"We are made wise not by the recollection of our past, but by the responsibility for our future." A Delta 2001 Annual Report To Delta's Shareowners, Customers and Employees: LEO F. MULLIN Chairman and Chief Executive Officer "It is. ..the strength of the foundation we have laid and the steps we take going forward that provide the best indicator of Delta s future. As George Bernard Shaw once said, `We are made wise not by the recollection of our past, but by the responsibility for our f uture. The events and challenges of 2001 were unlike any encountered in our nation's history, and certainly unlike any in the history of aviation. Already in the middle of an economic decline that began in January 2001, the airline industry was shaken to its very roots on September 11 when terrorists turned commercial aircraft into weapons of mass destruction. The saga of how Delta worked through this crisis and its aftermath, and how we have maintained stability while positioning the company for a return to profitable growth, is a tribute to the strength and ingenuity of our entire team. 2 0 0 2 March 15, Given the far-reaching consequences set in motion on September 11, it is easy to forget that not all of Delta's 2001 challenges began on that date. Even as the long-running economic boom of the last decade was weakened sharply early in 2001, the company was also working through difficult pilot contract negotia tions at both Delta and Comair. Despite a painful 89-day strike at Comair, by the middle of the year, contracts that were beneficial to pilots at both airlines but that also provided a structure for continued prof itable growth were in place. With these negotiations completed and an upturn in the economy just begin ning, Delta was poised for recovery. But on September f 1, everything changed. Swift and Decisive Action On that date, for the first time ever, our nation's avia tion system was called to a halt, grounding passengers, crew members, and aircraft in unplanned destinations. The skies were eerily silent and empty as airlines and the government worked together around the clock to design a safer and more secure air transportation sys tem so that travel could resume. Though aircraft and crews were out of position, many passengers stranded, and many airports still closed, Delta's service levels were back to more than 85 percent of normal levels by the fifth day following the shutdown. Leo F. Mullin (center) with United States Senators Tom Daschle and Don Nickles. In addition to these unprecedented operational and security demands, Delta and the rest of the industry also faced severe financial challenges. Passenger revenue had been reduced to zero during the shutdown, and travel demand declined dramatically following restart as a stunned public tried to absorb the dimensions of the tragedy. Delta played a key role in conveying to Congress and the Administration the seriousness of aviation's economic plight. The industry succeeded in obtaining $5 billion in cash aid (including $654 million for Delta) as well as a $10 billion loan guaran tee program. The cash infusion provided welcome immediate relief, but only partially covered the huge losses asso ciated with September 11. 2001 Annual Report 1 Letter to Shareowners, Customers and Employees With reduced revenues, weak demand, high fixed costs, and increasing expenses for security and insur ance, the situation for our airline and the industry remained grim throughout 2001 and into 2002, despite the governmental help. Delta recorded a loss of $1 billion for the year and the industry as a whole posted a staggering $6 billion loss -- the worst in aviation history. From left to right: Skycap Stacey Turmpseed Passenger Service Agent Lori Ann Wallace assists a Delta passenger. Delta responded quickly, decisively, and aggres sively to the challenges emanating from this financial stress, including: Rigorous assessments of the revenue picture, from the first signs of economic weakening in January 2001 through the crisis of September 1 1 and beyond. Fast reductions in mainline capacity without dis continuing any domestic destinations - leaving Delta poised for service recovery as demand returns. Difficult but necessary reductions in staffing - achieved almost entirely through voluntary programs such as leaves of absence, early retirement, and volun tary severance rather than layoffs. Commitment to security improvements through fast, thorough implementation of new procedures designed to provide a safe, secure environment for our passengers and our employees. Focus on Alliances While the immediate demands of 2001 required significant attention, Delta kept a constant eye on long-term strategic goals. As part of this focus, we strengthened SkyTeam, our international alliance, by adding Alitalia to a list of partners that already included Aeromexico, Air France, CSA Czech Airlines, and Korean Air. In addition, Delta won governmental approval for antitrust immunity between our airline and SkyTeam's European partners, permitting full 2 Delta Air Lines, Inc. coordination of schedules and fares that will offer the maximum in convenience and competitive prices to SkyTeam customers. Recovery Period Ahead Now, as we move into 2002 and trends in passenger demand and revenue slowly begin to climb, our indus try is in transition between crisis aftermath and initial recovery. From this point on, it is not the difficulties of 2001 that will determine Delta's success. It is instead the strength of the foundation we have laid and the steps we take going forward that provide the best indi cator of Delta's future. As George Bernard Shaw once said, "We are made wise not by the recollection of our past, but by the responsibility for our future." Our actions throughout 2001 reflected Delta's unwavering focus on recovery, including