Delta Air Lines - 10-Q quarterly report FY

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Commission File Number 1-5424

DELTA AIR LINES, INC.

State of Incorporation: Delaware

IRS Employer Identification No.: 58-0218548

P.O. Box 20706, Atlanta, Georgia 30320-6001

Telephone: (404) 715-2600

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and
(2) has been subject to such filing requirements for the past 90 days.

Yes [X]     No [   ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act).

Yes [X]     No [   ]

Number of shares outstanding by each class of common stock,
as of April 30, 2003:

Common Stock, $1.50 par value -123,363,018 shares outstanding

This document is also available on our web site at http://investor.delta.com/edgar.cfm.

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FORWARD-LOOKING STATEMENTS

     Statements in this Form 10-Q (or otherwise made by Delta or on Delta’s behalf) which are not historical facts, including statements about Delta’s estimates, expectations, beliefs, intentions, projections or strategies for the future, may be “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or Delta’s present expectations. Factors that could cause these differences include, but are not limited to:

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     Caution should be taken not to place undue reliance on Delta’s forward-looking statements, which represent Delta’s views only as of May 14, 2003, and which Delta has no current intention to update.

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PART I. FINANCIAL INFORMATION

Item  1.   Financial Statements

DELTA AIR LINES, INC.
Consolidated Balance Sheets
(In Millions, Except Share Data)

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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DELTA AIR LINES, INC.
Consolidated Balance Sheets
(In Millions, Except Share Data)

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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DELTA AIR LINES, INC.
Consolidated Statements of Operations
(Unaudited)
(In Millions, Except Share and Per Share Data)

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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DELTA AIR LINES, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In Millions)

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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DELTA AIR LINES, INC.
Statistical Summary
(Unaudited)

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DELTA AIR LINES, INC.
Aircraft Fleet Table
(Unaudited)

Our total aircraft fleet, orders, options and rolling options at March 31, 2003 are summarized in the following table. Options have scheduled delivery slots. Rolling options replace options and are assigned delivery slots as options expire or are exercised.

The table above reflects the following changes which occurred during the March 2003 quarter:

The table above includes the following 20 aircraft, which have been temporarily grounded: 13 B-737-200, three B-737-300, three B-767-200 and one MD-11 aircraft.

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DELTA AIR LINES, INC.
Notes to the Condensed Consolidated Financial Statements
March 31, 2003
(Unaudited)

Basis of Presentation

     The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, this Form 10-Q does not include all the information required by GAAP for complete financial statements. As a result, this Form 10-Q should be read in conjunction with the Consolidated Financial Statements and the accompanying Notes in our 2002 Annual Report to Shareowners (Annual Report).

     Management believes that the accompanying unaudited Condensed Consolidated Financial Statements reflect all adjustments, consisting of normal recurring items and restructuring and related items, considered necessary for a fair statement of results for the interim periods presented. We have reclassified certain prior period amounts in our Condensed Consolidated Financial Statements to be consistent with our current period presentation. The effect of these reclassifications is not material.

     Due to seasonal variations in the demand for air travel and other factors, including the decline in traffic due to geopolitical uncertainty and the military action in Iraq, operating results for the three months ended March 31, 2003 are not necessarily indicative of operating results for the entire year.

Stock-Based Compensation

     We account for our stock-based compensation plans under the intrinsic value method in accordance with Accounting Principles Bulletin Opinion (APB) 25, “Accounting for Stock Issued to Employees,” and related interpretations. For additional information related to our stock-based compensation plans, see Note 12 of the Notes to the Consolidated Financial Statements (pages 55-57) in our Annual Report. No stock option compensation expense is recognized in our Consolidated Statements of Operations because all stock options granted had an exercise price equal to the fair value of the underlying common stock on the grant date.

     The estimated fair values of stock options granted during the three months ended March 31, 2002 were derived using the Black-Scholes model. The following table includes the assumptions used in estimating fair values and the resulting weighted average fair value of a stock option granted in the periods presented. No stock options were granted during the three months ended March 31, 2003.

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     The following table shows what our net loss and loss per share would have been for the three months ended March 31, 2003 and 2002, had we accounted for our stock-based compensation plans under the fair value method of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock Based Compensation” (SFAS 123), using the assumptions in the table above:

     In November 2002, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. (FIN) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN 45), which expands the disclosures a guarantor is required to provide in its annual and interim financial statements regarding its obligations for certain guarantees. Disclosures are required to be included in financial statements issued after December 15, 2002. FIN 45 also requires the guarantor to recognize a liability for the fair value of an obligation assumed for guarantees issued or modified after December 31, 2002. The adoption of the liability recognition provision of FIN 45 had no impact on our Condensed Consolidated Financial Statements.

     On February 1, 2003, we adopted FIN 46, “Consolidation of Variable Interest Entities,” which addresses how to identify variable interest entities and the criteria that require a company to consolidate such entities in its financial statements. FIN 46 is effective on February 1, 2003 for new transactions and on July 1, 2003 for existing transactions. There have been no new transactions since

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January 1, 2003 subject to FIN 46. We are evaluating the impact of FIN 46 on our Consolidated Financial Statements as it relates to transactions entered into prior to January 1, 2003.

     In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (SFAS 149). This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133). SFAS 149 is effective for contracts entered into or modified after June 30, 2003, except in certain circumstances. We are evaluating the impact of SFAS 149 on our Consolidated Financial Statements.

