達美航空 (DAL) 2005 Q2 法說會逐字稿

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

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

Ms. Fuselier, you may begin.

Good morning and thank you, Michelle.

Please be aware that our call today is being transmitted live via the Internet 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.

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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 are Jerry Grinstein, our Chief Executive Officer;

Jim Whitehurst, Executive Vice President and Chief Operating Officer;

Ed Bastian, Executive Vice President and Chief Financial Officer;

Joe Kolshak, Executive Vice President and Chief of Operations;

Ken Calser [ph], Senior Vice President and Controller; and Gail Grimmett, Vice President of Pricing and Revenue Management.

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.

With that, I will turn the call over to our CEO, Jerry Grinstein.

Thank you, Laura.

Good morning, everyone.

Let me begin today with a couple of comments about the organizational changes we announced yesterday.

As you've read, Jim Whitehurst has been promoted to Chief Operating Officer.

In this role, he will oversee operations, customer service, network, revenue management and corporate strategy.

Jim's primary task will be to bring together the power of our strategic planning with the strength of Delta's outstanding operational team to create an even greater focus on executing the transformation plan.

His leadership role in helping to design and achieve the major milestones to date will serve him well as we prepare to deliver more.

Jim will make a few comments later in the call.

Also, Ed Bastian has rejoined Delta as Chief Financial Officer.

Everyone on the executive team is very pleased that Ed has returned to the fold.

We are fortunate to have a new CFO with detailed knowledge of Delta's finances and strategy, as well as one with a track record for executions that includes leadership of Delta's highly successful profit improvement initiatives.

We're also pleased to welcome Glen Hauenstein, who starts on August 1st as Delta's new Chief of Network and Revenue Management.

Glen is a 20-year veteran of the airline industry who brings to Delta an outstanding record as a network strategist for major carriers.

His expertise will further strengthen our capabilities as we undertake constant improvements to our global network.

These additions build on a core team of experienced professionals, establishing a management structure capable of the tough road ahead.

Also on the organizational front, I'd like to thank Michael Palumbo for his outstanding service as our Chief Financial Officer this past year.

My management and Board colleagues are grateful for his many contributions to Delta's transformation and we wish him well as he moves on.

Turning to the financial performance, results from the June quarter demonstrate that our transformation plan is progressing.

Along with many other significant strides, we achieved a 14.3% year-over-year drop in mainline CASM, excluding fuel and special items.

Delta's $382 million net loss for the quarter includes a net charge of 78 million.

It shows fuel costs and other external forces outside our control are offsetting our progress and adding new urgency to the pace of our transformation.

Our new organization is designed for that purpose, aimed at speed, efficiency and a seamless alignment between strategy and execution.

Delta continues to pursue viability in the face of the following -- Crushingly high fuel prices, increased competitive strain as some airlines shed billions of dollars in debt and pension obligations, and an end of summer, early fall revival of revenue draining fare wars.

We must be prepared to do more and to do it better and faster.

Delta is moving forward aggressively with our transformation plan, including several initiatives already underway.

Last week, for example, we reset our SimpliFare caps with a $100 increase, reflecting the rapid escalation in fuel prices.

At the same time, we maintained the simple, affordable customer focused pricing structure Delta pioneered last year, including the elimination of the Saturday night stay requirement.

We're also strengthening our long-standing fuel conservation efforts, with renewed emphasis on everything from taxi procedures to reduced aircraft weight to optimizing contingency fuel.

In addition, we're preparing to implement in September the next phase of Operation Clockwork, further reducing aircraft turn times and increasing efficiency in utilization.

And at the same time, Delta continues to work with active and retired employees, as well as partner airlines to bring about federal legislation that will provide a more affordable, practical solution to pension funding.

Despite our progress so far, the constantly-shifting dynamics of our industry and the effects of unrelenting external forces required Delta to make even faster, more definitive changes.

With a tightly-aligned management group in place and the support of Delta people throughout the Company, we are moving quickly ahead to meet these challenges.

Now, let me turn the call over to Ed Bastian for a few remarks.

After which Hank Halter will provide more details on the numbers.

Ed?

Thank you, Jerry and good morning, everyone.

I'm very happy to be back at Delta.

As you will hear today, the Delta team has accomplished a tremendous amount, but there is much more to do.

I'm proud to have the opportunity to lead Delta's finance organization and work with Jerry, the management team and, of course, the dedicated and professional people of Delta.

For those of you that do not know me, by way of background I have 25 years of financial experience with Price Waterhouse, PepsiCo and Delta.

I certainly believe my last six years of Delta experience provide me with a unique perspective on the challenges we are facing.

