Edgar Filing: DELTA AIR LINES INC /DE/

Sub Filer Id

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2007

£	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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes R No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer £ Accelerated filer R Non-accelerated filer £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes £ No R

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Yes R No £

Number of shares outstanding by each class of common stock, as of June 30, 2007:

Common Stock, $0.0001 par value - 240,670,191 shares outstanding

This document is also available on our website 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 “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 (“Form 10-K”) and “Part II, Item IA. Risk Factors” of this Form 10-Q. All forward-looking statements speak only as of the date made, and 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.

OTHER INFORMATION

On September 14, 2005 (the “Petition Date”), we and substantially all of our subsidiaries (collectively, the “Debtors”) filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code (the “Bankruptcy Code”) in the U.S. Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”). On April 25, 2007, the Bankruptcy Court approved the Debtors’ Joint Plan of Reorganization (the “Plan”). On April 30, 2007 (the “Effective Date”), the Debtors emerged from bankruptcy.

On the Effective Date, we adopted fresh start reporting in accordance with American Institute of Certified Public Accountants’ Statement of Financial Position 90-7, “Financial Reporting by Entities in Reorganization under the Bankruptcy Code” (“SOP 90-7”). The adoption of fresh start reporting results in our becoming a new entity for financial reporting purposes. Accordingly, our Condensed Consolidated Financial Statements on or after May 1, 2007 are not comparable to our Condensed Consolidated Financial Statements prior to that date.

References in this Form 10-Q to “Successor” refer to Delta on or after May 1, 2007, after giving effect to (1) the cancellation of Delta common stock issued prior to the Effective Date; (2) the issuance of new Delta common stock and certain debt securities in accordance with the Plan; and (3) the application of fresh start reporting. References to “Predecessor” refer to Delta prior to May 1, 2007.

Additional information about our Chapter 11 filing is available on the Internet at www.delta.com/restructure. Bankruptcy Court filings, claims information and our Plan are available at www.deltadocket.com.

Unless otherwise indicated, the terms “Delta,” the “Company,” “we,” “us,” and “our” refer to Delta Air Lines, Inc. and its subsidiaries.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

DELTA AIR LINES, INC.
Consolidated Balance Sheets


	Successor			Predecessor
ASSETS	June 30,			December 31,
(in millions)	2007			2006
	(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents	$	1,830		$	2,034
Short-term investments		1,549			614
Restricted cash		333			750
Accounts receivable, net of an allowance for uncollectible accounts
of $21 at June 30, 2007 and $21 at December 31, 2006		1,140			915
Expendable parts and supplies inventories, net of an allowance for
obsolescence of $3 at June 30, 2007 and $161 at December 31, 2006		246			181
Deferred income taxes, net		731			402
Prepaid expenses and other		420			489
Total current assets		6,249			5,385

PROPERTY AND EQUIPMENT:
Flight equipment		9,176			17,641
Accumulated depreciation		(76	)		(6,800	)
Flight equipment, net		9,100			10,841

Ground property and equipment		1,750			4,575
Accumulated depreciation		(64	)		(2,838	)
Ground property and equipment, net		1,686			1,737

Flight and ground equipment under capital leases		556			474
Accumulated amortization		(14	)		(136	)
Flight and ground equipment under capital leases, net		542			338

Advance payments for equipment		141			57

Total property and equipment, net		11,469			12,973

OTHER ASSETS:
Goodwill		12,373			227
Operating rights and other intangibles, net of accumulated amortization
of $35 at June 30, 2007 and $190 at December 31, 2006		2,918			89
Other noncurrent assets		725			948
Total other assets		16,016			1,264

Total assets	$	33,734		$	19,622

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

DELTA AIR LINES, INC.
Consolidated Balance Sheets


	Successor			Predecessor
LIABILITIES AND SHAREOWNERS' EQUITY (DEFICIT)	June 30,			December 31,
(in millions, except share data)	2007			2006
	(Unaudited)

CURRENT LIABILITIES:
Current maturities of long-term debt and capital leases	$	1,386		$	1,503
Air traffic liability		2,684			1,797
Accounts payable		1,288			936
Taxes payable		438			500
Deferred revenue		1,155			363
Accrued salaries and related benefits		621			405
Other accrued liabilities		159			265
Total current liabilities		7,731			5,769

NONCURRENT LIABILITIES:
Long-term debt and capital leases		6,913			6,509
Pension and related benefits		3,235			-
Postretirement benefits		1,042			-
Deferred income taxes, net		1,502			406
Deferred revenue		2,599			346
Notes payable		640			-
Other		600			368
Total noncurrent liabilities		16,531			7,629

LIABILITIES SUBJECT TO COMPROMISE		-			19,817

COMMITMENTS AND CONTINGENCIES

SHAREOWNERS' EQUITY (DEFICIT):
Common stock:
Predecessor common stock at $0.01 par value; 900,000,000 shares authorized,
202,081,648 shares issued at December 31, 2006		-			2
Successor common stock at $0.0001 par value; 1,500,000,000 shares authorized,
246,863,602 shares issued at June 30, 2007		-			-
Additional paid-in capital		9,428			1,561
Retained earnings (accumulated deficit)		164			(14,414	)
Accumulated other comprehensive income (loss)		8			(518	)
Predecessor stock held in treasury, at cost, 4,745,710 shares at December 31, 2006		-			(224	)
Successor stock held in treasury, at cost, 6,193,411 shares at June 30, 2007		(128	)		-
Total shareowners' equity (deficit)		9,472			(13,593	)

Total liabilities and shareowners' equity (deficit)	$	33,734		$	19,622

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

DELTA AIR LINES, INC.
Consolidated Statements of Operations
(Unaudited)

	Successor			Predecessor						Successor			Predecessor
	Two Months			One Month			Three			Two Months			Four Months			Six
	Ended			Ended			Months Ended			Ended			Ended			Months Ended
	June 30,			April 30,			June 30,			June 30,			April 30,			June 30,
(in millions, except per share data)	2007			2007			2006			2007			2007			2006

OPERATING REVENUE:
Passenger:
Mainline	$	2,338		$	1,046		$	3,176		$	2,338		$	3,829		$	5,669
Regional affiliates		760			349			1,035			760			1,296			1,893
Cargo		82			36			128			82			148			251
Other, net		268			124			402			268			523			722
Total operating revenue		3,448			1,555			4,741			3,448			5,796			8,535

OPERATING EXPENSE:
Aircraft fuel and related taxes		790			322			1,142			790			1,270			2,101
Salaries and related costs		708			331			1,070			708			1,302			2,293
Contract carrier arrangements		530			239			660			530			956			1,269
Depreciation and amortization		193			95			318			193			386			619
Contracted services		160			83			218			160			326			440
Aircraft maintenance materials and outside repairs		165			82			232			165			320			459
Passenger commissions and other selling expenses		175			78			234			175			298			446
Landing fees and other rents		122			60			194			122			250			491
Passenger service		61			24			81			61			95			154
Aircraft rent		36			20			73			36			90			168
Profit sharing		65			14			-			65			14			-
Other		98			62			150			98			189			211
Total operating expense		3,103			1,410			4,372			3,103			5,496			8,651

