達美航空 (DAL) 2004 Q1 法說會逐字稿

Good morning and welcome to 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 anyone has any objections, you may disconnect at this time.

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

Miss Grimmett, you may begin.

Thank you, Shelly.

Good morning, everybody and thank you for joining us.

Just a few housekeeping items before we begin: Our call today is being transmitted live via the worldwide web and is being recorded.

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

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

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 these differences are listed in Delta's SEC filings.

The discussion of our company's performance does include certain non-GAAP financial measures.

You can find the reconciliation of those measures to comparable GAAP measures on our Investor Relations web site at Delta.com.

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

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

Good morning and thank you for joining us.

Also on today's call in addition to Gail is Michele Burns, Executive Vice President and Chief Financial Officer.

Let me begin with a quick review of the financial results released earlier today.

Delta announced a first quarter 2004 net loss of $383 million or $3.12 per common share.

In addition, the Company ended the quarter with $2.2 billion in unrestricted cash, a decrease of $500 million from the previous quarter.

While these results are in line with the earnings guidance provided several weeks ago, the March quarter loss and Delta's falling liquidity level are part of a pattern that is clearly unsustainable over the long-term.

Let me repeat that point.

The current pattern for losses and liquidity is clearly unsustainable over the long-term.

During the December quarter '03 call, we talked about the urgent need to address our most fundamental problem, which is a cost structure that is no longer competitive.

The major boulder blocking the road to a competitive cost structure is Delta's pilot costs, by far, the highest in the industry.

Delta is fully engaged in efforts to attain competitive pilot costs.

At the same time, we have not lost sight of other crucial aspects of our business.

Instead, Delta is making progress in each of the four key areas of focus noted in the December quarter 2004 call.

Today, I'd like to touch briefly on each of these areas and also address the tough issues ahead.

Beginning with the first quarter of those four focus areas, our most pressing priority is the achievement of a competitive cost structure.

As the first quarter results show, even an increase in traffic is not the answer to our company's current financial problems because pricing power belongs to the low cost carriers.

We have to eliminate our competitive cost disadvantage.

Delta's efforts to address nonpilot costs are reflected in our 3.8% year-over-year improvement in fuel neutralized CASM, excluding unusual items reported for the March quarter.

This positive trend is due to the continued success of our profit improvement initiative program, which we will review in more detail.

But as noted earlier, our competitive disadvantage continues based primarily on pilot costs that are the highest in the industry.

This disparity will widen further with Delta's pilot scheduled May 1 pay raise of 4.5%.

Pilot costs must be reduced significantly if Delta is to compete effectively in the new marketplace and grow and earn again.

In town hall-style sessions in Atlanta and Dallas/Ft.

Worth, as well as other face-to-face venues, I've met with more than 1,000 pilots.

The key subject of these meetings have been the structural market changes that have occurred and the vested interest Delta pilots have in Delta's success.

My conversations with pilots will continue over the next several weeks.

Let me turn now to the second area of focus, which is the need to address our debt load.

Delta's current debt load is $20.6 billion.

Our debt to capitalization ratio is 104%.

Our balance sheet has been severely damaged to the point of exhaustion.

As stated earlier, we ended the March quarter with $2.2 billion in unrestricted cash, a decrease of $500 million from the previous quarter.

To begin to repair this damage, Delta needs to achieve a competitive cost structure, and quickly, that allows us to start earning again.

We also must also avoid additional debt, though at this point, more debt is not a viable option.

Based on recent downgrades in our credit ratings, including two bumps down by Standard and Poors, one by Moody's and one by Fitch, Delta's costs for borrowing are now prohibitive.

Even if these costs were more affordable, Delta has few remaining assets to leverage.

A February '04 report published by the Airline Pilots Association, representing Delta's pilots, stated that the basis for their most recent proposal was to provide Delta with enough relief to gain access to capital markets, thus giving us the opportunity to go further into debt.

As we have emphasized repeatedly, Delta cannot and will not consider any pilot agreement that falls short of allowing our airline to compete and succeed over the long-term.

Increasing competitiveness and rapid change in the marketplace require us to set a direct course and move forward with all the resources fully focused on the destination ahead.

That destination is the restoration of our competitive standing in the industry.

We cannot take half-steps backwards that will only slow our pace and leave us unprepared to go the full distance.

Beyond what is required for assets, we are already committed to take, we do not plan to incur additional expensive debt that further mortgages our company's future.

Moving now to the third focus area.

You may recall from the first -- fourth quarter call that Delta is conducting a full strategic reassessment.

Two weeks ago, Delta's senior leadership met for a two-day review of the work done so far.

