達美航空 (DAL) 2002 Q2 法說會逐字稿

Good morning, and thank you for participating in Delta Air Lines' conference call. All participants will be able to listen only until the question and answer session of the call. At the request of Delta Air Lines, this conference is being recorded. If you have any objections, you may disconnect at this time.

Moderating today's call is Ms. Gail [Grimmette], director of investor relations. Ms. [Grimmette], you may begin.

Thank you, Marie. Good morning, everybody. Just a few quick notes before we begin. Please be aware that our call today is being transmitted live world the World Wide 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 express written permission of Delta Air Lines.

Also, today's discussion does contain 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 statements.

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, our EVP and chief financial officer.

Following my remarks this morning, Fred will review delta's revenue and operational performance for the quarter, and Michele will take you through a more detailed financial analysis.

I'll begin with a quick recap of the financial results we released today. Excluding unusual items Delta reported a second quarter net loss of $162 million or $1.34 loss per share. This roughly approximates the 170 million we had provided earlier in the quarter.

Including unusual items, Delta reported a second-quarter net loss of 186 million, or $1.54 loss per share.

Typically in the airline industry, the second quarter is the strongest of the four, and today's results do show improvement over Delta's first quarter loss of 354 million.

You may recall, however, that during our April call to review first-quarter results, we offered the hopeful view that the revenue recovery was strengthening and that a more robust second quarter would provide the boost needed to move Delta to profitability by year's end. As you have heard already in competitor's calls and news reports, that positive shift in revenue recovery rate has not yet occurred. Primarily because yield is simply not improving sufficiently to drive the revenue.

As a result, while next quarter's outcome is difficult to predict, our current outlook is that the third-quarter results will not differ significantly from the second quarter.

Now, the effects of the continued industry stress on the nation's airlines are evident in the list of 16 carriers who applied for loan guarantees from the air transportation stabilization board prior to the June 28th deadline. That list includes, of course, two major hub and spoke airlines, united, which has an application under review, and USAir ways which last week received preliminary loan approval.

While Delta is not among the airlines seeking government loans, we continue to confront a demanding set of issues, including the ones I mentioned earlier, revenue growth lags behind traffic, supply continues to outstrip demand, pricing power is virtually nonexistent, and the economic recovery has slowed.

And the question of when the air travel market will return to normal remains uncertain. In addition to these issues, well-intentioned governmental policies related to aviation security which were imposed in the wake of September 11th are also adding to the financial duress. With Delta, the estimated pretax impact in 2002 of higher security insurance costs, new passenger security fees that can't be passed on because of limited pricing power, diverted revenue due to security restrictions on cargo and mail, and unreimbursed security costs totals approximately 700 million annualized.

We also estimate the annual revenue impact of passengers who were deterred from air travel by the greatly increased airport hassle factor has about a $650 million.

In industry meetings with high-level government representatives on this subject, their understanding of the public interest role of airlines was he have dint, and indeed, it was this underpinning which prompted post 9/11 assistance for our industry. The new context, however, is that the public interest role now is increasingly threatened by the response to the terrorist attack, rather than the attack itself.

In view of these concerns, Delta proposed five governmental policy actions which would enable the industry to fulfill its financial - its public interest mandate and relieve the current heavy financial burden.

These points are: One, aviation security is national security and should be funded by the United States as a national security priority; two, in that context, excessive taxation and fees targeted at the airline industry must be stopped so that aviation can resume its role as a vital economic engine for the broader economy; three, the goal of creating an airport security system that ensures both excellent security and excellent customer service must guide all actions of the transportation security agency; four, unfunded mandates and revenue restrictions which impose significant costs on the industry must be stopped; and five, until a reasonable market for war risk insurance exists, the federal government should, with the assistance of the airline industry, continue to fill that role.

I can assure you we will continue discussions on this important topic, working closely with the government to find workable solutions.

Now, obviously the challenges I have outlined are significant, including lagging revenue, a skewed ratio of supply and demand, nonexistent pricing power, and the increased impact do you to well-intentioned government policies.

But while we are fully aware of the current environment and the outlook for the near future, Delta remains confident about the longer term for several reasons.

We know our fundamentals are sound. For example, we have a firm handle on costs, and our balance sheet remains one of the strongest in the industry.

We've taken a disciplined approach to capacity growth, as Fred will detail.

And we're competitively well positioned in important arenas that yield key advantages, including our growing regional jet fleet and our ever-stronger SkyTeam alliance.

Now, on the issue of competition, let me close my comments today with a few observations on recent industry developments and the competitive implications.

First, in regard to the airline transportation stabilization board loans, which I mentioned earlier, Delta fully supported the creation of the loan program for the purpose of restoring confidence in the industry in order to ensure continued access to capital market funds.

