達美航空 (DAL) 2003 Q3 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.

This conference is being recorded at the request of Delta Airlines.

If anyone has any objections, you may disconnect at this time. (Operator Instructions).

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

Thank you, Shelly, and good morning, everyone.

Just a few housekeeping items before we begin.

Please be aware that our call today is being transmitted live via the World Wide Web and is being recorded.

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

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

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

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

Some of the factors that may cause such differences are listed in Delta's SEC filings.

Also in today's comments, we will include certain non-GAAP financial measures in the discussion of our company's performance.

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

Before we begin, I would like to as that when we get to the Q&A portion of the call, we limit questions to one question plus one follow-up per analyst.

And with that, I would now like to turn the call over to our Chairman and Chief Executive Officer, Leo Mullin.

Thank you.

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 CFO.

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

For the September 2003 quarter, Delta reported a third quarter net loss of $164 million, including unusual items, or $1.36 loss per common share.

Excluding unusual items, the net loss for the quarter totaled 172 million, or $1.43 per common share.

These results are somewhat better than the forecast of 200 million to 250 million loss, excluding unusual items, which we provided in the June quarter 2003 call.

During my portion of this morning's call, I would like to make a few comments on aspects of the September quarter results related to four key revenue and cost topics that I believe deserve special attention.

First, Delta realized somewhat lower revenue levels for the third quarter of '03 in part because of capacity cuts related to the war in Iraq.

As a second point, Delta followed its plans to add capacity in various markets during September, including markets served by Song in order to be primed for heavy holiday leisure travel.

September is historically a soft month for leisure travel, therefore, during the month, supply exceeded meander.

Turning to my third point, I would note that Delta continues to make good progress in reducing costs as a result of our profit improvement initiative program, a program which we have discussed in previous calls.

Evidence of our success so far can be seen based on a sequential quarter comparison of the June 2003 quarter to the September 2003 quarter.

During that period, Delta's capacity grew 8 percent while operating expenses, excluding special items, remained flat.

These results confirm our ability to absorb the increased cost associated with additional capacity as a result of the cost savings programs already underway.

Finally regarding my fourth point, I would note that despite our progress in reducing cost, Delta has not yet achieved a competitive cost structure, a problem which is primarily related to our pilot costs.

As context, Delta's unit cost measured in terms of cost per available seat mile, or CASM (ph), has for a number of years been among the lowest of any network carrier.

Now, however, Delta's CASM has catapulted to one of the highest in the group per the second quarter '03 reports.

Based on the terms of our 2001 contract, Delta's total pilot costs -- including paid, benefits and work rules -- are now running 80 percent higher than American Airlines.

The role these costs play in Delta's relative cost ranking can be illustrated by calculating Delta's CASM based on our airline having the same pilot cost that America now has.

And to make the comparison fair, the calculation assumes that all other network carriers who have not yet received concessions also have pilot costs no higher than American's.

The results of this analysis show that with these lower pilot costs, Delta's CASM would once more be among the lowest of any network carrier.

Obviously, Delta's chief challenging in achieving a competitive cost structure is related to pilot costs.

Now let me make a continuing point here, which is that no blame can be placed on Delta's pilots based on how this situation develops.

The current contract was achieved through the collective bargaining process and at the time of its conclusion in 2001, it was an appropriate arrangement.

However, the aviation industry has been significantly and permanently altered since then.

As you may know, elections for ALPA's (ph) master executive counsel were held recently and new leadership is now installed.

Fred, Michelle and I will be meeting to discuss Delta's financial situation with the new ALPA team this week on Friday, October 17th, as has been previously announced.

At this time, no (ph) negotiations are in progress and the October 17th meeting is not a negotiating session.

We do, however, remain hopeful that by working collaboratively with ALPA, we can together develop solutions that will allow Delta to grow and prosper and to reassume its financial and strategic leadership position in the industry.

Now let me turn the program over to Fred, who will provide detail concerning Deltas revenue and operational performance for the quarter.

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

I will be discussing Delta's revenue and operational performance before Michelle turns to our financial results.

This quarter was characterized by continued postwar mainline capacity reductions, which translated into higher loads.