As part of the review, we identified the most important strategic issues and established smaller groups to determine Delta's best options.

Resulting recommendations are expected to be presented to the Board of Directors at a late summer meeting.

We are approaching this reassessment with an open mind.

The outcome may be a reaffirmation of our current strategy, a new direction, or some combination of the two.

Importantly, every option under consideration assumes that we achieve a competitive cost structure.

Without that, no strategic plan can succeed.

While some aspects of this work obviously will remain propriety, our plan is to begin discussing the framework of Delta's strategic direction for the future following the Board review.

During Delta's two-day leadership meeting, I was enormously impressed with the quality of the discussions and the quality of our officers.

The passion this leadership team has for getting things right is apparent, as is their committment to keep all aspects of the business moving forward throughout this assessment period.

At this point, I will also note an organizational change during the March quarter, which was Fred Reed's (ph) decision to leave Delta.

While some management adjustments will be made as a result of his departure, at this time, Fred's duties, including his role as Chief Operating Officer, are under my leadership.

Finally, let me review Delta's fourth area of focus, which is to provide excellent customer service and also ensure a high level of employee morale.

The reason Delta exists is to serve our customers and the day-to-day responsibility for delivering that service rests with our employees.

As I have outlined to some extent, and as Michele will review in further detail, Delta is moving ahead with projects related to customer service and other aspects of our operation.

Among the efforts intended to improve customer service, Delta announced during the March quarter, a major expansion at New York JFK, including a $300 million facility investment and increased service.

Also, Song will have completed installation of its in-flight entertainment system on all aircraft by the end of this month.

Let me interject here a note regarding Song's excellent performance.

While we do not break out Song results separately, we are pleased that Song's March quarter performance was consistent with the strong Florida traffic typical of the season.

In addition, current reviews in both "Business Week" and the "L.A.

Times" rates Song number one based on peer comparisons.

Returning to the list of customer service improvements during the quarter, Delta also completed the first phase of our alliance with Northwest and Continental, which now provides 2600 co-chair flights across our collective systems.

The other part of this area is employee morale.

It is my belief that providing Delta people with the tools and support needed to do their jobs is the best guarantee of both high morale and excellent service.

Among the efforts initiated this quarter, to make sure the needed tools are in place, is our cabin refurbishment program.

This initiative was launched in response to concerns voiced by Delta employees who care deeply about customer comfort and satisfaction.

Also, because employee communication is essential, both for me to understand what goes on outside of headquarters and so employees can offer ideas and ask questions, my visits to Delta stations are continuing.

So far I've met with more than 4,000 Delta people in addition to the pilot meetings noted earlier.

During these meetings, I've been reminded that Delta's front line employees have both a solid understanding of the challenges we face and a deep commitment to our airline's success.

In closing, let me note that Delta faces major challenges and certainly the most significant is our pilot costs.

At the same time, however, Delta continues to make good progress that positions us for success, including lowering other costs, assessing our strategic direction.

At the same time, however, Delta continues to keep focused on positions essential for success such as upgrading facilities, maximizing fleet utilization and working to stay connected with employees.

With this foundation as our base and given the benefits to every Delta constituency, including pilots, of our achieving long-term sustained profitability, I believe that we will be able to make Delta a great airline once more.

And I also believe that by working together, we can reach that goal without resorting to court-supervised restructuring.

Now I will turn the program over to Michele.

Good morning and thanks for being with us today.

Let me begin with some comments regarding the March quarter performance.

While the quarterly net loss was in line with expectations, and 18% better than last year, it is still another significant and disappointing loss.

Passenger traffic did improve through the quarter, yet, yields remain under pressure as we continue to contend with the strong growth of low-cost competitors.

The network system that challenges for Delta are twofold, optimizing and competing effectively on the revenue side.

While we are maximizing revenue wherever possible, it is evident there is still no pricing power.

Additionally, we must create a competitive cost structure.

With this in mind, the key items I'd like you to take away are first: despite increases in passenger traffic, yields remain and will remain significantly under pressure.

Second, although we made significant progress in our profit improvement initiatives during the quarter, we have a long road ahead to achieve a competitive cost structure.

And third, while we ended the quarter with $2.2 billion of unrestricted cash, down from $2.7 billion at the end of 2003, the balance sheet remains overly stressed.

Let me begin by providing a brief revenue overview for the consolidated Delta system, including our wholly-owned connection carriers, ASA and Comair.

As a reminder, we have added significant detail to the earnings press release relating to capacity, yield and RASM performance by entity.

For the March quarter, system capacity was up 3.5% year-over-year while passenger revenue increased 4.1%.

