達美航空 (DAL) 2004 Q2 法說會逐字稿

Good afternoon and thank you for participating in the Delta Airlines conference call. All parties will be able to listen only until the questions and answer session of the conference. This call is being recorded at the request of Delta Airlines. If anyone has any objections, you may disconnect at this time. Monitoring today's call is Ms. Gale Grimmett, Managing Director of Investor Relations. Ms. Grimmett, you may begin.

Thanks, Sally. Good afternoon, everybody. 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 life transmission as well as any future use of the recording. Any recording or other use or transmission of the text or audio for today's call is not allowed without the express written permission of Delta Airlines.

Today's discussion also contains forward-looking statements that represent our belief or expectations about future events. All forward-looking statements involve risks and uncertainties that could cause the actual results to differ materially from the forward-looking statements. Some of the factors that may cause such differences are listed in Delta's SEC filings. Also in today's comments we will include certain non-GAAP financial measures in the discussion of our company's performance. You can find the reconciliation of those measures to comparable GAAP measures on our Investor Relations web site at delta.com.

With us this afternoon are Gerald Grinstein, Delta's Chief Executive Officer; Michael Palumbo, our Executive Vice President and Chief Financial Officer; Jim Whitehurst, our Senior VP and Chief Network and Planning Officer, and Ed Bastion., our senior Vice President of Finance and our Controller. One last item before we begin this afternoon, 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 follow up.

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

Thank you, Gail. Thanks, everyone, for joining us. Gail's already introduced Mike Palumbo, but he became the Vice President and Chief Executive Officer in May. He has quickly become valuable and highly-valued member of our senior management team. After reviewing the June quarter 2004 results, Mike will also lead the Q&A session at the end of this call. First though, let me briefly talk about Delta's plan to transform so that this airline can compete and succeed in the new marketplace that is radically different and still changing. We will begin with a brief overview of the financial results released this morning.

Delta reported a second quarter net loss of $1.96 billion for a $15.79 loss per common share. This $1.96 billion loss includes two non-cash charges totaling $1.65 billion. One of those charges reflects the reserve against the company's net deferred income tax assets; the other recognizes a non-cash settlement related to the company's defined pension benefit plan for pilots. Excluding these charges, Delta reported a second quarter net loss of $312 million, or a $2.55 loss per common share. In addition, the company ended the quarter with $2.0 billion in unrestricted cash, down from $2.7 billion at the end of 2003, and $2.2 billion at the end of the March 2004 quarter.

These results underscore the seriousness of Delta's current situation. Like all network carriers, we are operating in a fundamentally and permanently altered marketplace. Delta has been working diligently to the create a transformation plan that will address these changes and allow us to be a viable company and formidable competitor over the long-term.

Because the new marketplace is not based on a temporary industry cycle, the changes we make must be structural and permanent. We believe Delta is bringing a careful, methodical approach to the planning process. The company's intent is to avoid a piece-meal response by instead setting forth a clear, strategic direction, supported by bold and decisive initiatives. Delta's goal is to make it comprehensive, then do it once and do it right. We are now moving into the final planning stages.

In the leadership arena, Delta's new senior management team is now in place, fully engaged, and committed to the transformation process. Since the May announcement of the new seven-member team, this group has moved quickly to the make sure we have in place an integrated organization with clear lines of responsibility.

They understand both Delta's long-standing values and the dramatic, ongoing changes within the industry. I believe we have the right people in the right places to transform and rebuild our company, and to do it in a very short time frame. In another arena ,strategic reassessment planning teams are finalizing the framework and mapping out actions that will play a major role in Delta's transformation.

Three weeks ago, Delta's leadership group met again to review the most recent steps. As you know, we intend to present finalized plans to Delta's board of directors in late August. Full details won't be presented publicly, for obvious competitive reasons. You can, however, expect a prompt announcement and roll-out of some major strategic and operational initiatives shortly after the Board's approval.

At the same time, Delta continues to pursue all elements of a revised cost structure that will correspond to the revenue base our network can deliver. Our goal is to achieve long-term viability, not intermittent periods of unsustained profitability. That requires Delta to put in place a cost structure in line with our ability to generate revenue. Today we compete in an environment where pricing is increasingly dominated by low-cost carriers. The resulting financial pressures are enormous. Every day, the cumulative weight of these pressures and associated developments grows heavier.