We also supported the three conditions which the government adopted as key criteria for the granting of those loans, including: One, the applying airline has no access to private markets; two, the applying airline has a viable business plan that ensures full recovery; and three, the loan is essential to the continued health of the airline industry.

Clearly, it would be appropriate for any airline which meets these criteria and applies to the airline transportation stabilization loan board to receive approval. It is, of course, absolutely crucial, in order to ensure the recovery and future strength of our nation's aviation system, that the loan board remain diligent and aggressive in the application of the three criteria.

Also on the subject of industry competition, USAir ways has, as you know, announced its intention to form a domestic code share. Obviously, such discussions by there very nature alter the industry balance and can be expected to instigate competitive response.

Let me take this opportunity simply to note that we are giving full consideration to that situation, and that either through alliances of our own or through marketing actions, we will ensure and stabilize our competitive position and make it stronger.

I'll close this morning by noting that throughout this period of difficulty, and even before it began, Delta has consistently taken the bold, aggressive, and often difficult steps required to ensure our future, and you can be certain that we will hold to that course going forward.

Now, I'll turn the program over to Fred.

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

My key message for Delta's second-quarter performance include the following. First, after seeing traffic improvement during each month in the first quarter, the pace of recovery has slowed in the June quarter.

Second, passenger yield comparisons to last year improved from the first quarter to the second quarter. However, yields are still down significantly, year over year, and the rate of improvement has also flattened out.

Third, with these results in mind, and based on our outlook for the rest of the year, Delta will continue our conservative approach to capacity, which includes the expectation of further capacity reductions, and we will continue to execute tactically to improve revenues and productivity.

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

Passenger RASM was down 3% below last year. You'll remember that Comair did not operate for the entire second quarter of 2001, so when we adjust for the revenue and ASM impact of that strike, RASM would have been down 7.8%. Delta's second quarter load factor of 73.4% was six-tenths of one point ahead of last year.

System capacity was down about 6% year over year, although mainline capacity was down about 11%. Again, adjusting for last year's Comair strike, our system reduction would have been 9.4%.

Yield for the quarter was down 3.8%, and again, strike-adjusted, would have been down 8.7%. This compares favorably to the 12.9% drop we saw in the first quarter. However, in second quarter comparisons, one should recall that May and June of 2001 saw significant yield declines throughout the industry, and, therefore, year-over-year comparisons are favorably impacted.

Let's turn now to our entity performance, and beginning with North America.

In North America, RASM was down 5.4%. This includes ASA and Comair. Again, adjusting for the Comair strike, RASM would have dropped 10.9%. North American traffic was down 3.8% on a capacity reduction of 4.1%, driving a load factor of 72.4%.

Delta's revenue from business travel was down about 15% in the second quarter, which was less of a decline than we saw in the first quarter but expected, given the weakening business environment last year.

Continuing our entity results, Atlantic RASM is up two-tenths of a percent versus last year and traffic was down 3.8% on a 6% drop in capacity.

Load factor was a respectable 84%. Our year-over-year Atlantic entity RASM growth has consistently outperformed the rest of the industry this year. For example, in May, we reported a 5-point premium to the rest of the industry.

Our SkyTeam markets continue performing well. The ongoing strength of our Air France partnership has made our second Kennedy to Paris flight, which we began in March, an immediate success. We also added a seasonal Cincinnati-Rome flight, allowing our customers to connect on Al Italia to 21 European destinations in their network. This flight has started strongly with load factors above 70%.

Turning to a couple of other markets, Germany has shown the strongest year-over-year improvement of all of our trans-Atlantic operations while our United Kingdom services have also performed well.

In Latin America, RASM was up 1.9% year over year, and traffic was down 2.7%, on a drop of capacity on the order of 2.1%.

Turning to one of our key messages, Delta is taking tactical action to improve revenue and productivity. For example, in November, we will look forward to welcoming Chautauqua to Orlando as our fifth Delta Connection partner. Chautauqua's 37-seat Embraer RJs are the right size and cost structure for our Florida operation, while allowing us to redeploy Comair's Canadair regional jets to markets more befitting their capacity.

On another front, we took action to stimulate shuttle demand which had been particularly weak, affected by the continuing East Coast weaknesses. You've probably seen some of our shuttle initiatives in the media, such as our 20-minute guarantee of curbside to gate elapsed time, or a 20,000-mile guarantee of frequent flyer miles to the passenger.

Of 400,000 passengers who have used the shuttle since we introduced this initiative, that guarantee has only been paid to five of the passengers - of the 400,000 passengers, which shows that the 20-minute curbside to gate guarantee is working.

As a result, shuttle performance has shown substantial improvement with year over year RASM up 15-and-a-half points versus the first quarter.

Turning now to the alliance landscape, we were very to receive antitrust immunity with SkyTeam partner Korean Air. In fact, this is the first Trans-Pacific antitrust immunity grant in a multilateral branded global alliance.