Passenger RASM was up .6% versus last year.

During the quarter, as we have seen in the past, the periods between the holidays were difficult on a yield basis.

The traffic and yield picked up during the holiday and spring break periods.

On an entity level, North American passenger RASM, again including ASA and Comair were down .4% on 4.6% capacity growth.

Yields were under pressure and fell by 1.5%.

Trans-Atlantic passenger RASM grew 10.9%, but of course comparisons are impacted by the Iraq conflict from last year.

Latin American passenger RASM was up 10.9%, despite having lapped our reductions in long haul capacity, most notably Rio.

We expect that when all of the airlines report their quarterly results, our year-over-year results will lag the average of the major carriers, both in the domestic and Atlantic.

It's important to realize that this is a particularly difficult quarter to draw meaningful comparisons between the major carriers.

Last year there were two major external events, SARS and the war, and these affected the airlines differently, based on their outstructures and the ways they reacted to these events.

In terms of SARS, due to our small reliance on transPacific traffic, we expect that on a year-over-year basis, we will be one of the major carriers to show the least recovery from SARS.

Obviously, the Iraq War affects year-over-year comparisons.

The weakness was most prominent in the Trans-Atlantic region, where Delta did pull down a significant portion of its capacity as compared to some other carriers during and before the war.

In addition to these issues, we also faced difficult comparisons for three reasons.

While growth in low cost carriers is damaging, the yield environment for all carriers over the last year, we have seen LCC growth in places that we believe affect us more than others.

West Coast flying from Atlanta has seen large increases in LCC flying, damaging our yields.

Second, until we annualize over the Song capacity increases, we also expect some pressure on year-over-year RASM growth, compared to other majors.

And finally, Delta's RASM growth did outperform the industry for two years, thus, our comparisons are somewhat more difficult.

Next, let me address some of our network changes.

This quarter, we completed several network changes to improve our competitive position.

In January, we executed a complete restructure of Salt Lake City, the goal was to reorient the hub to local and regional traffic flows rather than one-stop transcon flights.

We shifted focus to short haul capacity and revised our pricing for the market.

We decreased the number of main line departures from 114 to 92 while increasing the number of regional jet departures from 178 to 208.

We also announced a major expansion at JFK with a planned $300 million facility investment over six years and an increase in flying.

We announced the addition of 13 main line departures, 15 RJ departures and 2 Song departures.

Our plan is to fully integrate our New York strategy, which includes our alliance with Continental and Northwest.

As Jerry mentioned, the Delta, Continental, Northwest alliance has completed its first phase with 2600 co-chaired flights between the three carriers.

Now I'd like to turn to our overall financial and cost performance.

Our earnings performance for the quarter resulted in a net loss of $383 million, or $3.12 loss per share.

Let me note that we are no longer treating FAS 133 as an unusual item.

The impact of this in the future should be minimal, however, the adjustment this quarter is larger than usual due to the early settlement of fuel hedges during the quarter.

The expense totals $15 million net of tax or approximately 12 cents per share, of which $10 million relates to the settlement.

CASM for the quarter was down 3.6%, despite record high fuel prices.

Fuel price neutralized CASM was down 4.9%.

Please note Delta recorded unusual items only for the prior year.

Therefore, excluding the prior year on usual items, CASM was down 2.5% and fuel price neutralized CASM was down 3.8%.

Our fuel price neutralized CASM performance exceeded our guidance to you of 2%.

On a consolidated basis, absent fuel expenses, Delta's absolute operating expenses were down 1%, despite a 3.5% increase in capacity.

These results are even more impressive on a main line basis.

For the quarter, main line capacity was up 1.2% from the prior year yet absolute operating expenses, excluding fuel, actually decreased by 2.7%.

These results were testament to the progress on cost containment to our profit improvement initiatives.

For 2004, we are expecting double-digit productivity improvements versus 2002 for all noncontract employee groups.

For example, let me share three productivity measures that indicate this progress.

Delta's airport customer service employees, waited departures per 100 hours work will increase 35% from 2002.

Also, our total cost per weighted maintenance unit is expected to drop 13% from 2002.

And our flight attendant productivity has improved 11% from 2002.

Throughout the remainder of the year, you will continue to see improvement.

This continued improvement will be driven by more cross-divisional initiatives, including improved asset utilization, the continued impact of our airport transformation program and better flight crew scheduling technology.

However, as a result of the capacity changes driven by the Iraq War and other increased cost pressures, such as increased pension costs, higher fuel expense and permanent changes to the revenue environment, we have concluded two things: First, while we remain focused on achieving a 15% fuel price neutralized main line CASM reduction compared to calendar year 2002, the capacity and cost pressures just stated will not allow us to reach this goal before 2006.