Among these factorings are greatly increased fuel costs, estimated to be $680 million higher in 2004 as compared to 2003, and so far, Delta has had very limited ability to pass these costs on. Other factors include credit rating downgrades totaling six since May of '03, as well as continued deterioration in yields as low-cost carriers expand into more markets. And yields are almost certain to deteriorate further, based on recent announcements by several low-cost carriers, that they'll slash fares even further this fall on a broad range of routes.

As a result of such developments, last year's estimates of the level of cost reduction Delta needs to achieve long-term validity -- viability, are no longer valid. The hole we must fill is considerably deeper today than it was a year ago, and the hole gross deeper every day. I have spoken about this increase in GAP in recent weeks at meetings across the Delta system with pilots and non-pilots, and national and local media interviews, and during a webcast financial conference.

A realistic current view of the cost challenges we face is absolutely necessary if we are to meet and overcome these challenges. All of us at Delta are, of course, encouraged by the recent communications from the Delta master executive council of [alpa]. We welcome the offer to resume discussions and to consider how to make the necessary contributions to Delta's transformation and cost reduction efforts. But let me be clear: while full participation by pilots based on Delta's current financial situation is crucial to our company's future, simply reducing pilot costs will not completely solve the problem.

That's why we are moving aggressively ahead with other essential components of the solution, including Delta's profit improvement initiatives, or PII. Importantly, PII has already resulted in more than $1.8 billion in benefits over the past 18 months. Our on-going progress, as outlined in our press release, is reflected in the 11% year-over-year improvement in mainline fuel price neutralized chasm during the quarter.

PII benefits have been achieved with improved efficiency throughout our operations, as well as considerable sacrifice and contributions by Delta's non-contract employees. Obviously, however, more will need to be accomplished in all areas, and quickly. As part of this effort, Delta's focus on PII will continue and intensify in the months just ahead.

Before I turn the program over to Mike, let me emphasize once more how seriously Delta views the need for transformation throughout our company. The industry marketplace has changed fundamentally and permanently. Even the usual seasonal uptick in the second quarter can no longer be counted on, as our results today show. Because we believe the current competitive situation leaves little room for error, Delta is given very thoughtful focus and clear-sighted consideration to how we will proceed.

We are now approaching the final stages of that assessment process, including planning for the implementation of key strategic operational and financial initiatives. Based on the rigor applied to the process as well as the dedication and determination of the entire Delta team, I have a lot of confidence that this transformation will succeed in establishing long-term viability.

This year, Delta marks its 75th year of passenger service. We intend to do what is necessary to build a solid platform that will take Delta to its centennial. And now, let me turn the program over to Mike.

Thank you, Gerry. Good afternoon and thank you for joining us today. As Gerry mentioned in his remarks, the $312 million loss at Delta -- that Delta reported this quarter, excluding non-cash charges, is clearly not sustainable. We must transform this company for long-term viability, and time continues to be of the essence.

Gerry has already discussed how this goal cannot be accomplished without pilot participation. However, it is not the only requirement. So after a brief update of our results, I'll spend sometime discussing the other initiatives we have accomplished, and those that we have underway.

With this in mind, the key items I would like you to take away are, first, that despite increasing in passenger traffic, yields remain and will remain significantly under pressure. As a result, we do not anticipate any type of revenue recovery in the foreseeable future. Second, although our overall results were disappointing, we continue to make significant progress on our profit-improvement initiatives during the quarter. But we have a long road ahead.

And third, as you know, the second quarter has historically been a time when the airline could build it's cash position. However, Delta's unrestricted cash balance deteriorated 214 million from the March quarter to the June quarter, ending with 2 billion on June 30th. Although cash flow from operation was slightly positive, it was significantly impacted by increased fuel prices and weaker domestic yields.

I'll begin with a brief revenue overview from -- for consolidated Delta, which includes our wholly-owned connection carriers, ASA and ComAir. Also, revenues and expenses for our contract carriers, ACA, Chautauqua, and SkyWest for the three and six months ended June 30th, and the three and six months ended June -- I'm sorry, June 2003 -- and the three and six-month ended June 2004, have been reclassified in passengers revenues and operating expenses, rather than showing as a net amount in other revenues.

For the June quarter, system capacity was up 16.1% year-over-year, while passenger revenues decreased -- or increased 13.4%. As such, passenger revenue was down 2.3% versus last year. The weakness in the quarter was driven by the domestic entity in which the increase in revenue did not match the increasing capacity due to continued yield pressure. As in recent quarters, traffic held up well but yield continued to show weakness.

