達美航空 (DAL) 2002 Q3 法說會逐字稿

Good morning and thank you for participating in the 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, everyone. Just a few small items before we begin. Please be aware that our call today is being transmitted live via 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.

Today's discussion contains forward-looking statements that represent our beliefs or expectations about future events. All forward-looking statements involve risks and uncertainties that could cause the actual results to differ materially from the forward-looking 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 this morning are Fred Reid, President and Chief Operating Officer, and Michele Burns, Executive Vice President and Chief Financial Officer. Following my remarks, Fred will discuss Delta's revenue and operational performance for the quarter and Michele will review the financial results in more detail.

Let me begin this morning with a quick recap of the financial numbers we have released today. For the September quarter, Delta reported a net loss of 326 million dollars or two dollars and 67 cents per common share. Excluding unusual items, Delta reported a net loss of 212 million dollars or a dollar 75 per common share. These results are in line with our September 27th 8-K filing, in which we estimated a loss including unusual items of 350 million dollars or excluding unusual items, a loss of 225 million dollars. Cash flow from operations for the quarter was breakeven. Obviously, these results were disappointing. As part of our effort to improve Delta's financial performance, by boosting yields and cutting costs, we are announcing a several quick changes for 2003 and 2004. First, Delta will ground its 15 MD-11s beginning in 2003 backfilling international flying with Boeing-767, which will in turn reduce domestic capacity.

Second, Delta withdraws deferred delivery of all main line aircraft during the two-year period, including the five Boeing planes scheduled for delivery in 2003 and the 24 scheduled for delivery in 2004. These fleet changes will allow us to better match capacity to demand and simultaneously reduce capital expenditures for the two-year period by 1.3 billion dollars. The steps outlined above to reduce and simplify Delta's fleet will also cut capacity. These capacity cuts in addition to the current challenging industry environment will require us to announce in the very near future to our utmost regret, staffing reductions beyond the 1500 flight attendant positions throughout the company already indicated.

Turning now to a review of the interim since our last quarterly call, a couple of key industry developments have occurred. First, US Airways has declared bankruptcy and United Airlines has probably acknowledged similar concern. In an effort by both carriers to shore up lagging revenue, US Airways and United announced plans for a full network code share and alliance partnership targeted specifically at increasing the carriers' market share on the East Coast, primarily at Delta's expense. In response, Delta has proposed a code share agreement with Continental and Northwest. Given that the Department of Transportation's recent approval of the United/ US Airway's agreement, we are hopeful that our alliance will be recognized as equally beneficial to consumers, but still maintaining necessary and healthy levels of market place competition. As we noted at the time of the announcement, the Delta, Continental and Northwest alliance required approval by Delta's pilot union, ALPA. Our continuing talks with Delta ALPA have so far been frank and productive. The potential revenue benefits of Delta from this code share agreement, once fully implemented, would be approximately 150 to 200 million dollars per year, net of the moderating impact of the US Airways/United alliance. Such additional revenue would be welcomed at any time, but especially now given the current financial requirements.

A second major industry development pertains to the costly post 9/11 changes in aviation security, which has been imposed by the government as a result of our nations war on terrorism. Delta's estimates indicate that for 2002 alone, new security fees major increases in premiums for tourism and insurance, restrictions on carriage of US mail and other cargo, Government mandated, but unreimbursed requirement such as four-to-five cockpit doors, new security equipment, and training and monthly fees paid to the DOT, among other items will total approximately 660 million dollars. Extrapolated to the rest of the industry, the amount reaches approximately 4 billion dollars.

Four billion dollars is a staggering amount for any industry to absorb and indeed to our knowledge no other private sector industry has been asked to finance national security cost to this extent. This amount does not however account for another security consequence, which has received much customer criticism, and done major damage to Airline revenues. And, that is the so-called hassle factor.