Second, domestic revenue performance remains under significant pressure with yields continuing to show year-over-year declines.

Accordingly and importantly, a 15% reduction in fuel price neutralized main line CASM will likely not be enough given the evolution of the industry.

As a result, it is even more important that we have pilot participation.

Closing this financial gap is essential to our recovery in order to achieve a long-term competitive cost structure.

Now, let me talk about the balance sheet and liquidity.

We ended the quarter with $2.5 billion in cash. $2.2 billion of which was unrestricted.

Our cash balance decreased by $500 million during the March quarter as a result of annual debt repayments and pension funding.

During the quarter, Delta chose to prefund the nonpilot pension plan in the amount of $325 million.

We also contributed $71 million to the pilot pension plan.

Our total projected pension funding for 2004 is approximately $460 million, of which $396 million was contributed in the first quarter.

In addition, we made debt repayments of approximately $400 million during the quarter, which included $236 million in principle payments on medium-term, unsecured notes.

In February, we issued a $325 million in convertible bonds in order to capitalize on the opportunity we had in the capital markets.

Also in February, we settled all of our fuel hedges prior to their settlement dates, resulting in cash proceeds of $83 million.

Let me explain why this was done.

Delta hedges its fuel to reduce volatility, not for speculative purposes.

Or analysis showed that the value of our hedges was well above analyst estimates for fuel prices and the decision was made to settle the hedges in advance.

The deferred gain from these transactions will be realized as an offset to fuel expense on the P&L as the fuel purchases that were being hedged are consumed throughout the year.

So, there will be an ongoing impact of these hedges.

Cash flow from operations for the quarter was negative $280 million, including pension funding.

Excluding pension funding, Delta-generated positive cash flow from operations of $116 million.

Capex for the quarter totaled $227 million, including $102 million for aircraft and $125 million for nonaircraft capex.

As you are aware, the pension relief bill was recently signed into law.

As a result of our funding measurement date, we expect this bill to have minimal impact to Delta in 2004.

We will realize the benefit of the legislation in 2005 and 2006.

Our current estimates still indicate that our 2005 pension funding will be larger than 2004.

Now let me provide further guidance for the year.

For the full year, we are still expecting an 8 to 10% capacity increase, including ASA and Comair.

Let me break this capacity increase down by quarter.

We expect capacity to be up 15% to 17% in the second quarter, 90% of this increase is from war restoration, the annualization of Song and DCI growth.

Third quarter capacity will be up 10% to 12% and fourth quarter will be up 6% to 8%.

At the end of 2004, our main line capacity will still be approximately 10% below our year 2000 main line capacity as only 3% of the full-year capacity increase is driven by new growth.

Looking to advanced bookings for the second quarter of 2004, bookings look strong as we annualize over the war period.

Overall, the bookings are up from the prior year with international advance bookings up more than domestic year-over-year.

However, as we've discussed at length, we don't expect this to translate into any kind of pricing power.

Turning to cost guidance, the results of our profit improvement initiatives will continue to show progress throughout the year.

For the second quarter 2004, we expect consolidated CASM to be down approximately 9% and fuel price neutralized CASM to be down 10% versus prior year.

For the full year, consolidated CASM is projected to be down 4% to 5% and fuel neutralized CASM to be down 5% to 6%.

With respect to capex, full year capex is expected to be $1.1 billion.

This consists of approximately $500 million for regional jet aircraft, $300 million for aircraft mods in inventory and $300 million for nonfleet expenditures, largely comprised of technology spending to enhance operational productivity and customer experience.

For the second quarter of 2004, we expect capex to be approximately $250 million.

This includes approximately $110 million for regional jet aircraft and $140 million for nonaircraft expenditures.

In closing, although the March quarter results were better than last year and in line with our expectations, we have much work ahead of us in order to achieve our goal of sustained profitability.

Although obtaining a competitive pilot cost structure is imperative to Delta's success, we will continue to focus on the four key areas that Jerry discussed in his remarks.

They are: cost competitiveness as well as rebuilding the balance sheet; the ongoing strategic reassessment; and enhancing our customer service.

We will update you accordingly on our progress throughout the quarter.

That concludes our prepared remarks.

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

Thank you.

We are now ready to begin the question and answer session.

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

To withdrawal your question, please press star 2.

Due to time restraints, please limit your questions to 1.

One moment, please, for the first question.

Our first question comes from Dan Hemme of Prudential Equity Group.

You may ask your question.

Hi, good morning.

I'm just wondering if you can peel back the onion layer on what's going on with the yield erosion.