It is important to note that during the quarter, there were several attempted fare increases. Some of those increases were sustained, most of which were initiated by low-cost carriers. Those that were sustained did not have a material impact on Delta due to the regional nature of the increases. North American RASM including connection carriers, was down 1.3% on a 12.8% capacity growth. Yields were under pressure and fell by 2.7%.

As we continue to see strong low-cost carrier growth in the Atlanta West, [transcon,] and point-to-point Florida markets, international performance continued to be strong -- or continues to be strong versus last year and versus 2002. As a result of the restoration of capacity that was reduced in 2003 due to the war in Iraq, transatlantic capacity grew 40% during the June quarter, yet RASM still grew 1.4% -- also grew 11.2% versus 2002.

Latin America RASM. was up 5.2% on capacity increase of 6.2% and RASM was up 16.8% versus 2002 Again, for this quarter, our year-over-year RASM performance under performed the industry in both domestic and international.

Part of this under performance is due to year-over-year comparisons and part is the result of the network we fly. As you recall, Delta's capacity was affected more than that of some other carriers last year as a result of the war, and therefore, we have had a larger capacity restoration this year, which adversely affects the year-over-year comparison.

Since our international growth was much greater than our domestic growth our system RASM performance versus the industry was significantly impacted by the geographic mix of capacity during the quarter. Also note that per the Department of Transportation guidance, last year, Delta included the passenger revenue associated with the craft in passenger revenues; however, the ASMs and RPMs were not included in the operating statistics.

As such, last year's RASM level was artificially high. From a network perspective the domestic RASM weakness is a function of both increased asset utilization, increasing capacity, and the markets in which this increased flying is occuring. For example, [inaudible] has not yet lapsed it's capacity growth, and we have added capacity in a number of [loan-home] markets. These are positive P&L decisions but do negatively affect RASM. Finally, the fact that Delta is more dependent on its domestic network than other network carriers makes us more vulnerable to domestic-yield weakness.

Now I'd like to turn to our overall financial and cost performance. For the June 2004 quarter, Delta reported a net loss of 1.96 billion, or $15.79 per diluted share. As we discussed in our 8-K filing on June 13th, these results included two significant non-cash charges, a 1.53 billion charge related to deferred income taxes. This charge is a result of a significant impact to Delta's actual and projected financial results due to the higher-than-expected fuel costs and lower-than-anticipated domestic yields.

As a result, it is unclear as to the timing of when the company will be able to generate sufficient taxable income to use its deferred income tax assets. And we also recorded $117 million settlement charge related to the pilot's defined benefit pension plan. Delta expects to record a similar charge during the second half of 2004.

Excluding these non-cash charges, Delta reported a loss of 312 million, or $2.55 per diluted share. [Chasm] for the quarter, excluding the settlement charge and prior-year government reimbursements, was down 4.9% despite record-high fuel prices.

Whole fuel expense was up 53.8% from last year. Fuel prices rose 37% to $1.05 a gallon during the June quarter; however, fuel price neutralized [chasm] excluding these items, was down 9.1% for the consolidated system and down 11% for the main line.

As disclosed in the March 2004 quarter, Delta settled all of its fuel hedge contracts in February of 2004 prior to their scheduled settlement date, resulting in a deferred gain of $82 million. In the June 2004, quarter, Delta recognized the reduction in fuel expense of 31 million, which represents a portion of this deferred gain.

The profit improvement initiatives continue to show progress during the quarter and the results can be seen when analyzing our operating expenses. For the June quarter, excluding the settlement charge, fuel expense, and prior year government reimbursement, main line operating expenses rose only 2.2%, despite capacity being up 16%. These results are a testament to the hard work of our employees.

Over the past 18 months, Delta has realized 1.8 billion of benefits from the profit improvement initiatives. During this past quarter, we continue to press forward on other initiatives identified through the profit improvement program. As previously announced last fall, we plan top implement our new flight attendant bidding system during the June quarter. As planned, this new technology was implemented last month and is expected to improve scheduling efficiencies and result in $40 million of annual savings.

Also building upon our already leading-edge technology, we have added enhancements to the electronic gate readers in the airport. During irregular operations, passengers often miss their connecting flights. These enhancements will allow those customers to now scan their boarding cards through the gate readers, receive new itineraries, new gate information, and hotel and meal vouchers, if necessary. This provides an easier process for our customers and also continues to foster productivity among our airport personnel. Furthermore, the new technology also provides us with revenue opportunity by enabling the sale of seats that are not used by passengers who miss their connection.

