達美航空 (DAL) 2004 Q4 法說會逐字稿

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

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

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

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

Moderating today's call is Ms. Laura Fuselier, Director of Investor Relations.

Ms. Fuselier, you may begin.

Thank you and good morning.

Please be aware that our call today is being translated live via the World Wide 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 of transmission--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 contains forward-looking statements that represent our beliefs or expectations about future events.

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

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

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

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

With us today is Jerry Grinstein, our Chief Executive Officer;

Michael Palumbo, Executive Vice President and Chief Financial Officer;

Paul Matsen, Senior Vice President and Chief Marketing Officer;

Ed Bastien, Senior Vice President and Controller, and Joe Kolshak, Senior Vice President and Chief Operations Officer.

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

And with that I will now turn the call over to our Chief Executive Officer, Jerry Grinstein.

Good morning, everyone and thank you for joining us today.

Let me begin with a brief review of Delta's financial results for the December 2004 quarter and the year.

Delta reported a fourth quarter net loss of 2.2 billion, or $16.58 loss per share.

Full year 2004 net loss was 5.2 billion, or $41.07 per share.

These results include a $1.9 billion goodwill impairment charge recorded in the fourth quarter and other unusual items.

Excluding unusual items the fourth quarter net loss was $780 million, or $5.88 loss per share.

Full year net loss for 2004, excluding unusual items, was 2.3 billion, or $18.10 loss per share.

Delta ended quarter with 1.8 billion in unrestricted cash.

Delta's financial results continue to be disappointing.

Importantly though, our company is engaged in making significant core changes based on our understanding that the airline industry has altered radically, structurally and permanently.

If Delta is to survive we must develop a fundamentally different way of doing business and that's what we're doing.

In this portion of the call I would like to step back and briefly review the distance Delta has come so far and the road still ahead.

Looking back to the beginning of 2004, Delta had just started a strategic reassessment.

Our costs were too high, our balance sheet was severely strained, and passengers felt that they could no longer trust us to provide the best value.

We had lost some of our customer focus and we were too complicated in general; including our operations, fleet, fare structure and Sky Miles loyalty program.

Since then, Delta has developed launched and is now aggressively pursuing a comprehensive transformation plan.

Our goal is to create the right airline for the new era, a viable carrier that is customer focused and profitable on a sustained basis.

Implementation of the first phase of supporting initiatives is well underway.

And let me add here that the progress we're making would not be possible without the courage, commitment and professionalism of the entire Delta team from the front line to the officer group.

Michael and Paul will review some of the steps taken in 2004 in more detail.

But briefly, Delta achieved the following: We accomplished almost half of our $5 billion annual savings effort that began in the base year 2002, including pilot cost savings.

As evidence of that, we expect that our mainline non-fuel unit costs will be down 14 percent in 2005 compared to 2004 and down 20 percent versus 2003.

We improved our liquidity position through crucial financial arrangements--agreements, I'm sorry, with Delta partners including G.E. and American Express.

We continued efforts to create a simpler, more efficient airline that customers can trust and that they find is easier to do business with.

Included in these initiatives were the expansion of Simplifares, the streamlining of Sky Miles and the addition of time saving technology at the airport and Delta.com.

Delta also laid ground work for this month's transition to a continuous hub operation at Atlanta's Hartsfield-Jackson International Airport.

Our operational redesign will include the restructuring of 51 percent of Delta's network in a single day.

Customers will benefit with fewer delays and less airport congestion.

And for Delta, faster turn times and other related efficiencies will improve aircraft utilization providing the equivalent of 19 additional aircraft to our network.

With this increased capacity, Delta can grow in customer preferred markets and continue our fleet simplification.

And Delta did grow in 2004, as we will in 2005.

In addition to planes gained through better utilization, Delta is also reallocating aircraft from lower yield markets to higher potential destinations as in the dehubbing of Dallas-Fort Worth.

During 2004 our airline expanded domestically and across the Atlantic, as well as in the Caribbean and Latin America.

Also Song launched international service from New York's J.F.K. to Nassau and announced that its fleet will grow by 12 aircraft in 2005.

Looking to the future we know the road ahead is at least as long as and difficult as the distance we've already come.

Five U.S. airlines accounting for 25 percent of all domestic seats are in bankruptcy.

High industry capacity continues to force-- foster a depressed fare environment; fuel remains volatile, in keeping with the situation in the Middle East; and low cost carriers, who currently have a total of 180 aircraft on firm order, are growing.

For Delta, issues related to debt and liquidity remain challenging.

Our company also will face significant pension funding obligations.

Because of our commitment to Delta people and the Company's desire to fulfill its pension obligations, our airline is working with the airline pilot's association, or ALPA, and other airlines in support of legislative reform.

These changes, if enacted, would help Delta continue to provide earned retirement benefits to its employees while also moving ahead with our transformation process.

If achieved the new rules would permit funding to be stretched out over a longer time period.