Extrapolating from Delta's own market research, as well as broader industry data, the financial impact of the hassle factor, in terms of passengers deterred from travel due to the real or perceived inconvenience of post 9/11 Airport Security Regiment totals approximately 2.5 billion dollars. During the past few months, the Air Transportation Association of Airlines have joined together in an effort to gain congressional and add administration support for appropriately placing this responsibility with the Federal Government as is specified by the Aviation Security Act which Congress passed last year.

I said clearly in these sessions that the airlines are not requesting special treatment or what is sometimes been termed a bail out. We have not asked for aid related to any portion of our industry's losses, which are the results of economic and competitive challenges that would constitute a bail out.

Instead, we have said repeatedly that marketplace factors are the responsibility of airlines themselves to be solved using the tools of the free market, and we accept that responsibility. We have requested from Congress, relief and compensation for security related items, an outcome that we believe was intended by Congress in the first instance. Now, before I turn the program over to Fred this morning, let me make just a couple of observations about the coming quarter. At this time, we do not expect near-term improvement for the remainder of the year or into 2003. EDP continues to grow slightly, but corporate earnings have been weak. An Airline recovery typically lags Corporate-earning improvement. Clearly the road ahead is difficult. However, Delta will continue to maintain tight control of all facets of our business making it difficult, but necessary decision that will ensure that our airline successfully makes it through these challenging times. Now, let me turn the program over to Fred Reid.

Thank you Leo. And good morning ladies and gentlemen. My review of the Delta's third quarter performance will touch on the following points. First of all, the traffic recovery we saw in the first half of the year has clearly stalled and although we have held the line on capacity, the revenue and demand environment has remained very weak. Secondly, macro economic indicators are describing an uneven recovery at best. It seems unlikely to benefit airline revenues until the end of 2003 at the earliest. Thus we are taking decisive actions particularly with our fleet to improve our financial results in this most challenging of environments. For example, we will continue to leverage Delta's aircraft gauge flexibility by tactically deploying capacity into market with supportable demand and eliminating nonperforming markets. Additionally, as an even more significant step in our regauging plan we will be removing MD 11 from our operational fleet. Turning to the entity results and beginning with the consolidated system, I will give you an overview of the September quarter which includes our wholly owned connection carriers. Passenger RASM was up 1.5 percent versus the third quarter last year. This result was derived from a 1.8 percent increase in traffic accompanied by a 2.5 percent drop in yield. Although our financial and revenue results have been disappointing, we expect to outperform the industry's year-over-year RASM change in the third quarter.

Delta's third quarter load factor of 74.3 percent was 3 points ahead of last year. System capacity was down 2.4 percent year-over-year of which mainline was down 5.2 percent quarter-over-quarter. Turning to North America and beginning with RASM, our RASM performance in North America was up 1.1 percent versus the same period last year. North American traffic was up 2.6 percent on a drop of 2.1 percent in capacity. It is also worth noting that mainline domestic capacity was down 5.7 percent versus last year and almost 12 percent below the third quarter up 2000. Atlantic RASM was done 3/10s of 1 percent versus last year on a capacity increase of 3.8 percent. Atlantic traffic rose 6.7 percent driving our load factors up 2 points over the year. Latin America RASM was up 2.9 percent on a growth in capacity up 7.8 percent. Although the industry's generally good capacity discipline has translated into strong load factors this has not unfortunately led to higher yields and despite more than a full year of positive GEP growth, the lingering effect of September 11 have impeded revenue recovery in the airline industry. Consequently, we are taking self-help action on several fronts to drive better financial performance.

