達美航空 (DAL) 2003 Q1 法說會逐字稿

Good morning and thank you for participating in Delta Air Lines conference call.

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

At the request of Delta Air Lines this conference is being recorded.

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Moderating today's call is Ms. Gail Grimmett, Director of Investor Relations.

You may begin.

Thank you, Marie and good morning, everybody.

Just a few preliminary 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 express written permission of Delta Air Lines.

Also, today's discussion does contain forward-looking statements that represent our beliefs or expectations about future events.

All forward-looking statements involve risks and uncertainties that could cause the actual results to differ materially from the forward-looking statement.

Some of these factors that may cause such differences are listed in Delta's 8k filing this morning.

One last item is also in today's comments.

We will include certain non-GAAP financial measures in the discussion of our company's performance.

You can find the reconciliation of those measures to comparable GAAP measures on our investor relations website at Delta.com.

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

Good morning, everyone and thank you for joining us.

Also in the call today are Fred 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 we released today.

Delta reported a net loss of $466m and a loss per share of $3.81 for the first quarter '03.

This compares to a first quarter '02 net loss of $397m and a loss per share of $3.25.

Excluding unusual items, the net loss for the quarter and loss per share were $426m and $3.49 respectively, which compares year-over-year to a net loss of 354m and a loss per share of $2.90.

The industry's depressed revenue picture, the key driver of current airline business results and future expectations deteriorated further during the March quarter primarily because of the result of falling demand due to the military action in Iraq.

That decline is reflected in the financial results we are discussing in today's call.

As Fred and Michele will describe in greater detail, Delta continues to take the steps which we believe that our airline not only survives this crisis, but is also positioned for long-term success.

As context for that confidence, I'll briefly discuss the following three points -- One, Delta continues to be extremely vigilant in the maintaining the liquidity levels that are fundamental to our survival.

Two, Delta is staunchly dedicated to maintaining extraordinary tight control over costs.

Three, despite enormous challenges, Delta continues to pursue the important and innovative initiatives that support our strategic vision.

Beginning with the first point that Delta continues to be extremely vigilant about maintaining liquidity levels that are fundamental to our survival, Michelle will address this topic in detail, but let me touch on a few key points.

You may recall that immediately following the events of September 11th and in the first phases of the current financial crisis Delta begun a concerted effort to improve the cash on the BS while simultaneously obtaining cash burn.

By the end of 2002, we had established $2.6b in cash and short-term liquidity.

We have succeeded in remaining near that level, ending the March quarter with $2.5b in cash and short-term liquidity.

In our January earnings call, we anticipated that we would have positive cash flow in the first quarter just ended.

An expectation we modified mid-quarter as the impact of the conflict in Iraq materialized.

Internally, as a result of that impact, cash flow from operations including the benefit of a $388m tax refund which we had noted during the fourth quarter call was likely to occur was a negative $165m.

Consistent with those results, Delta's daily cash burn rate for the quarter defined as cash flow from operations, including the funding of non-fleet CAPEX was $2.7m per day.

Moving now to my second point supporting Delta survival, our airline is staunchly dedicated to maintaining extraordinarily tight control over costs.

We are closely monitoring all areas of our business as our actions during the March quarter indicate.

For example, Delta took immediate steps as the situation in Iraq pushed traffic even lower, reducing capacity by 12% as we announced on March 24th.

At the same time, cost reductions were realized during the quarter due to our workforce reduction programs and previously announced changes in employee benefits as well as our continuing efforts to reduce ticket distribution costs.

Michele will provide you with more detail on these and other cost management efforts, including implementation of company-wide initiatives intended to cut non-fuel costs by 15% by the end of 2005.

Let me now turn to the third and final point in support of Delta's ability to survive and eventually succeed, which is that despite enormous challenges Delta continues to pursue the important and innovative initiatives that support our strategic vision.

Delta made the decision early on even as we addressed the concerns before us, that we would not lose sight of the longer term objectives, which we knew to be fundamental to survive the current crisis and also for future sustained profitability.

As a result of this commitment, we have attained several goals in the past two weeks or so and we're continuing to pursue additional initiatives.

Let me briefly review a few of these recent achievements.

First, Delta has, since March 31st, finalized commitments for a $759m of additional financing in the private markets as well as a separate commitment for an additional $140m facility subject to final documentation.

These financings include over $350m in new cash raised and a $409m facility to back existing debt that otherwise would have matured in June.

Michele will discuss this further later in the call.

However, I would simply note that the successful completion of this arrangement illustrates Delta's ability to continue to meet its financial obligations in relationships with private capital markets.

These commitments also provide Delta with a solid underpinning as we continue forward in the current difficult environment.

Second, you may recall that almost a year ago Delta initiated an industry discussion regarding the billions of dollars in post-9/11 government imposed security cost which is were being imposed on our industry.

Delta, along with other Air Transport Association members has campaigned vigorously since then for the government to assume responsibility for those aviation security cost which is are, in fact, a part of the national security.

And to address also the industry's high level of taxes and fees.

We are, of course, enormously pleased that the Congress included many of the items of concern to aviation in the War Supplemental Bill which passed earlier this week.

Among the provisions are, reimbursement of some security taxes and fees, suspension of the security segment tax and fees from June 1 to September 30 reimbursement for cockpit door fortifications, and an extension of the government backed war risk coverage insurance for one year.

