達美航空 (DAL) 2003 Q2 法說會逐字稿

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

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

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

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

Ms. Grimmett you may begin.

Thank you, Shelley.

Good morning everybody.

Please be aware that 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 airlines.

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

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

Some of the factors that may cause such differences are listed in Delta's SEC filings including the 10K form sent to the SEC this morning.

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.

Before we begin, I'd like to ask that when we get to the Q and A portion of the call, we limit questions to one question plus one follow-up.

And with that, I would now like to turn the call over to our chairman and CEO, Leo Mullin.

Good morning and thank you for joining us.

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

Let me begin with a brief recap of the financial results released today.

Delta reported second quarter net income, including unusual items of $184 million or $1.40 diluted earnings per common share.

Excluding unusual items which are primarily the security--related reimbursement from the Emergency Wartime Supplemental Appropriations act and again from the sale of Delta's equity investment in WORLDSPAN, Delta's reported loss for the period is $237 million, 75 million worse than the results for the same period last year.

During this morning's call I'd like to focus on four subjects which are germane to Delta's results today and also to our goals and related actions going forward in an environment that continues to be extremely challenging.

These subjects include the current business climate and outlook, two unusual items noted earlier, the governmental reimbursement for aviation security costs and the sale of Delta's equity interest in WORLDSPAN's company-wide improvement plan which is now well underway.

Turning first to the business climate.

There has been some improvement with GDP growth forecast for 2003 now up slightly, and growth for the third and fourth quarter set at 4.5% and 4.3% respectively.

While these are encouraging signs the underlying causes for the airlines remains not simply less traffic but a continued weak revenue environment.

For the June quarter, revenue is down 4.8% year over year and traffic is down 8.5%.

If these results are compared to the last normal year, generally regarded as 2000, then revenue is down 26%, traffic is down 20.5% and yield is down 8.5%.

As these comparisons indicate, not only are the industry basics drastically changed since 2000, but in addition revenue decline consistently outpaces traffic decline.

Looking forward a bit for Delta, bookings are improving slightly across all regions and we have resumed some previously suspended transatlantic service.

However these would appropriately be considered baby steps which do not yet signify the end of the crisis period.

Moving to my second and third topic, the two unusual items noted in the second-quarter results, I'd like to first express my appreciations once more to President Bush and the Congress for the 2.3 billion reimbursement provided to the U.S.

Airlines as part of the larger Emergency Supplemental Appropriations Bill.

Delta's portion of that payment was $398 million in cash, or $251 million net of tax.

This legislation is an important first step for congress and the administration in recognizing that the Federal Government should appropriately bear the costs of national security in the airline industry, just as it does in other sectors of our economy.

We continue to be hopeful that this niche acknowledgement will lead to permanent action, they will relieve the industry of the heavy burden of the post-9/11 related security costs in the future.

The other special item topic is the sale of Delta's equity investment in WORLDSPAN which was completed earlier this month.

Delta received immediate cash payment of approximately $285 million from that sale, which resulted in a $176 million gain net of tax.

This transaction provides incremental liquidity that further strengthens, our balance sheet which continues to be the strongest among the hub and spoke carriers.

As part of this transaction, Delta will also receive credits total approximately $125 million against future WORLDSPAN provided service and a $45 million subordinated promissory note which matures in 2012.

Turning to my final topic this morning I'd like to touch briefly on Delta's profit improvement initiative which is intended to reduce Delta's non-fuel cost by 15% by the end of 2005 compared to 2002.

The program targets are expected to create 2.5 billion in cost savings during that period which we expect will be partially offset by approximately 1 billion in cost pressures.

The need for a riveted focus on this effort is clearly evident based on the ongoing revenue issues I noted earlier as well as the increased challenges of competing effectively against fast expanding low-cost carriers.

In addition, Delta faces new demands to meet the unit cost benefits achieved through bankruptcy cost restructuring and through near bankruptcy restructuring at American Airlines.

The profit improvement initiatives fall into three categories focusing on cost savings and revenue enhancements including customer service projects, operational and product changes, and work force initiatives.

We are very pleased with the progress made so far in all of these areas which Michele will describe in more detail.

We believe that the work now taking place is part of this crucial cost saving and revenue-generating program will play a significant and long-term role in Delta's efforts to establish unit costs which allow us to be fully competitive.

An important aspect of the ongoing cost reduction effort is Delta's pilot costs, currently the highest of any hub and spoke carrier.

We appreciate the co-operative and constructive steps the Airline Pilots Association has taken by agreeing to reopen negotiations regarding the current contract, which is not scheduled to open until 2005.

