達美航空 (DAL) 2003 Q4 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 call is being recorded at the request of Delta Air Lines.

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

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

Miss Grimmett, you may begin.

Thank you, Shelly and good morning, everybody.

Before we start the call, I will briefly outline the usual formalities and housekeeping rules.

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.

Today's discussion does contain forward-looking statements that represents 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 those 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 the reconciliation of those measures to comparable GAAP measures on our Investor Relations website at Delta.com.

And finally, before we begin, I'd like to ask that when we get to the Q&A portion of the call we limit questions to one question plus one followup per analyst.

And with that, I would now like to turn the call over to to our Chief Executive Officer, Gerald Grinstein.

Good morning, everyone.

Thank you for joining us.

Also on this morning's call are Fred Reid, President and Chief Operating Officer and Michele Burns, Executive Vice President and Chief Financial Officer.

We have a lot to cover today regarding Delta's 2003 fourth quarter and full year results.

But before we get to that, I'd like to begin my first call with you as Delta's CEO with a few comments regarding the current state of the airline industry and our company.

In addition, let me share what must be Delta's primary areas of focus in the period ahead.

Taking a look first at the overall airline industry, there are three general categories of competitors.

Legacy carriers that have successfully restructured their costs, legacy carriers that are continuing to struggle with cost restructuring and low-cost carriers that due to their cost advantage are growing and at the same time, finding new ways beyond price to deliver premium value to their customers.

Essentially, there is a circular reactive dynamic at play in which all airlines are constantly reassessing and adjusting their competitive positioning, some more profitably than others based on their cost structure.

Cost structure has become crucial since the pricing environment, obviously, has been permanently altered.

Even the improving economy can't be depended on to increase pricing power and improve profitability.

Yields will remain under heavy pressure in 2004 and beyond.

In addition to competitive instability, aviation security continues to be a major issue.

Against this backdrop, Delta today announced a fourth quarter of '03 net loss of 327 million or $2.69 per common share.

And a full year 2003 net loss of 773 million or $6.40 per share.

Excluding unusual items, fourth quarter losses were 207 million or $1.71 per common share and full year 2003 losses totaled 1 billion or $8.58 per share.

These numbers are disappointing.

This is the third straight year of billion dollar or higher losses at Delta.

In addition, the quarterly results fall behind the expected performance of our competitors.

As you know, pilot costs for Delta are far higher than for our competitors and that difference alone accounts for most of the fourth quarter underperformance.

We no longer have a competitive advantage in terms of our balance sheet strength due to substantial losses and heavy borrowing during the past few years.

In fact, as other companies restructure or started toward recovery, they have gained over the past several months at least equal access to the capital markets.

While these are serious concerns that must be and will be addressed, let me note the excellent work done by so many fine people at Delta during 2003 and the resulting important achievements.

Fred and Michelle will cover several of these in more detail but a brief overview includes the following: Industry leading use of technology that has increased our efficiency and productivity and also significantly improved the service we provide our customers, achievement of cost-cutting goals as part of Delta's profit improvement initiative, formation of a domestic alliance with Northwest and Continental and the continued growth of SkyTeam International Alliance, the regauging of secondary hubs, including DFW and Salt Lake City, and continued investment in our RJ Fleet.

Let me now turn to the future.

With an entire two weeks as CEO under my belt, there are a lot of answers still to be discovered.

Following the announcement of my new job, however, I did spend the last part of November and all of December traveling around the Delta system, meeting and talking with as many employees as possible.

These trips will resume next month.

In between these visits there have been extensive talks with Delta's leadership group.

All of these meetings combined have helped me gain a good grasp of what our challenge is, what our goals must be and where we are to focus our immediate attention.

My ultimate goal for Delta is to regain its competitive standing on a long-term, sustainable basis in order to achieve consistent profitability.

We will move forward in pursuit of this goal by focusing on the following key areas.

The first priority is to reduce our cost structure.

Delta must achieve a competitive cost structure.

Our unit costs have gone from being the lowest of the network carriers to the second highest.

Only U.S.

Airways ranks higher.

The largest disparity in this comparison, as I noted earlier, is due to pilot costs, which are not in line with our competitors.

Discussions between Delta and ALPA, which represents Delta's pilots, are under way and the content of these talks will obviously remain private.

I can tell you, however, that any new agreement we reach with ALPA must be an agreement that will allow Delta to compete and succeed over the long-term.

A proposal that falls short of that requirement is not acceptable.

We will not cripple our company for the long-term in order to achieve a short-term deal.

The current situation at U.S.

Airways is a cautionary tale that we all will heed well.

At this time, we hope our discussions with ALPA will result in a mutually agreeable arrangement.

We intend to keep you posted on those developments which we can communicate as they occur.

Let me stress, however, that while achieving competitive pilot cost is pivotal in order to attain a competitive cost structure, this important objective is by no means the full story.