disciplined capacity control; continued development of a strong network through increased regional jet service and the expanding growth potential of SkyTeam; continued attention to capital infrastructure; and dedication to a strong partnership with Delta people. From left to right: Airport Customer Service Representative Kumok Zajac Ramp Customer Service Agent William Kofler As a result, we are now poised to move past the storms and into that future, fully prepared, fully responsible, and fully certain that Delta's best days are still ahead. Leo F. Mullin Chairman and Chief Executive Officer 2001 An al Report 3 Delta's Network of Choices This year, over 104 million passengers chose to fly Delta (including its wholly owned subsidiaries Atlantic Southeast Airlines, Inc. and Comair, Inc.) - more than any other airline. Delta offers its customers a variety of choices to better serve their travel needs - whether domestic, international, business or leisure. The Delta Network consists of the following five distinctive, com plementary and integrated products: Delta Mainline - the core of our hub and spoke system. Our strategically located hubs in Atlanta, Cincinnati, Dallas/Ft. Worth and Salt Lake City provide us with a strong route network that extends our reach around the world. Delta International - Delta is the #1 carrier across the Atlantic, offering 413 weekly departures and nonstop service in 32 mar kets. Delta's global reach is extended with its SkyTeam partners, Aeromexico, Air France, Alitalia, CSA Czech Airlines and Korean Air. Delta Connection - our regional jet carrier service provides passengers in small and medium-sized cities with greater access to their destinations. Delta Connection carriers include Atlantic Southeast Airlines, Comair, Atlantic Coast Airlines and SkyWest. Delta is an industry leader in the fast-growing regional jet market. As of December 31, 2001, 231 regional jets flew under Delta's code. Delta Shuttle - provides high-frequency service to our key business travelers, with 17 nonstop, hourly weekday departures between New York-La Guardia (Marine Air Terminal) and Boston-Logan International and 16 nonstop hourly weekday departures between New York-La Guardia (Marine Air Terminal) and Washington, D.C.-Ronald Reagan National airports. No reservations are required. Delta Express - is Delta's low-fare product, offering our leisure customers reliable service and a reserved seat assignment at a low price between the Northeast and Midwest to four Florida markets. Delta domestic destinations it, , DELTA CONNECTION BY ''TT# . AMERICAN EAGLE fra** * * \ P*CIF s*n*90 ^4N To: lorQgjtf To Worcester. NJfl \N ofC( p\a\0` HNNES-TAiWoNSItf '&* . Milwaukee*! DetroAAJT , , VwA MICWGAI^BUg ADes Moines Toledo^ Pittsburgh Ne^ I m South BendT 0Fort # ,,lC N x p NA wa,oHio pENN|U'e4 IiuNOIS A ^ 1 . 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In January 2002, Delta and its European SkyTeam partners Air France, Alitalia and CSA Czech Airlines received final approval from the U.5. Department of Transportation for antitrust immunity that will permit the carriers to implement a more integrated airline alliance. In February 2002, we announced plans to reinstate codesharing on Korean Air flights, beginning on May 1, 2002. Network Challenges Early in the year, the U.S. and global economies began experiencing weakness, resulting in a decline in demand for air travel. In response, Delta's network strategy focused on reducing capacity, eliminating unprofitable routes and continuing to reallocate aircraft to core strength markets. The events of September 11 created new challenges that severely impacted the airline industry. Following these tragic events, traffic decreased dramatically. In response, Delta reduced its scheduled capacity by 16 percent effective November 1. These reductions were achieved by: Reducing operations on high-frequency routes with high potential for traffic recapture. Suspending winter service in seasonal markets. Reducing international flying. Decreasing Delta Express capacity due to the decline in leisure travel demand. Continuing to use Delta's regional jets to provide additional serv ice to Delta's mainline network from smaller, feeder markets. In making these capacity reductions, our goals were to keep our route network intact and to minimize the impact on our customers, while achieving significant cost reductions. Alliance Partnerships Although focused on recovering from September 11, Delta continued executing its strategic alliance goals. In December, Delta announced the addition of a new SkyTeam partner, Alitalia, to provide additional travel opportunities to Italy and within Europe. Delta also increased its codesharing network by adding two new partners: Aerolitoral, to strengthen Delta's service between the U.S. and Mexico; and an innovative codeshare agreement with SNCF-French Rail to provide rail service from Paris' Charles de Gaulle International Airport to eight destinations in France. Delta also expanded its codesharing service with SkyTeam partner Air France to include eight new destinations in 6 Delta Air Lines, Inc. 2001 Annual Report 7 Officers Leo F. Mullin Chairman and Chief Executive Officer Frederick W. Reid President and Chief Operating Officer M. Michele Burns Executive Vice President and Chief Financial Officer Robert L. Colman Executive Vice President - Human Resources Vicki B. Escarra Executive Vice President and Chief Marketing Officer Edward H. Bastian Senior Vice President -- Finance and Controller Vincent F. Caminiti Senior Vice President -- e-Business Anthony N. Charaf Senior Vice President - Delta Air Logistics W. Lamar Chesney Senior Vice President -- Supply Chain Management Robert S. Harkey Senior Vice President -- General Counsel and Secretary Subodh Karnik Senior Vice