SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2004

or

[   ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

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.

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

Number of shares outstanding by each class of common stock,
as of October 31, 2004:

Common Stock, $1.50 par value - 129,410,921 shares outstanding

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

FORWARD-LOOKING STATEMENTS

     Statements in this Form 10-Q (or otherwise made by us or on our behalf) that are not historical facts, including statements regarding our 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 our present expectations. For examples of such risks and uncertainties, please see the cautionary statements contained in Risk Factors Relating to Delta and the Airline Industry in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this report.

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Table of Contents

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 ⁽¹⁾

⁽¹⁾ Not subject to the review procedures of our Independent Registered Public Accounting Firm.

⁽²⁾ Includes the operations of Flyi, Inc. (formerly Atlantic Coast Airlines), Chautauqua Airlines, Inc., and SkyWest Airlines, Inc. under our contract carrier arrangements with those airlines. For additional information about our contract carrier arrangements, see Note 5 in the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q.

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DELTA AIR LINES, INC.
Aircraft Fleet Table ⁽¹⁾

The following table contains information about our total aircraft fleet, orders, options and rolling options at September 30, 2004. Rolling options replace options and are assigned delivery slots as options expire or are exercised.

⁽¹⁾ Not subject to the review procedures of our Independent Registered Public Accounting Firm.

⁽²⁾ The table above:

	•		includes eight CRJ-700 aircraft which were delivered to us during the September 2004 quarter;
	•		reflects our sale of eight owned MD-11 aircraft pursuant to an agreement we entered into with a third party during the September 2004 quarter (see Note 6 of the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q for additional information on this subject); and
	•		includes two B-737-200, one B-767-200 and five MD-11 aircraft which are temporarily grounded.

⁽³⁾ In October 2003, we entered into an agreement to sell 11 B-737-800 aircraft immediately after those aircraft are delivered to us by the manufacturer in 2005. These 11 B-737-800 aircraft are included in the table above because we continue to have a contractual obligation to purchase these aircraft from the manufacturer. For additional information about our this matter, see Note 9 of the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2003, as updated by our Current Report on
Form 8-K dated September 15, 2004.

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DELTA AIR LINES, INC.
Notes to the Condensed Consolidated Financial Statements
September 30, 2004
(Unaudited)

1. ACCOUNTING AND REPORTING POLICIES

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 Annual Report on Form 10-K for the year ended December 31, 2003, as updated by our Current Report on Form 8-K dated September 15, 2004 (collectively, Form 10-K).

     Management believes that the accompanying unaudited Condensed Consolidated Financial Statements reflect all adjustments 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.

     Due to seasonal variations in the demand for air travel and other factors, operating results for the three and nine months ended September 30, 2004 are not necessarily indicative of operating results for the entire year.

Business Environment

Recent Financial Results

     During the nine months ended September 30, 2004, our financial performance continued to deteriorate. Our unaudited consolidated net loss of $3.0 billion reflects non-cash charges totaling $1.7 billion (which are discussed in Notes 6, 7 and 8 in this Form 10-Q), a significant decline in passenger mile yield, historically high aircraft fuel prices and other cost pressures. Our cash and cash equivalents at September 30, 2004 were $1.4 billion, down from $2.7 billion at December 31, 2003. These results are unsustainable and underscore the urgent need to reduce our cost structure.

     In light of our losses and the decline in our cash and cash equivalents, we must make permanent structural changes in the near term to appropriately align our cost structure with the depressed level of revenue we can generate in this business environment. Our cost structure is materially higher than that of low-cost carriers. Moreover, other hub-and-spoke airlines, such as American Airlines, United Airlines and US Airways, have significantly reduced their costs through bankruptcy or the threat of bankruptcy. As a result, our unit costs have gone from being among the lowest of the hub-and-spoke airlines to among the highest, a result that places us at a serious competitive disadvantage.

Our Transformation Plan

     At the end of 2003, we began a strategic reassessment of our business. The goal of this project was to develop and implement a comprehensive and competitive business strategy that addresses the airline industry environment and positions us to achieve long-term sustained success. As part of this project, we evaluated the appropriate cost reduction targets and the actions we should take to seek to achieve these targets.

     On September 8, 2004, we outlined key elements of our transformation plan, which is intended to achieve the cost savings and other benefits that we believe are necessary to effect an out-of-court restructuring. The initiatives that we announced are part of our overall strategic reassessment of our business discussed above.

     Our transformation plan is intended to deliver approximately $5 billion in annual benefits by 2006 (as compared to 2002) while also improving the service offered by us to our customers. The plan calls for over 51% of our network to be restructured by January 31, 2005, along with improvements to our product and services, network and fleet, and operational efficiencies and productivity immediately and over the next three years. We believe that we are on track to achieve, by the end of 2004, approximately $2.3 billion of the approximately $5 billion annual target through previously implemented initiatives under our profit improvement program, which began in 2002. Because our cost reduction targets are substantial, we believe that our key stakeholder groups, such as our employees, lenders, lessors and vendors, must participate in the process if we are to be successful.

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     Our transformation plan includes the following targeted annual benefits:

     Non-Pilot Operational Improvements

     Non-pilot operational improvements consist of (1) technology and productivity enhancements; (2) the elimination of 6,000 – 7,000 non-pilot jobs over the next 18 months; (3) non-pilot pay and benefit savings, including an across-the-board pay reduction of 10% for executives, supervisory, administrative, and frontline employees; (4) dehubbing of our Dallas/Ft. Worth operation effective January 31, 2005 and re-deploying those assets to grow our other hub operations which we believe will generate incremental revenue; and (5) redesigning our primary hub at Atlanta’s Hartsfield-Jackson International Airport to a planned continuous, “un-banked” hub and then expanding this concept to our other hubs, which we also believe will generate incremental revenue.

     In connection with our transformation plan, we expect to record significant one-time adjustments. These adjustments relate to, among other things, (1) a gain from the elimination of the subsidy we offered for retiree and survivor healthcare coverage; (2) charges from voluntary and involuntary employee reduction programs and (3) facility exit costs and other asset related charges. We cannot reasonably estimate the net impact of these adjustments at this time.

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     Pilot Cost Reduction

     Our pilot cost structure is significantly higher than that of our competitors and must be reduced in order for us to compete effectively.

     On November 11, 2004, we and our pilots union entered into an agreement that will provide us with $1 billion in long-term, annual cost savings through a combination of changes in wages, pension and other benefits and work rules. The agreement (1) includes a 32.5% reduction to base pay rates on December 1, 2004; (2) does not include any scheduled increases in base pay rates; and (3) includes benefit changes such as a 16% reduction in vacation pay, increased cost sharing for active pilot and retiree medical benefits, the amendment of the defined benefit pension plan to stop service accrual as of December 31, 2004, and the establishment of a defined contribution pension plan as of January 1, 2005. The agreement also states certain limitations on our ability to seek to modify it if we file for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The agreement becomes amendable on December 31, 2009.

     Other Benefits

     Our transformation plan also targets other benefits through concessions from aircraft lessors, creditors and other vendors. We are in discussions with certain aircraft lessors, creditors and other vendors with which we do business to obtain concessions from those parties.

     Equity Grants

     As part of our transformation plan, we will provide an employee incentive program for U.S. based employees, including pilots. One element of this program is a broad-based, non-qualified stock option plan. On November 11, 2004, we granted to approximately 60,000 employees (excluding officers and directors) stock options to purchase a total of approximately 63 million shares of common stock. The exercise price of the stock options is equal to the closing price of our common stock on the New York Stock Exchange on the date of the grant. The options will become exercisable in three equal installments on the first, second and third anniversaries of the grant date, and unexercised stock options will expire at the close of business on the sixth anniversary of the grant date.

     In addition, we expect to issue up to 12 million shares of common stock to (1) holders of Delta’s unsecured 7.7% Notes due 2005 who exchange those notes for newly issued unsecured 8.0% Notes due 2008; and (2) aircraft lessors and lenders who participate in our aircraft financing concession program.

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Liquidity

     Our unencumbered assets are limited, our credit ratings have been substantially lowered and our cost structure is materially higher than that of our competitors. Except for commitments to finance our purchase of regional jet aircraft, we had no available lines of credit at September 30, 2004. Continued losses of the magnitude we recorded in 2003 and in the nine months ended September 30, 2004 are unsustainable, and we have significant obligations due in 2005 and thereafter, including significant debt maturities, operating lease payments, purchase obligations and required pension funding.

     Subsequent to September 30, 2004, we announced the following transactions intended to improve our liquidity: (1) we amended an exchange offer under which, among other things, eligible holders of up to $235 million aggregate amount of our 7.78% Series 2000-1C Pass Through Certificates due 2005 and 7.30% Series 2001-1C Pass Through Certificates due 2006 could exchange those securities for a like principal amount of our newly issued 9.5% Senior Secured Notes due 2008; (2) we entered into an agreement with holders of approximately $135 million aggregate principal amount of 7.7% Notes due 2005 to exchange those notes for a like principal amount of newly issued 8.0% Notes due 2007 and approximately 5.5 million shares of our common stock; and (3) we entered into two separate commitment letters with American Express Travel Related Services Company, Inc. (Amex) and GE Commercial Finance (GE) under which those companies agreed to provide us (subject to a number of significant conditions) with a total of $1 billion of new financing. These transactions, if consummated, will result in the encumbrance of most of our remaining unencumbered assets. The securities offered in the exchange offers have not been registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. For additional information about these transactions, see Note 14 of the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q.