     In accordance with SFAS 133, we record all derivative instruments on our Consolidated Balance Sheets at fair market value and recognize certain changes in these fair market values in our Consolidated Statements of Operations. SFAS 133 applies to the accounting for our fuel hedging program, our interest rate hedging program and our holdings of equity warrants and other similar rights in certain companies. The impact of SFAS 133 on our Consolidated Statements of Operations is summarized as follows:

Fuel Hedging Program

     At March 31, 2003, our fuel hedge contracts had an estimated short-term fair market value of $37 million, which was recorded in prepaid expenses and other on our Consolidated Balance Sheets, and an estimated long-term fair market value of $7 million, which was recorded in other noncurrent assets on our Consolidated Balance Sheets. Unrealized gains of $40 million, net of tax, were recorded in accumulated other comprehensive loss on our Consolidated Balance Sheets at March 31, 2003. For additional information about SFAS 133 and our fuel hedging program, see Note 4 of the Notes to the Consolidated Financial Statements (pages 40-41) in our Annual Report.

Interest Rate Hedging Program

     At March 31, 2003, our interest rate swap agreements had an estimated short-term fair value of $4 million, which was recorded in prepaid expenses and other on our Consolidated Balance Sheets, and an estimated long-term fair value of $17 million, which was recorded in other noncurrent assets on our Consolidated Balance Sheets. In accordance with fair value hedge accounting, $4 million is included in current maturities of long-term debt and $17 million is included in long-term debt related to these

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agreements. On May 9, 2003, these agreements were settled early for $27 million, which we expect to receive in the June 2003 quarter. This amount will be recognized over the remaining term of the underlying debt in accordance with SFAS 133. For additional information about our interest rate swap agreements, see Note 4 of the Notes to the Consolidated Financial Statements (pages 40-41) in our Annual Report.

Equity Warrants and Other Similar Rights

     We own equity warrants and other similar rights in certain companies, primarily Republic Airways Holdings, Inc. (Republic) and priceline.com Incorporated (priceline). At March 31, 2003, the total fair market value of our equity warrants and other similar rights was $19 million. The changes in fair market value of these rights are recorded on our Consolidated Statements of Operations as fair value adjustments of SFAS 133 derivatives. For additional information about these equity interests, see Notes 2 and 22 of the Notes to the Consolidated Financial Statements (pages 37-39 and pages 64-65, respectively) in our Annual Report.

     The following table presents information about our intangible assets, other than goodwill, at March 31, 2003 and December 31, 2002:

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Future Maturities

     The following table summarizes the scheduled maturities of our debt, including current maturities, at March 31, 2003:

Enhanced Equipment Trust Certificates (Certificates)

     On January 30, 2003, we issued, in a private placement, $392 million aggregate principal amount of insured Certificates, Series 2003-1 G. These Certificates bear interest at floating rates based on LIBOR + 0.75% and require principal payments from 2003 to 2008. This financing is secured by two B-737-800 and 10 B-767-300ER aircraft owned by us. The net proceeds of this financing were made available for general corporate purposes.

Series C Guaranteed Serial ESOP Notes (ESOP Notes)

     As discussed in Note 6 of the Notes to the Consolidated Financial Statements (pages 43-46) of the Annual Report, on February 25, 2003, we purchased a portion of the outstanding ESOP Notes for $74 million, covering $57 million principal amount of ESOP Notes, $3 million of accrued interest and $14 million of make-whole premium. The $14 million loss recognized for the make-whole premium was recorded in other income (expense) on our Consolidated Statements of Operations. As of March 31, 2003, $35 million principal amount of ESOP Notes was held by third parties. On April 14, 2003, we purchased additional ESOP Notes for $17 million, covering $15 million principal amount of ESOP Notes, $1 million of accrued interest and $1 million of make-whole premium.

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Other Financing Arrangements

     On January 31, 2002, we entered into a facility to finance, on a secured basis at the time of acquisition, certain future deliveries of regional jet aircraft. At March 31, 2003, total borrowings outstanding under this facility, as amended, were $193 million. Borrowings under this facility (1) are due between 366 days and 18 months after the date of borrowing (subject to earlier repayment if certain longer-term financing is obtained for these aircraft) and (2) bear interest at LIBOR plus a margin.

     During the March 2003 quarter, we entered into financing arrangements under which we borrowed a total of $147 million. These borrowings are due in installments through September 2019; are secured by five CRJ-200 and four CRJ-700 aircraft; and bear interest at LIBOR plus a margin. A portion of the proceeds from these borrowings was used to repay $65 million of outstanding interim financing for three CRJ-200 and one CRJ-700 aircraft.

     For further information about our debt at December 31, 2002, see Note 6 of the Notes to the Consolidated Financial Statements (pages 43-46) in our Annual Report. For a discussion of events that occurred subsequent to March 31, 2003 related to our debt, see Note 13 of the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q.

Aircraft & Engine Order Commitments

     Future expenditures for aircraft and engines on order as of March 31, 2003 are estimated to be $4.7 billion. The following table shows the timing of these commitments:

Contract Carrier Agreement Commitments

     We have contract carrier agreements with three regional air carriers, Atlantic Coast Airlines, Inc. (ACA), SkyWest Airlines, Inc. (SkyWest) and Chautauqua Airlines, Inc. (Chautauqua), a regional air carrier which is a subsidiary of Republic. Under these contract carrier agreements, we schedule certain aircraft that are operated by those airlines using our flight code, sell the seats on those flights and retain the related revenues. We pay those airlines an amount based on their cost of operating those flights plus a specified margin.

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     The following table shows the total number of aircraft and available seat miles (ASMs) operated for us by ACA, SkyWest and Chautauqua, and our expenses related to the contract carrier agreements, for the three months ended March 31, 2003 and 2002:

     For additional information regarding our agreements with ACA, SkyWest and Chautauqua, see Notes 9 and 22 of the Notes to the Consolidated Financial Statements (pages 48-50 and pages 64-65, respectively) in our Annual Report.

