達美航空 (DAL) 2002 Q4 法說會逐字稿

Good morning, and thank you for participating in Delta Airlines conference call.

All participants will be able to listen only until the question-and-answer session of the call.

At the request of Delta Airlines, this conference call is being recorded.

If you have any objections, you may disconnect at this time.

Moderating this call is Ms. Gail Grimmett, Director of Investor Relations.

Ms. Grimmett, you may begin.

Thank you, and good morning to everybody.

Just a few brief reminders before we begin.

First, please be aware our call today is being transmitted live via the worldwide web and is being recorded.

Also, if you decide to ask a question, it will be included in both our live transmission as well as any future use of the recording.

Any recording or other use or transmission of the text or audio for today's call is not allowed without the express written permission of Delta Air Lines.

One other reminder, please be aware that today's discussion does contain forward-looking statements that represent our beliefs or expectations of 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 like to turn the call over to our Chairman and CEO, Leo Mullin.

Good morning, thank you for joining us.

Also on the call are Frederick Reid, President and Chief Operating Officer, and Michele Burns, Executive Vice President and Chief Financial Officer.

Let me begin this morning with a quick recap of the financial results released today.

Delta reported a net loss, including special items of $363 million and a loss per share of $2.98 for the December quarter.

This compares to fourth quarter '01 net loss of $734 million, and a loss per share of $5.98.

Excluding unusual items, the December 2002 quarter net loss and loss per share were $230 million and $1.90 respectively, compared to a net loss of $486 million and a loss per share of $3.97 in the December 2001 quarter.

While Fred and Michele will provide a detailed report on earnings, I would like to briefly characterize these results.

What do they imply relative to the business conditions of the airlines in general, and Delta in particular?

Then I would like to make a few comments on the key opportunities and challenges ahead.

Relative to the airline business itself, the current results and expectations clearly are driven by a revenue picture which remains depressed.

The revenue situation, which deteriorated so suddenly after September 11th, has led to profound structural changes and passenger buying behavior, and particularly in the buying behavior of business travelers.

In light of the ongoing revenue situation, Delta has made huge cost and capital expenditure reductions as Michele and Fred will further describe.

Our continued aggressive commitment to a program of expenditure control reflects Delta's assumption that revenue recovery is simply not likely in the near-term and certainly not in 2003.

Compounding the revenue challenges we face are two inter-related areas of event risk: fuel-price fluctuations and the possibility of war in the Middle East.

Airline fuel prices have skyrocketed in the past two months reflecting both Middle East uncertainty and the Venezuelan political crisis.

Delta's fuel hedging program will help mitigate the damage of the current fuel spike.

For the March 2003 quarter, Delta is 63% hedged at 77 cents per gallon and for the June quarter, we have 65% hedged at 75 cents per gallon.

For 2003 overall, we have 50% hedged at 75 cents per gallon.

However, the effects of the continued fuel price spike on the unhedged portion of our fuel purchases would create significant financial pressures in the next several months.

Regarding the second area of event risks, which is possible military action in the Middle East, I want to repeat a statement I've made before.

Issues of war and peace transcend by far any issues facing our industries as serious as our airline challenges may be.

Like all Americans, we can simply hope and pray the right decisions and actions are taken, and we will support those decisions in any way we can.

The uncertainties of the Middle East situation, do, however, cast a special call on aviation.

Our business relies on customer confidence in the services we offer.

Thus far, safety and security have been maintained in a magnificent way.

Yet there is already a factor of travel suppression that, in our judgment, reflects passenger concern over the threat of war.

This concern is reflected in disproportionate reductions in bookings, especially in the international market.

And this trend will not disappear until some resolution of the Middle East situation occurs.

Delta has plans in place to handle all of the most likely contingencies of a Middle East conflict.

But, like all other airlines, we'll just have to wait and see how events unfold.

Let me also note that, due to the extreme unpredictability of the situation, the impact of military developments in the region, unless otherwise noted, has not been included in our planning assumptions referenced in today's call.

Now, given the industry's weak revenue situation as well as current event risks, the obvious question is: What has this meant to Delta in terms of managing our business?

The summary answer is that, closely following 9/11 and its dramatic impact on our industry, Delta made the decision to pursue a three-part program.

One, move quickly to manage operations on as close to a cash break even basis as possible.

Two, build more than adequate liquidity on the balance sheet in order to provide the staying power required to get through the economic danger zones and to cope with any events risks.

Three, continue to pursue the crucial elements of Delta's strategic agenda.

Let me comment on each of these, beginning with moving operations to a break-even cash base.

As mentioned, revenues in the fourth quarter 2002 remain depressed.

However, the cost and capital control expenditure Delta had initiated during the year kicked in to effectively counter that trend.

As a result, cash flow from operations was a positive $177 million for the quarter.

Even after including funding for nonfleet capital expenditures in that calculation, Delta's daily cash flow for the quarter remains slightly positive.

We're relatively pleased with these numbers, which did beat our internal expectations since, due to seasonal issues, the fourth quarter is not typically strong for Delta.

Turning to the second part of Delta's three part program, we also made good progress in terms of building more than adequate liquidity on our balance sheets.

Delta ended the year with a total liquidity position of $2.6 billion, including $2 billion in unrestricted cash, $134 million in restricted cash, and $500 million in short-term liquidity.

We believe this effectively provides Delta with a strong balance-sheet position as we head into a challenging 2003.