Let me summarize a few of the actions we are talking to improve performance in this environment. We are continuing to use our aircraft gauge flexibility to deploy capacity into markets which can support demand even in today's environment. For example, we are in the process of transferring 4 of our 757s to fly from JFK to Orlando, Tampa, West Palm Beach and Fort Lauderdale. This will produce a total of 16 daily frequencies by the end of this year and we are using regional jets to maintain our presence in market which can no longer support mainline service, Atlanta to Buffalo is an example. We are also closely scrutinizing the performance of all existing markets and in terminating service whenever demands turnaround isn't in sight. Our flight from Atlanta to Buenos Aires, Atlanta to Riyad are examples of market which we will suspend effective December 1st. We are also becoming more aggressive about downsizing our schedule during low demand period such as weekends and holidays. Now let me elaborate slightly on our MD-11 plan. We are taking the significant step of parking 12 of our fleet 15 MD-11s by the third quarter of 2003.The remaining aircraft will continue to fly for six to nine months after that. That is to say into the spring or early summer of 2004 at which time they will in likelihood be replaced by 777. Driving this decision is the fact that MD-11 side is simply too great for the current and predictable levels of demand. The MD-11s will be replaced from our existing fleet of 767 300ER currently in domestic service. These aircrafts have 26 percent fewer seats than the MD-11. The effect of this decision will cascade to our entire system, with the end result a much better matching of aircraft guage to market demand in hundreds of market. And significant and will produce significant cost improvement given the elimination of an entire fleet type. Later in the call Michele will be providing capacity guidance for next year and that guidance will include the effect of this action.

Before turning the call over to Michele I would like to briefly summarize our operational performance during the third quarter of 2002. We are extremely pleased to have achieved a completion factor of 99.3 percent which is a full 6.5 points ahead of last year. This puts Delta solidly in the top rank of peer airlines for the period. Additionally we improved our competitive standing for on time arrival clocking number two in the industry for the month of August. Our quarterly result per arrivals within fifteen minutes was 83 percent, up 3.4 percent over the quarter last year.

In summary Delta is committed to takingdecisive action to maintain control of our destiny. We will manage our airline in the challenging environment and we are confident of our long-term ability to succeed. Now to discuss Delta's financial performance and cost-control initiative, I would like to turn the call over to our Chief Financial Officer Michele Burns.

Good morning and thank you for joining us today. During the third quarter of 2002 Delta remained focused every day to preserve our financial strength under extremely difficult business conditions. There is no doubt that this has been a demanding quarter for Delta and the entire industry. As such our efforts for the quarter centered on maintaining financial flexibility and preserving cash flow. If I discuss the financial result of the September quarter there are two key messages that I would like you to take away. First in January we started down a difficult road to recovery. However, we did not expect the domain environment to stall mid year. Therefore we continued to be under tight control. In second we do not see a near-term improvement as we told you last quarter we are very cautious and tough minded about the reminder of this year and into 2003. We have a daunting road ahead. We are focused in making the right business decisions. I'll give you detail around some of these decisions. Let's first discuss the September quarter performance, including unusual items, Delta reported a net loss of 326 million dollars or 2 dollars and 57 cents per share, excluding unusual items we reported a net loss of 212 million or a dollar 75 cents per share.

Our unusual items this quarter include the following after tax amounts. A 139 million dollar charge for the impairment of MD11 and B727 aircraft. During the third quarter, management reassessed the MD11 operating performance and the current market values and determined a write down was necessary. In addition, the B727 write down reflects management's assessment of its current disposal plans and a decline in the aircraft market value. We also reported a 22 million dollar gain related to the final compensation received under the Stabilization Act and as in prior quarters an 11 million dollar charge for the carrying cost of surplus pilots and grounded aircraft.

Our results this quarter are disappointing but in line with the guidance given in our 8-K filing on September 27. Our disciplined approach to cost, capacity and liquidity continue to be at the forefront of our decision-making. Fred discussed our capacity strategy with you and I'll spend a few minutes on the other two areas beginning with costs. One bright spot this quarter was our cost performance. We've consistently delivered on our commitment to reduce costs. Excluding unusual items, operating expenses for the quarter were down four percent versus last year and would have been down even more if it were not for the increase in fuel prices.

Also excluding unusual items CASM for the quarter was down 1.3 percent; on a fuel price neutralized basis, CASM was down 1.6 percent. These results were achieved on a 2.4 percent capacity reduction. The primary drivers behind our CASM performance were first passenger commissions were down 47 percent from last year, the elimination of travel agent based commissions and our continued strategy to migrate to online ticket purchases led to this improvement. In fact, revenues from online channels represented 21 percent of passenger revenues up from 16 percent in the September 2001 quarter.