Maybe more specifically than what is happening from a competitive standpoint.

How much of the yield erosion is structural in nature with the change in the frequencies for longer distance?

My perspective, as you look across all the -- the business units, so to speak, the yield erosion does have some implication from that, but I do believe the majority of our yield erosion is due to low-cost carrier incursion into markets that are very strong markets for Delta.

Okay.

Thanks very much.

Helane Becker with Benchmark, you may ask your question.

Thanks very much, operator.

Gerry, I saw the other day that Terry Erskin is retiring from Delta.

And I was just kind of wondering, as he's been the lead negotiator, how that will affect the negotiations for the pilots?

Well, Helane, I'm sorry to see Terry go, but he has his own plans and there's not much we could do about that.

I suspect that it will be a bit of a loss early on in the sense that, we have some expertise in house, but we may have to acquire an additional person to assist us and I would expect to do that within the next several weeks.

So that -- at the moment, and our discussions with ALPA there is a review going on of first quarter performance, and also some other numbers that they've asked to look at.

And during that period of time, we will probably do some restructuring and -- and build on the strengths that we already have.

Thank you.

Jim Higgins with CSFB.

You may ask your question.

Yes, hi.

I'm just -- I think Air Tran begins to get their 737s around June.

And I'm wondering -- obviously deployment of those could -- could -- could have a significant impact on -- on your operations.

Any way to read any tea leaves about where they may be deploying those?

Do you think they may be focusing on Atlanta?

Or any thoughts on that issue?

I have enough trouble discerning what's happening in a variety of different marketplaces without trying to speculate about where they're going! [ Laughter ]

I knew it was a tough question.

We really don't know and we have no -- no way of guessing how they're going to deploy those.

Well, I suspected that was the case.

Just a quick follow-up.

The -- the pension contribution you made in the first quarter, would that have had to have been made regardless of the outcome of the bill in Congress?

Yes, for the most part that is true.

We did make a strategic decision to prefund in the first quarter.

So, it depends on how you view the world.

The deficit reduction legislation coupled with the interest rate legislation, because of our measurement date doesn't have a material impact.

We did choose to prefund in this first quarter.

It was a good decision for Delta both for Delta from a -- from a management perspective, as well as for our employees, so, we made that strategic decision.

Great, thank you very much.

Jim, just let me go back again about Air Trans.

They have announced there will be no new markets and they've also announced the elimination of their RJ program beyond that.

Right, right.

Great.

Thank you very much.

Yep.

Dan McKenzie with Smith Barney.

You may ask your question.

Thanks, operator.

Wondering, is the accumulated benefit obligation the same as the ARISA (ph) obligation for Delta as I look at the funded status of your pension plan?

The ABO and the ARISA obligation are not the same and they vary both in the calculation as well as in the timing.

So, the two -- while they are somewhat similar, they do not track and do not track from a timing perspective.

Can you provide any sense for which would be the larger obligation, the ARISA or the ABO?

The 10K has a great discussion of the pension requirements and obligations, both from a funding, as well as from a GAAP perspective.

So, I'd refer you to the 10K or Gail will be glad to illuminate.

All right, fine.

And then regarding Delta's fleet plans, I know Delta currently has 21 767-400s that are about the same size as the 777s and I understand both fly nearly the same mission, you know, expect for -- except for Atlanta to Tokyo.

I know the Pacific revenues for Delta are small, relatively speaking.

I'm just wondering, what is the logic behind these two separate fleet types?

Well, basically the 767s have been a part of the Delta fleet for quite a while.

The 777s do have a different range capacity and allow us to go to different markets.

Through time, we've had more than one market in needed a 777 versus the 767 and we did use that.

For example, Atlanta/Rome is a market where the 777 is required, as well as some routes that we were planning and/or expanded into pre-September 11th and had to withdrawal from as a result of the September 11th terrorist attacks.

So, our plans would entail and - did and would entail potential to use an aircraft with more range.

I'd say secondly, the 777 is a very efficient aircraft and so in making decisions to expand wide body capacity, 777 was a logical choice.

Okay, thanks very much.

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

Yes, Gerry, before you took the reigns, the company, at a meeting, had told me you were planning on bringing planes back from the desert this year.

I just want to verify if that was true?

And if -- if so, capacity increase is kind of high for Delta compared to a lot of other legacy carriers.

I'm just wondering if that's contributing to the -- the yield problems the industry is having?

Actually, two thirds of the increase is going to be out of increased flying and increased utilization out of our existing fleet.

So, there will be a very small increment from the desert.

And we -- we do -- are contemplating bringing in a limited number of planes from the desert, but most of it, as I say, two-thirds, will be increased utilization, which is one of the derivatives we've gotten from the Song operation.