Overall, the profit improvement initiatives are on-track for plan 2004 benefits. However, as Delta continues to face more challenges, such as higher-than-expected fuel prices and continued deterioration in domestic yields, it is clear that our original cost- savings goal needs to be increased. As such, new goals are being analyzed within the ongoing strategic review.

Now, let's talk about our balance sheet and liquidity. We ended the quarter with 2.3 billion in cash -- 2.0 billion, 2 billion of which was unrestricted. Our unrestricted cash balance decreased by 214 million from March to June quarters. Although cash-flow from operations was slightly positive for the quarter at 57 million, it was impacted by increased fuel prices and weaker domestic yields.

CapEx for the quarter totaled 200 million, including 80 million for aircraft and 120 million for non-aircraft CapEx. On June 30, 2004, our debt was 20.5 billion, including operating capital leases, and our all end debt to capitalization ratio was 117%. In June -- in July, Delta amended an existing third-party financing agreement utilizing the same collateral pool, which resulted in an incremental 150 million of liquidity and refinanced 230 million of secured debt, originally due in 2006.

Now, let me provide guidance for the year starting with capacity. For the full year, we are still expecting an 8 to 10% capacity increased, including all connection carriers. As a reminder, one-third of this increase is the result of increased aircraft utilization and the remaining two-thirds is due to the war-related capacity restoration.

Let me break this capacity increase down by quarter. We expect capacity to be up 9 to 11% in the third quarter, and in the fourth quarter, up between 6 and 8%. It is important to note that despite the increase in capacity this year, at the end of 2004, our main line capacity will still be approximately 11.5% below our 2000 main line capacity.

Looking forward to advanced bookings for the second half of 2004, book load factor looks flat to slightly up for August and September. Overall, the book load factor is up from the prior year, with international advanced bookings up more than domestic, year-over-year. August is mostly flat, with some weakness in our leisure markets being offset by hub strength. September's book load factor is up year-over-year in all end cities. However, as we discussed at length, we still don't expect any increased load factors to translate into significant pricing power.

Turning to cost guidance. The results of our profit improvement initiatives will continue to show progress throughout the remainder of the year. For the third quarter 2004, excluding unusual items, we expect consolidated [chasm] to be flat to down 1%, and fuel price neutralized [chasm] to be down 4-5% versus prior year. For the full year, excluding unusual items, consolidated [chasm] is projected to be down 1 to 2%. Note that our guidance for the full year of consolidated [chasm] has changed due to higher-than-expected fuel prices.

Fuel neutralized [chasm], excluding unusual items, remains the same as previous guidance and is expected to be down 5 to 6%. With respect to CapEx, for the third quarter 2004 we expect CapEx to be approximately 370 million. This includes approximately 210 million for aircraft, primarily regional jets, of which a substantial portion would be financed under existing agreements, and 160 million for non-aircraft expenditures.

In closing, the results posted by Delta today indicate the significant challenges we are facing and the essential need to address these challenges. Without a cost structure that is in line with our ability to generate revenues, we simply cannot survive. We must find the Delta solution that works for us.

Clearly, we have a lot of work in front of us in order to achieve the competitive cost structure that leads to long-term viability. There is no room for to us accept anything less than that. Our plan, our efforts, and our strategies are all being developed and being implemented with this goal in mind.

That concludes our quarterly conference call in terms of our remarks. At this time, we are happy to take your questions.

Thank you. We are ready to begin the questions and answers of Q&A session of the conference. [Caller Instructions]. William Greene, you may ask your question .

[audio lapse]-- that if liquidity were to fall further, I would think it would increase pressure on your pilot group to come to an agreement faster.

I'm sorry, I didn't hear your entire question.

So the question is, why are you raising liquidity here in July if, as liquidity falls, it should make it somewhat more -- it should make it, it should put more pressure on the pilots, I would think, to come to an agreement sooner.

We're not driving any aspect of our debt or operating management based on a negotiating strategy. The decision that was made as regard to that agreement, had to with the opportunity and the appropriate refinancing of assets that was offered us. There was no consideration given to anything other than the appropriate nature of the decision as regards to the financing opportunities that was presented to us.

Okay. And then on a different point, can you talk a little bit about the growth plans in the second half? Why are they still 8 to 10%? Does that suggest that if you didn't grow at that pace the losses would be larger, or what's the rationale behind that kind of growth?

