達美航空 (DAL) 2002 Q1 法說會逐字稿

Good morning and thank you for participating in Delta Airlines conference call. All participants will be able to listen only until the question and answer session of the call. At the request of Delta Airlines, this conference is being recorded. If you have any objections, you may disconnect at this time. Moderating today's call is Ms. Gail Grimmett, Director of Investor Relations.

Ms. Grimmett, you may begin.

Thank you, Marie. Good morning, everybody.

Just a couple of items to note before we begin. Please be aware that our call today is being transmitted live via the Worldwide Web and is being recorded. Also, if you decide to ask a question, it will be included in both our live transmission as well as any future use of the recording.

Any recording or other use or transmission of the text or audio for today's call is not allowed without the expressed written permission of Delta Airlines. Also, today's discussion contains forward-looking statements that represent our beliefs or expectations about future events. All forward-looking statements involve risks and uncertainties that could cause the actual results to differ materially from the forward-looking statement. Some of the factors that may cause such differences are listed in Delta's 8-K filed this morning.

I would now like to turn the call over to our Chairman and CEO, Leo Mullin.

Good morning and thank you for joining us. Also on the call today are Fred Reid, President and Chief Operating Officer and Michele Burns, Executive Vice President and Chief Financial Officer. Following my remarks this morning, Fred will review Delta's revenue and operational performance for the quarter.

Then Michele will take you through first quarter financial results and provide some guidance for the second quarter. And finally, we'll open the floor to questions. Let me begin with a quick recap of our latest financial results. Delta reported a first quarter loss of $354 million or a $2.90 loss per share excluding unusual items.

Including unusual items, Delta reported a loss of $397 million or $3.25 loss per share. While encouraging developments during the quarter included an operating profit and positive cash flow from operations in the month of March, the industries rate of recovery remains slow. A brief look at the economic indicators show the improvement is expected to continue.

Fourth quarter, '01 GDP growth was revised upward again from 1.4 percent to 1.7 percent with consumer and government spending serving as primary sources of strength. For 2002, the consensus GDP forecast is currently up slightly at around 2.5 percent.

Historically, the growth rate for air travel demand is highly correlated with the GDP, though there is typically a lag between post recession economic growth and the return of air travel demand. Consumer confidence is also gaining. With the University of Michigan's consumer sentiment survey registering 95.7 for March, up five points over February.

We are modestly encouraged by these trends, though they by no means negate the industry's continued duress. Fred and Michele will tell you more about how Delta will proceed through this period including our commitments to disciplined capacity growth and diligent cost management.

What I'd like to do before that portion of the call, however, is to comment briefly on a couple of developments of major industry concern that are occurring in two important areas. War risk insurance and security, both with significant financial and strategic implications for the future.

The decisions made in the next few weeks and months will have both near and longer term consequences and the industry has been and needs to continue efforts to ensure that effective, but also efficient solutions are adopted. The first issue is the need to find industry answers to the huge rise in war risk insurance costs which occurred following the September 11th terrorist attack.

Prior to 9/11, U.S. carriers in total paid 15 to $20 million annually for war risk or terrorism insurance. Today the industry's annual cost is about $930 million, up from the 15 to $20 million. Delta's portion of this amount is estimated at $170 million this year which represents a $110 million increase over 2001 costs.

These increases, while staggering would be even greater were it not for the active role the Federal Aviation Administration has played in the post 9/11 environment. Since 9/11, the FAA has basically kept the nation's airplanes in the air by supplying excess liability insurance. If the FAA's current program for supplemental war risk coverage does not continue, costs could rise as high as $1.7 billion for the industry.

The FAA's support is essential for the success of the airlines group insurance style self-help effort which we have named Equitime. Through Equitime, U.S. carriers are creating their own terrorism insurance vehicle in partnership with the government.

Equitime would allow the U.S. airline industry to fund some of the terrorist risk relying on the federal government to reinsure for catastrophe liability protection until other reasonable insurance alternatives develop. Under Equitime, war risk insurance costs to U.S. carriers would be expected to run around $450 million the first year, many times the 20 million the industry paid prior to 9/11, but vastly preferable to the 1.7 billion cost without FAA support. Equitime is on track for a mid-late summer start up if FAA remains the reinsurer.

Given the enormous impact the $1.7 billion annual premium for war risk insurance would have on the industry, the issue is worth watching closely. In addition, from a public policy standpoint, we believe that terrorism is a public risk affecting private entities. And hence, it is the public obligation of government to absorb at least some part of the risk. Next let me turn to the subject of aviation security.

Over the next few weeks and months, the government will be making crucial decisions about issues such as the architecture of baggage related security. These decisions must be based not just on the technology, but also on how efficiently these technologies operate and how their implementation affects customers. Now without question, aviation security has improved enormously since September 11th. Pilots remain in the cockpit.