Okay.

And speaking of Song, I guess you're looking at the whole- the model and you said that you're going to report to the Board of Directors by August.

And I'm just wondering if Song doesn't work, or if the major legacy carriers like yourself decide they can't compete in many point to point markets, would there be a major change in the model such as retreating to your hubs in international where you can probably make money?

Where you have a competitive advantage against the low-cost carriers?

And is that some of the stuff that you're contemplating in the future?

Ray, I don't want to get to far out in front of where we are on this process and -- as -- we've told the Board we are open-minded on virtually everything that we're looking at and have not come to any even tentative conclusions.

So, it really is premature to try to answer that question.

Okay, I understand.

And then finally, you said there's no way of really raising cash -- there's no financeable assets and your balance sheet is a wreck.

You still do own two regional airlines.

Is there any plans maybe of doing an IPO on one or both of those?

No, we think they are essential to feeding our -- our hubs and providing additional service.

So, we're not -- I mean -- I go back to the beginning: Anything is open, but based on how we are now looking at it, the connection carriers are an integral part of our business plan going forward.

Okay, good luck with the pilots.

Thank you.

Jamie Baker with J.P.

Morgan, you may ask your question.

Yes, good morning, everybody.

Michele, your revised cost guidance, how much of that, if any, is predicated on reconfiguring your aircraft?

I know you recently began increasing the capacity on certain 76-types, for example.

It's a negligible impact.

Most of the cost guidance that shows these improvements are productivity improvements.

There is asset utilization involved, and the cross functional efforts that require the asset utilization to take place are later in the year, but that particular amount is a negligible number.

Okay.

And secondly, your unrestricted cash balance for the quarter was -- was about $200 million higher than what you had -- or rather the Company guided to as recently as three weeks ago.

Can you give us some color as to where the variance occurred?

Yes, I sure can.

We -- two things, when we guided back in -- March 22, we talked about approximately $2 billion and that was truly meant to be an approximate number.

So the difference between $2.2 and $2 wasn't all that surprising.

However, we did see a surge of -- of bookings into the summer and it increased, as to our expectations, what -- what our advanced bookings look like and therefore the cash balance from that.

Okay, that makes sense.

Thanks a lot.

Sam Buttrick with UBS, you may ask your question.

Yes, thank you, good morning.

Your -- you're clearly, entirely uncompetitive with respect to your existing pilot wage structure.

That's obvious to everybody and you've highlighted it.

And it will, you know, work itself out one way or the other sooner or later, preferably the former, probably the latter.

But how would you compare with those other costs that you have, besides pilot costs, as it turns out?

How would you compare your total CASM versus say AMR, over the balance of the year?

And I recognize AMR isn't the only benchmark out there, but, you know, as we see it, you know, Delta, even with the highest pilot costs by far, you know, has lower stage-length adjusted costs than AMR for the balance of the year.

So, how would you assess your total cost position?

Let's take it this way, I will take the first crack and Gerry may want to illuminate.

When we take a look at our performance without pilot costs, take the pilots out and look at all the rests of the costs, we are at or near the best of all of the network carriers.

Right.

So, in that regard, pound for pound, we look similar from a wage rate perspective, our people end up being in the top tier, but not always at the top.

But with the productivity metrics that we are able to measure, we believe that we are outperforming, from our employee base perspective or at least our noncontract employee, excluding pilots.

So, I believe if you -- if you do those types of analysis, you would find that that's where we would sit.

Obviously the pilot cost drive, the different metric, and change that metric and put us at the higher end of -- probably in the top three and every quarter it changes somewhat as to where we end up.

We will do that analysis and be very verbal about where we stand on a total cost perspective as soon as others report, but we do expect to be at or fiscal year the highest when we include pilot costs.

This is Gerry.

The disparity is -- is really very large.

Our pilots, on a block hour basis, are paid 59% more than American's, 82% more than United, 193% more than Jet Blue, and 207% more than Air Trans.

And -- and every seat in an Air Tran plane that takes off in a competitive market is 67% less costly than a Delta seat.

So, you can see where that disparity is and -- and what has to be addressed.

And quickly.

I guess, really, what I'm getting at is -- is -- and I agree with everything you're saying about your pilot cost, but, you know, they're only -- I wouldn't say only, but, you know, whatever, 12% of your total costs or whatever the number is.

And overall you've got a relatively competitive cost structure and you will get the pilot costs one way or the other.

But I guess kind of what I'm getting at is, do you inherently have a revenue disadvantage because of certain network characteristics or product attributes that requires that you have a lower cost structure than -- than, you know, the other large network carriers.