I was deeply involved in the development of the strategic plan that we're in the process of implementing, and remain committed to the tenants of that plan.

But to echo Jerry's words, the dynamics of the current environment dictate that we must intensify our efforts.

I look forward to working with all of you in my new role.

And now, given that I just started yesterday, I will turn the call over to Hank to provide more detail on the June quarter results.

Thank you, Ed.

With regard to our financial results, while the $382 million loss reported this morning is disappointing, record-breaking fuel prices continue to mask the significant change Delta has achieved through its transformation plan.

The June quarter's results reflect a fuel expense increase of 58% or $385 million year-over-year.

If you look deeper in these results, however, there are visible signs of progress.

Through the hard work of the Delta people, we're making solid progress with our transformation plan.

For the month of June, excluding special items, Delta had an operating profit.

Compared to the same quarter last year, we decreased our mainline, non-fuel CASM, excluding special items, by more than 14%.

Importantly, of the legacy carriers that have released earnings to date, we have the lowest mainline unit cost for the June quarter.

These results are evidence that our transformation plan is working.

Through our disciplined execution of the necessary initiatives in 2005, we expect to achieve the full $5 billion benefit in 2006, and as a result, to have a unit cost structure competitive with the low cost carriers.

Nevertheless, an environment of fuel near $60 a barrel, it should be obvious that we're looking to do more at every opportunity.

Turning to our financial and cost performance, for the June quarter, Delta reported a net loss of $382 million or $2.64 per diluted share.

Excluding special items, Delta reported a net loss of $304 million or $2.11 per diluted share.

This compares to a loss of 312 million for the June 2004 quarter.

Despite significantly higher fuel prices against the same period last year, CASM was down 2% and CASM, excluding special items and fuel, was down 11.6%.

These CASM improvements, along with a 14.3% mainline reduction mentioned earlier, are proof of the tremendous cost reduction we have accomplished.

But to get some perspective on the challenge we are facing with fuel, fuel prices rose 53.3% to $1.60 per gallon, which accounted for 366 million of the $385 million increase in fuel expense over 2004.

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

We ended the quarter with $2 billion in cash and cash equivalents and short-term investments, of which $1.7 billion was unrestricted.

During the quarter, we contributed approximately 95 million in required pension funding and made debt maturity payments of approximately $80 million.

Cash flows used in operations for the quarter were $122 million.

Capital expenditures for the June quarter were approximately 240 million, excluding approximately 150 million for regional jet aircraft, which were delivered under seller financing.

On June 30th, 2005, our total debt was approximately 20.5 billion, including operating and capital leases.

Updating our liquidity situation, during the June quarter, we completed three debt-for-equity transactions, exchanging 45 million of 7.7% notes due in December 2005 for 11.3 million shares of common stock.

These transactions reduced the principal amount of these notes from 167 million to $122 million.

In June, we deferred delivery of eight Boeing 737-800 aircraft from 2006 to 2008.

These deferrals postpone all remaining mainline aircraft deliveries scheduled for 2006.

Also in June, we sold one MD11 aircraft, generating proceeds of $26 million.

Finally, we amended two financial covenants under our financing agreements with General Electric Capital Corporation and American Express.

These changes lowered the level of EBITDAR that Delta must achieve for certain specified periods and increase the unrestricted funds Delta is required to maintain to a minimum of $1 billion for the remainder of the term of the agreements.

Turning to cost guidance, our transformation plan will continue to show the progress throughout the remainder of the year.

Compared to 2004, we expect consolidated CASM, excluding fuel, to be down approximately 13 to 15% for the third quarter and down 11 to 13% for the full year.

We expect mainline CASM, excluding fuel, to be down approximately 15 to 17% for the third quarter and down 13 to 15% for the full year.

Capital expenditures for the third quarter of 2005 will be approximately $200 million, including approximately 60 million for regional jet delivery payments, which will be financed under existing agreements.

Total capital expenditures for 2005 are estimated to be approximately $800 million, including roughly 360 million for aircraft.

This reduction from our previous guidance is due primarily to the timing of regional jet deliveries.

Before we go into our revenue performance, Joe Kolshak will provide an overview of Delta's efforts around fuel.

Thanks, Hank.

As Hank mentioned earlier, our average fuel price was up 53% to $1.60 per gallon during the quarter.

Based on our expected fuel consumption, every penny increase in the average annual cost per gallon of fuel drives approximately $25 million in additional mainline fuel expense.

Employees at all levels of our Company are making contributions to fuel conservation.

For example, payload planners are better matching the amount of fuel required on each flight.