Other dedicated efforts to reduce costs throughout the company, including the profit improvement initiatives, are continuing a pace.

Delta has accomplished a great deal in this arena as we will briefly outline today.

I will note, however, that as the profit improvement initiatives move into the next and more complex cross functional stage, progress will become more difficult.

We will, of course, continue to place emphasize on this effort while also ensuring that customer service remains a priority.

Fred will discuss this point in more detail.

A secondary of focus must be to address our debt load.

Delta's debt, including operating and capital leases is currently at 20.8 billion.

Such deep borrowing has damaged our balance sheet.

Repairing that damage requires a comprehensive strategy that addresses cost and establishes a realistic discipline plan that over time will re-establish our balance sheet.

The time required for this recovery makes it all the more important that we begin the process now with a full commitment to see it through to completion.

A third area of immediate focus is to make a full strategic reassessment of our business plan.

Given Jack Smith's and my new roles at Delta, the timing is appropriate for such a project, which is already under way.

We are calling in to full review every aspect of our operation, our resources and our strategy to make sure we have accurately determined where our strengths lie and how to best build upon them.

At the end of this project, we may determine that our current strategy is appropriate or we may decide to pursue a major strategic shift.

We're at the beginning of this process and we're approaching it with an open mind.

Regardless of the outcome, increasing industry pressures and rapid fire competitive changes require us to make absolutely certain our strategy meets the test of being successful over the long-term.

Again, the situation at U.S.

Airways is a clear reminder that the business plan we pursue must be fully capable of leading us all the way to our goal of sustained profitability.

Finally, there are two areas we will focus on that are listed last, not because they are less important, but because they are the foundation of all that we do.

They are the givens.

First, we must provide excellent customer service because customers are the reason we exist.

Regardless of any discussion of commodification, this remains a highly competitive customer service industry.

Delta continues to have significant customer service equity and goodwill among its passengers.

We intend to build on that equity to regain our ranking and our place in the hearts of customers and keep it.

In order to provide this level of customer service, our final and perhaps most important area of focus is to ensure a high level of employee morale.

It is the daily responsibility of Delta's employees to deliver service to our passengers.

The quality of that service relies heavily on the spirit, confidence and motivation of our workforce.

In other words, high employee morale.

By providing Delta people with the tools and the support they need in order to do the jobs they know so well how to do and want to do, we believe that we can restore our customer service equity to the highest levels once more.

Let me close by noting that as Delta enters 2004, we are fully aware of the very tough road ahead.

In response, we are addressing the short-term issues requiring immediate attention but we are, at the same time, taking the steps necessary to position our company for the long-term.

We will speak often in the coming year in order to keep your posted on our progress.

Now let me turn the program over to Fred, our President and Chief Operating Officer, who will discuss our operating results in greater detail.

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

It has been another very difficult and challenging year to put it mildly.

Through the fourth quarter, we continue to see demand improve but yields continue, and in our view will continue, to be under pressure.

The revenue performance, however, is only part of the story here.

Despite the challenges facing our company, we delivered a strong operational performance, in fact, the best in many years and we have continued our focus on improving customer service and achieved our goal on this phase of the profit improvement initiative.

Today I will focus upon a recap of our revenue performance and summarize the results of the initiatives we have under way.

This quarter we added significant detail to the earnings press release related to capacity, yield and RASM performance by entity.

Therefore, let me begin by giving you a very brief revenue overview for the consolidated Delta system, including, as always, the wholly-owned connection carriers, ASA and Comair.

System capacity was down 1.8% year-over-year while passenger revenue rose by 2.6%.

These two factors drove a passenger RASM gain of 4.6% ahead of the prior quarter.

During the quarter, demand and yield were strong during the holiday periods of Thanksgiving as well as Christmas and New Year's.

However, the periods surrounding the holidays were difficult on a yield basis.

Turning to the entities and beginning with North America, the RASM performance, again including the wholly owned connection carriers, was up 1.1% versus the fourth quarter of the previous year at a time when the capacity for North America was up 0.8 of a percent.

Trans-Atlantic RASM rose an impressive 18.9% versus last year on a capacity decrease of 10.7%.

Trans-Atlantic traffic declined 4.1%.

Load factors rose by 5.5 points year-over-year and the yields rose by 10.7%.

Latin America RASM was up 24.9% on 16.3% drop in capacity.

For the fourth quarter, we expect that our main line year-over-year RASM will underperform the ATA industry average.

We came into the fourth quarter beating industry main line system year-over-year RASM performance for the last six quarters by way of context.

However, as we begin 2004, we think this year-over-year performance, particularly on the domestic entity, will not keep pace for the following reasons: First, continued vigorous competition with a low-cost carriers.

Second, the annualzation of Song capacity increases resulting from both higher utilization of the aircraft as well as stronger seat density.