Today, Korean flies from Seoul to Atlanta and eight other U.S. gateways and we look forward to rapidly expanding and deepening this relationship, leveraging the strategic Inchon hub by increasing Asian destinations to which our passengers can travel. Delta and SkyTeam Atlantic partners, Air France, Al Italia, and Czech Airlines, have worked diligently to significantly expand the reach of our collective networks. On the trans-Atlantic, now, we code share on 38 trans-Atlantic trunk flights. Delta also code shares to 82 cities beyond the European hubs of our partners, while our Atlantic partners code share on 138 Delta cities in North America. This is an increase of 60% versus June last year.

Before turning the call over to Michele, let me briefly discuss our operational performance for the first half of 2002.

Completion factor is up 1.9 points ahead of last year, at a very robust 98.8%. Our on-time arrival rate has also improved significantly year over year, recording 78.2% of all flights arriving within 14 minutes or a 2.2 year over year improvement. Our ranking did decline versus our competitors in terms of DOT statistics, driven almost uniquely - almost entirely by unusual cloud cover and precipitation in Atlanta this spring, compared to a very mild winter in the northeast, which has driven Atlanta arrival rates to a four-year low. We expect this to improve during the second half of the year substantially, and recently recorded the number one DOT ranking for the first week of July.

In summary, the recovery we saw in the first quarter has flattened out. We expect to reduce capacity to address this situation. We expect to continue to drive toward high levels of service delivery and operational execution, while continuing to aggressively managing costs.

Now, I would like to turn over the call to our chief financial officer, Michele Burns. Michele?

Good morning, and thank you for joining us today.

During the second quarter of 2002, Delta continued our work to preserve our financial strength under tough business conditions. Our loss this quarter is disappointing, but it is substantially better than our first-quarter results and slightly better than expectations.

As I discuss the financial results of the June quarter, there are three key messages that I'd like you to take away today.

First, we are still on the critical road map for recovery we created in January. We continue to be under tight control, managing those things we can: cost, capacity and liquidity. Second, the gradual improvement in the revenue environment we saw in the first quarter appears to have stalled and we remain very cautious and tough-minded about the remainder of the year. Both the revenue environment and other external business pressures will make the second half of the year a challenging one.

And finally, in this tough financial environment, Delta is working to improve our customers' travel experience. Safety, security, and speed are all important in our business. We are investing in new technologies that will reduce the hassle factor and decrease the amount of time our customers spend waiting at the airports.

This continues to be accomplished by streamlining our business processes to deliver our product cost-effectively.

Let's first discuss the June quarter performance.

Excluding unusual items, we reported a net loss of 162 million, or $1.34 per share. Including unusual items, Delta reported a net loss of 186 million, or $1.54 per share.

Our unusual items this quarter consisted of the following after-tax amounts: A $9 million non-cash expense related to SFAS 133, and $15 million for the carrying costs of surplus pilots and grounded aircraft, which we mentioned in the December and March conference calls.

Our losses improved over the last several quarters, from 486 million in the December quarter to 354 million in the March quarter, to 162 million this quarter. While still a significant loss, there are several facts I'd like to point out.

First, Delta reported an operating profit in the month of June. Second, we had positive cash flow from operations for the entire quarter, which includes coverage of all non-fleet capital expenditures.

And lastly, our cost containment efforts are ahead of target. Excluding unusual items, operating expenses were down 6.5% year over year, our third consecutive quarter of operating expense declines.

Our disciplined approach to cost, capacity, and liquidity, were the foundation of these results. Fred discussed our capacity strategy with you, and I will spend a few minutes on the other two areas, beginning with cost.

As you know, our commitment to controlling costs began early in 2001 when we saw the first signs of the softening economy. It continued through the post-september 11th period and is still a principal focus today, especially with the slowing rate of recovery.

As I mentioned earlier, our operating expenses were down 6.5%. CASM for the quarter was down .3%. On a fuel price neutralized basis, CASM was up only .5%.

Even more impressive, these results were achieved on a 6.2% capacity reduction.

Our CASM performance is a result of the combination of line by line reviews of our cost structure as well as the technology we've implemented throughout the business. I'd like to briefly touch on a few of the primary drivers.

First, fuel. Fuel expense was down 13% for the quarter. We were 57% hedged at 59 cents per gallon, which yielded 43 million in pretax savings in the quarter. Delta's fuel hedging program is one of the best in the industry. Since 1999, we have saved over $1 billion as a result of this program.

Second, distribution costs are down 27%. This improvement was the result of the elimination of travel agent-based commissions and our continued strategy to migrate ticket purchases on-line. In fact, revenues from on-line channels represented 18% of passenger revenues, up from 14% of the June 2001 quarter. Delta.com accounted for 9% of passenger revenues, up from 7% last year.