During this call, Michelle will review other backstop financial capacity we have available should emergencies occur that are more serious than already anticipated events.

In summary, in terms of both moving operations to a break-even basis and building liquidity, we believe Delta has done what was necessary in order accomplish our short-term financial goals.

Moving to the third part of our program, which is to continue pursuing Delta's longer-term agenda, we have also made good progress.

First, we're continuing to prepare for the launch of our low-fare carrier subsidiary.

As I stated before, the low-fare carriers, Southwest, Jet Blue and Airtran, are Delta's most challenging competitors and we're excited about the steps we're taking to better compete with them.

The proactive program we have undertaken represents a significant commitment of resources during a difficult time period.

And we are confident of its success.

We have already outlined some features of this initiative and we will provide additional announcements in the next couple of weeks.

Our goal is to start service through the subsidiary in late spring and be fully up and running by the end of the year.

Secondly, we continue to await a final government decision regarding the proposed Delta Northwest Continental [indiscernible].

We think that will come very soon.

A positive resolution would be expected to provide revenue upside beginning in 2004 and beyond.

Finally, before turning the program over to Fred, I must also comment this morning on the absolute necessity for Delta in concert with other U.S. airlines to pursue an aggressive public policy agenda.

Much, though not all, of the financial challenge now facing the industry, derives from the September 11 tragedy in which commercial aircraft was used by terrorists as weapons of war against our nation.

The results of these events was not only the subsequent and continued depression of passenger revenue, but also the well-intended, but commute -- cumulatively overwhelmingly impact of actions by our government.

These actions, including costly new security programs, are for the purpose of providing protection to the flying public from the war against terrorism.

As a result, our industry is now struggling with massive costs, which are part of the post-9/11 national security enhancements.

Costs which no other industry has been asked to bear.

In addition, airlines have long been subject to a tax structure that is among the highest of any industry, including tobacco and liquor, which is typically subject to sin tax levels of taxation.

Efforts by the airlines to remedy these situations are sometimes characterized as requests for special treatment, or even as a bailout.

At Delta, we view that characterization as wholly inaccurate.

What the airlines are seeking is not special treatment but instead an end to special treatment.

Our goal is for airlines to be treated in a manner similar to all other industries in these two areas.

First, airlines shouldn't be uniquely singled out to shoulder costs relate specifically to the war on terrorism and similar issues of national security.

Costs which no other industry is asked to bear; and secondly, airlines should be taxed at levels similar to those imposed on other industries.

In closing, let me say once more that we consider these issues to be of vital interest to Delta and the industry, and we will continue to pursue this public-policy agenda in the months ahead.

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

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

I will be discussing Delta's revenue and net worth performance before Michele turns to our financial results.

As everybody knows, 2002 was more than a tumultuous year for the airlines.

At Delta, we continue to align ourselves with this new reality.

From our perspective, the new reality contains both cyclical and secular components.

On the cyclical side we see continuing lower demand for air travels, particularly from the business segment extending at least to mid-2004 and quite possibly beyond that date.

On the longer term or secular trend toward almost perfect transparency of airline pricing will continue to enable customer price sensitivity in tandem with continued low-cost carrier growth.

With these and other factors in mind, we have taken and will continue to take action, such as carefully managing capacity by reducing overall aircraft gauge, numbers of aircraft, and lowering main line available feed miles while simplifying our fleet.

And redeploying 38 757 aircrafts exclusively to the low fare leisure customer.

Going forward in 2003, Delta's focus will be on transforming our business in order to weather the cyclical component while also positioning ourselves to compete aggressively and permanently mindful of the secular competitive changes.

First let me provide an overview of our December quarter for the consolidated Delta system, include including our wholly owned connection carriers ASA and Comair.

Remember that year-over-year comparisons are significantly impacted in the fourth quarter of 2002 due to the effect of 9/11.

Passenger rasan [ph] was up 12.2% for the fourth quarter last year.

This result was derived from a 15.6% increase in traffic, accompanied by a basically flat yield or a modest increase of 0.3%.

Versus 2000, however, passenger rasan [ph] was 10.9% lower.

On a positive note and similar to the last two quarters, we expect that Delta to, again, outperform the industry's average year over year rasan [ph] change in the fourth quarter.

Delta's fourth quarter load factor at 71.2%, was a full 7.6 points ahead of last year, and 2.3 points ahead of 2000.

In fact, our month of December load factor set a new record, which was over five points ahead of our previous December record set in 1997.

System capacity was up 3.3% year over year, and that comprises of mainline being up 1.4%.

Versus 2000, system capacity was down 8.4%, and mainline capacity was down 11.2%.

Turning briefly to the market entities and beginning with North America, rasan [ph] again including ASA and Comair, was up 10.5% versus the fourth quarter of 2000.

North America traffic was up 14.2% on 2.7% more capacity, and yield was down 7/10 of a point versus the same quarter in '01.

Atlantic rasan [ph] was up 20.3% versus last year, on a capacity increase of 13.4%.

Traffic on the Atlantic rose 26.2% driving load factors up 7.5 points year over year.

Latin America rasan [ph] was up 16.5% on 1.8% more capacity.

Let me point out that Delta now operates over 250 weekly flights to Latin America and the Caribbean region, including new destinations recently such as Liberia and Costa Rica, [indiscernible], St. Martin, and we have resumed service to [indiscernible] and Montego Bay.