     The foregoing initiatives are part of our intensive effort to effect a successful out-of-court restructuring, but there can be no assurance this effort will succeed. If we cannot achieve a competitive cost structure, do not regain sustained profitability or are not able to consummate our financings with Amex and GE, we will need to seek to restructure under Chapter 11 of the U.S. Bankruptcy Code.

     In addition, our liquidity needs will increase to the extent we are unsuccessful in realizing any of the approximately $5 billion of targeted annual benefits. Similarly, to the extent that any of the other assumptions underlying our business plan prove to be incorrect, we expect that our liquidity needs could change materially. For example, if oil prices stay at current levels of approximately $50 per barrel instead of declining to an average of $40 per barrel in 2005 and an average of $35 per barrel in 2006 as we assume in our business plan, we estimate that our liquidity needs would increase by an additional

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$600 million in 2005 and an additional $900 million in 2006. To the extent our liquidity needs increase beyond the amounts in our business plan, we may be unable to satisfy such needs and we would then need to seek to restructure under Chapter 11 of the U.S. Bankruptcy Code.

     These matters raise substantial doubt about our ability to continue on a going concern basis. Our Condensed Consolidated Financial Statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Accordingly, the accompanying Condensed Consolidated Financial Statements do not include any adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should we be unable to continue as a going concern.

Stock-Based Compensation

     We account for our stock-based compensation plans under the intrinsic value method in accordance with Accounting Principles Bulletin (APB) Opinion 25, “Accounting for Stock Issued to Employees,” (APB 25) and related interpretations. For additional information about our stock-based compensation plans, see Note 12 of the Notes to the Consolidated Financial Statements in our Form 10-K. 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.

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          The estimated fair values of our stock options are derived using a Black-Scholes model. The following table includes the assumptions used in estimating fair values and the resulting weighted average fair value of stock options granted in the periods presented:

⁽¹⁾ There were no stock options granted during the three months ended September 30, 2004 and 2003.

          The following table shows what our net loss and loss per share would have been for the three and nine months ended September 30, 2004 and 2003, 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), as amended:

2. NEW ACCOUNTING STANDARD

          In September 2004, the Emerging Issues Task Force (EITF) reached a consensus on EITF Issue 04-08, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share” (EITF 04-08). This EITF requires shares of common stock issuable upon conversion of contingently convertible debt instruments to be included in the calculation of diluted earnings per share whether or not the contingent conditions for conversion have been met, unless the inclusion of these shares is anti-dilutive. Previously, shares of common stock issuable upon conversion of contingently convertible debt securities were excluded from the calculation of diluted earnings per share.

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          EITF 04-08 is effective for reporting periods ending after December 15, 2004. If applicable, EITF 04-08 will require the restatement of prior period diluted earnings per share amounts. We have outstanding two classes of contingently convertible debt securities: (1) our 8.0% Convertible Senior Notes due 2023, which we issued in June 2003; and (2) our 2-7/8% Convertible Senior Notes due 2024, which we issued in February 2004. These debt securities are contingently convertible into 12.5 million and 23.9 million shares of our common stock, respectively, subject to adjustment in certain circumstances.

          When we adopt EITF 04-08 as of December 31, 2004, we will restate our diluted earnings per share for the three months ended June 30, 2003 to include the dilutive impact of the 12.5 million shares of common stock issuable upon conversion of our 8.0% Convertible Senior Notes. All other quarterly and annual diluted EPS calculations for periods ending before December 31, 2004 are unaffected by our adoption of EITF 04-08. Additionally, we will include the shares of common stock issuable upon conversion of our 8.0% Convertible Senior Notes and our 2-7/8% Convertible Senior Notes in our future diluted earnings per share calculations, unless the inclusion of these shares would be anti-dilutive.

3. DERIVATIVE INSTRUMENTS

          In accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133), we record all derivative instruments on our Consolidated Balance Sheets at fair value and recognize certain changes in these fair values in our Consolidated Statements of Operations. SFAS 133 applies to the accounting for our fuel 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:

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          The fair value of our equity warrants and other similar rights totaled $30 million at September 30, 2004 and December 31, 2003. The change in the fair value of these rights is recorded in fair value adjustments of SFAS 133 derivatives on our Consolidated Statements of Operations. For additional information about these equity interests, see Note 2 of the Notes to the Consolidated Financial Statements in our Form 10-K.

4. DEBT

          The following table summarizes the scheduled maturities of our debt at September 30, 2004:

2-7/8 Convertible Senior Notes (2-7/8% Notes)

          In February 2004, we issued $325 million principal amount of 2-7/8% Notes due 2024. For additional information about our 2-7/8% Notes, see Note 22 of the Notes to the Consolidated Financial Statements in our Form 10-K.

General Electric Capital Corporation (GECC) Agreements

          In July 2004, we entered into amendments to three of our secured financing agreements with GECC (Spare Engines Loan, Aircraft Loan and Spare Parts Loan). This transaction increased our aggregate borrowings under these loan agreements by $380 million. As required by the amendments, we used $228 million of this amount to repurchase immediately $228 million principal amount of our Series 2001-1 Enhanced Equipment Trust Certificates held by GECC, which were due in 2006 (2001 EETC). As a result of these amendments:

•

Spare Engines Loan. The principal amount of this loan increased by $113 million to $232 million. This loan is secured by (1) 96 specified spare Mainline aircraft engines, which constitute substantially all the spare Mainline aircraft engines owned by us (Engine Collateral) and (2) so long as certain letters of credit issued by GECC

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are outstanding, nine B-767-400 and three B-777-200 aircraft (Letter of Credit Aircraft Collateral). Borrowings under this loan are not repayable at our election prior to maturity.

	•		Aircraft Loan. The principal amount of this loan increased by $43 million to $150 million. This loan is secured by five B-767-400 aircraft (Other Aircraft Collateral), the Engine Collateral and substantially all the Mainline aircraft spare parts now owned or subsequently purchased by us (Spare Parts Collateral). Borrowings under this loan are repayable at our election at any time, subject to prepayment fees on any prepayment.
	•		Spare Parts Loan. The principal amount of this loan increased by $224 million to $310 million. This loan is secured by the Other Aircraft Collateral, the Engine Collateral and the Spare Parts Collateral. Borrowings under this loan are repayable at our election at any time after July 6, 2007, subject to prepayment fees on any prepayment.
	•		Final Maturity Date. The final maturity date of each of the three financing agreements was extended from April 15, 2010 to July 7, 2011.

          In addition, prior to the amendments, the Engine Collateral secured, on a subordinated basis, up to $230 million of certain other existing debt and aircraft lease obligations to GECC and its affiliates. The amendments reduced this amount to $110 million on September 28, 2004.

Aircraft Financing Transactions

          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 September 30, 2004, the total borrowings outstanding under this facility, as amended, were $146 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 nine months ended September 30, 2004, we entered into secured financing arrangements under which we borrowed a total of $566 million. These borrowings are due in installments through June 2020; are secured by 18 CRJ-200 and 18 CRJ-700 aircraft; and bear interest at LIBOR plus a margin. The proceeds from these borrowings were used to (1) repay $498 million of outstanding interim financing for 18 CRJ-200 and 12 CRJ-700 aircraft and (2) finance the purchase of six CRJ-700 aircraft delivered during the nine months ended September 30, 2004.

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          During the March 2004 quarter, we entered into an agreement to purchase 32 CRJ-200 aircraft to be delivered in 2005. In conjunction with this agreement, we received a commitment from a third party to finance, on a secured basis at the time of acquisition, the future deliveries of these regional jet aircraft. Borrowings under this commitment (1) will be due in installments for 15 years after the date of borrowing and (2) bear interest at LIBOR plus a margin.

          For additional information about our debt, see Notes 6 and 22 of the Notes to the Consolidated Financial Statements in our Form 10-K. For information about financing transactions that occurred subsequent to September 30, 2004, see Note 14 of the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q.

5. COMMITMENTS AND CONTINGENCIES

Aircraft Order Commitments

          Future commitments for aircraft on firm order as of September 30, 2004 are estimated to be $4.3 billion. The following table shows the timing of these commitments:

          The table above includes approximately $135 million for the three months ending December 31, 2004 for the purchase of regional jet aircraft. We have available to us long-term, secured financing commitments to fund a substantial portion of this amount.