President -- Network and Revenue Management Lee A. Macenczak Senior Vice President - Sales and Distribution R. Michael Bell Vice President - Schedule Development Gerald A. Bemis Vice President - Line Maintenance Operations Harlan R. Bennett Vice President - Revenue Management Harold L. Bevis Vice President - Public Affairs Doug Blissit Vice President - Network Analysis John W. Boatright Vice President - Properties and Strategic Sourcing Walter A. Brill Vice President - Associate General Counsel Robert T. Cirulnick Vice President -- Finance, In-Flight & Operations Paulette L. Corbin Vice President -- Airport Customer Service -- West Richard W. Cordell Vice President - Airport Customer Service - Central Jack A. Daulton Vice President - Corporate Security Christopher A. Duncan Vice President - Finance and Chief Risk Officer John C. Marshall Vice President - Corporate Safety and Compliance James V. Maucere Vice President - Base, Engine and Component Maintenance Patrice G. Miles Vice President - Consumer Marketing Leon A. Piper Vice President - Worldwide Benefits and Health Resources Udo Rieder Vice President - Engineering and Planning Gregory L. Riggs Vice President - Deputy General Counsel and Assistant Secretary Debbie Siek Vice President -- Reservation Sales and Customer Care David J. Smith Vice President - Global Rewards and Recognition Belinda C. Stubblefield Vice President -- Global Diversity William F. Wangerien Vice President - Operations Planning, Control and Reliability Patrick H. Wildenburg, Jr. Vice President -- Supply Chain Management - Airline Operations Lemuel R. Wimbish, Jr. Vice President -- Atlanta Worldport Paul G. Matsen Senior Vice President - International and Alliances John N. Selvaggio Senior Vice President - Airport Customer Service Thomas J. Slocum Senior Vice President -- Corporate Communications Ray Valeika Senior Vice President -- Technical Operations James M. Whitehurst Senior Vice President - Finance, Treasury and Business Development Sharon Wibben Senior Vice President - In-Flight Service D. Scott Yohe Senior Vice President - Government Affairs J. Mark Balloun Vice President - Corporate Strategic Planning Terry M. Erskine Michael M. Young Vice President - Labor Relations Vice President - Community Affairs Carolyn A. Ezzell Vice President - Atlantic Region Michelle McKinney Frymire Vice President -- Finance -- Sales, Marketing and International Hank Halter Vice President - Finance and Assistant Controller Todd G. Helvie Vice President -- Tax Leslie P. Klemperer Vice President -- Associate General Counsel and Assistant Secretary William D. Kline Vice President - Organization Staffing & Development and Chief Learning Officer Joseph C. Kolshak Vice President -- Flight Operations Joseph Licitra Vice President - Airport Customer Service -- East Dean C. Arvidson Assistant Secretary Susan T. Hudson Assistant Secretary Delta Subsidiaries Frederick W.P. Buttrell President and Chief Executive Officer - Delta Connection, Inc. Jeffrey T. Fisher Vice President and Chief Financial Officer - Delta Connection, Inc. W. E. (Skip) Barnette President - ASA Holdings, Inc. and Atlantic Southeast Airlines, Inc. Randy D. Rademacher President - Comair Holdings, Inc. and Comair, Inc. Curtis Robb Acting President and Chief Executive Officer - Delta Technology, Inc. Chief Information Officer - Delta Air Lines, Inc. 8 Delta Air Lines, Inc. Board of Directors Edwin L. Artzt Non-Executive Chairman of the Board, Spalding Holdings Corporation; Retired Chairman of the Board and Chief Executive Officer, The Procter & Gamble Company James L. Broadhead Retired Chairman of the Board and Chief Executive Officer, FPL Group, Inc. and Florida Power & Light Company Edward H. Budd Retired Chairman of the Board and Chief Executive Officer, The Travelers Corporation R. Eugene Cartledge Retired Chairman of the Board and Chief Executive Officer, Union Camp Corporation Mary Johnston Evans Director of Household International, Inc., Moody's Corporation and Sunoco, Inc. Audit James L. Broadhead, Chairman Mary Johnston Evans George M.C. Fisher Joan E. Spero Andrew J. Young Benefit Funds Investment Andrew J. Young, Chairman James L. Broadhead R. Eugene Cartledge Mary Johnston Evans John F. Smith, Jr. Corporate Governance Mary Johnston Evans, Chairman James L. Broadhead Gerald Grinstein John F. Smith, Jr. Andrew J. Young Delta Boa Nancy E. Bossert Operational and Administrative Support Michele F. Chase Field and Air Logistics Sales Claudia S. Landau Supervisory and Management Representative of Ai Captain Dave A. Miller Associate non-voting member of the Board of Directors George M.C. Fisher Retired Chairman of the Board and Chief Executive Officer, Eastman Kodak Company David R. Goode Chairman of the Board, President and Chief Executive Officer, Norfolk Southern Corporation Gerald Grinstein Non-Executive Chairman of the Board, Agilent Technologies, Inc.; Retired Chairman of the Board, Burlington Northern Santa Fe Corporation; Former Chief Executive Officer, Western Air Lines, Inc. Leo F. Mullin Chairman of the Board and Chief Executive Officer, Delta Air Lines, Inc.; Former Vice Chairman, Unicom Corporation and Commonwealth Edison Company; Former President and Chief Operating Officer, First Chicago Corporation oard Committees Corporate Strategy R. Eugene Cartledge, Chairman Edwin L. Artzt James L. Broadhead Edward H. Budd Gerald Grinstein Executive Gerald Grinstein, Chairman Edwin L. Artzt James L. Broadhead Edward H. Budd R. Eugene Cartledge Mary Johnston Evans Andrew J. Young d Council Represe William M. Morey Reservation Sales and City Ticket Offices Kenneth R. Nowling Technical Operations r Line Pilots Associat John F. Smith, Jr. Chairman of the Board, General Motors Corporation; Chairman of Catalyst Joan E. Spero President of the Doris Duke Charitable