We are now engaged in those negotiations and while I of course cannot make any comment on the progress of these talks, or our expectations from them, I will note that we are hopeful that a mutually beneficial resolution will occur.

I'll close now by simply noting that while the challenges ahead remain significant, Delta's continuing to move forward with plans that maintain our core financial and operational strengths while also taking steps to renew our cost relationship for our company's long-term success.

Now I'll turn the program over to Fred for a closer review of Delta's revenue and operational performance.

Thank you Leo and good morning ladies and gentlemen, I will be discussing Delta's revenue and operational before Michele goes through our financial results.

In addition to continuing economic weakness, the last quarter was impacted by the war in Iraq and SARS both of which adversely affected the industry.

There have been some marginal indications of small improvements, however, for example, there has been some improvement in bookings, although on still reduced capacity.

However, looking at the bigger picture, we certainly cannot say that we are seeing recovery yet.

The pricing environment is still very weak, with second quarter yields still down 8.5% from the year 2000, passenger ridership remains at reduced levels, down 19% from 2000.

That translates into 6 million fewer passengers for Delta alone in the second quarter alone, and, finally, economic uncertainty remains high.

Also remember that the airline industry tends to lag the economy in recovery and therefore we do not expect to see a true recovery until we see a sustained economic recovery.

In addition to discussing Delta's revenue performance in this typical environment I will also briefly touch on a couple of special subjects, namely, the post-war capacity restoration versus our plan, military charters, and an update on two of our previously announced profit improvement initiatives, that being the launch of our low-fare operation Song and the inauguration of our domestic alliance with Northwest and Continental.

Before discussing these key topics let me first give you an overview of the June quarter for the consolidated Delta system, which, as always, includes our wholly owned connection carriers ASA and ComAir.

This in capacity was down 10 points, 7% year over year while the drop for Mainline was 14%.

Versus 2000, system capacity was down 18% and Mainline capacity dropped 22.9%.

Delta's second quarter load factor of 75.2% was 1.8 points better than last year but still down 2.3 points compared to the benchmark year 2000.

Passenger RASM growth rose 1.6% versus the second quarter last year.

This improvement was aided by the Atlantic and military charter performance.

Passenger RASM still remains, however, 11.2% lower than the year 2000.

Turning briefly to the geographic entities and beginning with North America, the North America RASM many, including the wholly owned connection carriers was up 2.9% versus the second quarter of last year.

North America traffic dropped 4.3% on a drop of 7.5% in capacity, which push load factors up 2.5 points.

Yield was down six tenths of a per cent versus last year.

In the Atlantic arena, RASM rose 9.6%, on a capacity decrease on the quarter of 25.3%.

Atlantic traffic declined 26.2% causing load factors to be down one point, while yields rose 10.9% in the quarter.

The strong yields were driven by reduced capacity and a stronger Euro exchange rate compared to the U.S. dollar.

In the Latin America region recorded a respectable rise of 11% on a 16% drop in capacity.

When we compare our mainline year over year revenue to the major network average we expect that Delta will again outperform the industry for the second quarter as we consistently have for the past 13 months.

The factors that have helped our performance include deeper capacity cuts, a significant restructuring of the DSLU, the Dallas Fort Worth hub which regauged capacity, and our continued emphasis across our system on connection carrier feed.

Nevertheless, it does remain true that returning to sustainable profitability is the only true benchmark to measure success.

Turning to the four special topics which I mentioned earlier, uh, let me begin with the post-war capacity.

Responding to the war-related decline in demand in April, Delta suspended service to nine of the 13 European destinations which we serve from Kennedy Airport in New York and reduced frequency to one other.

By June, Delta resumed all the suspended markets except JFK to Milan, which will resume next month.

In the meantime, this market has been covered seamlessly by our Skyteam partner, Air ltalia.

As a result of these restorations, transatlantic capacity went from being down 25% year over year on the second quarter, to an expended decline of 12% in the third quarter.

Going forward, Delta will, as always, restore capacity only as passenger demand returns.

The second topic is military charters, and Delta is very, very proud of our role in the air-lift of troops and supplies to the Middle east in the first half of this year.

In the first six months we flew 245 military charter missions transporting more than 47,000 troops and related military personnel.

Thanks largely to our engagement Delta's charter revenue was up sharply this quarter versus last year, up to $71 million.

The third topic is the launch of our low fare operation Song.

And we are very pleased to report that we did begin the launch as scheduled during the quarter.

By the end of June, Song was operating in nine markets, and we still plan to increase to 28 markets by November.

Our current fleet is 10 aircraft and that will also rise to 36 aircraft, uh, by the fourth quarter of this year.

