Last week, fellow Fool Salim Haji penned these prescient words: "Most airlines will announce second-quarter earnings next week. Based on Southwest's disappointing announcement today, next week's news is likely to be even more painful."

Yesterday, Delta (NYSE:DAL) let loose the week's first yelp of agony, announcing a loss of more than two and a half times its market capitalization. (Today, we should hear from Continental (NYSE:CAL), with Northwest (NASDAQ:NWAC) and AMR (NYSE:AMR) reporting on Wednesday and Motley Fool Stock Advisor pick JetBlue (NASDAQ:JBLU) on Thursday.)

The vast majority of Delta's loss was derived from massive write-offs of accrued tax benefits from past unprofitable years. Which is to say these were just "paper" losses. But write-offs aside, Delta still lost $312 million of "real" money for the quarter. This, despite an increase in operating revenues of more than 13% over last year. The revenue increase was far outweighed by an increase in operating expenses of more than 27%, caused in large part by greater fuel consumption from increased flights and increased costs for each unit of fuel used.

Readers familiar with Whitney Tilson's classic piece on the subject, Beware of Steel and Airlines, will not be surprised to learn that Delta also had negative free cash flow for the quarter. While it recorded positive cash from operations of $57 million, the company also incurred capital expenditures of $202 million, resulting in substantial negative free cash flow.

Numbers such as the above tend to raise visions of bankruptcy in investors' minds. In an effort to dispel such thoughts, Delta emphasized that it still has $2.3 billion in cash with which to keep the lights on and the jet fuel flowing. But weigh that against memorable quotes from the earnings release and conference call such as: "It is unclear as to the timing of when Delta will generate sufficient taxable income to realize its deferred income tax credits" and "consequently... Delta will no longer record income tax benefits... for the foreseeable future."

Then throw in the CEO's candid observations that "the hole grows deeper every day," "there is no revenue recovery in the foreseeable future," and "the erosion will continue quite steadily in the future," and you will understand why Standard & Poor's lowered Delta's credit rating from B- to CCC+ (translation: from junk bonds to really junky bonds).

Meanwhile, in spite of all the above, investors piled aboard Delta yesterday, raising the stock's price by 8%. To those brave souls, I suggest: Listen very carefully to the flight attendant when she is describing the location of the life vests.

Fool contributor Rich Smith owns no shares in any company mentioned in this article. While he flies Aeroflot regularly on business and for pleasure, just the thought of investing in the airline industry gives him the shivers.

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