Let me start, Gerry may want to add.

I would tell you that I believe that there is truth there.

If you look at the Delta network and where we fly, we are significantly a leisure flyer.

We have a significant market presence in Florida.

We fly to the East Coast, up and down the East Coast, which is a very highly-contested market, and this has been true for quite some time.

This factor is not new and we continue to work with our network to maximize on the opportunities that exist, that are stronger markets from that perspective, but also fly appropriately, so we can address the needs of our leisure customers.

Historically, Delta has been at the low end of the network carriers, if not well below certain of the network carriers in terms of where they sat on a total cost basis and at a minimum, must regain that position.

As the market begins to change and move, we do -- and as I indicated in the call, we understand that while we set a goal for ourselves of 15% unit cost reduction, around 18 months ago, as we did a longer term plan for the Company, many events have occurred in the airline industry, across that 18 months that have made us, as part of the strategic reassessment as well as part of managing the Company, question whether 15% will be enough.

And further to that point, as you make that statement, you know you're walking inside the networks and towards the low cost carriers, in terms of where the total costs for the Company need to end up.

And I think that your point of where we fly is critical.

Any company -- any airline's network structure is going to have an implication on its capability to produce revenue and revenue premiums.

These are the other competitors.

That -- that exposure, -- for Delta, is just about 70%, just maybe slightly under that.

But as you can tell, when you watch Southwest, for example, building up rather rapidly in Philadelphia, you're going to see it increase.

So, you're getting a rather rapid building of that and that is going to keep that downward pressure on yields.

It is -- it is a structural change and not just a cyclical one.

Right.

Lastly, I would just make perhaps the obvious observation that, you know, while I certainly concur and appreciate your earlier comment regarding, you know, the -- the integral aspect of your currently wholly-owned, you know, regional carriers and how important they are for your overall network, that economic objective can be fully realized without -- without holding the equity position.

Well, we've obviously looked at a lot of alternatives and will continue to look at a lot of alternatives and we're aware of that statement.

Yeah, great.

Thanks very much.

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

Good morning, guys.

Just a quick question for -- for Gerry.

You're in the midst of performing what you've called, you know, a soup to nuts review of anything that Delta does.

Yet you've got a key position that's open, you know, with the resignation of Fred.

I'm just curious if you -- if you can help us think through -- I mean is there something about that process that is held up by the fact that you don't have somebody in that position?

Should we expect an internal appointment?

Something coming soon?

Can you help us think through how that's going to work?

Well, you've really asked two questions.

One is does it affect the strategic reassessment that Fred has departed?

And the second one is what are you going to do about his role?

In response to the first question: I mean I think Fred would have been a contributor had he stayed, but as I mentioned in my opening remarks, this is a very strong and very passionate officer team and they've worked with Fred for a long time.

I think they know what he thinks and how he thinks and therefore even though he may not be there in person, the kinds of views that he would have expressed are part of the consideration that we have in front of us.

And so I -- I don't think we're going to miss a beat on that score.

I will say that in -- in terms of the future, I don't plan to appoint another President and -- and may not even appoint in exactly the same way a Chief Operating Officer and probably don't.

My -- my plan is to -- at the Board meeting next week, which will follow the shareholder meeting, is to review with the Board my thoughts and plans about it and -- and discuss with them the recommendations that I intend to follow, and they will probably be announced within a week or 10 days after that.

I'm sorry, the recommendation in terms of --

Of succession for Fred and how we're going to manage the various responsibilities that were under his supervision.

Okay.

I guess what I was driving at is does it complicate the situation at all that you're performing a strategic review without the input of someone who will almost surely be tasked with executing a significant portion of it?

You know, I really don't think so.

I think that -- that one of the contributions that Fred had to make was to really give his recommendations to the -- to the process and -- and he was fully debriefed before he left , and so we had a full exposure to his views and his recommendations and they will be carefully considered.

And I suspect that you're going to find that -- and this is directly responsive to the question you just asked, that out of the pool of people that are working on that, are the ones that will succeed to the responsibilities that -- that he formally supervised.

Okay, great, thank you.

Just very quickly, Michele, is there any way that you can just walk us quickly through sort of the -- the financing flows as we move through the remainder of the year?

The first question would be, do you have a tax refund that you're going to be able to get at some point this year?

And then is -- should we assume that your fleet capex is funded but nothing else is?

And can you just remind us exactly what the date of the additional $300 million maturity is and when you plan on making that $65 million incremental pension contribution?

I will -- much of that information is in the 10K.

I will make a good attempt at giving you the specific answers.

First, there will be no sizeable tax refund.