As would be expected in comparison to the fourth quarter of '01, all of our entities saw significant year-over-year load factor increases.

Looking back at 2000 year as a whole, all of our entities showed encouraging results verses the net carrier average.

Year-over-year mainline rasan [ph]outperformed the industry average by almost two points, driven primarily by our domestic and Latin entities.

Domestic rasan [ph] significantly outperformed the industry average on a similar capacity change, partly driven by our fleet rightsizing and deployment to markets with better demand.

In addition, our short-haul service where we made more conservative capacity capacity changes performed well.

Those are the short-haul markets around the Atlanta and Cincinnati hubs.

The northeast shuttle recovered from significant rasan [ph]momentum which was driven by strong traffic, and the northeast to Florida market saw double-digit rasan [ph] growth driven by both load and yield improvement.

While our Atlantic rasan [ph] change slightly lagged the industry, yields held their own, even though our capacity change was up almost 10 percentage points more than the industry average .

Here, the closer integration with our SkyTeam partners continued to pay significant dividends and supporting our decision a few years ago to become a major player in the Caribbean, Central and South America, our Latin entities saw rasan [ph] grow almost seven points better in 2002, while also increasing capacity more than the industry average.

Returning to the points made during my introduction, in light of cyclical reduced air travel demands across the industry, Delta has simultaneously reduced capacity and aircraft gage while simplifying the float.

Our last aircraft requiring three pilots, the Boeing 727, will exit our fleet in April.

Also, 12 of our 15 three-engine MD-11s will be grounded this year and the remaining three in early '04.

Therefore by this time next year, Delta's mainline fleet will be entirely composed of two pilots, two-engine aircraft [indiscernible] into four main types: The Boeing 777, the common type rated 75 and 767 models, the 737 series and our MD-88 and MD-90s.

Driven by both our MD-11 groundings and Delta's industry leading RJ flexibility, our consolidated network aircraft gauge expressed in average seat per departure has decreased by 12% quarter over quarter.

That's from 121 seats down to 106 seats today.

By the end of this year, we expect that aircraft size, average size, to decline further to 98 seats per departure.

This will represent a 19% reduction in hull size, versus 2001.

These steps allow us to much better match capacity demand with supply while often improving the all-important schedule frequency that business travelers desire.

As an example, we're leveraging the gauge flexibility advantage with the recently announced changes at our Dallas hub, where we're adding 14% more flights each day, and increasing the number of connecting banks from six to eight while decreasing overall hub capacity by about 10%.

Moving on to the industry secular changes, one of the many steps we are taking to ensure that Delta could compete aggressively for the long term is embodied in our low fare subsidiary.

The increase access to and transparency of airline fare information, particularly due to online sources, has made self-planning air travel a reality for many people, especially the leisure traveler.

In tandem, low cost carriers will be a growing part of the industry landscape.

We're more than cognizant of the fact that over the decade, low-cost carriers have tripled their share of industry seats to a full 23% of the domestic market today.

Our response will be Delta's low fare subsidiary.

The low-fare operation will provide both a very attractive and industry-leading product and service and prices that these highly-priced sensitive travelers desire.

This commercial move will complement our existing industry-leading position in deployment of regional jets, our continuous diverse hub and spoke network, and our, from dead last to tied for first position, in the global alliance world.

You can look for official announcement with specifics of this low fare brand and products quite soon.

Before turning the call over to Michelle, I would like to briefly summarize our operational performance for the full year 2002.

Our record in this area speaks to the continued dedication and professionalism of the entire Delta workforce.

We're extremely pleased to have achieved a record completion factor of 99%, which is 1.5 points ahead of the prior year, and this record put Delta solidly in the top tier of all airlines for the period.

Turning to the on-time arrival rate, 80.1% of all Delta flights arrived within the D.O.T. measurements of 15 minutes.

This set a record for Delta.

However, we have lagged the industry average.

Low coverage and low sky ceilings and rain in the southeast in October and November was partially responsible, driving a slowdown in the flow rate into our main Atlanta hub.

And as continued testimony to Delta's great attentiveness and commitment to a safe working environment, our 2002 OSHA recordable employee injury rate, already way below the industry average, continues an eight year decline.

We continue the to lead the industry in this critical human-oriented metric.

In summary, we at Delta have made and will continue to make the network fleet and marketing changes necessary to weather the cyclical storm while positioning ourselves to compete aggressively and permanently in the new reality.

Now, to discuss Delta's financial performance, 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 fourth quarter of 2002, Delta remained focused on preserving our financial strength under extremely difficult business conditions and we delivered across the board.

There is no doubt this has been a demanding quarter for Delta and the entire industry.

As Fred stated, we outperformed year-over-year industry rasan [ph] comparisons while meeting all of our cost targets.

As I discuss the financial results of the December quarter, there are two key messages I would like you to take away.

First, we built and adhered to a strategic plan which focused on results.

The results which we have achieved by making tough and necessary decisions.

Second, we leveraged the flexibility of our organization at implementing these decisions.

This skill has allowed us to aggressively manage our calls, to right size our capacity in order to quickly adjust a changing passenger needs and to strategically use our balance sheets to maintain appropriate liquidity.

These strategies and skills will continue to serve us well as we move forward into 2003.

Let's first discuss our performance for the December quarter.

Delta reported a net loss of $363 million, or $2.98 per share.

Excluding unusual items, we reported a net loss $230 million or $1.90 per share.