The security tax holiday also helped yields and we saw a year-over-year RASM (ph) growth.

However, while Delta's relative year-over-year third quarter performance showed improvements in traffic and revenue, it is not yet at a level required to achieve profitability.

Particularly as we move into the shoulder (ph) and fall seasons, we're not expecting the same demand as we saw in the summer months.

Leo spoke about the need to ensure viability for the long run.

During today's call, we will address what actions are been taken to improve performance and our commitment to making sure that these changes are permanently sustainable.

In particular, I will discuss three initiatives which are not only part of our profit improvement initiative, but are crucial elements in enabling Delta to transform itself for the long-term.

Let me begin as usual by giving you have overview of our September quarter for the consolidated Delta system, including our wholly-owned connection carriers, ASA and Comair.

System capacity dropped 6.3 percent year-over-year, while the mainline capacity dropped by 9.4 percent.

Delta's third quarter load factor of 76.9 percent was 2.6 points better than last year.

Passenger RASM rose 8 percent versus the third quarter of last year, and this produced a passenger revenue increase of 1.1 percent on significantly reduced capacity.

The greatest strength was seen in the leisure-driven summer months of July and August with somewhat weaker results for the month of September.

Turning to the geographic entities and beginning with North America, our RASM, including the wholly-owned connection carriers, was up 6.7 percent versus last year.

North American traffic dropped 7/10ths of a point on a drop of 4.6 percent in capacity, which pushed our load factors up by three points.

Yield rose 2.6 percent versus last year.

In the Transatlantic markets, RASM rose 10.5 percent versus last year on a capacity decrease of 12.3 percent.

The traffic on the Atlantic declined 12.3 percent, causing load factors to be flat, while yields rose by 10.5 percent.

The strong that yields were driven principally by reduced capacity and a continuing stronger euro exchange rate versus the dollar.

Latin America has also held up well in this difficult climate with RASM up 16.9 percent on a drop of 19 percent capacity.

As has been the story for the past five quarters, we expect to hold our own in year-over-year RASM growth when compared to our peer airlines.

Despite this RASM performance, revenue during the quarter had some noise in the results, driven by a couple of strategic changes in our network.

Similar to the rest of the industry, Delta had a robust July and August.

In September, additional pre-war capacity was added back on the mainline.

This was largely due to Song's implementation with Song's capacity increasing over 50 percent from the prior month -- that would be August -- and increases in other leisure-oriented market.

These strategic capacity increases dampened revenue performance for September, but with these changes now complete and these new flights ramping up, we are poised to compete aggressively as we head into the fourth quarter holiday season.

I would now like to turn my attention to the aforementioned profit improvement initiatives.

First, let me state that we are managing the profit improvement initiative program in a very focused, cross-divisional and highly integrated fashion with a program team that reports directly to me.

Three of the items I'd like to mention are -- first, the recent restructuring of Salt Lake City and Dallas-Fort Worth hubs; second, our preliminary assessment of the Northwest-Continental alliance; and third, Song's first six months of performance.

First on the hub story, in April, we completed a major restructuring on Dallas-Fort Worth.

By leveraging our connection carrier strength, we increased our daily departures overall while decreasing overall capacity by 17 percent.

This resulted in improved frequencies to most cities from Dallas.

The goal was to achieve sustainable profitability in today's environment and the preliminary results are very encouraging.

In fact, in the five months following the restructuring, the Dallas hub has had the best financial improvement of all of the hubs.

In a similar vein, we also announced a major restructuring of Salt Lake City at the beginning of this month.

This will take effect with the January schedule.

Departures will actually increase to their highest level ever at that hub while overall available seat miles will decrease by 13 percent year-over-year.

Both of these initiatives are designed to establish these hubs as sustainable, long-term profit makers.

And turning now to our new domestic alliance with Continental and Northwest, we began the co-chair relationship in June and were well on our way to implementing the co-chairing across our systems.

As of the middle of October, Northwestern and Continental will co-chair on approximately 425 Delta flights and Delta will co-chair on a similar number of their flights.

By the end of this year, Continental and Northwest will each co-chair on 650 of Delta's flights and we will co-chair on 650 of each of theirs, providing a total of 2600 co-chair flights across the partnerships.