OPERATING INCOME (LOSS)		345			145			369			345			300			(116	)

OTHER (EXPENSE) INCOME:
Interest expense (contractual interest expense totaled $88 and $366 for the
one month and four months ended April 30, 2007, respectively, and $306
and $615 for the three and six months ended June 30, 2006, respectively)		(120	)		(62	)		(227	)		(120	)		(262	)		(441	)
Interest income		33			4			18			33			14			30
Miscellaneous, net		9			(2	)		19			9			27			19
Total other expense, net		(78	)		(60	)		(190	)		(78	)		(221	)		(392	)

INCOME (LOSS) BEFORE REORGANIZATION
ITEMS, NET		267			85			179			267			79			(508	)

REORGANIZATION ITEMS, NET		-			1,339			(2,380	)		-			1,215			(3,783	)

INCOME (LOSS) BEFORE INCOME TAXES		267			1,424			(2,201	)		267			1,294			(4,291	)

INCOME TAX (PROVISION) BENEFIT		(103	)		4			(4	)		(103	)		4			17

NET INCOME (LOSS)		164			1,428			(2,205	)		164			1,298			(4,274	)

PREFERRED STOCK DIVIDENDS		-			-			-			-			-			(2	)

NET INCOME (LOSS) ATTRIBUTABLE TO
COMMON SHAREOWNERS	$	164		$	1,428		$	(2,205	)	$	164		$	1,298		$	(4,276	)

BASIC INCOME (LOSS) PER SHARE	$	0.42		$	7.24		$	(11.18	)	$	0.42		$	6.58		$	(21.86	)

DILUTED INCOME (LOSS) PER SHARE	$	0.42		$	5.19		$	(11.18	)	$	0.42		$	4.63		$	(21.86	)

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

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

	Successor			Predecessor
	Two Months			Four			Six
	Ended			Months Ended			Months Ended
	June 30,			April 30,			June 30,
(in millions)	2007			2007			2006


Net cash (used in) provided by operating activities	$	(210	)	$	1,025		$	770

Cash Flows From Investing Activities:
Property and equipment additions:
Flight equipment, including advance payments		(89	)		(167	)		(102	)
Ground property and equipment, including technology		(31	)		(41	)		(62	)
Proceeds from sales of flight equipment		6			21			26
Proceeds from sales of investments		-			34			-
Decrease in restricted cash		58			56			8
Other, net		-			-			5
Net cash used in investing activities		(56	)		(97	)		(125	)

Cash Flows From Financing Activities:
Payments on long-term debt and capital lease obligations		(74	)		(166	)		(217	)
Proceeds from Exit Facilities		-			1,500			-
Payments on DIP Facility		-			(2,076	)		-
Other, net		-			(50	)		(5	)
Net cash used in financing activities		(74	)		(792	)		(222	)

Net (Decrease) Increase in Cash and Cash Equivalents		(340	)		136			423
Cash and cash equivalents at beginning of period		2,170			2,034			2,008
Cash and cash equivalents at end of period	$	1,830		$	2,170		$	2,431

Supplemental disclosure of cash paid (refunded) for:
Interest, net of amounts capitalized	$	77		$	243		$	347
Interest received from the preservation of cash due to Chapter 11 filing		-			(50	)		(47	)
Cash received from aircraft renegotiation		-			-			(10	)

Non-cash transactions:
Flight equipment	$	-		$	135		$	-
Flight equipment under capital leases		4			13			156
Debt extinguishment from aircraft renegotiation		-			-			171

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

Delta Air Lines, Inc.
Consolidated Statements of Shareowners' Equity (Deficit)


										Accumulated
							Retained			Other
				Additional			Earnings			Comprehensive
	Common			Paid-In			(Accumulated			Income			Treasury
(in millions, except share data)	Stock			Capital			Deficit)			(Loss)			Stock			Total
Balance at January 1, 2007 (Predecessor)	$	2		$	1,561		$	(14,444	)	$	(518	)	$	(224	)	$	(13,623	)
Comprehensive income:
Net income from January 1 to April 30, 2007		-			-			1,298			-			-			1,298
Other comprehensive income		-			-			-			75			-			75
Total comprehensive income		-			-			-			-			-			1,373
Balance at April 30, 2007 (Predecessor) (Unaudited)		2			1,561			(13,146	)		(443	)		(224	)		(12,250	)
Fresh start adjustments:
Cancellation of Predecessor common stock		(2	)		(1,561	)		-			-			224			(1,339	)
Elimination of Predecessor accumulated deficit and
accumulated other comprehensive loss		-			-			13,146			443			-			13,589
Reorganization value ascribed to Successor		-			9,400			-			-			-			9,400
Balance at May 1, 2007 (Successor) (Unaudited)		-			9,400			-			-			-			9,400
Issuance of 246,863,602 shares of common stock in connection
with emergence from Chapter 11 ($0.0001 per share),
including 6,193,411 shares held in Treasury ($20.60 per share)		-			-			-			-			(128	)		(128	)
Comprehensive income:
Net income from May 1 to June 30, 2007		-			-			164			-			-			164
Other comprehensive income		-			-			-			8			-			8
Total comprehensive income																	172
Compensation expense associated with equity awards		-			28			-			-			-			28
Balance at June 30, 2007 (Successor) (Unaudited)	$	-		$	9,428		$	164		$	8		$	(128	)	$	9,472


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

DELTA AIR LINES, INC.

Notes to the Condensed Consolidated Financial Statements

June 30, 2007

(Unaudited)

1. CHAPTER 11 PROCEEDINGS

General Information

Delta Air Lines, Inc., a Delaware corporation, is a major air carrier that provides air transportation for passengers and cargo throughout the United States (“U.S.”) and around the world. Our Condensed Consolidated Financial Statements include the accounts of Delta Air Lines, Inc. and our wholly owned subsidiaries, including Comair, Inc. (“Comair”), which are collectively referred to as Delta.

On September 14, 2005 (the “Petition Date”), we and substantially all of our subsidiaries (collectively, the “Debtors”) filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code (the “Bankruptcy Code”) in the U.S. Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”). The reorganization cases were jointly administered under the caption “In re Delta Air Lines, Inc., et al., Case No. 05-17923-ASH.” On April 25, 2007, the Bankruptcy Court approved the Debtors’ Joint Plan of Reorganization (the “Plan”). On April 30, 2007 (the “Effective Date”), we emerged from bankruptcy as a competitive airline with a global network.

Upon emergence from Chapter 11, we adopted fresh start reporting in accordance with American Institute of Certified Public Accountants’ Statement of Financial Position 90-7, “Financial Reporting by Entities in Reorganization under the Bankruptcy Code” (“SOP 90-7”). The adoption of fresh start reporting results in our becoming a new entity for financial reporting purposes. Accordingly, our Condensed Consolidated Financial Statements on or after May 1, 2007 are not comparable to our Condensed Consolidated Financial Statements prior to that date.