Our mechanics are reducing excess weight by installing lighter seats and removing heavy ovens on selected aircraft.

Ground employees are using more efficient power units to reduce fuel burn on the ramp.

And our pilots, who have long been industry-leaders in saving fuel for single-engine taxi and other crew-like procedures, are implementing RNAV or area navigation, departure and arrival procedures in Atlanta and elsewhere, further improving our conservation efforts.

An added benefit of Operation Clockwork, the large scale rework of the Atlanta flight schedule, was to reduce average taxi times in Atlanta by almost four minutes year-over-year, saving several million gallons of fuel.

These changes, among others, sponsored by our cross-divisional fuel council will trim an estimated $60 to $70 million from our fuel costs in 2005.

With that, I will turn the call over to Jim Whitehurst to discuss revenue performance.

Jim?

Thank you, Joe.

With regard to Delta's revenue performance for the June quarter, June quarter passenger revenue was up 6% and passenger RASM increased by 1.2%.

RASM increased despite a 5.1% increase in our average stage link and a 4.8% increase in capacity.

While year-over-year RASM started off down in January, we have seen an improving trend each month, with results turning positive during the quarter and June being our best monthly year-over-year performance thus far.

North American RASM, including connection carriers, was up a half a percent on 3.4% capacity growth.

Strong RASM performance on the long haul markets was partially offset by declining RASM performance on the East Coast, driven by industry-capacity increases.

Atlantic RASM improved 6.6% with 5.1% more capacity versus last year.

More than two-thirds of the market showed positive RASM change.

Latin American RASM was down 4% on a capacity increase of 34.9%.

Capacity growth in new market ramp-up continued to pressure Latin American RASM.

While our decision to reset the SimpliFare's cap has gotten a lot of attention, it's merely one of many revenue initiatives we have undertaken, including other fare actions, and implementation of a new revenue management system.

But the hard work is ahead, as we address structural issues with our network that affect our revenue performance versus our competition.

For example, we have begun to reconfigure domestic wide-body aircraft for international flying.

This should add the duel benefit of improving revenue generation from international flying and down-gauging our domestic system.

Turning to our capacity guidance for the remainder of 2005, for the full year 2005, we are expecting a 5 to 6% capacity increase for the consolidated system.

We expect international entity to be up 13 to 14%, and the domestic entity to be up 3 to 4%.

Let me review this capacity increase by quarter.

We expect consolidated capacity to be up 6 to 7% in the third quarter and up 5 to 6% in the fourth quarter.

In the second half of the year, but particularly in the fourth quarter, we will see an increase in Song and regional jet flying.

However, our consolidated amounts are slightly lower than our previous guidance because of adjustments to mainline flying.

Delta will be trimming overall capacity slightly in the fall and winter months to adjust for seasonal demand.

We also plan to remove 14 aircraft from service during the second half of this year, and roughly half of this capacity will be made up via higher aircraft utilization.

Regarding advanced bookings for the second half of 2005, at a system level, August and September book load factors are up from the prior year.

August domestic advanced bookings look strong, while international is currently lagging somewhat last year.

We are starting to see some negative booking builds during the close-end period and we are watching bookings very closely.

In closing, at our annual shareholder meeting last year -- or this year, Jerry dedicated the 76-year to our employees.

I speak for the entire management team when I say we are very proud of the difference the Delta people are making and what's been accomplished thus far.

But as the urgency of the challenges grow and the speed of industry change continues to accelerate, Delta must step up the pace if we are to have the opportunity to reach our ultimate goals.

We are re-examining everything we do at Delta, working to find new ways to increase revenue and also reduce cost.

Without question, we are facing an extremely challenging period.

As a result of the work that has already been accomplished by Delta employees, our Company is prepared to do what is necessary to survive and succeed.

This concludes our quarterly conference call.

At this time, we are pleased to take any of your questions.

Thank you.

Thank you.

At this time, we're ready to begin the question-and-answer session. [OPERATOR INSTRUCTIONS] Our first question comes from Ray Neidl of Calyon Securities.

Congratulations on your promotions, Joe, Jim and Ed.

And --

Thank you.

Okay.

And, there's a lot of questions, but I will try to summarize to the two main ones.

You've done a very good job, it appears, in cutting CASM "X" fuel down to levels where it is now.

I guess pretty much have you reached the maximum that you can cut costs with the employee give-backs and the other things you've done?

Or are there further things you can do, such as maybe closing another small hub?

Or it sounds like you're committed to point-to-point routes, so it sounds like you're not going to be cutting back on Song, it sounds like it's going the other way.

What else can you do to further cut back your CASM?

We focused a lot of -- Ray, this is Jim.