7.     SHAREOWNERS’ EQUITY

     During the three months ended March 31, 2003, we issued 1,672 shares of common stock under the Non-Employee Directors’ Stock Plan, and had a net increase of 1,084 shares in treasury stock primarily due to shares withheld for taxes for activity under our 2000 Performance Compensation Plan. For additional information about our stock compensation plans, see Note 12 of the Notes to the Consolidated Financial Statements (pages 55-57) in our Annual Report.

     Comprehensive income (loss) includes (1) reported net income (loss); (2) additional minimum pension liability; and (3) unrealized gains and losses on marketable equity securities and fuel derivative instruments that qualify for hedge accounting. The following table shows our comprehensive loss for the three months ended March 31, 2003 and 2002:

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     The following table shows the components of accumulated other comprehensive loss at March 31, 2003 and the activity for the three months then ended:

     We anticipate that gains of $40 million, net of tax, will be realized over the 12 months ending March 31, 2004 as (1) fuel hedge contracts settle and (2) the related aircraft fuel purchases being hedged are consumed and recognized in expense. For additional information about our fuel hedge contracts, see Note 3 of the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q. For information regarding our additional minimum pension liability see Note 9 of the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q.

     At March 31, 2003, we recorded a $116 million credit ($72 million net of tax) to accumulated other comprehensive loss and reduced by $158 million a previously recognized intangible asset to adjust a portion of our additional minimum pension liability recorded at December 31, 2002 in accordance with SFAS No. 87, “Employers’ Accounting for Pensions.” This non-cash adjustment reduced our pension liability by $274 million and primarily reflects the remeasurement of certain benefit plan obligations as a result of previously announced changes to one of our pension plans and our 2002 workforce reduction programs.

     As previously disclosed in our Annual Report, we also recorded during the March 2003 quarter a net $43 million pretax curtailment charge for the incremental cost of pension and postretirement benefit obligations for employees participating in the 2002 workforce reduction programs. For additional information about our 2002 workforce reduction programs and their effect on our benefit plans, see Note 11 of the Notes to the Consolidated Financial Statements (pages 51-55) in our Annual Report.

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     We are managed as a single business unit that provides air transportation for passengers and cargo. For additional information about our single business unit, see Note 15 of the Notes to the Consolidated Financial Statements (pages 58-59) in our Annual Report. Our operating revenues by geographic region are summarized in the following table:

11.     RESTRUCTURING AND OTHER RESERVES

     The following table shows our restructuring and other reserve balances as of March 31, 2003 and the activity for the three months then ended for restructuring costs recorded in prior years related to (1) facility closures and other costs and (2) severance and related costs:

     The facilities and other reserve represents costs related primarily to (1) lease payments to be paid on closed facilities and (2) contract termination fees. The reserve for the 2002 workforce reduction programs primarily represents (1) employee severance costs and (2) medical benefits for employees who received severance or are participating in certain leave of absence programs, which will be paid monthly during 2003.

     During the March 2003 quarter, we recorded a $2 million adjustment to the facilities and other reserve balance based on revised estimates of remaining costs. For additional information regarding our charges for restructuring and related items recorded in prior years, see Notes 16 and 17 of the Notes to the Consolidated Financial Statements (pages 59-62) in our Annual Report.

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     We calculate basic earnings (loss) per share by dividing the income (loss) available to common shareowners by the weighted average number of common shares outstanding. Diluted earnings (loss) per share includes the dilutive effects of stock options and convertible securities. To the extent stock options and convertible securities are anti-dilutive, they are excluded from the calculation of diluted earnings (loss) per share. The following table shows our computation of basic and diluted loss per share:

     For the three months ended March 31, 2003 and 2002, we excluded from the diluted loss per share computation (1) 58.7 million and 51.3 million stock options, respectively, because the exercise price of the options was greater than the average price of common stock and (2) 6.8 million and 6.2 million additional shares, respectively, because their effect on our loss per share was anti-dilutive.

General Electric Capital Corporation (GECC) Agreements

     On April 15, 2003, we entered into the following four financing transactions with GECC aggregating $760.5 million:

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     In connection with these financings, we agreed that the Engine Collateral will also secure, on a subordinated basis, certain of our other existing debt and aircraft lease obligations to GE and its affiliates up to a maximum amount of $230 million. The outstanding amount of these obligations is substantially in excess of that amount.

     As noted above, the Aircraft Financing and the Spare Parts Financing are both secured by the Other Aircraft Collateral, the Spare Parts Collateral and the Engine Collateral. If we repay either the

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Aircraft Financing or the Spare Parts Financing, but not both, the remaining financing will still be secured by the Other Aircraft Collateral, the Spare Parts Collateral and the Engine Collateral.

     The aggregate net proceeds to us of approximately $350 million from the Engine, Aircraft and Spare Parts Financings were made available for general corporate purposes.

Other Financing Arrangements

     On April 15, 2003, we terminated our credit facility with certain banks under which we could borrow up to $500 million on a secured basis until August 21, 2003. No amounts were outstanding under this facility. The aircraft previously reserved as collateral under this facility are being or, in the case of the Reimbursement Agreement, will be used as collateral in connection with the financing transactions with GECC described above and the $138 million financing described below. For additional information about this credit facility, see Note 6 of the Notes to the Consolidated Financial Statements (pages 43-46) in our Annual Report.