Cockpit doors have been reinforced. Additional sky marshals are on board. Airline sweeps have been increased. Employee and supplier ID verification programs have been strengthened. And the employee and travel industry awareness, comprising one million people, has grown enormously. And the use of caps has increased as well. Because safety and security are the foundation of everything we do at Delta, we have fully supported each of these steps. And as a result, the public's confidence in air travel has been restored.

The dilemma now before us is how to maintain the highest levels of safety and security and provide high levels of customer convenience. Airlines are fully committed to the best possible aviation security system, but we are also committed to maintaining an efficient and effective air transportation system which fulfills its service obligation to the public.

Because the stakes are high, the aviation industry is working collaboratively with government to get the answer right. And I remain convinced that reducing the growing hassle factor our customers face in the wake of 9/11 is one of the most serious issues facing our industry today. Returning to this morning's agenda, you will hear in the remainder of today's call details about Delta's steady focus on disciplined capacity growth and cost management plus our continued underlying strengths, all of which support the confidence we have in Delta's future prosperity. With this, I'll turn the program over now to Fred Reid.

Thank you, Leo, and good morning ladies and gentlemen.

My key messages for Delta's first quarter performance of 2002 are threefold. Firstly, that first quarter traffic has continued to show improvement, albeit from an abnormal fourth quarter baseline.

Secondly, passenger yield recovery has continued to lag consistent with business travelers having yet to return in adequate numbers. Primarily due to the improvement in macroeconomic indicators, we are cautiously optimistic that frequent business travelers will return as the economy improves.

Thirdly, a potential mitigating factor to the improvement in the environment is that idled aircraft could be brought back too soon which could extend the downward pressure on yields. So Delta will follow a disciplined conservative approach to capacity and will increase service in targeted markets only when both traffic and yield so warrant.

Let me give you an overview of the March quarter for the consolidated Delta system which includes our wholly owned connection carriers, ASA and Comair.

Firstly, unit revenues or passenger RASM declined by 10.6 percent over last year, but showed improving momentum during the three month period. Delta's first quarter load factor of 68.9 percent was 1.8 percentage points ahead of last year. And load factor, like unit revenue, improved during each month of the quarter.

This incapacity declined by 10.6 percent year over year. Remember however, that our first quarter last year was unnaturally depressed because of labor issues at Delta since we had already pulled down mainline capacity about four percent during February and March of 2001.

Finally, yield for the quarter dropped 12.9 percent. Turning briefly to the highlights of our entity performance and beginning with North America, our total traffic in North America was down 6.8 percent, albeit on a capacity reduction of nine percent, which along with a yield drop of 15.3 percent, drove a RASM decline of 13.2 percent.

Within the revenue environment in North America, leisure traffic has been stronger than business traffic. And as we mentioned in January, east coast traffic continues to be sluggish as evidenced by Delta Shuttle, Delta Core Traffic Shuttle being down 28 percent versus last year. Atlantic traffic was down 7.6 percent on 11.3 percent lower capacity.

The Atlantic yields were down only 4.4 percent, resulting in effectively a flat RASM performance, quarter over quarter. As before, our sky team partner markets have exhibited the best results. For example, Italy showed the greatest year over year RASM improvement for Delta in the Atlantic area. And Atlanta, Paris is our most profitable European market of all.

Latin American traffic was up 5.9 percent on a drop of 2.2 percent in capacity. This was accompanied by a yield drop of 10.5 percent which drove a RASM decline of three percent. I would like to now turn to Delta's capacity growth strategy.

We feel strongly that conservative capacity management will be a key to the recovery of the airline industry. Delta is committed to a disciplined and conservative approach to capacity management using four approaches.

First of all, we will continue to leverage our very large regional jet flexibility by backfilling mainline, supplementing larger aircraft frequencies with additional frequencies to gain competitive advantage and adding incremental or new hub feed from smaller markets. Second, we continue to seek opportunities to redeploy aircraft seasonally into attractive markets, such as our announcement that we'll be operating a fourth Atlanta, London daily flight this summer.

Thirdly, we will continue to adjust all over the system to day of week demand. As an example of that, we are increasing New York to Florida service on Saturdays using Delta shuttle aircraft. And finally, we will continue our commitment to our fleet simplification program with a total of 31 727's and 737 300 retirements still on track by year end of 2002.

Turning to the alliance landscape and the ongoing successes of the sky team alliance, we continue to execute our alliance strategy by further integration in the newly approved antitrust environment between Air France, Delta, Czech Airlines and Alitalia. The addition of our partner Alitalia, for example, will provide additional travel opportunities for our customers to Italy and within Europe.

We recently inaugurated daily service from Atlanta to Milan as proof of the value of this partner. Today, Alitalia, Air France and Czech Airlines have 227 code share destinations beyond Delta U.S. gateways. And Delta in turn has 107 daily code shares beyond the European carrier hub. On May 1st, we will reinstate code sharing with Korean Air and will begin to bring in leveraging the world class quality of the new Inchon hub outside of Seoul.