          Our commitments for the year ending December 31, 2005 include (1) approximately $520 million related to our agreement to purchase 32 CRJ-200 aircraft, for which financing is available to us, on a long-term secured basis, at the time of acquisition of these aircraft and (2) approximately $415 million related to our commitment to purchase 11 B-737-800 aircraft, for which we have entered into a definitive agreement to sell to a third party immediately following delivery of these aircraft to us by the manufacturer in 2005. For additional information about these arrangements, see Note 4 of the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q and Note 9 of the Notes to the Consolidated Financial Statements in our Form 10-K, respectively.

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Contract Carrier Agreement Commitments

          We have contract carrier agreements with three regional air carriers: Flyi, Inc. (formerly Atlantic Coast Airlines) (Flyi), Chautauqua Airlines, Inc. (Chautauqua) and SkyWest Airlines, Inc (SkyWest). Under these agreements, Flyi, Chautauqua, and SkyWest operate certain of their aircraft using our flight code; we schedule those aircraft and sell the seats on those flights; and we retain the related revenues. We pay those airlines an amount, as defined in the applicable agreement, which is based on their cost of operating those flights and other factors intended to approximate market rates for those services. The number of aircraft operated under these agreements at September 30, 2004 and September 30, 2003 totaled 126 and 125, respectively.

          We have included the Available Seat Miles (ASMs) and Revenue Passenger Miles (RPMs), shown in the following table, related to our contract carrier agreements in our consolidated statistics on page 6 of this Form 10-Q so that those statistics are more meaningful:

⁽¹⁾ Not subject to the review procedures of our Independent Registered Public Accounting Firm.

          In April 2004, we notified Flyi that we will terminate our contract carrier agreement with them, effective November 2004, due to their plans to change their business model by operating a new low-fare airline. In July 2004, Flyi exercised its right to require us to assume the leases on the 30 leased Fairchild Dornier FRJ-328 regional jet aircraft that it operates for us. We estimate that the total remaining operating lease payments on these 30 aircraft leases, when we are required to assume the leases, will be approximately $300 million. These operating lease payments will be made over the remaining terms of the aircraft leases, which are approximately 13 years. We expect that these 30 aircraft will remain in the Delta Connection carrier program, but will be operated for us by another carrier.

          We may terminate the SkyWest agreement without cause at any time by giving the airline certain advance notice. If we terminate the SkyWest agreement without cause, SkyWest has the right to assign to us leased regional jet aircraft which it operates for us, provided we are able to continue the leases on the same terms SkyWest had prior to the assignment.

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          We may terminate the Chautauqua agreement, as amended, without cause at any time after November 2008 by giving the airline certain advance notice. If we terminate the Chautauqua agreement without cause, Chautauqua has the right to (1) assign to us leased aircraft that it operates for us, provided we are able to continue the leases on the same terms Chautauqua had prior to the assignment and (2) require us to purchase or sublease any of the aircraft that it owns and operates for us at the time of the termination. If we are required to purchase aircraft owned by Chautauqua, the purchase price would be equal to the amount necessary to (1) reimburse Chautauqua for the equity it provided to purchase the aircraft and (2) repay in full any debt outstanding at such time that is not being assumed in connection with such purchase. If we are required to sublease aircraft owned by Chautauqua, the sublease would have (1) a rate equal to the debt payments of Chautauqua for the debt financing of the aircraft calculated as if 90% of the aircraft was debt financed by Chautauqua and (2) specified other terms and conditions.

          We estimate that the total fair value, at December 31, 2003, of the aircraft that SkyWest or Chautauqua could assign to us or require that we purchase if we terminate without cause our contract carrier agreements with those airlines is approximately $630 million and $450 million, respectively. The actual amount that we may be required to pay in these circumstances may be materially different from these estimates.

          For additional information about our contract carrier agreements, see Notes 1 and 9 of the Notes to the Consolidated Financial Statements in our Form 10-K.

Legal Contingencies

          We are involved in legal proceedings relating to antitrust matters, employment practices, environmental issues and other matters concerning our business. We are also a defendant in numerous lawsuits arising out of the terrorist attacks of September 11, 2001. We cannot reasonably estimate the potential loss for certain legal proceedings because, for example, the litigation is in its early stages or the plaintiff does not specify the damages being sought. Although the ultimate outcome of our legal proceedings cannot be predicted with certainty, we believe that the resolution of these actions will not have a material adverse effect on our Consolidated Financial Statements.

War-Risk Insurance Contingency

          Under the 2003 Emergency Wartime Supplemental Appropriations Act, the U.S. government is currently providing U.S airlines with war-risk insurance to cover losses, including those of terrorism, to passengers, third parties (ground damage) and the aircraft hull. On July 30, 2004, the Secretary of Transportation directed the Federal Aviation Administration to extend the war-risk insurance currently in force from August 31, 2004 to December 31, 2004. The U.S. government is considering legislative and administrative options to extend some or all of the war-risk insurance provided to U.S. airlines beyond December 31, 2004; however, there can be no assurance that such an extension will occur. The withdrawal of government support of airline war-risk insurance would require us to

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obtain insurance coverage commercially, which could have substantially less desirable coverage, may not be adequate to protect our risk of loss from future acts of terrorism and may result in a material increase to our operating expenses.

6. SALE OF ASSETS

          In September 2004, we entered into an agreement to sell to a third party our eight owned MD-11 aircraft and related inventory. We recorded a $40 million impairment charge during the September 2004 quarter related to the sale of the aircraft and expect to record an $11 million gain in the December 2004 quarter related to the sale of the inventory. The sale of this equipment was accounted for in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” and EITF 00-21, “Revenue Arrangements with Multiple Deliverables.”

          At September 30, 2004, the aggregate net book value of the aircraft and inventory held for sale, adjusted for the impairment charge discussed above, was approximately $216 million. In October 2004, we completed this sale and received total proceeds of $227 million.

7. INCOME TAXES

          Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and income tax purposes. The following table shows significant components of our deferred tax assets and liabilities at September 30, 2004 and December 31, 2003:

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          The following table shows the current and noncurrent deferred tax (liabilities) assets, net recorded on our Consolidated Balance Sheets at September 30, 2004 and December 31, 2003:

          In accordance with SFAS No. 109, “Accounting for Income Taxes” (SFAS 109), the current and noncurrent components of our deferred tax balances are based on the balance sheet classification of the asset or liability creating the temporary difference. If the deferred tax asset or liability is not based on a component of our balance sheet, such as our net operating loss carryforwards, the classification is presented based on the expected reversal date of the temporary difference. Our valuation allowance has been classified as current or noncurrent based on the percentages of current and noncurrent deferred tax assets to total deferred tax assets.

          At September 30, 2004, we had $346 million of federal alternative minimum tax credit carryforwards, which do not expire. We also had federal and state pretax net operating loss carryforwards of approximately $6.3 billion at September 30, 2004, substantially all of which will not begin to expire until 2022. However, in the event we seek to restructure our costs under Chapter 11 of the U.S. Bankruptcy Code, our ability to utilize our net operating loss carryforwards may be significantly limited. This could result in the need for an additional valuation allowance, which may be material.

Valuation Allowance

          SFAS 109 requires us to periodically assess whether it is more likely than not that we will generate sufficient taxable income to realize our deferred income tax assets. In making this determination, we consider all available positive and negative evidence and make certain assumptions. We consider, among other things, our deferred tax liabilities; the overall business environment; our historical earnings and losses; our industry’s historically cyclical periods of earnings and losses; and our outlook for future years.

          In the June 2004 quarter, we determined that it was unclear as to the timing of when we will generate sufficient taxable income to realize our deferred income tax assets. This was primarily due to higher than expected fuel costs and lower than anticipated domestic passenger mile yields, which caused our actual and anticipated financial performance for 2004 to be significantly worse than we originally projected. Accordingly, at June 30, 2004, we recorded an additional valuation allowance against our deferred income tax assets, which resulted in a $1.5 billion non-cash charge to income tax expense on our Consolidated Statement of Operations for the three months ended June 30, 2004. In addition, we discontinued recording income tax benefits in our Consolidated Statement of Operations

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until we determine that it is more likely than not that we will generate sufficient taxable income to realize our deferred income tax assets.

          In the September 2004 quarter, we recorded an adjustment to our valuation allowance against our net deferred income tax assets, which resulted in a $6.1 million income tax benefit on our Consolidated Statement of Operations for the three months ended September 30, 2004.

          For additional information about our income taxes see Note 10 of the Notes to the Consolidated Financial Statements in our Form 10-K.

8. EMPLOYEE BENEFIT PLANS

Non-Cash Settlement Charges

          During the three and nine months ended September 30, 2004, we recorded non-cash settlement charges totaling $14 million and $131 million, respectively, in our Consolidated Statements of Operations. These charges relate to our defined benefit pension plan for pilots (Pilot Plan) and result from lump sum distributions to pilots who retired. We recorded these charges in accordance with SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits” (SFAS 88). SFAS 88 requires settlement accounting if the cost of all settlements, including lump sum retirement benefits paid, in a year exceeds, or is expected to exceed, the total of the service and interest cost components of pension expense for the same period.