Clearly, Delta must confront these and other issues as we move forward creating a simplified, efficient, customer focused airline that is also a fierce competitor.

Fierce competitor.

Already the Delta team is meeting the challenges of 2005 with the strength and determination that characterized the performance in 2004.

Based on their drive and the plan we are executing, I continue to believe we will succeed in preserving this great airline.

Now to discuss our fourth quarter and year end results, I'd like to turn the call over to our Chief Financial Officer, Michael Palumbo.

Good morning, thank you for joining us today.

As Jerry mentioned in his remarks the $780 million loss Delta reported this quarter, excluding unusual items, is disappointing; but we are making progress on our transformation plan and what really is a viability plan.

And I'd like to discuss the vision we have of our changing business.

Changes in the airline industry that have occurred in the last few years left us with no choice but to significantly change the way we do business.

Last year we embarked on a comprehensive strategic review of our business, the results of which are now playing out in our transformation.

You've heard other airlines use the term transformation before, but our plan needed to be different, it needed to focus on long-term viability.

With this in mind, the key items I'd like for you to take away are: first, our transformation plan is well underway.

Although we still have work to do, we have made significant progress and our plans are on track.

Jerry noted we have developed a platform from which to compete going forward.

However, our margin for error remains small and requires absolute diligence from our entire team.

Second, by simplifying our product, we have achieved significant changes to our operating cost structure and have improved efficiencies in our network and asset utilization.

Combined with the necessary liquidity facilities, our focus remains on stringent cost controls today and going forward.

And third, we recognize the marketplace is permanently changed.

We must change along with it and respond to what our customers want.

A bit later in this call Paul Matsen will speak to you about the changes we are making to simplify our product and our business.

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

For December, 2004-- for the December, 2004 quarter Delta reported a loss of 2.2 billion, or $16.58 loss per diluted share.

These results include 1.4 billion of net unusual charges.

These items include 1.9 billion of goodwill impairment charge and other items detailed in our press release earlier this morning.

This non-cash write down of goodwill relates to the balance sheet carrying value of ASA and Comair, increased fuel prices and in a difficult revenue environment resulting in this reduction in fair value.

Excluding these unusual items, Delta reported a net loss of 780 million, or $5.88 loss per share.

For the full year, excluding unusual items, Delta reported a net loss of 2.3 billion, or $18.10 loss per share.

CASM for the quarter, excluding unusual items, was up 6.9%.

The primary driver of this increase was year-over-year changes in fuel price.

Fuel price rose 68 percent, $1.42 per gallon during the December quarter.

This equates to an additional 385 million of operating expense for the December quarter and 860 million for the full year.

Fuel price neutralized CASM, excluding unusual items, was down 2.2 percent for the consolidated system, down 3.9 percent for the mainline.

Now I'll provide you with a brief revenue overview for the consolidated Delta system.

In the December quarter system capacity was up 5.8 percent year-over-year while passenger revenue was down slightly.

Passenger RASM was down 5.6 percent versus last year.

The full year 2004 system capacity rose 8.7 year-over-year while passenger revenue increased 5.9 percent.

This resulted in passenger RASM being down 2.6 percent versus the prior year.

The weakness in the quarter was driven by the domestic entity in which the increase in revenue did not match the increase in capacity due to continued yield pressure.

As in recent quarters traffic held up well but yield continued to show weakness.

Although we did see some sign of strength on a year-over-year basis during the holiday dates.

Turning to our transformation plans.

As I mentioned in my opening remarks our plan remains on track.

The top down strategic review resulted in the identification of 5 billion in annual [inaudible] requirements compared to the base year of 2002.

This is on a historical base of about 15 billion in operating expenses for the period.

So in order to be able to compete as a viable entity going forward, we have had to incorporate changes and improved efficiency by the measure of approximately one-third to our overall operating platform.

We have identified and have begun implementation of the key initiatives to support the 5 billion in targeted benefits and these initiatives have been incorporated in our business.

During the fourth quarter we achieved a critical milestone by reaching a new agreement with our pilots that will save the company $1 billion on an annual basis.

The 32.5 percent pay cut that was part of the new agreement became effective on December 1, 2004.

We also completed critical loan agreements with G.E. and American Express that provided up to $1.130 billion in liquidity.

These liquidity facilities will allow us the opportunity to execute the plan in an environment of continuing volatile fuel prices and cost pressures.

And as discussed in our press release, this in addition to the previously completed debt exchanges and deferrals of approximately 587 million and asset sales of approximately 370 million during this quarter, which include Orbitz and the sale of 8 MD-11s.

To summarize we are building a platform from which to compete going forward.

This platform is supported by four main pillars: Our product improvement -- I'm sorry, our profit improvement initiatives; economic viability model; our new liquidity facilities; and our other liquidity, cost reduction and revenue enhancement [inaudible] which were completed earlier [inaudible].

We recognize the permanently changed marketplace and as a result we are changing our business.

Most importantly this is going to require a discipline in cost controls in our to support our long-term viability.