Delta.com accounted for 11 percent of passenger revenues up from 9 percent last year. Second, the aircraft maintenance costs were down 16 percent compared to last year with partially to lower volume, but more importantly supply chain initiatives, which include better inventory management in buying behaviors.

Further more our CASM performance was achieved despite the significant new cost pressures we are facing. First as we discussed before we are facing higher security and insurance costs. Delta's security costs increased 14 million year-over-year. These costs are in addition to those imposed by the government such as cockpit door fortification, new security equipment and training, security taxes and fees. These costs will total 510 million this year. The insurance costs were up 42 million in the September quarter. It is important to note that of the 42 million dollar increase, 38 million relates to war risks and terrorism insurance. We expect full year insurance costs to increase 150 million dollars.

And the third significant cost pressure is related to Delta's pension plan. Pension expense increased 83 million in the September quarter. We expect total pension expense for 2002 to be 400 million dollars. The status of the industry's pension plan has been a subject of much discussion recently and I'd like to spend a moment on this topic. We measure the pension plan for two reasons; the first is for financial accounting purposes, which is driven by FSIS 87. The second is for pension funding, which is governed by ERISA and limited by the IRS.

There has been much discussion about Delta being under funded. For financial accounting purposes, Delta's current obligations to pay pension benefits exceed the fair value of related trust assets. As we stated in the most recent Form 8-K, we anticipate, we will record a non-cash charged equity recognizing this shortfall in the December quarter. The financial accounting charged equity is non-cash and does not impact our income statement. We therefore believe it is more important to focus on the need for Delta to make cash contributions into its pension plan trust. ERISA's cash funding requirements are based upon our current obligation to pay future pension benefits, ERISA does not record plans we fully funded at all points in time. It recognizes that the pension benefit liability is an obligation to pay benefits over a long period of time, 30 years or so, and allows for short-term volatility. The current difference between the benefit obligation and the fair value of the trust asset is not an amount, Delta is required to fulfill in a relatively short period of time. As a result this requirement to fund the pension plan is not expected to significantly hamper our recovery efforts. Delta has available approximately 7 billion dollars in the pension trust to pay benefits and we will continue to fund our pension plan as required by ERISA to protect employees in the future. As previously disclosed, we expect to provide additional funding of up to 250 million dollars little later than the first quarter of 2004 to stay in compliance with ERISA requirements. I want to reassure you that we are committed effectively managing all aspects of our pension plans during these tough economic times.

In addition to our focus on operating cost, Delta's liquidity position is of extreme importance. As I've stated before, access to the capital markets in managing our cash flow is a critical component of our financial strategy. Cash flow from operations was breakeven for the September quarter. We ended the quarter with cash balance of 1.7 billion dollars, an additional short-term liquidity of 920 million. In addition, we have unencumbered aircraft with an estimated value of 5 billion dollars of which about 2 billion is eligible under Section 1110. As indicated in our recent 8-K filing, Delta amended the covenants related to two Letter of Credit reimbursement agreements, which required us to pay off one agreement and shorten the term of the other by few months. The second agreement which re-negotiated on an unsecured basis and included a new covenant, which required us to have one billion in cash and cash equivalent at the end of each month. This covenant replaces the debt to equity ratio and secured debt covenant in the previous agreements. The current cash impact of these actions totals 340 million, which we expect to pay in the December and March 2003 quarters.