We are also particularly pleased to have the Air France-KLM transaction announced.

We now anticipate welcoming Northwest, Continental, as well as KLM into SkyTeam at some point in 2004, assuming the European Union approves the Air France-KLM agreement as envisaged.

We therefore look forward to seeing SkyTeam undisputedly (ph) positioned as the clearer leader among truly integrated global alliances.

Turning to Song now, customer reaction to the overall Song product and service has been very, very positive, including the food for sale program.

With the addition of more east-west flying, Song's scheduled totaled aircraft utilization is including from just under 11.5 hours per day in August to just under 12 hours in the month of December for the 36 aircraft involved.

However as we mentioned, September traffic was below our plan as we were aggressive in adding capacity in a basically non-leisure oriented month.

Nevertheless, with the last phase of implementation in process, we now have everything in place for the holiday booking period.

The next big steps for Song include introducing the first aircraft with a state-of-the-art in-flight entertainment system later this month and equipping the full fleet with this superior product by the end of the first quarter of 2004.

Finally, I would like to turn briefly to our operational performance for the quarter.

One of the most important tenets of our brand promise is to value our customer's time and our third quarter results affirm that ambition. 81 percent of scheduled flights for the quarter arrived within 15 minutes of schedule, despite significant challenges of Hurricane Isabel and blackout in the Northeast.

This brings our year-to-date on time within 15 minute arrival performance to 82.8 percent.

I'm also pleased that we recorded an impressive completion factor of 99.1 percent for the third quarter.

I would like to hereby thankfully acknowledge the productivity, motivation and teamwork of all Delta people who delivered this great performance.

In summary, while we have made progress, these results show that Delta's challenges are far from over.

I am confident, however, that we have the tools and the talent to achieve this goal.

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

Thanks, Fred, and good morning.

Thank you for joining us today.

Let me begin with some comments regarding our September quarter performance.

Overall, the quarter finished better than we expected with solid summer revenue performance in July and August, followed by some softening in the month of September.

On the cost front, we performed better than expected, driven by the momentum from our profit improvement initiative.

Like this momentum, Delta is very aware of its current position, the competitive challenges we face and short-run comparisons to our peers.

Our mission is to ensure that we choose the right path for long-term success by building sustainable changes to our business.

Let's first get through the high-level details of the quarter.

Our earnings performance for the quarter resulted in a net loss of 164 million, or $1.36 diluted loss per share.

Excluding unusual items, we reported a net loss of 172 million, or $1.43 loss per share.

The unusual items totaled an $8 million gain net of tax.

This primarily represents a gain on the extinguishment of debt related to the exchange offer that was completed in September.

Cash flow from operations was positive for the quarter at 201 million and we had operating profits in both July and August.

CASM (ph) for the quarter, excluding unusual items, was up 4.1 percent.

Fuel (ph) neutralized CASM, excluding unusual items, was up 2.8 percent from the prior year.

This was entirely driven by war-related capacity reductions.

We recognize this cost performance is very different from our peers.

Largest difference is driven by approximately 1 billion in annual cost disadvantage pilot cost (ph) structure.

Leo has said that this is not the fault of Delta pilots, but improving this financial differential is crucial to our recovery.

If Delta had the estimated pilot cost structure of American Airlines, we would have reported a loss of 46 million versus the current net loss of 172 million.

Furthermore, analysis shows that if we were to extrapolate American pilot rates to all carriers who have not received concessions and then calculating CASM, Delta's cost performance ranks among the top performers across the industry.

There were other challenges we concurrently addressed (ph) to become cost competitive and we have spent much time talking with you over the past several quarters regarding our profit improvement initiatives.

I realize it is difficult to see year-over-year changes in individual line items.

However, the progress can definitely be seen by analyzing sequential performance from the June 2003 quarter to September 2003 quarter.

Despite the fact that capacity for the September quarter increased 8 percent from the June quarter and despite higher fuel prices, our operating expenses remained flat.

This was possible due to the success of our profit improvement program.

For example, we have increased airport productivity through technology, allowing us to handle 27 percent more passengers per hour than we could in 2001.

Overall, our airport and ramp initiatives are projected to save Delta approximately $90 million in 2003.