Third, consolidated maintenance costs were down 7%, with mainline down 13% compared to last year, due to lower volume, material efficiencies, and supply chain initiatives.

Fourth, our fleet renewal has been very beneficial. In fact, in the June quarter, it provided approximately 45 million in cost savings from lower maintenance, fuel, and pilot costs.

And fifth, we continue to benefit from increased productivity from across all our work groups.

Furthermore, we have benefitted in several ways from our new technology. It has increased productivity and reduced the hassle factor for our customers, all in a coast-efficient manner. Two examples of increased productivity are from our airport customer service and reservations groups. NACS, the number of passengers handled per agent is down 6% year-to-date while agent hours paid are down 13%. This is a 7% productivity gain driven by new technology such as self-service kiosks, gate and boarding machines, and the gate information displace or GIDs. A second example of productivist win is our cost central renewal efforts. Training time for [inaudible] was four months. With the new system, which is windows based, our new employees are proficient within two months. We expect that once trained, agent productivity will be increased by at least 6%.

Our CASM performance was achieved despite other cost pressures both internally and externally. Pension expense increased 83 million in the quarter, primarily as a result of market deterioration. It's important to note that Delta's plans are well-funded and meet or exceed ERISA's minimum funding requirements. Our plan year began July 1st, so we are currently in the process of determining the funding requirements for the plan for the next 12 months, and fully intend to make the required contributions.

As Leo mentioned, there were significant pressures in the June quarter, and we expect these challenges to continue for the remainder of the year. I'd like to touch on a few of these.

On the cost side, security costs increased 20 million, and insurance costs are up 41 million in the June quarter. Note that of the $41 million increase, 36 million relates to war risk and terrorism insurance.

On the revenue side, the new passenger security fees totaled approximately 70 million. These cannot be passed on because of the weak pricing environment.

In addition, the security restrictions on cargo and mail accounted for approximately 25 million of lost revenue this quarter.

We are pulling all the levers we can within our business to offset and mitigate these pressures. However, they will add significant cost challenges to the already tough road ahead.

In addition to our focus on operating costs, Delta's liquidity position is a priority. Our balance sheet is among the strongest in the industry, and that gives us the financial flexibility needed during this recovery.

We ended the quarter with a cash balance of 1.8 billion and additional short-term liquidity of 1 billion. As I mentioned earlier, we had positive cash from operations for the June quarter. On April 30th, we closed a $1.1 billion double ETC offering. Our weighted average interest rate was 6.8%, with an average life of 10 years. Proceeds from this offering were used to pay the remaining 625 million of our corporate revolver which matured on May 1. The remaining 500 million is available for general corporate purposes.

While we are clearly disappointed by actions taken by S and P rating agencies several weeks ago relative to our debt rating, we do not expect that this will have an impact on our current debt, nor does it limit our flexibility for the future.

At June 30, our total long-term debt was 9.7 billion, and our all-in debt-to-cap ratio was 83%.

In addition, we have approximately 5.5 billion of unencumbered aircraft, of which 2 billion is eligible under Section 1110.

While we've hit all our financial targets for the first half of the year, the revenue recovery appears to have stalled. as a result, we will be proactive and find now opportunities to offset the declines on both the revenue and cost sides. In addition, as you have heard earlier, we are prepared to revise our capacity strategy as the environment warrants.

As we reduce costs, we will also continue to look for additional creative and effective opportunities to improve the top line during these challenging times.

Now, let's turn to guidance for the September 2002 quarter and beyond.

First, costs. For the September quarter, we expect both consolidated CASM and fuel price neutralized CASM to be flat to up 1% versus prior year. For the full year, we estimate CASM to be flat to down 1%, and fuel price neutralized CASM to be flat to up 1% versus 2001.

Turning to fuel, in the September quarter, we are 49% hedged at a hedge price of 66 cents per gallon. For the full year, we are 57% hedged at approximately 63 cents per gallon.

We expect capex to total 1.9 billion in 2002, of which 780 million is remaining. This has been revised down from our earlier guidance of 2.3 billion.

In addition, we will not take delivery of our next mainline aircraft until mid-2003.

Turning to capacity, on a consolidated basis, capacity for the September quarter will be down 3 to 4%. Mainline capacity will be down 6 to 7%, with both our owned and contract connection carriers showing year over year increases. For the full year, we expect consolidated capacity to be down 4 to 6%.

We remain committed to disciplined, conservative capacity decisions. Thus, we continue to have 27 usable mainline aircraft in storage, and our 727 retirement program remains on track with the last aircraft leaving our fleet next year.

As Fred mentioned earlier, based on the current revenue environment, it is likely that we will reduce capacity in the fourth quarter. However, this is under review and our capacity decisions will be finalized before the new schedule is loaded in the coming week.

