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