At September 30 our total long-term debt was 9.2 billion and our all end debt-to-cap ratio is 84 percent. Now I'd like to turn our discussion to other cap costs and capital expenditure efforts and give you some examples of the business decisions we've made to manage through the current environment. We've already discussed some of the specific actions taken by Delta over the last 18 months, which has helped us navigate through these tumultuous times, now let me add to that list. First and foremost Delta has initiated steps to bring seat capacity in line with demand more simplifying our fleet. As Fred discussed, to being early in 2003, Delta will begin to remove its 15 MD-11 aircraft from operations. Further more, we will defer delivery of all 5 Boeing aircraft scheduled for 2003 and we will also defer delivery of all 24 Boeing aircrafts scheduled in 2004. These revisions will reduce the number of delivered mainline aircraft in 2003 and 2004 from 29 to zero and will result in a 1.3 billion dollar capital expenditure reduction over the two-year period. The second important decision we've made relates to new agreements with two vendors to handle selected customer reservations functions. These unique partnerships, the first of their kind by US airlines will reduce our distribution cost. Delta expects to realize initial distribution cost savings of up to 12 to 15 million annually phased in over a two-year period. Third, we have initiated a strategic benefit review designed to aggressively manage rising employee benefit expenses. Today we've completed the review of Delta's healthcare benefits. In 2003, we estimate this initiative will provide 80 million dollars in savings to help control the expected rise in benefit cost.

As we continue with this initiative we will focus on our disability, sick pay, and retirement costs. Lastly, we partnered with American Express to launch a travel insurance portfolio called Global Travel Shield. AMEX and delta.com begin offering the parties exclusively on August 1st. This is an innovative approach designed to generate alternative sources of revenue by leveraging customer relations and delta.com, which is our lowest cost distribution channel. No other US carriers are offering this service.

The events of September 11, 2001 hurt the financial performance of Corporate America and hurt the airline industry worse than most. The decisions I have discussed are examples of how we are aggressively re-examining our business, focusing on making the right decisions, and managing those things we can while on this critical road to recovery.

Now let's turn to guidance for the December 2002 quarter and beyond. First costs , for the December quarter we expect consolidated CASM to improve 1 to 1.5 percent and fuel price neutralize CASM to improve 4 to 4.5 percent versus prior year. Earning-to-fuel in the December quarter, we are 50 percent hedged at a hedge price of 67 cents per gallon. For the first quarter of 2003, we are 43 percent hedged at 72 cents per gallon. For the second quarter of 2003, we are 46 percent hedged at 73 cents per gallon. We expect CAPEX to total 1.9 billion in 2002 of which 450 million is remaining. 300 million of the 450 million relates to regional jets. For 2003, we expect CAPEX to be 1.6 billion. This consists of 200 million for aircraft inventory, 1.1 billion for regional jet, and 300 million for non-fleet expenditures. These are preliminary projections that continued to be reviewed.

Turning to December quarter overall performance we believe our results will be roughly in line with current analyst expectations. Due to the seasonality of the airline business, we would expect to be cash flow negative for the December quarter. As we have stated, we see no signs of revenue improvement for the reminder of the year and into 2003.

On a consolidated basis, capacity for the December quarter will be up 2 to 2.5 percent versus last year, was down 9 to 10 percent versus the fourth quarter of 2000. Mainline capacity will be flat to last year, though 12 percent below fourth quarter 2000 levels. For 2002 as a whole we expect consolidated capacity to be down 4 to 5 percent versus last year and down 8 to 9 percent versus 2000.

I will now provide some preliminary capacity guidance for 2003, though I would caution we are still in the process of finalizing our 2003 business plan. Consolidated capacity including our own connection carriers will be down slightly. Mainline capacity is expected to be down 2 to 3 percent. And finally looking forward to our outlook for December quarter advance bookings, because of the comparison to 2001, we expect fourth quarter load factors to be up 4 to 6 points. As expected advance booking for October has picked up following the September 11th anniversary. Exception to this is our international entity, which is at least partially driven by the uncertainty of political situations. November bookings are being affected by the late Thanksgiving holiday weekend. In closing Delta and the airline industry expect to face more tough times for the remainder of 2002 and 2003. We will continue to aggressively manage our cost, capacity, and liquidity through a thoughtful strategic, disciplined, and flexible approach. That concludes our quarterly conference call. At this time, we are happy to take your questions.

Thank you. At this time, we are ready to begin the formal question and answer session. If you would like to ask a question, please press star one. You will be announced prior to asking a question. To withdraw your question, please press star two. Once again to ask a question, please press star one now. We will wait a moment for the question queue to fill. Our first question comes from Michael J. Linenberg, Merrill Lynch & Co.