And finally, looking forward to our outlook for the September quarter advanced bookings, because of the comparison to last September, we expect third-quarter load factors up 4 to 6 points. Similarly, yields will be higher than last year. Excluding the effect of last September, loads will be up slightly, though we don't expect nominal yields to show a significant upward trend.

Continuing the recent trend of more close-in bookings than we have historically seen, advanced bookings are down slightly versus the same time last year.

In closing, Delta expects the second half of 2002 to be marked by formidable challenges, but challenges we are prepared to handle. Our strategies and discipline have served us well during a difficult first half of the year. We will continue to aggressively manage those things within our control, and find new opportunities to further strengthen our financial position.

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

Thank you. At this time, we every ready to begin the formal question and answer session. If you would like to ask a question, please press star 1. You will be announced prior to asking your question. To withdraw your question, please press star 2.

Once again, to ask a question, please press star 1 now.

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

The first question comes from Michael [Linenberg] of Merrill Lynch

Yeah. Hi. Good morning. I have two questions. I guess, Leo, you made a comment about - you talked about the ratio of supply and demand being skewed, and I was curious, you know, throughout your system, you know, where you're seeing, you know, I guess the biggest shortfalls on the revenue side or where you're seeing a lot more capacity in place than what should - what should be there, you know, based on the current back drop, current circumstances.

Okay. Mike, the general question is - response is the obvious one. What I've generally said is that supply and demand is in imbalance, and we have too much capacity and not enough demand. We've often used the expression it's economics 1. It might be economics .1. And so that until we get that in better balance, we really won't have any pricing power.

I'll let Fred, you know, kind of comment on - a little bit on positions of strength and weaknesses. He had gone through some geographic comments in his but maybe he wants to make an elaborating statement.

Yeah. Michael, I'd just say that it's fairly weak and it's relatively uniform across the board. Two areas stand out. The northeast tends to be having slightly more downturn than the rest of the country, and the other sector where we see a problem is short-haul, very short-haul flights throughout the - throughout our whole system, which is reflective of the travel hassle problem.

Okay. And then my second question, with respect to capex - and I guess this is a question for Michele - you made the comment that I think you have about $780 million of capex left, and that you won't be taking any more aircraft until 2003. Is - mainline aircraft. Is a lot of that RJ's maintenance capex, aircraft purchase deposits? And what I'm trying to get at is maybe how much of that you can actually pull back. And then also what your capex number would be for 2003.

Okay. For 2002, the remainder of the year, roughly 500 million of that is the majority - is RJ aircraft.

Okay.

Then there's another 200 million of cap and ground and a hundred million in the mainline that of course we can look at in terms of mods, et cetera. We have taken a hard look at that already, and we will continue to do so. We have trimmed some technology spending, but honestly, on technology, not a lot because the technology initiatives we have in place now have very quick paybacks to the system. I've only alluded to a couple and there are more.

But all in, a significant amount of that is RJs.

For 2003, today - and again, we are in the process of scrubbing this further - we are looking at roughly 1.7 billion of capex, of which 500 million is mainline, 800 million is, again, RJ, and roughly 400 million, which at this point - this stage of the game is a very rough number, of ground and technology capex.

Okay. Thank you.

The next question comes from Jamie Baker of J. P. Morgan.

Yeah. Good morning. The popular refrain is that - that we keep hearing is that supply outstrips demand, and I'm just not sure I get that. I mean, loads are generally up, anecdotal evidence suggests there's more overbooking than ever, the airports are jammed. I mean, given the high fixed cost nature of this business, why is Delta taking this shrink to profitability route, which hasn't worked for any airline in the past?

Jamie, I don't think it is a shrink to profitability at all. I think it's a response to immediate term traffic and revenue picture that we do see. I think we're - we're of the belief that the traffic is going to return, and profitably return, you know, at some point in the future.

We had hoped, and certainly I have anchored in my own mind, the testimony that was delivered in the post-september 11th period where we had anticipated being in a better picture at right about this point. We had anticipated the turning point to be roughly June 30th of this year.

That simply has not occurred. And although the - you know, the load factors are decent right now for everybody, I mean, those load factors are on a - on a much reduced capacity for everybody.

And so - so therefore, I think that that's, you know, kind of straightforward in terms of the supply/demand equation.

In terms of the implication of a shrink to profitability, the question appears to imply a longer-term strategy, and I would just want to disabuse you of any thought to the extent you had it that we were implying a shrink to profitability mode.

That is not at all in our - in our thinking at this point. We are just making these adjustments, and I think that they're - they're extremely appropriate in the face of the immediate term financial challenges that we have to ensure that we generate an appropriate financial return the best we can under these demanding circumstances in the remainder of the year, and perhaps the first six months of next year.