The completed financial transactions during the December quarter gave us a bridge to be able to complete [inaudible].

Our profit improvement initiatives have delivered 2.3 billion of annual savings at the end of 2004.

Many of these initiatives are focused on enhancing our technology which resulted in significant productivity benefits throughout the Company.

The economic viability model is the result of a six-year time horizon forecast establishing the need for the $5 billion of improvement [inaudible].

Results of this analysis defined how critical it was for [inaudible] to use a new lower restructured cost base from which to compete going forward.

And thus transforming or framing our transformation plan.

As a result, we are well on our way to achieving the remaining 2.7 billion in targeted benefits by 2006.

Our new credit agreements with General--with G.E. and American Express, as mentioned, came at a critical time giving us the liquidity cushion to execute.

Now let's talk about our balance sheet and liquidity.

We ended the quarter with $2.1 billion in cash, 1.8 billion of which was unrestricted.

Our unrestricted cash balance decreased by 353 million from September 30 to December 31.

Cash flow from operations for the quarter was negative 636 million, impacted by the increased fuel price and weak domestic [inaudible].

Capital expenditures for the quarter totaled 191 million including 89 million for aircraft delivery [audible].

On December 31, 2004, our debt was 2-- 20.4 billion including operating and capital leases.

Now let me provide you guidance for the year starting with capacity.

For the full year 2005 we are expecting a 6 to 8 percent capacity increase [inaudible] consolidated [inaudible].

It is important to note that this capacity increase requires no capital investment as it is the result of increased utilization.

In fact, during 2005 we will be reducing the number of mainline aircraft in our fleet.

Let me review this capacity increase by quarter.

We expect capacity to be up 6 to 8 percent in the first quarter, up 4 to 6 percent in the second, 6 to 8 percent in the third, 7 to 9 percent in the fourth quarter.

It is important to note that despite this capacity increase [inaudible] the capacity increase [inaudible].

Our mainline capacity at the end of 2005 will still be approximately 7.5 percent below our mainline capacity [inaudible].

Turning to cost guidance.

We expect the results of our transformation plan will continue to show progress throughout the year.

The first quarter 2005, excluding unusual items, we expect consolidated fuel neutralized CASM to be down approximately 8 percent versus the prior year, down approximately 10 percent for the mainline.

For the full year, excluding unusual items, the consolidated fuel price neutralized CASM is expected to be down 9 to 10 percent, down 11 to 12 percent for the mainline.

With respect to CapEx, for the first quarter 2005, we expect CapEx to be approximately 289 million.

This includes approximately 147 million for delivery payments on aircraft, primarily regional jets, which are substantially financed under [inaudible].

As a result of the revised estimates we have lowered -- I'm sorry, as a result of revised estimates we have lowered our 2005 pension cash funding to a range of 400 to $450 million.

In closing, the focus for 2005 will be on execution.

As we have continued to implement, as we continue to implement our transformation plan, we are implementing changes to a degree at a rate that has never been done before; but we simply have no choice.

I would like to thank our employees, their tremendous efforts and their continued hard work to make Delta the best possible airline that it can be.

Clearly, we have a lot of work in front of to us achieve a competitive cost structure that leads to long-term viability.

There is no room for us to accept anything less.

Our plan, our efforts and our strategies are all being developed and implemented with that goal in mind.

Now discuss to Simplifares and our product initiatives I'd like to call on our Chief Marketing Officer, Paul Matsen.

Thank you Michael and good morning, everyone.

I'd like to spend a few minutes discussing the initiatives which are designed to simplify our product, including our recently announced Simplifares initiative.

It is important to note that this is not a fare sale.

This is a fundamental change designed to better match customer needs--and to simplify our business and provide a new, lower cost platform from which to compete.

It is important to note that this change was built into our business plan as part of the recently completed strategic review and is timed in conjunction with our network restructuring.

The reasons this structure makes sense for Delta include the fact that today 70 percent of our domestic passengers already fly on an LCC type fare structure and we are a mostly short to medium haul carrier with two-thirds of our flights under two hours and 85 percent of our flights under four hours, domestically.

We do expect a dilutionary impact to our revenue as a result of Simplifares, but believe that this will be offset in the longer term by three key areas: First, traffic stimulation.

As you are aware we have the benefit of up to four months of experience in Cincinnati where we saw an increase in local traffic of up to 25 percent.

This translates into increased customer loyalty and trust.

For example, in Cincinnati we saw a key customer satisfaction rating, how customers rate the value for fares paid going from worse to first in only 12 weeks.

Second, simplification.

By simplifying our product we expect to achieve productivity benefits in addition to the benefits we've already seen through our profit improvement initiatives.

For example we will have leaner staffing in sales, reservations and revenue management departments as a result of simplifying our structure; the workload is less complex than it previously was.

And, third, distribution channel shift.

Delta.com is now the best place to get Simplifares.

As a result, over the next two years, we expect to more than double the amount of bookings on a percentage basis via our lowest cost distribution channel.

