this year. We believe we have flexibility in our network and fleet to remove additional capacity if the environment warrants.

1 See
"Supplemental
Information"
below for the
reasons we use
combined and
other non-GAAP
financial
measures, as
well as for a
reconciliation
to the
corresponding
financial
measures under
GAAP.

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Fuel
Fuel is one of our most significant costs. During 2008, fuel prices fluctuated dramatically, hovering around $100 per barrel at the beginning of that year and escalating to $145 per barrel by mid-summer. Throughout the summer of 2008, fuel prices remained at record high levels and were forecasted to continue to rise. Based on this outlook, in 2008, we added fuel hedge contracts to protect against further increases in fuel prices. However, fuel prices fell dramatically, creating sizeable losses on our fuel hedge contracts. During the December 2008 quarter, we early terminated many of our fuel hedge contracts covering fuel purchases in 2009 to limit our exposure to additional losses and margin posting requirements. In accordance with GAAP, losses on fuel hedge contracts that relate to fuel purchases in 2009 are recognized in the period when the hedged fuel is purchased and consumed, even if the hedged contract is early terminated in 2008.
As of March 31, 2009, we recorded in accumulated other comprehensive loss on our Consolidated Balance Sheet approximately $900 million of losses on our fuel hedge contracts. This includes (1) fuel hedge contracts that were open on March 31, 2009, (2) fuel hedge contracts that we early terminated but which relate to fuel purchases after March 31, 2009 and (3) unamortized premiums on fuel hedge collar and call option contracts. The ultimate loss (or gain) on our open fuel hedge contracts at March 31, 2009 will be based on market prices when the contract is settled. In contrast, the loss on our early terminated fuel hedge contracts, and the expense associated with premiums on our fuel hedge collar and call option contracts, will not change based on future market prices. Assuming crude oil prices of $50 per barrel for purposes of calculating the fair value of our open fuel hedge contracts at March 31, 2009, we expect to recognize the following losses on our Consolidated Statements of Operations for the periods indicated:
• Approximately $500 million in the June 2009 quarter (which includes $300 million for open contracts, $150 million for early terminated contracts, and $50 million for option premiums);

• Approximately $275 million in the September 2009 quarter (which includes $75 million for open contracts, $110 million for early terminated contracts, and $90 million for option premiums); and

• Approximately $80 million in the December 2009 quarter (which includes $30 million for early terminated contracts and $50 million for option premiums).

Based on contract settlements and current fuel prices, we anticipate fuel hedge margin that we are required to post with counterparties will be less than $100 million after the June 2009 quarter.
Beginning in November 2008, in response to the decrease in crude oil prices, we entered into fuel hedge contracts which primarily consist of swap and call option contracts at an average crude oil price of $61 per barrel for approximately 33% of our expected consumption for the nine months ending December 31, 2009.
Merger Synergies
As a result of the Merger, we expect to recognize $500 million in synergy benefits in 2009, primarily in the second half of the year, and over $1 billion in synergy benefits in 2010. In an effort to mitigate the negative impacts of the recession, we are implementing initiatives to increase revenues and reduce costs, including acceleration of Merger integration activities. We regularly evaluate the costs of achieving the Merger synergies against the expected benefits and believe the synergy benefits significantly exceed the integration costs. Our ability to realize the synergies depends, among other things, on our successfully aligning technologies of the two airlines, receiving a single operating certificate and resolving labor representation differences while maintaining productive employee relations. Currently, our goal is to obtain a single operating certificate from the Federal Aviation Administration by the end of 2009.
Our goal is to resolve all remaining employee representation and seniority integration issues as promptly as possible. Seniority and representation issues have already been resolved for approximately 25% of our workforce. The integration of some portions of the rest of the pre-merger Delta and pre-merger Northwest workforces may be challenging because representation and seniority integration issues must be resolved. Two unions, the Association of Flight Attendants, which represents Northwest's flight attendants, and the International Association of Machinists and Aerospace Workers, which represents Northwest's airport employees and other categories of ground employees, have not announced when they will seek to resolve those issues.
We expect to achieve revenue synergies through more effective utilization of our combined fleet. In April 2009, we began the initial cross fleeting whereby certain Northwest aircraft operated on Delta routes and Delta aircraft served Northwest routes to better match capacity and demand. As part of this effort, we moved larger Northwest aircraft to New York and to Atlanta, and moved some of Delta's smaller international aircraft to Minneapolis and Detroit.