We focused a lot over the last year on operating efficiency.

We've dramatically reduced our turn times and dramatically increased our asset utilization.

That was just a first step.

We will be taking turn times down and increasing utilization further with our September schedule, which allows us to simplify our fleet and take older fleet types out more quickly while maintaining our overall capacity.

We will take several more bites at the apple on our overall operating efficiency over the next year.

That's been a key driver for why our CASM is where it is, and there's still substantial room for us to go that way.

I think you will see more of that than hub closures or something like that.

But we do believe there's still a lot more room we can go, continuing with our existing footprint, to take additional costs out.

Okay, good.

And my second question is, I know you were desperately fighting to stay out of bankruptcy.

Is the change of CFOs an indication that maybe that strategy is changing?

And on top of that, if 'we don't get pension reform this fall, would that be the death now for Delta in avoiding bankruptcy?

And I guess October 17th, when the pension rules change, is that a magic date?

Ray, it's Jerry.

I wouldn't read anything into Michael's departure on that score or Ed's arrival.

Our position is the same.

We continue to believe that an out-of-court restructuring is the better course for all of our constituencies and stakeholders.

But there are some things beyond our control, pensions, as you mentioned, are one of them, fuel costs, low-cost carrier growth in the markets we serve.

We will take all of those into account and other factors as we go ahead.

Great.

And October 17th, is that a date on your mind?

No.

No.

Okay, good, thanks, Jerry.

Our next question comes from Helane Becker of Benchmark.

Thanks very much, operator.

Hi, guys.

Jerry, I've done a lot of work on minimum stay requirements and I'm just kind of wondering, why don't you change the minimum stay from one night to two nights?

It looks like it would add a significant amount to revenue and go a long way towards helping to recover some of the higher fuel expense.

Can you just discuss your philosophy behind one-night versus two-night minimum stays?

Helane, could I ask the other GG, that is Gail Grimmett as opposed to Gerald Grinstein, to answer that question.

Sure, that would be great.

Thanks.

Hi, Gail.

Hi, Helane.

We did take a look at that, the one thing that we have to look at overall is SimpliFare holistically.

While we put it out there to allow the ease -- the ease of restrictions and to help passengers feel like they're getting value for the fare paid, there was more to it than that.

And that is we also -- creating SimpliFare was a big contributor to the profit improvement initiatives on the cost side, meaning it changed the way that we did business.

So, by changing the minimum stay requirements, as we think through any changes, either the minimum stay or any other changes, we also have to think about how that affects the way that we already changed our business.

For example, creating SimpliFare has helped to drive incremental fare shift to Delta.com.

It's easier for passengers to understand the fare rules and so it makes it easier for them to book on our lowest cost distribution.

We also were able to get significant savings by reducing the amount of off-tariff products that we previously offer and moving people to more online tariff.

And that showed up through productivity improvements and headcount savings through some of the migration of a couple departments.

And also, we also had significant changes in our sales department and the manner we approached corporate sales and leisure sales as a result of SimpliFare.

So, it's a bigger picture than just figuring out the incremental revenue that changing the minimum stay requirements would have on the product.

We have to look at it for how it drives the business overall.

Well, I understand that.

I don't see how getting the business traveler to be treated as a leisure traveler changes anything about what you said or what you said changes that.

I still think you would get incremental revenue from it, but that's okay, it's a debate for another day.

Thank you very much.

That's all my questions.

Our next question comes from Gary Chase of Lehman Brothers.

Good morning, guys.

Congratulations to Jim, Joe and Ed and belatedly to Gail, too.

Just a couple of quick ones.

First, Jerry, you mentioned something in your prepared remarks, and I just want to be sure I got clarification on it.

You mentioned -- I think you said an early summer revival of fare wars.

Can you elaborate on that?

Or Jim or Gail, do you see anything that would seemingly be different from what we're hearing around the rest of the industry?

There hasn't -- I haven't seen fare wars yet.

There's been a little bit more fare sale activity where the levels are about the same as where they have been.

The advanced purchases, advanced purchase requirements have been a little bit more aggressive along those lines, and we are seeing some changes -- Southwest has changed some of their fare structure, overall, particularly in their long haul market, moving some of those 14-day advanced purchases to 7-day advanced purchases.

Okay.

But --

That's what we're seeing -- so, what I'm saying is what we're seeing is I think everybody -- my interpretation is what we're seeing in terms of some slight negative booking bill closer in seems to be indicative of the rest of the industry being very cautious heading into the fall period.

Okay.

Also, for -- I guess this one is probably for Jim.