So I'd call it a short-term response, and not at all a shrink to capacity type of approach.

All right. Well, that's helpful. Thank you.

You're welcome.

The next question comes from Brian Harris of Salomon Smith Barney.

Okay. Just a question here. You're putting guidance out for really no real improvement sequentially between the second and third quarter, and I assume that's based, you know, on what you're seeing right now, but can you give kind of just some structural views of why that is? I mean, the third quarter should be relatively stronger in leisure traffic, which has generally been stronger than business. You know, you're another quarter beyond September 11th, and I assume that the hassle factor is slowly dissipating. There doesn't seem to be any unusual items on costs.

So are you being conservative, or why - why - give me some reasons why you would anticipate no improvement whatsoever.

A quick general comment, Brian, and then Fred will answer the explicit.

I hope we're being conservative. I think we need to be conservative in these trying economic times. I mean, this goes back to the question Jamie just asked, that I think it's important to - you know, to take the cost actions, you know, ahead of where you encounter, you know, the problem, and we've been doing that all the way along, and we will continue to do that as a philosophy.

I will also add, I think that the hassle factor has improved, just as you suggest, and, you know, the government and the airline industry have got some very hard-working task forces, you know, going on, in order to continuously improve that.

We have some, you know, security-related activities. The implementation of the EDS and the trace, you know, coming forward, even more aggressively. There's some discussion as to the schedules that will be associated with that, and we're factoring in some of the declines that are associated with the implementation of it, which we hope, you know, will be easier, but has at least some, you know, capacity for, you know, at least modest and I hope it's only modest disruption to the system as we move ahead.

And against that backdrop, then, I'll let Fred just make another comment on the revenue situation.

Yeah. I'd say, Brian, that the key issue really remains the mix situation, and if you look at the traffic drops, they are - they are problematic enough, and the yield drops, which record - which I recorded at 3.8% unadjusted for the second quarter were still off of a very, very deteriorating situation in May and June of last year.

If you recall last year, the yields precipitously. In fact, it was the sharpest month over month yield drop in about 20 years. And on top of that, the yield has reduced below that level. So that's another key driver here, and I'd say it's mostly mix for the time being.

Okay. Let me make sure I just get one other cut on this. Can you comment a little bit regarding the growth of low-cost carrier competition, or is it, in fact, shrinking given Metro Jet position extinction?

There is some growth in low-cost carrier competition, and to several points here, if you look at the year-over-year capacity and you look at year-over-year capacity change by major carrier, you'll see Delta down a couple of tenths of one percent. There are carriers out there who are having capacity share losses 3 and 4 and 5 times our amount.

And given the situation, that's a reasonably encouraging picture and one that shows that we are not, indeed, on a fundamental shrink to profitability situation.

As it always occurs during recessionary times, there is some relative growth in the low-cost carrier, but it has - segment, but it has not been hugely material to our system.

Okay. Thank you.

The next question comes from Susan [DeNafrio] of Deutsche Banc.

Yeah, hi. I have two questions. One is: Leo, I know you've been pretty visible down in Washington with respect to representing the airlines, and I'm just wondering what your thoughts are with respect to the trusted traveler program. I think it's getting rolled out for flight crews, and I was wondering if you have been able to put your own input in, because certainly the thought would be that it could eventually be rolled out, you know, to more people.

Could you comment on that?

Sure. We are highly enthusiastic about the trusted crew type situation. I've expressed myself very strongly on that subject, and will continue to do so.

And I'm also very much in favor of it from the standpoint of the - of passenger processing over time.

And the ATA has been working hard, the Air Transport Association has been working hard on it. Delta is highly involved in it.

I think that the - you know, the government is responsive to that. I mean they - I continue to acknowledge, you know, their overall concerns for making sure that we have all of the right security in place to prohibit any kind of terrible thing from happening, and I - you know, I commend them for their efforts, and we have a lot to go, and some of these discussions are fairly feisty about it, but I would just say that from my own standpoint, we appreciate the dialog that's going, and we will continue to express ourselves clearly on it, and I'm relatively optimistic, you know, that we will get this done, although I can't really give you a time frame for it, Susan.

Okay. And then unrelated, obviously the biggest challenge is just how to effectively compete over the long term with low-fare airlines. I'm just wondering, it sounds like you may be further along than American with respect to, you know, looking at ways to effectively compete against low-fare airlines.

Could you maybe share with us your initial thoughts and how quickly you think you may be able to implement kind of effective competitiveness against these low-fare airlines?

Well, I think, you know, first of all, to state something you know well is that we feel like we've been in a battle with the low-fare airlines for quite a while. I mean the original formation of Delta Express, say some six years ago, was an obvious step taken in response to that. And that has been, you know, pretty effective over time, although, you know, we think that we do need to make some changes in terms of just how we respond competitively with Delta Express in the future and we're thinking about that as we speak.