Fresh start reporting requires resetting the historical net book value of assets and liabilities to fair value by allocating the entity’s reorganization value to its assets and liabilities pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” (“SFAS 141”). The excess reorganization value over the fair value of tangible and identifiable intangible assets is recorded as goodwill on our Consolidated Balance Sheet. Deferred taxes are determined in conformity with SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”). For additional information regarding the impact of fresh start reporting on our Consolidated Balance Sheet as of the Effective Date, see “Fresh Start Consolidated Balance Sheet” below.

Effectiveness of Plan of Reorganization. Under the Plan, most holders of allowed general, unsecured claims against the Debtors received or will receive newly issued common stock in satisfaction of their claims. Holders of de minimis allowed general, unsecured claims received cash in satisfaction of their claims.

The Plan contemplates the distribution of 400 million shares of common stock, consisting of (1) 386 million shares to holders of allowed general, unsecured claims (including our pilots) and (2) 14 million shares to our approximately 39,000 eligible non-contract, non-management employees. The new common stock was listed on the New York Stock Exchange (the “NYSE”) and began trading under the symbol “DAL” on May 3, 2007. As of July 31, 2007, the following distributions of common stock have been made or commenced in accordance with the Plan:

254 million shares of common stock to holders of allowed general, unsecured claims with respect to allowed general, unsecured claims of $11.4 billion. We have reserved 132 million shares of common stock for future distributions to holders of allowed general, unsecured claims when disputed claims are resolved.

Approximately all 14 million shares of common stock to eligible non-contract, non-management employees. We expect to issue the remaining shares as eligible employees return to work during 2007.

The Bankruptcy Court also authorized the distribution of equity awards to our approximately 1,200 officers, director level employees and managers and senior professionals (“management personnel”). For additional information about these awards, see Note 10.

In addition, as of July 31, 2007, we issued the following debt securities and made the following cash distributions under the Plan:

$66 million principal amount of senior unsecured notes in connection with our settlement agreement relating to the restructuring of certain of our lease and other obligations at the Cincinnati-Northern Kentucky International Airport (the “Cincinnati Airport Settlement Agreement”). For additional information on this subject, see Note 4;

an aggregate of $78 million in cash to holders in satisfaction of their claims, including to holders of administrative claims, state and local priority tax claims and de minimis allowed unsecured claims;

$225 million in cash to the Pension Benefit Guaranty Corporation (the “PBGC”) in connection with the termination of our qualified defined benefit pension plan for pilots (the “Pilot Plan”).

During our Chapter 11 proceedings, we entered into a comprehensive agreement with the Air Line Pilots Association, International, the collective bargaining representative of Delta’s pilots (“ALPA”), to reduce our pilot labor costs. Under this agreement, we are required to issue by August 28, 2007, for the benefit of Delta pilots, senior unsecured notes (the “Pilot Obligation”) with an aggregate principal amount equal to $650 million, a term of up to 15 years and an annual interest rate calculated to ensure that the Pilot Obligation trades at par on the issuance date. The Pilot Obligation is pre-payable at any time at our option, and we may replace all or a portion of the Pilot Obligation with cash prior to issuance.

Under the priority scheme established by the Bankruptcy Code, unless creditors agree otherwise, pre-petition liabilities and post-petition liabilities must be satisfied in full before shareowners are entitled to receive any distribution or retain any property under the Plan. In accordance with the Plan, holders of our equity interests that were in existence prior to April 30, 2007, including our common stock, did not receive any distributions, and their equity interests were cancelled on the Effective Date.

On the Effective Date, we entered into a senior secured exit financing facility (the “Exit Facilities”) to borrow up to $2.5 billion from a syndicate of lenders. We used a portion of the proceeds from the Exit Facilities and existing cash to repay our two then outstanding debtor-in-possession financing facilities (the “DIP Facility”). For additional information regarding the Exit Facilities, see Note 4.

We continue to incur expenses related to our Chapter 11 proceedings, primarily professional fees that were classified as a reorganization item in the Predecessor. After we emerged, these expenses are classified in their appropriate line item, primarily in other expenses, in the Successor’s Consolidated Statement of Operations. For the two months ended June 30, 2007, the amount of such expenses was $9 million.

Significant Ongoing Chapter 11 Matters

Resolution of Outstanding Claims. The Debtors have filed with the Bankruptcy Court schedules and statements of financial affairs setting forth, among other things, the assets and liabilities of the Debtors, subject to the assumptions filed in connection therewith. All of the schedules are subject to amendment or modification.

Bankruptcy Rule 3003(c)(3) requires the Bankruptcy Court to set the time within which proofs of claim must be filed in a Chapter 11 case. The Bankruptcy Court established August 21, 2006 (the “Bar Date”) as the last date for each person or entity to file a proof of claim against the Debtors. Subject to certain exceptions, the Bar Date applies to all claims against the Debtors that arose prior to the Petition Date.

As of July 31, 2007, claims totaling $91 billion have been filed with the Bankruptcy Court against the Debtors. This amount includes $11.4 billion of allowed general, unsecured claims with respect to which common stock distributions have occurred or commenced and $32 billion of claims which have been expunged, reduced or withdrawn. We expect new and amended claims to be filed in the future, including claims amended to assign values to claims originally filed with no designated value. We have identified, and we expect to continue to identify, many claims that we believe should be disallowed by the Bankruptcy Court because they are duplicative, have been later amended or superseded, are without merit, are overstated or for other reasons. As of July 31, 2007, we have filed objections with respect to an additional $528 million in claims, but the Bankruptcy Court has not yet ruled on these objections. We expect to continue to file objections in the future. Because the process of analyzing and objecting to claims is ongoing, the amount of disallowed claims may increase significantly in the future. We currently estimate that the total allowed general, unsecured claims in our Chapter 11 proceedings will be approximately $15 billion, including claims with respect to which we have issued or commenced distributions of common stock.

The Plan provides that administrative and priority claims will be satisfied with cash. Certain administrative and priority claims remain unpaid, and we will continue to settle claims and file objections with the Bankruptcy Court with respect to such claims. All of these claims have been accrued by the Successor based upon the best available estimates of amounts to be paid. However, it should be noted that the claims resolution process is uncertain and could result in material adjustments to the Successor’s financial statements.

Through the claims resolution process, differences in amounts scheduled by the Debtors and claims filed by creditors will be investigated and resolved, including through the filing of objections with the Bankruptcy Court where appropriate. In light of the substantial number and amount of claims filed, the claims resolution process may take considerable time to complete, and we expect that it will continue for some time. Accordingly, the ultimate number and amount of allowed claims is not presently known, nor is the exact recovery with respect to allowed claims presently known.

Cincinnati Airport Settlement. On April 24, 2007, the Bankruptcy Court approved the Cincinnati Airport Settlement Agreement. A small group of bondholders is challenging the settlement in U.S. District Court for the Southern District of New York. For additional information on this subject, see Note 4.