Everything about Song's performance remains on goal.

Traffic looks very positive with load factors running consistently above 70% since launch, completion rates were better than 99.9% in the second quarter and unit cost performances tracking as planned.

Acceptance by the traveling public has been very positive and our onboard food sales have surpassed expectations both in pleasing the customer and in revenue generation.

Turning now to the new alliance with Northwest and Continental, beginning on June 1st, passengers were able to accrue frequent flyer miles on any of the three airlines, and as of now our passengers are able to redeem miles on Delta, Continental, or Northwest.

By June 2004, the partnership will field 2600 codes on share flights and we have the potential of doubling that by June 2005.

We now estimate that it will annually add approximately $200 million of revenue benefits when fully implemented.

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

Among the nine major carriers, a historically measured by the DOT, our second quarter on time arrival rate improved significantly over last year.

In fact, it rose 6.3 points to 85.1% of all flights arriving within 14 minutes.

This placed us in second place among the major carriers as of July 9th.

And our completion factor was 99.6%, slightly ahead of 2002.

This ties us for second among major carriers year to date, an improvement from our sixth place ranking last year.

These two measures reflect Delta employees' continued engagement, focus and professionalism in these times of change.

Now to discuss Delta's financial performance and related matters, I'd like to turn the call over to our Executive Vice-President and Chief Financial Officer, Michele Burns.

Good morning.

Let me begin my remarks by saying that Delta is encouraged by what we see in the early post-war environment.

Truly there are some significant challenges ahead.

Therefore, as I discuss the financial results of the June quarter, there are two key messages I'd like you to take away.

First, as we continue towards recovery, we will remain focused on building liquidity and preserving cash.

Second, the road to recovery requires us to significantly change our cost structure.

During the June quarter, we announce details of our profit improvement initiatives.

These initiatives well underway we are transforming our business and consuming a strategy that will lead Delta toward recovery and future profitability.

First let's discuss our performance for the June quarter.

Delta reported net income of $184 million or $1.40 diluted earnings per share.

However, excluding unusual items we reported a net loss of $237 million or $1.95 loss per share.

The unusual items total $420 million net of tax.

This includes the $251 million security reimbursement received from the government during the quarter, and 176 million from the same of our equity investment in WORLDSPAN.

Let me pause for a moment and provide some perspective.

Given the impact of the war and continuing industry challenges, Delta made great strides this quarter.

However, our net loss for the quarter excluding unusual items, was still 75 million worse than the prior year.

It is obvious that we must remain diligent in our recovery efforts for a long period to come.

For the month of June, Delta reported an operating income of 31 million.

Positive cash flow from operations was 335 million for the June quarter, excluding unusual cash items Delta achieved break-even cash flow from the operations in the quarter.

The unusual cash items include: 398 million of government reimbursements and a reclassification of 56 million to restricted cash during the June quarter.

Our cost performance for the quarter includes the following: CASM for the quarter excluding unusual items was up 9.7% while in line with our initial guidance provided last quarter it is important to understand the drivers of this increase.

Of the 9.7%, 2.3% was due to increases in fuel price. 7.1% was due to the short-term capacity reductions driven by the war in Iraq.

Adjusting for these items our CASM would have been flat compared to the prior year.

While fuel prices were better than the first quarter they still remained at 21% higher than the prior year.

Fuel neutralized CASM excluding unusual items was up 7.4% from the prior year.

Additional details regarding our cost performance for the quarter include: Items pertained to salary and benefits remains a challenge of 29 million from the prior year.

Driven by pensions, BCI growth and pilot-rate increases.

These increases total more than 117 million than from the prior year.

However, our focus on productivity and our profit improvement initiatives helped offset a majority of the increase.

Passenger commissions line item continues to see significant improvement for the June quarter this expense was down 44%.

Maintenance calls were down 12%.

The majority of the decrease or approximately two thirds is due to process improvement in six initiatives.

The other one third is due to reduced flying, grounding of the MD11s and the retirement of the 727s.

It's important to note that our safety remains unchanged.

Over the past year, Delta has taken action in the capital markets to help us manage through the financial crisis.

This quarter we had some unique strategic opportunities that allowed us to enhance our liquidity position.

As mentioned previously, excluding unusual cash items, we achieved break-even cash flow from operations.

Therefore, our own net expenditures were for non-fleet capex of 101 million, and combined with cash flow from operations this resulted in a daily cash burn rate for the quarter of 1.1 million per day.

During the quarter we seized several opportunities to build cash, as a result, Delta ended the quarter with 3 billion in cash, of which 2.8 billion is unrestricted.