These are operating decisions and plans that we continue to execute against the backdrop that suggests that is indeed our view, that these capacity -- the planned capacity increases are consistent with restoring capacity, especially in markets where it continues to be supported by the P&L results.

And again, internationally that continues to be the case, as a regional matter that continues to be the case, and as a competitive circumstance in Atlanta, it is also important that we continue to retain or not permit any low-cost carrier participation scheduling advantage. That is to say, we can't permit a low-cost carrier to have a scheduling advantage in any market that we believe it's economic to compete in.

We'll also say -- this is Jim Whitehurst. We also, throughout last summer, had pulled down more capacity, or less more capacity down post the Gulf War, and so a lot of this still just annualization to the return of that capacity we did late last year.

Okay. Thanks for your help.

[Reno Bionchi] of Citigroup, you may ask your question.

Yes, good afternoon. I was kind of wondering, part of the $57 million positive cash flow, can you give me a sense of what was the swing in working capital, particularly in air traffic liability for the quarter?

If I could, I'll try to get back to you off-line or ask Gail to do that. I'm sorry, I don't have that detail in front of me.

Okay. Fair enough. Thank you.

[Susan DiNafrio] of Fulcrum Global Partners, you may ask your question.

Yeah, hi. Just a couple of them. One is I saw that you got 50 million you're going to be funding for pensions, and I believe that's it for the next two years. Is that correct?

I'm sorry, I didn't hear -- could you please repeat the question?

Sure. With respect to your pension, you are going to be funding I think it's 50 million is going to be for the rest of this year.

Right.

And then I believe you are able to push it off for the next two years. Is that correct?

No, that's not correct.

Okay.

We will continue to have funding obligations over the next two years.

And how much is that?

We haven't disclosed nor finally determined.

Okay. And then my other question is in other [non-op], it looks like you swung from a 30 million expense last quarter to 1 million positive this. Could you flesh that out for us?

I'd like to try, but I'll have to get a hold of the details.

Okay. Great. Thank you.

Michael Linenberg of Merrill Lynch, you may ask your question.

Hi, good afternoon. I actually, two questions. One, Gerry and Mike, throughout your conversations you talked about long-term viability and how Delta needs to have long-term viability. Have you publicly defined what metric you are looking at? Is this an operating margin target? Is this a return on invested capital that you think Delta needs to achieve consistently going forward? If you could just -- anything on that would be helpful.

Yeah. I really think it comes down to an operating margin. You've to think about it in those terms. But over a long period of time, you can't think about it any given year, but you have to do it in a segment of time, a five or six-year slice. And you have to have significant margin in some of those years, and in some of those years you're going to have less than full returns. But that's how we think about it, is in a slice of time, about a six-year piece, what kind of margins we will need to sustain the kind of company that we expect to have.

I think if I might just add to that what ultimately, in this industry, the operating profit margin contributes to, is the cash flow and the level of operating profit necessary to see a carrier through cycles, and the contribution that the operating margin has to make to that structural cash flow circumstance is the inter-related nature between the two as metrics.

The other thing that helps come to grips with the operating profit margin level is the point at which we break-even, if you will, as an operating profit matter. Which then leads you, of course, to the relationship between your unit revenues, your unit selling price, your variable cost per unit, as well as your overall fixed cost structure. So I think it's a relationship of break-even load factor as it reflects itself in operating margin, as it impacts your structural cash-flow, is what, in total, defines whether or not you are a viability entity.

So I think I understand your philosophy. But you had, at this point you haven't come up with what you think is the right number, like a 6 or 8 or 10% operating margin, or pretax margin over the long-term. Is that right?

I think it's fair to say that against a changing backdrop, there are historical standards that we probably could speak to with some pre-existing analytical validity are changing, and we are working to make the appropriate changes into our current long-term view, or our view currently, of what the future may indeed require.

Okay. And then just a quick second one. With respect to your operations, I think the last couple months, I mean, I think in May you definitely lagged the group on time. I think you were sort of down in the bottom third. Is that a function of just some tough weather in and around Atlanta, or is there something else going on there?

I think it is predominantly some very tough weather here in Atlanta I can personally attest to that. But to the point, there are a few other fulcrums that are more vital to us, and certainly anything that is controllable must be taken to the optimum, if you will, so that on-time, performance schedule integrity in the absolute, especially completion factor, are vital measures that we pay great attention to.

Okay. Thank you very much.

Bill Mastrates with Bank of New York, you may ask your question.

