Date:July 16, 2008Toelta Colleagues Worldwide From:Ed Bastian

Subject:Ed Memo: June Quarter Financial Results



This morning Delta announced its financial results for the June quarter. Excluding special charges, we posted a $137 million pre-tax profit, despite more than a $1 billion increase in our input costs related to higher fuel prices.

Similar to the charge we took last quarter, we recorded a $1.1 billion non-cash charge, net of tax, to write down the value of goodwill and other intangible assets on the balance sheet, which drove a GAAP reported loss of $1 billion for the quarter. This charge reflects a finalization of last quarter’s charge relating to the valuation of our business since emergence from bankruptcy last year. We also recorded two other charges related to our voluntary headcount reduction programs and facility closures.
In reporting a profit in the face of unprecedented fuel prices, you should be proud of your accomplishments:

• Operating revenue grew 10%, or almost $500 million, compared to the prior year period with Cargo, TechOps MRO and SkyMiles all showing strong increases year over year;
• We reached our goal of closing the unit revenue gap to the industry a year ahead of schedule. Our length of haul adjusted PRASM was 102% of industry average for the first five months of 2008 with every region at a unit revenue premium to the industry;
• We maintained our cost discipline with our mainline non-fuel CASM up 1%, and we are targeting flat non-fuel unit costs for the balance of the year;
• Our fuel hedges generated more than $300 million in savings for the June quarter and our hedges through 2010 are currently valued at more than $1.3 billion;
• We maintained a strong liquidity position, ending the quarter with an unrestricted liquidity balance of $4.3 billion, which includes nearly $700 million in cash collateral deposits from counterparties to our fuel hedge contracts;
• Our top-tier results in operational performance and customer satisfaction resulted in $10 million in Shared Rewards payments for the quarter.

Today’s results are another sign that we are distinguishing Delta as a leader in the industry. Because of your hard work over the last three years, we:

• Have led the industry in domestic capacity rationalization due to record fuel prices but continuing our profitable international expansion efforts;
• Command a revenue premium to the industry;
• Have a best in class cost structure;
• Maintain a strong liquidity position and a solid balance sheet;
• Have approximately $2 billion in opportunities as a result of the Northwest merger; and
• Are showing consistent, top-tier results in operational performance and customer satisfaction.

Today’s results are another sign that we are distinguishing Delta as a leader in the industry. Because of your hard work over the last three years, we:

• Have led the industry in domestic capacity rationalization due to record fuel prices but continuing our profitable international expansion efforts;
It is no fluke that we reported a profit this quarter, excluding special charges, when our network competitors are not forecasted to do so. We have led the industry – doing more at a faster pace – and now you are seeing the results of your efforts. However, the stark reality is that high fuel prices continue to place tremendous stress on our business and industry. We have implemented an aggressive action plan to combat high fuel prices and enable Delta to achieve long-term success. This strategy sets us up to cover nearly $3 billion of the $4 billion impact from higher fuel prices this year and to compete in a high-fuel cost environment going forward.

Our merger with Northwest changes the industry landscape, strategically positioning us for success and creating a durable financial foundation for the long term. We announced today that we’ve increased our merger synergy target to approximately $2 billion annually by 2012, as compared to the $1 billion previously estimated. We expect one-time cash costs to approximate $600 million over three years.

Since our last merger update in mid-June, we have achieved several significant milestones on our path toward closing the merger. The Delta and Northwest units of the Air Line Pilots Association reached an unprecedented pre-merger agreement on a joint contract. This four-year agreement, which includes a process to establish an integrated pilot seniority list by the closing of the merger, will allow us to accelerate our network synergies. The tentative agreement is subject to ratification by both airlines’ pilot groups, which we expect by mid-August. We also announced the post-merger organizational structure and key leadership positions in the combined airline earlier this week, and we continue to provide information to the Department of Justice for their review process. We are targeting to close the merger in the fourth quarter and will continue to keep you updated on the progress of our integration teams.
Clearly, we have a great deal of work ahead of us this year, but we must never lose sight of delivering exceptional customer service and running the best airline. You have proven time and again that there is no group better to tackle any challenge than the people of Delta.

Thank you for your continued efforts to strengthen Delta’s leadership position in the industry.

 

[quote=JiffyLube;426820]Chow... These are BK write-downs. When you come out of BK you basically guess at what your value is based on the market. Just as inflation and rising gas prices are eroding your paychecks value, so is the market hurt Delta's original estimates of valuation. These are goodwill write-downs per the bk process. Also there is a $100mil write down for their 4000 early retirements. I commend Delta for this program as opposed to furloughing. Look at what AMR did vs. Delta. AMR lost $284million vs. Delta's $137 million in profits.[/quote}




Thanks Jiffy...so basically, a lot of this is on paper and has more of a tax implication rather than spending $7 billion more than was earned.

I appreciate the insight.

 

Think it's a good sign that our reported liquidity at the end of the first quarter was $3.6B and at the end of the second quarter is $4.3B. Last quarter they specifically mentioned a $1B credit line and this quarter they mention $700M in hedging related deposits.

What I read into that is we still have the big credit card but also have hedging deposits that are improving the bottom line.

 

This was a great quarter. Cash on hand is up and they made a substantial profit. There is only one other carrier that is projected to make money this quarter and that is SWA. The right downs are for the stock value. It has not one thing to do with how the airline is preforming.