          In connection with these non-cash settlement charges, we remeasured the benefit plan obligation for the Pilot Plan as of March 31, 2004 and June 30, 2004 in accordance with SFAS No. 87, “Employers’ Accounting for Pensions” (SFAS 87). As a result of the remeasurements, for the nine months ended September 30, 2004, we reduced our additional minimum pension liability by recording adjustments totaling $147 million ($91 million net of tax) to accumulated other comprehensive loss and reduced by $158 million the Pilot Plan liability. These remeasurements will not have a material impact on our remaining 2004 pension expense.

          We estimate that we will record an additional non-cash settlement charge of approximately $120 million related to the Pilot Plan in the December 2004 quarter. This estimate could change because certain data used to calculate the settlement charge is not yet final.

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Net Periodic Benefit Costs

          Net periodic benefit cost for the three months ended September 30, 2004 and 2003 included the following components:

          Net periodic benefit cost for the nine months ended September 30, 2004 and 2003 included the following components:

Pension Contributions

          Pension contributions to our qualified defined benefit pension plans during 2004 totaled $455 million, $410 million of which was contributed during the nine months ended September 30, 2004. Subsequent to the September 2004 quarter, we contributed the remaining $45 million.

          For additional information about our benefit plans, see Note 11 of the Notes to the Consolidated Financial Statements in our Form 10-K.

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9. SHAREOWNERS’ DEFICIT

          During the nine months ended September 30, 2004, we distributed from treasury (1) 3.9 million shares of our common stock for redemptions of our Series B ESOP Convertible Preferred Stock (ESOP Preferred Stock) under our Delta Family-Care Savings Plan and (2) a total of 95,837 shares of our common stock under our 2000 Performance Compensation Plan and our Non-Employee Directors’ Stock Plan. At September 30, 2004, accumulated but unpaid dividends on our ESOP Preferred Stock totaled $30 million and are recorded in accounts payable, deferred credits and other accrued liabilities on our Consolidated Balance Sheet. For additional information about our stock compensation plans and our ESOP Preferred Stock, see Note 12 of the Notes to the Consolidated Financial Statements in our Form 10-K.

10. COMPREHENSIVE INCOME (LOSS)

          Comprehensive income (loss) includes (1) reported net income (loss); (2) additional minimum pension liability adjustments; and (3) unrealized effective gains and losses on fuel derivative instruments that qualify for hedge accounting. The following table shows our comprehensive loss for the three and nine months ended September 30, 2004 and 2003:

          The following table shows the components of accumulated other comprehensive loss at September 30, 2004 and the activity for the nine months then ended:

          We anticipate that the remaining pretax gains of $18 million related to our fuel hedge contracts settled prior to their scheduled settlement dates will be realized in the December 2004 quarter as the aircraft fuel purchases that were being hedged are consumed. These

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gains will be recognized as a reduction to aircraft fuel expense. For additional information about the settlement of our fuel hedge contracts, see Note 22 of the Notes to the Consolidated Financial Statements in our Form 10-K. For information about our additional minimum pension liability, see Note 8 of the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q and Note 11 of the Notes to the Consolidated Financial Statements in our Form 10-K.

11. GEOGRAPHIC INFORMATION

     We are managed as a single business unit that provides air transportation for passengers and cargo. For additional information about how we manage our business, see Note 14 of the Notes to the Consolidated Financial Statements in our Form 10-K. Our operating revenues by geographic region are summarized in the following table:

12. RESTRUCTURING AND OTHER RESERVES

     The following table shows our restructuring and other reserve balances as of September 30, 2004 and the activity for the nine months then ended 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 employee severance costs.

     During the nine months ended September 30, 2004, we recorded adjustments totaling $3 million related to the 2002 workforce reduction programs reserve and to the facilities and

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other reserve based on revised estimates of remaining costs. For additional information about our charges for restructuring and related items recorded in prior years, see Notes 15 and 16 of the Notes to the Consolidated Financial Statements in our Form 10-K.

13. EARNINGS (LOSS) PER SHARE

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

     For the three and nine months ended September 30, 2004, we excluded from the diluted loss per share computation (1) 36.2 million and 37.1 million stock options, respectively, because the exercise price of these stock options was greater than the average price of our common stock; (2) 7.1 million and 7.0 million additional shares, respectively, primarily related to our ESOP Preferred Stock, because the effect on our loss per share was anti-dilutive; and (3) 12.5 million and 23.9 million shares of common stock issuable upon conversion of our 8% Convertible Senior Notes and our 2-7/8% Convertible Senior Notes, respectively, because the contingent conditions for conversion had not been met.

     For the three and nine months ended September 30, 2003, we excluded from the diluted loss per share computation (1) 34.3 million and 45.5 million stock options, respectively, because the exercise price of these stock options was greater than the average price of our common stock; (2) 7.3 million and 7.0 million additional shares, respectively, primarily related to our ESOP Preferred Stock, because their effect on our loss per share was anti-dilutive; and (3) 12.5 million shares of common stock issuable upon conversion of our 8% Convertible Senior Notes because the contingent conditions for conversion had not been met.

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     For additional information about our 8% Convertible Senior Notes and our 2-7/8% Convertible Senior Notes, see Note 2 of the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q and Notes 6 and 22, respectively, of the Notes to the Consolidated Financial Statements in our Form 10-K.

14. SUBSEQUENT EVENTS

Debt Exchange Offer (Exchange Offer)

     In October 2004, we amended the Exchange Offer under which, among other things, eligible holders of up to $235 million aggregate principal amount of our 7.78% Series 2000-1C Pass Through Certificates due 2005 and 7.30% Series 2001-1C Pass Through Certificates due 2006 (collectively, Short-Term Existing Securities) could exchange those securities for a like principal amount of our newly issued 9.5% Senior Secured Notes due 2008 (9.5% New Notes). The 9.5% New Notes will (1) be secured by a pool of 32 of our unencumbered mainline aircraft (consisting of 16 MD-88, five MD-90, six B-757-200, one B-767-300 and four B-767-300 ER aircraft) and (2) amortize from 2006 through 2008. Approximately $252 million aggregate principal amount of the Short-Term Existing Securities have been tendered in the Exchange Offer, which is scheduled to be completed on November 23, 2004. Based on the limited number of tenders to date for the other securities subject to the Exchange Offer (the Intermediate and Long-Term Existing Securities), we expect that the Exchange Offer will be unsuccessful with respect to such other classes and that we will seek to use the collateral originally reserved for the Intermediate and Long-Term Securities to secure alternative financing.

     The Exchange Offer is subject to a number of significant conditions which we may waive or amend in our sole discretion. The Exchange Offer is also subject to a condition, that we may not waive, that we have entered into a new collective bargaining agreement with ALPA that provides, in our judgment, at least $1 billion of annual cost reductions by 2006. We believe the new agreement we have entered into with our pilots, described in Note 1 of the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q, satisfies this requirement. The securities offered in the Exchange Offer have not been registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

Agreement with Holders of 7.7% Notes Due 2005

     On October 25, 2004, we entered into an agreement with the holders of approximately $135 million aggregate principal amount of our unsecured 7.7% Notes due 2005 to exchange those notes for (1) a like principal amount of newly issued unsecured 8.0% Senior Notes due 2007; and (2) a pro rata allocation of a number of shares of our common stock equal to $22.5 million divided by the average price per share of our common stock over a specified measurement period. We will issue a total of approximately 5.5 million shares of our common stock upon the consummation of this transaction.

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     The completion of this transaction is subject to a number of conditions, including the requirement that we have entered into a new collective bargaining agreement with ALPA that provides, in our judgment, at least $1 billion of annual cost reductions by 2006. We believe the new agreement we have entered into with our pilots, described in Note 1 of the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q, satisfies this requirement. The 8.0% Senior Notes and the related shares of our common stock have not been registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

Financing Commitment with American Express Travel Related Services Company, Inc. (Amex)

     On October 25, 2004, we entered into a commitment letter with Amex to provide us with up to $600 million of financing. Up to $100 million of this financing will be in the form of a loan from Amex as part of the new credit facility currently being negotiated with GE Commercial Finance as discussed below (Third Party Loan Facility), and $500 million of this amount will be in the form of a prepayment of SkyMiles.

     The prepayment of SkyMiles by Amex will be made in two installments, each in an amount of $250 million, and each subject to significant conditions. The first installment will be paid upon timely satisfaction of certain conditions including, without limitation, the following:

•

the completion of the Exchange Offer with respect to the Short-Term Existing Securities on substantially the terms discussed above in this Note 14;

•

with respect to the Third Party Loan Facility, the full amount of the term loan and the revolving loan has been drawn by us, or is available to be drawn by us, respectively;

•

our determination that there are anticipated annual benefits sufficient for us to achieve financial viability in an out-of-court restructuring, including reduction of pilot costs of at least $1 billion annually by 2006 (which condition we believe is satisfied by the new pilot contract) and achievement of other benefits of at least $1.7 billion annually by 2006 (in addition to the $2.3 billion of annual benefits expected to be achieved by the end of 2004 through previously implemented profit improvement initiatives);

•

satisfaction by Amex with the nature, priority and amount of collateral provided by us with respect to our obligations under the prepayment transaction;

•

there has been no material adverse change (as defined) in our business or financial condition;

•

Amex shall be reasonably satisfied with any change in our business plan that differs materially and adversely from our current business plan; and

•

execution of the prepayment transaction documents.