Delta's benefit from the package is expected to total approximately $400m.

Third in the last of positive developments, the Department of Transportation gave final approval to the Delta/Northwest/Continental alliance.

We are pleased with the final D.O.T. guidelines for the marketing agreement to provide customers access to the full range of benefits that alliances can offer to consumers.

Importantly, especially in an environment of scarce revenue, we expect at license when fully mature, to generate passenger new revenue gains of $150m to $200m per year.

And finally, just this past Tuesday, our new low fare subsidiary, Song, inaugurated service between New York City and West Palm Beach.

Song plans to introduce 144 flights, by this fall serving Las Vegas, Boston, Hartford, Dulles, Atlanta, Ft. Myers, Tampa and Orlando.

With the launch of Song, this important initiative is well on its way to full-scale implementation.

In addition to these gains, Delta is continuing to pursue other objectives which are necessary to ensure our ability to compete effectively against all other airlines.

This includes a competitive employee cost structure.

New observers either within or outside the industry, could have missed the drama the past few days as American airlines struggled with various employee groups to achieve such a competitive cost structure while remaining outside of bankruptcy.

As was widely reported this morning, American and its labor group successfully achieved that goal.

The changes at American as well as similar actions taken during the past few months by United Airlines, U.S.

Airways and other carriers obviously places added emphasis on Delta's retirement to pursue more aggressively and urgently, the cost reduction programs already under way, which Fred and Michele will cover more fully and to find also new opportunities as well.

In line with these concerns, we are pleased that the elected representatives of the airline pilots' association which represents Delta pilots have been very open to meeting with us to discuss the challenges we face.

Delta financial analysts are currently renewing the financial information as per their process and procedure and will submit their report to their master executive counsel shortly.

We appreciate the support Delta have demonstrated to our recovery efforts including approval for the Delta/Northwest/Continental marketing agreement and we look forward to a continued partnership with our pilots in pursuit of the mutual goal of assuring Delta’s ability to compete effectively.

In closing this morning, I would simply say during the very difficult March quarter, Delta took the steps to more than hold our own.

Unfortunately with the effect of the war and an uncertain economy still depressing revenues, indications are that the second quarter will also be extremely challenging.

Losses are expected to be greater than the same quarter last year.

However, a significant portion of the government's relief funding for the industry will arrive during the June quarter, so we anticipate continued strong liquidity throughout the period.

In the meantime, as we continue the pursuit of revenue improvements, we will maintain careful watch over the BS and careful control over cost issues.

Now I'll turn the call over to Fred.

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

I will be discussing Delta's revenue and network performance before Michele turns to the financial results.

After a discouraging performance in 2002, we had hoped that the bottom had been reached.

However, the war in Iraq, the SARS scare, the continuing economic malice are currently working against any improvement in the revenue environment now and for the foreseeable future.

We hope that the drop in demand driven by the Iraq conflict will be short lived and regarding SARS, Delta has been relatively insulated to the scare so far, given our small Pacific presence however, we have taken appropriate precautions system wide already.

Therefore, Delta's response to the decline in air travel demand will be my major topic.

In addition, I'll touch briefly on the alliance between Continental Airlines and the inaugural flight of Song which occurred 48 hours ago.

Before discussing those three events, let me give you an overview of the March quarter for the consolidated Delta system, which as always includes our wholly owned connection carriers.

Passenger RASM was up 3.5% versus the first quarter last year.

This result was almost all yield driven was load factor was flat year-over-year.

In comparison to 2000, however, which we think is more meaningful, passenger RASM(ph) was 10.4% lower and continuing the trend from last year, we expect again to outperform the industry's average year-over-year RASM change.

Delta’s first quarter load factor of 68.9% was flat versus last year and down 0.3% compared to 2000.

System capacity was down 1.6% year-over-year, while main line capacity was down 4.1%.

Versus 2000, again, system capacity was down 10.8% and main line capacity was down 15.1%.

Now, let me turn briefly to the entities.

North American RASM which includes, again, our wholly owned connection carriers, was up 1.2% versus the quarter last year.

North American traffic was up a percent on a half percent less capacity and yield was down 0.3 point for the same quarter last year.

Atlantic RASM was up 5.2% on a capacity decrease of 6.1%.

Atlantic traffic in the quarter declined by 12.3% driving a load factor drop of 4.9 points year-over-year, although yields rose 12.6%.

This yield strength was seen across almost all of the Atlantic markets, although particularly the ones from Atlanta.

The fact that some of our MD-11s have been flying military charters has also had an impact as yields in down gagged MD-11 markets is up significantly versus the prior year.

Latin American RASM was up 8.8% on an 11% drop in capacity.

The Latin entity has held up well in the cyclical climate consistent with customer shifting planned European trips to the Caribbean.

When we compare our year-over-year change in unit revenue by entity to the major network carriers average, we expect that Delta will have done better across the board only partially driven by the greater capacity cuts.

That said, sustainable profitability must be the long-term true benchmark against which we measure our success.

We'd also like to mention the fantastic job our charter operation folks and all the operating departments involved have done supporting the air lifts of troops and supplies to the Middle East.

Delta's charter revenue was up sharply versus this time last year to almost $60m.

Two-thirds of which was driven by military operations.