Foundation; Former U.S. Undersecretary of State for Economic, Business & Agricultural Affairs; Former executive of American Express Company Andrew J. Young Chairman of the Board and Senior Partner, Goodworks International, Inc.; Chairman of the Southern Africa Enterprise Development Fund; Former Mayor of Atlanta, Georgia; Former United States Ambassador to the United Nations; Former member of the U.S. House of Representatives Finance Edwin L. Artzt, Chairman Edward H. Budd R. Eugene Cartledge David R. Goode Gerald Grinstein Personnel & Compensation Edward H. Budd, Chairman George M.C. Fisher David R. Goode Gerald Grinstein n t a t i v e s Larry J. Stites Airport Customer Service and Air Logistics Dale C. Williams In-Flight Service ion, International 2001 Annual Report 9 Consolidated Financial Highlights Years ended December 31, 2001 and 2000 Dollar amounts in millions, except per share data 2001 2000 Change Operating revenues $ 13,879 $ 16,741 (17%) Operating expenses $ 14,996 $ 15,003 - Operating income (loss) $ (1,117) $ 1,738 (164%) Operating margin (8.0%) 10.4% (18.4) pts Net income (loss) $ (1,027) $ 897 (214%) Diluted earnings (loss) per share $ (8.46) $ 6.81 (224%) Passenger mile yield 12.742 13.862 (8%) Operating revenue per available seat mile 9.392 10.802 (13%) Operating cost per available seat mile 10.142 9.682 5% Dividends declared on common stock $ 12 $ 12 - Dividends per common share 10.002 10.002 - Common shares issued and outstanding at year end (thousands) 123,246 123,013 - C o n s o I i dated Operating Highlights Years ended December 31, 2001 and 2000 2001 2000 Change Revenue passengers enplaned (thousands) 104,943 119,930 (12%) Revenue passenger miles (millions) 101,717 112,998 (10%) Available seat miles (millions) 147,837 154,974 (5%) Passenger load factor 68.8% 72.9% (4.1) pts Breakeven passenger load factor* 74.7% 64.8% 9.9 pts Cargo ton miles (millions) 1,583 1,855 (15%) Cargo ton mile yield 31.952 31.462 2% Fuel gallons consumed (millions) 2,649 2,922 (9%) Average aircraft fuel price per gallon, net of hedging gains 68.602 67.382 2% Number of aircraft in fleet at year end 814 831 (2%) Average age of aircraft fleet at year end (years) 9.1 9.6 (5%) Average aircraft utilization (hours per day) 7.3 8.0 (9%) End of year full-time equivalent employees 76,273 83,952 (9%) * Excludes unusual Items. For information regarding unusual items, see pages 13-14. Index to 11 Glossary of Defined Terms 12 Management's Discussion and Analysis of Financial Condition and Results of Operations 24 Consolidated Balance Sheets 26 Consolidated Statements of Operations 27 Consolidated Statements of Cash Flows 28 Consolidated Statements of Shareowners' Equity Financials 29 Notes to the Consolidated Financial Statements 55 Report of Independent Public Accountants 55 Report of Management 56 Consolidated Summary of Operations 58 Business Description 58 Shareowner Information 59 Delta's Aircraft Fleet (Inside Back Cover) 10 Delta Air Lines, Inc. Glossary of Defined Terms Accumulated Postretirement Benefit Obligation - a measure of the deferred compensation obligation, other than pen sions, that Delta has to its employees under postretirement welfare benefit plans. Air Traffic Liability - a liability on Delta's Consolidated Balance Sheets that represents the sale of passenger tickets for which services have not yet been provided. As the transportation service is provided by Delta, the amount is removed from air traffic liability and is recognized as revenue. ASM - Available Seat Mile. A measure of capacity which is calculated by multiplying the total number of seats available for transporting passengers by the total number of miles flown during a reporting period. Cargo Ton Miles - the total number of tons of cargo trans ported during a reporting period, multiplied by the total number of miles cargo is flown. CASM - (Operating) Cost per Available Seat Mile. The amount of operating cost incurred per available seat mile during a reporting period. Also referred to as unit cost. Collective Bargaining Agreement - an agreement between an employer and a union representing a group of employees which details pay rates and working conditions for that group of employees. Common Stock - the common stock, par value $1.50 per share, of Delta Air Lines, Inc. ERISA - The Employee Retirement Income Security Act of 1974. This federal law governs employee benefit and retirement plans. Fuel Price Neutralized CASM - the amount of operating cost incurred per available seat mile during a reporting period, adjusting fuel price to equal the prior year. Net Debt-to-Capital Ratio - a measure of leverage which is calculated by dividing net debt by total capitalization. Net debt includes short-term and long-term debt, capital lease obligations and the present value of operating lease obliga tions, reduced by cash and short-term investments. Capital includes total debt and shareowners' equity, including Series B ESOP Convertible Preferred Stock. Operating Margin - operating income divided by operating revenues. Passenger Load Factor - a measure of available seating capaci ty that is used which is calculated by dividing RPMs by ASMs for a reporting period. Passenger Mile Yield - amount of passenger revenue earned per revenue passenger mile during a reporting period. Projected Benefit Obligation - a measure of the deferred compensation obligation that Delta has to its employees under its pension plans. RASM - (Operating) Revenue per Available Seat Mile. The amount of operating revenue earned per available seat mile during a reporting period. Also referred to as unit revenue. RPM - Revenue Passenger Mile. One revenue-paying passen ger transported one mile. RPMs are calculated by multiplying the number of revenue passengers by the number of miles they are flown for the reporting period. Series B ESOP Convertible Preferred Stock - convertible preferred stock, $1.00 par value, $72.00 stated and liquida tion value, which is allocated to participants as part of the Employee Stock Ownership Plan (ESOP). Ton Mile Yield - amount of cargo revenue earned per cargo ton mile during a reporting period. Working Capital Position - current assets minus current liabilities. 