Section 1110 Matters. During our Chapter 11 proceedings, we reached agreement with respect to substantially all of our aircraft financing obligations, subject in certain instances to the execution of definitive documentation. As of July 31, 2007, we were continuing to negotiate an agreement with aircraft financing parties for 12 aircraft; the outcome of these negotiations cannot be predicted with certainty. Upon emergence from bankruptcy, we lost the protection of the automatic stay provided under Section 362 of the Bankruptcy Code. To the extent we are unable to reach definitive agreements with, or obtain an extension and forbearance from, aircraft financing parties, those parties may seek to repossess such aircraft.

Tax Indemnity Agreements/Stipulated Loss Value Claims. A significant amount of disputed claims involves claims related to aircraft matters that have been filed by certain parties to aircraft leverage lease transactions. Some of these claims arise from tax indemnity agreements entered into with certain parties to these leverage lease transactions. We have filed objections, and expect to file further objections, seeking to expunge or reduce such claims. On July 19, 2007, the Bankruptcy Court entered an order affirming Delta’s objections as to certain claims and ordering those claims be expunged. A notice of appeal of that order is pending. Hearing dates as to further objections by Delta as to other claims have not yet been set. We continue to negotiate and review opportunities to settle such other claims where such settlements are advisable. We cannot predict the ultimate outcome of these negotiations or the ultimate resolution of these claims.

Liabilities Subject to Compromise

The following table summarizes the components of liabilities subject to compromise included on our Consolidated Balance Sheet at December 31, 2006:

	Predecessor
(in millions)	December 31, 2006
Pension, postretirement and other benefits	$	10,329
Debt and accrued interest		5,079
Aircraft lease related obligations		3,115
Accounts payable and other accrued liabilities		1,294
Total liabilities subject to compromise	$	19,817

Liabilities subject to compromise refers to pre-petition obligations that were impacted by the Chapter 11 reorganization process. The amounts represented our estimate of known or potential obligations to be resolved in connection with our Chapter 11 proceedings.

At June 30, 2007, we had a zero balance for liabilities subject to compromise due to our emergence from bankruptcy. For information regarding the discharge of liabilities subject to compromise, see “Fresh Start Consolidated Balance Sheet” below.

Differences between liabilities we have estimated and the claims filed will be investigated and resolved in connection with the claims resolution process.

Reorganization Items, net

The following table summarizes the components of reorganization items, net on our Consolidated Statements of Operations for the one month and four months ended April 30, 2007, and the three and six months ended June 30, 2006:

	Predecessor
(in millions)	One Month Ended April 30, 2007			Three Months Ended June 30, 2006			Four Months Ended April 30, 2007			Six Months Ended June 30, 2006
Discharge of claims and liabilities⁽¹⁾	$	4,424		$	-		$	4,424		$	-
Revaluation of frequent flyer obligation⁽²⁾		(2,586	)		-			(2,586	)		-
Revaluation of other assets and liabilities⁽³⁾		238			-			238			-
Aircraft financing renegotiations and rejections⁽⁴⁾		(438	)		(284	)		(440	)		(1,590	)
Contract carrier agreements⁽⁵⁾		-			-			(163	)		-
Emergence compensation⁽⁶⁾		(162	)		-			(162	)		-
Professional fees		(51	)		(25	)		(88	)		(53	)
Pilot collective bargaining agreement⁽⁷⁾		-			(2,100	)		(83	)		(2,100	)
Interest income⁽⁸⁾		12			26			50			47
Facility leases⁽⁹⁾		(81	)		11			43			(24	)
Vendor waived pre-petition debt		5			-			29			-
Retiree healthcare claims⁽¹⁰⁾		-			-			(26	)		-
Debt issuance costs		-			(13	)		-			(13	)
Compensation expense⁽¹¹⁾		-			-			-			(55	)
Other		(22	)		5			(21	)		5
Total reorganization items, net	$	1,339		$	(2,380	)	$	1,215		$	(3,783	)

⁽¹⁾

The discharge of claims and liabilities primarily relates to allowed general, unsecured claims in our Chapter 11 proceedings, such as (a) ALPA’s claim under our comprehensive agreement reducing pilot labor costs; (b) the PBGC’s claim relating to the termination of the Pilot Plan; (c) claims relating to changes in postretirement healthcare benefits and the rejection of our non-qualified retirement plans; (d) claims associated with debt and certain municipal bond obligations based upon their rejection; (e) claims relating to the restructuring of financing arrangements or the rejection of leases for aircraft; and (f) other claims due to the rejection or modification of certain executory contracts, unexpired leases and contract carrier agreements. For additional information on these subjects, see Notes 1 and 10 of the Notes to the Consolidated Financial Statements in our Form 10-K.

In accordance with the Plan, we discharged our obligations to holders of allowed general, unsecured claims in exchange for the distribution of 386 million newly issued shares of common stock and the issuance of certain debt securities and obligations. Accordingly, in discharging our liabilities subject to compromise, we recognized a reorganization gain of $4.4 billion as follows:

(in millions)
Liabilities subject to compromise	$	19,345
Reorganization equity value		(9,400	)
Liabilities reinstated		(4,429	)
Issuance of new debt securities and obligations, net of discounts of $22		(938	)
Other		(154	)
Discharge of claims and liabilities	$	4,424

(2)

We revalued our SkyMiles frequent flyer obligation at fair value as a result of fresh start reporting, which resulted in a $2.6 billion reorganization charge. For information about a change in our accounting policy for the SkyMiles program, see Note 2.

(3)

We revalued our assets and liabilities at estimated fair value as a result of fresh start reporting. This resulted in a $238 million gain, primarily reflecting the fair value of newly recognized intangible assets, which was partially offset by reductions in the fair value of tangible property and equipment.

(4)

Estimated claims for the one month ended April 30, 2007 relate to the restructuring of the financing arrangements for 127 aircraft, the rejection of two aircraft leases and adjustments to prior claims estimates. Estimated claims for the four months ended April 30, 2007 relate to the restructuring of the financing arrangements for 143 aircraft, the rejection of two aircraft leases and adjustments to prior claims estimates. Estimated claims for the three months ended June 30, 2006 related to the restructuring of the financing arrangements for 17 aircraft and the rejection of 14 aircraft leases. Estimated claims for the six months ended June 30, 2006 relate to the restructuring of the financing arrangements for 143 aircraft and the rejection of 16 aircraft leases.

(5)

In connection with amendments to our contract carrier agreements with Chautauqua Airlines, Inc. (“Chautauqua”) and Shuttle America Corporation (“Shuttle America”), both subsidiaries of Republic Airways Holdings, Inc. (“Republic Holdings”), which, among other things, reduced the rates we pay those carriers, we recorded (1) a $91 million allowed general, unsecured claim and (2) a $37 million net charge related to our surrender of warrants to purchase up to 3.5 million shares of Republic Holdings common stock. Additionally, in connection with an amendment to our contract carrier agreement with Freedom Airlines, Inc. (“Freedom”), a subsidiary of Mesa Air Group, Inc., which, among other things, reduced the rates we pay that carrier, we recorded a $35 million allowed general, unsecured claim.