     The second prepayment installment will be made on a date specified by us that is at least 90 days after the first prepayment installment and will be subject to the following conditions, among others:

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•

there exists no material default by us (as this term is defined by mutual agreement between us and Amex); and

•

there has been no material adverse change (as defined) in our business or financial condition since the date of the first prepayment installment.

     The prepayments of SkyMiles will be credited in equal monthly installments toward SkyMiles purchases to be made by Amex during the 24-month period beginning on the first anniversary of the first prepayment and ending on the third anniversary of that installment. Amex’s right to recover the prepayments will be secured on a senior basis by our right to payment for purchased SkyMiles and related assets, and on a junior basis by the collateral securing the Third Party Loan Facility described below in this Note 14.

     Also subsequent to September 30, 2004, we signed agreements with Amex for a multi-year extension of our co-branded credit card, Membership Rewards and merchant services relationships.

Financing Commitment with GE Commercial Finance (GE)

     On November 1, 2004, we entered into a commitment letter with GE to provide us with up to $500 million of financing. $300 million of this financing will be in the form of a senior secured revolving credit facility, and $200 million of this amount will be in the form of a senior secured term loan. Up to $100 million of the financing will be provided by Amex as discussed above.

     The $300 million revolving credit facility will be (1) collateralized on a senior basis by a portion of our accounts receivable and on a junior basis by the collateral securing the term loan and the collateral securing the SkyMiles facility, (2) subject to asset borrowing base limits and (3) subject to a $50 million reserve. It will mature three years from the closing date.

     The $200 million term loan will be (1) collateralized on a senior basis by a pool of a substantial portion of our remaining unencumbered assets and on a junior basis by the collateral securing the credit facility and the collateral securing the SkyMiles facility, and (2) subject to asset borrowing base limits. The collateral pool includes aircraft, real property, spare parts, flight simulators, ground equipment, landing slots, international routes and a pledge of stock of subsidiaries and other investments. The term loan will be payable in 12 equal monthly installments beginning on the second anniversary of the closing date.

     GE’s financing commitment is subject to significant conditions including, without limitation:

•

completion of due diligence by GE;

•

our determination that there are anticipated annual benefits sufficient for us to achieve financial viability in an out-of-court restructuring, including reduction of

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costs and other benefits of at least $2.7 billion annually by 2006 (in addition to the $2.3 billion of annual benefits expected to be achieved by the end of 2004 through previously implemented profit improvement initiatives);

•

GE has received our detailed operating budget for the 36 month period following closing of the facility in form and substance reasonably satisfactory to GE;

•

the definitive credit facility documentation will be mutually acceptable to the parties;

•

there has been no material adverse effect (as defined) on our business or financial condition; and

•

immediately prior to the closing, we shall have at least $1 billion of cash on hand.

Sale of Orbitz Investment

     During November 2004, we completed the sale of our investment in Orbitz, Inc. (Orbitz) for approximately $143 million. This transaction will result in the recognition of a pre-tax gain totaling approximately $124 million during the December 2004 quarter.

     We previously accounted for our investment in Orbitz under the equity method. Our equity earnings from this investment were not material for the three and nine month periods ended September 30, 2004 and 2003.

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

Business Environment

Recent Financial Results

     During the nine months ended September 30, 2004, our financial performance continued to deteriorate. Our unaudited consolidated net loss of $3.0 billion reflects non-cash charges totaling $1.7 billion which are discussed elsewhere in this Form 10-Q, a significant decline in passenger mile yield, historically high aircraft fuel prices and other cost pressures. Our cash and cash equivalents at September 30, 2004 were $1.4 billion, down from $2.7 billion at December 31, 2003. These results are unsustainable and underscore the urgent need to reduce our cost structure.

     Our financial performance for the nine months ended September 30, 2004 was materially adversely affected by a decrease in passenger mile yield. While Revenue Passenger Miles (RPMs), or traffic, rose 12% in the nine months ended September 30, 2004 compared to the corresponding period in the prior year, passenger revenue increased only 8%, reflecting a 4% decrease in the passenger mile yield on a year-over-year basis. The decrease in passenger mile yield reflects the permanent changes in the airline industry that have occurred primarily due to the rapid and continuing growth of low-cost carriers with which we compete in most of our domestic markets.

     Aircraft fuel prices also had a significant negative impact on our financial results for the nine months ended September 30, 2004. These prices reached historically high levels, as our average fuel price per gallon increased 32% to $1.07 (net of hedging gains) for the nine months ended September 30, 2004 compared to the corresponding period in the prior year. We project that our annual aircraft fuel expense will be approximately $950 million higher in 2004 than in 2003, with about 86% of this increase caused by higher aircraft fuel prices.

     In light of our losses and the decline in our cash and cash equivalents, we must make permanent structural changes in the near term to appropriately align our cost structure with the depressed level of revenue we can generate in this business environment. Our cost structure is materially higher than that of low-cost carriers. Moreover, other hub-and-spoke airlines, such as American Airlines, United Airlines and US Airways, have significantly reduced their costs through bankruptcy or the threat of bankruptcy. As a result, our unit costs have gone from being among the lowest of the hub-and-spoke airlines to among the highest, a result that places us at a serious competitive disadvantage.

Our Transformation Plan

     In 2002, we began our profit improvement program, which has a goal of reducing by 2005 our mainline fuel price neutralized unit costs by 15% as compared to 2002 and increasing our revenues. While we have made progress under this program, significant increases in aircraft fuel prices and pension and related expense and declining yields have

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offset a large portion of these benefits. Accordingly, we concluded that we will need substantial further reductions to our cost structure in order to achieve viability.

     At the end of 2003, we began a strategic reassessment of our business. The goal of this project was to develop and implement a comprehensive and competitive business strategy that addresses the airline industry environment and positions us to achieve long-term sustained success. As part of this project, we evaluated the appropriate cost reduction targets and the actions we should take to seek to achieve these targets.

     On September 8, 2004, we outlined key elements of our transformation plan, which is intended to achieve the cost savings and other benefits that we believe are necessary to effect an out-of-court restructuring. The initiatives that we announced are part of our overall strategic reassessment of our business discussed above.

     Our transformation plan is intended to deliver approximately $5 billion in annual benefits by 2006 (as compared to 2002) while also improving the service offered by us to our customers. The plan calls for over 51% of our network to be restructured by January 31, 2005, along with improvements to our product and services, network and fleet, and operational efficiencies and productivity immediately and over the next three years. We believe that we are on track to achieve, by the end of 2004, approximately $2.3 billion of the approximately $5 billion annual target through previously implemented initiatives under our profit improvement program, which began in 2002. Because our cost reduction targets are substantial, we believe that our key stakeholder groups, such as our employees, lenders, lessors and vendors, must participate in the process if we are to be successful.

     Key elements of the transformation plan include: (1) updating and upgrading customer products and services, including cabins and online functionality, and maintaining two-class service in mainline operations; (2) redesigning Atlanta’s hub operation to add flights for greater customer choice and reliability while simultaneously reducing congestion; (3) dehubbing our Dallas/Ft. Worth operations and re-deploying those assets to grow hub operations in Atlanta, Cincinnati and Salt Lake City; (4) adding 31 new nonstop flights to 19 additional destinations from key focus cities; (5) growing Song, our low fare operation, initially by 12 aircraft; (6) reducing fleet complexity by retiring at least four fleet types in four years and increasing overall fleet utilization and efficiency; (7) eliminating 6,000-7,000 jobs over the next 18 months, lowering management overhead costs by 15%, and reducing pay and benefits; and (8) creating an employee reward program to include equity, profit sharing and performance-based incentive payouts.

     Our transformation plan also requires us to raise a significant amount of new funding to meet our near-term operational needs. We expect that the Amex and GE financing commitments described below will, if completed, provide this funding. The transformation plan also contemplates our regaining access to the capital markets on acceptable terms to raise new capital. The amount of new capital will depend in part upon the implementation of various elements of our transformation plan.

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     Our transformation plan includes the following targeted annual benefits:

     Non-Pilot Operational Improvements

     Non-pilot operational improvements consist of (1) technology and productivity enhancements; (2) the elimination of 6,000 — 7,000 non-pilot jobs over the next 18 months; (3) non-pilot pay and benefit savings, including an across-the-board pay reduction of 10% for executives, supervisory, administrative, and frontline employees; (4) dehubbing of our Dallas/Ft. Worth operation effective January 31, 2005 and re-deploying those assets to grow our other hub operations which we believe will generate incremental revenue; and (5) redesigning our primary hub at Atlanta’s Hartsfield-Jackson International Airport to a planned continuous, “un-banked” hub and then expanding this concept to our other hubs, which we also believe will generate incremental revenue.