We had unusual items this quarter totaling $133 million net of tax.

Please refer to our press release for more details on the individual items.

Earlier, Fred discussed our capacity strength with you.

Now, I would like to spend a few minutes on our cost performance, followed by an update on our balance sheet.

Delta has consistently delivered on our commitment to reduce costs.

This is evident in our chasm [ph] results for the December quarter.

Excluding unusual items, chasm [ph] for the quarter was down 1.5%, which was in line with our previous guidance to you of down 1 to 1.5%.

On a fuel-price neutralized basis, chasm [ph] was down 3.9%, which was also in line with our guidance, down 4%.

On the operating line, total expenses excluding unusual items were up slightly this quarter due to higher-pinching expense and fuel costs that were partially offset by our recent cost initiatives.

Several of the primary drivers behind our chasm [ph] performance in the December quarter are: first, following 9/11, we made the difficult but necessary decision to reduce our workforce.

We saw cost savings from this decision throughout the year, including $100 million savings in the December 2002 quarter, and $500 million in savings for the full year.

These reductions, combined with the changes to our health care and pension plans, will provide the proper foundation for Delta going forward.

The second primary driver of our chasm [ph] performance was passenger commissions, which were down 54% 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, revenue from on-line channels represented 24% of passenger revenues, up from 18% in the December 2001 quarter.

Delta.com accounted for 12% of passenger revenues, up from 10% last year.

A third driver of our chasm [ph] performance was a decrease in aircraft maintenance costs, which was down 20%.

This decrease is primarily due to the timing of planned maintenance and warranty recovery, in addition to numerous materials management and supply chain initiatives.

Our comprehensive maintenance and safety program remains unchanged.

During the quarter, we also went live with our SAP inventory and supply chain management system, both on time and on budget.

After 18 months of diligent work, we're extremely pleased with the initial results.

We expect to achieve significant inventory reduction benefits over the next three years.

Furthermore, our chasm [ph] performance has particularly impressed us considering the significant cost pressures we're facing.

The increase in fuel prices resulted in a 29% increase in fuel expense over the December 2001 quarter.

This was partially offset by $40 million in pretax hedging gains.

As discussed in previous quarters, Delta is still dealing with the impact of higher insurance costs.

In fact, insurance costs were up $28 million in the December quarter.

It's worth noting that, of this $28 million increase, $25 million is the war and terrorism insurance.

Pension expense is another significant cost pressure that Delta and many airlines are facing and there continues to be much discussion about the funded status of Delta's pension plan.

I would like to take a moment to both review and update you on this topic.

Pension expense increased $101 million in the December quarter.

This was primarily due to the decrease in the fair market value of pension plan assets as a result of declining market conditions.

For the full year, pension expense totaled $365 million.

To help offset increases in pension expense, we recently announced changes to our employee pension plan, including the implementation, of and migration to, a cash-balance plan.

Delta expects to realize cost savings of $600 million over the next five years with $120 million realized in 2003; however, we expect to see continued pressure from pension expense and estimate a $300 million increase in pension expense for 2003.

How pensions are viewed under GAAP is another important consideration.

For financial accounting purposes, Delta's current obligation to pay pension benefits exceed the fair value of the related trust assets by $3 billion.

As a result of that, and as previously announced, we recorded a noncash charge to equity.

We originally estimated the noncash charge by using a discount rate and asset values as of July 1, 2002.

We reported that the charge would be in the range of 700 to $800 million net of tax, based on those date.

However, the actual charge recorded in December totalled approximately $1.6 billion net of tax.

The increase in the noncash charge to equity reflects the combined effect of the reduced interest rate and the diminished values of pension plan assets after we made our original estimate.

During that period, from July 1 to our measurement date of September 30, discount rates dropped roughly 50 basis points and the S&P fell 16%.

As previously disclosed, the pension plan has approximately $7 billion of assets and we expect to fund up to $250 million no later than the first quarter of 2004.

We intend to remain in compliance with ERISA funding requirements.

In the December quarter, we focused significant effort on our balance sheet, making strategic decisions based upon the current geo-political environment and the volatility in the airline industry.

We ended the quarter with $2.6 billion of cash and short-term liquidity, consisting of $2 billion of unrestricted cash, $134 million of restricted cash, and $500 million of additional short-term liquidity.

The $500 million of short-term liquidity is the bank credit facility, due in August 2003.

In the past, we have held more in short-term liquidity and less in cash than we're currently holding; however, based upon the current environment, it seems prudent to now hold more cash.

We have been able to build our cash at very low and variable interest rates, thus reducing the negative carry.

You may recall in our last analyst call, we indicated that this is the seasonality of the airline business.

We expect to be cash-flow negative in the December quarter; however, we're pleased to report cash from operations totaled $177 million for the December quarter.

Based on our definition of cash burn or operating cash flow minus nonfleet Cap Ex, we had slightly positive cash generation for the quarter.

For the full year, cash from operations totaled $385 million.

This enabled us to cover 75% of nonfleet Cap Ex for the year, resulting in a cash burn of $124 million for the full year.

At December 31, 2002, our total long-term debt was $10.1 billion, and our all in debt to cap ratio is 94%.

This is a considerable increase from 84% at September 30, and is a direct result of the previously mentioned $1.6 billion charge to equity, as opposed to increases in debt.

In addition, we have approximately $4.6 billion of unencumbered aircraft, of which $1.8 billion is eligible under Section 11-10 of the U.S. bankruptcy code.