(6)

In accordance with the Plan, we made $130 million in lump-sum cash payment to approximately 39,000 eligible non-contract, non-management employees. We also recorded an additional charge of $32 million related to our portion of payroll related taxes associated with the issuance, as contemplated by the Plan, of approximately 14 million shares of common stock to these employees. For additional information regarding the stock grants, see Note 10.

(7)

Allowed general, unsecured claims of $83 million for the four months ended April 30, 2007 and $2.1 billion for the three months and six months ended June 30, 2006 in connection with Comair’s and Delta’s respective comprehensive agreements with ALPA reducing pilot labor costs.

(8)

Reflects interest earned due to the preservation of cash during our Chapter 11 proceedings.

(9)

Primarily reflects a net $80 million charge from an allowed general, unsecured claim under the Cincinnati Airport Settlement Agreement for the one month ended April 30, 2007. For the four months ended April 30, 2007, we recorded a net $43 million gain, primarily reflecting a $126 million net gain in connection with our settlement agreement with the Massachusetts Port Authority (“Massport”) which was partially offset by the aforementioned $80 million charge. For additional information regarding the Cincinnati Airport Settlement Agreement and our settlement agreement with Massport, see Note 4.

(10)

Allowed general, unsecured claims in connection with agreements reached with committees representing pilot and non-pilot retired employees reducing their postretirement healthcare benefits.

(11)

Reflects a charge for rejecting substantially all of our stock options in our Chapter 11 proceedings. For additional information regarding this matter, see Note 2 of the Notes to the Consolidated Financial Statements in our Form 10-K.

Fresh Start Consolidated Balance Sheet

As previously noted, upon emergence from Chapter 11, we adopted fresh start reporting, which required us to revalue our assets and liabilities to fair value. In estimating fair value, we based our estimates and assumptions on the guidance prescribed by SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which we adopted in conjunction with our adoption of fresh start reporting. SFAS 157, among other things, defines fair value, establishes a framework for measuring fair value and expands disclosure about fair value measurements. For additional information about SFAS 157, see Note 2.

Our estimates of fair value are based on independent appraisals and valuations, some of which are not final. Where independent appraisals and valuations are not available, we estimate fair value using industry data and trends and refer to relevant market rates and transactions. As new or improved information on asset and liability appraisals and valuations becomes available, we may adjust our preliminary allocation of fair value within one year from the Effective Date. Adjustments to the recorded fair values of these assets and liabilities may impact the amount of recorded goodwill.

To facilitate the calculation of the enterprise value of the Successor, management developed a set of financial projections for the Successor using a number of estimates and assumptions. With the assistance of financial advisors, management determined the enterprise and corresponding equity value of the Successor based on the financial projections using various valuation methods, including (1) a comparison of our projected performance to the market values of comparable companies; (2) a review and analysis of several recent transactions in the airline industry; and (3) a calculation of the present value of future cash flows based on our projections. Utilizing this methodology, the equity value of the Successor was estimated to be in the range of $9.4 billion and $12.0 billion. The enterprise value, and corresponding equity value, are dependent upon achieving the future financial results set forth in our projections, as well as the realization of certain other assumptions. There can be no assurance that the projections will be achieved or that the assumptions will be realized. The excess equity value (using the low end of the range) over the fair value of tangible and identifiable intangible assets has been reflected as goodwill in the Consolidated Fresh Start Balance Sheet. The financial projections and estimates of enterprise and equity value are not incorporated herein.

All estimates, assumptions, valuations, appraisals and financial projections, including the fair value adjustments, the financial projections, the enterprise value and equity value projections, are inherently subject to significant uncertainties and the resolution of contingencies beyond our control. Accordingly, there can be no assurance that the estimates, assumptions, valuations, appraisals and the financial projections will be realized, and actual results could vary materially.

The adjustments set forth in the following Fresh Start Consolidated Balance Sheet in the columns captioned “Debt Discharge, Reclassifications and Distribution to Creditors,” “Repayment of DIP Facility and New Exit Financing” and “Revaluation of Assets and Liabilities” reflect the effect of the consummation of the transactions contemplated by the Plan, including the settlement of various liabilities, securities issuances, incurrence of new indebtedness and cash payments.

The effects of the Plan and fresh start reporting on our Consolidated Balance Sheet at April 30, 2007 are as follows:

Fresh Start Consolidated Balance Sheet

(in millions)	(Predecessor) April 30, 2007			Debt Discharge, Reclassifications and Distribution to Creditors			Repayment of DIP Facility and New Exit Financing			Revaluation of Assets and Liabilities			(Successor) Reorganized Balance Sheet May 1, 2007
CURRENT ASSETS
Cash, cash equivalents and short-term investments	$	2,915		$	—		$	(557	)	$	—		$	2,358
Restricted and designated cash		1,069			—			—			—			1,069
Accounts receivable, net		1,086			—			—			—			1,086
Expendable parts and supplies inventories, net		183			—			—			58			241
Deferred income taxes, net		441			—			—			296			737
Prepaid expenses and other		437			(19	)		—			(69	)		349
Total current assets		6,131			(19	)		(557	)		285			5,840
PROPERTY AND EQUIPMENT
Net flight equipment and net flight equipment under capital lease		11,087			—			—			(1,254	)		9,833
Other property and equipment, net		1,498			—			—			215			1,713
Total property and equipment, net		12,585			—			—			(1,039	)		11,546
OTHER ASSETS
Goodwill		227			—			—			12,249			12,476
Intangibles, net		88			—			—			2,865			2,953
Other noncurrent assets		740			—			48			87			875
Total other assets		1,055			—			48			15,201			16,304
Total assets	$	19,771		$	(19	)	$	(509	)	$	14,447		$	33,690
CURRENT LIABILITIES
Current maturities of long-term debt and capital leases	$	1,292		$	5		$	—		$	35		$	1,332
DIP Facility		1,959			—			(1,959	)		—			—
Accounts payable, accrued salaries and related benefits		1,396			561			(50	)		155			2,062
SkyMiles deferred revenue		602			—						620			1,222
Air traffic liability		2,567			—			—			—			2,567
Taxes payable		423			—			—			(2	)		421
Total current liabilities		8,239			566			(2,009	)		808			7,604
NONCURRENT LIABILITIES
Long-term debt and capital leases		5,132			37			—			398			5,567
Exit Facilities		—			—			1,500			—			1,500
SkyMiles deferred revenue		294			—			—			1,966			2,260
Other notes payable		—			697			—			—			697
Pension, postretirement and related benefits		62			4,202			—			—			4,264
Other		1,026			—			—			1,372			2,398
Total noncurrent liabilities		6,514			4,936			1,500			3,736			16,686
Liabilities subject to compromise		19,345			(19,345	)		—			—			—
SHAREOWNERS’ (DEFICIT) EQUITY
Debtors
Common stock and additional paid in capital - Debtors		1,563			—			—			(1,563	)		—
Retained deficit and other - Debtors		(15,890	)		4,424			__			11,466			—
Reorganized Debtors
Common stock and additional paid in capital - Reorganized Debtors		—			9,400			—			—			9,400
Total liabilities and shareowners’ (deficit) equity	$	19,771		$	(19	)	$	(509	)	$	14,447		$	33,690