And I have, in each my last three annual meeting reports, you know, chosen to state something which I very firmly believe, that as one looks forward to the future, that our main competitor is not American or not United, but is, in fact, Southwest and it's associated low-cost carrier competitors, Air Tran and Jet Blue are very significant in our area and are quite successful in the current environment.

We have been competing with them very aggressively, you know, as we speak, and I think that that has been going reasonably well. But we are - we are going to - and are giving some thought to how to further enhance that competition over time, as they are enhancing their methods of competing with us.

And so I think - I think we're in for some real competitive battles as we move along, but I'm - I'm pretty confident that we're going to do well in that game over time, and you'll see more of that roll out as we formulate and firm up our ideas on it. But we've got a lot of really good ideas on the table and you'll hear more about that in the next several months.

You think we'll start seeing maybe some changes in like the fall? Or is that too early?

It's a little too early for me to predict the exact aspects of it. There's a lot going on, you know, kind of just in terms of just the way we respond to these right now that is in the area of what I would call the normal combat that one has out there relative to the - to the discount carriers. I mean, when one is up against Southwest, I mean there's no question that that is an excellent airline with excellent competing capabilities, and I would add that so are Air Tran and Jet Blue. I mean, they're tough guys and they're doing well, and so I will also say I think we're more than holding our own. But - but this is one we're - this is going to be a very tough ball game for all the mainline competitors to deal with the growing strength of these. They're taking market share in our country, and, as I say, I'm pleased with our results so far but I want to be more pleased. So you'll just hear about it in the next months ahead, Susan, but I have no immediate-term, you know, kind of announcement to make or - and I don't want to set your expectations for any time frame.

Great. Well, thank you very much.

You're welcome.

Your next question comes from Sam Buttrick of UBS Warburg.

Close enough. Good morning.

We know who you are, Sam.

Yeah. There you go. In your comments, you said something along the lines of until revenues return to normal. I think that's really kind of exactly what the issue is. What - what is normal? How are you defining "normal" in that context?

Well, I'd begin by saying that it ought to get back on a - you know, on a pattern that fairly closely resembles, you know, the kind of almost completely predictable trend of passenger demand that existed prior to September 11th, and we're not there yet. I mean, you know, I've seen graphical representations of that line, you know, drawn over the last 15 years, and it's - you know, it - up until September 11th, it was one of the most predictable numbers that one has ever seen. And so when we refer to it, we're basically saying, when we get back to that fundamental demand line, and I think that that - we still think - is a year or so out there. And when that happens, Sam, I do think that the supply/demand situation will be such that we begin to have some pricing power, and that that will begin to help us with respect to our yield.

Now, you know, we get the question all the time about whether there's some fundamental change that is taking place in American business travel patterns, and the like.

It's going to get tougher all the time, but I don't - I'm not ready to sort of concede that that has yet changed. I still think we're - we're very much under the rubric of two major elements. There's still an overhanging difficulty with respect to the September 11th-related operational changes that we've had. I believe the hassle factor is real. I noted, you know, American yesterday, you know, kind of downplayed it a bit, and - but from our standpoint in our business markets, we think it is real, and part of it is that even though the actual operation has improved a lot, so that the reality of improving through those lines is far better, we still haven't quite gotten across to the customer base that they can begin to count on that enough. And then so until we get to that point, you can't kind of decree victory with respect to the hassle factor. We've got to have the business traveler be able to count on getting through it, and if they hit those periods where, you know, we might be down to 20 minutes on average, you know, getting everybody through the line, and all of a sudden you hit some, you know, pretty busy periods where it's an hour to an hour and a half and that's when they're there, then all of a sudden they just think they've got to give that extra hour, hour-and-a-half to get there and that's what disturbs it.

So to sum up, you know, in answer to your question, it's when the actual passenger traffic gets back closer to that line which was so easily extrapolated prior to September 11th. At that point, when yield comes back somewhat more. And thirdly, that the - particularly the business traveler is convinced that that he can count on the time taken to get through the airport, meaning that the hassle factor is minimized. And I think all of those three things will probably shake out mid-next year.

Thanks, Leo.

Okay, Sam.

The next question comes from Glenn Engel of Goldman Sachs.

Good morning.

Hi, Glenn.

First question is, you've got 27 planes in storage, yet you're taking five next year from Boeing and I think 23 the year after. Why do you need more coming in?

Well, at this point, the planes coming in are contractual. The five are committed. We continue to look at the future, and continue to move deliveries as we see fit. There are - the ones coming in next year are, for the most part, replacement aircraft for 727s.

Can you talk about the labor situation, your nonunion? Each year you look at general pay increases. How much will that add to the numbers over the next several quarters?