     In connection with our transformation plan, we expect to record significant one-time adjustments. These adjustments relate to, among other things, (1) a gain from the elimination of the subsidy we offered for retiree and survivor healthcare coverage; (2) charges from voluntary and involuntary employee reduction programs and (3) facility exit costs and other asset related charges. We cannot reasonably estimate the net impact of these adjustments at this time.

     Pilot Cost Reduction

     Our pilot cost structure is significantly higher than that of our competitors and must be reduced in order for us to compete effectively.

     On November 11, 2004, we and our pilots union entered into an agreement that will provide us with $1 billion in long-term, annual cost savings through a combination of changes in wages, pension and other benefits and work rules. The agreement (1) includes a 32.5% reduction to base pay rates on December 1, 2004; (2) does not include any scheduled increases in base pay rates; and (3) includes benefit changes such as a 16% reduction in vacation pay, increased cost sharing for active pilot and retiree medical benefits, the amendment of the defined benefit pension plan to stop service accrual as of December 31, 2004, and the establishment of a defined contribution pension plan as of January 1, 2005. The agreement also states certain limitations on our ability to seek to modify it if we file for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The agreement becomes amendable on December 31, 2009.

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     Other Benefits

     Our transformation plan also targets other benefits through concessions from aircraft lessors, creditors and other vendors. We have received commitments from over 100 vendors and suppliers for approximately $59 million in annual savings. Some of these commitments are conditioned on our determination that we have received reasonable assurances from stakeholders of adjustments and concessions that will be sufficient for us to achieve financial viability. We are in negotiations to obtain additional savings from other parties with which we do business.

Employee Incentive Program

     As part of our transformation plan, we are implementing three new employee incentive programs for U.S.-based employees, including pilots: a broad-based nonqualified stock option program; a profit sharing program; and a monthly performance incentive program.

     Pursuant to the broad-based stock option program, on November 11, 2004, we granted to approximately 60,000 employees (excluding officers and directors) stock options to purchase a total of approximately 63 million shares of our common stock. The options have an exercise price equal to the closing price of our common stock on the New York Stock Exchange on the date of grant. For additional information on this subject, see Note 1 of the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q.

     Pursuant to the profit sharing program, employees (excluding officers and directors) would be paid an annual bonus from a pool which consists of up to 20% of our annual pretax income (as defined) in excess of specified thresholds.

     Pursuant to the performance incentive program, employees (excluding officers and other participants in management incentive programs) would be eligible to receive monthly bonuses of up to $100 based on customer satisfaction and operational performance metrics.

Liquidity

     Our unencumbered assets are limited, our credit ratings have been substantially lowered and our cost structure is materially higher than that of our competitors. Except for commitments to finance our purchase of regional jet aircraft, we had no available lines of credit at September 30, 2004. Continued losses of the magnitude we recorded in 2003 and in the nine months ended September 30, 2004 are unsustainable, and we have significant obligations due in 2005 and thereafter, including significant debt maturities, operating lease payments, purchase obligations and required pension funding.

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     To increase our liquidity, we have taken the following actions:

	•		Subsequent to September 30, 2004, we entered into two separate commitment letters with American Express Travel Related Services Company, Inc. (Amex) and GE Commercial Finance (GE) under which those companies agreed to provide us with a total of $1 billion of new financing (Financing Commitments). These Financing Commitments are subject to significant conditions, many of which we cannot control. These conditions include, without limitation: (1) the completion of definitive credit facility documentation; (2) the absence of a material adverse change in our business or financial condition; and (3) our determination that there are anticipated annual benefits sufficient for us to achieve financial viability in an out-of-court restructuring, including reduction of pilot costs of at least $1 billion annually by 2006 (which condition we believe is satisfied by the new pilot contract) and the achievement of other benefits of at least $1.7 billion annually by 2006 (in addition to the $2.3 billion of annual benefits expected to be achieved by the end of 2004 through previously implemented profit improvement initiatives). There can be no assurance that we will be able to consummate these Financing Commitments. Moreover, the consummation of these Financing Commitments will require us to pledge most of our remaining unencumbered collateral. For additional information about these Financing Commitments, see Note 14 of the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q.
	•		Also subsequent to September 30, 2004, we took two actions to defer certain near-term debt obligations:

	o		Debt Exchange Offer. We amended an exchange offer (Exchange Offer) under which, among other things, eligible holders of up to $235 million aggregate principal amount of our 7.78% Series 2000-1C Pass Through Certificates due 2005 and 7.30% Series 2001-1C Pass Through Certificates due 2006 (collectively, Short-Term Existing Securities) could exchange those securities for a like principal amount of our newly issued 9.5% Senior Secured Notes due 2008 (9.5% Notes). Approximately $252 million aggregate principal amount of the Short-Term Existing Securities have been tendered in the Exchange Offer, which is scheduled to be completed on November 23, 2004. We do not expect the minimum tender conditions to be met for the other notes covered by the Exchange Offer. We intend to seek to use the collateral originally reserved for those other notes to secure additional financing.
			The Exchange Offer is subject to a number of significant conditions which we may waive or amend in our sole discretion. The Exchange Offer is also subject to a condition that we may not waive that we have entered into a new collective bargaining agreement with ALPA that provides, in our judgment, at least $1 billion of annual cost reductions by 2006, which condition we believe is satisfied by the new pilot contract.
	o		Agreement with Holders of 7.7% Notes Due 2005. On October 25, 2004, we entered into an agreement with the holders of approximately $135 million aggregate principal amount of our unsecured 7.7% Notes due 2005 to exchange those notes for (1) a like principal amount of newly

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issued unsecured 8.0% Senior Notes due 2007; and (2) a pro rata allocation of a number of shares of our common stock equal to $22.5 million divided by the average price per share of our common stock over a specified measurement period. The completion of this transaction is subject to a number of conditions, including the requirement that we have entered into a new collective bargaining agreement with ALPA that provides, in our judgment, at least $1 billion of annual cost reductions by 2006, which condition we believe is satisfied by the new pilot contract.

The securities offered in the exchange offers have not been registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. For additional information regarding these transactions and other transactions affecting our liquidity which occurred subsequent to September 30, 2004, see Notes 6 and 14 of the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q.

     The foregoing initiatives are part of our intensive effort to effect a successful out-of-court restructuring, but there can be no assurance this effort will succeed. If we cannot achieve a competitive cost structure, do not regain sustained profitability or are not able to consummate our financings with Amex and GE, we will need to seek to restructure under Chapter 11 of the U.S. Bankruptcy Code.

     In addition, our liquidity needs will increase to the extent we are unsuccessful in realizing any of the approximately $5 billion of targeted annual benefits. Similarly, to the extent that any of the other assumptions underlying our business plan prove to be incorrect, we expect that our liquidity needs could change materially. For example, if oil prices stay at current levels of approximately $50 per barrel instead of declining to an average of $40 per barrel in 2005 and an average of $35 per barrel in 2006 as we assume in our business plan, we estimate that our liquidity needs would increase by an additional $600 million in 2005 and an additional $900 million in 2006. For additional information about our liquidity needs and the assumptions underlying our business plan, see “Risk Factors Relating to Delta and the Airline Industry” in Item 2 of this Form 10-Q. To the extent our liquidity needs increase beyond the amounts in our business plan, we may be unable to satisfy such needs and we would then need to seek to restructure under Chapter 11 of the U.S. Bankruptcy Code.

     For additional information about the business environment and the risks we face, see “Risk Factors Relating to Delta and the Airline Industry” in this Form 10-Q.

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Results of Operations-Three Months Ended September 30, 2004 and 2003

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

     Our unaudited consolidated net loss was $646 million for the September 2004 quarter ($5.16 diluted loss per share), compared to a net loss of $164 million ($1.36 diluted earnings per share) in the September 2003 quarter.

Operating Revenues

     Operating revenues totaled $3.9 billion in the September 2004 quarter, a 6% increase from the September 2003 quarter.

     Passenger revenue increased 5% on a 9% increase in capacity. The increase in passenger revenue reflects a 10% rise in RPMs and a 5% decline in passenger mile yield. The increase in capacity was primarily driven by the restoration of flights that we reduced in 2003 due to the war in Iraq. The decline in the passenger mile yield reflects our lack of pricing power due to the continuing growth of low-cost carriers with which we compete in most of our domestic markets as well as increased price sensitivity by our customers, reflecting in part the availability of airline fare information on the Internet. Also, four major hurricanes impacted a significant portion of our Southeastern operations during the September 2004 quarter, resulting in an estimated revenue loss of approximately $50 million.

     Passenger Revenue per ASM (Passenger RASM) decreased 4% to 9.10¢. Load factor increased 1.0 point to 77.7%. For additional information about factors impacting our passenger revenues for the September 2004 quarter, see the Business Environment section of MD&A in this Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2003, as updated by our Current Report on Form 8-K dated September 15, 2004 (collectively, Form 10-K).