     On April 30, 2003, we borrowed $138 million which is due in installments through April 2018. These borrowings are secured by one B-767-400 aircraft and one B-777-200 aircraft. This debt bears interest at a floating rate based on LIBOR plus a margin. The net proceeds of this financing were made available for general corporate purposes.

Sale of Receivables

     We were party to an agreement under which we sold a defined pool of our accounts receivable, on a revolving basis, through a special-purpose, wholly owned subsidiary to a third party. This agreement terminated on its scheduled expiration date of March 31, 2003. As a result, on April 2, 2003, we paid $250 million, which represented the total amount owed to the third party by our wholly owned subsidiary, and are now collecting the related receivables. For additional information regarding our sale of receivables, see Note 8 of the Notes to the Consolidated Financial Statements (pages 47-48) in our Annual Report.

Emergency Wartime Supplemental Appropriations Act (Appropriations Act)

     On April 16, 2003, President Bush signed into law the Emergency Wartime Supplemental Appropriations Act (Appropriations Act) which provides for, among other things:

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We estimate that we will receive total payments of approximately $400 million under the Appropriations Act during the June 2003 quarter. In accordance with the Appropriations Act, we executed a contract with the Government agreeing to comply with the executive compensation limits described above.

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Item  2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

RESULTS OF OPERATIONS

Business Environment

     Since September 11, 2001, Delta and the airline industry have faced the worst financial crisis in aviation history. Our industry has experienced substantial revenue declines and cost increases which have resulted in industry-wide liquidity issues. Additionally, during the March 2003 quarter, the industry’s financial results were negatively impacted by the military action in Iraq and the Severe Acute Respiratory Syndrome (SARS) outbreak.

Revenues

     Our revenues during the March 2003 quarter continued to be adversely impacted by revenue challenges faced during 2002, including (1) a sharp decline in high-yield business travel after the September 11, 2001 terrorist attacks; (2) industry capacity exceeding demand, which resulted in heavy fare discounting to stimulate demand; (3) the government-imposed passenger security fee adopted after September 11, 2001, which we have not been able to pass on to our customers because of the weak demand situation; and (4) a reduction in traffic due to the real and perceived “hassle factor” resulting from increased airport security measures. Our revenues also continued to be adversely impacted by the weakness of the U.S. and world economies, and the growth of low cost carriers.

     The depressed revenue environment that existed in 2002 further deteriorated during the March 2003 quarter due to threatened and actual military action in Iraq, which reduced the demand for air travel. We estimate that these events negatively impacted our flown revenues by $125 million in the March 2003 quarter. International traffic, particularly in our Atlantic region, experienced the greatest impact related to these events, declining 12% in the March 2003 quarter as compared to the March 2002 quarter.

     In March 2003, we announced a short-term, 12% reduction in planned mainline capacity in response to the decline in demand due to the military action in Iraq. These capacity reductions were fully implemented in April 2003. In June 2003, we will begin restoring some of these flights in anticipation that passenger demand will begin to return with the decline of military action in Iraq. Therefore, our flight schedule for June 2003 will reflect a 7% reduction from our original mainline capacity plan.

     During the March 2003 quarter, the SARS outbreak, which has primarily centered in China and other Asian countries with a number of cases in Toronto, Canada, also significantly impacted airline industry revenues. Due to our small Pacific presence, however, the SARS outbreak had only a minimal impact on our March 2003 quarter revenues. We are not able to estimate the impact SARS may have on our future revenues due to uncertainty related to the spread of this outbreak.

     Since December 31, 2002, the U.S. Department of Transportation completed its review of our marketing agreement with Continental Airlines and Northwest Airlines, which we expect to begin to

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implement later this year. In April 2003, we launched Song, our new low-fare service. While these and other initiatives are intended to mitigate revenue pressures in the long-term, we do not anticipate significant improvement in our revenues in 2003 due to the difficult revenue environment.

Costs

     Our cost pressures during the March 2003 quarter included increases in (1) pension expense primarily due to increased obligations resulting from declining interest rates, a decrease in fair value of our pension plan assets, as well as scheduled pilot pay increases; (2) fuel expense mainly due to the rise in fuel prices in the period leading up to the military action in Iraq; and (3) interest expense largely due to higher levels of debt outstanding. These costs increased by a total of approximately $260 million in the March 2003 quarter as compared to the March 2002 quarter.

     We estimate total annual increases for 2003 compared to 2002 related to pension and interest expense will be approximately $375 million to $400 million. Based on our current assumptions, we estimate that our fuel expenses will not be significantly different for the nine months ending December 31, 2003, than they were in the corresponding period a year ago. This estimate may differ materially from our actual fuel expenses for the nine months ending December 31, 2003, due to changes in fuel prices, our fuel consumption, our fuel hedging program and the impact of events outside of our control, such as geopolitical uncertainties.

     To reduce our near-term costs in response to the decline in demand caused by the military action in Iraq, we (1) reduced planned mainline capacity by 12% as discussed above; (2) began furloughing 250 pilots; and (3) offered domestic ground employees and flight attendants 60-day voluntary, unpaid leaves of absence during April and May 2003. Over 1,000 employees elected to participate in this leave of absence program.

     We believe it is essential for us to reduce our costs to compete in this business environment. Accordingly, during the March 2003 quarter, we continued to develop and implement initiatives to achieve our goal of reducing non-fuel unit costs by 15% by the end of 2005. In addition, we recently presented a proposal to the Air Line Pilots Association (ALPA), which represents Delta’s pilots, to move towards a competitive pilot cost structure. ALPA has not yet responded to this proposal. Our collective bargaining agreement with ALPA becomes amendable in May 2005.