The early returns have been impressive.

After announcing the Simplifares program on January 5th, we drew a record 300 percent increase in single day traffic to Delta.com shattering all previous one-day sales records.

In the first five days after the national launch, ticket sales on Delta.com increased 60 percent over the same period in 2004.

At peak volume Delta.com ticket sales totalled nearly $1 million per hour over a period of several hours and recorded more than $15 million in daily revenue on the peak day.

Since the launch of Simplifares, bookings on Delta.com have been at 29 percent and total online bookings including online agencies are now over 50 percent.

In addition to Simplifares we've also made improvements to the Sky Miles program including ways to better reward our most important customers such as simplifying how customers earn medallion status and the first class upgrade process.

We are in the midst of a cabin refurbishment program that will be 50 percent completed by the end of this year and will also be introducing new uniforms for our front line staff and streamlining our food service.

All of these programs are the result of the strategic review initiated last year.

What we've done is designed as a Delta solution, a solution that is in the best interest of Delta Airlines and one that will better position our company for future success.

That concludes our quarterly conference call and at this time we'd be happy to take your questions.

Thank you. [Operator Instructions].

Mr. Gary Chase, Lehman Brothers.

I apologize for this, parts of the call were cutting out, I don't know if you were hearing it on your end.

I think we have the CASM guidance in release but there is a tape item that says CASM ex file down 14 percent in '05.

Was that said somewhere on the call that we missed?

I'm sorry if you missed that but that's correct.

As a mainline matter, fuel neutralized CASM--

no ex fuel

--I'm sorry--excluding fuel as a mainline matter, we expect costs to be down 14 percent, yes.

Versus?

Last year.

Okay.

Because, then on a fuel neutral it's only down 11 to 12, is that the right way to read it?

Yes, that is correct.

Okay.

I guess just along those lines, the real question is, I would have thought that number would be a little bit higher like I'd be thinking more like 15 or better, ex fuel.

Maybe a little bit better at fuel neutral.

I mean, I understand some of the profit improvement initiatives are revenue based but, you know, just add up-- there are cost numbers that I think existed in the disclosures you've made previously come to something like 1.8 billion.

If you apply that to the mainline expense base for '04, it's a number that gets closer to what I was describing, more like 14 or 15 percent.

Is there conservatism baked in there or is there something that we're missing just in terms of offsets in '05 versus '04?

There are a number of things that end up resulting in the net number.

Among them principally are areas of ongoing inflation.

Things that are just imbedded in year-over-year change.

Even though there's no capital costs imbedded in the capacity increase because of better utilization.

There are other volume-related increases in general cost levels in the absolute.

But it's really the netting of all those things that results in the change that we have quoted.

I mean I guess I'm not surprised there's volume related cost increase, I just think with utilization rising it would it make sense that your CASM would be--as you expand.

In other words, applying it to the '04 base you would think then with the growth that you're going to get out of additional utilization it would look even better when applied against the '05 capacity base.

Again, the principal push back is other inflationary items.

I mean, the savings are fully imbedded in our plan as indicated.

Okay.

And I guess a question for Paul.

You said that you do anticipate some revenue dilution, I think the opinions are pretty unanimous on that in the early going, anyway.

Is there any way to sort of judge objectively from the outside before, I guess, the first quarter is reported, how that's going?

And I guess where I'm going with this is, do we need to see some pretty substantial load factor gains domestically in order to believe that this has a chance to meet your expectations?

And is there any way that we can measure this on the outside before we get the quarterly results?

I think it may be difficult for you to measure it from the outside until you get the quarter results, but obviously we are tracking it every day.

We are seeing a significant improvement in our book load factor above the capacity increases that we're taking in the first quarter.

And I think that's exactly the type of result that we were looking for and expecting.

I think the other thing that we're seeing is we, on a national basis, 70 percent of the market was already exposed to 70--to low and simplified fares.

So I don't expect on a full network basis that we'll match the kind of traffic stimulation we saw in Cincinnati.

But I think the fact that the industry has broadly matched our initiative, which is a restructuring, not a fare sale.

And I think the magnitude of the fare wars quote, unquote have been exaggerated.

That this is a fundamental fare restructuring and I think that we'll be very closely watching the yield impact.

But our early indications are that yields are in line with our expectations as are the book load factor increases in line with our expectations.

And the competitive response is-- has probably, I think, overall been better than we expected.

Is the negative impact dramatically worse in the early going?

Is there a pretty significant improvement as, say, we get into the second quarter of it or the third quarter of it as you've modeled it?

I think the key assumption there is what you believe is going to happen with industry capacity, because as Jerry noted at the outset of the call, with 180 aircraft on order from new entrants and with the yield declines that we've been seeing over the course of 2004; and exacerbated with the expansion of Independence Air in the fourth quarter, we were continuing in a very difficult yield environment.

And I think we saw it right from the start of the year with a number of LCC led fare initiatives to start off the year.