Let me now turn to the impact that the Iraq war is having and actions that we have taken to mitigate its impact.

Delta estimates that the negative impact to our revenues of the Iraq war was approximately $125m for the first quarter.

Beginning earlier this year, we developed contingency plans around our customers' capacity and operations.

These plans were entity specific, scaleable and were designed to be rapidly executable when we began to see a decline in demand levels.

In early February, when the code orange alert kicked in, we began to see significant weakening in advance bookings and after the war began, we announced a 12% main line capacity reduction.

The Atlantic was appropriately particularly hard hit with bookings off almost 20 points year-over-year.

As part of our contingency plan, we suspended Transatlantic service on 10 out of 14 routes out of Kennedy and out of 4 out of 18 routes on Atlanta.

Our SkyTeam partners have been of tremendous help here as we have been able to get customers affected by the cancellations to and from their destinations via our European partners, Air France, Alitalia(ph) and Check(ph) Airlines.

Demand in our Latin entity has been relatively strong.

So thus far, we have not materially reduced capacity although we continue to assess the environment.

Delta's specific entity which is currently compromised only of the Atlanta Tokyo service has also experienced double digit traffic decline.

Our domestic system has seen fewer bookings as well, although not the double digit declines that the Atlantic and Pacific have experienced.

In response, we reduced domestic main line capacity about 1% in March, which is 4.6% lower than the prior year.

We continue to monitor traffic and bookings carefully during this uncertain time and will make adjustments to capacity as our demand forecasts warrant.

Michele will be giving an update of the capacity outlook for the rest of 2003 later in the call.

Turning now to a more positive development, we are pleased to have our alliance with Northwest and Continental approved by the Department of Transportation, thus affirming the inherent customer benefits in this alliance.

Between the three carriers, we expect to ramp up to 2,600 code share flights by the end of this year and over 5,000 flights by the end of '04.

And as early as next month, our customers should be able to accrue frequent Flyer miles on any of the three carriers as well as having reciprocal lounge access.

We expect the revenue benefit of the alliance to grow from a modest $10m this year to $150m to $200m when mature.

On another positive note, Tuesday this week marked an important date for Delta, namely the launch of our new low fare carrier, Song.

The load factor on the first flight which flew from Kennedy in New York to West Palm Beach was 91% and advance bookings for Song are quite encouraging.

To us, Song is another indicator visible to the outside world of the speed and urgency with which we are transforming Delta.

Before turning the call over to Michele, I'd like to briefly summarize our operational performance for the first quarter of 2003.

Our completion factor was 98.4%, which was slightly ahead of 2002.

This ranks Delta solidly in the top tier of airlines for the period and is particularly noteworthy given the winter storms in the Northeast.

And our first quarter on time arrival rate was significantly improved from '02, up 4.5 points to 82.1%.

This improvement was achieved even with the poor weather and extended days of cloud cover in Atlanta, moving our relative ranking from number eight last year to number four in the first quarter of this year.

In summary, this quarter Delta planned for and responded quickly to the war demand decline.

We also executed the alliance with Continental and Northwest and we took Song from the drawing board to launch in record time.

Now to discuss Delta's financial performance, I'd like to turn the call over to our Chief Financial Officer, Michele Burns.

Good morning and thank you for joining us today.

Following the unrelenting challenges faced in 2001 and 2002, Delta has once again been tested during the first quarter of 2003.

Yet, Delta continues to persevere in spite of the worst financial crisis ever faced by the airline industry.

We are moving forward with our strategic plan to permanently reduce costs and maintain liquidity while transforming this company for the future.

As Fred discussed, we are making solid progress on our revenue initiatives.

As I discuss the financial results of the March quarter, there are two key messages that I would like you to take away, first, although our losses were substantial, our BS continues to be a critical strategic advantage for Delta.

Second, we are committed to managing this company in a conservative and prudent manner, driving first for stabilization then for a return to profitability.

We are diligently watching for potential risks and are taking steps to protect Delta from those risks.

We will continue to use our ability to respond rapidly to marketplace and industry changes as a competitive advantage.

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

Delta reported a net loss of $466m or $3.81 per share, excluding unusual items we reported a net loss of $426m or $3.49 per share.

These unusual items largely comprised of a charge for pension benefits as a result of our work force reductions total $40m net of tax.

Please refer to our press release or website for more details on the individual items as well as our reconciliation of quarterly earnings.

I would like to spend a few minutes on the cost performance followed by an update on the liquidity position and profit improvement initiatives.

Delta continues to move forward with the cost control efforts.

However, expected increases in pension expense as well as significant increases in fuel coupled with short-term capacity reductions led to an increase in our chasm for the quarter.

Fuel prices skyrocketed, resulting in $172m or 51% increase.

While total pension expense which includes retirement and survivor expense increased $70m or 73%.

Chasm for the quarter was up 5.9% which was somewhat higher than our previous guidance to you of 4.5%.

The difference attributable to higher fuel cost and lower capacity driven by the war.

The numbers are the numbers, however, if you look at the underlying analysis, it is evident we continue to make progress on the cost side.

Of the 5.9% increase, 5% was due to increases in fuel and 1.4% was due to short-term capacity reductions.

Had it not been for these items, our chasm would have improved versus last year.