The Federal tax refund has been exhausted.

There could be some moderate other types of tax refunds coming in from state taxing authorities.

The pension funding contribution: There are small quarterly contributions to be made with one of about -- and this is a guess, I'm trying to remember, but call it $35 million in the fourth quarter, but the rest are more or less quarterly contributions.

Okay.

The debt repayments occur more or less, I think, throughout the year.

There may be one that's slightly larger in the third quarter but that is, I believe, by quarter, illuminated in the 10K.

And then finally, of the fleet capex is financed, fully financed and we believe the nonfleet capex will be fully covered by cash flow from operations.

Okay.

And did your comment earlier or Gerry's comment earlier, should we take that to mean you're not planning on issuing any incremental debt?

That's absent funding regional jets, but there's not a specific need to fund additional debt.

Thanks very much.

David Strine with Bear Stearns.

You may ask your question.

Thanks, good morning.

Two questions.

One broad and one specific.

The broad one for Gerry.

Given that you have made some progress in -- in running through your -- your review of the company, at this juncture, you know, what have you seen -- or have you seen anything outside of labor, specifically, that you think can be radically changed?

And the second question for Michele.

In '05, I understand that you said that the cash contributions for the pension will be higher than -- than '04.

Do you know what portion of that is DRC?

The -- the -- the benefits from deficit reduction contribution per se, I do not know exactly what the benefit is.

There is probably on the order of, you know, a hundred million, a couple hundred million.

And the reason I can't give you more specific answers to the DRC question is because we do not have the calculation done vis-a-vis what '05 contributions are in such a manner as to give guidance.

Our plan year is June 30.

Our GAAP year is September 30, so, we have many moving parts, vis-a-vis doing those calculations and will give guidance as to what we believe the '05 contribution is and what that DRC specific impact was as we get closer to those dates and understand the implications of interest rates.

Although, you know, I did say in the call and would reiterate here for everyones' consumption, that we do know that that contribution, even with DRC, would be higher than it is this year.

Yeah, got it.

Okay.

Let me take the first part of that question.

I mean you couldn't listen to all that's been said without coming to the conclusion that we have high costs and we're in a revenue environment where even when there's strong demand, the -- your yields are under pressure and not able to hold up.

So, that -- that much is clear.

What -- and I -- I think it's -- it's important to understand that everything is on the table.

We -- we're going to look at -- at everything that can be done.

And there are some dramatic changes that can be made, but I really -- it's not appropriate to get into it at the moment because it would be pre-judging the way it's going to turn out.

But there are some -- some very dramatic and -- and radical changes that can be made.

So, in terms of -- in terms of, you know, telling folks what -- what those changes will be, do you think we will really have to wait until the end of the summer?

Just at this juncture you your can't quite put your finger on it, or you do know what it is but you feel can't make a full conclusion yet because you need more time to -- to assess the whole company?

No, no, let me emphatically say I do not know what it is!

I -- we -- we are in the middle of -- of a process, and that process is not going to play out until sometime late in the summer and at the moment I've -- I couldn't prejudge and I have no fixed notion of how it's going to play out.

Okay.

Thanks a bunch.

Sally, we have time for one more question.

Thank you.

Our final question comes from William Greene with Morgan Stanley.

You may ask your question.

Yeah, good morning.

I was wondering if you folks could talk a little bit about the rationale for the 8% to 10% capacity increase given the size of the losses?

Does it suggest that were you not to grow capacity this much, the losses would be larger?

I think the way I think of the capacity increase is that certainly we justify those based on what we believe the markets that we're going to serve can produce.

And also remember that a good bit of this growth is actually part of prior year capacity reductions due to the war.

So, only a 3% increase due to growth.

Also, we do know that as we add this capacity, it is a positive cash impact on the Company.

The flying clearly does more than cover marginal costs and improve the cash flow characteristics at Delta.

Okay.

And then one last question, Michele.

How much longer can you recognize a tax benefit on the income statement from these losses?

We have reviewed that over the -- you know, obviously review that every quarter and have reviewed it extensively.

At this point, we're comfortable with continuing to have that item in our financial statements as our projections indicate that we'll be able to use the NOLs into the future.

So, but, obviously it's a -- it's a matter of constant review.

Is there a time -- sort of can you estimate how many more quarters you can do that?

I really can't at this time.

We have not given guidance on that historically and I can't really elaborate, but I would tell you that certainly for the first quarter of the year we felt very comfortable.

Okay, thanks for your help.

Okay, well that concludes our call for today.

We appreciate you joining us and we look forward to talking to you again next quarter.

Thanks so much.

Bye-bye.