So we have to look at the-- the performance against what we would have anticipated the yield dilution would have been from continued new entrant growth.

And this is a strategy that is an offensive move on Delta's part that's done in conjunction with our network strategy.

And that's a key part of what we're trying to achieve.

Gary, to your point, it's going to be hard for you to measure this before the data actually comes out.

And recognize only 2 percent of our tickets were sold above the caps that we put into place.

So obviously we are managing yield on those tickets.

And so-- but since it was only 2 percent it's going to be hard for you to be able to tell exactly what's going on until the specific data comes out.

So that obviously varies for different carriers.

In terms what have you can see, obviously when you go out with a big announcement you naturally pull forward bookings.

So the short term some of the bookings come in looking weaker than the actual flown ends up being because you've pulled forward some leisure bookings.

So you really have to let it play out for a couple of months.

Mr. Robert Ashcroft, UBS.

How much did the Comair Christmas present cost?

We have approximated it at about $20 million both revenue and cost.

Thank you very much.

It looks like your regional results were down both in the fourth quarter but also perhaps more so in the third quarter.

I was wondering if there's an explanation for that, in particular is the rent for the now grounded 328 jets, is that still being credited or debited from the regional account?

It is.

So the--and the results for the third and fourth quarter?

Yes.

Your regional results seem to be down for those two quarters.

Is there a particular, is that credited to something or?

Just general industry trends.

Just general--Okay.

In general our renewals are obviously heavily deployed in the east and the east is where our relative weakness has been.

Mr. William Greene, Morgan Stanley.

Mike, can you tell us how many-- or how much borrowing capacity you have left in the liquidity facilities you've already put in place?

We have drawn, as we reported, about $830 million.

We have about 250 million rounds numbers left to draw.

That's on G.E.?

The combined facility of G.E. and American Express, that's correct.

Okay.

And how much debt repayment do you have in '05?

'05 rounds to about $600 million of principal repayment.

And that includes capital leases?

Yes.

Okay.

And how about pension expense for the year?

Well, we've -- the cash funding portion we've-- we are now ranging between 400 and $450 million.

Right.

And the expense number?

The expense is approximately 700 million.

Mr. Bill Mastores (ph), Bank of New York.

I'm wondering if you could kind of give me an idea as to whether there might be additional debt deferrals that might be in the works beyond what has already been mentioned here?

I think it was 587 million, although that number was broken up just a little bit during the conference call.

Yeah, that's correct.

We continually as a part of our overall transformation plan look to enhance or improve our structural cash flow.

Jerry mentioned in his comments the desired participation and potential impact for pension payment deferrals, not reductions but deferrals.

We have certainly imbedded in our objectives of this plan a continuing amount of effort and work around restructuring the balance sheet.

So we will be looking for a couple of things.

I mean deferrals are helpful to permit the running room to implement the plan.

And they were critical, frankly, in structuring and preparing ourselves to be able to implement this sort of cost base transformation.

But that's not enough.

We do have to continue to look and will be looking for capital market opportunities to be opportunistic, to improve that balance sheet circumstance.

And that effort will go beyond deferrals.

So how much might you expect?

I mean could the number be 3, 400 million, or--

It really is impossible for us to speculate that because it will be totally dependent on marketplace-- capital market reaction both to our equity valuation and how that also relates to our debt valuation.

Okay.

And, Michael, amongst much of this restructuring and fare simplification would you venture an estimate as to what your liquidity might be at the very end of the first quarter, during what is seasonally generally a very weak one?

We're not -- we're not-- we tend not to give guidance in that regard.

But you're right in-- at least directionally, the first quarter is one where we structurally expect a decline in our liquidity somewhat.

Would you expect to drawdown the additional 250 million during this first quarter?

It's scheduled to be drawn down, that's correct, yes.

Okay.

Then finally the fare simplification, you've mentioned that it's going to be revenue negative the first quarter.

Might it actually turn the corner and be revenue neutral during the second quarter and revenue positive during the third quarter?

How should we be thinking about that?

I think we said actually the full year 2005 is a transition year for us in this overall program.

So while the rates of impact might change early towards the end of the year, the overall yield at least from I think a fairly conservative forecast is a net negative.

Mr. Jamie Baker, JP Morgan Chase.

A question I guess for Jerry.

Independence Air was brought up once or twice already and I think that that story there is a reasonable example of how you can't mix low fares and 50 seat economics.

Why should be view DCI any differently considering events that are paradigm?

And, depending on your answer, have you therefore limited your future ability ability to spin DCI off as you've said that you might be interested in?

Could you repeat the question?

It broke up and I couldn't hear it all.

Oh, okay.

No problem at all.

If 50 seat economics and low fares don't work in Dulles, and I think it's fair to say that the Independence plan is clearly not working, why should we view DCI and the combination of 50 seat economic and low fares in Cincinnati any differently?

And if that's appropriate, have you therefore limited your ability to spin off DCI down the road [inaudible]?