Yes. Good morning. I have got two questions here. The first question is to Michele. With respect to CAPEX, Michele, as I recall, I think on the last quarter the CAPEX number you were looking at, I think, for 03 was about 1.7 billion, and I think you threw about 1.6 billion and it would appear with the reduction in CAPEX over the next couple of years that the number would be less than that, and I am not sure if there are more RJs in 03 than what you had originally envisioned. Could you, may be walk us through, may be talk about the differences there and then, you know, how CAPEX breaks down for 04?

I will start with 03. For 03 the number is 1.6 billion, 1.1 billion of the 1.6 is regional jets, 200 is parts, and 300 is other non-fleet CAPEX. I will have to go back and look at the 1.7 occasionally, that's not ringing a bell to my mind, I'll follow up with you to prove that back. As I said for 2003, we continue to review our plans, but these numbers are tentative, but you are correct that since last quarter, five Boeing aircraft for 2003 have been deferred, and we are not giving CAPEX guidance for 2004, although the removal of the Boeing aircraft will significantly reduce the CAPEX expectations for 2004.

Okay. My second question then is a question to Fred. Given that you guys compete heavily against US Airways, you know, since they filed for Chapter 11, have you seen any material change in the way in which they compete on the East Coast. If you could just touch on that competitive environment, that would be helpful.

The short and truthful answer is no, we have not seen a material difference in the competitive environment attributable to their current situation.

Okay, could that be because fares were already low prior to the Chapter 11 filing? Any color on that would be helpful.

Well I think, I think that we have massive disruption produced by 9/11 that is clearly drawing the industry revenues down to an all-time low, first drop in history in 2001 and of course exacerbated by the hassle factor to which Leo referred. I just can't imagine, hopefully not seeing further deterioration and we hope that it will stabilize at this level and rise over time.

Okay. Thank you very much.

The next question comes from Susan Donofrio of Deutsche Bank.

Yeah hi. Just have a couple of quick ones. One is with respect to what happened in Valley over the weekend. I am just wondering if you had seen any change in you forward bookings?

No, we have not Susan.

Okay and then, can you elaborate a little bit on your low- fare strategy and kind of what you are doing to compete?

Well Susan, there's a number of issues around that, that have come out, I think by way of context Delta is probably the most experience network carrier in successful low-cost competition, that being are very very strong performance that with Delta Express in its first 3 years or 4 years call it '96 to 2000. We have indicated that it's time to revamp that strategy, redesign it in some regard, there's been a few speculative comments about what that's going to look like, let me just say what we said all along Susan that we will probably be able to talk fulsomely to that topic some time in the month of November and describe our implementation plans for low-cost competition that will take effect in 2003.

Great and then this last with respect to your regional jets. Have there been any changes to the delivery schedule?

Not at this time.

Okay great, thank you.

Your next question comes form Glenn Engel of Goldman Sachs.

Good morning, talk about, what you think the total headcount will end up declining in 2003; will you continue to see productivity gains?

Glenn, what we have mentioned so far is that we've referred to 1500 probable flight attendant productions. We are in the process of finalizing those numbers as we speak, and as I mentioned in my opening remarks, we expect to have an announcement of that very soon but we don't have it right at this moment, it will very soon though.

Can you talk about how you are doing relative to the low-fare competition, in terms of protecting share?

Well I think, given our size and scope, we are protecting more share than most of our network peers, it is no secret that the low cost carrier segment in aggregate will grow this year while, the network carriers will shrink this year in aggregate and that is the reason Glenn that we will be announcing some proactive steps to mitigate or turn around that situation in 2003.

Thanks.

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

I am asking this question, it's probably for Fred, can you guys have qualified that net of the United/US Airways, you guys think you can get to a 150 to 200 million from the codeshare of Northwest and Continental. Can you comment, I am just wondering is that the pre-tax number and secondly what impact does United/US Airway is having, what impact do you anticipate to have if your codeshare is not approved?