Before closing, let me summarize our operational performance for the quarter. For the March quarter, on time performance was 77.4 percent of all flights arriving within 15 minutes. And our completion factor was 98.3 percent. We ranked a disappointing eighth in the industry for both of these metrics.

The principle driver of our ranking performance with respect to on time performance was unusual weather activity in Atlanta in January and March and in Dallas and Atlanta in March. This was in contrast to an unusually mild winter in the northeast which drove our ranking. However, we would like to point out that on a year over year basis, our performance has substantially improved.

In fact, on time performance was full 5.9 points above last year and the completion factor came in 2.2 points ahead of last year. Both of these measures are indicative of the ongoing spirit and can do attitude of the frontline professionals at Delta.

At this point, I'd like to turn the call over to Michele Burns.

Good morning. After the unrelenting challenges we faced in 2001, the first quarter of 2002 has been one of transition to recovery. We followed our strategic plan to rebuild and strengthen our financial foundation.

Delta's financial losses are improving, but they are losses nonetheless. As I discuss the financial results, there are three key messages that I'd like you to take away today. First, in a seasonally weak quarter, we continued to follow our broad based recovery plan implemented after the September 11th terrorist attacks.

Second, we are seeing signs of gradual recovery in the economy and in our business. As we told you last quarter, our financial strategy will continue to focus on liquidity management, cost control and capacity discipline.

By focusing on three elements, we will position ourselves to take advantage of the stronger second half of the year. And finally, Delta continues to build for the future. I will give you several examples of smart, disciplined decisions we've made which will benefit us in the years ahead.

Our goal in 2002 is not to simply survive, but to thrive in today's dynamic environment. Let's first discuss the March quarter performance. Delta reported a net loss of 397 million or $3.25 per share. Excluding unusual items, we reported a net loss of 354 million or $2.90 per share.

Our unusual items this quarter consisted of the following after tax amounts: an $18 million non-cash expense related to SFAS 133 and 25 million for the carrying costs of surplus pilots and grounded aircraft which we mentioned in the December conference call. While still a significant loss, there are several highlights to this performance. First, excluding unusual items, Delta recorded an operating profit in the month of March, our first operating profit in eight months.

Second, we had positive cash flow from operations in March, a significant accomplishment in the current environment. And lastly, our cost containment efforts remained on target. In fact, excluding unusual items, our operating expenses were down 11.6 percent, year over year.

Furthermore, as we mentioned last quarter, we've implemented a program which reduces our cost structure by 1.8 billion. This represents our efforts over the past year as well as new 2002 initiatives. To date, we are on track with this plan. As a major part of our financial strategy, we have been relentless in our line by line reviews of our cost structure.

We continue to revisit all areas and look for new opportunities to realize additional savings. Our 11.6 percent reduction in total operating expenses was our second consecutive quarter with year over year double digit decline.

This is evidence of our commitment to cost discipline. The net result is that we beat our original CASM guidance by two percentage points. CASM for the quarter declined 1.2 percent. On a fuel price neutralized basis, CASM was up only 1.7 percent.

These results were achieved on the 11 percent capacity reduction while preserving our network footprint. Our CASM was helped by

which was down 34 percent. Both lower fuel price and lower consumption contributed to this reduction. Our all-end fuel price was 57 cents per gallon.

We were 72 percent hedged at 61 cents per gallon which yielded 21 million in pre-tax savings in the quarter. This CASM performance was delivered even though we saw cost pressures from both security and insurance. For the March quarter, security costs increased 34 million and insurance costs were up 43 million. As Fred outlined, the revenue environment is improving, but at a slow rate. Traffic continues to improve month to month.

However, yields remain a constant challenge. Operating revenues were down 19 percent and totaled 3.1 billion compared to 3.8 billion last year.

Passenger revenues total 2.9 billion, down 20 percent from last year.

Passenger RASM was down 10.6 percent. However, we saw meaningful improvement during the quarter. January RASM was down 12.9 percent. February was down 10.9 percent. And March was down 8.6 percent.

In addition to our focus on the operating side, we continued our relentless efforts of preserving cash and managing Delta's liquidity position. We pride ourselves on having one of the industry's strongest balance sheets and believe that it has provided the financial flexibility needed during these challenging times. We ended the quarter with a cash balance of 1.5 billion, and additional short-term liquidity of 1.6 billion.

Our cash earned for the quarter was 1.5 million a day, significantly better than our earlier estimate of 3 to 4 million per day. As I mentioned earlier, we had positive cash from operations in March. Our cash earned excludes both cap ex and all tax refunds.

It also assumes that federal excise taxes were paid during the December quarter. Using this same definition, we expect to be cash flow positive in the June quarter. I'd like to spend a moment on Delta's tax refund.

Delta expeditiously filed its 2001 tax return on February 6th and received an 160 million refund the next day. This represents an eighth month acceleration of the filing of that return. Subsequently, Congress passed the economic stimulus package extending the NOL carry back period to five years.