Liquidity

     At March 31, 2003, our cash and cash equivalents totaled $1.9 billion compared to $2.0 billion at December 31, 2002. This includes (1) proceeds from our sale in January 2003 of $392 million principal amount of insured enhanced equipment trust certificates; (2) net tax refunds totaling $388 million; (3) a $76 million payment to fund our pension trust for the broad-based employee Delta Family-Care Retirement Plan (Pension Plan); and (4) our purchase in February 2003 of a portion of outstanding Series C Guaranteed Serial ESOP Notes (ESOP Notes) for $74 million. For additional information about changes in our cash balance during the March 2003 quarter, see our March 31, 2003, Condensed Consolidated Statement of Cash Flows in this Form 10-Q.

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     Subsequent to March 31, 2003, we completed the following transactions, which are further discussed in Note 13 of the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q:

     Subsequent to the transactions discussed above, we estimate that the value of our unencumbered aircraft assets is approximately $2.8 billion, approximately $500 million of which consists of MD-11 and MD-90 aircraft that are eligible under Section 1110 of the U.S. Bankruptcy Code. The values of our unencumbered aircraft assets were derived by us from published third party estimates of the “base value” of similar aircraft using certain assumptions and may not accurately reflect the current market value of the aircraft. Base value is an estimate of the underlying economic value of an aircraft based on historic and future value trends in a stable market environment, while current market value is the value of the aircraft in the actual market; both methods assume an aircraft is in average condition and in its “highest and best use.” Given the difficult business environment, there is no assurance we would have access to financing using these aircraft as collateral. In any event, the amount we could finance using these aircraft would be significantly less than their base value.

     We expect to meet our obligations as they come due through available cash and cash equivalents, investments, internally generated funds and borrowings. While we expect new financing to be available to us, access to such financing cannot be assured given the existing business environment and the composition of our currently available unencumbered assets. Failure to obtain new financing could have a material adverse effect on our liquidity.

Other Recent Developments

     On April 16, 2003, President Bush signed into law the Emergency Wartime Supplemental Appropriations Act (Appropriations Act ) which provides for, among other things:

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We estimate that we will receive total payments of approximately $400 million under the Appropriations Act during the June 2003 quarter. In accordance with the Appropriations Act, we executed a contract with the Government agreeing to comply with the executive compensation limits described above.

June 2003 Quarter Outlook

     Based on the difficult business environment discussed above, we estimate that our net loss for the June 2003 quarter will be substantially greater than our net loss in the June 2002 quarter. This estimate excludes the approximately $400 million of payments that we expect to receive during the June 2003 quarter under the Appropriations Act.

Three Months Ended March 31, 2003 and 2002

Net Income (Loss) and Earnings (Loss) per Share

     Our unaudited consolidated net loss was $466 million for the March 2003 quarter ($3.81 diluted loss per share), compared to a net loss of $397 million ($3.25 diluted loss per share) in the March 2002 quarter.

Operating Revenues

     Operating revenues totaled $3.2 billion in the March 2003 quarter, a 2% increase from the March 2002 quarter. Passenger revenues increased 2% to $2.9 billion. Revenue passenger miles decreased 1% on a capacity decline of 2%, while passenger mile yield increased 3%. The 2% rise in passenger revenues for the March 2003 quarter from the depressed March 2002 quarter level primarily reflects a 2% increase as a result of higher charter revenues due to the transportation of American

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troops and supplies to the Middle East, and a 1% increase due to a rise in North American passenger revenues discussed below. These increases were partially offset by the decrease in international revenues primarily due to the negative impact on traffic of the military action in Iraq and the period leading up to the military action.

     North American Passenger Revenues - North American passenger revenues increased 1% to $2.4 billion for the March 2003 quarter. Revenue passenger miles increased 1% on a capacity decrease of 1%, while passenger mile yield remained relatively flat. As discussed in the Business Environment section of Management’s Discussion and Analysis in this Form 10-Q, the difficult revenue environment is having a substantial adverse impact on our business.

     International Passenger Revenues - International passenger revenues decreased 2% to $466 million during the March 2003 quarter. Revenue passenger miles decreased 12% on a capacity decline of 7%, while passenger mile yield increased 11%. The decline in international revenue passenger miles, particularly in the Atlantic region, is due to the impact of the military action in Iraq and the period leading up to the military action. The increase in passenger mile yield primarily relates to the reduction of capacity in certain markets.

     Cargo and Other Revenues - Cargo revenues increased 2%, or $2 million, in the March 2003 quarter, which primarily reflects a 4% increase due to higher European import volume and rates which was partially offset by a 2% decline due to a lower volume of first class mail. Cargo ton miles and cargo ton mile yield both increased 1%. Other revenues decreased 3%, or $3 million, primarily reflecting an 11% decrease due to lower revenue from certain mileage partnership arrangements which was partially offset by a 6% increase resulting from higher miscellaneous revenues due to new passenger and ticketing policies established in mid-2002.

Operating Expenses

     Operating expenses for the March 2003 quarter totaled $3.7 billion, a 4% increase from $3.5 billion in the March 2002 quarter. Operating capacity declined 2% to 33 billion available seat miles. Cost per available seat mile increased 5.9% to 11.11¢.

     Salaries and related costs increased 9% to $1.6 billion. This primarily reflects a 5% increase due to higher pension expense which was partially offset by savings realized from our strategic benefits review, a 2% increase due to salary and benefit rate increases for pilots and mechanics effective in the June 2002 quarter, and a 2% increase due to growth in our regional jet operations. These increases were partially offset by a 2% decrease due to headcount reductions related to our 2002 workforce reduction programs.