This is up from the 2.5 billion of cash and short-term liquidity in the March quarter.

On June 30, 2003, our total debt was 12.2 billion and our all-in debt to cap rate show was 95%.

As you know we have embarked on our 16 company-wide profit improvement initiatives following the three broad categories.

Travel process and customer service initiatives, operations and product initiatives, workforce initiatives.

Let me give you some examples of where Delta is already realizing significant benefits.

Across the Delta system we are rolling out check-in tech knowledge and airport productivity for process improvement.

Delta.COM check-ins have gone from just 250,000 in 2001, to over 21 million check-ins expected this year.

And by 2005, our goal is to have 95% of our check-ins through alternate channels such as Delta.COM, deoff and curbside.

These initiatives have led to an 8% productivity enhancement this year, and will represent savings of approximately 95 million in 2003.

In the maintenance arena, we have been able to revamp our line maintenance layover checks by eliminating unnecessary work without compromising any requirements.

Overnight checks have been reduced from 289 per night to 142 per night.

Translating these savings to a full year results in over 51,000 overnight checks being eliminated.

Over the last two years we have also achieved a reduction in aircraft out of service of approximately six per day, and an improvement of dispatch reliability by 26%.

By implementing six sigma and lane overhaul 757 engines has been reduced from 50 days to 38 days.

This has allowed us to increase capacity 50% from 12 to 18 engines per month, delivering greater utilization and availability, as well as improved aircraft maintenance engine productivity.

Overall these maintenance initiatives combined with many other specific initiatives are anticipated to provide 110 million in benefits in 2003.

Improved scheduling tech knowledge for pilots and flight attendants is expected to significantly modernize our crew scheduling process.

This will be particularly helpful for recovering from a regular operation, and improving crew productivity.

Combination of these and further crew resource productivity initiatives will help yield 150 million in annual savings when fully implemented.

Our profit improvement initiatives are on track to achieve 1.3 billion in savings initiatives for 2003, as compared to 2002.

When netted against cost pressures, such as pension and employment costs, this will result in a net improvement in operating profits of 800 million.

These improvements have already been included in the guidance we have been providing to you during the course of this year.

As previously indicated, we expect our savings initiatives to grow to 2.5 billion by 2005, or 1.5 billion net for cost pressures.

Now let's discuss guidance for the September 2003 quarter and beyond beginning with capacity.

Consolidated basis we now expect that capacity for the full year 2003 will be down five to 6% versus 2002 and down 13 to 14% versus 2000 levels.

Mainline capacity for 2003 will be down 8% to 9% versus last year, and 18% to 19% following 2000.

Looking at the details of that quarter.

For the third quarter consolidated capacity will be down 6% to 7% over 2002.

And for the fourth quarter, consolidated capacity should be down 3% to 4% over 2002.

Turning to cost guidance for the September quarter as a result of the 6% to 7% capacity reduction, we expect consolidated CASM excluding unusual items to be up 6% to 7% and neutralized CASM to be up 5% to 6% versus prior year.

For the full year consolidated, CASM excluding unusual items is expected to be up 6 to 7% on a fuel neutralized basis CASM for the full year will be up approximately 4% to 5%.

Let me provide you some color since the increase in unit costs for the year contradicts the savings we just referred to from the profit improvement initiatives.

Of the four to 5% increase in fuel neutralized CASM, 5.4 points contributable to capacity reductions related to the war. 2.2 points is related to the increases in Delta's pension costs.

Absent these two pressures Delta's unit costs for the end of the year would have improved 3% to 4% to indicate the positive impact of the initiatives.

Now I'll provide additional guidance for the second half of the year.

Turning to fuel in the September quarter we are 54% heads at a price of 79 cents per gallon.

For the December quarter we are 45% heads at 76 cents per gallon.

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

Turning to capex, we expect our capex for 2003 to be 1.5 billion, of which 700 million has been spent in the first half of the year.

Our full-year capex consists of 1 billion for RJ, 251 million for aircraft inventory. 279 million for non-fleet expenditures which is largely comprised of technology spending to enhance those operational productivity and the customer experience.

For the September 2003 quarter, we expect a loss between 200 and 250 million, similar to the losses in the September 2002 quarter including unusual items.

Looking forward to the September quarter.

July and August books load factors were slightly ahead of last year, while September is still lagging behind last year but improving.

The Atlantic and Pacific entities are still recovering from the worst decline in recent years and are still behind the prior year, particularly for the end of the summer.

Latin America continues to show a fair amount of strength.

It's important to note that even with the recovery in book load factor we still expect absolute traffic levels for the summer to be significantly below last year.