This indicates our cost savings initiatives were more than offset our other significant cost pressures such as the pension.

On a fuel price [inaudible] basis, chasm was up 0.9%.

Our diligent focus on cost paid off in other areas of the business.

I'd like to highlight a few examples.

First, the salary line remains a challenge with pension expense up $70m.

We have not yet annualized the pilot and mechanics salary increases which were implemented last year and as a result they were up $34m.

These items were offset by work force reduction program and changes implemented to employee benefits which provided $34m, $20m respectively in cost savings during the March quarter.

The remainder of the increase in the salary line was attributable to DCI growth.

A second cost savings was realized from passenger commissions which were down 49% from last year.

The elimination of travel agent-based commissions and our continued strategy to migrate to online ticket purchases led to this improvement.

Keep in mind that the commission reduction was annualize the at the end of this quarter, therefore, we do not expect similar declines in the remainder of the year.

A third example of year-over-year expense declines is aircraft maintenance costs which were down 22%.

The majority of the decrease, or 75% is due to process improvement and six sigma initiatives.

The other 25% is attributable to reduced flying and fleet decisions around 727s and MD11s.

It is important to note that our comprehensive and maintenance and safety programs remain unchanged.

Considering the significant cost pressures we are facing, we are pleased with the cost performance and continue our meticulous review of costs throughout the company.

I already mentioned the increases in pension expenses for the quarter, but I'd like to update you on an important decision we made in the March quarter.

As I stated in the last conference call, the increases in pension expense are primarily due to the fair market value of pension plan assets as a result of declining market conditions.

To help offset the pension expense, we announced in the December quarter that we will be implementing changes to the family care plan which included the migration to a cash balance plan.

As a result Delta expects an expense savings of approximately $600m over the next five years with $120m realized in 2003.

However, as we discussed last quarter, we expect to see continued pressure from pension expense an estimated $300m increase in pension expense for 2003 even with the changes to our pension plan.

Another important aspect of pensions is the cash funding.

In the March quarter, we doubled our 2003 contribution to our pension trust for the family care retirement plan, our broad-based employee pension plan in the amount of $76m and funded it earlier than the ERISA requirement.

This allowed us to exceed certain ERISA guidelines and will enable us to better manage future contributions.

We felt this was the right decision to make for both Delta and its employees.

Keep in mined that Delta currently has assets in excess of $7b in its retirement programs.

For 2004, our expected pension funding requirement is $350m to $450m.

We fully intend to remain in compliance with ERISA funding requirements.

During the March quarter, we focused significant effort in our BS ensuring the appropriate levels of liquidity while maintaining the financial flexibility.

Cash flow from operations for the March quarter was a negative $165m.

This is fully attributable to the impact of the conflict in Iraq.

This conflict manifested as $125m net reduction in revenue and a $200m reduction in our air traffic liability account.

We had non-fleet CAPEX of $96m which when combined with cash flow from operations resulted in a daily cash burn for the quarter of $2.7m per day.

You may recall that we defined cash burn as cash flow from operations less non-fleet CAPEX.

Cash flow from operations includes $388m from tax refunds received during the quarter and $76m outflow to fund our pension plan that I discussed earlier.

In addition, we had three significant items that impacted our liquidity.

First, we closed a privately held EETC transaction for $392m in January.

Second, we paid $74m for ESOP notes tendered during the March quarter.

Lastly, we had $101m in debt maturity.

After completing these transactions, we ended the quarter with $2.5b of cash and short-term liquidity.

This consists of $1.9b of unrestricted cash, $153m of restricts cash and $500m in a credit facility.

March 31st, 2003, our long-term debt was $10.2b and our all end, debt to capital ratio was 96%.

We have approximately $3.1b of unencumbered aircraft of which $800m is eligible under Section 1110 U.S.

Bankruptcy as of March 31st.

There were two transactions that occurred during the March quarter but are not yet reflected in our BS and cash flow statement.

First our $250m account receivable securitization was terminated in late March.

During the first week of April, we paid in full all amounts owed under this facility.

Second, we entered into an agreement to sell our ownership in WorldSpan.

While the terms of the agreement are not yet public, we expect the deal to close in the second half of this year.

We have not recognized any amount from the proceeds of the sale.

Also, subsequent to March 31st, two events took place that are worth mentioning.

First, Delta entered into a series of transactions with third parties that include closing three credit facilities which total $351m in new long-term debt and a commitment for a five-year, $409m letter of credit to replace the current letter that expires in June.

This new letter backed certain municipal bond issues.

The commitment is subject to comments by third parties including rating agencies and the respective municipalities.

These transactions are collateralized with a large portion of Delta's main lane spare parts and spare engine inventory as well as Section 1110 aircraft; some of these aircraft were used in our $500m undrawn credit facility that was due to expire in August.

Therefore, we have terminated that facility.

Further, due to the termination of the credit facility, Delta entered into a separate commitment for $140m in financing subject to certain documents being finalized.

These transactions which total $900m will take care of all significant debt maturities for the remainder of 2003.

The second event that took place after March 31 was positive for both Delta and the entire industry.

Congress approved a Wartime Supplemental Bill which the arms were given financial relief for security-related costs.

We expect to receive $400m in the June quarter.

This is a lot of detail.

Let me step back and summarize the past few months.