You broke up but we're going to try to respond to that portion that we heard.

I'm going to ask Jim to take a shot at it.

Jamie, this is Jim.

Couple of points there.

There's a big difference between our fare structure with 499 caps and the average fare realized by Independence Air.

Fairly significant, an order of magnitude difference in a lot of their fares and our fare caps.

So we're clearly are not looking at those levels.

As well as, regionals work as part of a network and the overall feed that it brings to the mainline network.

I think Independence Air has shown that it's hard to make the economics work without a hybrid model that includes the mainline planes.

Obviously our network includes quite a lot of mainline flying.

And so, in combination, we think it's going to work quite well.

I couldn't understand the second part of your question, Jamie, you were breaking up.

Mr. Daniel McKenzie, Citigroup.

Mike, I'm wondering if you can provide a cash bogie for pensions in '06 and maybe at least a range.

I realize it's kind of hard to look that far out, but assuming discount rates are flat, assuming market returns are flat, what kind of range for your pension obligations might you have?

I'm sorry, I mean really with all the things that are identified as variances it could be misleading for us to lock on a particular set of expectations.

And we really don't provide guidance out that far with any precision.

I think I will say that in '08 and '09 there is, as currently structured, an anticipation of a significant increase to the levels versus that which we earlier mentioned.

But it is within the context of a somewhat longer time frame.

I see.

Okay.

Then I believe in the past you've said that the recovery plan was predicated on oil at $40 per barrel in '05 and $35 a barrel in '06.

And I'm just wondering at what price range, and I'm referring to WTI futures, makes you uncomfortable with the recovery prospects?

Actual I had -- I have not been accurately quoted with those earlier numbers but the fact is our business plan has embedded the-- approximated the forward curve expectations at the end of last year, the beginning of this year.

It's into the environment that we've watched, all of us, over the last eight months.

That's of little comfort, I realize.

On the other hand, we didn't substitute our judgment for any-- for anything other than essentially a market consensus view.

The problem is-- is that view changes with much too much volatility.

So it's very hard.

I see.

If I could just ask one last question here.

I believe the recovery plan or at least the growth in this year is predicated on the fact that it's pretty cheap capacity from Delta's perspective; being that this is utilization and there's no capital investments.

Interestingly, we saw AMR make similar arguments for their growth in 2004 at the end of 2003, and that is that the capacity was cheap so the growth made sense.

Yet AMR lost $900 million in 2004.

So I'm wondering if you can add some color for why it would be different for Delta in 2005 given such a harsh fuel and revenue environment?

It is more intricate than to limit it to a couple of satisfactory sound bites but, frankly, the reallocation of our network that takes into account the closure of Dallas and the quality enhancements to our schedule to really enhance our competitive position where we are standing and fighting, if you will, are somewhat unique to Delta.

And, yes, they are very efficiently delivered us in terms of the structural network change that permits this additional utilization.

But I guess there is-- there is--there's still a bit of a point when we try to connect to directly capacity changes, if you will; however they're funded with their impact on price and/or financial results.

I mean I think the relative rate of loss experience has to do with, among other things, your relative cost platform.

I think when we were looking last year at people criticizing capacity levels-- or people's planning capacity--or actual capacity into the third quarter, we were still looking at 80 percent load factors into the third quarter and still looking at declines in yields.

If that was a pure capacity issue, I mean what would we be saying?

At 82 percent load factors we would have been seeing dramatic price increases?

I think what you're seeing is-- in terms of capacity pricing and cost structure all need to be taken into account.

This industry is not reacting rationally to supply demand levels as evidenced in the third quarter of last year.

And part of that reason-- at least part of that reason has to do with the relative differential in cost structures.

So that until this industry is more aligned in terms of the overall relative level of cost structures and structural cash flow, it's going to be very hard to anticipate rational reaction to general levels of supply and demand.

And until we're more aligned-- and, candidly, our plan takes us to where we have to be in terms of that alignment, it's going to be very hard to anticipate rational reaction to supply and demand.

And the other piece of this is--is we can't control, in the absolute, other people's capacity decisions; yet we have to execute our plan into our network and our system where we compete.

Mr. Jamie Baker, JP Morgan.

As you potentially recover revenue, in the Simplifare environment, where does it come from?

Is it 50 percent demand stimulation and 50 percent share shift, 100 percent demand stimulation, zero on the share shift?

Where is the balance?

Where is the revenue going to come from?

It would be hard to say with precision precisely the-- how much of it's going to come from share shift or how much is going to come from stimulation based on, as Michael was just saying, what happens with competitive capacity and response.

But, as an example, in Cincinnati we did see growth-- significant growth in the local market because the market previously hadn't been stimulated with low fares.

Secondly, we saw 6 points of shift from the surrounding alternative airports of Dayton, Louisville, Columbus.

And customers prefer to go from primary airports and with the convenience of the schedule that we offer.

And I think over time what we're going to see is a combination of stimulation and also better-- the ability to manage our mix better and a better shift overall in the mix on board the airplane.