Debt Discharge, Reclassifications and Distribution to Creditors. Adjustments reflect the elimination of liabilities subject to compromise totaling $19.3 billion on our Consolidated Balance Sheet immediately prior to the Effective Date. Excluding certain liabilities, which were assumed by the Successor, liabilities subject to compromise of $13.8 billion were discharged in the Chapter 11 cases. Adjustments include:

(a)

The recognition or reinstatement of $561 million to accounts payable, accrued salaries and related benefits comprised of (1) a $225 million obligation to the PBGC relating to the termination of the Pilot Plan (which is reflected on the Consolidated Balance Sheet net of a $3 million discount) and (2) $339 million to reinstate or accrue certain liabilities related to the current portion of our pension and postretirement benefit plans and for certain administrative claims and cure costs.

(b)

The recognition of $697 million in other notes payable comprised of (1) the $650 million Pilot Obligation relating to our comprehensive agreement with ALPA reducing pilot labor costs (which is reflected on the Consolidated Balance Sheet net of a $19 million discount) and (2) $66 million principal amount of senior unsecured notes (following the reduction of the $85 million face value of the notes for the application of certain payments made by us in 2006 and 2007) under the Cincinnati Airport Settlement Agreement. For additional information on the Cincinnati Airport Settlement Agreement, see Note 4.

(c)

The reinstatement from liabilities subject to compromise of $3.2 billion associated with our non-pilot defined benefit pension plan (the “Non-pilot Plan”) and other long-term accrued benefits and $1.0 billion associated with postretirement benefits.

Repayment of DIP Facility and New Exit Financing. Adjustments reflect the repayment of the DIP Facility and borrowing under the Exit Facilities. Financing fees related to (1) the DIP Facility were written off at the Effective Date and (2) fees related to the Exit Facilities were capitalized and will be amortized over the term of the facility. For additional information regarding the Exit Facilities, see Note 4.

·	Revaluation of Assets and Liabilities. Significant adjustments reflected in the Fresh Start Consolidated Balance Sheet based on the revaluation of assets and liabilities are summarized as follows:

(a)

Property and equipment, net. A net adjustment of $1.0 billion was recorded to reduce the net book value of fixed assets to their estimated fair value.

(b)

Goodwill. An adjustment of $12.2 billion was recorded to reflect reorganization value of the Successor in excess of the fair value of tangible and identified intangible assets.

(c)

Intangibles. An adjustment of $2.9 billion was recorded to recognize identifiable intangible assets. These intangible assets reflect the estimated fair value of our trade name, takeoff and arrival slots, SkyTeam alliance agreements, marketing agreements, customer relationships and certain contracts. Certain of these assets will be subject to an annual impairment review. For additional information on intangible assets, see Note 2.

(d)

Long-term debt and capital leases. An adjustment of $398 million was recorded primarily to reflect a $223 million net premium associated with long-term debt and a $138 million net premium associated with capital lease obligations to be amortized to interest expense over the life of such debt and capital lease obligations.

(e)

SkyMiles deferred revenue. An adjustment to revalue our obligation under the SkyMiles frequent flyer program was recorded to reflect the estimated fair value of miles to be redeemed in the future. An adjustment of $2.0 billion and $620 million was reflected for the fair value of these miles in long-term and current classifications, respectively. Effective with our emergence from bankruptcy, we changed our accounting policy from an incremental cost basis to a deferred revenue model for miles earned through travel. For additional information on the accounting policy for our SkyMiles frequent flyer program, see Note 2.

(f)

Noncurrent liabilities - other. An adjustment of $1.4 billion was recorded primarily related to the tax effect of fresh start valuation adjustments.

(g)

Total shareowners’ deficit. The adoption of fresh start reporting resulted in a new reporting entity with no beginning retained earnings or accumulated deficit. All common stock of the Predecessor was eliminated and replaced by the new equity structure of the Successor based on the Plan. The Fresh Start Consolidated Balance Sheet reflects initial shareowners’ equity value of $9.4 billion, representing the low end in the range of $9.4 billion to $12.0 billion estimated in our financial projections developed in connection with the Plan. The low end of the range is estimated to reflect market conditions as of the Effective Date and therefore was used to establish initial shareowners’ equity value.

2. ACCOUNTING AND REPORTING POLICIES

Basis of Presentation

Our 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. Consistent with these requirements, 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 accompanying Notes in our Form 10-K.

Upon emergence from Chapter 11, we adopted fresh start reporting in accordance with SOP 90-7. The adoption of fresh start reporting results in our becoming a new entity for financial reporting purposes. Accordingly, our Condensed Consolidated Financial Statements on or after May 1, 2007 are not comparable to our Condensed Consolidated Financial Statements prior to that date.

Fresh start reporting requires resetting the historical net book value of assets and liabilities to fair value by allocating the entity’s reorganization value to its assets and liabilities pursuant to SFAS 141. The excess reorganization value over the fair value of tangible and identifiable intangible assets is recorded as goodwill on our Consolidated Balance Sheet. Deferred taxes are determined in conformity with SFAS 109. For additional information regarding the impact of fresh start reporting on our Consolidated Balance Sheet as of the Effective Date, see Note 1.

In preparing our Consolidated Financial Statements for the Predecessor, we applied SOP 90-7, which requires that the financial statements, for periods subsequent to the Chapter 11 filing, distinguish transactions and events that were directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain revenues, expenses, realized gains and losses and provisions for losses that were realized or incurred in the bankruptcy proceedings were recorded in reorganization items, net on the accompanying Consolidated Statements of Operations. In addition, pre-petition obligations that were impacted by the bankruptcy reorganization process were classified as liabilities subject to compromise on our Consolidated Balance Sheet at December 31, 2006. For additional information regarding the discharge of liabilities subject to compromise upon emergence, see Note 1.

We have eliminated all material intercompany transactions in our Condensed Consolidated Financial Statements. We do not consolidate the financial statements of any company in which we have an ownership interest of 50% or less unless we control that company. We did not control any company in which we had an ownership interest of 50% or less for any period presented in our Condensed Consolidated Financial Statements.

Management believes that the accompanying unaudited Condensed Consolidated Financial Statements reflect all adjustments, including adjustments required by fresh start reporting, normal recurring items, restructuring and related items, and reorganization items, considered necessary for a fair statement of results for the interim periods presented.

Due to the impact of our Chapter 11 proceedings, seasonal variations in the demand for air travel, the volatility of aircraft fuel prices and other factors, operating results for the two months ended June 30, 2007 and the one and four months ended April 30, 2007 are not necessarily indicative of operating results for the entire year.