Moving into 2003, we will continue to preserve and strengthen our overall liquidity position throughout the year.

Our 2003 plan is expected to generate cash flow over daily operations, nonfleet Cap Ex and our existing debt maturity.

We'll continue our focus on maintaining $2.5 billion in cash and liquidity.

We'll also continue to take advantage of the current low interest rate environment in order to minimize our negative arbitrage.

And while we recognize the need for collateral in the current environment, we continue to seek the most efficient financing vehicles possible.

Now, I would like to discuss several of the specific actions taken by Delta in the December quarter.

Actions that helped us navigate through these tumultuous times.

Many of these decisions have produced and will continue to yield significant cost savings.

First and foremost, Delta has initiated steps to enhance our total network efficiency.

In 2003, we will further reduce our mainline capacity by 4 to 5% while continuing to down-gauge our fleet.

A major component of this is the recently announced changes to our Dallas-Ft.

Worth hub where we leveraged our flexibility and in order to substantially reduce our operating losses.

We accomplished this by adding additional frequency while reducing capacity by 5.10%.

Second, in October, Delta made a very difficult but necessary decision to reduce our workforce by 7 to 8,000 jobs.

On a run-rate basis this program will save approximately $350 million.

For 2003 we estimate savings of $250 million.

Most of these job reductions will be complete by May 2003.

Approximately 3900 jobs are reduced through voluntary programs.

Up to an additional 4,000 jobs are expected to be reduced through involuntary reduction.

Once this program is complete, the total workforce reductions at Delta the since September 11, 2001, will be approximately 16,000, representing 21% of our mainline workforce.

We will record $175 million pretax charge with costs associated with the job reduction programs. $125 million of that charge was recorded in the December quarter, 2002, and $50 million will be recorded in the first quarter, 2003.

And third, we have implemented a series of initiates designed to aggressively manage costs into the future.

Delta has reduced 2002 costs by $1.5 billion versus 2000, offset by cost pressures such as pension and insurance, and net approximately $1 million of lower operating expenses.

As we look forward, our goal is to reduce nonfuel unit costs by 15% by the end of 2005.

In so doing and in recognition of an estimated $1 billion of cost creep, we estimate this will require $2.5 to $3 billion of cash savings initiatives from 2002 cost levels.

The result of this will be $1.5 billion net savings.

Some of the key elements of our plan include first, investing in core technology to improve processes; second, adopting techniques to drive best in class productivity; third, adjusting our core schedule and asset footprint to reflect the new environment; fourth, optimizing our workforce flexibility.

And fifth, on the revenue front, pursuing new approaches to accelerate revenue.

In addition to these and other plan initiatives, we continue to actively seek out additional opportunities from throughout the business.

The decisions we have made and the results we have realized from acting upon those decisions, clearly demonstrate the flexibility of Delta to react to geopolitical uncertainty and the challenging demands of the airline industry.

Now, let's turn to guidance for the March 2003 quarter and beyond.

As a reminder, this guidance doesn't include any assumptions for war.

First, let me discuss our revenue outlook for 2003.

Our forecast for GDP growth in 2003 consistently show improvement from 2002.

The outlook for airline revenues remains cloudy; therefore, we have not built our 2003 business plan around a significant improvement in the revenue environment, particularly given two major external risks.

First, the prevailing geopolitical uncertainty.

While we have developed thorough contingency plans that will, we believe, significantly mitigate the impact to our revenues of a regional war, a prolonged conflict could be damaging.

Second, two of our major competitors, United and U.S.

Airways, are currently operating under bankruptcy protection.

In the past, the cash demand for bankruptcy has driven pricing behaviors of uncertain value which have hurt revenues for all of the airlines.

While we have confidence in our ability to navigate through these challenges, significant risks remain.

Let's turn to costs.

For the March 2003 quarter, driven by higher fuel costs, we expect a consolidated chasm [ph] to be up 4 to 4.5%, and fuel price neutralized chasm [ph] to be flat to slightly up versus prior year.

For the full year, consolidated chasm [ph] is projected to be up 4 to 5%.

On a fuel-neutralized basis, chasm [ph] for the full year will be up approximately 2%.

Turning to fuel, in the March 2003 quarter, we're 63% hedged at a hedge price of 77 cents per gallon.

In the June 2003 quarter, we're 65% hedged at 75 cents per gallon.

For the full year, we're hedged 50%, also at a hedge price of 75 cents.

Now, turning to Cap Ex, we're managing through these difficult times and are diligent in our decision surrounding capital expenditures.

We're investing in projects necessary to run our business and the financial payback within 12 months or are part of our long-term strategic plans.

Our total Cap Ex for 2002 was $1.9 billion.

For 2003, we expect Cap Ex to be $1.5 billion.

This consists of $200 million for aircraft mods[ph] and inventory. $1 billion for RJs and $300 million for nonfleet expenditures.

Turning to the March 2003 quarter overall performance, as a result of a 50% increase in fuel prices, we believe the results will not be any better than our March 2002 quarter EPS loss of $2.90.

Assuming we receive our tax refund in the same pattern as last year, we expect to be slightly cash flow positive in the March 2003 quarter.

Turning to capacity, on a consolidated basis capacity for the full year 2003 will be down 1 to 2% versus 2002.

And down about 10% versus 2000 levels.