And, as you recall, we have more than lapped our previous outperformance and therefore comparisons going forward will be slightly more difficult.

Now I'd like to turn briefly to our operational performance for the quarter.

In the quarter 81.2% of our scheduled flights arrived on time by the D.O.T. definition, which is a 0.3 of a point improvement from the same quarter last year.

Based on the preliminary results available from other carriers, we estimate that Delta will rank in 5th place for the fourth quarter and in 4th place for the year.

Our completion factor for the quarter remained flat year-over-year at 99% despite a severe winter storm that forced the cancellation of more than 800 flights over a four-day period during the month of December.

This result puts Delta in second place for the quarter as well as for the full year.

As Gerry indicated, despite the financial challenges, we remain fully committed to our operational performance.

Delta employees have again done an outstanding job and remain committed to delivering strong operational performance throughout 2004.

If you look behind the numbers on the P&L, the Delta team remains strongly focused on both profit improvement initiatives as well as improving customer service.

For the year 2003, we achieved an estimated gross $1.2 billion in companywide improvements.

Netted against related cost pressures, the net amount achieved is approximately $700 million, almost exclusively through leveraging new technology and higher productivity through innovative work processes.

Let me just give you a couple of examples.

In the year we transformed 72 airports into the new system, eliminating lines in our lobbies through highly efficient self-service options.

We now have more than 850 kiosks operating.

More than 20 million customers used them in 2003, almost triple than the prior year and 10 times more than three years ago.

We also implemented Delta Direct last year, connecting customers at the airport to our reservation service center.

Delta is the only airline to fully utilize the skill and knowledge of reservations centered at the airport.

You can conduct any transaction through these dedicated phones, buy, change, upgrade, check baggage, pick a seat and your documents will be printed a few feet away.

At these units we took 1.3 million calls at the Delta Direct phone with an average wait time of only 8 seconds during the year.

We expect greater volume in this year.

The steps we took in 2003 not only removed costs but in many instances resulted in improved customer service.

Check-in time at the airport has been reduced by 66%.

It now sometimes takes as long to stowe your carryon in the overhead as it does to check in for your flight.

As a result of these innovative and sustainable productivity changes, our above wing employees handled 29% more passengers per hour than they did in 2001.

Up through the second quarter of 2003, Delta customer service metrics, according to syndicated data, either lagged or were on par with the industry for the last couple of years.

As of the third quarter of 2003, however, not only did we exceed the industry average for the onboard experience and customer satisfaction, we recorded a 4.8% positive variance above the industry average in the airport environment, tied for number 1 with Southwest.

And we saw continued positive improvement in these metrics during the fourth quarter, too.

As Gerry mentioned, we must continue this focus on cost competitiveness.

In 2004, the next phase of profit improvement initiatives does become more complex but are still achievable in our view.

They can yield significant results.

As a current example for this year, we have restructured our operational processes to create shorter turn times on a portion of the main line system, as well as Song, of course.

This allows for increased asset utilization, freeing up a total of nine aircraft in the first phase of growth, which funds a portion of our capacity increases during this year.

We continue to work toward an efficient operation that is highly reliable.

We recognize that these efforts must deliver long-term sustainable value while not losing focus on the improved customer experience that we've seen so far.

These changes are permanent.

They have no expiration date.

I would be remiss if I didn't give credit where credit is truly due.

Our front line employees across the Delta system have delivered the lion share of our transformation and our success to date is due to their professionalism, their flexibility and their commitment as well as their creative personal contributions of finding new ways of serving our customers.

And now I'd like to turn the call on to Michele Burns, our Executive Vice President and Chief Financial Officer.

Good morning and thanks for joining us today.

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

While the quarter results were in line with our expectations, it is still a significant loss.

The road to sustained profitability is long and difficult.

We will manage this company in a conservative and prudent manner but yet we recognize how rapidly the marketplace and industry are changing.

The overall business environment remains challenging.

Revenues continue to remain under pressure and we are working tirelessly to create a competitive cost structure.

We anticipate these challenges continuing into 2004.

As such, the key takeaways I'd like to discuss with you today are: First, as Gerry has already mentioned, we remain committed to creating a competitive cost environment.

And second, we will continue our disciplined approach in managing all aspects of the business.

Let me first discuss our overall results for the quarter.

Our earnings performance for the quarter resulted in a net loss of 327 million or $2.69 loss per share.

Excluding unusual items, we reported a net loss of 207 million or $1.71 lost per share.

These unusual items totaling 120 million net of tax, there were two primary items, both of which have been previously disclosed.

The first represents a $26 million charge, net of tax, as a result of the agreement to sell 11 737-800 aircraft and the second is 134 million noncash settlement charge, net of tax, related to our pilots defined benefit pension plan.

This was driven by a significant increase in pilot retirements from historical levels.