First of all the numbers that we stated are pre tax and secondly we are not open, we are not publicly discussing the impact of one alliance being approved and not on the other, frankly we feel very much committed to getting this alliance approved and achieving all the steps necessary to implement it.

And I think Brian, I could add that we can't presume on a government decision, but, you know, certainly our discussions with the government are constructive at this point.

I have never seen a kind of big three-way alliance domestically like that, what kind of structure in generally, are you guys have envision in order to divide up the revenue?

We will make some announcements on that Brian when we get it approved.

Okay. Just one more thing, you are adding a lot more capacity now on JFK to Florida, could you describe the reasoning for that and are you seeing a loss of, you a higher yielding traffic to Jet Blue on those markets?

We are seeing, we are certainly noticing the rise of Jet Blue's capacity, but we also should remind everybody that we are still extensively deploying Delta Express up and down the coast and as a product that's well established in the marketplace not only from Kennedy, but from all Northeast major markets. The 757 move is one move of a number of future moves that will be designed to maintain or improve our share in this segment and the main reason we are putting those 757s on is that we see the demand.

Okay, thank you.

As a reminder, if you would like to ask a question please press star one. The next question comes from Helane Becker, Buckingham Research Group.

Thank you very much operator. This is a question probably for Michele and then for Fred. One, Michele, on a go forward basis with the changes in the aircraft now, can you just discuss what depreciation will be and two, Fred, can you discuss how the shuttle, the Northeast shuttle is performing may be and in relation to where you thought it would be and where it actually is? Thank you.

Helane, we don't expect depreciation to be materially impacted being great down this quarter while 139 million after-tax or not that significant over the total of our aircraft and we will continue to depreciate the remaining balance. Obviously, the run rate for the next couple of years will be slightly decreased because of the deferrals of the Boeing Aircraft. Otherwise, I think steady as she goes.

Thank you.

Yeah. We are seeing substantial uptake in shuttle performance since the low that we experienced earlier this year, Helane. Having said that in aggregate short haul flights across the country whether we see it in our DCI portfolio or in the very short haul of the Delta main line flights continue to track at drops lower than aggregate traffic. So, I think you have probably seen the statistics around drops in traffic on flight segments below 250 to 300 miles in contrast to very low drops in traffic on flights of 1,500 to 2,000 miles or longer. We have recorded a three and a half, four point improvement of share from US Air in recent months.

Okay, Thank you. And then can I just ask one follow-up question? Since you guys are in the best position to alter salaries of flight attendants, mechanics and pretty much the entire staff, is that something that you are looking at or some thing that you will consider at this point in time given the fact that you perceive no improvement in business between now and next year?

Helane, this is Leo. The steps that we have taken and outlined here which are added to the ones that we have already done, represent our program thus far and we do hope that, you know, that this would be enough. Quite clearly, if it became crucial to take some actions in that respect we would, but at this point we don't have any immediate plans to do that.

Okay. Thank you very much.

Welcome.

The next question comes from Kevin Murphy of Morgan Stanley Dean Witter & Co.

Thank you. Most of my questions have been answered. But, I guess, one to start with clarification on the benefits of the alliance with Continental and Northwest. Is that a pre-tax figure or is that a revenue figure?

It is a pre-tax figure Kevin.

Okay, because that is split hairs but the press release said that it is a revenue figure. I mean, are you talking about a pre-tax income or revenue. I guess this is really what I am trying to get at.

It is a pre-tax figure and basically I guess the way it is worded will be the pre-tax revenue but with normal offsetting expenses the way the coutier will be accounted for.

Okay. And on the Northeast shuttle did you see, have you seen any impact from American airlines, sort of devising their own little niche shuttle. At all has there been any impact on your market share?

No, nothing discernible at all Kevin.

Okay, thank you.

As a reminder, if you would like to ask a question, please press star 1. Our next question comes from Jim Higgins of Credit Suisse First Boston.