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Results of Operations-March 2009 and 2008 Quarters
Operating Revenue

                                                                                                                                Increase
                                                                                                                               (Decrease)
                                                                                                       Increase due to         Excluding
                                           Three Months Ended March 31,              Increase             Northwest            Northwest
(in millions)                               2009                  2008              (Decrease)            Operations           Operations

Operating Revenue:
Passenger:
Mainline                               $      4,367          $      3,061           $   1,306           $       1,794           $  (488 )
Regional carriers                             1,234                 1,039                 195                     443              (248 )

Total passenger revenue                       5,601                 4,100               1,501                   2,237              (736 )

Cargo                                           185                   134                  51                      92               (41 )
Other, net                                      898                   532                 366                     269                97

Total operating revenue                $      6,684          $      4,766           $   1,918           $       2,598           $  (680 )

                                                         Increase (Decrease) vs.
                           Three Months             Three Months Ended March 31, 2008
                               Ended          Passenger
                             March 31,          Mile                                  Load
 (in millions)                 2009             Yield                 PRASM          Factor

 Passenger Revenue:
 North America             $       2,648              (8 )%                 (7 )%       1.1 pts
 Atlantic                            843             (13 )%                (19 )%     (5.8) pts
 Latin America                       321              (3 )%                (11 )%     (6.2) pts
 Pacific                             555             (10 )%                 (4 )%       5.6 pts

 Total Mainline                    4,367              (9 )%                (10 )%     (0.7) pts
 Regional carriers                 1,234              (9 )%                (13 )%     (3.6) pts

 Total passenger revenue   $       5,601             (10 )%                (12 )%     (1.1) pts

Mainline Passenger Revenue. Mainline passenger revenue increased in the March 2009 quarter due to the inclusion of Northwest's operations, partially offset by weakened demand for air travel from the global recession and related capacity reductions. Passenger mile yield and passenger revenue per available seat mile ("PRASM") declined 9% and 10%, respectively.
• North American Passenger Revenue. North American passenger revenue increased 56% due to the inclusion of Northwest's operations. North American PRASM decreased 7% as a result of an 8% decrease in passenger mile yield. The decrease in passenger mile yield reflects a reduction in business demand due to the global recession and an overall decrease in average fares due to competitive pricing pressures. Excluding Northwest's operations, we reduced capacity by 9% for the March 2009 quarter compared to the March 2008 quarter. Load factor was flat as a result of our decrease in capacity.

• International Passenger Revenue. International passenger revenue increased 63% due to the inclusion of Northwest's operations. International PRASM decreased 13% as a result of a 2.8 point decrease in load factor and 9% decrease in passenger mile yield. The decrease in passenger mile yield reflects significantly reduced demand for international travel and competitive pricing pressures (especially in the Atlantic and Pacific markets, which have seen decreases of 13% and 10%, respectively, in passenger mile yield), primarily reflecting a significant decrease in business demand due to the global recession. Also contributing to the decrease in passenger mile yield in the Atlantic market were unfavorable foreign currency exchange rates. Excluding Northwest's operations, we increased international capacity by 8% for the March 2009 quarter compared to the March 2008 quarter due to the addition of routes in 2008.

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Regional carriers. Passenger revenue of regional carriers increased due to the inclusion of Northwest's operations, including its Compass Airlines, Inc. and Mesaba Aviation, Inc. subsidiaries. Excluding Northwest's operations, regional carriers revenue declined $248 million primarily as a result of an 8% decrease in passenger mile yield and 17% decrease in traffic on a 15% decrease in capacity due to the slowing economy.
Cargo. Cargo revenue increased due to the inclusion of Northwest's operations, partially offset by significantly reduced cargo yields and decreased international volume. During the March 2009 quarter, we grounded three B-747-200F aircraft.
Other, net. Other, net revenue increased primarily due to the inclusion of Northwest's operations. Excluding Northwest's operations, other, net revenue increased $97 million primarily due to new or increased administrative service charges and baggage handling fees and higher SkyMiles program revenue, partially offset by reduced volume in Delta Global Services, LLC, our staffing services business to third parties.

Operating Expense

                                                                                                             Increase (Decrease) due to:
                                             Three Months Ended March 31,              Increase            Northwest
(in millions)                                2009                  2008               (Decrease)          Operations               Other

Operating Expense:
Aircraft fuel and related taxes          $     1,893          $       1,422          $      471          $       586          $        (115 )
Salaries and related costs                     1,867                  1,091                 776                  748                     28
Contract carrier arrangements                    908                    928                 (20 )                190                   (210 )
Contracted services                              458                    254                 204                  222                    (18 )
Aircraft maintenance materials and
outside repairs                                  424                    268                 156                  155                      1
Depreciation and amortization                    384                    297                  87                  127                    (40 )
Passenger commissions and other
selling expenses                                 356                    225                 131                  175                    (44 )
Landing fees and other rents                     316                    167                 149                  148                      1
Passenger service                                135                     84                  51                   53                     (2 )
Aircraft rent                                    121                     64                  57                   58                     (1 )
Impairment of goodwill                             -                  6,100              (6,100 )                  -                 (6,100 )
Restructuring and merger-related
items(1)                                          99                     16                  83                    -                     83
Other                                            206                    111                  95                  103                     (8 )

Total operating expense                  $     7,167          $      11,027          $   (3,860 )        $     2,565          $      (6,425 )

(1) Includes $53 million in the March 2009 quarter for merger-related charges related to Northwest.