2001 Annual Report 11 Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations BUSINESS ENVIRONMENT Our financial results for the year ended December 31, 2001 were materially affected by the terrorist attacks on the United States on September 11, 2001, the slowing U.S. and world economies and pilot labor issues at both Delta and Comair, Inc. (Comair). September 11, 2001 Terrorist Attacks On September 11, 2001, four commercial aircraft were hijacked by terrorists and crashed into The World Trade Center in New York City, the Pentagon in northern Virginia and a field in Pennsylvania. These attacks resulted in an overwhelming loss of life and extensive property damage. In response to the terrorist attacks, the Federal Aviation Administration (FAA) closed U.S. airspace, prohibiting all flights to, from and within the U.S. Airports reopened on September 13, 2001, except for Ronald Reagan National Airport in Washington, D.C., which partially reopened on October 4, 2001. During the period when airports were closed, we earned no revenues but continued to incur many of our normal operating costs. For several days after airports were reopened, we were able to operate only a portion of our scheduled flights. When flights were permitted to resume, our passenger traffic and yields were significantly lower than before the attacks. In addition, new security directives increased our costs and negatively impacted our ability to operate a pre- September 11 schedule. We estimate that the September 11 terrorist attacks negatively impacted our revenues by approxi mately $1.25 billion for the year. This is in addition to revenues that were adversely affected by the slowing U.S. and world economies and the pilot labor issues at Delta and Comair. Due to the significant reduction in traffic, we reduced our scheduled capacity by 16% effective November 1, 2001. In making these capacity reductions, our goals were to keep our route network intact and to minimize the impact on our cus tomers, while achieving significant cost reductions. Accordingly, we focused on reducing service on high-frequency routes with high potential for recapturing traffic, suspending winter service in seasonal markets, reducing international flying, decreasing Delta Express capacity and using regional jets to maintain pres ence and to provide mainline connecting traffic. As a result of the capacity reductions, we have reduced staffing levels by approximately 11,000 employees across all major work groups at December 31, 2001. Approximately 10,000 Delta employees elected to participate in one of Delta's voluntary programs, which include leaves of absence, sever ance and an early retirement program. Involuntary reductions are expected to affect approximately 1,700 employees, which includes the furlough of approximately 1,400 pilots. Approximately 400 pilot furloughs occurred in 2001 and approximately 1,000 are expected to occur in 2002. We recorded a $566 million charge relating to the staffing reduc tions, $475 million of which relates to the early retirement and voluntary leave of absence programs, while the remaining $91 million relates to severance and related costs. As of December 31, 2001, approximately $44 million had been paid for sever ance and related costs. An additional $47 million is expected to be paid in 2002. On September 22, 2001, President Bush signed into law the Air Transportation Safety and System Stabilization Act (Stabilization Act), which is intended to preserve the viability of the U.S. air transportation system. Among other things, the Stabilization Act (1) provides for payments from the U.S. Government totaling $5 billion to compensate U.S. air car riers for losses incurred from September 1 1, 2001 through December 31, 2001 as a result of the September 11 terrorist attacks; and (2) authorizes, subject to certain conditions, the issuance of federal loan guarantees totaling up to $10 billion to U.S. air carriers. We have recognized $634 million in com pensation under the Stabilization Act, $556 million of which was received in 2001. For additional information about the Stabilization Act and the compensation payable to us under that statute, see Note 2 of the Notes to the Consolidated Financial Statements. U.S. and World Economies Prior to September 11, the slowing economy reduced the demand for air travel among both business and leisure pas sengers. This decline in demand negatively impacted our passenger traffic and yield for the year. As a result of the September 11 terrorist attacks, the business environment significantly worsened. 