We ended the March quarter with $2.5b in cash and short-term liquidity.

We paid our $250m account receivable securitization in full and $500m bridge facility was terminated.

We issued $350m of long-term debt and received a commitment for a $409m dollar letter of credit.

We have an additional letter of commitment of $140m that is in the final stages of approval.

Furthermore, as I stated earlier we expect to receive approximately $400m from the government and hope to finalize the sale of WorldSpan in the second half of the year.

All of these items combined give us confidence that our liquidity position is stable and assurance that we will be able to meet our financial obligations.

Now I'd like to update you on the continued momentum of our profit improvement initiatives which include both cost savings measures and revenue enhancements.

As discussed last quarter, our goal is to reduce non-fuel unit costs by 15% by the end of 2005.

In doing so and in recognition of an estimated $1b of cost creep, this will require $2.5b to $3b of cash savings initiatives.

This will result in $1.5n to $2b of net savings.

I'd like to provide a few examples of our profit improvement initiatives.

First, there are a number of opportunities we've initiated on the revenue front.

We've resigned our loyalty program.

Also in our technical operations area, we've continued the growth of our in-sourcing business and expect a 25% increase in revenue in 2003.

In addition, we are now working towards implementation of our domestic code share with Northwest and Continental as Leo mentioned, once completely implemented, we expect an annual revenue benefit of $150m to $200m.

Our second initiative is our network optimization and fleet simplification strategy.

It was reallocating the Delta Express 737s to our secondary hub while launching our new low fare subsidiary, Song.

Out of the gate this week, they began with 22% lower unit cost performance versus our main line 757s.

Our fleet simplification program provides operational efficiencies allowing Delta to save of maintenance costs and pilot training expenses.

It also improves fleet reliability which translates into improved customer service.

To date, we have announced the grounding of our MD-11 fleet by early 2004 and we retired our 727 fleet.

Third, is our investment in core technologies to improve and streamline processes.

One example includes our aim for a self-service airport experience by installing more kiosks, gate display screens and phone banks.

In 2003, we plan to add an additional 400 kiosks for a total of 800 and the implementation of Delta Direct self-service phone lines.

Customer who use the phones will be able to obtain their boarding passes from a printer located adjacent to the phone bank.

At the gate, the Delta Direct phones will help customers who need to be rebooked following a flight cancellation or delay.

In 2003, Delta will install over 440 Delta Direct phones in over 80 cities.

These are just a few examples of items we are focused on.

In total, we have 15 profit improvement initiatives each led by an officer of the company.

We are pleased with the progress we've made to date.

We are committed to this program.

In fact, as to the impact of the war, chasm would have improved for the quarter.

This is testament to the traction of these initiatives.

Now, let's turn to guidance for the June 2003 quarter and beyond beginning with capacity.

I'll now provide guidance on consolidated capacity for the rest of 2003 by quarter.

So please note that the speed with which demand recovers after the Iraq war could change these forecasts significantly.

For the second quarter, we currently forecast consolidated capacity to be down 10% to 12% year-over-year.

For the third quarter, capacity is forecasted to be down 6% to 7% and for the fourth quarter, capacity should be down 3% to 4%.

On a consolidated basis, capacity for the full year 2003 will be down 6% to 7% versus 2002 and down about 14% versus 2000 levels.

Main line capacity for 2003 will be down about 9% versus last year and about 19% below 2000.

Turning to costs.

All of our guidance assumes the continued war impact manifests as we have forecasted.

For the June 2003 quarter, as a result of the 10% to 12% capacity reduction, we expect consolidated chasm to be up 9% to 10% and fuel price neutralized chasm up 7% to 8% versus prior year.

For the full year, consolidated chasm is expected -- projected to be up 5% to 6% on a fuel neutralized basis, chasm for the full year will be up approximately 3% to 4%.

Turning to fuel, in June 2003 quarter, we are 88% hedged at a hedged price of $.78 a gallon.

For the September quarter, we are 54% hedged at $.79 with gallon.

For the full year, we are hedged 65% at $.78 per gallon.

Now, turning to CAPEX.

We continue to be diligent in our decisions surrounding capital expenditures.

For 2003, we expect CAPEX to be $1.5b.

This consists of $1b for RJs, $200m for aircraft mods and inventory and $300m for non-fleet expenditures largely comprised of technology spending.

Our guidance for earnings for the June 2003 quarter assumes a significant continued war impact as just mentioned.

While we expect the June quarter performance to be better than the March quarter performance, we expect our results to be substantially worse in the June 2002 quarter.

I would like to point out our current financial plans will enable us to maintain our liquidity positions throughout the June quarter.

And finally, looking forward to outlook for the June 2003 quarter advanced bookings, advanced bookings for the quarter are showing continued weakness when we look beyond April.

Atlantic and Pacific entities are experiencing the worst decline, while Latin America is seeing the opposite, a fair amount of strength.

The public seems comfortable with air travel overall given the war's progress and absence of other incidents.

However, bookings more than 30 days out are consistent the with customers' wait and see approach to their summer travel plans.

In closing, throughout the remainder of 2003 and beyond, Delta will continue to employ a thoughtful and sound strategy for addressing the challenges that lie ahead.

We will refine our strategic plan as needed, utilizing both our operational flexibility and our proven financial discipline.