For the December quarter, cash flow from operations was $82 million.

After funding non fleet CapEx for approximately 125 million, Delta had negative cash flows of 43 million.

Let me briefly walk you through the December quarter cost and liquidity performance.

CASM for the quarter, excluding unusual items, was up 2.3%.

Fuel prices remained at close to historically high levels, nearly 85 cents per gallon during the fourth quarter.

Fuel will neutralize CASM, excluding unusual items, was up .8% from the prior year, slightly better than our guidance.

Again, we recognize cost reduction remains our single biggest challenge and we continue to focus on it going forward in 2004.

By far the largest hurdle to this effort continues to be the cost disadvantage for our pilot cost structure.

Closing this financial differential is crucial to our recovery.

As an illustrious of example and to provide a range, if Delta had the pilot cost structure equal to our restructured peer carriers or equal to low cost carriers, we would have improved our December quarter net loss by 120 to $220 million, therefore almost breaking even for the quarter.

The balance sheet remained stable during the December quarter.

We ended the quarter with 2.9 billion in cash, 2.7 billion of which was unrestricted.

During the December quarter, Delta participated in Orbitz and Hotwire equity sales resulting in cash received of $45 million.

This quarter, we recorded a $1.1 billion noncash charge to equity, net of tax, related to our pension plan.

This is similar to the $1.6 billion charge taken in the fourth quarter of 2002.

The 1.1 billion charge is higher than the 700 million estimate given in November.

The increase is a result of finalizing demographic data used to determine actuarial assumptions.

The historical demographic data has changed due to workforce reductions.

This charge does not impact Delta's current cash funding obligation to it's pension plans.

Delta intends to continue to fund it's pension plans in full accordance with the ARISA regulations.

Fred spent some time this morning discussing the achievement of the profit improvement initiatives over the past year and the challenges that lie ahead.

Specifically, I'd like to discuss how Delta has maintained a non-pilot employment cost advantage compared to our peers.

Flight concessions at restructured network carriers, we have continued to work in partnership with our non-pilot groups to deliver top tier overall cost productivity.

Our profit improvement initiatives have provided us the opportunity to use technology and other innovations to significantly increase the productivity of our non-unionized workforce.

In line with our strategic benefits review program, the end result is a $600 million cost advantage versus the average of other network carriers.

This advantage crosses all functional areas of the company including, but not limited to, airport customer service, in-flight service, technical operations, reservation sales and the ramp.

We recognize that these efforts don't immediately show up in CASM improvements due to significant capacity shifts and external cost pressures, however, versus 2002, airport customer service cost per waited departure improved by 13%.

Maintenance costs per weighted maintenance unit improved by 6%.

Cost per flight attendant minimum block hour improved by 10%.

And reservation sales cost per passenger has improved 6%.

These are significant statistical numbers.

It should be noted that despite the 8 to 10% capacity increase this year, excluding fuel and pension costs, every main line operating division within the company, with the exception of flight operations, will reduce absolute operating costs for 2004.

Now let me provide further guidance for the year.

In particular, I will breakdown this 8 to 10% capacity increase by quarter.

We expect 2 to 4% increase in the first quarter, 15 to 17% in the second, which is when we started pulling down capacity due to the war last year. 90% of this increase is from war restorations, annualzation of Song and DCI growth.

A 10 to 12% increase in the third quarter, and 7 to 9% increase in the fourth quarter.

Looking forward to advance bookings for the first quarter of 2004, coming into the new year we are seeing some year-over-year booking weakness primarily in North America.

Bookings for North America are down slightly from the prior year and international advance bookings are up year-over-year.

For the first quarter 2004, excluding unusual items, we expect consolidated CASM to be down approximately 2%, fuel price neutralized CASM to also be down approximately 2% versus prior year.

For the full year, excluding unusual items, consolidated CASM is projected to be down approximately 5% and fuel neutralized CASM to be down approximately 5 to 6%.

Turning to fuel, the March '04 quarter, we are 52% hedged at 80.1 cents per gallon.

For the full year, we are 32% hedged at 76.5 cents per gallon.

The full year CapEx is expected to be 1.2 billion.

This consists of approximately 600 million for aircraft, 300 million for aircraft mods and inventory and 300 million for non-fleet expenditures, largely comprised of technology spending to continue to enhance operational productivity and the customer experience.

For the first quarter 2004, we expect CapEx to be approximately 300 million, this includes approximately 125 million for aircraft, 90 million for mods and inventory and 80 million for non-fleet expenditures.

We expect our 2004 cash funding for the pension plans to be approximately $450 million.

During the first quarter of 2004 we expect to fund approximately 300 million of this amount.

For the first quarter of 2004, we expect to report a net loss of 300 to $350 million.

In closing, we recognize that there are still many challenges ahead and opportunities which still must be addressed.