In closing, during the last half of 2003 and beyond, Delta will continue to transformation of our business, creating an airline that is cost competitive and quick to respond to new opportunities.

We still have a long road ahead, one fraught with many challenges, yet we are committed to our future and share a sense of urgency.

We have the strategy, the tools, and most importantly the talent to face these challenges head on.

To re-establish Delta's financial stability in preparation for the future.

That concludes our quarterly conference call.

At this time we are happy to take your questions.

At this time we are ready to begin the question-and-answer session.

If you'd like to ask a question, please press star 1.

You'll be announced prior to asking your question.

To withdraw your question you may press star 2.

Due to time restraint, please limit your questions to one.

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

One moment for the first question.

Our first question comes from Helane Becker of Buckingham Research Group, Inc. .

You may ask your question.

Thank you very much, operator.

Michele, with respect to your comments on the outlook for the third quarter, did -- did you also comment or included in your lost estimate are you including all pension expenses and all other expenses?

Yes, that loss estimate is all in.

Okay.

Thank you.

Susan Donofrio of Deutsche Banc, you may ask your question.

Yeah, hi.

I just wanted to -- I know you can't say too much about the pilots, but I just have a question as to how -- how confident you are that, you know, the pilots, you know, are looking at the numbers relative to the other carriers.

And my other follow-up to that is, you know, do you have a contingency plan on how to get your costs in line,, you know, if the pilots aren't on board and what about the other two workforces that aren't unionized, are you going to be, you know, in -- working kind of with them, you know, with respect to, you know, -- to cost initiatives?

Uh, typically -- Susan.

First with respect to your question on whether the pilots appreciate the differences between the Delta pilot compensation and the others, I think the answer to that is clearly yes, they do.

As I think you know, as part of Delta's normal activities in preparation for any kind of a negotiation they rely very heavily on economic analyzes and even the hiring of independent financial counselors due to go through and do independent analyzes away from the company.

We have shared all of our information with them to enable us as best an analysis as they could possibly do and to support their independent efforts.

When the pilots announced that they would engage in constructive negotiations with the Company, they indicated to the pilot group in its entirety that the differences in the pilot situation at Delta relative to the competitive need justified entering into these negotiations before May of 2005, which would be the normal amendable date of the contract.

So I think quite clearly the pilots have indicated publicly a clear understanding of the need to engage in these discussions.

You know, relative to the what-if contingency plans, is -- as you've heard, we have a very, very aggressive program here through our profit improvement initiatives going on.

And we're looking at -- across the board at that.

Generally speaking, the wage rates of the other employees throughout the companies does not really represent a substantial opportunity for savings for us because Delta is far more in line, you know, with respect to those wage rates when compared to -- to our competitors, including those who have just made changes by virtue of the -- the bankruptcy process or in America's case that they closed the bankruptcy process.

Having said that, we're going to be looking at savings everywhere we can.

We've made very substantial changes in the pension plan so far, and with -- on the medical side.

And further examinations in the context in those arenas will continue.

But we -- we obviously -- and everybody knows how crucial it is to have a good outcome with respect to the pilot discussions, because that's the area where the most substantial differences and where the leverage does lie.

What about your other workers?

That's just -- I think I just made the point on the other workers.

Uh-huh.

Susan, which is that the -- you know, the general wage-rate comparisons are much closer so I would anticipate there would be some changes over time, but they don't really represent a substantial avenue for significant, say, cost reductions just by, saying, making an across the board wage rate type changes.

And would that be the same with work rules?

We continue to look at work rules and of course we don't really have the constraints of contracts.

Right.

To which we have to refer because we -- we're not unionized in those workforces and so, as I think you know, Delta has always been an organization that paid competitively on a wage-rate way but we've always had productivity advantages relative to the other airlines and those productivity advantages continue R&D are quite considerable in our -- enabling us to do as well as we are under the circumstances.

So.

Great.

I think we'll continue to look for those and a lot of them in terms of process changes are embedded in the -- in the -- in the profit improvement initiatives that we've got going on here.

So that search for -- and very aggressive examination of improvements continues.

But -- but there's no question -- but that the leverage was improving the cost structure lies very heavily in the pilot arena.

Great.

Well, thank you very much.

Susan, this is Fred.

If I can just add one point.

I do want to quantify that we have achieved a savings of just north of $200 million in the benefit line for the non-pilot workforce.

And if you add -- if you take a generic measure of employment output, let's say costs per weighted departure or parts for passenger and you add the effects of productivity which was high and has gotten higher, the continued savings in the benefit line and, uh, the wages, we do enjoy a productivity advantage all in over the average of our network peers even after the restructuring of the three carriers.