Jamie, mix is a big part of this.

And recognize only 2 percent of our tickets were sold over the caps that we put in place.

Getting business travelers to not go through horrible machinations to stay over a Saturday night to get a lower fare, and potentially pay a little bit more to travel during the week obviously helps us a lot.

So we've done a lot of things to really provide value.

So people don't have to pay the $2,000 which they weren't willing to pay and, therefore, were staying over Saturday night.

Now people can pay an incremental $50 or $100 to be able to do the midweek travel.

And have you quantified how leisure yields might change, might potentially improve from your perspective as there are fewer price points along the demand curve?

I think at this point the leisure market today with the level of discounting we're seeing in the fourth quarter and the first quarter I don't think we see this in this scenario any further deterioration of leisure--dramatic deterioration of leisure yields due to Simplifares itself.

In fact , as you just pointed out, we expect to be able to manage that mix better.

Particularly business demand and recapturing business demand at the walk up levels where in the past LCC was a far better alternative for last minute travel for someone looking for a value.

Mr. Mike Linenberg, Merrill Lynch.

Just a couple of questions.

When we look at the incremental benefits that you're targeting for 2005, I think it's another 2.1 billion in addition to the 2.3 billion that's already been achieved.

How should--I realize that's a combination of both cost and revenue, how should we look at that as it breaks out?

Is that predominantly cost or is that 50/50?

No, it's predominantly cost.

Okay.

And then my second question is, I think earlier there was a comment made that the fares that are sold on the cap represent 2 percent of your tickets.

What percentage of revenue does that represent?

I guess maybe a better way, what percentage of domestic revenue does that represent if you can provide that?

It was 2 percent of our tickets and 8 percent of our revenue.

Putting it in context, you really need to look at who Delta is structurally as an airline.

We fly typically a shorter average stage length than a lot of our other competitors.

Obviously, we're concentrated in the East Coast and we have 30 percent of our revenue coming from Florida.

So that-- that really affects our mix and that's why the 499 cap made sense for our network.

Okay.

And, Paul, that's 8 percent of domestic revenue.

Yes.

Mr. Ray Neidl, Calyon Securities.

Yes, Jerry, back to the new pricing policy of Delta, you've upset the industry and I personally don't see why so many people are upset.

This is a direction I think the industry had to evolve to because the consumer is demanding it.

But we've seen horror stories out there that the industry is going to lose up to 2 to $3 billion a year in revenues.

And I can't quite come up with those numbers.

One problem I do have is, as you pointed out, you think you're going to get a lot of traffic stimulation.

With high load factors I think that is limited how high you can go there.

But as you were talking about before, do you really think you can shift the yield demand, the business traveller and really start improving yields once this new policy takes place?

And do you think, in fact, in 2005 the industry-- and I guess with Delta about 15 percent of the industry will lose that much in revenues?

Ray, this is Paul.

I think the key for us in the future will be stimulating demand which ultimately let's us manage the mix better and that's what Simplifares is really all about and it's done in conjunction with the network restructuring that's taking capacity out of a very weak hub in DFW and redeploying it to our other hubs, into our strength markets.

So it's going to give us a chance to really optimize the mix on board our aircraft and recapture a lot of the last minute business demand we were pricing ourselves out of reach for those walk up customers.

And that's really where the biggest impact of this.

I would add, and I think your comments are right on, that this restructuring really is a restructuring, it's not a fare war.

I think as one of our-- as American Airlines said yesterday that the magnitude of the revenue impact has been significantly overstated on the industry.

But Delta-- for Delta this is a true simplification.

Overnight when we loaded Simplifares we replaced our entire previous domestic fare structure with the new Simplifares structure.

We have taken out all the other price points.

There's just eight selling fares in the market.

And I know some people have been raising questions about that.

There are other fares in the structure for connecting international either itineraries or for prorate purposes.

But there's eight selling fares facing customer in the market.

We immediately restructured our corporate agreements literally overnight because we had planned for that in advance.

And we also took out a significant amount of complexity due to unpublished programs that no longer make sense in this environment.

And we're planning significant enhancements to Delta.com that are going to help us further drive the distribution mix shift towards our long-term goal of 45 percent and we're running at 29 percent; which is up 9 points from where we were at this time last year.

So this is an integrated plan, and so far all the elements appear to be working well.

And the competition reaction, I think to your point, particularly American's match;

I think--you know, we're-- this is not a fare war, it's an industry restructuring that's going on.

And my second question for Jerry is you've done a commendable job in managing to reduce your cost structure and especially negotiating the agreement with the pilots.

I'm just wondering in the pilot agreement how come you didn't go all the way?

United in bankruptcy has eliminated all scope clause restrictions--or most scope clause restrictions about the size of aircraft RJ that can be operated.

From what I understand, you've only liberalized your pack and you still do have a lot of restrictions, both regarding the number and the size of aircraft.

That's something that seems like it should have been something easier to work out with the pilots while you're going through this major transaction.