Thank you. First question is on are there any covenants in the RJ financing -- financings, I should say -- that are in danger of being tripped at all, or do you expect to remain in compliance, really, for the foreseeable future?

There are no such covenants and, therefore, we absolutely expect to remain in compliance.

Okay. And the second follow up would just have to do with -- I just want to confirm that this existing third-party financing arrangement utilizing the same collateral pool, that was just a rollover of longterm -- or I should say short term financing into long-term financing. Would that be correct, or is that the permission of, let's say, an expanding loan-to-value on an existing transaction? Which is a double A. T. C.

It's several fold, if you will. The same collateral pool yielded us, as stated, an incremental 152 million, I think, precisely, in incremental liquidity. The overall refinancing of that collateral pool, beyond the additional liquidity, had the effect of pushing out over $200 million of 2005 maturities, so that it was a two-fold effect.

Okay. So you received cash of 150 million, and then an additional 230 million was refinanced from '05 to '06. Would that be correct there?

No. Actually, it's pushed out a good deal further than that. We took -- the first part of that is absolutely true; 2005 will have the total, reduced sinking fund obligation. The maturity was pushed out over the next four years. So it was almost a straight line, approximate $50 million a year decline in benefits, if you will. We took $200 million and spread it out over the next four years.

Okay. Thank you.

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

Hi, guys. Actually just a couple quick questions for Jim. First, wondering if you had any insight on the impact of lapsing the ticket tax from last year on summer revenue. You had some experience in June, certainly ongoing in July.

And in general, if you could just comment on how revenue trends have been in the first half of July here, with the holiday period and so on?

Yeah. I don't think we thought it was significant last year. We haven't really seen anything that's materially in the numbers at all this year. It hadn't even shown up as a blip, though I don't think it was particularly significant last year.

Okay. And, Jim, can you just speak to -- I'm thinking particularly on the international front, there seems to be a lot of capacity that will be in the system this year that was not there last year.

You did have, at least what some people believe was pent up demand from the war, and of course, I guess one could argue the segment tax helped a little bit on the international front. What are your thoughts going forward on the international comparisons which still are holding up pretty well? Particularly for you, obviously, the Atlantic, and to a lesser extent Latin America?

Well, for us those are holding up very well. I think even though we've seen capacity up, and we've obviously been a chunk of that capacity increase, it's still just relatively not as competitive with, kind of, unstructured fares. It's still part of the traditional, main line carrier-type fare structure, and therefore, we haven't seen the same impact that we've seen domestically, where when we've gone to removing the fare fences, we've proven that we can go to unheard of load factors without having any power to push yields up.

That's not true internationally. We'll obviously see what happens is that other people make competitive responses internationally, but for right now, it is behaving a little more normally, i.e., when you have high load factors, we have been able to do a little bit more on the yield front. I think that is likely to continue for a while. Obviously, longer term, we'll see what happens with that competitive environment. Also, Gary, I'll follow up on your first question. I just can't see it in the data, but we'll follow up with more detail.

And one final one, I guess, just globally. Are you guys going to provide some reconciliation of -- I know you've got the first two quarters, I guess, restated, or we can figure it out, if we're ambitious, that we can do the first and second, the third and fourth for last year. Do you have some statistics that you are planning to distribute so we can reconcile our models?

Yes, and I'll ask Gail to help us with that.

Thanks a lot, guys.

Jamie Baker with JP Morgan, you may ask your question.

Hi, everybody. Gerry, you indicate the results of this strategic review aren't intended to be made public. I guess my first question is, why not?

Well, for obvious competitive reasons, whatever can be made public ,which we don't anticipate having a competitive reaction to, we might do that, but there are some things that are going to be, changes, I suspect, that are going to be of interest to competitors and I don't want to telegraph that punch. So that's one reason.

Well, should we presume, therefore, that more radical change, i.e., substantive fleet simplification or hub closure is not to be included?

No, no. I wouldn't jump to that conclusion at all. In fact, I mean -- I didn't mean to say that that was, Jamie, that that covered everything, but there are certain parts of it that will come under the "not to be disclosed" category, but there are other things that we will articulate and make public.

Okay, I see. And as a follow up to Mike, I guess, is debt repayment going to be an input or an output in the restructuring process? I mean, in other words, do you need to have lower debt burden now in order to thrive, or does thriving result in a lower debt payment eventually? The words of the press really seem to imply the former.