Our recently announced changes in flight attendant work rules will reduce flight attendant nonproductive time by reducing reserve staffing and leveraging technology to maximize schedule efficiency.

This initiative will save $40 million annually.

We're implementing food for sale and revising catering processes across our network.

These actions will results in $70 to $80 million in additional savings once fully implemented in 2004.

These initiatives are designed to be sustainable in the long run and further initiatives are underway.

Delta also continues to be focused on its liquidity position by preserving cash.

The hard work of our employees generated a $201 million operating cash flow for the quarter.

During the quarter, two items in particular should be highlighted.

In September, Delta completed a debt exchange offer for 800 million of unsecured notes due in 2004 and 2005.

As a result, Delta will defer until 2008 the 220 million of these maturities.

In July, the company announced the decision to discontinue the payment of quarterly common stock cash dividends.

Delta expects to realize an annualized cash flow benefit of approximately 12 million as a result of this decision.

Delta also ended the quarter with 2.9 billion in cash, of which 2.7 billion is unrestricted.

On September 30, 2003, our total debt was 12.4 billion and our net debt-to-cap ratio was 96 percent.

Delta will continue to focus on preserving liquidity.

Today, Delta announced the sale of certain aircraft scheduled to be delivered in 2005.

Let me provide you with some details of this transaction.

Delta entered into an agreement to sell 11 Boeing 737-800 aircraft scheduled for delivery to Delta in 2005.

The transaction also includes an option to acquire up to 10 additional aircraft scheduled for delivery to Delta in 2006 and 2007.

This transaction will improve our liquidity by eliminating approximately 500 million of capital expenditures through 2005.

In addition, we plan to defer delivery until 2008 of eight more Boeing 737-800 aircraft originally planned for delivery in 2005.

As a result of the aircraft sale, Delta will recognize in the September 2003 quarter a charge of approximately 26 million net of tax.

Delta currently intends to accept delivery of two Boeing 777 aircraft in 2005, as planned.

These aircraft sales and deferrals are indicative of the challenges we and the remainder of the industry face.

Reductions of CAPEX over the next years will help us maintain our balance sheet as other obligations become due.

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

Fourth-quarter consolidated capacity will be 2-3 percent lower than fourth quarter of last year and mainline capacity will be down 4-5 percent.

Capacity for the full year in 2004 will be up 8-10 percent, more than half of which is driven by war-related restorations.

The remainder of the increases are due to improved asset utilization.

Turning to cost guidance, for the December quarter, excluding unusual items, we expect consolidated CASM to be up approximately 2 percent and fuel price neutralized CASM to be up approximately 1 percent versus prior year.

For the full year, excluding unusual items, consolidated CASM is projected to be up 5-6 percent and fuel-neutralized CASM will be up approximately 3 percent.

Let me explain further, since the increase in unit cost for the year contradicts the savings we just referred to from the profit improvement initiative.

Approximately 5 points of the fuel-neutralized CASM increase is attributable to the capacity reductions driven by the war.

Therefore, had we not decreased capacity, fuel-neutralized CASM for the year would have been down approximately 2 points.

Now I will provide additional guidance for the December quarter.

Turning to fuel for the December quarter, we are 47 percent hedged at 75.8 cents per gallon.

For the full year, we are hedged 66 percent at 78.1 cents per gallon.

Turning to CAPEX, we expect our CAPEX for the December quarter to be 234 million.

Our full year CAPEX consists of 1 billion for RJs, 240 million for aircraft mods (ph) in inventory and 258 million for non-fleet expenditures, which is largely comprised of technology spending to enhance revenue, operational productivity and the customer experience.

Looking at earnings guidance for the December 2003 quarter, we expect a GAAP loss of gender and 225 to 275 million, including the charge attributable to the aircraft sale.

Excluding unusual items, we expect a net loss between 200 and 250 million.

Looking forward to advance bookings for the December 2003 quarter, domestic book (ph) load factor is somewhat behind last year, but the gap is closing and we anticipate that the holiday traffic will be strong.

Latin America continues to show a fair amount of strength and the Atlantic book load factor is running very close to last year and strengthening.