12 Delta Air Lines, Inc. Delta Pilot Labor Issues In December 2000, we canceled a substantial number of flights due to a job action by some Delta pilots which significantly reduced pilot availability for overtime (or additional) flying. To provide more reliable service to our customers, we lowered the need for overtime flying by reducing Delta's mainline flight schedule from the previously planned levels by 2.7% for the March 2001 guarter and 2.4% for the June 2001 quarter. Public concern over a possible strike by Delta pilots relat ing to the then ongoing collective bargaining negotiations caused some customers to make reservations and travel with airlines other than Delta during the six months ended June 30, 2001. On June 20, 2001, Delta pilots ratified a new col lective bargaining agreement, avoiding a possible strike. Comair Pilot Labor Issues On March 26, 2001, Comair pilots began a strike, which continued until June 22, 2001 when they ratified a new col lective bargaining agreement. As a result of this 89-day strike, Comair suspended its operations between March 26, 2001 and July 1, 2001. Comair resumed partial service on July 2, 2001, and gradually began restoring service through the year. Comair's service was fully restored to its pre-strike levels during January 2002. We estimate that the Comair strike negatively impacted our revenues by approximately $680 million in 2001. Additional negative impacts of the strike include added costs to retrain Comair pilots and rebuild the Comair workforce. OUTLOOK 2002 will be a challenging year. The events of September 11 continue to materially affect our revenues due to a decline in traffic and yield. While the business environment is slowly recovering, traffic and yield remain well below last year's level. In January 2002, our revenue decreased 23%, traffic declined 10% and yield fell 15% compared to January 2001. We expect significant cost pressures to continue in 2002. These include increased (1) security costs and premi ums for war and terrorism risk insurance due to the events of September 11; (2) interest expense resulting from higher lev els of outstanding debt; and (3) pension expense due to the decrease in the fair value of our pension plan assets resulting from the stock market decline and to the new Delta pilot contract. During 2002, we expect to incur unusual operating costs of approximately $130 million. These nonrecurring expenses are a direct cost of our capacity reductions and rep resent the temporary carrying cost of surplus pilots, as well as requalification training and relocation costs. To help offset the impact of revenue declines and cost pressures, we have implemented a cost reduction program. The primary elements of this program are (1) the reduction of our staffing levels by approximately 12,000 employees; (2) capacity reductions, including the accelerated retirement of certain aircraft types; and (3) a detailed line item review of all other elements of our cost structure. Our capacity reduc tions will remain in place through at least the March 2002 quarter, with the pace of passenger revenue recovery deter mining our mainline capacity plans for the remainder of the year. Due to the changing business environment, we continue to refine many of our cost estimates for 2002. Based on the above, we expect to report a significant loss for the March 2002 quarter. The continuing impact of September 11 on our future financial condition and results of operations will depend on, among other things, the duration and magnitude of the adverse impact of the terrorist attacks on the demand for air travel and the business environment. Assuming traffic and yields continue to improve during 2002, we believe we may be profitable by the end of the year. 2001 Compared to 2000 NET INCOME (LOSS) AND EARNINGS (LOSS) PER SHARE (EPS) Excluding the unusual items described below, our net loss was $1.0 billion ($8.46 diluted EPS) in 2001 compared to net income of $897 million ($6.81 diluted EPS) in 2000. Including the unusual items described below, we recorded a net loss of $1.2 billion ($9.99 diluted EPS) in 2001, and net income of $828 million ($6.28 diluted EPS) in 2000. UNUSUAL ITEMS Our results of operations for 2001 and 2000 include the fol lowing items, which are collectively referred to as "unusual items" in this discussion of 2001 compared to 2000: 2001 Annual Report 13 Management's Discussion and Analysis of Financial Condition and Results of Operations 2001 Gains: A $634 million gain ($392 million net of tax, or $3.18 diluted EPS) that reflects the compensation we recognized under the Stabilization Act (see Note 2 of the Notes to the Consolidated Financial $tatements). A $111 million gain ($68 million net of tax, or $0.55 diluted EP5) on the sale of our equity interest in 5kyWest, Inc., the parent company of SkyWest Airlines (see Note 3 of the Notes to the Consolidated Financial Statements). A $68 million non-cash gain ($41 million net of tax, or $0.33 diluted EP5) for fair market value adjustments of financial instruments accounted for under $tatement of Financial Accounting $tandards (5FA5) 133, "Accounting for Derivative Instruments and Hedging Activities." These gains relate to derivative instruments we use in our fuel hedging program and to our equity warrants and other similar rights in other companies, primarily priceline.com Incorporated (priceline) (see Note 4 of the Notes to the Consolidated Financial 5tatements). An $11 million gain ($7 million net of tax, or $0.06 diluted EPS) from the sale of our equity interest in Equant, N.V. (Equant), an international data network services company (see Note 3 of the Notes to the Consolidated Financial Statements). Charges: $1.1 billion ($695 million net of tax, or $5.63 diluted EPS) in asset writedowns and other nonrecurring items. This primarily relates to charges for early retirement and severance costs relating to our staffing reductions, charges for the impairment and early retirement of certain aircraft and charges for discontinued contracts, facilities and information technology projects (see Note 9 of the Notes to the Consolidated Financial Statements). 