You mentioned structural network issues at some point during the call, it might have been Ed mentioned that you have the lowest CASM of the network carriers that have reported to date.

I mean, I don't know that cost has ever really been an issue for Delta, at least as compared to other network carriers.

Revenue has been.

And I'm wondering, maybe this sort of piggybacks a little bit on Ray's question, if there's more drastic action that's required on the revenue front to make up the difference -- you've obviously had a lot of cost-cutting in your results on a year-on-year basis.

They're actually not improving as much as the rest of the industry, and I'm just curious, clearly that's not a function of the progress you've made on the cost side.

It's a revenue issue.

And I'm just wondering if there's more drastic action that's required on that front?

This is Jim.

I think you will see continuing changes to our network.

I mean, obviously the big issues that we face is relatively higher domestic exposure, vis-a-vis the other legacy carriers.

We have a substantially higher mix of connecting traffic, which is lower yielding, and because we're more domestic, we have a higher exposure to low-cost carriers, and there's some structural issues in the Northeast that we need to address.

We started off making progress, we dehubbed DFW, where we were a distant No. 2.

We've depeaked Atlanta, which has allowed us to grow our strongest hub.

Song growth, actually not only has Song growth been good, but Song pulled large aircraft out of our hub structure, flying point to point, which has the net effect of helping us down-gauge our domestic hub and spoke network.

We've also continued to grow internationally, substantially more quickly than domestically.

You will continue to see a lot more activity in terms of rotating aircraft that are capable from domestic to international.

You will continue to see us doing other things to address our relative local versus flow mix.

So, there's still a lot we can do and we recognize our substantial structural issues for us to address.

The difficult thing here is we've done a lot in the last year, but especially when you look at things that require reconfiguration of fleets or rotating fleet in and out of the system.

Those things just take a while.

So, there's a lot more on the plate in the next year that you will see rolling out.

To improve that local mix, is there anything you can do other than reallocating the aircraft internationally?

Well, there's -- certainly by reallocating aircraft internationally, you've down-gauged the domestic system.

Doing things like with Song and continuing to grow Song, one of the reasons you saw the transcon growth that we announced earlier, is to continue to down-gauge the domestic system, which increases our mix of local.

We've also started doing a lot of incremental point to point over flights of our hubs, and a lot of people look at that and say, well isn't that kind of cannibalizing the hub?

At the same time, that point-to-point flying is a much lower cost way to serve those passengers.

So, we're continuing to actually grow our presence in markets where there's local demand.

So there's still a lot we can do.

Obviously, we are retiring aircraft as a way to simplify our fleet versus replacing those aircraft.

We're not in a position to be taking mainline deliveries.

By pulling those aircraft out, we're net pulling capacity out of our hub complexes.

Also, if Gail's doing her job right, reduces the connecting flow and maintains the local.

I was going to add to that.

The new revenue management system should helped -- it's much smarter about choosing local versus connecting traffic, because it has a much more granular level of calculating displacement costs.

So as the system had been rolled out, we are seeing a shift in the system optimizing local versus --

We're also seeing just a natural uplift.

When we dehubbed Dallas and reallocated that capacity, places like Salt Lake City literally grew over 30%.

And we see sequential improvement month over month as that new capacity seasons and people learn that those flights are in the market.

So, we see continued growth in local traffic on those segments as people see it there versus having to back fill with much lower quality connecting.

Okay.

Thanks a lot, guys.

Our next question comes from Mark Streeter of J.P. Morgan.

Hi, thanks very much.

Folks, if we take the inputs that you're giving us for guidance for the second half of the year and extrapolate sort of the current fuel curve and current industry trends and so forth, basically Delta is still running out of money here.

So, what can you tell us about liquidity raising, exercises that you're going through?

There are lots of rumors about financing from GE and from others and sale of regional subsidiaries.

Can you give the market any sort of comfort about your ability to raise liquidity to, again, bridge that gap until you can get to a better revenue environment or get costs down further?

Mark, hi, this is Ed.

We are absolutely continuing to evaluate potential opportunities to raise additional liquidity.

My arrival is not going to do anything to change that.

We're certainly looking at things that you suggest in terms of potential sales of noncore assets and other additional financing sources, but beyond that, we just cannot speculate any further.

Great.

Can you comment on the pension payment during the quarter?

Was that a payment that was due during the quarter or was it due during this year and you chose to make it during the quarter?

I believe it was due during this quarter.

Okay, great.

And finally, just any more aircraft that can be sold?

We noticed one more MD11.

Anything left in terms of noncore aircraft that you can provide any color on?

We don't have anything currently sitting in the desert of any material value that we can sell.