It is important to note that, even with the recovering book load factor build, we still expect absolute traffic levels to be slightly below last year.

In closing, during the final quarter of 2003 and beyond, Delta will continue efforts to build a more competitive cost structure, one that provides a healthy revenue to cost relationship and ensures our long-term success.

We recognize that there are still many challenges and opportunities which still must be addressed.

We remain confident that our strategy is sound and Delta's focus on long-term stability is on target.

That concludes our quarterly conference call.

At this time, we are happy to take your questions.

(Operator Instructions).

Mike Linenberg, Merrill Lynch & Co.

Hi; good morning.

I guess, Michele, regarding the charge that you are taking, the 26 million related to the 737-800s, what is behind that.

Since I know the plans are not on the balance sheet; what is that, a write-down of prepaid deposits?

If you could just elaborate on that.

Mike, it is comprised of a number of items.

There's some capitalized interest, there's some prepaid deposits, there is some accounting issues regarding how these Boeing contracts booked on the balance sheet.

We're still analyzing the details of all of those accounting -- goes-ins and goes-outs, if you will -- and we will update you further and more completely as we complete that more likely than not in an 8-K in the next several days.

As a follow-up to that point, Michele, are you selling these planes at a loss, or can you not provide guidance on that?

I cannot provide guidance on that specifically.

All right, thank you very much.

Glenn Engel, Goldman, Sachs & Co.

Good morning.

Can you go give us what the aircraft utilization was in the third quarter versus last year, and where you would hope to get to in 2004?

Do you mean overall aircraft utilization, or Song's?

Overall.

I do not have that handy.

We can come back to you off-line.

Do you have any guidance for 2004 capacity yet?

The 2004 capacity was to be up between 8-10 percent, Glenn.

I assume that is aircraft utilization driving it?

Aircraft utilization and war-related -- in other words, restoring war-related capacity reductions, coupled with an increased utilization of our own aircraft.

What is mainline alone?

About half of that, I think.

45 percent.

Thank you.

Jim Higgins, CSFB.

The -- you don't mention -- I think you -- if your third party does not exercise the option to buy the 10 730-800s in 2006-2007, I think you still have 32 being delivered.

You comment on the triple-7s; you do not comment on the 737-800s.

Is there anything that we should take away from that?

At this time, we intend to take delivery of the 777s.

But no comment on the 737-800s that are coming in that period?

Which period are you referring to?

2006-2007.

The only thing we're disclosing at this time is the intent to have -- we've executed the option for the purchase of 10 of them.

And at this time, we have no further comment as to the use of the remaining capacity.

Great.

Just to make sure I understood, your fourth quarter CASM guidance includes the expected charge, or excludes it?

Excludes.

Thank you very much.

Helane Becker, Benchmark.

Thank you very much.

There is number that has been going around that 30 percent of your revenues are coming from the Florida markets, I guess.

Can you just talk about how Song is performing, relative to your peer group in that market, and -- relative to who your competition is in that market?

It has been closer to 25 percent of our system revenue is coming to or going from Florida, which contains Delta Connection mainline and the former DeltaExpress historically, and now Song.

With the Song rollout approaching its Phase I of ramp-up the 36 aircraft, we estimate that close to 40 percent of all the leisure traffic to and from Florida will have a Song product available on those routes.

So the big routes will have -- of all the Florida routes, 40 percent will have a Song product.

Due to the steep ramp-up, Helane, I don't think we can make exact judgments about how it is going to look on a full-year basis.

I think we need to get a full year and the full winter season behind us, which is coming up.

But we are maintaining as a result of this and may even grow our leading share in the Florida market, which I think is about 33-34 percent right now.

Great, thank you very much.

William Greene, Morgan Stanley.

Fred, can I ask you to comment on Song one more time, in terms of -- you mentioned Phase I being 36 aircraft.

What does Phase II entail?

We have not really formalized any plans for a Phase II.

We are encouraged by the way Song is performing, and obviously with the way the market is evolving with the very high demand for low-fare products and Song's great cost performance, we're very encouraged by the idea of growing it.

But we have made no formal decision to do so at this time, and such a decision would probably be made, if made, sometime in '04.