Delta again expedited the filing of its refund claim and received an incremental tax refund of 300 million on March 22. This represents flawless execution by the Delta

Team. At March 31, out total long-term debt was 9.3 billion and our all-end debt to cap ratio is 82 percent.

In addition, we have approximately 7 billion of unencumbered aircraft. As I mentioned earlier, we remain committed to the key components of our financial strategy which we discussed with you last quarter.

We've already discussed liquidity management and capacity discipline, so let's spend another moment on costs. In our December earnings call, we discussed the significant cost pressures Delta will face in 2002 and how we built our plan to minimize the impact of these pressures. Again, in detail, these include security and insurance costs.

For the full year, as Leo indicated, we expect our security costs to be up 50 to 60 million and insurance costs to be up 110 to 120 billion. In the area of pension expense, Delta will have increased pension expense due primarily to market deterioration and interest rate declines as well as the new pilot contract.

We expect this increase to be approximately 400 million for the year on an asset base of 8.5 billion. To mitigate these cost pressures, we will continue our aggressive cost management initiatives. Two examples of cost savings include: first, savings from our headcount reduction. Mainline headcount is down over 13 percent, year over year. And this continues to be monitored closely. We expect the benefit on a run rate basis to be over 500 million for the year.

Second, a reduction in distribution costs will yield approximately 300 million in savings.

This includes 100 to 150 million in savings from our elimination of travel agent based commissions. The remainder is partially a result of our online migration strategies. To this end, revenues from online channels represented 17 percent of passenger revenues, up from 12 percent in the March, 2001 quarter. Delta.com accounted for 10 percent of passenger revenues, up from seven percent last year. Now let me provide some additional color on our decision to eliminate based commissions. We've implemented a new incentive commission program which rewards agencies based on their performance.

The 100 to 150 million we expect in cost savings is above and beyond our 1.8 billion of targeted cost reductions. The elimination of published based commissions at Delta removes one of the last vestiges of the commission program developed in a regulated environment.

Prior to deregulation of the airline industry, airlines were required to pay base commissions to travel agents at a rate fixed by the government without regard to efficiencies or sales results achieved by these agencies. Contrast, Delta's pay for performance program will reward travel agencies who achieve superior sales results for Delta. These two items alone represent 800 million in calendar year 2002 cost savings and we innovate every day. While focusing on our financial strategy, Delta is also building for its future.

We are in the middle of a difficult time, but have not lost sight of the importance of investing in our company. We continue to make smart, disciplined decisions to not only manage the business in 2002, but also build for the years ahead.

To this end, we have taken the following steps during the quarter. First, our commitment to our fleet of regional jets is strong. We have the largest order book in the industry and will take delivery of 60 RJ's this year. Seventeen arrived in the first quarter. I'd also like to point out that both ASA and Comair were profitable in the March quarter.

We believe the RJ's will continue to be an integral part of our network strategy and benefit us in the future. Second, we continue to invest in technology, a longstanding Delta commitment. As announced last week, we will enhance productivity and ease our customers' travel experience by adding over 300 self-service kiosks by year end.

We are proceeding with our call center renewal which this year provides a six percent productivity gain in reservations through a decrease in average call handling time. And we are in the second phase of our SAP implementation, inventory and supply chain management. We expect a $200 million cash flow benefit over the next three years. And lastly, we are serious about customer service.

As Leo stated, we realize that the hassle factor is real and traveling can be stressful. We've adjusted our airport processes and worked diligently at addressing this challenge. As a result of our effort, we have reduced the amount of time we advice customers to arrive at the airport from two hours to one hour before their flight.

We've doubled our frequent travelers security line by adding them at nine new airports.

And we've also added food back on selected flights. Delta believes these are the right decisions to make for our customers and we will continue to analyze other customer service initiatives. Now let's turn to guidance for the June, 2002 quarter and beyond.

First, costs. For the June quarter, we expect consolidated CASM to be approximately 2 to 3 percent and fuel price neutralized CASM up approximately three percent. For the full year, we estimate both CASM and fuel price neutralized CASM growth of one percent.

Turning to fuel, in the June quarter, we are 57 percent hedged at an all- end hedge price of 58 cents per gallon. For the second half of the year, we are 47 percent hedged at approximately 65 cents per gallon. And finally, we expect cap ex to total 1.2 billion in 2002. In addition, we expect RJ leases of 1.1 billion in 2002. Turning to capacity guidance, on a consolidated basis, capacity for the June quarter will be done seven to nine percent.

Mainline will be down 11 to 13 percent, with our connection carriers showing year over year capacity increases. We are committed to disciplined, conservative capacity decisions throughout this year. Any additions beyond the June quarter will depend solely on the revenue environment.

