Updated from 9:45 a.m. EDT

The losses continue to mount at

Delta Air Lines

(DAL) - Get Report

, which missed Wall Street estimates and delayed its plan to reassess the company's business in hopes of becoming competitive again.

Before the start of trading Wednesday, the carrier announced a first-quarter net loss of $383 million, or $3.12 a share. Despite the fact

Delta issued an earnings warning on March 12, the company's first-quarter loss was deeper than the loss of $3.05 a share expected by analysts. Nonetheless, the quarter was an improvement from a year ago, when Delta had a net loss of $466 million, or $3.81 a share.

Revenue came in at $3.29 billion, up 4.3% from last year, but shy of the $3.36 billion that analysts expected, on average. Delta shares -- which were off 35% year to date heading into the earnings release, rose 21 cents, or 2.7%, to $7.91.

"This was a disappointing quarter for Delta and there are more challenging times ahead," CEO Gerald Grinstein said in a statement. "Continued losses of this magnitude are unsustainable. Delta must regain sustained profitability so we can compete effectively. The urgent task is to achieve a competitive cost structure so that Delta can generate a positive cash flow, reduce its debt burden and return to profitability."

To do this, Grinstein is conducting a strategic reassessment of Delta's business, with a definite focus on pilot wages, which Grinstein called a "major boulder" in the path to profitability. But this plan appears to be heading off track in the wake of president Fred Reid's

recent departure. Originally, Grinstein planned to present the board of directors with a plan in late June, but in the conference call he said it would be presented "at a late summer meeting."

Currently, management and labor are locked in a stalemate. Delta management has asked pilots to cut their pay by 30% annually. But pilots, whose contract runs until May 2005 and are some of the highest paid in the industry, have offered a 9% pay cut and the elimination of a pay raise due in May.

Furthermore, the company said that it would not be willing to tap the capital markets going forward, citing a slew of recent debt rating downgrades and the fact it has a debt-to-equity ratio of 104%.

"Our balance sheet has been severely damaged -- to the point of exhaustion," Grinstein said.

The company is already taking steps to cut expenses. In the first quarter, Delta's cost per available seat mile, or CASM, came in at 10.71 cents, off 3.8% from last year, as the company cut nonlabor costs and boosted efficiencies. As Delta starts to focus on labor costs, it said CASM will continue to fall in the coming quarters. In the second quarter, Delta said that CASM would fall about 9% from the previous year's quarter, with CASM down 4% to 5% for the full year.

But while the company moves to cut costs, it's also planning a big expansion of flights and the markets it serves. For the full year 2004, Delta said that it planned to expand capacity by 8% to 10%. With so many low-cost carriers like



, which competes with Delta out of its Atlanta hub, adding flights, there are concerns that too much capacity is coming back on line, forcing carriers to slash ticket prices.

"We wonder how Delta can be adding capacity at such an aggressive rate for 2004 given its materially deficient terms," said Linenberg.

At the end of the first quarter, Delta said it had $2.5 billion in cash, $2.2 billion of which was unrestricted. Unrestricted cash is down $500 million from the end of the fourth quarter, because of Delta's pension contributions and debt payments.

And as Delta uses cash to fund pensions and pay down debt, the company's operations are burning through it at a time the company has $3 billion in debt due over the next three years, which is why

bankruptcy rumors are swirling. In the first quarter, Delta had negative cash flow of $280 million. Excluding pension costs, it would have had positive cash flow of $116 million.

But not all the news is terrible. While Delta's first-quarter loss of $3.12 a share was bad, an accounting change makes it look worse than analysts' estimates. Unlike last year, Delta included a $23 million charge related to its fuel-hedging activities in its first-quarter results. Without it, the company would have lost $3 a share, said Michele Burns, company CFO, on a conference call discussing results.

Ultimately, the bad results have a silver lining; they could force employees to cut their pay earlier and deeper than they originally wanted to. A year ago, union groups at



, parent of American Airlines, vowed to veto pay cuts before agreeing to last-minute concessions as the company weighed a bankruptcy filing.

"The March quarter results should once and for all convince employees that Delta needs to be restructured -- sooner rather than later," said Linenberg, one of the only analysts to correctly predict Delta's loss. "The extent of the company's deteriorating financials plus growing low-cost carrier competition adds to the sense of urgency."