This will allow us to strengthen our BS, achieve our company-wide transformational goals, meet our customers' ever-changing needs and prepare Delta for the future.

Furthermore, I want to acknowledge the tremendous effort that all of Delta's employees contribute each day in our struggle for survival.

Delta's people are using their unique talents to drive our strategic plan and help stabilize our company.

This shared commitment is providing Delta with its key advantage in its quest for success that is unmatched anywhere in the airline industry.

It to will help It, too, will enable Delta to emerge from the current crisis.

This concludes our quarterly conference call.

At this time, we will be happy to take your questions.

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 your question.

To withdraw your question, please press star two.

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

We'll take a moment for the question queue to fill.

The first question comes from Gary Chase of Lehman Brothers.

Hi, guys, just a quick question for Michele.

I apologize.

There was a lot of information you gave in your prepared remarks.

Could you go back to the 15% unit cost reduction goal and just walk us through what you had said there in terms of, you know, what your intentions are?

I'm curious if the cost reductions include growth in Song, which we know has a lower unit cost.

And I'm also curious to know, I mean, if we talk about a 15% reduction in non-fuel costs, I mean, can we assume fuel stays flat instead of $.11 by '05 you want to report a number that's 9.5 cents, 10 cents?

Is that a fair way to look at what you're describing?

It is a fair way to describe it.

Take a look at 2002 chasm and challenge ourselves to achieve a 15% reduction to that number.

We are measuring our sales on a consolidated basis, while I would emphasize with each of the operating units we have very specific goals and objectives for what their chasm should be given their operating capabilities.

All end, you're in the right direction as to how we're measuring chasm improvement.

Okay.

That's a consolidated number.

From a cash flow perspective in your 10-K or annual report, had you written that you expected to be -- at least cash flow, break even for the year, the way you define it, which includes non-fleet CAPEX.

I'm just curious -- I guess we probably ought to throw the first quarter out.

Going forward for the rest of the year, do you expect that would be the case?

I think the answer to your question is we continue to strive for that, however, the unknown impact of the war, particularly in the June quarter we have the March quarter in the bag, obviously.

But June if the June quarter continues with a continued decline, we have to balance that loss against the government aid that will come in June.

So it's difficult for me to give you a really great look at that.

I would say, we do continue to strive to achieve that.

Okay.

With that government aid.

Just to switch gears for one second, one last question for Fred.

I apologize.

I haven't followed up on, this but I'm led to believe you have curtailed or stopped our business fare experiments that you were running.

I'm curious if there's any color there that can you provide for us?

Well, they did expire, but there's been so much other noise in the business with the war scare and the SARS scare that we have not expanded them or renewed them and we're really just still looking at them.

There's nothing new to report on that subject.

It's not -- you didn't -- just the data was confusing.

We didn't come to any definitive conclusions yet.

I think other events have really overtaken us and we will continue to examine innovative fare mechanisms as we move forward.

Great, thanks, guys.

The next question comes from David Strien(ph) of Bear Stearns.

Good morning.

In the release you noted that you're studying the efficiencies produced through Song to determine whether or not you can incorporate them into the main line operations.

My question is, how quickly, how deep and how broad and what efficiencies specifically do you think you will be transferring over to the main lane operations?

I -- first of all, I think it's important to record we are going to -- we are coming out of the blocks at a 22% unit cost reduction on the 757 equipment versus the main line driven by a number of factors, but the large ones being aircraft size, turn times, distribution productivity and flight attendant productivity.

The things that we are focusing upon the most acutely for transference to the main line right now are turn time.

We see some opportunities for very measurable reductions in turn time, not only on the 757, but other aircraft types.

I'd say that's the first large innovation that will potentially move to part or all of the main line.

The distribution method, distribution initiatives show promise as well.

And we're very, very please with the increase in productivity in the in-flight arena, but we have not got a fixed date of transferring any of those measures to the main line yet.

Okay.

Thanks.

The next question comes from Jim Higgins of Credit Suisse First Boston.

Yes, hi.

A ton of things I'd like to ask.

I'll try to narrow them down.

Do you have any early indications of how Song's yields are looking versus the similar Delta Express flights.

Not really.

We only have a single aircraft in operation with build up rather fast.

It's a little too early to say.

Remember, we are moving into the lower season for Northeast to Southeast and I think we'll have -- you really kind of need to serve a seasonal market like this for a year to get a good fix on the yield.

Sure.

When you do something like flash capacity as much as did you in the Transatlantic, how should we think about the SkyTeam JV is working?

I'm just -- I can't conceptualize at the moment what happens.

Does it just JV capacity drops and the results are what they are and each of you gets your share or how do that work?

To begin with, we had the privilege of being able to sit down and chart four entire network systems.

Alitalia, Air France, Czech and Delta around one table and we came to some very specific advantages to keep the collective footprint in place.

Secondly with the antitrust immunity in the pricing arena, we were able to and we just made new breakthroughs literally in the last 60 days where we were able to coordinate more closely on leisure pricing than we had before.

And we are very, very close to the finalization of the JV structure which will decide how the changes in capacity will translate into the revenue share moving forward.

We think it's been a tremendous advantage.

Great.

Finally, there have been a number of situations where there appear to be some curtailment of capacity growth coming out of some of the regional carriers, in part responding to what's -- I'd say in large part responding to what's happening at their main line partners.