Our team remains focused on driving towards our goal of achieving sustained profitability.

That concludes our quarterly conference call.

At this time we are happy to take your questions.

Thank you.

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

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

You will be prompted to record your name.

To withdraw your request, you may press star 2.

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

One moment for the first question.

Our first question comes from Mike Linenberg of Merrill Lynch.

You may ask your question.

Yeah, hi.

I guess I have two questions.

Michele, just back to your guidance about the 300 to $350 million net loss for the March quarter of '04.

Last year I think when you exclude the one-timers your net loss was about 350 million in the month.

Month of March we had SARS and we had the buildup to war.

Are you basically saying that the environment today is similar or is this higher fuel prices that's coming up with the forecast that is similar with what we saw a year ago?

Mike, our number is 425 million for the first quarter of last year so this does represent improvement year-over-year.

We might want to just separately, perhaps, reconcile your number, but our excluding unusual items number for the first quarter of '03 was about $425 million.

Okay.

Okay, thanks for the clarification.

And then I guess on my second question, and this is probably a question for Gerry, U.S.

Airways is out there basically putting the company up for sale.

I guess outside of the shuttle, are there any assets there that you'd be interested in?

Well, it's no secret that almost every airline has had discussions with U.S.

Air and it remains to be seen how they're going to allocate those resources but there have been some talks about it and there are some areas of interest.

Okay.

Thank you very much.

Our next question comes from Glenn Engel of Goldman Sachs.

You may ask your question.

Can you talk about what service enhancements you will be offering in 2004?

I thought you talked about that your cabins were looking tired and you wanted to refurbish there?

And whether there's things from Song on service that will move over to Delta main line?

Well, in terms of cabin improvements, I think your eye is accurate and your experience, I hope is, too.

And we are going to go ahead with a reconditioning program for the interiors of the aircraft.

And we've made that decision.

How expensive is that?

The cost for what we are doing, Glenn, is to establish a program that will begin to refurb the interior of the aircraft, but I think much more importantly be a program that will be routine year in and year out .

So it's a thoughtful program that would be probably valuable at some point to talk about in a little more detail, but not on the call.

The range for this year is 20 to $30 million.

And how much will your pension and health costs rise in 2004 versus 3 from an accrual basis?

The number differential for this year is about $150 million for the pension.

And for the medical it's roughly $100 million reduction netting out changes that we've made here at Delta.

Thank you.

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

Gerry, just a quick question, both in your prepared comments and in the press release you kind of make mention of improving customer service.

I know Fred noted that the airport experience was getting better and sort of offered some metrics there.

But I was just curious if you perceive there to be a problem on that front?

Not that it hasn't always been a goal, but I think it's the first time you've specifically mentioned it in a release?

No, I don't think that there is a problem.

I think that while we were facing a number of other challenges, we might not have had the same focus on it.

But as I've gone around and talked to our people, one of the things I've detected is they needed kind of a re-energization, if that's a word, and a remotivation and I think committing to going ahead with the interior renewal and generating enthusiasm so that our people are sure that they have the tools, is going to give us that opportunity.

It's not a problem.

It's really just an opportunity to go ahead.

Do you have any metrics similar to what Fred pointed to on the airport side for the on-board experience?

Yes, on-board experience rose substantially.

I don't have them in front of me, but they did rise substantially and have been rising every quarter for about four quarters now.

If my memory serves me right, it's 2.3, 2.4% above the average.

Let me also elaborate slightly to the last two questions on what specifics there are in product improvement and enhancement of customer service.

First and foremost, new and innovative training for front line employees.

The Delta employees have a long and rich tradition of great training.

We're going to continue that.

More capacity in Delta Direct.

The phone services that I eluded to, including multi-lingual capacity, enhancements to the Song IFE, which is going to be folded in through the year, and, of course, across the system, both on Song and main line, in the economy cabin, food for sale is driving up ratings radically and, of course, saving cost, as well.

But the food quality is measurably better.

Okay.

And just a cleanup question for Michele.

On the other expense line there was a huge drop both sequentially and year on year.

You pointed in your supplemental comments to communications and insurance but if you look on form 41, just the dollar amounts that you report in those line items makes it kind of hard to believe it's all coming from there.

Is there anything else going on?

In the other cash calls line there are a number of items that decreased.

Insurance is a major driver, but there are a number that we'd be happy to reconcile with you offline.

Okay, great, thanks very much.

Helane Becker of benchmark.

You may ask your question.

Thank you very much, operator.

Hi, everybody.

Gerry, you're really not much of a shrinking violet and so having been on the board for a long time now, I'm kind of surprised to hear you say that you have to reassess the entire business plan and take some time to do that.

I would have thought, given your experience, you would have been able to hit the ground running and make some changes a lot sooner.

Can you just address what you're referring to there?

Sure.