And finally, looking forward to outlook for June quarter traffic and advanced bookings. Return of traffic we have seen in the first quarter is expected to continue with load factors up two points versus the June quarter last year.

Advanced bookings support this view in all entities except Latin America where the economic conditions are beginning to put downward pressure on demand for air travel.

On a cautionary note, we have yet to see any upward

yield will be key to the return of profitability for the industry as a whole. All of these factors combined will yield a second quarter loss which is significantly lower than the first quarter, but a loss nonetheless. Closing, Delta expects 2002 to be a year of recovery. The first quarter behind us, we continue to be confident in our ability to prosper over the long term.

In fact, our preliminary estimates indicate that we will be profitable sometime in the second half of the year. This will be achieved by aggressively managing all things within our control, capacity, liquidity and costs.

That concludes our quarterly conference call. At this time, we are happy to take your questions.

Thank you. At this time, we are ready to begin the formal question and answer session. If you would like to ask a question, please press star one on your touchtone phone. You will be announced prior to asking your question. To withdraw your question, please press star two. Once again, to ask a question, please press star one now.

We will take a moment for the question queue to fill.

The first question comes from

of Merrill Lynch.

Yes, hey, good morning. I guess two questions here. I guess the first to Fred. You know, given some of the moves by Air Tran and also service additions by JetBlue, I mean, can you talk about what you're seeing on the low fare front, you know, competition-wise?

Yes Michael. We have got considerable exposure to low cost competition and have had that for quite some years now. It is always true that in times of a recession, that during those times, the low cost carriers surge somewhat ahead of the network carriers.

But that seems to balance out during the up part of the cycle. So we're continuing to compete very, very aggressively in all of our markets, especially the northeast and the southeast in response to this competition. And we'll continue to do so.

OK. And then I guess another, you know, sort of market related question, Fred, with respect to, you know, your plans for Boston long-term, I know recently you did announce that you were going to pull out of the Boston, London, Gatwick market.

And I think, you know, long-term that's probably a market that you wanted to be in. Can you maybe talk about maybe how the long-term plans for Boston may have changed?

Well, they really have not changed materially,

. I would say -- would like to emphasize that our

for both Boston and New York over the long term remain very upbeat and very ambitious.

Now, it's no secret that the downturn in the Northeast continues to exceed the national downturn on average, and we are dealing with this through the appropriate capacity reductions and perhaps the slowing down of our expansion plans. The Boston-Gatwick, frankly, was simply a matter of better strength from our alliance partners than we had anticipated with the quadrilateral antitrust immunity and the ability to reallocate to Atlanta-London with the fourth daily frequency.

So we also did launch Boston-Gatwick, quite frankly, with the idea that Heathrow might be available at this time, which it is not. Overall, I will say that the Boston plan remains on track, albeit slightly delayed, and that you will see a buildup of our RJ capacity and our Boston to -- our Boston domestic capacity more or less in line with original plans except slightly delayed.

OK. And just lastly, on the alliance front, since, you know, you now have the antitrust immunity with, you know, several partners, have you at all put out a new number on what you think -- you know, the enhancement to revenues on an annual basis, what we should -- want to look at going forward?

No,

. We see considerable upside, but we are in the process of working through those opportunities. I would not venture a number on this call today.

But I will also add that we will be applying for antitrust immunity with Korean, which will add a very, very strong dimension, thereby getting us an ATI relationship transPacific, as well as with three carriers transatlantic. So it's a good story, but I wouldn't venture a number today.

OK, thank you.

The next question comes from

of Lehman Brothers.

Hey, guys. I wonder, Michele, if maybe you could give us a little bit more color on labor costs. I'm thinking, sequentially, you know, we've got head count down considerably between the fourth quarter and the first, yet have a pretty significant uptick in the wage line. You alluded to pension, and I wondered if there's some weather impact in there as well.

In answer to your first question, the salary line is not up. It is down by about $100 million.

And as you noted, the head count has gone significantly down, and, as a matter of fact, even more at mainline than at the connection carriers, so all them significantly down. We do expect that these head count reductions would yield a $500 million benefit over the course of the year.

And I guess, Michele, I was thinking sequentially, from the fourth quarter to the first, your head count is down, you know, on a sequential basis, and personnel expenses are up quite a bit, quarter to quarter. Is that primarily pension related?

It's primarily the pension expense that we discussed earlier in the call, and that has -- I mentioned the $400 million pension expense accrual, which is then obviously brought into the P&L throughout the year.

If you'd like, we'll take that question off-line and give you some additional color in detail.

Great.

Fred, also, I just wondered if you could shed a little bit more light on the -- on the whole Northeast issue. You'd mentioned, obviously, shuttle is -- shuttle's performance is a little bit weak, you know.

Does it go -- I mean, I assume it goes broadly beyond that. Can you give us a sense -- you know, can you quantify maybe what the difference is in what you're seeing, you know, in the Northeast versus, say, the rest of the network?