You have 59 RJs coming this year another 23 next year.

What is Delta's feeling about these kinds of trends?

We have not seen or decided upon any substantial or significant change in our RJ capacity growth plans.

Okay.

Great.

Thank you very much.

The next question comes from Susan Donofrio of Deutsche Banc.

I just have two questions.

One, could you just update us with respect to where you are with talks with your pilots now that American has reached their concessions?

Susan, this is Leo.

As I mentioned in my statement, we are in discussions with them right now that are primarily fact-finding in nature, quite obviously, we all knew there was a tremendous amount of information that would flow from the negotiations that were being conducted with other carriers and with the resolution of the American situation.

All that information is now on the table.

So I think we'll be moving forward, I think, with a sense of urgency on both sides to continue those discussions.

I don't think we'll have a lot precise, to say about them, frankly as these discussions continue.

Certainly I would clearly term those -- the tone of those discussions as constructive at this point.

And how are you going to handle your nonunion workers, Leo?

You know, obviously I believe you can simply, you know, impose new wage rates overnight.

I'm wondering, are you waiting for the pilots to go and then we can expect some kind of cost concessions at your other groups?

How are you handling that?

We're going to put that together as a total mosaic, Susan.

There's no sense of sequencing, really, on any of that.

We're very much aware that we -- and we do, of course, measure all of our cost elements on an item-by-item basis.

And -- but I wouldn't have any specifics to say right now with respect to the sequencing of anything that might occur in that respect.

Susan, I want to add one thing.

Looking at the non-contract wage rates at Delta, it's important to remember we have some extraordinary productivity advantages already.

Actually coming into the crisis they were high, now they're even higher since 9/11, particularly in takeoffs, ACS and sales and reservations are the leaders in productivity standing and productivity gain since 9/11.

That's the first point.

The second point is, we had a strategic benefits review last year which resulted in the implementation of changes in health care contributions and, of course, the conversion to the cash balance program, which is a very, very large benefit.

In moving forward, the mosaic to which Leo referred has to address productivity benefits as well as wages.

And that is why Delta has been able, historically, to provide very high wages and yet maintain a unit cost advantage, because of that productivity.

Great.

Okay, well, thank you very much.

The next question comes from William Greene of Morgan Stanley.

Yeah, good morning.

Michele, I have a question on the cost savings initiatives that you have to reduce non-fuel unit costs.

How much of that is not from labor.

The majority of if is not labor.

Any labor that is built into it is not labor in terms of rate, it is labor in terms of productivity improvements across the business.

The discussions that you're having with these -- with your pilots or other work groups, that would just be in addition to what you've got here?

That would help us achieve these goals in addition.

Michele, just to sum the total long-term debt and capital lease principal payments you'll make this year, including what you did in the first quarter, what will that sum be.

Total long-term debt, it depends on how you cut it.

Let's use a number on the order of $1.2b, $1.3b, but understand that that includes the expiration of the line of credit as well as the expiration of the facility.

So that's about -- that's a significant amount.

We had about $330m of scheduled amortizing debt in addition to those two items.

Aircraft utilization in the quarter, where was it and how did it compare to last year?

I'm afraid I don't have that at hand.

Can Gail call you back on that?

Of course.

Thank you.

Marie?

The next question comes from Glenn Engel of Goldman Sachs and Company.

Good morning.

A couple questions.

One, I know you have a sense of urgency, but it doesn't seem like any other labor group has had any sense of urgency until you threaten bankruptcy.

Why do you think your pilots will respond without those threats when no other group has?

And, two, if you were to sign -- reach agreements comparable to what American has just done, how much money would that save you and if you could break that all up by group, that would be great.

Well, this is Leo.

First of all, I can assure you, if from the standpoint of a fundamental objective, everybody at Delta is working to absolutely and is committed to achieving our aims outside of bankruptcy.

I think that I would certainly echo all of the statements that have been made by American and others and then just for others to simply watch what has been happening in situations where companies have gone into bankruptcy is to say that it is a struggle that is tremendously worth the pain and the challenge that it represents.

And so this team here, across all of Delta has attempted in every conceivable way to put ourselves in a position to avoid it.

I think that the situation could put us in a position where that would need to be considered is all, frankly, up to us.

It is truly an internal situation, as it pertains to all of Delta.

We have it within our hands to do it and by far the best chance of doing it in a way that ensures our enormous success on a long-term basis.

That's the pitch that's going to be made.

It's -- it is certainly a truism that if in fact we are unsuccessful in achieving a cost structure that is competitive, there is no airline that would succeed under that circumstance.

And it would eventually lapse into a bankruptcy-type situation.

As everything that we have put forward here today implies that that prospect is not facing us in the immediate term at all.

But it could face us if in fact we don't do the right things that we need to do in the next period of time.

And so the conversations will go forward in that context, and I think that -- and I think everybody here at Delta appreciates that we have to have these discussions.

We have to have a competitive cost structure and that we have done the right things here at Delta to ensure that we are not doing or having that kind of conversation on the edge of bankruptcy.

If your statement is true and I don't know that it is, but it sounds sort of generally true, that these kinds of issues have not been resolved except on the edge of bankruptcy, if they are not resolved, it will just take us longer to get there, but at the moment, we've done everything we can to position ourselves so we do not have to have those conversations in the context of at least that immediate threat.