We don't have any in the plan for this moment, Glenn, as far as - there was a contractual issue related to the pilots that has already occurred. It's baked in. And there was an increase related to the technical operations folks who had fallen well, well into the ranks of competitive - of the competitive set. Those actions have been taken.

At this point, there aren't any others in the plan for the rest of '02.

And finally, when you look at the U.S. Airways plan, you know, with the boatload of regional jets, how do you see that affecting you?

It's a pretty long ramp-up, to put it mildly, Glenn, and I think that we have a very robust order book and some pretty aggressive plans for the northeast covering all aspects of our operation, mainline, the low-cost product will continue and probably grow, as well as a substantial regional jet allocation to the region.

So we're not we're not overly concerned by that.

And finally, when you look at Jet Blue's success in JFK in New York, what do you attribute that to?

A well-run airline with a good product.

Simple enough. Thank you.

Thanks, Glenn.

We have time for more - for one final question. The last question comes from Gary chase of Lehman Brothers.

Good morning, guys.

Hi, Gary.

Just a couple of quick things. For Leo, you know, in your press release, you mentioned a comprehensive review of, you know, the business from soup to nuts, which is something we've heard from some of your peers this week, and you mentioned some tough choices, and I was just wondering if you could give us any color on what you're thinking specifically. Is there anything that leads you to believe that there is something you can do to enhance the revenue picture, or are you looking entirely at cost-based initiatives?

I think we've been, you know, really terrific on the cost side. You know, I mean I'm proud of what we've done to manage that situation. You know, when we - we look at what we had by way of plans in early 2001, which now, you know, seems so distant, 18 months ago, you know, we've taken well in excess of $2 billion or so of costs out relative to that plan that we had at that time. And what you - you've heard here today is that in light of the revenue picture which we foresee here, we're taking the prudent steps of even further cost reductions.

So that will - that will continue.

There are no silver bullets on this one, Gary. I think we - we just kind of slug this through, and, you know, there are questions as to whether something, you know, absolutely strategic has - to have changed the entire model of aviation has arisen here. I - we're not ready yet to decree that. I think we just got to play this out somewhat more, and find out, as best we can, how much of it is economically related, how much is September 11th related and then how much of it is - is - really does reflect any, say, fundamental shifts in travel patterns, which I think was behind Sam Buttrick's question in part. And we're constantly doing that. But you've heard our plans for the immediate term and we have no dramatic announcements to make beyond what we've said here today.

Okay. Just following up on a couple of the U.S. Airways questions that have been asked, would Delta have an ability to strike a code-sharing arrangement with a carrier similar to what U.S. Airways is doing? Is that in - would that be allowed under your current pilot contract?

Well, it would - it would technically not be allowed, so we'd have to seek a waiver on it, but, you know - those kind of approvals, I guess is the way to put it. And that is included in the scope clauses within the pilot contracts and it's contained within the scope clauses of other organizations. United has got that. I believe U.S. Airways has it as well.

And so it's a - I think a relatively normal provision for that to be included as a - as an element of the scope clause. So, yes, we would have to have those discussions with our pilots, and - and if the time came where that were appropriate, we would do so.

All right. Just one last one for Michele.

You know, we've noted a couple of times in the conference call, you know, focus on costs. I was just wondering, just for your general thoughts on, you know, you noted in the supplemental disclosures that you put out that your interrupted trip expense was better than you'd anticipated, presumably was you had pretty good weather during the quarter. I've also - you can also just see in the schedule, block times are down because of reduced congestion. How much of what you're seeing, do you think, is structural and how much of it is just a product of, you know, reduced capacity in a pretty mild weather environment?

The numbers that we gave of around 2 billion of cost savings, we estimate that at least half of that is structural. We believe that the part of that related to capacity is on the order of 6 to $700 million, and the rest would be structural, and we intend to hold onto that, as the system begins to grow and as the revenue environment recovers, so that we will de-lever that number as we go along.

Okay. How far in are you? I mean, you know, how much of the 2 billion do you think you've realized to date?

Virtually all of it. So really we believe we'll exceed our $2 billion estimate quite nicely by the end of '02.

Is it currently in the results?

Yes. Yes, it is. A significant part of it is currently in the results, with more to come in the final two quarters. Obviously, a lot of the reductions, you know, take place if you start looking in 2001 - we've had at least three quarters of quarter-over-quarter sequential absolute cost reduction, and that's in the face of some other cost pressures that we have had to cover. So when you take that into consideration, it started very robustly in '01, got traction in '02, and continues in the back half to continue to show benefits throughout the rest of this year.

Thanks a lot, guys.

Thanks, Gary.

Thanks, Gary. This concludes our call for today. Thank you for joining us this morning, and we look forward to talking with you again next quarter bye-bye.

This concludes today's teleconference. You may disconnect at this tim