     Aircraft fuel expense totaled $511 million during the March 2003 quarter, a 51% increase from $339 million in the March 2002 quarter. The average fuel price per gallon increased 53% to 86.89¢. Total gallons consumed decreased 2%. Our fuel cost is shown net of fuel hedge gains of $69 million in the March 2003 quarter and $21 million in the March 2002 quarter. Approximately 80% and 72% of our aircraft fuel requirements were hedged during the March 2003 and 2002 quarters, respectively.

     Depreciation and amortization expense increased 6%. This is primarily due to an increase in regional jet aircraft purchased since March 31, 2002.

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     Contracted services expense decreased 12% primarily due to lower security costs mainly as a result of the TSA assuming responsibility for certain airport security functions during the middle of the March 2002 quarter at rates lower than our previous contracted rates. These new rates are lower than the previous rates due to the TSA’s receipt of the government-imposed passenger security fee (see the Business Environment section of Management’s Discussion and Analysis in this Form 10-Q for discussion related to this fee).

     Landing fees and other rents rose 7%, reflecting a 5% increase due to higher landing fee rates and a 2% increase due to higher facility rates. Aircraft maintenance materials and outside repairs expense decreased 22%, primarily from reduced maintenance volume and materials consumption as a result of process improvements, improved reliability, reduced capacity and our fleet simplification program. Aircraft rent expense rose 3% mainly due to our decision in the December 2002 quarter to return our leased B-737-300 aircraft to service during 2003. For additional information related to this decision, see Note 16 of the Notes to Consolidated Financial Statements (pages 59-61) in our Annual Report.

     Other selling expenses declined 21%, primarily reflecting a 9% decrease due to lower booking fee costs as a result of lower volume and online vendor rebates, a 5% decrease due to reduced advertising and promotion spending and a 3% decrease resulting from the sale of mileage credits under our SkyMiles program. Passenger commissions expense declined 49% primarily due to the change in our commission rate structure. In March 2002, we eliminated travel agent base commissions for tickets sold in the U.S. and Canada. Passenger service expense decreased 15%, primarily reflecting an 11% decrease due to lower cleaning and food costs resulting from capacity reductions and a 4% decrease due to certain meal service related cost savings initiatives.

     Restructuring and related items totaled $43 million in the March 2003 quarter compared to $40 million in the March 2002 quarter. Our March 2003 quarter charge relates to the cost of pension and postretirement obligations for participants in our 2002 workforce reduction programs. Our March 2002 quarter charge related to the temporary carrying cost of surplus pilots and grounded aircraft resulting from our capacity reductions which became effective on November 1, 2001, as well as related requalification training and relocation costs for certain pilots.

     Other operating expenses decreased 12%, primarily reflecting a 4% decrease due to lower insurance rates due to renegotiations, a 4% decline due to lower communication and professional fee expenses, and a 4% decrease as a result of lower miscellaneous expenses.

Operating Loss and Operating Margin

     We incurred an operating loss of $535 million for the March 2003 quarter, compared to an operating loss of $435 million in the March 2002 quarter. Operating margin, which is the ratio of operating income (loss) to operating revenues, was (17%) and (14%) for the March 2003 and March 2002 quarters, respectively.

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Other Income (Expense)

     Other expense, net in the March 2003 quarter was $189 million, compared to other expense, net of $167 million in the March 2002 quarter. This change is primarily attributable to the following:

FINANCIAL CONDITION AND LIQUIDITY

Sources and Uses of Cash

     Cash and cash equivalents totaled $1.9 billion at March 31, 2003, compared to $2.0 billion at December 31, 2002. For the three months ended March 31, 2003, net cash used in operations totaled $165 million, which includes:

     Additionally, our air traffic liability increased only $134 million from December 31, 2002 to March 31, 2003 as compared to an increase of $327 million from December 31, 2001 to March 31, 2002. This approximately $200 million decrease in the change in our air traffic liability primarily represents the decline in advance bookings during the March 2003 quarter due to the military action in Iraq. Our cash flows from significant financing and investing activities are described below.

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     Capital expenditures during the March 2003 quarter totaled approximately $400 million and included the acquisition of 12 CRJ-200 and seven CRJ-700 aircraft, which were acquired through seller-financing arrangements. Capital expenditures, including aircraft to be acquired through seller-financing arrangements, for the nine months ending December 31, 2003, are expected to be approximately $1.1 billion, including approximately $650 million for the purchase of regional jet aircraft.

     Debt and capital lease obligations, including current maturities and short-term obligations, totaled $11.4 billion at March 31, 2003 compared to $10.9 billion at December 31, 2002. On January 30, 2003, we issued, in a private placement, $392 million aggregate principal amount of insured enhanced equipment trust certificates, Series 2003-1 Class G.

     Shareowners’ equity was $505 million at March 31, 2003 and $893 million at December 31, 2002. The decrease in shareowners’ equity is primarily due to our net loss in the March 2003 quarter. Our net debt-to-capital position, which includes implied debt from operating leases, was 96% at March 31, 2003 compared to 94% at December 31, 2002.

     See page 21 of Management’s Discussion and Analysis in our Annual Report for a summary of our contractual obligations as of December 31, 2002. For information regarding activity during the March 2003 quarter that would impact these obligations, see Notes 5 and 6 of the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q. For additional information on our liquidity and financing activities that occurred subsequent to March 31, 2003, see the Business Environment section of Management’s Discussion and Analysis in this Form 10-Q, and Note 13 of the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q, respectively.

Working Capital Position

     At March 31, 2003, we had negative working capital of $3.0 billion compared to negative working capital of $2.6 billion at December 31, 2002. A negative working capital position is normal for us, typically due to our air traffic liability and the fact that we primarily generate revenue by providing air transportation through the utilization of property and equipment, which are classified as long-term assets. Our working capital position also reflects our losses for the periods presented.