     North American Passenger Revenues - North American passenger revenues increased 2% to $2.8 billion for the September 2004 quarter on a capacity increase of 7%. RPMs increased 9%, while passenger mile yield fell 6%. Passenger RASM decreased 5% to 9.18¢. Load factor increased by 1.1 points to 76.6%.

     International Passenger Revenues - International passenger revenues increased 18% to $755 million during the September 2004 quarter on a capacity increase of 17%. RPMs increased

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17%, while passenger mile yield remained unchanged. Passenger RASM increased 1% to 8.61¢. Load factor increased by 0.4 points to 82.1%. The increases in passenger revenues, RPMs and load factor are primarily due to the depressed levels in the prior year resulting from the war in Iraq.

Cargo and Other Revenues - Cargo revenues increased 3% to $117 million in the September 2004 quarter primarily due to a 13% increase from higher freight volume, which was partially offset by a 9% decrease due to lower mail yield. Cargo ton miles increased 8%, while cargo ton mile yield decreased 4%. Other revenues increased 27% to $190 million, primarily reflecting a 7% rise due to increased administrative service charges, a 6% increase due to higher codeshare revenue from capacity increases and a 6% increase due to miscellaneous contract revenue.

Operating Expenses

     Operating expenses were $4.3 billion and $3.7 billion for the September 2004 and September 2003 quarters, respectively. The increase in operating expenses was primarily due to higher fuel prices in the September 2004 quarter as compared to the September 2003 quarter. Operating capacity increased 9% to 39 billion ASMs primarily due to the restoration of capacity that we reduced in the prior year period due to the war in Iraq. Operating cost per available seat mile (CASM) increased 5% to 10.96¢.

     Salaries and related costs increased 3% to $1.6 billion. This reflects a 3% increase due to higher pension and related expense, a 1% rise from a 4.5% salary rate increase in May 2004 for our pilots under their collective bargaining agreement and a 1% increase due to growth in our wholly owned regional jet operations. These increases were partially offset by a 3% decline due to a decrease in benefit expenses from our cost savings initiatives and a 1% decline due to lower mainline headcount.

     Aircraft fuel expense increased 63%, or $304 million, to $786 million, with approximately $285 million of the increase resulting from higher fuel prices, which remain at historically high levels. The average fuel price per gallon increased 52% to $1.20 and total gallons consumed increased 7%.

     None of our aircraft fuel requirements were hedged during the September 2004 quarter. We hedged approximately 53% of these requirements during the September 2003 quarter. As discussed in Note 22 of the Notes to the Consolidated Financial Statements in our Form 10-K, in February 2004, we settled all of our fuel hedge contracts prior to their scheduled settlement dates, resulting in a deferred gain of $82 million ($43 million of which was recognized in the March 2004 and June 2004 quarters). In the September 2004 quarter, we recognized a reduction in fuel expense of $24 million, which represents a portion of this deferred gain. The remaining $15 million of the deferred gain will be recognized during the December 2004 quarter when the related fuel purchases that were being hedged are consumed. Our September 2003 quarter fuel expense is shown net of fuel hedge gains of $26 million.

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     We project that our annual fuel expense will be approximately $950 million higher in 2004 than it was in 2003. Approximately 86% of this increase is due to higher fuel prices. These projections assume an average fuel price per gallon in 2004 of $1.15 (net of hedging gains), which is 40% higher than our average fuel price per gallon in 2003, and aircraft fuel consumption of approximately 2.5 billion gallons, which is 7% higher than the aircraft fuel gallons we used in 2003.

     Contracted services expense increased 20%, primarily due to a 6% increase from the suspension of the Transportation Safety Administration (TSA) security fee in the prior year, a 6% increase from new contracts, a 3% increase from additional technology projects and a 2% increase due to increased traffic.

     Expenses from our contract carrier arrangements increased 10% to $234 million, largely reflecting a 4% increase from higher fuel costs and a 2% increase due to higher capacity under certain of these arrangements.

     Aircraft maintenance materials and outside repairs increased 22% to $197 million. This increase is primarily due to increased materials volume from the restoration of capacity that we had reduced due to the war in Iraq and the timing of heavy maintenance visits on regional jet aircraft.

     Passenger commissions expense increased 15%, primarily due to higher incentive commissions as a result of higher passenger volume.

     Passenger service expense increased 13%, primarily due to a 17% increase from higher traffic which was partially offset by a 7% decrease due to lower expenses from our cost savings initiatives.

     Pension settlements, asset writedowns and related items, net totaled $54 million ($0.43 diluted loss per share) for the September 2004 quarter compared to a $7 million ($5 million net of tax, or $0.04 diluted earnings per share) reduction to operating expenses in the September 2003 quarter. The September 2004 quarter reflects (1) a $40 million non-cash aircraft impairment charge ($0.32 diluted loss per share) related to our agreement, entered into in the September 2004 quarter, to sell eight owned MD-11 aircraft and (2) a $14 million non-cash settlement charge ($0.11 diluted loss per share) related to our defined benefit pension plan for pilots (Pilot Plan) due to lump sum distributions to pilots who retired. For additional information about these charges, see Notes 6 and 8, respectively, of the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q. We estimate that we will record an additional non-cash settlement charge of approximately $120 million related to the Pilot Plan in the December 2004 quarter. This estimate could change because certain data used to calculate the settlement charge is not yet final.

     Other operating expenses increased 10%, primarily due to a 10% increase from higher miscellaneous taxes, a 9% increase from higher professional fees associated with

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restructuring initiatives, and a 3% increase due to increased international traffic. These increases were partially offset by a 12% decrease from lower frequent flyer program expenses.

Operating Income (Loss) and Operating Margin

     We incurred an operating loss of $423 million for the September 2004 quarter, compared to an operating loss of $81 million in the September 2003 quarter. Operating margin, which is the ratio of operating loss to operating revenues, was (11%) and (2%) for the September 2004 and September 2003 quarters, respectively.

Other Income (Expense)

     Other expense, net in the September 2004 quarter was $229 million, compared to other expense, net of $173 million in the September 2003 quarter. This change is primarily attributable to the following:

•

Interest expense increased $19 million in the September 2004 quarter compared to the September 2003 quarter primarily due to higher levels of debt outstanding.

•

We recorded a $15 million gain on extinguishment of debt in the September 2003 quarter related to the completion of a debt exchange offer.

•

Fair value adjustments of derivatives accounted for under Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133), resulted in a $26 million charge in the September 2004 quarter compared to a $1 million charge in the September 2003 quarter. These adjustments relate to our equity warrants and other similar rights in certain companies in both periods and to derivative instruments we used in our fuel hedging program in the prior year period. For additional information about SFAS 133, see Note 3 of the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q.

Results of Operations—Nine Months Ended September 30, 2004 and 2003

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

     Our unaudited consolidated net loss was $3.0 billion for the nine months ended September 30, 2004 ($24.06 diluted loss per share), compared to a net loss of $446 million ($3.71 diluted loss per share) for the nine months ended September 30, 2003. The loss for the nine months ended September 30, 2004 includes non-cash charges totaling $1.7 billion related to our (1) deferred income tax assets, (2) defined benefit pension plan for pilots and (3) agreement to sell our eight owned MD-11 aircraft. For additional information on these non-cash charges, see Notes 6, 7 and 8 of the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q.

Operating Revenues

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     Operating revenues totaled $11.4 billion for the nine months ended September 30, 2004, an 8% increase compared to the depressed level recorded for the nine months ended September 30, 2003, particularly in international markets, due to the threatened and actual war in Iraq and the difficult revenue environment.

     Passenger revenue increased 8% on a 10% increase in capacity. The increase in passenger revenue reflects a 12% rise in RPMs and a 4% decline in passenger mile yield. The increase in capacity was primarily driven by the restoration of flights that we reduced in 2003 due to the war in Iraq. The decline in the passenger mile yield reflects our lack of pricing power due to the continuing growth of low-cost carriers with which we compete in most of our domestic markets as well as increased price sensitivity by our customers, reflecting in part the availability of airline fare information on the Internet. Passenger RASM decreased 2% to 9.21¢. Load factor increased 1.5 points to 75.0%. For additional information about factors impacting our passenger revenues for the nine months ended September 30, 2004, see the Business Environment section of MD&A in this Form 10-Q and in our Form 10-K.

     North American Passenger Revenues - North American passenger revenues increased 6% to $8.4 billion for the nine months ended September 30, 2004 on a capacity increase of 8%. RPMs increased 10%, while passenger mile yield fell 3%. Passenger RASM decreased 2% to 9.39¢. Load factor increased by 1.0 point to 74.0%.

     International Passenger Revenues - International passenger revenues increased 21% to $2.0 billion for the nine months ended September 30, 2004 on a capacity increase of 15%. RPMs increased 20%, while passenger mile yield increased 1%. Passenger RASM increased 5% to 8.33¢. Load factor increased by 3.2 points to 79.7%. The increases in passenger revenues, RPMs, yield and load factor are primarily due to the depressed levels in the prior year resulting from the threatened and actual war in Iraq.