2000 Gains: A $301 million gain ($184 million net of tax, or $1.40 diluted EPS) from the sale of investments. This includes a $73 million gain from the sale of 1.2 million shares of priceline common stock and a $228 million non-cash gain from the exchange of six million shares of priceline common stock for priceline preferred stock (see Note 3 of the Notes to the Consolidated Financial Statements) A $16 million one-time, non-cash gain ($10 million net of tax, or $0.07 diluted EPS), related to our equity investment in WORLDSPAN, L.P (Worldspan), a computer reservations system partnership. This gain represents our share of Worldspan's favorable outcome in certain arbi tration proceedings. Charges: A $164 million cumulative effect, non-cash charge ($100 million net of tax, or $0.77 diluted EPS), resulting from our adoption of SFAS 133 on July 1, 2000 (see Note 4 of the Notes to the Consolidated Financial Statements). A $159 million non-cash charge ($97 million net of tax, or $0.74 diluted EPS) for fair market value adjust ments of financial instruments accounted for under SFAS 133 (see Note 4 of the Notes to the Consolidated Financial Statements). A $108 million charge ($66 million net of tax, or $0.50 diluted EPS) for nonrecurring items. This includes charges of $86 million for an early retirement medical option pro gram for eligible employees and $22 million related to our decision to close our Pacific gateway in Portland, Oregon (see Note 9 of the Notes to the Consolidated Financial Statements). A $7 million charge ($4 million net of tax, or $0.03 diluted EPS) for the early extinguishment of certain debt obligations. OPERATING REVENUES Operating revenues were $13.9 billion in 2001, decreasing 17% from $16.7 billion in 2000. Passenger revenues fell 17% to $13.0 billion, reflecting a 10% decrease in RPMs on a capacity decline of 5%, and an 8% decrease in passenger mile yield to 12.74tf. These decreases were primarily the result of the effects of the terrorist attacks on September 11, the slowing U.S. and world economies and pilot labor issues at both Delta and Comair. North American Passenger Revenues North American passenger revenues fell 19% to $10.6 billion. RPMs decreased 11 % on a capacity decrease of 6%, while passenger mile yield decreased 9%. These decreases resulted from the terrorist attacks, the slowing economy and pilot labor issues. 14 Delta Air Lines, Inc. International Passenger Revenues International passenger revenues decreased 6% to $2.3 billion. RPMs fell 6% mainly due to the terrorist attacks on September 11 and the slowing U.S. and world economies. Passenger mile yield remained flat while capacity increased 2%, reflecting our international expansion, particularly in Latin American markets. Cargo and Other Revenues Cargo revenues decreased 13% to $506 million primarily due to the effects of the terrorist attacks on September 11, including the implementation of new FAA restrictions on cargo, and the slowing U.S. and world economies. The FAA restrictions prohibit passenger airlines from transporting mail weighing more than 16 ounces, which represented close to 50% of our mail business. Cargo ton miles decreased 15% and cargo ton mile yield increased 2%. Other reven ues decreased 18% to $409 million, primarily due to lower codeshare revenues, resulting from the terrorist attacks on September 11 and the slowing U.S. and world economies. OPERATING EXPENSES Excluding unusual items, operating expenses remained flat at $15.0 billion, CASM rose 5% to 10.14c, and fuel price neu tralized CASM grew 5% to 10.12c. Including unusual items, operating expenses for 2001 totaled $15.5 billion, increasing 2% from $15.1 billion in 2000. CASM rose 7% to 10.47c, and fuel price neutralized CASM grew 7% to 10.45c. Operating capacity decreased 5% to 148 billion ASMs. The increase in CASM is primarily related to a reduction in capacity due to the terrorist attacks on September 11 and pilot labor issues at Delta and Comair, as well as an increase in asset writedowns and other nonrecurring items and higher salaries and related costs. Salaries and related costs increased 3% during 2001 to $6.1 billion. The increase in salaries and related costs primarily relates to increased costs associated with the new pilot contract. Aircraft fuel expense decreased 8% in 2001. The average fuel price per gallon rose 2% to 68.60c. Total gallons con sumed decreased 9% due primarily to the decrease in flights resulting from the September 11 terrorist attacks and the Comair pilot strike, as well as fuel efficiencies realized from our fleet renewal efforts. Our fuel cost is shown net of fuel hedge gains of $299 million for 2001 and $684 million for 2000. Approximately 58% and 67% of our aircraft fuel reguirements were hedged during 2001 and 2000, respectively. For additional information about our fuel hedge contracts, see Note 4 of the Notes to the Consolidated Financial Statements. Depreciation and amortization expense rose 8% in 2001 due to the acquisition of additional aircraft and ground equip ment. Other selling expenses decreased 10% due to a lower volume of credit card charges resulting from lower revenue. Passenger commissions expense declined 18%, primarily as a result of lower passenger revenues. Contracted services expense increased 5% as a result of rate increases for build ing and equipment maintenance and increased security costs. Landing fees and other rents rose 1 % due to increased rates at various locations, partially offset by the impact of the Comair strike. Aircraft rent expense decreased 1 % due to a decrease in the number of leased aircraft. Aircraft mainte nance materials and outside repairs expense grew 11 % due to the timing of certain maintenance work. Passenger service expense decreased 1%. Other operating expenses decreased 4% as a result of lower fuel-related taxes, interrupted trip expenses and professional fees, partially offset by new uniform costs and higher insurance expenses. OPERATING INCOME AND OPERATING MARGIN Excluding unusual items, we incurred an operating loss of $1.1 billion in 2001, compared to operating income of $1.7 billion in 2000. Operating margin excluding unusual items was (8%) and 10% for 2001 and 2000, respectively. Including unusual items, we incurred an operating loss of $1.6 billion in 2001, compared to operating income of $1.6 