As I stated earlier, mainline capacity for 2003 will be down 4 to 5% versus last year, and about 15% below 2000.

I will now provide guidance on consolidated capacity for 2003 by quarter.

The first quarter, consolidated capacity will be up .5 to 1% year over year.

For both the second and third quarters, capacity will be down 3 to 4%.

And for the fourth quarter, capacity will be down 1 to 2%.

Finally, looking forward to our outlook for March 2003 quarter advanced bookings.

Advanced bookings for the quarter are showing some weakness, and especially the further into the future we look.

Some of this is partially explained by the ongoing trend of the shortened booking curve; however, the risk of war is also having an impact.

This is supported by the disproportionate weaknesses we're seeing in our international bookings.

In closing, there are still challenging times ahead for both Delta and the airline industry.

Despite the many uncertainties facing us in 2003, we will remain focused on our strategic plan, revising it as appropriate, and exercising the same discipline and flexibility which contributed to our performance this quarter and throughout 2002.

That concludes our quarterly conference call.

At this time, we're happy to take your questions.

Thank you, at this time, we're ready to begin the question-and-answer session.

For those of you who would like to ask a question, please press star and then 1 on your touch-tone phone.

You will be announced prior to asking your question.

To withdraw that question, press star then two.

Again, to ask a question, please press star then 1.

Our first question is from Michael Linenberg with Merrill Lynch.

Yeah, hi, good morning.

Two quick questions.

I guess the first, Michele, you referred to a tax refund.

Maybe I missed a number, but what amount should we be looking for in the March quarter?

We're expecting roughly a $300 million tax refund in the normal course in the March quarter.

My second question is, you know, you probably -- there have been a couple of press releases where Northwest Airlines was looking at using their regional operator.

I guess the value of that as a means of funding their underfunding issue with their pension, you know, given that you guys have a sizable regional operation that historically has been very profitable, is that something that Delta would consider?

Any consideration of monetizing our DCI portfolio would be made in context of the overall strategic emphasis of the company.

Granted, should such a monetization occur, it would be available for such purposes but it would be, quite frankly, a second order fault process in regards to any kind of disposition to create that possibility.

Okay, thank you very much.

Yvonne?

Thank you.

Our next question is from Ray Nidel with Waylock Partners.

Good morning.

Hi, Ray.

As far as the pension goes, you are converting over to a defined contribution from defined benefit for your nonunion workers.

But it looks like most of the pension, underfunding liabilities, the problem is mostly with the pilots, that's one of the few groups that Delta is unionized in, and there may be more difficulty.

Is there any thought of addressing the pilot pension and maybe trying to modify that program as well?

First of all, a point of clarification, while somewhat small, but I think it's important for a broader population.

This conversion is truly a defined benefit to define benefit is cash balance plan that has characteristics of defined benefit.

That said, you're correct that the cash balance changes affect the nonunionized workforce, and , and as to the remainder of our strategy with regard to our overall employee workforce, I might ask Fred to comment.

Yeah, I would like to just say that we're following industry developments very, very closely with the development of competitive actions on all costlines.

Delta remains very, very committed to remaining cost competitive.

It's been a very powerful force for us in the last few years, so, we're watching these developments very carefully and we'll act accordingly.

Okay and the second question is in the financing area.

Aircraft financing has -- from what other airlines have been telling me, has become very tight lately because of the industry conditions, and quite a bit of the underlying asset value of that you listed was in equity and aircraft.

How real do you feel is that value and is that value in the process now of declining as financing becomes tighter and the demand for aircraft goes down -- continues to go down?

Clearly, we have seen the value -- let's put it a different way.

The financing value of those aircraft go down throughout 2002, and this capital markets environment is tough at this point in time; however, the capital markets have, throughout the quarter, and currently remain open to Delta , as -- at conceived the diminished value.

And I think we have to watch the environment to see how that goes.

A lot of impact results from how the bankruptcy process -- process is going with United.

Okay, good.

Thank you very much.

Our next question is from Jamie Baker with J.P. Morgan.

Good morning, Delta, like some others, has been experimenting with the notion, that, you know, business demand can be stimulated with lower fares.

Can you give an update on those efforts and what, if any, the reaction has been to the new United price points from a couple of weeks ago?

Jamie, we have not drawn any, what we would regard as long-term, conclusions from our rather limited experiences in this area.

Of course, the challenge is to respond to market realities while remaining an adequate revenue base to run our business.

I will just go on the record by saying we do not have any conclusions from our limited experiments so we will continue those experiments.

As far as the United actions are concerned, I am sure that they're attempting to do a similar experiment to find out whether the market can be stimulated or not.

We do feel that, it should be fairly clear, that there will be some revenue impact to Delta from that pricing action, especially if United does not correspondingly reduce corporate discounts as part of it.

Okay, that's helpful.

Secondly, given your considerable revenue overlap with U.S.

Airways, can you comment on any share shift that you might be seeing particularly as you move somewhat aggressively into, you know, a handful of markets here and there.

Well, we see a net positive shift of share as a result of our capacity actions in the northeast, a strategy which has been unfolding for several years now.

Okay.

Thanks, Fred.

Our next question is from Susan Donofrio with Deutsche Banc.

I just have a couple of fuel-related questions.

One in, your comments you gave some hedging, did that include or exclude taxes?

Hello?

I'm sorry, Susan.

It includes fuel-related taxes.

It does.

Okay, great.

Then, you gave a consolidated chasm [ph] number for the year.