Off-Balance Sheet Arrangements

     As discussed on page 22 of Management’s Discussion and Analysis in our Annual Report, we were party to an agreement under which we sold a defined pool of our accounts receivable, on a revolving basis, through a special-purpose, wholly owned subsidiary to a third party. This agreement terminated on its scheduled expiration date of March 31, 2003. On April 2, 2003, we paid $250 million, which represented the total amount owed to the third party by our wholly owned subsidiary. Subsequent to this payment, we began collecting the receivables previously securitized under this agreement. For additional information related to this agreement, see Note 8 of the Notes to the Consolidated Financial Statements (pages 47-48) in our Annual Report.

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Credit Ratings and Covenants

     On March 28, 2003, Standard & Poor’s downgraded certain of our credit ratings, including our senior unsecured long-term debt to B from BB-. Subsequent to March 31, 2003, Moody’s also downgraded our senior unsecured long-term debt to B3 from Ba3. Both Moody’s and Standard & Poor’s ratings outlooks for our long-term credit ratings are negative.

     Upon termination of the Commerzbank AG (Commerzbank) letters of credit as discussed in Note 13 of the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q, the covenants in our reimbursement agreement with Commerzbank will also terminate. These covenants, among other things, require us to maintain a minimum of $1 billion of unrestricted cash, cash equivalents and short-term investments at the end of each month.

     For additional information related to our credit ratings and covenants, see page 20 of Management’s Discussion and Analysis in our Annual Report.

Other Matters

     We own 40% of Worldspan, a Delaware limited partnership which operates and markets a computer reservation system and related systems for the travel industry. Northwest Airlines and American Airlines own 34% and 26%, respectively, of Worldspan. On March 3, 2003, Delta, Northwest and American entered into an agreement to sell their equity interests in Worldspan to a third party. The completion of this transaction is subject to financing, governmental and regulatory approvals and other customary closing conditions, the satisfaction of which cannot be guaranteed. For additional information related to our ownership interest in Worldspan, see Note 1 of the Notes to the Consolidated Financial Statements (pages 31-37) in our Annual Report.

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Item  3.    Quantitative and Qualitative Disclosures About Market Risk

Aircraft Fuel Price Risk

     We are subject to price risk associated with our jet fuel purchases. We manage this risk with our fuel hedging program. At March 31, 2003, the fair value of our derivative instruments, consisting of heating and crude oil contracts, was $44 million, compared to $73 million at December 31, 2002. A 10% decrease in the average annual price of heating and crude oil would have decreased the fair value of these instruments by $37 million at March 31, 2003. We do not enter into fuel hedge contracts for speculative purposes.

     The following table shows our fuel hedging position based on instruments held at March 31, 2003:

     For additional information regarding our fuel hedging program, see Note 3 of the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q. For additional information regarding our other exposures to market risks, see “Market Risks Associated With Financial Instruments” (pages 23-24), as well as Notes 2, 3, and 4 (pages 37-41) of the Notes to the Consolidated Financial Statements, in our Annual Report.

Item  4.    Controls and Procedures

     Based on their evaluation of our disclosure controls and procedures conducted within 90 days of the date of filing this report on Form 10-Q, our Chairman of the Board and Chief Executive Officer, and our Executive Vice President and Chief Financial Officer have concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in this report on Form 10-Q. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

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INDEPENDENT ACCOUNTANTS’ REPORT

To the Board of Directors and Shareowners of
Delta Air Lines, Inc.
Atlanta, Georgia

We have reviewed the accompanying consolidated balance sheet of Delta Air Lines, Inc. (the “Company”) and subsidiaries as of March 31, 2003, and the related consolidated statements of operations and condensed consolidated statements of cash flows for the three-month periods ended March 31, 2003 and 2002. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to such consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of Delta Air Lines, Inc. and subsidiaries as of December 31, 2002, and the related consolidated statements of operations, cash flows and shareowners’ equity for the year then ended (not presented herein); our report dated January 31, 2003, expressed an unqualified opinion on those consolidated financial statements and included explanatory paragraphs relating to (1) the Company’s change in its method of accounting for goodwill and other intangible assets to conform with Statement of Financial Accounting Standards No. 142 and (2) the application of procedures relating to certain revised disclosures in Notes 5, 9, 17 and 21 related to the 2001 and 2000 consolidated financial statements that were audited by other auditors who have ceased operations and for which we have expressed no opinion or other form of assurance other than with respect to such disclosures. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2002 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ DELOITTE & TOUCHE LLP

Atlanta, Georgia
April 17, 2003

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PART II. OTHER INFORMATION

Item  1.    Legal Proceedings

     Hall, et al. v. United Airlines, et al. As discussed on page 17 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (Form 10-K), several airlines, including Delta, are defendants in a class action lawsuit which is pending in the U.S. District Court for the Eastern District of North Carolina on behalf of all travel agents in the United States, Puerto Rico and the U.S. Virgin Islands which sold tickets on the defendant airlines between 1997 and 2002. The lawsuit alleges that the airline defendants conspired to fix travel agent commissions in violation of Section 1 of the Sherman Act. In April 2003, approximately 50 travel agents opted out of this class action and asserted similar individual claims in a lawsuit filed in the U.S. District Court for the Northern District of California.