Great.

Well, thank you.

Sam Buttrick of UBS, you may ask your question.

Yeah, hi.

By your own account, your cost reduction efforts are not contingent upon wage reductions, therefore, if we look at what essentially becomes a 20% targeted reduction in unit costs based on 2003 costs, you're expecting larger non-wage cost reductions than any of your major competitors are targeting and so I'm -- what makes Delta unique in this regard, as best as you can tell, and secondly, with a 20% reduction in unit costs sought from 2003 to 2005, does that -- should we expect your unit costs to be down 10% next year and 10% in 2005, is -- you know, how does that -- how does that play out?

Let me start by saying that you're right about the wage-rate comment.

I would say to you that as you look at employment costs in general, many of the things that you heard me speak to are driven by productivity improvement.

And so the productivity that is being built into Delta, into how we process the airline day-in, dayout, is driving significant amounts of these savings.

Their bucketed in a lot of different places in terms of the savings that are manifested but they do come out of and through our capabilities and marshal the efforts of our employees in a very meaningful way.

We are experiencing cost pressure increase this year for pension and others, I see some of that in the years to come.

In the next couple of years they will be moved through the program, you will see accelerated reductions on an absolute basis.

We do not have that number to give you for '04, '05 -- at this time.

In addition, capacity add-backs after this year -- through the end of this year and into the next year, as necessary, will have an impact on this overall CASM calculation as well.

Okay.

Secondly, I guess I'm a little puzzled by the reference to 2000 as a -- as a normal revenue year.

On the one hand I understand it in the context of not, you know, having -- you know, a 9/11 or an Iraq war.

You know, on the other hand, I think by most accounts it was -- there was a spectacular, you know, bubble in business travel that culminated in 2000, and I guess I'm perhaps a little concerned that -- that reference to 2000 and a business travel bubble as normal, you know, may result in some bad planning.

Uh, Sam, that's a very good point.

This is Fred.

I take your point.

We referred to it because it was the last -- what I would call a reasonably stable year.

Uh-huh.

Everything we had said and done for the past year and for the next couple of years does not -- does not -- addresses what we regard as a permanent reduction in the revenue environment.

That's the entire point.

Uh-huh.

Of our business plan.

We do not see returns to 2000 levels any time in the foreseeable future.

And we believe that we must build our business to the reality that a reduced revenue environment is a permanent feature of the landscape.

So I take your point that normal is not the -- the appropriate word and --

I understand.

And I -- I want to stress that we do not regard the return of those levels as -- anywhere on the horizon.

Okay.

That's great.

Thank you.

James Higgins of Credit Suisse First Boston.

You may ask your question.

Yes, hi.

A question in the change in the cost outlook, and I think I have my numbers right.

But at the -- on -- in the first quarter call, you were looking for a full year ASMs, to be down 6% to 7%, you're now saying 5% to 6%.

You're looking for fuel CASM to be up at the end of the first quarter and you're now saying up 4 to 5%.

So you may have touched on this and I just missed it but can you tell us where the slippage is taking place?

Um, we'll go back and reconcile with you.

I think that one moving part is capacity, as we move through the remainder of the year.

And as we go through the third quarter we will be adding some capacity back, uh, and as you can see, though, we still intend to be I think three to 4% down for the year.

So I believe that some of the difference may well be in the capacity line because the costs are on track.

And if it's okay with you, I'll just have Gail give you a call and reconcile back to where you are and make sure that we are all talking about the same numbers.

Okay.

Yeah.

That would be very helpful.

If I could also -- when you -- you may not have this figure at your fingertips either.

But when you take a 757 out of the hub and spoke network and put it into Song, you're presumably backfilling with aircraft for the most part.

Do you have -- do you know what the sort of average change in gauge is when you do that?

In other words, take a 757 out, you put a new airplane in, what's the average change in number of seats when you do that?

Well, I think that this has to be regarded in terms of -- there's a lot of movement.

There's an increased stream of RJ, there's some permanent aircraft retirements accompanying all of this.

But overall, an aircraft or aircraft swap takes you from maybe 180, uh, down to about 130, 150.

Overall, I would say that in the secondary hubs of Cincinnati, Salt Lake, and Dallas, we are close to achieving about a 25% reduction in average hull size when we get to the end of the spool-up cycle of Song, which will be October.

Great.

Thank you very much.

Thank you.

Gary Chase of Lehman Brothers, you may ask your question.

Good morning guys.

I just wanted to see if you -- if we could get a little more color on Song, specifically -- I was wondering if you had any revenue data that you might be willing to share with us.