Look, anytime you have a new CEO, the new CEO is going to go in and take a look at everything that's going on.

One of the things that I think you know, there is always a different perspective between the board and the management and when you step into this role you want to review everything that's under way and being done.

The other point about it is that this is such a rapidly changing and dynamic field and you can see that changes with U.S.

Air, ACA and it's independents entering the field, the growth that's been announced at JetBlue and their 100 seat aircraft, as well, Southwest and it's 100 seat discussions, that we're going to be facing a very challenging, changing, rapidly shifting environment and so I think it's time to take a look at everything that we're doing.

And we're going to do it quite rapidly.

My target is it will take us several months but we will do it, I hope, before the middle of the year.

Okay.

And then just one quick question for Michele.

Thank you very much for that explanation.

Michele, when you talked about your pilot costs being more competitive with the low cost carriers and the others that have restructured and you said we would have narrowed our loss.

Did that include productivity changes as well?

Or was that just straight dollar range rates?

That's an all the-in number.

So, however you get there, those kinds of cost reductions would have yielded those numbers.

Okay, thank you very much, everybody.

Ray Neidl of Blaylock and Partners, you may ask your question.

Good morning.

One thing I'm just trying to clarify now, I've heard a couple of different explanations of your cost cutting goals and I don't know if you've stated a clear number like American did last year, but as much as I can back into it, it looks like you're looking for a total employee cost-cutting, including the pilots, of about $1.6 billion.

And then I've heard from other sources that you're looking for a CASM target at today's fuel prices of about 8.5 cents, which does not include pilot givebacks.

I was just wondering if you could clarify that for me, if you do have any goals, specific goals.

Oh, we absolutely do.

We've been, I think, pretty communicative, Ray.

We intend to achieve a 15% unit cost reduction by the end of '05.

That number, whatever that number is, takes to get there, it will be the number, but we've talked about openly 2.5 billion plus of cost reductions of which we have already achieved in this year in excess of 1 billion.

Fred referenced 1.2 billion of improvement to our P&L. 100 million from revenue and 1.1 billion from costs in 2003.

The 2004 plan continues against those initiatives with significant additional cost reductions in 2004, all moving toward a 15% unit cost reduction at the end of 2005.

Okay, great, thanks for clarifying that.

And the other follow-up --

Ray, Ray, I think Fred would like to inject something if you -

Okay, fine.

Ray, I just wanted to comment to your question which I think contained the phraseology 1.5 or $1.6 billion in reduction of employee costs and I really want to make sure that we elaborate a rather unique aspect of Delta's cost reduction.

First of all, somewhere on the order of 70 to 85% of the cost improvements in employee productivity is non-pocketbook issues.

That is to say what's going on at Delta is although we have industry leading wage rates, or top tier wage rates, for every single group, the productivity improvements are so large that they're producing the $600 million productivity advantage.

That really is the differentiating factor at Delta.

There have been some changes to the health plans and benefits which keep us top tier in the industry, but the big, big movement is coming from improvement in work processes and not wage reductions.

In fact, there haven't been any wage reductions to any Delta employees besides management.

Okay, great.

Thanks, Fred.

And Fred, the follow-up question I was going to ask is in the capacity area.

I know a lot of the legacy carriers are now, for the first time, starting to add capacity back and you went through your capacity increases for this year, which are pretty aggressive.

In the second quarter, a lot of it can be explained because of the war and Song and so forth, but do you think that maybe Delta and some of the legacy carriers are being a little too aggressive in putting capacity back too soon before you can get prices up a little bit with the economic recovery?

Let me take a crack at that.

First of all, I think we did make the point, and you reiterated it as well, Ray, that a significant part of the capacity increase in 2004 is a result of comps against the war pulldowns.

As a matter of fact, as I said in the second quarter, 90% of the second quarter capacity increases related to lapping capacity that was added postwar and very little as it related to brand new capacity coming in.

For example, out of the desert.

We've looked at this quite carefully, we obviously, because we have made decisions around disposing of 737-800s this year and next, have a very, very laser like view on what we think the capacity environment should be and in addition have the ability to change our numbers if we perceive that the market is not materializing.

Based on where we see the market today, this looks like the right answer for us.

Okay, thank you, Michele.

Jamie Baker of JP Chase, you may ask your question.

Good morning, everybody.

First question for Michele, just back of the envelope here it looks like you will need to issue debt or raise cash this year.

What are your capital raising plans, if any?

And what's your appetite now for your own asset sales, i.e. a potential divestiture of one of your regional affiliates?

At this point we sit with the $2.7 billion cash balance and as you know, the operation has traditionally generated cash flow.

Our challenge this year will be debt maturities and pension funding, although the pension funding is in our operating numbers.

So, I'm really focused on the debt maturities that have come due.

There is something on the order of $700 million of debt maturities.