     Cargo and Other Revenues - Cargo revenues increased 6% to $364 million for the nine months ended September 30, 2004. This reflects a 12% increase from our freight business due primarily to yield improvement and increased volume, which were depressed in the prior year period due to the war in Iraq. This increase was partially offset by a 6% decline due to lower mail yield. Cargo ton miles increased 8%, while cargo ton mile yield decreased 1%. Other revenues increased 19% to $536 million. The rise in other revenues reflects a 5% increase due to higher administrative service charges, a 5% increase due to miscellaneous contract revenues, a 4% increase related to codeshare relationships and a 3% increase due to higher revenue from certain mileage partnership arrangements.

Operating Expenses

     Operating expenses were $12.4 billion for the nine months ended September 30, 2004, a 14% increase over the nine months ended September 30, 2003. The increase in operating expenses was primarily due to (1) higher fuel prices in the nine months ended September 30, 2004 than in the nine months ended September 30, 2003 and (2) $398 million

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in government reimbursements under the Appropriations Act that were recorded as an offset to operating expenses in the September 2003 quarter. Operating capacity increased 10% to 114 billion ASMs primarily due to the restoration of capacity that we reduced due to the war in Iraq. CASM decreased 4% to 10.93¢.

     Salaries and related costs remained flat at $4.8 billion. This reflects a 3% decline due to a decrease in benefit expenses from our cost savings initiatives and a 2% decline due to lower Mainline headcount. These decreases were offset by a 2% increase due to higher pension and related expense, a 2% rise from salary rate increases primarily for our pilots under their collective bargaining agreement and a 1% increase due to growth in our wholly owned regional jet operations.

     Aircraft fuel expense increased 42%, or $601 million, to $2.0 billion, with approximately $500 million of the increase resulting from higher fuel prices, which remain at historically high levels. The average fuel price per gallon increased 32% to $1.07 and total gallons consumed increased 7%.

     Approximately 11% and 72% of our aircraft fuel requirements were hedged during the nine months ended September 30, 2004 and 2003, respectively. As discussed in Note 22 of the Notes to the Consolidated Financial Statements in our Form 10-K, in February 2004, we settled all of our fuel hedge contracts prior to their scheduled settlement dates, resulting in a deferred gain of $82 million. In the nine months ended September 30, 2004, we recognized a reduction in fuel expense of $87 million, of which $67 million represents a portion of this deferred gain. The remaining $15 million of the deferred gain will be recognized during the quarter ending December 31, 2004 when the related fuel purchases that were being hedged are consumed. Our fuel expense for the nine months ended September 30, 2003 is shown net of fuel hedge gains of $131 million.

     Contracted services expense increased 12%, primarily due to a 3% increase from new contracts, a 2% increase due to technology projects, a 2% increase from the suspension of the TSA security fee in the September 2003 quarter and a 2% increase due to higher traffic.

     Expenses from our contract carrier arrangements increased 24% to $708 million, largely reflecting a 9% increase due to higher capacity under certain of these arrangements, a 6% increase from higher fuel costs and a 4% increase from higher maintenance expense.

     Aircraft maintenance materials and outside repairs increased 11%, primarily due to increased materials volume and higher costs from scheduled maintenance events.

     Other selling expenses increased 8%, primarily due to an increase in advertising costs. Passenger commissions increased 5% largely from higher incentive commissions due to higher passenger volume. Passenger service expense increased 7%, primarily due to increased traffic which was partially offset by lower expenses from our cost savings initiatives.

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     Pension settlements, asset writedowns and related items, net totaled $171 million ($1.37 diluted loss per share) for the nine months ended September 30, 2004 compared to $36 million ($23 million net of tax, or $0.18 diluted loss per share) for the nine months ended September 30, 2003. Our charges for the nine months ended September 30, 2004 include two non-cash settlement charges totaling $131 million related to our Pilot Plan and a $40 million non-cash aircraft impairment charge related to our agreement, entered into in the September 2004 quarter, to sell eight owned MD-11 aircraft. Our net charge for the nine months ended September 2003 reflects a $43 million non-cash charge for the cost of pension and postretirement obligations for participants in our 2002 workforce reduction programs, offset by a $7 million reduction to operating expenses from revised estimates of remaining costs for certain prior year restructuring reserves. For additional information about these charges, see Notes 6, 8 and 12 of the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q and Note 15 of the Notes to the Consolidated Financial Statements in our Form 10-K.

     During the nine months ended September 2003, Appropriations Act reimbursements totaled $398 million ($251 million net of tax, $2.03 diluted earnings per share). These reimbursements from the U.S. government were recorded as an offset to operating expenses. For additional information about the Appropriations Act, see Note 19 of the Notes to the Consolidated Financial Statements in our Form 10-K.

     Other operating expenses increased 2%. This primarily reflects a 3% increase from higher capacity, a 3% increase related to miscellaneous contracts, a 2% increase from higher fuel taxes and a 1% increase from higher professional fees, which were partially offset by a 4% decline from lower insurance rates, a 4% decline due to lower frequent flyer program expenses and a 2% decline due to lower supplies, utilities and communications costs.

Operating Income (Loss) and Operating Margin

     We incurred an operating loss of $1.1 billion for the nine months ended September 30, 2004, compared to an operating loss of $420 million for the nine months ended September 30, 2003. Operating margin, which is the ratio of operating income (loss) to operating revenues, was (9%) and (4%) for the nine months ended September 30, 2004 and 2003, respectively.

Other Income (Expense)

     Other expense, net for the nine months ended September 30, 2004 was $627 million, compared to other expense, net of $257 million for the nine months ended September 30, 2003. This change is primarily attributable to the following:

•

Interest expense increased $43 million for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003 primarily due to higher levels of debt outstanding.

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•

Gain from sale of investments was $0 for the nine months ended September 30, 2004 compared to $284 million for the nine months ended September 30, 2003. During the September 2003 quarter, we sold our equity investment in Worldspan, recognizing a $279 million gain ($176 million net of tax, $1.42 diluted earnings per share) on that transaction.

•

Fair value adjustments of derivatives accounted for under SFAS 133 resulted in a $44 million charge for the nine months ended September 30, 2004 compared to a $16 million charge for the nine months ended September 30, 2003. These adjustments related to our equity warrants and other similar rights in certain companies and to derivative instruments used in our fuel hedging program. For additional information about SFAS 133, see Notes 3 of the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q.

•

Miscellaneous expense, net was $10 million for the nine months ended September 30, 2004 compared to miscellaneous income, net of $7 million for the nine months ended September 30, 2003. This change is primarily due to (1) less favorable foreign currency exchange rates during the nine months ended September 30, 2004 and (2) a decrease in earnings from our equity investment in Worldspan due to our sale of that investment during the June 2003 quarter.

Income Taxes

     We account for our deferred income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.” This standard requires us to periodically assess whether it is more likely than not that we will generate sufficient taxable income to realize our deferred income tax assets.

     During the June 2004 quarter, we recorded an additional valuation allowance against our deferred income tax assets, which resulted in a $1.5 billion non-cash charge ($12.30 loss per share) to income tax expense on our Consolidated Statement of Operations. We recorded this additional valuation allowance because we determined that it is unclear as to the timing of when we will generate sufficient taxable income to realize our deferred income tax assets. In addition, we will no longer recognize the tax benefit of current period losses for the foreseeable future. For additional information regarding our income taxes, see Note 7 of the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q.

FINANCIAL CONDITION AND LIQUIDITY

Sources and Uses of Cash

     Cash and cash equivalents totaled $1.4 billion at September 30, 2004, compared to $2.7 billion at December 31, 2003. For the nine months ended September 30, 2004, net cash used in operating activities totaled $685 million, which includes the following significant items:

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•

A $447 million increase in our air traffic liability from December 31, 2003 to September 30, 2004 due to increased codeshare sales and higher bookings for the upcoming holiday travel season.

•

Our $410 million funding of our qualified defined benefit pension plans.

     Capital expenditures include (1) cash used for flight equipment, including advance payments; (2) cash used for ground property and equipment (including expenditures, net of reimbursements, related to our Boston airport terminal project); and (3) aircraft delivered under seller-financing arrangements (which is a non-cash item). For the nine months ended September 30, 2004, capital expenditures were approximately $750 million. For the quarter ending December 31, 2004, we expect capital expenditures to be approximately $300 million, including $135 million related to the acquisition of regional jet aircraft which we expect will be delivered under seller-financing arrangements.

     Debt and capital lease obligations, including current maturities, were $12.8 billion at September 30, 2004 and $12.6 billion at December 31, 2003. During the nine months ended September 30, 2004, we entered into the following financing transactions (for additional information about these transactions, see Note 4 of the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q):

•

We entered into secured financing arrangements under which we borrowed $566 million, which is due in installments through June 2020. The proceeds from these borrowings were used to (1) repay $498 million of outstanding interim financing for 18 CRJ-200 and 12 CRJ-700 aircraft and (2) finance our purchase of six CRJ-700 aircraft delivered during the nine months ended September 30, 2004.