Then for Michele, do you have any updates on the pension cash funding needs for '04, for calendar '04?

We're historically estimating, and we continue to have the same number -- a $350 top $50 million payment will would be required in '04.

So no change?

No change.

Okay, thank you.

Gary Chase, Lehman Brothers.

Good morning guys.

You noted that -- I think, Fred, you said capacity growth next year would be plus 8-10 percent.

Can we expect the same kind of incremental economics from you that you saw from the second to the third quarter?

In other words, what is marginal cost going to be looking like as you add the additional capacity?

I think you can expect a similar performance.

Our intention is to bring back capacity with only minor moderate increases in expenses related to variable expenses, and that is certainly our charge and our mission.

I think we ought to remember in making the year-to-year comparisons, Gary, that at least half of that number of the mainline growth is Iraq war restorations.

There's a lot of capacity noise in 2003.

A question for Leo, or I guess anybody in the room.

You obviously have a lot of financial obligations that you have to deal with, pension being just one of them.

You have noted some plans to improve on the earnings front, in addition to what you're asking for from your pilots.

I'm curious for your thoughts on -- do you think that what you have laid out to date is enough to restore your competitive position?

If you can get your unit costs, ex-labor, down 15 percent and get the pilot savings that you need, will you have achieved what you think you need to in order to shoulder your capital structure and be successful for the long-term?

The answer to that is an unequivocal yes.

If we get an appropriate pilot agreement, everything else with respect to the profit improvement initiative is going well and is in fact slightly ahead of schedule by all of the metrics, and we measure that very carefully.

So the quick answer is yes.

Is appropriately (ph), or would you define that as -- you threw out a number earlier that there was something like a billion dollars.

Is there a number that we can use to think about what -- how you're viewing an appropriate pilot agreement?

No, Gary, you can't.

I think that the -- from our standpoint, first of all, we all have to recognize we're in a collective bargaining process here.

It is out of sequence obviously since our contract is not amendable until May of 2005.

And so we are not following the usual process here.

And so where exactly this comes out is -- obviously, we have some numbers which are acceptable to us and we just have to go through a negotiation with the pilots and then determine where we land on it.

I think that the number that we have used here, the $1 billion or so that represents the difference that we have relative to our principal competitors, is arithmetic.

That can be just judged by all of you and anybody else who chooses to do just a quick calculation.

And so that is the kind of mountain that we're facing as we enter into discussions and we hope down the road negotiations with the pilots.

Thanks.

David Strine, Bear Stearns.

Thank you; good morning.

Another question with respect to pensions.

Assuming the status quo in pension law, what portion of the '04 cash contributions is -- do you think is catch-up, as opposed to just maintenance due to salary inflation -- catch-up to deal with the funding deficit?

At this time, we don't have that number calculated.

There's certainly a bit that's related to the funding deficit, but I hesitate to even give you a percentage.

I'd say some is related to each, but a significant amount is related to the calculation as it takes full interest expense change, as well as our inflation.

As we get closer to that, we can break that out.

The issue is -- we continue to do those calculations all the way up to the time we make the payment, because the complexity of the workgroups and their two different plans to fund will be very explicit at that time.

If you're looking at it today, would you think it is less than half or more than half?

I hesitate to say.

I would estimate less than half, but that is just a guess.

Second, with respect to the CRJs on order for '04, if given the choice today, would you still take those planes?

Absolutely.

We're taking 23 70-seater CRJs in 2004 and are happy to have each and every one.

Great, thanks a bunch.

Sam Buttrick, UBS Warburg.

Good morning, everybody.

Michele, I guess, could you perhaps clarify a bit how you are reducing capital expenditures by 500 million through 2005, by selling in roundish numbers, 300, 330 million worth of aircraft to a third party?

The absolute cost of the aircraft also includes us having to staff up for inventory; in other words, acquire additional inventory.

And then the modification on top of the contract price adds a different -- additional cost.

So when you roll all that together, it's roughly $500 million of CAPEX that would've been put in place (indiscernible) provisions of system to accept these aircraft.

Okay, thank you.

And to your credit I think really -- on previous calls, you have been very specific about the company's ultimate unit cost objective, which is essentially a 8.5 cent seat mile cost in 2005, and that excluded any pilot concessions.