Uh-huh.

There is another in the public disclosure of roughly 300 million of what are called debt maturities but that is actually interim financing for regional jets, which we will receive permanent financing.

So, focusing on the 700 million, this is the number that we will need to look at and we will be in the market to some degree but I have to tell you that as you look across the market, we will make prudent decisions about how and when to add any debt to the balance sheet.

Okay.

So should we assume you are not, unlike U.S.

Airways, you're not discussing any potential asset sales with other airlines.

We are absolutely not.

Okay.

And the second question, if I may, for Gerry, the comments you made a moment or two ago on 100 seat aircraft, should we assume that scope release is a component to the ongoing pilot negotiations?

Scope release in the sense of your comments that you may wish, if I understand correctly, to potentially explore a larger regional aircraft?

Well, that isn't where I was going with that comment, I was only observing that the other carriers, JetBlue and Southwest had either announced that they were studying it or were committed to going ahead with it rather than any indication on our part.

But your question is have we had any part of that discussion with the pilots?

And my answer has to be that our discussions with the pilots really have to be off the record and very private and so I'm not in the position to discuss that now.

Okay, fair enough.

Thanks, everybody.

You bet.

William Greene of Morgan Stanley.

You may ask your question.

Yeah, good morning.

Michele or Fred, what percentage of the capacity growth in '04 is in international markets?

Or non-U.S. markets, if you will?

I don't have that number right in front of me, I don't think Fred -- we can give that to you -- give me a second here.

It's fairly significant comparatively speaking because of the significant pulldowns because of the war.

We pulled down 33% of international capacity in the second quarter alone last year.

Still, with your permission, I will give that to you offline.

Okay.

Just by why of segments, it's Cincinnati Rome and Cincinnati Amsterdam which are the new routes, but there was disproportionately large pulldowns in the first half of last year due to the conflict in the Middle East.

Okay.

And then through productivity improvements in '04, will you be able to, whether through attrition or an actual program, be able to reduce head count further?

There are some head count reductions that were announced prior to the end of the year, which will take place in the next couple of months.

And it is possible that further workforce reductions could occur but we don't have any planned now.

I do want to say that, besides those that have already been announced.

We are continuing to just produce more productivity and allow attrition to occur.

But no large numbers out there.

Okay, and then just lastly, Michele, tax rate, at some point I presume you won't be able to recognize a benefit anymore from the losses, does that happen in '04?

At this point we are continuing to recognize the benefit, as you see, and we will continue to evaluate that on a going-forward basis.

But as of this point in time, we have not made the decision to not benefit the loss.

Okay, thanks for your help.

Bill, while I've got you.

Yep.

Let me give you some of these numbers, I found my note, I am sorry I just couldn't flip through it fast enough.

The consolidated system, we said 8 to 10, so, call it 10% consolidated system increase.

The main line system increases at 8.5%.

Domestic: 6.9%.

And international: 13.9%.

Okay.

Thanks for your help.

Sam Buttrick of UBS, you may ask your question.

Good morning, everybody.

I guess first of all for Gerry, I wanted to clarify if you please the timeline for completing the strategic review.

It sounded like from your answer to an earlier question you were targeting mid-year, but I wanted to clarify that, please?

I did say that the target was mid-year, but my guess is, and my goal is to make a presentation to the board of directors at our July meeting.

Okay.

Which is a little beyond the mid-year, but that's my target.

Okay, thank you for that.

Secondly, Michele, at the risk of sounding like a broken record, having asked essentially the same question over the last few calls, although broken record is probably a dated metaphor these days, but in any event, you've reiterated your goal of 8.5 cent network CASM without wage concessions by the end of 2005.

Based on your cost guidance here for 2004, that's going to require double-digit plus declines in CASM in 2005 and I guess I continue to struggle with what's so magical about 2005 and especially considering your significant capacity increase this year which will presumably be substantially less next year.

What makes that an achievable target?

Sam, we intend to continue to move down this path next year and with the combination of the capacity coming back in very significant decreases next year, we believe we will get about roughly 70% toward our goal next year.

And then '05, there is nothing special, but we do believe we see some abatement of continued increases and costs that offset and detract from our goals.

We have taken such significant increases in certain line items such as pension that it has masked, to some degree, our capability to show this absolute improvement.

So, I think the numbers hold up at this point in time.

We will continue to update you as we go forward.

And just watch us next year.

Okay, we'll leave it at that.

I'm still a little puzzled, but we will continue the dialogue, I'm sure.

Thank you.

James Higgins of Credit Suisse First Boston.

You may ask your question.

Yes, hi, thanks.

First of all, Gerry, it's good to hear your voice again on these calls.

Thank you.

Or some calls!

You're obviously a long-term observer of this industry and a participant with a fair degree of experience.