Well, USA Today published statistics this morning indicating a year-over-year drop in the first quarter in the Northeast of around 17 percent of traffic versus an approximate 10 percent reduction in the rest of the nation. That's roughly in line with our numbers.

I will say,

, that we have noted not only on the shuttle but on some of the very, very short-haul routes in Delta mainline and those of our partners, Atlantic Coast and Sky West, a disproportionately high reduction of traffic on the very short haul. This is attributable largely to the perceived security hassle.

First of all, the security hassle is real, and it's ongoing. But the perception is lagging a little bit, because it has improved more than some people realize.

We were able recently to publish a reduction of the reporting times at airports from two hours down to one hour nationwide, and we are processing most of our shuttle passengers out of National Airport in 20 minutes, sometimes 22. But, overall, the security environment remains a perceived hassle. There are occasional hiccups, as we know, but, overall, it is improving.

When you say wait times in your -- that you're experiencing are down to pre-9/11 levels, is that hub airports only or across the system that you're experiencing that?

That's pretty much across the system, and I wouldn't say that they're universally down to pre-9/11 levels. They're dramatically better than post-9/11 levels, and they're increasing over time. We're not exactly back to pre-9/11, but we are substantially better than the October through January period.

Thanks a lot.

The next question comes from

of Buckingham Research Group.

Thank you very much, operator. Hi everybody.

Just a couple of questions -- first, Michele, on pension, in the 10-K, you go through the expected long-term rate of return at 10 percent for your plan assets. Are you still comfortable with that level given the market?

We are comfortable with that level, essentially because it represents a long-term rate, and that rate is a rate at which Delta has exceeded for some number of years. So, you know, at this point, we do believe that that's a comfortable place for us to sit.

OK. And then the other question is in last year's second quarter, the numbers were affected by the Comair pilot strike, because I think if you adjust last year for the strike, you actually would have had a profit in that quarter.

So when you give us guidance for the second quarter, especially on the capacity numbers, is that capacity adjusted for Comair?

It has not been adjusted for Comair. So, you know, that would essentially mean the capacity reduction is higher, but the mainline capacity reduction would be consistent.

OK, great. Those were my questions. Thanks for your help.

The next question comes from

of UBS Warburg.

Yes, good morning. You -- from a RASM perspective, you under-performed by two or three points domestically, and you out-performed by a similar amount, perhaps maybe even a little better, in the transatlantic.

You sort of touched on some of the factors, but you've got more numbers than we do. Could you elaborate on that trend and whether you expect that to continue through the balance of the year, just from a relative perspective?

Yes,

. Fred here. I think that the major driving factors are the -- our heavy presence in the Northeast and the Southeast and the relationship of traffic flows from the Northeast to the Southeast, which is a big part of our network. In fact, it's disproportionately large to our network airline peers, and I would call the principal driver the lower drop in Northeast traffic and Northeast to Southeast traffic.

I think it's also to -- it's important to remember that in a -- in the comparable period last year, particularly February and March, we had an abrupt pull-down of capacity and a drop-away of low-fare bookings, which artificially drove our RASM up. That was due to the labor issues we were dealing with at the time.

If you correct for that, our RASM performance would be one or two percent better in the first quarter than the numbers that have been published. And, thirdly, of course, the heavy concentration of business traffic in the Northeast has been a third contributing factor.

So Cincinnati, Dallas, and Salt Lake are doing better than Atlanta in a relative manner of speaking?

Marginally, yes.

And, lastly, the company has stated in the past and recently that it expects to be profitable in the second half, as you just stated. Is that still your expectation? Is it an expectation? Is it a hope? Is it for the duration? Is it for a day? Is it for a week? Could you just clarify that statement or reiterate it?

We do expect to be profitable in the second half, and I would -- the way I'd like to characterize it at this point is that we certainly expect to be profitable for several months during that period.

OK, thank you.

Once again, if you'd like to ask a question, please press star-one. The next question comes from

of Credit Suisse First Boston.

Yes, I actually have a number of questions. I'll try to limit them.

There was a statement in the release this morning about additional near-term liquidity position of $1.6 billion in addition -- on top of your $1.5 billion in cash. What is that?

It's several components. We have a line of credit which is currently outstanding. We also have manufacturer's back-stop facilities with our aircraft manufacturers, and those add up to an excess of $1.6 billion.

OK, great. Where do you stand on regional jet flying as it's allowed under the pilot scope clause? There have been a lot of moving parts there, and I think you may have just triggered and increase in the proportion of flying that can be regional jet flying with the second -- first quarter loss. I'm just wondering where you stand there.

Well, there are two issues going on. First of all, there is an Airline Pilots Association grievance related to the proportion of mainline flying to RJ flying. That is being arbitrated as we speak.

Secondly, there is another contract clause which has been triggered by today's announcement of two consecutive quarter losses, which require those levels to be reset and renegotiated. And right now, we do not feel -- we do not feel that we are in a constrained position as far as the deployment of RJs is concerned, nor do we see that coming in the foreseeable future.