Is that -- could you elaborate on that or just perhaps be a little bit more explicit?

Is that still your goal and something that you feel you're going to achieve?

It's our goal; we've made no change in that and continue to walk down the path.

As a matter of fact, Leo referenced that we're slightly ahead on our profit improvement initiatives to date.

This year alone, $1.3 billion will come into the Delta system as a result of the profit improvement initiatives.

So I think you can confirm that previous guidance.

Okay, thank you very much.

Jeffrey Kauffman, Fulcrum Global Partners.

Thank you.

Michele, as we look forward to 2004 and 2005, can we just summarize some of the significant cash obligations of the company.

I am thinking basically in three buckets here -- number one, cash that may need to be paid into pension plans; number two, what your net cash CAPEX position, post all these changes looks like; and number three, what your net financing obligations look like, net of some of the changes?

I can give you 2004.

Our 2004 CAPEX is 1.1 to 1.3 billion, consisting of 23 70-seater RJs and roughly 500 and change for technology, parts and mods (ph), etc.

The pension obligation is 350 to 450 million, and the debt repayment is probably roughly $600 million, although I don't have the balance sheet right at my fingertips today.

So I would prefer to not go further than that.

We have not released guidance on CAPEX or the pension obligation.

And frankly, it is too soon to give you an estimate of the pension obligation in 2005, given the fluctuations in interest rates.

And of the 1.1 to 1.3 in CAPEX, how much of that is pre-funded at this point?

All but the 500.

Okay, thank you.

Ray Niedle, Blaylock Partners.

First of all, I would like to say Gail did a great job in the press release giving the information on the fleet plan going out and your fuel hedges.

That's everything everyone wants to know, (indiscernible) airlines, so good job there, Gail.

Thank you.

Just basically the first question is -- what is your estimate now of, now that the holiday is over for the security tax, what is the additional cost going to be in the fourth quarter?

And how much of that do you think can be passed onto the consumer, and what is your estimate for next year?

I think is a little too early to estimate that right now.

The re-imposition of the charge went into effect on October 1st, just a couple weeks ago.

And ultimately, what happens to the fares is going to be based on the supply and demand situation.

I don't have a number for that yet.

What was the bounce-up in cost, though, if you can't pass that onto the customer for the quarter?

What's your estimate on that?

Last year, in the estimates that we gave out, which generated 600 million or so ongoing lugging of the cost of security that we had, we had a number of roughly $280 million or so in there.

And I think that on an annualized basis, given the reinstitution (ph) of it, quite obviously, that represents and defines the maximum penalty associated with it.

Great.

And the second question regards the maintenance cost.

They're down significantly, and in your flyer (ph), you gave the reason that it is due to process improvements.

Is this something that's going to be permanent going forward?

Have you really figured out a way of getting your maintenance costs down that much?

Yes.

We know those are permanently sustainable and we're actually looking for increased improvements in 2004.

That is one of the real bright spots.

Airport customer service and the technical operations arenas are two areas where the employees and the technological support we're giving them are producing truly industry-leading productivity.

In fact, I believe in the second quarter, our CASM cost and maintenance were about equivalent to Southwest.

Great, thank you.

Larry Taylor (ph), CSFB.

My questions have been answered.

Thank you.

(Operator Instructions).

Phillip Blakely (ph), Standard & Poor's.

Michele, you provided some information on cash obligations for next year.

Could you do likewise for the fourth quarter of this year -- that is, cash, CAPEX -- pension is probably not an issue -- and debt maturities?

We have no pension contribution in the fourth quarter; you're correct.

The debt maturities is 100 million, and -- give me one second -- the number on CAPEX is -- the fourth quarter CAPEX in total is 234 million, of which roughly 53 million is a few RJs that are coming in.

The 53 million is the nonfinanced amount?

No, no -- this as a total amount of 234 million, of which roughly 50 million is pre-financed (multiple speakers) no pension obligation and a $100 million debt repayment.

Thank you very much.

Okay at this point, then, I think we have nobody else is in the queue, and we want to thank you for your time this morning and we look forward to seeing you again next quarter.

Thank you so much.

Bye.