Can you just give us some thoughts on how you've been surprised by, perhaps by, how the industry structure is changing by the perhaps persistence of ongoing strategic realignment in the industry?

Any sort of broad tops down thoughts you can give us as a new voice here for a lot of people, would be helpful.

Well, that's quite a challenge!

I mean when somebody uses the term record, it dates them.

I mean obviously one of the biggest changes, and an area where I expect the change is going to keep going, is in the use of the net to get at fares.

And the more people come up with clever ways to use that, the more competitive it's going to be.

So, I think that competitive pressure is going to continue.

The other piece is that you're getting other carriers, and JetBlue in particular, have obviously come up with a business model that is going to attract both imitators and capital.

And so I think you're going to see a growth in that area and people will try variations of that.

And so I think that that's going to be a continuing challenge that we've got to get ahead of.

A third area, I think, is that you've got a company like U.S.

Air putting assets up for sale and when you have that situation a couple of things occur.

One is you may tend to get a short-term improvement but over the long-term experience tells us that capacity flows into those markets and if some of those assets wind up in the hands of low cost carriers you're going to have another, bigger level of activity in that.

So you've got this challenge of very rapid growth in that segment because it's going to attract capital and people love to get in the airline industry, like they love to own sports teams.

It's show business.

So, those, I think, are among the changes that are taking place and you also are seeing something that's, I think, quite healthy from a passenger point of view, which is amenities in flight.

And a number of companies have taken the lead in that and that's an area where you cannot afford to be left behind.

People essentially find flight boring and they want amenities and in-flight entertainment and you're going to have to provide that.

And I suspect that that's an area that's going to continue to grow.

But those are just quick observations of things that I think that are going to make permanent and lasting changes part of the way we have to live in this industry and therefore going to cause us to be much more flexible in not just responding to them, but getting out in front of them.

Great.

Well, it was a bit of an unfair question such short notice.

Thanks very much, that was great.

Shelly, we have time for one more question.

Thank you.

Our final question comes from David Strine of Bear Stearns.

You may ask your question.

Gail, thanks for squeezing me in!

Revert back to the issue of capacity, and anyone who feels comfortable can answer this, what do you see as your aircraft utilization doing in '04?

And then the second part to that, where do you see it peaking?

At what point can you not squeeze anymore out of the existing aircraft?

Let me start and maybe Fred will also chime in.

We do see aircraft utilization improving in 2004.

We talked about in the call having non-aircraft improvement, if you will, due to utilization efforts and turn time initiatives going on as a part of the profit improvement initiatives.

Secondly, the actual utilization of the Song aircraft across the entire system represents a significant utilization improvement that has an impact on the numbers.

We believe there is a continued efforts afoot and we believe that we can continue to improve the utilization of our aircraft across our system to do what I think is really critical in an industry of this nature.

A high capital intensive industry needs to have as high a possible utilization of its very expensive assets, so we are focused on that.

Can you quantify that in terms of hours per day, just across the fleet?

At this point our hours per day across the main line system is on the order of 8, close to 9, and I think we would push that number north of that number.

Whether we can get to 10, that's a stretch, but certainly we are seeking to increase as much as we can.

Song utilization is currently 13.5 hours a day.

So, are you saying --.

Somewhere between 9 and 13.5 is the goal.

Are you saying that you see it peaking out, the max being about 10 hours a day for the whole system?

No, I am not saying that.

I am saying that when we see how Song flies, we know that we would not be at 13.5, because that's physically impossible with connecting traffic and for a major of this nature.

However, to do anything other than shoot for the stars, so to speak, would be inappropriate, as well.

So, somewhere between the 9 number that we are currently achieving after focusing on it for part of 2003, we expect to continue northward and we are aware that Song's at 13.5, so we will continue to strive to close that gap.

I can't really tell you exactly where I think the watermark is, but I would certainly expect to see an improvement that was significant over the 9 hours.

Okay.

And last question, Gerry, you mentioned at the beginning, you're going to review everything.

Given the comments that Michele made on domestic bookings, does that include the 8 to 10% ASM growth this year?

Yes, yes.

Yes.

Sure.

I think that when you get into the process of doing a review there can't be any sacred cows.

You have to look at everything that's there and think about it in a way that maybe you haven't thought about them before.

And doing it not in a series of single steps but in - one of the things about this industry is you move one piece and six other things jump at the same time.

So, it's got to be looked as a total picture.

So, yes, everything is open.

But I have to emphasize, again, and maybe I should have said this in response to Jim Higgins's question, that a fundamental piece that can't be delayed is getting our costs down and particularly in the cockpit.

Got it.

Thanks a bunch.

Now I'd like to turn the call back over to Miss Grimmett.

Thanks, Shelly.

Thank you, everybody, for joining us, this concludes the call for the quarter and we look forward to chatting with you again next quarter.

Thanks so much.

Bye-bye.