New Accounting Standards

Effective January 1, 2007, we adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting and disclosure for uncertainty in tax positions, as defined. FIN 48 is intended to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes. The adoption of FIN 48 resulted in a $30 million charge to accumulated deficit that is reported as a cumulative effect adjustment for a change in accounting principle to the opening balance sheet position of shareowners’ deficit at January 1, 2007. For additional information regarding FIN 48, see Note 8.

In September 2006, the FASB issued SFAS 157. This statement, among other things, defines fair value, establishes a framework for measuring fair value and expands disclosure about fair value measurements. SFAS 157 is intended to eliminate the diversity in practice associated with measuring fair value under existing accounting pronouncements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We adopted SFAS 157 on April 30, 2007 in connection with our adoption of fresh start reporting. For our presentation associated with our recurring and nonrecurring fair value measurements, see Note 12.

In June 2006, the FASB ratified the Emerging Issues Task Force (“EITF”) consensus on EITF Issue No. 06-03, “How Taxes Collected From Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (“EITF 06-03”). The scope of EITF 06-03 includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer, and provides that a company may adopt a policy of presenting taxes either gross within revenue or on a net basis. For any such taxes that are reported on a gross basis, a company should disclose the amounts of those taxes for each period for which an income statement is presented if those amounts are significant. This statement is effective for interim and annual reporting periods beginning after December 15, 2006. We adopted EITF 06-03 on January 1, 2007. Various taxes and fees on the sale of tickets to customers are collected by us as an agent and remitted to the respective taxing authority. These taxes and fees have been presented on a net basis in the accompanying Consolidated Statements of Operations and recorded as a liability until remitted to the respective taxing authority.

Reclassifications

Prior to amending our Visa/MasterCard processing agreement, as described in Note 5, the credit card processor (“Processor”) withheld payment from our receivables and/or required a cash reserve of an amount (“Reserve”) equal to the Processor’s potential liability for tickets purchased with Visa or MasterCard that had not yet been used for travel (the “unflown ticket liability”). The cash portion of the Reserve was recorded in restricted cash on our Consolidated Balance Sheet.

For the two months ended June 30, 2007 and the four months ended April 30, 2007, the change in the cash portion of the Reserve is reported as a component of operating activities on our Condensed Consolidated Statements of Cash Flows to better reflect the nature of the restricted cash activities. For the six months ended June 30, 2006, we presented such change as an investing activity. We have reclassified prior period amounts to be consistent with the current period presentation. For the six months ended June 30, 2006, these reclassifications resulted in a $177 million decrease to cash flows from operating activities and a corresponding increase to cash flows from investing activities from the amounts previously reported.

Upon emergence and as a result of the adoption of fresh start reporting, we changed the classification of certain items in our Consolidated Statements of Operations. We also reclassified prior period amounts to conform to current period presentation. These changes have no impact on net income in any period prior to or subsequent to our emergence. These reclassifications are as follows for the three and six months ended June 30, 2006:

In-sourcing revenue. We reclassified $75 million and $136 million, respectively, associated with revenue for our maintenance in-sourcing business to other, net revenue, and reclassified the related costs to (1) salaries and related costs, (2) aircraft maintenance materials and outside repairs and (3) other operating expense. Previously, these revenues and expenses were reflected on a net basis in other operating expense.

Delta Global Services, LLC (“DGS”). We reclassified $41 million and $82 million, respectively, associated with salaries for employees at our wholly owned subsidiary, DGS, to salaries and related costs. DGS provides staffing services to both internal and external customers. Previously, these costs were recorded in contracted services.

Fuel taxes. We reclassified $31 million and $61 million, respectively, to aircraft fuel expense. Previously, fuel taxes were recorded in other operating expense.

Crown Room Club. We reclassified $11 million and $25 million, respectively, associated with the expense of our Crown Room Club operations to several operating expense line items, primarily salaries and related costs and contracted services. Our Crown Room Club provides amenities to members when traveling. Previously, these expenses were recorded net in other, net revenue.

Arrangements with Other Airlines. We reclassified to passenger revenue $17 million and $96 million, respectively, of revenue associated with (1) SkyMiles earned or redeemed on other airlines and (2) frequent flyer miles of other airlines earned or redeemed on Delta. Previously, these amounts were reflected in other, net revenue.

Cash and Cash Equivalents

We classify short-term, highly liquid investments with maturities of three months or less when purchased as cash and cash equivalents. These investments are recorded at cost, which approximates fair value.

Under our cash management system, we utilize controlled disbursement accounts that are funded daily. Checks we issue that have not been presented for payment are recorded in accounts payable on our Consolidated Balance Sheets. These amounts totaled $109 million and zero at June 30, 2007 and December 31, 2006, respectively.

Short-Term Investments

At June 30, 2007 and December 31, 2006, our short-term investments were comprised of auction rate securities. In accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” we record these investments as trading securities at fair value on our Consolidated Balance Sheets. For additional information about our accounting for trading securities, see “Investments in Debt and Equity Securities” in Note 2 of the Notes to the Consolidated Financial Statements in our Form 10-K.

Restricted Cash

We have restricted cash, which primarily relates to cash held as collateral by credit card processors and interline clearinghouses to support projected self-insurance obligations. In June 2007, we amended our Visa/MasterCard processing agreement to provide for the return of the then existing Reserve. This Reserve consisted of an $804 million cash reserve and a related $300 million letter of credit. Pursuant to the amendment, the entire cash reserve was returned to us and the letter of credit was terminated. No future holdback or cash reserve is required except in certain circumstances. The $804 million cash reserve was reclassified from restricted cash to cash and cash equivalents. For additional information regarding our amended Visa/MasterCard processing agreement, see Note 5.

Restricted cash included in current assets on our Consolidated Balance Sheets totaled $333 million and $750 million at June 30, 2007 and December 31, 2006, respectively. Restricted cash recorded in other noncurrent assets on our Consolidated Balance Sheets totaled $15 million and $52 million at June 30, 2007 and December 31, 2006, respectively.

Long-Lived Assets

We record property and equipment at cost and depreciate or amortize these assets on a straight-line basis to their estimated residual values over their respective estimated useful lives. In connection with our adoption of fresh start reporting, we reduced the net book values of property and equipment to their estimated fair values and revised the estimated useful life of flight equipment. The estimated useful lives for major asset classifications are as follows:


	Estimated Useful Life
Asset Classification	Successor	Predecessor
Flight equipment	25-30 years	25 years
Capitalized software	5-7 years	5-7 years
Ground property and equipment	3-40 years	3-40 years
Leasehold improvements	Shorter of lease term or estimated useful life	Shorter of lease term or estimated useful life
Flight equipment under capital lease	Shorter of lease term or estimated useful life	Shorter of lease term or estimated useful life

Goodwill and Intangible Assets

Goodwill reflects the excess of the reorganization value of the Successor over the fair value of tangible and identifiable intangible assets from our adoption of fresh start reporting. We recorded $12.5 billion of goodwill upon emergence from bankruptcy.