Yeah, yes thanks. May be early but are you seeing any revenue impact of the tightening of the highly restricted tickets. Tightening of restrictions on those tickets rather?

No not yet.

You need that from what you might see or when you might start to see any impact?

Well, we do see a low double-digit million annual impact but due to the recent nature of this action we don't see that, that's the run rate and annualized, but we will see that mostly in '03.

Okay great. Secondly, September was a particularly difficult, month. There are so many, I think non-systematic matrix going on. Could you just talk a bit about how the month end hold it for you in terms of traffic revenues, just any kind of detail if you give us on the months, we might have a better sense of gauging, you know, what is the 9/11 anniversery impact might have been?

Well, I think, what was note worthy in our case is that we were one of the most aggressive and not the most aggressive carrier in recognizing the problem early and pulling down capacity substantially. And that drove actually record differences in our load factor performance for not only the week of 9/11 but also book ended for the week before and the week after. So, we see a substantial uptick in our load factor performance versus competition in September and we anticipate a pretty substantial RASM gain versus first of all in absolute sense and versus our competitors for the month of September.

Great, thank you very much.

The next question comes from Michael Daimler of UBS Warburg.

Good morning. Can you hear me?

We can, Michael go ahead.

I just had a question regarding cash burn for the quarter and what that was and what it might be going forward?

For the quarter we were break even for operating cash flows. We had CAPEX roughly 250 million that was nonfleet but for operating cash flow purposes reflecting the accurate definition of that we were break even for the quarter.

What do you anticipate in the fourth quarter?

We anticipate we will be cash flow negative due to the seasonality of the industry. Because that cash flow negative number is generated so much from balance sheet changes it's impossible to really give you very accurate estimate at this time.

Thank you.

The next question comes from Gary Chase of Lehman Brothers.

Good morning guys. A quick question for Michele just related to market access, you have obviously got you know decent amount of unencumbered assets here some of which you could do in a double ETC. American recently put out a rap deal that seemed well received, do you think you have the capacity to raise money as we sit here today, you know in that kind of vehicle?

I do in fact in that as well as certain sale or lease back transactions, while I would say that the capital markets are extremely tough as I am sure you are aware we still have access into those capital markets with regard to this unencumbered assets.

Okay. So you are confident that you are still in business on that front.

Absolutely.

While I've got you Michele you're taking a writedown on your pension for you know the bad stock market performance this year, just from aside from funding issues from a book expense issue, you had a quite bit of variance year-on-year this year, what should we expect going forward for next year, is it going to be the year-on-year incremental pension expenses on the P&L?

This year the numbers are around 400 million for 2002.

Yeah.

For pension expense, for 2003, we will expect an incremental number of hard to estimate 2 to 300 million dollars incrementally year-over-year on the pension expense line.

Okay. For book purposes.

Right.

Okay and one last one for you. The cash and equivalent covenant that you have as part of your facility, does that include any of your unencumbered assets?

No.

No. Okay.

The one billion dollars that underwrites the letters of credit.

Yes.

Particular ones, that is meant to be a cash requirement andwe have billion dollars of cash per month that is at the end of the month and we are comfortable with that covenant.

Okay. Just one quick one for Fred. US Airways, there is obviously a lot of talk now nobody knows what is going to happen here in terms of outcome on chapter 11 but they arereported to be looking at a pretty significant network reconfiguration that would have them much more focused on Charlotte than they have been in the past, are you hearing any thing on that front and what might your response be under those circumstances?

Well, we are not hearing anything on that front and I think there are ups and downs with capacity over the last years have proved that we don't, we shouldn't expect any problems for Delta.

Okay. Just a last quick technical point for Leo, the low fare strategy that you are looking at, will that require, I know you don't want to talk details, would that require any concessions from AlPA?

We don't anticipate that at present.

Okay. Thanks guys.

All right.

At this time, I'll turn the meeting back over to you, Ms. Grimmette.

Well that concludes our conference call for today. Thank you for joining us and we will talk to you next quarter. Thanks so much. Bye, bye!

That concludes today's teleconference, you may disconnect at this time.