Obviously, as we continue to reconfigure the network going forward, it's possible there may be opportunities in the future, but there's nothing kind of unpassed in the short-term.

Great, thanks very much.

Our next question comes from David Strine of Bear Stearns.

Thank you, good morning.

A couple of questions.

First, can you tell us what air traffic liabilities were at the end of the second quarter?

The air traffic liability at June 30th was 2.22 billion.

That's up about $70 million from the March 31st balance.

Okay.

And with respect to the -- the covenant that you have under your agreement with GE and American Express, or the two covenants, actually, the EBITDAR and then the 1 billion in unrestricted cash.

Is the 1 billion covenant related to both GE and AMEX or is it just one?

That's correct, it's related to both General Electric and American Express.

Okay.

And final, just sort of a broader question in terms of strategy, it seems as if you dialed down -- maybe, Jim, this is for you, you've dialed down your capacity growth plans for the second half a bit, but there's still -- still pretty significant growth there, where it seems like it's pretty difficult for the business on an organic basis to generate sufficient operating cash flow.

I'm struggling with the logic behind keeping that -- that growth rate as high as it is.

What are your thoughts there?

Well, basically, looking on a cash basis, our -- you have to look at the marginal CASM of that flying versus the marginal RASM of that flying.

And, we believe it's -- it, well more on a cash basis, justifies itself.

I mean the level of that growth, frankly, is due to our current fleet and our retirement schedule in combination with the incremental efficiencies that we continue to generate via Operation Clockwork and other initiatives.

So, clearly if any of that flying were direct operating costs negative, we would not be doing it.

Over time, our capacity will continue to change, based on a retirement schedule and how much further we can push asset utilization, and basically, that's going to determine our capacity because we're not taking aircraft, and obviously, we wouldn't be adding incremental aircraft units given the current total RASM/CASM gap.

Are you saying that you -- you don't think that you would lose less money or generate less cash -- or generate more cash if you shrunk the business?

Well, a rough rule of thumb is that your operating -- your direct operating costs are about 50% of your total costs, in terms of CASMs.

And we definitely believe that the -- at least in the shorter term, where you can't really go and attach fixed costs, that our marginal RASM is above that marginal CASM.

That's not to say going forward, as we make further structural changes that our capacity might not change, but it needs to be part of something where we'restructurally going and getting 100% of the CASM out, versus just short-term sitting down units, where you're only getting the marginal operating costs out.

Okay, thanks a bunch.

Our next question comes from Susan Donofrio of Fulcrum Global Partners.

Yes, hi, everyone.

I wanted to zero in a little bit on Song and kind of how it's doing.

It just appears to me that perhaps the 757s may be a little big for that.

And I'm just wondering if you could provide for us, do you know how big it is right now?

Load factor performance and any other type of financial metrics so we can get a pretty good handle on that.

Susan, this is Jim.

Let me start out on a little bit -- backing up to the logic and we don't provide a lot of details breaking out Song, so, I'm getting stern looks from Laura here, but the rationale for the 757 is that it allows us to provide a longer tube higher gauge, which allows us to close the CASM gap where we compete with JetBlue.

Obviously, that limits Song to very large O&D markets where there's enough demand for 199 seats.

So, the strategic logic for Song was to close our -- some of our structural cost differences with JetBlue by flying a longer tube and that really does -- just the math of the CASM curve, allows us to close that gap.

It does, without question, limit the markets where you can put Song because you need very, very large markets to be able to have 199 seats on any given departure.

But we do feel like the markets that we've chosen are very, very dense.

Northeast, especially JFK and Boston to Florida are very, very dense.

As are the transcon markets.

So, we feel pretty comfortable with the markets they're in are markets that are suited to that.

A lot of people ask us, why aren't you growing it into a bunch of other markets and they'll mention ones that are smaller.

And, clearly, as markets get smaller, it's very difficult to maintain reasonable RASM as with 199 seats.

Okay.

And then my other question is, I'm looking here at your covenants, can you just provide us a little more detail on the EBITDAR with respect to the specific levels there?

Susan, this is Hank.

The -- related to the EBITDAR covenant, when we structured that, the covenant was originally designed last fall based on fuel prices that were significantly lower than what we are seeing now.

So, earlier this year we went back to the lenders and restructured the EBITDAR covenant, which was based on fuel prices that were more reflective of what we were experiencing.

Right, I'm just wondering the number.

In determines of the specific number, we do not provide that information out, but we do have the 8-K that was released earlier this year that I think could give you the more specific guidance you're looking for.

Okay, great.

Thanks.

Susan, actually let me -- one more comment on Song, you mentioned load factor and we don't break that out separately.