Northwest Operations. As a result of the Merger, our results of operations for the March 2009 quarter include Northwest's operations for the period from January 1 to March 31, 2009. The addition of Northwest to our operations increased operating expense $2.6 billion and capacity 59% for the March 2009 quarter. Northwest's operations are not included in our results of operations for the March 2008 quarter.
The operating expenses discussed below do not include the impact of Northwest's operations for the March 2009 quarter.
Aircraft fuel and related taxes. Aircraft fuel and related taxes decreased $115 million primarily due to decreases of (1) $660 million associated with lower average fuel prices and (2) $91 million from a 6% decline in fuel consumption due to capacity reductions. These decreases were partially offset by $594 million in fuel hedge losses for the March 2009 quarter, compared to $41 million in fuel hedge gains for the March 2008 quarter.
Salaries and related costs. The $28 million increase in salaries and related costs reflects higher pension expense from a decline in the value of our defined benefit plan assets as a result of market conditions and pay increases for pilot and non-pilot frontline employees. These increases were partially offset by a reduction in inactive and retiree group insurance claims and an 8% average decrease in headcount primarily related to workforce reduction programs in connection with our capacity reductions.
Contract carrier arrangements. Contract carrier arrangements expense decreased $210 million primarily due to decreases of (1) $135 million associated with lower average fuel prices and (2) $39 million from a 12% decline in fuel consumption due to capacity reductions.
Depreciation and amortization. In December 2008, we announced a multi-year extension of our co-brand credit card relationship with American Express (the "American Express Agreement"). Accordingly, we extended the useful life of the American Express Agreement intangible asset to the date the contract expires, which drove a $34 million decrease in depreciation and amortization expense.

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Passenger commissions and other selling expenses. Passenger commissions and other selling expenses decreased $44 million in connection with the decrease in passenger revenue.
Impairment of goodwill. During the March 2008 quarter, we experienced a significant decline in market capitalization driven primarily by record high fuel prices and overall airline industry conditions. In addition, the announcement of our intention to merge with Northwest established a stock exchange ratio based on the relative valuation of Delta and Northwest. As a result of these indicators, we determined goodwill was impaired and recorded a non-cash charge of $6.1 billion based on a preliminary assessment. We finalized the impairment test during the June 2008 quarter and recorded an additional non-cash charge of $839 million.
Restructuring and merger- related items. Restructuring and merger-related items totaled a $99 million charge in the March 2009 quarter, primarily consisting of the following:
• Merger-related charges. $49 million in costs associated with integrating the operations of Northwest into Delta, including costs related to information technology, employee relocation and training, and re-branding of aircraft and stations. We expect to incur total one-time cash costs of approximately $500 million over approximately three years to integrate the two airlines.

• Severance and related costs. $50 million in restructuring and related charges primarily in connection with voluntary workforce reduction programs for U.S. non-pilot employees announced in December 2008.

Other (Expense) Income
Other expense, net for the March 2009 quarter was $311 million, compared to $129 million for the March 2008 quarter. This change is primarily attributable to (1) a $161 million, or 110%, increase in interest expense primarily due to a higher level of debt outstanding, including Northwest debt for the March 2009 quarter and the borrowing in 2008 of the entire amount of our $1.0 billion revolving credit facility (the "Revolving Facility"), (2) a $17 million decrease in interest income primarily from significantly reduced short-term interest rates and (3) $4 million increase to miscellaneous, net expense due to the following:

                                                                             Increase (Decrease) vs.
                                                                                Three Months Ended
(in millions)                                                                     March 31, 2008

Miscellaneous, net
Unfavorable foreign currency exchange rates                                     $             26
Mark-to-market adjustments on the ineffective portion of our fuel
hedge contracts                                                                              (11 )
Northwest non-operating expense for the March 2009 quarter                                    (6 )
Impairment of our investment in insured auction rate securities in
2008                                                                                          (4 )
Other                                                                                         (1 )

Total miscellaneous, net                                                        $              4

Income Taxes
We did not record an income tax benefit as a result of our March 2009 and 2008 quarter losses. The deferred tax asset resulting from such net operating losses is fully reserved by a valuation allowance.

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