I was wondering what your fuel assumptions are for the back half of the year?

Can we take that offline?

Sure, not a problem.

The last, with respect to the pilots, have you been talking with the pilots with respect to any midstream opening of their contract with respect to productivity or wages, et cetera?

No, we have not.

As of this date, we have not held such discussions.

We're evaluating that issue quite actively.

Okay, great.

Well, thank you.

Our next question is from Sam Buttrick with UBS Warburg.

Yes, good morning, everybody.

I want to make sure that I heard you right on some of your cost statements.

I believe you expressed a goal of reducing your nonfuel unit cost by the end of 2005 by 15% from current levels.

Yet you said that you expect your unit cost ex-fuel to be up 2% in 2003, which would suggest that by the end of this year, your goal would be to reduce your unit cost ex-fuel 17% by the end of 2005.

If I have those numbers right, I'm trying to understand what is it that's going to suddenly happen in 2004, or 2005, to reverse the trend.

I think there is a couple of things going on.

First of all, the pension increases will --

Uh-huh.

will reach a peek in 2003.

Right.

And so at that point, then you have a run-rate issue that their that goes away.

Uh-huh.

The second point is that we have obviously initiated numerous savings programs in 2002 as I discussed earlier.

We also have been underway planning for 2003, and both of those years, and all the accumulation from 2001, 2002, and then the work that we're doing currently takes hold.

We'll have run-rate benefits in '04 and '05.

What I would tell you, Sam, is we have outlined a significant number of initiatives, and have gone across the business on essentially initiative-by-initiative basis and are signed up to try to deliver those types of benefits, so I feel comfortable with the analysis that we gave you.

Okay, thank you.

We have a question from William Greene with Morgan Stanley.

Yeah, just a quick point of clarification.

On the pension-cash contribution, was that a first half number or a full year number?

That's the number that we need to find in the first quarter of '04.

Oh, by '04.

By '04.

So, in '03, is there a cash contribution?

There could be a small contribution, but at this point, , we're not required to make one.

As we go through the calculations for the subsequent fiscal year, we might need to make a small one but it would be in the fourth quarter.

Okay, and then when we think about Cap Ex, and you said it was $1.5 billion.

I presume a lot of that is already pre-financed.

How much of it is still left to get financed?

A billion dollars of the Cap Ex is regional debt for which we do have manufacturer financing. $500 million of nonfleet Cap Ex, we would expend to fund from cash flow through operations.

Okay, great.

Thank you.

Our next question is from Brian Harris with Solomon Smith Barney.

Thank you, this is a question for Fred.

Can you comment, , you know, either this fourth quarter or, you know, over the year, how the performance of your four hubs has done particularly differentiating Atlanta versus the other three?

I would characterize it as follows.

Of course, Atlanta's been the strongest performance relatively speaking in the current environment due to the well-known strength we have here.

In the secondary hub,, Dallas was showing the most weakness of the three, which led to the actions we have taken, which are quite similar to actions we have already taken and will continue to take in both Cincinnati and Salt Lake.

We do anticipate, with the reduction of the aircraft gauge size to those three hubs , significant improvements versus the recent trend in all three of those hubs.

Remembering that this has two elements.

The significant growth of RJ capacity and the pulling out of the 38 757s that goes to the low fare subsidiary.

They will be replaced by 737s in each of the secondary hubs, which has contributed significantly to the all-important objective of reducing aircraft gauge size in order to meet the current demand environment.

Okay, thanks.

This is a question for Leo.

I am trying to -- it seems to me -- I understand the efforts you're making to ease the burdens on the industry, but what I'm having a hard time time understanding is which one of all of these things I keep hearing are being bantered about in Congress and so for example, which one of these proposals is more likely to hunt.

Can you just comment as far as the McCain Bill or all these other efforts, which, like two or three, are you the most optimistic that you will get positive change out of.

Brian, I think it's hard to handicap which of these will receive the most legs.

I think that -- but I will comment.

I think that anybody associated with security has -- has the highest probability because I think there is a general acceptance on the part of the Congress that it is a national responsibility, consistent with national defense, to provide security for all industries.

What so far has not happened is we have not translated that into a -- into a program appropriate, either tax abatement through the recision of the security fee, which has become a cost to us because we have no pricing power, or a full payment on the mandated security requirements that we have.

And I do think there is an acceptance of the principle.

And so, this is the period in the next, I think, three to six months wherein these issues will be joined and, quite clearly, the appropriate committees of the United States Congress are highly attuned to the crisis facing the industry as punctuated most notably by the United and U.S.

Airways bankruptcy.

In a time when the airline industry is dealing with so much economic duress, you know, to a place -- the albatross of these tremendous excess costs associated with security, I think there is a great deal of support for the view that it's inappropriate to tag the industry with those costs and with those tax implications.

So, you know, I can't handicap the specifics, but I do think that anything related to security has a better chance perhaps than the others, but I think there is also an appreciation of the enormously outsized tax ratios that have been imposed on this industry vis-a-vis almost any other.

So, I think something will happen.

And we're not building anything yet into our plans on it, Brian, but, you know, as we said, you know, we projected a loss for the upcoming quarter.

I would add there is an expectation here at Delta we will have a loss for the year.

I think most of you would anticipate that and, so, we're going to be working hard with the United States Congress to get inappropriate costs off of our income statements and place them where they belong.

You haven't mentioned in the McCain Bill.