So that's how we're moving ahead.

You know, relative to the discussions of pertaining to the American deal, we don't have those.

The American deal was just done last night, and I think, Glenn, what we better do is get back to you later on that.

I don't have those figures right at hand.

Is there -- could you -- are you willing to share any sense of when you run out of patience waiting for the union?

No, I'm not.

Thanks.

Okay.

The next question comes from Michael Linenberg of Merrill Lynch.

Yeah, hi.

This is a question for Michele.

With respect to the aircraft, the unencumbered aircraft that are eligible under Section 1110.

Subsequent to March 31st when you include the various transactions assuming their completed, how much aircraft, at least subject to 1110 will you have available to you?

And can you maybe just, you know give us a sense of the type of aircraft are in that pool?

[ Inaudible ] the statement I made, as of the end of March 31st, the number goes to $2.8b of total unencumbered, $500m of which is Section 1110 eligible.

The 1110 are MD-11s and the [ Inaudible ] are 75s, 73s, a variety of Boeing aircraft and some additional McDonald Douglas.

Okay.

My second question, I think you listed as or stated that the impact on the revenue side as a result of the Iraq war, I think was something like $125m.

Is that a net number?

And what I'm getting at, does that include the gain that you're getting on the charter side or, you know, bringing troops over to Iraq or is that a gross number?

It is a net number.

And it's revenue driven with some of the costs taken out.

The costs obviously in that environment, there's a small amount of variability that you can get out on a short-term basis.

The intention of using 125 was to give an indication of the full all-end management view of the war in what the war cost us in terms of P & L for the March quarter.

The additional $2m is pretty much a line of sight drop in air traffic liability account.

So $325m of cash.

Okay.

Thank you very much.

The next question comes from Ray Neidl of Blaylock and Partners.

Michele, I just want to verify cash pension expense for the remainder of the year is going to be zero?

Correct.

The NOL carry forwards you have textless(ph) carry forwards available for this year, is that correct?

That's correct.

Good.

And as far as the structured financing goes going forward, I know united in bankruptcy is trying to -- they went to court to try and disavow some leases as not being secured.

They're also doing a heavy job on the aircraft ETCs and cutting them down.

Will that have a major effect on Delta's future secured financing do you think?

At this point, we've done enough secured financing to take us through a significant period of the future.

While we contend to continue to be in the market, to the extent it the has an impact, which certainly it would, we don't consider that as a significant risk to Delta.

In the future, our secured transactions may well take the form of sale leasebacks and lease equity and certain RJs will be in the marketplace, but are watching those developments with interest.

Okay.

Then finally, with Song, there's been a couple different plans that have changed here while you were building the product.

I'm just wondering what the game plan is now.

Is Song going to be competing on certain roots with Delta and is Song going to be operating into hubs now?

Originally I thought they weren't going to operate into hubs.

We're keeping a wide aperture open with Song.

There's going to be an East/West component, Northeast to the West Southeast to the West.

We have announced, I believe it's the 2nd of June a flight from Atlanta to Kennedy.

Atlanta being a hub, Kennedy being a strength market.

We're seeing a lot of growing demand for a low-cost carrier product and given the complexity and the breadth of our New York strategy, serving five airports, having RJs, having SkyTeam, having the international, we don't regard the introduction of Song as anything more than complimenting the Delta armada here and there.

Yes, Atlanta/Kennedy is a new development just because we see the demand.

Okay.

With your new partnership with Continental and Northwest and the over hub situation in the country is your Cincinnati hub in danger at all?

No, absolutely not.

We have done a lot of redesigning of the Cincinnati hub over a long period of time.

And have tons of strength there and do not see any material changes to that hub, footprint for the foreseeable future.

Your other weaker hubs out West, Dallas and Salt Lake, you're happy with that situation right now also?

We were not happy with the financial results in Dallas, which drove a substantial redesign in which we actually increased our footprint, increased our frequencies, but radically changed the shift between RJ and main line capacity and deployment.

We've implemented that in the last three weeks, I'm thinking.

All I remember was a hail storm on opening night.

It's working very, very well.

We really think we have a good shot at curing the Dallas problem with that.

Salt Lake was already evolved over a period of time into a more RJ accentuated hub with our SkyWest partner there and we will make more changes to Salt Lake, but they won't be as definitive as what occurred in Dallas, because Salt Lake's been evolving over time.

Okay.

Then just going forward with your regional airlines for future cost adjustments, is there any -- in light of current developments at United and so forth, is there any plan in our changes for the wait between contract carriers and the way you handle the contract carriers?

No, in fact it's worked out really, really well to have the three contract carriers and the two owned carriers.

Whenever there's a new root, there we've got a jump ball going and there's five very, very capable carriers competing for revenue and cost.

It's proved to be very, very healthy for everybody concerned and we don't see any large changes in that.

And we're really pleased that we have that balance and the flexibility to deploy the most effective carrier to the most effective route.

Thank you.

Due to time restrictions I'll turn the meeting back over to Ms. Grimmett.

Thank you, Marie.

That concludes our call for the day.

We appreciate your time and we look forward to talking with you again next quarter.

Thank you so much.

Bye-bye.

This concludes today's teleconference.

You may disconnect at this time.