Okay.

But we are very pleased that we've closed the majority of the load factor gap with jetBlue.

We intentionally focused on building the Song brand in the first couple of years.

I don't know if you have noticed in New York, there's a lot more price advertising starting in January for Song.

We felt comfortable we built the basic brand and we're now pushing hard to get people to fly Song.com as well as to build our relative load factor by advertising price, and obviously Song is a low fare carrier.

So, you will continue to see us closing the load factor gap with JetBlue, and it is a big focus for us this year.

Any chance on RASM or am I kind of pushing too much?

Sorry.

Okay, I tried.

Thanks.

Our next question comes from Jamie Baker of J.P.

Morgan Chase.

Hey, good morning.

And -- and hi, Jim, I'm sure we will get plenty of Song statistics when JetBlue starts its conference call in a few minutes.

My first question to Jerry, the bankruptcy protection letter in your pilot contract requires you to notify the pilots in writing.

Let's see here, anytime you expect total liquidity on the last day of any two consecutive months to be less than forecasted liquidity.

Has this notification been given to ALPA?

And if not, when does your forecast suggest that you will have to?

The answer is that we have not given any notification to ALPA.

And, Jamie, we certainly wouldn't forecast that at this point.

Okay.

Internally, presumably, you have.

Presumably.

Jamie, that was a slick way to ask that question!

Well, yes.

As a follow-up, and recognizing here it's a touchy subject ,and obviously you're going to try to pull out all the stops to avoid Chapter 11, the fact remains that something has to be leftover in order -- presumably, in order to achieve some form of dip financing.

Can you speak to what those assets might possibly include?

Or is the plan to simply burn all the possible furniture that you have in order to remain out of the -- out of the court process?

Jamie, I'm afraid I can't get into all of that.

Okay.

Well, credit for trying, I suppose.

Thanks, everybody.

Our next question comes from Glenn Engel of Goldman Sachs.

Good morning.

A couple of questions, one is can you talk about what planes are being put on the ground?

What -- where is the capacity being cut?

Is it mainly short-haul markets in the Southeast?

And finally, can you just talk about your efforts to get the Delta product and brand enhanced?

This is Jim.

Glenn, I will start with the aircraft removals.

The majority of the aircraft removals are 737-200s and 737-300s.

There are several 767-200s as well that will come out.

This is part of our effort to, as quickly as possible, reduce complexity in our fleet types, and obviously those are older, nonstandard, noncore fleet types that we will continue to work on ultimately exiting the system over the next couple of years.

In terms of where the capacity is coming out, it's -- it's hard to answer that question because while the planes are coming out, our incremental efficiency we are generating is continuing to have us throughout the rest of the year, actually continuing to grow our mainline flying.

So, the planes are exiting, but because of our incremental efficiency, capacity is not exiting.

So, frankly, capacity is still up and I think -- if you look through -- it's the -- the places you've seen it thus far where we've added the brand.

I'm sorry, you asked -- your second question was what we're doing around the brand?

That's correct, and just enhancing the service product in general.

Well, we've continued to roll out our new cabin interiors.

I believe we have close to half of our M88s complete already and we're continuing with that cabin refurbishment program.

The new flight attendant uniforms begin in the first quarter of next year, which, hopefully, you've all seen, I think they're quite impressive.

The "Good Goes Around" campaign continues and we're continuing to roll out changes to our -- to our website.

So, our efforts that we've talked about around comfortable, affordable, simple, stylish, inviting continue in earnest.

While we've done a lot to reduce cost, obviously we need to continue to enhance the customer experience.

We also had the upcoming relaunch of Delta.com.

Where are you right now in Internet penetration and in kiosk penetration?

Internet penetration is around 25 -- well, Delta.com penetration is around 25%.

We expect that to rise to 45% by the end of 2007.

Kiosk penetration is -- it's extremely high, we will get back to you with the number.

But in total, our automated check-in of combination of kiosks and Delta.com is extremely high.

The vast majority of the passengers.

We will get back to you with the actual number.

Thank you.

Our next question comes from Bill Masduris of Bank of New York Capital Markets.

Thank you.

Jerry, it's been reported that you would seriously consider filing Chapter 11 if you did not get adequate pension reform.

Is the Bill that's being bantered around the House inadequate, in your mind, and does that incentivize you a little bit more to declare Chapter 11?

Must you -- or stated another way, must you get the Senate version of the Bill to avoid Chapter 11?

Well, the pending House Bill that I think is in the Rules Committee, not only doesn't address the problem, it complicates it.

It shifts more of the burden on those companies with defined benefit plans and who are under stress.