Great. And then, finally, can you give us a sense of aggregate sky team transatlantic capacity? I believe -- not a -- you know, just a -- within a few days after antitrust immunity was announced, I think that Air France announced a fairly sizable tour offering capacity. I'm wondering what aggregate alliance capacity is looking like this year.

I'm afraid I don't have that, but we can get that and call you off-line.

Yeah, that would be great. Thank you very much.

The next question comes from

of Salomon Smith Barney.

Hi. Two quick questions -- I think

was hitting on this a little bit.

But can you comment, Fred, a little bit just regarding the shuttle compared to other, you know, Northeast markets, because, at least anecdotally and perhaps a little bit more than anecdotally, I'm hearing that Amtrak and Acela have picked up some, you know, serious share, and I was just wondering what your view is or if you can comment on the rate of recovery for the shuttle, say, relative to other Northeast markets.

OK.

, let me -- let me be specific about the first quarter. Overall revenue was down 20 percent for the system, and overall shuttle revenue down -- was down 40 percent.

Our traffic drop on the system was only eight percent, but it was 41 percent on the shuttle. So shuttle yields are flat.

What's driving the shuttle situation is, of course, the very unusual period out of which we are coming, which was an enhanced security environment and, very initially, you know, some lag in fear of flying, which we think has largely abated. In fact, it's almost totally abated.

So I would say that, moving forward, we remain very confident about the shuttle. The hassle factor is affecting traffic, but the hassle factor is diminishing week by week, the security environment is improving, and we recently launched a 20-minute guarantee and a marketing program which factually states that the plane is faster than the train.

So I do see return -- the return of historic traffic numbers on the shuttle over time. We're quite confident that in the coming months, it will rebound substantially.

OK. And I have just one more question, perhaps for Leo, but maybe also for Fred, just, you know, regarding the TSA --- and you folks have given guidance as far as security costs for the remainder of the year and so forth. But there certainly seems to be a lot of nasties still kind of floating around there.

And I was wondering if you could give a comment as far as, you know, how you feel, particularly going into 2003, if there's more exposure for additional security costs. Are these disruptions that we see sporadically, most recently the one in La Guardia -- are those starting to die down a little bit? Are TSA folks working with airport authorities -- any comments on that whole issue?

This is Leo,

. We have met repeatedly with the federal government on these subjects, and I -- and I do think that the government is highly sensitized to it, recognizes its role to absolutely maintain total security, but at the same time, it has to be done in a customer appropriate way, and Secretary Mineta has confirmed that repeatedly.

And I do expect that we will find better and, in some senses, more common-sense responses. There's been on the order of 165 or so airport or concourse clearances as a result of this -- you mentioned the La Guardia situation as just a recent example, and, quite clearly, we are not going to get back our business traffic if we have that low reliability associated with these really dramatic responses to some relatively small issues that do occur.

And so we all need to sort out those, and I think that the government is doing a good job in thinking it through and will commit to that. I think that the big questions yet ahead in answering your future issue has to do with what I termed in my brief outline, architecture.

There are some very big decisions pertaining to the use of the big CAT scan machines as opposed to trace moving ahead, and the government is grappling with that architecture as we speak. And I think that the crucial ingredient has to do with the reliability of the technological approaches that are used and to -- and to look at that in conjunction with the process of just simply getting the passenger through the airport to his -- to his plane.

And the ATA is having intensive discussions with the government on these subjects. They are very, very important, and they need to be sorted out in a -- in a very customer-sensitive as well as security-oriented way as we move ahead.

So big questions lie ahead. I think that the government will be talking about this in the near future. But I feel that the -- that the industry is very much involved with these issues, and I'm hopeful we'll get a good answer, but they are very important answers.

Any sense yet who's going to be paying for those CAT scan machines?

Well, I think that the -- this is another issue that the government is grappling with right now. There's no question that the amount of money that is in the -- that has been appropriated for airline security right now is very low relative to the need, whether you go with a CAT scan or whether you go with a trace related or some other technologically related -- such as a CAPS oriented, you know, type system. And, of course, the best answer is probably some combination of all of these factors.

And so -- but I think that, you know, there will be a higher cost associated with it. We have no indication yet that that would bring up the issue of any additional charges imposed on the airline ticket. I mean, we already, I think, are suffering in terms of the charges that have already been imposed.

There's no question -- if you look at the question you asked earlier about Acela and Amtrak, or, even more importantly, driving -- that the increased ticket prices associated with these -- with these charges are, in fact, diverting traffic to other modes of transportation. And so the government is grappling with that as we speak, and, of course, their two basic alternatives would be to increase charges which --- at this moment, I don't see that as a serious concern right now, but it needs to be watched, and the others are obviously to deal with it out of general purpose funds. So it remains to be seen.

OK, thank you. That was very helpful.

You're welcome.