Jamie the answer is two-fold, unfortunately, and a little intricate. I mean, the answer is to be viable, we must have not just cost in line with our revenues, we must have a structural cash flow that's consistent with our capacities to generate cash. And that is a -- sort of based on where we are and where we are going in terms of our capacities to pay in the absolute.

The other part of it is attacking the sheer condition of the balance sheet. And the condition of the balance sheet at 117% of debt to capitalization, suggests something that isn't just related to earnings power, if you will.

Does that also suggest that if and when you have a substantial check from your pilots, that if the capital markets become more receptive that you wouldn't do any more damage to the balance sheet, rather, that you would potentially pursue, well, bankruptcy?

No, no. The answer to that is no, but with the following clarification. The answer is that the company needs to be viable; viable means at some level, self financing. That is to say, to generate enough cash so that a structural cash flow can be served.

Additionally, the balance sheet and our capacity to do things like refleet the airline, has to be in synch and not have the good news be that we're refleeting the airline, the bad news is that capital costs that will, once again, make us nonviable. So we have to blend those two objectives, or at least two objectives, if you will.

Obviously, a viable airline has a greater capacity to pay all obligations and not just debt. On the other hand, it is a relatively nonviable situation to be at 117% of debt versus capitalization.

Okay. That's a big help. Thanks, gentlemen. Thanks, Gail.

David Strine with Bear Stearns, you may ask your question.

Good afternoon. This question will go to Gerry. I think earlier in your comments you mentioned that partly due to yield pressure, the hole you're in now is deeper than you had expected last year. And my question is, with respect to the method of projecting yield, is that changing for you? And is there some sort of baseline stabilization that you are assuming, or in your assumptions when you are thinking about cost cutting, are you assuming a chronic decline in yield indefinitely?

And if so, what does that mean for your projections for costs over, not the next quarter or two, but over the next three years or five years, for that matter?

Well we haven't yet been able to discover a floor to how far our yields can go down. And I think as you look at it, and as you look at the pricing actions that have just taken place, you are going to see continued erosion in yields. There's no way to know how far they are going to go down, but we have seen that continued erosion.

So for planning purposes, we have to look at an environment where we expect yields to be very weak, way out into the future. And I don't see any other way to analyze it than that, and therefore, you've got to try and -- as you project out -- you have to build a cost structure that's going to let you achieve the viability in that yield environment.

And when you say, assuming very weak out into the future, are you assuming an acceleration of the weakness or deceleration of the weakness?

I think maybe in some ways, it's been better expressed as the premium that a network or a broader network carrier might be able to sustain, is shrinking. I mean, the absolute level of yield is going to be a market circumstances, that's correct. But I think as we look to that which is supportable in terms of the incremental infrastructure that is required at a network carrier, that gap is, I think, narrowing, and I think narrowing as a consensus matter in people's minds. It's just being -- we're just reflecting on the marketplace as it's there and observing the tide.

When I think of yields, we're also talking about, you've got to take a look at what you see the growth of the low-cost carriers is and how they are going into additional markets. I mean, when you look at JetBlue and Airtran'sgrowth patterns, you can see they are going into a wide variety of markets. And so in those markets where you have had some pricing power, we see that not enduring for a long time.

I understand it's a tough thing to put your finger on, and the point is well taken. But then let's switch it to the RASM premium that the hub-and-spoke carriers can get. Is it your assumption that the shrinkage in the RASM premium is going to decelerate going forward, or do you think it will continue to accelerate going forward?

It's very hard to see that as being -- people have been suggesting as much as 20%, down from the 30 to 50% historical premiums. It's very hard to see a world that's very different than 5 to 10%, based on where we sit today in the absolute.

And I think the fact, as best I can interpret your question, I mean, deceleration at some point is likely since there's already been -- the big markets have already gotten a lot of low-cost carrier incursion already and are already impacted.

I'm just trying to understand what your assumptions are when thinking about how truly revolutionary the change is going to be at the end of August?

Well, I'll give you my reaction. I think we are at the tipping point here, and I see it -- that the pace is going to stay roughly the same. I don't know whether I think of that as decelerating or accelerating, but I think that the erosion is going to continue, quite steadily, out into the future. But I don't think -- what we've seen now is, which has happened, I think, rather dramatically -- is going to continue at approximately that same pace.

Okay. I appreciate it. Thanks.

Sam Buttrick of UBS, you may ask your question.