You know, you mentioned load factors that are in --, you know, consistently above 70%, some of the competition in that market, though, is well above that.

Um, you know, another issue related to Song was, you know, you've historically had a fair mix that was, say, heavily weighted towards the low end.

Just wondering if there's anything that you're seeing out of Song that suggests improvement there, and is there any way for us to gauge how you're doing as, you know, a RASM basis or what have you?

Uh, well, we -- we're not reporting Song revenue as a stand-alone item.

I think also a load factor of -- north of 70% for a -- what's effectively a start-up is an appropriate place to be.

We are also moving into, right now, the low season for these high-volume leisure markets focused on -- on the South east.

So it's just a little bit early to say, but I do think that we are very encouraged by the -- the numbers we're seeing, and particularly the passenger acceptance.

Is there any way to baseline -- Fred, maybe just all of Florida versus last year or something like that, to give us a sense of how it might be helping?

It's too early at this point.

We're in a transition mode.

Okay.

The second question, just, you know, following up on that was with -- the aircraft that we've seen both out of Air Tran and out Jet Blue, just was curious if you are thinking now that the growth of Song needs to be more aggressive?

Uh, Gary, just a quick shot at that.

Um, we started -- we're starting off with -- as you know with 36 airplanes and we'll monitor that.

We have plenty of 757s in the Mainline fleet.

So if it became appropriate to expand Song, we clearly would do so.

The expansion that we're seeing with the low-cost carriers and even, I guess, Richard Branson's announcement this morning in the paper, is clearly consistent on the continuing challenges that the Mainline carriers face with the discount competition.

And I think that the general principle that we've established by launching Song as aggressively as we have in the midst of a very challenging period is demonstrable of our commitment through this sector of the business.

And we clearly will expand it and we intend to be extraordinarily competitive with respect to any competitors of a discount nature who kind of deal with us in what I'd call "Delta territory".

So I think you could have an expectation that it will increase.

I don't think it'll increase by huge percentages, but I think it probably will go higher than 36 but our current plan is 36.

Thanks a lot.

Jamie Baker of J. P. Morgan Securities, you may ask your question.

Oh, good morning.

A question presumably for Fred.

AMR St. Lewis decision obviously resurrects of how many domestic hubs are necessary.

I've considered Salt Lake to be on the short-list for some time now, you know, not to mention, you know, a couple others east of the Mississippi.

Could you comment on the performance of Salt Lake and any discussions you might be having with local community leaders or the airport there?

Uh, we do not have any foreseeable plans of dramatic changes to our hub structure.

I think it's appropriate to remember that we undertook a massive restructuring of Dallas Fort Worth, dropping mainland departures from 85 to 55 a day, increasing RJ departures from 130 to 210.

Cincinnati has been on the evolutionary track for a long time.

And of course with our very strong position in the RJ segment we have a number of flexible opportunities.

But the point does remain that unless Delta overall does return to a cost-competitive position which will permit us to be profitable in the long term, there certainly aren't any sacred cows, there's nothing to report now.

As a follow-up with AMR, you know, planning to redeploy St. Lewis capacity down to Dallas, does that change your -- I recognize it's very early in the process?

No, it does not.

Not a this stage.

Okay.

All right.

Thanks.

Mike Linenberg of Merrill Lynch you may ask your question.

Yeah, hay, good morning.

I guess two questions and I guess both of these would be directed at Fred.

You know, Fred, you did mention the Dallas fort hub and you have made a significant restructuring of that operation and I was just curious, any numbers that you could maybe provide us to give us a sense of the change, because it was such a dramatic shift, and I don't know if it it's --, you know,, maybe increase in margin points that you've seen since you've made the change or, you know, how much of the revenue that you're holding on to as a result of going to a smaller-type operation?

Uh, well, the only thing I'll say Michael is that the -- the unit revenue increase exceeded all of our expectations,, you know, we don't provide a lot of granule lar detail on hub performance per se, but I will say that the unit revenue increase exceeded all of our expectations significantly, it's a very, very encouraging outlook, or let's say very encouraging actual and the outlook is equally encouraging.

Okay.

And then just my second question, Fred.

I think one of your competitors who is currently or recently started service between Atlanta and the LA Basin made a comment that Delta was losing something on the order of 45 million dollars a year in that market and I was just curious if there's anything that you can add to that, whether that number's out there or maybe that's local as opposed to, you know, not including the amount of connect traffic that you guys carry.

Anything on that front would be helpful as well?

Well, I don't know who the competitor is or what he or she's perspective is, but that's news to me.