billion in 2000. Operating margin including unusual items was (12%) and 10% for 2001 and 2000, respectively. OTHER INCOME (EXPENSE) Other expense totaled $262 million during 2001, compared to other expense of $88 million in 2000. This change is attrib utable to the following: net gain from the sale of investments decreased $174 mil lion in 2001 compared to 2000 (see Note 3 of the Notes to the Consolidated Financial Statements); net interest expense increased $153 million in 2001 due to higher levels of outstanding debt; 2001 Annual Report 15 Management's Discussion and Analysis of Financial Condition and Results of Operations miscellaneous income decreased $74 million mainly due to a decrease in our equity earnings from Worldspan; and a $68 million gain in 2001 compared to a $159 million loss in 2000 related to fair market value adjustments of SFAS 133 derivatives mainly due to changes in the price of the underlying common stock (see Note 4 of the Notes to the Consolidated Financial Statements). 2000 Compared to 1999 NET INCOME AND EARNINGS PER SHARE (EPS) Excluding the unusual items described below, net income was $897 million ($6.81 diluted EPS) in 2000, compared to $1.0 billion ($6.79 diluted EPS) in 1999. Including unusual items, our net income was $828 million ($6.28 diluted EPS) in 2000, com pared to net income of $1.2 billion ($8.15 diluted EPS) in 1999. Our 1999 results include the results of operations of Comair Holdings, Inc. from November 22, 1999 and ASA Holdings, Inc. from April 1, 1999. Comair Holdings and ASA Holdings are the parent companies of regional jet car riers Comair and Atlantic Southeast Airlines, Inc. (ASA), respectively. See Note 19 of the Notes to the Consolidated Financial Statements for additional information about our acquisitions of these companies. UNUSUAL ITEMS Our results of operations for 2000 and 1999 include the fol lowing items, which are collectively referred to as "unusual items" in this discussion of 2000 compared to 1999: 2000 The unusual items for 2000 are listed under "Unusual Items - 2000" on page 14 of this Annual Report. 1999 Gains: A $927 million gain ($565 million net of tax, or $3.83 diluted EPS) from the sale of investments, including: (1) $711 million from the sale of 11.1 million shares of price line common stock; (2) $137 million from the sale of our equity interest in Singapore Airlines Limited; (3) $50 million from the sale of a portion of our equity interest in Equant; and (4) $29 million from the sale of our equity interest in SAirGroup, the holding company of Swissair (see Note 3 of the Notes to the Consolidated Financial Statements). Charges: A $469 million charge ($286 million net of tax, or $1.94 diluted EPS) for asset writedowns and other nonrecurring items. This includes charges of $320 million for an asset writedown resulting from our decision to retire certain aircraft earlier than previously planned and $149 million for asset impairment losses (see Note 9 of the Notes to the Consolidated Financial Statements). An $89 million non-cash charge ($54 million net of tax, or $0.37 diluted EPS) from the cumulative effect of a change in accounting principle resulting from our January 1, 1999 adoption of SEC Staff Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements." SAB 101 required us to change our method of accounting for the sale of frequent flyer mileage credits to participating part ners (see Note 6 of the Notes to the Consolidated Financial Statements). A $40 million charge ($24 million net of tax, or $0.16 diluted EPS) for the early extinguishment of certain long term debt obligations. OPERATING REVENUES Operating revenues were $16.7 billion in 2000, increasing 12% from $14.9 billion in 1999. Passenger revenue growth of 12% reflects a 6% increase in RPMs on capacity growth of 5%, and a 5% increase in passenger mile yield to 13.86c. Excluding Comair and ASA, RPMs grew 3% on capacity growth of 2%. North American Passenger Revenues North American passenger revenues grew 11% to $13.2 billion, driven by a 6% increase in RPMs on capacity growth of 6%, and a 4% rise in passenger mile yield. The increase in RPMs was due to the inclusion of Comair and ASA, favor able economic conditions and the expansion of our fleet. The growth in traffic was partially offset by flight cancella tions due to severe winter weather conditions and reduced flying by some Delta pilots during December 2000. The increase in passenger mile yield was largely a result of the full-year impact of Comair and ASA and improved revenue management systems, partially offset by increased low-fare competition and capacity increases by competitors. 16 Delta Air Lines, Inc. International Passenger Revenues International passenger revenues increased 20% to $2.5 billion. RPMs rose 7% on capacity growth of 5%, and pas senger mile yield increased 12%. The increase in RPMs reflects our expansion into Latin America, which resulted in 24% traffic growth in that region during 2000. The increased passenger mile yield reflects strong demand and improved revenue management systems. Cargo and Other Revenues Cargo revenues increased 4% to $583 million, reflecting a 6% increase in cargo ton miles partially offset by a 2% decline in ton mile yield. The increase in cargo ton miles was primarily caused by overall capacity increases and higher mail volume from the growth in e-commerce activity. The decrease in ton mile yield was due to pricing pressure from industry-wide capacity growth in international markets. Other revenues increased 34% to $501 million, mainly a result of higher rev enues from joint marketing programs, codeshare activity and administrative service charges. OPERATING EXPENSES Excluding unusual items, operating expenses in 2000 were $15.0 billion, increasing 15% from $13.1 billion in 1999; CASM rose 9% to 9.68