Identifiable intangible assets consist primarily of our trade name, takeoff and arrival slots, our SkyTeam alliance agreements, marketing agreements, customer relationships and certain contracts. These intangible assets, excluding marketing agreements, customer relationships and certain contracts, are indefinite-lived assets and are not amortized. Marketing agreements, customer relationships and certain contracts are definite-lived intangible assets and are amortized over the expected term of the respective agreements and contracts.

In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” we apply a fair value-based impairment test to the net book value of goodwill and indefinite-lived intangible assets on an annual basis and, if certain events or circumstances indicate that an impairment loss may have been incurred, on an interim basis. The annual impairment test date for our goodwill and indefinite-lived intangible assets is October 1. We have not performed impairment testing on goodwill and intangible assets subsequent to May 1, 2007, because there have been no events or changes that would indicate that such assets are impaired.

In accordance with SOP 90-7, if we utilize pre-emergence bankruptcy net operating loss (“NOL”) carryforwards, we will sequentially reduce the cost of goodwill followed by other indefinite-lived assets until the net carrying cost of these assets is zero. Accordingly, during the two months ended June 30, 2007, we reduced goodwill by $103 million with respect to utilization of pre-emergence NOL carryforwards.

The following table presents information about our intangible assets, including goodwill, at June 30, 2007 and December 31, 2006.

Indefinite-lived intangible assets

	Successor		Predecessor
	June 30, 2007		December 31, 2006
	Gross Carrying		Gross Carrying
(in millions)	Amount		Amount
Goodwill	$	12,373	$	227
Trade name		880		1
Takeoff and arrival slots		635		71
SkyTeam alliance		480		-
Other		2		-
Total	$	14,370	$	299

Definite-lived intangible assets

	Successor							Predecessor
	June 30, 2007							December 31, 2006
	Estimated		Gross Carrying		Accumulated			Estimated		Gross Carrying		Accumulated
(in millions)	life		Amount		Amortization			life		Amount		Amortization
Marketing agreements		4 years	$	710	$	(32	)			$	-	$	-
Contracts		17 to 34 years		205		(3	)				-		-
Customer relationships		4 years		40		-					-		-
Operating rights				-		-			9 to 19 years		121		(104	)
Other		1 year		1		-			3 to 5 years		3		(3	)
Total			$	956	$	(35	)			$	124	$	(107	)

The following table summarizes the expected amortization expense for the definite-lived intangible assets:

(in millions)
Six months ending December 31, 2007	$	112
2008		217
2009		217
2010		217
2011		18
After 2011		140
Total	$	921

Revenue Recognition and Frequent Flyer Program

We recognize revenue from the sale of passenger tickets as air transportation is provided or when the ticket expires unused. Our SkyMiles program offers participants the opportunity to earn travel awards primarily by flying on Delta, Delta Connection carriers and participating airlines. We also sell mileage credits in our frequent flyer program to participating companies such as credit card companies, hotels and car rental agencies.

As a result of the adoption of fresh start reporting, we revalued our SkyMiles frequent flyer award liability to estimated fair value. In accordance with SFAS 157, fair value represents the estimated amount we would pay a third party to assume the obligation for miles expected to be redeemed under the SkyMiles program. These miles were valued based upon the weighted average of amounts paid to SkyTeam alliance members and the equivalent ticket value of similar fares on Delta.

We previously accounted for frequent flyer miles earned on Delta flights on an incremental cost basis as an accrued liability and as operating expense, while miles sold to airline and non-airline businesses were accounted for on a deferred revenue basis. For additional information concerning the accounting for the SkyMiles program prior to May 1, 2007, see “Management’s Discussion and Analysis of Financial Condition and Results of Operation - Application of Critical Accounting Policies - Frequent Flyer Program” in our Form 10-K.

Upon emergence from bankruptcy, we changed our accounting policy to a deferred revenue model for all frequent flyer miles. We now account for all miles earned and sold as separate deliverables in a multiple element revenue arrangement as prescribed by EITF 00-21, “Revenue Arrangements with Multiple Deliverables.” Our revenues are generated from the sale of passenger tickets, which includes air transportation and mileage credits. Our revenues are also generated from the sale of miles to other airline and non-airline businesses, which may include a marketing premium.

We use the residual method for revenue recognition. The fair value of the mileage credit component is determinable based on the selling rate per mile to other SkyTeam alliance members. The fair values of the air transportation and marketing premium components are not determinable because they are not sold without mileage credits. Under the residual method, the fair value of the mileage credits is deferred and the remaining portion of the sale is allocated to air transportation or the marketing premium component, as applicable, and is recognized as revenue when the related services are provided.

The value associated with mileage credits that we estimate are not likely to be redeemed in the future is recognized as passenger revenue in proportion to actual mileage redemptions over the period redemptions occur.

3. DERIVATIVE INSTRUMENTS

Fuel Hedging Program

As of June 30, 2007, we had hedged 22% of our projected aircraft fuel requirements for the September 2007 quarter using heating oil zero-cost collar contracts. We have not entered into any fuel hedge contracts for the December 2007 quarter or thereafter.

Prior to the adoption of fresh start reporting, we had recorded as a component of shareowners’ deficit a $46 million unrealized gain related to our fuel hedging program. This gain would have been recognized as an offset to aircraft fuel expense as the underlying fuel hedge contracts were settled. However, as required by fresh start reporting, our accumulated shareowners’ deficit and accumulated other comprehensive loss were reset to zero. Accordingly, fresh start reporting adjustments eliminated the unrealized gain and increased aircraft fuel expense by $25 million for the two months ended June 30, 2007.

Gains (losses) recorded on our Consolidated Statements of Operations for the two months ended June 30, 2007, one month ended April 30, 2007 and three months ended June 30, 2006 related to our fuel hedge contracts are as follows:

	Aircraft fuel and related taxes						Other income (expense)
	Successor		Predecessor				Successor		Predecessor
	Two Months		One Month		Three Months		Two Months		One Month			Three Months
	Ended		Ended		Ended		Ended		Ended			Ended
	June 30,		April 30,		June 30,		June 30,		April 30,			June 30,
(in millions)	2007		2007		2006		2007		2007			2006
Open fuel hedge contracts	$	-	$	-	$	-	$	2	$	(7	)	$	7
Settled fuel hedge contracts		4		10		1		-		(2	)		-
Total	$	4	$	10	$	1	$	2	$	(9	)	$	7

Gains (losses) recorded on our Consolidated Statements of Operations for the two months ended June 30, 2007, four months ended April 30, 2007 and six months ended June 30, 2006 related to our fuel hedge contracts are as follows:

Aircraft fuel and related taxes

Other income (expense)

Successor

Predecessor

Successor

Predecessor

Two Months

Four Months

Six Months

Two Months

Four Months

Six Months

Ended

June 30,

April 30,

June 30,

April 30,

June 30,

(in millions)

2007

2006

2007

2006

Open fuel hedge contracts

Settled fuel hedge contracts

)