Traffic's up, it has had the stimulating effect new entrance have had the stimulating effect in the market.

Our load factors have increased substantially.

And we are -- it is obvious that the competitive intensity has increased as well.

But we have -- we feel that we will be able to deal with that.

Okay.

Thank you very much.

David Strien, bear Sterns, you may ask your question.

Okay thanks the question was answered.

Thank you.

One moment.

William Greene of Morgan Stanley, you may ask your question.

Yes, just two quick questions, Fred.

The first on Song yields on a staple-store sales basis, that is relative to what you replaced, are they up or down and for Michelle pension cash funding for calendar 2003 and 2004, if you could remind us of those numbers?

It's really too early to say.

We do want to remind everybody we've got nine aircraft in eight markets so it really is a bit early to say on that.

So we'll watch that and report what we will report appropriately over time.

Michelle.

For the pension funding calculations, for 2003 we made a payment of 76 million into the pension fund in March and that has all requirements for pension-fund contributions I would also it was in excess of the needed amount.

Secondly, for 2004, the estimate leads given is 350 to 450 million of pension fund contributions for that period.

And that's not changed?

And it's not changed.

Thank you.

Our next question comes from Raymond E. Neidl of Blaylock & Partners, you may ask your question.

Yeah, two quick things.

One for Leo, one for Fred.

Leo, being a leader in leading airline spokesman in the industry, what's your assessment of maybe getting the security costs exemption extended beyond the September 30th deadline, are you getting good feedback from Washington negative feedback or what do you think the chances are of you even trying to do that?

I think that right now, Ray, I'd say that the outlook is negative on that, meaning that it is our expectation that the security fee will be added back in October, which is the start of the government fiscal year.

You know, that is disappointing because in effect it does represent a kind of a tax increase on the industry at a time when --, you know, when we're August struggling with the revenue issues that we've outlined here and I suspect that our other competitors have outlined in other calls.

You know, the government is obviously grappling with its own budgetary problems, but I do think -- and obviously we were pleased with -- as I mentioned in my opening statement, that they acknowledged responsibility for -- for the security challenges and paying for them as part of the legislation passed in the spring.

But we've got our work cut out for us in terms of further discussions in this respect, just because I think of the budgetary problems that the government faces, but my -- my expectation right now, Ray, is that that -- that fee will come back in October.

Do you have an estimate of the costs in the fourth quarter, what that would be then?

I don't.

Okay.

I don't have that estimate.

I could have Gail get back to you.

With respect to the security fees that we will be paying there.

Right.

And, Fred, it's been beaten to death here a little bit on Song, I'm just wondering, it still sounds like it's a work in progress and I'm just wondering as far as -- originally you weren't going to go in a hub with Song and then you decided to go in, what's the status now of where you're going to fly with Song?

Well, we've made -- we've announced a number of our remaining market expansions but not all of them.

I think the characterization is that there will be a lot more route diversity in Song.

What I think we're seeing is a lot of transference of market practice and perhaps there's not going to be two or three different industries going on here, but maybe one.

By that I mean to say that flying in and out of hubs is not a particular taboo.

Low-cost carriers are buying larger planes and flying longer distances, some of them are building strong brands like jet blue and network carriers are becoming far more productive and more cost competitive.

So all these things are kind of blending.

We -- as I said, you will see a lot of route diversity in Song that we did not see in Delta Express because low-cost competition is not a regional phenomenon but an industry phenomenon and will continue to be so moving forward.

Will it cost customer confusion though if you're operating Song into your business hubs?

We haven't seen any.

Okay.

Good.

Thank you.

Our final question comes from Bill Masters of Bank of New York.

You may ask your question?

Most of my questions have been answered but I do have two relatively minor questions.

The first one for Michelle.

Michelle you talked about the conservation of cash and could there be in the works any further deferral maybe of aircraft delivery very similar to what Continental recently engaged in and is in the process of try to go further that.

And the second question, and just a much more of an administrative thing.

The debt paydowns in the second quarter and capital lease paydowns, that number would be greatly appreciated?

Let me take the first one first.

I'd say that the Delta fleet plan is quite dynamic and has been ever since September 11th and therefore while we are not at this point agreeing to defer aircrafts that are due to come in '05, that is certainly something that we will be looking at as we move forward.

The debt repayment for the quarter, I'm not sure I have that number, but if you'd let me, I will -- I'll -- I'll get back to you on that.

We'll just do a follow up with you on that later because I don't have the number in mind.

Great I appreciate that, thank you.

At this time I'd like to turn the call back over to Miss Grimmett.

Thank you.

That concludes our call for today.

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

Thanks so much.

Bye bye.