The next question comes from

of Goldman Sachs.

Good morning. I have a couple of questions. First, on the maintenance side, I'm seeing big reductions in maintenance costs of other carriers with capacity down in older planes, but I really haven't seen that for you in the last couple of quarters.

, Fred here. First of all, I would maintain that our maintenance productivity and maintenance cost as a percentage of total cost and maintenance workers versus the number of engine changes that we do are substantially higher than almost all of our network peers and more than 50 to 60 percent higher than some of those -- is the first item I'd mention.

And secondly is that our insourcing capability, work that we're doing for sky team partners, work that we're doing for related companies, is also improving at a double-digit rate for the last three years. And those are the two big issues that I'd mention.

I'd add to that,

, that there's also some timing involved that has to do with which aircraft are being retired, when and where the HMBS are scheduled, so

.

Are you saying that at some point in the next year or so, that should start dropping?

You'll see some improvement, yes.

A second question is when I look at the cash position from December to March dropping from $2 billion to 1.5 billion, it doesn't seem to add up, because you had tax refunds offsetting excise tax. Your cash burn rate didn't seem that large. So why did it drop so much?

We have chosen to pay for in cash some of our RJs and some of our mainline jets, and we've done that in anticipation of the leasing environment. It was basically just a timing issue with regard to financing those aircraft. Quite honestly, we had the cash and we have the liquidity, so it was the better part of the argument to avoid the negative carry.

Thank you.

The next question comes from

of Deutsche Bank Alex Brown.

Thanks. Good morning, everyone. I just have one question. And I think you said you have 60 RJs coming in for calendar '02, and I think the

manufacturers are on strike. Is there any risk to deliveries?

We have not received any notification or information,

, that our delivery stream is in jeopardy.

OK. So you feel pretty comfortable with that. And then just a follow up on the security -- obviously, you must have a greater level of confidence with security. Wait at the airports

is supposed to come from two hours to one. Are you finding a consistency across all of your hubs, or are some hubs, you know, better than others? Obviously, your

is more in others, but I'm just trying to get a little sense as to, you know, whether the passenger, you know, can experience the same thing going to the various airports.

Well,

, there will be one-day disruptions all over the system on an unexpected nature, which I would call growing pains. You have new -- the new TSA structure being established at the airports. You have a consequent hand-over of more responsibilities from the airlines to the government. But, in aggregate, we are seeing substantial improvement all across the system.

Now, you are still having debates around what is the appropriate response to small or medium security risks, whether -- you know, we are -- we are very, very active with the government in terms of talking about isolating problems, not going for concourse evacuations, and, by and large, the dialog has proved to be pretty positive, and we're confident about our partnership with TSA. But all of them are improving more or less at the same rate.

And is there a dialog with the TSA on -- I know one of the concerns expressed was that, you know, in different airports, you do get, you know, different managers, you know, doing things slightly different, and you really want a consistent airport experience. I'm not sure if you could comment on that, as to whether that is being addressed as well.

Yes, it is being addressed. For example, every time that there is an incident or an event which disrupts operations, there is a very constructive four-way meeting between the FAA, usually, the airport authority, the airline, and the TSA, and issues of jurisdiction and consistency are a large part of the TSA agenda. And, again, I'm seeing improvements in terms of how we react to actual or perceived security threats.

Going back to the issue around airports, I forgot to mention,

, that we keep very specific and very updated information on Delta.com about the security environment at almost all the airports through which we operate.

Terrific. OK, great. Well, thank you.

Due to the time restrictions, we have time for one last question. That question comes from

of J.P. Morgan.

Yes, good morning, Fred. A follow up quickly to what you were saying earlier about short-haul markets -- last month, you lowered business fares in a number of the short-haul, predominately regional jet markets. Could you share with us whether your corporate travel has responded to these lower fares and whether there are any important elasticity lessons that we can take away from this exercise?

Well, to begin with, I think the response of the traveling public to fare stimulation has been pretty substantial in the last three or four months. We're seeing, you know, much faster improvement in traffic than we are in yield, and that is net positive.

We have also taken steps to provide more stimulation on areas that require it, which are areas that are disproportionately affected, like the short-haul. But you've also noticed some opportunities of upward pricing and some attempts at upward pricing which is reflective of traffic capacity coming back to a point where you can achieve some marginal pricing power in some parts of the system.

I do not think that we are seeing a C-Change or a permanent change in buying behavior or booking windows or the behavior of business traffic passengers to the airline system. I think -- I think we're still in flux here, and we have to let the security situation continue to improve, which it is, and see how the behavior evolves as the economy ticks up before we can draw any long-term conclusions.

OK. That's helpful. Thank you very much, Fred.

At this time, there are no further questions. I'll turn the meeting back over to Ms. Grimmett.

Thank you very much, everyone. This concludes our call for today. We appreciate your time and look forward to speaking with you next quarter.

All participants may disconnect at this time.