Is that something you're no longer focused on or --

No.

I think we're focused on it tremendously.

The reason -- when I talk about public policy priorities, in this conference we have been highly focused on what it's going to yield immediate term, economic improvement and I think that the -- helping with the security costs and helping with the -- with tax issues, you know, can produce a fairness, you know, with respect to our situation and then it's up to us to perform.

You know, there is no, in my opening talks here, I think, I hope you all noticed the absence of any request for special treatment with cash payments.

I'm on the record as saying I don't think the loan program put forward by the Loan Stabilization Board should be reinstituted.

We're against that here at Delta.

We're not asking for any special treatment.

We're asking to be treated like everybody else.

Now, on the labor front, we do -- we have stated and we strongly support, you know, the efforts for some form of mandatory arbitration, and, -- and I always state that and I feel very, very strongly -- first of all, I express a full belief in the collective bargaining process.

I have always believed that in my entire career and believe in it now.

We have had a breakdown in collective bargaining in this industry, and I think that the defects of collective bargaining, as it's been undertaken , have seriously affected the cost structure of this industry and been a major contributor to the situation in which we find ourselves.

If the industry is going to have a good hope in the future of succeeding, it has to have collective bargaining processes at work.

And some form of mandatory arbitration, we think in the ATA and certainly Delta thinks, is a fundamental component of what has to happen here in order to enable collective bargaining to work.

I know some place it's been said, gee, stated that 99% of, you know, all of these situations have been solved through a current collective bargaining process.

Well, that simply hasn't been true with Delta.

We had -- we're the poster child in the Comair situation -- of the situation which did not work, and where we had an 89-day strike that cost us over $600 million, you know, in the circumstances in which we find ourselves, we really wish we had that money at our disposal.

That was truly wasted money and, so, for those reasons , we strongly endorse having gone through the experience of having seen it not work, to fully endorse the program at the national level.

Okay, thank you.

Yvonne?

Thank you.

Our final question will come from Helane Becker with Buckingham Research Group.

Thank you very much, operator.

I think this is a question for, maybe, Leo and Fred.

Delta is in a unique position with only the pilot union, and you have excellent labor relations and you've prided yourself on that for the past so many years and maintaining those relations.

But you're in a position where you could make your entire a low-cost airline.

Why wouldn't you do that rather than just a portion of it?

Well, I think first of all, we're committed to paying our employees appropriately relative to the competitive situations that they face, and generally speaking, you know, our entire employee group is pretty much in line with the -- with the employee situations that we find throughout the industry.

Although there are some significant changes taking place, obviously in the context of the bankruptcy discussions that are going on.

As Fred mentioned in his statement, we're monitoring those situations very, very carefully.

And it's obvious the pilot situation is the most out of line.

You know, by the circumstances of timing, Delta's contract was signed in, you know, four or five months before the September 11th situation, and there really has been no negotiation which has been consummated with the possible exception of Southwest, I think , that -- in the time period since.

So, we're just monitoring that situation.

But we have a continued -- a continued policy of fair pay to our employees and that fair pay is determined in comparison with other airlines.

Helane, this is Fred.

If I could just elaborate on one small point here, but I think it's important.

I think it's important to remember that part of the cost advantage of low-cost carriers is derived from the actual business model, the way it operates principally point-to-point, non-hub operations.

Delta is responding aggressively by its actions both on the costline and in network actions to the blatant fact that the network system in aggregate is too large.

That system has to shrink, and we're responding appropriately.

It's important to remember that the low cost point-to-point system cannot replace the entire network system.

In fact, of all the city pairs out there, more than 100,000 of them, less than 25% of them can be operated profitably, solely by point-to-point.

What I mean to record here is the hub and spoke system is and remains and will be a competitive advantage for Delta over time.

So we have to operate that more efficiently at a substantially lower-cost position as well as grow in the point-to-point low-fare segment.

So we're doing both of those at once.

I think they're complementary.

Okay, thank you.

The other questions I had were with respect to maintenance cost, Michelle.

Can you continue to keep that decline going or is -- did you have a maintenance holiday that is perhaps over now?

Part of the 20% reduction in the December quarter was timing of maintenance, so you can probably look for roughly a 10% decrease in the future, the 20% was an anomaly based on the timing issues, but there are significant, productivity initiatives and lean maintenance-type techniques being implemented to continue to improve the productivity [indiscernible].

So, continual decreases are in order.

Okay, my last question is with respect -- well, a similar question with respect to passenger commissions, has the easy declines already occurred?

The other question is with respect to asset writedowns, do you expect any further asset writedowns?

On the passenger commissions, the majority of the run-rate issue did occur.

It was not for the full year.

You would see continued declines into '03 as we annualize a commission action.

I think that will be able to be calculated.

As to your -- your second question, I don't really expect further asset impairment of the market, obviously is what it is.

At this point, we have taken thorough looks at all the aircraft and on a quarter by quarter basis different things happen in markets that occur to certain assets.

If you recall we ran down what we're focusing on in terms of our fleet is essentially 777s, 767s, 757s, and 73s.

And I think those are very reasonable valued on the balance sheet

Great, thank you very much for your help, everybody.

Thank you, Ms. Grimmett, I would like to turn the call over to you for closing remarks.

Thank you.

That concludes our call for today.

We appreciate you joining us, and we look forward to speaking with you again next quarter.

Thank you so much.

Bye-bye.