I'm just wondering why--why didn't you just eliminate all the scope clauses?

Well, it was a negotiation.

It wasn't a command decision.

And one of the reasons you couldn't is that we had to-- we had a lot of things that we had to address and it's a process of give and take.

And so scope clause was one of the major things that we focused on.

On the other hand we did get very significant relief on the scope clause, and particularly with the 70 seater and we've had--we think we have a dramatic opportunity to increase that.

But we couldn't go all the way, simply because it was negotiation.

Okay.

The pilots were just resistant to that, then.

Hey, Ray, it's Joe Kolshak.

I'm not aware that United has removed all their scope restrictions, it's certainly been liberalized.

And you may be referring to U.S.

Airways has the ability to fly a larger jet.

I don't think that they have yet--have any on order.

But if you look at what we negotiated, it works very well for Delta.

We liberalized the 70 seat agreement.

We now can fly up to 125 70 seaters where before we could fly only 58.

And with certain block hour growth assumptions we could actually go to 150 70 seaters.

And that certainly works very well within our network plan.

Okay.

So as far as your future--your future growth plans go, you think you did really get everything that you need as far as the RJs go.

Yeah, I think we're pleased with what we were able to negotiate.

David Strine, Bear Stearns.

Michael, I heard you mention the first quarter CapEx number.

What's your expectation for CapEx for the full year?

The total is just over 500 million.

Okay.

And with respect to the capacity growth how much of that will be international and how much of that will be domestic?

It's predominantly international.

Domestic is up 4 percent.

International is about 17.

Okay.

And last question, with respect to the assumption of traffic stimulation as an offset to the lower prices.

When you gain this out, how long did you assume there would be stimulation, assuming all the competitors eventually became competitive either by matching or undercutting by a greater amount; so as not to lose traffic themselves?

Right.

I mean, I think we continue to expect to see stimulation over the course of our five-year viability plan.

Obviously more of it up front, but I think our experience in Cincinnati suggests that, although we don't expect the same level of stimulation nationally that will we got in Cincinnati because of the dramatic nature of the restructuring in Cincinnati where there wasn't LCC competition in the market, that we were able to sustain that stimulation over the full-length of the test and are still seeing it today.

So I think the expectation is this will continue to help grow the market.

I'm sorry if I might just clarify, this is Mike Palumbo.

My earlier comment, the 500 million approximation for CapEx is non-aircraft CapEx.

The increment for aircraft is financed by agreement so it was not part of the inclusion.

So I was netting the--

The 147 you're referring to?

There's another approximate 500 million coming from aircraft but they're financed by contract.

It is the non-aircraft, non-financed portion of CapEx that I was referring to rounding to 500 million.

Glenn Engel, Goldman Sachs.

A couple.

One is, is that if I'm looking at your RASM by region, it wasn't just domestically but in all regions internationally.

Latin America, Asia, Europe, you seem to significantly underperform the group.

Why is that?

Okay.

Couple of points there.

Internationally we had very significant amount of growth.

And so I think-- relative to others.

And so that was a big driver there.

Domestically, obviously, our exposure to the East Coast hurt our north, south and Atlanta was particularly weak.

Cincinnati east was very weak.

Salt Lake was actually up year-over-year in the fourth quarter.

And the west and--out of both Atlanta and Cincinnati were pretty close to break even.

So our overall exposure in the east has been the most difficult thing for us in our relative performance on the domestic.

Secondly, can you go through Cincinnati and, initially, when you put through it how much it under performed the rest of your system; and then as the months went by when did it catch up in terms of unit revenues declined?

You know, in all honestly, there was there was no drop and then catch up.

Cincinnati has performed as well, actually better than Atlanta except for Cincinnati east, which is just because we have a lot of east to east connections there has been hit hard by Independence Air and just the general weakness on the East Coast.

So, frankly, it's hard to say.

Cincinnati has outperformed but how much of that is netting out the fact that it's more east west than Atlanta, which has just been stronger for the industry versus how much Simplifares has actually cost.

But at least for the quarter and Simplifares was in, obviously, for the entire quarter; it looked very, very similar to performance in Atlanta.

And just to build on that, we continue to see the sustained 25 percent increase in traffic in the local Cincinnati market.

Obviously this was a market that did not have an LCC simple fare structure or direct competition in the local market that had that kind of fare structure and, importantly, we got 6 points of shift from the perimeter cities moving back into the Cincinnati market.

So those two factors really helped drive the results there.

Finally can you just give me a share count?

One -- I'm sorry, just under 130 million.

Still even with the fourth quarter when you were doing stuff you didn't have that many new shares?

The new shares, I mean it's important to note that when you talk about share count, the actual shares versus the potentially dilutive shares, a lot of what we did with share distribution had to with warrants and vesting periods.

So until they're exercised they don't get counted, if you will.

I'm sorry, the answer is 133 with precision.

That concludes our conference call today.

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This concludes today's conference.

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