Hi, yes. Good afternoon. How should we be thinking about the relationship between your strategic plan and your future pilot costs, if any? Is the strategic -- I mean I presume there is -- is the strategic plan contingent upon some basic assumption on achieving market-rate wages? Or is there a Plan A in the event our costs are X and a Plan B in the event our costs are 1.1 times X, or are they completely independent of each other?

I think viability is a standard that is mathematical once you get your forecast figures correct. That is to say, you can defined the numerical requirements for viability and operating profitability, break-even load factor, and you can apply them to your structural cash flow quite mechanically. And therefore, you can define an order of magnitude size of the entirety of the whole, if you will, or need for improvement.

The intricacies that each airline do relate to -- relative as I've heard it in the past referred to relative expense. That is to say, when you look at a carrier's capacity to generate revenues, and compare that revenue/RASM level, and you find that you are indexed to your peers of something less than 100 percent, that means your cost structure, and certainly your controllable cost structure, must be in synch with that; i.e., you must be more productive than those that are able to generate higher unit revenues based on where they live or how they fly.

Into the Delta solution, if I can refer to it that way, there will be a need and the strategic plan is focused on optimizing the productivity of our revenue generating capacities; i.e., highest possible revenue level with the lowest infrastructure, if you will, for delivery. And therefore, that macro overlay design will help define, or show us, the way to certain of the costs efficiencies that result from that change. But the rest of the hole has to be filled and there will be only so many line items that we have control over.

One of the line items that must be contribute is overall flight operations productivity. And it'll have a role that fits and is very critical to fitting because we have nowhere else to go for the difference to the extent it doesn't fit. And, on the other hand, that line item, or those costs, cannot alone support the order of magnitude change that's going to be needed to take Delta to viability. And those will have to be assaulted.

But then to an earlier question, none of that can be adequate without a long-term fleet plan that is going to be necessary, ultimately, to feed that productivity into the future and to have a set of work rules that, within the context of a pilot contract, that is consistent with viability.

Um-hum. Let me ask a second question. You mentioned earlier that it was critical that you not permit any competitor to have a schedule advantage in Atlanta; I believe that's what you said, yet you allow or it is the market condition that you have a schedule disadvantage in many of your other markets? So how would you reconcile that inconsistency?

The apparent inconsistency.

Well, I mean, I am looking at your schedule out of JFK to most domestic markets. versus out of Atlanta, for example. And you allow JetBlue to out schedule you in many markets and what have you.

That's fair. Into your major -- and I said it for this reason, certainly -- certainly out of your major hub locations, it is very hard to not have a -- to suggest that you could compete in a city pair and not have a competitive schedule. I mean, I realize I've answered in the negative.

But, yes, we do believe in our major hub locations that we must not have anything less than scheduling parity or quality of schedule, or we're already starting to foretell the fact that it's a market that we maybe we can't economically compete in. Now, it will vary. The market circumstance and the schedule will vary into places that are not as impactfull, if you will, in terms of control, as Atlanta.

Lastly, what fuel assumption are you using over the next five or seven years?

We don't pretend to be any smarter than --

Well I know, but I mean, it just has dramatic consequences, one way or the other.

Absolutely. Absolutely. The consensus view of the world is it changes as you look. But I mean it's not inconsistent to look out today and see something between 30 and maybe $32.00 a barrel for a long-term view, and we're trying to reconcile against that sort of consensus.

Okay. Great. Thanks very much.

We have time for one more question.

Thank you. Our final question comes from Helane Becker with the Benchmark, you may ask your question.

Oh, thank you very much, operator, and Gail. Hello, everybody. This is my question, Gerry, for you. I think the regional airline pilots at Delta have a plan that they've submitted to you, I guess about merging their operations together.

Is that part of your strategic review that will you present to the board next month or is that separate? And how should we think about the regionals sitting in with the main line going forward?

Yeah. There was a store that ran that they had submitted that plan to me. They hadn't. They had written a letter about wanting a meeting and I've declined the opportunity. It is the idea of combining ASA and ComAir is not part of our long-term strategic plan.

Do you think spinning them off is, or is part of the plan keeping them in-house?

Well I don't want to get into that issue, because how that's handled in the future I want to wait until we've finished the strategic review. But it's clear to me that we won't put those two together.

Okay. Thank you very much for your help.

At this time, I would now like to turn the call back over to Ms. Grimmett.

Well that concludes our call for today. We appreciate you joining us and we'll look forward to chatting with you next quarter. Thanks so much. Bye-bye.