     All Direct Travel, Inc., et al. v. Delta Air Lines, et al. As discussed on pages 17-18 of the Form 10-K, two travel agencies filed a purported class action lawsuit against Delta in the U.S. District Court for the Central District of California on behalf of all travel agencies from which Delta has demanded payment for breach of the agencies’ contractual and fiduciary duties to Delta in connection with Delta ticket sale transactions from September 20, 1997 to the present. The lawsuit alleges that Delta’s conduct (1) violates the Racketeer Influenced and Corrupt Organizations Act of 1970; and (2) creates liability for unjust enrichment. In April 2003, the District Court granted Delta’s motion for summary judgment on all claims. The plaintiff’s time to appeal has not yet expired.

     Power Travel International, Inc., et al. v. American Airlines, et al. As discussed on page 18 of the Form 10-K, a travel agency filed a purported class action lawsuit against several airlines, including Delta, on behalf of a nationwide class of travel agents. The lawsuit, which the airlines removed to the U.S. District Court for the Southern District of New York, alleges that the airlines breached their contracts with and their duties of good faith and fair dealing to U.S. travel agencies when the airlines discontinued the payment of published base commissions to U.S. travel agencies at various times beginning in March 2002. In April 2003, the District Court granted the airlines’ motion to dismiss this lawsuit, and granted plaintiff leave to file an amended lawsuit.

     An adverse decision in any of the cases discussed above could result in substantial damages against us. We are vigorously defending these lawsuits. Although the ultimate outcome of these matters cannot be predicted with certainty, management believes that the resolution of these actions will not have a material adverse effect on our Condensed Consolidated Financial Statements.

     Jeans v. Delta Air Lines, Inc. As discussed on page 18 of the Form 10-K, an individual filed an amended class action lawsuit against Delta in the Circuit Court of Jackson County, Missouri on behalf of all persons who relinquished their seats on an overbooked Delta flight in exchange for a travel voucher that may be redeemed for a round-trip, economy class Delta ticket. In January 2003, the Circuit Court granted Delta’s motion for summary judgment on all claims, and the plaintiff subsequently appealed to the Missouri Court of Appeals. The parties have now settled this lawsuit.

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Item  6.    Exhibits and Reports on Form 8-K

     On January 16, 2003, Delta filed a Current Report on Form 8-K reporting, under Item 5 — Other Events and Regulation FD Disclosure, its financial results for the quarter and the year ended December 31, 2002.

     On March 10, 2003, Delta filed a Current Report on Form 8-K reporting, under Item 5 — Other Events and Regulation FD Disclosure, updated information regarding its expected financial performance for the March 2003 quarter.

     On March 25, 2003, Delta filed a Current Report on Form 8-K reporting, under Item 9 — Regulation FD Disclosure, that it began mailing to shareowners its Notice of Annual Meeting of Shareholders, Proxy Statement and 2002 Annual Report to Shareowners.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

May 14, 2003

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CERTIFICATIONS

I, Leo F. Mullin, certify that:

     1.    I have reviewed this quarterly report on Form 10-Q of Delta Air Lines, Inc. for the quarterly period ended March 31, 2003;

     2.    Based on my knowledge, this Form 10-Q does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Form 10-Q;

     3.    Based on my knowledge, the financial statements, and other financial information included in this Form 10-Q, fairly present in all material respects the financial condition, results of operations and cash flows of Delta as of, and for, the periods presented in this Form 10-Q;

     4.    Delta’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for Delta and have:

            (a)    designed such disclosure controls and procedures to ensure that material information relating to Delta, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Form 10-Q is being prepared;

            (b)    evaluated the effectiveness of Delta’s disclosure controls and procedures as of a date within 90 days prior to the filing of this Form 10-Q (the “Evaluation Date”); and

            (c)    presented in this Form 10-Q our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.

     5.    Delta’s other certifying officer and I have disclosed, based on our most recent evaluation, to Delta’s auditors and the Audit Committee of Delta’s Board of Directors (or persons performing the equivalent function):

            (a)    all significant deficiencies in the design or operation of internal controls which could adversely affect Delta’s ability to record, process, summarize and report financial data and have identified for Delta’s auditors any material weaknesses in internal controls; and

            (b)    any fraud, whether or not material, that involves management or other employees who have a significant role in Delta’s internal controls.

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     6.    Delta’s other certifying officer and I have indicated in this Form 10-Q whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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I, M. Michele Burns, certify that:

     1.    I have reviewed this quarterly report on Form 10-Q of Delta Air Lines, Inc. for the quarterly period ended March 31, 2003;

     2.    Based on my knowledge, this Form 10-Q does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Form 10-Q;

     3.    Based on my knowledge, the financial statements, and other financial information included in this Form 10-Q, fairly present in all material respects the financial condition, results of operations and cash flows of Delta as of, and for, the periods presented in this Form 10-Q;

     4.    Delta’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for Delta and have:

            (a)    designed such disclosure controls and procedures to ensure that material information relating to Delta, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Form 10-Q is being prepared;

            (b)    evaluated the effectiveness of Delta’s disclosure controls and procedures as of a date within 90 days prior to the filing of this Form 10-Q (the “Evaluation Date”); and

            (c)    presented in this Form 10-Q our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.

     5.    Delta’s other certifying officer and I have disclosed, based on our most recent evaluation, to Delta’s auditors and the Audit Committee of Delta’s Board of Directors (or persons performing the equivalent function):

            (a)    all significant deficiencies in the design or operation of internal controls which could adversely affect Delta’s ability to record, process, summarize and report financial data and have identified for Delta’s auditors any material weaknesses in internal controls; and

            (b)    any fraud, whether or not material, that involves management or other employees who have a significant role in Delta’s internal controls.

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     6.    Delta’s other certifying officer and I have indicated in this Form 10-Q whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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Exhibit Index

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