So, it -- as I say, that does not address it at all.

The Senate Bill, on the other hand, is being considered in both the finance and the health education, labor and pensions committee, and we are actively working with both members in the Senate and the staffs of the Senate and we expect that before the end of this month that a Bill will be reported out that addresses the problem.

And I hope it provides an answer.

It may not be exactly in the version that Senators Isaacson and Rockefeller have introduced, but it may be close enough to give us the breathing room that we need.

Okay.

So, to be perfectly clear, if -- if a pension reform Bill is passed that's much closer to the House Bill, that would trigger or motivate a Chapter 11 filing.

If not, and you get something closer to the Senate Bill, you still need additional fundraising?

I just want to make sure that I'm not misquoting anything or that that's perfectly clear.

Well, I -- I guess my view of it is that the -- the House Bill may complicate it.

I'm not sure that the House Bill is going anywhere.

On the other hand, the Senate Bill has enormous support behind it and we expect it to address the problem.

I expect that we will see an answer in early September or before much of the fall is passed.

Okay.

And my follow up has to do with -- I'm wondering if you could delineate how much in the air traffic liability consists of the AMEX financing liability that's associated with frequent flyer miles?

Yes, we'd have to get back to you with that answer.

That information.

Okay.

Thank you.

[OPERATOR INSTRUCTIONS] One moment, please.

Operator, do we have anyone else?

Our next question comes from Robert Dishner of Stark Investments.

One moment, please.

Hello?

One moment, please.

Mr. Dishner, your line is open.

Hi, it's Don Bobs from Stark Investments.

I understand you can't control necessarily what hits the newspapers, such as the "Wall Street Journal" this morning, but there was something in that article this morning I'd like for you to address if you would, and that is departures, or lack thereof from executives as a result of contemplations that the Company or arguments that the Company may be having about filing for Chapter 11 and when.

I wonder if you could -- the first part of your question was muffled and I couldn't hear it.

I wonder if you'd be good enough to repeat it for me.

There was an article this morning in the "Wall Street Journal," which I'm very sure that you've had an opportunity to read.

It highlights that the issue that [inaudible] for you to address is that of departures of certain top management personnel, pilots and other key employees through operations, that are pointed to in this article.

Okay, I'm going to divide it into two parts.

We will talk first about the pilot departures and I will ask Joe Kolshak to address that.

And then I will get back to the executives.

In terms of the pilot departures, there is no recent phenomena.

We've experienced over the last two to three years, obviously accelerated pilot retirements because of what I call the phenomena associated with their ability for them to receive 50% of their pension benefit as a lump sum.

So, that certainly continues, but there's nothing new with regard to that.

I did not see the "Wall Street Journal" article specifically on that.

We continue to run the operation and have not seen a negative impact operationally because of that.

On -- let me talk about the executives.

There have been some departures, but that's been true at almost all of the airlines and the suggestion was that there was some link between the supplemental executive retirement programs and the departures.

But all of the airlines -- I shouldn't say all of them, but many of them had surps [ph] and they've had many departures and at the same time, we've had the two arrivals that we announced this morning, Ed Bastian and Glen Hauenstein.

So, to the extent that it suggests there's been a rapid change because of some other reason, I don't think that's right.

Operator, we have time for one more question.

Our next question comes from Mike Linenberg of Merrill Lynch.

Yes, hi and good morning.

I guess two questions, I know -- I think, Gail, you may have touched on this, talking about some of the cost savings from SimpliFare, and I know that when you did launch it back in January that was one of the key elements of the pricing structure, the potential cost savings.

At this point, do you guys maybe have a sense, and maybe it's a rough estimate of what sort of -- what the magnitude of savings are?

Maybe on an annual basis?

I don't have the savings -- Hank?

The SimpliFare's benefit through that initiative ramps up over the year and, in fact, the benefit of -- will be north of $100 million when it's fully mature.

In fact, several hundred million, but the benefit is something that is one of our initiatives that expands well beyond 2005.

While the $5 billion is achieved in 2006, we actually could see benefits from the SimpliFare in terms of the cost savings, expanding into 2007, even.

Okay.

And then just my -- my second question, to Jim, on -- on the 14 airplanes coming out, I know you listed the 73s, the 2s and the 3s and the 767s.

As a result of this, will we see the -- the entire, I guess elimination of at least one fleet type with the 14 coming out?

With this 14, no.

You will see us fully eliminating at least one fleet type next year, if not a couple.

We're still working through the details of that.

But just this 14 alone will not in total take out any of those fleet types.

Okay, thank you.

That concludes our conference call.

Thank you for joining us today.